Peconic Industrial Development Ltd v Lau Kwok Fai & Ors

27 February 2009, Court of Final Appeal, Hong Kong

Chio Ho Cheong was a Macau businessman and his girlfriend, Elsie Chan Yik Sze (Elsie) was a 23-year-old film and TV celebrity. In September 1991, Chio persuaded the Agriculture Bank of China (the bank) to enter into a speculative purchase of a land next to the Mai Po Nature Reserve, a Site of Special Scientific Interest and important bird sanctuary through the plaintiff. The plaintiff purchased the land from a company called "Asiagreat Ltd." which an ICAC investigation in December 1998 revealed that the beneficial owners were Chio and Elsie. The first defendant, by his English name Danny Lau, was the solicitor acting for Asiagreat in the sale of the land. The bank suffered a loss of almost HK$400 million.

In 2002 the bank commenced proceedings against the defendants and the trial judge, Cheung J, after a trial lasting 40 days, ruled that the defendants were liable and that they were not entitled to plead the limitation period (6 years). The court of appeal (Rogers VP, Le Pichon JA and Stone J) ruled that the defendants were entitled to raise the limitation defence and that the bank should not brought the action sooner (Stone J dissenting). The court of final appeal (main judgment delivered by Lord Hoffmann NPJ) dismissed the appeal of the bank.

The case depended on the construction of sections 20 and 26 of the Limitation Ordinance and whether the 1st defendant , as an "dishonest assister", was a "constructive trustee" under the Trustee Ordinance. Lord Hoffmann went through the relevant authorities (Beckford v. Wade (1805) 17 Ves Jun 87, Cattley v. Pollard [2007] Ch 353, Selangor United Rubber Estates Ltd v. Cradock (No. 3) [1968] 1 WLR 1555, Taylor v. Davies [1920] AC 636, Paragon Finance plc v. DB Thakerar & Co. [1999] 1 All ER 400, Soar v. Ashwell [1893] 2 QB 390, Royal Brunei Airlines Sdn Bhd v. Tan [1995] 2 AC 378, Dubai Aluminium Co Ltd v. Salaam [2003] 2 AC 366) and ruled that an dishonest assister is not a fiduciary and can plead the limitation defence. His Lordship said,

"The purpose of the Act is not, after all, to allow people to escape liability for fraud. It may incidentally have that result, but that is not the policy which underlies it. Its purpose is to avoid the investigation of whether the defendant was fraudulent after a lapse of time which could prejudice his ability to rebut the charge. The fact that this sometimes allows people who were undoubtedly fraudulent to escape liability is the price which the legislature was willing to pay for having a general and clear-cut rule."

The court also ruled against the bank on the issue whether the bank could have discovered the fraud under section 26 of the Limitation Ordinance. The burden was on the bank to prove that it could not have discovered the fraud and that it failed to discharge the burden.

By July 1993 the bank already knew about the "mouth-watering profit" made by Asiagreat by merely "flipping" the property. The 1st defendant had left clue about Elsie in his conveyancing file and that it was "unreal" that the plaintiff did not put two and two together. The directors of Asiagreat were Chio's brother's common law wife and Elsie's mother. It is true that it was not enough that the bank could have discovered the fraud of Chio in an action against Danny Lau, who was, as Stone J put it, "the apparently respectable lawyer working quietly in the background". The judge said that the discovery of Elsie's connection to Asiagreat should lead the plaintiff to assume that the 1st defendant knew that (a) Chio was a director of the plaintiff and (b) Elsie was Chio's girlfriend and constant companion.

"He would have known the former from the documents he was receiving from JSM and he would have known the latter because all Hong Kong knew it."

and that,

"Elsie Chan was a celebrity. It seems to me that even if Danny Lau knew nothing about her relationship with Chio, it is inconceivable that Chio would have attempted to conceal something which could at any moment have been revealed to Danny Lau by a photograph on the social page of a newspaper. It was absolutely necessary for him to take Danny Lau into his confidence and secure his participation in the fraud."

His Lordship also said

"The question of what the plaintiff could with reasonable diligence have discovered must be answered dispassionately and without regard to what may be perceived as the merits. In any case, I am not at all clear where the merits in this case lie. The bank was on any view extremely foolish to invest a large sum of money without any independent expert advice about the planning situation and the consequence of a judgment for the bank may be the ruin of Danny Lau's innocent partner."

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