SIG CHINA INVESTMENTS ONE, LTD v. LAM FUNG

HCA 219/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 219 OF 2011

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REASONS FOR DECISION

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1.  On 16 March 2012, I dismissed the defendant’s appeal against the master’s order dated 14 December 2011 entering summary judgment against him for specific performance of an Investment Agreement dated 2 October 2007 (“the Investment Agreement”). I had indicated that I would hand down the reasons for my decision, which I now do.

Background

2.  The Investment Agreement was made by the defendant as Vendor, Fabulous Way Limited (“Fabulous Way”) as Company and Dragonrider Opportunity Fund LP (“Dragonrider”) as Investor.  It is governed by Singaporean law (Clause 27).  (The parties made a Supplemental Investment Agreement dated 12 November 2007.  Nothing turns on that Agreement for present purposes.)

3.  Fabulous Way is a company incorporated in the Cayman Islands.  The defendant was at all material times the sole legal beneficial owner its entire issued and paid up capital (1,000,000 shares). Under the Investment Agreement, the defendant agreed to sell to Dragonrider 230,700 shares that he held in Fabulous Way for an aggregate of US$52,630,000 (Clause 4).  The sale was to be completed by way of three tranches (Clause 2):

	No. of Shares	Consideration (US$)	Completion Date
Tranche 1	57,675	13,157,500	3/10/2007
Tranche 2	86,513	19,736,250	31/10/2007
Tranche 3	86,512	19,736,250	16/11/2007

4.  Clause 5.2(a) provides that for each of the Tranches, on the respective completion date, the defendant shall deliver to the Dragonrider the share certificates concerned, “duly executed by [the defendant] in favour of [Dragonrider] and/or its nominee(s) or assignees (the ‘Investor Nominees’), and/or such other person(s) as may be directed by [Dragonrider] (‘Other Investors’)”.  Clause 5.7 further stipulates:

“For the avoidance of any doubt, each of the Investor Nominees and/or Other Investor shall have the same obligations and rights as Dragonrider under this Agreement as if it is a party to this Agreement and may enjoy the benefit of or enforce the terms of this Agreement in accordance with the provisions of the Contracts (Rights of Third Parties) Act, Chapter 53B of Singapore (‘the Act’)….”

5.  Pursuant to Clause 5.2(a), Dragonrider directed the defendant to transfer a total of 32,876 shares to the plaintiff, that is, 13,150 shares from Tranche 1, 10,959 shares from Tranche 2 and 8,767 shares from Tranche 3.  (According to the plaintiff, the defendant had only delivered the share certificates of the first two lots of shares.  Although the share certificates for the third lot had not been delivered, the plaintiff was, pursuant to article 7 of Fabulous Way’s Articles of Association, entered into the Register of Members as the holder of the said 8,767 shares.  The transfer for the third lot was effective.  The defendant does not seek to dispute that.)

6.  It is the plaintiff’s case, which is not contradicted by any evidence before me, that Dragonrider directed the defendant to transfer the said 32,876 shares to the plaintiff because it had contributed US$7,500,000 to the total consideration payable by Dragonrider under the Investment Agreement.

7.  The present dispute arose out when the plaintiff purported to exercise a Put Option under Clause 16 of the Investment Agreement.  The relevant provisions of Clause 16 read:

“16.1 Put Option

(a) In consideration of the sum of US$1.00 by the Investor (the sufficiency and receipt of which the Vendor hereby acknowledges), the Vendor hereby irrevocably grant to the Investor a right to require the Vendor to purchase all or part of the Ordinary Shares (‘Put Option Shares’) held by the Investor at the Option Consideration on the terms and subject to the conditions of this Agreement (the ‘Put Option’).

(b) On the exercise of a Put Option by the Investor, the Vendor will become bound to purchase the Put Option Shares, and the Investor will become bound to complete, or to procure the completion of, the sale of the Put Option Shares on the Transfer Terms.

(c)   Subject to Clause 16.1(d), the Put Option my be exercised by the Investor in respect of all or part of the Ordinary Shares held by him by serving on the Vendor the Put Option Notice by facsimile or by registered post or by hand only during the Option Period, failing which it will lapse and cease to have any further effect.  The Put Option Notice shall not be served on the Vendor in the event that a Listing has occurred.”

8.  On 3 December 2009, pursuant to Clause 16.1(c), the plaintiff served on the defendant a notice dated 1 December 2009, requiring him to purchase the said 32,876 shares at the Option Consideration of US$11,115,000. The defendant failed to do so despite repeated demands.

9.  The plaintiff commenced the present action on 2 February 2011.  On 14 December 2011, the master granted summary judgment against the defendant, making a declaration that the plaintiff is entitled to enforce the terms of the Investment Agreement with consequential directions.

10.  The defendant now appeals.

Discussion

11.  The defendant raised a number of points in his affirmation dated 3 November 2011.  But Ms Yan, his counsel, only sought to deploy two.  She first contended that the plaintiff is, as a non-party, not entitled to sue on Clause 16 of the Investment Agreement.

12.  Section 2 of the Act provides :

“ Right of third party to enforce contractual term

2.‑(1) Subject to the provisions of this Act, a person who is not a party to a contract (referred to in this Act as a third party) may, in his own right, enforce a term of the contract if –

(a) the contract expressly provides that he may; or

(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) shall not apply if, on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the third party.

(3) The third party shall be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.

(4) …

(5) …

(6) …

(7) In this Act, in relation to a term of a contract which is enforceable by a third party –

‘promisee’ means the party to the contract by whom the term is enforceable against the promisor;

‘promisor’ means the party to the contract against whom     the term is enforceable by the third party.”

13.  Ms Yan argued that section 2(1)(a) does not apply because Clause 16 does not expressly provide that the plaintiff may enforce the Put Option.  Nor does section 2(1)(b) apply because Clause 16 does not, on a proper construction, purport to confer a benefit on the plaintiff. Clause 5.7 does not assist the plaintiff because it dealt with another subject matter other than the Put Option.  With respect, I disagree.

14.  Clause 16 must be construed within the entire context of the Investment Agreement.  Clause 5.2 clearly envisages a transfer to the shares held by the defendant to an Investor Nominees or Other Investors, as defined.  Clause 5.7 ensures that the Investor Nominees or Other Investors, holding the shares so transferred, shall have the same obligations and rights as Dragonrider, under the Investment Agreement.  They are also entitled to enforce the terms of the Investment Agreement in accordance with the Act.  The provision makes perfect commercial sense by conferring on the Investor Nominees and Other Investors the same benefit as Dragonrider, the investor, enjoys.  Now the right to exercise the Put Option under Clause 16 is an important right and benefit enjoyed by Dragonrider as investor.  Pursuant to Clause 5.7, the Investor Nominees and Other Investors are plainly entitled to invoke Clause 16.  Thus on a proper construction, Clause 16 read together with Clause 5.7, does confer a benefit on the plaintiff.  Section 2(1)(b) of the Act applies.

15.  Ms Yan submitted that section 2(2) of the Act applies as it is the defendant’s understanding that the parties never intended that Clause 16 should be enforced by a non-party.  However, as confirmed by the plaintiff’s expert on the Singaporean law, in construing a contract, the subjective understanding of a contracting party is irrelevant.  I reject Ms Yan’s submission.

16.  Ms Yan next submitted that Investor Nominees and Other Investors might not had existed at the time of the Investment Agreement. If they were allowed to exercise the right under Clause 16, it would lead to uncertainty.  The answer to Ms Yan’s submission is to be found in section 2(3) of the Act.  “Investor Nominees” and “Other Investors” are sufficiently defined in Clause 5.2.  Section 2(3) applies.

17.  In my view, section 2(1)(b) of the Act does enable the plaintiff to exercise the Put Option under Clause 16.

18.  The second point advanced by Ms Yan is non est factum.  In gist, the defendant alleged that a Ms Jacqueline Lim, a lawyer representing Dragonrider, told him, among other things, that the Investment Agreement is only enforceable by Dragonrider.  He does not know English and relied on Ms Lim for explanation of the Investment Agreement before he signed it.  However, Ms Lim had never explained to him that a third party investor may have the rights and obligations as Dragonrider under the Investment Agreement.  What the defendant alleged is akin to misrepresentation.  But that is not what he tries to argue for the purpose of the appeal.  Indeed, it is not his pleaded case in his defence either.  So I will not deal with his allegation on that basis.

19.  The Singaporean law on non est factum is similar to Hong Kong law.  The plaintiff’s expert referred to a recent case of the Singapore High Court in Oversea-Chinese Banking Corp Ltd v Frankel Motor Pte Ltd and others [2009] 3 SLR(R) 623 and stated :

“14. In Oversea-Chinese Banking Corp Ltd, the 2^nd Defendant, who was the guarantor of the 1^st Defendant under certain banking facilities extended by the Plaintiffs to the 1^st Defendant, sought to defend a claim by the Plaintiff against him under the guarantee by pleading non est factum. The 2^nd Defendant alleged that he did not recall signing any guarantee because the bank officer did not explain or tell him that the documents he was asked to sign involved any personal guarantee.

15. The Court’s summary of the principles applicable in Singapore on non est factum is succinctly set out at paragraph 25 of the judgment, which is reproduced below for ease of reference :‑

‘25 The defence of non est factum is explained succinctly in Halsbury’s Laws of Singapore vol 7 (LexisNexis, 2005 Reissue) at paras 80.169-80.171:

As a general rule, the signature to a document by a person of full age and understanding binds him whether or not he read or understood it. However, where a party can show that the signed instrument is radically different from that which he intended to sign and that his mistake was not due to his carelessness, he will escape liability in an action against him on the basis of non est factum. Whilst fraud is present in most cases of non est factum, it is not a requirement that fraud be present. The basis of the doctrine is the lack of consent, and not the means by which this result is obtained.

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The doctrine of non est factum can only be pleaded where the signer had made a fundamental mistake as to the character or effect of the document. The degree of difference that must exist between the document actually signed and the document it was believed to be has to be “radical”, “essential”, “fundamental” or “very substantial”. Ultimately, the question depends on the circumstances of each case.

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Negligence or carelessness on the part of the person signing the document excludes the defence of non est factum. Similarly, a person who is ignorant of (as opposed to being mistaken about) what he is signing cannot plead non est factum.’

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16. The High Court rejected the 2^nd Defendant’s arguments. The Court held that the 2^nd Defendant knew he was signing documents in connection with the financing facilities extended to the 1^st Defendant and the guarantee was an integral part of the financial arrangement. Therefore, it could not be said that the 2^nd Defendant had made a fundamental mistake on the character and effect of the guarantee he signed.  The Court also held that, in any event, the 2^nd Defendant’s negligence and carelessness in being so oblivious to the prominent presence of words such as ‘personal guarantee’ and ‘guarantor’s name’ in the document disentitled him from pleading non est factum.”

20.  Applying the applicable principles, I find that, even taking the defendant’s allegation at its highest, the defendant had not made out a case where he had made a fundamental mistake as to the character or effect of the Investment Agreement to enable him to plead non est factum. Further, his ignorance of English and reliance on Ms Lim’s explanation of the Investment Agreement before he signed it does not assist him.  It is his own evidence that Ms Lim expressly told him that she was not representing him as legal advisor in the transaction.  Any reasonably prudent businessman, in the defendant’s position, ought to have sought independent legal advice before he signed the Investment Agreement.  By failing to do so, the defendant was guilty of negligence and carelessness.  It does not now lie in his mouth to plead non est factum.

Conclusion

21.  For the above reasons, I dismissed the defendant’s appeal with costs.