MANDECLY LTD AND ANOTHER v. HAO WEI AND OTHERS

CACV 347/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 347 OF 2006

(ON APPEAL FROM HCA 1216 OF 2002)

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JUDGMENT

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Hon Tang VP :

1.  This is the appeal from the judgment of Yam J given after a trial which lasted 38 days.  The main protagonists, Mr Chan, the 2^nd plaintiff, and Mr Hao, the 1^st defendant, gave their evidence in Putonghua, which was then interpreted into Cantonese.  Almost all the important documents were in Chinese.  There was no official English translation, although a small number of the documents have been translated into English.  The judgment was in English.  The appeal was conducted in English.  Hence this judgment is also in English.  For that purpose, I have freely translated some of the documents and the evidence.  I must stress, however, that in the event of discrepancies between my translation and the Chinese original (whether documentary or transcript) the original must prevail.  I depend on the original for my understanding of the proceedings.

Introduction

2.  The plaintiffs were the only shareholders in the 3^rd defendant.  The 3^rd defendant owned 52% of the Beijing Mandas Real Estate Development Company Limited (“Beijing Mandas”).

3.  The 1^st plaintiff was the corporate vehicle in which most of the shares in the 3^rd defendant were held on behalf of Mr Chan.

4.  Beijing Mandas was formed as a joint venture between the 3^rd defendant and the Chaoyang Park Development and Operation Company (“Beijing Chaoyang”) to develop the real estate project known as Greenlake Garden.

5.  The present proceedings arose out of the sale by Mr Chan and the 1^st plaintiff of the shares in the 3^rd defendant to Mr Hao.  The 2^nd defendant was the corporate vehicle for Mr Hao.  In this judgment I refer to the 1^st and 2^nd defendants as the defendants.

6.  It is common ground that the use of the land on which Greenlake Garden was to be built was initially granted to Beijing Mandas on terms that Beijing Mandas might built, for residential and ancillary use, 68,600m² of structures for which “地价款”Ұ75,460,000 was payable, as to 30% thereof within 5 days of the Land Grant dated 6 April 1994 and the balance within 60 days.  The learned judge referred to Ұ75,460,000 as land grant fee.  The parties referred to it as land premium.

7.  In default of payment, what the parties have described as default payments and penalties (default payment) calculated at the rate of 0.1% per month from the respective due dates were payable.

8.  Ұ75,460,000 divided by 68,600m² is Ұ1,100.  That was adopted by the parties as well as the relevant authorities in Beijing as the land premium payable per m² of the structure above ground.  That is so notwithstanding that some of the 68,600m² to be built would be underground.  It is unnecessary to consider the logic behind this approach.  It was the approach adopted by the parties as well as by the relevant authorities in Beijing.

9.  There is a dispute between the parties, however, whether in respect of unenclosed balconies, the land premium was payable in full at Ұ1,100 per m² or payable at the half rate of Ұ550.  The parties are agreed that under the relevant government regulations premium for unenclosed balconies was payable at half rate only.  However, the defendants’ case was that they had paid the full rate in respect of Phase 1 and as a matter of contract the plaintiffs were liable to reimburse them.  I will deal with this below.

10.  The Land Grant was revised on the 25 April 1994 to permit a construction area of 117,200m² comprising 95,550m² of residential flats and underground car parks and public facilities of 21,650m².  It is common ground the premium calculated at the rate of Ұ1,100 per m² would be payable in respect of the additional above ground structures.

11.  It is also common ground that the default payment was only payable in respect of the land premium of Ұ75,460,000, so that in respect of the additional premium payable for the revised construction area, no default payment would be payable.

12.  It is also common ground that subject to the payment of default payment on Ұ75,460,000, in practice, one could postpone the payment of any land premium until such time as one required the issuance of a separate title document, say, in favour of the purchaser of a flat.  That may be why in evidence Mr Chan referred to the land premium of Ұ1,100 payable per m² as“出让金”(transfer fee).

13.  It is also common ground that Greenlake Garden was to be developed in two phases.  The actual area built in Phase 1 was 46,800m², which was approximately 40% of the total permitted built up area of 117,200m².  However, only 36,143m² of the 46,800m² was above ground.

The transaction

14.  Mr Hao wanted to purchase the 3^rd defendant’s interest in Phase 2 only.  However, without the cooperation of Beijing Chaoyang and, more importantly, approval by the authorities, that was not feasible.  So it was agreed that Mr Hao should purchase the entire share capital of the 3^rd defendant.

15.  In Mr Chan’s 1^st witness statement (his witness statements stood as his examination-in-chief), he said that prior to the agreement:

“	… the 1st Defendant also had separate negotiations with the people of Beijing Chaoyang at the time.”

16.  Mr Chan said Mr Hao wanted to buy the plaintiffs’ 52% stake in the land for Phase 2 and deal separately with Beijing Chaoyang in respect of the remaining 48%.

17.  Mr Chan went on to say in paragraph 32 of his 1^st witness statement:

“	32.	… At around the time when I and the 1st Defendant had our negotiations, I also made some enquires with the then responsible officer of Beijing Chaoyang, Mr. Ma Ai Guo, Assistant General Manager of Beijing Chaoyang, about what they wanted to do with their interest in Beijing Mandas. He provisionally indicated that Beijing Chaoyang may withdraw from the Development but they should have some RMB 100 million profits from the Development, including both Phase 1 and 2. And he also indicated that the RMB 100 million should be exclusive of the profits which Beijing Chaoyang had received directly (as distribution of profits from Beijing Mandas) or indirectly (as advance payments made by the Plaintiffs for Beijing Chaoyang). Those profits were in the sum of about RMB 26 million. He also indicated that part of the profits to be given to Beijing Chaoyang may be ‘paid’ in kind by transferring some of the units in the Development to Beijing Chaoyang. I told him that the figure he was looking for was too high, and the more reasonable figure should be about RMB 100 million.
	33.	On the other hand, in the course of my negotiation with the 1st Defendant, the 1st Defendant told me that he had negotiated with Beijing Chaoyang, and it would agree to the 1st Defendant’s purchase of the shares in the 3rd Defendant and to sell its interest in Beijing Mandas to the 1st Defendant if Beijing Chaoyang would be paid some thing like RMB 100 million as its share of profit in the Development, including both Phase 1 and Phase 2. Indeed, the Plaintiffs had paid Beijing Chaoyang RMB 26 million profit in respect of Phase 1 already, and thus the 1st Defendant would have to pay Beijing Chaoyang the balance of some thing like RMB 74 million.
	34.	If the 1st Defendant were to buy up the 3rd Defendant’s shares and were also to pay Beijing Chaoyang RMB 74 million or RMB 100 million, the 1st Defendant would effectively be acquiring the whole of Beijing Mandas. He would effectively be buying up all of the assets as well as liabilities of Beijing Mandas. At the time, whilst Beijing Mandas did have various liabilities, it also had very substantial assets represented by the unsold residential units and other parts of Phase 1, as well as the land for Phase 2 and its foundation works.
	35.	However, as said above, the 1st Defendant did not want to have anything to do with Phase 1 of the Development. Further, the 1st Defendant at the time told me that he did not have sufficient cash to pay the Plaintiffs for the shares in the 3rd Defendant and also to pay Beijing Chaoyang. There was then the arrangement whereby some of the property developed but unsold in Phase 1 would be left in Beijing Mandas to offset the liabilities of Beijing Mandas, and the rest of the property developed but ‘unsold’ in Phase 1 and also some other assets of Beijing Mandas would be transferred to the Plaintiffs or our nominees as part of the price which the 1st Defendant would have to pay for the shares in the 3rd Defendant.”

18.  As will be seen, it was agreed that 13,200m² of the property developed but “unsold” in Phase 1 would be left in Beijing Mandas.  The 13,200m² were “unsold” apartments.  They were all above ground but included unenclosed balconies.

19.  The balance of the “unsold” properties became known as the Schedule 1 properties.  Schedule 1 is a schedule to the Statement of Claim and the properties comprised in it formed part of the plaintiffs’ claim.

20.  These properties were described as “unsold” because some of them were the subject of false sales which were entered into for the purpose of obtaining bank finance.  It appeared that false sales were known to banks and “tolerated” by the authorities.

21.  The parties created a total of 15 documents.  The first such document is dated 12 April 2001 and the last 27 September 2001.

22.  In Appendix 1 of Yam J’s judgment, there is a list of such documents.  For convenience sake, an abbreviated list can be found in Appendix 1 to this judgment.

23.  It is unnecessary to refer to all 15 documents.  I will only refer to those documents which are necessary for the understanding of the proceedings, and even so, as briefly as possible.

The 1st Transfer Agreement (“TA1”) of 12 April 2001（股权转让协议书）

24.  This is the first of the 15 documents, signed by both Mr Chan and Mr Hao.

25.  It may be noted, though nothing turns on it, that Party A (the vendor) was stated to be the 1^st plaintiff only.  Party B, was Mr Hao.  The 3^rd defendant was described as Party C although it was not a party and Beijing Mandas was described as Party D, it was also not a party.

26.  TA1 stated that the parties had reached agreement on certain matters of principle（原则性问题）.  It recorded that Mr Hao agreed to buy the entire share capital in the 3^rd defendant for a share transfer fee of Ұ50,000,000 payable as to Ұ10,000,000 upon the signing of the Share Transfer Contract（股权转让合同）and Ұ20,000,000 to be paid within 60 days after the effective date of the Share Transfer Contract, and the balance within 150 days after the effective date of the Share Transfer Contract.

27.  On the other hand, the 1^st plaintiff, confirmed, inter alia, that the construction fee payable to China Xin Xing Construction Development Main Co. （中国新兴建设开发总公司）(“Xin Xing”) would be no more than Ұ60,000,000 (Clause 2.2), that Beijing Mandas had 13,200m² completed premises (现房) (Clause 2.3), that Beijing Mandas had liabilities of approximately Ұ87,000,000 exclusive of the amount payable to Xin Xing (Clause 2.4), and Beijing Mandas had paid to the tax authorities not less than Ұ10,000,000 (Clause 2.5).  The dispute over the construction fee payable to Xin Xing was not pursued in the appeal.

28.  TA1 went on to provide, inter alia,

5.1	If there were less than 13,200 sq. m. of residential units left to the 1st Defendant, the share transfer fee should correspondingly be reduced at the rate of RMB 8,000 per sq. m..
5.2	If the Liabilities of Beijing Mandas were in excess of RMB 87 million, the share transfer fee payable should be reduced accordingly.
5.3	In clause 2.5 (erroneously typed as clause 3.5), if Party A’s tax liabilities, payable but unpaid, exceeds Ұ5,000,000, the excess amount shall be deducted from the share transfer fee.  If such tax liabilities did not exceed Ұ5,000,000, then Party B would be responsible.  The amount payable shall be determined by the (tax receipt) 稅票issued by the tax authorities.

29.  Clause 5.3 clearly contemplated that the statement of tax paid in clause 2.5 might be incomplete or inaccurate regarding tax liabilities but that Mr Hao should be responsible for no more than Ұ5,000,000 of any shortfall.

30.  It appeared that the parties proceeded on the basis that Mr Hao would become the sole owner of Beijing Mandas, thus, deduction in full was made in respect of the share transfer fee if the liabilities of Beijing Mandas should exceed Ұ87,000,000 although Mr Hao was merely purchasing a 52% interest in Beijing Mandas.

31.  In cross-examination Mr Chan said that Mr Hao gave 10,000m² of unsold apartments to Beijing Chaoyang, presumably as profits in return for relinquishing their 42% interest.  [See Day 5 page 61-62; Day 5 page 30P, page 27N.]

32.  It may be helpful at this juncture to mention some of the major issues in this appeal:

(1)	the liability to pay land premium in respect of the 13,200m2 of completed apartments现货;
(2)	the liability for default payment attributable thereto, if any;
(3)	the calculation of premium in respect of balconies, namely, whether they should be charged at full or half rate;
(4)	whether Beijing Mandas’ tax liabilities exceeded the amount paid (not less than Ұ10,000,000) and if so, whether Mr Chan was responsible for such liabilities.

33.  According to Mr Chan, on 12 April 2001, when he and Mr Hao met to sign the 1^st Transfer Agreement, he proposed and Mr Hao agreed that Mr Hao should pay a deposit of Ұ1,000,000 before he should be given access to confidential documents including the finance documents and accounts of Beijing Mandas.

34.  That resulted in the next document, namely, agreement on share transfer deposit, by which Mr Hao agreed to pay a deposit of Ұ1,000,000.

Agreement on Share Transfer Deposit (“DA1”) of 16 April 2001（关于股权转定金的协议）

35.  DA1 also provided that if after verification, it should appear that the fundamental position of Beijing Mandas was different from what was stated in the TA1 and the transaction did not proceed, the 1^st plaintiff would be liable to repay twice the deposit.

36.  Clause 5 provided that, in principle, the verification work by Mr Hao should be completed within 10 days of DA1.

37.  At trial, an important dispute between the parties related to whether or not verification work began shortly after 16 April 2001.  According to the plaintiffs, substantial verification work took place on 21 and 22 April 2001 involving not just Mr Chan and Mr Hao, but one Ms Yang Li Hua (Ms Yang) for the plaintiffs and a Ms Qin Jian Ping (“Ms Qin”)  for the defendants.  That was flatly denied by Ms Qin and Mr Hao.

38.  In relation to the events of 21 and 22 April 2001, the learned judge preferred the plaintiffs’ version.  Although Mr Jat, counsel for the appellant, devoted a substantial part of his written submission to the event of that particular weekend, realistic as ever, Mr Jat made no oral submission on the matter.  I will deal with this aspect of the case later in the judgment.

Share Transfer Contract (“TA2”) of  28 April 2001（股权转让合同）

39.   Mr Chan was named as Party B in TA2.  This was meant to be the formal Shares Transfer Contract referred to in clause 3 of TA1.

40.  TA2 again stated that the parties had reached agreement on certain matters of principle (原则性问题).  It repeated the provisions of TA1, including, for example, the mistaken reference to Clause 3.5 in Clause 5.3.

41.  Clause 5.3 is identical in effect to Clause 5.3 in TA1.

42.  Other new provisions included Clause 6 dealing with the handover of the documents of Beijing Mandas.

43.  A time table for payment of the cash consideration was agreed to in Clause 4, under which Ұ10,000,000 was payable on the signing of TA2, Ұ20,000,000 payable 60 days thereafter, and Ұ20,000,000 payable 150 days after the signing of TA2.  It also provided that Beijing Mandas should come under the joint management of the plaintiffs and the 1^st defendant after RMB 10 million of the share transfer fee had been paid (Clause 7.1) and the legal representative of Beijing Mandas would also start changing (from Mr Chan to Mr Hao) when the 1^st Defendant had paid the second instalment of Ұ20,000,000 (Clause 7.2).

2nd Deposit Agreement (“DA2”) of  28 April 2001（关于股权转让定金的协议）

44.  On the same day, 28 April 2001, the parties entered into the DA2 under which Mr Hao agreed to pay a deposit of Ұ6,000,000 (inclusive of the Ұ1,000,000 already paid).  That is notwithstanding that under TA2 Ұ10,000,000 was payable on signing of TA2.  According to Mr Chan, the deposit was reduced to Ұ6,000,000 because Mr Hao’s cash flow was tight but that he promised to pay the balance of Ұ4,000,000 within 10 days.  Ұ5,000,000 was paid on 28 April 2001, but Mr Hao did not pay the Ұ4,000,000 until 22 May 2001 by a cheque dated 25 May 2001.

The 1st Supplemental Agreement (“SA1”) of 28 May 2001（补充协议（一））

45.  By SA1, it was expressly agreed that as from 28 May 2001, Beijing Mandas should come under the joint management of Mr Chan and Mr Hao, and that the handover of the fixed assets of Beijing Mandas should take place in accordance with the accounts and relevant materials of Beijing Mandas provided by the plaintiffs.

46.  According to Mr Chan, a list of fixed assets to be handed over had been prepared and was supposed to be annexed to the SA1.  However, eventually, it was not annexed but it had been handed over to Mr Hao.

47.  It was also agreed that the cut off date for the accounts and financial matters of Beijing Mandas was to be 28 April 2001 which was the date when TA2 was signed.

The 2nd Supplemental Agreement (“SA2”) of 12 July 2001（补充协议（二））

48.  In Clause 5.1, it was recorded that what became the Schedule 1 properties should be transferred to the plaintiffs or their nominee.  On the plaintiffs’ case, this is an example of something which had been orally agreed at the inception being recorded in writing subsequently.

49.  Clause 1.7 recorded that Beijing Mandas had made tax payment of not less than Ұ10,000,000, but if the actual tax payable should exceed Ұ15,000,000, the excess should be borne by the plaintiffs.  This is similar in effect to Clause 5.3 in TA1 and Clause 5.3 in TA2.

50.  Clause 1.8 stipulated that disclosures regarding, inter alia, assets and liabilities were true and complete and made part of SA2.  On the other hand, clause 1.7 was obviously premised on the basis that the disclosed tax liabilities might have been inadequate.

51.  Clause 1.13 provided that Mr Hao would be responsible for the land premium and default payment in respect of Phase 2.  It also recorded that land premium of Ұ30,186,000 had been paid in respect of Phase 1, “the deficiency, if any, shall be paid by (Mr Chan)”.

52.  So far as the share transfer fee was concerned, SA2 provided that the 2^nd installment of Ұ20,000,000 should be paid upon the signing of the SA2.  However, as Mr Chan explained, the Ұ20,000,000 was not paid because Mr Hao had cash flow difficulties.

The 1st and 2nd Confirmation Letters of 30 July 2001（确认函（一）及（二））

53.  Under the 1^st Confirmation Letter, dealing with the seals under joint management, it was confirmed that they had been put under joint management at 5:30 pm on 12 July 2001.  By the 2^nd Confirmation Letter, inter alia, that Mr Hao would pay Mr Chan Ұ10,000,000 on 2 August 2001.

The 3rd Supplemental Agreement (“SA3”) of 6 August 2001（补充协议（三））

54.  Upon the signing of SA3, the 1^st defendant paid the balance of Ұ10,000,000.

55.  Clause 1(9) of this agreement is important.  It provided that if taxes paid by Beijing Mandas prior to 28 April 2001 were inadequate, that would be the responsibility of the defendants:

“	(九)	税务事宜：
		本《补充协议（三）》签署前，明达公司已交纳的各种税项若有不足或有退税皆由丙方承担；本《补充协议（三）》签署后，明达公司项下碧湖居无论一期、二期、无论出租、出售，所有应交的需补交的稅款皆由丙方承担。”

56.  This is to be compared with Clause 5.3 of TA1, and Clause 1.7 of SA2 under which it was agreed that if the amount of tax payable should exceed the amount paid (not less than Ұ10,000,000) by Ұ5,000,000, the excess should be deducted from the balance of the share transfer fee.

57.  Thus, Clause 1(9) removed the cap of Ұ5,000,000, that is to say, the defendants’ liability for unpaid tax was no longer capped at Ұ5,000,000.

58.  Another important provision in SA3 is clause 1.6.4.3 which stated in effect that as the premium payable in respect of the area actually built in Phase 1 exceeded the premium paid, an additional Ұ2,027,300 was payable as land premium for Phase 1:

“

1.6.4.3

考虑到碧湖居一期实测面积与已交土地出让金部分面积相比有出超，应付約Ұ202.73万出让金。”

59.  This supposed liability of Ұ2,027,300 was to be set off against certain amounts payable to the plaintiffs.  In other words, the plaintiffs were made to absorb the additional liability of Ұ2,027,300.

60.  The plaintiffs also agreed to pay approximately Ұ8,500,000 directly to some of the creditors of Beijing Mandas.

61.  Furthermore, in relation to the liability of Beijing Mandas, which was originally said to be about Ұ87,000,000, that was adjusted to Ұ92,300,398.92 inclusive of interest.  In other words, there were extra liabilities of Ұ5,300,398.92.  That was to be borne by the plaintiffs.  There were also other liabilities to be borne by the plaintiffs netted off at about Ұ2,500,000.  The net total amount of liabilities of Beijing Mandas to be borne by the plaintiffs was Ұ7,871,778.48, which was rounded up to Ұ8,000,000, and to be deducted from the balance of the share transfer fee, so that the balance was reduced from Ұ20,000,000 to Ұ12,000,000.  See clauses 1 and 3.3.

Letter of Undertaking of 6 August 2001（承诺函）

62.  By this, Mr Hao undertook to pay the balance of Ұ12,000,000 on or before 28 September 2001.  In default, he was liable to pay default interest.  Also before the balance was paid, the 1^st defendant should not transfer or sell the shares in the 3^rd defendant.

Declaration Share Transfer of 6 August 2001（关于股权转让的声明）

63.  By this, the plaintiffs confirmed the receipt of Ұ30,000,000, and the transfer of the shares in the 3^rd defendant to Mr Hao.

The Finance Matters Declaration of 7 August 2001（关于北京明达公司股权转让过程中有关财务问题的声明）

64.  This was signed on 7 August 2001, however, it is common ground that this was drafted to be signed contemporaneously with SA3.  It is sufficient for the present purpose to set out paragraph 1 of this document.

“

1、

北京明达公司的全部债权债务以上述《补充协议（三）》之附件一所列款项为准。实际支付中金额如有大的出入，转让各方多退少补；但如有超出附件一的债权债务单位及事项，由甲、乙方负责承担，丙方概不负责。”

65.  Essentially, this provided that the plaintiffs should be responsible for any liability not disclosed in Appendix 1 to SA3.

66.  Mr Jat relied heavily on this provision in connection with the counterclaim on unpaid tax liabilities.  His submission, put simply, is that Clause 1(9) of SA3, where the cap on tax liability was removed, was made on the basis that Appendix 1 of SA3 contained a complete and true statement of Beijing Mandas tax liabilities.  Since the tax liabilities disclosed in Appendix 1 was incomplete, the plaintiffs could not rely on clause 1(9) of SA3.  This will be discussed in some detail below.

The 13,200m² Declaration of 7 August 2001（关于北京明达公司股权转让中有关13,200平方米房屋及已售出房屋问题的声明）

67.  It was recorded that the plaintiffs had provided the 1^st defendant with 13,209.06m² totaling 95 residential units in the development, and some of them were free of mortgages and others were subject to mortgages, being mortgages made to secure loans to provide funds for the operation of Beijing Mandas, which loans formed part of the liabilities of Beijing Mandas included in the Ұ87,000,000.  These mortgages were made to nominees of Beijing Mandas following false sales entered into for the purpose.

4-Party Agreement (“4PA”) of 27 September 2001（四方协议）

68.  This is the last of the 15 documents under which the plaintiffs agreed to provide certain properties as security for certain liabilities including, for example, a guarantee of Ұ10,000,000 relating to a loan made to a company called Jin Ri.

69.  The clause which is important for the purpose of this judgment is clause 9 which provided if the premium paid in respect of Phase 1 in the sum of Ұ32,200,000 be inadequate, the plaintiffs would be liable for the deficit:

“

九、

北京明达房地产开发有限公司的一期部分（碧湖居）应交土地出让金（按北京市房地局有关部门出具的证明为准），减去甲、乙方已交的土地出让金人民币3220万元，超出部分由甲、乙方名下的‘碧湖居’房产按每平米人民币柒仟伍佰元的单价折給丙方。”

70.  Ұ32,200,000 is roughly the total of Ұ30,186,000 actually paid and the Ұ2,027,300 referred to in Clause 1.6.4.3 in SA3.

The appeal

71.  The defendants failed to pay the last installment of Ұ12,000,000.  In these proceedings the plaintiffs claimed, inter alia, payment as well as for the transfer of the Schedule 1 properties.  Essentially, they succeeded.

72.  This is the defendants’ appeal.  The defendants challenged each and every finding of the learned judge, which they acknowledged  were findings of fact.  Mr Jat submitted that this is one of those exceptional cases where the appellate court is entitled to interfere, citing the well-known words of Bokhary PJ in Ting Kwok-keung v Tam Dick-yuen & Ors [2002] 5 HKCFAR 336 at paras. 32 to 46.

73.  Mr Patrick Fung, SC, who appeared for the plaintiffs, referred us to the decision of this court in Tin Kwong International Enterprise Co Ltd & Ors v San Tung & Anor [2006] 2 HKLRD 185, namely that we are not entitled to disturb a finding of primary fact, unless we are satisfied the learned judge’s conclusion is plainly wrong.  Mr Fung also referred us to the celebrated words of Kirby J in State Rail Authority of New South Wales v Earthline Construction Pty Ltd (in liq) and Ors [1998] 160 ALR 588, at paras. 90 to 92.

Oral agreement regarding 13,200m²

74.  Essentially, Mr Chan’s case is that the premium which had been paid in respect of Phase 1 already exceeded the amount of the premium payable in respect of the properties actually sold to genuine purchasers as well as the Schedule 1 properties.

75.  In order to understand this oral agreement, it is necessary to consider how it came about that it was agreed that the plaintiffs should have the benefit of 13,200m² of apartments.  It seems uncontroversial that at the material time, the unsold area of Phase 1 included about 143 residential apartments with a total gross floor area of about 18,475.88m², of which only 13,200m² was to be left to Beijing Mandas.

76.  Under cross-examination, Mr Chan said, in relation to TA1:

「	寫這個13,200是因為我跟他已經談好的幾個基本的因素才這樣寫的。」Page 28 Day 5.
	(“13,200 was written because I have already agreed several basic elements with Mr Hao.”)

77.  At Day 5 page 27, he said:

「	就是由於被告方缺少現金，他跟中方談到一個基本的方式，就是用面積來折成這個 － 把金額折成面積給，把這個面積給中方就可以了。」

[Mr Hao told him that because he lacked cash, he agreed with Beijing Chaoyang that he would give them the apartments.]

78.  According to him, the 13,200m² and the fact that he should not be responsible for the payment of land premium attributable to them laid at the heart of the agreement:

「	這個是達成的協議的一個核心的兩三個問題之一。」Day 5 Transcript page 25G

79.  As noted, Mr Chan’s evidence was that Beijing Chaoyang wanted profits of Ұ100,000,000 on top of the Ұ26,000,000 already received by them.  Mr Chan was of the view that the total should be Ұ100,000,000 instead of Ұ126,000,000.  His evidence, both in his 1^st witness statement and orally did not appear to have been seriously challenged.  Mr Jat confirmed that Mr Chan’s evidence that the defendant appeared to have given 10,000m² to Beijing Mandas was neither challenged in cross-examination, nor refuted by Mr Hao in his evidence.

80.  It should be noted however that, for example, Clause 1.5 in SA2 (12 July 2001) recorded that the“现房”, the existing apartments, totaling 13,200m² were provided to Mr Hao to offset the liabilities stated in Clause 1.6, namely, Ұ87,000,000.  Be that as it may, Mr Chan’s evidence was that Mr Hao would transfer these existing apartments to Beijing Chaoyang as their profits for their relinquishment of their 42%.  This is possibly an example that the written provisions did not represent the reality.

81.  Mr Jat made 3 points:

1)	that the alleged oral agreement was not mentioned in any of the contractual documents, 12 of which directly related to the transaction or the financial side.
2)	in 3 of the agreements, the plaintiffs agreed to bear outstanding premium for Phase 1.  It was therefore incredible that no mention should be made about the land premium regarding the 13,200m2.
3)	that the terms of the agreements are contrary to the oral agreements.

82.  In relation to the 3^rd point, Mr Jat relied basically on clause 1.13 in SA2, clause 1.6.4.3 in SA3 and Clause 9 in the 4PA.

83.  Clause 1.13 of SA2 recorded the fact that in relation to Phase 1, the premium paid was Ұ30,186,000, it then went on to provide that the deficit, if any, should be borne by the plaintiffs:

「	不足部分（或有）由甲、乙方负责交纳。」

84.  Clause 1.6.4.3 in SA3 referred to the short fall in premium as Ұ2,027,300.

85.  Mr Fung submitted that if the plaintiffs were responsible for the land premium in respect of the 13,200m², in Clause 1.13 of SA2, the parties would not have used the expression, “if any” in connection with unpaid premium.  Moreover, the parties would not have referred to Ұ2,077,300 as the deficient land premium in SA3.  A simple calculation would show that on the basis that the balcony area of 5,155.2m² should be charged at half fee, the total land premium payable would have been Ұ36,143,000 but if the balcony area were to be charged at full rate, then the amount payable would be Ұ39,757,300.  Both were far in excess of the paid premium of Ұ30,186,000 even with the addition of the Ұ2,027,300.

86.  Mr Jat accepted that had Mr Hao been aware of the actual amount of area built above ground in Phase 1, he would have realized that more land premium would definitely have been payable, and it would have been inexplicable why in clause 1.6.4.3 in SA3, he should have accepted that the amount remaining to be paid was only Ұ2,027,300.  Moreover, Mr Hao would also have been aware that there would definitely have been land premium unpaid at the time of SA2, so the use of the reservation “if any” was unnecessary.  It was thus an important issue of fact before the learned judge, when Mr Hao or Ms Qin became aware of the actual footage built in Phase 1 and the amount of land premium paid in respect of Phase 1.

87.  It was the plaintiffs’ case that long before SA2, which was signed on 12 July 2001, Mr Hao was aware, not only that the amount of land premium paid was Ұ30,186,000, but also of the actual footage built.

88.  It is common ground that Ұ30,186,000 had been paid, Ұ7,546,000 on 27 March 1995 and Ұ22,640,000 on 14 April 1994.  According to Ms Yeung, after she has given the figures orally to Ms Qin in April 2001, Ms Qin requested that it be stated in writing, and that was done by a document marked as “YLH-2” dated 27 April 2001.  That, however, has been denied by Ms Qin.

89.  Another important document bearing on this issue is the letter from the Beijing Real Estate Authority（北京巿房屋土地管理局）, dated 26 April 1999, which was Exhibit P64 at trial.  This document recorded that the total constructed area in Phase 1 was 46,613.6m² of which 36,143m² were above ground.  It would be recalled that the premium would only be charged in respect of the above ground construction (leaving aside for the moment whether the balcony should be charged at the full rate or half rate).  According to Mr Chan, Exhibit P64 was supplied to Mr Hao in April.  Certainly, long before SA2 or SA3.

90.  Exhibit P64 is not an easy document to understand.  Nor would I attempt a translation.  It was written in response to a letter dated 18 March 1999 from Beijing Mandas, requesting the issuance of individual title documents “产权证” to individual purchasers “小业主”.

91.  Exhibit P64 reads:

“	权属处：
	北京明达房地产开发有限公司开发建设碧湖居公寓，位于朝阳公园西小区F组团。其一期工程现已竣工，一期占地面积16308.7平方米，总建筑面积46613.6平方米，其中地上36143平方米。该项目办理出让时土地面积43000平方米，规划地上面积68600平方米。若一期办理出让地上建筑面积为34300平方米，则一期地上建筑面积增加了1843平方米，应补交地价款202.73万元。该项目合同地价款7546万元，已交3018.4万元。若预留二期工程定金565.95万元，则一期可办理产权面积 ─ （3018.4 － 565.95）／1100 ＝2.2295万平方米。该公司可颁发房产证的建筑面积应控制在这个范围内。
	特此函告”

92.  The significance of this document is that one can find the figure of Ұ2,027,300, as well as the fact that the Beijing Real Estate Authority（土地局）appeared to be willing to give individual titles to individual purchasers calculated on the basis of land premium paid at the rate of Ұ1,100, so that for example, on the basis of the land premium paid and attributed to Phase 1, namely (Ұ30,184,000 – Ұ5,659,500)/1100, title documents for 22,950m² of apartments could be provided.

93.  Whether there was the oral agreement regarding the liability for land premium in respect of the 13,200m² turned on credibility.  Credibility, of course, was a matter for the learned judge.  The plaintiff was under cross-examination for 10 days, and Mr Hao was cross-examined for about 4 days.  I am satisfied this is a case where the trial judge enjoyed a tremendous advantage.  The oral evidence took over 30 days.  The witnesses are not natives of Hong Kong (although Mr Chan is a Hong Kong resident).  As the learned judge said “everything happened in Beijing”.  Given the unfamiliarity with the legal and business environment in Beijing, the advantages of observing the witnesses at length and in close quarters are particularly important.

94.  The learned judge was keenly aware of the attack on the credibility of Mr Chan.  He said:

“

3.7

… They queried why no such term of agreement was ever set out in any of the 15 agreements or declarations between 12-4-01 and 27-9-01.  They submitted that for the span of nearly five months, if there were such an agreement, they would have spelt out in one of those agreements which was meant to set out all the agreements between the parties in writing. …”  para. 3.7  of the judgment.

95.  The learned judge accepted Ms Yang’s evidence that the document of 27 April 2001 namely Exhibit YLH-2 was given to Ms Qin on or about 27 April 2001, notwithstanding Ms Qin’s denial.

96.  Also, as the learned judge said, it would make sense for Mr Hao to want to know how much by way of land grant fees had been paid, because the amount paid in respect of Phase 1 would affect Phase 2.  I would add that it is inconceivable that Mr Hao would not wish to know how much of the permissible built up area in relation to Greenlake Garden, had been utilised in Phase 1, because that would affect what square footage could be built in Phase 2.

97.  Mr Hao’s denial of such knowledge has to be seen in the light of Mr Jat’s acceptance that it was inexplicable why he should have agreed to Clause 1.6.4.3 in SA3, if the understanding was that the plaintiffs were liable to pay the land premium on the 13,200m².

98.  Mr Jat also relied on TA1 Clause 5.1 which provided that if the plaintiffs were unable to provide 13,200m² of structure, the share transfer fee should be deducted at the rate of Ұ8,000 per m².

99.  Thus Mr Jat argued the parties must have proceeded on the basis that each m² was worth Ұ8,000.  Since the learned judge proceeded on the basis that Ұ8,000 was inclusive of the land premium, that supported the defendants’ case that the plaintiffs were responsible for the land premium.  This was put to Mr Chan in cross-examination.  In response he said:

“	傳譯員：	那這個1,100塊是被告要付的，那怎麼可以拿這個數來扣減被告要付的尾數呢？
	答：	我給你簡單地舉個例子，如果說給被告一百平方米，最終我只給了他九十平方米，那麼被告呢要負責一百平方米的出讓金，剩下的出讓金是我負責。好了，那背後不是少拿了十平方米的房子嗎，那就等於被告多替我付了十平方米的出讓金，那所以被告向我要除了十平方米的房子價格加上這十平方米房子的出讓金，這樣才--就是才--才平了嘛。”

100.  The answer should be understood against the background that the land premium already paid exceeded the land premium payable in respect of the apartments sold to third party purchasers as well as the Schedule 1 properties by at least Ұ5,000,000 (such a sum being regarded as deposit for Phase 2).  In other words, of the 13,200m² to be left in Beijing Mandas part of the land premium had already been paid, so that it would make sense if less than 13,200m² were left behind.

101.  Be that as it may, Mr Chan’s explanation was not straightforward or clear.  Unfortunately, not everything in this case was straightforward.  As Mr Jat submitted the parties operated in an environment where regulations or laws were administered flexibly and everything seemed negotiable.  Despite the length of the trial, I am not satisfied that the court has been told the full picture.

102.  As I have said the learned judge’s conclusion that there was the oral agreement regarding the land premium on 13,200m² was essentially a finding of fact based on credibility.  Mr Jat argued most forcefully that some of the learned judge’s reasoning was not correct.  I have taken such criticism into account.  With respect, the learned judge’s reasoning varied in quality.  But, after careful consideration of Mr Jat’s submission and the evidence, I am satisfied that the learned judge’s overall conclusion is right.  On the evidence I would have come to the same conclusion.

YLH-23, the weekend of 21 April 2001

103.  One of Mr Jat’s complaints is that the learned judge was overly influenced by his adverse view on Mr Hao and Ms Qin’s credibility in relation to exhibit YLH-23 and the events of the weekend of 21 April 2001.

104.  I turn to the serious factual dispute between the parties over the event of the weekend of 21 April 2001.  Undoubtedly, the learned judge’s conclusion on the credibility of the witnesses on this issue exerted an important influence over his overall assessment of the credibility of the witnesses.  Understandably so, in my view.  The discrepancies between the evidence of the plaintiffs and the defendants over the events of the weekend of 21 April 2001 could not have been the result of mistaken recollection.  After careful consideration of the evidence I shared the view of the learned judge that the credibility of Mr Hao and Ms Qin had been severely damaged.

105.  According to the plaintiffs, Mr Chan and Ms Yang met Mr Hao and Ms Qin, and others from Mr Hao’s side at the office of Beijing Mandas for verification work on 21 and 22 April 2001.

106.  In preparation for that meeting, Ms Yang instructed the accountants of Beijing Mandas to prepare the ledger balances from the computer accounts.  That was in turn done by a Ms Ren Yi Ying (“Ms Ren”).  This is the Exhibit YLH-23 which was in the handwriting of Ms Ren.  It may be confusing but the reference to YLH-23 was sometimes a reference to the actual exhibit produced at trial and other times to the documents created (according to Ms Yang) for the weekend of 21 April 2001 and provided to Ms Qin, of which the exhibit YLH-23 was the copy retained by the plaintiffs.  In this judgment I will refer to the former as YLH-23 (exhibit) and the latter as YLH-23 (document).

107.  Ms Yang said she provided a copy of YLH-23 (document) to Ms Qin over that weekend.  Also she said she switched on the computer to show Ms Qin the ledger balances as recorded on the computer and gave her various explanations on the various items shown in YLH-23 (document).  Some primary documents were also shown to Ms Qin for checking as she requested.  Ms Qin jotted down notes of such explanations on YLH-23 (document).

108.  However, Ms Qin said that the YLH-23 document was only given to her after 28 May 2001 and that her handwriting which appeared on the first page of YLH-23 (exhibit) were written by her after 28 May 2001.

109.  Ms Qin was empathic that she was not at the office of Beijing Mandas over the weekend on 21 and 22 April 2001.  She said, however, she went to the office of Beijing Mandas on 28 April 2001.  However, she only stayed for a very short time, and no verification work was done.

110.  On the plaintiffs’ side, it was alleged that verification work took place not only on the weekend on 21 April 2001, but also the weekend of 28 April 2001.

111.  YLH-23 (exhibit) consisted of 2 sheets of paper, they were produced by Ms Yang on behalf of the plaintiffs.  They are both photocopies.  There are original handwriting written with a blue ball pen on the first page of YLH-23 (exhibit).  Ms Qin accepted that they were written by her.  On the 2^nd page of YLH-23 (exhibit), the words“2001年4月20日统计”(position as at 20–April-01) appeared.  The date supports the plaintiffs’ case that YLH-23 (document) was prepared for the purpose of the verification exercise on 21 April 2001.

112.  Ms Qin said that although she had written on the 1^st page on YLH-23 (exhibit) and that she had been given a 2-page document, the 2^nd page she was supplied with, albeit after 28 May 2001, did not have the words “position as at 20 April 2001” on it.

113.  The question whether there was verification work done over the weekend of 21 April 2001, and if so, whether YLH-23 was prepared for the occasion and supplied to Ms Qin, occupied much time at trial but eventually it was demonstrated most convincingly that the copy that was supplied to Ms Qin also bore the date of 20 April 2001.

114.  On the 1^st page of YLH-23 (exhibit), on which the original handwriting of Ms Qin appeared, one could also see, though faintly, the words“2001年4月20日统计”, probably because the 1^st page was photocopied on top of the 2^nd page.  Furthermore, there were other writings or figures on the 2^nd page of YLH-23 (document) which were also copied onto the 1^st page in the process.

115.  On 2^nd page of YLH-23, there was no handwriting of Ms Qin, but there was some original handwriting of Ms Yang.  The learned judge held in para. 2.24 of his judgment that he accepted Ms Yang’s explanation why the 2^nd page of YLH-23 did not bear Ms Qin’s handwriting.  I agree.

116.  With respect to the learned judge, he then demonstrated convincingly in paras. 2.9 to 2.19 of his judgment why the evidence of Ms Yang and Mr Chan should be preferred over the evidence of Mr Hao and Ms Qin in relation to YLH-23.  Then he turned to consider Exhibit P55, which according to Ms Yang, was created by Ms Qin on 22 April 2001 as a summary of the result of the investigation into the financial affairs of Beijing Mandas.

117.  Ms Qin denied that.  According to her, it was made very late in July 2001, the learned judge dealt with this in paras. 2.20 to 2.32 of his judgment.  And he concluded in para. 2.33:

“

2.33

Accordingly, I find that Ms Qin’s evidence that [P55] was only prepared after mid-7-2000 [which should be mid-7-2001] was not truthful. …”

118.  The learned judge then dealt with another document which was Exhibit P52 entitled “list of loans”（贷款清单2001年4月9日）.  Again, he preferred the evidence of Ms Yang to Ms Qin.

119.  He then concluded in para. 2.47 that the:

“	… version of Ms Qin and Mr Hao in turn in respect of YLH23 is not credible.  Instead, Mr Chan and his staff, and in particular, Ms Yang, had frankly disclosed the financial position of Beijing Mandas to Mr Hao and his staff, in particular, Ms Qin”.

120.  The importance of YLH-23 and the events of the weekend of 21 April 2001, of course, was the plaintiffs’ evidence that Exhibit P55 was produced as a result.  If that version of events were accepted by the court, that would seriously weaken a substantial part of the defendants’ counterclaim based on non-disclosure.

121.  As I have said, Mr Jat made no oral submission in relation to undisclosed liabilities.  So far as Exhibit P55 is concerned, Mr Jat submitted that paras. 2.26 to 2.32 of the judgment is wrong, because the judge failed to appreciate that the entries he relied on only showed that Exhibit P55 was prepared after YLH-23, but they did not prove that Exhibit P55 was produced on 21 to 22 April 2001.  But the significance of YLH-23 is that the learned judge concluded and was entitled to conclude that Ms Qin and Mr Hao were unreliable.  The learned judge could not be criticised for accepting Ms Yang’s evidence that Exhibit P55 “was created by Ms Qin on 22-4-01 …” 2.20.

122.  Ms Qin’s evidence which was rightly rejected by the learned judge affected not just her credibility, it also went to the credibility of Mr Hao, because it also his evidence that no verification exercise took place on 21 and 22 April 2001.

123.  Mr Jat made the valid point that even if Mr Hao and Ms Qin were not credible witness, the learned judge ought nevertheless to have scrutinised the evidence of Mr Chan to see whether there was indeed the oral agreement regarding the land premium for the 13,200m².  But that was what the learned judge has done, and with respect, I agree with his conclusion.

124.  Moreover, I agree with Mr Fung that as a matter of inherent probability, it was inconceivable that no verification work was done until well into May 2001.

125.  It will be recalled that under DA1 (16 April 2001), the defendants agreed to pay a deposit of Ұ1,000,000 because the defendants needed to verify confidential information of Beijing Mandas, including financial and accounting matters（财务、账务等）.

126.  DA1 also provided expressly that in principle, the verification work should be completed within 10 days of the 1^st Deposit Agreement.  It also provided that the plaintiffs would have to refund twice the Ұ1,000,000 if the transaction should not proceed because of discrepancies between the information disclosed and the information contained in TA1.  Furthermore, the parties not only entered into TA2 on 28 April 2001, a further deposit of Ұ5,000,000 was paid under DA2.

127.  I agree with Mr Fung that it does not make sense that no verification work was done until late May 2001.  According to Ms Qin, on 28 April 2001 she attended the office of Beijing Mandas, but no verification was done.  She was introduced to Mr Chan and stayed half an hour or so and left.  The judge in para. 2.6 of the judgment recounted Ms Qin’s evidence that probably on 21 April 2001, Ms Qin was asked to wait outside Greenlake Garden by Mr Hao, and then she accompanied Mr Hao to see Mr Chan at Greenlake Garden, but that was only a short introduction.  She left after about half an hour to an hour, she did not do any verification work.  However, it seems clear that according to Ms Qin, that event took place not on 21 April 2001, but on 28 April 2001, but this error does not affect the correctness of the learned judge’s conclusion.

128.  Moreover, YLH-23 was prepared so as to show Beijing Mandas’ position as at 20 April 2001.  That supports the plaintiffs’ case that it was prepared for the purpose of the verification exercise which commenced on 21 April 2001.

Default Payment and Penalties (Default Payment)

129.  They can be dealt with relatively briefly.

130.  Under SA2, it was expressly provided that the defendants should be responsible for Phase 2 default payment.  Clause 1.13 provided:

“	本补充协议签署后，（Mr Hao）负责与巿房屋土地局及有关部门商洽并负责支付碧湖居二期项目应支付的土地出让金（含滞纳金等）”

131.  It would be recalled that default payment was only payable in respect of the initial agreed premium of Ұ75,460,000.

132.  Mr Jat, however, submitted that, since the cut-off date was 28 April 2001, all default payment payable in respect of the full sum of Ұ75,460,000 up to 28 April 2001 should be the responsibility of the plaintiffs.  That was also the basis upon which the expert called on behalf of the defendants proceeded.

133.  The learned judge rejected that submission.  I agree.

134.  Under the Land Grant, the default payment was indeed payable in respect of the entire amount of Ұ75,460,000 after default.  Even so, it was the defendants’ case that the final amount was reduced after negotiation.

135.  Mr Jat has correctly pointed out the Land Grant made no mention of Greenlake Garden being developed in 2 phases.  However, Exhibit P64 recognized the fact that Greenlake Garden was being developed in 2 Phases.  It referred in terms to the fact that:

“	Phase 1 has been completed.”（第一期工程现已竣工）

It also recognized that the land premium could be apportioned to the 2 phases separately and the Beijing Real Estate Authority was prepared to proceed on the basis that the premium paid of Ұ30,184,000 could be apportioned between the 2 phases, and in fact it was.

136.  However, as a matter of contract between the plaintiffs and the defendants, the parties had agreed that the defendants should be responsible for the default payment in relation to Phase 2, see in particular, Clause 1.13 in SA2.  They had not agreed that the defendants should be responsible only for default payment in respect of Phase 2 accruing after 28 April 2001.  I believe the only reasonable interpretation to put on the parties’ agreement is that such part of  default payment in respect of Ұ75,460,000 attributable to Phase 2 of the Greenlake Garden development should be the responsibility of the defendants regardless of when they were accrued.

Balcony at full or half rate

137.  In the calculation prepared by Mr Jat, the defendants were seeking overdue default payment in the sum of Ұ8,886,538.55, on the basis that the plaintiffs were responsible for all default payment, falling due up to 28 April 2001.  The defendants’ alternative case was that the plaintiffs were responsible for the land premium attributable to the actual area built in relation to Phase 1 which when calculated on the basis that the rate of premium for the balcony was the full rate amounted to Ұ3,594,336.20, alternatively, when calculated on a 50% basis at Ұ2,959,375.33.  This alternative claim depended on the plaintiffs’ liability to pay land premium in respect of 13,200m².  Since I agreed with the judge’s conclusion on this issue it would have been unnecessary for me to deal with the question whether the land premium for balconies should be at full or half rate.  However, since this matter might go further, I would deal briefly with this question.  It is common ground that under the relevant regulations, land premium for unenclosed balconies was payable at half rate only.  However, the defendants have applied for leave to adduce the Supplemental Agreement made between the Beijing Real Estate Authority and Beijing Mandas dated 12 September 2006, under which it appeared that land premium for balconies had been paid at the full rate.  I agree with Cheung JA that we should refuse leave to produce the Supplemental Agreement.

138.  In any event Mr Jat’s submission depended on Clause 9 of the 4PA.  He submitted that it was agreed under Clause 9 that the land premium payable in respect of Phase 1 should be determined in accordance with proof produced by the relevant Real Estate Authority:

“

九、

… 一期部分（碧湖居）应交土地出让金（按北京巿房地局有关部门出具的证明为准）”,

He submitted that the Supplemental Agreement was such proof.

139.  I am not satisfied that that is correct.  Nor am I satisfied that the supplemental agreement satisfies the second and third Ladd v Marshall conditions.  The Supplemental Agreement was a consensual document and was entered into to vary the contractual obligations of Beijing Mandas.

Tax liabilities

140.  It is helpful to note that this part of the counterclaim was made under the rubric of “Plaintiffs’ liability in respect of tax in excess of RMB5,000,000”.

141.  It was part of the defendants’ counterclaim that there were undisclosed taxed liability for which the plaintiffs were responsible.  According to the defence, there were 3 separate taxes which might be payable:

1)	income tax (所得税),
2)	property tax (房产税),
3)	business tax (营业税)

142.  Income tax was only payable if there were profits.  However, it seemed to be common ground the business tax at 5% was payable on sales regardless whether they resulted in profit or loss.

143.  In para. 71K of the Re-amended Defence and Counterclaim, it was alleged that according to the records of Beijing Mandas, prior to 28 April 2001, Beijing Mandas had sold 231 apartments in Phase 1 for the total consideration of Ұ409,414,247.24, and that business tax at 5% on the same was Ұ20,470,712.36 and that exceeded “the RMB5 million limit which the Defendants are prepared to bear by RMB15,470,712.36”.

144.  It went on to plead in paragraph 71J(4) that according to the financial accounts of Beijing Mandas, as at 28 April 2001, Beijing Mandas had already paid business tax （营业税）in a sum of Ұ3,974,491.27.

145.  By para. 71L, the defendants sought to counterclaim as follows:

“

(1)

The best particulars the Defendants can give is that on account of ‘Business Tax’ and on the basis that a sum of RMB3,974,491.27 has been paid by Beiiing Mandas as Business Tax for the sale of properties in Phase I, the additional amount in excess of RMB5 million is RMB11,496,221.09 (RMB20,470,712.36 - RMB3,974,491.27 - RMB5,000,000).”

146.  There was also a claim for penalty for late payment of such business tax amounting to Ұ53,572,707.77.

147.  Mr Jat’s submission is simple.  He submitted as the plaintiffs had warranted in the Declaration on Financial Matters dated 7 August 2001 that Appendix 1 to SA3 was complete and true, and the warranty formed the basis of SA3, including Clause 1(9) which removed the cap of Ұ5,000,000 regarding excess tax liability, the plaintiffs could not rely on Clause 1(9) of SA3.

148.  In SA3, there were a total of 6 appendices.  At page 2 of Appendix 1, there was an item of Property Tax房产税 in the sum of Ұ150,000.  In Appendix 5, it appeared that in respect of this Property Tax, Mr Hao was to be responsible for Ұ100,000, and Mr Chan Ұ50,000.  This was probably why this sum was specifically set out.  There was no reference to income tax or business tax.

149.  It should be noted that it was stated in various agreements that in excess of Ұ10,000,000 had been paid in respect of the tax liability of Beijing Mandas, and that TA1 and TA2 provided that should the additional tax liability exceed Ұ5,000,000, the plaintiffs would be liable for them.  The limit of Ұ5,000,000 was removed in Clause 1(9) SA3, so that the defendants would be liable for all the additional tax liability.

150.  But in 71E of the Re-Amended Defence and Counterclaim, it was alleged that sometime between the signing of SA2 12 July 2001 and the signing of the SA3 on 6 August 2001, the plaintiffs:

“	… had produced certain accounting records of Beijing Mandas to the 1st Defendant ….  In the said accounting records, there was an item showing that the “Income Tax”（所得税）payable was in the sum of RMB2,015,371.70.” para. 71E(2)
“	(5)	The Plaintiffs … prepared and provided to the Defendants 7 Appendices to be annexed to the 3rd Supplemental Agreement.  Under Appendix 1 of the 3rd Supplemental Agreement, the only reference to tax liability is the said “Property Tax”（房产税）in the sum of RMB150,000.
	(6)	The “Income Tax”（所得税）in the sum of RMB2,015,371.70 received no mention in Appendix 1 as it had been agreed that any unpaid tax liability below RMB5 million would be borne by the 1st Defendant.”

151.  This was an important indication that Appendix 1 of SA3 was not intended to contain a complete statement of Beijing Mandas’ tax liabilities.  The specific inclusion of Property Tax of ¥150,000 was necessary because of the agreement on splitting up the liability between the parties.

152.  It was further alleged:

“	71F.	In the premises, the Plaintiffs have represented to the Defendants:
		(1)	that the only outstanding tax which might be payable by Beijing Mandas consisted of:
			(a)	‘Income Tax’ in the sum of RMB2,015,371.70 which was within the RMB5 million limit which the 1st Defendant agreed to bear; and
			(b)	‘Property Tax’ in the sum of RMB150,000, of which the 1st Defendant would only be responsible for RMB 100,000;
		(2)	that, in any event, the outstanding unpaid tax liability which the 1st Defendant has assumed would not exceed RMB 5 million. (‘the Representation’).”

153.  Mr Chan in his evidence denied any misrepresentation, and in his 1^st Supplemental Witness Agreement he explained why the cap of Ұ5,000,000 was removed in SA3.  Ms Yang further explained in her Supplemental Witness Statement that business tax paid in respect of false sales would be refunded.  As the learned judge said, when Beijing Mandas borrowed on the basis of the false sales that was expressly made known to the lender.  It seemed that the creation of false sales to raise finance was at the time a tolerated practice and that the business tax paid would be refunded.

154.  The learned judge was also satisfied that there was no misrepresentation.  He was satisfied that Mr Hao was aware of the potential business tax payable.  It is unnecessary to consider in detail why the learned judge thought Mr Hao would agree to Clause 1(9) of SA3.

155.  The learned judge was skeptical about the defendants’ counterclaim on tax liabilities which was not raised until:

“

4.39

… 12-2004, just two weeks before the commencement of this trial in 1-2005.”

Further that:

“

4.41

… By the end of the trial which is nearly one and a half years later, the defence did not inform the court nor lead any evidence as to what explanation they have given to the tax authority and what was the result of the investigation by the tax authority. …”

Although it was the evidence of Mr  Hao that:

“

4.40

… he was repeatedly demanded by the tax authority in 9 and 10-2004 …”

Then:

“

4.41

… it is reasonable to accept the plaintiffs’ submission that the allegations of the defence about the tax problems were unreal. …”

He concluded that:

“

4.46

In conclusion, given the elaborate system of the investigations into the tax position of enterprises by the tax authority of the government, if the tax problems of Beijing Mandas were real or as substantial as alleged by the defence, it is quite impossible that the problems would not have been discovered by the tax authority over the years.  However, in the past five years, Beijing Mandas had not been demanded by the tax authority to make any outstanding payment for tax, otherwise Mr Hao would have produced the same.  Further SA3 must have superseded the previous old provisions in relation to tax since those provisions provided that the payment of such tax liability is subject to tax payment receipt (应以税务部门开具的税票为准) (for example, see Clause 5.3 in TA1 of 12-4-01).  There is no tax receipt issued by any tax authority produced to the court.”

156.  It also appeared that the audited accounts of Beijing Mandas, even after Mr Hao had taken over, did not disclose any contingent tax liabilities.

157.  The thrust of the pleadings was that Clause 1(9) was the result of misrepresentation.  That was rejected by the learned judge.  I am not satisfied that the obligation of the defendants to pay the additional tax liability depended on the correctness of Appendix 1.  I am of the view that Clause 1(9) of SA3 (and the earlier provisions with the Ұ5,000,000 cap) was entered into on the basis that there might be undisclosed tax liabilities, and the defendants would be liable for them.  Also, although the experts’ views were that the business tax should be payable, I share the learned judge’s skepticism that such liability would ever have to be paid.  Or that the liability, if any, could not be kept within reasonable bounds.  I will not deal with Ms Yang’s evidence on this aspect save to say that on her evidence, such liability, if any, was likely, to be minimal.

Water charges

158.  This is a claim for Ұ780,000.  This is based on an agreement reached between Beijing Mandas and the Beijing water authority.  The agreement seemed to acknowledge that the water supply to Greenlake Garden had been illegally connected to the mains, and when that was discovered Beijing Mandas agreed to pay Ұ780,000 to the Water Supply Company , it being accepted that Beijing Mandas was a victim as well as a beneficiary of such illegal connection.

159.  The learned judge was not satisfied that the defendants had sufficiently proved their case.

160.  This might appear to be a surprising conclusion.  However, having regard to the material considered by the learned judge, and referred to specifically in his judgment, I have come to the conclusion that this is a finding which should not be disturbed.

161.  The documents produced on behalf of the defendants showed that the inspectors on behalf of the Inspectorate of Beijing Sale of Tap Water Supply Group (北京市自来水集团供水营销稽查大队) have reported that:

“	(i)	Greenlake had never properly applied for the official supply of water;
	(ii)	Greenlake had not, since the commencement of works in or about 1994 up to then, paid any water charges.
	(It is not apparent from this report nor from Mr Hao and Ms Qin why Mr Gong could have come to this conclusion and his reasoning therefor.)”  Judgment at para. 9.6

162.  Eventually, it was agreed that Beijing Mandas should pay the Water Supply Company Ұ780,000 for water consumption between 1994 and 2006.

163.  However, as recorded by the learned judge, Ms Yang’s evidence was that water charges had been paid and that it was impossible that they had not paid water charges since 1994.  According to the plaintiffs’ evidence, Beijing Mandas in about 1995, contracted with a You Lian Company (友联公司) and signed a written agreement to the effect that You Lian would be responsible to install and apply for proper supply of water.  The contract was completed at the contract price of Ұ200,000.  The pipes were connected and the water meter was installed.  See judgment at para. 9.2.

164.  At para. 9.28 of the judgment , the judge recorded that:

“

9.28

… According to Mr Chan, You Lian was a subsidiary company of the water company and a quasi-designated contractor of the water company for water connection works.”

165.  The learned judge then set out in paras. 9.29 and 9.30 of his judgment, the various contracts and documents in connection with water supply, which had been supplied to Mr Hao’s side by Mr Chan, including, for example, a water connection works contract with You Lian, dated December 1995.

166.  These documents also included, amongst others, a letter to the Water Company on registration and instalment in office, dated 20 October 1997, and water supply facilities hygiene permits.  None of these documents had been produced by the defence.

167.  The judge then concluded:

“	9.32	I must say I agree with the plaintiffs’ submissions that it is inconceivable with all these documents that the plaintiffs had not paid water charges by illegally and improperly connecting water pipe to the main water supply in all these years and thereby avoided paying the same.   This could not be done unless there is a conspiracy among Beijing Mandas, You Lian, Chaoyang Park and Wan Guo Property.  Why should a state enterprise participate in such a conspiracy basically for Xin Xing?
	9.33	On the other hand then why there was a report by water company in February 2002?  There is no definite answer in this respect.  The only thing which had so glaringly happened is that by November 2001 Mr Hao had already taken the stance that he was not going to pay the balance of Ұ12 million.  This action has been started in 3-02 with an injunction application to restrain Mr Hao from transferring the shares in Hong Kong Mandas to a third party.  The relationship between the two parties since 9-2001 to 2-2002 had been quite acrimonious.”

168.  Mr Jat submitted that the learned judge should not have speculated about the possibility of a conspiracy.  No conspiracy had been alleged.  The defendants’ allegation was that there had been an illegal connection to the mains.  There is force in this submission.  However, in the end, I have decided that I cannot interfere with the learned judge’s conclusion.  This is a case where the learned judge was entitled to look at the larger picture and refuse to take documents at their face value.

Whether sufficient land premium paid in respect of Phase 1

169.  Here Mr Jat’s submission is that the premium paid in respect of Phase 1 should not include Ұ5,659,500 which had been apportioned to Phase 2 by Exhibit P64.

170.  Mr Jat submitted that since between Beijing Mandas and the Real Estate Authority, it was agreed that Ұ5,659,500 out of the premium paid of Ұ30,186,000 should be attributed to Phase 2, so between the plaintiffs and the defendants, the plaintiffs should be regarded as having paid only Ұ24,526,500 as premium for Phase 1.  If that be the case there might be a deficit even if the plaintiffs were not liable for the land premium attributable to the 13,200m².  I am satisfied that whatever might have been the position between Beijing Mandas and the Real Estate Authority as evidenced by Exhibit P64 or otherwise, between the plaintiffs and the defendants the position was governed by Clause 9 of 4PA which clearly recorded that the land premium of Phase 1 paid was Ұ32,200,000, (namely, Ұ30,186,000 plus Ұ2,027,300) which was more than enough to cover the apartments genuinely sold and the Schedule 1 properties.

Non-disclosure and other matters

171.  Mr Jat made no oral submission in relation to other matters such as, e.g. the loan of Yi De Company（怡得公司）, guarantees given for purchasers, and accounts receivables.  In relation to these items I am in respectful agreement with the learned judge and will not deal with them separately.

Blocks 3, 4 and 5 and 4 vehicles

172.  Included in the Schedule 1 properties are Blocks 3, 4 and 5 as well as 4 vehicles.  Mr Jat relied on the language of Clauses 6.5.2 and 6.5.3 in SA3 where it was provided that Mr Hao should collaborate or act together with（“配合”）the 1^st plaintiff in arranging the transfer of Blocks 3, 4 and 5.

173.  Mr Jat submitted that the learned judge was wrong to order that Blocks 3, 4 and 5 as well as the 4 vehicles be transferred to the plaintiffs.  Essentially, Mr Jat’s submission is that on the evidence the learned judge ought not to have been satisfied that the defendants had been in breach.  In relation to Blocks  4 and 5, there was an application for leave to adduce evidence to show that they have been demolished and that there is an order for the demolition of Block 3.  The application had not been actively pursued.  In any event, I agree with Cheung JA that leave should be refused.

174.  Mr Jat also submitted that the plaintiffs had failed to show lack of co-operation on the defendants’ part.  I think it would be naive to think that there would have been co-operation.  As the learned judge said, though in the context of water charges,

“	The relationship between the two parties since 9-2001 to 2-2002 had been quite acrimonious.”

If the defendants are no longer able to transfer Blocks 3, 4 and 5 no doubt the matter can be resolved in the enforcement of the order.  The question of damages in lieu, if any, may then have to be resolved.

175.  As for the 4 vehicles, on the evidence referred to us by Mr Jat, it does seem that the defendants had offered to assist in the transfer of these vehicles.  However, looking at the matter in the round, I am not prepared to interfere with the order made by the learned judge.

176.  I also ignore for the purpose of this judgment the correspondence from the parties relating to actions or in actions regarding the 4 vehicles subsequent to the judgment below.

Conclusion

177.  For the above reasons, I would dismiss the appeal with costs.

Hon Cheung JA:

178.  I agree.

Application to adduce new evidence

179.  The defendants applied for leave to adduce the following evidence for the purpose of the appeal:

(1)	The Administrative Judgment of the People’s Court of the Beijing Chao Yang District dated 22 August 2006 (北京市朝陽區人民法院行政裁定書 (2006)) (‘the 22 August 2006 Judgment’).
(2)	Civil Judgment of the Second Intermediate Court of Beijing dated 3 August 2006 (北京市第二中級人民法院民事裁定書 (2005)) (‘the 3 August 2006 Judgment’).
(3)	Supplemental Agreement made between 北京市國土資源局 and Beijing Mandas dated 12 September 2006 (‘the Supplemental Agreement’).

The relevance

180.  The first two documents were sought to be adduced in relation to the order of Yam J requiring the defendants to transfer the Schedule 1 properties to the plaintiff.  Among the Schedule 1 properties are three blocks of buildings, namely, Blocks 3, 4 and 5.   It was argued that the two judgments show that the defendants would not be able to comply with the order.

181.  The 22 August 2006 Judgment empowered the Demolition Notice dated 3 April 2006 issued by the Beijing Planning Committee (北京市計劃委員會) to be executed.  By that Demolition Notice Beijing Mandas was required to demolish Block 3 on or before 18 April 2006. 

182.  The 3 August 2006 Judgment was in respect of an action brought  by Beijing Millennium (北京千禧年代投資資訊有限公司) against Beijing Mandaswho claimed that Beijing Mandas had on 22 October 2005 wrongly demolished Blocks 4 and 5. 

183.  According to this judgment Beijing Mandas demolished the two blocks pursuant to a Demolition Notice issued by the Beijing Planning Committee.  Accordingly, Beijing Millennium’s claim was not a civil dispute within the jurisdiction of the Beijing Court.  The Beijing Court dismissed the claim by Beijing Millennium. 

184.  The purpose relied upon by the defendants in respect of the Supplemental Agreement is that the agreement confirmed that 北京市國土資源局 charged land premium for the whole of the area of the balconies and hence the Yam J’s finding that the land premium would only be chargeable over half of the balcony area (paragraph 3.13 of the judgment) is erroneous. 

Ladd v. Marshall

185.  The principle on the admission of new evidence is governed by Ladd v. Marshall [1954] l WLR 1489 :

‘	Leave to adduce further evidence on appeal will only be granted
	(1)	if it is shown that the evidence could not have been obtained with reasonable diligence for use at the trial.
	(2)	if the further evidence is such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive, and
	(3)	if the evidence is such as is presumably to be believed.’

The two judgments

186.  In respect of the 22 August 2006 Judgment although it was delivered after the judgment of Yam J, the subject matter was concerned with the Demolition Notice of 3 April 2006 which was already in existence before the judgment of Yam J.

187.  The 3 August 2006 Judgment was delivered after close of submissions and shortly before the judgment of Yam J.  But again the relevant subject matter dealt with in that judgment was already in existence at the trial. 

188.  The position is that at the hearing before Yam J the defendants were aware that Block 3 was subject to the Demolition Notice.  They were further aware that Blocks 4 and 5 were already demolished by Beijing Mandas since Mr. Hao by then had already controlled Beijing Mandas.  Furthermore the defendants must be aware of the plaintiff’s claim in respect of these three blocks.  Irrespective of the dates of these two judgments the issue could have been raised before Yam J by the defendants if they were concerned with any order requiring them to transfer the three blocks to the plaintiff. 

189.  We are not satisfied that the second limb of the Ladd v. Marshall requirement is satisfied in this case namely, if the two judgments were adduced as evidence they would probably have an important influence on the result of the case although they need not be decisive because at the trial the defendants already had evidence which had a significant bearing on this issue. 

190.  Insofar as these two judgments are relevant for the purpose of the enforcement of the judgment, Yam J had already provided the parties with liberty to apply.  In our view the parties should return to Yam J if this issue arises in the future.

191.  Further these two judgments will not be able to assist this Court on the issue now raised by the defendant, namely, the Order of transfer exceeded what was required of the defendants under Supplemental Agreement No. 3 dated 6 August 2001.  The defendants’ case is that they were only required to cooperate with Beijing Millennium in respect of Beijing Millennium’s application for ownership permit of Blocks 4 and 5 and that in respect of Block 3 they were to coordinate with Beijing Millennium’s application for approval of this block and also to coordinate with Beijing Millennium’s application for the ownership permit.  The two judgments have no bearing on this particular issue. 

192.  Accordingly we will not admit the two judgments as new evidence. 

The Supplemental Agreement

193.  In relation to the Supplemental Agreement, clearly whether the land premium was to be charged on full balcony or half balcony basis cannot be resolved even with this new evidence.  If this document was to be admitted then clearly the plaintiff must be given an opportunity to cross-examine Mr Hao on the circumstances in which this Supplemental Agreement came into existence and also to call further evidence in relation to be correctness of the decision of 北京市國土資源局.  We do not accept that the issue should be reopened in this manner. 

194.  Hence we would also not admit the Supplemental Agreement as new evidence.

Hon Yuen JA:

195.  I agree.

Hon Tang VP:

196.  The appeal is dismissed and we make an order nisi that the plaintiffs are to have the costs of the appeal including the costs of the application for leave to adduce evidence on appeal; such costs to be taxed if not agreed.

Appendix 1