GLOBAL BRIDGE ASSETS LTD AND OTHERS v. SUN HUNG KAI SECURITIES LTD

CACV 161/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 161 OF 2009

(ON APPEAL FROM HCA NO. 317 OF 2008)

_______________________________

BETWEEN

_______________________________

_____________________

J U D G M E N T

_____________________

Hon Rogers VP:

1.  This was an appeal from a decision of Suffiad J given on 22 April 2009. The judge had before him applications to strike out all the plaintiffs’ claims. The judge dismissed the applications and on this appeal the defendant appeals in respect of the claims made by the first and second plaintiffs.

2.  At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

3.  It is unnecessary to recite the full background to this case. Much of the background can be gleaned from the pleadings and the evidence which has been filed by the parties. It is sufficient to say that there is a considerable dispute in relation to some of the facts. It suffices to say that there is a Chinese-Foreign Equity Joint Venture company, the English name of which is Hubei Changzhou Power Development Company Limited. The Articles of Association of that company are dated August 1993. Under Article 3 the defendant was named as one of the parties that had signed the Contract on Joint Establishment of Changzhou Power Development Company Limited (the “Agreement”). The Articles set out the purpose of that company, which was to build a coal powered electricity generating plant to supply electricity for Suizhou City.

4.  The Articles and the Agreement mirror each other in many of their provisions. It was provided that the defendant would hold 40% of the joint venture whereas the PRC partner would hold 60%. The capital contributions were to be made in tranches. The defendant’s total contribution was to be US$10 million. Article 15 of the Articles, which is mirrored in Article 11 of the agreement, provides that:

“Any party who wishes to transfer its investment contribution amount whether it is for the whole or part of it, must obtain the consent of the other party.  When one party intends to transfer, the other party has the pre-emption right to purchase.”

5.  Article 16 further provides that:

“In the event of the transfer of the joint venture company’s registered capital, the resolution must be passed unanimously before, then submitted to the original examining and approving authority for approval and application be made to the national industrial and commercial administration department for completing registration procedures of change.”

6.  For the purposes of this decision, there is no dispute that the defendant has not paid part of its capital contribution, namely US$3 million; there has been an arbitration award in the Mainland to that effect, as pleaded in paragraph 10 of the statement of claim.

7.  The first plaintiff’s claims are based on what are referred to as an oral guarantee, alternatively pleaded as a collateral contract, and a collateral warranty. The guarantee that was said to have been given on the defendant’s behalf was that if there were not due performance of the obligations owed to the first plaintiff by a third party in respect of a contract to purchase a large shareholding in another company, the defendant would transfer, or procure the transfer to the first plaintiff or its nominee of, its 40% share in the joint venture company. It is pleaded that there was a collateral contract as well as an oral guarantee to that effect. It is further pleaded that there was a collateral warranty that the defendant could and was in a position to transfer and procure the transfer of its 40% share to the first plaintiff or its nominee. It is then pleaded that, in purported performance of the oral guarantee and/or the collateral contract, the defendant entered into a contract, which is entitled Contract for the Transfer of Registered Capital in Chang Zhou Power Development Company Ltd (“the “Contract”), with the second plaintiff.

8.  The terms of the Contract are important because, together with the Deed of Waiver and Indemnification (“the Deed of Waiver”) its terms form the basis of the defendant’s application to strike out the first and second plaintiffs’ claims. The Contract was made between the defendant and the second plaintiff. The important terms of the Contract are as follows:

“Recital

WHEREAS, LPI desires to acquire any and all interest which SHK may hold in the registered capital (the “Interest”) of Chang Zhou Power Development Company Limited (the “Joint Venture”), a Sino-foreign equity joint venture company established in Hubei Province, People’s Republic of China from SHK and SHK agrees to transfer to LPI any such Interest upon and subject to the terms and conditions herein;

NOW, THEREFORE, the Parties agree as follows:

1.  Transfer of Equity Interest

1.1  SHK hereby transfers to LPI and LPI hereby acquires from SHK the Interest at a price of one Hong Kong Dollar (HK$1.00) (the “Transfer Price”).

1.2  Within five (5) days from the date hereof, LPI shall pay the Transfer Price in full to SHK in cash.

1.3  LPI shall be responsible for arranging and obtaining any waivers, consents and approvals as may be required by LPI or as may be required under PRC law for the transfer of the Equity Interest from SHK to LPI.

1.4  LPI acknowledges and agrees that SHK hereby transfers the Interest to LPI without any representation, guaranty or warranty of any kind by SHK, express or implied, as to any title or right or otherwise or any other representation or warranty whatsoever, express or implied, with respect to the Interest or any part thereof.

1.5  LPI shall be responsible for any and all taxes, fees, charges, levies and costs in connection with or arising from the transfer of the Interest by SHK to LPI, including but not limited to, stamp tax, business tax, enterprise income tax and other governmental charges wherever arising.

2.  Assumption of Rights, Duties, Obligations and Liabilities

From the date hereof, LPI hereby assumes all rights, duties, obligations, liabilities of SHK in relation to the Interest, the Joint Venture or any transaction related thereto, arising prior to or after the date hereof.  From the date hereof, LPI hereby releases SHK from all of its duties, obligations and liabilities in relation to the Interest and the Joint Venture.

For the avoidance of doubt, and without limiting the generality of the foregoing, from the date hereof, LPI shall be responsible for all claims (if any) against SHK by third parties and the Joint Venture in respect of its performance of any duties or obligations arising in relation to the Interest or the Joint Venture.”

9.  The Deed of Waiver had the following provisions on which specific reliance is placed;

“Recital

WHEREAS, pursuant to the Contract for the Transfer of Registered Capital (the “Transfer Contract”) between SHK and LPI of even date, SHK has transferred to LPI and and all interest (the “Interest”) which it may have in Chang Zhou Power Development Company Limited (the “Joint Venture”), a sino-foreign equity joint venture company established in Hubei Province, the People’s Republic of China;

WHEREAS, in consideration of SHK’s entering into the Transfer Contract, LPI agrees to provide waivers and indemnities set forth herein to SHK:

1.  Waiver

1.1  LPI hereby releases and forever discharges SHK and… (collectively the ‘Releasees’), and each of them separately and collectively, from any and all claims, liens, demands, causes of action, obligations, damages and liabilities of any nature whatsoever, known or unknown, that LPI ever had, now has or may hereafter claim to have in respect of any claims (the “Released Claims”) arising against any of the Releasees, including (but not limited to) claims relating to or arising from the Interest, the Joint Venture or any transaction related thereto.

1.2  LPI hereby agrees to cause each of its subsidiaries and affiliates to forbear from pursuing any Released Claims which they may have against SHK, its subsidiaries or affiliates, or their assets.

2.  LPI’s Covenant Not to Sue

LPI covenants and agrees that it will never, by itself or with any person or in any way, commence, aid in any way, except as required by due legal process, prosecute or cause or permit to be commenced or prosecuted, any action or other proceedings based upon any claim which is the subject of the releases set forth in Article I hereof.  This Deed shall be deemed breached by LPI and a cause of action shall be deemed to have accrued immediately upon LPI’s commencement or prosecution of any action or proceedings against any of the Releases contrary to this Deed.”

10.  The first plaintiff’s claims are founded upon the assertion that the defendant had never obtained the written consent of the PRC party to the joint venture for the transfer of its 40% share and that the defendant had deliberately concealed that fact from the first plaintiff. Furthermore, the defendant had never paid the US$3 million which it was required to pay, as evidenced by the arbitration award. On the first plaintiff’s part it is alleged that that constitutes a breach of the oral guarantee, collateral contract and collateral warranty. It is also alleged that there were representations to similar effect that had been made negligently and/or recklessly and/or fraudulently.

11.  The second plaintiff’s claim is based on the footing that the defendant has failed to transfer or procure the transfer of its 40% share in the joint venture.

12.  It is the defendant’s case that, in so far as the defendant had, as at the date of the Contract, any interest in the joint venture, whether as pleaded in the statement of claim or otherwise, the responsibility for securing the waivers, consents and approvals that may be required under the Mainland law for the transfer of the defendant’s share or interest lay with the second plaintiff. That was so, apart from anything else, because of the terms of clause 1.3 of the Contract, as Mr McCoy SC, who appeared on behalf of the defendant in this court, was at pains to emphasise at length and to repeat on a number of occasions.

13.  It was the defendant’s case that the Contract was executed on its coming into existence and that any interest which the defendant had in the joint venture had been transferred on the coming into existence of the Contract. Thereafter, as clause 2 of the Contract made clear, the second plaintiff assumed all the duties, obligations and liabilities of the defendant in respect of the joint venture and the second plaintiff was thereafter responsible for any claim made by the joint venture in respect of the share originally held by the defendant.

14.  In respect of the Deed of Waiver, there was no dispute between the parties that it was made under seal immediately following the making of the Contract. In short, it is said that the provisions of clause 1: Waiver and clause 2: LPI’s Covenant Not to Sue, conclude the matter that the claims brought by the first and second plaintiffs are unsustainable because the second plaintiff had covenanted that it would not pursue and would cause any subsidiary or affiliate to forbear from pursuing any of the claims, which were referred to as the Released Claims, which would encompass the claims by the first and second plaintiffs in the statement of claim.

15.  The judgment in the court below concentrated on the words “has transferred” in the first recital of the Deed of Waiver. In paragraph 49 of the judgment it is said:

“In the first recital, the sentence which states that pursuant to the Capital Transfer Agreement, the defendant ‘has transferred’ to the 2nd plaintiff any and all interest which it may have in the JV, the use of the words “has transferred” would suggest :

(a)  not only that the Waiver and the Covenant Not to Sue was given only upon the defendant fulfilling those obligations of transferring its interest in the JV to the 2nd plaintiff pursuant to the Capital Transfer Agreement; but also

(b)  that the “Released Claims” would not encompass that obligation of the defendant to transfer its interests to the 2nd plaintiff under the Capital Transfer Agreement, since if that obligation has, according to the Recital, been completed, it cannot be contemplated by the parties that if the obligation was not fulfilled, the 2nd plaintiff would release the defendant from having to meet that obligation.”

16.  Whereas there is no dispute that, at least on the pleading, the second plaintiff has obtained nothing and, therefore, the statement in the first part of the recital clause has not been satisfied, two matters appear to me to be relevant. The first is that the second recital clause specifies the consideration for the waivers and indemnities as being the defendant’s entering into the Contract. It also has to be borne in mind that because the Deed of Waiver was made under seal, different rules apply in relation to consideration.

17.  In my view, the consideration specified, namely of the defendant entering into the Contract, is sufficient consideration for the various waivers and covenants specified in the Deed of Waiver. On the face of the matter, the Deed of Waiver would thus be effective and the defendant would, therefore, have a clear defence to the claims by the second plaintiff.

18.  In respect of the claims in respect of the oral guarantee and/or collateral warranty made by the first plaintiff, I observe, in case it is ever considered relevant in the future, that no argument was addressed to this court that an action could not be founded upon an oral guarantee of this nature. Therefore, I make no further comment and it should not be taken that this court has considered the matter on this interlocutory application.

19.  It appears to me that the first plaintiff’s claims in respect of the oral guarantee and/or the collateral contract and collateral warranty arise on the basis that the first plaintiff nominated the second plaintiff to be the recipient of the defendant’s share in the joint venture. As such, the second plaintiff was the agent of the first plaintiff. The first plaintiff is, therefore, equally bound by the provisions of the Deed of Waiver.

20.  I would, therefore, allow the appeal in respect of the first and second plaintiffs. I would make an order that the first and second plaintiffs’ claims in the statement of claim be struck out but that the first and second plaintiffs be at liberty to make application to the Court of First Instance to file an amended statement of claim within 21 days of the date of the perfection of the order herein, if so advised. I would make an order nisi of costs in favour of the defendant as against the first and second plaintiffs here and below.

Appeal as to costs

21.  The defendant also appeals in respect of the order of costs which the judge made in respect of the third plaintiff. The argument below in respect of the third plaintiff’s claim was distinct from that in respect of the first and second plaintiffs. In short, the judge refused to strike out the claim by the third plaintiff on the basis that there would be an amendment to the statement of claim. The judge made one global order in respect of costs. The judge clearly considered that that the third plaintiff’s claim did not involve a substantial part of the whole application and that there would be an obvious amendment.

22.  It is said that it was wrong in principle that the third plaintiff should be permitted its costs. If I had not been disposed to interfere with the decision in the court below in other respects, I, for my part, would have been very reluctant to interfere with the exercise by the judge of his discretion when making a global order as to costs. However, since I consider that the order below should be set aside, I consider that the fair order, in view of the judge’s approach to the matter, is that there be no order as to costs in respect of the application in respect of the third plaintiff’s claim.

Hon Le Pichon JA:

23.  I agree.