FAMOUS MARVEL CO LTD AND OTHERS v. CONVERSANT GROUP LTD AND OTHERS

HCA 2153/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2153 OF 2009

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DECISION ON COSTS

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1.  This case has been settled on the 2^nd day of trial without calling evidence and the remaining question is one of costs.

2.  There is not much dispute of facts and I gratefully adopt the summary of the Plaintiffs’ counsel in their opening submission.

Background

3.  Henry (D2), Lawrence (P3) and Thomas (P4) are brothers.  Further:

(a)  The shares of their family company (KTB (D3)) were held by them in equal shares via their respective corporate vehicle, namely, Conversant (D1), Famous (P1) and Camtron (P2).

(b)  The 3 of them were also partners of a partnership known as King Tah Steel Ball & Bearing Company (“King Tah”).

4.  The 3 brothers and their respective corporate vehicles were parties to an earlier dispute over KTB (HCA2243 of 2008) which they managed to settle (including the interest in King Tah) by a Deed of Settlement dated 24.06.09.  As a result of this settlement, 5 agreements (collectively known as the “Settlement Documents”) were signed, including the agreement for the sale and purchase of all properties jointly owned in the Mainland (“SPA for Jointly Owned Properties”).

5.  Under the SPA for Jointly Owned Properties, Lawrence and Thomas agreed to sell to Henry and Henry agreed to purchase their interest in 14 properties in Shanghai and 1 property in Guangdong that were jointly owned by the 3 of them (“Interest”) for a consideration of HK$60,256,060 (“the Transactions”).

6.  Pursuant to clause 3 of the SPA for Jointly Owned Properties:

“3.01 Within 3 days of notice given by the Purchaser, the Vendors and the Purchaser shall jointly engage a reputable firm of PRC attorneys (the “PRC Attorney”) nominated by the Purchaser in writing so as to prepare documents that are required for validly selling and transferring the Interest and completing this Agreement under the PRC laws (the “PRC Conveyancing Documents”).

3.02 Upon completion, the Vendor shall duly execute a power of attorney (to be properly witnessed and notarized) in favour of the Purchaser or his nominee, authorizing the Purchaser or his nominee, inter alia, to sell and transfer the Interest to the Purchaser or his nominee pursuant to the terms hereto (the “PRC PA”) and, if available, the PRC Conveyancing Documents.”

7.  The “Completion Date” of the SPA for Jointly Owned Properties was supposed to be 30 September 2009.  Further, the “Completion Date” under the 4 other Settlement Documents was the date on which all the conditions precedent as set out in the respective documents were duly fulfilled or waived, which shall in any event be also no later than 30 September 2009.

8.  Between 24 and 30 September 2009, the parties engaged in a debate on correspondence as to whether PRC law applied to restrict the Transactions.  Messrs Siao, Wen & Leung (“SWL”), solicitors for Henry, suggested that the Transactions were contrary to PRC law as there was restriction on foreigners acquiring more than one property.  SWL went on to suggest that the parties could (i) try either a gift (“the gift mode”) or (ii) try “to complete the Transactions (one property at one time), effectively the parties will have to fly to Shanghai a number of times”.  On the other hand, Messrs So, Keung, Yip & Sin (“SKYS”), solicitors for Lawrence and Thomas, replied that: (i) their PRC lawyers had advised that the “restriction” did not apply to the Transactions as the parties have been holding the properties jointly before the legislation came into effect; and (ii) the Transactions could be completed in accordance with the terms of the SPA for Jointly Owned Properties.

9.  By 26 September 2009, Henry indicated that he was not asking Lawrence and Thomas to accept the gift mode.  He had decided to follow the original buy-and-sell mode, since Chinese Authority has accepted his pleading and allow him to transfer all properties at once by means of buy and sell.  The position of SWL during this period, on the one hand, appeared to suggest that Henry was prepared to attempt to effect the Transactions without prejudice to the restriction.  On the other hand, SWL repeatedly pressed SKYS to provide PRC legal opinion to support the position that the Transactions were lawful.

10.  In any event, completion did not take place on 30 September 2009.  Despite that, on 12 October 2009, SKYS requested SWL to extend the completion date to 14 October 2009 at 10 a.m.

11.  On the same date, SWL reverted and suggested using the gift mode.  This suggestion was not accepted by SKYS.

12.  The Plaintiffs’ case is that the Defendants failed to complete the Transactions under the Settlement Documents including the SPA for Jointly Owned Properties on the agreed Completion Date as extended.  The Plaintiff’s main claim is for specific performance of the Settlement Documents.

13.  In response, the Defendants alleged that following PRC laws restricted both the ownership of more than one property by non-PRC citizens in the Mainland; and the manner of payment of the consideration:

(a) 《关于规范房地产巿场外资准入及管理的意见(建住房) [2006] 171号》which is also referred to as 国六条 (“the 171/2006 Document”) ;

(b) 《关于规范房地产巿场外汇管理有关问题的通知》(the “Foreign Exchange Regulations”);

(c) 《关于进一步加强本巿商品房销售监管工作的通知》(the “Notification”)

(d) 《关于进一步加强本巿房地产巿场调控加快推住房保障工作的若干意见》(“the Opinions”)

The Defendants claimed that they were not aware of the aforesaid restrictions when the Settlement Documents were entered into. 

14.  In the premises, the Defendants contended that:

(a) As the 3 brothers are not PRC residents and Henry was already the owner of a property in Shanghai in his own name, the Transactions were caught by the 171/2006 Document.  The Transactions would not be registrable and could not be registered with the Land Registries in Mainland China.  Henry would not be able to obtain title and ownership to the PRC properties.

(b) Further, the consideration could not be properly and lawfully paid or settled.

(c) By reason of the aforesaid, the SPA for Jointly Owned Properties was illegal and/or invalid and/or unenforceable and the consideration could not be paid without contravening the Foreign Exchange Regulations.

(d) The lawful way for Lawrence and Thomas to convey the PRC Properties to Henry was by way of “gift”.  In refusing to adopt the gift mode, Lawrence and Thomas were in breach of the Deed of Settlement and the SPA for Jointly Owned Properties.

15.  The 1^st and 2^nd Defendants counterclaimed for, inter alia, (a) a declaration that the performance and completion of the Transactions under the SPA for Jointly Owned Properties was illegal, invalid or unenforceable under PRC laws and regulations; (b) an order that it should be severed from the Deed of Settlement; and (c) an order for specific performance of the Deed of Settlement and the Settlement Documents (with the SPA for Jointly Owned Properties severed therefrom).

16.  In response thereto, the Plaintiffs contended that, as a matter of PRC law, the restrictions under the 171/2006 Document, the Foreign Exchange Regulations and the Opinions had no application to transfers between existing co-owners.  Further, the Opinion was published only after 30 September 2009 and was hence irrelevant.

17.  In addition, the Plaintiffs also contended that:

(a) The Plaintiffs’ obligations in clauses 2, 3.01, 3.02, 5.02, 5.03 and 7 of the SPA for Jointly Owned Properties were: (i) to sell their 2/3 interests in the Jointly Owned Properties to Henry; (ii) to join in the engagement of Henry’s nominated PRC attorney; (iii) to execute a power of attorney in favour of Henry or his nominee; (iv) to deliver to Henry such completion/transfer documents as he may reasonably require for the sale and transfer of the 2/3 interests and complete the agreement; (v) to enter into a lease of 2 of the properties; and (vi) to execute documents and do as Henry may require to vest the 2/3 interests in Henry.

(b) Registration at the respective Land Registries, was not a condition to the completion of the SPA for Jointly Owned Properties.

(c) Even if the titles to the PRC Properties could only be validly obtained and vested on a purchaser upon the due registration, Henry has breached clause 5.02(1) of the SPA for Jointly Owned Properties by failing to deliver any completion or transfer documents for execution by the necessary parties before any application for registration could be made with the relevant Land Registries.

(d)     The real reason for Henry’s request for the intended transfers to be conducted by way of “gift” was to avoid payment or to reduce the amount of tax payable, which Henry had agreed to bear under clause 14.02 of the SPA for Jointly Owned Properties.  The Plaintiffs contended that it was unlawful under PRC laws to change the agreed mode of transfer for the purpose of avoiding payment or reducing the amount of tax payable.  They denied breach of the SPA for Jointly Owned Properties.

18.  By the time of trial, the Defendants have abandoned their arguments on breach of the Foreign Exchange Regulations. After adjournment for discussion, the parties have come to terms (“the Settlement Order”):

“Without prejudice to any of the contentions of the parties in this Action and/or any and all the relief and remedies sought by them, it is ordered by consent that:

1. All Settlement Documents referred to in paragraph 6 of the Statement of Claim herein all dated 24 June 2009 be specifically performed and carried into execution in accordance with the Minutes of Order attached hereto.

2. …

3. Costs be reserved.”

19.  The material differences between the Settlement Order and the reliefs claimed are as follows:

(i) Instead of using lawyers nominated by the Defendants, the parties have agreed to use Allbright Law Offices (“the Shanghai Lawyers”, who had given reports on PRC law for the Plaintiffs) to prepare documents for validly selling and transferring the Interest to Henry, completing the SPA for Jointly Owned Properties, and to apply to the relevant PRC Land Registries for transfer of ownership.

(ii) The Defendants shall attempt to have to the properties registered in their names as provided for in the SPA for Jointly Owned Properties (“the 1^st mode”).  If that is not successful, the Plaintiffs will execute an irrevocable power of attorney which has the effect of transferring the 2/3 interests in the PRC Properties to the Defendants (“the 2^nd mode”).  The 2^nd mode was not in the SPA for Jointly Owned Properties.

20.  Under the Settlement Order, completion of the SPA for Jointly Owned Properties and other Settlement Documents shall take place within 30 days (or such other date as may be agreed, which date should not be later than 15 April 2013) after the parties are notified by the Shanghai Lawyers that the certificates of ownership of all the Jointly Owned Properties in the name of Henry are available or the certificate of ownership of some or all of the Jointly Owned Properties cannot be obtained. 

21.  The Plaintiffs seek costs against the 1^st and 2^nd Defendants only.

The principles for determining costs

22.  There is no dispute that even if a case is settled except as to costs, the Court still has power to determine which party should be liable for costs. There is no tradition for there to be “no order as to costs” in such a scenario. I am guided by the following principles in deciding costs:

(i) The Court is to decide if the party seeking costs has substantially obtained the reliefs sought in the litigation: Re Chinese United Establishment Ltd, HCCW 291/1994, 5 October 1995, Rogers J (as he then was), approved in CACV 214/1995; Lai Yuet Chun v Super Deluxe International Limited & ors, HCCW 186/2001, 3 June 2003 Kwan J (as she then was).

(ii) At each end of the spectrum there will be cases where it is obvious which side would have won had the substantive issues been fought to a conclusion.  In between, the position will, in differing degrees, be less clear.  How far the Court will be prepared to look into the previously unresolved substantive issues will depend on the circumstances of the particular case, not least the amount of costs at stake and the conduct of the parties.  Brawley v Marcynski (No.1) [2003] 1 WLR 813.

(iii) The Court will first consider if it is in a position to say what the likely outcome after trial would have been. If it is not in a position to do so, the order may well be no order as to costs: Brawley v Marcynski (No.1),at para 18, Longmore LJ; followed in BCT Software Solutions Ltd v C Brewer & Sons Ltd [2004] FSR 150.

(iv) The Court may permit parties to adduce evidence on the question of costs: Ta Tung China & Arts Ltd v Fontana Restaurant Ltd [1999] 1 HKLRD 404; Lai Yuet Chun v Super Deluxe International Limited & ors, at para 12.  However, to say that the parties must go to trial in order to resolve any outstanding questions of costs would be contrary to the underlying objectives enshrined in RHC Order 1A rules 1 and 2: Graham M Morley v Kwan Wo Wan & others, HCA 4366/2003, 30 December 2009, Recorder Jat SC.

(v) A broad brush can be taken by referring to all matters already laid before the Court, eg pleadings, correspondence, witness statements, transcripts of evidence and the terms of the settlement order: c.f. BCT Software Solutions Ltd v C Brewer & Sons Ltd, at para 9; Graham M Morley v Kwan Wo Wan & others.

(vi) The objective is to do justice between the parties without incurring unnecessary Court time and consequently additional cost: Brawley v Marcynski (No.1).

23.  In the present case, the parties have sensibly asked me to proceed on the evidence already lodged and no viva voce evidence was called.

Is the Court in a position to determine the likely outcome of the case if it had proceeded to trial?

24.  I am of the view that the Court is a position to determine the likely outcome of this litigation.  The Court was to decide if the SPA for Jointly Owned Properties was a lawful agreement and whether it was appropriate to order specific performance.  The order after trial would be one directed at the parties and not at the PRC Land Registries.  As the opening shows, the issue to be decided by the Court was narrowly confined to the question of PRC land law.

25.   I am of course mindful of the Court’s role when having to determine foreign law (which, in this case, is very different from common law).  Even so, the Court is obliged to use its legal training insofar as it may have a bearing on the resolution of the dispute: Hong Jing Co Ltd v Zhuhai Kwok Yuen Investment Co Ltd CACV 63/2011 and CACV 254/2011, 17 July 2012, Chu JA, at para 110; Shenzhen Development Bank Co Ltd v New Century HCA 2976/2001, 31 July 2012, Lam J (as he then was), at paras 25-27.  Although the PRC experts’ evidence has not been tested in cross-examination, that does not preclude the Court from forming a view as to the probable outcome of the trial. 

What the Settlement Order purports to resolve

26.  Mr Chain, counsel for the Defendants, submits that the 2 central issues in the present case were (i) the effect of the 171/2006 Document; and (ii) the dispute over what constituted completion in PRC conveyancing.  He submits that the Settlement Order did not decide issue (i) which was a dispute over the expert evidence filed and the Court does not have sufficient materials to reach a decision on costs.  The dispute over question (ii) was answered in the Defendants’ favour.

27.  I mention, by way of passing, another issue of whether or not the Defendants had been dragging their feet in completion or had tried to avoid tax liability when they suggested the gift mode.  The delay in completion in fact kept the Defendants out of pocket for a substantial amount – a net sum of about $180 million payable by the Plaintiffs to the Defendants after setting off one another’s liabilities over purchase prices.  I am prepared to take a view in favour of the Defendants that the delay was caused, not by an intention to avoid tax liability, but by their genuine concern that if registration could not be achieved after the completion, they would be left to fend on their own without assistance from the Plaintiffs.

Dispute over the effect of the 171/2006 Document

28.  The Plaintiffs’ case is that there was no obligation on their part to ensure or guarantee that Henry would obtain title in respect of the 2/3 interest and there was no plea in the defence and counterclaim to deny that.  Mr Ho SC submitted that in the absence of an express term to that effect, the only proper construction of the specific provisions in the SPA for Jointly Owned Properties must be that Henry had assumed the risk of any difficulty with registration of the properties at the respective registries.

29.  With respect to Mr Ho, SC, in PRC, it was registration that would confer title on a purchaser.  The Plaintiffs’ primary duty under the SPA for Jointly Owned Properties was to “validly sell and transfer”.  Hence registrability of the Transactions in 2009 in view of the 171/2006 Document was crucial.

30.  I have considered both parties’ expert reports.  It was common ground that there was nothing in the 171/2006 Document or any explanatory document which covered the present situation.  According to Mr Chain acting for the Defendants, the pertinent question is whether there was any exemption covering the present situation, to which the answer was obviously no.

31.  On the other hand, the Plaintiffs’ expert set out his test for determining whether the Transactions were unlawful as follows:

“一般来说，判断一种行为或一项交易是否违反一项部门规章，一般先判断该一种行为或一项交易是否违反该部门规章的某条或多条明文规定。在该等部门规章的明文规定不明确的情况下，首先应当查询是否存在有权对部门规章进行解释的部门作出的正式解释。在没有相关正式解释的情况下，可以通过参考该等部门规章的颁布背景和意图来分析和推测规定不明确的条文的含义，也可以通过咨询相关的规章颁布机关和具体的执行机关从而参考他们对于部门规章的理解并了解该部门规章在实践中的执行情况”。

32.  He was of the view that, judging from the intent, the 171/2006 Document did not apply to the Transactions.  Both experts agreed that the intent behind the 171/2006 Document was to “规范房地产市场的外资投资及购买行为”.  The 3 brothers became owners before promulgation of the 171/2006 Document.  There was no specific provision covering transfer between co-owners, which did not involve acquisition of other properties.

“本交易中: 首先，买方和卖方均是境外个人；其次，买方和卖方取得共有房产的产权是在国六条颁布之前。因此，本交易中涉及的卖方是否可以将其2/3产权出售给买方的情况在国六条中没有明确规定。鉴于国六条没有明确规定，国六条的制定机关也未颁布任何解释的情况下，本人认为可以根据国六条颁布的目的来判断本交易是否违反国六条。因为买方和卖方之间就共有房产的产权份额的转让并未导致境外个人在中国境内获得额外的房产，所以本人认为，本交易并未违反国六条颁布的目的。”

33.  The Defendants’ expert had no direct answer to this view.  All he said was that the situation was not entirely clear and he could not rule out the possibility that the relevant registries would consider the intended transfers to be caught.  He relied on the Opinions.  Quite apart from the fact that the Opinions came into existence only after 30 September 2009, they did not affect the scope of the policy under the 171/2006 Document.

34.  Further, instead of speculating the effect of the 171/2006 Document, the Plaintiffs’ expert and his colleague Ms Zhou made enquiries with the relevant registries in September and October 2009. 

35.  None of the registries suggested any problem with the intended transfers.  The Plaintiffs’ expert summarized the position thus:

“三个区的房地产交易中心均答复，因为卖方和买方取得共有房产的产权是在国六条颁布之前，卖方将共有房产2/3的份额出售给买方，只是扩大了买方在原有房产证上的份额，买方并没有拥有一套新的房产，因此卖方将其共同持有的2/3产权出售给买方的情况属于国六条没有明文规定的情况。因此，可以用买卖的方式进行转让。”

36.  Mr Chain has rightly pointed out that the persons of whom Ms Zhou enquired were 工作人员、办事窗口工作人员、咨询热线工作人员, clearly not senior officials at the relevant Land Registries. There was also no explanation as to why written enquiries were not made.  However, these comments go to weight of the evidence.  The fact remains that the Defendants have not adduced factual evidence in rebuttal, notwithstanding opportunity given to the Defendants’ expert to consider the evidence on the enquiries.  

37.  Had this action gone to trial, the Plaintiff’s expert evidence would have likely been adopted.  The SPA for Jointly Owned Properties is likely to be held to be lawful and the Transactions registrable.

Dispute over what constituted completion in PRC Conveyancing

38.  Mr Chain submits that the Plaintiffs have backed down and accepted, as the primary position, that the Defendants should get new ownership certificates.  The Settlement Order contemplates that registration may not be approved and provides for an alternative mode of performance by an irrevocable Power of Attorney.  The Settlement Order has answered this issue in favour of the Defendants.

39.  With respect to Mr Chain, the converse is true.  The Settlement Order without doubt acknowledged the legality of the SPA for Jointly Owned Properties, contrary to the case of the Defendants.  Had the trial proceeded, it is not in dispute that the 1^st mode under the Settlement Order was the only mode of specific performance that the Court could have ordered.  Mr Chain submits that the Plaintiffs would not have got an order in terms of the 2^nd mode.  I agree, because the Plaintiffs simply did not need the 2^nd mode.  The power of attorney now attached to the Settlement Order was different from the one provided for under the SPA for Jointly Owned Properties.  The Court could not have forced it upon the Plaintiffs without their consent.  In fact, neither party wanted the 2^nd mode except to facilitate the working out of the specific performance order.  It was for the benefit of the Defendants, who cannot turn it round and say that the Plaintiffs had backed down on their argument.  The Settlement Order, therefore, effectively gives the Plaintiffs substantially all that they claim for.  And it has taken 3 years plus 3 days of trial to reach this position.

40.  Further, the Plaintiffs have never stood in the way of the registration.  To the contrary, before 30 September 2009, the Defendants had only sent a draft power of attorney to the Plaintiffs in respect of the Guangzhou property.  Never had the Defendants sent any draft power of attorneys to the Plaintiffs in respect of the 14 Shanghai properties.  Beyond 30 September 2009, the Plaintiffs did the extra to prepare the draft power of attorneys for the Shanghai properties based on the draft for the Guangzhou property. Never had the Defendants objected to the terms of the drafts.  Never had they proposed the 2^nd mode.  All along their case was that the Transactions were illegal and unenforceable.  Mr Ho SC further pointed out that the Defendants had never suggested the mode of using nominees, a legitimate way of completion according to paragraph 4.6.2 of the Plaintiffs’ expert report and permitted by clause 3.02 of the SPA for Jointly Owned Properties.  As this was not pleaded, I disregard this mode.

41.  Mr Chain submits that there was give and take on the part of the Defendants, eg giving up a claim for interests and enquiry.  That may well be correct but, in the light of the overall settlement, those claims were of relatively little significance.  If the Plaintiffs had won at the trial, the order might still have provided for the Plaintiffs to pay the Defendants money on completion with interest and for an inquiry to be conducted.  However, that would not in any way make the Plaintiffs less a winner.

42.  I am of course mindful of the principle that even after an order for specific performance is made, the contract in question remains under the supervision of the Court.  The Court will still have power to make a supplemental order to assist the carrying out of the order for specific performance, replace the order or even dissolve the decree and substitute an award of damages: Snell’s Equity, 32 ed, paras 17-53.  But that does not mean the parties can come back for a trial on the merits or make the Plaintiffs any less a winner. 

43.  The parties had at one stage asked for the settlement order to include a term that the trial be adjourned sine die with liberty to restore or apply for further directions or generally.  I rejected the idea, the trial being a milestone date.  It was upon further discussion between the parties that the Settlement Order ended up with its present terms.  As conceded by Mr Chain in his written submission in reply, the terms of the Settlement Order aimed at achieving finality and did not contemplate the parties having to return to Court. 

44.  The clear answer to the dispute under this head must be answered in favour of the Plaintiffs.

Conclusion

45.  I am of the view that the winner is the Plaintiffs. The 1^st and 2^nd Defendants should bear the Plaintiffs’ costs with certificates for 2 counsel.

46.  I thank counsel for their able assistance.  Their efforts in helping parties to make things work are greatly appreciated.