CANTAB INTERNATIONAL LTD AND OTHERS v. LUK NGAI LING IRENE AND OTHERS

CACV 232/2016

[2019] HKCA 1002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 232 OF 2016

(ON APPEAL FROM HCA NO 926 and 1022 OF 2012

Consolidated pursuant to the Order of

Mr. Registrar KW Lung dated 10^th January 2014)

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J U D G M E N T

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Hon Kwan VP:

1.  I agree with the judgement of Yuen JA.

Hon Cheung JA:

2.  I agree with the judgement of Yuen JA.

Hon Yuen JA:

3.  This is the defendants’ appeal from a Judgment of Deputy High Court Judge Seagroatt given on 1 November 2016 (“the Judgment”) giving judgment to the plaintiffs in the sum of $2,186,371.78 with costs and dismissing the defendants’ counterclaim with costs.

Background

4.  Due to the nature of the defendants’ challenge to the Judgment, it is necessary to set out first some relevant background, and then the facts in some detail.

5.1.  It is quite common for secondary school students in Hong Kong to attend tutorial schools after normal school hours.  They enrol for lessons in the subjects they need help with, and the lessons are given by tutors who specialize in those subjects.

5.2.  The operation of a tutorial school requires the following component parts:

(1)  Tutors;

(2)  Premises;

(3)  A supervisor registered with the Education Bureau (“EDB”);

(4)  Administrative staff;

(5)  Furniture and equipment at the premises.

6.1.  The present case is concerned with some tutorial schools operating under the name “Cantab” which were run:

-  in Fo Tan, Tai Wo and Wo Che by the 2^nd defendant company (“D2”),

-  in Kowloon Bay by the 3^rd defendant company (“D3”), and

-  at Prince Edward by the 4^th defendant company (“D4”).

6.2.  I shall refer to all the above schools as “the subject schools”.  There had been at least one other tutorial school operating under the “Cantab” name but by early 2012, it had been taken over by a third party. 

7.  In respect of the 5 component parts mentioned in §5.2 above, the relevant facts in the present case are as follows.

(1)  Tutors

8.1.  As the judge put it, tutors enjoyed “cult status” 1.  Of course, such a status may not apply to all tutors, but it was common ground that if a “celebrity” tutor moved to another tutorial school, students would follow suit.

8.2.  The tutors at the subject schools were not employees.  They were independent contractors who had entered into written contracts for services with a company called Cantab Education Administration Ltd (“CEAL”).  Under the contracts for services, the tutors are paid commissions by CEAL being a percentage of the net fees paid by students participating in the courses those tutors teach.  The contracts for services were for terms of years 2.

8.3.  It is important to note that although the plaintiffs knew of these contracts for services between CEAL and the tutors, the plaintiffs did not wish to acquire CEAL 3.  Accordingly CEAL was not a party to the Agreement made between the plaintiffs and the defendants which is the subject matter of these proceedings, nor is CEAL a party to these proceedings.

8.4.  CEAL was controlled by the 1^st defendant (“Ms Luk”) who also controlled via corporate means D2-D4 which owned the furniture and equipment in the school premises, and D5 which rented the premises from their respective landlords. 

8.5.  The Chief Executive Officer of what was termed the Cantab Education Group 4 (D2-5) was Thomas Yan King-Tong (“Mr Yan”), who was one of the celebrity tutors.  The tutors had their own staff who handled student enrollment for their courses and arranged course venues and materials (copyright in which remained with the tutors 5).

8.6.  On 27 February 2012, CEAL gave notice to Mr Yan dismissing him with immediate effect as CEO, alleging misappropriation of funds 6. Mr Yan’s contract for services as a tutor was not affected.

(2)  Premises 

9.  The premises of the subject schools 7 were rented from various landlords by D5 as tenant.  It would appear that no sub-tenancies had been granted to D2-4, which owned the furniture and equipment inside the premises. 

(3)  Supervisor

10.  Ms Luk was registered with the EDB as the supervisor (amongst other posts 8) of the subject schools. 

(4)  Administrative staff

11.1.  The subject schools had staff (“the staff”) who dealt with administrative matters, eg collecting fees from students 9.

11.2.  It would appear that the staff were also employed by CEAL.  On 27 February 2012, CEAL gave notices of termination of employment to all of D2-D5's staff  10.  Except for 2 employees, the accusation made against Mr Yan was made against the rest of the staff.  Some staff (including Mr Yan and the COO) were dismissed outright, some were given 7 days notice, and some were given 1 month’s notice (ie expiring on 26 March 2012).  Only one staff member was given 3 months’ notice.  Clearly by late February, Ms Luk had a poor relationship with the staff.

(5)  Furniture and equipment

12.  As mentioned earlier, the furniture and equipment in the subject schools were the assets of D2-D4. 

13.  I shall now come to the material events. 

Events prior to April 2012

14.  Sometime in late 2011 and early 2012, some other celebrity tutors in the Cantab Schools left, leading to reductions in student numbers and consequently, reductions in income.  Ms Luk no longer wished to be involved in operating tutorial schools as shown by (1) the notices of termination given to Mr Yan and nearly all the staff; (2) instructions to the staff given in March 2012 that no fees for the month of April 2012 were to be accepted from students.

15.1.  The 2^nd plaintiff (“Mr Ng”), who had some experience with other types of education centres, was interested in the subject schools.  The 3^rd plaintiff (“Mr Leung”) had no previous experience in this field and was simply an investor. (Subsequently on 10 May 2012, Mr Ng and Mr Leung formed a company by the name of Cantab International Ltd, ie the 1^st plaintiff.  This company, Mr Ng and Mr Leung are hereafter referred to collectively as “the plaintiffs” as the company ratified pre-incorporation acts done by Mr Ng and Mr Leung). 

15.2.  During the month of March 2012, Mr Ng met with the tutors 11 (including Mr Yan) with a view to collaboration when the plaintiffs took over.  Mr Ng also met with the staff 12.  Although Mr Ng had run other types of education centres, it was not the plaintiffs’ case that they would be installing other tutors and staff as substitutes immediately after the agreement the subject matter of the proceedings.     

16.  Despite the notices of termination from CEAL, during this period of negotiations, Mr Yan 13 continued to conduct himself as CEO (and apparently also as COO 14), and the staff carried on working at the subject schools.

17.  The parties’ respective cases with reference to the 5 components 15 for the operation of the subject schools were as follows.

- Ms Luk’s case:

18.  According to Ms Luk 16, Mr Ng informed her in or about late March 2012 that he had made arrangements with (1) the tutors and (4) the staff, for when the plaintiffs take over the subject schools.  Therefore, as far as Ms Luk was concerned, of the 5 component parts, the only parts left to dispose of in the proposed transaction with the plaintiffs were:

(2)  the premises (of which D5 was the tenant);

(3)  her position as supervisor and

(5)  the furniture and equipment (the assets of D2-D4). 

As will be seen below, she, D2-D4 and D5 were indeed the only parties to the Agreement with P1, and these component parts, viz. (2), (3) and (5) were the only items disposed of in the Agreement. 

- Mr Ng’s case:

19.1.  Mr Ng 17 admitted he had talks with the staff and with the tutors.  As noted above, he admitted he was aware that the tutors’ contracts for services were with CEAL, but the plaintiffs did not wish to acquire CEAL because of this company’s liabilities.  He wished to reach an agreement to collaborate with the tutors. 

19.2.  According to Mr Ng, Ms Luk told him that the plaintiffs could “continue using” CEAL’s contracts for services with the tutors as the latter would probably be “unaware of the difference between [D5] and CEAL”, or alternatively the plaintiffs had the option of signing new contracts with the tutors 18. 

19.3.  Mr Ng said he “thought there was little risk in continuing to use these [CEAL] contracts” as:

(i)  he thought Ms Luk would not cause CEAL to “interfere” with the contracts; and

(ii)  between the plaintiffs and the tutors, the plaintiffs had the upper hand as the tutors had to look to them for payment 19. 

19.3.  Mr Ng’s allegations above, and the question whether the judge dealt with them (and if so, how), will be discussed later in this Judgment 20. However what is clear is that:

(1)  at least Mr Yan as CEO would be expected to know the difference between CEAL and D5;

(2)  there was no assignment to P1 of CEAL’s contracts with the tutors;

(3)  there was no acquisition of CEAL by the plaintiffs because they did not wish to be burdened by its liabilities;

(4)  there was no joint venture with CEAL; this was not the plaintiffs’ case and it was undisputed that Ms Luk intended to end her involvement with the schools.

The Agreement

20.1.  On 2 April 2012, a written agreement (“the Agreement”) was signed which was expressed to have been “jointly prepared” by all the parties and to be legally binding and enforceable in law. It was not drafted by solicitors.  Apparently the plaintiffs were advised by a friend who worked in a bank.

20.2.  I would pause to note here that the costly and time-consuming dispute that has developed from this agreement serves as a reminder to business people that it would be prudent to instruct lawyers to draw up commercial agreements, because in the drafting, amendment and approval process, the parties’ minds would be brought to bear on areas of ambiguity and possible disagreements, which it would be far more beneficial for them to resolve (if possible) over a conference table with the benefit of legal consultation.  If it turned out that after ambiguities were clarified, it was not possible to resolve areas of disagreements, then it would be far better for all concerned to walk away early, rather than to become ensnared in years of costly litigation. 

21.1.  There were 5 parties to the Agreement:

Party A:  P1;

Party B:  D2-D4 (the owners of furniture and equipment);

Party C:  D5 (the tenant of the premises);

Party D:  Mr Ng and Mr Leung (the 2^nd and 3^rd plaintiffs)

Party E:  Ms Luk (the 1^st defendant and supervisor).

21.2.  As noted earlier, the plaintiffs agreed that CEAL was not part of the deal 21, in other words, the Agreement did not cover component parts (1) and (4), ie the tutors and the staff of the schools.

22.  The clauses may be summarized as follows.

Clause 1

23.1.  The only two properties transferred were as follows.

-  The shares in D5 (the tenant of the premises) were transferred to P1 for $100,000;

-  The furniture and equipment owned by D2-D4 were transferred to P1 for $0.

23.2.  These transfers disposed of component parts (2) and (5).

Clause 2

24.1.  P1 would pay:

-  to D5 22, $100,000 and

-  to D2-D4, the deposits for rentals and management fees etc paid for the school premises in the total amount of $1,910,216.50 23.

24.2.  The total sum of $2,010,216.50 was to be paid in 2 instalments:

(1)  $1,000,000 was to be paid at the execution of the Agreement;

(2)  the balance of $1,010,216.50 (“the balance”) was to be paid on 30 April 2012 (4 weeks later).

24.3.  D5 would “ensure that an updated Audit Report 24 will be provided before receiving 25 the balance”.

24.4.  The term “updated Audit Report” was not defined in the Agreement.  It was common ground that at the time of the Agreement, the last audited report was for the financial year ended 30 June 2009.

25.  The parties’ respective cases as to the meaning of “updated Audit Report” were as follows.

-  Mr Ng’s case

25.1.  Mr Ng said Ms Luk promised orally that the report would be updated “up to the time of handover” which he understood to be the date when the agreement was executed 26, ie 2 April 2012.

- Ms Luk’s case

25.2.  Ms Luk denied she made such a promise, and said her understanding of the term meant “updated to the end of the last financial year” 27, ie 30 June 2011. 

25.3.  It would be noted that:

(a)  time was not made of the essence of this 28 clause; and

(b)  in clause 7, Ms Luk gave a personal guarantee that D5 had no debt or liability.    

Clause 3

26.  Importantly, the parties agreed that the “aforesaid transfer” 29 was completed on 2 April 2012.

Clause 4

27.1.  This stated that all expenses of relevant premises (including but not limited to rental, management fees, air-conditioning fees, employees salaries and tutor commissions etc) prior to 1 April 2012 would be paid by D2-D4 directly to the relevant persons or bodies 30; P1 would be responsible to pay all expenses of relevant premises (including but not limited to rental, management fees, air-conditioning fees, employees salaries and tutor commissions etc) “on or after” 1 April 2012.

27.2.  Pausing here, the purpose of this clause was obviously to provide a “cut-off” date, as the various expenses were lumped together with no distinction made between the different entities responsible for each type of expense.  P1 had not even been incorporated at that date.

Clause 5

28.1.  At the time of execution of the Agreement, D2-D4 or all related persons would submit to P1 resignation letters from the school supervisor and manager of each school.  Upon EDB approving the school supervisor and manager appointed by P1, P1 would send the resignation letters to EDB for processing. 

28.2.  This dealt with component (3).

Clause 6

29.  Since Ms Luk was the guarantor for the rent for two of the school premises, Mr Ng and Mr Leung shall offer personal guarantees against her guarantee in respect of those schools.

Clause 7

30.  Ms Luk shall give a guarantee that D5 had “no debt or liability and undertake to be wholly responsible if there is any”.  Accordingly if the “updated Audit Report” showed D5 had any liabilities, the plaintiffs could claim against Ms Luk personally.

31.1.  By way of summary of the Agreement, with reference to the 5 component parts, the only components transferred under the Agreement were:

(2)  the tenancies of the premises (through the transfer of D5's shares);

(3)  the position of supervisor etc (through Ms Luk providing resignation letters); and

(5)  the furniture and equipment (through the sale of these assets by D2-D4 at nil consideration).

31.2.  There was no mention at all of

(1)  the tutors’ contracts for services, or

(4)  the staff’s employment contracts,

both of which were made with CEAL, the company which the plaintiffs did not wish to acquire. 

31.3.  Nor was there any mention of goodwill, brand name, intellectual property or information pertaining to students, tutors or staff 31.  Indeed, the judge did not find the identity of the owner(s) of these assets, or whether it was (or they were) a party to the Agreement.

32.1.  On 2 April 2012,

(1)  Ms Luk 32 signed contract notes and instruments of transfer in escrow 33 of D5’s shares to P1;

(2)  the plaintiffs gave Ms Luk two cheques dated 3 April 2012 in the total sum of $1,000,000;

(3)  Ms Luk signed and delivered to the plaintiffs a number of letters (dated 3 April 2012) addressed to the EDB resigning from the position of school supervisor and manager 34 and nominating Mr Ng as school supervisor and principal.  (I shall for convenience refer to these as the “Supervisor letters”). 

32.2.  As far as the Agreement was concerned, the only remaining obligations were for D5 to provide the updated audit report and for the plaintiffs to pay the balance.

33.1.  Mr Ng and Mr Leung went on vacation between 3 and 15 April 2012.   In the meantime, the schools continued operations, a fact known to the plaintiffs 35.  It is important to note the plaintiffs had not put in place any tutors or staff of their own in substitution for the existing tutors and staff.  This will be discussed later in relation to a letter written by the plaintiffs’ solicitors 36.    

33.2.  On their return from holidays, on 15 April 2012 Mr Ng and Mr Leung met up with Henry Wong, the general manager of D5 (which company had since 2 April 2012 been controlled by the plaintiffs), who passed to them various keys and passwords. 

Plaintiffs’ non-payment of rent

34.1.  The rents for the schools’ premises were due on 1 April 2012.  Under Clause 4 of the Agreement, P1 was responsible to pay (among other things) the rents for the school premises “on or after 1 April 2012”.  The obligation to pay the rents was of course that of D5, the shares of which had been transferred to P1.  However neither D5 nor P1 paid the rents due.

34.2.  In a letter dated 16 April 2012 from D2-D4 to Mr Ng and Mr Leung, the plaintiffs were reminded to pay the rents outstanding for the month of April (due on 1 April).  Ms Luk was the guarantor of the rents vis-a-vis the landlords.  

P1’s solicitors’ letter 17.4.2012

35.1.  In reply, on 17 April 2012, P1's solicitors wrote to Ms Luk, as follows:

(1)  “We are instructed that by [the Agreement] ..., the operation of the education centres so far under your control as listed out in the agreement was agreed to be transferred to our client as of the date of the agreement.  Under the said ... agreement, our client was to take over the premises of the education centres and be responsible for the rent thereof from the agreement”.  (Emphasis added).

(2)  “We are advised by our client that despite the said terms of the agreement, you have purported to further operate educational courses at the education centres beyond the date of the agreement and you are still currently doing so”.  The solicitors went on to assert that as a result of a “dialogue” between the parties, there was an “agreement” that “as long as you are still operating the education centres our clients’ responsibility in relation to rent and all other expenses and legal responsibilities will not begin”.  (Emphasis added). 

(3)  Ms Luk was asked to confirm the agreement, and if it was not the case, she should “cease all activities at the education centres and hand over their control ... forthwith”.  (Emphasis added).

35.2.  Pausing there, the plaintiffs were asserting in that letter that it had been agreed that as of 2 April 2012, the schools would be operated by themselves (though P1 was not yet incorporated). 

35.3.  Of course by the completed transfers of 2 April 2012, the plaintiffs already controlled D5 (the tenant of the premises), and the furniture and equipment from D2-D4.  Ms Luk had also signed and delivered the Supervisor letters.

35.4.  Accordingly, that left the tutors and staff as the remaining component parts of the schools’ operations.  In this letter, the plaintiffs’ solicitors were asserting that Ms Luk had been operating the schools from 2-17 April 2012, that she should not have been doing so, and that was the reason given for the plaintiffs’ failure to pay the rents.

35.5.  It follows that the plaintiffs’ case (as shown in this letter) was that, as of the date of the Agreement, they had already authorized someone (other than Ms Luk) to operate the schools.  This appears to be consistent with Ms Luk’s evidence that the plaintiffs already had some arrangements in place under which the existing tutors and staff would work for them (the plaintiffs) 37. If there had been no such arrangements, it seems unlikely that Mr Ng and Mr Leung (having completed the transfers, parted with $1 million, and not having put in place any substitute tutors and staff) would have gone on holiday.

35.6.  I shall return to this letter when I discuss the Judgment later 38.

35.7.  On the same day 17 April 2012 39, Mr Ng’s assistant emailed Ms Luk’s assistant saying that “we will settle the rent individually” and inquired about invoices and landlords’ information.

35.8.  However the rents were still outstanding on 19 April 2012 when Ms Luk’s assistant sent another email to Mr Ng warning him of the landlords’ right to forfeit the tenancies. 

Changing of locks etc

36.1.  The relationship between the parties deteriorated thereafter.  The plaintiffs alleged they had not been given some passwords and door keys 40, there were disputes over access, and parents of students who found themselves unable to enter school premises complained to the police and the media.

36.2.  According to the plaintiffs, “up till the police entered the premises on 22 April 2012, our company had never authorized anyone to operate and receive tuition fees at the school premises” 41 (emphasis added).  They went on to say that “nevertheless, there is solid evidence to show your staff collected the tuition fees and deposited into your bank account”.

P1’s letter of 7 demands (23.4. 2012)

37.1.  In a letter dated 23 April 2012 to Ms Luk, P1’s solicitors (whilst stating that there was a continuing dialogue between the parties) made 7 demands, summarized below:

(1)  Ms Luk must stop all staff from returning to work and cease all activities and operation of “yours” (Ms Luk’s) in the premises;

(2)  She must settle all indebtedness and return all fees due to students;

(3)  She must provide information relating to students, courses and schedules for P1 to follow-up;

(4)  She must bear P1's losses for not being able to use and operate the premises;

(5)  She must stop inviting potential purchasers to the premises;

(6)  She was put on notice that someone had cut a chain installed by the plaintiffs “at the door”;   

(7)  She must pay the rent to date.

37.2.  There seems to be some inconsistency between demands (1) and (3) because presumably the information demanded would have to be found by the staff only if they were able to access the premises. 

37.3.  In any event, there was no reference in this letter to the terms in the Agreement (or any oral agreement) under which these demands were made. 

37.4.  Although the balance was to be payable on 30 April 2012, there was no demand for D5’s updated audit report.

38.  Further on this date (23 April 2012) the plaintiffs sent to the EDB Ms Luk’s Supervisor letters (which she had delivered to the plaintiffs on 3 April 2012).

P1’s letter of 16 demands (26.4.2012)

39.1.  The letter of 7 demands was followed 3 days later by another letter from P1’s solicitors to Ms Luk, this time containing 16 demands, summarized as follows:

(1)  records and details of students;

(2)  records and details of teachers and staff;

(3)  correspondence with the EDB;

(4)  cease forwarding the hotline to other telephone numbers;

(5)  passwords for office facilities;

(6)  records and details of suppliers;

(7)  contact details of all teachers or staff 42;

(8)  landlords’ invoice codes;

(9)  rental deposit receipts;

(10)   telephone bills and contracts;

(11)   settlement of students application refunds;

(12)   “return” of P1’s company kit (although it had not yet been incorporated);

(13)   stop sending staff to request the signboard;

(14)   return of equipment placed in the schools;

(15)   settlement of “all matters” on or before 30 April 2012;

(16)   “always make yourself available to support and cooperate on this matter”.

39.2.  Again, there was no reference in this letter to the terms in the Agreement (or any oral agreement) under which these demands were made.

D2-D4’s reply (27.4.2012)

40.1.  D2-D4 replied the following day (apparently to the letter of 7 demands addressed to Ms Luk), stating the following.

(a)  The furniture and equipment had already been sold to P1 at $0, and the transfer had been completed on 2 April 2012.

(b)  At the time of the transfer, their management company 43 had already terminated the contracts of all the staff of D2-D4.  On 15 April 2012, Henry Wong, D5’s general manager, had gone to the various schools with Mr Ng to check the furniture and equipment.  Thus, everything had been completed except for payment of the outstanding balance 44.

(c)  As far as D2-D4 were aware, Mr Ng had reached an agreement with their former tutors that classes would continue in April, and D2-D4 had agreed with P1 “to receive the business turnover for April on [P1's] behalf on a voluntary basis, and the turnover would belong to you [P1]” (emphasis added).           

(d)  For the sake of reputation and professionalism, D2-D4 hoped that the plaintiffs would handle the conflict between the plaintiffs and “your staff and tutors” properly (emphasis added).  D2-D4 reiterated that they no longer had any relationship with the staff.

40.2.  In relation to the 7 demands, the defendants stated the following.

(1)  They reiterated that they had “no relationship” with their former staff and tutors, and they (the defendants) had simply been rendering assistance on a voluntary and friendly basis to P1.

(2)  They had already instructed staff in March not to receive fees from students for April, and it was only pursuant to discussions between Mr Ng and the tutors in late March that they continued to receive fees for April “as per your instruction”; they accepted that the income for April belonged to P1 and had been collected on its behalf, and that any refund should be done on P1’s behalf and out of the income received; to this end, they said they would remind Mr Yan to handle the matter.

(3)  They would try to assist P1 regarding the information requested.

(4)  They set out their understanding that at the time of the transfer on 2 April 2012, Mr Ng had wished to collaborate with the tutors and to employ the former staff, and so Mr Ng had agreed with the tutors that the tutors could use the schools before 15 April 2012 45; subsequently however, the plaintiffs were unable to reach agreement with the tutors and had numerous disputes with them which resulted in the plaintiffs prohibiting the tutors from giving lessons at the schools.  The defendants reiterated that as far as they were concerned, they had left the scene after the transfer of the furniture and equipment at $0, and there was no basis for them to be held responsible for any loss suffered by the plaintiffs.

(5)  They agreed that any potential purchasers would enter into possession of the schools only if the plaintiffs failed to comply with the agreement on 30 April 2012 46.

(6)  Regarding entry to the school premises, they set out their understanding that all that the tutors wanted was for the students to continue their lessons until the end of the month.

(7)  They reminded the plaintiffs of their (the plaintiffs’) obligation under Clause 4 of the Agreement to pay the rents, informed them that landlords have been chasing up, and that the schools could not stop operations for more than 3 days 47.

Events on 30 April 2012

41.1.  On 30 April 2012, P1’s solicitors wrote to Ms Luk, stating:

“Subject to your performance of the 16 demands contained in our letter dated 26^th April 2012, and to provide to [P1] an updated audit report pursuant to the agreement between the parties, [P1] is ready and willing to pay to you the balance of the payment ... [P1] has already passed to us a cheque to be forwarded to you upon your compliance of your duties”. (Emphasis added).

41.2.  On the same day, Ms Luk signed off D5’s audited reports and financial statements for the years ended 30 June 2010 and 30 June 2011.  However these were not provided to the plaintiffs, and the plaintiffs’ solicitors did not forward the cheque. 

41.3.  In the course of that week, the defendants’ staff supplied the plaintiffs’ staff with some further tutors’ contacts and information on their courses and commission.

Ms Luk’s withdrawal of Supervisor letters

42.  However according to Ms Luk, in early May 2012 she learnt that Mr Leung would not be injecting further capital to perform the Agreement, and so on 7 May 2012, she wrote to the EDB withdrawing the Supervisor letters (which she had previously delivered to the plaintiffs on 3 April 2012, and which the plaintiffs had sent to the EDB on 23 April 2012).

Defendants’ demand for balance

43.1.  On 8 May 2012, D2-D5 wrote to the plaintiffs’ solicitors denying that payment of the balance was “subject to ... performance of the 16 demands”.  The defendants asserted that the 16 demands were not part of the Agreement.  They demanded the balance to be paid by cashier order before 5 pm the next day.  They said “we will on that occasion provide the updated audit report to you accordingly”.

43.2.  However 9 May 2012 passed without payment by the plaintiffs or the supply of the audit report by the defendants.

Receipt of fees from students

44.1.  On 11 May 2012, the plaintiffs wrote to Ms Luk with a list of complaints and repeated that they had never authorized anyone to operate the schools and receive fees from the students.

44.2.  However as noted previously 48,

-  the transfers had been completed on 2 April 2012 for the transfer of D5’s shares and D2-D4’s furniture and equipment,

-  no substitute tutors and staff had been put in place by the plaintiffs,

so the plaintiffs would have had to authorize the existing tutors to continue to give lessons to the students and the existing staff to administer the schools after that date.

44.3.  This list of complaints did not include the defendants’ failure to provide an updated audit report.  

44.4.  On a separate issue, on the same day (11 May 2012) the plaintiffs wrote to the EDB stating that Mr Ng had taken over as supervisor. 

45.1.  On 17 May 2012, the defendants replied, stating that:

-  Mr Yan had told them that the plaintiffs had entrusted the schools enrollment to him from 2 April 2012 as the plaintiffs and Mr Yan were in negotiations over collaboration;

-  since the plaintiffs had gone on holiday thereafter without leaving instructions to the staff as to where to deposit the fees paid by the students, the staff deposited the fees into the defendants’ account in accordance with previous practice;

-  in March 2012, the defendants had already instructed the staff not to accept fees from the students for April, and the defendants had no prior knowledge that the staff would deposit the funds into their account;

-  the defendants were keeping the funds on the plaintiffs’ behalf on a voluntary basis;

-  the defendants were prepared to render any assistance the plaintiffs needed.

45.2.  On 23 May 2012, the defendants informed the plaintiffs that they had received about $20,000 on behalf of the plaintiffs, with the rest kept in the safe (which Mr Yan 49 could access as he had the password). The defendants further asked for the plaintiffs’ instructions whether they (the defendants) should issue refunds of fees directly to the students, or alternatively, transfer the funds to the plaintiffs for the latter to issue refunds. 

Plaintiffs’ demand for updated Audit Report immediately

46.1.  On the same day (23 May 2012), the plaintiffs wrote to Ms Luk referring to Clause 2(2) of the Agreement under which D5 50 was liable to provide an updated Audit Report up to 1 April 2012 51 before 30 April 2012.  The plaintiffs demanded that Ms Luk provide the documents immediately, failing which the plaintiffs threatened that they would apply for an injunction and commence proceedings against her. 

46.2.  It has been noted previously  52 that time was not expressly made of the essence of the Agreement or of any clause therein.  Even if it were implied 53, the obligation to supply an updated Audit Report before 30 April 2012 would have been waived by this time (23 May 2012), and reasonable notice would need to be given to make time of the essence again. 

46.3.  On the same day, Ms Luk requested D5’s auditors for an audited report for the period from 1 July 2011 to 31 March 2012 54.   

Ms Luk’s withdrawal of Supervisor letters             

47.1.  However on the same day (23 May 2012), Ms Luk sent a letter to the EDB withdrawing the Supervisor letters.  (The EDB had not taken any action yet in relation to her previous letters to the same effect dated 7 May 2012).

47.2.  On the following day, Mr Ng wrote to Ms Luk asking her to retract the withdrawal of the Supervisor letters, and he also followed-up his application with the EDB 55. 

Defendants’ offer of reports and retraction of withdrawals of resignation

48.1.  Meanwhile on 26 May 2012, the defendants faxed and emailed a message to the plaintiffs saying that on Monday 28 May 2012 they would send the “updated reports” to the plaintiffs’ lawyers and at the same time collect the cheque for the balance which the plaintiffs were asked to arrange. 

48.2.  They also said in the message that after receiving the cheque, they would write to the EDB to change the data relating to the supervisor (which in the circumstances meant retracting the withdrawal of the Supervisor letters).

Events of 28 May 2012

49.1.  On 28 May 2012, Mr Ng wrote to the EDB asking why the EDB had said it was seeking professional advice on his application for registration as manager and approval of him as supervisor. This letter would only be necessary if his intention to be registered and approved in those positions was extant.

49.2.  On the same day however, P1 wrote to Ms Luk 56.  After saying:

-  the balance should be settled on 30 April 2012 upon the receipt of updated audit report;

-  Ms Luk would submit the Supervisor letters upon signing the Agreement,

it alleged that she was unable to comply with the above “forthwith”, and her unilateral action was regarded as breach of the Agreement. 

49.3.  It demanded the “reimbursement of $1,000,000 under Clause 2(1) of the Agreement, together with the rent and any loss derived from the above forthwith”.

49.4.  It is the plaintiffs’ pleaded case 57 that by this letter, P1 accepted repudiatory breaches being

(a)  the defendants’ failure to provide an updated audit report 58, and

(b)  the withdrawal of the Supervisor letters;

and terminated the Agreement on that date.

Defendants’ response

50.1.  However this was followed by a message from the defendants on 30 May 2012 which invited the plaintiffs to bring a cashier’s order for the balance at 5pm that day.

50.2.  The following day, solicitors instructed by the defendants wrote to the plaintiffs’ solicitors demanding specific performance of the Agreement and any loss or damages suffered as a result of the plaintiffs’ non-performance.

Plaintiffs’ response

51.  However on the following day (1 June 2012), the plaintiffs’ solicitors sent a writ to the defendants’ solicitors stating that the plaintiffs were claiming “rescission” of the Agreement and stating that the plaintiffs had withdrawn from all the schools and enclosing a set of keys.

Defendants’ further response

52.1.  On the same day, the defendants’ solicitors replied saying that the plaintiffs’ conduct had evinced an intention not to be bound by the Agreement, and amounted to a wrongful repudiation of the same, which the defendants accepted.  The payment of $1,000,000 was forfeited, and documents signed for the transfer of shares in D5 were declared invalid.

52.2.  On 20 June 2012, Mr Ng wrote to the EDB withdrawing his applications for registration as manager, principal and supervisor of the subject schools.  

53.  It has been necessary to set out the above matters in some detail because of the nature of the appellants’ challenge to the Judgment.  However before the grounds of appeal and the Judgment can be examined, it is first necessary to see what was the plaintiffs’ case as pleaded.

The plaintiffs’ case

54.  The plaintiffs’ case in the statement of claim was that the contract between the parties was partly written and partly oral, and that there were implied terms for both the written and alleged oral terms, as summarized below.

-  Written part -

Alleged implied condition-

55.1.  The plaintiffs pleaded that apart from the express terms in the Agreement, it was an implied term (as a matter of obvious inference and/or necessary for business efficacy 59) that Ms Luk would not withdraw the letters of resignation.

55.2.  Moreover, the plaintiffs pleaded that this implied term was a condition, ie an essential stipulation of the contract, breach of which entitles the innocent party (if it so wishes) to treat itself as discharged from further performance.   

-  Alleged oral part -

56.1.  The plaintiffs alleged there was an oral part of the agreement, which was made in a conversation between Mr Ng and Ms Luk on 2 April 2012 “immediately before the signing of the agreement” 60. 

56.2.  The plaintiffs alleged there were 4 additional oral terms, summarized as follows.

(1)   D2-D4 would “vacate the ... premises and leave the ... schools in a state ready to be operated by P1” 61. 

The plaintiffs further pleaded it was implied from this oral term that the defendants should pass information and records essential for P1 to operate the schools, and that this was a condition of the contract 62.

(2)   The audited report was required to be updated to the end of March 2012. 

It was also pleaded that further or alternatively, on a proper construction of Clause 2, the audited report was required to be updated to that period “or alternatively to a reasonably recent time” 63.

(3)   Notwithstanding Clause 2 (which provided that payment be made to D5), the sum of $100,000 and the balance would be paid to Ms Luk 64.

(4)   Notwithstanding Clause 2 (which provided that D5 would ensure that an updated audit report would be provided before receiving the balance), it was Ms Luk who had the obligation to provide the said updated audit report 65.

56.3.  Further, in the plaintiffs’ closing submissions, it was argued that “the parties’ intention, as agreed orally, was for Ps to purchase the entire business” 66.  This “orally agreed term” had not been pleaded in the Re-re-Amended Statement of Claim. 

56.4.  In the Consolidated Reply and Defence to Counterclaim, it had not been pleaded as an “orally agreed” term either, but rather like this:

“5(2)(c) The said discussions proceeded on the premise that Dr Ng and Mr Leung would be purchasing from Ms Luk the entire business of the Cantab schools, i.e. not only the existing tenancies of the School Premises and the fittings, furnishings, and equipment contained therein, but also the business’s goodwill, brand name, intellectual property, and connections with existing students, teachers and staff. (Emphasis added).

5(2)(d) Therefore, the parties’ intention and mutual understanding leading up to, and which became manifested in, the Contract 67 was for Dr Ng and Mr Leung to purchase the entire business of the Cantab Schools from Ms Luk (through their respective companies)”.

56.5.  The plaintiffs alleged repudiatory breaches by the defendants in that:

(i)  the defendants failed to provide information and records regarding the schools 68,

(ii)  the defendants failed to provide D5’s updated Audit Report by 30 April 2012 69 and

(iii)  Ms Luk withdrew her Supervisor letters 70, and that:

the plaintiffs accepted (ii) and (iii) on 28 May 2012 71; alternatively, they accepted all three breaches by the issue of the writ on 31 May 2012 72 or by letter from their solicitors to the defendants’ solicitors dated 1 June 2012 enclosing the writ and returning the keys to the school premises.

56.6.  The plaintiffs claimed loss and damage being:

(1)  rent paid to the landlords of the school premises for April and May 2012 of $911,712.24;

(2)  expenses including fees for school manager and principal, salaries for staff, utilities, etc in the total sum of $594,659.54;

(3)  loss of profits to be assessed 73; and

(4)  return of the $1million by reason of total failure of consideration 74.

The defendants’ defence

57.1.  The defence may be summarized as follows.  It was denied that the contract was partly written and partly oral. The defendants’ case is that there were no oral terms and that the Agreement contained all the terms of the contract 75.

57.2.  In particular, in respect of the alleged implied term (from the alleged oral term that the defendants had to vacate the premises, etc. 76) that the defendants had to pass information or records to P1, the defendants’ case was that at the end of March 2012, the plaintiffs had made arrangements with the tutors and staff for the operation of the schools by P1 after the transfers 77.  Accordingly there was no implied term regarding information or records.  The defendants explained that the name “Cantab” continued to be used only because the tenancy agreements did not permit a change of name 78.  In any event, any failure to provide the information and records would not be so serious as to entitle the plaintiffs to terminate the Agreement 79.

57.3.  The defendants emphasized that the benefit of the Agreement was for P1 to take over the existing tenancies of the school premises (through the transfer of shares in D5) and the furniture and equipment in the premises (through the transfer by D2-D4). Both transfers were completed on 2 April 2012, as expressly stated in the Agreement 80. 

57.4.  The supply of the updated Audit Report (which the defendants were ready willing and able to do  81) was therefore not a condition or condition precedent of the Agreement, and even if the term “updated Audit Report” meant up to 31 March 2012, any failure to supply the report, in the light of the guarantee given by Ms Luk, would not be so serious as to entitle the plaintiffs to terminate the Agreement  82.

57.5.  As for the Supervisor letters, the defendant pleaded that her withdrawal of these letters on 7 May 2012 was in anticipation of the plaintiffs’ repudiation of the Agreement  83, but in any event the parties had shown by their conduct that they regarded the Agreement as still valid and binding.

57.6.  The defendants asserted that the plaintiffs’ 16 demands which were not part of the Agreement, the plaintiffs’ failure to pay the balance, and their commencement of the action were repudiatory breaches of the Agreement, which they (the defendants) accepted by their solicitors’ letter dated 1 June 2012  84.  They counterclaimed for:

(1)  a declaration that the plaintiffs had wrongfully repudiated the Agreement and the defendants were entitled to forfeit the $1million deposit;

(2)  further or alternatively, damages to be assessed.

58.  That was the state of the dispute between the parties when the action came on for trial.

The judge’s Judgment

59.  After a 6-day trial, the judge gave Judgment on 1 November 2016.  It was divided into the following sections:

-  The Parties                                                  §§ 2 - 10

-  Preliminary Negotiations                               §§11 - 14

-  The Written Agreement of 2 April 2012        §§15 - 32

-  The Subsequent Events and Effects             §§33 - 57

-  The 1st defendant’s case                             §§58 - 76

-  The written contract of 2 April 2012             §§71 - 76

-  Conclusions and Findings                            §§77 - 85

-  The Plaintiffs’ Claim for Damages                §§86 - 88.

60.  The judge gave damages to the plaintiffs as follows:

“(1) return of $1 million being the first instalment of the purchase price;

(2) the sum of $911,712.24 as the rental for the premises in April and May 2012;

(3) the sum of $274,659.54 being the “costs/payments of the schools/business in April and May 2012 during which time of course the 1^st defendant had effectively reinstated herself as director/manager/principal of the schools and effectively running the business on a ‘meddling’ basis. The plaintiffs (or any one of them) had not registered themselves as the shareholders of the 5^th defendant”  85.

The defendants’ counterclaim was dismissed.

The Appeal

61.  The defendants appealed.  The Notice of Appeal contained 23 grounds but Mr Jason Pow SC for the defendants submitted that the most important were Grounds 1 and 2, which focus on the issue of the substance of the agreement.

Ground 1

62.  This ground focused on the judge’s failure to properly consider and decide what was the agreement between the parties; in other words, was the agreement (as the plaintiffs allege) partly written and partly oral, or was the agreement contained entirely in the Agreement?  (“the entire agreement” issue) 

Ground 2

63.  This ground is closely related to Ground 1.  Mr Pow submitted that the judge was wrong in ignoring the fact that only specific assets were transferred under the Agreement, and in finding instead that there was a “sale of the business of the 5 schools as a going concern” (“the going concern” issue). 

64.  Mr Pow submitted that if these first 2 grounds were established, the judge’s subsequent fact-finding exercise became fundamentally flawed, and at least a re-trial would be inevitable  86. 

65.  The other grounds can be summarized as follows:

Grounds 3-9 (information and records):

66.1.  The judge’s holding that the defendants were at fault in not supplying information and records to the plaintiffs was based on his finding of “undertakings or promises by D1 to provide all necessary information and efforts to make the plaintiffs to take over the business as a going concern”  87 (emphasis added).

66.2.  Accordingly if the Agreement was the entire agreement between the parties and if the defendants had no obligation to transfer a “going concern” to the plaintiffs, there would have been no such obligation and no fault on the part of the defendants. 

Ground 8:

67.  Separately however and in any event, even if the defendants had been in breach, the judge failed to consider whether a delay in providing information and records was a breach which would entitle the plaintiffs to repudiate the Agreement, or which would sound in damages only.

Grounds 10 - 13 (updated audit report):

68.1.  The judge failed to decide the character of the obligation to provide an updated audit report.  In assuming that it was a condition of the Agreement, he proceeded to treat its breach as entitling the plaintiffs to repudiate the Agreement, when the defendants had pleaded that it was an innominate term, and the circumstances would have to be examined to see if a breach would entitle the plaintiffs to regard themselves as being discharged from the agreement or just to damages.

68.2.  The defendants also challenge the judge’s finding that Ms Luk knew that the audited report should have been updated to 1 April 2012; the defendants submit Ms Luk simply had an erroneous interpretation of the clause, and as such, any breach on her part was not of a repudiatory character  88.

Grounds 14 - 18 (withdrawal of the Supervisor letters):

69.1.  The judge failed to decide whether there was an implied term that Ms Luk could not withdraw the Supervisor letters, and even if there was such an implied term, whether it was reasonable for her to do so given the circumstances such as the plaintiffs’ 7 demands followed by their 16 demands.

69.2.  The judge failed to decide the character of the obligation (similar to §68.1 above).

69.3.  The judge failed to consider whether the withdrawal was itself revocable, as the defendants had offered to reinstate the Supervisor letters.

69.4.  The defendants also submit the judge was in error in finding that the plaintiffs were not aware of the withdrawal letters until 24 May 2012, contrary to the plaintiffs’ own letter dated 11 May 2012 (at §7).

Grounds 19 - 23 (affirmation of the contract)

70.1.  Even if there had been contractual breaches by the defendants, the judge failed to consider whether the plaintiffs had affirmed the contract by conduct as shown in the contemporaneous documents.

70.2.  If the judge had done so, he would have found that even if the defendants had committed repudiatory breaches, the plaintiffs had not accepted them.

Discussion

71.1.  One starts with the main issue i.e. the “entire agreement” issue.  The plaintiffs having alleged that the written Agreement did not contain all the terms agreed and that there were additional oral terms (which the defendants denied), the judge first had to decide this factual dispute on the evidence before him; and if his finding was that the Agreement did not contain all the terms agreed, he then had to decide what were the additional oral terms. 

71.2.  Findings on these fundamental issues would inform the judge’s decision on the other issues (eg the nature of the terms agreed, whether any terms had been breached, whether any breaches had been waived, whether the breaches would entitle the innocent party to terminate the agreement or to damages only, etc).      

72.1.  However with respect, it appears the judge did not identify the issues that required resolution, or make sufficiently clear findings on the fundamental issues, and insofar as he did make some findings, adequate reasons had not been given.

72.2.  In English v Emery  89, the English Court of Appeal held that generally:

“19.... the issues the resolution of which were vital to the judge’s conclusion should be identified and the manner in which he resolved them explained. ... It does require the judge to identify and record those matters which were critical to his decision”.

72.3.  A judge’s duty to give adequate reasons was explained succinctly in this passage in Zhuo Cui Hao v Ting Fung Yee 90:

“Generally speaking, a professional judge is under a duty to analyze in his judgment the material points in the evidence of the case and give reasons as to why he has reached a particular conclusion or decision. This is the only way to make people understand why their evidence is not accepted by the court and why they lose in a case. Only by this can justice be seen to be done. Furthermore, the losing party needs to be clear on whether there is any error in the reasons for the decision given by the court before he can decide whether to appeal or not, and, at a later stage, submit to the Court of Appeal his grounds of appeal in order to set aside the original decision”. (Emphasis added).

72.4.  In relation to the “entire agreement” issue, it is well-established that the burden is on the party alleging that there were additional oral terms to rebut the presumption that a written agreement is intended to contain all the terms of their bargain 91 

72.5.  Accordingly, to decide if the plaintiffs’ allegations were established, the judge should have examined the evidence to see what oral statements the parties had allegedly made, and the circumstances in which those statements were made, to see if the plaintiffs had succeeded in proving that additional oral terms had been made in contractually binding circumstances, in order to rebut the presumption that the written document contained the entire agreement.

73.1.  Unfortunately, that was not done in this case.  First, in the section on preliminary negotiations, the judge held (§12) that

“the plaintiffs expected to be able to continue to engage/employ the tutors either on the basis of their existing contracts or by means of negotiated new contracts with their own business. It was understandable as a matter of common sense and commercial reality, that no obstacles would or should be placed in their path in respect of their fundamental requirements”. (Emphasis added).

73.2.  He also held (§13) that:

“the impact of the plaintiffs’ evidence and approach was that the business was to be taken over as far as possible, as a going concern. [After the judge referred to the defendants’ counsel’s objection to this, he said] “any other view would be untenable. Of course there would always be a risk that some tutors might not wish to serve under new ownership ... It was a risk that would require elimination by the new owners by means of contracts with the tutors ... The seller as part of its bargain in the sale would be obliged to facilitate or aid this transition and avoid doing anything which might disrupt continuity of staff and students. The plaintiffs were not seeking to buy a crewless empty ship, devoid of sails and rudder”. (Emphasis added).

73.3.  He also held (§14) that:

“in the face of it, the 1^st defendant recognised this and purported to aid the transfer as smoothly as possible. Beyond these matters, the negotiations have little significance”. (Emphasis added).

74.  Pausing there, the following observations may be made.

(1)  The judge’s focus was on the plaintiffs’ unilateral expectation and their approach.  The judge did not find as a matter of fact whether any statements had been made by the defendants, and if so, in circumstances which would have made any of the alleged additional oral terms legally binding as a matter of contract.

(2)  The judge did not find there had been a collateral contract (which the plaintiffs had not pleaded anyway) that the defendants would transfer the “entire business” of the subject schools as a “going concern” 92 to the plaintiffs.

(3)  The judge did not refer to (and presumably did not accept) Mr Ng’s allegation that Ms Luk had expressly offered the plaintiffs the “use” of CEAL’s contracts 93. If the judge had accepted that evidence, he would have had to analyze how that could have been done in the absence of an assignment of CEAL’s contracts or a joint venture with CEAL 94.

(4)  On the contrary, the judge accepted that the plaintiffs were not entitled to the tutors’ services.  As can be seen from the passage from the Judgment quoted in §73.2 above, he found the tutors were free to contract - or not to contract - with the plaintiffs.  He found it was a “risk” which the plaintiffs would have to “eliminate” by making new contracts with the tutors.  In other words, the judge contemplated bilateral negotiations between the plaintiffs and the tutors for new contracts.  In this bilateral context, what did the judge mean by the sellers’ “part of its bargain”? The plaintiffs did not plead, nor did the judge find, that the defendants had attempted to sabotage any negotiations for new contracts between the plaintiffs and the tutors.            

(5)  It is not clear whether by the reference to “staff”, the judge included the tutors.  Even assuming he did, once the plaintiffs decided they did not wish to acquire CEAL, there could not have been any “continuity” of staff in the absence of an assignment by CEAL or a joint venture with CEAL.

(6)  Importantly, it is not clear what was the basis of the judge’s holding that the defendants “as part of its bargain in the sale” would be obliged to facilitate or aid the plaintiffs’ acquisition of the tutors’ services.  Both the plaintiffs and the defendants knew that the tutors were contractually bound to CEAL, and CEAL was not going to be part of the bargain.  What acts were the defendants contractually obliged to do to help the plaintiffs in their negotiations with the tutors?  Unfortunately the judge did not articulate these “obligations”, which were not written in the Agreement, nor were part of the pleaded 4 additional oral terms.      

75.1.  The judge went straight from the section on Preliminary Negotiations to the section on the Written Agreement. As noted above 95, the plaintiffs’ case was that 4 additional oral terms were made “in a conversation between Mr Ng and Ms Luk on 2 April 2012 immediately before the signing of the agreement”.   

75.2.  However it would appear that the judge did not make a finding as to whether this alleged conversation took place, and if so, which of the alleged additional terms were made in contractually binding circumstances.  In other words, there was no (or no adequately reasoned) finding in respect of this fundamental issue.

75.3.  In the introduction in §1 of the Judgment, the judge simply said:

“This action concerns a contractual dispute between the parties arising out of an agreement, written in Chinese with English additions, and dated 2 April 2012” (Emphasis added).

75.4.  The judge only referred in his Judgment to “oral agreements” in §40 of the Judgment (dealing with Subsequent Events & Effects) when he discussed the “16 demands”.  The judge said:

“They [the 16 demands] are no more than the essential material to be handed over to or provided to the purchasers of such a business in order to facilitate its continuation, seamlessly if possible, although in this case not so seamlessly. Compliance with them would in my judgment be at least implied although I am satisfied that there were oral agreements to their effect. It would not make sense if express or implied provisions were lacking”. (Emphasis added).

75.5.  With respect, the judge did not set out the evidence or substance of these “oral agreements”, nor did he say which “agreements” to these demands were express, and/or which were implied (and if implied, on what ground).   

75.6.  Insofar as the judge found “express oral agreements” for the “16 demands”, the plaintiffs had pleaded only 4 additional oral terms made in a conversation between Mr Ng and Ms Luk on 2 April 2012.  The “16 demands” included matters occurring after that date.   

75.7.  Insofar as the judge found “implied terms”, he did not say whether they were implied as being necessary as a matter of business efficacy, or whether they were implied as the obvious, but unexpressed, intention of the parties.      

75.8.  In my view, with respect, it was inadequate for the judge to find there had been “oral agreements” simply on the basis that “it would not make sense” if “express or implied” provisions were lacking, which in turn was due to his view that the parties had agreed to transfer the business as a “going concern” 96.

76.  This was the same approach taken at §78 (in the section on Conclusions and Findings) when the judge found “clear undertakings or promises” by Ms Luk, but the evidence supporting a finding of an oral agreement was not set out, and the finding appeared to be based on it being a “necessary exercise” for the plaintiffs to take over the business as a going concern, which suggests the judge was referring to an implied term.

77.  Finally on the issue whether there were additional oral terms and their substance, at §34 of the Judgment, the judge said:

“Dr Ng and Mr Leung went their separate ways on holiday between 3 and 15 April. That [sic] was clearly some agreement between the parties that Ms Luk and staff would keep the tutorial business ‘ticking’ over in the interim and this seems to have been done albeit, it appears, on a minimal level”. (Emphasis added).

78.  The judge seemed to have found another orally agreed term here but it would be noted first, that such a term contradicted the position asserted by the plaintiffs’ solicitors in their letter dated 17 April 2012, when they objected to Ms Luk’s operation of the schools after the date of the Agreement 97, and it does not appear that the judge had taken that contemporaneous document into account when he found “some agreement” 98.  Secondly, Mr Wilson Leung counsel for the plaintiffs fairly acknowledged before this court that this had not been pleaded as an agreed term.  (Further this finding impacts on the “going concern” issue, see below).

79.  With respect to the judge, for the reasons set out above, I take the view that the defendants have established that the judge had failed to make reasoned findings on the “entire agreement” issue. 

80.1.  Ground 2 is closely related to Ground 1.  Absent properly analyzed grounds for finding that the agreement was partly oral (and if so, which terms had been orally agreed), it follows that the Agreement in its written form would not support the judge’s finding that the agreement was for the “sale of the business of the 5 schools as a going concern” unless that term was implied.

80.2.  The judge did not discuss the basis for implying such a term.  Insofar as he was implying it in fact 99, he has not explained why the term was necessary to give business efficacy to the contract.  The Agreement was clear and workable.  The Agreement expressly provided for the transfer of only 3 component parts of the operations, ie the premises, the furniture and equipment, and the position of Supervisor.  The transfer of these component parts could be, and were, performed without the need for implying a term.

80.3.  In §76 of the Judgment (in the section on the 1^st defendant’s case on the written contract of 2 April 2012), the judge asked:

“What was the point of the plaintiffs buying the company which held the tenancies and buying all the assets in the premises unless they were going to run a fully functional tutorial establishment?”

80.4.  Clearly that was a reference to the services of the tutors.  Whilst they were obviously important to the operations, the fact was that the plaintiffs knew the tutors had contracts with CEAL but they did not wish to acquire this company.  It is difficult to see why (and how) a term should be implied somehow to provide them with that benefit 100 when the parties had made a deliberate commercial decision not to include this component part into the contract.

80.5.  The judge referred to Ms Luk’s evidence that the plaintiffs were making private arrangements with the tutors and staff which he found showed that she knew “they wanted to take over a going concern” 101. The judge also said at §69 (in the section on the 1^st defendant’s case):

“Of course the tutors, by virtue of their reputations in the tutorial world, had their following of students, and the plaintiffs would no doubt have to negotiate contracts with them for the continuation of their services to the five schools, and such negotiations would, as a matter of commercial practicality, have to take place, or at least start, before the agreement was executed. The plaintiffs did not anticipate coming in schools devoid of tutors and students. They were not buying an empty shell of a business, however unsuccessful it may have been in Madam Luk’s hands, and she well knew that at least in principle, she was selling a going concern”. (Emphasis added).

80.6.  The judge’s addition of the words “in principle” is not understood.  In passing, it is noted that if the agreement had been for the transfer of a business, then P1 would have had to cause to be published in the Gazette etc 102 a notice of transfer of the business pursuant to the Transfer of Businesses (Protection of Creditors) Ordinance Cap 49 103.  That was not done.

80.7.  Further, a finding of one party’s knowledge of the other party’s desire is not equivalent to a finding of an obvious but unexpressed inference from the agreement which bound the first party to perform any obligations.  This was particularly so when the judge accepted the evidence that the plaintiffs were directly negotiating with the tutors and staff, and Ms Luk was not on amicable terms with them.  It is well-established that a term will not be implied unless the court is satisfied that both parties would, as reasonable people, have agreed to it had it been suggested to them 104. It is difficult to see how Ms Luk would have agreed to some unspecific obligation to assist the plaintiffs in their negotiations with the tutors and staff, especially when she had a poor relationship with them (the tutors and staff) having made serious accusations against them.         

80.8.  For the reasons set out above, I take the view, with respect to the judge, that the defendants have established that the judge had failed to make reasoned findings on the “going concern” issue as well. 

81.1.  Given the difficulties posed by the absence of findings of fact and reasons for such facts as were found on both the “entire agreement” issue and the “going concern” issue, the approach as set out in Welltus 105 is that we should then consider if the issues can be resolved by this court.  This course should be adopted if possible so as to avoid further costs and time being expended.  However having read the documents, transcript and submissions extensively, it seems there is no alternative but to remit the action for retrial.

81.2.  The “entire agreement” issue obviously will have to be determined on oral evidence.  The “going concern” issue is closely related to it.  The findings of the trial judge on these fundamental issues will inform his/her decisions on the other issues referred to in the other grounds of appeal.  The disputes as to whether the defendants were contractually obliged to give “information and records” to the plaintiffs can only be resolved after a determination of (1) the terms of the agreement, (2) which company these records belonged to, (3) whether this company was a party to the agreement and (4) if not, whether there was an agreement that a party to the agreement had bound itself to procure these records.  The same process would have to apply to the plaintiffs’ 7 demands and later their 16 demands. The defendants’ reactions to those demands and their subsequent conduct would have to be considered against the validity of those demands. 

81.3.  There is also the question whether those demands 106 were in respect of conditions (the breach of which would entitle the plaintiffs to regard themselves as discharged from performance of the contract), or only innominate terms (in which case the plaintiffs’ entitlement to discharge, or to damages only, would depend on the seriousness of the breach in all the circumstances).

82.  This is not a case where, irrespective of the findings on these earlier issues, a subsequent issue would be determinative of the proceedings 107.

83.1.  In respect of the supply of the updated Audit Report, assuming that the defendants were obliged to provide one updated to 31 March 2012, there are still the following questions:

-  whether time was of the essence of that clause originally,

-  if so, whether performance at the original time had been waived,

-  whether the plaintiffs had given a reasonable time for performance after waiver (on 23 May 2012 the plaintiffs had demanded it “immediately”, and on 28 May 2012, the plaintiffs terminated the agreement on the basis of the defendants’ failure to supply it);

-  whether it was a condition or an innominate term, and

-  the consequences of failure to perform, in particular, whether the supply of the Audit Report updated to the last financial year was due to an erroneous interpretation so as not to amount to repudiation.

83.2.  In the Judgment, the judge held (§22) that clause 2(2) “is pivotal to the Agreement” (emphasis added). However it seems that this finding had not been considered in the light of clause 3 of the Agreement which provided that the transfers (of shares in D5 and the furniture and equipment under clause 1) were completed on 2 April 2012.  The trial judge would have to consider whether the agreement was still executory, or whether it was a completed transaction with the only remaining obligations being the supply of the updated audit report and payment of the balance 108. That, together with Ms Luk’s personal guarantee, should all be taken into account when considering some of the matters in the preceding paragraph.  In the absence of findings on these matters, the fact that the defendant did not supply the updated Audit Report cannot be determinative of the proceedings.

84.  In respect of the withdrawal of the Supervisor letters, this response on the part of the defendants should be considered against the validity of the plaintiffs’ continuously increasing demands.  It would also have to be considered whether this was a condition, or an innominate term, and the judge would also have to find whether the withdrawal could be retracted, given the defendants’ offer in the email message of 26 May 2012 to do so.

Order

85.  For the reasons set out above, the appeal should be allowed, the Judgment set aside, and an order is made for the case to be remitted to the Court of First Instance for trial before another judge, with an order nisi that the costs of the appeal be to the defendants, and the costs below to be costs in the cause of the retrial.  I apologize for the length of time taken to prepare this Judgment and for its length.