HONG JING CO LTD v. ZHUHAI KWOK YUEN INVESTMENT CO LTD

HCA156/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 156 OF 2006

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REASONS FOR JUDGMENT ON LIABILITY

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Introduction

1.  Zhu Kuan (Hong Kong) Co. Ltd (“ZKHK”) is a company incorporated in Hong Kong.  Zhu Kuan Group Company (“ZKG”) is a company incorporated in Macau.  The two companies were controlled by the Zhuhai Municipal Government of the People’s Republic of China (“Zhuhai Government”). 

2.  ZKHK and ZKG (the “Zhuhai companies”) were used as investment vehicles (also known as window companies) by the Zhuhai Government.  They incurred substantial debt from various creditors.  The amount of total debt was about HK$8 billion.  Since 1998, the Zhuhai Companies were unable to make repayment.  They were unable to reach any agreement with creditors even in August 2003.  One of the creditors was Bank of China Group Investment Ltd (“BOCGI”) and the relevant amount owed to BOCGI was no less than HK$800 million as at 4 October 2004 (“the Debt”).  ZKG was adjudged “bankrupt” in Macau, and both ZKG and ZKHK were wound up in Hong Kong by the end of 2004. 

3.  BOCGI refused to sign a memorandum for restructuring debt and threatened to push for liquidation and obtain the underlying securities.  The Zhuhai Government did not want this to happen, and sought the help of outside investors.  In order to facilitate the rescue, the Defendant herein (“D”) was incorporated in the Mainland.  The purpose of D is to obtain enough funds to pay off the Debt and “unwind” the underlying securities. 

4.  The plaintiff (“P”) was one of the potential investors.  In or around October 2005, Madam Chu Kin Heung (“Madam Chu”) was approached by one Mr Wu Yue Ping and one Mr Xiao Guang Bing.  Both Mr Wu and Mr Xiao were estate agents.  Madam Chu said that at their suggestion she wrote on behalf of P to explore the possibility of helping D with the restructuring of debt by buying the underlying securities of the debt. 

5.  On or about 26 October 2005, Madam Chu and Mr Xiao went to Zhuhai and visited Mr Zhang Song.  Mr Zhang was the director of the Financial Services Department (“FSD”) and the Deputy Secretary-General of the Zhauhai Government.  At the 5^th meeting with the Zhuhai Government, Madam Chu on behalf of P and Mr Quan Li on behalf of D signed a memorandum of understanding (“P’s MOU”) on 11 November 2005. 

6.  P’s MOU provided, inter alia, that D would endeavor to negotiate on P’s behalf with BOCGI.  P was to pay HK$810 million and D was to transfer the securities (3 valuable properties) to P.  The understanding at that time was that D would receive HK$110 million and BOCGI would receive HK$700 million (for repayment of the Debt of about HK$800 million).  D explained the HK$110 million to be received from P was not for the benefit of the Zhuhai Government. Instead it was to be used for repayment of other debts owed by the Zhuhai Companies.  It was both parties’ understanding that P would buy the “debt”, but not the securities itself, from BOCGI.  The transfer of the 3 valuable properties would not take place immediately.  They would be transferred to P after D had completed the whole restructuring scheme with all the creditors of ZK Companies. 

7.  P’s MOU also provided for an exclusivity period, in which D was not to negotiate with other parties regarding the Debt and securities.  The exclusivity period would end on 30 November 2005 but could be extended by mutual agreement. 

8.  A series of correspondences took place between the solicitors acting for P and D during the exclusivity period.  The exact content and nature of the correspondences will be fully explored later. 

9.  P and D did not come to any further agreement during the exclusivity period.  Understandably Madam Chu, on behalf of P, tried to contact representatives of D near and after the end of the exclusivity period. 

10.  In the afternoon of 30 December 2005, D through one Mr Liao Ke contacted Madam Chu and invited her to participate in a tender/auction (投標) for the Debt and securities on 31 December 2005 in Zhu Hai.  On the next day, Madam Chu and P’s solicitor, Mr KC Ho arrived at the tender/auction. P submitted a heavily defaced set of auction documents and P’s bid was declared invalid.  The stated price at P’s document was HK$880 million, higher than the price offered by P’s sole competitor, one Sei Pou Estate Development Ltd (at HK$871,990,000). 

11. (i) P brought this action alleging that D was in breach of P’s MOU by :

(1) failing to negotiate with BOCGI in furtherance of P’s MOU;

(2) failing to provide information requested by Messrs K.C. Ho & Fong (“KCHF”) acting for P, to enable P to further P’s MOU;

(3) negotiating with third parties, See Good Investments Limited (“See Good”) and Sei Pou Estate Development Ltd (“Sei Pou”), in breach of clause 7.1 of P’s MOU; and

(4) causing the Debt and the securities therein to be sold to Sei Pou Estate Development Ltd (“Sei Pou”). 

(ii) P also claimed that the said tender/auction in Zhu Hai was invalid under the laws of the Mainland. 

12.  There are numerous issues put forward by Counsel from both sides.  Those issues are :

(1) What is the nature and extent of D’s duty under P’s MOU?

(i) What is the condition for triggering D’s duty?

(ii) Did P provide sufficient asset proof?

(iii) Did D waive the requirement for asset proof?

(2) When did the exclusivity period end?

(3) What caused D to fail in its negotiation with BOCGI during the exclusivity period?

(i) When did D start its negotiation with Sei Pou and its predecessor See Good?

(ii) Did D intend to further P’s MOU by D’s solicitors’ letter to BOCGI dated 26.11.2005?

(iii) Did BOCGI change its stance by “raising the price” during the exclusivity period?

(4) Did P waive its right under P’s MOU by participating in the auction on 31 December 2005?

(5) Is the auction on 31 December 2005 valid?

(6) What is the governing law for P’s MOU?

Issue 1 — Nature and Extent of D’s duty under P’s MOU

13.  The starting point for any alleged duty on the part of D is clause 5 to 7 and 11 of P’s MOU.  Clause 11 specifically provides that all clauses (except clauses 5 to 7), are not to have legal effect.  Both parties conducted their case on this basis. 

14.  Clause 5 provides that the price for selling the Debt and the underlying securities is HK$810 million.  Clause 6 provides that P should pay D’s solicitors (Messrs Paul, Hastings Janofsky &Walker, “PH”) HK$50 million as earnest money before 20 November 2005 and provide asset proof of HK$760 million and Clause 6.1 and 6.2 provide the treatment of the earnest money in different events. 

15.  Clause 7 provides that upon payment of earnest money, D promised to do/forbear to do certain acts in Clause 7.1-7.3, from the date of signing of P’s MOU to 30 November 2005 (or later if extended by mutual agreement).  The period referred in Clause 7 is the exclusivity period mentioned above.  Clause 7.1 provides that D would only discuss/negotiate/contract with P and no one else during the exclusivity period.  Clause 7.2 provides that D would provide all reasonable and necessary help and information.  Clause 7.3 provides that any agreement between D and BOCGI would require P’s confirmation/approval regarding the content and format. 

16.  P alleges that D owes a contractual, as well as a fiduciary duty towards P because P had to rely on D in the negotiation with BOCGI.  D denies any fiduciary duty owed, because both parties were dealing at arms’ length. 

Issue 1.1 — What is the condition for triggering D’s duty?

17.  Mr Paul Shieh SC appearing with Mr Liu Man Kin, for the Defendant, submitted that the trigger for D’s duty under P’s MOU is not just the payment of earnest money (which P had made on 19 November 2005), but also the provision of the asset proof.  He further submitted that D’s duty did not arise unless P had paid the earnest money and provided the asset proof which happened on 23 November 2005. 

18.  Mr Denis Chang SC appearing with Ms Gekko S.Y. Lan and Mr Newman Lam, for the Plaintiff, submitted that Mr Shieh’s interpretation of Clause 7 is contrary to its literal meaning. 

19.  I agree with Mr Chang that D’s duty was conditional only upon the payment of earnest money and had retrospective effect.  The very clear words used in Clause 7 eliminated any room for any alternative interpretations. 

20.  Mr Shieh submitted that the duties in Clause 7.1-7.3 could not be imposed upon D when P had not provided the asset proof according to Clause 6.  To this there are two answers : first, it was the effect both parties intended under the exigent situation; secondly, D had recourse to P if P failed to provide the asset proof. Accordingly, the construction of P’s duty under Clause 6 as a concurrent condition, instead of a condition precedent, to D’s duties under Clause 7 and 7.1-7.3, is not unfair to D.  Upon construction, this is the meaning and effect of the P’s MOU. 

Issue 1.2 — Did P provide sufficient asset proof?

21.  Having found that the provision of asset proof is not a condition precedent but a concurrent condition, coupled with the fact that D is not counter-claiming under Clause 6, the issue of asset proof seems to have no significance.  However, this issue may be relevant to the assessment for damages and it is prudent for me to make a ruling on this issue.

22.  It is undisputed fact that P provided a bank reference letter (“the Reference Letter”) from Bank of China (Hong Kong) Limited (“BOCHK”) stating that Future Leader Management Limited (“FLML”) maintained an account with a high 9-digit fund with BOCHK.  It also stated that Fit Profits Limited (“FPL”) (with FLML as its shareholder) maintained a cheque account with BOCHK. 

23.  D first took issue with the Reference Letter in the allegedly unfriendly meeting on 26 November 2005, where P was represented by Madam Chu and D was represented by Mr Zhang Song, one Mr Ouyang Guoliang and one Mr Huang Hai To. D (through PH) again took issue with the Reference Letter on 28 November 2005 and requested P to provide another asset proof that specified an amount of more than HK$760 million.  PH also requested P to provide documents to show the relationship between P, FLML and FPL.  On the same day, P (through KCHF) replied that P would not provide any document mentioned in the aforementioned letter of PH and urged D to continue with its obligations under P’s MOU.  D had not pursued its request any further. 

24.  Mr Shieh submitted that the Reference Letter was flawed in two ways.  First, it does not link FLML and FPL with P, as it does not mention any relationship between P and FLML and/or FPL.  Secondly, a high 9-digit figure could not be taken to mean that P had over HK$ 760 million in BOCHK’s account. 

25.  P’s case is that the relationship between FLML and FPL on one hand, and P on the other hand had been imputed to D (through Mr He Ning Ke) by P (through Madam Chu) on 11 November 2005.  Allegedly Madam Chu mentioned that the investor behind P was one Mr Cheung Lap Kwan.  Mr Cheung intended to use FLML and FPL to hold the 3 valuable properties.  Therefore, any asset proof regarding FLML and FPL’s financial position must be taken to be sufficient for discharging P’s burden under Clause 6.  Madam Chu explained that as Mr Cheung would like to maintain a low profile in this transaction, thus she wanted to avoid mentioning his name as much as possible.  For the same reason she saw no need to repeat his name when responding to the letter from PH on 28 November, especially since D must have known about Mr Cheung by then. 

26.  D denied that FLML and/or FPL were ever mentioned to Mr He, who denied any English words were ever mentioned to him.  Mr He also could not recall if the name Cheung Lap Kwan was mentioned to him. 

27.  In my judgment, the relationship between P, FLML, FPL and Mr Cheung Lap Kwan had been understood by D before 19 November 2010.  Otherwise, the Reference Letter would be totally meaningless to D and D would have immediately raised an issue with it.  The delay by D in raising the issue regarding the relationship between P, FLML, FPL and Mr Cheung can only be taken to mean that D knew about it before receiving the Reference Letter. 

28.  KCHF said in their letter dated 28 November 2010 (page 461 of Bundle 4), that high 9-digit figure is usually taken by banks to mean somewhere between 700 million to 990 million; 760 million therefore falls within this range. I find that this is sufficient asset proof of their ability to pay the balance of 760 million.  As aforesaid, PH for D had not pursued their request in respect of the high 9-digit figure and identify of FLML and FPL any further. 

Issue 1.3 — Did D waive the requirement for asset proof?

29.  P submitted that even if P was in breach of its obligation under Clause 6, D had waived its right by continuing to perform P’s MOU.  Having held that P is not in breach of Clause 6 and, in any event, P’s obligation under Clause 6 is not a condition precedent, this point becomes purely academic.  Accordingly there is no need to make a ruling on this issue. 

Issue 2 — When did the exclusivity period end?

30.  P submitted that the exclusivity period was orally extended by a telephone call with D’s representative on 28 November 2005.  D denied such an extension. 

31.  I do not believe the exclusivity period was extended by D.  As I have held below, D negotiated with a third party before 25 November 2005 and acted as if such contact had only begun on 1 December 2005 and another MOU was only signed on the next day 2 December 2005.  More likely than not, D would not endanger itself by extending the exclusivity period. 

32.  Accordingly, on the balance of probability, the exclusivity period under P’s MOU ended on 30 November 2005. 

Issue 3 —  What caused D to fail in its negotiation with BOCGI during the exclusivity period?

33.  Apparently, D failed to secure the deal between BOCGI and P during the exclusivity period.  P alleged that D failed because it wanted to bring in another investor (See Good/Sei Pou) and deliberately delayed the negotiation.  D alleged that it was because BOCGI suddenly changed its stance and decreased the debt discharged by payment of HK$700 million.  In other words the payment of HK$700 million would not be sufficient to discharge the Debt completely. 

Issue 3.1 — When did D start its negotiation with Sei Pou and its predecessor See Good?

34.  D admitted that the Zhuhai Government received See Good’s application letter on 25 November 2005.  Mr Zhang and his assistant Madam Chen Yu Rong (“Madam Chen”) of the FSD received the same on 29 November 2005.  D’s case is that Mr Zhang and Madam Chen discussed about the application letter but decided not to pass it onto Mr Quan, in order to avoid conflict until 1 December 2005.  

35.  P’s case is that D had contacted See Good’s representative(s) on/before 25 November 2005, i.e. within the exclusivity period.  P relied on the following factors to support its proposition :

(1) similarity between See Good’s 1^st MOU submitted on 25 November 2005 (“SGMOU-1”) and P’s MOU;

(2) the speed of the negotiation between See Good and D; and

(3) D’s solicitors’ letter dated 26.11.2005 to support this proposition. 

36.  Mr Chang had helpfully prepared a summary of the similarity between SGMOU-1 and P’s MOU.  The more decisive similarities are the exact titles and price ($810 million).  These similarities tend to show that D helped in the drafting of the SGMOU-1.  It should be noted that the title in SGMOU-1 is in Traditional Chinese while the one in P’s MOU is in Simplified Chinese. 

37.  Mr Chang also pointed out that Clause 7.5 of SGMOU-1 stated PH “had advised” (曾建議) See Good to seek independent advice regarding the proposed transaction.  Mr Chang submitted this was for the benefit of PH and the proper inference is that PH, who was still representing D at that time, inserted this clause in SGMOU-1.  This might be the case, but more importantly, this literal meaning of the words suggested that PH had already contacted (and advised) See Good in drafting SGMOU-1.  No one from PH gave evidence to the contrary.  D’s case seems to be that as it was well known that PH represented D in relation to the restructuring of the Debt, it was possible that See Good added this clause on its own initiatives. 

38.  In my judgment, this is very unlikely.  There is no reason why See Good would want to add a clause that says it had been advised when in fact it had not been so advised.  The effect would put itself in a more disadvantaged position for no good reason.  When analysed this clause (which says See Good had been advised) logically, one would immediately ask : who would have advised See Good?  It could not be its own solicitors, as no solicitor would advise his client to add a clause to its detriment on its own initiative.  Thus probably, See Good had been “advised” by PH already, at least in a draft given by PH.  Accordingly there is a strong inference that D (apart from itself but, also through PH), had contacted See Good within the exclusivity period. 

39.  The second factor is supported by Mr Quan of D, who described the signing of the final version of the MOU with Sei Pou (See Good’s successor) happened very fast (negotiation started on 1 December 2005 and concluded next day) that even surprised him.  Indeed, relative to the length of discussion between P and D before the signing of P’s MOU (several weeks), the negotiation between Sei Pou and D was unusually fast (less than 48 hours).  I think it is more likely than not that D negotiated with Sei Pou (through its predecessor See Good) before 1 December 2005. 

Issue 3.2 — Did D intend to further P’s MOU by D’s solicitors’ letter dated 26.11.2005?

40.  Mr Chang also submitted that the letter sent by D to BOCGI on 26 November 2005 was in fact used to further SGMOU-1.  He pointed out that this letter envisaged that the “buyer”, whoever D intended to be, would buy the Debt and the underlying securities directly from BOCGI.  This is the same mechanism envisaged in SGMOU-1, but different from the one envisaged in P’s MOU (Clause 5) as aforesaid. 

41.  I accept this submission.  The proper inference is that immediately after receiving SGMOU-1 on 25 November 2005, D contacted BOCGI on 26 November 2005 to further SGMOU-1.  

42.  From the findings above, D breached P’s MOU by negotiating and aiding a third party (See Good) in purchasing the Debt and underlying securities during the exclusivity period. 

Issue 3.3 —Did BOCGI change its stance by raising the price during the exclusivity period?

43.  This issue was heavily debated during the trial.  It surrounds the purported change of stance by BOCGI during the exclusivity period.  D’s case is that BOCGI suddenly decided that the payment of HK$700 million was only sufficient for purchasing the portion of the Debt worth HK$652 million but not the remaining portion of HK$154 million.  This was completely contrary to the earlier understanding that D would settle the whole Debt (HK$652 million + HK$154 million = HK$806 million) by payment of HK$700 million. 

44.  Counsel from both sides repeatedly described the change of stance as an increase of price by BOCGI.  This is not the most accurate description.  A better description is that BOCGI reduced the amount of Debt discharged by payment of HK$700 million.  An interesting observation is that D’s case made no mention of how BOCGI/Bank of China would treat the remaining portion of the Debt (HK$154 million).  

45.  D relied on a purported letter from the Zhuhai Government to BOCGI dated 30 November 2005.  It was said to be an official document from the Zhuhai Government and bore the words “珠府函[2005]232号”.  I shall refer to this document as Letter 232 which said :

“……然而，11 月28 日我方得知，中银投资单方面改变了10 月27 日双方所达成的意向，认为我方所拟付的7 亿港元只是购买其单独所持的对珠光集团债权6.52 亿港元，而不包含其在中银香港名下的间接债权1.54 亿港元，……升幅达19%。……”

46.  P denied that BOCGI ever changed its stance by reducing the amount of Debt discharged by the HK$700 million.  They relied on a letter sent from BOCGI (through its solicitors Mayer Brown JSM) to P’s then solicitors on 12 October 2010.  I shall refer to this letter as the JSM Reply.  The JSM Reply states, inter alia, that BOCGI could not find document regarding the alleged change of stance.  BOCGI also could not find the various documents alleged to have been sent by BOCGI to convey the change of stance in Mr Zhang’s statement.

47.  Mr Shieh submitted, rather innovatively, that as Letter 232 was discovered by P, P cannot challenge its authenticity.  He relied on an analogy, that is a man cannot challenge his own witnesses unless he turns the witness hostile.  I cannot see how the two can be treated alike.  Mr Shieh’s analogy is qualified by the important exception regarding hostile witness, and I think he implicitly accepted that a document cannot be “turned hostile”.  As the exception is not applicable to documentary evidence, the rule is simply inapplicable.  Otherwise this will cause undue hardship to P, who had no control over the documents discovered. It is not, as Mr Shieh suggested, that the rule is applicable and the exception prevents P from challenging the evidence. 

48.  I do not accept that BOCGI had ever changed its stance.  The first reason is that the “change” would necessarily mean that the buyer would pay HK$700 million for HK$652 million of debt, which is ridiculous.  D explained that BOCGI might have foreseen that the market value for the securities would go up, and so asked for a higher price. However, one must remember that even on D’s case, BOCGI’s stance was thoroughly that of an eager seller.  BOCGI’s initial willingness to discharge the HK$806 million Debt for HK$700 million also shows that it did not consider the Debt (or its underlying securities) to have much investment potential. 

49.  D’s case necessarily meant that BOCGI suddenly saw the potential of the securities and substantially increased the price, but shortly after on 31 December 2005 it reverted the price to HK$700 million.  D’s case is plainly unbelievable. 

50.  The second reason is the lack of any trace of document in BOCGI’s record (except Letter 232) that can support the alleged change of stance.  There is no reason why BOCGI would not record such an important business decision.  There is also no reason why BOCGI would deliberately conceal any such record. 

51.  I do not consider that the letter dated 29 November 2005, allegedly sent by BOCGI to the Zhuhai Government, as a document that supports the alleged change of stance.  It only states that the Zhuhai Government requested BOCGI not to further increase the price for the Debt.  It does not refer to any recent increase of price.  This letter did not tally with the allegation in the Letter 232 part of which was quoted in Chinese in paragraph 45 above.  Thus it cannot prove that BOCGI had changed its stance.  In any event the authenticity of this document is in doubt.  The date and number of pages were apparently corrected as the digits “9” and “1” were hand-written while the other digits were typed. 

52.  D also produced two courier receipts to show that Letter 232 had in fact been sent to BOCGI and BOC Beijing.  The first receipt (p. 820 of Bundle 4) shows that the sender is ZKG and the recipient is Bank of China (in Beijing).  The second receipt (p. 821 of Bundle 4) shows that the sender is the Zhuhai Government and the recipient is BOCGI (in Hong Kong).  Both receipts are dated 1 December 2005. I do not think these receipts are relevant at all.  They only show that something was sent to BOC Beijing and BOCGI.  It does not show what was actually sent.  More importantly, the senders in the two receipts are different, even though the packages were mailed by the same person (Michael Wong).  If both packages contained the same item (Letter 232), one would expect them to be sent from the same sender. 

53.  In the end, as orally submitted by Mr Chang, all documents produced by D (some of which were only produced during the trial) to support this allegation of change of stance, had some problems and queries of their own.  For those reasons above, the proper inference is that BOCGI had never made the alleged change of stance. 

Issue 4 —  Did P intend to waive its right under P’s MOU by participating in the auction on 31 December 2005?

54.  D alleged that P had waived its right under P’s MOU by the following acts :

(1) Alleged oral assurance made by Mr Xiao.

(2) P’s participation in the tender/auction on 31 December 2005.

(3) The Undertaking (承諾書) given by P as part of the tender/auction documents submitted. 

55.  Regarding the alleged oral assurance made by Mr Xiao, I cannot find that Mr Xiao possessed any actual or ostensible authority.  From Madam Chu’s evidence, it was clear that Mr Xiao was known to D as an estate agent only, and he never had actual authority to bind P in matters regarding the sale of the Debt. 

56.  Mr Xiao also had no ostensible authority, since Madam Chu was the only representative of P in all the meetings regarding the sale of the Debt.  It is clear from the witness statements from both sides that any major decisions from P were communicated by Madam Chu. It is inconceivable that D would perceive Mr Xiao as an agent for P with all its authority, in its technical sense. 

57.  It is true that in Madam Chu’s affirmation dated 21 January 2006, Mr Xiao was said to be a representative of P.  Mr Shieh placed great weight to the word “representative”.  He submitted that this word means Mr Xiao had authority to bind P.  However as I have found above, Madam Chu was the only person responsible for making or communicating major decisions from P.  D must have understood the above and it could not have thought otherwise.  D must have known that Mr Xiao’s role was at best that of a helper or an assistant to Madam Chu.  His role was purely advisory, and P did not act through him.  

58.  In any event I cannot accept how Mr Xiao’s alleged oral assurance that P would abide by the rules laid down by the Zhuhai Government could be taken as an unequivocal statement of waiver. There was not the slightest mention of P’s MOU by D and Mr Xiao’s reply could not be taken as a waiver in any event. 

59.  The same principle applies to the Undertaking given as part of the tender/auction documents on 31 December 2005.  Mr Shieh submitted that by agreeing to the following words, P had waived its right under P’s MOU :

「為明確起見，我司確認 貴司、珠海市政府及普衡律師事務所對上述安排將不會承擔任何責任」

60.  The “aforementioned arrangement” (上述安排) only refers to the matter arising from the tender/auction on 31 December 2005.  This is apparent from the paragraph immediately preceding the quoted sentence (omitted by Mr Shieh in his quote).  In that paragraph, there is a detailed arrangement regarding the treatment of earnest money.  It states that once P signs the document, the earnest money would be treated as deposit and P must understand the risk (“我司完全明白該訂金一經支付將不會退回我司，就此，我司願意自行承擔這風險”).

61.  In my judgment, the “aforementioned arrangement” clearly refers to the treatment of the earnest money, quoted above.  The true interpretation of the two quoted sentences in Chinese is simply this : P understands the risk regarding the earnest money, and P understands that D, the Zhuhai Government and PH cannot be held liable for the treatment of earnest money.  The liability regarding P’s MOU was never mentioned in the Undertaking and it cannot be implied into the document. 

62.  The final act that may be said to constitute a waiver is the participation in the tender/auction on 31 December 2005. The submission by D that Madam Chu intended to participate in the tender/auction as a genuine bidder, and decided to protest only after the failed attempt to win the bid, is inconceivable.  Had Madam Chu really intended to submit the tender documents qua bidder, she would have at least queried the organiser as to the proper form of making a counter proposal, or the possibility of deferring the tender/auction for the purpose of further negotiation in relation to the proposed terms.  Instead of being cautious, P had recklessly defaced the tender document and it must have been apparent to her (or to her advising solicitor at least) that any hope of it being accepted would be lost.  The only inference that can be drawn was that P only intended to protest with the document. 

63.  I further accept P’s submission that even assuming that the tender/auction were valid, and that P had genuinely participated in it, such acts, under Hong Kong law, which is the governing law of the MOU, would still not amount to waiving, relinquishing or varying any or any relevant rights under the MOU.  The participation in the tender/auction is perfectly consistent with P’s duty to mitigate the damage and cannot be said to be a waiver. 

64.  Since D’s own case was that it was not in breach of the MOU, because it did not contact Sei Pou (or See Good) during the exclusivity period, and it did not consider the duty under P’s MOU arose retrospectively, following HIH Casualty & General Insurance Ltd v AXA Corporate Solution [2002] 2 All ER (Comm) 1053, D could not be heard to have interpreted P’s participation as waiver.  The principle can be found at §22 (per Tuckey LJ) :

“What I have said illustrates the difficulty in establishing this type of estoppel when neither party is aware of the right which is to be forgone. A representor who is unaware that he has rights is unlikely to make a representation which carries with it some awareness that he has rights. Conversely a representee who is not aware that the representor has a particular right is unlikely to understand the representor to mean that the representor is not going to insist on that right or abandon any rights he might have unless he expressly says so.”

65.  Even assuming the Mainland Chinese law applies, Professor Wang for D, under cross-examination, has accepted that in the case of breach of contract, there would only be waiver if the representor is aware of his rights and expressly says that he would waive the same [T16/2035S]. 

Issue 5 — Is the auction on 31 December 2005 valid?

66.  I agree with P that the whole tender/auction was invalid.  This tender(投標)is a kind of tender within the <招投標法> of the Mainland.  But it was a breach of various provisions of <招投標法> and <廣東省實施辦法>.  It was therefore invalid(無效)by virtue of <民法通則> s. 58(5) [違反法律].  It was further invalid by virtue of <民法通則> s. 58(3).  (“一方以欺詐、脅迫的手段或者乘人之危、使對方在違背真實意思的情況下為的”.)  In this respect, I accept the submissions of P, as set out in much more detail in Chinese in its Appendix I to P’s Submission Part II.  

Issue 6 — What is the governing law for P’s MOU?

67.  Is P’s MOU governed by Hong Kong Law? The legal principles are well settled.  In the absence of an express or an effective choice of law, a contract is governed by the law of a country or system of law with which it is most closely connected. 

68.  All matters have to be taken into consideration that are relevant to the contract : see Dicy, Morris and Collins, Conflict of Laws (14^th Edn) rule 204. 

69.  Those relevant matters include :

(1) the place of contracting,

(2) the place of performance,

(3) the places of residents of business of the parties,

(4) the nature and subject matter of the contract, and

(5) the situation of funds which are available for the discharge or security of the obligation.

70.  Two cases were cited to support the aforesaid submission by P, namely :

(1) Reunited Railways of Advana and Retla Warehouses Limited [1960] CH 52, at 36 (CA), which was affirmed in

(2) Tomkinson and Another v First Pennsylvania Banking & Trust Co. [1961] AC 1007. 

71.  The subject matter of the anticipated acquisition under P’s MOU was in the nature of chose in action held by BOCGI in Hong Kong.  The “Debts and Properties” was a convenient label to refer, first to the Debts owed to BOCGI by the ZKHK, a company also incorporated in Hong Kong and ZKG, a Macau company.  It also refers to the Properties upon which the Debt were secured, the most valuable of which was situated in Macau.  The Debt with the relevant security interests were choses of action created under loan documentation and security instruments all expressed to be governed by Hong Kong law.  It was Hong Kong law which governed the restructuring that was necessitated by the liquidation of the Zhuhai companies.  Neither the creditor nor the debtor was located within the Mainland. 

72.  The place of performance of P’s MOU was Hong Kong.  This is the most weighty consideration in the present case.  The payments of the Earnest Money under the relevant provisions of P’s MOU in the sum of HK$50 million, was made by P’s solicitors to D’s solicitors and both of them are Hong Kong solicitors.  Thus apart from the payments under P’s MOU was in Hong Kong currency, the stakeholder was also located in Hong Kong and subject to the laws of Hong Kong.  The completion of the transaction was envisaged to be in Hong Kong. 

73.  Thus the place of negotiation, the contracts, and other matters relied upon by D, such as the use of simplified Chinese in P’s MOU, lose their significance in this context.  D submitted that, despite the involvement of Hong Kong lawyers, P’s MOU was drafted and prepared using the Mainland simplified characters in order to support its argument that P’s MOU is governed by the Mainland law.  This is insignificant.  Civil memorandum prepared by PH in its first and second draft were prepared in Chinese traditional characters.  The final draft was changed to simplified characters. These two types of characters are interchangeable in any computer with the appropriate software. 

74.  Thus I accept P’s submissions that Hong Kong law is the proper law of the contract in P’s MOU. 

75.  The defendant’s expert suggested that the only difference under PRC law is that there is no concept of constructive trust. 

76.  However I accept P’s submission that whether the MOU is governed by PRC law or Hong Kong law would not have affected P’s substantive causes of action nor would it have any effect on the construction of the MOU.  Hong Kong court can hold D liable as a constructive trustee.  It was stated in Dicey, Morris & Collins, at para. 34‑049 that :

“Similarly, if it is argued that a defendant, who in a domestic case would be required to hold property on constructive trust, is nevertheless not liable, on the ground that the law of the place of the enrichment, or other lex causae, does not recognize the principles of constructive trusteeship, the argument is misconceived. The appropriate analysis is to ask whether, under the lex causae, the defendant owes obligation which would impose on him under that law a liability to disgorge a benefit. If so, an English court may hold him liable as constructive trustee when giving remedial effect to the substantive right arising under the lex causae.”

77.  Further it was held in Kuwait Oil Tanker SAK v Al Bader [2000] 2 All ER (Comm) 271 (CA) that :

“190. The judge held that the claimants’ alternative claim was made out. Although his consideration of the question proceeded mainly on the footing that the defendants were liable as constructive trustees, he concluded by holding that they were also liable by reason of breaches of their fiduciary duties to the claimants. On the basis of his previous findings, that conclusion was both justified on the facts and correct in law. However, because the rule of English private international law is that the obligation to restore the benefit of an enrichment such as was obtained by the defendants in this case is governed by the law of the country where the enrichment occurred (see Dicey & Morris: The Conflict of Laws (13^th ed.) Rule 200(2)(c)), it was necessary for the judge’s decision to be based, in the first instance, on the law of Kuwait.

191. Although the concept of trust is unknown to Kuwaiti law, both Dr Hoyle and Professor Ballantyne agreed that Articles 264 and 267 of the Civil Code (see above) imposed on each of the defendants an obligation to make restitution to the claimants in respect of the funds misapplied by him.  On that footing the judge followed the decision of Chadwick J in Arab Monetary Fund v. Hashim (15^th June 1994 –unreported), which has since itself been followed by Mance J in Gruppo Torras S.A. v. Al Sabah (24^th June 1999 – unreported), and held that the restitutionary obligation under Kuwaiti law could be characterized as fiduciary in character by English law and thus capable of supporting the equitable remedies in personam which would be available to the claimants in an English court.”

This case was cited in Dicey & Morris with other authorities for the aforesaid proposition. 

78.  Under Hong Kong law, a fiduciary certainly owes an obligation to disgorge any secret or unauthorised profits.  Therefore, even if the MOU is governed by the PRC law, the obligation owed to P by D under PRC law are capable of supporting the court in Hong Kong in holding that D is liable as a constructive trustee.  D fails to refer to para. 34‑049 of Dicey & Morris in his closing submission. 

Conclusion

79.  From the plain meaning of Clause 7, the exclusivity period started from the date of signing of the MOU to 30 November 2005.  P had provided a sufficient asset proof.  Even if they had not, that did not affect the length of the exclusivity period.  D negotiated with Sei Pou/See Good during the exclusivity period and this amounted to a breach of Clause 7.1.  The letter dated 26 November 2005 sent by PH corroborated with SGMOU-1 but not P’s MOU and I have held that on a balance of probability, it was sent to further the deal with See Good/Sei Pou.  Even this letter was sent in breach of Clause 7.1.  

80.  BOCGI never took a change of stance and it could not be the cause for D’s failure to secure a deal with BOCGI.  The cause was D’s delay in performing the MOU and its negotiation with See Good/Sei Pou during the exclusivity period.  In any event, the failure by D to inform P of this purported change amounted to a breach of Clause 7.2.  It was not open to D to say that if P were so informed it would jeopardise the negotiation between D and BOCGI.  The promise under Clause 7.2 does not allow D to withhold information on the ground of furthering an ongoing negotiation.  P was entitled, as of right, to all reasonable and important information from D irrespective of D’s assessment of the situation. 

81.  P’s MOU is governed by Hong Kong Law.  P’s participation in the tender/auction on 31 December 2005 in the Mainland could not be taken as a waiver of its rights following from the breaches of P’s MOU.  The tender/auction in the Mainland is invalid (無效) under the laws in the Mainland. 

82.  For the aforesaid reasons, I gave Judgment on Liability for the plaintiff immediately after hearing Counsel’s submissions on 20 December 2010.