EDWARD WONG FINANCE CO. LTD. v. PROFIT MAKING INVESTMENT LTD. AND OTHERS

CACV 1049/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1049 OF 2000

(ON APPEAL FROM HCA 3022 OF 2000)

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J U D G M E N T

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Hon Le Pichon JA:

1. This appeal arises from an application made by the plaintiff under Order 86 for declarations against each of the four defendants that the relevant agreement for sale and purchase made between the plaintiff and each of the defendants had been lawfully and effectively terminated by the plaintiff, and that the relevant deposits had been forfeited to the plaintiff, and for damages to be assessed for breach of the agreements. On 21 August 2000, the Acting Registrar granted the defendants unconditional leave to defend the action. On appeal, Yeung J allowed the appeal and set aside the Acting Registrar's order, granting summary judgment under Order 86 in favour of the plaintiff. This is the defendants' appeal, seeking to set aside the order of Yeung J and to have restored the order that the defendants do have unconditional leave to defend the action.

The Facts

2. On 1 November 1999, the plaintiff as vendor entered into four provisional sale and purchase agreements, one with each of the four defendants. The provisional agreements related to Houses 1 to 4 at No. 8 Tai Tam Road. The provisional agreements were in identical terms save as to the price and the identity of the purchaser. The aggregate purchase price for all four houses was $128 million and deposits totalling $12.8 million have been paid. The purchase price for each of Houses 1 and 4 was $33 million whereas the purchase price for each of Houses 2 and 3 was $31 million. The provisional agreements contained, inter alia, the following provisions: clause 6 provided for the execution of a formal sale and purchase agreement on or before 29 November 1999; clause 7 provided that completion should take place before 4 pm on 8 March 2000; clause 12 made time of the essence; clause 13(a) provided that if the purchaser should fail to complete the transaction in accordance with the terms of the provisional agreement, the initial deposit and further payments paid by the purchaser should be forfeited to the vendor without prejudicing the vendor's rights and remedies; clause 14 contained a number of special conditions including reciting the facts that the vendor was selling as mortgagee and that the purchaser had been made aware of legal proceedings affecting the property, and providing that upon the signing of the formal agreement, the purchaser would be allowed to enter into the property for the purpose of decorating and fitting out the property.

3. The formal agreements which were again identical except as to the identity of the purchaser and as to price were executed on 8 December 1999, a week later than had been provided for in the provisional agreements although nothing turns on that fact. The material provisions, for present purposes, are the following: clause 21 made time of the essence; clause 22 gave the vendor the right to forfeit deposits paid in the event of the purchaser's failure to complete without prejudice to the vendor's other rights and remedies; clause 3(c) referred to the fact that the purchaser had been made aware of the High Court action affecting the property; and clause 38 provided that the purchaser "shall not rely on the said legal proceedings or any implications arising out of the same to invalidate, set aside or rescind the agreement"; clause 28 was an entire agreement clause and clause 29 provided that the formal agreement superseded all previous contracts and agreements and no variation thereof would be effective unless in writing.

4. The defendants which are shelf companies incorporated between 17 September and 6 October 1999, shortly before the date of the provisional agreements, failed to complete on 8 March 2000.

5. On 21 March 2000, the plaintiff issued a writ against the defendants seeking declarations that the agreements had been lawfully and effectively terminated by the plaintiff and that the aggregate deposit of $12.8 million had been forfeited to the plaintiff and claiming damages. By an amended summons dated 13 June 2000, the plaintiff sought summary relief pursuant to Order 86.

The Defence

6. The defence raised is that the plaintiff had through its agent Michael Chan represented to the defendants through assurances to Chan Hoi Lam that it would grant mortgage finance to the defendants of 70 per cent of the purchase price at an interest rate slightly above the prime rate to enable the defendants to complete the purchases should the defendants have difficulty in arranging financing elsewhere, that the representations induced the defendants to enter into the agreements and that the failure to provide such finance showed that the representation had been false. Further, the agreement to finance was a collateral contract without which the defendants would not have entered into the formal agreements.

7. The defendants base their defence on the following facts which are set out in the affirmation of Chan Hoi Lam dated 29 April 2000.

8. In July 1999 Chan Hoi Lam and Chong Chi Ming were looking for luxury residential properties to purchase. They were approached by Michael Chan, a director of Finnex Development Limited ("Finnex"), who suggested that the properties could be purchased from the plaintiff, the owner of the properties, through him, who had authority to sell them for the plaintiff. Chan Hoi Lam met with Michael Chan and his assistant Eric Chan many times thereafter to discuss the transaction. At the end of September 1999 when Chan Hoi Lam had become aware of ongoing litigation affecting the properties, at two meetings attended by Michael Chan, Eric Chan and Chan Hoi Lam, Chan Hoi Lam expressed his concern that the litigation would make it difficult for him to obtain the necessary mortgage. At each of the two meetings Michael Chan gave assurances that if Chan Hoi Lam had difficulty in making mortgage arrangements, the plaintiff would provide them with a 70 per cent mortgage at an interest rate slightly above the prime lending rate.

9. At the end of September, an agreement was reached orally between Chan Hoi Lam and Michael Chan: (1) the purchase would be at an aggregate price of $128 million; (2) the defendants would be named as the purchasers, their shares were to be transferred to Eric Chan and Jade West Property Corp. ("Jade West"), a BVI company of which Eric Chan was a director; (3) formal agreements were to be signed before 29 November with completion on 8 March 2000; (4) Eric Chan's shares were to be transferred to Chan Hoi Lam and Chong Chi Ming as soon as possible after the signing of the formal agreements and they were to replace Eric Chan and Tam Wai Ching as directors of the defendants; (5) Finnex was to receive fees in the sums of $3 million and $2.7 million respectively on 1 November 1999 and upon completion; and (6) deposits totalling $12.8 million would be paid on or before 29 November. At the meeting at which the oral agreement was reached, Michael Chan "held himself out to have authority to agree the terms of the agreement on behalf of the plaintiff". According to Chan Hoi Lam, Michael Chan "reiterated the assurances" on two occasions between signing of the provisional agreements and the formal agreements.

10. Between 8 December 1999 and the beginning of March 2000, Chan Hoi Lam tried to seek a mortgage of over 70 per cent from financial institutions without success. Then at the beginning of March 2000, with completion looming, he met with Michael Chan and Eric Chan and reminded them of the assurances. Michael Chan however said he would have to consult the plaintiff first and became evasive. On the next day, Michael Chan told Chan Hoi Lam that the plaintiff was not willing to talk about the mortgage matter.

11. During the first week of March, Chan Hoi Lam tried frantically to obtain a mortgage from other sources but without success.

Is the defence credible?

12. Underpinning the defence is the assertion that Michael Chan was the plaintiff's agent. Unless the defendants can establish that Michael Chan was indeed the agent of the plaintiff, the defence whether based on misrepresentation or collateral warranty does not get off the ground.

13. Between July 1999 and 8 March 2000, Chan Hoi Lam "never had direct communication with the plaintiff" concerning the transactions. It is thus not the defendants' case that the plaintiff ever held Michael Chan out as its agent and the absence of such holding out by the plaintiff is fatal to any claim of agency based on apparent authority. See Freeman & Lockyer (A Firm) v. Buckhurst Park Properties (Mangal) Ltd [1964] QB 480, 503. Rather, the defendants' case is based on his having actual authority. But the defendants have not adduced any evidence to support their bare assertion that Michael Chan was the plaintiff's agent.

14. The plaintiff's position was made clear from the outset. In the second affirmation of Au Wing Kui Joseph ("Joseph Au"), a director of the plaintiff who handled the transactions in question, which affirmation was filed in reply to Chan Hoi Lam's affirmation opposing the plaintiff's application for summary judgment, he denied that Michael Chan was a representative or agent of the plaintiff as alleged by the defendants. In his fourth affidavit, he elaborated upon this and said:

"At no time did the Plaintiff authorise Mr Michael Chan Sing Fai or Mr Eric Chan Wing Fai or any of their associates to do anything on behalf of the Plaintiff. I have gone through the files of the Plaintiff in relation to this matter. There is no document suggesting the grant of any authority by the Plaintiff in favour of any of those persons to act on the Plaintiff's behalf."

In the face of this evidence, the defendants had to do more than make bare assertions that Michael Chan was the plaintiff's agent. Even if Michael Chan, as is alleged by the defendants, did hold himself out as having authority to act as agent for the plaintiff, that fact, of itself, does not establish agency: it is irrelevant to the issue of actual authority and insufficient to establish apparent authority which, as the defendants acknowledge, is not their case.

15. There are a number of features which, taken together, render the allegation of agency and, therefore, the defence based on collateral warranty and/or misrepresentation incredible.

16. First, there is nothing in the evidence before the court that could be said to support or corroborate the defendants' allegation of agency. They have not adduced evidence from Michael Chan and/or Eric Chan to substantiate the allegation of agency and the contemporaneous correspondence generated prior to 8 March 2000 is wholly silent on the question: there was no mention anywhere of either Michael Chan or Eric Chan or Finnex. Further, there is no apparent connection or relationship between Finnex and the plaintiff. Finnex was a $100 company, beneficially owned by Michael Chan (at least up to 99 per cent) and he and one Choi Ioc Chi were its sole shareholders and directors. Michael Chan held himself out as being "well experienced and well connected in the property field" but nothing is known about Finnex's business. At the initial meeting, in discussions about the purchase price, Michael Chan said he would have to consult the plaintiff regarding what Chan Hoi Lam and Chong Chi Ming had intimated they were prepared to pay. Even on the assumption that Michael Chan had been appointed the plaintiff's agent, it is, to say the least, curious that there should have been a need to consult about price but not for the grant of mortgage finance which involves lending the proceeds of sale (or part thereof).

17. Second, if Finnex was the plaintiff's agent, one would not expect it to be remunerated by the defendants. Yet, it is apparent from the oral agreement as set out by Chan Hoi Lam that Finnex was to be paid the not insignificant fee of $5.7 million for its role in the transaction. So far as discernible from the terms of the oral agreement, its role was to acquire the shelf companies, i.e., the defendants, to provide shareholders and first directors involving the use of a newly incorporated BVI company to execute the provisional and formal agreements on behalf of the defendants, and as soon as possible thereafter to cause Chan Hoi Lam and Chong Chi Ming to become the beneficial owners and directors of the defendants. In this connection, the point of the elaborate charade is not at all apparent. The defendants could as well have been acquired by Chan Hoi Lam and Chong Chi Ming at the outset. But what is clear from the arrangement is that Finnex (acting through Michael Chan and/or Eric Chan) was to render services to the defendants for which handsome fees were exacted. This does not sit comfortably with the defendants' assertion that Michael Chan was the plaintiff's agent.

18. At this point, it would be convenient to digress to consider the corporate history of the defendants and of Jade West, one of its shareholders.

19. A week before the signing of the provisional agreements, Eric Chan and Tam Wai Ching were appointed the first directors of each of the defendants. Eric Chan as director of each of the defendants signed the relevant provisional agreement on its behalf. On the day the provisional agreements were signed, i.e., 1 November 1999, the two subscriber shares in each of the defendants were transferred to Eric Chan and Jade West respectively.

20. Jade West was incorporated in the BVI on 10 September 1999. Trident Trust Company (BVI) Limited being the subscriber to the Memorandum and Articles of Association of Jade West appointed Eric Chan as the company's first director on 10 September 1999. At the first meeting of the board held on the same day, it was resolved to issue one share to Eric Chan pursuant to his application. These facts tend to suggest that Jade West was a company under the sole control of and beneficially owned by Eric Chan at the time when the provisional agreements and formal agreements were executed rather than Eric Chan being a nominee for Jade West.

21. As regards the corporate history of the defendants after the signing of the provisional and formal agreements, nothing further happened until 23 December 1999, some two weeks after the date of the formal agreements. On 23 December, Eric Chan and Tam Wai Ching were replaced as directors by Chan Hoi Lam and Chong Chi Ming. On 28 December 1999, Eric Chan transferred his one share in each of the defendants to Chan Hoi Lam. The entry against consideration for the transfer was: "Nil-transferred to the other trustee." Contemporaneously, Chan Hoi Lam executed declarations of trust (one in relation to the one share in each of the defendants transferred to him) to the effect that the share standing in his name did not belong to him but to Jade West and that Chan Hoi Lam was holding the share as nominee for Jade West the beneficial owner.

22. So far as Jade West was concerned, on 23 December 1999, Chong Chi Ming applied for and was issued with one share in Jade West. He was also appointed a director on that day in place of Eric Chan. On 28 December 1999, Eric Chan sold his share in Jade West to Chan Hoi Lam. Although Chong Chi Ming became a shareholder of Jade West before Chan Hoi Lam it is to be noted that Chan's share certificate issued on 28 December is certificate number 2 whereas Chong's share certificate issued on 23 December is certificate number 3 which, to say the least, is curious and unexplained.

23. Upon analysis, it is clear that the transfer by Eric Chan of his one share in each of the defendants to Chan Hoi Lam supposedly as "the other trustee" coupled with Chan Hoi Lam's declarations of trust is premised upon Eric Chan having held the shares as trustee for Jade West. The documents tell a different story: Eric Chan was the owner of Jade West, not vice versa. The acquisition by Chan Hoi Lam and Chong Chi Ming of Jade West did not ipso facto make Jade West the owner of the shares in the defendants registered in the name of Eric Chan. Although the deposit monies were provided by way of cashier orders, there is no evidence that the monies came from Jade West. If Chan Hoi Lam had provided the funds, that would still not have made Jade West the beneficial owner. This whole episode suggests that the elaborate arrangement for which Finnex was to be paid by Chan Hoi Lam had little point. If anything, it shows a degree of gullibility on the part of Chan Hoi Lam.

24. Returning to the features that render the defendants' case of Michael Chan's agency incredible, the following should also be mentioned.

25. There were never any direct negotiations between Chan Hoi Lam and the plaintiff relating to the purchase price. On 24 September 1999, solicitors for the defendants made an offer to the plaintiff's solicitors which offer was subsequently rejected. On 14 October 1999, Eric Chan of Finnex faxed a draft provisional agreement to Antonio Wu of CB Richard Ellis, the plaintiff's estate agents, who forwarded the same to the plaintiff's solicitors. The purchase price was blanked out. If, as is the defendants' case, the purchase price had been agreed as at the end of September, why should the price have been blanked out on the draft provisional agreement? Further, if Michael Chan was the plaintiff's agent, why should Finnex have dealt through Richard Ellis? Surely he would have dealt directly with the plaintiff without having to go through an intermediary.

26. Further, the covering note of 14 October from Richard Ellis to the plaintiff's solicitors is consistent with the plaintiff's case that "the negotiation on the price of the four properties was through the property agency Messrs CB Richard Ellis throughout." Joseph Au's evidence is that he negotiated the purchase price with Eric Chan or Michael Chan through Richard Ellis. Had Michael Chan been the plaintiff's agent, there would not have been any need for "negotiations"; he would simply have sought his principal's instructions regarding price. Rather, the negotiations that took place are consistent with the plaintiff's case that it was dealing with Eric Chan or Michael Chan as representative of the purchasers. This, it is to be noted, fits in with arrangement entered into between Chan Hoi Lam and Finnex.

27. There is also the fact that the provisional agreements as well as the formal agreements were executed by Eric Chan on behalf of the defendants. According to Chan Hoi Lam, Eric Chan was a director of Finnex and Michael Chan's assistant. (Factually, that was incorrect: Eric Chan was not a director of Finnex.) If Michael Chan was indeed the plaintiff's agent, one would not expect his assistant to be executing the provisional and formal agreements on behalf of the defendants.

28. It is also significant that there was never any mention between July 1999 and the date scheduled for completion (8 March 2000) of the representation or assurance by the defendants or their solicitors who were brought in as early as September 1999. Even in the critical week before completion when Michael Chan was described as being "evasive" about providing mortgage finance, the matter was never raised by the defendants or their solicitors. Rather, as late as 4 March, the defendants' solicitors wrote enclosing their draft assignments and seeking instructions for split cheques. Then two days later, they sent amendments concerning the draft Deed of Mutual Covenant but no mention was made of any assurance as is alleged.

29. Finally, it was not until some 26 minutes after the time due for completion that new solicitors for the defendants sent a letter to the plaintiff's solicitors alleging the assurance of mortgage finance for the proposed purchases. It was put in the following terms:

"We are instructed that before the execution of the Sales and Purchase Agreement on 8th December 1999, our clients met with the representative of your client regarding the potential sales and purchase of the Properties. It was specifically drawn to the representative of your client that our clients requested a mortgage to finance the proposed purchases to which the representative of your client assured our clients that your client would take all necessary steps to arrange for the mortgage. Moreover, the representative of your client also assured that there would be no encumbrances against the Properties which would pose obstacles for our clients to obtain mortgage for the purchases."

There are discrepancies between the nature of the assurance set out in this letter and Chan Hoi Lam's affirmations in several respects. First, the allegation made in the March letter was that a request was made for a mortgage to finance the proposed purchases and not, as appears in Chan Hoi Lam's affirmations, that the defendants would only need mortgage finance from the plaintiff if Chong Chi Ming and he had difficulty in making mortgage arrangements. Second, the March letter also alleged a further assurance relating to the encumbrances against the properties. That further assurance is inconsistent with the special conditions contained in clause 14 of the provisional agreements and clause 38 of the formal agreements. It is also internally inconsistent with the earlier assurance set out in the March letter.

30. For all these reasons, I agree with the conclusion reached by the judge that the defendants' defence is not credible, premised as it is on Michael Chan being the plaintiff's agent which defies belief.

31. So far as the defence itself is concerned, I only need to add the following brief remarks:

32. Collateral warranty

33. The Judge rejected the defence based on collateral warranty and accepted the plaintiff's submission that clauses 28 and 29 prohibit the defendants from raising the issue of collateral warranty. Clauses 28 and 29 of the formal agreements provide:

"28. This Agreement sets forth the entire agreement and understanding between the Vendor and the Purchaser in connection with the sale and purchase hereby agreed and no party has relied on any representation warranty or undertaking of any other party save for any representation, warranty or undertaking expressly set out or referred to in this Agreement.

29. This Agreement supersedes all previous contracts or agreements entered into between the Vendor and the Purchaser in respect of the sale and purchase of the Property (if any) and it is expressly declared that no variation hereof shall be effective unless it is made in writing and signed by both the Vendor and the Purchaser."

34. In Inntrepreneur Pub Company (GL) v East Crown Limited [2000] All ER (D) 1100 Lightman J held at [7] as follows:

"such [an entire] agreement clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such clause might have effect as a collateral warranty) shall have no contractual force, save in so far as they are reflected and given effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible ... : it is to denude what would otherwise constitute a collateral warranty of legal effect."

I would respectfully agree with the reasoning of Lightman J. It would thus follow that the collateral warranty defence is bound to fail irrespective of the question of Michael Chan's agency considered above. Further, quite apart from the entire agreement clause, the collateral warranty defence faces another insuperable obstacle: in order to give rise to a binding contract, the terms must be sufficiently certain. According to the defendants, the promise was to provide a mortgage of 70 per cent of the purchase price of the properties "at an interest rate slightly above the prime lending rate". But the essential terms of the mortgage which would include the actual rate of interest, the term of the mortgage, and the need for personal guarantees (if any) were never mentioned, much less agreed.

35. In my judgment, for these reasons, the defence based on collateral warranty cannot succeed on any footing and the judge was right in rejecting the collateral warranty contention raised by the defendants.

36. Misrepresentation

37. Suffice to say that notwithstanding counsel's further researches, there does not appear to be any clear authority on the question whether the rule that the terms of a contract must be "certain" is also applicable to the terms of a representation of fact relied on as inducing the representee to enter into the contract. Since the determination of that question is not necessary for the disposal of this appeal, I propose to leave it open for determination in an appropriate case.

Conclusion

38. I would dismiss this appeal with an order nisi for costs to be taxed if not agreed in favour of the plaintiff.

Hon Keith JA:

39. I agree with the judgment of Le Pichon JA. There is nothing which I can usefully add. Accordingly, the appeal is dismissed with the order for costs which she proposes.