POMATO PRO CO., LTD. TAKAHIRO TANAKA AND ANOTHER v. CHOW NGAI KEUNG ALEX AND ANOTHER

HCA 2640/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2640 OF 2008

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JUDGMENT

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1.  The plaintiffs claim against the 1^st defendant under a personal guarantee for return of an investment sum of HK$2.7 million. Default judgment against the 2^nd defendant has been entered.

BACKGROUND

2.  Through the introduction of one Ms Sawada (PW2), the 1^st defendant (“Mr Chow”) and the plaintiffs (“Pomato Pro” and “Mr Tanaka”, respectively) came to know one another.  They were to explore business opportunities for participating in events leading to the Beijing Olympic Games 2008. 

3.  A meeting was held on 24 April 2007 (“the First Meeting”) in Tokyo, attended by, amongst others, Mr Iijima for Pomato Pro, Mr Tanaka and Mr Chow.  Ms Sawada acted as an interpreter.  Mr Chow represented to those present that approval had been obtained from the relevant authorities to conduct the operation of 2 projects relating to the Beijing Olympic Games,  namely the Olympic Charity Concert (“the Concert”) and the Olympic Carnival and Exhibition for the Torch Relay (“the Carnival”).   These 2 projects will be collectively referred to as “the 2 Projects”.   There was a dispute as to the true extent and meaning of such representation, which I will come to below.  It was mentioned also that a foreign entity (like the plaintiffs or Mr Chow) who wanted to participate in an Olympic project had to enter into a joint venture with a Mainland entity which held the approval to organize that project.

4.  A second meeting was held on 28 and 29 May 2007 (“the Second Meeting”) in Hong Kong.  It resulted in a letter of intent (“the letter of intent”) dated 1 June 2007 executed by Pomato Pro and Mr Chow’s company, Olympic Investments (China) Co. Ltd. (“OIC”).  Under the letter of intent, a Hong Kong company would be established with stated subscription of each party.  The new Hong Kong company would form a joint venture company with a Beijing entity and hold 70% shares.  The HK-Beijing joint venture company would invest and  participate in events, including holding the Concert and the Carnival and assisting the sponsors in designing and implementing a whole host of propaganda activities for the Beijing Olympics. 

5.  The investment amount agreed under the letter of intent was subsequently varied so that Pomato Pro and Mr Tanaka would invest HK$2,500,000 and $200,000 (“the investment money”) respectively.  They and Mr Chow became subscribers for 25, 2 and 73 shares respectively.

6.  The plaintiffs paid OIC the investment sum in June/July 2007.   The Hong Kong company was incorporated on 9 July 2007 pursuant to the letter of intent and it was the 2^nd defendant (“PEIG”).

THE PLAINTIFFS’ CASE

7.  According to the statement of claim, Mr Chow represented to the plaintiffs at the First Meeting that his company had been authorized and approved by the relevant authorities to conduct the operation of the 2 Projects (“the representations”).   

8.  In about late July 2007, Mr Iijima learnt from Mr Chow for the first time that the representations were untrue and inaccurate in that no approval had been obtained from the relevant authorities by Mr Chow or his company to operate the Projects.  However, Mr Chow indicated that he would get the relevant approval very soon. 

9.  As pleaded, later, it was agreed among Mr Chow, and the plaintiffs as shareholders of PEIG (“the shareholders’ agreement”) that:

(i) The authorized share capital of PEIG was HK$10,000.

(ii) The subscription price for the ordinary shares of PEIG was $1.00 each so that the plaintiffs’ total subscription was $27.  The balance of their investment money would be treated as shareholders’ loans from the plaintiffs to PEIG.

(iii) Mr Chow personally guaranteed and undertook to refund to the plaintiffs all the investment money less relevant expenses (if any) in proportion to each plaintiff’s shareholding in the event PEIG did not get the approval from the Beijing Olympic Game Organizing Committee (“BOGOC”) (“the Approval”) for operation of the Projects (“the Guarantee”).

10.  The guarantee was made orally but was contained in and/or evidenced by a summary of the meeting held on 5 September 2007 prepared by Mr Chow.

11.  After various extensions, the deadline imposed by the plaintiffs for obtaining the Approval was 31 October 2007 (“the Deadline”).  Mr Chow failed to fulfill his obligation and informed Pomato Pro on 19 November 2007 that he could not get the Approval.  As a result, Pomato Pro decided to withdraw its entire investment and requested Mr Chow for refund of the investment money on 30 December 2007 pursuant to the guarantee.  

THE DEFENDANT’S CASE

12.  Mr Chow denied ever representing that it was his company that got the Approval and ever giving the guarantee. 

13.  Mr Chow claimed that the plaintiffs had undertaken to provide sponsors for the 2 Projects (“the undertaking”).  In November/December 2007, conditional approval was obtained from BOGOC to organize the Olympic Charity Concert but the plaintiffs failed to honour their undertaking.  As a result, the conditional approval was revoked.

14.  In early 2008, Mr Chow found a subsidiary company of Shandong TV (“STTV”) which had been granted approval by the Chinese Olympic Committee duly endorsed by BOGOC for arranging and holding concerts for the Beijing Olympic Games. However, at a very late stage before reaching the cooperation agreement, both Mr Iijima and Mr Tanaka expressed that they would only be interested in arranging classical concerts but not others.  Mr Chow eventually cooperated with that subsidiary company and concerts were finally held in Qingdao in about June 2008.

15.  Mr Chow also claimed that he had discussed with BOGOC to ascertain whether there would be any opportunities for PEIG to be authorized to hold functions and activities for the Beijing Olympic Games.  However, the sponsorship proof of PEIG did not meet their requirements.

16.  In early 2008 Mr Iijima and Mr Tanaka informed Mr Chow of their intention to withdraw from PEIG and asked for refund.  Given that intention, Mr Chow informed the plaintiffs that PEIG would be dissolved.

17.  Accordingly, the condition for invoking the guarantee had not been met. In any event, the investment money had been fully expended.

THE ISSUES

18.  I will first consider the circumstances giving rise to the guarantee (ie discovery of Mr Chow’s alleged untrue or inaccurate representations and the shareholders’ agreement) and then the following issues:

A. Did Mr Chow give the guarantee?

B. Was there any consideration for the guarantee?

C. What were the terms of the guarantee?

D. Had Mr Chow performed his obligation under the guarantee and obtained Approval to run the Concert?

E. Had the plaintiffs failed to honour their undertaking? 

F. Was the cooperation with STTV sufficient fulfillment of Mr Chow’s obligation under the guarantee?

G. Were there any expenses deductible from the investment money?

SOME OBSERVATIONS

19.  Three witnesses have given evidence – Mr Iijima, Ms Sawada and Mr Chow. In analyzing their evidence and each party’s case, I have borne in mind 3 matters.

20.  Firstly, it is no part of the Court’s role to re-write the pleadings for the parties to fit in the evidence.   It is important to bear in mind the pleaded case of each party when there was material variance between it and the evidence.  Examples of such variance included:

· whether the Approval was allegedly given for the Projects or to Mr Chow’s company;

· whether the guarantee was given at all;

· the time when the guarantee was first given;

· the deadline for performance of Mr Chow’s obligations under the guarantee. 

21.  Secondly, I have placed much weight on contemporaneous documents for the following reasons:

(i) The Meetings were held with translation – English-Japanese at the First Meeting and Chinese-English-Japanese at the Second Meeting.  One can imagine the difficulties involved, especially since the parties had no previous dealings on which to repose mutual trust. As Mr Chow pointed out, the translation of Chinese technical terms at the Second Meeting was extremely difficult.  There was thus room for misunderstanding so the Court had to look to contemporaneous documents for verification. 

(ii) Clearly Pomato Pro and Mr Tanaka had concern as to the veracity of Mr Chow’s remarks and had kept asking for documents in proof at different stages.

(iii) The 3 witnesses were not entirely reliable on certain aspects.  There were things they could not remember.  The oral evidence also contradicted the witness statements on certain aspects.

(iv) Ms Sawada was not an entirely independent witness. She was not just an interpreter but had monetary interest in getting the parties to cooperate.

There will be specific examples to illustrate the lack of credence of witnesses under individual issues analyzed below.

22.  Thirdly, legal liability is fixed not premised on a party’s impression or what he unilaterally thought was the position but on the objective facts and what each would have led the other reasonably to assume were the acts that he was promising to do or had done.  This is particularly important when one comes to analyze Mr Iijima and Mr Chow’s views on the effect of certain acts or defaults said to constitute misrepresentation or breach of obligations under the guarantee.

CIRCUMSTANCES GIVING RISE TO THE GUARANTEE

23.  The plaintiffs’ pleaded case was based on discovery of the untrue representations and a shareholder’s agreement. 

DID MR CHOW MAKE ANY UNTRUE REPRESENTATIONS?

24.  The pleaded “representations” were those made by Mr Chow to the plaintiffs at the First and Second Meetings that his company had been authorized and approved by the relevant authorities to conduct the operation of the 2 Projects.  Those representations were discovered to be untrue in about late July as no Approval had in fact been obtained from the relevant authorities by Mr Chow or his company. 

25.  The plaintiffs’ evidence was at variance with the statement of claim.  In the witness statement of Mr Iijima, it was said that Mr Chow mentioned that an entity named Gehua (which Mr Chow did not say was his company) got the approval. Ms Sawada’s evidence was that Mr Chow informed the plaintiffs at the First Meeting that his company would be able to organize 7 events under Gehua.  Mr Chow showed the plaintiffs some documents which revealed that the company which got the approval was not Gehua.   As the impression of Mr Iijima was that the approval was obtained for the Projects instead of to any individual person or company, he did not think that problematic.  With the BOGOC chop on those documents, Mr Iijima thought it was a proper approval.  The plaintiffs did not have knowledge as to the procedure for obtaining approval from BOGOC and only knew it from what Mr Chow told them.  Mr Iijima’s impression was that “Mr Chow’s group of persons” had some approval. 

26.  Clearly the plaintiffs were not content to rely on Mr Chow’s words because they asked for documents after the First Meeting.  Following the First Meeting, upon the plaintiffs’ request, pages C192-200 of the trial bundle had been given to the plaintiffs through Ms Sawada. 

27.  In addition, there were the following email exchanges between Ms Sawada and Mr Chow:

(i) Email from Mr Chow to Ms Sawada dated 7 May 2007:

“With regard to the two licenses[1] which we are now having, one is to arrange Charity concerts for the Olympic Games and another being to arrange exhibition and carnival in different cities of China for the torch relay and stamps of the previous Olympic Games, I would like to elaborate more on the basis for the opportunities for getting new partners into these projects as follows:

1. First of all, the new partner can only participated (sic) into these Olympic projects by forming a new JV company with us in HK (i.e. they will not be involving in any Sino-HK JV in China.

…

4. Lastly, the controlling will still be the China partner for these projects because the approval rights are being held by them, but the newly formed HK JV company will be authorized by the Chinese party for exclusive right in the operation of the whole project. (emphases added)

(ii) Email from Mr Chow to Ms Sawada dated 9 May 2007:

“…For the Olympic projects, we will sign up the agreement with the BOGOC people before the end of May, so you better advise [Pomato Pro] (or Dentsu, Mccann and Hakudhodo) about the schedule, and it would be better for us to come up with a mutual agreement before we sign up with the BOGOC people for the 2 licenses. …”(emphasis added)

(iii) Email from Mr Chow to Ms Sawada dated 23 May 2007:

“I have just come back from Beijing after meeting with the BOGOC people and our China partner. We have already confirmed the co-operation model with them for the Concerts and the Exhibition/Carnival. We will be able to confirm with you about the JV with [Pomato Pro] while you visit to HK.

…

As we will sign up the agreement with our China partner and the Society next week, so we would like to confirm with Pomato Pro (and other partners if necessary) before we sign up the agreement with our China partner.

…

P.S. the BOGOC people has just confirmed us that we can arrange a big concert in Beijing under the existing license, so you may also talk to Dentsu about that (the timing can be anytime after August this year), besides the emperor show can also be arranged by our new JV company in Beijing (no need to work with Gehua), lastly, we may be able to participate in the Opening and Closing Ceremony too,” (emphasis added)

28.  The plaintiffs were not involved in the correspondence in between the 2 Meetings but Ms Sawada did report the communications with Mr Chow to them.

29.  When the plaintiffs attended the Second Meeting, they participated with the starting premise that the Projects had obtained BOGOC’s approval.  Mr Iijima understood from the Second Meeting that the company holding the approval was a Chinese company which would enter into a joint venture with a Hong Kong company to be established between the plaintiffs and Mr Chow.  The Second Meeting was to work out the details of the mode of cooperation between the parties.

30.  Ms Sawada said that at the Second Meeting, Mr Chow kept explaining to the plaintiffs that he had a contract with a Chinese company which had the right with BOGOC to organize the Olympic events. 

31.  I have resorted to the contemporaneous documents for verification of the oral evidence.  As admitted by Mr Iijima, the documents  at pages C192-200 were not easily accessible to anyone and they were formal documents from BOGOC.  They showed that:

(i) Approval for organizing the Olympic Review and Philatelic Tour was given to the Beijing Association for the Promotion of Olympics Related Culture and the China Society for the Promotion of Cultural and Art Development (“the Society”) in 2006. 

(ii) BOGOC consented to let the Society and 中國演出管理中心 jointly organize the Olympic theme song charity concert, stating,  “請按國家有關規定辦理其他相關報批手續” .

(iii) The flowchart entitled “Flow of the Official Approval” clearly showed that approval for the Carnival did not stop at the level of the Society.  There was still approval needed from the Committee of the Execution of the Olympic Culture Journey (“the OCJ Committee”) to be given to the Beijing joint venture. 

(iv) An agreement would be entered into between the OCJ Committee and the Beijing joint venture. The latter was to be formed between the Hong Kong joint venture and the Chinese partner as proposed by Mr Chow.

So it was not Mr Chow or OIC that was grantee of the approval but the Society (not even Gehua).

32.  However, Mr Chow had confused the plaintiffs by his emails with Ms Sawada.  Those emails tended to show that approval for the 2 Projects had been granted to Mr Chow’s Chinese partner and that it was only a matter of signing with BOGOC and the Chinese partner. 

33.  Yet another confusion was caused by the document named “Proposal Of Forming Up Joint Venture For The 2008 Beijing Olympic Project” dated 10 May 2007 (“the Proposal”). The Proposal was given to the plaintiffs before the Second Meeting and they had had it translated into Japanese before the Meeting.  The aim of that Proposal was said to be:

“In order to acquire the license for two Olympic projects – arrangement of Olympic Charity Concert and the Olympic Carnival and Exhibition for the Torch Relay, we propose that we can form up a new JV company in Hong Kong and to invest and operate in the above two projects.” (emphasis added)

The background of that Proposal was said to be:

“The IOC and BOGOC has already approved the above licenses to The China Society for the Promotion of Cultural and Art Department (“The Society”) in 2005 and 2006.  The Society would like to authorize our company and our China partner to handle the operation of these two projects. …”

34.  These 2 statements in the Proposal suggested that not even the Chinese partner had the Approval. 

35.  Despite their doubts, the plaintiffs had signed the letter of intent without clarification with Mr Chow.

36.  Ms Sawada added that at the beginning, Mr Chow talked about Gehua but every time they had a meeting, he brought in new company names.  The plaintiffs then started to doubt in May/June.  Ms Sawada attended a meeting in Beijing with Mr Chow in July to make sure which company he was going to sign with.  It was discovered in July that no Approval had in fact been obtained.

37.  Whether Mr Chow represented that he, or his company, or the Projects, got the Approval was not important.  I agree with Mr Cheng’s view (which was supported by the evidence) that in fact the plaintiffs did not mind who got the Approval so long as PEIG could participate in the Projects.  Nor was it necessary, to trace, as Ms Wong did, the different charity concerts for which application was approval was made, to see if they were the same Olympic Charity Concert that the parties intended to participate in.  The fact remained that by late July 2007, no Approval had been obtained which would have enabled the plaintiffs to participate in any concert or carnival.  Mr. Chow had misrepresented that approval was obtained.  It was in that state of affairs that the alleged guarantee emerged.

THE SHAREHOLDERS’ AGREEMENT

38.  The shareholders’ agreement contained terms (i) governing the authorized share capital of PEIG, (ii) applying the investment money for the subscription price for the shares and treating the balance as shareholders’ loans from the plaintiffs to PEIG, and (iii) the guarantee.  The plaintiffs admitted in their Reply that the shareholders’ agreement was not in writing but the guarantee was “contained in and/or evidenced by a summary of the meeting held on 5 September 2007 prepared by [Mr Chow]”.   By the manner of pleading paragraphs 9 and 10 of the statement of claim, the shareholders’ agreement and hence the guarantee could not have been formed earlier than late July 2007.  It was confirmed by Mr Cheng in his opening submission that there was not a single document called “shareholders’ agreement”.  The statement of claim was merely defining the terms collectively as a shareholders’ agreement.

39.  It is most surprising that the plaintiffs chose to plead the shareholders’ agreement in this manner as some of those agreed terms could not have been agreed upon at the same time.  The investment monies were fully paid by 14 July 2007.  PEIG was incorporated on 9 July 2007.  A shareholders’ agreement at the end of July providing for the authorized capital and subscription fees was virtually meaningless.  If so, when and why would a guarantee suddenly emerge was not clearly pleaded except that it came after discovery of the alleged misrepresentation in July 2007.

40.  The evidence as to when the guarantee emerged was at variance with the plea.  Ms Sawada’s evidence (adopted by Mr Iijima or Mr Tanaka in their witness statements) was that it was at the Second Meeting that the guarantee was first mentioned. 

41.  According to Mr Iijima, the guarantee was even repeated in June and July.  Mr Chow allegedly told him that if approval could not be obtained, either the joint venture company or Mr Chow would pay back the investment money to the plaintiffs.  When cross-examined as to why he did not plead it, he claimed that in May or June, the plaintiffs still trusted Mr Chow.  However, each time they met, Mr Chow said something different.  It was by July that Mr Iijima knew that the Approval was not forthcoming. 

42.  Mr Iijima claimed that the version in his witness statement was the most accurate.  There he said it was under the shareholders’ agreement that the guarantee was given.  Mr Iijima blamed it on his first experience in litigation that he left out something so material in his witness statement.

43.  The contemporaneous documents exhibited a complete silence over the giving of a guarantee until 31 August 2007.  I can hardly accept that the plaintiffs would have left out the date of its first emergence when the guarantee formed the core of their claim. 

44.  I find that the guarantee was probably given in between late July when the plaintiffs discovered that there was no Approval and 31 August 2007. Inclusion of the guarantee in the shareholders’ agreement meant that the parties had some discussion and agreement over its terms.

45.  I now come to analyze the issues.

ISSUE A: DID MR CHOW GIVE THE GUARANTEE?

46.  The defence completely denied the giving of a guarantee.  The first witness statement of Mr Chow was completely silent on this issue.  The supplemental witness statement finally referred to an “assurance”.  How that differed from a guarantee had never been explained.  I thus adhered to the term “guarantee’ in this judgment.  What is important is that Mr Chow never disputed the existence of the following 2 documents.

47.  The first was an email dated 31 August 2007 (“the First Document”) Mr Chow informed Pomato Pro:

“我亦很清楚通知了[Ms Sawada], 如果最終未能成功取得北京奧組委的批准,令到不能推行演唱會及嘉年華項目, 我們隨時接受 Pomato Pro 退出[PEIG], 我們亦將 Pomato Pro的投資, 在扣除了這幾個月以來的營運成本後, 按照比例退回予 Pomato Pro 的， 因此不會令 Pomato Pro 的投資有太大的損失的 … …。”(間綫後加)

48.  The second was a summary of meeting dated 5 September 2007 prepared by Mr Chow (“the Second Document”) Mr Chow told Pomato Pro:

“Lastly, I have provided my personal guarantee to Mr Iijima and Mr Tanaka that if we cannot get the approval after I meet with CPAA next week, they can choose to quit from PEIG and I will calculate the total expenses in the past few months and return the investment to them after deducting the proportion which they should be entitled. Although we do not include this term in the LOI between us and Mr Iijima, being a reasonable partner, I would like to provide assurance to Mr Iijima and Mr Tanaka about this. (emphasis added)

No matter if we have any misunderstanding or not when we agree to let Mr Iijima and Mr Tanaka join PEIF, we appreciate all the efforts which they have done in the past few months and I still hope that we can get the approval finally, and I can assure everyone of you that I will try my best to get the approval.  In the meantime, I am still confident to get the approval, so I will not give up so easily.”

49.  The First Document clearly referred to a prior communication of the promise to Ms Sawada.  It supported the plaintiffs’ case that the guarantee was made orally in the first place.  The Second Document supported the plaintiffs’ case that the guarantee was part of a shareholders’ agreement.

50.  These 2 Documents came from Mr Chow himself.  He cannot deny giving the guarantee. 

ISSUE B: WAS THERE ANY CONSIDERATION FOR THE GUARANTEE?

51.  Consideration for the guarantee was not pleaded as required: Hong Kong Civil Procedure 2011, para 18/12/7.

52.  Mr Cheng submits that the plaintiffs’ continuation of their investment in PEIG provided sufficient consideration. The plaintiffs invested in PEIG based on Mr Chow’s misrepresentation.  They discovered the true position, and then Mr Chow gave them the guarantee.  It was only after Mr Chow’s failure to obtain the Approval that the plaintiffs decided to withdraw from PEIG.  This meant that the plaintiff continued their investment in PEIG upon receiving the guarantee.

53.  Whilst Ms Wong does not dispute continuation of investment constituted consideration, she disputes how the case of Pao On v. Lau Yiu Long [1980] AC 614 applies to the present case.

54.  In the Pao On case, a main agreement for the sale of shares by the plaintiff to the defendant was entered into in consideration of allotment of shares by the defendant to the plaintiff.  The plaintiff promised not to sell 60% of the defendant’s shares within a certain period of time in return for a guarantee from the defendant that it would buy back those shares at a specified price by a specified date (“subsidiary agreement”).  The plaintiff, realizing that the guarantee did not protect it from loss in the event the share price rose by the specified date, asked the defendant for a new guarantee.  The subsidiary agreement was cancelled by consent and replaced by a new guarantee of the defendant which would give more protection to the plaintiff.  The consideration for the guarantee was held to be the whole arrangement of the completion of the main agreement for sale of shares of which the cancellation of the subsidiary agreement formed part.

55.  The Privy Council was of the opinion that:

“An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. The act must have been done at the promisors’ request: the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit: and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance. (at page 629)

…

Their Lordships agree that the mere existence or recital of a prior request is not sufficient in itself to convert what is prima facie past consideration into sufficient consideration in law to support a promise: as they have indicated, it is only the first of three necessary preconditions. (at page 630)

…

There is no doubt – and it was not challenged – that extrinsic evidence is admissible to prove the real consideration where (a) no consideration, or a nominal consideration, is expressed in the instrument, or (b) the expressed consideration is in general terms or ambiguously stated, or (c) a substantial consideration is stated, but an additional consideration exists. The additional consideration must not, however, be inconsistent with the terms of the written instrument. Extrinsic evidence is also admissible to prove the illegality of the consideration. … Thus the real consideration for the indemnity was the promise to perform, or the performance of, the plaintiffs’ pre-existing contractual obligations to Fu Chip. This promise was perfectly consistent with the consideration stated in the guarantee. Indeed, it reinforces it by imposing upon the plaintiffs an obligation now owed to the defendants to do what, at the first defendant’s request, they had agreed with Fu Chip to do. (at page 632)

Their Lordships do not doubt that a promise to perform, or the performance of, a pre-existing contractual obligation to a third party can be valid consideration. In New Zealand Shipping Co Ltd v. A.M. Satterthwaite & Co. Ltd. (The Eurymedon) [1975] AC 154, 168 the rule and the reason for the rule were stated:

‘An agreement to do an act which the promisor is under an existing obligation to a third party to do, may quite well amount to valid consideration … the promisee obtains the benefit of a direct obligation.  This proposition is illustrated and supported by Scotson v Pegg (1861)6 H. & N. 295 which their Lordships consider to be good law.’”

(at page 632)

56.  The investment was made before the guarantee at the request of Mr Chow. The parties understood at the time of the cooperation with OIC that the investment must be compensated for by the benefit of shareholding in PEIG and an opportunity for PEIG to participate in the 2 Projects.  The guarantee would have been enforceable if given contemporaneously with the investment.

57.  If that was not enough, consider the state of affairs at the time the guarantee was given in July/August.  The parties did not have a formal contract apart from the letter of intent.  There could be a future obligation on the part of the plaintiffs to secure the sponsorship, the scope of which was yet to be decided.  On top of these, the parties had been in discussion over a range of topics stated in the First Document: registered capital, application of the investment money, state of progress of the application for Approval, performing bodies, venue and sufficiency of capital.  These matters had clearly raised concern in the minds of the plaintiffs such that Mr Chow thought fit to make a formal reply on 31 August 2007 to “avoid any misunderstanding” and hold a meeting on 5 September to explain things again to allay misunderstanding.   It was in the interest of Mr Chow to encourage the plaintiff to go as far as they could so he could continue to use the investment money.  There was consideration for the guarantee.  In passing, I add that it was not open to Ms Wong to argue that there was no intention to create legal relations (not pleaded)  in the light of these matters.  But for this guarantee, the plaintiffs would have taken stronger measures as a result of the misrepresentation, like withdrawing from the joint venture immediately.  And they would have sufficient basis to do so. The plaintiffs had accepted the guarantee, as evidenced by Mr Iijima’s statement that the plaintiffs decided that efforts should continue to be spent on obtaining the Approval.

58.  Mr Chow’s version was that the guarantee was provided unilaterally by him without discussion or consideration.  On 26 July an agreement was signed with one 中促會 for them to seek the Approval.  On 8 August, Mr Chow invited the plaintiffs, Ms Sawada and Mr Chang（常中保）to meet.  At that evening, Mr Chang stated that he would assist to obtain BOGOC’s approval.  If not, Mr Chang would repay the RMB 3.45 million investment of Mr Chow.  Between 8 and 31 August, Pomato Pro had asked many times about the Approval.  Because of Mr Chang’s assurance, Mr Chow was so confident with obtaining the Approval that he gave the guarantee.    He was aware that his promise meant that he had to refund to the plaintiffs irrespective of whether Mr Chang would refund to him, but he was so confident that he did not think there would be a need to refund.

59.  Quite apart from not being pleaded, Mr Chow’s version only came about under cross-examination.  His evidence on this aspect was not admissible.  In any case, between the First Meeting and August, there was no change to the basis of the cooperation between the parties.  Mr Chow could not explain why he suddenly had to give a guarantee.  I reject his evidence on this aspect.

60.  On a fair reading of the statement of claim, consideration could be inferred from the pleaded case of misrepresentation and subsequent terms of the shareholders’ agreement.  I find that there was consideration provided by the plaintiffs as suggested by Mr Cheng.  It is not necessary to rely on Poon Hau Kei v. Hsin Chong Construction Co Ltd (2004) 7 HKCFAR 148.  There, the Court relied on the pleaded version of the defendant to find for the plaintiff.  Here, there is no plea at all in the defence on consideration to assist.

ISSUE C:   WHAT WERE THE TERMS OF THE GUARANTEE?

61.  Ms Wong claims that the terms of the guarantee were uncertain.  This was never pleaded.  Mr Chow who prepared the 2 Documents never said the terms therein were uncertain.

62.  I have no doubt that the 2 Documents had accurately set out the terms of the Guarantee.  It was to apply to obtaining the Approval for 2 Projects and not just the Concert, regardless of the fact that the parties were not pursuing the Carnival at the time the guarantee was given.  I regard this as a valid promise because the plaintiffs’ investment was premised on there being 2 Projects to organize. 

63.  The pleaded case of the plaintiffs did not state that a time limit had been imposed for the defendant to obtain the Approval.  The evidence did show that agreement had been reached by correspondence as to the deadline. 

64.  In the Second Document, Mr Chow stated that he would know whether the Approval could be obtained when he met with the China Performing Arts Agency the following week.  The plaintiffs gave a grace period and imposed a deadline of 20 September 2007.

65.  By an email dated 21 September 2007, Mr Iijima raised a requisition with Mr Chow,

“我們前日約定的20日的期限已經到期,不知批文申請的進程如何? 請問您的看法如何? ”

66.  Mr Chow replied on 23 September, claiming that he had set a deadline by the end of September; and that if no approval was obtained by then, the plaintiffs could choose whether or not to continue with PEIG.   

67.  On 25 September, Mr Chow reported to the plaintiffs that in view of the intervening mid-autumn festival and national day, the Approval might be given by mid-October.

68.  On 4 October 2007, Mr Chow wrote to Ms Chen in these terms:

“現時,我能告訴你的是無論促進會及中演在10月15日能不能拿到奧組委的批文,PEIG都能直接參與奧運的項目,至於詳細的内容我會在10月15日后才正式通知你及Mr Tanaka先生,同時我會容許你們2位重新再決定是否繼續參與PEIG的項目,如你們決定退出或與其他單位合作,我都不會介意,至於我會用什麽條件回購你們的股權,我會在與促進會解除協議后再通知你們。”

69.  By an email dated 20 October to Mr Chow, the plaintiffs stated:

“7. 到10月31日爲止,若仍然得不到正式批文的話,我們希望先將此事告一個段落,希望把當初投資的金額先退回給我們。但是，若批文在進入11月后下來的話，我們還是一如既往對此項目非常感興趣，希望能夠再次重新合作。

8. 若在31日以前取得了批文,希望能夠儘快召開 TV 會議。開始具體的作業分工。Pomato 將進一步與松下電器、三星、可口可樂交涉，預計在 11 月中旬與贊助商簽訂最終協約。”

70.  When a contract does not impose a time frame for performance of an obligation, the law implies a reasonable time.  Here, the parties had expressly imposed deadlines.  Contrary to his averment in the supplemental witness statement that “the plaintiffs persisted in demanding that [Mr Chow] confirmed that BOGOC’s approval would be granted, by a number of unrealistic deadlines unilaterally set by them”, those deadlines were initiated and unilaterally extended by Mr Chow.  From the First Meeting in April to 31 October 2007, the plaintiffs had been more than lenient towards Mr Chow.  In my view, the email dated 20 October could be nothing but an ultimatum.  The Deadline was 9 months before the Olympic Games were due to start in August 2008.  It was reasonable, as organizing the approved event and securing sponsors required time.

71.  It is not open to Ms Wong to suggest that the guarantee was at the suggestion of Mr Chow made without discussion and there was no evidence of acceptance of the terms by the plaintiffs.  This was not pleaded.  In any event, the plaintiff had accepted the terms and the suggested deadlines, and chased for a reply upon reaching every deadline.  Mr Chow could not be mistaken about it. 

72.  It is also not open to Ms Wong to suggest that the pushing back of the deadlines by Mr Chow was sometimes linked to an offer to allow the plaintiffs to withdraw and was not necessarily linked to any promise of a refund.  I respectfully differ.  The wording of the 2 Documents clearly linked withdrawal with refund.

73.  Further, it is not open for Ms Wong to submit that from the context in which he had communicated the guarantee, it was offered on his own terms, whilst he was facing changing situations whereby he had considered that it would be fair to give the plaintiffs an opportunity to withdraw.  The guarantee was at all times conditional and Mr Chow had seen fit to change the contents of his offer from time to time.  By 19 November Mr Chow had considered that the situation had changed, which warranted a re-think of how the withdrawal of the plaintiffs should be handled. 

74.  With respect that was never her client’s case.  Mr Chow’s (if it was his) subjective view was not the factor to decide liability.  The objective circumstances would have led the plaintiffs to reasonably assume that the terms of the guarantee as set out in the 2 Documents would not be changed.  They acted on it by waiting until the Deadline before taking any legal action.  It was not up to him to re-think the situation after the Deadline has passed.

75.  In summary, the guarantee applied to the 2 Projects.  The terms were certain and had not changed save that the deadline for performance by Mr Chow had been fixed at 31 October 2007.

ISSUE D:   HAD MR CHOW PERFORMED HIS OBLIGATION UDNER THE GUARANTEE AND OBTAINED APPROVAL TO RUN THE CONCERT?

76.  Mr Chow had explained the process of obtaining approval in paragraphs 4-16 of his supplemental witness statement.  The contents might be true but there was no suggestion that the plaintiffs were informed of them at any meeting.  I accept them to be true but they were not relevant for present analyses. 

77.  Mr Chow alleged that Approval was obtained by about 23 October 2007 and the plaintiffs were invited to execute an agreement (“the tripartite agreement”). The plaintiffs denied this.

78.  By his email dated 23 October 2007, Mr Chow asserted that he had already obtained approval from BOGOC and he would not return the investment money to the plaintiffs:

“7. 有關你們先退回資金的要求，我絕對無法接受，因爲我已經達成我當時的承諾取得批文，[PEIG] 已正式獲得北京奧組委的同意，舉辦演唱會及音樂會的權利，所以不會將你們投資的金額退回給Pomato，但如果你們希望退出，我可以考慮給你們一個退出的建議，但我不會保證你們能取囘任何的金額。

8. 有關于各贊助商洽談的工作，我們會與貴方共同負責，至於那方負責那個贊助商洽談，在取得正式批文后，會馬上与貴方開會共商。

P.S.  今天剛收到David 發過來的電郵,由於奧組委已同意我們的活動, 現正安排正式的批文,所以中演要求與促進會及[PEIG] 簽訂一份合作協議, 現正與中演商討協議的内容, 待修改后會傳予你們參考及提供意見, 希望在批文出來之前與中演及促進會簽訂。”

He appeared to rely on an email from Mr David Zhang of 中演 dated 22 October 2007 to show that Approval was obtained. 

79.  I agree with Mr Cheng that these emails could not show Approval as having been obtained because Mr David Zhang only said that the application to BOGOC was in the process of seeking approval (已在批准流程中).   He had requested BOGOC or the relevant authorities to give him an acknowledgement letter (收悉函) to facilitate the organization of the Project.  The authorities promised to give him one as soon as possible.  That was not equivalent to having obtained actual approval.

80.  Mr Chow, however, asserted further that he had sent a draft tripartite agreement to Mr Iijima for execution.  He did not mention the date of dispatch but I assume that it was on or about 23 October. That (undated) document was purported to be made between 北京中演世紀文化傳播有限責任公司 on the one part and 中國國際經濟文化促進會 and PEIG on the other part.  It purported to cover the Olympic Charity Concert and symphonic concert. According to Mr Chow’s supplemental witness statement, if 促進會 had not felt that the discussion had come to a point where it was almost certain that BOGOC’s approval would be forthcoming, the tripartite agreement would not have been drafted in the first place.  促進會 did receive word from BOGOC in around late October or early November 2007 that Mr Chow could go ahead with organizing 5 concerts.

81.  Mr Cheng concedes that obtaining the Approval subject to a condition of getting enough sponsorship would have been sufficient performance of Mr Chow’s obligation regarding the Concert.  The question was whether the draft tripartite agreement was sent to Mr Iijima and whether he failed to provide the sponsorship. 

82.  The plaintiffs denied ever receiving the tripartite agreement. Mr Chow could not produce any proof of its dispatch to the plaintiffs.  He admitted that if he had done so, it would have been by email.  Unfortunately, his email system failed after the Olympic Games and what he had were only the documents he printed out at the time; there might have been emails missing.  I am not satisfied that the tripartite agreement had been sent to the plaintiffs.

83.  The existence of the tripartite agreement in the month of October was inconsistent with the pleaded defence that it was only in about November/December 2007 (i.e. after the Deadline) that conditional approval was granted by促進會.

84.  Further, Mr Iijima had challenged Mr Chow by asking, on 30 October, for documentary proof of the Approval and reminded him of the Deadline.

“在您前些日子发来的电邮中，宣明既已取得批文。

但直至现在，我们还没有看到正式的文件。

我认为，只要还没有见到正式文件，就还不能说已取得批文。

其后，又有了一些进展吗？

明天10月31日，也就是到了本人提出的截止日期了。

这已经是由9月20日向后推延了40天了。

今年3月以来，已经过去了8个月。

PEIG与促进会的合同也将到期 。

在此，如不重新调整一次的话，不断的拖延只会使交涉赞助的工作陷入很尴尬的境地。

请告诉我您的见解如何？

另外，您提到正式在协商CPAA、促进会及PEIG间的合同一事，不知合同书是否已成？

是否既已签定完了合同？

请告合我其后的动向。”

It would be surprising for Mr Iijima to ask for a contract this email if he had received the tripartite agreement.  

85.  When Pomato Pro pressed for a reply, Mr Chow eventually informed them on 19 November 2007 that it was unlikely that any approval would be forthcoming and he suggested looking for a backup plan.  This was the clearest admission that no approval had been obtained from BOGOC for the Projects by the Deadline. This reply made no mention about the tripartite agreement and did not even blame the Chinese parties for the position he ended up with.

86.  I find that Mr Chow had not obtained Approval from BOGOC for running the Concert.  He had not sent the tripartite agreement to the plaintiffs.

E. HAD THE PLAINTIFFS FAILED TO HONOUR THEIR UNDERTAKING?

87.  Assume I am wrong and Mr Chow had dispatched the tripartite agreement to the plaintiffs.  Mr Chow claimed that it was the plaintiffs who refused to honour their undertaking to find sponsors so that the tripartite agreement could not be executed.

88.  Mr Chow claimed that at the First Meeting, Mr Iijima represented to him that Pomato Pro had experience cooperating with Olympic sponsors at the Athens Olympics.  Given the fact that they had very good connection with many big companies in Japan including Panasonic and Samsung, Pomato Pro could undertake and promise to obtain sponsors for the Beijing Olympic Games.  Mr Chow added that the collaboration between the parties as expressed in the letter of intent was premised on such an undertaking. 

89.  Mr Iijima’s version was that at the First Meeting, he mentioned that his company had supported the international torch relay activities conducted by Samsung but not Panasonic in Athens Olympic 2004.  He denied ever giving the undertaking. His version was supported by Ms Sawada.  She testified that she did not think Mr Chow said it was Pomato Pro’s obligation to find sponsors but Mr Chow said it would be nice for them to do so.

90.  Mr Iijima said that he had to present the formal Approval and a set of proposals to the sponsors before they would act.  He and Ms Sawada claimed that getting the Approval on condition of obtaining sufficient sponsorship was suggested for the first time in the defence.

91.  I am sure the question of sponsorship was discussed at the Meetings.  I am sure the plaintiffs’ participation at the Athens Olympics 2004 and ability to secure substantial sponsors made them attractive partners for Mr Chow.  I am also sure that sponsorship was one of the ways to bring in profit for the parties.  The plaintiffs should have known that they needed to find Japanese sponsors but there was no agreed time frame for them to do so nor was there a commitment as to the amount of sponsorship to get in.  The lack of reference to this undertaking in the contemporaneous documents prior to 23 October suggested that the undertaking did not exist.    

92.  According to the attachment to an email from Mr Chow to Pomato Pro dated 23 October 2007, Mr Iijima was informed that Pomato Pro and Mr Chow were required to deal with sponsorship matters only after formal approval by the relevant authorities had been obtained to operate the Projects.

93.  In cross-examination of Mr Chow, it was established that: BOGOC only agreed to let 促進會 and 中演 organize the concert and symphonic orchestra but had not yet given approval.  Clause 3(1) of the tripartite agreement did not say whether the process of approval (批復手續) should precede the provision of sponsorship list or vice versa.  Clause 4 stated that the joint venture had to be responsible for confirmation of sponsorship.  It was 促進會 and 中演 (not BOGOC as stated in his supplemental witness statement) which told Mr Chow that if he wanted to continue, there must be enough sponsorship.  As the plaintiffs did not guarantee there would be sufficient sponsors, Mr Chow could not commit with 促進會and 中演 and so BOGOC withdrew the approval.

94.  Mr Chow said in his supplemental witness statement that sponsorship was crucial to BOGOC’s approval.  However, in the same witness statement, he confirmed that recruiting of sponsors for events like the Olympic Charity Concert and Olympic Carnival and Exhibition was to be done after obtaining official approval from BOGOC.  His evidence was inconsistent.

95.  In any case, as the deadline of 31 October was approaching and the plaintiffs could not see proof of the Approval, it would have been reasonable for them to refuse to commit to the provision of an unknown amount of sponsorship even if they had been asked to do so. 

96.  On 19 November 2007 when Mr Chow confirmed that it was unlikely that the Approval would be forthcoming shortly, he did not lay blame on the plaintiff’s failure to provide sponsorship.

97.  I find Mr Chow’s evidence incredible.  In the premises, I find that the plaintiffs had not given the undertaking and the failure to execute the tripartite agreement was not due to their fault.

F. WAS THE COOPERATION WITH STTV SUFFICIENT FULFILMENT OF MR CHOW’S OBLIGATION UNDER THE GUARANTEE?

98.  Mr Chow was able to secure a cooperation agreement between a subsidiary of STTV and OIC to hold concerts in 7 cities of China.  The signed agreement was dated 29 February 2008. 

99.  Pomato Pro and Mr Tanaka admitted having meetings with representatives of STTV in which they were informed that STTV had obtained approval from BOGOC for arranging and holding concerts for Beijing Olympic Games.  The plaintiffs refused to join that project and   had no knowledge of whether Mr Chow did enter into it. 

100.  Mr Cheng conceded that this concert held with STTV would have fallen within the definition of one of the Projects – the Olympic Charity Concert. However, it came after the Deadline.  This project with STTV was independent of Mr Chow’s obligation under the guarantee.  I agree.

G. WERE THERE ANY EXPENSES DEDUCTIBLE FROM THE INVESTMENT MONEY?

101.  The plaintiffs do not deny Mr Chow’s right to make deductions for expenses incurred in obtaining the Approval in proportion to the plaintiffs’ shareholding in PEIG.  Mr Cheng submits that only expenses incurred between 9 July 2007 (date of incorporation of PEIG) and 31 October 2007 (the Deadline) would be covered.   The plaintiffs would, at worst, only be liable for 27% of the total expenses in accordance with their shareholding.  I agree.

102.  The evidence of such expenses from Mr Chow contained only a bare assertion in his supplemental witness statement that all of the investment money was expended.  There was no supporting document despite his being given leave to file a supplemental witness statement after the pre-trial review.  The projection of expenses and management costs in his proposals could not be taken as actual expenses.  I am thus not satisfied as to the amount of deductible expenses.

FINDINGS

103.  I find that Mr Chow did give the guarantee, orally in the first place and evidenced in writing in the 2 Documents.  There was consideration for the guarantee in terms of the plaintiffs’ continued investment in PEIG.  The guarantee covered both Projects.  The agreed deadline for Mr Chow to obtain Approval from BOGOC to organize the Projects was 31 October 2007.  Mr Chow failed to obtain the Approval for neither Project by then.  He had never sent the draft tripartite agreement to the plaintiffs for execution.  The plaintiffs had not given any undertaking to secure sponsorship and the failure to execute the tripartite agreement was not their fault.  The cooperation with STTV to hold concerts could have fulfilled Mr Chow’s obligation under the guarantee but it came too late. 

104.  Accordingly, I find that the plaintiffs had valid grounds for withdrawing from the cooperation and invoking the guarantee. The plaintiffs’ decision to withdraw was communicated to Mr Chow by an email dated 30 December 2007. There being no proven expenses, Mr Chow is liable to refund the investment money.

ORDER

105.  I order that:

(i) Mr Chow do refund HK$2,500,000 to Pomato Pro and HK$200,000 to Mr Tanaka. 

(ii) There shall be an order nisi that interests shall be at judgment rate from the date of the writ to the date of payment.

(iii) There shall be an order nisi that costs be to the plaintiffs, provided that 2 hours’ hearing costs should be to the defendant for the plaintiffs’ failed application to amend the statement of claim.  The costs shall be set off against each other.

(iv) There shall be summary assessment of costs on the papers on 19 April 2011 at 2:30 pm.  No attendance is required. The plaintiff shall file and serve its statement of costs by 11 April 2011. The defendant shall file and serve its grounds in opposition by 18 April 2011.

106.  I thank counsel for their assistance.