INVEST GAIN LTD v. NOVEL GOOD LTD

CACV 341 & 344/2019
(Heard together)

[2021] HKCA 62

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS 341 AND 344 OF 2019

(ON APPEAL FROM HCA NO 939 OF 2013)

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(Heard together)

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J U D G M E N T

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Hon Kwan VP:

A.1. Introduction

1.  On 28 June 2019, B Chu J handed down her judgment in a trial which had lasted for 12 days (“the Judgment”).  The action arose out of the agreement for the sale and purchase of a substantial stake of shares in a listed company in Hong Kong now known as Shanghai Industrial Urban Development Group Limited (formerly known as Neo-China Land Group (Holdings) Ltd; Stock Code 563; “Target Company”).  The plaintiff was the vendor and the defendant the purchaser.  The transaction was completed on 24 June 2010.  The defendant claimed there were numerous breaches of warranties of the plaintiff resulting in substantial losses to the defendant.  The plaintiff brought this action to seek the release of the shares it had charged as security for the performance of its obligations.  The defendant counterclaimed for damages for breach of warranties and other terms of the agreement.

2.  Pursuant to an order for split trial, the trial in 2018 dealt with the questions of liability and causation in respect of the plaintiff’s claim and the defendant’s counterclaim and the issue of damages will be tried subsequently depending on the rulings on liability and causation. The parties had lodged an agreed Scott Schedule stating the relevant issues for trial and a list of agreed facts.

3.  For ease of reference, I will adopt the abbreviations and nomenclature in the Judgment.

4.  The defendant and the plaintiff have each brought an appeal (CACV 341/2019 and CACV 344/2019) against those parts of the Judgment with adverse findings against that particular party.  The plaintiff is represented by Mr Neville Sarony, SC^[1] and the defendant appears by Ms Eva Sit, SC^[2].

A.2.  The agreed facts and other relevant background matters

5.  The agreed facts as set out in the Judgment are as follows:

“7.  The plaintiff (“P”) and the defendant (“D”) are and were at all material times BVI limited companies.  D is a wholly owned subsidiary of Shanghai Industrial Holdings Limited (上海實業控股有限公司), a publicly listed company in Hong Kong (Stock Code 363) (“SIHL”).

8.  Mr Li Songxiao (驪松校) (“Mr Li”) is the sole legal and beneficial owner and sole director of P.  Mr Li was the Executive Director of the Target Company and the Chairman of its Board of Directors until his resignation on 22 August 2009.

9.  As at 19 January 2010, P was the registered owner of 1,051,762,995 ordinary shares in the Target Company, representing approximately 54.06% of the Target Company’s then issued share capital.

10.  On 19 January 2010, P as vendor and D as purchaser and Mr Li as P’s guarantor entered into an agreement relating to the sale and purchase of the shares in the Target Company (“SPA”), which was later amended and varied by an agreement dated 11 May 2010 (collectively referred to as the “Acquisition Agreement”).  Under the Acquisition Agreement, P agreed to sell and D agreed to purchase 500,000,000 shares (“Sale Shares”) in the Target Company at a consideration of HK$1,160,000,000 (equivalent to HK$2.32 per Share). 

11.  Further, on 19 January 2010, the Target Company entered into a subscription agreement with D whereby D agreed to subscribe for 683,692,000 ordinary shares of the Target Company to be allotted at a total of HK$1,586,165,440 (“Subscription Agreement”). Completion of the Subscription Agreement was conditional upon completion of the Acquisition Agreement and would take place immediately thereafter (“Completion”).

12.  Through the Acquisition Agreement and the Subscription Agreement, D would acquire a controlling stake in the Target Company.

13.  On 27 August 2010, P granted a charge (“Share Charge”) over all its rights, title and interest in and to another 50,000,000 shares in the Target Company owned by P (“Charged Shares”) in favour of D as continuing security for the payment and discharge of the “Secured Obligations”.

14.  The parties agreed that Clause 6.04 of the SPA did not accurately reflect parties’ agreement and should have read as follows:

(i)   P: “would use its best endeavours to liaise with relevant parties to recover RMB 126m”

(ii)  D: “should use its best endeavours to liaise with relevant parties to recover the consolidated value of the Target Company’s investment (through Yingtong) in the Tongzhou Project (i.e. RMB 126m) and that any sums recovered by P as aforesaid would accrue to the Target Company”

and to that end P undertook that such payment over should be no less than RMB 60m. Accordingly, there should be rectification of Clause 6.04.

15.  On 24 June 2010, P transferred the Sale Shares to D and D paid HK$1,160,000,000 to P.”

6.  Further background matters relevant for present purpose are mentioned in the Judgment as follows:

“16. The principal business of the Target Company was real estate development in Mainland China and its main assets consisted of its real estate property projects in Mainland China.

17. P became the majority shareholder of the Target Company in 2003.

18. Mr Jia Liqun (賈立群) (“Mr Jia”) was/is the Vice President of P at all material times. Mr Jia was appointed by P to join the Target Company in 2005 and left as Vice President of the Finance Department of the Target Company in 2010 and his role in the Target Company focused on capital operations and investor relations.

19. On 22 January 2008, the shares of the Target Company were suspended from trading as a result of office searches conducted by the Independent Commission Against Corruption.

20. It was during the trading suspension, and according to P, in around July 2008, that P began negotiations with representatives of SIHL for the sale of P’s interest in the Target Company. According to Mr Jia, the SIHL’s representatives involved in the negotiations were (i) Mr Ni Jian Tat (倪建達) (“Mr Ni”), (ii) Mr Cheng Guo Min (“Mr Cheng”) and (iii) Mr Chong Tao. On P’s side, the representatives were Mr Li, Mr Jia, and 3 Executive Directors of the Target Company at the time, namely Mr Jia Bo Wei (賈伯偉), the then Chief Executive Officer, Mr Yuan Kun (元崑), the then Chief Operations Officer, and Ms Bao Jing Tiao (鮑景桃) (“Ms Bao”), the then Chief Financial Director.

21. It was not disputed that in the course of the negotiations, SIHL/D had engaged the following professionals:

(i) SIHL’s auditors, PricewaterhouseCoopers, to carry out financial due diligence;

(ii) DTZ Debenham Tie Leung Limited to carry out valuation of the Mainland real estate assets;

(iii) Mainland lawyers Allbright Law Offices (“Allbright”) to conduct the Mainland legal due diligence.

22. According to P, SIHL also appointed UBS AG and Nomura International (Hong Kong) Limited as joint financial experts to provide expert opinion on the financial risks in relation to the takeover of the Target Company.

23. On 22 August 2009, not long after negotiation started, Mr Li resigned from his position as Chairman and Executive Director of the Target Company.

24. As said earlier, on 19 January 2010, the parties entered into the SPA and the Subscription Agreement.

25. The SPA contained a detailed list of warranties (“Warranties”) set out in Schedule 2 of the SPA (“Schedule 2”) which P had, amongst other things, warranted to be true, accurate and not misleading as at date of the SPA and to continue to be so on the Completion Date (as defined below). It is provided in Clause 8.05 of the SPA, amongst other things, that P shall not be liable under any of the Warranties unless notice of a claim has been received by P not later than the expiry of the period of 1 year following the Completion Date. As seen later in this judgment, the construction and effect of Clause 8.05 is a matter of dispute between the parties.

26. The Completion of the Acquisition Agreement and the Subscription Agreement took place on 24 June 2010 (“Completion Date”). Of the former management, according to Mr Jia, he left the Target Company sometime after Completion and Mr Yuan Kun also resigned but Mr Jia Bo Wei and Ms Bao had remained with the Target Company for a while after Completion. According to Mr Ni, Mr Jia Bo Wei remained an executive director of the Target Company until February 2012 and Ms Bao remained executive director until July 2010. After Completion, the Target Company became a subsidiary of D and the new management and directors came on board of the Target Company and its subsidiaries (“New Management”).

27. The Share Charge was granted by P to D pursuant to a deed executed by the parties on the Completion Date. P granted the Share Charge to D over the Charged Shares on 27 August 2010 and P unconditionally and irrevocably covenanted to pay and discharge in full the secured obligations as defined therein (“Secured Obligations”) when due or on demand by D at any time. It is provided in the Share Charge, amongst other things, that in the case where no claim has been made by D against P in accordance with the SPA, D shall at the request and cost of P, discharge the security created by the Share Charge.

28. On 21 June 2011, D through its former solicitors, Messrs Mayer Brown JSM (“MBJSM”) issued a letter to P (“MBJSM Letter”). The MBJSM Letter consisted of a one-page letter in English attaching a 4-page letter in Chinese (“Chinese Attachment”) which set out 6 alleged instances of breaches of contract and/or Warranties on the part of P.

29. P denied any such breaches and by a letter dated 5 July 2011, P requested D to release the Charged Shares pursuant to the terms of the Share Charge. D refused to do so.

30. P issued the writ herein on 29 May 2013 and in its statement of claim essentially sought a declaration that P had duly complied with the conditions set out in the Acquisition Agreement and the Share Charge and to seek the return of the Charged Shares.

31. As set out in its amended defence and counterclaim, D’s defence was that P had no basis to demand the release of the Charged Shares, and D counterclaimed, amongst other things, for damages for P’s breach of the Acquisition Agreement (“Counterclaim”).”

A.3.  The issues for trial on liability and causation

7.  12 issues were set out in the Scott Schedule as issues for trial. The first nine were related to the Counterclaim.  The issues as stated therein are as follows:

Issue 1 – The Yingtong Recovery

Issue 2 – The Xian Project

Issue 3 – Jinma Tax Rebate

Issue 4 – Undisclosed litigation concerning Ms Zheng Xiangli

Issue 5 – The Hua Fu Yi Undertaking/Guo Rui Debts

Issue 6 – Failure to maintain proper accounts for Beijing Xinsong Development (“BJ Xinsong”)

Issue 7 – Failure to maintain proper records in relation to the Rich Glory transaction

Issue 8 – Failure to disclose undertaking allegedly given by the Target Company under the Moral Luck Agreement

Issue 9 – Alleged misstatements concerning Wo Ke’s accounts

Issue 10 – Whether effective notice was given under Clause 8.05 of the SPA prior to 24 June 2011 of all the defendant’s counterclaims

Issue 11 – Whether the plaintiff’s liability was confined and limited under    Clause 8A of the SPA

Issue 12 – Whether the plaintiff had fulfilled the conditions under the Share Charge for the release of the Charged Shares

8.  Issue 10 is crucial to liability in respect of the Counterclaim. If no compliant notice of claim was given pursuant to clause 8.05 of the SPA by the MBJSB Letter, the claims for breaches of Warranties would fail at first hurdle.  This turns on the proper construction of the contractual term.  It would be logical to resolve this issue first before all other issues and that was what the judge did in the Judgment. The same approach would be followed in these appeals.

A.4.  The determinations in the Judgment

9.  Ms Sit has helpfully summarised the determinations in respect of Issues 1 to 12 in table form. The table is reproduced below:

Issue	Nature	Judge’s Determination	Appeal
10	Whether compliant contractual notice of claim(s) given	(a) In favour of D on cl 8.05 being “bald notice” clause (b) In favour of P that cl 8.05 requires that claim(s) have already come to the knowledge of or revealed to or discovered by D at the time of giving notice (c) In light of (b), no compliant notice given for Issues 5, 6 and 8	P D   D
1	Yingtong Recovery	In favour of D	P
2	Xian Project	(a) Against D on construction of warranty (b) In favour of D on causation	D P
3	Jinma Tax Rebate	In favour of D on liability and causation	P
4	Zheng litigation	In favour of D on liability and causation	P
5	Hua Fu Yi Undertaking	In favour of D on liability and causation	P
6	BJ Xinsong accounts	(a) In favour of D on liability (b) In favour of D in part on causation	-- D
7	Rich Glory transaction	In favour of D on liability and causation	P
8	Moral Luck Undertaking	(a) In favour of D on liability (b) Against D on causation	-- --
9	Wo Ke account misstatements	Against D on liability and causation	--
11	Cl 8A construction	(a) In favour of D on construction (b) In favour of D that on the facts subject matter of breaches within knowledge and/or control of P/Mr Li (save for Issue 2)	P P
12	Release of Share Charge	Share Charge should not be released in light of breaches found for Issues 1, 3, 4, 7	P

A.5.  The issues in these appeals

10.  At the hearing of these appeals, Mr Sarony informed the court that the plaintiff will limit its arguments to the issues mentioned below in respect of Issues 10, 1, 7 and 12.  Hence, the plaintiff’s appeal in respect of Issues 2, 3, 4, 5, 6 and 11 is abandoned.

11.  The issues in these appeals (using the same numbering as per the table above) may be stated as follows and will be considered in the order as mentioned below:

 B.  Issues 10(a) and (b) – proper construction of clause 8.05

B.1.  Relevant background matters

12.  Clause 8.05 of the SPA provides as follows:

“The Vendor will not be liable under any of the Warranties unless notice of a claim under the Warranties has been received by the Vendor not later than:

(a) the expiry of the period of 1 year following the Completion Date; and

(b) the date upon which the Company’s preliminary announcement of its audited financial results for the financial period ending 31 December 2010 is made, whichever is the later.”

13.  It was not in dispute that the MBJSM Letter issued on 21 June 2011 was within the stipulated period in clause 8.05^[4]. In the Chinese Attachment, paragraph 3 set out 6 incidents of alleged breaches of contractual terms^[5] (“6 Incidents”).  Paragraph 4 stated that apart from the breaches mentioned, there were other breaches discovered by the defendant and which the defendant reserved its right to pursue.  Paragraph 5 stated that the 6 Incidents were clearly also breaches of the Warranties^[6].  Paragraph 6 stated that the notice was to be regarded as a notice of claim pursuant to clause 8.05 of the SPA.

14.  Of the nine claims in the Counterclaim (Issues 1 to 9), only the incidents in Issues 1 and 2 were mentioned in the Chinese Attachment. The complaint in Issue 1 was not a claim for breach of any of the Warranties.  It was for breach of another contractual term being clause 6.04 of the SPA and so the provision in clause 8.05 for notice of claim under the Warranties was not engaged^[7].

15.  Before the judge, the plaintiff advanced a “primary case” and a “secondary case” as regards the defendant’s failure to comply with giving notice under clause 8.05.  Its primary case was that clause 8.05 would require identification and some particulars of the potential claim that was being advanced.  Other than Issues 1 and 2, the MBJSM Letter did not comply with clause 8.05 and the defendant was precluded from relying on or advancing any claims under any of the Warranties based on allegations that had not been notified.  And even for Issues 1 and 2, no proper notice was given as the incidents in respect of these issues were later formulated in an entirely different way compared to what was alleged in the letter.  If, contrary to its primary case, it should be held that clause 8.05 would not require the claim to be specified in the notice, its secondary case was that the MBJSM Letter would only be effective to give notice of matters which were revealed and known to the defendant at the time of issuing that letter.

16.  The judge ruled against the plaintiff on its primary case and held in its favour on its secondary case.  She concluded at §106 of the Judgment:

“… on my construction, a ‘bald’ notice under Clause 8.05 is sufficient, namely without having to identify which of the Warranties the claim is in respect of and without having to set out any information, particulars or details of the claim, save that such notice is only effective in relation to a claim or claims that have already come to the knowledge of or revealed to or discovered by D at the time of the giving of notice.”

17.  In light of these rulings, the judge held that the MBJSM Letter was a proper and effective notice of the claims in relation to Issues 2, 3, 4, 7 and 9, and it could not have been a proper or effective notice in relation to the claims in Issues 5, 6 and 8, which were revealed or discovered only after that letter.  Hence, the claims in Issues 5, 6 and 8 have been contractually time barred^[8].

18.  The plaintiff appealed the ruling on its primary case and the defendant appealed the ruling on the plaintiff’s secondary case.

19.  The judge has held that clause 8.02 operated as a time bar provision and is an exclusion clause, the effect of which is to exclude the plaintiff’s liability where notice of a claim under the Warranties is not given in compliance with this provision^[9]. This is not challenged on appeal.

B.2.  Legal principles on construction of notice clauses

20.  Clauses requiring written notice of a warranty claim to be given by a specified deadline are a common feature of agreements for the sale and purchase of shares and such clauses take many different forms. (ROK plc (in Administration) v S Harrison Group Ltd [2011] EWHC 270 (Comm) at §35)  The only true principle to be derived from the authorities on notification clauses is that every notification clause turns on its own individual wording. (RWE Nukem Limited v AEA Technology plc [2005] EWHC 78 (Comm) at §10; Forrest v Glasser [2006] 2 Lloyd’s Rep 392 at §24)  “Each notice clause has to be construed for itself and in light of the commercial context in which it is found and the commercial purpose it is intended to serve.” (Laminates Acquisition Co v BTR Australia Ltd [2004] 1 All ER (Comm) 737 at §29)

21.  One would of course have regard to the guidance given by the courts on the construction of documents in general.  The well-known summary by Lord Hoffmann of the general principles in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912H to 913F had been quoted in this regard.^[10]

22.  The starting point is to look at the matter linguistically, and to treat the natural meaning of language as the best guide to interpretation. One should consider whether the natural meaning of the language is so clear as to preclude serious consideration of the commerciality or otherwise of rival interpretations or to preclude recourse to the principle that ambiguous exclusion clauses should be construed narrowly. (Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128 at §29)

23.  Reliance on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision construed.  The parties have control over the language they use in a contract, particularly in a contract which was professionally prepared and involves a careful combination of clauses, which constitute part of the bargain negotiated and struck between the parties who have been advised by their own lawyers.  The court should be very cautious about undermining the delicate balance which the parties have sought to arrive at for themselves.  While commercial common sense is a very important factor to take into account, the court should be very slow to reject the natural meaning of a provision simply because it appears to be a very imprudent term for one of the parties. (Arnold v Britton [2015] AC 1619 at §§17, 20; Tsakos Shipping & Trading SA v Orizon Tanker Co Ltd (“The Centaurus Mar”) [1998] CLC 1,003 at 1,009)

24.  Commercial common sense is not to be invoked retrospectively, or to be seen through the eyes of only one party.  If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.  This is because the court is not privy to the negotiations (evidence of negotiations is inadmissible) and has no way of knowing whether a clause which appears to be onerous was a quid pro quo for some other concession, or one of the parties may simply have made a bad bargain. (Arnold v Britton at §19; Sinoearn International Ltd v Hyundai-CCECC Joint Venture (2013) 16 HKCFAR 632 at §77; Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at 296G to H)

25.  Where it is necessary to resolve an ambiguity on the construction of an exclusion clause, the principle is that “an ambiguity in its meaning may have to be resolved by a preference for the narrower construction, if linguistic, contextual and purposive analysis do not disclose an answer to the question with sufficient clarity.” (Nobahar-Cookson v The Hut Group Ltd at §21). The rationale for this is as explained by Briggs LJ in that case:

“18. … Ambiguity in an exclusion clause may have to be resolved by a narrow construction because an exclusion clause cuts down or detracts from the ambit of some important obligation in a contract, or a remedy conferred by the general law such as … an obligation to give effect to a contractual warranty by paying compensation for breach of it. The parties are not lightly to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligations without using clear words having that effect …

19. This approach to exclusion clauses is not now regarded as a presumption, still less as a special rule justifying the giving of a strained meaning to a provision merely because it is an exclusion clause. Commercial parties are entitled to allocate between them the risks of something going wrong in their contractual relationship in any way they choose. Nor is it simply to be mechanistically applied wherever an ambiguity is identified in an exclusion clause. The court must still use all its tools of linguistic, contextual, purposive and common-sense analysis to discern what the clause really means. In the Seadrill Management case^[11] Moore-Bick LJ described the principle as: ‘essentially one of common sense; parties do not normally give up valuable rights without making it clear that they intend to do so.’ ”^[12]

B.3.  The contractual provisions and factual matrix

26.  Negotiations for the sale of a substantial stake in the Target Company started in around July 2008.  The negotiations were conducted intermittently, due to market fluctuations at the time.  When the market recovered in 2009, the parties resumed negotiation discussions^[13].

27.  The parties were legally represented throughout the negotiations and drafting of the relevant agreements, being the SPA, the Subscription Agreement and the Share Charge^[14], which were prepared contemporaneously.  The plaintiff and the Target Company were represented by Mallesons Stephen Jaques and the defendant by MB JSM^[15].

28.  There had been due diligence (financial and Mainland legal due diligence) and valuation of Mainland real estate assets conducted by professionals, prior to the execution of the SPA and the Subscription Agreement in January 2010^[16]. Under clause 5.02 of the SPA, the plaintiff undertook to use its reasonable endeavours to cause that, pending Completion, the Target Company and its subsidiaries would make good the defects as agreed between the parties discovered during the due diligence exercise, as set out in an agreed list in Attachment A to the SPA. 

29.  Clause 2.01(h) of the SPA provided that Completion is conditional upon “the due diligence on the financial, legal and business affairs of the Group^[17] by the Purchaser has been completed and the Purchaser is satisfied with the results of such due diligence in all respect”.  By proceeding to Completion, the defendant must be taken to have accepted that due diligence on the financial, legal and business affairs of the Target Company and its subsidiaries had been completed to its satisfaction in all respects.  A joint announcement was made on 24 June 2010 by the defendant, its parent company SIHL and the Target Company that Completion had taken place on that date in accordance with the SPA and the Subscription Agreement.

30.  Although the stipulated period under clause 8.05 for the giving of notice was only 12 months from Completion, it was clearly accepted by the defendant.  It must be borne in mind that the defendant is itself part of a conglomerate or a publicly listed company in Hong Kong and was assisted by a team of professionals.

31.  Clause 8 is the provision by which the plaintiff provided warranties and indemnities.  The material provisions read as follows:

“8.01 Subject to Clause 8A.01,^[18] the Vendor hereby:-

(a) represents, warrants and undertakes to and with the Purchaser and its successors in title that each statement contained in Schedule 2 is true, accurate and not misleading in all respects as at the date of this Agreement, and will … continue to be so on the Completion Date with reference to the facts and circumstances subsisting at that time, save as otherwise mentioned in Schedule 2 or elsewhere in this Agreement;

(b) accepts that the Purchaser is entering into this Agreement in reliance upon each of the Warranties; …

8.02 Each of the Warranties shall be construed as a separate Warranty and (save as expressly provided to the contrary) shall not be limited or restricted by reference to or inference from the terms of any other Warranty or any other terms of this Agreement.”

32.  Clause 8.05 has been set out earlier and will not be repeated. There is no definition in the SPA of the word “claim” in this provision.  The word “Warranties” in clause 8.05 is defined in clause 1.01 to mean “the representations, warranties and undertakings set out in Schedule 2”. The Warranties set out in Schedule 2 are grouped under five topics: “The Sale Shares”, “Information provided to the Purchaser”, “Arrangements Between [the Target Company] and the Vendor”, “Corporate information” and “Other Warranties”.  Under the topic of “Other Warranties”, there are 16 divisions, covering: “Corporate information”, “Accuracy and Adequacy of Information”, “Compliance with Legal Requirements”, “Accounts, Management Accounts and Assets and Liabilities”, “Events Since the Accounts Date”, “Insolvency”, “Litigation”, “Tax Returns”, “Anti-avoidance”, “Stamp and Other Duties”, “Power of Attorney”, “Material Receivables”, “Deductions and Withholdings”, “Grants and Allowances”, “Licences and Consent” and “PRC Properties”.  The Warranties are detailed, comprehensive and wide-ranging.

33.  Save that clause 16.01 provides that every notice or communication under the SPA must be in writing, there are no particular requirements specified in clause 8.05 regarding the notice to be given.  Nor is there any provision in the SPA as to when court proceedings for a claim have to be issued, after notice of a claim under the Warranties has been received by the vendor under clause 8.05.

34.  The Subscription Agreement, entered into between the Target Company and the defendant as the subscriber (in contradistinction to the SPA which was made between the plaintiff as the vendor, the defendant as the purchaser and Mr Li as the vendor’s guarantor), makes provision for warranties and indemnities given by the Target Company in clause 7. Clause 7.01 is substantially the same as clause 8.01(a) of the SPA and clause 7.05 is the same as clause 8.05 of the SPA.  The Warranties contained in Schedule 2 of the Subscription Agreement are largely similar to those in Schedule 2 of the SPA.  Clauses 7.06 (excluding the liability of the Target Company for breach of Warranties in the situations and to the extent as stipulated) and 7.07 (excluding and limiting the liability of the Target Company for breach of Warranties with reference to monetary amounts) have no equivalent in the SPA.  Materially for present purpose, there is this provision in clause 7.09 with no equivalent in the SPA and it reads as follows:

“If any matter which will or can reasonably be expected to give rise to a claim against the Company under any of the Warranties comes to the notice of the Subscriber:-

(a) the Subscriber shall as soon as reasonably possible (and in any event within the following 30 days) notify the Company in writing of the matter and make available to it all information and documents in the possession or under the control of the Subscriber in so far as such information and documents relate to that matter;

(b) neither the Subscriber nor the Company nor any of the Subsidiaries shall (subject to the fiduciary duties of their respective directors) make any admission of liability or take any action in connection with the matter without the prior written consent of the Company (such consent not to be unreasonably withheld or delayed); and

(c) the Subscriber shall take all such steps as the Company may reasonably request to mitigate its liability.”

35.  The Share Charge, made between the plaintiff as the chargor and the defendant as the chargee, provides in the charging clause as follows:

“3.1 Charge

The Chargor, as beneficial owner, mortgages by way of first equitable mortgage, and charges, by way of first fixed charge, to the Chargee, all the right, title and interest of the Chargor in and to the Securities as a continuing security for the payment and discharge of the Secured Obligations.

3.2 Period

Subject to Clause 3.3, the Chargee shall be entitled to retain this Charge for such period as the Chargee may certify to the Chargor to be appropriate in order to protect the interests of the Chargee in respect of the Secured Obligations.

3.3 Discharge

(a) Subject to Clause 13.5^[19] and without prejudice to Clause 3.3(b) below, the Chargee shall, at the request and cost of the Chargor, discharge the security created by this Charge if the Chargee considers in its absolute discretion that all the Secured Obligations have been unconditionally and irrevocably paid and discharged in full.

(b) In the case where no claim has been made by the Chargee against the Chargor in accordance with the [SPA], the Chargee shall, at the request and cost of the Chargor, discharge the security created by this Charge.”

36.  “Secured Obligations” is defined in clause 1.1 to mean:

“(i) all obligations of the Chargor pursuant to, whichever occurs earlier, (i) a settlement agreed between the Chargor and the Chargee; or (ii) a final judgment of a court of competent jurisdiction whereby neither the Chargor nor the Chargee has filed any appeal against it within the applicable time limit for instituting the relevant appeal proceedings or no appellant proceeding is available, each in respect of a breach of any of the obligations of the Chargor under the [SPA]; and

(ii) all amount payable under this Charge.”

37.  Under the covenant for payment in clause 2.1 of the Share Charge, the plaintiff “unconditionally and irrevocably covenants to pay and discharge in full the Secured Obligations when due or, if there is no specified time for payment or performance, on demand made by the Chargee at any time.”

38.  It should be noted that the Share Charge was given only in respect of the obligations of the plaintiff as the vendor under the SPA.  It did not cover the obligations of the Target Company under the Subscription Agreement.

B.4.  Whether clause 8.05 only requires “bald notice”

39.  On the natural and ordinary meaning of clause 8.05, all that is required is that “notice of a claim under the Warranties” be given by the purchaser to the vendor. It is clear from the wording that notice of one (“a”) claim under the Warranties suffices, as opposed to a claim for each Warranty.  There is a complete absence of wording requiring any details or particulars of a claim to be provided.  The contrast between the form of wording in clause 8.05 and the cases cited which required some information of the claim be given is stark.  By way of illustration, these are some examples of relevant notice clauses in share purchase or asset sale agreements:

“… the Vendor shall not be liable under this Agreement in respect of any breach of any of the warranties: Unless notice of it is given in writing by the Purchaser to the Vendor setting out such particulars of the grounds on which such claim is based as are then known to the Purchaser …” (Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s Rep 423 at §7)

“A Warrantor shall be liable for breach of a Warranty … only if notice of a claim is given to him, specifying such details of the event or circumstance giving rise to such claim as are available to the Investor and estimating (if capable of estimation by the Investor) its quantum …” (Bottin (International) Investments Ltd v Venson Group plc [2004] EWCA Civ 1368 at §11)

“the Vendor will be under no liability in respect of any Claim unless written particulars of such Claim (giving details of the specific matter as are available to the Purchaser in respect of which such Claim is made) have been given to the Vendor …” (RWE Nukem Limited v AEA Technology plc at §2)

“The Vendor is not liable for a Claim or a claim under the Tax Undertaking or the Indemnities unless the Purchaser has given the Vendor notice in writing of the Claim or the claim under the Tax Undertaking or the Indemnities, specifying in reasonable detail the nature of the Claim or claim under the Tax Undertaking or the Indemnities and the amount claimed (based in each case on the information then available to the Purchaser) …” (ROK plc (in Administration) v S Harrison Group Ltd at §13)

“No Seller Warranty Claim, … Indemnity Claim … shall be brought against the Seller unless … the Purchaser shall have given to the Seller written notice of such Claim … specifying in reasonable detail: (i) the matter which gives rise to the Claim; (ii) the nature of the Claim; and (iii) (so far as is reasonably practicable at the time of notification) the amount claimed in respect thereof (comprising the Purchaser’s good faith calculation of the loss thereby alleged to have been suffered) …” (Ipsos SA v Dentsu Aegis Network Ltd [2015] EWHC 1171 (Comm) at §10)

“No Seller shall be liable for any claim unless the purchaser has given notice to the Seller of such claim setting out reasonable details of the claim (including the grounds on which it is based and the purchaser’s good faith estimate of the amount of the claim (detailing the purchaser’s calculation of the loss, liability or damage alleged to have been suffered or incurred)).” (Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23 at §7)

40.  To paraphrase what Ward LJ had said in Forrest v Glasser at §23, it is apparent from the authorities cited that: “The reasonable man will know, therefore, that clauses requiring a degree of specificity can easily be drafted but he will also know that no such detail was provided for in [clause 8.05 of the SPA].”

41.  Of all the decided cases cited to us concerning notice clauses in share purchase agreements, none of the clauses required only a ‘bald notice’ that was wholly uninformative, with the possible exception of Forrest v Glasser.

42.  Even in Forrest v Glasser, although it was held on appeal that a bald notice of claim was sufficient to satisfy the notification provision in clause 6.3.1 which operated as a condition precedent to liability, the effect of that provision was somewhat ameliorated by two other clauses.  By clause 6.3.2, the purchasers must bring court proceedings in respect of any claim which had been notified within 12 months of the notification (shorter than the statutory limitation period for contractual claims), failing which the claim should be deemed to have been waived.  Ward LJ reasoned the very fact that proceedings were contemplated at the second stage of 12 months of the notification, with all the formality of pleading and particularity at that stage, would militate against the argument that the same degree of particularity should have been given at the first stage when the claim was notified (at §25).

43.  The other relevant provision in that case was clause 6.4, which was “without prejudice to the provisions of clause 6.3”, and this provided that “the Subscribers will notify the Company and the Warrantors in writing as soon as reasonably practicable after the date upon which the Subscribers became aware of a Claim against the Warrantors, such notification to be in sufficient detail to enable the Company and the Warrantors to identify the Claim and to respond to it”.  Although clause 6.4 did not affect clause 6.3 (each of these provisions was held to be freestanding and independent) in that failure to give notice pursuant to clause 6.4 would not be a defence so as to preclude a claim which was brought in time in accordance with clause 6.3, clause 6.4 nevertheless imposed a contractual obligation of the subscribers to give notification of a claim in sufficient detail and failure to do so might be a breach of contract. (at §19)

44.  In the present case, there are no such ameliorating provisions in the SPA. In this regard, the SPA may be contrasted with the Subscription Agreement.

45.  I have mentioned earlier that the provisions in the Subscription Agreement equivalent to clauses 8.01(a) and 8.05 of the SPA are clauses 7.01 and 7.05, and there is no equivalent provision to clause 7.09 in the SPA.  If clause 7.09 is regarded as an independent and freestanding provision to clause 7.05, this would be similar to the situation in Forrest v Glasser. Clause 7.09 (like clause 6.4 in Forrest v Glasser) applies to the situation where the subscriber becomes aware of any matter which can be expected to give rise to a claim.  The similarity with clause 6.4 is that clause 7.09 requires the subscriber to make available to the Target Company relevant information and documents in the notification, albeit that the obligations that arise as a result as provided in clauses 7.09(b) and (c) are different from clause 6.4.

46.  Clause 7.09 caters for a different situation that has no equivalent in the SPA.  Quite clearly, a deliberate decision was made to adopt a different combination of clauses for the SPA regarding claims under the Warranties to reflect the different bargain that was struck and agreed.  By making provision in clause 7.09 (not to mention the notice clauses commonly found in decided cases), the draftsman must be “well aware of the need to be specific where specificity is demanded”.  To paraphrase Ward LJ again in Forrest v Glasser at §22, “imposing specific requirements in [clause 7.09 of the Subscription Agreement] in contrast to being silent of any specificity in [clause 7.05 of the Subscription Agreement, which is the same as clause 8.05 of the SPA] argues strongly in favour of a bald notice of claim being sufficient for the latter’s purposes.”

47.  I agree with the judge that the natural and ordinary meaning of clause 8.05 is that all it requires is for the plaintiff to receive a notice of a claim under the Warranties, without any kind of particularisation, not even identifying the Warranty alleged to have been breached, or the nature of the breach.  From the examples of the decided cases, it can readily be seen that even where provision was made in the notice clause for some information to be given with the notice of claim, disputes would often arise as to the extent of particularisation required for the notice to constitute a proper notice, depending on the wording of the notification clause.  It is not possible to construe clause 8.05 as requiring particularisation of a claim under the Warranties in light of the varying possibilities.  Needless to say, it is impermissible to rewrite the contract.

48.  To construe clause 8.05 as requiring only a bald notice is workable, as this provision does not set in motion any process after a notice of claim is received by the vendor within the Stipulated Period.  No provision was made for the vendor to respond to the notice of claim, whether to remedy the breach or to mitigate the loss of the purchaser.  Nothing is required to be done which necessitates some particularisation to be given of the claim.  The consequence that would flow from the vendor receiving notice of a claim under the Warranties within the stipulated period is simply that clause 3.3(b) of the Share Charge would come into play, the chargee shall not discharge the security created by the Charge, as a “claim has been made by the Chargee against the Chargor in accordance with the [SPA]”. It did not allow the chargee to foreclose on the security. Pursuant to clauses 3.1 and 3.2, the security would be discharged when the Secured Obligations have been paid and discharged, either pursuant to a settlement of the claim or a final judgment of the court.  And details of the claim would be provided to the vendor when settlement negotiations are pursued or when legal proceedings are issued. 

49.  I agree with the judge that the commercial purpose of clause 8.05 is to provide a temporal cut-off point, so that the plaintiff would know with certainty whether it would be called upon to answer for the Warranties and there would be peace of mind to the plaintiff if no notice was given within the Stipulated Period and that the Share Charge could be released^[20]. In the event that notice of claim was given within the Stipulated Period, the defendant would remain protected by the Share Charge and would have the limitation period prescribed by statute to issue legal proceedings in respect of the claim.

50.  Mr Sarony submitted for the plaintiff that if clause 8.05 is construed to require no more than a bald notice, this would give the defendant licence to raise any claim unbridled by the time restraint stipulated in clause 8.05 (ie not later than the expiry of one year following the Completion Date).  He contended that it flies in the face of common sense, let alone good business practice, that the requirement to make a claim within one year following Completion built into clause 8.05 could be overridden in so cavalier a fashion.  Instead of a cut-off point of 12 months from the Completion Date, the plaintiff would have to live with uncertainty for at least six years during which time legal proceedings may be issued for a claim under the Warranties.

51.  Mr Sarony relied also on clause 3.3(a) of the Share Charge, which gives an “absolute discretion” to the chargee to decide if “all the Secured Obligations have been unconditionally and irrevocably paid and discharged in full” before acceding to the chargor’s request to discharge the security, and argued that in light of this absolute discretion, the notice of a claim is required to be specific.

52.  I do not agree with his submissions.  The language of clause 8.05 is sufficiently clear to allow the defendant the statutory limitation of six years to bring a claim under the Warranties, provided that notice of a claim is received by the plaintiff not later than the expiry of one year following the Completion Date.  That this may seem an imprudent term for the plaintiff is not a ground to reject the natural and ordinary meaning of clause 8.05. As explained earlier, the ordinary meaning of clause 8.05 does make sense in relation to the rest of the SPA and the relevant provisions in the Share Charge.  The court should give effect to that language, even though the consequences may appear hard for the plaintiff.

53.  As for the absolute discretion in clause 3.3(a) of the Share Charge, this does not support the plaintiff’s contention. Clause 3.3(a) is “without prejudice to clause 3.3(b)”, which provides that it is “In the case where no claim has been made by the Chargee against the Chargor in accordance with the [SPA]” that the chargee shall discharge the security. In any event, having regard to the definition of “Secured Obligations”, it is not necessary for particulars of the claim to be provided for the parties to know whether the discretion should be exercised in deciding that the Secured Obligations have been paid and discharged in full.

54.  Mr Sarony also prayed in aid the evidence of the defendant’s witness Mr Ni Jian Da (“Mr Ni”), who had participated in the negotiations, and Mr Ni’s understanding of clause 8.05, as well as the MBJSM Letter which provided details of the 6 Incidents, to contend that such evidence should carry substantial weight as showing how a “reasonable recipient” or participant would have understood clause 8.05 and the need to provide details of the claim.  These arguments were raised by the plaintiff’s former counsel before the judge and were rightly rejected as evidence of the parties’ subjective intent or understanding would be irrelevant and inadmissible^[21]. And I do not think clause 5.02, which gives an opportunity to the Group to make good the defects in an agreed list prior to Completion, is relevant to the construction of clause 8.05.

55.  For the above reasons, I uphold the judge’s construction of clause 8.05 that it is sufficient to give a bald notice of a claim under the Warranties.  I would dismiss the plaintiff’s appeal against this holding.

B.5. Whether the notice would only be effective in relation to matters that had come to the defendant’s knowledge

56.  The judge held that on a proper construction of clause 8.05, a bald notice of a claim under the Warranties would only be effective in relation to matters that had come to the defendant’s knowledge or were revealed to or discovered by the defendant at the time of giving of the notice.  Ms Sit argued that the judge was wrong in this holding and took a number of points.

57.  First, the plaintiff’s “secondary case” that the judge ruled in favour of was not pleaded and was raised only in the closing submission of the plaintiff. 

58.  Second, she submitted there is no express provision in clause 8.05 to the effect as held by the judge.

59.  Third, she contended that this construction is inconsistent with the purpose of clause 8.05, which is to provide for how and when notice of a claim should be given and is not concerned with the type of claim that could be made.  The judge’s construction is to impose a further limitation, which is unsupported by the wording in clauses 8.01(a) and 8.05. By clause 8.01(a), liability of the vendor for the Warranties is crystallised by reference to facts at the date of the Acquisition Agreement and the Completion Date, which are objectively ascertainable.  The requirement of the purchaser’s knowledge of matters in respect of the claim would undercut the element of certainty as the vendor would have limited means to ascertain or verify the purchaser’s knowledge in this regard.  Ms Sit submitted there is no inherent unfairness in the plaintiff being liable for breaches of Warranties even though the defendant did not have knowledge of the relevant matters at the time notice of a claim was given.  By analogy, she cited Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339, which held that an employer could rely on information acquired after the dismissal of an employee to justify the dismissal.

60.  Fourth, she criticised the judge for taking into consideration the evidence of Mr Ni and the MBJSM Letter in construing clause 8.05, as such evidence is irrelevant.

61.  The pleading point taken by Ms Sit is not valid. A party may by his pleading raise any point of law, but is not required to do so.  Ms Sit did not contend that the plaintiff’s failure to plead its “secondary case” had any or any significant impact on the evidence.

62.  The reason for the judge referring to the evidence of Mr Ni and the MBJSM Letter was to address a submission raised by the plaintiff’s former counsel, who prayed in aid such evidence to support his contention that such evidence was consistent with the commercial purpose of clause 8.05, which was to give one year for the defendant to investigate into the affairs of the Target Company^[22]. This came after the judge had accepted the plaintiff’s secondary case on the construction of clause 8.05^[23]. I have some doubts whether such evidence had played a significant part in the judge’s reasoning.  In any event, whether the judge had taken into consideration inadmissible and irrelevant evidence is not the main focus on appeal. The primary question is whether the judge’s construction is correct. 

63.  The fact that there is no express wording in clause 8.05 providing for the purchaser’s knowledge of the matters for which notice of a claim is given does not necessarily mean that this could not be the proper construction.  “The court must still use all its tools of linguistic, contextual, purposive and common-sense analysis to discern what the clause really means” (Nobahar-Cookson v The Hut Group Ltd at §19), in order to resolve any ambiguity in this exclusion clause, the effect of which is to exclude the plaintiff’s liability for breach of Warranties where notice of a claim is not given in compliance.

64.  A bald notice is all that is required on the proper construction of this clause and the threshold requirement to be satisfied by the purchaser has already been set very low.  If it is to be construed as permitting any claim for breach of the Warranties to be made notwithstanding that knowledge of the matters relating to the breach is acquired after notice of a claim is given, the threshold requirement would be lowered even further, so much so that one may wonder whether any meaningful purpose is to be served by setting the Stipulated Period of one year following the Completion Date.  Following the approach to exclusion clauses, and guided by the principle that parties do not normally give up valuable rights without making it clear that they intend to do so, clear words are required if it is intended that a notice of claim may be given in respect of matters that the purchaser has no knowledge of. Clear words to that effect are not found.

65.  Looking at the matter linguistically and with common sense, I do not think notice of a claim can be given in relation to a matter that had not come to the purchaser’s knowledge at the time.  For without any knowledge of the matter concerned, there can be no genuine claim at all. Even though the purchaser is not required to give any information of a claim under the Warranties in the notice, there is no reason to think that the claim as notified can be non-existent at the time and which may or may not arise in future.

66.  I am fortified in the above thinking by looking at the matter purposively and contextually.  According to Clause 3(b) of the Share Charge, the security may be discharged “where no claim has been made by the Chargee against the Chargor in accordance with the [SPA]”. When a claim has been made in accordance with the SPA, the purchaser would have the protection of the Share Charge.  What is required is not giving notice to the vendor of a claim which may or may not be made, it is notice of a claim that is made.

67.  I do not think the situation in Boston Deep Sea Fishing & Ice Co v Ansell is an appropriate analogy, as the context is entirely different. Nor do I think proving the purchaser’s knowledge at the time of giving of the notice should give rise to such difficulty or uncertainty that the court should discard a construction that is correct and accords with common sense. I do not accept Ms Sit’s submissions as mentioned earlier.

68.  For the reasons given above, I agree with the judge on her construction of clause 8.05 that a notice under this provision would only be effective in relation to matters that had come to the knowledge of the purchaser at the time the notice was given.  I would dismiss the defendant’s appeal against this holding.

C.  Issue 1 – Yingtong Recovery: if “recover” should mean actual receipt of money

69.  The relevant background matters are as follows.

70.  Pursuant to clause 6.04 of the SPA, the plaintiff gave an undertaking to “recover” by 25 June 2011 (one year after the Completion Date) no less than RMB 60 million from Yingtong (a Mainland company of which the Target Company was the majority shareholder), being the monetary compensation to be provided by the local government to Yingtong in respect of a real estate project that could not be proceeded with.

71.  On 31 December 2010, Mr Gong Xiangmin, who was arranged by the plaintiff to liaise with relevant parties, obtained confirmation from the Land Resources Bureau that a compensation of RMB 90 million would be paid to Yingtong.  On 23 June 2011, an agreement executed by the Land Reserve Centre (“June Agreement”) was forwarded to Yingtong for signature, by which the first instalment of RMB 60 million would be paid within 40 days from the signing date and the remaining RMB 30 million within three months, subject to the conditions therein. Yingtong refused to execute the June agreement and receipt of the RMB 60 million was delayed. Yingtong eventually signed an agreement with the Land Reserve Centre in September 2011, and received RMB 60 million on 15 December 2011, RMB 28 million on 29 September 2012 and RMB 2 million on 16 October 2012^[24].

72.  The defendant claimed loss and damage as a result of the plaintiff’s breach of clause 6.04 in failing to recover RMB 60 million before the deadline.

73.  It was the plaintiff’s defence that Yingtong, under the new management, wrongfully and unreasonably did not agree to some of the conditions precedent in the June Agreement and refused to sign it^[25].

74.  The judge held that the RMB 60 million was not recovered within the stipulated time in clause 6.04 and the plaintiff was in breach of this provision^[26].

75.  Mr Sarony argued on appeal that the judge’s holding was wrong in that she construed “recover” in clause 6.04 to mean actual receipt of the money and this is “impracticably narrow”.  He submitted that the plaintiff had done everything in its power and had obtained an “unconditional agreement” by the government before the deadline, so in that context Yingtong had “recovered” the RMB 60 million.

76.  Before the judge, it was submitted by Ms Sit that the ordinary meaning of “recover” in clause 6.04 is to receive cash, not just receiving a chose in action to enforce or sue for RMB 60 million.  There was no real dispute by the plaintiff’s former counsel over the meaning of “recover”^[27].

77.  In my judgment, on the proper construction of clause 6.04, “recover” in this context would entail the actual receipt of RMB 60 million, not just to acquire a right to receive the money by entering into an agreement with the relevant authority.  I do not agree with Mr Sarony that the meaning of “recover” would be impracticably narrow if it should mean the actual receipt of money.  There is no valid reason to depart from the ordinary and natural meaning of “recover” and adopt a strained interpretation.  On the judge’s finding, there was no sufficient evidence from the plaintiff that had the June Agreement been signed, the RMB 60 million would be paid forthwith or received by Yingtong before the deadline.

78.  The judge’s holding of liability cannot be faulted.  I would dismiss the plaintiff’s appeal against this holding.

D.  Issue 2(a) – Xian Project: proper construction of the Litigation Warranty

79.  By clause 8.01(a), the plaintiff warranted that each of the Warranties in Schedule 2 was true, accurate and not misleading as at the date of the SPA (19 January 2010) and would continue to be so on the Completion Date (24 June 2010).

80.  The Litigation Warranty in Schedule 2 of the SPA provides as follows:

“Save as disclosed pursuant to this Agreement or in the Accounts or the Management Accounts or publicly available information, the Company is not engaged (whether as plaintiff, defendant or otherwise) in any material litigation or arbitration, administrative or criminal or other proceedings and no litigation or arbitration, administrative or criminal or other proceedings against the Company is pending, threatened or expected and there is no fact or circumstance likely to give rise to any such litigation or arbitration, administrative or criminal or other proceedings or to any proceedings against any director, officer or employee (past or present) of the Company in respect of any act or default for which the Company might be vicariously liable”.

81.  As noted by the judge, what the plaintiff had warranted under the Litigation Warranty was that: (i) the Target Company was not engaged in any material proceedings; (ii) no proceedings against the Target Company was pending, threatened or expected; and (iii) there was no fact or circumstance likely to give rise to any such proceedings or to any other proceedings against any director, officer or employee (past or present) of the Target Company in respect of any act or default for which the Target Company might be vicariously liable^[28].

82.  Nothing turns on (i) and (ii) in this instance. The issue is in respect of (iii), namely, whether there was any fact or circumstance likely to give rise to proceedings as at 19 January 2010 and up to 24 June 2010.

83.  Between February 2008 and June 2010, six of the Target Company’s subsidiaries in the Mainland (“Developers”) entered into construction contracts with builders in relation to a residential development in Xian (“Xian Project”).  In August 2010, it was exposed by the media the Xian Project contained structural defects in that the steel bars used in load-bearing walls were over-lengthened and failed to meet the prescribed safety standard (“Steel Bar Issue”).  This led to rectification works carried out by the Developers and delay in completion of the Xian Project^[29].

84.  The defendant alleged that the plaintiff was in breach of clause 8.01(a) and the Litigation Warranty.

85.  The defence of the plaintiff was that there was no fact or circumstance which was likely to give rise to proceedings as at 19 January 2010 and up to 24 June 2010 and so there was no breach of the Litigation Warranty.

86.  The judge held that the relevant wording in the Litigation Warranty in respect of (iii) should be construed as being qualified by words such as “to the best of the knowledge, information and belief of the vendor” so that it would apply only so far as the vendor was aware of the relevant fact or circumstance, citing Sinclair on Warranties and Indemnities on Share and Asset Sales (11^th ed) at §4-19.  Hence, the plaintiff’s knowledge of the Steel Bar Issue is required to establish breach of the Litigation Warranty^[30]. As it was accepted by the defendant’s witnesses there was no actual knowledge on the part of the plaintiff and no sufficient evidence the plaintiff ought to have known of the defects of the steel bars, the judge found that the plaintiff was not liable for breach of clause 8.01(a) or the Litigation Warranty^[31].

87.  Ms Sit argued on appeal that the judge was wrong to construe the Litigation Warranty as being qualified by words requiring knowledge of the vendor of the relevant fact or circumstance.  She submitted that this construction is not supported by the actual words in the Litigation Warranty. No reference is made to any knowledge of the vendor in this provision. Furthermore, a qualification has been expressly provided for at the outset of this provision which reads: “Save as disclosed pursuant to this Agreement or in the Accounts or the Management Accounts or publicly available information”.  This should militate strongly against implying or reading in a qualification as held by the judge, as the parties were aware of the use of qualifications and were capable of inserting them if it had been their intention to do so.

88.  I think Ms Sit is correct on the proper construction of the Litigation Warranty.  I also agree with her that the extract cited in Sinclair does not support the proposition apparently accepted by the judge that it is unnecessary to qualify a warranty expressly so that it applies only to the best of the knowledge of the vendor. The learned author cited William Sindall Plc v Cambridgeshire County Council [1994] 1 WLR 1016 as authority in support of the proposition. But the context in that case is very different.  It was concerned with the duty to give good title in a conveyancing transaction and the construction of standard terms in the National Conditions of Sale in the UK (the relevant provision read: “Without prejudice to the duty of the vendor to disclose all latent easements and latent liabilities known to the vendor to affect the property, the property is sold subject to … easements …”).  In issue was the existence of an easement of drainage not known to the vendor at the time of the sale.  It was held that under the relevant provision, the vendor undertook to disclose all easements and incumbrances it had knowledge or means of knowledge of and so the vendor was not exposed to liability in that situation. 

89.  I reject Mr Sarony’s contention that the common usage of the word “warranty” dictates that a warranty cannot be given unless one has sufficient knowledge to do so.  It all depends on the context in which the word is used.  Nor do I think this construction of the Litigation Warranty (that it is not necessary to establish the vendor was aware of or ought to be aware of the relevant fact or circumstance) would flout commercial sense. It is up to the parties to decide by negotiation whether the vendor should accept the risk of inaccuracy of a state of affairs where he has no means of knowing and strike a bargain where the risk is to lie in that situation.

90.  Ms Sit pointed out there is clear evidence that as at 19 January 2010, defective steel bars had been used in the Xian Project, even though the judge did not make a finding on the position as at that date.  Mr Sarony did not argue to the contrary.  It would be appropriate for this court to make a finding that as at 19 January 2010 defective steel bars had been used in the properties in that project.  Hence, the statement in the Litigation Warranty there was no fact or circumstance likely to give rise to litigation as at 19 January 2010 is untrue. 

91.  For the above reasons, I would allow the defendant’s appeal against the judge’s holding on the construction of the Litigation Warranty, with the result that the plaintiff was liable for the breach of clause 8.01(a) and the Litigation Warranty in respect of the Xian Project.

E.  Issue 6 – BJ Xinsong accounts

E.1.  Issue 6(b) – causation in respect of the 2013 Claims

92.  This is the defendant’s appeal against a finding of fact. The relevant background may first be stated as follows.

93.  BJ Xinsong, an indirect subsidiary of the Target Company, was owed a debt of RMB 2.1 million odd by a company called San Jian (“San Jian Debt”). San Jian made part payment of RMB 459,133 in 2007, reducing the San Jian Debt to RMB 1.7 million odd. Notwithstanding the part payment, BJ Xinsong brought a claim in the Beijing Xicheng District People’s Court against San Jian in 2011 for the full amount of the San Jian Debt (“2011 Claim”). San Jian’s defence was that BJ Xinsong had agreed to an arrangement whereby the outstanding debt was to be discharged by San Jian transferring two flats to two senior management staff of BJ Xinsong, Mr Wu Xiang Dong (“Mr Wu”) and Mr Shi Lu Zhong (“Mr Shi”).  In support of this, San Jian adduced an undated agreement between BJ Xinsong, San Jian and the developer of the two flats and an agreement dated 27 December 2005 signed by the developer and San Jian. The 2011 Claim was dismissed by the court on the evidence of the flat transfer arrangement and on the ground that the claim was time barred^[32].

94.  BJ Xinsong then brought the 2013 Claims against Mr Wu and Mr Shi in the Beijing Chaoyang District People’s Court to recover the two flats transferred to them.  Mr Wu and Mr Shi adduced evidence to show that BJ Xinsong had caused the flats to be transferred to them in settlement of their annual salaries.  The court held that Mr Wu and Mr Shi were entitled to have the flats transferred to them and dismissed the 2013 Claims^[33].

95.  The defendant alleged that the plaintiff was in breach of the accounting related Warranties in the SPA in that there was failure to record the flat transfer arrangement in the accounting records of BJ Xinsong and the consolidated accounts of the Target Company and hence the accounts were not complete and accurate in all material respects. The defendant claimed damages being mainly the legal costs incurred in the 2011 Claim and the 2013 Claims. 

96.  Among the defence raised by the plaintiff was the contention that it was not reasonable for BJ Xinsong to pursue the 2011 Claim and the 2013 Claims.

97.  The judge found there was failure to record the flat transfer arrangement in the accounting records and hence breach of the accounting related Warranties was established^[34]. She found that the breach had resulted in the defendant incurring loss including its legal costs in the 2011 Claim but not the 2013 Claims. It was not unreasonable for BJ Xinsong to pursue the 2011 Claim but it was unreasonable for BJ Xinsong to issue the 2013 Claims after it had failed in the 2011 Claim^[35].

98.  Ms Sit argued on appeal that the judge was wrong to find BJ Xinsong was unreasonable to issue the 2013 Claims.  She submitted that the judge had ignored the evidence of Ms Zhao Ye (who handled the audit and legal work of the Target Company since 2011; “Ms Zhao”) that it was only during the 2013 Claims that material evidence was disclosed, being (i) a witness statement of Mr Chen Bo (“Mr Chen”), an employee of BJ Xinsong; (ii) a confirmation given by BJ Xinsong dated 20 February 2006 that the two flats were transferred to Mr Wu and Mr Shi in settlement of outstanding annual salaries (“Wu/Shi Confirmation”); and (iii) title registration certificates of Mr Wu and Mr Shi as owners of the flats^[36]. Ms Zhao had also testified that no claims would have been brought had those documents been disclosed before.

99.  Ms Sit further criticised the judge for finding that even though the Wu/Shi Confirmation was only produced during the course of the 2013 Claims, the new management of BJ Xinsong could have made enquiries from its former employees or relevant parties and checked its own documents^[37]. She submitted there was no evidence to support this finding and “former employees” were not identified.

100.  I do not think Ms Sit’s criticisms are justified.  The judge did not ignore the evidence of the documents disclosed in the course of the 2013 Claims as this evidence was mentioned in the same paragraph where she made the finding that BJ Xinsong was unreasonable to issue the 2013 Claims.  In the Wu/Shi Confirmation, reference was made to the minutes of a BJ Xinsong management meeting concerning the flat transfer arrangement^[38]. In the judgment of the 2011 Claim, the court had found that Mr Wu was the general manager of BJ Xinsong in 2005 and at the same time working for the company was Mr Chen and two deputy general managers including Mr Shi^[39]. There is ample support for the judge’s finding that the new management of BJ Xinsong could have made enquiries from its former employees or relevant parties and checked its own documents.

101.  The defendant has no basis to challenge the judge’s finding of fact that it was unreasonable for BJ Xinsong to issue the 2013 Claims.  I would dismiss the defendant’s appeal against this finding.

E.2.  Issue 10(c) – in light of the determination of Issue 10(b), whether compliant notice was given for Issue 6

102.  This is the defendant’s appeal to challenge the finding of fact that the alleged breaches under Issue 6 were only revealed or discovered after the MBJSM Letter^[40].

103.  The judge made this finding on the basis that the defendant only became aware of the circumstances when BJ Xinsong issued a letter demanding San Jian to pay the outstanding sum of the San Jian Debt on 9 October 2011, which was after the MBJSM Letter^[41].

104.  Ms Sit submitted that the judge’s finding was in error because this is contrary to evidence and without factual basis. She referred this court to the unchallenged evidence of Ms Zhao^[42] who had deposed that “immediately after completion in June 2010, the New Management discovered details pertaining to the San Jian Debt during the Internal Audit”.  She went on to say that the new management “could not locate any books or records which explain the status of the Outstanding [San Jian Debt], or the reasons why such debt remained recorded as an account receivable in BJ Xinsong Development’s books.”

105.  Hence, even though a demand letter was issued by the new management to San Jian in October 2011, the matters relating to the alleged breaches of the accounting related Warranties had been discovered before the MBJSM Letter.  The judge’s finding was in error.

106.  I would allow the defendant’s appeal against this finding.  The result is that a compliant notice was given in respect of the breaches in Issue 6.

F.  Issue 7 – Rich Glory transaction: whether breach had been revealed or discovered prior to the MBJSM Letter

107.  This is the plaintiff’s appeal to challenge the judge’s finding of fact that a compliant notice under clause 8.05 was given in relation to the breach complained of in Issue 7, in light of the determination on the proper construction of clause 8.05.  The judge found that the breach in relation to Issue 7 had been revealed or discovered by the defendant prior to the MBJSM Letter and so the notice was compliant^[43].

108.  The relevant background may be related as follows^[44].

109.  On 9 September 2007, a subsidiary of the Target Company, Neo-China (Group) Infrastructure Investment Limited (“Neo-China Infrastructure”), signed an agreement (“1^st Rich Glory Agreement”) with Hong Kong Changyi Real Estate Development Limited (“HK Changyi”) to acquire the entire shareholding of HK Changyi in Rich Glory Investments Limited (“Rich Glory”).  The consideration for the acquisition was stated to be $300 million, of which $250 million was to be paid on the day immediately after the signing of the agreement.  Rich Glory held a 50% interest in a joint venture company (“JV Company”), which held a property development in Shenyang (“Shenyang Project”).

110.  The 1^st Rich Glory Agreement was terminated by agreement on 19 September 2007. On the same day, Neo-China Infrastructure entered into another agreement (“2^nd Rich Glory Agreement”) with HK Changyi for the acquisition of the latter’s entire shareholding in Rich Glory, with the Target Company as guarantor for Neo-China Infrastructure’s obligations thereunder.  The consideration in the 2^nd Rich Glory Agreement was stated to be $50 million and was payable by two instalments: (i) $10 million on the “Business Day” as defined immediately following the date of issue of the Land Use Right Certificate or within 60 Business Days after the issuance of a fresh business registration licence of the JV Company, whichever was earlier; and (ii) the balance of $40 million on the Business Day immediately following the issuance of the Superstructure Construction Planning Permit of the Shenyang Project.

111.  According to Neo-China Infrastructure, it had signed a supplemental agreement with HK Changyi on 12 October 2007 (“Supplemental Agreement”), which provided that the consideration for the transfer of the shareholding in Rich Glory remained at $300 million, and apart from $250 million which had been paid, it was agreed that the balance of $50 million was to be paid by Neo-China Infrastructure by three instalments: (i) $10 million on the signing of the Supplemental Agreement; (ii) $10 million on the 2^nd day of the JV Company being granted the Land Use Right Certificate or within 60 days upon the JV Company completing the procedure of effecting the changes in its business registration, whichever was earlier; and (iii) the balance of $30 million on the 2^nd day of the JV Company being granted the Superstructure Construction Planning Permit.

112.  On 18 July 2011, the solicitors of HK Changyi issued a letter of demand to Neo-China Infrastructure and the Target Company alleging there was an outstanding sum of $10 million of the consideration under the 2^nd Rich Glory Agreement.

113.  In the reply of Neo-China Infrastructure dated 3 August 2011, it referred to the Supplemental Agreement and asserted that the consideration of $50 million under the 2^nd Rich Glory Agreement had been paid in full by various tranches, of which RMB 10 million (which at the time equated to just over $10 million) was paid on 17 October 2007 to the JV Company at the instruction and direction (“1^st Payment Instruction”) of a Mr Xu Zhong Ping (“Mr Xu”).  HK Changyi denied it had signed the Supplemental Agreement or that Mr Xu had authority to give the 1^st Payment Instruction on its behalf for the $10 million to be paid to the JV Company.

114.  In September 2011, HK Changyi issued a writ in HCA 1576/2011 against Neo-China Infrastructure for the outstanding sum of $10 million under the 2^nd Rich Glory Agreement.  At the trial, Neo-China Infrastructure dropped its contention that the RMB 10 million paid to the JV Company on 17 October 2007 was the 1^st instalment payment of the consideration under the 2^nd Rich Glory Agreement and argued instead there was no obligation to pay as the conditions precedent had not been satisfied. Judgment was given in favour of HK Changyi.

115.  The defendant alleged breach of one of the accounting related Warranties in that records in relation to the 1^st Payment Instruction were not properly kept, resulting in HK Changyi denying payment and successfully suing Neo-China Infrastructure in HCA 1576/2011.

116.  The judge held the plaintiff liable for breach of one of the accounting related Warranties and that such breach had caused loss and damage to the defendant.  These findings are not challenged on appeal. The only challenge raised by the plaintiff is in respect of the finding that the defendant was aware of the matters giving rise to the breach alleged in Issue 7 before the MBJSM Letter was issued on 21 June 2011.

117.  For this purpose, we have been referred to the letters and emails exchanged in June and July 2011 in a list of correspondence submitted by the plaintiff after the hearing of the appeal.

118.  The first letter in the series was dated 8 June 2011 from HK Changyi to Neo-China Infrastructure referring to the 2^nd Rich Glory Agreement and seeking payment of $40 million should the condition for payment as stipulated be satisfied.

119.  In the email of 14 June 2011 from Mr Ip Kin Fan Samuel (“Mr Ip”) of HK Changyi to Mr Peter Cho (“Mr Cho”) of the Target Company, HK Changyi requested settlement of the balance of payment without further delay.

120.  Mr Cho replied by email on 17 June 2011, stating that according to their record, the payment of $40 million was duly made by various instalments on 25 November 2008, 16 February 2009 and 23 July 2009 and enclosing the bank slips.  He sent a further email on the same day, this time stating that according to their record, the payment of $50 million was duly made, being $10 million on 1 October 2007, $10 million on 1 December 2007, $10 million on 25 November 2008, $5 million on 16 February 2009 and $15 million on 23 July 2009 and enclosing the bank slips.

121.  Mr Ip responded by an email on the same day acknowledging the receipt of $40 million by instalments in December 2007, November 2008, February 2009 and July 2009.  He stated however that HK Changyi did not have record of receipt of the $10 million on 1 October 2007, that the payment of RMB 10 million was made to a bank account in the Mainland and they could not recognise the name of the recipient on the bank slip.  He requested payment of $10 million.

122.  Mr Cho replied by email on the same day reiterating that “from our record, we have paid HK$10,000,000 on 1/10/2007.”

123.  The emails and correspondence that followed were after the MBJSM Letter was issued on 21 June 2011.  In summary, Mr Ip maintained that HK Changyi had only received $40 million and sought payment of $10 million.

124.  In a letter dated 30 June 2011 from Mr Ip to Mr Ni of Neo-China Infrastructure, he complained of lack of response to his demand for payment of $10 million.  He stated that HK Changyi “strongly believe that the present management might not be aware of this matter before [HK Changyi’s] first letter on 4 June 2011” and suggested that the “confusion/ignorance” might be caused by “mis-management” of the previous management of Neo-China Infrastructure.  That first letter of HK Changyi dated 4 June 2011 was not adduced in evidence.

125.  The judge noted that that the first letter of HK Changyi was dated 4 June 2011 and remarked that on 4 June 2011 and 14 June 2011, HK Changyi had chased for payment and by its email on 17 June 2011 it had denied that the payment of $10 million as alleged by Neo-China Infrastructure was received. She pointed out that although Neo-China Infrastructure sent a copy of the bank credit advice of the RMB 10 million dated 17 October 2007 as evidence of payment (in Mr Cho’s email of 17 June 2011), a copy of the 1^st Payment Instruction was not sent.  The remitter on the bank credit advice was not Neo-China Infrastructure and the recipient on the copy of the advice was illegible but would appear to be the JV Company and HK Changyi made clear by email on 17 June 2011 that it had never received the $10 million. It was not until March 2012 when Neo-China Infrastructure filed an affirmation to oppose the application of HK Changyi for summary judgment that a copy of the 1^st Payment Instruction was adduced.  On this evidence, the judge found that the breach of the relevant Warranty (ie that accounting records were not properly kept resulting in HK Changyi’s dispute that $10 million had been paid) had been revealed to or discovered by the new management of Neo-China Infrastructure prior to the MBJSM Letter on 21 June 2011^[45].

126.  Mr Sarony submitted that the letter dated 18 July 2011 from the solicitors of HK Changyi to Neo-China Infrastructure demanding payment was the first notice of potential litigation.  The earlier correspondence and emails in June 2011 could not reasonably be construed as threatening litigation and hence the new management of Neo-China Infrastructure could not have been aware of the alleged breach in relation to Issue 7 prior to 21 June 2011.

127.  I do not accept his submission.  Regardless of whether litigation was threatened prior to 21 June 2011, it is quite clear from the correspondence and emails before that date there was a dispute between HK Changyi and the new management of Neo-China Infrastructure regarding the payment of $10 million, and that HK Changyi denied receipt of this amount as the only supporting document Neo-China Infrastructure was able to produce from its records at that time was a bank credit advice and the name of the recipient was illegible.  Sufficient information was revealed of a potential breach in that proper records had not been kept. There is no basis to interfere with the judge’s finding.  I would dismiss the plaintiff’s appeal against this finding.

G.  Issue 12 – whether the Charged Shares should be released to the plaintiff

128.  Pursuant to the charging clause in the Share Charge, the Charged Shares are to be released upon the plaintiff’s discharge of the Secured Obligations.  The judge found the plaintiff liable in respect of the claims in Issues 1, 3, 4 and 7. She therefore declined to order the release of the security.

129.  Mr Sarony’s stance is that the MBJSM Letter did not constitute a valid and effective notice pursuant to clause 8.05 on a proper construction of that provision and hence the security should be discharged pursuant to clause 3.3(b) as “no claim has been made by the Chargee against the Chargor in accordance with [the SPA].”  As I have ruled against the plaintiff on its construction of clause 8.05, the plaintiff’s contention in respect of Issue 12 must fail.  

H.  Conclusion and orders

130.  In summary, the results of the determination of the extant issues in these two appeals are as follows:

CACV 341/2019 (brought by the defendant)

Issue 10(b): the judge’s holding is upheld – on the proper construction of clause 8.05 of the SPA, the notice given is only effective in relation to claim(s) that have already come to the knowledge of or revealed to or discovered by the purchaser at the time of the giving of the notice;

Issue 2(a):   the judge’s holding is set aside – on the proper construction of the Litigation Warranty, the vendor’s knowledge of the relevant fact or circumstance is not relevant or required to establish breach of the warranty;

Issue 6(b)    the judge’s finding of causation in respect of the 2013 Claims is upheld;

Issue 10(c):  the judge’s finding that a compliant notice was not given for Issue 6 is set aside.

CACV 344/2019 (brought by the plaintiff)

Issue 10(a): the judge’s holding is upheld – on the proper construction of clause 8.05 of the SPA, a bald notice is sufficient;

Issue 1: the judge’s holding that “recover” in clause 6.04 of the SPA should mean actual receipt of money is upheld;

Issue 7: the judge’s finding that a compliant notice was given for Issue 7 is upheld;

Issue 12: the judge’s holding that the Share Charge should not be discharged is upheld.

131.  In light of the above determinations, I would make these costs orders nisi.  There is no reason to depart from the principle that costs should follow the event.  For CACV 341/2019, I would order the plaintiff to pay 40% of the defendant’s costs.  For CACV 344/2019, I would order the plaintiff to pay the defendant’s costs.

Hon Cheung JA:

132.  I agree.

Hon Au JA:

133.  I agree.