YIU YAN CHE AND OTHERS v. YIU HO MING, HERMES AND OTHERS

HCA 630/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 630 OF 2008

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J U D G M E N T

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Background

1. The 1st to 4th plaintiffs are the directors and/or shareholders of the 5th plaintiff, a company registered in Hong Kong.  The 1st to 9^th defendants are siblings, and relatives of the 1st plaintiff (“YC”).  The 1st to 3rd defendants are shareholders of the 10th defendant, a company registered in Hong Kong.  Prior to 26 March 2007, the plaintiffs and the defendants were involved or interested in Chung Tung Investment Limited (“Company”) and its related companies in Hong Kong and overseas (“Chung Tung Group”), of which Klang Krung Company Limited (“KK”) incorporated in Thailand was one such company.  Disputes arose between the plaintiffs and the defendants in relation to the accounts and the management or control of the Chung Tung Group. On 26 March 2007, the plaintiffs and the defendants signed a Deed of Settlement (“Deed”) for settlement of their disputes.  These proceedings, which were commenced in April 2008, relate to the performance of the Deed. 

2. The Deed recites that the plaintiffs on the one part and the defendants on the other part hold 50% each of the beneficial interest in the Chung Tung Group. The 1st Schedule to the Deed sets out the companies within the Chung Tung Group, and refers to KK.  The Deed further recites the disputes which had arisen between the plaintiffs and the defendants in relation to the accounts of the companies within the Chung Tung Group and the share of power of the management of the Chung Tung Group.  Recital (g) of the Deed provides that the parties agreed to the terms of the Deed “for the purposes of settling their disputes and separating their respective estate right title interest in the benefit of and in Chung Tung Group of Companies and all the Companies as set out in the 2nd Schedule on a clean break principle”.  The 2nd Schedule to the Deed is not relevant to the present dispute.

3. The plaintiffs are defined in the Deed as Group A, whereas the defendants are defined as Group B.

4. The current dispute between the parties turns on clause 5 of the 4th Schedule to the Deed (“Clause 5”), which provides as follows:

“Group B doth severally and collectively cause, procure and effect any document in respect of all or any of their interests, rights, entitlements and claims of and in the proceeds of sale and realization of the properties and assets of (KK), a company incorporated in Thailand and for such purpose, to execute all necessary documents to ensure that the same be achieved and effected whenever reasonably required of them by (YC).”

5. The plaintiffs claim that in breach of Clause 5, the defendants failed to cause, procure and effect the execution of the necessary share transfer forms and application forms required under Thai law (“Corporate Documents”) to ensure that they would not retain any interests in the proceeds of sale and realization of the properties and assets of KK.  The proceeds of sale of KK’s properties include a sum of 80,080,000 Baht (“Sum”), which had been transferred from KK’s bank account to YC’s personal bank account (“Account”) maintained with Kasikornbank Public Company Limited in Thailand (“Thai Bank”). The plaintiffs claim that the Sum was at all material times held by YC on trust for KK.

6. Prior to the execution of the Deed, the defendants had in February 2006 complained to the Thai police and to the Thai Bank about YC’s transfer of the Sum to the Account.  The plaintiffs claim that as a result of the defendants’ failure to execute the Corporate Documents, the Thai Bank prohibited the transfer or payment of the Sum out of YC’s Account, and required the defendants to sign a Settlement Contract prior to the release of the Sum from the Account. The defendants refused to sign the Settlement Contract, and the Thai Bank refused to reactivate the Account until 12 July 2010, when the parties signed a separate Memorandum of Agreement, under which YC undertook solely to indemnify the Thai Bank in the event of any damage that may be sustained by the Thai Bank by reason of the transfer of the Sum from the Account.

7. In these proceedings, the plaintiffs seek from the defendants the damages which they claim they have sustained as a result of the defendants’ breach of Clause 5.  They claim that they had been deprived of the use of the Sum, and seek loss of interest by reference to interest on the Sum at the prevailing commercial rate from the date of the Deed to the date of the actual release of the Sum (HK$4,019,532.63), less the interest actually earned on the Account (HK$1,034,297.52), and expenses which they had to incur as a result of the defendants’ breach of contract.

8. By way of defence, the defendants claim that Clause 5 does not oblige them to sign either the Corporate Documents or the Settlement Contract, which were not contemplated under the Deed.  They further claim that Clause 5 does not extend to documents required to transfer the Sum, which at all material times was in YC’s personal bank account.  The defendants also claim that the Corporate Documents and the Settlement Contract were not reasonably required of them, and that no request had ever been made for their execution of the Corporate Documents.

9. The issues for determination at trial are accordingly:

(1)  On a proper construction of Clause 5, were the defendants obliged to execute the Corporate Documents and the Settlement Contract?

(2)  Was there a breach by the defendants of Clause 5?

(3)   If there was a breach of Clause 5, what are the damages payable by the defendants?

On a proper construction of Clause 5, were the defendants obliged to execute the Corporate Documents and the Settlement Contract?

10. The legal principles on construction of documents are summarized by Lord Hoffman in Investors Compensation Scheme Limited v West Bromwich Building Society [1998 ] 1 WLR 896, 912 -913, as endorsed in Ying Ho Co Ltd & Ors v Secretary for Justice (2004) 7 HKCRAR 333, 406-407 :

“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the “matrix of the fact”, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and the declarations of subjective intent. They are admissible only in an action for rectification…

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945.

(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 AllER 229 at 233, [1985] AC 191 at 201:

…if detailed semantic and syntactic analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.”

11. These are the principles which I will apply in the interpretation of Clause 5. 

12. The following matters are not in dispute.  KK was one of the companies within the Chung Tung Group.  It used to hold land in Thailand, and when the land was sold in 2004, voluntary liquidation proceedings of KK were commenced in about 2005.  At the time when KK was being wound up, the Sum was in KK’s bank account and represented KK’s assets, being the balance of the proceeds of sale of its land.  In about January 2006, before the execution of the Deed, the Sum had been transferred from KK’s bank account to YC’s Account. 

13. According to the correspondence emanating from the 1st defendant’s solicitors at the material time (in particular, the letter dated 1 August 2007 from YL Yeung & Co), the 1st defendant had in February 2006 lodged a report to the Thai police and to the Thai Bank relating to YC’s transfer of the Sum to his Account, claiming that it was “misappropriation of money from KK”.  As a result, the Thai Bank withheld withdrawals from the Account and YC was unable to transfer the Sum out from the Account.

14. There is a dispute as to whether YC had knowledge of the 1st defendant’s complaint to the Thai Bank, and of the Account having been frozen as a result of such complaint.  The defendants allege that YC knew of the complaint made to the police and of the Account having been frozen by the time when the Deed was signed.  YC denies this, and claims that he only knew that the Account had been frozen when he visited the Thai Bank in May 2007.  Despite the assertions made on behalf of the defendants prior to trial, when the 4th defendant gave evidence in court, she claimed only that YC should have had knowledge of the defendants’ complaint made to the Thai police (as distinct from the complaint to the Thai Bank), and admitted that she did not know if YC had knowledge of the Account having been frozen, and when he had such knowledge.

15. The assertions made by the defendants, as to the meaning and interpretation of Clause 5, and as to either their intentions, or what they purport to be YC’s intentions, regarding the ambit of Clause 5, are clearly inadmissible and are irrelevant to the issue of the construction of Clause 5 and the Deed, which are matters for the court.

16. Clause 5, on its plain reading, requires the defendants to cause to be executed and to effect any document which concerns, or relates to, their interests and rights in, or their claims to, the proceeds of sale and the realization of the properties and assets of KK.  It is wide in ambit, with references to “any document”, and documents which are “in respect of” the defendants’ “interests, rights, entitlements and claims” of and in the proceeds of sale and realization. 

17. It is not in dispute that the Sum represents the proceeds of sale of the land purchased and held in KK’s name before the sale, and before the commencement of liquidation of KK.  Objectively construed, Clause 5 must include documents which relate to the defendants’ acknowledged 50% indirect interest in and rights to, and their claims to the Sum, which is the property of KK.  It cannot be disputed that the proceeds of sale of KK’s property remain KK’s property, whether they are in KK’s bank account, or YC’s Account.

18. The defendants argue that by virtue of their execution of the Deed, and as provided in clause 3 of the Deed, YC had purchased from the defendants all the shares, interests, properties, assets and benefits which the defendants have, directly or indirectly, in the Chung Tung Group, for the consideration stated in clause 3, ie HK$115 million.  They claim that there was nothing further for them to execute or effect under Clause 5 in respect of their interests and rights in KK, or KK’s assets and property.

19. The sale and purchase referred to in clause 3 of the Deed is stated to be subject to and conditional upon the dismissal of a winding up petition commenced by the 10th defendant against YC, the 5th plaintiff and the Company (“Winding Up Petition”).  The parties to the Deed further covenant expressly under clause 2 of the Deed that each of them “would cause, procure and effect the acts and deeds set out in the 4th Schedule”. 

20. The 4th Schedule sets out in detail the acts to be performed by the parties.  The defendants covenant in the 4th Schedule to procure the delivery of various documents, including the Consent Summons for the dismissal of the Winding up Petition, and the instruments of transfer, contract notes and other corporate documents in respect of the Hong Kong companies within the Chung Tung Group.  Clause 4 of the 4th Schedule requires the 10th defendant, upon dismissal of the Winding Up Petition, to procure the transfer of the assets, properties, shares and interests of the Company to or in favor of YC or his nominee.  Clause 5 then sets out the documents to be procured and effected by the defendants, in relation to the proceeds of sale and realization of the properties and assets of KK, “and for such purpose, to execute all necessary documents to ensure that the same be achieved and effected whenever reasonably required of them by (YC)”.

21. Clause 13 (a) of the Deed provides that “all provisions of (the Deed) shall so far as they are capable of being performed or observed continue in full force and effect notwithstanding Completion (ie the date of last instalment payment to be paid by (YC)) except in respect of those matters then already performed”.

22. On the plain reading of the Deed as a whole, I do not agree that the defendants’ execution of the Deed itself is sufficient for the transfer of their shares, interests and benefits in the Chung Tung Group, or to discharge their duties under the Deed for the sale and purchase of their interests in the Chung Tung Group.  Clause 2 of the Deed and the provisions of the 4th Schedule clearly envisage and provide for the acts and deeds to be carried out by the defendants, and these include the acts covered by Clause 5.  By virtue of Clause 13(a), any act not performed upon completion of the sale and purchase would have to be performed thereafter.

23. Further, on the evidence, the defendants had, in February 2006 and prior to the execution of the Deed, asserted claims to the Sum, by claiming to the police and to the Thai Bank that YC had misappropriated KK’s property by transferring the Sum to the Account.  The plaintiffs are entitled under Clause 5 to require the defendants to procure and effect documents “in respect of”, ie which concern or relate to, the defendants’ claims which had been made to the Sum.  These documents include the Settlement Contract required by the Thai Bank as a result of the claims made by the defendants to the Sum.

24. The defendants argued that the Deed and Clause 5 make no express reference to either the Sum, or the Corporate Documents, or the Settlement Contract, and that this shows that the parties never envisaged the need to execute these documents under Clause 5.  It was further argued that if, as YC claims, he had no knowledge of the defendants’ complaint to the Thai Bank or of his Account having been frozen by the Thai Bank, it could not have been envisaged by him that Clause 5 would extend to the execution of the Settlement Contract, as required by the Thai Bank.  It is also claimed that the parties never envisaged that Clause 5 should extend to documents to facilitate transfer of money out of YC’s personal Account.

25. These arguments made by the defendants do not lead to an inevitable conclusion that the Corporate Documents and Settlement Contract are not within the scope of Clause 5.  As the learned author of Lewison, The Interpretation of Contracts, 5th Edition states at paragraph 2.13, in many if not most cases, the problem of interpretation arises because the parties to a contract did not foresee the factual situation which has arisen, and to which the contract applies.  The author then cited the explanation given by Chadwick LJ in Bromarin v IMD Investments Ltd [1998] STC 244:

“…it is commonplace that problems of construction, in relation to commercial contracts, do arise where the circumstances which actually arise are not circumstances which the parties foresaw at the time when they made the agreement. If the parties have foreseen the circumstances which actually arise, they will normally, if properly advised, have included some provision which caters for them. What that provision may be will be a matter of negotiation in the light of an appreciation of the circumstances for which provision has to be made.

It is not, to my mind, an appropriate approach to construction to hold that, where the parties contemplated event A, and they did not contemplate event B, their agreement must be taken as applying only in event A and cannot apply in event B.  The task of the court is to decide, in the light of the agreement that the parties made, what they must have been taken to have intended in relation to the event, event B, which they did not contemplate.  That is, of course, an artificial exercise, because it requires there to be attributed to the parties an intention which they did not have (as a matter of fact) because they did not appreciate the problem which needed to be addressed. But it is an exercise which the courts have been willing to undertake for as long as commercial contracts have come before them for construction.  It is an exercise which requires the court to look at the whole agreement which the parties made, the words which they used and the circumstances in which they used them; and to ask what should reasonable parties be taken to have intended by the use of those words in that agreement, made in the circumstances, in relation to this event which they did not in fact foresee.”

26. Having considered the Deed as a whole, the words used in Clause 5 and the circumstances or factual matrix of the case, I have come to the conclusion that, objectively considered, reasonable parties in the position of the plaintiffs and the defendants must have been taken to have intended that Clause 5 would include and extend to the Corporate Documents and the Settlement Contract, for the defendants’ interests in KK to be properly divested, and for their claims made to the assets and funds of KK (including the Sum) to be withdrawn, should the circumstances and need arise for such divesting or withdrawal.

Was there a breach by the defendants of Clause 5?

27. The parties’ experts agree that under Thai law, the Corporate Documents were the documents required to be executed for the transfer of the defendants’ interests in KK to YC.  When the liquidation of KK was completed in June 2007, the defendants had not executed the Corporate Documents, and there was no effective transfer under Thai law of the defendants’ interests in KK to YC.

28. The experts on Thai law agree that dissolution does not cause a limited company to be discontinued immediately, and the company is deemed to continue to exist after its dissolution, as far as it is necessary for the purpose of liquidation.  KK remained the beneficial owner of the Sum, at least during the process of its liquidation.  The plaintiffs’ expert considers that when the liquidation of KK is completed (on 28 June 2007), KK’s money should be returned to its shareholders.

29. The defendants claim that the plaintiffs had never requested them to sign the Corporate Documents.  However, since the defendants remained as shareholders of KK on its records, and because the defendants had complained to the Thai police and to the Thai Bank that YC had misappropriated the Sum from KK’s bank account, the Thai Bank required the defendants to sign the Settlement Contract before the Thai Bank could release the Sum in the Account.  The effect of the Settlement Contract was to acknowledge that the defendants as shareholders of KK consent to the withdrawal of the Sum from the Account despite the claim of misappropriation made.  The Bank also sought in the Settlement Contract an indemnity from the shareholders of KK, including the defendants.  It cannot be disputed that the Settlement Contract was sent by the plaintiffs’ solicitors to the defendants’ solicitors on 25 October 2007, and that the defendants were informed in October 2007 that the Settlement Contract had to be signed.

30. The plaintiffs’ expert is of the opinion that there are no specific provisions under Thai law which restrict the conduct of the Thai Bank, in requiring an indemnity from the shareholders of KK in terms of the Settlement Contract before its release of the Sum from the Account.  The plaintiffs’ expert considers that it is neither unlawful nor illegal under Thai law for the Thai Bank to require the parties to enter into the Settlement Contract before its release of the Sum.

31. The defendants’ expert considered that it was unlawful for the Thai Bank to demand execution of the Settlement Contract.  The reason given by him was that the Thai Bank “had no right” to impose the condition that the shareholders of KK should be liable for any damage that the Thai Bank might sustain (paragraph 8 (iv) of the Joint Report on Thai law).

32. However, when the defendants’ expert gave evidence in court, his testimony was that the Thai Bank may have the right to offer the Settlement Contract, but that it was unreasonable to accept the conditions of the Settlement Contract, as the Thai Bank was seeking to protect itself for what the expert considered to be the Thai Bank’s own mistake in the way it had handled the Sum.  He then explained that it was unreasonable for the Thai Bank to ask the shareholders of KK, who had done nothing wrong, to be jointly liable for the damage that may be sustained by the Thai Bank by the release of the Sum. His evidence, that it was unreasonable for the Thai Bank to require the Settlement Contract, is at great variance with the earlier opinion, expressed in his report, that it was unlawful for the Thai Bank to require the Settlement Contract.

33. Since there is no satisfactory evidence that it was unlawful under Thai law for the Thai Bank to require the parties to sign the Settlement Contract, I reject such evidence of unlawfulness. 

34. Any dispute as to YC’s right to transfer the Sum from KK’s bank account to YC’s Account had been settled pursuant to the Deed.  The Deed acknowledges in recital (d) the parties’ involvement in disputes concerning the accounts of the companies within the Chung Tung Group, and recital (g) refers to the parties’ agreement to settle their disputes, and to separate their interests in the Chung Tung Group.

35. In view of the claims to the Sum which had been made by the defendants, when they complained to the Thai Bank of YC’s misappropriation of KK’s funds, the Settlement Contract was in my view reasonably required by the Thai Bank, and by YC as a result, to seek the defendants’ waiver or abandonment of their claims to the Sum, and of their interests in the Sum. 

36. Having found that the Settlement Contract is within the scope of the documents required to be signed by the defendants under Clause 5, and as having been reasonably required by YC, the reasons given by the defendants (their proposal for a form of counter indemnity, the withdrawal of their complaint to the Thai police, the letter to the Thai Bank signed solely by the 1st defendant but purporting to act on behalf of all the other  defendants and shareholders of KK) cannot justify their refusal to sign the Settlement Contract.

37. To conclude, I consider that the defendants were in breach of Clause 5, by failing to procure and effect the execution of the Settlement Contract. 

If there was a breach of Clause 5, what are the damages payable by the defendants?

38. By reason of the defendants’ refusal to sign the Settlement Contract, the Sum was only released from the Account on 12 July 2010, when the Memorandum of Agreement was signed by the parties, with YC personally indemnifying the Bank in respect of any damage that the Thai Bank may sustain by reason of its release of the Sum.  This was over 4 years after the Account was frozen.

39. The plaintiffs claim they have been deprived of the use of the Sum from the date of the Deed, 26 March 2007, to 11 July 2010, before the release of the Sum, and they claim interest on the Sum at the prevailing commercial rate during this period, less the interest earned from the Account, in the sum of HK$2,985,235.12.

40. On the evidence, there was no demand or request made by the plaintiffs for the Corporate Documents or any other documents to be signed by the defendants in respect of their interests in KK, nor was there any complaint made by the plaintiffs in respect of the defendants’ failure to sign any documents in respect of KK, until the plaintiffs’ request in October 2007 for the execution of the Settlement Contract.  I will only allow the plaintiffs’ claim for interest on the Sum from 15 November 2007, a reasonable time of 21 days after 25 October 2007, when the Settlement Contract was sent to the defendants, to 11 July 2010 as the plaintiffs claim, at the commercial rate prevailing at the material time as the plaintiffs claim, less the interest earned from the Account for the period.

41. I further allow the legal costs and the expenses which the plaintiffs had to incur in Thailand, in the revised sums of HK$288,465 and HK$79,268 respectively.

Orders

42. Judgment is to be entered against the defendants for the amounts mentioned in the preceding 2 paragraphs, together with the costs of this action, to be taxed if not agreed, with certificate for counsel.