YEUNG CHIU SING RICKY AND ANOTHER v. TSUI TACK KONG

DCCJ 6755/2019

[2020] HKDC 1140

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 6755 OF 2019

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DECISION

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INTRODUCTION

1.  This is an application by the 1^st and 2^nd plaintiffs for a summary judgment to be entered against the defendant for a sum of $639,835 plus interests, or as an interim payment in the same amount.

2.  The main issue in the application is whether the defendant is estopped from challenging the expert opinion which the parties were agreed to treat as authoritative.  The defendant intends to challenge the relevant expert opinion on the basis that it was incomplete because it did not address an issue which the defendant considers to be essential.

3.  The application was heard before me on 25 November 2020, at which the 1^st and 2^nd plaintiffs were represented by Mr Kevin Lau of counsel and the defendant by Mr Simon Wong of counsel.  At the end of the hearing, I indicated that I would hand down a written decision on 2 December 2020, which I now do.

BACKGROUND 

4.  The 1^st and 2^nd plaintiffs (collectively referred to as “the plaintiffs”) were shareholders of a company called Seven Round Property Ltd (“the Company”), holding 85% and 15% of its shares respectively [1]. The only asset of the Company is commercial premises situated at the Hing Lung Commercial Building on Bonham Strand, Hong Kong (“the Property”)[2].

5.  By a provisional sale and purchase agreement, the plaintiffs agreed to sell, and the defendant agreed to buy, the entire shares of the Company[3]. In the transaction, the plaintiffs were, and still are in the present proceedings, represented by Messrs Wat & Co (“W&C”), whereas the defendant was represented by Messrs Au, Thong & Tsang, Solicitors (“AT&T”), who no longer represent the defendant in the present proceedings.

6.  The present controversy between the parties concern the construction of clause 9 of the provisional agreement.  Since the defendant does not admit the terms of the clause as formulated by the plaintiffs in the Statement of Claim[4], I propose to set out the clause in full as follows[5]:-

“The Vendor undertakes to deliver to the Purchaser or the Purchaser’s solicitors at least five (5) days prior to the Completion Date the proforma completion accounts (hereinafter called ‘the Proforma Accounts’) comprising a proforma profit and loss account of the Company for the period from its date of incorporation/the beginning of the current financial year to the Company Date and a proforma balance sheet of the Company as at the Completion Date. If the NTAV (hereinafter defined) as shown in the Proforma Accounts is more or less than zero, the Balance shall be adjusted upwards or downwards (as the case may be) accordingly in the manner as follows:

(1)     It shall be added to the Balance all current tangible assets of the Company as shown in the Proforma Accounts including rentals receivable (if applicable) (up to and inclusive of the Completion Date), utilities and other miscellaneous deposits, prepaid rates and government rent, and other expenses relating to the Property (up to but exclusive of the Completion Date); and

(2)     It shall be deducted from the Balance all liabilities of the Company as shown in the Proforma Accounts (other than the Sale Debt).”

7.  Under the same clause, “NTAV” was defined as “the aggregate of all tangible assets of the Company which are readily convertible into cash or cash equivalents (excluding the Property, any intangible assets and other fixed assets and deferred tax), less the aggregate of all liabilities (actual, contingent or otherwise but excluding the Sale Debt) and provisions of the Company as at the Completion Date” [6].

8.  On 10 June 2019, AT&T sent a letter[7] to W&C pointing out that the Company might be liable for tax of $639,835, being 16% of the aggregate allowance of $3,877,788, and requested the plaintiffs to pay the said sum to the defendant at the Completion Date.  W&C replied[8] that those matters were not present liabilities or potential liabilities under clause 9(2) of the provisional agreement.

9.  In response, AT&T referred W&C to the HKFRS for Private Entities and stated that the said standard required the Company to account for the deferred tax liability of $639,835[9].  W&C then replied[10] that the allowances might only be reversed, and tax might only be arisen, if the defendant further deposed of the Property after the completion.  It was further stated that, in accordance with the relevant accounting standards, there was only a deferred tax asset of $5,125, which was immaterial.  According to W&C, there was no omission for the deferred tax liabilities of $639,835.

10.  Apparently, the parties could not agree on the matter. In such circumstance, W&C suggested[11] that the parties were to appoint a reputable 3^rd party to give an independent opinion on the calculation of the deferred tax and the costs would be borne by the losing party.

11.  In their letter dated 10 July 2019 (“the 10-Jul-19 Letter”)[12], AT&T referred to certain accounting standards, indicated their disagreement on the deferred tax matter, and suggested to proceed with seeking independent opinion on the point “Whether the deferred tax constitutes a potential liability on the Company?”.

12.  Notwithstanding the outstanding issue of the deferred tax liability, the parties were agreed to (a) proceed with the completion of the sale as scheduled and (b) to have a sum representing the disputed liability stake-held by the plaintiffs’ solicitors pending the independent opinion regarding the same[13]. Subsequently, W&C proposed to appoint Ernest & Young Tax Services Ltd (“EY”) to provide comments on the issue[14].

13.  By a letter dated 2 September 2019[15], W&C furnished AT&T with the formal report prepared by EY dated 29 August 2019[16].  In the report, EY opined that, given the Property was not being sold or demolished or destroyed or ceased already to be used, there would be no balancing adjustments arising from the change in the shareholding of the Company and thus no tax implications on the commercial building allowance being claimed by the Company[17].  On the other hand, EY opined that a deferred tax asset of $5,125 should be recognized[18].

14.  On the following day, AT&T wrote[19] to W&C requesting EY to expressly state the issue as previously requested in the 10-Jul-19 Letter. Upon further exchange of correspondence between the parties’ solicitors, EY agreed to revise its opinion and to refer the 10-Jul-19 Letter in the “Background facts and assumptions” section[20]. Insofar as I am aware, the conclusion of the EY’s opinion remained unchanged.

15.  Subsequently, AT&T requested[21] W&C to provide them with the debit note to be issued for payment by the defendant.  Over a month later, AT&T wrote[22] to W&C informing that they were clarifying with EY regarding certain accounting standards in its opinion.  It should also be noted at this point that, on 17 January 2020 (ie after the plaintiffs’ commencement of the present action), the defendant wrote to EY personally that he opined it was not under his obligations to pay the debit note.

16.  On 8 November 2019[23], W&C issued an ultimatum to AT&T that, unless the defendant gave consent to allow them to release the sum stake-held by them to the plaintiffs, the plaintiffs would institute legal proceedings against the defendant.  Four days later, the defendant replied[24] personally that he demanded the plaintiffs’ solicitors to release the money back to him because the EY’s opinion did not deal with (among others) the issue stated in the 10-Jul-19 Letter.

17.  The plaintiffs commenced the present proceedings against the defendant on 16 December 2019.  The plaintiffs aver, and the defendant admits[25], that, based on the correspondence exchanged between the parties’ solicitors, the parties had entered into a dispute resolution agreement[26].  It is further averred that the defendant breached the agreement by failing to accept the authoritativeness of the EY’s opinion and by failing to give consent for the release of the money stake-held by W&C to the plaintiffs[27].  The plaintiffs seek a declaration from the court that they are entitled to the release of the sum of $639,835 shake-held by their solicitors, or alternatively claim damages for the breach of agreement in the same amount[28].

18.  The main defence of the defendant is that the EY’s opinion failed to deal with the issue stated in two paragraphs of the statement of work, and hence the EY opinion was not complete[29].  He denies that he breached the dispute resolution agreement[30]. He also counterclaims for a declaration that he would be entitled to the release of the sum stake-held by the plaintiffs’ solicitors[31].

19.  In his affirmation in opposition, the defendant expressly stated that the “EY [opinion] only focused on whether the deferred tax liability should or should not be recognized under a particular accounting standard.  But it is common sense that the non-recognition of a liability in the Financial Statements does not mean that there is no such liability.”[32]  In other words, according to the defendant, EY failed to address the question as to whether there was in fact a deferred tax liability on the part of the Company.  I will refer to this as the “Essential Question”.

20.  Furthermore, the defendant also relied on an expert report of Mr Albert Wong where the expert opined that the Company has a liability to pay the deferred tax upon the future sale of the Property[33].  

PARTIES’ SUBMISSIONS

21.  As mentioned in the introduction, the main contention of the plaintiffs was that the defendant was estopped from raising the point that EY failed to address the Essential Question.  Mr Lau said at the hearing that this was indeed the main battleground of this application.  In applying the doctrine of estoppel by convention[34], Mr Lau submitted that[35]:-

(1)     The parties engaged EY on the common basis that its opinion would be authoritative.

(2)     The Agreed Instructions to EY were negotiated and agreed between the parties based on their respective legal advice, and EY provided its opinion based on the said Agreed Instructions.

(3)     The defendant had never requested to include the Essential Question in the Agreed Instructions.  Nor did he mention the Essential Question in the pre-engagement negotiation between the parties.

(4)     The defendant is therefore estopped from challenging the EY’s opinion on the basis that it did not address the Essential Question.

22.  On the other hand, Mr Wong submitted that the matters as pleaded by the plaintiffs and the evidence placed before the court did not justify a summary judgment for damages[36]. In response to Mr Lau’s estoppel point, it was submitted that the plaintiffs had all along asked the wrong question, and the real question was whether the EY opinion had addressed the Essential Question[37].  Mr Wong further argued:-

(1)     The defendant had insisted that EY should address the Essential Question as stated in the 10-Jul-2019 Letter.  There was no suggestion from the plaintiffs that the Essential Question was not a correct one[38].

(2)     The scope of work as stated in the Agreed Instructions was wide enough to include giving an opinion in respect of the Essential Question.  There was no change of stance on the part of the defendant[39].

(3)     The defendant is fully entitled to expect that EY would have addressed the Essential Question, and to regard the EY’s Opinion as incomplete in absence of it[40]. It is not the case that the Essential Question was only stated in the defendant’s affirmation.  To the contrary, the question was clearly stated in AT&T’s letter dated 10 June 2019 and the 10-Jul-19 Letter[41].

(4)     If it was the plaintiffs’ case that the Agreed Instructions were not clear enough, then no estoppel by convention should have arisen[42].

(5)     There is nothing unjust that the defendant did not accept the EY opinion on the ground that it failed to address the Essential Question, and there is no evidence that the plaintiffs had suffered detriments.  The reliance on the estoppel by convention was misplaced, as the plaintiffs had never pleaded the same[43].

(6)     Finally, in reliance on the defendant’s expert report, the defendant insinuates that the plaintiffs had switched to adopt a different accounting standard (ie SME-FRS) for the 2019 account and the completion accounts, under which the deferred tax was not recognized[44].

LEGAL PRINCIPLES

23.  The legal principles governing the court’s discretion in granting summary judgment under Order 14 of the Rules of the District Court are trite and non-controversial.  I do not think it is necessary for me to repeat them here.

24.  Understandably, Mr Lau and Mr Wong emphasized different aspects of the principles.  On the one hand, Mr Wong stressed the importance for a plaintiff to raise a prima facie sustainable case in first place[45]. On the other hand, Mr Lau focused on the test as to whether the defendant has raised any credible triable issues or any arguable defence and that the court should avoid embarking a mini-trial on affidavit evidence only[46].  Both Mr Lau and Mr Wong agreed that the summary judgment procedure is only for clear case in which there is no serious factual dispute[47].

ANALYSIS

(1) The plaintiffs have established prima facie sustainable case

25.  The first question I need to deal with is whether the plaintiffs have established a prima facie sustainable case. I am satisfied that they have.  There is no dispute between the parties that they had entered into the dispute resolution agreement.  Both parties have agreed that the release of the stake-held money would be depended on the outcome of an independent 3^rd party’s opinion, and that the said opinion would be regarded as authoritative.  Nor is there any dispute that the outcome of the relevant 3^rd party’s opinion was not in the defendant’s favour.  It was admitted by the defendant that he did not accept the said 3^rd party’s opinion and did not give consent the sum stake-held by the plaintiffs’ solicitors to be released.  In my view, in absence of any substantive defence, the plaintiffs would be entitled to an order declaring their title of stake-held money.  Accordingly, I am satisfied that the plaintiffs have passed the threshold of having a sustainable prima facie claim against the defendant.

(2) The dispute resolution agreement is not contained in a single written document and contains no finality clause

26.  That said, insofar as obtaining a summary judgment is concerned, the plaintiffs’ case does not strike me as very strong for several reasons.  First of all, I think Mr Wong was right to criticize that the plaintiffs sought summary judgment for damages only, whereas they have not pleaded the causation of damages independent of the declaration of entitlement of the stake-held sum.  As Mr Lau fairly accepted at the hearing, the summary judgment for damages (if any) should be granted upon a condition that the stake-held sum be released to the defendant, and the plaintiffs were prepared to give such an understanding if the Court is minded to do so.  However, the plaintiffs did not clearly set out such a condition or their proposed undertaking in their application.  In view of these, the plaintiffs’ application may be regarded as defective.

27.  Secondly, it is observed that the dispute resolution agreement was not contained in a single written document.  The terms thereof were derived from a series of correspondence exchanged between the parties’ solicitors ranging over a period of 4 months.  The meaning of words and the intention of the parties need to be extracted from different letters during that period.  It would not be surprising that there were nuances of meanings in similar words or phrases.  And it is an easy task to pinpoint the exact meanings of certain words and phrase, or to ascertain the intentions of the parties in such circumstance.  In my view, to undertake this task is close, if not tantamount, to embark a mini-trial based on affidavit evidence, which the court is not permitted to do at this preliminary stage.  Indeed, I think this is the very reason why the court is usually reluctant to grant a summary judgment based on an oral contract where the terms are in dispute[48].

28.  Another difficulty that the plaintiffs obviously face is that there is an apparent gap between treating the 3^rd party’s opinion as authoritative and accepting the said opinion without reservation, as the latter does not necessarily follow from the former.  Of course, it is not hard to imagine that the gap may be bridged by a written contractual term, such as a finality clause providing that the opinion shall be treated by the parties as final and binding.  But this is not the case here. 

(3) The estoppel by convention raises triable issue

29.  I believe this explains why Mr Lau needed to resort to the doctrine of estoppel by convention.  The doctrine was functioned as a bridge for the said gap.  But the doctrine creates another problem for the plaintiffs.  First of all, the doctrine is fact sensitive.  Particularly, it concerns the intentions of the parties to a transaction.  As I have just explained earlier, the circumstances in the present case make it difficult for the Court to ascertain the same on the sole basis of affidavit evidence.

30.  More importantly, in order to invoke the doctrine, the plaintiffs need to show that the parties had acted upon a common assumption, and that that common assumption must be sufficiently certain to enable the court to give effect to it[49]. In the present case, Mr Lau argued that the defendant had by conduct conceded that the real question was the one asked by the plaintiffs and answered in the EY’s opinion.  Notwithstanding the force of this argument, I am not able to agree with it.  In my view, Mr Lau had at best shown that it had all along been the plaintiffs’ intention that the assets and liabilities as referred to in NTAV were those as recognized in the Company’s financial accounts.  It is however not clear to me that the defendant had also adopted the same intention.  As Mr Lau fairly accepted, the 10-Jul-19 Letter was “ambiguous” – on the one hand it referred to the accounting standards; and, on the other hand, it sought opinion on the issue based on the Essential Question.  While the defendant’s solicitors did not expressly repeat the Essential Question verbatim in the subsequent letters, they did insist to have the 10-Jul-19 Letter referred to in the Statement of Work for EY, and subsequently complained about the failure of EY to address the same issue. Accordingly, based on the materials placed before me, I am not able to agree with Mr Lau that it was unequivocally clear that the defendant accepted that EY should only address whether the deferred tax liability should be recognized in the Company’s financial accounts. 

31.  Having considered the correspondence exchanged between the parties in details, all I can conclude from them is that the defendant had taken, whether intentionally or not, an ambiguous stance.  And I am not able to accept Mr Lau’s suggestion that the ambiguity of the defendant’s stance was confined in the 10-Jul-19 Letter only.  In my view, the ambiguity had spread to the subsequent conducts of the defendant, especially when he had insisted EY to refer to the 10-Jul-19 Letter in the background section of their opinion.  It is unfortunate that neither the plaintiffs nor W&C had taken the opportunity to clarify the issue with the defendant regarding his ambiguous stance.  If that had been done, as Mr Lau suggested at the hearing, the present litigation might well be avoided.

32.  Accordingly, I am not able to accept that there is a common assumption between the parties to the effect that EY’s opinion needed only to address the issue whether the deferred tax liability should be recognized in the Company’s financial account, but not the Essential Question. I consider that this issue as to whether the parties had such a common assumption deserves to have a trial. 

33.  In the course of advocating the estoppel by convention doctrine, Mr Lau sought assistance from an Australian case[50], where Mr Justice Judd J of the Supreme Court of Victoria refused to accede to the plaintiff’s request to declare that the expert determination was void and of no effect, notwithstanding the said expert determination did not fall within the terms of the contract.  Based on that case, Mr Lau submitted that:-

(a)     The parties are free to refer to a dispute to an expert for determination; and

(b)     The court will give effect of the determination by way of estoppel.

34.  Mr Wong responded by pointing out that the case was distinguishable from the present one.  First, there was a written contract in that case and the parties were agreed to be bound by the determination made in accordance with the terms of the contract.  There was no such contract in the present one.  Secondly, there was a very clear and unequivocal common assumption in that case.  Again there was none in the present one.  I agree with Mr Wong’s analysis.  Indeed, in that case, the contract entered between the parties had explicitly provided that the determination would be final and binding on the parties[51]. Such a term is absent in the present case.

35.  Mr Lau challenged the defendant’s case by saying that, by a proper construction of clause 9 of the provisional sale and purchase agreement, no reasonable person would consider that the defendant had requested EY to address the Essential Question.  Furthermore, after perusing the correspondence exchanged between the parties, EY could not have realized that it was required to address the Essential Question.  In other words, according to Mr Lau, the Essential Question is a wrong question, and the right question has all along been whether the deferred tax liability should be recognized in the Company’s financial statement.  However, be that as it may, the Essential Question, rightly or wrongly, has nonetheless been raised by the defendant.  In Mr Lau’s first skeleton submissions, he just pointed out that the defendant was estopped from raising the Essential Question.  It was not until his reply submissions did Mr Lau point out that the Essential Question was indeed wrongly asked.  In my view, regardless its correctness, one cannot just simply ignore it and pretend that it does not exist.  Nor can one answer another question (albeit it may appear to be the correct one) and pretend that that had satisfactorily answered the “wrong” question.  Of course, one can persuade the defendant to accept that he had indeed asked a wrong question; and, if he accepts that, then it will be the end of the matter.  But if the defendant does not accept, he is fully entitled to have the dispute resolved, or even litigated.  It does not seem fair to me if the defendant is held to be incapable of raising the Essential Question just because the Court thinks the question is wrong.

36.  In my view, there is also a triable issue as to whether or not, on a proper construction of clause 9 of the provisional sale and purchase agreement, the Essential Question is the correct question.  This issue involves a textual/contextual analysis of the term of the agreement.  It is clearly a mixed question of law and fact, which is unsuitable to be determined in a summary application such as this.  In any event, as I said in the preceding paragraph, fairness also demands that the defendant should be able to have the issue fully litigated.

37.  As regards the estoppel point and based on the correspondence exhibited to the affidavit evidence, I cannot conclude that there was in fact a common assumption between the parties and such common assumption is sufficiently certain such that the court can give effect to it. I reject this ground accordingly.

38.  As mentioned above, Mr Wong also put forth some technical challenges to this ground.  It was submitted that there was nothing unjust for the defendant to point out that the EY’s opinion did not address the Essential Question and that there was no evidence that the plaintiffs had suffered any detriments.  He also criticized the plaintiffs’ change of accounting standards.  For the reasons I have just given, I do not think it is necessary for me to deal with such challenges here.

(4) Conditional Leave to defend?

39.  Initially, having read the materials placed before me, I have planned to comment on the merits of the defendant’s case. However, at the hearing, both Mr Lau and Mr Wong advised against the granting of a conditional leave to the defendant to defend the plaintiffs’ claim.  In view of the fact that the sum of $639,835 is now being stake-held by W&C, I agree.  In such circumstance, it is neither necessary nor appropriate for me to make such comments as planned.  I will say no more in this respect.

(5) Interim payment is not appropriate

40.  In respect of the plaintiffs’ application for interim payment, Mr Wong took the technical point that the application was not in compliance with the requirements under O 29, r 10.  It was submitted that the affirmation filed on behalf of the plaintiffs was made in support of the summary judgment application only[52], and there is no affidavit to support the application for interim payment, in contravention of the requirement under r 10(3).    Aside this technical point, Mr Wong submitted that, in light of the fact that the disputed sum is now stake-held by the plaintiffs’ solicitors, it is not appropriate to grant an interim payment in the present case.  Nor was there any basis for the Court, said Mr Wong, to grant leave to release a portion (say, two-thirds[53]) of the dispute sum to the plaintiffs.  I agree.  In my view, it is clearly not practicable to grant an interim payment in the present case. 

COSTS

41.  At the end of the hearing, I said I would make an order nisi in respect of costs.  In light of my rulings as state above, I find that there are inherent weaknesses in the plaintiffs’ case.  I agree with Mr Wong’s criticism regarding the difficulties for the plaintiffs to obtain a summary judgment for damages.  I have also ruled that, since the dispute resolution agreement is not contained in a single written document, it is necessary for the court to extract the meanings and intentions from different correspondence exchanged between the parties’ solicitors.  The estoppel by convention doctrine is fact-sensitive.  The correspondence does not show a common assumption between the parties with sufficient certainty that the court is able to give effect to it.  Nor do I think it is reasonably arguable that, given the express reference to the 10-Jul-19 Letter in the defence and counterclaim, the defendant had only raised the Essential Question in his affirmation in opposition.

42.  In such circumstances, I would order the plaintiffs should pay the defendant’s costs of this application, to be summarily assessed if not agreed.

43.  For the avoidance of doubt, I am not minded to make any separate costs order in relation to the plaintiffs’ ancillary application for interim payment.

44.  As I said, the above costs order would be made on a nisi basis, which will become absolute after 14 days from the date hereof unless there is an application for variation.  The parties will have the liberty to seek directions from the court in respect of the summary assessment as mentioned above.

DISPOSITION

45.  For the reasons as aforesaid, I make the following order:-

(1)     The 1^st and 2^nd plaintiffs’ summons filed herein on 15 May 2020 be dismissed;

(2)     There be an unconditional leave to the defendant to defend this action; and

(3)     Leave be granted to the 1^st and 2^nd plaintiffs to file and serve their Reply and Defence to Counterclaim (if any) on or before 30 December 2020.

46.  There be also an order nisi, which will become absolute after 14 days from the date hereof unless there is an application for variation, that:-

(1)     The 1^st and 2^nd plaintiffs shall forthwith pay the defendant’s costs of the summons, to be summarily assessed if not agreed; and

(2)     The parties be at liberty to seek direction from the court in respect of the summary assessment mentioned in sub-paragraph (1) above.

47.  To facilitate the application to vary the said costs order nisi:-

(1)     The applicant may within 14 days from the date hereof lodge written submissions (not exceeding 5 pages) with authorities in support of the application;

(2)     The respondent may within 7 days thereafter lodge written submissions (not exceeding 5 pages) with authorities in response; and

(3)     The variation application will be dealt with by the court on the papers without oral hearing.

48.  Lastly, it remains for me to thank Mr Lau and Mr Wong for their assistance rendered to this court.