OKACHI (HONG KONG) CO LTD v. NOMINEE (HOLDING) LTD

CACV 347/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 347 OF 2005

(ON APPEAL FROM HCA NO. 4596 OF 2000)

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J U D G M E N T

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Hon Cheung JA :

The Action

1. The plaintiff is a broker engaged in futures trading.   The defendant is a limited company owned by Mr Philip Yuen Pak Yiu (‘Mr Yuen’) and his wife.  Mr Yuen is the senior partner of the solicitors firm of Messrs. Yung Yu Yuen (‘YYY’).

2. In 1999 the plaintiff held two ordinary shares in the Hong Kong Futures Exchange Limited (‘HKFE’) which operated a market for futures transactions.  By an agreement dated 14 June 1999 (‘the Agreement’) the plaintiff agreed to sell one of the two shares (‘the Share’) to the defendant for the sum of $1,850,000.  The defendant had by then already paid the purchase price to the plaintiff’s solicitors Messrs. J. Chan & Lai (‘JCL’) as stakeholder.  The money was to be released to the plaintiff upon completion of the sale and purchase of the Share. 

3. By a notice dated 15 March 2000 the plaintiff terminated the Agreement on the ground that, among other things, the defendant had repudiated the Agreement.   On 8 May 2000 the plaintiff commenced the present action against the defendant.  The plaintiff claimed declaratory relief and damages against the defendant.

4. The defendant denied that it was guilty of repudiation.  It alleged that the termination by the plaintiff was wrongful and amounted to repudiation.  It lodged a counterclaim to the plaintiff’s claim.

The appeal

5. Deputy High Court Judge Jeremy Poon found for the plaintiff and granted a declaration that the plaintiff was entitled to rescind the Agreement by reason of the defendant’s repudiation.  He also ordered the defendant’s counterclaim to be dismissed.  The defendant now appeals against the decision.

Membership and dealership

6. At the time of the Agreement in order to be qualified as a member of HKFE a person must also obtain approval for his registration as a dealer by the Securities and Futures Commission (‘SFC’) under the Commodities Trading Ordinance Cap 250 (‘the Ordinance’) which was subsequently repealed by Ordinance No. 5 of 2002.

7. The application for transfer of the Share from the plaintiff to the defendant had to be approved by HKFE.  HKFE would only give the approval if the transferee had obtained approval from SFC to be registered as a dealer under the Ordinance.  In the case of a corporate transferee, approval must be obtained from SFC for registration of a dealing director accredited to it.

The proposed reform

8. At the time of the Agreement the Financial Secretary had already announced a comprehensive reform of the securities and futures markets in Hong Kong.  At that time there were five recognized and approved market operators in Hong Kong of securities and futures products.  HKFE was one of the market operators.  The reform was to merge these five operators into a single holding company the Hong Kong Exchanges and Clearing Limited (‘HKEC’).

The announcement

9. On 31 July 1999 details of the proposed merger was published in the press by, amongst others, HKFE and HKEC.  The change would be in the form of a scheme of arrangement (‘the Scheme’) by HKFE which was expected to take effect on or before 31 January 2000.

The Scheme document

10. On 1 December 1999 the Scheme document was issued.  Under the Scheme

1)    HKFE would become a wholly owned subsidiary of HKEC. 

2)    All the ordinary and standard shares in HKFE would be cancelled.

3)    Shareholders in HKFE would be allotted shares in HKEC.

11. In order to be entitled to the shares in the HKEC, it was necessary to be registered as a HKFE shareholder immediately prior to an ‘effective date’.  The transfer must be approved by the board of directors of the HKFE.  The latest time at which approval may be given would be the last meeting of the board before the effective date held for such purpose.  The date of such meeting of the board is described as the ‘transfer approval deadline’ (‘TAD’).

TAD : 21 February 2000  

12. On 2 February 2000 HKFE informed its shareholders that TAD would be 21 February 2000, after which applications for admission as a member of HKFE would not be considered and that the effective date of the Scheme would be 6 March 2000.  By then completion of the sale of the Share under the Agreement had not taken place.

The new shares

13. The Scheme became effective on 6 March 2000.  The Share was cancelled under the Scheme for which the plaintiff was allotted 1,393,500 shares in HKEC.  It was also granted the futures exchange trading right and became an exchange participant in HKEC.  The HKEC shares were worth some $23 million. 

14. The outcome of this litigation will determine who is entitled to the “windfall” of $23 million. 

The relevant clauses

15. Under the Agreement the defendant was required to make the requisite applications to SFC for dealership and to HKFE for membership upon SFC’s approval.  In order to enable the defendant to make the necessary application, Clause 3.1 of the Agreement required the plaintiff to deliver to the defendant’s solicitors as stakeholder all requisite documents including share certificate, transfer form, the sold note and an application for transfer of the Share to the defendant addressed to HKFE ‘to facilitate the (defendant’s) application to (HKFE) for membership of (HKFE) as soon as practicable thereafter’.

16. Clause 3.2 required the defendant to apply to SFC to be registered as a dealer or dealing directors ‘and shall complete promptly all prescribed forms and provide references as required in connection with such application’.

17. Clause 3.3 required the defendant to make the application for membership to the HKFE ‘as soon as practicable’ upon the approval by SFC and ‘shall use its best endeavours’ in order to succeed in such application. 

18. Under Clause 4.2, the defendant represented that it shall be in every respect qualified to become a member of HKFE and to be registered as a dealer and there is no reason why any of the applications ‘should not be wholly successful without any delay’.

19. Clause 4.4 required the defendant to undertake to ‘use its best endeavours’ to ensure the success of the applications; to pursue the same ‘promptly’; and in connection therewith to ‘promptly’ and ‘regularly’ provide to the plaintiff copies of all correspondence between the defendant, HKFE and SFC. 

20. Under Clause 4.3 the plaintiff also undertook to use its ‘best endeavours’ to provide such assistance, as was appropriate and typical of transactions such as contemplated under the Agreement, to the defendant in connection with the defendant’s application for membership of HKFE. 

21. Clause 5.1 provided that completion of the sale and purchase of the Share was to take place within seven days after receipt of HKFE’s approval or SFC’s approval whichever shall be the later but shall not in any circumstances take place after 15 months of the Agreement (the expiry date). 

22. Clause 5.3 required the defendant to forthwith notify the plaintiff of the approvals of HKFE and SFC and stipulated that its failure to do so shall not affect the defendant’s obligation to complete within the period set out in Clause 5.1.

23. Clause 7.1 provided that ‘Time shall be of the essence of this Agreement’.

Steps taken by the plaintiff

24. By July 1999 the plaintiff had supplied the necessary documentations to the defendant.  It began on 14 June 1999 when JCL sent to YYY the duly executed Agreement and undated bought and sold note and instrument of transfer in respect of the Share. 

25. On 21 June 1999 the plaintiff gave notice to HKFE of its intention to transfer the Share to the defendant.

26. On 6 July 1999 JCL sent to YYY a copy of the resolution dated 14 June 1999 signed by the directors of the plaintiff authorizing the sale of the Share to the defendant. 

Steps taken by the defendant

27. On the other hand, as the judge found, the defendant did not make applications to SFC and HKFE until February 2000, some eight months after the execution of the Agreement.

28. Earlier on 30 June 1999 YYY made inquiries with HKFE about the procedure for the application of HKFE membership.  HKFE sent a membership application form and information package to YYY on 15 July 1999. 

29. On his return from abroad Mr Yuen began looking for a dealing director in August or September 1999.  Three candidates were approached.  At that stage the defendant had not lodged the applications to SFC or HKFE. 

The Sub-sale

30. What happened was that the defendant had decided to sell the Share to another purchaser.  As found by the judge Mr Yuen did not wish to go through the trouble of getting the defendant to be qualified as a HKFE member and he wanted to make a quick profit out of the sub-sale. 

31. Mr Yuen came to know about the TAD in August 1999.  By October 1999 after the issue of the Scheme document Mr Yuen became aware of the compensation package offered to HKFE members on the merger. 

32. Eventually the defendant decided to sub-sell the share to CSC Futures (HK) Ltd. (‘CSC’) for $4,550,000.  The negotiations with CSC began in October 1999.  Thereafter there were discussions between CSC and the defendant on the terms of the sub-sale. 

33. On 13 December 1999 YYY wrote to JCL alleging that the defendant had been unable to find a suitable dealing director and would like to nominate CSC to take up the Share pursuant to Clause 3.4 of the Agreement.  Clause 3.4 allowed the defendant to nominate and substitute a new transferee for the Share in its place if the defendant’s application to HKFE for membership is unsuccessful.  Clause 6.2, however, provided that the nomination by the defendant of a new transferee pursuant to Clause 3.4 shall not in any way relieve the defendant from complying with the terms and performing all the obligations therein. 

34. As can be seen from the terms of Clause 3.4 it did not allow the defendant to nominate CSC to take up the Share because it did not fulfill the condition for the nomination : HKFE had not even received the defendant’s application let alone rejected it.  

35. By a letter dated 22 December 1999 the plaintiff refused to give consent to the sub-sale.  Eventually the sub-sale was not proceeded with and on 7 January 2000 the defendant returned the initial deposit to CSC. 

The appraoches

36. The defendant then took steps to make the applications to SFC and HKFE. 

37. In order to obtain the approval the defendant must prepare a business plan and to find a suitable dealing director.  The defendant approached a Mr Brian Fung in October 1999 to prepare the plan.  The plan was only prepared at the end of January 2000.  By the end of January 2000 the defendant approached a Mr Kwong Dak Shing (‘Mr Kwong’) to be its dealing director.  Mr Kwong was then a dealing director accredited to Kaiser Futures Ltd.  He was a subordinate of Mr Fung. 

The lodging of applications to HKFE and SFC

38. On 9 February 2000 the defendant lodged the application to HKFE for membership supported by the business plan.  The defendant also submitted an application for registration as dealer to SFC together with the application for registration as dealing director on behalf of Mr Kwong.  On 10 February 2000 the defendant applied to HKFE for transfer of the Share. 

SFC’s request

39. SFC required the defendant to confirm that Mr Kwong would surrender his registration as a dealer accredited to Kaiser upon approval of the defendant’s application for registration.  On 17 February 2000 the defendant informed SFC that Mr Kwong would not be able to surrender his dealer’s status with Kaiser immediately. 

40. On 18 February 2000 SFC advised the defendant that in the absence of a qualified supervisory dealing director the defendant would not be able to satisfy SFC that it was able to perform the functions of a commodity dealer properly. 

Fresh application to SFC

41. On 21 February 2000 the defendant submitted two fresh applications to SFC for registration of two other candidates as dealing directors. 

The passing of TAD

42. On 23 February 2000 HKFE advised the defendant that it would not proceed further with its application for membership and transfer of the Share because the defendant had failed to obtain approval for admission or transfer of the Share before the TAD i.e. 21 February 2000.  The defendant was advised that it might apply for exchange participationship. 

The correspondence

43. On 26 February 2000 the plaintiff asked the defendant to provide copies of the correspondence it had with HKFE and SFC.  On 1 March 2000 the defendant provided the correspondence.  The plaintiff then learnt that the defendant had not made the requisite applications until 9 February 2000. 

Further steps by the defendant

44. On 10 March 2000 the defendant informed HKFE that it would continue with its application for dealing directorship with SFC because it was a prerequisite for the application for exchange participationship under the new rules.  Thereafter the defendant applied for registration as dealer with SFC and applied to HKFE for exchange participationship.  The application to HKFE was deemed refused by lapse of time on 30 November 2000.  The application to SFC was later withdrawn on 18 December 2000. 

The termination

45. As stated earlier, the plaintiff issued the notice of termination on 15 March 2000.

The issues

46. The issues raised in this appeal are as follows :

(1)    Whether the terms of the Agreement relating to the defendant’s obligation to apply for registration with the SFC and HKFE were conditions or were intermediate terms or innominate terms? 

(2)    Did the defendant repudiate the Agreement?

(3)    What was the subject matter of the Agreement?

The first issue

47. In respect of the first issue, although ‘innominate terms’ was referred to, the parties in this appeal did not dwell on this aspect.  The Court is concerned with whether the terms are conditions the breach of which entitled the plaintiff to terminate the Agreement : see Scandinavian Trading and Lombard North Central PLC v Butterworth [1987] 1 Q.B. 527.

The three categories of terms

48. For the purpose of the first issue I would simply state the three categories of contractual terms:

(1)    Terms breach of which will always give rise to a right to bring the contract to an end (“conditions”);

(2)    Terms breach of which may or may not give rise to such a right depending on the gravity of the breach (“intermediate terms” or “innominate terms”);

(3)    Terms breach of which will never give rise to a right to bring the contract to an end, but give rise only to a claim for compensation (“warranties”).

See Lewison : The Interpretation of Contracts 3^rd Edn para 15.09. 

Construction of the Agreement

49. It is a matter of construction of the Agreement to determine the exact nature of these terms.  The approach on construction can be summarised as follows :

1)	The agreement must be construed as a whole, having regard to the factual and legal background against which it is concluded and the practical objects which it was intended to achieve: Jumbo King Ltd. v Faithful Properties Ltd. [1999] 2 HKCFAR 279 at 296 and River Trade Terminal Co. Ltd. v Secretary for Justice [2005] 8 HKCFAR 95 at page 107.
2)	This being a commercial agreement, the approach is that a commercially sensible construction should be adopted since this will be more likely to give effect to the intention of the parties : see Mannai Investment Co. Ltd. v Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749 at 771.  Further as Lord Diplock stated in Antaios CIA Naviera S. A. v Salen Rederierna A. B. [1985] A.C. 191 if a detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense it must be made way to yield to business commonsense.
3)	The relevant time of construction is of course the time when the parties entered into the agreement.

The plaintiff’s position

50. The plaintiff’s position can be summarised as follows: time is of the essence of the Agreement and the obligations of the defendant to apply to SFC and HKFE are conditions, the breach of which entitled the plaintiff to repudiate.

51. On the other hand the defendant’s position is that Clause 7.1 of the Agreement i.e. time being of the essence of the Agreement does not apply to the obligations of the defendant to apply to SFC and HKFE.  Even if it does, the terms are not conditions because of

(1)   the wording of these terms;

(2)    the period of 15 months for the Agreement to come to an end;

(3)    the provision for liquidated damages and interest in the Agreement itself. 

Overview

52. Although in the Agreement the parties did not specify a date for the completion of the transaction, this being a commercial agreement the parties must have intended that the sale must be completed as soon as possible.  Although the defendant had paid the purchase price, it was paid to a stakeholder and it could not be released to the plaintiff until the Agreement has been completed.  Likewise the defendant would only be able to get hold of the Share on completion.  Hence it is expected that both parties should progress as speedily as possible to reach the goal of completion.  In order to achieve this goal my view is that the obligations imposed on the defendant must be strictly observed.  Specifically the following factors further lend support to this view:

(1)	The parties have expressly agreed that time is to be of the essence of the Agreement.
(2)	It was a known fact that the defendant had to obtain the approval from SFC and HKFE in order to acquire the Share in HKFE.  The defendant expressly agreed to proceed ‘promptly’, ‘as soon as practicable’ and with its ‘best endeavours’ in the application.
(3)	The subject matter of the sale is a share whose value may fluctuate depending on market conditions.
(4)	At the time of the Agreement the government had already announced the planned merger of the five market operators into one single unified structure.  Although the details of the reform were not known clearly it must be within the reasonable contemplation of the parties that the reform will have a serious impact on the subject matter of the sale.

Time being of the essence

53. The principles regarding time being of the essence of a contract can be summarised as follows:

(1)	Under common law, before the intervention of equity, time is of the essence of a contractual term;
(2)	In equity time is not normally of the essence of a contractual term;
(3)	The rules of equity now prevail over the old common law rules : see section 11 Law Amendment and Reform Consolidation Ordinance Cap 23, its origin being section 25(7) of the English 1873 Judicature Act.
(4)	In equity time is of the essence in three types of cases
	a.	where the contract expressly so stipulates;
	b.	where the circumstances of the case or the subject matter of the contract indicate that the time for completion is of the essence;
	c.	where a valid notice to complete has been given.

See British and Commonwealth Holdings Plc v Quadrex Holding Inc [1989] 1 QB 842.

Which obligation?

54. Mr Chain who appeared together with Mr Kenneth Wong as counsel for the defendant relied on the statement of Sir Nicolas Browne-Wilkinson V.C. in British and Commonwealth Holdings Plc at p. 856

‘the phrase “time is of the essence of the contract” is capable of causing confusion since the question in each case is whether time is of the essence of the particular contractual term which has been breached’.

55. In my view it is not necessary to specify to which obligation the time is of essence clause applies.  As Lord Diplock pointed out in Scandinavian Trading Tanker Co. A B v. Flota Petrolera Ecuatoriana [1983] 2 A.C. 694 at page 703

‘  Prima facie parties to a commercial contract bargaining on equal terms can make “time to be of the essence” of the performance of any primary obligation under the contract that they please .....’

56. Further as stated in Butterworths Common Law Series The Law of Contract 2^nd Edn. para 7.25, the expression time is of the essence of this contract is effective to make time stipulations conditions (para. 7.10) and the parties may expressly agree that time is essential commonly, generally or with respect to a particular time stipulation.  A provision stating that time is of the essence of the contract is sufficient. 

Clause 7.1 applies to all contractual obligations

57. Applying these principles, my view is that although clause 7.1 did not refer specifically to any particular contractual obligation, it is not necessary for it to do so.  Bearing in mind the nature of the Agreement and the commercial purpose behind it, Clause 7.1 must apply to the contractual obligations of the parties under the Agreement which will lead towards the completion of the sale.  Specifically it will apply to the obligations of the defendant to make applications to HKFE and SFC.

58. In this case the success of the transaction would really depend on a very large extent on the steps taken by the defendant in relation to his application to SFC and HKFE.  The approval by the authorities are pre conditions to the completion.  These steps are not controlled by the plaintiff.  Hence the requirement that the defendant should act promptly meant exactly what it said.  Further since the defendant itself is subject to the decisions of SFC and the HKFE, the Agreement provided that the defendant’s obligations are discharged if it had proceeded promptly or with due diligence so that it should not be faulted if it was the inactivities of third parties which hindered the progress of the transaction. 

59. All this pointed to one thing and one thing only namely, the parties cannot proceed with their obligations tardily or at a leisurely pace in the fulfillment of their contractual obligations under the relevant clauses.  This further reinforces the view that time being of the essence clause applies not merely to Clause 5.1 which provides that completion shall take place within seven days after the receipt of the relevant approvals but to the contractual obligations which required the defendant to make applications to SFC and HKFE.  It would make no sense at all if time being of the essence is to apply merely to completion and not to the steps leading towards the completion.

Finding a dealer first

60. Mr Chain argued that the true meaning of Clause 3.2 which required the defendant to apply to the SFC to be registered as a dealer means that the defendant was only required to make the application after it had secured an appropriate candidate. 

61. This may be so but it does not mean that it should not act promptly in securing the candidate so that its obligations in terms of seeking approvals from the authorities could be met. 

15 months period

62. Clause 5.1 stated that completion of the sale and purchase of the shares ‘.........shall not in any circumstances take place later than 15 months from the date hereof’.  The judge ruled that the 15 months is not a completion date.  It does not give the defendant 15 months to take out the applications. 

63. Although Mr Chain accepted that the 15 months is not a completion date he, nonetheless, argued that this is a relevant factor to be considered in deciding whether the relevant clauses are essential terms of the Agreement.

64. Mr Yu S.C., who appeared together with Ms Yvonne Cheng as counsel for the plaintiff, submitted that the 15 months was only ‘a long stop’ date.  By that I understand him to mean no more than a date on which the parties had agreed that the Agreement would come to an end.  This catered for the situation where, for example, the approval from the authorities were not forthcoming and the parties agreed that the Agreement would in any event come to an end after 15 months.  It did not affect the defendant’s primary obligation to proceed without delay.

65. The authorities illustrated that the primary obligation of the party to perform promptly is not affected by the imposition of such a date.  Thus in Bulman v Bennett [1974] RTR 1 where it was held that the statutory obligation under the Road Traffic Act 1975 to report an accident as soon as reasonably practicable and in any case within 24 hours after the accident was not merely an obligation to report within 24 hours.  R v Independent Television Commission Ex Parte TV NI Limited [1991] TLR 606 is another example.  Order 53 rule 4(1) of the Rules of the High Court requires applications for leave to apply for judicial review to be made ‘promptly and in any event within three months from the date when grounds for the application first arose’.  It was held that an application which is made within three months may nevertheless not have been made promptly.  See also R v Cotswolds District Council Ex Parte Barrington Parish Council [1998] 75 P and CR 515 at 523.

66. The 15 months period in this case does not mean the defendant would have 15 months to perform the task of applying to the SFC and HKFE.  Its primary obligation was to proceed with those applications promptly.

The wording of the clauses and the cases

67. Mr Chain further argued that the wording of Clauses 3.2, 3.3 and 4.4 were not intended by the parties to be conditions because general words were used and they were neither specific nor capable of exact determination.  He relied on the case of Bremer Handelsgesell-Schaft Schaft M.B.H. v Vanden Avenne-Izegem P.V.B.A. [1978] 2 Lloyds Rep. 109 in which a clause stated that in case of prohibition of export ‘...... this contract or any unfulfilled portion thereof so affected shall be cancelled.  In the event of shipment proving impossible during the contractual period by reason of any of the causes enumerated herein, Sellers shall advise Buyers without delay with the reasons therefor.  If required, Sellers must produce proof to justify their claim for cancellation’.

68. Lord Wilberforce rejected the contention that the clause is a condition.  Among other things, he held that the generality of the words ‘without delay’ tells against this contention: if a condition were intended a definite time limit would be more likely to be set.  It should be noted that the contract in Bremer did not contain a time of the essence clause. 

69. Mr Chain further relied upon British and Commonwealth Holdings Plc in which an agreement did not specify a date for completion but merely provided for completion ‘as soon as practicable’.  Sir Nicolas Browne-Wilkinson stated that it is impossible to say that time was originally of the essence of completion since the agreement did not specify a date for completion or fix a time for completion by reference to a formula which subsequently made the date capable of exact definition.  Again the contract in question did not have a time of the essence clause. 

70. On the other hand in three other cases where the contract did not provide for time to be the essence the court was able to construe certain terms to be conditions.

71. In McDougall v. Aeromarine of Emsworth Ltd.  [1958] 1 WLR 1126, the defendant agreed to build a pleasure yacht for the plaintiff and to deliver a completed craft on 1 May 1957.  However the contract also expressly stated that such delivery date could not be guaranteed.  Diplock J (as he then was) held that the clause placed upon the seller a duty to deliver within a reasonable time of the specified date and such clause was a condition.  

72. In Bunge Corporation v Tradax Export S A [1980] 1 Lloyd’s Law Rep. 294, under a FOB contract the buyers were required to give at least 15 days loading notice of readiness of vessel.  The dispute was whether the notice clause was a condition.  In the Court of Appeal Megaw L.J. held that

‘ Since the obligation of the sellers to deliver the goods so that they could be shipped by June 30 at latest was a condition of the contract, why should the buyers’ contractual obligation to give the sellers notice of a length which the parties had agreed to be the reasonable time for the purpose of enabling the sellers to perform that condition, binding on them, be any the less a condition, binding on the buyers?’

73. The House of Lords affirmed that the clause in question was a condition.  Lord Wilberforce stated that,

‘ As to such a clause there is only one kind of breach possible, namely, to be late, and the questions which have to be asked are, first, what importance have the parties expressly ascribed to this consequence, and secondly, in the absence of expressed agreement, what consequence ought to be attached to it having regard to the contract as a whole.’

74. In Societe Italo-Belge Pour Le Commerce Et L’Industrie v Palm And Vegetable Oils (Malaysia) SDN. BHD. (The “Post Chaser”) [1981] 2 Lloyd’s Law Rep. 695 a CIF contract required the seller who agreed to sell palm oil to the buyer to make a declaration of ship to the buyer as soon as possible after vessel’s sailing.  Goff J (as he then was) held that although time for compliance is not fixed the requirement that the declarations should be made as soon as possible after vessel sailing indicated that speedy declaration are regarded as important by the parties.

75. Post Chaser was distinguished in British Holding Plc by Sir Nicolas Browne-Wilkinson V.C. who stated that:

‘ But in that case it was conceded that the declaration had not been made as soon as possible and there was a finding by the arbitrators that such declarations would normally be passed on on the same day as they were received.  Therefore, in the context of that case, there was no doubt that the requirement was to give the notice within, say, two days, which had been complied with.’

My view

76. I do not need to reconcile the difference in approach in these cases.  It is sufficient for me to say that ultimately it is a matter of construction of the terms of a contract to ascertain the importance of the terms to the parties in the transaction.  Furthermore unlike the English cases, the Agreement in this case provides a time of the essence clause.  This overcomes the difficulties of construction as discussed in these English cases. 

77. In this case considering the commercial nature of the transaction and the conditions that have to be fulfilled before completion can take place, the choice of words ‘promptly’, ‘as soon as practicable’, ‘best endeavours’ not only do not lessen the defendant’s requirement to proceed speedily with its application with HKFE and SFC, actually strengthen its need to do so.  It would be meaningless to use those words if the parties intended to allow the defendant a leisurely pace to fulfill its task.

Liquidated damage and interest

78. Under the Agreement, in the event of the defendant’s failure to complete, the plaintiff is entitled to be paid out of the purchase price the sum of $555,000 as pre-estimated liquidated damages (Clause 6.1(b)).  Further in respect of the purchase price, irrespective of whether completion will take place or not, the plaintiff is ‘absolutely entitled to the interest (if any accrued on the purchase price)’ (Clause 2.2).  Mr Chain argued that since the parties have already agreed on the liquidated damages and interest, this is a further indication that the relevant clauses should not be treated as conditions.

79. In the context of this case I do not regard the provision on liquidated damages or interest to be so important a factor in ascertaining the intention of the parties. 

80. Lord Lowry stated in Bunge Corporation the difficulty of assessing damages is an indication in favour of construing a term to be a condition.  Based on this I accept that it may be argued since the parties have no difficulties in agreeing on damage, one should not construe the terms as conditions.  In my view the mere fact that the parties had agreed on the liquidated damages does not by itself show that the parties have intended not to treat the clauses to be conditions so that a breach of which will only entitle the plaintiff to damages.  This is because the parties have also at the same time agreed to the provision of interest in favour of the plaintiff.  This is an indication that they could not have intended that the breach of these obligations would only result in an award of damages.  The significance of these two clauses cancels each other out.

The other factors

81. The fluctuation of the value of a commodity such as shares and the merger of the HKFE do not require further elaboration as relevant factors in showing that the defendant must proceed with speed in its application.

The clauses were conditions

82. To conclude on this topic, in my view, the relevant clauses were conditions and the breach of which entitle the plaintiff to terminate the Agreement.  Mr Chain, although denying that the defendant had repudiated the agreement, made a qualified concession that the defendant had been in breach by not making the applications to SFC and HKFE promptly.  But even without the concession, the defendant was clearly in breach of its obligations on promptitude.  The facts speak for themselves.  As the defendant was in breach of the conditions the plaintiff was entitled to terminate the Agreement.

Repudiation

83. The second issue is whether in any event the defendant had repudiated the Agreement.  This goes beyond the argument of whether the terms in question are innominate terms because repudiation occurs when a party evinces an intention not to be bound by the agreement.  In this case the judge found that the evidence on repudiation is overwhelming.  He held that 

‘123.  In my view, the evidence is overwhelming.  Under the Agreement, the defendant must pursue the applications with SFC and HKFE promptly and as soon as practicable, that is, within the shortest practicable time.  It must also use its best endeavours.  In order to make the applications successful, the defendant must have a business plan which satisfied HKFE’s requirements, a suitable dealing director accredited to it, and an office fully equipped and ready for business upon approvals being given.  However, after making some initial search for a dealing director in August or September 1999, the defendant went astray and engaged in attempts to sub-sell the Share.  Instead of performing its obligations under the Agreement, the defendant wanted to get a quick profit by sub-selling the Share.  It spent three months in so doing under the misapprehension that it had such a right of sub-sale under Clause 3.4.  And the defendant did it with full knowledge that after TAD, no transfer of the Share would be considered by HKFE.  It was only after the purported sub-sale to CSC failed in December 1999 that the defendant began to take the preparatory steps for making the applications in January 2000.  The first applications were not made until 9 February 2000.  Even then, the applications were doomed to failure because Mr Kwong, the proposed dealing director, would definitely not join the defendant for the simple reason that the defendant was not even ready for its business. When the second applications were made with Ms Wei and Mr Leung on 21 February 2001 (note : should be 2000), it was already too late. HKFE would not have approved the transfer of the Share any way.

124.     The lapse of eight months from the time of the Agreement until the applications were made in February 2000 is inordinate and inexcusable.  In my view, the defendant had clearly acted in repudiatory breach of the Agreement.  And I so find.’

Woodar Investment Development Ltd.

84. I agree entirely with his observation.  The only matter that needs to be addressed is the case of Woodar Investment Development Ltd. v Wimpey Construction UK Ltd. [1980] WLR 227 where Lord Wilberforce stated at page 280 and 281 that

‘ .... in considering whether there has been a repudiation by one party, it is necessary to look at his conduct as a whole.  Does this indicate an intention to abandon and to refuse performance of the contract?

.....

The facts indicative of the appellants’ intention must now be summarised.  It is clear in the first place that, subjectively, the appellants, in 1974, wanted to get out of the contract.  Land prices had fallen, and they thought that if the contract were dissolved, they could probably acquire it at a much lower price.  But subjective intention is not decisive: it supplied the motive for serving the notice of rescission: there remains the question whether, objectively regarded, their conduct showed an intention to abandon the contract.’  

85. The House of Lords held that the appellant did not repudiate the contract, he was relying on it and invoking one of its provisions when he gave the notice of rescission. 

86. The facts of this case are so different from Woodar.  As the judge observed the lapse of eight months from the time of the Agreement to the time when the applications were made in February 2000 is inordinate and inexcusable.  The defendant clearly had evinced an intention of repudiating the Agreement.

87. Since I have found against the defendant I do not need to address the preliminary objection by Mr Yu that fairness excludes the defendant from relying on this point on the basis that it had not been raised before the judge.

Subject matter of the Agreement

88. The last issue is on the subject matter of the sale.  This would only become relevant if the defendant had not been in repudiation of the Agreement.  Mr Chain accepted that if the defendant was in repudiation then he could not rely on this issue.  In essence Mr Chain is saying that the subject matter of the Agreement is not merely the Share but also the new shares allotted by HKEC. 

Clause 5.5

89. There are different bases in which this claim arises.  Mr Chain first of all relied on Clause 5.5 of the Agreement which provided that

‘In the case where there may be any dividends, bonuses or any other distributions or payments accrued and received or receivable by the Vendor in respect of the Share as from the date of signing this Agreement up to Completion (both days inclusive), the Vendor shall from Completion hold the same on trust for the Purchaser.’  (emphasis added)

90. Mr Chain argued that the new shares could be treated as ‘dividends, bonuses or other distributions of payments accrued or received’ by the plaintiff in respect of the Share.  The short answer to this argument is that under Clause 5.5 the condition precedent to this entitlement is that there must be a completion.  As there was no completion in the present case Clause 5.5 simply does not assist Mr Chain irrespective of whether the new shares constituted any of the dividends or bonuses as described in that clause. 

Conversion

91. Second, Mr Chain argued that the principle of conversion would assist the defendant because equity treats what is required to be done as being done.  He argued that a share is a chose in action consisting of a bundle of legal rights: Borland’s Trustee v. Steel Brothers and Co. Ltd. [1901] 1 Ch 279.  In normal circumstances a vendor of share does not warrant that the purchaser will be registered as a shareholder but that does not affect the validity and legal effect of such an agreement between the parties.  Gore-Browne on Companies Vol. 1 45^th Edn at para 23[12] stated that

‘ A further effect of the shares being specified is that whilst the vendor remains the holder of the legal title to the shares, and is treated by the company as the owner of them, the beneficial ownership passes to the purchaser, even though the sale is in breach of a pre-emption clause in the articles.’

92. Pennington on Company Law 8^th Edn at page 441 further stated that

‘ On completion of a purchase of shares, the seller’s obligation is to deliver his share certificate and a duly executed instrument of transfer to the purchaser, and to assist him to be registered as a member of the company.  If the seller impedes the purchaser from being registered, he is liable to him in damages.  But if the directors of the company have power to refuse to register transfers by the provisions of its memorandum or articles of association, the seller, does not impliedly undertake that the directors will register the transfer to the purchaser.  If the directors refuse to register the transfer, the seller is not liable to the purchaser in damages for breach of contract, nor can the purchaser treat the contract for sale as repudiated by the seller; the seller instead continues to hold the shares as a bare trustee for the purchaser, who is entitled, as between himself and the seller, to all the financial and other benefits resulting from the shares.’

93. Mr Chain further prayed in aid of Rooney v Stanton [1900] 17 TLR 28 and Spence v. Mitchell [1913] 14 SR (NSW) 121.  In Rooney the court reaffirmed the view that the vendor of shares upon transfer of the shares to the purchaser immediately became a trustee of those shares for the purchaser and consequently incapable, except by arrangement with the purchaser, of receiving any advantage in respect of them by reason of his being the registered holder.  In Spence the court held that the contract for sale of shares passes to the purchaser of the shares as they stood at the date of the contract with any rights at that time attaching to them.  As the seller did not reserve to herself the right to take up the new shares the right passes to the purchaser. 

My view

94. I have no difficulties with the principles set out in the cases and textbooks.  But in my view this argument does not avail Mr Chain.  In the first place the authorities cited in support of the statements in the textbook showed that a transfer of the shares had been effected and it was the company who had refused to register the shares.  The two cases also showed that transfer had been executed and handed to the purchaser.  In this case this was not the situation.

95. What is more important is that the principle of equity is based on the requirement of specific performance.  The often cited passage of Sir George Jessel MR in Lysaght v. Edwards [1976] 2 HD 499 at 506 is that

‘the moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser.’

But as Lord Parker of Waddington said in Howard v Miller [1915] AC 318 at 326

‘It is sometimes said that under a contract for the sale of an interest in land the vendor becomes a trustee for the purchaser of the interest contracted to be sold ...; but however useful such a statement may be as illustrating a general principle of equity, it is only true if and so far as a Court of Equity would under all the circumstances of the case grant specific performance of the contract.’

Degeling and Edelman in Equity in Commercial Law at Chapter 18 page 465 stated that

‘If, for whatever reason, specific performance will not issue, no trust will arise.  So, for example, if I agree to sell you a parcel of shares in a public company, you will not have the benefit of a trust, for shares in a public company are not unique, an award of expectation damages generally being an adequate response to any breach on my part of the contract of sale.  But if I contract to sell you shares in a private company, for which there is no market, such a contract is specifically enforceable and you will have the benefit of a trust in your favour.

Finally, it should be noted that the trust in no way depends on the purchase money having been paid.  However, if it has not, the vendor has an equitable lien for the purchase price over the right contracted to be sold.’

96. The short point I wish to make is that the Agreement is not capable of specific performance because the Agreement requires the defendant to fulfill its obligations of application to the SFC and HKFE in the first place and the Scheme expressly provided for the deadline for the transfer to be approved.  The deadline had long gone.  This case illustrates most vividly the operation of the qualification to the Lysaght v. Edwards principle in terms of the requirement for specific performance.

The third basis

97. As a matter of academic interest, there is a third basis in which trust on the new shares will arise and this is by way of purchaser’s lien on the purchase price.   Mr Yu referred to an article entitled ‘Relief Against Forfeiture and The Purchaser of Land’ (‘Cambridge Law Journal 43(1) April 1984 pages 134-176) by Mr Charles Harpum, the editor of Megarry and Wadeon The Law of Real Property 6^th Edn.  At page 138 Mr Harpum stated that

‘It must be emphasised that the trust that arises from the payment of all or part of the price is quite distinct from that which arises under the doctrine of conversion, though the two are often con­fused.  The purchaser’s lien arises from the fact that there is a contract for the sale of land to him.  The contract need not be specifically enforceable nor need he have accepted the vendor’s title.....

The equitable right of lien is of limited importance in respect of deposit, because of the common practice of requiring payment to a stakeholder rather than to the vendor.  In those circumstances, there is no debt owed by the vendor to the purchaser that can be secured by any lien.’

98. Mr Yu relied on this passage to show that no trust arises in this case because the purchase price was paid to the stakeholder and there is no debt owed by the plaintiff to the defendant that can be secured by a lien.  As I have already found against the defendant on conversion, I do not need to take a concluded view on this further point. 

99. Likewise I would like to note that since I have found against the defendant on conversion, I do not need to deal with Mr Yu’s preliminary objection that this point should not be taken on the appeal because it had not been raised in the court below.

Conclusion

100. In my view the judge was correct in finding for the plaintiff.  I would dismiss the appeal with costs nisi to the plaintiff.

Hon Yuen JA :

101. The salient facts have been set out in Cheung JA’s judgment and I will address the issues in the same order.

Construction

102. First, as a matter of construction I think it is clear that when the parties provided in cl. 7.1 that time was of the essence of the Agreement, they agreed that either party’s failure to perform any contractual duty in time would amount to a breach of condition, entitling the other to terminate the contract for repudiatory breach, irrespective of the magnitude of the breach (Lombard North Central plc v Butterworth [1987] 1 QB 527, at p.535F-G, p.536E-F).

103. That is an express agreement on the effect of the breach of a term.  Whether it may be easy or difficult for the parties to ascertain whether a term has been breached in the first place is another matter, so long as it is possible to do so.

104. Mr Chain refers to the absence of specific dates for the defendant to perform certain contractual duties and he argues that time could not therefore be of the essence of those terms.  But with respect, in my view that is confusing the ascertainment of a breach with the effect of that breach.

105. Mr Chain’s argument is based on Sir Nicolas Browne-Wilkinson’s judgment in British and Commonwealth Holdings plc v Quadrex Holdings plc that there is "no general concept that time is of the essence of a contract as a whole" (p. 856H) and he has also relied on passages referring to the situation where a date of performance is not "capable of exact determination" (at p.857F).

106. First it is important to note that time was not expressed to be of the essence of the agreement in Quadrex (nor in The Post Chaser) so what the Vice-Chancellor was examining was the trial judge’s holding - necessarily by implication - that time was of the essence of the agreement - as a whole (at p.857A). 

107. As I understand it, what the Vice-Chancellor was saying was that rather than addressing the question (whether time is of the essence) to the agreement as a whole, the judge should have addressed it to the contractual term at issue.  At p.856F, he said:

"The basic question is whether the failure to comply with a contractual provision within the time limited by the contract constitutes a repudiation of the contract i.e. is time of the essence of that contractual provision.  The phrase ‘time is of the essence of the contact’ is capable of causing confusion since the question in each case is whether time is of the essence of the particular contractual term which has been breached. ...

There is therefore no general concept that time is of the essence of a contract as a whole: the question is whether time is of the essence of a particular term in question".  (Emphasis added).             

The Vice-Chancellor went on to find, in the passages relied on by Mr Chain, that the court could not imply that time was of the essence of the term at issue - completion - where no date had been fixed or was capable of precise determination.  However a party to the contract could make time of the essence of completion by serving a reasonable notice.

108. In our case however, the parties had expressly agreed that time was to be of the essence of the Agreement, i.e. they had agreed that if a party fails to perform a contractual duty in time, the innocent party would have a right to terminate the contract.

109. There is no reason why the parties cannot agree on the right to terminate as the effect of a breach, even though the answer to the question whether by a particular day there has been a breach may not be as immediately obvious to everyone at the time, as would have been the case if a fixed date for performance had been stipulated.  I accept that the absence of a specific date for a party’s performance of a contractual duty (such as a fixed date for the defendant to make an application) and the use of words such as "promptly" or "as soon as practicable" in its place may make it less easy in practice for the parties at the time to determine with certainty whether there had been a breach, but the courts are often asked to determine whether an act under a contract has been done in reasonable time.  The courts do so applying objective standards in the light of all relevant circumstances.  There is therefore no difficulty in principle or in practice in determining whether in the circumstances an act has or has not been done "promptly" or "as soon as practicable".

110. Of course parties who agree that time is of the essence of a term where the time for performance is not specific but has to be ascertained by reference to surrounding circumstances run the risk that they may miscalculate the appropriate time of performance.  In that sense the parties may be said to be "playing for higher stakes" - because the consequence of a party reckoning the time of performance too early or too late may have a significant impact on its legal rights - but where business people sign an agreement drafted by legal representatives, the courts should strive to give it the agreed effect.  

111. Further I do not accept Mr Chain’s argument on the construction of cl. 3.2 which is to the effect that the defendant could, as it were, sit on its hands in finding a dealing director and it was only after one was secured that it was required to "complete promptly all prescribed forms and provide references as required in connection with such application and pay all relevant fees and deposits".  As I read it, cl. 3.2 is one entire act - the act of applying to be registered for dealing, which is performed by the completion of forms, provision of references, payment of fees, etc. all of which have to be done promptly as required under cl. 3.2.  Besides the defendant had in cl. 4.2 represented and warranted that "there is no reason why any of the applications aforesaid should not be wholly successful without any delay" (emphasis added).

Nature and subject-matter of contract

112. It is also consistent with the commercial nature and the subject-matter of the contract that the defendant was required to perform its duties promptly or else be open to the plaintiff’s termination of the contract.  The plaintiff had not received any payment by way of deposit, and it would not get the purchase price until completion, so there was every reason for it to look to a completion date earlier than the long-stop date of 15 months from the date of Agreement.

113. In the meantime the share agreed to be sold was placed beyond the reach of other potential purchasers for the duration of the pending transfer, and in a fluctuating market, there may have been a risk that the liquidated damages (being only 1/3 of the purchase price) might not be adequate compensation.

Liquidated damages

114. I do not agree with Mr Chain that the liquidated damages clause conflicts with the finding that the defendant was contractually bound to act promptly on pain of termination for breach of condition.  The liquidated damages clause would cater for the possibility that even though the defendant had acted promptly, it was not able to obtain the necessary approvals and thus be in breach of the representation and warranty under cl. 4.2 that it would be "in every respect qualified to become a member of the Exchange and to be registered as a dealer under the Ordinance, that there is no reason why any of the applications aforesaid should not be wholly successful without any delay".

Interest

115. Nor do I think that the provision that the plaintiff would have the accrued interest in any event assists the defendant.  First, as I have noted, the plaintiff had not received any payment by way of deposit.  Secondly, it is commercial common sense that a party in business (especially a broker) would prefer to receive a capital sum earlier than bank interest on that sum later.

Repudiation

116. I then come to the trial judge’s finding of fact that the defendant had substantially delayed in making the necessary applications.  I would agree that the evidence justified that finding.  The defendant made no effort to secure a dealing director until late January 2000, probably because it was hoping that the plaintiff would agree to a sub-sale.  But the defendant had no right under the circumstances to sub-sell and unfortunately for the defendant, the plaintiff refused to agree to a sub-sale in late December 1999. 

117. It was not until late January 2000 that the defendant took steps to obtain approval of the applications.  Of course at the time the Agreement was made, the defendant did not know of TAD, and it may be that once it became aware of TAD it tried to act as quickly as possible in late January.  But taking those steps in late January was too late.  It does not change the fact that the defendant did not take those steps in the 7 months before late January. 

118. Mr Chain also argued that assuming there had been a repudiatory breach by the defendant, the plaintiff had affirmed the Agreement.  He argued that under cl. 4.4, the plaintiff was entitled to receive from the defendant copies of all correspondence between the defendant, the SFC and HKFE.  Since the plaintiff did not receive any, the plaintiff must have been aware that the defendant had not made any applications, and in not terminating the Agreement earlier, the plaintiff had waived the breaches of cl.3.2 and consequential clauses.

119. I do not agree.  For all the plaintiff knew, the defendant may simply have been in breach of cl.4.4 (providing copies of applications) without having been in breach of cl. 3.2 (actually making the applications) and other consequential clauses.  It is well-established that for there to be waiver by election, the party making the election must first be fully aware of the facts which have given rise to the existence of its right - in this case, the plaintiff would first have to know that in fact the defendant had not made any applications.  It is apparent from the evidence that the opposite was the case - the plaintiff had assumed that the defendant had made the necessary applications, as evidenced by the letter from the plaintiff’s solicitors dated 29 December 1999 asking for copies of correspondence between the defendant, the SFC and the HKFE. 

120. The correspondence was only supplied to the plaintiff on 1 March 2000, and it led to the plaintiff terminating the Agreement on 15 March 2000.

121. As for Mr Chain’s argument based on Woodar, this is not that type of case at all.  In Woodar the innocent party knew that the conduct of the other party, although in breach of contract, did not evince an intention not to be bound by the contract (p.299 C-H).  In the present case, the defendant was in repudiatory breach when it did not make the necessary applications in the months before January 2000, and soon after the plaintiff became aware of this (in early March 2000), it terminated the Agreement.  Although the defendant started the process of making applications in January 2000, it could not turn the clock back and treat those steps as having been taken before then.

Subject-matter of the Agreement

122. Finally I come to Mr Chain’s argument regarding the subject-matter of the Agreement.  I think the short answer to his argument, whether based on cl.5.5 or conversion or lien, and whether or not specific performance is relevant, is that this Agreement was a conditional contract. 

123. The Agreement was conditional because the principal obligation under it (to transfer the Share) arises only on fulfilment of a condition which was not within the control of the parties.  This type of contract has been accepted as being properly classified as a contract subject to a condition precedent (Michaels v Harley House (Marylebone) Ltd [2000] Ch 104, p.115A-B) and the principle that a purchaser acquires an interest in equity in property agreed to be purchased does not apply to conditional contracts (p.114E).  Accordingly the cases cited by Mr Chain are with respect irrelevant.

124. The Share agreed to be purchased was no ordinary share.  It was a share in a regulated futures market operator, the rules of which stipulated that "no member shall sell, transfer, ... or create any trust, ... lien" over his Membership (r.503) or his shares (r.504) otherwise than in accordance with the Rules.  For this reasons also there was no question of the plaintiff holding the Share as trustee for the defendant when the HKFE refused its approval. 

125. Finally, unless and until the Share is transferred to the defendant (contra the situation in Rooney v Stanton), there is no question of it having any rights or benefits accruing to that Share.

Order

126. I would also dismiss the appeal with an order nisi that the costs should follow the event, i.e. that the defendant pays the plaintiff’s costs of the appeal.

Hon Yam J :

127. I agree with the judgments of Cheung JA and Yuen JA.

128. I would just like to add one point in respect of the issue of “liquidated damage”.  Although Lord Lowry stated in Bunge Corporation that the difficulty of assessing damages is an indication in favour of construing a term to be a condition, the reverse is not always true.  The contract must be construed as a whole.  Here, there is a specific provision that time is of the essence of the contract.  Thus it cannot be said, as submitted by Mr. Chain for the defendant, that the liquidated damages clause conflicts with the finding that it is a condition the defendant was contractually bound to act promptly.

129. I would also dismiss the appeal with costs nisi to the plaintiff.