YEUNG WEI SUNG and Another v. KLH INVESTMENT LTD.

IN THE COURT OF APPEAL

1996, No. 110
(Civil)

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J U D G M E N T

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Bokhary, J.A. (delivering the first judgment at the invitation of the Acting Chief Justice) :

1. This appeal concerns the Lung Mun Seafood Restaurant in Lei Yue Mun.

2. That restaurant is operated by a company named Forecast Nominee Ltd.

3. Between them, the plaintiffs own 50% of the shares in Forecast, while the other 50% is owned by the defendant.

4. There is another respect in which the parties find themselves in a 50:50 situation.

5. For the restaurant occupies premises at 20-22 Praya Road West and certain adjoining land. That land is occupied under a licence from the government. But those premises are occupied under a lease from a company named Fairwood Investment Co. Ltd. And between them, the plaintiffs own 50% of the shares in Fairwood, while the other 50% is owned by the defendant.

6. In 1994, the restaurant, which had been in operation for well over 10 years, underwent extensive renovations. Following that, the plaintiffs took charge of the day-to-day management of the restaurant, while the defendant took charge of its daily accounting.

7. Within a short time, relations between the parties had so deteriorated that each side retained solicitors. And through their respective solicitors, they entered into negotiations aimed at resolving their differences.

8. Have those negotiations resulted in a concluded agreement between the parties in regard to the operation of the restaurant? The plaintiffs say "yes", while the defendant says "no".

9. Proceedings in the High Court this year arose out of that dispute.

10. On February 7, the plaintiffs took out an originating summons. Essentially, they claimed two things : (i) a declaration that the parties have reached a concluded agreement in regard to the operation of the restaurant; and (ii) specific performance of that agreement.

11. That originating summons was heard by Mrs Justice Le Pichon this May, and dismissed with costs by the judgment which she handed down on June 5.

12. The plaintiffs now appeal to this Court, seeking at our hands what they failed to recover at the judge's hands.

13. Let us now look with some care at the course which the negotiations between the parties took.

14. Those negotiations took place in 1995. So I will generally refer to days and months without repeating that year.

15. What was on the negotiating table - first put there by the plaintiffs - was a proposal that one of the parties, either the plaintiffs or the defendant, take up a franchise to operate the restaurant. A set of draft documents for the implementation of the franchise arrangement came into being for discussion.

16. The negotiations went back and forth on the terms of the arrangement and on the question of which party would take up the franchise.

17. On November 25, the defendant sent the plaintiffs certain amendments which it made to the draft implementation documents.

18. The plaintiffs made certain re-amendments and sent them to the defendant on November 30.

19. On December 4, the defendant's solicitors wrote to the plaintiffs' solicitors. It is in this letter that one finds what the plaintiffs say is an offer. The words on which the plaintiffs rely are these :

"If your client finds that your reamendment is reasonable and refuse to accept our amendment, we are instructed that our client shall take up the Franchise Agreement in place of yours in the exact terms of your reamendment."

20. Those words came at the end of a paragraph which was immediately followed by one which reads :

"Lastly, we are instructed that before our respective clients' obligations and rights can be formally finalized, the status quo of our respective clients' right shall remain and that your client is not allowed to credit any business incomes of Lung Mun in any bank account other than that of Lung Mun."

21. On the following day, December 5, the plaintiffs' solicitors wrote in reply saying, among other things, this :

"As a last chance to search for a resolution for the problem, we are instructed to accept your client's offer of taking over the franchise of Lung Mun's business in accordance with the Shareholders Agreement as re-amended on 30th November 1995."

22. Before us, the lines of battle are drawn thus. The plaintiffs said that the defendant had made an offer by its solicitors' letter of December 4. But the defendant said that what the plaintiffs relied on as an offer was not an offer in law. The judge agreed with the defendant. And now the plaintiffs ask us to say that the judge was wrong there.

23. The defendant has filed a respondent's notice saying that if it had made an offer, then the same was subject to contract, so that the judge's result should be affirmed even if she were wrong on the question of whether there was otherwise an offer in law. That was put at the forefront of the arguments of Miss Audrey Eu QC for the defendant as her best point. But in any event, the defendant does say, the judge was right on the question of whether there was otherwise an offer in law.

24. If there was an unconditional offer in law, then the question would be whether it had been accepted. The plaintiffs said that they had accepted it, relying on the words which I have quoted from their solicitors' letter of December 5. But the defendant said that the same did not amount to an acceptance in law. The judge agreed with the defendant. And now the parties join issue before us on that, too : with the plaintiffs saying that the judge was wrong, and the defendant saying that she was right.

25. Going back to the words which the plaintiffs rely on as an offer, I think that Sir John Swaine QC for the plaintiffs is right in what he says they mean. They mean, as he says, that the defendant will take up the franchise on the exact terms contained in the implementation documents as re-amended by the plaintiffs on November 30.

26. That gives rise to this problem. Those terms are for a four-year franchise commencing on November 1, 1995, and expiring on October 31, 1999. But that commencement date had already passed by the time of the alleged offer. So it was simply no longer possible to have a four-year franchise period with those commencement and expiry dates. You could have a four-year franchise period with later commencement and expiry dates. Or you could have a franchise period of less than four years commencing on some later date but ending nevertheless on October 31, 1999.

27. Sir John submits that the defendant should be taken to have offered to take up a franchise for a period less than four years by however much time elapses between November 1, 1995, and the day on which it became franchisee, on certain conditions including one that it receives whatever profits the plaintiffs may have made as de facto franchisee between November 1, 1995, and that day, whenever it may fall.

28. He further submits that there would be nothing uncommercial about such an offer. I agree. But the question is whether there was such an offer.

29. If it were plain that the defendant intended to be bound if and as soon as the plaintiffs were to say "we accept", I would feel drawn towards saying - and might even feel driven to say - that there was such an offer.

30. But no such intention is plain. As we have seen, the defendant's solicitors' letter of December 4 also said that "before [the parties'] obligations and rights can be formally finalized, the status quo of [their] rights shall remain."

31. It is true that the sentence continues "and that [the plaintiffs are] not allowed to credit any business incomes of Lung Mun in any bank account other than that of Lung Mun." Relying on those concluding words, Sir John submits that the requirement of formal finalization is confined to the matter of the plaintiffs' position as de facto franchisee since November 1.

32. I do not think that such requirement is confined to that matter at all. That matter is not what the terms in question concern. What those terms concern is the position of whoever becomes a de jure franchisee for a four-year term. That is the matter covered by the requirement of formal finalization. And the matter is therefore subject to contract. The expression "subject to contract" is one which was used in terms in some of the earlier correspondence. And whether or not those words were repeated as a formula each time, the concept was inherently appropriate to everything that ever happened afterwards. Far from becoming inappropriate, they became - looking at the thing realistically - if anything more appropriate.

33. As Nourse, J. said in Alpenstow Ltd. v. Regalian Properties Plc [1985] 1 WLR 721 at p.730, basing himself principally on the sure ground of Sargant LJ's classic statement in Chillingworth v. Esche [1924] 1 Ch. 97 at p.114, it required "a very strong and exceptional" context to displace the prima facie meaning of the words "subject to contract", which is that either party may withdraw before a formal contract. That would apply - and possibly with re-doubled force - where it is said in plain terms that before the parties' obligations and rights can be formally finalized, the status quo of their rights shall remain.

34. There is nothing in the least uncommercial or otherwise odd about any of that. Businessmen and lawyers alike realize that even when complicated negotiations appear to have borne fruit, there may nevertheless remain things which still have to be agreed. And preserving everybody's position until pen is put to paper on a formal document or a set of formal documents is a prudent and common course. Every counsel practising in commercial matters has experience of cases in which, in the small hours of the morning before the case is due to start at 10 o'clock, the parties reach agreement in principle. But nobody heaves a sigh of relief or stops working until the heads of agreement are ironed out, with temper sometimes becoming frayed along the way, and ultimately signed.

35. Before that kind of thing is done, the parties may detect problems which have to be resolved first. They may see a need to adapt terms earlier envisaged. For example, using the present case as one, they may see that terms for a four-year franchise commencing on November 1, 1995, and expiring on October 31, 1999, would have to be adapted because the commencement date had already slipped by. And if the parties can agree how, then they would sign, but if they cannot agree how, then they would not sign.

36. I have been at pains to relate the applicable legal principles to real life for this reason. Courts must of course guard against undoing bargains which people have struck. At the same time however, courts must also guard against over-zealousness which may inadvertently cram negotiating parties into contracts which they have actually stopped short of concluding however close they may have come to doing so.

37. As I see it, the questions of whether there was an offer in law and of whether the matter was subject to contract are inter-related to the extent that they are not in water-tight compartments.

38. In my judgment, there was no offer in law and the whole matter was subject to contract in any event.

39. It matters not therefore whether the judge was right or wrong in her view that even if there was an offer for the plaintiffs to accept, there was no unqualified or unconditional acceptance of the same by them.

40. By a route differing in some respects from the one which the judge followed, I have arrived at the same conclusion as the one which she reached. I would, despite Sir John's able arguments, dismiss this appeal.

41. Sir John recognized that even if he was successful on the question of whether there was a contract, there could be an argument for denying specific performance of the same, so that some other relief may have to be granted. In the result, I am of the view that there is no right so that there is no need to consider the nature of the remedy which would have to be granted if there had been a right.

42. Before concluding this judgment, I would like to say this. It is of course a great pity that the parties have not after all succeeded in resolving their differences. Certainly, it must be said to the credit of both firms of solicitors that each appears to have worked very intensely to achieve such a resolution for the parties. But no solicitor can do more for his client than the client lets him. So the solicitors emerge from this case with credit. As do of course counsel who have argued their respective cases in a manner which I have found very helpful, so that they have, as they should know, my thanks.

43. In the result, I would dismiss this appeal.

Seagroatt, J.:

44. I agree with my Lord, Mr Justice Bokhary and there is nothing useful that I can add.

Power, Ag. C.J.:

45. I also agree and wish to emphasize that I am satisfied that the negotiations throughout were subject to contract and that the appeal must therefore be dismissed.