MG CHARTER LTD v. BEIJING CAISSA INTERNATIONAL TRAVEL SERVICE CO, LTD

CACV 2/2023, [2025] HKCA 1129

On Appeal From [2022] HKCFI 3672

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 2 OF 2023

(ON APPEAL FROM HCA NO. 1635 OF 2012 and

HCCL NO. 7 OF 2014 (consolidated))

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J U D G M E N T

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Hon Cheung JA (giving the judgment of the Court) :

I.  The appeal

1.  This is an appeal by the plaintiff against the judgment of Linda Chan J who declined to give judgment for its claim for contract sum or damages for breach of payment obligation under a contract between the parties.

II.  Background

2.  The Judge had summarised the background of the case which she held was not in dispute. The following are the relevant parts for this appeal.

3.  MEGA Airline and Hainan Airline used to run direct flights from Beijing, China to Male in the Maldives (‘the route’). They were the only two operators of the route. The plaintiff was affiliated with MEGA Airline and was exclusive sales agent of MEGA, responsible for selling all the seats on a wholesale basis to other tourist agents which, in turn, sold the seats to other agents or customers. The defendant was affiliated with Hainan Airline. It was a travel agent with licence to provide international tourism services to customers in the Mainland. The seats on Hainan Airline were sold through the defendant.

4.  From mid to late 2011, there was political and civil unrest in the capital of Maldives which adversely affected the tourism industry. In November 2011, Hainan Airline began to operate flights on the route. The operation ceased in February 2012 due to poor market conditions and MEGA became the only airline operating flights on the route. At that time, MEGA had already commenced the First Rotation of scheduled flights, and planned to commence the Second Rotation in May 2012.

5.  By March-April 2012, the civil unrest largely came to an end and demand for flights on the route began to recover. To fulfil the customers’ demands, the defendant had to purchase the seats on MEGA flights on the First Rotation from other agents.

6.  In March to April 2012, representatives of the plaintiff and the defendant held discussions on block sale of seats on the route. In a meeting held in Beijing on 30 April 2012, the plaintiff informed the defendant that if the plaintiff were to arrange for MEGA to set up a Third Rotation, it would be almost exclusively for the defendant. As for the Fourth Rotation to be commenced later, the defendant would have to take up a majority of the seats; to secure the seats, the plaintiff would have to enter into binding commitments with MEGA for the Third Rotation and Fourth Rotation, thereby assuming a significant risk; and the most important thing for the plaintiff would be to obtain certainty and exclusive commitments from the defendant. The defendant informed the plaintiff that the defendant could arrange or procure Hainan Airline to recommence flights on the route for 3‑5 flights a week (i.e. about 2 to 3‑4 rotations); and for the defendant to provide certainty and exclusive commitment to the plaintiff, favourable terms and significant discounts and concessions must be given to the defendant.

7.  The discussion led to the parties 1) entering into a contract on 30 April 2012 (‘the Contract’) which consisted of (1) the Customer Contract, (2) the Supplemental Agreement, and (3) the plaintiff’s Standard Terms and Conditions; 2) the plaintiff and the defendant executed a reservation form for the Third Rotation of the route from 1 July 2012 to 31 December 2013 whereby the defendant agreed to purchase the specified number of seats on 6 flights per month subject to seasonal variations (‘Third RF’); 3) the plaintiff and the defendant executed another reservation form for the Fourth Rotation of the route from 10 January 2013 to 31 December 2013 whereby the defendant agreed to purchase the specified number of seats on 6 flights per month subject to seasonal variations (‘Fourth RF’). In turn, the plaintiff and MEGA executed a reservation form in respect of MEGA’s Third Rotation and Fourth Rotation of the route (‘MEGA’s RF’).

8.  Under clause II(A) of the Customer Contract, the parties agreed, inter alia, that the plaintiff would sell and the defendant would buy the seats or packages on the flights specified in the clause.

9.  The Third RF provides, inter alia, as follows :

1)  Season : ‘July 1^st, 2012 to December 31^st, 2013. The actual start date shall be by mutual agreement between July 1^st and July 16^th and the Season end date may be anytime between December 15^th and 31^st, 2013 by mutual agreement’.

2)  Schedule : ‘6 times per month and subject to seasonal variations.’

3)  Airline and Aircraft : ‘MEGA; Boeing 767‑300ER, 12 business class, 42 premium economy class and 196 economy class seats or similar aircraft.’

4)  Seats and Pricing : ‘Hard Block: RMB1,238,000 per Flight for 0 Business class seats at/per seat, 42 Premium economy class seats at RMB6,000 per seat, and 170 Standard economy class seats at RMB5,800 per seat. This price includes current passenger taxes and fees.’

5)  Payment Terms : ‘Payment due to [the plaintiff’s] Hong Kong account at HSBC (as in Terms and Conditions) by Wednesday each week for all flights occurring the following week (beginning on Monday). The flight payment amount agreed in this Reservation Form is after tax (if any) and after deducting bank charge amount…’

6)  Promotion : ‘No minimum charge for first [route] (only charge for actual passengers carried). Both parties agree to discuss the market situation periodically and through mutual consultation the parties may agrees [sic] to cancel up to total 17 [Beijing‑Male] round trip flights within the Season … If no specific stopping period is agreed by a majority of the agents, then [the plaintiff] will assume no stop and keep the flight schedule unchanged. When the Contract is finished and both parties agree not to continue the operation, then [the defendant] should pay the one‑way ferry cost at RMB2000 per seat.’

7)  Deposit : ‘3 times the seat price for all seats payable to [the plaintiff] by May 5^th, 2012.’

8)  Conditions : ‘The terms of this Reservation Form are conditional on all seats for this Season being sold and deposits paid by May 5^th, 2012 and all parties who contracted seats continuing to operate the flight in good faith for the length of the contract...’

10.  The terms of the Fourth RF are materially the same as the Third RF save for matters relating to the Season, Seats and Pricing and Promotion.

11.  Under the Supplemental Agreement, the plaintiff agreed to provide the defendant with additional seats on the Third Rotation and Fourth Rotation.

12.  Taking into account the seats which the defendant agreed to purchase under the Third RF and the Fourth RF and the seats to be provided to the defendant under the Supplemental Agreement :

1)  For each flight in the Third Rotation, 238 seats (or 95.2%) would be allocated to the defendant; and

2)  For each flight in the Fourth Rotation, 153 seats (or 61.2%) would be allocated to the defendant.

13.  In MEGA’s RF, the plaintiff agreed to buy, and MEGA agreed to undertake all reasonable measures to provide and sell, flight services as requested by the plaintiff on inter alia the following terms :

1)  Schedule : ‘6 flights per month in the Third Rotation and 12 flights per month in the Fourth Rotation.’

2)  Pricing : ‘36 return flights for year 2012 and 145 return flights for year 2013 both at US$197,011.95 per round trip.’

3)  Payment Terms : ‘the plaintiff should settle payment within 15 days of each flight. Permitted cancellations are allowed as per Other Terms. Any other cancellation or no shows may be subject to per flight charges or penalties’.

4)  Other Terms : ‘Both parties agree to discuss the market situation periodically and through mutual consultation the parties may agrees [sic] to cancel up to total 17 [Beijing‑Male] round trip per Flights within the Season … If no specific stopping period is agreed by a majority of the agents, then [MEGA] will assume no stop and keep the flight schedule unchanged. When the Contract is finished and both parties agree not to continue the operation, then [the plaintiff] should pay the one‑way ferry cost at USD78,750.’

14.  In breach of the provision for payment of deposit under the Third RF, the defendant did not pay the deposit on 5 May 2012 or any deposit.

15.  On 29 June 2012, the defendant issued a Termination Notice to the plaintiff terminating the Contract.

16.  The plaintiff commenced the action below against the defendant on 10 September 2012 for breach of the Contract.

III.  The Judge’s decision

17.  The Judge rejected the defendant’s defence that, inter alia, the plaintiff had agreed to the termination of the Contract. She rejected the defendant’s justifications for issuing the letter of termination. She found that the defendant had ‘proactively pushed and procured Hainan Airline to recommence operation of flights’, and then ‘actively solicited other travel agents’ to purchase seats on Hainan Airline’s flights rather than MEGA’s, in clear breach of the contractual exclusivity obligation under clause XV of the Standard Terms and Conditions and clause IV(B) of the Customer Contract :

‘ XV. Exclusivity of the Cooperation.

[The defendant] undertakes that it and its subsidiaries, directors, and staff will not cooperate with any other entity to conduct business in respect of the specific routes agreed in Appendix A [i.e. Reservation Forms] during each relevant Season without the prior written consent of [the plaintiff], plus, in the case of early termination due to breach of the Contract by [the defendant], an additional six months’ period commencing immediately upon the termination date. In the case of termination due to the non‑performance of [the plaintiff], no such limitation on [the defendant] will apply. This paragraph shall not be construed to mean [the defendant] may not act as a common travel agent for booking regular scheduled flights available directly from airlines to the general public for individual travelers but not including large group fares available exclusively to high volume travel agents.’

‘ IV B Termination shall not relieve either party of its obligations to make payment for services rendered or to maintain confidentiality or exclusivity under this Contract….’

18.  The Judge held that the defendant is liable to the plaintiff in damages for breach of the exclusivity clause in the Contract in the sum of approximately RMB 22 million and ordered the defendant to pay all of the plaintiff’s costs for the trial.

19.  The Judge, however, accepted the defendant’s defence that the payment of deposit was ‘condition precedent to the formation of contract, non‑fulfillment of which prevent the Reservation Forms from becoming effective’. Accordingly, she dismissed the plaintiff’s claim for the contractual sum of RMB 201,322,800 or alternatively damages for breach of contract.

20.  The Judge held that the defendant’s obligation to make payments is, on the terms of the Contract, subject to the following conditions precedent, the non‑fulfillment of which prevents the Reservation Forms from becoming effective :

1)  Clause III(A) of the Customer Contract :

‘ The Deposit must be received by [the plaintiff] within ten business days of the date of a [RF] for the applicable Season unless otherwise specified in the [RF]. A [RF] will become effective only upon [the plaintiff’s] receipt of the Deposit for the allocation Season’. (underlined added)

2)  ‘Conditions’ in the Reservation Forms :

‘ The terms of this Reservation Form are conditional on all seats for this Season being sold and deposits paid by May 5^th, 2012 and all parties who contracted seats continuing to operate the flight in good faith for the length of the contract. [The plaintiff] may occasionally buy back unsold seats at the effective average price per seat (considering also any promotions) for its own use with advance notice to [the defendant]. If the Carrier’s reservation and departure control system is used, a fee will be applied for each booking. The prices herein are conditional on strict confidentiality. Breaching confidentiality causes serious harm to [the plaintiff].’ (underlined added)

21.  The Judge referred to these two terms collectively as ‘CPs’. The Judge found :

‘ [44] In my view, the CPs are conditions precedent to the formation of contract, non-fulfilment of which prevent the RFs from becoming effective. This accord with the natural and ordinary meaning of clause III(A), which provides that “A Reservation Form will become effective only upon [the plaintiff’s] receipt of the Deposit for the allocation Season”. It is also consistent with the “Conditions” in the Third RF, which states that the terms of the Third RF “are conditional on” the Third Deposit being paid by May 5^th, 2012.’ (underlined added)

22.  She rejected the plaintiff’s argument that the CPs are for the plaintiff’s exclusive benefit or that they can be waived by the plaintiff unilaterally for the following reasons :

‘ [45](1) The CPs operate both ways. If the CPs are complied with, the Reservation Forms become effective for the benefit of both parties: the plaintiff would be able to secure the sale of a majority of the seats in the Third and Fourth Rotations at the stated prices, while the defendant would be able to lock‑in the specified seats in the Third and Fourth Rotations at the prices stated in the Reservation Forms. Conversely, if the CPs are not complied with, both parties are released from any obligation to perform the Reservation Forms. It follows that the CPs are not provisions which can be waived by the plaintiff unilaterally.

(2) In any event, Mr Chain’s [i.e. counsel for the plaintiff] argument does not sit well with clause VI(A) of the Customer Contract, which provides that any variations of the terms of the Customer Contract must be made by an instrument in writing executed by both parties. If the plaintiff were allowed to waive the condition stipulated in clause III(A), it would be tantamount to allowing the plaintiff to vary clause III(A) without the written consent of the defendant.

(3) The ‘prevention principle’ has no application to the Reservation Forms as they have not become effective.

(4) Insofar as the plaintiff seeks to rely on the ‘common knowledge’ of the parties in support of its argument that the parties intended that the CPs are for the plaintiff’s exclusive benefit, such ‘knowledge’ is inadmissible as clause VI(B) provides that the Customer Contract (together with the SA) ‘constitutes the entire agreement and supersedes all prior oral or written arrangement, contract, understandings and communications’.

(5) Although clause XVII(A)(i) of the STC states that ‘failure by either party to perform any of the material obligations of the Contract including payment of Deposit’ shall constitute a breach of the Contract, such clause must be read in conjunction with (1) clause III(A) of the Customer Contract, which provides that the Reservation Forms will become effective only upon the plaintiff’s receipt of the Deposit; and (2) clause II(A) of the Customer Contract, which provides that ‘in the event of conflict or inconsistency in the terms and contents between this Contract and a particular Reservation Form, the latter shall prevail’.

23.  She held that the effect of clause III(A) and the CPs is as follows :

‘ [48](1) Upon execution, the Customer Contract and the Reservation Forms and all the provisions therein became binding and enforceable upon the plaintiff and the defendant (clause VI(H)).

(2) If the defendant wanted to lock-in the specified seats at the prices stated in the Reservation Forms, it had to pay deposits of i) RMB 3,714,000 (‘Third Deposit’) to the plaintiff by 5 May 2012; and ii) RMB 886,000 (‘Fourth Deposit’) to the plaintiff by 1 July 2012. This is the combined effect of clause III(A) of Customer Contract and the ‘Seats and Pricing’ and ‘Deposit Terms’ in the Reservation Forms.

(3) During the periods from the date of the Reservation Forms to the last dates for payment of deposits (‘Deposit Periods’), there was no obligation for the plaintiff to arrange and lock‑in any seats specified in the Reservation Forms for the defendant.

(4) If the defendant did not pay the Third and Fourth Deposit (together ‘Deposits’) before expiry of the Deposit Periods, the Reservation Forms would not become effective, and neither party had to perform the terms under the Reservation Forms. In the case of the Third RF, the Deposit Period was only for 5 days. The plaintiff would know by 5 May 2012 whether it was necessary to arrange and lock in the seats specified in the Third RF.’

24.  Accordingly, the Judge held :

‘ [49](1) Upon execution, the Contract and all the terms therein became binding and enforceable against the plaintiff and the defendant.

(2) The Reservation Forms would only become effective upon payment of the Deposits.

(3) There was no obligation for the defendant to pay the Deposits within the Deposit Periods.

(4) As the defendant never paid the Deposits, the Reservation Forms have not become effective. Neither the plaintiff nor the defendant has to perform the terms under the Reservation Forms including making weekly advance payments to the plaintiff accordance with the Reservation Forms.’

IV.  The plaintiff’s argument

25.  Mr Chain SC and Ms Cheung for the plaintiff argued that the Judge’s interpretation was wrong. In summary, they advanced the following reasons :

1)  The Judge failed to consider the undisputed factual matrix (otherwise known as the context or factual background) because she was of the view that it was inadmissible by reason of the ‘entire agreement’ clause.

2)  The CPs are not condition precedents to the existence of a binding agreement. Rather, they are condition precedents to the performance of the binding agreement i.e. the condition suspends immediate performance of the obligations created by the binding agreement until the fulfilment of the condition. The condition is promissory in nature.

3)  It was the defendant who promised to fulfil the condition, namely, by way of payment of the deposits and the non‑performance of this condition by the defendant’s failure to pay deposit is a breach of contract which attracts a remedy of damages flowing from such breach.

4)  In respect of the plaintiff’s alternative claim for the contractual sum, the Judge erred in holding that the CPs could not be waived by the plaintiff.

V.  The defendant’s argument

1)  Interpretation

26.  Mr Chang SC and Ms Wong for the defendant supported the Judge’s interpretation that the defendant’s obligation to make payments to the plaintiff was subject to the CPs set out in clause III(A) of the Customer Contract and the ‘Conditions’ in the Reservation Forms. Mr Chang submitted that clause III(A) of the Customer Contract is in clear terms. The Reservation Forms will ‘become effective’ (in Chinese, 「生 效」) only upon the plaintiff’s receipt of the Deposits. It naturally follows that if the plaintiff did not receive the Deposits (as in the present case), the Reservation Forms will become ineffective 「不 生 效」. This is consistent with the ‘Conditions’ in the Reservation Forms, which are also clear in that the terms of the Third RF are conditional upon, inter alia, the Third Deposit being paid by 5 May 2012 and the terms of the Fourth RF are conditional upon, inter alia, the Fourth Deposit paid ‘on time’. The timing and quantum of the payment of the Fourth Deposit vary. If the Reservation Forms are not effective, there is no ‘applicable Reservation Form which specifies the flight seats that the plaintiff agrees to sell and the defendant agrees to buy, as provided for under clause II(A) of the Customer Contract. If there are no effective Reservation Forms, the plaintiff can do whatever it wishes with the flight seats set out in the Reservation Forms. It can sell them to third parties, or sell them to the defendant (if the defendant still wants to buy) at a price to be agreed (which may be higher than the price set out in the Reservation Forms) and without the promotional terms under the Reservation Forms and the additional seats under the Supplemental Agreement.

27.  If, on the other hand, the defendant pays the Deposits in accordance with the terms of the Reservation Forms, the Reservation Forms become effective; the plaintiff is under an obligation to provide to the defendant the lock-up flight seats at the agreed price and on other terms set out in the Reservation Forms (and Supplemental Agreement); and the defendant is under an obligation to make weekly advance payments to the plaintiff for all flights occurring the following week under the ‘Payment Terms’ of the Reservation Form. The Deposits will serve as security for the due performance of the defendant of any and all of its obligations under the Customer Contract: clause III(B) of the Customer Contract. This includes the defendant’s obligation to buy the flight seats as specified in an ‘applicable’ Reservation Form pursuant to clause II(A) of the Customer Contract. If, despite there being an effective Reservation Form, the defendant fails to make the requisite weekly payments to the plaintiff, the plaintiff may apply the Deposits to cover any sums due from the defendant, and claim the balance from the defendant: under clause III(B) of the Customer Contract.

28.  Mr Chang submitted that this construction of the relevant clauses of the Customer Contract and Reservation Forms is consistent with the nature of deposit in general. In the absence of express terms to the contrary, payment of deposit is subject to the implied term that ‘in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee’: Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234 at [64]. He submitted that the Judge was right in her construction of the relevant contractual provisions (Judgment [49]). Accordingly, there was no obligation for the defendant to pay the Deposits within the Deposit Periods; and as the defendant never paid the Deposits, the Reservation Forms have not become effective, and neither the plaintiff nor the defendant has to perform the terms under the Reservation Forms, including the defendant making weekly advance payments to the plaintiff in accordance with the Reservation Forms. Thus, the Deposit CP is plainly not a ‘promissory CP’.

29.  Mr Chang submitted that according to there is no inconsistency when, on the one hand, the Judge held that the CPs are conditions precedent to the formation of contract, non‑fulfillment of which prevent the Reservation Forms from becoming effective and, on the other hand, after referring to clause VI(H) of the Customer Contract, the Judge held that upon execution, the Customer Contract and the Reservation Forms and all provisions therein ‘became binding and enforceable upon the plaintiff and the defendant’.

30.  He submitted that clause VI(H) must be read together with the rest of the Customer Contract, including clause III(A) which provides that a Reservation Form will become effective only upon the plaintiff’s receipt of the Deposits within the Deposit Period. The Reservation Forms also confirm that their own terms are conditional upon the Deposits being received by the plaintiff within the Deposit Periods. Properly construed, clause VI(H) plainly meant that the Reservation Forms would be legally binding and enforceable according to their terms. Their terms can set out the conditions precedent to the formation of effective Reservation Forms. What the Judge said in her judgment where she referred to ‘formation of contract’ must be viewed in this light. Since as the Judge held the CPs are conditions precedent to a Reservation Form taking effect, non‑fulfillment of the CPs would prevent the Reservation Forms from becoming effective.

31.  Mr Chang further submitted that the plaintiff contended that upon signing of the Contract and the Reservation Forms, the defendant was under extant obligations to pay the Deposits. This must also mean that the moment that a Reservation Form is signed, the defendant is automatically obliged to make all the weekly payments for the lock‑up flight seats. At the same time, the plaintiff acknowledges that the Reservation Forms only become effective upon the plaintiff’s timeous receipt of the Deposits. On the plaintiff’s interpretation, the defendant has to pay the Deposits and weekly payments even if the CPs have not been met and there is no effective Reservation Form. This is not what the contractual provisions say, and makes no sense.

2)  Factual background

32.  Mr Chang submitted that it was an unfair reading of the Judgment for the plaintiff to contend that the Judge made a ‘fundamental error in law’ in holding that the undisputed factual matrix was inadmissible by reason of the entire agreement clause in the Customer Contract. The Judge was, in fact, addressing a different issue raised by the plaintiff, namely whether the CPs could be unilaterally waived by the plaintiff. In support of its argument that the CPs were intended by the parties for the plaintiff’s exclusive benefit, the plaintiff sought to rely on the matters said to be ‘common knowledge’ of the parties as summarized by the Judge in the Judgment. Mr Chang submitted that the Judge was not stating that the factual matrix was inadmissible to the construction of the Customer Contract in particular clause III(A). The Judge was clearly alive to the correct legal principles on contractual interpretation as she set out in the Judgment. The Judge was also right to exclude any extrinsic evidence by which the plaintiff sought to show the parties’ intention on whether the CPs were for the plaintiff’s exclusive benefit. Construction of a contract is an objective exercise that does not depend on the parties’ subjective intentions (even if common or shared): Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 775B-E.

33.  In any event, the undisputed factual matrix cannot be used to, and does not, contradict the plain meaning of the contractual provisions. It is used to construe the meaning of the words, which are clear and unambiguous under clause III(A) of the Customer Contract.

3)  Unreasonableness of result

34.  As to the plaintiff’s argument on the unreasonableness of the result according to the Judge’s interpretation, Mr Chang submitted that commercial common sense and surrounding circumstances should not be used to undervalue the importance of the language of the provision ‑ which is unambiguous in the present case: Eminent Investments (Asia Pacific) Ltd v DIO Corp (2020) 23 HKCFAR 487 at [45(e)], citing Wood v Capita Insurance Services Ltd [2017] AC 1173. It matters not that the contract has worked out badly for one of the parties (Eminent (supra) at [45(e)]), or the term appears to be a very imprudent one for one of the parties to have agreed (Arnold v Britton [2015] AC 1619 at [20]), or the consequences may appear hard for one side (Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at 296G-H). The Court should not re‑write a contract to assist a party to back out from a bad bargain.

4)  Standard Terms and Conditions

35.  As to the plaintiff’s reliance on clause XVII(A)(i) of the Standard Terms and Conditions, Mr Chang submitted that as the Judge correctly held at Judgment [45(5)], this clause must be read together with clause III(A) and the ‘Conditions’ in the Reservation Forms. Insofar as this clause may give the impression that the defendant has an obligation to pay the Deposits irrespective of whether the Reservation Forms are effective, the terms of the Reservation Forms prevail: clause III(A) of the Customer Contract.

VI.  Our view

1)  Condition precedent: terminology

36.  It is important to understand the term condition precedent in contract. Lewison The Interpretation of Contracts (8^th Edn) at page 906 stated :

‘ A condition precedent is a condition which must be fulfilled before any binding contract is concluded at all. The expression is also used to describe a condition which does not prevent the existence of a binding contract, but which suspends performance of it or an obligation under it until fulfilment of the condition; or to describe a contractual obligation that must be performed by one party before another contractual obligation of the counterparty arises.’

37.  Lewison at [16.08] and [16.09] summarised the relevant authorities :

‘ In Trans Trust SPRL v Danubian Trading Co Ltd [1952] 2 QB 297, a contract for the sale of goods provided that payment was to be by cash against shipping documents from a confirmed credit. The question arose what was the nature of the buyer’s obligation to procure the provision of a confirmed credit. Denning LJ said:

“Sometimes it is a condition precedent to the formation of a contract, that is, it is a condition which must be fulfilled before any contract is concluded at all. In those cases the stipulation ‘subject to the opening of a credit’ is rather like a stipulation ‘subject to contract’. If no credit is provided there is no contract between the parties. In other cases the contract is concluded and the stipulation for a credit is a condition which is an essential term of the contract. In those cases the provision of the credit is a condition precedent, not to the formation of a contract, but to the obligation of the seller to deliver the goods. If the buyer fails to provide the credit, the seller can treat himself as discharged from any further performance of the contract and can sue the buyer for damages for not providing the credit.”

In the result it was held that the obligation to open a credit was not a condition precedent, but an essential obligation of the contract, breach of which entitled the seller to refuse to deliver and to sue for damages.

The formulation by Denning LJ divides conditions precedent into two groups; one where non‑fulfilment of the condition prevents the existence of any binding agreement, and the other where non‑fulfilment of the condition has the same effect as a breach of contract which goes to the root of the contract. However, there is an intermediate position. A condition may be such as not to prevent a binding contract from coming into existence, but to suspend immediate performance of the obligations it creates until fulfilment of the condition.’ (emphasis added)

38.  In Wood Preservation Ltd. v. Prior [1969] 1 WLR 1077 at page 1090, Goff J referred to counsel’s submission and approved the identification of four different types of conditional arrangement. The third type supports the last category of condition precedent stated by Lewison :

‘ His [i.e. counsel] third class is where you have a bilateral contract of sale subject to a condition precedent with an immediate obligation on one of the parties to perform the condition or to use his best endeavours to perform it. There he says there is an immediate obligation, but the bilateral obligations of the contract of sale are nonetheless subject to a condition precedent, and there is no sale until the condition is performed.’

39.  Chitty on Contracts (35^th Edn) Vol 1 at [4‑196] gave an example for this type of condition :

‘ (2) It may refer to the performance by one party of his undertaking. Where, for example, A agrees to work for B at a weekly wage payable at the end of the week, the contract is immediately binding on both parties, but B is not liable to pay until A has performed his promise to work. Such performance is a condition of B’s liability, and, as A has promised to render it, the condition may be described as promissory.’ (emphasis added)

2)  Interpretation of the Contract

40.  It is common ground that the Contract consisted of the Customer Contract (which has two appendixes : Appendix A is the ‘Reservation Form’ and Appendix B is the ‘Standard Terms and Conditions’) and the Supplemental Agreement. All the documents had been duly signed and dated.

41.  The Contract is to be interpreted both by its text and its context. This Court per Chu JA in Law Ting Pong Secondary School v. Chen Wai Wah [2021] 3 HKLRD 185, in applying the Court of Final Appeal judgment of Eminent Investments (Asia Pacific) Ltd v DIO Corp (2020) 23 HKCFAR 487, [2020] HKCFA 38 stated :

‘ 48. The process of interpretation is thus a unitary exercise and the Court does not consider the words in a vacuum but always in the context of the background, even if the words are unambiguous and sensible.’

42.  We disagree with Mr Chang’s interpretation of the Contract and we are of the view that the correct interpretation is that the Contract is valid, legally binding and enforceable upon their execution. It is not subject to any precondition for its validity. The payment condition of the deposit is only a condition precedent to the performance of the defendant or a promissory condition on the part of the defendant, the breach of which constituted a breach by the defendant of the Contract.

43.  Turning to the text of the Contract, the following terms of the Contract point towards a valid and binding contract :

1)  Clause IV(A) of the Customer Contract expressly provided that the Contract ‘shall come into effect when duly signed and dated and, unless terminated under the terms of this Contract, shall remain in force and effect for three years. This Contract will be terminated by mutual agreement in writing or other situations where termination for convenience is permitted by applicable laws and regulations. In addition, either party may terminate this Contract with immediate effect by giving the other party a written notice in circumstances set out in Article XVII.A of the Terms and Conditions.’

2)  Clause VI(H) of the Customer Contract further provided that ‘each party further represented to the other that upon execution by the other party and the subsequent dating of the Contract and each Reservation Form, each of these documents will constitute valid and legally binding and enforceable obligations of the representing party.’

3)  Clause XVII(A) of the Standard Terms and Conditions expressly provided that failure to pay a Deposit amounted to a breach of the Contract. This further points to the fact that there is already in existence a valid binding contract.

‘ Any of the following shall constitute a breach of this Contract: (i) failure by either party to perform any of the material obligations of this Contract including payment of Deposit, which, if remediable, has not been remedied within 10 days of the day of [sic] of a notice requiring such action.’

(emphasis added)

44.  The Judge, however, focused her attention on matters relating to the Reservation Forms and came to a different interpretation. She referred to the ‘Conditions’ on the Reservation Form which stated that :

‘ The terms of this Reservation Form are conditional on all seats for this Season being sold and deposits paid by 5^th May 2012’ (as in the Third Rotation) and 1^st July 2012/1st October 2012 (as in the Third Rotation). ’ (emphasis added)

45.  She also referred to clause III(A) of the Customer Contract that :

‘ ......A Reservation Form will become effective only upon Party A’s receipt of the Deposit for the allocation Season.’ (emphasis added)

and clause II(A) of the Customer Contract which provided that :

‘ .....For the avoidance of doubt, each Reservation Form shall incorporate the terms of this Contract and take effect accordingly and in the event of conflict or inconsistency in the terms and contents between this Contract and a particular Reservation Form, the latter shall prevail.’ (emphasis added)

46.  We do not regard these terms support the Judge’s conclusion. On the contrary, these terms support the interpretation that the payment of deposit by the defendant on the specified dates is merely a condition precedent of performance or promissory condition on its part. The term ‘deposit’ is defined in clause I of the Customer Contract as ‘the deposit required for each Season for seats committed to be paid for each Flight (a ‘hard block’) or, for seats which are on a flexible commitment basis (a ‘soft block’), any required advance.’ It is important to emphasize that the use of the term ‘Hard Block’ in the executed Third RF, shows that the parties had gone beyond some loose, flexible, or non‑binding arrangement regarding the supply of seats by the plaintiff and the payment of deposit by the defendant. Under the term ‘Seats and Pricing’ it is provided that ‘Beijing third rotation route, up till December 31, 2013 Hard Block RMB 1,238,000 per Flight, for 41 premium economy class seats at RMB 6,000 per seat and 170 standard economy seats at RMB 5,800 per seat’. This means seats for the third rotation flight had been committed by the plaintiff to be supplied to the defendant. The Fourth RF also refers to the term ‘Hard block’ RMB 886,000 per Flight, again with the specified price per seat for the specified class and number of seats. Again, this means that the seats had been committed by the plaintiff to be supplied to the defendant. What is then required is for the defendant to pay the deposit according to the terms of payment for the seats to be released to it. When one party to the Contract, namely, the plaintiff, had committed its obligation to such an extent, this reinforces the argument that clause III(A) and the ‘Conditions’ in the Reservation Forms, are condition precedent relating to the performance of the obligations under the Contract or, to put it in another way, promissory condition on the part of the defendant. On the other hand, to rely solely on the wording of ‘Conditions’ in the Reservation Form, and clauses II(A) and III(A) of the Customer Contract to say that a valid and binding contract had not come into existence, would mean the Court would have to ignore the term relating to supply of ‘Hard Block seats’ to the defendant in the Third RF or the Fourth RF and also the other terms of the Contract which expressly provided that a valid and legally binding agreement has come into existence and non‑payment of deposit constitutes breach of contract. This is incorrect as all the terms of the Contract should be looked at and properly considered in the interpretation exercise.

47.  Further, this interpretation, as Mr Chain submitted, would also result in an unreasonable result because it would mean the defendant had a unilateral option to decide whether to ‘activate’ the Reservation Forms by choosing whether to pay the Deposits (all whilst the plaintiff had already incurred substantial risk and commitment to ensure that it could perform the Reservation Forms). This is unreasonable in light of the terms of the Contract. In Building Authority and Appeal Tribunal (Buildings) (ENM Holdings Ltd) [2018] HKCFA 20, the Court of Final Appeal per Tang PJ and Lord Collins of Mapesbury NPJ stated :

‘ 54. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear: L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, 251. ....’

48.  Mr Chang submitted that his interpretation provides a flexible arrangement for the parties. However, this ignores the specific provisions of the committed seats and flight provisions by the plaintiff in the Third RF and Fourth RF. In our view, the text of the Contract amply supports the interpretation we have given.

49.  In any event, the undisputed factual background further supports our interpretation. It shows that the plaintiff had to source the seats from MEGA Airline which would be provided exclusively to the defendant and the plaintiff would have to enter into binding commitments with MEGA Airline, thereby assuming a significant risk. The plaintiff did enter into the MEGA’s RF. It is not necessary for us to decide whether the Judge had rejected the undisputed factual background when she dealt with the ‘entire agreement’ issue in addressing the plaintiff’s argument on waiver. What is clear is that she did not refer to this undisputed factual background on the commitment of the plaintiff on the seats when she relied on the requirement of payment of deposits to come to the view that there is no binding agreement. In any event, Chitty pointed out at [16 031] the entire agreement clause should not prevent the use of extrinsic evidence to ascertain the meaning of an express term in the contract. Lewison L.J. in NHS Commissioning Board v Vasant (trading as MK Vasant & Associates) and Others [2019] EWCA Civ 1245 799 stated :

‘ [47] Longmore LJ took a similar view in Barclays Bank plc v UniCredit Bank AG [2014] EWCA Civ 302, [2014] 2 All ER (Comm) 115, [2014] 1 BCLC 417 (at [27]):

“The entire agreement clause is concerned with identifying the terms of the contract. The use of the phrase “constitute the entire agreement and understanding” is intended to exclude any evidence or argument to the effect that the terms of the contract are to include any mutual understanding that is not recorded in the contract. It is not intended to exclude admissible evidence or argument about the way in which parties exercise rights given to them by the terms of the contract.” ’

50.  As there is no inconsistency if the term for payment of deposit is constructed as a condition precedent to performance or promissory condition under a binding agreement between the parties, the reliance on clause II(A) of the Customer Contract which provided that in case of inconsistency, the Reservation Form prevails, is misplaced.

51.  The interpretation of the Contract involves a short point and no further elaboration is required.

3)  Remedies

52.  The Judge held :

‘ 78 In light of my holding that there was no obligation for [the defendant] to pay the Deposits or make any payments in accordance with the [Reservation Forms], [the plaintiff’s] claim for contractual sum of RMB 201,322,800 must fail.

79. Although [the plaintiff] has an alternative claim for damages for breach of the Contract and the [Reservation Forms] in the amount of RMB 85,994,308.56, such claim is premised on [the defendant’s] “failure to make payments in breach of the Contract, the [Third RF] and the [Fourth RF]”. Apart from breach of Exclusivity Clause, no other breach is pleaded in respect of this claim. As [the defendant] had no obligation to make any payments under the Contract or the [Reservation Forms], [the plaintiff’s] alternative claim cannot succeed.’

53.  In view of our interpretation that there is a binding contract between the parties, the issue of remedy must be remitted to the Judge for a fresh determination. Mr Chain submitted that his argument on waiver before the Judge affects the claim for the contract sum and this issue must be revisited by the Judge. We will also direct the Judge to deal with the issue of waiver afresh.

VII.  Conclusion

54.  Accordingly, the appeal is allowed. Without prejudice to the reliefs (and costs order) already granted in the judgment, we grant a declaration that the defendant is obliged under the Contract and the Third and Fourth RFs to pay the Deposits and weekly payments for the seats specified in the Third and Fourth RFs and that the defendant had breached the said payment obligations. We further order that the issue of the remedies for the defendant’s breach of the said payment obligation, including the issue of waiver, be remitted to the Judge for determination based on the factual findings in the judgment and the evidence before the Judge at the trial (unless otherwise directed by the Judge).

VIII.  Costs of the appeal

55.  There will be an order nisi that the plaintiff is to have the costs of the appeal to be taxed if not agreed.

IX.  Other matter

56.  On 28 November 2025 before the appeal was heard, the Court received a letter with attachments purportedly from a law firm by the name of Hainan Waijing Law Firm claiming to represent a state‑owned enterprise, called Caissa Tosun Development Co. Ltd (‘Caissa Tosun’) of which the plaintiff is said to be its subsidiary. The letter referred to this appeal and stated that Caissa Tosun and its subsidiaries had been placed by the Court in Hainan Province under a reorganisation plan and the plaintiff had submitted the proof of debt under the Enterprise Bankruptcy Law of the People’s Republic of China. The letter further stated the People’s Court of Chaoyang District in Beijing had in an action lodged by the defendant against the plaintiff awarded compensation to the defendant for its economic loss due to the termination of the Contract. The letter concluded by saying :

「五、 鍳於美佳包機已根據《中華人民共和國企業破產法》對其所主張的債權進行破產申報，同時貴院原訟法庭就該等合同所產生爭議又存在相反判決，債務人公司認為其有義務告知上述情況，尤其是美佳包機申報債權和兩地司法管轄權可能存在衝突的情況，故特此說明情況，請貴法庭審慎考慮。」

‘English translation:

Given that MG Charter has declared its asserted claims regarding the bankruptcy matters under the Enterprise Bankruptcy Law of the People’s Republic of China, and at the same time, there is an existing contrary judgment from the Court of First Instance on issues arising from the Contracts, the debtor company feels obliged to inform this Honourable Court of the above circumstances, in particular the potential conflicts on the declaration of claims made by MG Charter and the jurisdiction of the two regions. For this reason, we are writing this letter to explain the situation for this Honourable Court’s prudent consideration.’

57.  The Court supplied copies of the letter with the attachments to the parties. Both parties asked the Court to disregard the letter. Accordingly, we have disregarded the letter, which, in any event, we would have disregarded as it is impermissible as a matter of law and procedure to consider unsolicited letters from non‑parties like this. A party who has a good cause to intervene in proceedings should follow the proper procedure and make a formal application for joinder.