MAXGOOD INTERNATIONAL LTD. v. CHARTER VICTORY INTERNATIONAL LTD.

HCA 12017/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12017 OF 1997

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JUDGMENT

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1. In this action, the Plaintiff company is suing the Defendants for:-

(i) commission in the sum of $10,250,000, alternatively at 3% of the payment received by the "Defendants" in the sale of certain property;

(ii) a declaration that the 1st Defendant company "at all material times were acting as agent for the 2nd Defendant";

(iii) a declaration that "the corporate veil of the 1st Defendant be lifted".

Background

2. Before I set out the issues, it may be helpful to first summarize the background facts.

3. The 1st Defendant company was the owner of a piece of land in Kowloon ("the property"), for which permission to build a hotel had been granted by the authorities.

4. The 2nd Defendant ("Chau") controlled the 1st Defendant company. He was a property developer who also controlled other property-holding companies.

5. The Plaintiff company was in the business of acting as an agent. Dr Tan Tiong Hong ("Tan") was its executive chairman and held half of the shares in the company.

6. It is common ground between the parties that an agency agreement was made around August 1996 for the purpose of finding a purchaser for the property. What is however in dispute is the identity of the parties to this agreement. The irony of the situation is that the Plaintiff's primary case is that the principal was Chau (not the 1st Defendant) and that the agent was the Plaintiff company (not Tan), whilst the Defendants' case is that the 1st Defendant (not Chau) was the principal and Tan (not the Plaintiff) was the agent.

7. After the agency agreement was entered into, the Plaintiff got a Malaysian businessman, Khoo Chai Kaa ("Khoo") interested in the purchase of the property. Early in November 1996, a Malaysian company controlled by Khoo, Nikmat Maju Development Sdn. Bhd ("Nikmat"), made an offer to the 1st Defendant company. This was followed by a series of counter-offers between the Plaintiff and Nikmat.

8. Eventually, on 27 December 1996, the 1st Defendant company entered into a Provisional Sale and Purchase Agreement to sell the property at $350m to a Hong Kong company called United Trump International Ltd ("United Trump") which was controlled by Khoo. On 16 January 1997, the Formal Sale and Purchase Agreement was signed by the same parties, but the purchase price was reduced to $345m. The assignment of the property took place on 10 April 1997.

9. Around the same time, on 8 April 1997, a Development Agreement was entered into between United Trump and Molitoko Ltd, another company controlled by Chau, for the construction and decoration of a hotel on the property. The consideration for the works was $150m. As events transpired, the construction project was subsequently abandoned.

Plaintiff's case

10. It is the Plaintiff's case that it is entitled to commission for introducing the purchaser of the property. It claims to be entitled to a commission of 3% on the purchase price of the property of $345m, i.e. $10,350,000. The Plaintiff is however prepared to give credit to the Defendants in the sum of $100,000. This sum was paid by Molitoko to a subsidiary of the Plaintiff called Sianara Investment Ltd, but in a receipt signed by an officer of the Plaintiff, the sum was referred to as a loan only.

11. The Plaintiff's primary case at trial was that its principal in the agency agreement was Chau, but that the 1st Defendant company is liable as Chau's undisclosed principal.

Defendants' case

12. The Defendants' case is that neither defendant is liable to the Plaintiff. Their case is as follows:-

(a) that whilst there was an agency agreement, it had been made between the 1st Defendant company and Tan personally, and Tan is not a party to the action;

(b) in any event, no commission is payable because it had been agreed that commission would only be paid in the event of a "successful transaction" of sale of the property with the hotel development project at $500m, which was not achieved by the sale of the property at $345m. or $350m. and the entering into of the development agreement for $150m;

(c) irrespective of the contentions at (a) and (b) above, the Plaintiff is not entitled to commission as it had failed to disclose to the Defendants that Tan was a shareholder and director of United Trump, and Tan and the Plaintiff had put themselves in a position of conflict of interests.

Issues

13. The issues that have arisen can be classified as follows:-

(i) who were the parties to the agency agreement?

(ii) if it is found that the 1st Defendant company (and not Chau) was party to the agency agreement, should the corporate veil of the 1st Defendant company be lifted so as to render Chau personally liable?

(iii) was commission payable when:-

(a) the land was sold for $345m.?

(b) the purchaser was United Trump, and not Nikmat?

(c) as Chau alleged in evidence, Tan had guaranteed that if the 1st Defendant company would release the title deeds to the purchaser instead of holding them as security for the payment of the $150m under the Development Agreement, $50m. would be paid to it (the 1st Defendant company), and this sum has not been paid?

(iv) what is the effect on the agency agreement of Tan's shareholding in and directorship of United Trump?

(i) Parties to the agency agreement

14. It appears to be common ground that the agency agreement arose from discussions between Chau and Tan who were friends and who met from time to time. According to Tan, Chau had earlier attempted to interest the Guoco group (where Tan worked) in acquiring the property but the group was not interested. This was not disputed by Chau.

15. There is some dispute between the parties as to whether in the summer of 1996, Chau sought out Tan again specifically in relation to this property, or whether Tan sought out Chau, but this dispute is not relevant to the determination of this issue. What is common ground is that Chau and Tan had discussions about trying to sell the property.

16. The first issue concerns the capacities of Chau and Tan when they made the agency agreement, which was made orally and was evidenced (at least in part) by a letter dated 29 August 1996 from the 1st Defendant company to the Plaintiff company.

17. I find that in making the agency agreement, Chau was acting as a director of the 1st Defendant company only and that he was not contracting personally as principal. Mr Chau's evidence in cross-examination was that he had given the 1st Defendant company's name as the owner of the property before August 1996 at a very early stage of discussions, and that the Plaintiff company had been given documents bearing the 1st Defendant company's name as the owner of the property. However, no contemporaneous documentary evidence was adduced to support this allegation.

18. This aspect of Chau's evidence was denied by Tan, who said that he did not know that the 1st Defendant company would be the party to the sale until the Provisional Sale and Purchase Agreement. That cannot be right, because Nikmat's 1st offer of purchase on 1 November 1996 was addressed to the 1st Defendant company. Nikmat could not have known the 1st Defendant company's name (as the party to which it should address its offer to purchase the property) except through the Plaintiff company.

19. Dr Tan admitted in cross-examination, however, that he knew that Chau had many companies doing property development business. He also said that when Chau asked him to be an agent for the sale of the property, Chau had advised him to set up a company first (he told Chau that he did not need to do so as he already had the plaintiff company). That shows quite clearly that, to Tan's knowledge, Chau did business using limited companies. There was no evidence of any statement from Chau that he would be personally responsible to pay the commission even though the vendor (which would benefit from the performance of the agency agreement) was a limited company.

20. Thus, even if the name of the 1st Defendant company had not been disclosed to Tan or the Plaintiff until the 1st Defendant's letter of 29 August 1996, it would not be a case of the 1st Defendant company being Chau's undisclosed principal, but simply of it being unnamed until the letter confirming the oral agreement made by Chau, its director.

21. The letter bore the 1st Defendant company's letterhead and was signed by Wallace Cheng, Investment Manager, "for and on behalf of Charter Victory Int'l Ltd" (the 1st Defendant company). It refers to the conversation between "our Mr. C.C. Chau (the Vendor)" and the Plaintiff, the letter being marked for the attention of Tan. The letter thus makes it clear that the principal for the agency agreement was the 1st Defendant company.

22. As for Tan's capacity, the Defendants have sought to argue that Tan was the agent, and not the Plaintiff company. I reject that contention, as the letter was clearly addressed to the Plaintiff company, albeit marked for Tan's attention. It is true that in subsequent letters dated 29 October 1996 and 8 November 1996, the 1st Defendant company wrote that 5% and 3% of the purchase price would be paid to Tan, without mentioning the plaintiff company by name. However, the relationship between the parties (insofar as recorded in contemporaneous documents) commenced with the letter dated 29 August 1996 and that clearly stated the agent to be the Plaintiff company, not Tan. There was no evidence of any contractual variation of that position.

23. I find therefore that the true position was that both Chau and Tan were acting in their capacities of directors only (of the 1st Defendant company and the Plaintiff company respectively) in entering into the agency agreement. That finding is supported by the fact that they were both experienced businessmen who were evidently aware of the advantages of conducting business through limited companies.

(ii) No lifting of corporate veil

24. The next issue is: it having been found that the 1st Defendant company (and not Chau) was party to the agency agreement, should the corporate veil of the 1st Defendant company be lifted, as the Plaintiff contends, so as to render Chau personally liable?

25. I have no hesitation in rejecting this aspect of the Plaintiff's case. It has pleaded that the Court should lift the corporate veil as the 1st Defendant company had acted merely as a facade for Chau to enable Chau to evade his legal obligations to the Plaintiff.

26. However, it is noted that the property had been owned by the 1st Defendant company since 1993, some 3 years before the agency agreement. It cannot be suggested that the property had been put into the 1st Defendant company's name in order that Chau could evade any personal legal obligations to the Plaintiff, and as I have found, it was the 1st Defendant company (the owner of the property) which would benefit from its sale, Chau not having assumed any personal rights or obligations. The concept of a limited company being a separate legal entity from the person who controls it is well-entrenched in our laws, and the corporate veil should not be lifted unless circumstances clearly require it under established rules.

(iii) Commission payable under agreement

27. The next issue is whether commission was payable in light of the actual agreement for sale and purchase that eventually ensued. The first step in the determination of this issue is to consider what the agreement for commission entailed.

28. Chronologically, it is necessary to start in August 1996. It has been pleaded by the Plaintiff that there was an oral agreement for agency on or about 29 August 1996 (that being the date of the letter from the 1st Defendant company to the Plaintiff company).

29. The letter itself is not relied upon by the Plaintiff even as evidence of the oral agreement. In fact, the letter is peculiar in that it refers to the Plaintiff as "purchaser". An item of agreement recorded in the letter is that the "purchaser" will be entitled to an "award" equivalent to 5% of the purchase price "from fulfilment of all terms and conditions listed for this deal".

30. In their evidence, however, both Chau and Tan took the position that Tan (or, as I have found, the Plaintiff company which he represented) was not a "purchaser", but was only an agent. Tan's evidence was that he had never purported to be a prospective purchaser. He did not have such funds and Chau knew it. He regarded the references in the letter to his company as "purchaser" as errors, which he claims to have told Chau about. Chau's evidence was that he did not know if there was even a prospective purchaser or not at that stage, but that since Tan (i.e. his company) was to act as an agent, the agent should be entitled to commission and the letter was to record that agreement. He did not read or write English and had left the drafting of the letter to Wallace Cheng, who may have misunderstood. Mr Cheng was not called as a witness to explain why he used the term "purchaser", so the only evidence that the Court is left with is that both sides are agreed that Tan (i.e. his company) was acting throughout as an agent and was regarded as such.

31. In that first letter in which the terms of sale are mentioned, the purchase price was to be $550m. on the basis that an Occupation Permit would be obtained from the Buildings Department.

32. This was later varied by a letter from the 1st Defendant company dated 29 October 1996 faxed to Tan who was negotiating with Khoo in Kuala Lumpur. In this letter, the purchase price demanded by the 1st Defendant company was reduced to $410m. but this was for the land and approved plans only.

33. This was superceded by a letter dated 8 November 1996 which the Plaintiff relies upon as evidencing the agency agreement. In this letter, the 1st Defendant company indicated that its terms were for a purchase price of $500m. excluding decoration for the Chinese restaurant. The last paragraph of this letter stated that "in the event of successful transaction, 3% of the purchase price will be awarded to [Tan]. The payment will be pro rata upon the payment payable by the purchaser to us [the 1st Defendant company]".

(a) The question is whether that meant that commission would be payable only if the property was sold at $500m., even though the 1st Defendant company agreed to a sale on different terms later.

34. I find that commission was payable to the agent even though eventually the agreement for sale was effected on different terms. It is established law that if an agent was the effective cause of the agreement for sale and if there were implied terms that remuneration would be payable upon the happening of the transaction that actually resulted, albeit at a lower price than that set out in the authorization of agency, commission would still be payable (Bowstead & Reynolds on Agency, 7th ed. paragraph 7-029).

35. Here, the Plaintiff was clearly the effective cause of the sale that eventually resulted. Nikmat was not known to the Defendants before the Plaintiff's introduction. The Defendants have sought to argue that the eventual agreement for sale came about when Chau flew to Malaysia to negotiate directly with Khoo, but that was not because the Plaintiff could not or would not conduct negotiations. The Plaintiff was ready willing and able to carry on being middle-man, and a principal cannot say that the agent is not entitled to commission merely because the principal himself short-circuited the process and took it out of the agent's hands to do the acts that would earn it commission. Indeed, Chau acknowledged that Tan participated in discussions up to January 1997.

36. Further, it is clear that the eventual $345m. and $150m. transactions were simply the end-result of the various formulations considered in the counter-offers during negotiations since August 1996 in which the letter dated 8 November 1996 was but a step. After that letter, there was a counter-offer on 12 November, followed by a lunch meeting which the Plaintiff's KK Low attended. In early December 1996, Low and Khoo discussed a split of the purchase price into $350m. for the property and $150m. for the construction work. Then in late December, Chau went to Malaysia with the agenda of trying to achieve a split of $400m for the property and $100m for the work. This then evolved into $350m for the property and $150m for the work.

37. Therefore, when the letter of 8 November 1996 referred to a "successful transaction", that was not restricted to a sale at $500m. only, but should be read to mean the closing of a deal between the 1st Defendant company and the purchaser. If the 1st Defendant company, despite its earlier position for an outright sale at $500m, eventually agreed to a formulation which by then had evolved into sale of the property for $345m. and a construction agreement for $150m., then that was a successful transaction effectively brought about by the Plaintiff's introduction for which commission should be paid (subject to the matters discussed later in this Judgment).

(b) The next question is whether it could be argued by the Defendants that since the purchaser was United Trump and not Nikmat, that the Plaintiff was not the effective cause of the transaction.

38. The 1st Defendant company asserts that United Trump had been introduced not by the Plaintiff but by Khoo. This argument is artificial. United Trump was only a replacement for Nikmat. It only entered the picture after Khoo had received advice that it would be better for the property to be held by a company incorporated in Hong Kong as Nikmat was a Malaysian company.

39. As between principal (the 1st Defendant company) and agent (the Plaintiff), the fact was that there was a successful transaction for the sale of the property introduced by the agent. The fact that the third party (Nikmat) had at some stage chosen to nominate another company (United Trump) to carry on from where it left off, to which the principal does not object, does not undo the successful transaction and disentitle the agent to commission.

(c) The final question in this regard arises from Chau's evidence that Tan had guaranteed that if the 1st Defendant company would release the title deeds to the purchaser instead of holding them as security for the payment of the $150m under the Development Agreement, $50m. would be paid to it (the 1st Defendant company). As this sum has not been paid, Chau says the Defendants are not liable to pay the commission.

40. It is noted that this "defence" was never pleaded in the Defence, nor appeared in Chau's Witness Statement. Indeed, even in examination in chief, the evidence arose only elliptically. There is nothing in the contemporaneous documents evidencing or referring, even tangentially, to such an agreement. There was no satisfactory explanation as to why this defence was raised so late and I do not accept Chau's evidence on this aspect.

41. Therefore, save for the matter of non-disclosure and conflict of interests discussed below, I find that the 1st Defendant company would be liable to pay commission at 3% of the purchase price of $345m to the Plaintiff company.

(iv) Failure to disclose relationship with purchaser

42. However there is the matter of Tan's relationship with United Trump. It is not disputed by the Plaintiff that on the same day as United Trump's execution of the Provisional Sale and Purchase Agreement, i.e. 27 December 1996, Tan accepted appointment as one of the two directors of United Trump, the other director being Khoo. On the same day, 2 shares were allotted, 1 to Tan, and the other to Khoo. These appointments and allotments were reported to the Companies Registry on 25 January 1997.

43. It is the Defendants' case that Tan and the Plaintiff company of which he was a director had failed to disclose this relationship to the Defendants and had put themselves in a position of conflict of interests, thereby disentitling the Plaintiff to commission. If an agent who is employed to sell land sells it to a company in which he is a director and shareholder, he is not entitled to commission upon the sale, even if the sale is confirmed by the principal (Salomons v Pender (1865) 3 H&C 639, Bowstead & Reynolds on Agency, 320).

44. It can make no difference that the agent was the Plaintiff company and that it was Tan who was the purchaser company's director and shareholder. Tan was a director of the Plaintiff and thus his knowledge of his relationship with United Trump is imputed to the Plaintiff company.

45. Further, it is clear from the evidence that even though Tan accepted appointment on the same day as the Provisional Sale and Purchase Agreement, his relationship with United Trump had started prior to that day, during the time when there were still negotiations and when the Plaintiff's duties as agent for the 1st Defendant company had not been completed.

46. In cross-examination, Khoo gave various versions as to when Tan agreed to be a director and shareholder of United Trump, which Khoo said he acquired about a month before the Formal Sale and Purchaser Agreement in mid-January 1997. He did however accept in cross-examination that he had invited Tan to be a director and shareholder during the "final negotiation time, when we were nearly there", in other words, before the agreement for sale and purchase was concluded by the signing of the Provisional Sale and Purchase Agreement. Tan's evidence too was that he became a director of United Trump because he was asked by Khoo to "facilitate the formation of his company". Since that must have come before United Trump's name was put forward as purchaser in the Provisional Sale and Purchase Agreement, that again would place the time frame of his relationship with United Trump as having commenced before the conclusion of the sale and purchase. Tan himself said in cross-examination that he agreed in November or December 1996 to be a director of the company that Khoo was intending to be the purchaser of the property.

47. It matters not in my view what Khoo's purpose was in inviting Tan to be a director and shareholder of United Trump or what was Tan's reason for accepting it. It also does not matter that Tan held his 1 share on trust for Khoo or that a few months later, Khoo was allotted substantially more shares so that Tan's shareholding became nominal in value. The fact remains that an agent should not serve two masters and that he should not place himself in a position when his two masters had conflicting interests, whether actual or potential (Richard Ellis Ltd v Van Hong-tuon [1988] 1 HKLR 169).

48. The Plaintiff's contention as pleaded in the Reply was that the Defendants were aware of the situation, and that United Trump was acquired in order only to obtain facilities from financial institutions in Hong Kong and that Tan only had 1 share. However, this contention of knowledge of the Defendants is not supported by the evidence.

49. Mr Chau's evidence was clear that he only became aware of Tan's involvement with United Trump in around June 1997, when United Trump failed to make payment under the Development Agreement. A company search of United Trump was done which revealed Tan's directorship and shareholding. Mr Chau's evidence on this was straightforward and strong and he was not shaken in cross-examination.

50. Dr Tan's evidence was that he had "assumed" that Chau's solicitors had done a companies search on United Trump. He accepted in cross-examination that it was only a "presumption" on his part. In any event, a search in December 1996 would not have revealed Tan's involvement because the relevant documents were only registered with the Companies Registry a month later.

51. In the course of cross-examination, Tan at one stage said he had "declared it", but he was not able to say to whom, and indeed he was extremely vague about what he declared. When pressed, he could only say that it was "common knowledge" that Khoo had asked him to help and that he agreed to hold 1 share, but he was not able to say how that private agreement between them could have become "common knowledge" unless either of them informed the Defendants, and there was no satisfactory evidence that either of them had done so. When an agent relies upon disclosure to and consent of his principal to his serving two masters, the disclosure must be full and frank, and the consent must be explicit and informed (Richard Ellis, 174E).

Order

52. In the circumstances, I find that the Defendants are not liable to the Plaintiff and I would accordingly dismiss the action with an order nisi that the Plaintiff bear the costs of the action.