HUNG FUNG ENTERPRISES HOLDINGS LTD AND ANOTHER v. THE AGRICULTURAL BANK OF CHINA

HCA 16459/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16459 OF 1998

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J U D G M E N T

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INTRODUCTION

1.   In this action, the Plaintiffs claims against the Defendant for damages arising from its breach of an oral agreement (“Swap Agreement”) to exchange certain landed securities over two lots of land, lot number G09205-1(2) and G09205-1(3) (“the two lots of land”) in Longgang district in Shenzhen of the People’s Republic of China (“PRC”) represented by land use certificates number 1001335 and 1001336 (“the two LUCs”) charged to the Bank as security for the 1^st Plaintiff’s borrowings for another set of landed securities represented by another five land use certificates number 1008583, 1008587, 1008636, 1008639 and 1008642 (“the five LUCs”) owned by the 2^nd Plaintiff.  The two lots of land and the two LUCs are conveniently referred to as “old securities” and the five LUCs as the “new securities”. For twenty-six months, the Defendant held on to the two LUCs as well as the five LUCs without effecting the exchange.  As a result, the Plaintiffs were unable to dispose of the land represented by those seven land use certificates and the buildings built thereon and suffered loss.  The Plaintiffs also claim against the Defendant for misrepresentation, breach of warranty and conversion of the five LUCs. 

2.  The Defendant counterclaims against the Plaintiffs for repayment of loans advanced to the 1^st Plaintiff under various loan facilities.

3.  This action took twelve years to come to trial. A fore-warning is that this case is one of abundance: abundance of inaction and delay, abundance of evidence, documents and expert opinion and abundance of legal argument.  Most of these were unnecessary and even futile.  These abundance contributed to an over-burdened judgment.

Dramatis personae

4.  Hung Fung Holdings Limited (“HF Holdings”) was a company incorporated on 4 April 1991 in accordance with the Companies Ordinance, Cap 23.  It had a number of subsidiaries in Hong Kong and the PRC, including Hung Fung Enterprises Holdings Limited (i.e. the 1^st Plaintiff), Hung Fung Holdings (Shenzhen) Company Limited (i.e. the 2^nd Plaintiff,) and Hung Fung Property Development Limited.  These companies and the other subsidiaries are collectively referred to as the “HF Group”.  The HF Group dealt in property investment, engineering, construction, glass and aluminium products.  Chan Siu Ping was the director, majority shareholder and person in control of HF Holdings, HF Enterprises Holdings Limited and HF Holdings (Shenzhen) Company Limited and some of the subsidiaries.

5.  Hung Fung Enterprises Holdings Limited(雄豐企業控股有限公司)(“HF Enterprises”) is a company incorporated in Hong Kong and carries on the business of project management and investment holding.  It is the holding company of HF Holdings (Shenzhen) Company Limited.  It is the 1^st Plaintiff in this action.

6.  Hung Fung Holdings (Shenzhen) Company Limited(雄豐集團(深圳)有限公司)(“HF Shenzhen”) is a company incorporated in the PRC and carries on the business of real estate development in Shenzhen.  It is a subsidiary of HF Enterprises.  It is the 2^nd Plaintiff in this action.

7.  Hung Fung Property Development Limited(“HF Property”) is a company incorporated in Hong Kong.  It is a subsidiary of HF Holdings.

8.  The Agricultural Bank of China(中國農業銀行)(the “ Bank”)is a bank incorporated in the PRC.  It is registered under Part XI of the Companies Ordinance in Hong Kong.  It has a branch in Shenzhen.  At the material time, it maintained an offshore banking department(離岸業務部) (“Offshore Department”) in Hong Kong to provide services for its Hong Kong customers.  It is the Defendant in this action. 

9.  Shenzhen Longgang Lung Shing City Development Industrial Company(深圳市龍崗龍城城建開發實業有限公司)(“Lung Shing Property”) is a property development company of the Longgang government.

10.  Shenzhen Jiuzhou Property Development Company Limited(深圳市九州房地産開發有限公司)(“Jiuzhou Property”) is a property development company of the Longgang government.  It was formerly known as Shenzhen City Longgang Township Property Development Company(深圳市龍崗鎮物業發展公司).

11.  Shenzhen Zhenye (Group) Holdings Company Limited(深圳振業股份有限公司)(“Zhenye Holdings”) is a construction company in Shenzhen.

12.  Guangzhou Yue Hua General Trading Company(廣州市裕華綜合貿易公司)(“Yue Hua Trading”) is a trading company in Guangzhou.

13.  Chan Siu Ping (“Chan”) and Wong Kwok Sing (“Wong”) are the Plaintiffs’ only factual witnesses.

14.  Geng Jinhai (“GJH”), Li Yutian (“LYT”), Chen Yaoping (“CYP”), Xie Fung (“XF”), Chen Wu(“CW”), He Xiaomao (“HXM”) are employees of the Defendant.  Except for GJH, all of them gave evidence on behalf of the Bank. 

15.  Professor Zhang Xianchu (“Zhang”) is the Plaintiffs’ expert witness in PRC law.

16.  Huang Hui (“HH”) is the Bank’s expert witness in PRC law.

17.  Neill Poole (“Poole”) is the Plaintiffs’ expert witness in accounting.

18.  Mark Bowra (“MB”) is the Bank’s expert witness in accounting.

19.  Leung Siu Hong (“Leung”) is the Plaintiffs’ expert witness in quantity surveying.

20.  Cheung Tat Tong (“CTT”) is the Bank’s expert witness in quantity surveying.

21.  Ng Sai Hee (“Ng”) is the Plaintiffs’ expert witness in property valuation.

22.  Li Chi Ho (“LCH”) is the Bank’s expert witness in property valuation.

23.  For ease in reading, the Plaintiffs’ witnesses are referred to by their surnames, while the Defendant’s witnesses are referred to by their initials.

The background

24.  In 1992, Chan acquired the two lots of land in Longgang district, which were subsequently held under the two LUCs and some other lots of land in Longgang district through one of the subsidiaries of HF Holdings.  He entered into an agreement with two PRC parties, namely Jiuzhou Property and Zhenye Holdings on 1 July 1993 to construct a development known as New City Garden (“NCG”) over those lots of land (“Jiuzhou Agreement”).  On 2 July 1994, Lung Shing Property substituted Jiuzhou Property as one of the contracting parties.

25.  On 8 July 1994, HF Holdings entered into a formal co-operation agreement with Lung Shing Property to develop NCG.  Later, HF Shenzhen entered into an identical agreement with Lung Shing Property to develop NCG and backdated it to 8 July 1994 (“1994 Co-operation Agreement”). Under that agreement, Lung Shing Property would pay the land premium and obtain the land use certificates in respect of the land under its name.  The land premium of the various lots of land was paid by HF Shenzhen but the lots of land were held in the name of Lung Shing Property under an arrangement known in the PRC as “gua kao(掛靠)”,which is a common way of enabling foreign entities to participate in business activities restricted to Chinese entities.

26.  Then the Bank came into the scene.  On 19 October 1994, HF Holdings became a customer of the Bank through its Offshore Department.  As at 1996, the Bank had granted four facilities to HF Enterprises, totalling $35 million.  Those facilities were:

Date	Facility	Security	Owner
29/11/1994	$14 million, repayable by 9/12/1995     (“Facility 1”)	Lot number G09205-1(3)	Lung Shing Property
23/01/1995	$12 million, repayable by 27/01/1996     (“Facility 2”)	Lot number G09205-1(2)	Lung Shing Property
22/08/1995	$2 million, repayable on demand  (“Facility 3”)	Sheung Shui Property	HF Enterprises
23/10/1995	$7 million, repayable on demand (“Facility 4”)	PRC Factory	HF Shenzhen

Facility 1 and Facility 2 were secured against the two lots of land of which Lung Shing Property was the registered owner and mortgagor.  The two LUCs were kept by the Bank.  On 28 February 1996, Facility 1 and Facility 2 were consolidated into a single facility of $26 million repayable on demand (“Consolidated Facility”).  Facility 3 was secured against Section A of Lot No. 725 in Demarcation District No. 94, Lin Tong Mei, Sheung Shui, New Territories, Hong Kong (“Sheung Shui Property”) owned by HF Enterprises.  Facility 4 was secured against a factory in the PRC (“PRC Factory”) owned by HF Shenzhen.

27.  Pursuant to the 1994 Co-operation Agreement, a housing development comprising of twelve blocks of flats known as NCG Phase 1 was built.  Pre-sale permits were obtained for blocks B1 to B4.  HF Holdings apportioned a little over two of those blocks of flats to Lung Shing Property in repayment of about RMB20 million land premium paid by Lung Shing Property for HF Shenzhen.  All four blocks of flats were sold or assigned in 1995.  The remaining eight blocks were built over the two lots of land mortgaged to the Bank.

28.  In 1993, the township of Longgang was upgraded from rural area to urban area and became a district under Shenzhen City.  As a result, in 1996 Shenzhen Land Bureau required HF Holdings to pay additional land premium of over RMB70 million for the various lots of land in Longgang it had purchased before Shenzhen Land Bureau as a condition for issue of the respective land use certificates.  The trade receivables due to HF Holdings or HF Enterprises in respect of construction works they executed for the Shenzhen government were applied by the Shenzhen government to off set the additional land premium.  As a result, HF Enterprises fell into arrears in repaying the Bank under the various facilities. 

29.  Since 1996, HF Holdings or HF Group as a whole was in financial difficulties.  On 27 June 1996, Chan wrote to GJH explaining the cash flow problem which HF Enterprises was facing.  He enclosed copies of nineteen land use certificates held by HF Group.  He assured the Bank that it would have trade receivables of RMB60 million in July and August 1996 to repay the loans.  He said that he had secured some interested buyers for the flats in NCG Phase 1.  He proposed mortgaging another lot of land use certificates of equivalent value to the Bank as security so that the two LUCs held by the Bank could be released to HF Enterprises to facilitate sale of the flats in NCG Phase 1 to alleviate HF Enterprises’ cash flow problem.

30.  Following that letter, a meeting between Chan and Wong representing HF Enterprises and GJH and LYT representing the Bank was held in the conference room of the Bank in Shenzhen on 9 July 1996.  It was a very brief meeting.  At the meeting, Chan selected five copy land use certificates from among a batch of nineteen copy certificates which he had sent to the Bank together with his letter of 27 June 1996 to be used in exchange for the two LUCs.  LYT requested for the original certificates.  According to Chan, which was hotly disputed by the Bank, an agreement was reached at the meeting to swap the two LUCs for the five LUCs, i.e. to swap the old securities for the five LUCs which would be used as new securities and that the Bank would also consider whether to release the securities over the PRC Factory and Sheung Shui Property as well.  This meeting formed the principal basis of the Plaintiffs' claim under the Swap Agreement. 

31.  On the following day, Wong faxed a minute of the meeting held on 9 July 1996 to the Shenzhen branch and the Offshore Department confirming the agreement to swap land use certificates reached at the meeting. On 16 July 1996, Wong delivered the originals of the five LUCs to the Offshore Department.  Those certificates were then sent by courier to Shenzhen branch and kept in the vault of the Bank.  Since then, Wong issued numerous faxes pressing for the swap.

32.  On 28 July 1996, HF Shenzhen entered into an agreement with Lung Shing Property and Yue Hua Trading for the sale and purchase of 168 flats in blocks B-5 to B-8 of NCG Phase 1 at a consideration of RMB39.95 million.  HF Shenzhen was to deliver possession of the blocks of flats on or before 30 December 1996.  A deposit of RMB1 million was paid to HF Shenzhen.

33.  Wong kept chasing the Bank for the swap.  He alleged that he had a telephone conversation with LYT on 8 October 1996 during which LYT informed him that the Bank had agreed to the swap.  LYT denied.  That conversation formed the alternative basis of the Plaintiffs’ claim under the Swap Agreement.

34.  On 23 April 1997, CYP replied by fax that the Bank agreed to process the request for swap but refused to release the securities over the PRC Factory and Sheung Shui Property.  He wrote: “貴公司…要求更換土地證1001335及1001336號，我行同意予以辦理”.  However, the swap was never effected.  As a result, HF Shenzhen was unable to complete the sale and purchase of blocks B-5 to B-8 of NCG Phase 1 and refunded the deposit to the intended purchasers on 24 January 1998.

35.  Eventually, in March 1998, the Bank asked HF Enterprises to apply for an extension of the facilities using the five LUCs held by the Bank as security after which the two LUCs would be released.  HF Enterprises complied with the request and other subsequent requests for amendment of the application and submission of valuation reports on the new securities. However, on 14 September 1998, the Bank informed HF Enterprises that the application was refused.  Yet it did not return the five LUCs until 24 September 1998 and only upon the demand of HF Enterprises’ then solicitors.  On the following day, the Plaintiffs commenced the present action.

36.  On 29 September 1998 the Bank demanded repayment of the outstanding loans under the facilities.  HF Enterprises failed to pay. The Bank commenced action in Shenzhen City Intermediate People’s Court and obtained judgment against HF Enterprises in the amount of $7 million in respect of Facility 4 under action number (1998) 深中法經調初字第654號(“Shen 654/1998”) on 24 April 2000 and in the amount of $21,190,543.97 in respect of the Consolidated Facility under action number (1998) 深中法經調初字第655號 (“Shen 655/1998”) on 18 April 2000.  HF Enterprises appealed against the judgment in Shen 654/1998, but the appeal was dismissed.  The Bank successfully sold the security, i.e. the PRC Factory, and recovered $6,066,883.39.  HF Enterprises did not appeal against the judgment in Shen 655/1998.  However, the Bank was unable to execute on the securities because the court of execution in Shanwei district took the view that while the two lots of land were held under the name of Lung Shing Property, the flats built thereon belonged to a third party (“Shan 219-2/2005”).  The Bank had not taken any action in respect of Facility 3 in the PRC.

37.  On 27 November 2000, a winding up order was made against HF Holdings in Hong Kong.

38.  In January 2003, the then solicitors of the Bank, Messrs Koo and Partners (“K&P”) discovered HF Enterprises had allotted 4 million of its shares to Chan.  As the allotment was made after the winding up order of HF Holdings, K&P believed that it was an invalid disposition contrary to section 182 of the Companies Ordinance.  At the instigation of K&P, the liquidators of HF Holdings commenced action in the High Court against HF Holdings, Chan and others for relief (“HCA 2957/2003”). Upon the application of the Bank, an order staying the present action pending the outcome of HCA 2957/2003 was granted on 12 August 2003.  HCA 2957/2003 was concluded in September 2007.  By consent, the order for stay was uplifted on 8 October 2007.   

The issues

39.  The Plaintiffs rely on four causes of action: breach of contract; misrepresentation; breach of warranty and conversion of the five LUCs.

40.  The principal basis of the Plaintiffs’ claim in breach of contract is the breach of Swap Agreement reached between Chan on behalf of the Plaintiffs and GJH and LYT on behalf of the Bank during the meeting on 9 July 1996 or alternatively reached between Wong on behalf of the Plaintiffs and LYT on behalf of the Bank during their telephone conversation on 8 October 1996. 

41.  The Plaintiffs’ claim for misrepresentation is based on representations made by the Bank in the course of negotiating the Swap Agreement.

42.  The Plaintiffs’ claim for breach of warranty is a repetition of their contractual claim based on collateral contract made prior to formation of the Swap Agreement. 

43.  The claim in conversion is based on the Bank’s undue and prolonged retention of the five LUCs.

44.  The Bank’s defence is one of denial.  It disputes the factual basis of the Plaintiffs’ claim and argues that even on the facts of the Plaintiffs’ case the Bank is not liable as a matter of law.  It denies the existence of the Swap Agreement whether reached on 9 July 1996 or 8 October 1996.  Its case is that the parties were only negotiating and never reached any binding or concluded agreement.  It disputes HF Shenzhen was the beneficial owner of the two lots of land or suffered any loss.  It also counterclaims for repayment of the outstanding loans under the various facilities and relied on the two PRC judgments, namely Shen 654/1998 and Shen 655/1998.

45.  The parties have agreed that the issues to be determined are as follows:

(1)   On the claim for breach of contract:

(a)        whether the Swap Agreement was reached between the Plaintiffs and the Bank in the meeting on 9 July 1996, whereby the Bank agreed to release the two LUCs to the Plaintiffs in exchange for the five LUCs to be provided by HF Shenzhen;

(b)        if no, whether the Swap Agreement was reached between the Plaintiffs and the Bank on 8 October 1996, whereby the Bank agreed to release the two LUCs to the Plaintiffs in exchange for the five LUCs to be provided by HF Shenzhen;

(c)         if the Swap Agreement was in fact made between the parties, what were the terms of that agreement;

(d)        the governing law of the Swap Agreement;

(e)         whether the Bank has breached the Swap Agreement;

(f)          the relief to the Plaintiffs as a result of the said breach;

(2)   As alternative to (1), on the misrepresentation claim:

(g)        whether the Plaintiffs can establish a claim against the Bank in misrepresentation;

(3)   Further to (1), on the breach of warranty claim:

(h)        whether the Plaintiffs can establish a claim against the Bank for breach of warranty;

(4)   On the conversion claim:

(i)          whether the Plaintiffs can establish a claim in conversion for the retention of the five LUCs between 1996 and 1998;

(5)       the governing law in respect of the above claims;

(6)       the quantum of the Plaintiffs’ claim, if the Plaintiffs succeed against the Bank; and

(7)       whether the Bank is entitled to the counterclaim and the quantum.

CREDIBILITY OF FACTUAL WITNESSES

46.  This is a case which is particularly fact sensitive.  Finding of fact and assessment of credibility of witnesses are extremely important.  In this section, I shall give an overall view of my assessment of the credibility of the factual witnesses.  I shall analyse their evidence more fully in specific areas where greater attention is required.  As for the expert witnesses, I shall deal with my assessment of their evidence in the respective sections where it will be more convenient and appropriate.

47.  The events in this case took place in 1996, some fourteen years ago.  Witnesses’ memory may have faded and their demeanour adversely affected.  However, there is a host of contemporaneous documentation in the form of faxes and other correspondence, mostly from the Plaintiffs.  The authenticity of those documents has never been disputed.  In approaching the evidence of such a case, I bear in mind the guidance of the Court of Appeal in Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corporation Ltd [2007] 3 HKLRD 439.  I shall approach the evidence with caution and place special weight on documentation.  I shall test the credibility of the assertion of any witness by reference to contemporaneous documentation where it exits, or to its absence and lack of explanation where one would expect it to have been created and to inherent probabilities having regard to all the known facts and incontrovertible evidence.  I shall consider the totality of the evidence and the context in which each piece of assertion arose.  I also bear in mind the tenor of the parties’ case.

Bird’s eye view of the Plaintiffs’ case

48.  The Plaintiffs’ principal claim is for breach of the Swap Agreement to swap securities.  The parties conducted their affairs peculiarly over a period of twenty-six months on the basis of an oral discussion to use a neutral term on 9 July 1996 or 8 October 1996.  As a result of the discussion on 9 July 1996, the Plaintiffs delivered very valuable title documents, namely the five LUCs with a value of RMB52 million at the time, which the Bank retained for twenty-six months.  During those twenty-six months, the Plaintiffs issued numerous faxes to the Bank referring to the Swap Agreement and pressing for completion of the formalities necessary for the exchange.  The Bank did not respond to that allegation except on one occasion on 23 April 1997.  On that occasion, it confirmed its agreement to the swap except in respect of the PRC Factory and Sheung Shui Property.  But the swap never took place.  Eventually, when the Bank rejected HF Enterprises’ application for extending the facilities, the Plaintiffs demanded return of the five LUCs and promptly instituted the present action on 25 September 1998.  The action was stayed until 8 October 2007.  By now, the events had taken place fourteen years ago.  This is the framework within which I shall analyse the credibility of the witnesses.

Chan Siu Ping (“Chan”)

49.  Chan is the Plaintiffs’ principal witness.  His credibility was severely attacked by Mr Chan SC, counsel for the Bank.  He was searchingly cross-examined.  The cross-examination was extended to matters which occurred some years after the events relating to the present dispute for the purpose of destroying his credibility.  Specifically, Chan’s conduct in the proceeding of (2003)粵高法民–終字第 311號(“Yue 311/2003 proceeding”) before the Guangdong Province Higher People’s Court(廣東省高級人民法院)was used as a weapon to impeach his credibility.  I shall deal with those matters in the latter part of this judgment.  In this section, I shall only give my general view on Chan’s credibility.

50.  Chan was the managing director and majority shareholder of HF Holdings, HF Enterprises and HF Shenzhen and a number of subsidiaries of the HF Holdings.  He was the person in control of the Plaintiffs.  He came from a humble background and was not highly educated.  He started off with an engineering company and built up a substantial business empire in early 1990. He was the “boss” of the group who was concerned with major management decisions but was seldom involved at the operational level which he delegated to his staff and accountants.  My overall impression is that Chan is not a sophisticated person.

51.  Chan’s business empire grew and prospered until 2000 when it collapsed with the winding up of HF Holdings on 27 November 2000 and his own bankruptcy.  What led to the collapse of HF Holdings is irrelevant.  Apparently, HF Holdings experienced cash flow problems in 1996 caused by the Shenzhen government applying contract fees payable to HF Group to pay or set off against additional land premium associated with upgrading of Longgang township to the status of a district.  HF Enterprises fell into arrears in repayment of the loans to the Bank. 

52.  That was the context in which negotiation for the Swap Agreement commenced.  I accept, as submitted by Mr Tong SC, counsel for the Plaintiffs that as HF Enterprises had been suffering from cash flow problems and had been in default of repayment to the Bank, it needed forbearance and help from the Bank to arrange for a swap of securities so that HF Shenzhen could sell some of the blocks in NCG Phase 1 to repay the facilities. The parties were not in equal bargaining position.  Chan was not in any position to be overbearing or pushy.  As the financial position of HF Holdings deteriorated further since 1997, the imbalance between their respective bargaining power became even more stark.  However, Mr Chan SC argues that despite the disparity in bargaining power, Chan would not be saying things he did not mean to say.  I think Chan was being diplomatic in his dealings with the Bank.  He acknowledged his handicapped position and refrained from being too pushy.  But as soon as the Bank confirmed its refusal to effect the swap despite all efforts to comply with the Bank’s requirements, he immediately demanded return of the five LUCs and promptly instituted action against the Bank.  His failure to take more active steps in obtaining alternative financing from other banking institutions by using the five LUCs during the twenty-six months is difficult to understand.  It may well be due to a combination of factors, including the imbalance in bargaining power, fear of retaliation by the Bank, undue reliance on LYT’s assurance, his inadequacy in financial management and lack of legal advice.  On the totality of the evidence, I do not think Chan’s evidence is in any way inconsistent with his dealing with the Bank.

53.  Between 1997 and 2000 came the Asian financial crisis and its aftermath.  HF Holdings was wound up in November 2000 and Chan was declared bankrupt.  Chan described HF Holdings at the time as a ship full of holes.  The entire group employing over 1,000 employees collapsed.  HF Enterprises was at its worst.  HF Holdings and Chan were being chased by creditors.  Chan had no money or assistance from his staff.  His hard-built business empire was vanishing fast right in front of his eyes.  According to Chan, that was the worst time in his life.  I have no doubt that such circumstances adversely affected the way Chan conducted his affairs in relation to the HF Group around that time.

54.  Yue 311/2003 proceeding was conducted in mid 2003.  By then, the winding up and bankruptcy proceeding had been concluded two and half years ago.  HF Holdings was in the hands of the liquidators, though Chan was still in control of HF Enterprises and HF Shenzhen.  He had lost everything and was worrying that he might face criminal prosecution in the PRC.  Though the worst of his time was behind him, Chan could not have been in the best of his condition to handle the proceeding.  Mr Chan SC suggested that Chan misled the PRC court as to HF Holdings’ right over the blocks of flats in NCG Phase 1 and misled this Court about his role in that proceeding.  Hence, he argues that Chan was an incredible witness.  It would be to Chan’s and the Plaintiffs’ disadvantage for him to claim that the blocks in NCG Phase 1 belonged to HF Holdings.  I accept that at the time Chan was in a state of confusion. He must have been worrying about the prospect of his being prosecuted in the PRC and was only too happy to go along with the judge to have the matter swept under the carpet.  More importantly, as submitted by Mr Tong SC, the Yue 311/2003 proceeding is a red-herring.  What happened in that proceeding took place in mid 2003, seven years after the material events in this proceeding. Whatever dishonesty displayed by Chan in that proceeding could have little impact on his credibility in this proceeding.  More importantly, the evidence Chan gave in relation to the issues in dispute in this proceeding is amply supported and borne out by the documentary evidence.  I shall deal with the Yue 311/2003 proceeding separately.

55.  On the whole, I find Chan a credible witness.  His evidence is largely supported by contemporaneous documents, the authenticity of which is not in dispute.  I accept his evidence, save as otherwise pointed out in this judgment.  Where his evidence conflicts with those of the Defendant’s witnesses, I prefer Chan’s.

Wong Kwok Sing (“Wong”)

56.  Wong was the general manager of HF Enterprises from 2 May 1994 to 31 January 2001.  He was also a director of HF Enterprises from 1 October 1994 to December 1999.  He had a master degree in business administration.  He acquired the qualification of Chartered Secretary during his employment with HF Enterprises.  He was responsible for most of the documentations of the Plaintiffs connected with this action.  He is no longer in the employ of Group.

57.  Mr Chan SC criticised Wong as an incredible witness.  I respectfully disagree.  I think Mr Chan SC’s criticisms are trivial and fault finding.  Most of Wong’s evidence is incontrovertible and supported by contemporaneous documentation, the authenticity of which is not challenged. Part of his evidence is favourable to the Bank.  He frankly admitted that there were inaccuracies in some of the faxes he issued to the Bank which he introduced in the hope of getting more favourable terms under the Swap Agreement for HF Enterprises.  There were some discrepancies between his and Chan’s evidence.  He was not involved in the actual decision-making process concerning HF Enterprises or in the affairs of HF Shenzhen across the border.  As he acted on the basis of Chan’s instructions, he might not be fully appraised of Chan’s acts and would have to rely to some extent on his own understanding and interpretation of the situation when he handled matters initiated by Chan but left to him to follow up.  I do not consider those discrepancies could in any way influence my assessment of their credibility.  After fourteen years, I would be very surprised if their evidence would match each other’s seamlessly. Wong has ceased working for Chan or HF Group for almost ten years.  He has no personal interest in this litigation.  He impressed me as a responsible witness.  I find him credible and accept his evidence except otherwise mentioned in other parts of this judgment.

Li Yutian (“LYT”)

58.  LYT was a manager of the Offshore Department of the Bank back in 1996.  He was the second in command.  His senior officer was GJH who was not called to give evidence.  He was the most senior officer available to give evidence on behalf of the Bank.  He was the one who had the most knowledge of what happened between 1996 and 1998.  He attended the important meeting with Chan on 9 July 1996.  He said that the purpose of that meeting was to discuss with Chan about HF Enterprises’ defaults in repayment of the outstanding loans.  He denied having agreed to swap securities. 

59.  Many of the faxes quoting the Swap Agreement from Wong were sent or copied to LYT.  LYT did not respond to any of them. When pressed during cross-examination, he replied that he responded orally. LYT also said that had pressed HF Enterprises for repayment orally.  But in none of his or his colleagues’ witness statements was it ever mentioned that any of them had responded to any of the faxes orally on the phone.  Had he done so, I would be surprised if Wong would not have responded in any of his faxes. This is precisely the type of case where in the light of the numerous faxes alleging an oral agreement and the fact that pursuant to that oral agreement the five LUCs which are title documents of five very valuable properties were handed over to the Bank that one expects a written denial would have been made if the allegation was untrue.  But such a document is missing. 

60.  The Bank was unable to produce even a single file note recording any such oral denial.  LYT’s and his colleagues’ evidence is that the Bank was very casual in filing correspondence.  It only filed formal documents.  The Bank had no system for filing correspondence exchanged with its customers.  Such letters and other communication from clients would simply be left lying around or filed or disposed of at the discretion of the officer concerned.  Their evidence is that the Bank’s practice was to communicate with its customers orally.  They would not correct their clients’ misapprehension or misunderstanding or state the Bank’s position even if its customers’ assertion is patently incorrect.  The officers were free to file or to discard any correspondence or faxes received at will.  Hence, there was no note of any oral response made to Wong’s faxes.  This is hardly credible for such a large and well-organised banking institution.

61.  More fatally is the fax reply from CYP on 23 April 1997.  That reply, as I have noted, was the only contemporaneous response from the Bank to Wong’s faxes.  CYP wrote that the Bank agreed to process the request for swap but refused to release the securities over the PRC Factory and Sheung Shui Property.  CYP’s fax is not conclusive evidence that an agreement was reached on 9 July 1996, but is more consistent with the Plaintiffs’ evidence than with LYT’s.

62.  Further, when he was stuck, LYT was prepared to volunteer any irresponsible answer to explain himself.  For instance, in order to justify his assertion that the Bank could not do anything for HF Enterprises in 1996, he said that was because HF Enterprises never made a formal application for new loan in connection with the swap.  When confronted with absence of any formal application relating to the extension of the Consolidated Facility in March 1996, he said that a board minute from HF Enterprises would qualify as a formal application.

63.  Applying the Court of Appeal’s test in Esquire (Electronics) Ltd, it is only too obvious that LYT is not a credible witness.  I do not accept his evidence.

Chen Yaoping (“CYP”)

64.  CYP was a marketing officer of the Offshore Department.  He succeeded HXM as the officer responsible for HF Enterprises’ account between the end of 1996 and the beginning of 1998.  He was actively involved in the account of HF Enterprises and was the officer who wrote the fax dated 23 April 1997 on behalf of the Bank confirming the swap.  He avoided answering questions relating to that fax by saying that he could not remember. That was the feature of his evidence under cross-examination.  He gave three witness statements, none of which disclosed anything of substance relating to this dispute.  He asked the Court to rely on LYT’s evidence and not his in case of conflict.  His attitude demonstrated a total disregard of his responsibility as a witness to tell the truth and his fear for saying anything contrary to his senior’s evidence or adverse to the Bank’s interest.  If he did not have clearance or confirmation about the Swap Agreement from LYT or GJH, he would not have replied along the lines of his fax dated 23 April 1997.  He is not a credible witness.

Chen Wu (“CW”)

65.  CW is a deputy manager of the Offshore Department.  At the material time, he was posted to work in Silux Investment Limited which was a private corporation set up by the Bank in Hong Kong.  He had previously handled the facilities of HF Enterprises.  He described himself as a “runner” or courier bringing documents to and from Shenzhen.  He arranged the Bank’s visit to HF Shenzhen.  Mr Tong SC criticised CW as being less than honest when he suggested he had little involvement in this dispute.  That criticism may not be fair.  There was nothing material in his evidence, anyway. 

YUE 311/2003 PROCEEDING

Introduction

66.  Yue 311/2003 proceeding had not been raised by the Plaintiffs or the Bank in their pleadings.  It was first put in issue by the Bank in its counsel’s opening submission.  The Bank’s purpose was two fold: to discredit Chan and to show that HF Shenzhen was not the beneficial owner of the two lots of land.  The issue was vigorously argued and perhaps out of all proportion.  I shall first set out the background to that litigation and then deal with the attack on Chan’s credibility.  I shall leave the question of HF Shenzhen’s beneficial ownership of the two lots of land to be dealt with separately.  

Background

67.  It should be recalled that after HF Group acquired the land in Longgang district, it together with Jiuzhou Property on the one part entered into the Jiuzhou Agreement dated 1 July 1993 with Zhenye Holdings on the other part to develop the land into a residential development. The agreement was for a term of two years.  Under the agreement, HF Group and Jiuzhou Property would provide the land and obtain land use right from the government, while Zhenye Holdings would build and finance the building of the development and to lend RMB20 million to HF Group and Jiuzhou Property.  Upon completion of the project, Zhenye Holdings would be entitled to 55% of the flats built and be repaid the loan of RMB20 million by being allotted flats in the development calculated at a 10% discount of the current market price. 

68.  Upon signing the agreement, Zhenye Holdings advanced RMB 13 million to HF Group and Jiuzhou Property instead of RMB20 million.  It arranged for one of its subsidiaries, Shenzhen No.1 Construction Company (“No.1 Construction”) to execute the construction work.

69.  In late 1993, the State Council of the PRC implemented the macroeconomic control policy which had an adverse effect on the property market.  Jiuzhou Property wanted to pull out from the Jiuzhou Agreement.  The parties reached agreement to terminate the Jiuzhou Agreement. HF Group would repay the loan of RMB13 million from proceeds of sale of the flats in NCG Phase 1 and No.1 Construction would complete the development at a budgeted cost of RMB37 million to be settled after completion and sale of the development.  Lung Shing Property would substitute Jiuzhou Property as the contracting party.  The arrangement was approved by the Longgang government which is evidenced by a notice of the alteration dated 2 July 1994 published by the Longgang government (“1994 Arrangement”).  The above background facts are fully documented and not disputed by the Bank. 

70.  On 8 July 1994, HF Holdings and Lung Shing Property entered into a formal co-operation agreement.  Some time later, HF Shenzhen also entered into an identical co-operation agreement with Lung Shing Property backdated to 8 July 1994 (“Lung Shing Agreement”).  Chan explained that HF Shenzhen was newly incorporated and was not ready to enter into the co-operation agreement with Lung Shing Property.  Hence, HF Holdings entered into that agreement first which was then replaced by the Lung Shing Agreement and backdated to 8 July 1994.  As HF Shenzhen had been incorporated on 1 July 1994, that explanation is not convincing at all.  There was probably more that was left untold whether inadvertently or deliberately.  Mr Chan SC suggests that there was some impropriety or dishonesty on the part of Chan in entering into two identical contracts so that he could attribute the agreement to whichever of the two parties as it suited him.  But on the facts, it appeared that the Lung Shing Agreement had all along been performed by HF Shenzhen. According to the Capital Verification Report No. 113 of 1996 issued by Shenzhen Da Cheng Certified Public Accountants, HF Holdings injected $19,346,925 cash into HF Shenzhen by four instalments as at 28 November 1994 and land use right worth $80,653,075 on 28 June 1996.  The four cash injections totalling $19,346,925 were used to pay for the purchase price of various lots of land including the two lots of land.  Even the Bank’s accountancy expert confirmed that the evidence supported a link between HF Shenzhen and NCG and the two lots of land.  Thus, despite the somewhat unsatisfactory explanation given by Chan, I have no doubt about the propriety of the two co-operation agreements.  I accept that HF Shenzhen had substituted HF Holdings as the contracting party to the Lung Shing Agreement.

71.  As HF Shenzhen was unable to sell the flats in NCG Phase 1, Zhenye Holdings was not repaid the RMB13 million lent under the 1994 Arrangement with Lung Shing Property and HF Shenzhen.  In 2001, instead of suing HF Shenzhen and Lung Shing Property under the Lung Shing Agreement or the 1994 Arrangement.  Zhenye Holdings instituted action in the Shenzhen City Intermediate People’s Court under (2001) 深中法房初字第7號 against HF Holdings and Jiuzhou Property under the Jiuzhou Agreement (“Shen 7/2001”) and against Lung Shing Property as third party.  It sought a declaration that the Jiuzhou Agreement was null and void and sought repayment of monies paid under that agreement.  On 20 February 2003, the Shenzhen City Intermediate People’s Court granted judgment in favour of Zhenye Holdings.  It declared the Jiuzhou Agreement void; ordered HF Holdings, Jiuzhou Property and Lung Shing Property to repay Zhenye Holdings investment funds of RMB29,882,520 and the loan of RMB13 million with interest but dismissed all other claims of Zhenye Holdings.  Jiuzhou Property appealed to the Guangdong Province Higher People’s Court in Yue 311/2003.  The court allowed the appeal and set aside the award of Shenzhen City Intermediate People’s Court.  It ordered Zhenye Holdings to complete the construction of the eight blocks of flat in NCG Phase 1 and ordered six of the blocks to be transferred to Zhenye Holdings and two to be kept by HF Holdings.  Those facts are incontrovertible.

Chan’s involvement in Yue 311/2003 proceeding

72.  According to Chan, he learned about Shen 7/2001 proceeding taken out by Zhenye Holdings in early 2001.  As HF Holdings was in liquidation, he could not represent the company.  He gave notice of the action to the Official Receiver who was then the provisional liquidator of HF Holdings.  He was not involved in that action until 2003.

73.  In September 2003, Yang Guang, the general manager of the parent company of Lung Shing Property informed him about the outcome of Shen 7/2001 proceeding taken by Zhenye Holdings and of Jiuzhou Property’s appeal.  Yang enlisted his help as a witness in the appeal.  The purpose for which Chan was called was to produce a letter dated 20 October 1997 from Zhenye Holdings (“Zhenye Letter”) showing that Jiuzhou Property had withdrawn from the Jiuzhou Agreement.  Chan agreed.  Chan’s participation in Yue 311/2003 proceeding was under severe attack by Mr Chan SC.

74.  Mr Chan SC argues that Chan’s evidence that he participated as a witness on behalf of Lung Shing Property to produce the Zhenye Letter was a concoction and an excuse to explain his participation in that proceeding.  Mr Chan SC’s theme is that in that proceeding, Chan took a stand which was contrary to his stand in the present case and that in that proceeding HF Shenzhen had claimed no interest in the two lots of land.  Mr Chan SC argues that the Zhenye Letter did not show whether Zhenye Holdings had withdrawn from the Jiuzhou Agreement and Chan was unable to show the relevance of the letter.  As it was Chan’s evidence that he first saw the letter in around October 2003, Mr Chan SC queried how Chan could have testified on the letter.  The letter was issued by Zhenye Holdings and addressed to Lung Shing Property and HF Shenzen.  It referred to the Lung Shing Agreement to develop NCG and urged Lung Shing Property and HF Shenzhen to pay the land premium so as to facilitate sale of the units to repay Zhenye Holdings.  The purpose for which Chan was called was a matter for counsel of Lung Shing Property which Chan might not appreciate.  Having had some familiarity with the background of the case, I could well see the purpose of calling Chan, though the weight to be given to his evidence was a matter for the PRC court.  The Zhenye Letter was addressed to Lung Shing Property and HF Shenzhen, which were not parties to the Jiuzhou Agreement.  Thus, the contents of the letter were clearly referable to the 1994 Arrangement and the Lung Shing Agreement rather than the Jiuzhou Agreement.  Chan was the person in control of HF Shenzhen and HF Holdings and the person who negotiated the Jiuzhou Agreement, 1994 Arrangement and Lung Shing Agreement.  Though he might not have seen the letter in 1997, he was able to speak to the matters referred to in the letter and inform the PRC court of the historical background leading to the transactions.  Depending on the law of evidence in the PRC, Chan’s evidence might have some probative value.

75.  Mr Chan SC criticised Chan’s incomplete disclosure of the documents relating to Yue 311/2003 proceeding to this Court as a basis of attack on his credibility.  He argues that Chan’s disclosure was selective and it was only upon the Bank’s production of copies of certain pages of the notes of proceeding that the Plaintiffs produced the full set of documents.  He suggests that in view of the direction given by the Supreme People’s Court in (2009) 民監字第545號 (“SPC 545/2009”) in relation to HF Shenzhen’s appeal against the judgment in Yue 311/2003, the Plaintiffs could have access to the notes of proceeding in that case.  However, having seen the course which Yue 311/2003 proceeding took, I give little weight to that criticism.  In my view Yue 311/2003 proceeding is irrelevant to the dispute in the present case.  It was not pleaded by the parties, but raised in the Bank’s opening submission.  Chan had to urgently obtain the documents which were in the possession of PRC lawyers instructed by the liquidators of HF Holdings during the course of this trial.  The Plaintiffs’ un-preparedness in disclosing the documents could be understood.  So was Chan’s confusion in his witness statement which he prepared without the benefit of the full set of notes of proceeding to refresh his memory.  I draw no adverse inference against Chan.

76.  Mr Chan SC criticised Chan for telling lies before the PRC court claiming to have a copy of the Zhenye Letter when he even never had personal knowledge of that letter.  Chan had never seen that letter. His evidence at the highest was that he genuinely believed there was such a letter which was lost in the flood.  He asked his staff in HF Shenzhen to contact Jiuzhou Property and Lung Shing Property for a copy and obtained a copy of the Zhenye Letter and a reply from HF Shenzhen.  Even though what he believed was in fact true, his evidence was not.  He tried to economise on the evidence.  In so doing, he misled the PRC court.  To some extent, this reflected adversely on his credibility.

77.  According to the notes of proceeding, Chan appeared as the legal representative of HF Holdings and Zhou Tao appeared as its attorney.  Both of them signed the notes of proceeding.  Chan was adamant that he attended as a witness only and did not realise that he was acknowledged by the PRC court as representing HF Holdings or was he aware of the capacity with which Zhou Tao appeared.  Indeed, the notes of proceeding on 20 November 2003 showed that he gave some evidence, but it equally showed that he also participated as legal representative of HF Holdings when making suggestion to the judge as to how the flats in NCG Phase 1 should be divided and participated in mediation.

78.  Chan’s explanation was that he was confused at the time.  His concern was that the action should be settled as soon as practicable.  He said he was told by Yang that if he did not testify in the PRC court there would be very serious consequences, for if the court found out that the Jiuzhou Agreement was still subsisting and he had procured the change in one of the contracting parties from Jiuzhou Property to Lung Shing Property without Zhenye Holdings’ consent, he might attract criminal sanction.  Though Chan was prepared to testify that Jiuzhou Property had been substituted by Lung Shing Property, he found himself in a delicate situation as regards whether Zhenye Holdings had consented to the substitution.  He was in deep trouble at the time with the winding up of HF Holdings and his own bankruptcy.  Chan also explained that he had no opportunity to read the notes of proceeding as he signed them and was not given a copy afterwards.  Though his conduct was not what I would condone, I accept he was in genuine fear and was only too eager to have the matter swept under the carpet in whatever way he could.

79.  Mr Chan SC tried to contradict Chan’s evidence that Zhenye Holdings had withdrawn from the Jiuzhou Agreement because under cross-examination Chan admitted that Zhenye Holdings was still executing works in NCG Phase 2.  I think this criticism is unfair because the un-contradicted evidence of Chan was that Zhenye Holdings assigned one of its subsidiaries, No.1 Construction, to execute the works under the Jiuzhou Agreement and that No.1 Construction continued to execute the works under the 1994 Arrangement.

80.  There are many other allegations made against Chan suggesting he was not an honest witness.  In particular, Mr Chan SC suggests that in Yue 311/2003 proceeding, Chan claimed that the flats in NCG Phase 1 belonged to HF Holdings when it was convenient to him and now Chan claimed that they belonged to HF Shenzhen when it would be to his benefit.  I think those criticisms were trivial, fault finding and of no substance.  As Chan rightly pointed out, at the time HF Holdings was in liquidation while he still had a good stake in HF Shenzhen.  It would have been to his advantage if HF Shenzhen rather than HF Holdings was to claim ownership of the flats.  Chan was obviously in a state of confusion and was attending the proceeding as a witness for Lung Shing Property.  He was in fear and at a loss not knowing how to explain the ownership of the flats.  He was trying to have the proceeding settled to avoid the risk of his criminal prosecution in the PRC.  In any event, even when claiming the flats for HF Holdings, he told the PRC court that those flats were to be given to the Bank which must be in satisfaction of the loans owed by HF Enterprises to the Bank under the Consolidated Facility.  However, it is clear from the documentary evidence from the PRC that HF Shenzhen paid for the land premium.  This is not disputed by the Bank’s accounting expert. It is also clear that HF Shenzhen had taken over the responsibility of developing the land from HF Holdings. 

81.  At last, HF Shenzhen saw fit to correct the error in Yue 311/2003 judgment.  It failed to come to settlement with the liquidators of Lung Shing Property in 2007 and commenced action in the Shenzhen City Intermediate People’s Court on 20 April 2008.  It then withdrew the action in order to commence action in the Guangdong Higher People’s Court on 24 February 2009.  The Higher People’s Court refused to entertain the application.  On 8 June 2009, HF Shenzhen commenced action in SPC 545/2009 in the Supreme People’s Court to review the judgment in Yue 311/2003.  Eventually, the Supreme People’s Court dismissed HF Shenzhen’s application on the ground that it was made out of time.

Effect of the judgment in Yue 311/2003

82.  In the end, after the lengthy cross-examination, I agree with Mr Tong SC, that the Yue 311/2003 proceeding is but a red herring.  The fact that HF Shenzhen paid for the blocks of flats is clearly borne out by the documents.  Chan’s representation before the PRC court that they belonged to HF Holdings was misfortunate and, even if deliberate, was a fortuitous event blown all out of proportion by Mr Chan SC. Basically, I accept Chan’s explanation for the way he conducted himself in Yue 311/2003 proceeding.  But whatever might have been his conduct in that proceeding, it was seven years after the material events in this case and has no impact on his credibility.

OTHER PRC JUDGMENTS

83.  Hereunder is a summary of a number of PRC judgments involving the Plaintiffs.

Shen 654/1998

84.  By this action, the Bank sued HF Enterprises as borrower and HF Shenzhen as mortgagor for repayment of the loans under Facility 4.  HF Enterprises defaulted appearance.  HF Shenzhen was legally represented by the same firm of lawyers who represented Lung Shing Property in Shen 655/1998.  Its defence was that the Bank’s claim was time-barred and that interest should be calculated in accordance with regulations of the People’s Bank of China.  The court entered judgment against HF Enterprises in the amount of $7 million plus interest and costs and ordered that in default of payment the Bank may enforce the security against HF Shenzhen.

85.  HF Enterprises appealed against the judgment. Its appeal was dismissed.  The Bank successfully sold the PRC Factory and recovered $6,066,883.39.

Shen 655/1998

86.  By this action, the Bank sued HF Enterprises and Lung Shing Property as borrower and mortgagor respectively for repayment of the loans under the Consolidated Facility.  HF Enterprises defaulted appearance. Lung Shing Property was legally represented by the same firm of lawyers who represented HF Shenzhen in Shen 654/1998.  No defence was pleaded by Lung Shing Property. The case of the Bank was admitted.  The PRC court entered judgment against HF Enterprises in the amount of $21,190,543.97 plus interest and costs and ordered that in default of payment the Bank may enforce the securities, which were the two lots of land represented by the two LUCs, against Lung Shing Property.

87.  HF Enterprises did not appeal against the judgment.  However, the Bank was unable to execute on the securities.

Shen 9964/2005

88.  In this action, HF Shenzhen sought a declaration from the Shenzhen Longgang District People’s Court that it is the beneficial owner of lot number G09205-1(9) and G09205-1(10) held by Lung Shing Property under a reliance relationship with HF Shenzhen.  Those lots were within lot number G09205-1 which included the two lots of land.  Thus, the decision in this case is equally applicable to the two lots of land.  Lung Shing Property did not dispute the reliance relationship, that HF Shenzhen had paid the land premium and that the land belonged to HF Shenzhen.  It refused to transfer the land use certificates to HF Shenzhen because of the latter’s failure to undertake to pay the substantial tax involved.  At the hearing, the court reviewed the evidence and was satisfied with the reliance relationship.  On 20 September 2005, upon HF Shenzhen agreeing to pay all the necessary expenses associated with the transfer of the land in question, the court declared that HF Shenzhen was the beneficial owner of the land which was held in the name of Lung Shing Property under a reliance relationship with HF Shenzhen.  It also ordered Lung Shing Property to arrange the transfer with the land bureau within ten days after its judgment had entered into effect and ordered HF Shenzhen to pay all necessary expenses of the transfer and the costs of the proceeding in the amount of RMB100.

Shan 219-2/2005

89.  The Bank applied to the Shanwei People’s Court to enforce the security over the two lots of land.  In view of the judgment in Yue 311/2003, the court held that the Bank could not enforce the securities as the land use right belonged to Lung Shing Property but the flats on the land were owned by Zhenye Holdings.  As HF Enterprises had no other assets available for execution, the court terminated the execution process on 30 October 2007 and left it to the parties to resolve the matter among themselves.

SPC 545/2009

90.  On 8 June 2009, HF Shenzhen applied to the Supreme People’s Court to review the judgment of Guangdong Province Higher People’s Court in Yue 311/2003.  The application was dismissed by the Supreme People’s Court on the ground that it was made out of time.

THE  SWAP AGREEMENT

Introduction

91.  The Plaintiffs pleaded that an oral Swap Agreement was reached at the meeting on 9 July 1996 among Chan, Wong, GJH and LYT in the conference room of the Shenzhen branch of the Bank, or alternatively during the telephone conversation between Wong and LYT on 8 October 1996.

92.  In June 1995, twelve blocks of flats were completed in NCG Phase 1, of which four had been sold.  The remaining eight blocks of flat were built on the two lots of land mortgaged to the Bank.  In 1996, HF Enterprises fell into arrears in repayment of its loans in the total amount of $26.8 million.  The Bank pressed for repayment.  In early June 1996, Lung Shing Property together with Yue Hua Trading expressed interest to purchase four more blocks of flats in NCG Phase 1 from HF Shenzhen.  To complete the sale of the blocks, HF Shenzhen had to apply to the authorities for pre-sale permits which would require production of the relevant land use certificates.  Hence, Chan wished to negotiate with the Bank to exchange the two LUCs for the five LUCs.

93.  On 27 June 1996, Chan wrote a letter to GJH explaining the cash flow problem of HF Group.  He enclosed copies of the land use certificates as evidence of the asset worthiness of HF Enterprises.  He said that HF Enterprises would be receiving over RMB60 million between July and August 1996 and assured the Bank that HF Enterprises would repay the outstanding loans due under the trust receipts before 15 August 1996.  In the last paragraph of the letter, he indicated that the company had found buyers for some of the flats in NCG Phase 1, the land use certificates of which land were held by the Bank as security.  He proposed to mortgage to the Bank another batch of land use certificates of equivalent value as security in exchange for the two LUCS so as to facilitate the sale of the flats to relieve the HF Enterprises’ cash flow problem.  He wrote:

「現該批房產部份有買家，本公司想用另一批相等價值的房地產證抵押給 貴行，等本公司可以將原來的房產銷售，減輕本公司資金壓力，…」

Following that letter, the meeting on 9 July 1996 was arranged.

The meeting on 9 July 1996

94.  On 9 July 1996, Chan and Wong went to the Shenzhen branch of the Bank.  They had a meeting with GJH and LYT in the conference room.  It was a brief meeting.  The discussion was mainly conducted between Chan and LYT, while GJH went in and out of the conference room during the course of the meeting.  This much is not in dispute.

95.  The bone of contention between the parties is whether an oral agreement for the exchange of the two LUCs held by the Bank for the five LUCs was reached at the meeting.  According to Chan, the focal point of the meeting was the content of his letter of 27 June 1996, whereas LYT said that the focus was on pressing HF Enterprises for repayment.  Chan’s and Wong’s evidence are as follows.  During the discussion, the copies of land use certificates attached to Chan’s letter of 27 June 1996 were placed on the table.  Chan selected five copies of land use certificates from the batch with a total value of RMB52 million which was about twice the Consolidated Facility and offered the originals of those certificates in exchange for the two LUCs held by the Bank.  According to Chan, LYT said that the Bank was agreeable to the proposal and would like to have the originals of the five LUCs, whereupon the Bank would release the two LUCs.  He said that LYT indicated that the Bank would consider whether to release the security over the Sheung Shui Property and PRC Factory as well.

96.  Interestingly, LYT gave two slightly different accounts of what happened at the meeting.  In his witness statement dated 30 October 2001, he said that at the meeting, he pressed Chan for repayment.  Chan and Wong replied that HF Shenzhen had cash flow problem because its clients did not pay and that they had to pay land premium.  They suggested the Bank to allow HF Shenzhen to sell some of its mortgaged properties to repay the Bank. That was not a swap of securities.  Then he emphasised on Chan’s failure to identify the securities offered for the exchange, failure to provide a resolution authorising the exchange of securities, financial reports of HF Enterprises and HF Shenzhen and valuation report of the new securities proposed for the exchange.  He said that he and GJH indicated that unless HF Shenzhen paid all the arrears, the Bank would not consider any proposal by HF Shenzhen. He also explained to Chan and Wong the mechanisms involved in exchanging securities which basically involved granting a new loan on the strength of new securities to discharge the old loan with release of the old securities.  The salient feature of his evidence is that no exchange of securities was proposed by Chan but simply release of the two LUCs to enable sale of the flats in NCG Phase 1 to repay the loan, copies of nineteen land use certificates were not presented at the meeting and copies of the five LUCs to be used to exchange for the two LUCs were not even identified.  Then gradually, LYT mentioned about explaining the mechanisms involved in exchanging securities which impliedly suggested that the exchange was discussed.  One wonders why he should be so guarded in his witness statement.  His evidence in that witness statement is inconsistent with the totality of the evidence and in particular Chan’s letter of 27 June 1996.  In that letter, Chan had offered to exchange the two LUCs for some other land use certificates.  There was no reason why Chan would retreat his offer and ask for release of the two LUCs and not exchange.  With the release of the two LUCs and repayment of the loan after sale of the flats, HF Enterprises would have no more facilities from the Bank to finance its business activities.  Clearly LYT concealed the truth on the very first occasion he was to give a witness statement.  He is not credible.

97.  Then, in his fourth supplemental witness statement dated 27 October 2009, filed shortly before trial and in connection with an application to amend the defence and counterclaim, LYT put in a different account which he maintained at trial.  He tried to blend in his account with Chan’s, but maintained the crucial difference that no agreement for exchange was reached.  He said Chan proposed to use some new securities to replace the old securities held by the Bank, an allegation which he had tried hard to avoid agreeing in his witness statement given in 2001.  He went on and said that the Bank did not agree and did not give Chan any proposal or guarantee. He pointed out to Chan that his exchange proposal would have to be submitted to the credit approval committee for consideration after HF Enterprises had repaid the outstanding interest and principal.

98.  The new account LYT gave bore no relationship with the amendment to the defence and counterclaim.  It is curious why back in 2001 when memories were still fresh in his mind, LYT did not openly disclose the discussion about the exchange, but maintained a very distanced and detached stand talking about the standard procedure for applying for a mortgage, avoided admitting any discussion for exchange had ever taken place at all and said that nothing but the Bank’s pressure for repayment and HF Enterprises financial difficulties had been discussed.  One wonders why it took him nine years to come up with an account which is so different from his original account and which ties in with Chan’s.  In his witness statement dated 30 October 2001, he was clearly trying to hide his involvement and what he had said at the meeting.   In his fourth supplemental witness statement, he was trying to fabricate a more reasonable and credible account of what took place at the meeting while denying the agreement to swap securities.  He has demonstrated no sincerity in his evidence.  I do not believe in his evidence.

99.  Mr Chan SC raised three points about the letter dated 27 June 1996.  Firstly, he doubted if copies of nineteen land use certificates had been enclosed in that letter.  Secondly, he argues that there was nothing in the letter to suggest that the proposed offer of another batch of land use certificates were those to be selected from the enclosed copy certificates.  He said that if indeed the intention was to ask the Bank to select the land use certificates to be used as replacement securities, there was no reason not to make this clear in the letter.  He submits that even if there were copies of land use certificates enclosed, it was plain from the letter that the documents were enclosed to support the contention in the letter that HF Enterprises had made payment of land premium and was in cash flow difficulty for good reason.  These are very trivial points.  There was no suggestion that the letter was a fabrication.  Chan was seeking a favour from the Bank, if not for exchanging the securities at least for forbearance of some sort.  Chan could not have written that he had enclosed copies of land use certificates without actually enclosing them.  Mr Chan SC’s argument of another batch of certificate to be used in exchange is just misplaced.  He was over-emphasising on the words「想用另一批相等價值的房地產證抵押給貴行」used in the penultimate paragraph of the letter.  Chan’s evidence is that he was not referring to another batch of land use certificates.  The words “another” referred to other than the two LUCs then held by the Bank.  Whether Chan was offering another batch of land use certificates for the exchange does not affect the Plaintiffs’ case a bit.

100.  The third point raised by Mr Chan SC is more substantial.  He referred to what the Plaintiffs’ accounting expert, Poole, said in paragraph 3.32 of his 1^st Report dated 26^th August 2002:

“In addition, I have been instructed that all land owned by the 2^nd Plaintiff, other than the plots which constitute the New Securities, had already been pledged to lenders to the company prior to 9 July 1996.”

Under cross-examination, Poole said that he was told the above by Chan.  Hence, Mr Chan SC submits that if HF Shenzhen had mortgaged all its land other than the lots represented by the five LUCs before 9 July 1996, it was impossible for Chan to have sent nineteen copies of the land use certificates to the Bank for the Bank’s selection on or around 27 June 1996 and for there being nineteen copies on the table during the meeting on 9 July 1996 for selection.

101.  Mr Chan SC’s argument is valid, only if viewed in isolation.   Chan’s evidence is supported by his letter dated 27 June 1996 in which it was written that copies of land use certificates were enclosed.  On the other hand, Poole’s report was prepared in 2002, six years after the event.  Poole was asked to recall what had happened while he was preparing the report eight years ago.  He said that the above information was provided either by Chan or by another staff whom he could not now recall.  If the information was provided by that other staff, it may be that staff was just speaking off his head without full knowledge or without referring himself to documents.  If the information was provided by Chan, it may well be that Chan was careless or too casual or understandably too confused at the time in view of the collapse of his business empire and his own bankruptcy.  Likewise, he might not have addressed his mind to the letter and the meeting.  I would place no weigh on Poole’s evidence.  Looking at the totality of the evidence, especially the contemporaneous letter of 27 June 1996, and applying common sense, there is no reason why Chan’s evidence in Court is not to be believed.

102.  Mr Chan SC submits that as Chan only requested for the release of the two LUCs, it was highly improbable that LYT would all out of the blue offer to exchange for all the securities held by the Bank, including the Sheung Shui Property and PRC Factory.  According to Chan, LYT only said that the Bank was considering whether to release the securities over the Sheung Shui Property and PRC Factory, but no decision was in fact made.  That, too, was the understanding of Wong.  As the five LUCs offered in exchange were worth more than twice the value of the Consolidated Facility, LYT’s proposal could not be said to be devoid of commercial sense or at all improbable.  LYT may have his own reasons for proposing to release all the securities.  The securities offered for exchange were not only comparable but of double value. They were physically located in the PRC and were more accessible to the Bank, in case enforcement action is necessary.  For those advantages, he might well be anxious to proceed with the proposal in the Bank’s interest.  LYT’s proposal as alleged by Chan is not improbable or is Chan’s evidence incredible.

103.  There is a slight discrepancy between Chan’s and Wong’s evidence as to whether the need for valuation of the properties offered       in exchange was discussed at the meeting.  Chan said it was. Wong said    it was not, but he was told by Chan that the issue had been discussed      and agreed before the meeting.  LYT denied that the properties were ever identified at all.  I prefer Wong’s evidence.  He understood his position   was to keep record of what happened at the meeting and to take follow     up action.  He followed up with the fax of 10 July 1996.  He took follow up action with respect to the exchange.  His recollection was quite precise.  On the other hand, Chan, being   the chief executive officer of the HF Group had too much on his agenda    to be able to recall precise details. It is more likely than not that he had discussed the issue of valuation with GJH and LYT before but not at the meeting and he had informed Wong of the discussion.  I accept Wong’s evidence as more credible.  But nothing turns on this minor discrepancy in the evidence.  Subject to the above, I accept Chan’s and Wong’s evidence as to what happened at the meeting.  The totality of the evidence does not support LYT’s allegation that he had informed Chan about the mechanics for the exchange, the need to apply for new facility to repay the outstanding loans etc.  Probably during the meeting, LYT acted on some misapprehension of the procedure himself.  What he said about the mechanics etc. was just afterthoughts.  I certainly do not believe in LYT’s evidence.

The events between 10 July 1996 and 16 July 1996

104.  On the day immediately following the meeting on 9 July 1996, i.e. 10 July 1996, Wong faxed a minute of the agreement reached at the meeting to YLT.  He wrote:

「9/7/96與你們開會談雄豐(深圳) 有限公司土地証作更換，當時同意馬上進行交換。現提出下列土地証作更換 :-

房地產証號	宗地號	用地價值
1008583	G09202-5(7)	RMB12,603,591.00
1008587	G09202-5(9)	RMB 7,464,897.00
1008636	G09202-5(1)	RMB 8,910,000.00
1008639	G09202-5(4)	RMB 9,915,147.00
1008642	G09202-5(11)	RMB13,167,000.00

亦解釋過該些土地証是96年6月底出的，所以反映現值，故應無需再行估價，再估值亦肯定遠超該數。同意後請確認，告知辦理手續和公証。謝謝。」

The fax was addressed to LYT and copied to GJH.  This suggests that Chan and Wong considered that they were dealing with the Bank through LYT rather than GJH who only happened to have an intermittent presence during the meeting.  Mr Tong SC’s criticism of the Bank’s failure to call GJH to give evidence is misplaced.

105.  Wong said that the fax was a minute of the meeting on 9 July 1996 recording the agreement reached to effect the exchange of securities immediately.  He set out the facilities granted to HF Shenzhen. He gave particulars of the five LUCs to be used in the exchange.  He explained why no valuation of the new securities was necessary as the certificates were just issued towards the end of June 1996 any valuation would only give a higher value.  He sought confirmation of the above and advice on the procedures. 

106.  Mr Chan SC takes a contrary view.  He emphasises on the phrases “現提出下列土地証作更換 (now we offer the following land use certificates as exchange)” and “同意後請確認 (please confirm upon your agreement)” used by Wong in the fax.  He submits that not only that the fax did not witness a concluded agreement, on the contrary the above phrases are clear evidence of a still on-going negotiation.  He argues that there was not even any agreement on waiving the requirement for valuation of the new securities. 

107.  Since 10 July 1996, Wong issued a string of faxes quoting the oral agreement and enquiring about the progress of the swap.  Those faxes are also relied on by the Plaintiffs as supporting the evidence of Chan and Wong about the oral agreement. 

108.  Wong explained that an agreement had already been reached on 9 July 1996 and that by those phrases, he meant what remained was for the Bank to verify the information provided by HF Enterprises and to confirm the information was correct.  Those clauses are not to be quoted out of their context and the faxes are not to be read in isolation.  In the fax of 10 July 1996, Wong recorded that at the meeting on 9 July 1996, the parties agreed to effect the exchange immediately(同意馬上進行交換).  His purpose of specifying the land use certificates offered for the exchange was to give precision to the oral agreement.  Wong admitted that it was his wrong choice of words.  The use of the word “現 (now)” was redundant and misfortunate.  Then he addressed the issue of valuation and suggested that there was no need to value the properties represented by the five LUCs because they were newly issued with a current value which was already twice the value of the Consolidated Facility. It was in that context that he sought LYT’s agreement not to call for valuation and not that he was seeking agreement to the exchange.  Once Wong’s explanation is accepted, there is no significance to be attached to the word “現 (now)”, the fact that he sought LYT’s confirmation to waiving valuation could not prevent an agreement from having been reached at the meeting on 9 July 1996. 

109.  Mr Chan SC argues that Wong’s reference to the existing facilities of $35 million was more consistent with exchange for all existing securities held by the Bank, but strangely no particulars of the existing securities to be released was given.  I think that is neither here nor there.  After all, Wong was a layman.  The evidence was clear.  At the meeting, Chan asked for release of the two LUCs only.

Delivery of the five LUCs on 16 July 1996

110.  On 16 July 1996, Wong arranged for the five original LUCs referred to in the fax dated 10 July 1996 to be delivered to the Offshore Department of the Bank.  The certificates were then delivered to the Shenzhen branch of the Bank.

111.  According to Chan and Wong, the five LUCs were delivered to LYT pursuant to the Swap Agreement reached at the meeting on 9 July 1996.  By way of contrast, LYT’s evidence was that the five LUCs were delivered to him voluntarily and he did not even know why they were delivered to him.  So he sent them to Shenzhen branch for safe custody and to await further instructions from HF Group as to their disposal.  If that was any truth in his evidence, he should have picked up the telephone and asked Wong.  It would have been open to him to say that the originals were delivered to him for the purpose of investigating title or valuation in respect of an intended mortgage.  But that was not his evidence.  He wanted to steer clear of anything that might even remotely touch on the exchange.  He did so even to the extent of ridiculing himself.  His evidence was just laughable, especially as it came out of the mouth of a senior bank officer.  He noted that the five LUCs belonged to HF Shenzhen whereas he only had discussions with Chan and Wong on behalf of HF Enterprises.  His answer was artificial as he knew that Chan was the corporate mind of HF Group and Chan and Wong were the natural persons who carried out the corporate will of the different members of the HF Group and that on his own evidence a week ago they were discussing about the exchange.  He must have read Wong’s fax of 8 October 1996 and knew that the five land use certificates delivered to him were the five LUCs mentioned in that fax.  No one would have delivered such expensive title documents to another without reason.  In the absence of an agreement to exchange, it is difficult to understand why Chan would have caused the five LUCs to be delivered to the Bank and why the Bank would have held them for twenty-six months.  Clearly, LYT had a lot to hide about what he had said at the meeting on 9 July 1996.  He was not telling the truth in his evidence in Court.  I prefer Chan’s and Wong’s evidence.

The events between 17 July 1996 and 8 October 1996

112.  After the meeting on 9 July 1996, a string of faxes dated 20 and 29 July, 22 and 29 August, and 27 September 1996 were sent by Wong to LYT referring to the agreement reached on 9 July 1996 and enquiring as to the progress and the procedures.  There was no written response from LYT or the Bank to the faxes.  On 19 August 1996, HF Enterprises repaid $7 million. On 29 August 1996, HXM, on behalf of the Bank, replied to Wong’s fax dated 22 August 1996 relating to Wong’s inquiry as to how that repayment was apportioned as between capital and interest.  But he gave no response to the enquiry about the swap which Wong also raised in that fax.  Then, on 28 July 1996 HF Shenzhen entered into a sale and purchase agreement in respect of four blocks of flat in NCG Phase 1 for a consideration of RMB39,950,400.  If there was no agreement to release the two LUCs, Chan would not have entered into that agreement on behalf of HF Shenzhen as he well knew that the sale of the flats could not be completed unless the two LUCs were released to HF Shenzhen to enable it to obtain the necessary pre-sale permits.

113.  On 27 September 1996, Wong wrote to LYT again. He referred to his telephone conversation with LYT on 25 September 1996 and the two LUCs held by the Bank as security.  He said that HF Shenzhen had almost reached consensus for the sale of the blocks of flats.  He sought the return of the two LUCs for the purpose of processing pre-sale permits so as to sell the flats and repay the Bank.  He referred to the delivery of the five LUCs to the Bank to be used in the exchange.  He sought the Bank’s reply to the exchange.  He wrote:

「由於最近差不多與客户達成共識取得買賣交易，所以希望取回該些房地產証換銷售証，加促取錢後立即歸還過期T/R。

而在16/7/96時額外給予貴行5本雄豐集團(深圳)有限公司之龍崗土地証「紅本」給貴行，價值RMB52,060,635.00作更換所有抵押在農行的房地產証。

房地產証號	宗地號	用地價值
1008583	G09202-5(7)	RMB12,603,591.00
1008587	G09202-5(9)	RMB 7,464,897.00
1008636	G09202-5(1)	RMB 8,910,000.00
1008639	G09202-5(4)	RMB 9,915,147.00
1008642	G09202-5(11)	RMB13,167,000.00
		RMB52,060,635.00

  敬希考慮和答覆。」

114.  LYT said that he could not recall if he had received that fax, but asserted that the document could not be found among the file of HF Enterprises kept by the Bank.  He could recall having spoken with Wong on one occasion in which Wong requested to exchange the securities and he reiterated that HF Enterprises must repay the outstanding loan capital and interest and formally apply with full set of documentation otherwise the Bank would not consider the request to exchange.  He said that the process would take about ten days but HF Enterprises never applied or submitted any documentation, financial report, valuation report etc.  He admitted that he could not recall if he had other telephone conversations with Wong.

115.  Towards the end of September 1996, GJH, LYT, CW and a Miss Huang of the Bank had a very brief visit to HF Group office in Energy Plaza.   LYT said that the visit was made at the invitation of Chan.  He said that during the visit Chan repeated the request to exchange the securities but he repeated that HF Enterprises must repay the outstanding loan and interest before the Bank would consider the exchange.   According to Wong, no demand for repayment was made.

116.  Mr Chan SC referred to Wong’s fax dated 27 September 1996 in which Wong wrote “敬希考慮和答覆”seeking the Bank’s consideration and reply to the request for exchange.  He submits that was evidence that the parties were still in the course of negotiation.  According to Chan’s and Wong’s evidence, an agreement was reached on 9 July 1996 for the immediately exchange of the two LUCs for the five LUCs, though LYT was considering releasing all securities held by the Bank.  Thus, it is obvious that what Wong was asking LYT to consider was the due or prompt performance of the Bank’s obligation under the Swap Agreement because HF Shenzhen had performed its part of the agreement by delivering the original five LUCs and the matter was becoming urgent as HF Shenzhen had reached consensus with a potential purchaser to purchase the blocks of flats in NCG Phase 1.  I think it would be wrong to argue that the parties were still negotiating.

The telephone conversation on 8 October 1996

117.  According to Wong, he telephoned LYT on 8 October 1996.  LYT told him that the Bank had agreed to exchange the two LUCs, that the Bank was processing the application and that the proceeding would take about ten days.  After that conversation, he immediately sent a fax to LYT to put on record what was discussed.  He wrote:

「8/10/96與你通電話，知悉貴行已同意以5本雄豐集團(深圳)有限公司之龍崗土地証「紅本」，價值RMB52,060,635.00作為更換以往所有抵押在農行的房地產証(可參閱我司27/9/96傳真GW9159/96)，手續你方在辦理中，估計需時10天左右，如有那方面手續需要我司配合，請告知。」

118.  LYT denied having had such a conversation with Wong.  He could not recall clearly if he had ever received the above fax but asserted that no copy of the fax could be found in HF Enterprises’ file kept by the Bank.  Given the adverse view I formed of LYT’s credibility and in the light of the totality of the evidence, in particular the contemporaneous documents, I find that LYT had spoken with Wong on the telephone on 8 October 1996 and promised that the exchange could be arranged in ten days.  That is a clear acknowledgement of the agreement to swap securities.

The events between 14 October 1996 and 23 April 1997

119.  In the ensuing six months, Wong kept on sending reminders by fax to LYT pressing for the exchange quoting the telephone conversation with LYT on 8 October 1996.  He sent four such reminders on 14, 18 and 28 October, 12 November 1996.  There was not a single written response from LYT or the Bank.  However, there is no dispute that the Bank had kept on pressing for repayment.  On 31 December 1996, HF Enterprises repaid interest in the amount of $1.09 million.

120.  During the first quarter of 1997, Wong sent five more reminders dated 22 and 24 February; 3, 17 and 19 March 1997 to LYT by fax.  In his fax dated 19 March 1997, he mentioned about having been informed by LYT at a meeting that the exchange would be effected on or before 31 March 1997.

121.  No exchange was effected.  Wong sent three more reminders on 1, 7 and 19 April 1997 to the Bank.  For the first time, the Bank responded.  CYP replied on 23 April 1997 by fax as follows: 

「收到貴公司傳真詢問更換抵押房產証事宜，現再就年前我行與陳少平總經理商談的有關精神陳述如下：

1. 我行同意貴公司繼續使用批准之額度。

2. 貴公司應盡快恢復額度之正常使用，並儘快清還逾期額度。

3.   貴公司因售樓需要要求更換土地証1001335及1001336號，我行同意予以辦理，但香港房產証，廠房及住宅的抵押，不同意更換。」

122.  LYT argued that that fax was evidence that no concluded agreement had been reached at the meeting on 9 July 1996.  However, in the light of my analysis of what happened at the meeting and the events which took place thereafter, I find that this fax precisely acknowledged the agreement reached at that meeting.  At the meeting, LYT had mentioned but without committed the Bank to release the security over the PRC Factory and Sheung Shui Property.  This fax was just repeating what had been agreed and retreating what LYT had said he would consider.

123.  The faxes must be read and understood as a whole and against the background in which they were written.  I agree with Mr Tong SC that it is inappropriate to subject the faxes to Mr Chan SC’s nit-picking exercise of dissecting each and every word used as if they were statutes.   One must also bear in mind that they were written by a layman.  Looking at the series of faxes issued by Wong in which the Swap Agreement and immediate exchange were referred to.  I think, with respect, Mr Chan SC was quoting Wong’s faxes out of the context.  LYT’s promise to effect the exchange within ten days, CW’s promise to effect the swap by 31 March 1997 and CYP’s reply on 23 April 1997 clearly acknowledged the Bank’s agreement to the exchange.  The total lack of response from the Bank in the face of those allegations reinforces that conclusion.

Whether any agreement was reached at the meeting on 9 July 1996

124.  Chan, Wong and LYT were the only three witnesses who testified about the events on 9 July 1996.  Looking at the totality of the evidence and the contemporaneous documents, Chan’s and Wong’s evidence are clearly to be preferred.  They gave evidence in a logical manner.  Their evidence makes sense and, most importantly, is supported by contemporaneous documents issued by Wong, in particular the faxes of 10 July, 27 September and 8 October 1996 and by CYP’s fax of 23 April 1997.  The Plaintiffs’ and the Bank’s conduct in respectively delivering and safe keeping the five LUCs could only be explained on the basis of the Swap Agreement. 

125.  On the other hand, LYT’s evidence is hopelessly unconvincing.  He bore the hallmark of a defensive witness trying to avoid telling the truth for fear that he might have said anything wrong.  He regurgitated time and again what he thought was safe for him to tell.  For example, he said he insisted HF Enterprises to repay the outstanding loans and interest before the Bank would consider exchanging the securities and that HF Enterprises had to apply with full documentation, including board resolution, financial statements and valuation reports of the property to be used as new security. As Chan rightly pointed out in cross-examination, if HF Group could repay the outstanding loans and interest there was no need for the swap.  HF Enterprises would have the right to demand return of the securities.  LYT’s evidence is not supported by any contemporaneous documents and is wholly unrealistic. Surprisingly, he could not recall if he had seen the crucial faxes dated 27 September 1996 and 8 October 1996.  He asserted that he could not find those documents in HF Enterprises’ file in the Bank.  He could not recall if he had the conversation with Wong on 8 October 1996.  Even if he had missed those faxes or forgotten about that conversation, he could not have missed a whole string of faxes thereafter addressed to him and quoting those two faxes or conversation.  More importantly, while not denying the authenticity of those faxes, neither he nor the Bank responded.  LYT demonstrated a total lack of good faith as a witness.  He was obviously not telling the truth. 

126.  Chan’s evidence about HF Group having to pay huge sums of land premium and about having reached agreement with Lung Shing Property and Yue Hua Trading to purchase four blocks of flats in NCG Phase 1 is supported by contemporaneous documents.  To enable the sale to complete, Chan had to seek the Bank’s release of the two LUCs.  All these are set out in his letter dated 27 June 1996.  Hence, he went with Wong to Shenzhen branch of the Bank on 9 July 1996 specifically to discuss with GJH and LYT about the exchange of securities.  In contrast, LYT’s evidence is that Chan and Wong simply went all the way from Hong Kong to the Bank’s conference room in Shenzhen to retract his request for a swap and simply to ask for release of the two LUCs or just to be reminded to repay the outstanding loans and interest.  That is incredible.

127.  As the evidence unfolded LYT changed the tenor of his evidence and admitted that the question of exchange was discussed at the meeting on 9 July 1996.  He only denied having agreed to the proposal or made any proposal or given guarantee on behalf of the Bank.  The only blemish in Chan’s evidence is as to what LYT had offered in exchange for the five LUCs. According to Chan, his letter dated 27 June 1996 and the nineteen copies of land use certificates were placed on the table at the time of the discussion. His concern was to seek the release of the two LUCs.  He asked how many land use certificates would be required to exchange for the two LUCs.  LYT told him that the Bank preferred exchanging all the securities held by the Bank as one lot, i.e. including the securities over the PRC Factory and Sheung Shui Property.  Chan said that he and LYT then picked five copies of land use certificates from the batch of nineteen copy certificates and agreed to use the originals of the five LUCs to exchange for all the securities then held by the Bank.  However, in his first witness statement, Chan said that LYT’s response was that the Bank was considering whether it would also release the securities over the PRC Factory and/or the Sheung Shui Property but as his concern was for the release of the two LUCs, he did not discuss the topic further.  Mr Chan SC criticised Chan for departing from his witness statement.  Chan denied and attempted to draw support from Wong’s fax dated 10 July 1996.  However, Wong’s evidence was also that the Bank agreed to release the two LUCs only.  Wong also admitted that when he wrote in his faxes that the Bank had agreed to exchange for all the securities, he was only stating his subjective wish in an attempt to bargain for more benefits for the Plaintiffs as the five LUCs had a value far in excess of the Consolidated Facility or outstanding loan and interest. This, I think, is the only blemish in Chan’s evidence.  This finding only cut down the extent of the Swap Agreement, but has little impact on Chan’s credibility.

128.  Mr Chan SC carried out a fine forensic analysis of Chan’s and Wong’s evidence in his seven hundred page long closing submission (which included recital of the evidence for the convenience of the Court) to show that their evidence is not to be believed.  He criticised them for failing to explain many of the questions he put to them.  I have considered his arguments fully but I do not think they dented the credibility of Chan and Wong in any way.  One cannot overlook the totality of the evidence and that human nature is but common sense.  The events occurred fourteen years ago.  No witness could be expected to remember why he did or did not do any particular act in respect of all minutiae details.  This consideration applied to Chan and Wong just as it applied to LYT.  But LYT’s failure is glaring.  I do not intend to over-burden this already long judgment by dealing with all the criticisms raised by Mr Chan SC.  I shall deal with the more significant ones. 

129.  Mr Chan SC queried the credibility of Chan’s case by comparing the date of the Swap Agreement pleaded at the commencement of the action with that as pleaded in the latest Re-Re-Amended Statement of Claim.  Initially, the Plaintiffs pleaded an oral agreement on 16 July 1996. No explanation for the amendment was given by Chan.  I think Mr Chan SC has given this query the significance which it does not deserve.  There was nothing to suggest there was any change in Chan’s witness statement.  It is obvious that the change was probably a draftsman’s point.  On Chan’s evidence the Swap Agreement was reached on 9 July 1996 and not 16 July 1996 when the originals of the five LUCs were delivered to the Bank.  Mr Chan SC also found it notable that the agreement as pleaded was to exchange for “other properties” and not the five lots of land held under the five LUCs delivered to the Bank on 16 July 1996.  With respect, I think Mr Chan SC was being fault-finding.  The amendment in the pleading does not have any adverse impact on the credibility of Chan or Wong.

130.  Mr Chan SC criticized Chan for not being able to explain why he did not mention the Swap Agreement reached on 9 July 1996 or the telephone conversation on 8 October 1996 in his letter dated 23 May 1998 to the Bank.  Again, that letter was quoted out of its factual context.  That letter was issued almost two years after the meeting on 9 July 1996 and shortly before the total break down of relationship between the parties.  At the time, the Bank asked HF Enterprises to make a fresh application for facility instead of proceeding with the exchange, which Chan did still in the hope of effecting the swap.  In that connection, the Bank wrote to HF Enterprises on 11 May 1998 asking for repayment of outstanding interest of $1.33 million as part of their agreement to regularize(盤活)the account.  It was in that context, Chan wrote the letter of 23 May 1998.  He was pleading for indulgence to repay.  As Chan said under cross-examination, HF Group was in financial difficulties and his concern was to deal with the fresh application so as to obtain the release of the two LUCs so that the blocks of flats in NCG Phase 1 could be sold to solve his cash flow problem.  It was not in his interest to provoke the Bank by accusing it of failure to honour the oral agreement as suggested by counsel.  Again, this criticism was unfair. 

131.  Perhaps, the most powerful criticism of Chan’s credibility arose out of the Plaintiffs’ conduct in Shen 654/1998 and Shen 655/1998.  In Shen 654/1998, the Bank sued HF Enterprises and HF Shenzhen as borrower and mortgagor of the PRC Factory under Facility 4.  HF Enterprises defaulted appearance.  HF Shenzhen was legally represented.  Its defence was that the action was time-barred and the interest on the loan should be calculated in accordance with the regulations of the People’s Bank of China. In Shen 655/1998, HF Enterprises and Lung Shing Property were respectively sued as borrower and mortgagor of the two lots of land.  As in Shen 654/1998, HF Enterprises also did not appear.  Lung Shing Property was represented by the same firm of lawyers who represented HF Shenzhen in Shen 654/1998.  No defence was pleaded by Lung Shing Property.  The case of the Bank was admitted.  In both cases, judgment was entered against HF Enterprises and HF Shenzhen. During cross-examination, Chan was asked if he had informed his PRC lawyers about the existence of the Swap Agreement.  Chan repeatedly said he could not remember.  Mr Chan SC submits that if indeed there was such a Swap Agreement and in view of the catastrophe the Bank’s breach of agreement had caused HF Group, there was no reason why Chan, HF Enterprises or HF Shenzhen did not inform their PRC lawyers to contest the action and to make a counterclaim rather than for HF Enterprises to default appearance in both actions and for HF Shenzhen to raise such spurious defence as limitation. 

132.  The judgments of those two actions were delivered in April 2000.  Chan’s evidence must be viewed against the backdrop of a man whose hard built business empire was fast falling apart, HF Holdings was facing winding up and he was facing his own bankruptcy.  As soon as he was informed by the Bank on 14 September 1998 that the exchange or the application for new facility was refused, he instructed his then solicitors, Messrs Robert W. H. Wang & Co., to demand the Bank to return of the five LUCs.  One day after their return, he commenced the present action on 25 September 1998.  But by 2000 when the two actions came up for trial in the PRC court, Chan was in deep financial trouble in Hong Kong, ending up the year with the winding up of HF Holdings and his own bankruptcy.  He said that he was too burdened to be able to recall what instructions he had given to his lawyers in the PRC in relation to the two actions.  He agreed that it would have been normal to inform his PRC lawyers about the Swap Agreement and he believed that the actions should have been tried in Hong Kong as he had commenced proceedings in Hong Kong before the Bank commenced the two actions in the PRC.  The way the two actions were conducted was peculiar.  HF Enterprises defaulted in both actions, but HF Shenzhen was legally represented.  HF Shenzhen was represented by the same firm of lawyers representing Lung Shing Property.  Effectively Lung Shing Property admitted the Bank’s claim and HF Shenzhen put up a spurious defence.  Lung Shing Property was sued as mortgagor.  It had no beneficial interest over the mortgaged properties because it was only their owner in a reliance relationship.  HF Enterprises and HF Shenzhen were both under the control of Chan.  One wonders why HF Enterprises defaulted in both actions when HF Shenzhen was represented in one.  Or put it the other way round, why HF Shenzhen was represented when HF Enterprises was not.  I do not wish to surmise what happened in the two actions, but it appears that Lung Shing Property had the conduct of the defence in both actions instead of HF Enterprises and HF Shenzhen.  I have no doubt that in view of the circumstances Chan was facing, he could not recall what he had instructed his lawyers, if he had.  The Swap Agreement had been quoted in the string of faxes and in the letter of Messrs Robert W.H. Wang & Co.  These are contemporaneous documents.  The allegation could not have been created with the foresight of the present litigation in mind.  I am left in no doubt that Chan and Wong were telling the truth.

133.  In conclusion, except for the little blemish I mentioned above, I accept Chan’s and Wong’s evidence as to what happened at the meeting on 9 July 1996.  In brief, Chan sent the Bank his letter dated 27 June 1996, enclosing copies of nineteen newly issued land use certificates and proposed using some of those certificates to exchange for the two LUCs held by the Bank as security.  Then Chan and Wong attended a meeting with the Bank in its Shenzhen branch to discuss the exchange.  Chan selected five copies of land use certificates with a value of RMB52 million and offered to use the originals of the five LUCs to exchange for the two LUCs held by the Bank.  LYT agreed on behalf of the Bank and asked for the originals.  An agreement was reached between Chan representing HF Enterprises and HF Shenzhen on the one part and LYT representing the Bank on the other part to exchange the securities.  The essence of the agreement was recorded in the fax dated 10 July 1996 issued by Wong to LYT, except that the exchange was limited to the two LUCs only. 

134.  Pursuant to that agreement, the Plaintiffs delivered the five original LUCs to the Offshore Department of the Bank, which were received by LYT who forwarded them to the Shenzhen branch of the Bank for custody.  In a string of faxes that followed, Wong quoted the Swap Agreement reached at the meeting on 9 July 1996 and pressed for the exchange.  Those faxes were received by the Bank without demur.  The authenticity of those documents were not in dispute.  The Bank had never retorted or denied the existence of the Swap Agreement.  Indeed, during a telephone conversation on 8 October 1996, LYT confirmed the agreement with Wong.  In a fax dated 23 April 1997, CYP also quoted the agreement.

135.  Having made the above finding, it is not necessary to consider the Plaintiffs’ alternative case based on the telephone conversation between Wong and LYT on 8 October 1996.  I accept Wong’s evidence about the telephone conversation.  It flowed from the Swap Agreement made on 9 July 1996 and did not constitute a separate agreement.

136.  I must emphasise that for the present purpose the word “agreement” is used in the laymen’s or non-technical sense as opposed to a binding legal agreement.  “Consensus” would have been a more proper word. What was the content of that Swap Agreement and its legal effect will be dealt with in the following sections.

The terms of the Swap Agreement

137.  In essence, the crux of the Swap Agreement was to exchange the two LUCs then held by the Bank for the five LUCs.  It is the Plaintiffs’ case that the express term of the Swap Agreement was evidenced by the fax dated 10 July 1996.  In addition, the Plaintiffs pleaded in paragraph 5A of the Re-Re-Amended Statement of Claim that there was an implied term that the Bank was to use its best endeavour to facilitate or carry into effect the swap and not to impede any further procedures required to effect the swap or towithhold its approval for such procedure unreasonably.  Mr Chan SC argues that the implied terms pleaded are contradictory to the existence of a binding agreement.  I think, if the express term of a valid and concluded agreement is proved, it goes without saying that the parties shall carry out the terms of the agreement with reasonable despatch, unless the time for performance is expressly provided for or is expressed to be not of the essence of the agreement.  What is reasonable despatch depends on the factual circumstances of the case.  It may not necessarily be synonymous with best endeavour.

138.  The crux of the Swap Agreement reached on 9 July 1996 was to exchange the two LUCs held by the Bank for the five LUCs agreed between Chan and LYT.  The five LUCs were particularised in Wong’s fax to LYT dated 10 July 1996 and subsequently delivered to the Bank on 16 July 1996.  The agreement was to effect the exchange forthwith.  Given the nature of the securities and the statutory requirement under Hong Kong law or PRC law, the word “forthwith” could not mean anything other than as soon as practicable and subject to the time required for completion of the necessary formalities.  To give business efficacy or as a matter of necessity, it must be implied into the agreement a term that the Bank should use its best endeavours to facilitate or carry into effect the swap because without the co-operation of the Bank, the agreement simply could not be performed.  However, the Plaintiffs’ claim is not for damages for delayed performance, but for total non-performance.  Those implied terms pleaded are redundant and only provoked unnecessary arguments.  Indeed they were used to fuel the Bank’s argument that the implied terms pleaded are contradictory to the existence of a binding agreement, which I dismiss.

139.  Another implied term pleaded by the Plaintiffs in paragraph 7 of the Re-Re-Amended Statement of Claim is that the Bank would have to return (presumably without demand) the five LUCs if the swap was not to be effected within a reasonable time. Mr Tong SC argues that the five LUCs were delivered to the Bank against the background of there being intended purchasers for some of the flats built on the land represented by the two LUCs and the Plaintiffs wanting to use the five LUCs to exchange for those two LUCs so as to sell the blocks of flats to repay the Bank.  He then argues that the swap had to be carried out expeditiously to meet those ends and in the premises it must be an implied term or condition in the delivery of the five LUCs that they should be returned within a reasonable time if the swap was not to take place.  He submits that such an implied term was plainly within the parties’ contemplation and was necessary, for it must have been clear to all that, given the financial pressure HF Enterprises was facing at the time and the fact that the Plaintiffs were entrusting two sets of valuable securities to the Bank with value far exceeding the debt owed by HF Enterprises; if there was to be no swap, the Plaintiffs would apply the new securities towards relieving HF Enterprises’ financial pressure.  Hence, Mr Tong SC argues that if the Bank never agreed to or intended to perform the swap, its prolonged retention of the five LUCs amounted to a breach of implied term.

140.  The court may imply a term into a contract in order to give effect the presumed intention of the parties or to give business efficacy to the contract: see The Moorcock (1889) 14 PD 64.  A term could only be implied into a contract if it is necessary.  The court will not imply a term which the parties were too lazy to make for themselves, no matter how reasonable the term is.  Though it was apparent to the Bank that HF Enterprises was in financial difficulties and was in arrears of repayment, it was also apparent to the Bank that HF Enterprises had other resources, including access to another fourteen very valuable land use certificates.  The implied term suggested was certainly reasonable.  But I am unable to see how such an implied term would be necessary to give business efficacy to the contract.  If the Plaintiffs considered that reasonable time had lapsed and they wanted the five LUCs back, they could simply ask the Bank.  Why should the Plaintiffs choose not to ask and now raise the implied term argument?  There is no necessity to impose an implied obligation on the Bank to return the certificates.  Accordingly, I decline to imply such a term into the oral agreement.

Whether the Swap Agreement was a concluded agreement

141.  Mr Chan SC argues that the Swap Agreement was, at the highest, a consensus reached in the course of a negotiation which was short of a binding agreement.  He used the term “binding agreement”.  But I prefer the term “concluded agreement” and reserve his term to those concluded agreements which are legally binding as having fulfilled any formal requirements as required by law or as not having been otherwise vitiated.  Mr Tong SC takes the view that the point argued is an unpleaded point based on uncertainty.  He objects to the point taken by Mr Chan SC as the Plaintiffs would then be required to engage in “shadow-boxing” with the Bank.  A party suing on a contract has the burden of proving the contract.  It is open to the defendant to test the plaintiff’s case by adducing some evidence or argument that no contract has yet been concluded as the parties were still in the course of negotiation.  It is one thing to argue that a contract has not yet been formed and another to avoid the liability under a contract founded on terms which are void for uncertainty.  The party seeking to avoid a contract for uncertainty bears the burden of proving the uncertainty.  The distinction between the two is a very fine one.  But, in my view, Mr Chan SC has not crossed over the line.

142.  Negotiation of a contract may take place by stages.  The parties would first seek agreement or to avoid ambiguity, consensus or meeting of the minds, on the essential term or terms.  When that stage has been achieved, they may say that they have reached agreement in principle.  That is still short of an agreement.  It is just an agreement to agree.  They will then negotiate on all the terms that the parties intend to include in the contract beyond those essential terms.  In the course of their negotiation, they may fine tune what they have achieved.  But, it is only when they have reached consensus on all the essential terms to make a contract and all the terms they desire to put in the contract that one can say that the parties have reached a “concluded agreement”.  Even where the parties have reached consensus on all the terms essential for an agreement, if they still intend to have more terms, no matter how trivial they are on an objective view, to be agreed before they are bound, the parties are still in the process of negotiation and there is no concluded agreement.  In Rossiter v Miller (1878) 3 App. Cas 1124, Lord Blackburn said at 1151:

“So long as they are only in negotiation either party may retract; and though the parties may have agreed on all the cardinal points of the intended contract, yet, if some particulars essential to the agreement still remain to be settled afterwards, there is no contract. The parties, in such a case, are still only in negotiation.”

143.  The requirement that there must be complete agreement not only on all essential terms but also on terms desired by the parties cannot be overlooked.  A good example is the House of Lords decision in Hussey v Horne-Payne (1879) 4 App. Cas 311.  In that case, the parties agreed to the price and the property to be sold, i.e. meeting of minds on the three-Ps.  The purchaser however requested the vendor to agree to payment of the purchase price subject to the title being approved by his solicitors.  Subsequent to that, he further suggested to pay by instalments.  The vendor insisted on immediate payment of 10% and the balance in a few months.  The House of Lords held that there was no concluded agreement.

144.  An example in Hong Kong is the Court of Final Appeal’s decision inKwan Siu Man and Yaacov Ozer (1997-98) 1 HKCFAR 343.  In that case, the parties were former landlord and tenant of a property.  Their relationship was not an entirely happy one.  The landlord obtained judgment against the tenant for rent in the High Court with costs.  The tenant was applying for a new tenancy while the landlord was seeking an order for possession in the Lands Tribunal.  One day, the parties somehow met in the lift lobby where the tenant agreed to purchase and the landlord agreed to sell the property for $4.25 million. Subsequently, the landlord called off the deal.  The Court of Final Appeal held that in the context of Hong Kong conveyancing, the mere fact that the parties have agreed on the property and the price, being the three-Ps required for an open contract, did not immediately bring about the existence of a concluded contract between the parties for the sale of the property, it still required the court to scrutinize the surrounding circumstances carefully, and not be too impressed by the parties’ own protestations as regards their intent.

145.  This case is heavily relied on by Mr Chan SC. He referred to the following dicta of Litton PJ at 355:

“By parity of reasoning, there is nothing to prevent an owner selling a property on a “handshake”, but when such an unusual case is put forward, and is accepted by the trial Judge, the function of the Court of Appeal is to examine critically the factual foundation upon which the judge’s finding is based.It cannot just accept blandly the label “open contract” as if that were some kind of magic shibboleth, sufficient by itself to confer on the purchaser the rights of a beneficial owner.”

(Emphasis added)

Mr Chan SC drew my attention to Litton PJ’s emphasis on the need of the court to carefully scrutinize the evidence and the parties’ intention to have an immediately binding agreement in the light of the unusual nature of the alleged agreement, i.e. an agreement for the sale of a flat allegedly reached at a lift lobby over a short conversation.  Likewise, Mr Chan SC argues that in the present case it was unlikely that the Bank would have during a brief conversation at its office entered into a concluded agreement for the exchange of some securities it was holding by other securities which it had done no valuation of. 

146.  Mr Chan SC also referred to the following dicta of Bokhary PJ at 363:

“So even assuming that an open contract can be made under our law, still our courts should always be slow to find that such a contract has indeed been made in any given case. The making of such a contract is not to be found just because there has been a meeting of minds as to parties, property and price. For the strong probability would be that such meeting of minds was no more than one stage in the course of on-going negotiations. This is because in Hong Kong nowadays the inherent probability is that negotiations for the sale of land would, if successfully concluded, result in a contract which includes express terms as to other important matters in addition to parties, property and price: not least of all the date for completion.”

Then, his Lordship continued at 364:

“Once that question receives consideration, it can be seen that the inherent and strong probability is that their meeting of minds was indeed merely one stage in such negotiations: in other words that no oral contract had been made. Indeed the Judge seems, without realising it, in effect so to have found. For she spoke of the parties having “agreed on all important matters” and leaving “all other details ... for their solicitors to sort out.” But in the circumstances of this case, the matters left to the solicitors were much more than mere details. They included the very important matter of the date for completion. Accordingly all that the parties achieved was an agreement to agree: and that is not a contract. The law preserves bargains; but it does not create them: that must be done by the parties themselves, if it is to be done at all.” (Emphasis added).

147.  Based on these dicta, Mr Chan SC argues that the discussion on 9 July 1996 was only a stage in a negotiation process without any legally binding contract for the exchange of securities having been formed.  He argues that from any point of view, a contract between a banker and a customer over the question of provision of security is a serious matter.  Even assuming that the parties did have a meeting of the minds over what security the customer would like to be released and what security was offered in substitution, it is against common sense that one would expect that the customer, not to mention the banker, would expect that they would have a binding and enforceable contract over a preliminary conversation without any valuation of the security offered, without going through the normal vetting procedure of the bank and without any stipulation on the reward or charges of the bank.  He characterised the oral Swap Agreement put forward by the Plaintiffs as a “contract by a handshake” and urges the Court to examine critically the factual foundation upon which the allegation is based.

148.  Mr Tong SC seeks to distinguish Kwan Siu Man from the present case by arguing that in Kwan Siu Man the Court of Final Appeal was concerned about an agreement allegedly reached on a casual, chanced meeting in the lift lobby.  It was also a composite agreement involving besides the sale of property, settlement of Lands Tribunal proceedings and costs in certain High Court proceedings.  He pointed out that the finding of the Court of First Instance which was overturned by the Court of Final Appeal was solely based on the sale and purchase of property.  He argues that the present case is wholly distinguishable.  Chan and Wong went all the way from Hong Kong with the sole purpose of discussing the Swap Agreement.  The meeting was held in the conference room of the Bank in the normal course of its business.  Chan’s proposal contained in his letter dated 27 June 1996 with copies of the nineteen land use certificates were placed on table for discussion.  Short, though the meeting was and with GJH leaving the conference room every now and then, the discussion took place under a business-like atmosphere.  I agree with Mr Tong SC.  The present case is distinguishable from Kwan Siu Man and the oral agreement was not a contract by handshake.  However, given the exchange of securities is a serious matter, whether the parties have reached a concluded agreement does deserve critical examination. 

149.  In answer to Mr Chan SC’s arguments that the Swap Agreement was but one stage of the negotiation and there were still other outstanding matters to be agreed, Mr Tong SC’s reply is that the Swap Agreement was an open contract. The only outstanding items which he could identify from Mr Chan SC’s cross-examination are: the procedures to be executed to effect the swap; the fees payable to the Bank for the swap and the valuation of the new securities. He submits that it is plain from the very nature of those items that they were at best peripheral to the Swap Agreement and could not in any way be said to be fundamental terms that failing to agree on them would mean no agreement at all.

150.  I agree with Mr Tong SC’s submission.  The Court of Final Appeal in Kwan Siu Man did not find that there could be no valid open contract as a matter of law.  It only cautioned against the finding of an open contract in the context of sale and purchase of properties in Hong Kong, since the date of completion is invariably regarded as an important term ranking probably on a par with parties, property and price.  In the end, the Court of Final Appeal rejected the argument based on open contract because of the casual, chanced nature of the meeting and the trial judge’s inconsistent finding of fact.  However, in the present case, the parties were not strangers.  At the time, they had a continuous business relationship for two years prior.  It is open to the Plaintiffs to argue on open contract.

151.  Insofar as procedures are concerned, it is clear that they were just standard procedures of the Bank and the terms were standard terms.  It had always been the Bank who dictated the formalities.  In other words, it was for Bank to specify the procedures and formalities to be undertaken, and that was precisely what HF Enterprises had been chasing the Bank to do through the series of faxes.  When the Bank suggested in 1998 to HF Enterprises that it should effect the swap through a new loan application, HF Enterprises immediately complied and submitted the application.  Plainly the proper procedure to be adopted was a matter entirely for the Bank which HF Enterprises would unconditionally accept.

152.  As for the fees payable to the Bank, as Chan explained, payment of the fees had always been in his contemplation but that was not a matter which concerned him, since the amounts would be insignificant compared to the amount of the outstanding loan and, I should add, his dire need for the swap.  They had a past and a then on-going business relationship.  All throughout this relationship, the question of fees was never discussed.  HF Enterprises would just accept whatever amount the Bank proposed.  Neither had Chan ever disputed the interest rates charged.

153.  As for the requirement of valuation, the question is what had the parties agreed.  According to Chan, it was agreed at the meeting on 9 July 1996 that no valuation was necessary.  According to Wong, the requirement for valuation was not discussed, but he was told by Chan that GJH and LYT had agreed with him prior to the meeting that no valuation was necessary as the five LUCs had just been issued by the Shenzhen Land Bureau in June 1996 with an up-to-date valuation of RMB52 million, which was about twice the Consolidated Facility.  LYT denied that there was such an agreement reached during the meeting or at all.  Though the Plaintiffs’ evidence is conflicting, given the unfavourable view I formed of LYT’s credibility, I accept Wong’s evidence.  From the fact that it was only until very late during the twenty-six month period that the Bank asked for valuation, I draw the inference that Wong’s evidence was true.  Chan and LYT or GJH had agreed to dispense with the requirement of valuation.  Furthermore, the evidence is also clear that if the Bank had insisted on valuation of the new securities, the Plaintiffs would have complied.  As a matter of fact, when the Bank subsequently demanded valuation two years later in 1998, the Plaintiffs complied without demur.  A valuation of RMB47.327 million was obtained which exceeded the facilities by a wide margin. The absence of a valuation report or agreement to obtain a valuation as such is not anything which could prevent a contract from being concluded.

154.  That said, valuation may be very relevant in another context.  Facility would only be granted upon the borrower providing such security as the lending bank considers adequate.  Hence, a valuation report of the security is almost a must.  A lending bank would lend up to a certain percentage of the value of the security offered.  However, the prime consideration of a lending bank is the borrower’s ability to repay rather than the value of the security.  Having to enforce a security is what a lending bank wishes to avoid.  Thus, apart from the value of the security, the lending bank will consider other factors such as the liquidity of the security, credit worthiness of the borrower and his ability to repay, his asset worth, the purpose of the loan, the business risk, etc.  Some of these factors could not be assessed until a valuation report of the security is available and the bank had an opportunity to review all those considerations.  Usually, these are considered by a credit approval committee rather than the front line staff, no matter how senior he is.

155.  In the present case, the oral agreement was not an agreement for exchange of personal chattels but an exchange of securities. The agreement could not be performed by LYT opening his drawer or the safe of the Bank, retrieving the two LUCs and giving them to Chan in exchange for the five LUCs and putting them into the safe as if they were chattels which exchange could be effected upon delivery.  The exchange is not as simple as Mr Tong SC suggested as merely comparing the value of the securities offered for the exchange against that held by the Bank and involved no input or control by the credit approval committee of the Bank.  As a matter of legal procedure, the two LUCs could only be returned to HF Shenzhen upon HF Enterprises repaying the outstanding loan and the Bank discharging the mortgage under the Consolidated Facility.  HF Enterprises did not have the necessary funds to repay the loan.  It is therefore common ground that the exchange could only be effected, as explained by LYT and agreed by Wong, by HF Enterprises using new securities to obtain a new loan to repay the outstanding loan under the Consolidated Facility.  The application for the new loan required approval from the credit approval committee and the mortgage of the new securities would have to be registered with Shenzhen Land Bureau.  It was not merely a matter of comparing the value of the securities.  Submission of valuation report certifying that the properties were of a certain value is not the last formality which seals a contract.  A decision had yet to be made by the Bank whether to agree to the exchange.  That decision had to be made not by LYT but by an independent credit approval committee.  Valuation is but one of the considerations.  The credit approval committee may rightly or wrongly for any of the considerations I have mentioned above or for other commercial reasons unforeseen by the processing front line staff of the Bank reject a loan application despite the adequacy of the security.  Indeed, the Offshore Department and GJH sitting on the credit approval committee supported HF Enterprises application for new facility.  However, the credit approval committee rejected the application because of an unfavourable comment by the Longgang branch of the Bank that the security was not marketable and land premium had not been fully paid.  This precisely demonstrates the caution which one has to exercise in determining whether a concluded agreement was reached during the meeting on 9 July 1996 in relation to an agreement of this nature.

156.  What the parties agreed at the meeting on 9 July 1996 must be understood in the light of the nature of the underlying transaction. The agreement would involve HF Enterprises applying for a new loan which would be subject to scrutiny by the credit approval committee of, among other things, HF Enterprises’ credit-worthiness, ability to repay the adequacy of the securities offered, its liquidity and other commercial considerations.  It could not have been intended to be an outright swap such as an exchange of personal chattels. Given his experience and position in the Bank, LYT would not have misunderstood the agreement to be such.  By reason of their previous dealings, HF Enterprises must know the procedures involved.  Even if Chan thought that it was just an outright swap, at least, according to Wong, he knew the exchange would involve approval by the Bank.  The agreement has to be viewed objectively.  The so called agreement must be conditional upon the Bank or its credit approval committee approving an application for a new loan using the five LUCs.  It was subject to so many uncertainties which the parties were aware of.  Those were not matters which could be left to be agreed between lawyers.  It was also unwittingly admitted by the Plaintiffs’ expert, Zhang, that the exchange must be predicated on the Bank being satisfied as to the value of the new securities and that the whole of the arrangement was finally worked out, including HF Enterprises’ being willing to pay the handling fees required by the Bank.  It is impossible that in a brief meeting of that nature, LYT could have committed the Bank to advance money on the strength of the securities represented by the five LUCs without undergoing the process of approval by the credit approval committee.  Though the word “agree” or some other strong language might have been used, at the highest, the agreement was an agreement subject to approval or an agreement to process the application for exchange which in turn involved an application for a new loan.  LYT agreed to support HF Enterprises’ application for a new loan for the purpose of discharging the loan under the Consolidated Facility and for the release of the two LUCs.  The Swap Agreement was just an agreement to agree or an agreement subject to approval which is short of a concluded agreement.  The parties could not be said to have reached a concluded agreement.

157.  The alternative basis of the Plaintiffs’ claim under the oral agreement is Wong’s telephone conversation with LYT on 8 October 1996.  As the underlying basis of that agreement was the discussion or agreement reached at the meeting on 9 July 1996, the alternative claim also fails for the same reason.  Any agreement which LYT was said to have made with Wong was no more than an agreement subject to approval by the credit approval committee or an agreement to agree.  There was no concluded agreement.  

158.  Counsel argued on LYT’s ostensible authority to bind the Bank.  As there was no concluded agreement, whether LYT had actual or ostensible authority is just besides the point.

Conclusion

159.  For the above reasons, the Plaintiffs’ claim for breach of contract under Hong Kong law or PRC law must fail as there was no concluded agreement.

160.  In the last part of this judgment, I shall, for the sake of completeness, deal with the alternative scenario by assuming that there were a concluded agreement reached on 9 July 1996.  I now turn to the Plaintiffs’ claim for misrepresentation.

MISREPRESENTATION

161.  The Plaintiffs’ case on misrepresentation as pleaded in the Re-Re-Amended Statement of Claim is based on a representation made at the meeting on 9 July 1996 (“First Representation”) and another representation made in early March 1998 (“Second Representation”). 

162.  Both representations were made in the Shenzhen branch of the Bank.  Thus, the Plaintiffs would only be entitled to pursue this cause of action if its claim satisfies the requirement of double-actionability, i.e. the wrong is of a character that if committed would have been actionable in Hong Kong, and the civil liability in respect of the claim exists as between the actual parties under the law of the foreign country where the act was committed: see Boys v Chaplin [1971] AC 356.  Mr Chan SC accepts that in the present case, if the Plaintiffs were able to prove misrepresentation under Hong Kong law, both limbs of the requirement would be satisfied.  This is because the alleged wrong complained of is misrepresentation, which is plainly actionable under Hong Kong law and the wrong complained of would also give rise to civil liability under article 42 of Contract Law of the People’s Republic of China(《中華人民共和國合同法》)(“Contract Law”) which provides:

「當事人在訂立合同過程中有下列情形之一，給對方造成損失的，應當承擔損害賠償責任：

(一) 假借訂立合同，惡意進行磋商；

(二) 故意隱瞞與訂立合同有關的重要事實或者提供虚假情況；

(三) 有其他違背誠實信用原則的行為。」

Translation:

“Where in the course of concluding a contract, a party engaged in any of the following conducts, thereby causing loss to the other party, it shall be liable for damages:

(i) negotiating in bad faith under the pretext of concluding a contract;

(ii) intentionally concealing a material fact relating to the conclusion of the contract or supplying false information;

(iii)  any other conduct which violates the principle of good faith”

163.  In order to succeed in an action founded on deceit under Hong Kong law, the Plaintiffs have to prove: that the Bank made a statement, i.e. a representation of present fact; that the representation was false; that the representation was intended to be acted upon by the Plaintiffs; that the Plaintiffs did act on the representation and that they suffered damage as a result: see Clerk & Lindsell on Torts (19^th ed), paragraphs 18-04, 18-28 and 18-32.  I was also referred to Cartwright’s Misrepresentation, Mistake and Non-Disclosure, paragraphs 3.03-3.05, in which the learned author suggested that the false statement must be made with a particular state of mind: fraud for the tort of deceit or breach of duty of care for the tort of negligence.  The learned author further submitted in paragraph 3.41 that for an action founded on breach of duty the better test is whether the statement, in the circumstances in which it was made and the position of the parties, was one which the representee was entitled to take seriously and rely on without making his own inquiries.  I have no quarrel with the above tests.

The First Representation

164.  The First Representation as pleaded in paragraph 5D of the Re-Re-Amended Statement of Claim is as follows:

“… in order to induce the Plaintiffs to deliver to the custody of the Defendant the New Securities and to enter into the Agreement, the Defendant by Mr. Geng [GJH] and Mr Li [LYT] orally and wrongfully falsely represented to the Plaintiffs, or alternatively, warranted (“the Warranty”) that it was the intention of the Defendant to agree to the Swap (collectively “the 1^st Representation”) and in particular, to release the Old Securities in exchange for the New Securities.”

165.  Mr Chan SC attacks the Plaintiffs’ case as incredible because there was no reason why LYT would offer to release the securities over the PRC Factory and Sheung Shui Property.  He also submits that the Plaintiffs’ case is unsubstantiated because at the time of the alleged representation, the Bank was not yet aware of what exactly were the properties to be offered as security.  That argument is premised on LYT’s evidence which I rejected.  In considering the Plaintiffs’ claim for misrepresentation, I consider I am bound by my finding of fact made in relation to the Plaintiffs’ claim in contract.  I have found that at the meeting on 9 July 1996 LYT agreed to the exchange of securities on behalf of the Bank.  Apart from that, there was no evidence of the Bank’s intention.  Based on such scanty evidence and the nature of the transaction, I can only reach the conclusion that LYT agreed on behalf of the Bank to process the application for exchange including the application for new loan.

166.  Interpretation of a document or a contract is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract: see Investor’s Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 897 at 912 to 913.  By analogy, the test to be applied in the construction of an oral communications between the parties in the course of negotiating a contract is the meaning which the communication would convey to a reasonable person in the position of the recipient having all the background knowledge of the circumstances surrounding the negotiation.

167.  Applying that test to the evidence which I accept, I find that the intention of the Bank as represented by LYT could be no more than an intention to process the application for exchange and the application for new loan.  There were so many uncertainties in connection with the application, including among other considerations, the view taken by the credit approval committee of HF Enterprises’ credit worthiness, its ability to repay, the commercial profitability of the transaction, adequacy and liquidity of the new securities offered and business risk.  Ultimately, whether the exchange would be effected would have to be left to the total discretion of the credit approval committee.  In just the same way as I could not find a concluded agreement to exchange securities, I am equally unable to find that the representation evinced a committed intention on the part of the Bank to exchange the securities.  While it is possible to plead an alternative case, the Plaintiffs have insurmountable difficulties with the evidence in support of their alternative case. 

168.  If the Plaintiffs were able to prove the representation, I would have no difficulties to find that it was false as it was LYT’s evidence that the Bank never intended to exchange the securities at that stage but until the credit approval committee would have approved the loan application.  At one stage, LYT went as far as saying that the Bank would only process the application if HF Enterprises had repaid the outstanding loan and interest in full.  Thus, it is clear that the Bank did not then have the intention at that stage to effect the exchange.  I would also have no difficulties to find that the Bank intended the Plaintiffs to act on the representation which was why LYT asked for and kept the original copies of the five LUCs. 

169.  Even assuming that LYT did not have actual authority to make the representation on behalf of the Bank or that while doing so he acted outside the scope of his employment, I would have held that he had ostensible authority to do so.  LYT was the deputy manager of the Offshore Department responsible for the account of HF Enterprises.  He was the banking officer with whom Chan and Wong liaised in connection with the account of HF Enterprises.  He had authority to sign the facilities letters dated 28 February 1996 and 14 March 1996.  The Bank had clothed him with authority to make the representation on its behalf in relation to the matter in hand.  In Armagas Ltd and Mundogas SA [1986] 1 AC 717, Lord Keith held at 781:

“The essential feature for creating liability in the employer is that the party contracting with the fraudulent servant should have altered his position to his detriment in reliance on the belief that the servant’s activities were within his authority, or, to put it another way, were part of his job, this belief having been induced by the master’s representations by way of words or conduct.”

At 782-783, his Lordship continued:

“At the end of the day the question is whether the circumstances under which a servant has made the fraudulent misrepresentation which has caused loss to an innocent party contracting with him are such as to make it just for the employer to bear the loss. Such circumstances exist where the employer by words or conduct has induced the injured party to believe that the servant was acting in the lawful course of the employer’s business. They do not exist where such belief, although it is present, has been brought about through misguided reliance on the servant himself, when the servant is not authorised to do what he is purporting to do, when what he is purporting to do is not within the class of acts that an employee in his position is usually authorised to do, and when the employer has done nothing to represent that he is authorised to do it.”

170.  The point was also raised that HF Enterprises was the borrower but not the owner of the two lots of land represented by the two LUCs or the five LUCs.  The distinction relied on by the Bank is more apparent than real.  HF Enterprises and HF Shenzhen were under the same management, which the Bank was well aware of.  Chan and Wong spoke on behalf of both companies.  Insofar as HF Shenzhen was treated as the beneficial owner of the two lots of land under the reliance relationship, there must be a special relationship in this tripartite relationship of lender, borrower and mortgagor, albeit short of a fiduciary relationship.  As for reliance on the representation, clearly HF Enterprises as borrower relied on the representation because the discussion at the meeting was about release of the two LUCs to facilitate sale by HF Shenzhen of the blocks of flats in NCG Phase 1 so as to repay the debt of HF Enterprises.  On the other hand, though Lung Shing Property was the legal owner and mortgagor of the two lots of land, HF Shenzhen as the party who was ultimately entitled to have the land transferred to its name under the reliance relationship was clearly concerned as it was its property which was at risk of enforcement by the Bank if HF Enterprises was unable to pay the debt.  As submitted by Mr Tong SC, there was clearly a special relationship in the circumstances of this case between HF Shenzhen and the Bank to give rise to a duty of care on the part of the Bank.  It was reasonably foreseeable that the Bank’s failure to effect the swap would entitle it to enforce the securities and cause loss to HF Shenzhen.  There was a sufficiently proximate relationship between the Bank and HF Shenzhen in that HF Shenzhen was to the Bank’s knowledge closely associated with HF Enterprises and was under the same management and control by Chan.  HF Shenzhen was the party whose interest in the two lots of land represented by the two LUCs charged to the Bank would be adversely affected if the swap was not effected and HF Shenzhen would also charge the five LUCs to the Bank in exchange.  Applying Lord Keith’s dictum in Armagas Ltd and Mundogas SA, there is no policy reason why it would not be fair, just and equitable to affix the Bank with a duty in the present case. 

171.  It was reasonable for the Plaintiffs to deliver the five LUCs to the Bank in reliance on the belief that LYT’s representation was within the scope his authority.  Applying the test suggested by Cartwright’s Misrepresentation, Mistake and Non-Disclosure, the essential condition for creating liability is satisfied.  In view of the circumstances in which the representation was made and the relationship between the parties, the Plaintiffs were entitled to take LYT’s representation seriously and rely on it without making any inquiries.

172.  In reliance on the First Representation, the Plaintiffs delivered the five LUCs to the Bank, continued to deal with the Bank for the ensuing two years, did not demand their return and did not make alternative arrangement to obtain finance by using the properties represented by the five LUCs.  As a result, the Plaintiffs suffered detriment.  Had the First Representation been proved, I would have awarded damages to the Plaintiffs.

The Second Representation

173.  The Second Representation as pleaded in paragraph 22 of the Re-Re-Amended Statement of Claim is as follows:

“In about early March 1998, the Defendant invited the 1^st Plaintiff to apply for an “extension” of the Loan of $35 million (even though the Loan had not expired as notice of termination under the various facility letters has never been given by the Defendant).  The Defendant represented to the 1^st Plaintiff that:

(1)  it would exchange or substitute the Old Securities with the New Securities (as previously agreed) under the “extension” of the Loan;

(2)  the application for the “extension” of the Loan was a mere formality as it was very likely or almost a certainty that the Defendant would approve the “extension” of the Loan.”

174.  On the facts, HF Enterprises knew that the application for a new facility of $35 million was part of the exercise of borrowing a new loan to repay the outstanding loan.  HF Enterprises knew that the application was subject to the approval of the credit approval committee.  Indeed, the Plaintiffs pleaded that “the application for “extension” of the loan was a mere formality as it was very likely or almost a certainty that the Bank would approve the “extension” of the loan.  Thus, on the Plaintiffs’ pleaded case, the application was subject to approval.  There is no representation that as a matter of certainty the Bank will definitely grant the application. 

175.  It is also the Bank’s case that the application was subject to approval by the credit approval committee and there was no representation that the application would be approved in any event.  The evidence was that XF, LYT and GJH all recommended approving the loan.  It was only due to a last minute twist that the Bank decided to act on the contrary view of its Lunggong branch and rejected the application. There was no evidence to show that the representation was untrue.  Further, as said before, at all material times HF Enterprises knew that the Bank required them to regularise their account and this was a precondition which HF Enterprises must satisfy before submitting their request for exchange of securities to the credit approval committee for consideration.  Thus, there is no evidence that the Second Representation was false.  The Plaintiffs have not pleaded why they said that the Second Representation was false.  Mr Tong SC made no submission in respect of the claim under the Second Representation.  I think the Plaintiffs’ pleaded case under the Second Representation is defective and fatal. 

176.  The Plaintiffs’ claim for misrepresentation must be dismissed.

BREACH OF WARRANTY

177.  The Plaintiffs’ claim for breach of warranty is based on a collateral contract preceding the oral agreement.  Mr Tong SC submits that the collateral contract still subsists despite the oral agreement failed to materialise.  With respect, I am unable to agree.  On the facts of this case, in the absence of a concluded oral Swap Agreement or misrepresentation, I am quite unable to see how and when a collateral contract preceding the Swap Agreement could have been formed.  In the circumstances, the claim under this head must fall together with the claim for breach of the Swap Agreement and misrepresentation.

178.  If there were a collateral agreement, the question of the governing law of that agreement would arise.  For reasons as will be explained in the section under the alternative scenario, the governing law of the collateral agreement would be PRC law.  The collateral agreement would also be null and void under PRC law.

THE CONVERSION CLAIM

179.  There is no dispute that relying on the First Representation, the Plaintiffs submitted the five LUCs to the Bank on 16 July 1996 and thereafter dealt with the Bank for twenty-six months without demanding or taking legal action to enforce their return in the false expectation that the swap would materialise.  The certificates were then conveyed by courier to Shenzhen and kept in the safe of the Shenzhen branch of the Bank.  When the Bank finally rejected HF Enterprises application for an extension of the loan of $35 million, HF Enterprises demanded return of the five LUCs on 17 September 1998.  The Bank returned the five LUCs to HF Enterprises on 24 September 1998 in Shenzhen.  The Plaintiffs’ pleaded case on conversion is that the Bank ought not to have kept the five LUCs or ought to have returned them to the Plaintiffs promptly upon receiving them. 

180.  The Bank’s defence is that the Plaintiffs had never demanded the return of the five LUCs during the twenty-six months when the certificates were in the Bank’s possession, that they were promptly returned to the Plaintiffs upon demand and that there was no conversion of the certificates under PRC law.  In addition, it was suggested that the wrongful act was committed in the PRC and the Plaintiffs have to justify bringing the action in Hong Kong by proving that the requirement of double-actionability is satisfied.

Conversion under Hong Kong law

181.  Mr Chan SC submits that to constitute the tort of conversion under Hong Kong law, there must be a refusal to surrender the property belonging to the plaintiff on demand.  He quoted the following passages from Clerk & Lindsell on Torts (19th Edition), paragraphs 17-22:

“The ordinary way of showing a conversion by unlawful retention of property is to prove that the defendant, having it in possession, refused to surrender it on demand. Indeed, such a demand is generally a precondition of the right of action for detention: the mere unpermitted possession of another’s chattel is not as such a conversion of it.

…

  It should be noted, however, that the defendant’s obligation is normally only to allow the claimant to collect the goods, not to deliver them to him.”

182.  Mr Tong SC argues that demand and refusal is not the only way to establish conversion by wrongful retention.  All that is required is some positive, overt act of withholding possession.  He quoted the case of Barclays Mercantile Business Finance Ltd And Another v Sibec Developments Ltd And Others [1992] 1 WLR 1253 at 1257-1258.  Indeed, the learned authors of Clerk & Lindsell on Torts only submitted that demand and refusal is the ordinary but not the only way of proving conversion. In Barclays Mercantile Business Finance Ltd, Millett J, as he then was, quoted the earlier edition of Clerk & Lindsell on Torts and said at 1257:

“In Clerk & Lindsell on Torts, 16^th ed. (1989), at p.1234 conversion by keeping is described as follows:

“Mere unpermitted keeping of another’s chattel is not a conversion of it.  There must be some detention consciously adverse to the rights of the owner, such as an assertion of a lien that does not exist.  The ordinary way of showing a conversion by unlawful retention of property is to prove that the defendant, having it in his possession, refused to give it up on demand made by the party entitled.”

Mr. Mann, who appeared for the applicants, seized on the word “ordinary” to submit that the making of a demand is not a precondition of the cause of action for damages in conversion. That is so, but in my judgment the use of the word was not intended to contradict the opening sentence: “mere unpermitted keeping of another’s chattel is not a conversion of it.” Demand is not an essential precondition of the tort: what is required is an overt act of withholding possession of the chattel from the true owner. Such an act may consist of a refusal to deliver up the chattel on demand, but it may be demonstrated by other conduct, for example, by asserting a lien. Some positive act of withholding, however, is required; so that absent any positive conduct on the part of the defendant, the plaintiff can establish a cause of action in conversion only by making a demand. In my judgment so much is clear from Clayton v. Le Roy [1911] 2 K.B. 1031, where the need for a demand in a simple retention case is clearly stated. The reason for this is clearly stated by Fletcher Moulton L.J., at p. 1048:

“The question as to the exact moment at which a cause of action arises may seem a very technical one, but in my opinion it is a point of substance in this case, and for the following reason. In an action of detinue, as in other actions of tort, the Statute of Limitations runs from the time when the cause of action arose; consequently, if nothing has happened to give rise to an action of detinue, there is no period of time which can operate to extinguish the title of the real owner. He may have been deprived of control over his chattel for 100 years, but it still remains his property, and an action will lie to recover it, unless there have been a demand and a refusal which would be sufficient to give rise to a cause of action. If there is a demand by the owner from the person in possession of the chattel and a refusal on the part of the latter to give it up, then in his six years the remedy of the owner is barred; it is therefore very important for the owner that the law should lay down the principle some clear act of that kind is required to constitute a cause of action in detinue.’

And, at p. 1050:

“the plaintiff must establish that at the moment of issue [of the writ] he was in a position to bring an action of detinue; in other words, that there had been a wrongful denial by the defendant of the plaintiff’s title to the watch.  At first the case was treated as though the question was as to the effect of a demand by the plaintiff of his watch and a refusal by the defendant to hand it over; but this point was practically abandoned, for there had been neither demand nor refusal.  Then the question was treated, but rather vaguely, as one of conversion, and the defendant’s letter of 16 May was said to be evidence of conversion.  But the mere fact that there was evidence pro and con on such a point would not be enough; it is necessary to find as a fact that there was a demand and refusal before the issue of the writ.”

  In my judgment, those purposes show clearly that an overt act of withholding goods from the true owner is a condition precedent to the tort of conversion and that absent any overt act on the part of the party in possession the true owner must establish both demand and refusal before he can establish a cause of action.”

183.  Thus, the law is clear.  An overt act is needed to establish a cause of action in conversion.  A demand and refusal is generally relied on as such an act.  Possession without more is not an overt act.  In Barclays Mercantile Business Finance Ltd, Millett J held that the plaintiffs failed to establish conversion against the administrators who did nothing save retaining the goods and declining to give their consent for the applicants to retake possession.  The Bank was in a similar position as the administrator.  It was given possession of the five LUCs.  It kept them in safe custody.  Other than that, it did nothing which is inconsistent with the rights of the owner.  Upon demand, it promptly facilitated their collection by HF Shenzhen.  The Plaintiffs could not have a cause of action against the Bank.    

184.  Mr Tong SC tried to get around the difficulty by arguing that the Bank had an obligation under an implied term of the Swap Agreement to return the five LUCs if the swap was not effected within a reasonable time.  I have rejected that argument on implied term.  Such a term could not be implied into the Swap Agreement under the Moorcock principle.  Nothing could be simpler than for the Plaintiffs to ask for the return of the five LUCs after the lapse of such time as they considered reasonable or appropriate.  Besides, the obligation of the Bank as bailor of the goods whose right to retention of the goods has been terminated is to allow the rightful owner to come and take back the goods.  There was no obligation on the Bank to take the initiative to return the five LUCs.

185.  Lastly, Mr Tong SC argues that the only reason why the Plaintiffs had not demanded the return of the five LUCs at an earlier stage was because of the Bank’s representation that it was willing to effect the swap and was processing the swap and the Plaintiffs were concerned not to demand the return which might provoke retaliation.  Hence, Mr Tong SC submits that it is not open to the Bank to rely on its own wrong to argue that there was no conversion.  I can well understand the grievance felt by the Plaintiffs because of the conduct of the Bank.  However, that is no answer to the need to have an overt act in order to establish a cause of action.  I have to conclude that there was no conversion under Hong Kong law.

186.  In view of the above conclusion, whether the alleged wrongful act was committed in Hong Kong or the PRC is irrelevant. There was no conversion under Hong Kong law.  If the wrongful act was committed in the PRC, the requirement of double-actionability could not be satisfied.  I do not find it necessary to venture into the realm of PRC law.  The Plaintiffs’ claim under this head must be dismissed.

THE BANK’S COUNTERCLAIM

187.  The Bank counterclaims against the Plaintiffs in respect of their obligations under the Consolidated Facility, Facility 3 and Facility 4 and financial documents related thereto.  There is no dispute that HF Enterprises borrowed money from the Bank under the aforesaid facilities and failed to repay. The Bank obtained judgment in Shen 654/1998 against HF Enterprises and HF Shenzhen in respect of the outstanding loans under Facility 4.  It also obtained judgment in Shen 655/1998 against HF Enterprises under the Consolidated Facility respectively.  No legal action has until now been taken by the Bank in respect of the loan under Facility 3 which was secured against the Sheung Shui Property.

188.  Apart from the claim against the Bank in these proceedings, the Plaintiffs have no defence to the Bank’s counterclaim.  The Plaintiffs raised three criticisms against LYT’s calculations in respect of the Plaintiffs’ indebtednesses under the three facilities:

(1)        HF Enterprises’ repayments have not been taken into account;

(2)        the interest was calculated on a “360-day year” basis instead of a “365-day year”; and

(3)        the Bank is not entitled to charge compound interest under the Consolidated Facility.

The Bank accepted the first two criticisms and adjusted its calculation accordingly, but claims it is entitled to charge compound interest under the Consolidated Facility. 

189.  Another objection raised by the Plaintiffs is that the penalty interest awarded by the PRC court under Shen 654/1998 and Shen 655/1998 are not enforceable in this jurisdiction.  I shall deal with these two points under the respective counterclaim.

The counterclaim under Facility 3

190.  The relevant facility letter was dated 22 August 1995.  It was signed by Chan on behalf of HF Enterprises and constituted a contract between HF Enterprises and the Bank.  The full amount under the facility was advanced to HF Enterprises.  The amount of outstanding principal owed to the Bank is $2 million.

191.  Pursuant to clause 6(d) of the facility letter, HF Enterprises executed a mortgage of the Sheung Shui Property in favour of the Bank.  As HF Enterprises is unable to repay its indebtedness under Facility 3, the Bank is entitled to enter into and take possession of the Sheung Shui Property by virtue of clause 8.2.2 of the Mortgage Deed and to realise the same in satisfaction of the outstanding loan.

The counterclaim under Facility 4

192.  The relevant facility letter was dated 23 October 1995.  It was signed by Chan on behalf of HF Enterprises and constituted a contract.  The full amount under the facility was advanced to HF Enterprises. 

193.  Pursuant to clause 6(d) of the facility letter, HF Enterprises procured HF Shenzhen to executed a charge over its PRC Factory as security of the indebtedness of HF Enterprises in favour of the Bank on 6 November 1995.  The charge was executed by Chan on behalf of HF Shenzhen.  Under clause 2(1) of the said charge, HF Shenzhen not only agreed to be the guarantor but also the principal debtor in respect of all the indebtednesses incurred under Facility 4.  Thus, HF Shenzhen is liable together with HF Enterprises for the outstanding loan.

194.  The Bank sued both Plaintiffs in the Shenzhen Intermediate People’s Court in Shen 654/1998 in respect of the indebtednesses under the facility.  HF Enterprises defaulted at the hearing.  On 24 April 2000, the Bank obtained judgment against both the Plaintiffs.  The Shenzhen Intermediate People’s Court ordered:

「雄豐公司尚欠深圳市農行貸款本金港幣700萬元及利息、逾期利息(利息、逾期利息按合同約定和中國人民銀行規定利率計算，從欠息之日起至還清之日止)應於本判決發生法律效力之日起10天內給付清結。逾期按民訴法規定加倍計付遲延履行期間的債務利息。

雄豐集團公司繼續以其位於深圳市龍崗區龍崗鎮新生村仙人嶺的廠房5號、7號、11號、13號、宿舍4號、6號、10號、12號及綜合樓1號(房地產証深房地字第1001317號、第1001318號、1001320號)作抵押，如雄豐公司不能按期歸還上述欠款，深圳市農行有權依法申請拍賣、變賣上述抵押物，所得價款優先得到受償。」(emphasis added)

195.  HF Enterprises appealed against the judgment.  The appeal was dismissed by the Guangdong Higher People’s Court in (2001) 粵高法經二終字第386號on 17 June 2002.  The judgment under Shen 654/1998 is therefore final and conclusive.

196.  In execution of the judgment under Shen 654/1998, the Bank sold the PRC Factory through judicial auction and obtained RMB6,326,546 on 31 October 2005.  The said sum was converted to HK$6,066,883.39 in January 2006 and applied to reduce the Plaintiffs’ indebtedness.  The amount of outstanding principal owed to the Bank is $933,116.61.

197.  The Plaintiffs do not dispute that the judgment in Shen 654/1998 is a final and conclusive judgment given by a court of competent jurisdiction.  Mr Tong SC argues that this judgment is only enforceable in the Hong Kong courts to the extent of the outstanding principal, interest and default interest but not double interest awarded by way of penalty by the PRC courts.  

198.  The relevant rule of international law is that the courts of one country are prohibited from enforcing the penal laws of a foreign state or enforcing penalties recoverable in favour of the foreign state.  The rule is summarised in paragraph 14-020 of Dicey, Morris and Collins on The Conflict of Laws (14^th ed) as follows:

“For a claim to be brought to enforce a foreign judgment, the judgment must be for a definite sum of money, which expression includes a final order for costs, e.g. in a divorce suit. It must order X, the defendant in the English action, to pay to A, the claimant, a definite and actually ascertained sum of money; but if a mere arithmetical calculation is required for the ascertainment of the sum it will be treated as being ascertained; if, however, the judgment orders him to do anything else, e.g. specifically perform a contract, it will not support an action, though it may be res judicata. The judgment must further be for a sum other than a sum payable in respect of taxes or the like, or in respect of a fine or other penalty. It is well settled that an English court will not entertain an action for the enforcement, either directly or indirectly, of a penal or revenue law of a foreign country. Since “the essential nature and real foundation of a cause of action are not changed by recovering judgment upon it,” it follows that the court cannot entertain an action for the enforcement, either directly or indirectly, of a foreign judgment ordering the payment of taxes, fines or other contributions or penalties. A penalty in this sense normally means a sum payable to the State, and not to a private claimant, so that an award of punitive or exemplary damages is not penal. But it is possible that an award of multiple damages, e.g. in an anti-trust action, might nevertheless be regarded as penal at common law. If the purpose of the damages as awarded by the foreign court is to punish the defendant, enforcement of the judgment may be found to be against English public policy, with which the rule against enforcing foreign penal laws will overlap. If the foreign judgment imposes a fine on the defendant and also orders him to pay compensation to the injured party (called the “partie civile” in French proceedings), the latter part of the judgment can be severed from the former and enforced in England.”

  (emphasis added)

199.  Mr Tong SC then referred to Schnabel v Lui [2002] NSWSC 15 (lexis copy), in which the Supreme Court of New South Wales refused to enforce an award for punitive damages ordered by the United States court.  By analogy, Mr Tong SC submits that the award of double interest by the PRC court in Shen 654/1998 as quoted above is a penalty which this Court shall not enforce.  

200.  The issue is therefore whether the award of double interest by the PRC court is a penalty.  The Supreme Court of New South Wales considered this issue in Schnabel v Lui.  It referred to Huntington v Attrill [1893] AC 150 which was quoted by Dicey, Morris and Collins in support of their proposition above.  In that case, Lord Watsons explained that the very essence of this rule of international law is that criminal wrongs are only punishable in the country where they were committed.  His Lordship said at 156:

“The rule has its foundation in the well recognised principle that crimes, including in that term all breaches of public law punishable by pecuniary mulct or otherwise, at the instance of the State Government, or of some one representing the public, are local in this sense, that they are only, cognizable and punishable in the country where they were committed. Accordingly no proceeding, even in the shape of a civil suit, which has for its object the enforcement by the State, whether directly or indirectly, of punishment imposed for such breaches by the lex fori, ought to be admitted in the Courts of any other country...

In its ordinary acceptation, the word “penal” may embrace penalties for infractions of general law which do not constitute offences against the State; it may for many legal purposes be applied with perfect propriety to penalties created by contract; and it therefore, when taken by itself, fails to mark that distinction between civil rights and criminal wrongs which is the very essence of the internal rule… But the expressions “penal” and “penalty”, when employed without any qualification, express or implied, are calculated to mislead, because they are capable of being construed so as to extend the rule to all proceedings for the recovery of penalties, whether exigible by the State in the interest of the community, or by private persons in their own interest.”

201.  Lord Watsons then quoted with approval the decision of the Supreme Court of the United States in Wisconsin v The Pelican Insurance Co 127 US (20 Davis) 265 that the rule applied not only to prosecutions and sentences for crimes and misdemeanours but also to all suits in favour of the state for the recovery of pecuniary penalties for any violation of statutes for the protection of its revenue or other municipal laws and to all judgments for such penalties.  His Lordship said at 157-158: 

“Their Lordships do not hesitate to accept that exposition of the law, which, in their opinion, discloses the proper test for ascertaining whether an action is penal within the meaning of the rule. A proceeding, in order to come within the scope of the rule, must be in the nature of a suit in favour of the State whose law has been infringed. All the provisions of Municipal Statutes for the regulation of trade and trading companies are presumably enacted in the interest and for the benefit of the community at large; and persons who violate these provisions are, in a certain sense, offenders against the State law, as well as against individuals who may be injured by the misconduct. But foreign tribunals do not regard these violations of statute law as offences against the State, unless their vindication rests with the State itself, for the community which it represents. Penalties may be attached to them, but that circumstance will not bring them within the rule, except in cases where these penalties are recoverable in the instance of the State, or of an official duly authorised to prosecute on its behalf, or other member of public in the character of common informer.”

Simply put, the test of the enforceability is whether the penalties attached to violation of statute law are recoverable at the instance of the state.

202.  The Supreme Court of New South Wales also referred to the English Court of Appeal decision a hundred years later in United States of America v Inikley (1989) 1 QB 225, in which Purchas LJ set out the approach in determining whether a penalty falls within the meaning of the rule.  His Lordship said at 265:

“From these authorities the following propositions seem to emerge which are relevant to the present appeal: (1) the consideration of whether the claim sought to be enforced in the English Courts is one which involves the assertion of foreign sovereignty, whether it be penal, revenue or other public law, is to be determined according to the criteria of English law; (2) that regard will be had to the attitude adopted by the Courts in the foreign jurisdiction which will always receive serious attention and may on occasions be decisive; (3) that the category of the right of action, ie whether public or private will depend on the party in whose favour it is created, on the purpose of the law or enactment in the foreign state on which it is based and on the general context of the case as a whole; (4) that the fact that the right, statutory or otherwise, is penal in nature will not deprive a person who asserts a personal claim depending thereon, from having recourse to the courts of this country; on the other hand, by whatever description it may be known if the purpose of the action is the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity, it will not be entertained; (5) that the fact that in the foreign jurisdiction recourse may be had in a civil forum to enforce the right will not necessary affect the true nature of the right being enforced in this country.”

Thus, the approach is to look at the true nature of the right being enforced in the local jurisdiction.  The nature of that right is to be determined according to the law of the local jurisdiction having regard to the attitude adopted by the courts in the foreign jurisdiction which ordered the penalty.  The fact that the right may be enforced in the foreign jurisdiction in civil proceedings is not conclusive of its true nature.

203.  In Schnabel v Lui, the Supreme Court of New South Wales held that the word “penalty” was wide enough to cover civil liability for punitive damages.  However, the punitive damages in that case were in fact punishment for the defendant for failing to comply with an order of court of the Unites States and to deter others from doing the same.  It was for that reason that the Supreme Court of New South Wales took the view that the damages fall within the categories of punishment under either a penal law or other public law of the foreign jurisdiction and was unenforceable.

204.  In the present case, the double interest ordered by the PRC court was pursuant to Civil Litigation Law(民訴法).  I have not been referred by either parties to that statute, which I presume to be article 232 of the Civil Litigation Law of the People’s Republic of China(《中華人民共和國民事訴訟法》).  It provides as follows: 

「第二百二三二條　被執行人未按判决、裁定和其他法律 文書指定的期間履行給付金錢義務的，應當加倍支付遲延履行期間的債務利息。被執行人未按判决、裁定和其他法律文書指定的期間履行其他義務的，應當支付遲延履行金。」

Translation:

“Article 232. If the person subject to execution fails to fulfill his obligations in respect to payment of money within the time limit specified by a judgment or order or any other legal document, he shall pay a multiplied interest on the debt for the period of deferred fulfillment. If the person subject to execution fails to fulfill his other obligations within the time limit specified by a judgment or order or any other legal document, he shall pay a surcharge for the deferred fulfillment”

205.  That statute apparently governs all civil proceedings in the PRC.  Under that provision, double interest may be awarded by the PRC court to a party in a civil proceeding for failing to pay damages for breach of contract ordered by the court.  Presumably, the double interest is a sanction imposed to ensure the court’s orders are promptly complied with.  The purpose behind that is to ensure justice to be dispensed promptly and effectively.  The award is to be paid to a party whose civil right has been infringed and whose right to judgment delayed.  Subject to the court’s discretion in determining the time within which its order is to be complied with and the amount of the additional interest to be paid, the right and sanction are to be applied to all litigants and not discriminately at any particular individual.  It is a punishment for violation of the court’s order made under a statute and is recoverable at the instance of the party but not the state.  Even assuming that the statute was enacted for the regulation of civil litigation in the interest and for the benefit of the community at large and that persons who violate those provisions are, in a certain sense, offenders against the state law, the victim of such violation is the successful party in a civil litigation who is injured by being denied of the judgment which he is entitled.  On the face, the statute and the award contains no element of punishment under either a penal law or other public law.  It is not enforceable at the instance of the state.  

206.  Mr Tong SC argues that the Bank sought to enforce the PRC judgment and bears the burden of proving that the award is not a penalty but has not discharged that burden.  I accept that the legal burden rests on the party seeking to enforce a foreign judgment to prove a valid judgment.  However, the evidential burden, at least, of proving that a valid foreign judgment is not enforceable as a penalty rests on the party against whom the judgment is sought to be enforced.  On the face, the award is not a penalty.  I have not heard argument or expert evidence on PRC law to the contrary.  There is no evidence of the nature of the double interest awarded and the attitude of the PRC court towards such award.  Though in my view on the facts of this case the rate of double interest of 38% per annum is on the very high side, it is, nevertheless, far short of the 60% limit imposed by section 24 of the Money Lenders Ordinance, Cap 163, above which a money lending transaction would be rendered illegal.  From what I could assess using criteria under Hong Kong law, I am unable to find the award was penal in nature.  I am not satisfied that the evidential burden is discharged by the Plaintiffs by merely relying on the PRC judgment without showing how under the relevant statute the double interest is a penalty.  Thus, as a matter of law, the PRC judgment is wholly enforceable against the Plaintiffs.

207.  However, the double interest is so high that this Court feels inappropriate to enforce once it has assumed jurisdiction over the matter upon the Bank filing a counterclaim.  The counterclaim was filed on 1 March 1999 before the judgment of the PRC courts.  In paragraph 67A, the Bank prayed for interest according to the contractual rate or under sections 48 and 49 of the High Court Ordinance.  The Bank pleaded similarly in respect of repayment of the loan under the Consolidated Facility.  In the circumstances, I think justice would be best served by awarding the Bank interest at contractual rate, including default rate if applicable, or judgment rate, whichever the less.  For the above reasons, the double interest awarded by the PRC court will not be enforced by this Court.  The judgment of the PRC court Shen 654/1998 shall be enforced to the extent stated above.

The indebtedness under the Consolidated Facility

208.  The relevant facility letter was dated 28 February 1996.  It was signed by Chan on behalf of HF Enterprises and constituted a contract.  The amount of outstanding principal advanced under the Consolidated Facility was $21,190,543.97. 

209.  Pursuant to clause 6(4) of the facility letter, HF Enterprises procured Lung Shing Property to executed a charge over the two lots of land in Longgang as security for the indebtedness of HF Enterprises in favour of the Bank on 13 March 1996. 

210.  On 18 April 2000, the Bank obtained judgment from the Shenzhen Intermediate People’s Court in Shen 655/1998 against both HF Enterprises and Lung Shing Property in respect of the indebtednesses under the facility.  HF Enterprises defaulted at the hearing.  The Shenzhen Intermediate People’s Court ordered:

「雄豐公司尚欠深圳市農行貸款本金港幣21,190,543.97元及利息、逾期利息(利息、逾期利息按合同約定和中國人民銀行規定利率計算，從欠息之日起至還清之日止)應於本判決發生法律效力之日起10天內給付清結。逾期按民訴法規定加倍計付遲延履行期間的債務利息。」

In addition, the PRC court also ordered HF Enterprises to pay a case acceptance fee in the amount of $122,193.  There was no appeal against the judgment in Shen 655/1998 which is therefore final and conclusive.  The Bank seeks to enforce that judgment.  The Plaintiffs criticized the Bank for charging compound interest and for seeking to enforce a penalty under a foreign judgment.

211.  The Bank relied on clauses 2.3 and 2.4 of the facility letter which provide as follows:

「2.3 貴司應於我行指定的日期支付應付利息。如果未能按時付息，則該應付利息視為應付未付利息。

2.4 我行有權對逾期或到期應付未付的款項收取違約利息。…… 違約利息按逾期款項及實際逾期天數按日息0.05%計收，由違約發生起至該款項全部清還止。」 (emphasis added)

Mr Chan SC argues that under clause 2.3, if the HF Enterprises failed to pay interest due, the interest due shall be deemed to be interest due and unpaid.  Hence, he submits that such interest due and unpaid constituted monies due and unpaid within the meaning of clause 2.4 and attracted interest at default interest rate. 

212.  Mr Tong SC argues that clauses 2.3 and 2.4 draw a distinction between “interest due and unpaid” and “monies due and unpaid” and that only the latter attracted default interest, but not the former.  If the former was subject to default interest, it would be of the nature of compound interest.  He referred to clause 2.3 of the facility letter under Facility 3, in which it was provided that HF Enterprises shall pay interest after the end of the interest period on a date specified by the Bank and that such interest due but unpaid shall be capitalised and subject to interest.  Clause 2.4 of that facility letter is similar to clause 2.4 of the facility letter under the Consolidated Facility which imposed default interest on monies due and unpaid.  Hence, Mr Tong SC submits that if the intention of the Bank was to charge interest on interest due and unpaid, it would have used the clearer formula in the facility letter in Facility 3.

213.  Construction of a document is to ascertain the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract: see Investor’s Compensation Scheme Limited.  In October 1995, the Bank charged interest on interest due and unpaid under Facility 3.  Then four months later, the Bank granted the Consolidated Facility which was a combined facility of Facility 1 and Facility 2.  If the Bank intended not to charge interest on interest due and unpaid, nothing could be easier than deleting the last sentence of clause 2.3 without the trouble of deeming such interest as interest due and unpaid.  If that were the intention of the Bank, the entire sentence would be redundant. On the other hand, “monies due” include loan capital due to be repaid as well as interest arising therefrom.  Thus, in my view, the words “monies due and unpaid” are wide enough to cover “interest due and unpaid”.  That explains why there was no need to use the word “capitalise” in clause 2.4 of the letter under the Consolidated Facility.  I agree with the construction submitted by Mr Chan SC.

214.  For reasons as explained earlier, the Plaintiffs have failed to discharge the burden of proving that the double interest awarded by the PRC court was a penalty. However, for the reasons set out in paragraph 207, the judgment of the PRC court in Shen 655/1998 shall be enforced to the extent of the outstanding principal with interest at contractual rate, including default rate if applicable, or judgment rate whichever the lower.

Conclusion,

215.  For reasons as explained above, the Bank is entitled to judgment against the Plaintiffs on the counterclaim.  It is entitled to be awarded: (1) the capital sum of $2,000,000 in respect of Facility 3; (2) the capital sum of $933,116.61 in respect of Facility 4; and (3) the capital sum of $21,190,543.97 and the case acceptance fee of $122,193, totalling $21,312,736.97 in respect of the Consolidated Facility.  The Bank is entitled to enforce the judgments awarded by the PRC courts in Shen 654/1998 and Shen 655/1998 on the capital sums and interest due under Facility 4 and the Consolidated Facility respectively to the extent as stated in paragraphs 207 and 214.  The Bank is entitle to possession of the Sheung Shui Property which it may realise in satisfaction of the outstanding loan under Facility 3.  The Plaintiffs dispute the interest rates applied by the Bank.  Accordingly, for expediency, I shall enter judgment on the counterclaim on the capital sums only with interest to be assessed.  I shall give directions to the parties to agree, without prejudice to their right to appeal against my finding on liability, on the amount of interest payable after verifying the proper interest rates.

216.  The Bank is entitled to interest on the capital sums and interest calculated in accordance with the following principles:

(1)        the interest shall be calculated at the contractual rate from the date on which interest started to accrued under the respective facilities until the date of default;

(2)        thereafter at contractual default rate until 1 March 1999, the date of filing of the Defence and Counterclaim;

(3)        thereafter, at judgment rate or default rate, whichever the lower until full payment; and

(4)        the Bank is entitled to interest upon capitalised interest which were due and unpaid.

217.  On procedures, I give the following directions. The parties shall agree on the computation of interest within four weeks from the date of this judgment, failing which the parties shall file their respective computations within one week thereafter for my determination.  Where appropriate, the parties shall support their computations with affidavits, if they entertain any disputes on the factual basis of their computation such as prime rate.

CONCLUSION

218.  In conclusion, the Plaintiffs’ claim is dismissed. 

219.  On the Defendant’s counterclaim:

(1)        the 1^st and 2^nd Plaintiffs are jointly and severally liable to the Defendant in the amount of $933,116.61 in respect of unpaid loan capital advanced under Facility 4 with interest to be assessed;

(2)        the 1^st Plaintiff is liable to the Defendant in the amount of $2,000,000 in respect of unpaid loan capital advanced under Facility 3 with interest to be assessed; and

(3)        the 1^st Plaintiff shall within 30 days of this judgment deliver vacant possession of the property known as Section A of Lot No.725 in Demarcation District No.94, Lin Tong Mei, Sheung Shui, New Territories, Hong Kong which the Defendant may dispose of in accordance with the terms of the mortgage deed in order to repay the outstanding loan under Facility 3 to the Bank.

220.  Having succeeded in both the defence and the counterclaim, the Defendant is entitled to costs from the Plaintiffs.  However, the Defendant was much to blame for its conduct in handling the Plaintiffs’ application to swap the securities, which led to the litigation.  Though its conduct is short of making a concluded agreement, it induced the Plaintiffs into the belief that the parties had reached a concluded agreement.  It advanced factual evidence which was almost totally rejected by the Court.  It raised unnecessary factual disputes such as the judgment in Yue 311/2003, which unduly and unnecessarily wasted a lot of time and costs.  Its accounting expert was unnecessary.  Its expert witnesses in quantum were typical hired guns.  The same could be said of the Plaintiffs’ legal expert.  But the blame is mainly on the Defendant’s.  Much time was wasted by the Defendant in engaging in such meaningless or unmeritorious factual disputes.  It could have equally well succeeded had LYT told the truth and had its expert witnesses not attempted to mislead the Court.  To show the disapproval of the Defendant’s conduct, it is appropriate to deprive it of its costs in defending the action. On the counterclaim, the Plaintiffs have no valid defence, it is appropriate for costs to follow the event.  Accordingly, I make a costs order nisi that there shall be no order as to costs on the Plaintiffs’ claim and that the Plaintiffs shall pay the Defendant’s costs of the counterclaim.

THE ALTERNATIVE SCENARIO

221.  I now consider the alternative scenario, assuming that there were a concluded Swap Agreement.  I shall deal with this very briefly.  Whether that agreement was based on the discussion reached at the meeting on 9 July 1996 or the telephone conversation on 8 October 1996 does not matter.  The question which immediately arises is what is the proper law of the Swap Agreement.

The proper law of the Swap Agreement

222.  The proper or governing law of an agreement is to be determined by the court before which the agreement is being litigated, i.e. the Hong Kong High Court applying the law applicable in Hong Kong as a matter of lex fori.  The tests to be applied in determining the proper law of contract are summarised in sub-rules 1, 2 and 3 of Rule 180 in Dicey & Morris: The Conflict of Laws 11^th edition.  Basically, the test is to ascertain the intention of the parties.  Firstly, when the intention of the parties to a contract as to the law governing the contract is expressed in words, this expressed intention, in general, determines the proper law of contract. Secondly, in the absence of an expressed intention, the parties’ intention as to the proper law is to be inferred from the terms and nature of the contract, and from the general circumstances of the case.  Thirdly, when the intention was neither expressed nor could be inferred from the circumstances, the contract is to be governed by the system of law which the transaction has its closest and most real connection.  There was no express choice of law under the Swap Agreement.  In the circumstances of the present case, the inferred intention as to the proper law is best ascertained by finding out objectively that system of law which the transaction has its closest and most real connection.  Thus, the second and third tests are the same.

223.  Mr Tong SC argues for Hong Kong law as the proper law by emphasising on the following factors.  While HF Shenzhen is a PRC company incorporated in the PRC, it is nevertheless a subsidiary of HF Enterprises which is a company incorporated in Hong Kong under the Companies Ordinance.  Though the Bank is a PRC corporation, it was registered under Part XI of the Companies Ordinance with a place of business in Hong Kong.  It conducted business with HF Holdings through its Offshore Department in Hong Kong.  Chan who discussed the swap on behalf of the Plaintiffs and Wong who handled the follow up work were resident in Hong Kong, while LYT, the Bank’s key personnel responsible for the discussion concerning the swap, was based in Hong Kong.  Mr Tong SC also argues that the underlying transaction in which the Swap Agreement arose provided the context in which the proper law of the agreement should be considered.  He also argues the fact that Hong Kong was the place of performance of the Swap Agreement, i.e. the place where the five LUCs were delivered, and that the loan was denominated in Hong Kong dollars point to a Hong Kong direction.

224.  The Swap Agreement was to exchange the securities represented by the two LUCs for those represented by the five LUCs.  The starting point of the inquiry must therefore be the nature of the securities to be exchanged; the facility letters, the deeds of guarantee, the mortgage documents, the proper law governing those agreements and the location of the parties thereto.  I have found that the exchange did not extend to the securities over the PRC Factory and Sheung Shui Property.  I shall not take any of the factors relating to those securities into consideration.  Even if I were to, those factors would cancel each other and the conclusion would be the same.

225.  Clause 13 of the facility letter dated 28 February 1996 regarding the Consolidated Facility which was secured against the two lots of land stated that the governing law of the facility letter was PRC law. The two lots of land are real properties in the PRC.  Clause 6(4) of the facility letter stated that the mortgage must be registered with the Shenzhen Land Bureau.  The legal owner and mortgagor of the property was Lung Shing Property, which is a PRC corporation.  Clause 5 of the mortgage guarantee(抵押担保書)dated 13 March 1996 executed by Lung Shing Property stated that the mortgage guarantee was governed by PRC law.  All these points heavily to the inference that the parties and Lung Shing Property must have intended that their legal relationship in the transaction shall be governed by PRC law where the properties and their legal owner are situated.

226.  The five lots of land represented by the five LUCs, were all landed properties in the PRC owned by HF Shenzhen, a PRC corporation, though a subsidiary of HF Holdings, a Hong Kong company.  The location of the direct and immediate owner of those properties must carry more weight than the location of its holding company.   

227.  Though the swap of securities could be performed in Hong Kong or Shenzhen, the underlying obligations of the Swap Agreement would involve the discharge of the old securities and the creation of new securities in their place.  If the Swap Agreement were to be carried out, the five lots of land would have to be mortgaged in accordance with the laws of the PRC and the mortgage registered with the Shenzhen Land Bureau.  Hence, the creation of the new security must be governed by PRC law.  It is difficult to see how a charge or mortgage of land in the PRC could ever be governed by Hong Kong law. Against such background, it is impossible to draw the inference that the parties intended Hong Kong law to be the governing law from the relatively neutral fact that the five LUCs were delivered to the Offshore Department of the Bank in Hong Kong and the loan was denominated in Hong Kong dollars, to be advanced to the 1^st Plaintiff in Hong Kong and to be repaid in Hong Kong dollars in Hong Kong.  The fact that Chan and Wong had to make a special trip to Shenzhen to negotiate and conclude the Swap Agreement also points to PRC as the proper law.  Even if the Swap Agreement were concluded during the telephone conversation in October 1996 in Hong Kong, that does not diminish the significance of the meeting in Shenzhen where the negotiation first took place.

228.  All the objective factors point to PRC law is the system of law which the Swap Agreement has its closest and most real connection and raise the inference that the parties intended that the proper law of the Swap Agreement shall be PRC law.

The parties’ experts on PRC law

229.  Having found that the proper law of the Swap Agreement is PRC law, it becomes necessary to consider its validity under PRC law.  The Plaintiffs called Zhang of the University of Hong Kong as their legal expert on PRC law.  Zhang has an extremely impressive curriculum vitae.  He graduated with a bachelor of laws degree from Beijing Fa Zheng University (北京法政大學)in 1983.  He studied in Indiana University where he obtained his master of laws degree and doctor of jurisprudence degree in 1989 and 1992 respectively.  He taught in Hong Kong City Polytechnic University in 1995 and then University of Hong Kong in 1997.  At present, he is a professor and vice dean of the School of Law of Hong Kong University.  He had sixteen year’ experience teaching and researching PRC laws since 1983.  But he has never practised law in the PRC.  He had given expert evidence on PRC law before the Hong Kong courts on four occasions previously and had given written expert evidence on another four to five occasions without having to attend court.  His evidence had been accepted by the courts.

230.  Mr Chan SC severely criticised Zhang for his lack of professional qualification to practice law in the PRC and lack of experience in handling mortgages and registration of land charges in the PRC.  More importantly, he criticised Zhang as a hire-gun and as being evasive.  These are very serious allegations made against an expert, particularly one who is called to assist the court as a legal expert.  Zhang is a scholarly academic.  It is understandable that he might became unduly sensitive and defensive when asked about his qualification to practise law in the PRC.  I do not consider him evasive.  However, it is well known and common knowledge which I may take judicial notice of, that the laws in the PRC have undergone unprecedented reforms and expansion since its recovery from the cultural revolution in late 1970 and early 1980 and thereafter to cope with its fast economic development to become the world’s second biggest economy after the United States.  Thus, Zhang’s lack of professional practice and his being away from the PRC since 1983 weigh against the reliability of his opinion. 

231.  Mr Chan SC’s criticism of Zhang as being a hire-gun is based upon Zhang’s volunteering opinion that the proper law of the Swap Agreement was Hong Kong law which had never been invited from him and for his expert opinion which Mr Chan SC argues were not frank and unsupported by authorities. 

232.  On the uninvited opinion on proper law, Zhang’s explanation was that he did so because the issue had been dealt with by his predecessor and by the Bank’s expert.  That, unfortunately, was not supported by the written opinions of those experts.  His explanation may well be a convenient one made without much thought at the spur of the moment.  In view of his professorial status, Zhang might well be trying to be comprehensive in his opinion as was illustrated by the continuing research he undertook during the course of the trial.  By itself, volunteering an uninvited opinion which turned out to be wrong is not sufficient to justify such a serious label.  Anyway, Zhang’s opinion on that issue was not relied upon by Mr Tong SC at all.  In view of the conclusion which I reached, Zhang was also wrong.

233.  Mr Chan SC quoted various instances in support of his allegation that Zhang was deliberately being partial not full and frank with court.  I shall deal with those allegations when I deal with the relevant aspects of PRC laws.  The somewhat biased and unconvincing way with which Zhang presented his expert opinion on PRC law made me feel he was more of an advocate than an expert witness.  But I do not find it necessary to make a finding if he was a hire gun.  Suffice it is to say, after due and proper consideration of the literature produced by Zhang and HH as well as the submission of counsel, I reject most of Zhang’s opinion.

234.  HH was the expert in PRC law called by the Bank.  He is a practising lawyer in the PRC.  He obtained his bachelor of laws degree from Si Nan Fa Zheng Da Xue(西南政法大學)(formerly known as 西南政法學院) in 1986 and LLM degree (International Finance) from School of Law of Zhong Guo Ren Min Da Xue(中國人民大學法學院)in 1991.  He also participated in law drafting work in the PRC.

235.  Mr Tong SC doubted HH’s impartiality as the Bank had instructed the law firm in which HH was a partner.  Such attack was answered by the unchallenged evidence of HH that the Bank was not satisfied with the service of the firm and eventually took legal action against the firm.  Another attack was that HH’s firm had been the legal advisor of a PRC company during 1993 to 2002 of which the Bank was a shareholder.  However, that retainer was terminated in 2002.  I consider there was no basis to doubt HH’s impartiality.  HH appeared to be assertive.  But on the whole, his opinion was not severely criticised and was supported by the legal literature he submitted as well as those by Zhang.  I reject some of his opinion founded on factual basis which are contrary to my finding of fact.  That apart, I accept most of his opinion.

Nature of the Swap Agreement

236.  The main thrust of the Plaintiffs’ case on the Swap Agreement under PRC law as argued by Zhang is that it was an agreement to exchange securities and as such there was no formal requirement of any kind under PRC law.  On the other hand, the Bank’s position as well as the opinion of its expert in PRC law is that the Swap Agreement was an agreement to use some new properties as securities to replace some other securities to be released to the Plaintiffs.  It was therefore a foreign economic contract as well as a contract to amend a charge agreement and mortgage agreement which has to be made in writing under Foreign Economic Contract Law of the People’s Republic of China《中華人民共和國涉外經濟合同法》and Guarantee Law of the People’s Republic of China《中華人民共和國擔保法》applicable at the material time.   

237.  Zhang was referred to clause 6(3) of the facility letter relating to the Consolidated Facility dated 14 March 1996 which required the registration of the charge of the two lots of lands to be a condition precedent to granting the facility.  He was asked whether the Swap Agreement was an agreement to vary the facility contract.  He avoided answering that question by saying that the Swap Agreement might have included some other terms.  That was contrary to the Plaintiffs’ case that the Swap Agreement did not contain any terms other than those pleaded.  Plainly, on the pleaded case of the Plaintiffs, the Swap Agreement was an agreement to vary the facility letter which has the effect of amending a charge agreement and a mortgage agreement. 

238.  It is the common opinion of both experts that a foreign economic contract and an agreement to amend another agreement which under PRC law was required to be in writing must also be in writing.  However, this requirement has been relaxed since 1999 when Contract Law came into effect.  In the following two sections, I shall deal with the legal questions whether the Swap Agreement has to be made in writing under relevant PRC laws.

Whether the Swap Agreement is valid and effective under Foreign Economic Contract Law

239.  The Swap Agreement was entered into on 9 July or 8 October 1996.  It was essentially an economic contract.  According to HH, Economic Contract Law of the People’s Republic of China《中華人民共和國經濟合同法》(“Economic Contract Law”) applied to economic contracts entered into between local parties, while Foreign Economic Contract Law applied to economic contracts of which one of the parties was a foreign entity.  But there is no question that both laws applied to the same contract.  HH’s opinion is not challenged.  HF Enterprises is a company incorporated in Hong Kong which was recognised as a foreign party under PRC law.  Thus, the Swap Agreement was governed by Foreign Economic Contract Law which was effective from 1 July 1985 until 1 October 1999 when it was replaced by Contract Law.  Article 7 of Foreign Economic Contract Law provided that a foreign economic contract was formed when the parties reached agreement in writing and signed on the agreement.  It provided as follows:

「當事人就合同條款以書面形式達成協議並簽字，即為合同成立。通過信件、電報、電傳達成協議，一方當事人要求簽訂確認書的，簽訂確認書時，方為合同成立。

  中華人民共和國法律、行政法規規定應當由國家批准的合同，獲得批准時，方為合同成立。」

(emphasis added)

Translation:

“A contract is formed when the clauses of contract are agreed in written form and signed by the parties. In case one party requests to sign a confirmation letter when the agreement is reached by the means of letter, telegram or telex, the contract is only formed upon the confirmation letter being signed.”

(emphasis added)

Hence, Mr Chan SC argues that the Swap Agreement could not be regarded as having been formed as it was not in writing.  The focal point of the dispute between the parties is whether the Swap Agreement has been formed in accordance with Foreign Economic Contract Law.

240.  Zhang argued that the requirement that a foreign economic contract must be in writing under article 7 of Foreign Economic Contract Law was not an inflexible one.   He referred to an article titled「合同法條例評述」written by Vice President Tang De Hua(唐德華)of the Supreme People’s Court which discussed about an action for breach of contract by a chemical company against an exporting company (“Chemical Company Case”) in which the court held on appeal that the oral agreement was valid.  That article is of limited use as it did not contain a report of the judgment of the court.  It is therefore not clear what was the basis of the court’s decision.  In any event, the doctrine of staredecisis is not recognised under PRC law.  The author supported the decision of the court for three reasons.  Firstly, he said that according to article 56 of the General Principles of the Civil Law of the People’s Republic of China《中華人民共和國民法通則》and article 10 of Contract Law which provided that agreements may be made orally or in writing or in other manners.  Secondly, the oral agreement contained all the essential terms required by law.  Thirdly, the oral agreement was one in which the accounts were settled immediately(即時清結合同), i.e. one in which the parties immediately performed their respective obligations under the agreement.  The chemical company delivered goods and the exporting company paid forthwith.  The incidents in that case happened in 1990.  At that time, both Economic Contract Law and Foreign Economic Contract Law were in force.  The parties in that case were both PRC parties, though the exporting company intended to export to a foreign party.  Hence, the contract was governed by Economic Contract Law and not Foreign Economic Contract Law.  Article 3 of that law provided that economic contracts other than those in which the accounts were settled immediately, must be in writing:

「經濟合同，除即時清結者外，應當採用用書面形式，當事人協商同意的有關修改合同的文書、電報和圖表，也是合同的組成部分。」

Translation:

“Economic contracts, except for those in which accounts are settled immediately, shall be in written form. Documents, telegrams and charts that relate to the modification of a contract and that are agreed upon by the parties through consultation shall also be integral parts of the contract.”

For these reasons, the Chemical Company Case is distinguishable from the present case as the Swap Agreement was not one in which the accounts were settled immediately and not a local economic contract.  Plainly, the rationale in the Chemical Company Case has no application to the Swap Agreement.  This shows the very flimsy nature of Zhang’s expert opinion.

Whether the validity of the Swap Agreement has been saved by Contract Law and judicial interpretations《司法解釋》

241.  In the alternative, Zhang argued that the validity of the Swap Agreement has been saved by Contract Law and judicial interpretations by the Supreme People’s Court.  The following facts are common knowledge which I have acquired from other cases and which I may take judicial notice of.  By way of background, a lot of legislations were passed by the National People’s Congress of the PRC to cope with its rapid economic development.  The legislative philosophy has been to legislate broadly instead of making detailed legal provisions and leaving details to be pronounced by government bureaus in the form of administrative directions as and when required.  The Supreme People’s Court was also authorized by the Standing Committee of the National People’s Congress to supplement the legislations by giving judicial interpretation to legislations.  Judicial interpretations are statement of legal principles of general application and not statement of facts of a particular case.  Those principles were discussed and approved by the Judicial Committee of the Supreme People’s Court(審判委員會)before they were published on Ren Min Fa Yuan Bao(人民法院報)in accordance with prescribed format.  These formal requirements are set out in「最高人民法院關于司法解釋工作的若干規定(1997年6月23日法發(1997)15號)」(“1997 Working Regulations”).  Such judicial interpretations have the force of law.  Of course, such judicial interpretation is unknown to the common law system. 

242.  It is the common opinion of both experts that judicial decisions in individual cases or precedents are not recognised under PRC law.  They are for reference only.  On the other hand, opinions of highly regarded academic writers expressed in legal publications are persuasive and may be taken into consideration by the courts.  Many of those writers are judges of the Supreme People’s Court.  Zhang has referred to many of those opinions in his argument, which I shall refer to shortly.

243.  Contract Law was passed in March 1999 and became effective from 1 October 1999 when it superseded and replaced Economic Contract Law and Foreign Economic Contract Law.  Hence, with effect from that date, there is no longer any requirement that an economic contract with a foreign entity must be in writing. HH has no dispute with the above propositions.

244.  Zhang then argued that articles 1 and 3 of the Judicial Interpretation of the Supreme People’s Court on Contract Law pronounced in 1999《最高人民法院關於適用〈中華人民共和國合同法〉若干問題的解釋(一)》(“JI-1”) have retrospective effect so as to save the Swap Agreement from being invalid for want of writing.  Zhang referred to three articles published in《合同司法解釋小文庫》, volumes 3 and 5 in support of his proposition.  Those articles were written by senior and respected judges of the Supreme People’s Court.  Zhang quoted those articles and expressed his agreement with the opinions stated therein.  Mr Chan SC does not dispute with those opinions but argues that they do not support Zhang’s interpretation, but rather the Bank’s contrary proposition. 

245.  Articles 1 and 3 of JI-1 provide as follows:

「1. 合同法實施以後成立的合同發生糾紛起訴到人民法院的，適用合同法的規定；合同法實施以前成立的合同發生糾紛起訴到人民法院的，除本解釋另有規定的以外，適用當時的法律規定，當時沒有法律規定的，可以適用合同法的有關規定。

  3.  人民法院確認合同效力時，對合同法實施以前成立的 合同，適用當時的法律合同無效而適用合同法合同有效的，則適用合同法。」

(emphasis added)

Plainly whether Contract Law applies to save the validity of the Swap Agreement depends upon the true interpretation to be given to the word “formed(成立)” in JI-1.

246.  Zhang argued that a contract was formed when the parties were ad idem. Hence, on the Plaintiffs’ case, the Swap Agreement was formed on 9 July or 8 October 1996.  Zhang referred to an article titled「適用新的《合同法》審理案件要注意的問題」in《合同法司法解釋小文庫》volume 5 which was extracted from the speech of the Vice President Li Guo Kuang(李國光)of the Supreme People’s Court, in which Vice President Li said:

「要正確適用與舊的《合同法》有關的條例和司法解釋。新的《合同法》實施後，最高人民法院及時發布了《關於適用<中華人民共和國合同法>若干問題的解釋(一)》和《予以廢止的1999年底以前發布的有關司法解釋目錄(第三批)》，對審判工作中適用新的《合同法》有關問題作出了明確的解釋，並廢止了最高人民法院依據三部舊的《合同法》制定的若干司法解釋。但是，對於與舊的《合同法》有關的行政法規、最高人民法院的司法解釋，能否在審理新的《合同法》實施之前的合同糾紛案件中繼續適用等問題，在審判實踐中還存在一些需要進一步明確的問題。根據《立法法》規定的原則，除了法律、法規有特殊規定的，法律、法規一般無溯及既往的效力。因此，在處理涉及新舊法交替時期的合同糾紛案件時，要按照合同成立的時間分別具體掌握：審理新的《合同法》實施以後成立的合同糾紛案件，不再適用與舊的《合同法》有關的行政法規和司法解釋；審理《合同法》實施之前成立的合同糾紛案件，應當適用與舊的三部《合同法》有關的行政法規和司法解釋；對履行期間跨越新舊《合同法》的合同糾紛案件，以及依新的《合同法》為有效而依舊的行政法規、司法解釋為無效的合同糾紛案件則可以參照新的《合同法》有關規定處理。」

(emphasis added)

In the above passage, Vice President Li emphasised the principle of non-retroactivity of legislation and the importance to ascertain the time when a contract was formed in determining whether JI-1 is applicable to a contractual dispute.  What Vice President Li said accords with well recognised legal principles both under the common law and civil law.  I agree with and accept his view.  Thus, before determining whether JI-1 is applicable to the contractual dispute arising out of the Swap Agreement, it is necessary to ascertain first whether the contract was formed in accordance with the law at the time, i.e. Foreign Economic Contract Law in the instant case.

247.  In another article titled《最高人民法院關於適用〈中華人民共和國合同法〉若干問題的解釋(一)》in the same publication referred to by Zhang, Chao Shi Bing(曹士兵)and others set out the general approach to construing JI-1.  They wrote:

「從《合同法解釋》第一條的規定看，新合同用新法，對舊合同以不溯及既往為原則，以溯及既往為例外，以適用舊法為原則，以適用新法為例外、補充。《合同法》實施以前成立的合同發生糾紛起訴到人民法院的，原來三部《合同法》有規定的適用原來的規定。」

(emphasis added)

248.  Those authors were of the same opinion as Vice President Li.  They were of the opinion that the article 1 of JI-1 sets out the general principle that legislation is not retrospective.  Thus, they opined that in respect of disputes arising out of contracts formed before Contract Law, the general rule is that the law at the time of formation of the contract applies and Contract Law only applies in exceptional cases.  The exceptions are governed by articles 2 and 3 of JI-1.  The learned authors then set out three exceptions. The first exception arises out of the time of performance of the contract, i.e. the case of a contract formed before Contract Law came into effect but its performance was extended beyond that date.  Article 2 of JI-1 provides that such disputes are to be dealt with in accordance with the detailed provisions under chapter 4 of Contract Law.  Those provisions have no application to the present case.  The second exception arises out of policy considerations of securing safety of a contractual transaction, i.e. giving effect to contractual transactions.  The policy considerations are to reduce the incidence of contracts being rendered void, to promote and encourage business transactions and to ensure safety of business transactions, which are to the benefit of the business community.  To this end, article 3 deals with the effect of a contract formed prior to the implementation of Contract Law.  The rule is that if the contract would be void under the then existing law but valid under Contract Law, Contract Law applies to preserve its validity.  It must be emphasised that this exception applies to the effect of a contract which has been formed before Contract Law came into effect.  The third exception relates to the hierarchy of different kinds of laws under the PRC legal system.  The relevant principle here is that a law of specific application has priority over a law of general application.  The fourth exception is to preserve finality of litigation.  Hence, article 5 provides that the court will not entertain a retrial of any dispute arising out of contracts formed before the implementation of Contract Law if it has already passed a final and conclusive judgment.

249.  In an earlier article titled《最高人民法院關於適用〈中華人民共和國合同法〉若干問題的解釋(一)》導讀in volume 3 of the same publication, Wang Chuang(王闖)gave a similar opinion.

250.  In summary, the opinion of these writers is as follows.  The general principle is that Contract Law and judicial interpretations are not retroactive but there are exceptions under special circumstances.  The first part of article 1 states the obvious rule that Contract Law applies to disputes arising from contracts formed after the implementation of Contract Law.  The second part of article 1 deals with contracts formed before the implementation of Contract Law.  Unless otherwise provided by JI-1, such contract is subject to the law then applicable.  In the absence of such legal provisions, the legal provisions of Contract Law applies.  Article 3 governs other contracts formed before the implementation of Contract Law.  It focuses on the effect(效力)and not the formation of such a contract.  It provides that in determining the effect of such a contract, the rule is that if the contract would be void under the then existing law but valid under Contract Law, Contract Law applies.  Article 3 is highly relevant to the present case.

251.  Zhang argued that an agreement was formed when the parties were ad idem. As the parties had reached consensus in July or October 1996, the Swap Agreement was formed before the implementation of Contract Law.  Therefore, article 3 of JI-1 applies to the Swap Agreement.   Hence, he further argued that pursuant to article 3, Contract Law applies to the Swap Agreement which has legal effect although is was not a written agreement.  He relied on the following extract from Wang Chuang’s article in support of his proposition that the Swap Agreement was formed when the parties were ad idem:

「因為合意是構成真正交易的精神事件，合同是當事人合意的結果，是合同自由原則的體現；因此，只要當事人雙方根據《合同法》所規定要約和承諾規則就合同的主要條款達成一致，或者符合《合同法》第三十七條等所規定的情形，該合同即告成立。」

252.  With respect, Zhang was quoting the opinion of the author of that article out of its proper context.  The author was discussing about JI-1 and Contract Law.  The author recognised the principle of non-retroactivity of legislation and the policy of protecting business transactions.  He saw the need to strike a balance between that principle and policy consideration.  Then he identified three convergent points(含接點)in JI-1 between Contract Law and the previously existing legislation, which are the formation of the contract, time for performance of the contract and the legal effect of the contract.  As I have already mentioned, the focus in article 3 of JI-1 was shifted to legal effect of the contract formed before the implementation of Contract Law.  There must be a pre-existing contract which has been formed before the question of its legal effect arises for consideration under article 3 of JI-1.  Hence, when discussing about the second of the three convergent points, i.e. legal effect of a contract, the author identified three different concepts, namely whether a contract has been formed(成立或不成立); has entered into effect(生效或不生效)and has legal force(有效或無效).  He said that whether a contract has been formed is a pre-requisite for considering whether that contract has entered into effect or has no legal force and that a contract which has not entered into effect is not synonymous with a contract which has no legal force.  It was in that context, that the author wrote the passage quoted by Zhang.  Just a few lines down in the same paragraph, the author continued:

「生效”是與“不生效”相對應的概念，而不是與“無效”相對應，因此“不生效”不等於“無效”。人民法院應當認識到，合同的生效與不生效，都是以合同成立作為前提的，如果合同根本不成立，則根本談不上生效的問題，更談不上有效或無效的問題。」

(emphasis added)

253.  In the passage cited by Zhang, the learned author was discussing about consensus or ad idem as a general requirement of a contract but not about formation of special contracts which are required by law to be made in writing.  Zhang was quoting the author out of the context.  With respect, I think his argument is contrived.  The Swap Agreement was governed by Foreign Economic Contract Law.  Article 7 of that law required that such an agreement must be made in writing.  Putting aside my finding that the parties had not reached any agreement during the meeting on 9 July 1996 or during the telephone conversation on 8 October 1996 for the purpose of considering this alternative scenario, any foreign economic contract reached orally could not have been formed under Foreign Economic Contract Law and has no legal force, i.e. null and void under PRC law due to want of writing. 

254.  Mr Tong SC seeks reliance on articles 36 and 37 of Contract Law which provide that a contract is formed if there was substantial performance by one side and such performance was accepted by the other side to save the Swap Agreement from being rendered void for want of writing.  Mr Chan SC’s reply is that those articles being part of the Contract Law could not apply to such performance under JI-1 for precisely the same reason as discussed above.  I respectfully differ.  The rationale discussed above is based on article 1 of JI-1 which applies to an oral agreement made at a time when Foreign Economic Contract Law expressly provided that a foreign economic contract could not be formed orally.  However, Mr Tong SC’s present argument is based on a contract which would be formed by operation of law and not an oral agreement.  This is precisely the type of situation envisaged by article 3 of JI-1, i.e. the contract had no effect under the old law but would have effect under Contract Law. Accordingly, pursuant to article 3 of JI-1, articles 36 and 37 of Contract Law are applicable to such a contract formed by conduct. 

255.  However, the difficulties of the Plaintiffs do not end there. As was pointed out by HH, the exchange of securities would involve other important acts of performance sufficient to turn the five LUCs into securities.  Those acts include the production of signed documentation to show that the registered owner of the landed property had agreed to the use of the land as security and the registered owner of the land attending to the registration of the security.  In my view, mere delivery of the five LUCs with the intention of making them securities is far from being substantial performance.

256.  In another of his desperate attempt to rescue the Swap Agreement, Zhang referred to articles 1, 2 and 30 of the Judicial Interpretation of the Supreme People’s Court on Contract Law pronounced in 2009《最高人民法院關於適用〈中華人民共和國合同法〉若干問題的解釋(二)》(“JI-2”).  Article 1 of JI-2 provides that where parties dispute as to whether a contract has been formed, the court shall find the contract formed if it can ascertain the parties name, the subject matter of the contract and its quantity, unless the law or the parties have provided otherwise.  The court may also imply other terms into the contract in accordance with articles 61, 62 and 125 of Contract Law.  Article 2 provides that where the parties have not entered into a contract in writing or orally, the court may find a contract formed if it can infer from the parties’ conduct the intention to enter into a contract, unless the law provides otherwise.  Thus, before Zhang can rely on articles 1 and 2, Zhang has to overcome two hurdles.  He has to show that JI-2 is applicable to the Swap Agreement and that there were no other legal provisions which would otherwise prevent the court from finding a contract has been formed.  

257.  In respect of the first obstacle, Zhang relied on article 30 of JI-2 which provides:

「合同法施行後成立的合同發生糾紛的案件，本解釋施行後尚未終審的，適用本解釋；本解釋施行前已經終審，當事人申請再審或者按照審判監督程序決定再審的，不適用本解釋。」

Translation:

“This interpretation is applicable to disputes arising out of contracts formed after the implementation of Contract Law which have not been finally determined since implementation of this judicial interpretation; this interpretation is inapplicable to cases which had been finally determined but against which determination a party has applied for retrial or a retrial has been ordered pursuant to the trial supervisory procedure.”

258.  Zhang argued that the semi-colon (;) after the first clause of article 30 has the same effect as a full stop (.) with the result that under the first clause JI-2 applies to disputes arising out of contracts formed after the implementation of Contract Law which have not been finally determined since implementation of this judicial interpretation whereas the second clause refers to disputes arising out of all contracts whether formed before or after the implementation of Contract Law which are subject to retrial.  I have no difficulties with his interpretation of the first clause which accords with the principle of non-retroactivity.  His interpretation of the second clause is problematic.  He has to read the second clause wholly independently of the first and to ignore the words “contracts formed after the implementation of Contract Law”.  But even on that interpretation the article does not help the Plaintiffs because it would dis-apply JI-2 to contracts formed before the implementation of Contract Law. Hence, Zhang made a twist by arguing that the word “only” should be implied to the second clause with the result that JI-2 is only inapplicable to retrials in respect of disputes arising out of contracts formed before or after the implementation of Contract Law which had received final judgment.  Again, that is not sufficient to enable JI-2 to apply to the Swap Agreement.  Then Zhang made yet a further twist by arguing that by necessary implication, JI-2 is applicable to disputes arising out of contracts formed before the implementation of Contract Law which have not been finally determined.  If that were the intention of the Supreme People’s Court, why didn’t the judicial committee of the Supreme People’s Court in their collective wisdom not simply put such category of contracts into the first clause?  This can be very conveniently achieved by deleting the words “arising out of contracts formed after the implementation of Contract Law.

259.  There was certainly nothing in JI-2 to justify the construction that it would be applicable to all disputes arising out of contracts whenever made.  The way Zhang interpreted article 30 ignored the important principle against retroactivity of legislation.  It was not open to him to construe the semi-colon the way he did.  Plainly, article 30 must be read as one sentence only and subject to the introductory phrase of “disputes arising out of contracts formed after the implementation of Contract Law”.  Zhang’s interpretation of this article was so contrived as may properly be regarded as ugly.  It well justified Mr Chan SC’s criticism of his hire-gun approach, a remark which I have hitherto tried hard to refrain from making.  Also, there was no way that Zhang could overcome the second hurdle because Foreign Economic Contract Law expressly provided that such contracts shall be in writing.

260.  Furthermore, HH argued that a charge agreement must be in writing in accordance with article 38 of Guarantee Law and article 49 of《房地產抵押登記管理辦法》.  Accordingly, the Swap Agreement to amend the charge agreement must also be in writing. 

261.  Zhang relied on article 112 of Opinion of the Supreme People’s Court on guarantee relating to the implementation of the General Principle of the Civil Law (for trial implementation)（1988年最高人民法院《關於貫彻執行〈中華人民共和國民法通則〉若干問題的意見（試行）》）(“1988 Opinion for trial implementation”) to argue that the lack of agreement in writing does not necessarily render the Swap Agreement void if the charge could be formed by the conduct of the parties.  That article provides as follows:

「債務人或者第三人向債權人提供抵押物時，應當訂立書面合同或者在原債權文書中寫明。沒有書面合同，但有其他證據證明抵押物或者其權利證書已交給抵押權人的，可以認定抵押關係成立。」

262.  HH disagreed.  He pointed out that the General Principles of the Civil Law is a legislation of general application, so must be the 1988 Opinion for trial implementation issued to implement that legislation.  But thereafter,《城市房地產管理辦法》and Guarantee Law were pronounced respectively on 5 July 1994 and 30 June 1995.  These are more recent and specific legislations.  They must override the 1988 Opinion for trial implementation according to the principles that later legislation overrides earlier legislation and specific legislation overrides legislation of general application under PRC law.  Zhang had no dispute with these legal principles which are recognised by both PRC law and the common law.  Again, Mr Chan SC commented adversely on Zhang’s failure as an expert to draw the Court’s attention to the relative timing of these legislations.  I reject Zhang’s opinion.  

263.  As for the need for registration, Zhang said that a charge agreement was not strictly necessary.  He referred to a decision by the Zhuhai Intermediate People’s Court, (2001)(珠法經終字第 70 號).  That was a case involving a written charge agreement which was not registered.  On appeal, the Zhuhai Intermediate People’s Court held that the charge agreement and the chargee’s right to the charged property upon his failure to register the charge were two different legal issues.  The charge agreement was effective on the date it was formed and was binding as between the parties to the charge agreement.  On the other hand, the chargee’s priority to the charged property depended on whether the charge had been registered.  If not, the charge is not binding against third parties.  In that case there was no third party interest involved.  The court rightly held that the charge was valid and enforceable against the chargor at the instance of the chargee.  That was a case where the parties had entered into a written charge agreement.  The validity of the charge agreement was decided on the basis that the charge agreement had been made in writing and not that it was made orally.  To that extent, that decision does not help the Plaintiffs.  But I agree with the principle that a charge agreement properly formed is not avoided due to lack registration.

264.  On the mechanics of registration, Zhang argues that the oral Swap Agreement could nevertheless be registered because the parties might register a bundle of correspondence.  His view is unrealistic and he admitted that he had never seen registration of the charge in such a manner.  His opinion is contrary to the view expressed by Chao Shi Bing in an article titled《中國擔保諸問題的解決與展望》.  Zhang was unable to explain how an oral charge agreement could be formed and/or registered under Guarantee Law.  Even if Contract Law applies to the Swap Agreements by virtue of JI-1 or JI-2, it would be void as it failed to comply with the requirement in writing under Guarantee Law.

265.  The inescapable conclusion is that even if, contrary to my finding of fact, the parties had reached the Swap Agreement to exchange securities, the fact that it had not been reduced into writing prevented the agreement from being formed in accordance with PRC law.  The Plaintiffs’ claim in contract must fail in all events.

Reliance relationship (“gua kao”) and ownership of the two lots of land

266.  Were the Plaintiffs successful in proving breach of contract, misrepresentation or breach of warranty, the question of HF Shenzhen’s ownership of the two lots of land under reliance relationship would arise.  As they have failed, I shall only state some brief observations on the issue.

267.  The Plaintiffs’ case is that HF Shenzhen was the beneficial owner of the two lots of lands under a reliance relationship with the registered owner, Lung Shing Property, and as such it suffered loss as a result of the Bank’s breach of the Swap Agreement, misrepresentation or breach of warranty.  The Banks’ contention is that the two lots of lands were purchased and owned by Lung Shing Property and in any event not by HF Shenzhen and there was no room or concept of beneficial ownership of land in the PRC.  The legal question is what is reliance relationship under PRC law which does not recognise beneficial interest in land.

268.  Before considering that legal issue, I shall set out the fact and background as to how the two lots of land came to be held under the name of Lung Shing Property.  HF Group purchased the two lots of land and some other lots in Longgang through its subsidiaries in 1992.  At the time there were restrictions against land ownership by foreign entities, thus the lots of land were held by Jiuzhou Property under a reliance relationship. Then HF Holdings and Jiuzhou Property entered into the Jiuzhou Agreement with Zhenye Holdings to develop NCG Phase 1 on the land.  In 1994, Lung Shing Property substituted Jiuzhou Property as a party to the joint venture and became the legal owner of the two lots of land.  On 8 July 1994, HF Shenzhen entered into a similar agreement with Lung Shing Property and Zhenye Holdings in place of HF Holdings, i.e. the Lung Shing Agreement.  The land premium was however paid by HF Shenzhen. 

269.  HH argued that according to the terms of the Lung Shing Agreement, Lung Shing Property was the owner of the two lots of land which it purchased with a loan from HF Shenzhen and that the relationship among HF Shenzhen, Lung Shing Property and Zhenye Holdings was that of a business joint venture.  He further argued that under the Lung Shing Agreement, Lung Shing Property was to contribute the two lots of land for developing NCG Phase 1 and would obtain RMB40 for each square meter of flat space sold as its share of profit, Zhenye Holdings would finance the development cost, HF Shenzhen would finance Lung Shing Property’s purchase of the land and all sale proceeds would be deposited into a joint account.  Accordingly, HH argued that the arrangement pointed to a joint investment in which Lung Shing Property would benefit from the profit of the joint venture as well as the risk of lost.  As for the loan advanced by HF Shenzhen, HH argued that it only created a creditor and debtor relationship between Lung Shing Property and HF Shenzhen.

270.  The profit of RMB40 per square metre of flat area sold could have no bearing to profit from the so called joint venture.  Lung Shing Property would receive that fixed award regardless of the amount of profit made or loss suffered.  I also fail to see what business risk Lung Shing Property could have under the Lung Shing Agreement.  There is no dispute that HF Shenzhen paid the purchase price for the two lots of land as well as some other lots.  In Shen 9964/2005, Lung Shing Property did not dispute that the purchase price for two lots of land were paid by HF Shenzhen or its obligation to transfer the two lots of land to HF Shenzhen.  Thus, although on the face the Lung Shing Agreement supported HH’s argument, I could have no doubt that it did not reflect the true situation between the parties but was a sham agreement to facilitate HF Shenzhen’s purchase of the two lots of land under the reliance relationship.  Accordingly, I accept Chan’s evidence that Lung Shing Property held the two pieces of land under a reliance relationship with HF Shenzhen which paid for the purchase price.

271.  Having reached the above finding of fact, the next issue is what is the nature of that reliance relationship and whether under that relationship HF Shenzhen has any beneficial interest in the two lots of land.  It is common ground that beneficial ownership in land is not recognised under PRC law until Trust Law of the People’s Republic of China《中華人民共和國信託法》(“Trust Law”) came in operation in 2001.  Zhang did not argue that Trust Law has retrospective effect.  He submitted that HF Shenzhen could have ownership in the land under a reliance relationship.  He relied upon articles 402 and 403 of Contract Law in support of his contention that before 2001 there could be some kind of legal reliance relationship akin to the trust arrangement under Hong Kong law in the PRC.  These articles provide as follows:

「 第四百零二條 受託人以自己的名義，在委託人的授權範圍内與第三人訂立的合同，第三人在訂立合同時知道受託人與委託人之間的代理關係的，該合同直接約束委託人和第三人，但有確切證據證明該合同只約束受託人和第三人的除外。

第四百零三條 受託人以自己的名義與第三人訂立合同時，第三人不知道受託人與委託人之間的代理關係的，受託人因第三人的原因對委託人不履行義務，受託人應當向委託人披露第三人，委託人因此可以行使受託人對第三人的權利，但第三人與受託人訂立合同時如果知道該委託人就不會訂立合同的除外。

受託人因委託人的原因對第三人不履行義務，受託人應當向第三人披露委託人，第三人因此可以選擇受託人或者委託人作為相對人主張其權利，但第三人不得變更選定的相對人。

     受託人行使受託人對第三人的權利時，第三人可以向委託人主張其對受託人的抗辯。第三人選定委託人作為其相對人的，委託人可以向第三人主張其對受託人的抗辯以及受託人對第三人的抗辯。」

Translation:

“Article 402 Agent's Act Binding on Principal; Exceptions

Where the agent, acting within the scope of authority granted by the principal, entered into a contract in its own name with a third person who was aware of the agency relationship between the principal and agent, the contract is directly binding upon the principal and such third person, except where there is conclusive evidence establishing that the contract is only binding upon the agent and such third person.

Article 403 Agent's Non-performance toward Principal Due to Act of Third Person; Non-performance toward Third Person Due to Act of Principal

Where the agent entered into a contract in its own name with a third person who was not aware of the agency relationship between the agent and the principal, if the agent failed to perform its obligation toward the principal due to any reason attributable to such third person, the agent shall disclose the third person to the principal, allowing it to exercise the agent's rights against such third person, except where the third person would not have entered into the contract with the agent had it known the identity of the principal.

Where the agent failed to perform its obligation toward the third person due to any reason attributable to the principal, the agent shall disclose the principal to the third person, allowing the third person to select in alternative either the principal or the agent as the other contract party against whom to make a claim, provided that the third person may not subsequently change its selection of the contract party.

Where the principal exercises the rights of the agent against the third person, the third person may avail itself of any defense it has against the agent. Where the third person selects the principal as the other party to the contract, the principal may avail itself of any defense it has against the agent as well as any defense the agent has against the third person.”

On the face, these articles deal with contracts entered into between a principal and a third party and their mutual rights and obligations.  They do not specifically deal with beneficial ownership in land and the rights of a beneficial owner against a third party.  Zhang admitted that he knew of no case in which it was held that a non-registered owner of a real property had proprietary interest in the property, but he did not rule out the possibility that in fact there were such cases.  That was a fair comment but unhelpful.

272.  Zhang also relied on the doctrine of acts for undisclosed principal(隱名民事法律行為)and implicitly suggested that HF Shenzhen’s ownership of the two lots lands was of such a nature.  He referred to an article downloaded from the Ningboshi Renmin Jianchaynan (“People’s Procuratorate”)(寧波市人民檢察院)on 13 March 2006.  The article reported a case before the Ningboshi People’s Court.  The facts of that case were as follows.  B purchased a property from A in 1999. The transfer of property was never registered.  In 2001, B was desirous to sell the property.  To save the inconvenience of registration, he sought A’s agreement to sell the property in A’s name with himself as A’s agent.  A gave B a written authorisation to that effect.  As agent of A, B sold the property to C but C failed to complete the purchase.  Then B forfeited C’s deposit and sold the property to D.  C sued for return of the deposit and a declaration that the sale to him was void.  The Ningboshi People’s Court found in favour of C and ordered B to return the deposit to C and pay compensation of like amount.  The court held that B had no right to sell the property without having first transferred the land use right to himself.  B applied for review to the People’s Procuratorate. The People’s Procuratorate considered the court had erred in law in not accepting A’s authorisation and in holding that B could not sell the property as an undisclosed agent.  The People’s Procuratorate applied to the Ningboshi People’s Court for review.  The case was then settled.  Thus, it is not clear whether the doctrine of undisclosed principal is applicable to property transaction.

273.  Zhang also exhibited an article written by Zhang Chor(張楚)titled「論隱名民事法律行為」published in the 5^th issue of《法律科學》in support of his contention that the two lots of land were held by Lung Shing Property on behalf of HF Shenzhen as undisclosed principal.  However, his contention was in fact contrary to the full opinion of Zhang Chor as set out in his article.  The author recognised the doctrine of acts by undisclosed principal but unequivocally said that it does not apply to industrial property and immovable property.  Mr Chan SC complained Zhang’s hire gun approach for not drawing the Court’s attention to the fact that the author’s opinion which he quoted was a qualified one and is contrary to the opinion Zhang advocated.  Zhang’s reply was a rather disappointed one that he thought it adequate that he had exhibited the entire article for the Court to read.

274.  The reason why the doctrine does not apply to these two categories of property is obvious.  In the case of immovable property, this is probably because of the tight control over land ownership and the system of title registration in the PRC.  In《房地產法》, 4^th edition, edited by Huang He(黃河), the Vice President of the Shensi Higher People’s Court, the author wrote:

「房地產登記是指房地產管理機構依法對房地產的所有權、使用權及其他權利狀況進行的持續登記，房地產登記制度是國家對房地產進行管理的一項重要法律制度。本章在闡述房地產登記法律制度基本內容的同時，按照我國相關法律法規的規定，分別對土地登記和房屋產權登記進行了介紹。

二. 房地產登記的特點

1. …

2. 權利登記制度是由房地產所在地的登記機關備置登記簿，簿上記載房地產權利的取得、變更過程，使有利害關係的第三人可就登記簿的記載推知該房地產產權狀態。若房地產權利的取得，未經登記便不產生效力，不僅不能對抗第三人，即使在當事人之間也不發生效力。其主要特點為：登記機關對登記申請採取實質審查主義，登記權利的現狀；登記有公信力即登記簿上所載事項，對善意第三人在法律上有絕對的效力。因該項登記制度發源於德國，故又稱為“德國式登記制度”。

我國現行的房地產登記制度，…主要有以下幾點：

1. …

2. 房地產權屬登記為房地產權利動態登記。當事人對房地產權利的取得、變更、喪失均須依法登記，不經登記，不發生法律效力，不能對抗第三人。房地產屬登記，不僅登記權利的靜態狀況，而且也登記權利動態過程，使第三人可以就登記情況，推知該房地產權利狀態。

3. 房地產權屬登記採取實質審查主義。我國房地產法規定，房地產權屬登記時，登記機關對登記申請人提出的登記申請，不僅要審查形式要件，還必須對申請登記的權利的權源証明是否有效進行嚴格審查，並要進行實地勘驗。形式要件與實地勘驗結果一致，才能登記。

4. …

5. 房地產權屬登記實行強制登記制度。房地產權利初始登記 後，涉及權利轉移、設定、變更等，權利人必須申請登記，不登記房地產權利得不到法律的保護，且要承擔相應的法律責任。如《土地登記規則》第69條規定，凡不按規定如期申請變更土地登記的，除按違法佔地處理外，視情節輕重報經縣級以上人民政府批准，注銷土地登記和土地証書。

6. 頒發權利証書。房地產權屬登記機關對權利人申請登記的權利，按程序登記完畢後，由地方人民政府頒發房地產權利証書。權利証書為權利人權利之憑證，由權利人持有和保管。

(三) 房地產登記有利於維護房地產交易的安全

房地產交易是以交易主體的一方擁有房地產權利為前提的，而判斷交易主體是否擁有房地產權利是以房地產權利的登記、發証為唯一標準。房地產的權屬登記具有將房地產權利變動的情況向社會公開，用以表明房地產流轉的功能，從而有效地避免了房地產交易中，真實的權利人與名義上的權利人分離的現象，確保了房地產交易的安全。」

In essence, being a controlled economy, the PRC exercises tight control over ownership in land and land use right.  It engages a system of continual registration which included a process of title verification.  Undisclosed beneficial ownership is inconsistent with such a system of title registration and land control.  

275.  The only other literature which Zhang could produce in support of his opinion about reliance relationship in respect of land is the 饒天祿case (“Yiao’s case”).  Zhang referred to a judicial interpretation allegedly reported in [2001] Guide and Study on the Adjudication Supervision, Volume 4(審判監督指導與研究) which reported a request by the Shensi Higher People’s Court and an answer from the Supreme People’s Court.  When challenged about the authenticity of the answer as a judicial interpretation, he produced a book titled Judicial Interpretation of The Supreme People’s Court and Answers to Requests(最高人民法院司法解釋與請示答覆全書)and a copy of the answer downloaded from the website of the Shensi People’s Court.  In that case, Yiao paid a fee to a service company which applied for the necessary business licence from the authority and permitted Yiao to conduct his retail business under the name of the service company.  The Shensi Higher People’s Court sought advice from the Supreme People’s Court on the nature of the relationship between Yiao and the service company.  The Supreme People’s Court answered that the business operated by Yiao belonged to Yiao but was held by the service company under a reliance relationship.  The Supreme People’s Court answered as follows:

「經研究認為，西安標準件經銷站(以下簡稱經銷站)的營業執照雖然登記為西安市蓮湖區環城西路生產、生活服務公司(以下簡稱服務公司)開辦的集體企業，但服務公司在開辦經銷站之初和營業中均未直接投資，該經銷站是饒天祿以服務公司名義申請開辦、利用餘銷的15萬元標準件經銷這營並逐步發展起來的；經銷站自負盈虧，自擔經營風險，人員錄用、辭退、工資及奬金發放均由饒天祿一人決定，服務公司並不干涉，也未派員參與經營管理；經銷站每年僅向服務公司交納一定數額的管理費。西安市工商行政管理局正式給西安市中級人民法院覆函，認定經銷站“屬於饒天祿等人籌資開辦起來，並掛靠在環城企業總公司名下的私營(合伙)企業”。故同意你院審判委員會第一種意見，即西安市標準件經銷站的性質為私營企業。」

The Shensi Higher People’s Court accepted that answer and ordered the business and some landed property transferred to the service company by the court below to be transferred back to Yiao.  Zhang argued that the answer from the Supreme People’s Court was a judicial interpretation to the effect that landed property may be held by a registered owner under a reliance relationship for a beneficial owner. 

276.  HH disagreed.  His opinion is that the publication was just an answer from the Supreme People’s Court which was a statement of fact in a particular case.  It is not binding on the courts as the PRC does not recognize the principle of stare decisis.  A judicial interpretation, on the other hand, is a statement of legal principle of general application, which is binding on the courts. 

277.  Mr Chan SC referred Zhang to the formal requirements of judicial interpretation as set out in the 1997 Working Regulations.  Those requirements include (a) that the answer be discussed in and approved by the Judicial Committee of the Supreme People’s Court: article 3; (b) that the answer be published on Ren Min Fa Yuan Bao(人民法院報): article 8; (c) that the answer be published in accordance with a prescribed format: article 9 and appendix to the 1997 Working Regulations; and (d) that the answer bears a heading in prescribed form: article 10.  Indeed, the copies of JI-1 and JI-2 complied with the above requirements.  However, the downloaded copy from the Shensi People’s Court does not meet any of the above requirements.  HH also produced the index from a book titled《解讀最高人民法院司法解釋》published by the Ren Min Fa Yuan Press and some of the judicial interpretations printed therein.  Those judicial interpretations complied with the formal requirements mentioned above, while the answer in Yiao’s case could not be found in the index.  Zhang was unable to explain the inconsistencies.  Despite that, he obstinately refused to change his view. This clearly demonstrated the inadequacy of his legal research and opinion, if not also his hire-gun attitude.  In conclusion, HH’s opinion that the answer was not a judicial interpretation is supported by overwhelming evidence.  I reject Zhang’s opinion that the Supreme People’s Court’s answer in that case was of the status of a judicial interpretation. 

278.  Furthermore, in Yiao’s case, the landed properties were all purchased by Yiao and were either registered under his name or with his name on the documents.  Thus, the court’s order to return the properties to Yiao was not referable to his beneficial interest in the properties or the reliance relationship, but to his legal ownership.  In my view, the answer from the Supreme People’s Court does not support the proposition that PRC law recognised beneficial interest in land held under a reliance relationship in the name of another person.  Even if the answer to the Shensi People’s Court were a judicial interpretation, one can deduce no legal principle from that answer.  It did not define what a reliance relationship is and whether it exists in relation to real property. 

279.  This term, “reliance relationship” was mentioned in a number of PRC judgments in relation to the two lots of land.  I have also seen the term being used in other cases involving business transactions in the PRC.  In Shen 9964/2005, the Shenzhen People’s Court acknowledged that the two lots of land were held by Lung Shing Property for HF Shenzhen under a reliance relationship.  That relationship was not disputed by Lung Shing Property.  It only refused to transfer the land to HF Shenzhen because HF Shenzhen refused to pay the substantial tax involved.  Accordingly, the court ordered the transfer on condition that HF Shenzhen paid all necessary tax and costs. As Lung Shing Property had no dispute about the reliance relationship, it would not have litigated if the tax involved was not substantial.  HH pointed out that the substantial tax showed that the law did not recognise beneficial ownership under the reliance relationship otherwise no tax would have to be paid or the tax would only be nominal.  HH also argued that if the court regarded HF Shenzhen as the beneficial owner, it would have ordered the transfer unconditionally.  Neither did Zhang challenge HH’s argument nor did HH produce the relevant tax legislation in support of his contention.  Shen 9964/2005 was a case between the parties to a reliance relationship.  Lung Shing Property did not dispute the relationship or that HF Shenzhen had paid for the purchase price of the land or HF Shenzhen was entitled to the land.  That case can readily be explained by way of a contract between parties to the contract.  It gives no clue as to the right of the parties against third party in respect of landed property held under a reliance relationship.  In particular, it gives no clue as to the rights of the “reliance beneficiary” against a third party as regards the landed property held by the “reliance owner” under that relationship, if I may use those terms.  I am left in a state of ignorance as to what PRC law is regarding this reliance relationship.

280.  Zhang argued that the Supreme People’s Court mentioned that term in its judgment in SPC 545/2009 without any disapproval indicating its endorsement of the legality of the reliance relationship.  Mr Chan SC submits that the Supreme People’s Court was only narrating the background history as mentioned in the other judgments which could not be taken as a recognition of HF Shenzhen’s beneficial interest in the two lots of land.  I agree.  Not much could be read into that judgment as to whether there was in fact a reliance relationship between HF Shenzhen and Lung Shing Property.  But more importantly is that the court did not give any definitive opinion as to what was the nature of a reliance relationship.

281.  Mr Tong SC then referred to the judgment in Yue 311/2003 in which Lung Shing Property was not allotted any of the flats in NCG Phase 1 as evidence that Lung Shing Property did not have any interest in the two lots of land under the reliance relationship in support of his contention that the beneficial interest was vested in HF Shenzhen.  However, the judgment in that case was a compromise among Zhenye Holdings, Lung Shing Property and Chan in his rather ambiguous capacity as representing HF Holdings and not HF Shenzhen.  As pointed out by Mr Chan SC, the case only dealt with the disposal of eight blocks and not the rest of the lands, the subject matter of the joint venture.  Also, Lung Shing Property was authorised to dispose of the remaining four blocks and other land in NCG Phase 1.  I do not consider that case helpful to the Plaintiffs.

282.  Neither Zhang nor HH had ever attempted to give any definitive opinion supported by proper authority as to what a reliance relationship is and its legal effect.  None of the decisions referred to by Zhang cast any light on the nature of that relationship.  The Plaintiffs bear the burden of proof if they wish to rely on that relationship to establish their claim.  But they failed.  Despite that I am satisfied that Lung Shing Property held the two lots of land under a relationship with HF Shenzhen recognised by the parties as a reliance relationship and that HF Shenzhen had paid for the purchase price of the land, I have not been informed by expert evidence as to the legal nature of that relationship.  In particular, it has not been proved to my satisfaction that under PRC law the “reliance beneficiary” can enforce his right over landed property held by the “reliance owner” under that relationship against a third party.  I am not satisfied that HF Shenzhen has any beneficial interest over the two lots of land, which it can enforce against a third party under PRC law.

Conclusion

283.  In conclusion, I accept the proposition of PRC law as submitted by Mr Chan SC.  The Swap Agreement was an economic contract made with a foreign party to which Foreign Economic Contract Law would have applied. As it was not in writing, the Swap Agreement was not formed.  For that reason, Contract Law would not have applied to the Swap Agreement pursuant to JI-1 or JI-2 as to cure the defect of want of writing.  Accordingly, the Swap Agreement was null and void and of no effect under PRC law.  Though articles 36 and 37 of Contract Law would apply to the act of delivery of the five LUCs to the Bank and its acceptance of the same, such conduct was far short of being substantial as would invoke the operation of those articles.

284.  The Swap Agreement would also be null and void under PRC law because in effect the swap would involve two main obligations which are the discharge of the existing securities and the creation of securities over the five lots of land.  The nature of the Swap Agreement would in effect be a contract to amend a charge contract, which is required to be in writing pursuant to article 38 of Guarantee Law.  Accordingly, even if the Swap Agreement, in the non-technical sense of the word, were reached during the meeting on 9 July 1996 or over the telephone conversation on 8 October 1996, it was null and void under PRC law because it was not made in writing.

285.  Furthermore, there was no expert evidence as to the legal effect of such a reliance relationship under PRC law.  The doctrine of acts for undisclosed principal does not apply to acts relating to real property. Also, PRC law does not recognise beneficial interest in land.  Thus, even if the Swap Agreement were valid and binding, the Plaintiffs had no interest to sue.

Conclusion

286.  Accordingly, the Plaintiffs’ claim in contract would also fail if the proper law of the Swap Agreement was PRC law.

OTHER EXPERT EVIDENCE

287.  In view of the conclusion reached on the basis of my finding of fact and on the alternative scenario, I do not consider it necessary to deal with the expert evidence on accounting, quantity surveying and property valuation.  Other than giving my overall views on their evidence, I am not going to over-burden this already long judgment with an analysis of their expert evidence.  I shall issue a supplementary judgment on those issues only if it becomes necessary.

Accounting experts’ evidence

288.  The purpose of calling the accounting experts was to show whether according to the audited accounts and accounting documents of the Plaintiffs and HF Holdings, HF Shenzhen had paid the purchase price for the two lots of land as to support its claim of beneficial interest over the land and the blocks of flat built thereon.  That issue is now academic in view of my finding of fact.  I shall nevertheless comment briefly on the experts’ evidence. 

289.  Mr Chan SC criticised the Plaintiffs’ failure to provide underlying accounting documents in support of the audited accounts of HF Holdings and HF Enterprises.  He argues that in the absence of such accounting documents the Court should accept MB’s written opinion that on a proper analysis of those audited accounts, HF Shenzhen had no interest in the two lots of land.  On the other hand, Mr Tong SC’s proposition is that the auditor had misinterpreted the accounts of HF Holdings and HF Enterprises which resulted in the land investments in Shenzhen being entered into the assets of HF Property.  He demonstrated the inconsistencies between the audited accounts of HF Holdings and HF Enterprises in support of his proposition.  He argues that the audited accounts did not accurately reflect how the financial resources and assets of HF Group were distributed among the various members of the group.  The capital verification reports also conclusively supported Chan’s evidence that upon the incorporation of HF Shenzhen he transferred RMB1 billion to its account for the purchase the two lots of land and other land for development NCG. 

290.  According to MB, the audited accounts of HF Holdings and HF Enterprises did not support HF Shenzhen’s claim to have paid for the purchase price of the two lots of land.  That may be a fair view of his interpretation of the audited accounts, but it was obviously based on inaccurate audited accounts, I could not give much weight to it.  In their evidence in Court, both MB and Poole were of the opinion that based on the capital verification report, there was a clear link between the HF Shenzhen and the purchase price for the two lots of land.  MB must be taken to have withdrawn his opinion as stated in his written report. Furthermore, the registered owner of the two lot of land, Lung Shing Property, acknowledged that the purchase price for the two lots of land were provided by HF Shenzhen.  This and the capital verification must be taken to have conclusively proved that the purchase price for the two lots of land were financed by HF Shenzhen.  

Quantity surveying experts’ evidence

291.  The quantity surveying experts were called to give evidence on the building cost required to complete the various blocks of flats in NCG Phase 1 and Phase 2 for the purpose assessing the Plaintiffs’ loss of profit.  Again, that issue is now academic.

292.  The estimates were made difficult due to the lack of drawings and plans for the flats to be built.  However, there was a fair amount of agreement between the experts of both parties on the principle and approach to be adopted in estimating the building cost.  Despite that, they were unable to reach agreement on the estimated building cost.  Their differences lie in the choice of Guangdong or Shenzhen reference data to be used as a basis for estimation and in the adjustment to be made from those data in the light of the specification and type of flats to be built in NCG, such as the framework of the buildings, whether piles would be required and the appropriate allowance for contingency. 

293.  Except for the choice of reference data, I consider CTT’s stance unreasonably cautious.  Though drawings were not available, the experts could and should make reference to the finish and structure of the completed flats.  His interpretation of the specification of the building standard in respect of the reference data was contrived.  In insisting to make allowance for the cost of piling and more expensive framework due to the absence geotechnical reports on the soil condition and drawings, he was deliberately ignoring the fact that the flats were to be built in the same locality in which there was no suggestion that the soil condition was likely to be very much different.  He was also turning a blind eye to the foundations which were already built for some of the blocks.

294.  In Yue 311/2003 proceeding, the parties thereto, i.e. Zhenye Holdings, Lung Shing Property and Chan, jointly instructed 深圳市建設工程造價管理站 to estimate the building cost of the eight blocks in NCG Phase 1. The cost was estimated to be RMB37,353,151.14.  That estimate could be treated as having been made by an independent and credible body appointed by antagonising parties interested in the outcome of the estimate who must have exercised care in the appointment of this joint expert and had properly scrutinised his valuation.  Being an expert in the locality and instructed at a time much closer to the event, that expert must be in a better position to make a proper estimate of the building cost.  That expert must have access to more information, such as building plans and had opportunity to view the flats than have Leung and CTT.  However, CTT unreasonably refused to adopt that estimate as a basis of assessment.

295.  CTT has impressed me that his attitude was simply to make allowance for anything he could make an excuse for so as to inflate the building cost for the best interest of his client.  He was being deliberately unreasonable, unrealistic and impractical.  He was not acting fairly as an expert should.  He had in mind his client’s interest more than his duty to assist the Court.  On the other hand, I consider Leung’s approach proper and his assessment reasonable. I would accept Leung’s assessment, subject to some minor adjustments.

Property valuation experts’ evidence

296.  The property valuation experts were called to give evidence on the market value of blocks B-5 to B-8 in NCG Phase 1 and the blocks in NCG Phase 2 which could have been built and sold had the Bank released the two LUCs.  Insofar as blocks B-5 to B-8 were concerned, the valuation is a matter of historical fact, i.e. the consideration stated in the sale and purchase agreement with Lung Shing Property and Yue Hua Trading.  The focal point of the experts’ dispute was on the valuation of blocks C-1 to C-4 in NCG Phase 1 and all the blocks in NCG Phase 2.  Experts from both sides have no disagreement on the principles to be adopted in the valuation, which are all very familiar to the Court. However, their valuations differ significantly for two reasons. 

297.  Firstly, the Bank’s expert, LCH, took the view that the flats were not marketable and had absolutely no value because the land premium had not been fully paid.  In his written opinion, he refused to give a valuation.  His duty was to give a valuation and not to decide on the conflicting evidence whether the land premium had been paid which was outside his expertise.  That was a matter for lawyers or for the Court if necessary.  His assertion that the flats had no value was so irresponsible as to suggest he was acting as a mouth piece of his client.

298.  In his evidence in Court, LCH was asked by Mr Liu, junior counsel for the Bank, to give a valuation nevertheless.  LCH reiterated his original opinion and gave a valuation which is significantly lower than the Plaintiffs’ expert, Ng.  This is the second area where the experts depart.  Both experts agreed to use the direct comparison method and to use the sale prices of flats in NCG Phase 1 as comparables for the purpose of preparing valuation.  They also agreed that only transactions which were made at arms’ length should be used as comparables.  On that basis, Ng excluded all transactions of which he was informed by Chan were sales at a discount to staff of HF Group or Lung Shing Property.  LCH disagreed with the exclusion for the reason that there was no evidence from the public record to show that those transactions were sales to staff.  One could not expect such information to be entered in the public record.  The transactions which Ng excluded were at a significant discount from those made at about the same time.  They were out of line with contemporaneous and later transactions.  They were even lower than the price of comparable flats which HF Shenzhen sold to Lung Shing Property.  There was no good reason not to accept Chan's assertion that those transactions were sales to staff.  Clearly, they were not sales at arms’ length, whether they were sales to staff or not.  Those sales should be excluded under well established valuation principles known to the court.  This clearly showed that LCH was only paying lip service to establish valuation principles.  It also shows not only that LCH was manifestly wrong professionally, but was deliberately so.  He adopted the approach of a hire gun fighting in the best interest of his client regardless of the duty he owed to assist the court.  I accept Ng’s valuation and reject LCH’s valuation.