HUA NING INDUSTRIES LTD v. BEST LEADER ENGINEERING LTD

CACV 157/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 157 OF 2013

(ON APPEAL FROM HCA 1801/2008)

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1.  At the conclusion of the hearing, we dismissed these two appeals with costs. We now give our reasons.

HCA 1801/2008 (CACV 157/2013)

2.  These two appeals, arising from two related actions heard together before Deputy High Court Judge Lok, concerned two individuals, Mr Chan Ka Ming (“Mr Chan”) and Mr Sze Kung Yee (“Mr Sze”), and two companies founded by Mr Sze, that is, Hua Ning Industries Limited (“Hua Ning”) and Best Leader Engineering Limited (“Best Leader”).

3.  The essential facts can be briefly stated.  In 2003, reclamation works were to be carried out in Central.  Hua Ning, Best Leader and one Leader International Limited (“Leader International”) – another company established by Mr Sze – agreed to cooperate with each other to obtain a sub‑contract for the reclamation works and to carry out the works to the benefit of all.  Eventually, Best Leader was awarded a sub‑contract for the reclamation works, which involved the use of vessels for seawall and marine fill, dredging and demolition works.

4.  The vessels required for the works were owned and supplied by Hua Ning.  Under various rental agreements and their extension agreements, Hua Ning leased the vessels to Best Leader to carry out the sub‑contract works.  Rental arrears for the vessels in the total sum of $28,537,236 were due and owing by Best Leader to Hua Ning under the rental agreements and their various extension agreements.  This gave rise to HCA 1801/2008 between the two companies whereby Hua Ning sued for payment of the arrears.

5.  In his judgment dated 28 June 2013, the deputy judge found for Hua Ning.  He rejected the suggestion that there was an implied term governing the contractual relationship between the two companies that no legal action should be taken by Hua Ning against Best Leader for any outstanding rentals unless and until all the reclamation works had been carried out and completed by Best Leader and its claims had been fully settled and paid by the principal contractor.

6.  In CACV 157/2013, the only ground put forward to challenge the deputy judge’s judgment was that he wrongly rejected the implied term argument.

HCA 215/2009 (CACV 158/2013)

7.  Pausing here, a reader of this judgment might ask – why should Hua Ning be suing Best Leader for the rental arrears as they are both companies founded by Mr Sze?  This conveniently brings me to HCA 215/2009 and its subsequent appeal, CACV 158/2013.  In order to finance the sub‑contract works, Mr Sze through Hua Ning managed to borrow a sum of $12 million from Mr Chan under a loan agreement dated 8 February 2005.  Under the loan agreement, Hua Ning provided the vessels as security for the loan in favour of Mr Chan.  The loan was repayable on 31 December 2005.

8.  Due to financial difficulties, the repayment time was extended several times under no less than three extension agreements.  The last extension was “up to June 2008 but not beyond December 2008”, the completion date of the Central reclamation works. Under each extension agreement, additional securities were given to Mr Chan in consideration for the extension in question.  These additional securities included the transfer of a total of 88% shareholding in Hua Ning to Mr Chan and a legal charge of a property in his favour.  Furthermore, both Mr Sze and Best Leader acted as guarantors for the loan.

9.  Eventually, Hua Ning failed to repay the loan, and Mr Chan, in control of Hua Ning under the circumstances just described, thus caused that company to sue Best Leader for the rental arrears under HCA 1801/2008 as already mentioned.  Furthermore, Mr Chan caused the vessels as well as the property to be auctioned as he was entitled to, and applied the net proceeds of sale in partial repayment of the outstanding loan.

10.  Mr Chan also commenced HCA 215/2009 against Mr Sze and Best Leader as guarantors for the remaining balance of the loan.

11.  The deputy judge gave judgment for Mr Chan in the sum of $3,569,551.23, being the remaining balance of the loan.  He rejected the allegation that Mr Chan had wrongfully removed valuable equipment and articles from the vessels on 3 January 2009 prior to the auction; allegations of serious irregularities in the auction of the vessels on 7 January 2009 as a result of which, so it was alleged, the vessels were sold at a price below their market value to Mr Chan’s son.  He further rejected an argument that the (alleged) irregularities in the auction had been so serious and Mr Chan as creditor had so failed to deal with the securities for the debt as he ought that they were of a repudiatory nature, such that equity would intervene so as to discharge the guarantors.

12.  In CACV 158/2013, Mr Sze and Best Leader through counsel repeated similar arguments to challenge the deputy judge’s judgment.

Rental arrears – the implied term argument

13.  In support of the implied term defence, Mr Jeffrey Tam appearing for Best Leader (as well as Mr Sze) relied on the minutes of two joint board meetings of Hua Ning, Best Leader and Leader International held on 22 April 2003 and 29 April 2003 respectively :

Minutes of 22 April 2003

Clause 5(F)(5)

“三家公司分工合作，各盡其責、自負盈虧，工程最終總體盈虧統一結算，盈虧責任比例另行確定”;

Clause 6(3)

“各自核算成本；工程盈虧結算照合作約定比例承擔、分成；統由[Best Leader]對承建商結算，結算之回收資金優先還各方本金”。

Minutes of 29 April 2003

Clause 5(8)

“‘合約’結束、工程結束、工程款回收結束、各方利益分配(或亏損的承擔)結束，則算該項合作結束”;

Clause 5(9)

“參與营运公司，在工程營運中，優勢互補，互通有無，求大同 存小异，分工緊密合作，共同對外，共同為順利完成HK12/02海事工程而努力，為立足香港海事工程、土木工程打基礎”;

Clause 5(10)

“各方依法經營，內外有別，嚴控成本，通力團結合作，共進退”。

14.  Mr Tam further relied on the cooperation agreement made by Hua Ning and Best Leader on 12 September 2003:

Clause 3(3)

“[Hua Ning] 協助 [Best Leader] 籌貸資金”;

Clause 5

“雙方友好協商，共進退，緊密合作，共同順利完成HK12/02海事工程”。

15.  Mr Tam argued that the board minutes, the cooperation agreement and the rental agreements should be read together as one instrument with the distinct effect of carrying out one arrangement.  He contended that the deputy judge failed to apply his mind to the true question, that is what was the parties’ intention as was apparent from the terms quoted above.  He criticised the deputy judge for failing to consider those terms as representing the intention of the parties, and to consider the close relationship amongst Hua Ning, Best Leader and Leader International.  He submitted that the deputy judge failed to consider the fact that Best Leader would have a cashflow problem, and the entire arrangement would lack business efficacy and indeed be paralysed without the implied term suggested.

16.  I reject this argument.  It is common ground that the deputy judge has correctly stated the applicable legal principles in paragraph 38 of his judgment :

“However, it is trite law that the court would only imply a term in a contract if the following conditions are satisfied (see: Kensland Realty Ltd v Whale View Investment Ltd & Anr (2001) 4 HKCFAR 381 at §§23 & 59):

(i) it must be reasonable and equitable;

(ii) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(iii) it must be so obvious that “it goes without saying”;

(iv) it must be capable of clear expression; and

(v) it must not contradict any express terms of the contract.”

17.  I accept that the three companies involved had a very close relationship and they wanted the sub‑contract to succeed, so that an action by Hua Ning against Best Leader for arrears of rent for the leasing of the vessels cannot have been at the forefront of anybody’s mind at the time the rental agreements were entered into.  However, precisely because of the close relationship amongst the companies, the suggested implied term would not be necessary to give business efficacy to the contract, in the sense that the contract would still be effective without it.

18.  Furthermore, the close relationship amongst the parties and the requirement to cooperate with each other for the success of the sub‑contract  – something specifically required by the express terms – actually mean, in my view, that there was no place for an implied term not to sue each other. Either such litigation would be barred by the express terms, in which case there was no need for the suggested implied term; or it would not be barred, in which event there was no basis whatsoever for implying the suggested term into the contract.  Either way, the express terms would actually defeat the implied term argument.

19.  The deputy judge was also right in rejecting the defence based on pleadings.  The only pleaded implied term was an implied term to the cooperation agreement.  There was no pleading that there was a similar implied term to the rental agreements.

20.  For the reasons given above, the application by Mr Tam to amend the pleadings to include such an implied term must be rejected as being totally unarguable.

21.  I further think that the deputy judge was right in rejecting the implied term defence in any event on the basis that on the evidence before the court, Best Leader had been paid by the principal contractor for the use of the vessels, and there was no reason why it should not pay Hua Ning.

Alleged removal of equipment

22.  The allegation that Mr Chan has removed valuable equipment from the vessels shortly before the auction is an allegation of fact, on which the judge has made findings after hearing evidence.  A challenge on appeal against a primary finding of fact is notoriously difficult : Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336.  Such a primary finding of fact will not be disturbed on appeal unless it is shown to be plainly wrong.

23.  Mr Tam argued that the court accepted Mr Chan’s evidence (denying any such removal) on the simple basis that he conceded in evidence that he had overclaimed the guarantors because he had included some loans unconnected with the Central reclamation works in his claim, and this showed that he was a reliable and honest witness.  Counsel challenged the deputy judge’s observation that Mr Chan testified in a “clear and straightforward manner” as unsustainable.  He criticised the deputy judge’s reasoning that if (as alleged) Mr Chan was planning to sell the vessels through the auction at an undervalue to his son, there was no need to remove the valuable equipment from the vessels shortly beforehand at some cost to himself.  He also took issue with the deputy judge’s view that following a report made by Mr Sze, there were police officers at the site and it was improbable for Mr Chan to carry on removing equipment from the vessels in the presence of the police officers.  Mr Tam further criticised the deputy judge for refusing to draw adverse inferences against Mr Chan for failing to call any of the workers or watchmen employed to maintain or guard the vessels to give evidence.  Mr Tam therefore said that the deputy judge erred in preferring Mr Chan’s evidence to the evidence of Mr Sze and that of one worker who was called by Mr Sze’s side to give evidence.

24.  I reject these arguments of Mr Tam.  In his clear judgment, the deputy judge has considered all these points.  How he evaluated the evidence presented before him, including the oral evidence, was a matter for him as trial judge.  He never said that any of the matters that he mentioned in his judgment was a conclusive reason for his findings.   Nor did he say any of the points he made were irrebuttable and there were no possible counter arguments.  What he did was to consider the individual points as well as the entire evidence as a whole, and come to findings of fact on the balance of probabilities accordingly.  Certainly, the deputy judge did not decide to believe Mr Chan for the only reason that he had made the concession described above.  That would be an unfair reading of his judgment.  He gave his reasons for refusing to draw an adverse inference against Mr Chan for not calling any of the workers or watchmen.  A different judge might have taken a different course.  But what the deputy judge did was quite open to him to do, and he gave his reasons for it. 

25.  The deputy judge had sufficient evidence before him to enable him to make his findings.  He has seen and heard the witnesses, and he has considered the circumstances of the case.  He has looked at the two lists of removed equipment produced by Mr Sze and the worker and he has given his reasons for doubting their reliability (those two lists contradicted each other and no satisfactory explanations were offered by the two witnesses).  All in all, I fail to see how the deputy judge’s findings of fact relating to the alleged removal of valuable equipment from the vessels before the auction can be described as “plainly wrong”.

26.  I reject this ground of appeal.

Alleged irregularities regarding the auction

27.  As regards the auction of the vessels, Mr Tam argued that the reserve price of $12 million was fixed arbitrarily and far too low; the vessels were in any event sold below the original reserve price; and the successful bidder was in fact the son of Mr Chan.  Mr Tam mentioned two survey reports prepared in April and July 2008.  In the earlier report, the total value of 7 of the 8 vessels was estimated at $26.5 million.  In the later report, the total value of the 8 vessels was stated to be $17.58 million.

28.  Again, I reject Mr Tam’s argument.  As Mr Tam accepted, the auction took place in January 2009, many months after the two reports.  There was no valuation report on the market value of the vessels as at the time of auction.  There was simply no evidential basis to support the allegation of a sale at an undervalue against Mr Chan.  Moreover, the auction was conducted by an independent auctioneer.  It was a public auction and followed the usual terms and procedures of the auctioneer.  The eventual price fetched at the auction was the best price available.  In fact, according to Mr Chan’s evidence which the judge accepted (as he was fully entitled to), it was the auctioneer who advised Mr Chan on the day of auction that the reserve price fixed by Mr Chan was too optimistic and he had to lower it in order to attract bidders.  Rather than suggesting that the vessels were auctioned at an undervalue, the price actually fetched was the best evidence of the market price of the vessels as at the auction date.

29.  For these reasons, Mr Tam’s application to amend his client’s pleadings to plead the alleged irregularities concerning the auction was quite hopeless.  The deputy judge was right to rely on this pleading defect as his first reason for rejecting Mr Sze’s and Best Leader’s argument.

30.  Given this conclusion of mine, Mr Tam’s legal argument based on a creditor’s mishandling of his security simply has no leg to stand on.  It must also be rejected.

31.  In any event, I think the judge was right in saying that regardless of all the arguments concerning the outstanding loan, Best Leader simply has no defence regarding the dishonoured cheques which it issued in Mr Chan’s favour for repayment of the outstanding loan.

Disposition

32.  For these reasons, the respective summonses both dated 27 December 2013 for leave to amend the defence in both actions and the two appeals were dismissed with costs.

Hon Cheung JA:

33.  I agree with the judgment of the Chief Judge.

Hon Chu JA:

34.  I agree.