UPPLAN COMPANY LTD v. LI HO MING AND ANOTHER

HCA 1915/2009

[2023] HKCFI 2370

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1915 OF 2009

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(By Original Action)

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(By Counterclaim)

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________________________

DECISION

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1.  This is the Summons of the 2^nd and 3^rd Defendants by Counterclaim (respectively “Anita” and “Mother”)  seeking to enforce paras 6(a)  to 6(c)  of the Schedule to a Tomlin Order dated 1 December 2021 (“Schedule”)  against the Plaintiff by Counterclaim (“Virginia”)  for shortfalls in the net rental income of the 3 properties :

(1)  Flat 5A, Tower 7, South Horizons (“South Horizons”)  (§6(a)  of the Schedule);

(2)  Unit A1 of Khuan Ying Commercial Building (“Khuan Ying”)  (§6(b));

(3)  Flat 2C and Flat Roof of Fortuna Building (“Fortuna”)  (§6(c)).

2.  The rental income of South Horizons is no longer in dispute.  The dispute is therefore limited to §§6(b)  and (c).  In addition, Anita and Mother further claim that Virginia is in breach of a warranty under §14 of the Schedule.

3.  There is no dispute that the amount of shortfall in rent (“Shortfall”)  in respect of Khuan Ying and Fortuna is solely attributable to tax payments made by Kong Wah Por Investment Co Ltd (“KWP”)  through which the two properties were held.

Issue

4.  The issue in this application turns upon the proper construction of §§6(b), 6(c)  and 14 of the Schedule.  In particular, whether Virginia is solely responsible for the tax payments represented by the Shortfall pursuant to those terms. 

Background

5.  In December 2021, the parties to various legal proceedings (including those to this Summons)  reached a global settlement by way of a Consent Order.  The Consent Order was signed and executed by all parties to the related proceedings and approved by the Court.  It took the form of a Tomlin Order with the attached Schedule, which set out the terms agreed by the parties.

6.  Altogether 7 sets of proceedings were involved, 5 in the High Court and 2 in the District Court.  The main antagonists of the proceedings were Anita, Mother and Virginia.  They are mother and daughters. The proceedings concerned some landed properties or sale proceeds and 2 companies.  KWP was one of companies and it owned, inter alia, both Khuan Ying and Fortuna.

7.  Essentially, by the settlement the mother and daughters had agreed how the assets were to be divided.  They were legally represented and the Schedule was drafted by lawyers. 

Relevant clauses

8.  The relevant clauses provided as follows :

“6(b)

all rental incomes from the Fortuna Property from 1^st April 2018 shall, after discharge of all expenses incurred in relation to the Fortuna Property (such expenses shall not include the payment of property and/or profit tax), be shared by Virginia and [Mother] equally,

6(c)

all rental incomes from Unit A1 of the Khuan Ying Property from February 2006 shall, after discharge of all expenses incurred in relation to Unit A1 of the Khuan Ying Property (such expenses shall not include the payment of property and/or profit tax), be shared by Virginia and Anita equally,

14

Virginia warrants and confirms that she has paid on behalf of KWP the estimated tax assessed by the Inland Revenue Department up to 31^st March 2019 and she shall not claim contribution from Anita.”

[all emphasis added]

9.  KWP was at the time of settlement owned by Anita and Virginia as 50/50 shareholders, and they were the directors of the company. It is not in dispute that all rental income derived from Khuan Ying and Fortuna were paid into KWP’s bank accounts (“KWP Accounts”).  Virginia and Anita were the authorized signatories of those accounts. 

10.  The total amount of tax in question paid by KWP was HK$620,293.  Anita and Mother claim half of such amount as Shortfall from Virginia.  After an agreed adjustment[1], their claim now stands at HK$297,930.50.

Applicable principles

11.  The principles of construction are well settled. In Eminent Investments (Asia Pacific)  v DIO Corp (2020)  23 HKCFAR 487, the CFA restated them in [45] :

(a)  it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the Court balances the indications given by each;

(b)  the Court must be alive to the possibility that one side may have agreed to something which with hindsight did not serve its interest, or that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms;

(c)  some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals, whereas the correct interpretation of contracts which are marked by informality, brevity or the absence of skilled professional assistance may be achieved by a greater emphasis on the factual matrix;

(d)  but negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement; and

(e)  commercial common sense and surrounding circumstances should not be used to undervalue the importance of the language of the provision which is to be construed, and the mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly for one of the parties, is not a reason for departing from the natural language.

12.  In [43] of Eminent Investments, it was held that the starting point to interpretation is the ordinary and natural meaning of the words of the contract, and “in the vast majority of cases that is the ending point also”.

Analysis

13.  In my view, the language and meaning of the relevant provisions of the Schedule are clear.  First, the rental income from both Fortuna and Khuan Ying, net of expenses, would be shared.  Tax payments were specially excluded from the expenses (clauses 6(b)  and (c)). 

14.  Second, Virginia warranted and confirmed that she had paid the tax “on behalf of KWP”, and she should make no contribution claim against Anita (clause 14). 

15.  Mr But, who appeared for Virginia, submitted that the tax liabilities were those of KWP and Virginia had, in discharge of her duty as its director, paid the tax from KWP’s Accounts.  Anita, being KWP’s director either knew that the tax was so paid or could have found out about it. 

16.  I do not believe that the submission detracts from the clear meaning of the provisions.  Assuming[2] in Virginia’s favour that Anita knew that the tax was paid from KWP’s Accounts, there would have been no reason for clause 14 unless Virginia had assumed the tax liabilities of KWP.  In the absence of such assumption, there was no reason to describe the tax payments as having been made by Virginia “on behalf of KWP”.  They were simply payments by KWP of its own liabilities. 

17.  Equally, there was no basis for any contribution claim against Anita by Virginia.  It is difficult to see how Virginia could have a claim of contribution against Anita if it was not agreed for the purpose of the settlement that she had paid the tax.  Further, if the tax was not paid by Virginia, why would clauses 6(b)  and (c)  exclude tax from expenses?

18.  In respect of Mr But’s suggestion that clause 14 was erroneous in stating that the tax was paid by Virginia on behalf of KWP, the point was made half-heartedly because there is no application for rectification of clause 14.

19.  Mr But also submitted that under the settlement it was intended that Virginia on one hand and Anita and Mother on the other would be treated equally, and having the tax liabilities shouldered by Virginia alone would be unequal.

20.  This is an over simplistic view of the settlement.  In addition to Fortuna and Khuan Ying, the settlement covered South Horizons, a company called Upplan, KWP (which in addition to Fortuna and Khuan Ying, owned another unit in the Khuan Ying building), the rent of all the properties and cash payment to Virginia.  Further, the settlement provided for various liabilities of Upplan and KWP which were to be taken over by Anita. 

21.  Under clause 14, Virginia’s warranty only covered the period up to 31 March 2019, whereas the settlement was reached over 2 ½ years later, in December 2021.  By taking over KWP, Anita would (at least indirectly)  be liable for KWP’s tax from 31 March 2019 to December 2021.  Under clause 9 of the settlement, Anita had agreed to indemnity Virginia in respect of “any and all claims against, as well as any liabilities of … KWP” (see also clause 10). 

22.  This is a case which illustrates that it would not be appropriately or possible for the Court to second-guess the parties’ rationale behind a settlement, which is normally the result of much horse-trading. 

Disposition

23.  For these reasons, I agree with Anita and Mother that they should be entitled to the total payment of HK$297,930.50.  I make an order in terms of para 1 of their Summons filed on 25 May 2023, save that: (a)  the stated sums require amendment (see para 10 above); and (b)  interest is awarded on the payment at prime plus 1% from the date of Summons until today and thereafter at judgment rate(s)  until payment.

24.  The parties had agreed that costs should follow the event and summarily assessed.  Based on the Statements of Costs of both sides and Virginia’s List of Objection, costs are awarded to Anita and Mother and assessed at HK$300,000 (which include counsel’s fee at HK$220,000).  In this assessment the costs awarded to Anita and Mother in respect of Virginia’s Summons filed on 23 August 2023, which were included in their Statement of Costs, have been taken into account.

25.  I am grateful to counsel for their assistance.