XCHRX PACIFIC TELECOMMUNICATIONS LTD. v. BB TELECOM LTD. AND ANOTHER

1998, No. A19538

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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1. In terms of a written agreement dated 21 March 1996, the plaintiff sold to the first defendant certain assets of the plaintiff's radio paging business. The second defendant was a party to this agreement by which he guaranteed "for his own primary obligation . . . the due and punctual payment" by the first defendant of the price, less the sum of $7,629,517. The agreed price was $24,190,349 of which the first defendant paid $7,629,517, leaving a balance of $16,560,832. The plaintiff has commenced proceedings against the defendants to recover this balance, plus interest.

2. The plaintiff applied for summary judgment, and, on 28 April 1999, the Master gave the defendants leave to defend on condition that the sum of $16,560,832 was paid into court. The defendants now appeal against that decision, asking that the defendants be given unconditional leave to defence, or that judgment in favour the plaintiff be stayed pending trial of a "counterclaim and/or set-off". The plaintiff asks for judgment without any stay.

3. The first defendant is now in liquidation. Miss Chan told me that her instructions from the liquidator were to adopt the submissions made by Mr Chang on behalf of the second defendant.

4. In his first affirmation, the second defendant (Mr Lau) seemed to be challenging the basis on which the price was reached, although this was not pressed below or before me. This is not surprising given that the first defendant signed a document agreeing to the calculation of the price. Mr Lau also sought to explain why two letters that he wrote, dated 20 August 1998 and 3 September 1998, in which he offered to pay the agreed price by instalments, should be treated as being written "without prejudice". Mr Lau further stated that the plaintiff had "fundamentally breached the agreement" and caused the first defendant "severe loss and damage" in relation to the assets and the first defendant's own business and goodwill. He also alleges that, as I understand him, that the breaches caused the first defendant to fail to get a listing on the stock exchange.

5. The defendants filed an affirmation by Ms Chan Yin Mei, who was the first defendant's project adviser in relation to the transfer of the assets. The assets were to be handed over on 1 April 1996. Ms Chan's describes the events of that morning, including the breaking down of the telephone and paging systems, lack of passwords, lack of instructions manuals, and inability to log-on to the computers. On the basis of Ms Chan's description, Mr Chang labelled the situation as "chaotic". According to Ms Chan, this situation lasted for three days. She also raises other complaints. She drafted a letter dated 10 April 1996 which was signed by Mr Lau. This letter says that the plaintiff had not delivered certain identified "documents, information and items". The letter asked for these "as soon as possible and in any event, by not later than 15 April 1996.". Mr Lau said that, if the plaintiff failed to deliver by 15 April, this would be a breach of the agreement.

6. The evidence of "chaos", and the consequences of the alleged failures of the plaintiff, is not reflected in the contemporaneous letter. The suggestion is that only if the plaintiff fails to deliver by 15 April will the plaintiff be in breach. There is no sense of urgency contained in that letter, which one would expect if things were going as badly as the defendants' evidence suggests; only a request for delivery within the next five days. That contemporaneous letter, which is the best evidence of the real situation, does not support the defendants' case of a disaster, with great damages being suffered.

7. There was a meeting on 15 April 1996 to sort out the disputes. The only thing in respect of which Ms Chan complains after this meeting was that the plaintiff failed to provide account records to ascertain the number of subscribers in order to have a basis for calculating the price. That would have no effect on the first defendant's business.

8. Ms Chan says that she noticed that "there was an abnormally high drop-out rate of subscribers from 25 April 1996 onwards".

9. Mr Lau filed a second affirmation. In that he says the first defendant suffered damages in the sum of $17.7 million, and further unquantifiable damages.

10. In a third affirmation, Mr Lau says that 3864 subscribers dropped out within 12 months of completion and "in fact, many of them dropped out within 3 months after completion.".

11. In his fourth affirmation, filed after the Master's decision, Mr Lau sought to deal with the problem of the first defendant remaining silent about the plaintiff's alleged breaches after the letter of 10 April and until proceedings were started by the plaintiff. He did this by saying that the first defendant had already complained on 10 April 1996, and saw no need to complain again. More important than what he did say is what he did not say. In spite of the fact that his attention had been drawn specifically to this problem facing the defendants, nowhere does Mr Lau suggest that the reason for the first defendant's failure even to mention the plaintiff's breaches that caused it, so it is alleged, over $17.7 million in damages is that now advanced by Mr Chang; that the first defendant wanted to maintain a good commercial relationship with the plaintiff. Only in his fifth affirmation is there a reason given other than that the first defendant had already complained on 10 April 1996, and saw no need to complain again. He says that, in terms of the agreement, the plaintiff had a right to take payment of the price by allotment of shares in the first defendant, rather than in cash. To pay by allotment of shares, says Mr Lau, was "most desirable", and that is why the complaint was not mentioned again before the "cut-off" day for the proposed listing which is 31 March 1998.

12. The defendants filed another affirmation after the Master's decision. This was by Madame Hui Sau Ying, the first defendant's manager of its Customer Service Department until 1 May 1999. Mdm Hui says that "Surprisingly, from 1 April to about 14 April 1996, our department received not less than 200 complaints . . . More than 100 of them were lodged between 1 and 3 April 1996.". I assume that the number of complaints was surprising because they were so high, but no figures are given by which a useful comparison can be made. She says she was told by Mr Lau that there was a drop-out of 3864 subscribers within 12 months after completion. Mdm Hui says that "the monthly normal drop-out rate should be around 5%." She says that she believes that the problems of early April were "highly relevant to the abnormally high drop-out . . . within the first 3 months after completion." Mdm Hui goes on to say that "To the best of my memory, from April to June 1996, there were more than 2000 . . . dropping out which was an abnormally high drop-out rate."

13. If the normal monthly drop-out percentage is "around 5%", it is not explained why a drop-out of 3864 over 12 months is extraordinary, even calculating this on a decreasing pool.

14. So, that is the case put forward by the defendants. Is it capable of belief?

15. I have already commented on some unsatisfactory aspects of the defendants' case. The defendants say that the first defendant had a claim against the plaintiff for breaches of the agreement that resulted in the first defendant suffering damages amounting to many millions of dollars. Whatever may be the reasons advanced by the defendants for failing to say anything about this large claim after 10 April 1996 and before 31 March 1998, and these are not impressive, there is no such reason advanced for why the first defendant did not, when the "cut-off" date for the listing had passed, and the plaintiff was demanding payment in cash, say that it had that claim, and that this must be taken into account in assessing the amount, if any, that was due to the plaintiff.

16. I say those reasons are not impressive because the reason first advanced - that the first defendant had already complained, and saw no need to complain again - does not make any sense at all in the light of the fact that the plaintiff was, on the defendants' own evidence, pressing the first defendant to settle the figure payable to the plaintiff. That would have been the ideal opportunity to say, if the defendants' had any faith at all in their claim, that the first defendant had that claim, and, at least, would be advancing it in due course. And this is especially so because the agreement itself, in clause 8.02, makes express provision for the first defendant, during the assessment of the amount payable to the plaintiff, to raise any claim against the plaintiff "for breach or non-fulfilment . . . of any of its obligations under the agreement." It did not do so. Instead, on 4 March 1997, the first defendant signed a memorandum agreeing the amount of the consideration without raising the slightest hint that it had any kind of counterclaim.

17. The second reason, hinted at very late in the day by Mr Lau and advocated expressly by Mr Chang - that the defendants' wanted to keep the plaintiff "sweet" so that it would exercise the option to take allotment of the shares rather than demand cash - does not ring true when one bears in mind that the first defendant was, on its own admission, strongly contesting the calculation of the amount due put forward by the plaintiff. One does not keep the other party to a contract sweet by fighting hard over the price payable.

18. But when one looks at the situation after 31 March 1998, the defendants failure even to mention a potential claim defies any degree of acceptability. At that stage, even on the defendants' own evidence, they did not have the slightest reason to avoid damage to the commercial relationship between the parties. And, not only does the first defendant fail to raise again the complaints made about two years before, but it admits the amount due to the plaintiff, and seeks the plaintiff's indulgence in delaying payment.

19. Mr Chang, of course, recognises fully his difficulty in the face of these admissions. That is why he contends that the letters containing those admission, those of 20 August and 3 September 1998, were without prejudice communications. Mr Lau says that he thought that his discussions with the plaintiff and the letters were without prejudice, although he does not say why he thought this. But it matters not what Mr Lau thought; it is what the letters are that counts. He says he was asked to put his proposals in writing, and he did so. What Mr Lau put in writing was how the first defendant proposed to pay the very amount that the plaintiff was claiming. The plaintiff's solicitors wrote three letters, all demanding payment of the sum of $16,560,832, plus interest. The first defendant's letters of 20 August and 3 September 1998 both said that the balance outstanding due to the plaintiff was precisely the same sum of $16,560,832, plus interest, and then suggested payment by instalments. This is not a case in which one party says - "You owe me $20.", and the other says - "No, I don't. I owe you $10, but I will pay you $15 as a compromise." Whatever the parties called this or thought about it, it would be a without prejudice conversation, and, if not accepted by both parties, it would be privileged from disclosure. Here, the first defendant said it would pay what the plaintiff demanded. That is not a without prejudice communication. And it matters not one jot that both letters talk about a "settlement" proposal. That cannot be read, in the context, as an offer to settle a disputed claim; there was no disputed claim, and it means simply that it was a statement of how the first defendant proposed to settle the plaintiff's claim.

20. Mr Chang suggests that without these letters, the plaintiff "has nothing". I do not accept that, but the plaintiff does have these letters, and Mr Chang does not suggest that, being admissible, there is any satisfactory answer to them. It is inconceivable that, if the defendants' thought, at the time of writing those letters, that the first defendant had any kind of genuine claim against the plaintiff that it would have unequivocally committed itself to making payment of the exact amount that the plaintiff was claiming, without, at the very least, pointing out that it had such a claim. The only possible conclusion is that the defendants' did not think that there was any such claim, and, if they did not think there was any such claim, there clearly wasn't one.

21. I have come to the conclusion that the defendants have no believable case on which to base a counterclaim or set-off that would justify a trial, and leave the plaintiff without an immediate enforceable judgment. Accordingly, there will be judgment for the plaintiff for $16,560,832, with interest as claimed in paragraph 11 of the statement of claim until judgment, and thereafter at the judgment rate.

22. I have heard no argument on costs, but there seems no obvious reason why they should not follow the event. I make an order nisi that the defendants pay the plaintiff's costs of action and this application, here and below.

23. Mr Jat argues that, even if it so that the first defendant has some basis for avoiding immediate payment of its debt, that does not apply to the second defendant. He says this because the guarantee entered into by the second defendant is simply to pay the balance of the consideration, which was agreed. There is, Mr Jat, no answer to that. Mr Chang says that the guarantee clause recites that the consideration for the guarantee is the plaintiff "agreeing to enter into this agreement and to complete the transfer of the business assets in accordance herewith", and the plaintiff did not complete the transfer accordingly. It is so, I accept, that the defendants say that the plaintiff did not complete the transfer according to the agreement. So, it seems to me, if the first defendant were entitled to a trial on that issue, so is the second defendant.

24. As a fall back position, Mr Jat submits that the Master's order should stand. He says this because, in spite of the fact that the second defendant has had plenty of warning that the plaintiff would say that he had not made full and frank disclosure of his assets, he has still failed to do so. I have to say that, looking at the matters to which Mr Jat has drawn my attention, there is much that the second defendant has not disclosed. So, if I had been satisfied that the defendants had put up a shadowy defence, I would have allowed the Master's order to stand, at least so far as the second defendant is concerned.