SAVILLS (HONG KONG) LTD v. KIT WANG GROUP (CHINA) LTD

CACV 212/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 212 OF 2015

(ON APPEAL FROM HCA NO. 1779 OF 2014)

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REASONS FOR JUDGMENT
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Hon Kwan JA (giving the reasons for judgment of the court):

1. This is the defendant’s appeal against the granting of a summary judgment by Master S Kwang of $3.5 million and upheld on appeal by Deputy High Court Judge Le Pichon. The judge dismissed his appeal on 20 August 2015 and reasons for her decision were handed down on 24 August. At the conclusion of the hearing before us, we also dismissed the appeal with costs to the plaintiff, to be taxed if not agreed. These are the reasons for our judgment.

Background

2. We take the pertinent background matters from the reasons for decision of the judge at §§9 to 24:

“9. The action brought was on a dishonoured cheque.

10. The parties to the action are Hong Kong companies. The plaintiff is a well‑known estate agency with offices worldwide. The defendant became a client of the plaintiff in about the year 2000 and since then the parties have had business dealings concerning various purchases or sales of properties. Sze Kai Lung (“Mr Sze”) a director of the defendant dealt with Ms Frances Chow (“Ms Chow”), one of the directors of the plaintiff.

11. The plaintiff’s case is that the cheque was handed over by Mr Sze to Ms Chow on or about 8 January 2014 in settlement of the plaintiff’s invoice dated 1 November 2013 issued pursuant to an agency letter signed by the parties on 2 March 2013 (“the agency letter”).

12. The agency letter was confirmation that the plaintiff’s agency fee would be 0.5% of the final purchase price, payable to the plaintiff upon the successful acquisition by the defendant of an industrial property situated in Kwai Chung (“the property”) or of the entire share capital in CRM One Ltd (“the company”) then the sole owner of the property.

13. Two weeks later, on 15 March 2013, the defendant as purchaser entered into a provisional sale and purchase agreement with Tang Yiu Sing and Metro Rider Investment Ltd (“the vendor”) to acquire the entire issued share capital of the company and the related shareholder’s loan for $700 million with completion fixed for 15 October 2013 (“the provisional agreement”).

14. Clause 14 of the provisional agreement provided that within one month thereof, the defendant may request in writing to the vendor to arrange for a short‑term loan of one year for a sum not exceeding $490 million to finance the purchase. Clause 14 also set out the terms of such a loan relating to interest and the security required.

15. On 18 October 2013, completion of the provisional agreement took place and the defendant became the registered holder of the share capital of the company consisting of one share.

16. It is relevant to mention at this point various documents that came into existence contemporaneously with of the provisional agreement.

17. On 18 October 2013 the vendor and the defendant entered into what was called the “supplement to provisional agreement” (“the supplemental agreement”). The recitals show that, on 15 October 2013, the company had charged the property to Full Profit Trading Limited (“Full Profit” or “the mortgagee”) to secure repayment of loans aggregating $211,202,239.78 (“the CRM loan”) made by Full Profit to the company, that the vendor and the defendant had agreed that the CRM loan as secured by the mortgage would continue after completion of the provisional agreement until its maturity, and further that the parties had agreed to vary certain of the financial provisions of Clause 14 by entering into the supplemental agreement for the purposes thereinafter set out.

18. The operative part of the supplemental agreement contained the vendor’s agreement to procure Full Profit to lend to the defendant $278,797,760.22 (instead of $490 million provided for in Clause 14 of the provisional agreement) to finance part of the acquisition costs on the terms and conditions of a loan letter of even date addressed by Full Profit to and signed by the defendant and Clause 14 of the provisional agreement was to take effect thereafter as varied by the supplemental agreement.

19. Clause 7 of the loan letter also stipulated for the execution of specific documents by the defendant in favour of Full Profit as continuing security for all the liabilities of the defendant to Full Profit including a second mortgage on House No 31 and House No 32 of Villa Bel‑Air (collectively “the Bel‑Air houses”).

20. On 1 November 2013, Savills Realty Ltd issued an invoice on behalf of the plaintiff in respect of the fees payable under the agency letter. On 8 January 2014, the defendant delivered a cheque (post dated to 28 February 2014) to the plaintiff (“the cheque”).

21. Ms Chow’s evidence is that between those dates, she had personally contacted Mr Sze for settlement on several occasions. That appears to be common ground as Mr Sze accepted (see §28 of Sze) that he had ‘repeated discussion (sic)’ with Ms Chow in the period preceding the delivery of the cheque regarding settlement of the invoice.

22. The cheque was not presented for payment until 24 July 2014. Ms Chow has provided an explanation for the delay in her affirmation but that has been criticised by the defendant as self‑serving.

23. Be that as it may, the defendant’s case is that at the time the cheque was handed over, it was agreed between Mr Sze and Ms Chow that the defendant would settle the invoice only upon the plaintiff’s full compliance with the oral agreement (set out in §27 below), referred to as the “agreed condition”.

24. On 17 June 2014, the government made an offer to the defendant to proceed with the special waiver of restrictions in relation to the use of the property subject to the acceptance of certain conditions that included the written consent of the mortgagee Full Profit.  Although the offer was open for acceptance until 30 June 2014, the mortgagee’s consent was not forthcoming and the offer lapsed.”

The defences and the decision below

3. As set out in §§25 and 27 of the reasons for decision, the lines of defence raised by the defendant were as follows:

“25. Mr Kok, counsel for the defendant, raised two defences:

(i) Delivery of the cheque was conditional and not for the purpose of transferring the property in the bill. Accordingly the cheque was not operative nor legally binding as the “agreed condition” was not fulfilled.

(ii) Total failure of consideration.”

“27.  According to Mr Sze, sometime in February 2013 and before 2 March 2013, he and Ms Chow, respectively acting on behalf of the defendant and the plaintiff, orally agreed as follows (“the oral agreement”):

(I) The defendant would engage the services of the plaintiff in relation to the following (see §7 of the Sze affirmation dated 14 November 2014 summarized below):

(a) The plaintiff would procure for the defendant the purchase of the entire issued share capital and the related shareholder’s loan of the company which was the registered and beneficial sole owner of the property.

(b) The plaintiff would procure the following:

(i) the vendor or its associated company to lend to the defendant a loan equivalent to 70% of the purchase price of the entire issued share capital of the company to finance part of the acquisition costs payable by the defendant for the purchase of the shares (“the loan”);

(ii) the loan would be first secured by a mortgage of the Bel‑Air houses (“the mortgage”); and

(iii) the mortgage would be released one month after the completion of the sale and purchase of the shares of company and thereafter be substituted by a mortgage of the property to secure the outstanding loan.

(c) The plaintiff would procure the mortgagee of the property to do any other things in the capacity of mortgagee of the property as required by the Lands Department in a reasonable and timely manner to facilitate the approval of the Special Waiver Application.

(II) In return for the plaintiff’s services (set out in (I)), the defendant would pay the plaintiff a fee equivalent to 0.5% of the final purchase price of the shares of the company (see §8).”

4. Mr Martin Kok contended before the judge that extrinsic oral evidence is admissible to prove that the cheque did not contain all the terms of the contract, which was that the defendant would settle the invoice only upon full compliance by the plaintiff with the terms of the oral agreement.

5. The judge rejected that contention.  She held that extrinsic evidence is excluded by the parol evidence rule, as what the defendant is seeking to do is to qualify its absolute undertaking on the cheque by adducing evidence of the alleged oral agreement in defeasance of that undertaking, citing her earlier judgment in the Court of Appeal in Lam Tai Kwan v Lo Wai Kit [2007] 1 HKLRD 367 at §§10 to 11, where she considered the parol evidence rule in the context of a cheque and its rationale.  Even assuming extrinsic evidence were admissible, the judge was not satisfied that credible triable issues have been made out.  She considered the defence of conditional delivery “pure ‘moonshine’ ”.

6. The defence regarding the total failure of consideration also hinged on the extrinsic evidence.  This was premised on the oral agreement, and it was alleged that the plaintiff had failed to discharge two of the conditions, namely, the release of the mortgage and procuring the mortgagee to facilitate the approval of the Special Waiver Application.

7. Assuming extrinsic evidence were admissible, the judge rejected this line of defence as “hopeless”.  The mortgagee’s refusal to co-operate in June 2014 did not result in the project coming to naught.  It was merely disrupted or delayed according to the defendant’s evidence.  Besides, the mortgagee’s refusal to give consent was not unconnected with the defendant being in default with its interest payments under the second mortgage at the time, causing the mortgagee to call in the outstanding loan.

This appeal

8. On appeal, Mr Kok essentially repeated his submissions in the court below.  He contended that the judge was wrong in law in applying the parol evidence rule in excluding extrinsic evidence.  On the extrinsic evidence, he submitted that the judge should have found there were factual disputes which ought to be tried on the defences of conditional delivery and total failure of consideration.

Conditional delivery

9. Mr Kok submitted that a less restrictive application of the parol evidence rule in relation to cheques should be adopted in modern times.  In support of this contention, he cited Kazeminy & Ors v Siddiqi & Ors [2009] EWHC 3207 (Comm) at §53 and Bank of China (Hong Kong) Ltd v Fung Chin Kan & Anr (2002) 5 HKCFAR 515 at §55.

10. In Kazeminy, Teare J said at §§53 and 54:

“53. … I am told that no modern case has examined the application of the parol evidence rule to bills of exchange or promissory notes. In those circumstances there appears to me some scope for arguing that where there is evidence that the note does not contain the parties’ entire agreement extrinsic evidence is admissible to establish the parties’ entire agreement. …

54. The present dispute is between the immediate parties to the promissory notes. I find myself unable to dismiss the Defendants’ argument on the law as one which is bound to fail. This hearing is not the appropriate occasion on which to determine whether that argument is correct. …”

11. In light of the somewhat guarded language in the passages quoted above, we do not think Kazeminy provides firm support for advocating a less restrictive approach.  Besides, in Hong Kong, the parol evidence rule in relation to bills of exchange had been considered in a long line of modern cases, including the more notable cases cited in Lam Tai Kwan v Lo Wai Kit at §§10 to 12 (Great Sincere Trading Co Ltd v Swee Hong & Co [1968] HKLR 660; Suen Ho Sun v Kamenar International Ltd [1989] 1 HKC 135; Prosperity Lamps & Components Ltd v Rotegear Corp Ltd [2000] 2 HKC 638; SY Chan Ltd v Choy Wai Bor [2001] 3 HKLRD 145).  To these cases, we would add another decision of the Court of Appeal in Po Yuen (To’s) Machine Fty Ltd v Chan Siu King [2003] 2 HKC 402. For a fuller summary of this line of cases, see Chitty on Contracts: Hong Kong Specific Contracts (4^th ed), §4-108.

12. As for Bank of China (Hong Kong) Ltd v Fung Chin Kan, the statement of Litton PJ regarding the modern tendency taking a far less restrictive view at §55 was made in the context of collateral warranties or collateral contracts in general, not specifically in relation to bills of exchange.  So we do not find this to be supportive of Mr Kok’s proposition of a less restrictive approach in the present context.

13. We do not think the analysis of the law in the Court of Appeal decision of Lam Tai Kwan v Lo Wai Kit is in any way erroneous.  Nor do we understand Mr Kok to have so submitted.  His contention was just that the defendant’s position should not be categorised as “seeking to qualify its absolute undertaking on the cheque by adducing extrinsic evidence”.  Rather, the defendant’s position should be treated as contending that the written contract under the cheque was not to come into operation until the terms in the oral agreement were fulfilled.

14. But as stated in Chalmers and Guest on Bills of Exchange (17^th ed) at §2-153:

“In practice, however, it may be difficult to distinguish between situations where it is orally agreed that the bill is not to become operative pending the fulfilment of a condition (in which case oral evidence of the conditional delivery will be admitted) and situations where the bill is delivered operatively but subject to an oral agreement in defeasance of a party’s liability on the bill (in which case oral evidence to qualify the terms of the written instrument will normally not be admitted).”

15. The judge took the view the present case was the latter situation.  We are inclined to agree that is the proper interpretation to be placed upon the alleged oral agreement, which sought to qualify the absolute undertaking on the cheque in that the liability to pay was to be enforceable only in certain contingencies or that it was to be postponed to a time later than that expressed on the face of the cheque.  Since the effect of such evidence would be to contradict the terms of the instrument, it is inadmissible, see, for example, Great Sincere Trading Co Ltd v Swee Hong & Co at 664 to 665; Suen Ho Sun v Kamenar International Ltd at 138A to I; Po Yuen (To’s) Machine Fty Ltd at §8.

16. In any event, for these cogent reasons given by the judge, we do not think the defence raised is believable even if extrinsic evidence were to be admitted:

(1) There was no suggestion of there being an oral agreement (much less its terms) until after the commencement of this action.  That is notwithstanding the invoice and two subsequent reminders having been issued to the defendant (§35).  We might also add that according to the invoice issued to the defendant on 1 November 2013, the agency fee of $3.5 million was due on presentation of the invoice, and “interest will be charged at 2% per month on amount outstanding 30 days from date of this invoice.”

(2) The alleged oral agreement was made when negotiations for the acquisition of the property had not yet been concluded and the terms would still be at large.  It is doubtful any estate agent would agree to undertake to procure the matters as set out in §27(I)(b) of the decision when the terms of the transaction were yet to be finalised and agreed (§37).

(3) The alleged oral agreement appeared to involve the provision of services (which on any view were onerous) well beyond the usual scope of services normally rendered by estate agents for no additional remuneration (§§37 to 40).

(4) The alleged oral agreement would mean that the agreed agency fee of 0.5% of the purchase price (which is nothing out of the ordinary) was an “all-in” fee with no extra remuneration for the additional service and that the defendant, being a seasoned investor, was content to sign the agency letter that made no mention of what, on the defendant’s case, was the key element of the transaction (which was to obtain government approval for conversion of user of the industrial building) (§40).

(5) The additional services described in §§27(I)(b) and (c) of the decision could not realistically be performed except by a party who is in a position to influence or assert ‘leverage’ over the vendor as well as the unidentified mortgagee.  It was nowhere suggested and there was no evidence to show that the plaintiff was in such a position (§41).

(6) Each of the vendor, the defendant and the mortgagee was legally represented.  The legal documents involved (the provisional agreement, the supplement agreement, the loan letter and the second mortgage of the Bel-Air houses) were professionally drawn and each of the parties was legally represented by the time the provisional agreement was signed on 15 March 2013.  It defies belief that the defendant would not have conveyed the terms of the alleged oral agreement to its solicitors.  It is worth highlighting that while the loan letter required a second mortgage of the Bel-Air houses, it is silent as to its release and substitution of the property to secure the loan (§§42 and 43).

(7) There is no evidence to suggest that the plaintiff had any substantive involvement once solicitors had been instructed to handle the transaction.  The fact that the plaintiff did relay email messages relating to the Special Waiver Application some 15 months after the provisional agreement does not take matters further (§44).

17. Mr Kok has no or no real answer to the above.  He merely pointed to matters which he submitted were consistent with the defendant’s case, such as the fact that the cheque was presented close to the expiry of the six-month validity period; that in February 2013 the parties had engaged in discussions as to the government’s initiatives of revitalising old industrial buildings; that the agency letter did not set out the terms of the scope of the services to be provided by the plaintiff; that the plaintiff’s representatives had engaged in email exchanges with the defendant in relation to the Special Waiver Application.

18. We do not think the matters mentioned by Mr Kok, taken separately or cumulatively, could raise a triable issue on the alleged oral agreement.

19. We would make this additional observation.

20. There was no dispute that the cheque, post-dated to 28 February 2014, was issued by the defendant to the plaintiff in January 2014.  According to the alleged oral agreement, the plaintiff was to procure the release of the mortgage of the Bel-Air houses one month after the completion of the sale and purchase of the shares of the Company and thereafter substituted by a mortgage of the property to secure the outstanding loan.  As the completion of the sale and purchase had taken place on 18 October 2013, the plaintiff should have procured the release of the mortgage by 18 November.  It was one of the defendant’s complaints that the plaintiff had failed to discharge its duties (§27(1) of the affirmation of Mr Sze).  Mr Sze deposed in §28 that the cheque was issued to the plaintiff after repeated discussion and eventual agreement that the defendant would settle the invoice upon the plaintiff fully complying with the alleged oral agreement.  One might ask rhetorically why the defendant would find it necessary to agree with the plaintiff as alleged and issue a post-dated cheque to the plaintiff when the plaintiff was in breach of the alleged oral agreement and the obligation to pay the agency fee did not even arise.

21. The judge is clearly right in holding that the alleged oral agreement and conditional delivery, even if evidence on this were admissible, is pure moonshine.

Total failure of consideration

22. In the court below, Mr Kok’s argument on total failure of consideration was run on the basis that the plaintiff had failed to discharge two important obligations under the alleged oral agreement, so the defendant did not get what it bargained for.  That is at least a comprehensible argument, whereas his submissions on appeal are somewhat confusing, to say the least.

23. He quoted various passages from Chapter 12 in Goff and Jones on The Law of Unjust Enrichment (8^th ed) on the general principles relating to “failure of basis” as a ground for restitution.  We fail to see what claim of restitution the defendant might conceivably have against the plaintiff.  It does not appear to us how unjust enrichment could possibly come in.

24. Mr Kok repeated his submission before the judge that as the government’s approval of the Special Waiver Application was at least one of the bases for payment of the agency fee by means of the cheque, since the approval was not obtained and the government’s offer lapsed in June 2014, the defendant would have an arguable defence in total failure of consideration.

25. We agree with the judge the defence of total failure of consideration is wholly untenable.  It is premised on the same alleged oral agreement.  For the reasons given earlier, we find this alleged agreement unbelievable.