FULLY LUCK INVESTMENT LTD. v. NEW FAST TRADING LTD.

DCCJ 3644/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIC ACTION NO. 3644 OF 2001

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JUDGMENT

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BACKGROUND

1. On or about 11th August 1997, Mr. Tsui Tak Kong ("Mr. Tsui"), a director and shareholder of the Plaintiff, came to know that vehicle mark HA 88 (the "Mark") was being offered for sale by auction through Chung Sen Auctioneers Limited ("Chung Sen").

2. Mr. Tsui attended the auction held on 5th September 1997 and on behalf of the Plaintiff, made the highest bid at the price of HK$230,000. As a result a Memorandum of Agreement, dated the same day (the "Memorandum"), was entered into with Mr. Tsui acting for the Plaintiff and Mr. Eric Chan Chi Ming ("Mr. Chan") of Chung Sen, acting for the vendor.

3. Pursuant to the Memorandum, the Plaintiff paid a sum of HK$115,000 being 50% of the total purchase price as deposit and HK$6,900 as commission to Chung Sen. After deducting their commission, the sum of HK108,000 was transferred by Chung Sen to Mr. Lo Chun Yu ("Mr. Lo"), pursuant to the written direction of the Defendant (the "Direction").

4. On or about 8th September 1997, Mr. Chan told Mr. Tsui that the Defendant Company was the owner of the Mark and the Defendant would not transfer the Mark directly to the Plaintiff, but instead would transfer ownership of all shares of the Defendant to the Plaintiff.

5. The purchase of shares in a limited company was not what the Plaintiff had bargained for; however, in accordance with the terms of the Agreement, the Plaintiff paid the balance of the purchase price in the sum of HK$115,000 to Chung Sen as stakeholder.

6. Although the Plaintiff was reluctant, the parties' solicitors attempted to negotiate a share purchase arrangement. The negotiation was not successful. On 30th October 1998, the Plaintiff's solicitor gave notice to the Defendant's solicitors terminating the share purchase negotiations and demanded return of all sums paid.

7. Chung Sen had returned to the Plaintiff, the stakeholder money of HK$115,000, together with interest of HK$7,430.10. Despite request, the Defendant has failed to return the original deposit paid by the Plaintiff.

8. On or about December 1998, the present shareholders of the Defendant decided to purchase the Mark. The purchase transaction was completed by purchasing all of the shares of the Defendant from the existing shareholders. Prior to the transfer, the Defendant had 10,000 issued and outstanding shares. 9,999 of which were owned by Mr. Lo, the balance 1 share was owner by a Mr. Lo Leung.

9. The Plaintiff was claiming against the Defendant damages for breach of contract, in the original sum of HK$115,000 and HK$6,900 being commission, paid to Chung Sen.

10. Third Party Notice was issued against Mr. Lo Chung Yu and Mr. Lo Leung, the original shareholders of the Defendant Company, for indemnity against all loss and damages arising from the claim by the Plaintiff.

11. Judgment against the Third Parties was obtained on 25th August 1999.

THE PLAINTIFF'S CASE

12. It was the Defendant that instructed Chung Sen to offer the Mark for sale by auction. When the Plaintiff entered into the Memorandum with Chung Sen, Chung Sen was acting as agent of the Defendant.

13. The article offered for sale was the Mark and not shares in the Defendant. The Defendant was in breach when it was unable to transfer the Mark to the Plaintiff, pursuant to the terms and conditions stated in the Memorandum.

THE DEFENDANT'S CASE

14. Regulation 12 of the Road Traffic (Registration and Licensing of Vehicles) Regulation, Cap. 374 (the "Regulation") provided:

"(1) ..., where the ownership in a vehicle to which there is assigned a special registration mark is transferred, the Commission shall cancel the allocation of the special registration mark and reallocate it under regulation 9(1)."

15. The Mark was a special registration mark as defined under the Regulation. Accordingly it was subject to cancellation if transferred directly to the Plaintiff. To circumvent the Regulation, the right to use the Mark could be transferred by a transfer of all shares of the Defendant.

16. The Memorandum was a contract between Mr. Lo and the Plaintiff. Mr. Lo gave instruction to Chung Sen to sale all of the shares in the Defendant and it was Chung Sen that had misrepresented their instructions.

17. The deposit was paid to Mr. Lo and not to the Defendant, The Defendant was not liable to the Plaintiff's loss.

THE ISSUES

18. Mr. Lau, for the Plaintiff, suggested there were 3 issues in this matter:

(1) Who was the other contracting party?

(2) What was the subject matter of the contract?

(3) If the other contracting party was the Defendant and the subject matter of the contract was the Mark, was the Defendant in breach when it required performance solely by transfer of shares?

19. Mr. Maurellet, for the Defendant, suggested that there was only one issue: Who gave authority to Chung Sen on 5th September 1997?

FINDINGS

20. Mr. Maurellet suggested since Mr. Lo had signed the appointment letter dated 11th August 1997 (the "Appointment Letter") without any qualification remark, he had therefore contracted in his personal capacity.

21. To support this proposition Mr. Maurellet submitted a list of authorities including: "The Swan" Lloyds Reports [1968] Vol 1 p5; Universal Stream v. James McKelvie AC [1923] 492; Gian Singh v. Banque de I'Indochine [1974] WLR 1234; Dragages v. Gladhover Ltd [1988] 1 HKLR p 298; Cliffe v. Lefebvre (unreported, Lexis) and Kotecha v. Bennett [1983] Ca Bound Transcript 361.

22. A careful review of these cases, however revealed that these were cases where the signing parties were held to be liable under the contract, when they failed to include words that clearly exclude personal liability. These cases did not stand for the proposition that the signatories had signed in their own personal capacity because words to exclude personal liability were not used next to their signatures.

Bowstead & Reynolds On Agency, 16th ed. at p 550 stated:

"Agent may be liable or entitled. ...There is no reason why an agent should not be entitled and/or liable on the contract which he has made for his principal, or upon a separate but related contract. 'In all cases the parties can by the express contract provide that the agent shall be the person liable either concurrently with or to the exclusion of the principal.' The question whether an agent who has made a contract on behalf of his principal is to be deemed to have contracted personally, and, if so the extent of his liability, depends on the intention of the parties to be deducted from the nature and terms of the particular contract and the surrounding circumstances, including any particular custom. As in all matters of formation of contract, the test is objective...." (Emphasis original)

23. Mr. Maurellet further argued that at all relevant times the Plaintiff dealt with Chung Sen and not directly with the Defendant, if it was Mr. Lo who appointed Chung Sen as his agent, Chung Sen could not act as agent for the Defendant. The only relevant document was the Appointment Letter. To determine whether Mr. Lo signed the Appointment Letter as agent for the Defendant or in his own personal capacity, I must look only to the content of the Appointment Letter and no other documents.

24. I do not agree with Mr. Maurellet's argument. In Reardom Smith Line Ltd v. Yngvar Hansen-Tangen [1997] 1 WLR 989, at 995-996, Lord Wilberforce said:

"No contract are made in a vacuum; there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances' but this phase is imprecise; it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."

25. Accordingly, to ascertain whether Mr. Lo intended to contract for the Defendant or in his own capacity, I must look at all of the "surrounding circumstances", of which, the Appointment Letter was but one of many.

THE SURROUNDING CIRCUMSTANCES

Nature of the Relationship:

26. Chung Sen was an auctioneer, it received instructions from vendors who wanted to sell their goods and acted as agent for these vendors. Thus the nature of the Appointment Letter was the vendor (whether Mr. Lo or the Defendant Company) as principal, appointing Chung Sen as agent, to represent it in the auction of the subject matter.

Subject Matter of the Auction:

27. On the Appointment Letter the subject matter was clearly stated as the "vehicle registration mark HA 88". On the Consent Letter dated 11th August 1997 (the "Consent Letter"), it was stated as "vehicle registration mark HA88". In the auction pamphlet it was stated as "Hong Kong Vehicle Registration Marks For Sale". On the Direction, it was in reference to "Hong Kong Vehicle Registration Mark No. HA88". On the Memorandum, it was stated as "Hong Kong Vehicle Registration Mark HA 88". In the Condition Of Sale attached to the auction pamphlet, it was stated:

"1. The Hong Kong Vehicle Registration Mark is sold according to the Conditions of Sale as provided herein.

...

7. The Vendor should pay the costs in relation to the transfer of the ownership of the Vehicle Registration Mark to the Purchaser.

...". (Emphasis added)

28. Shares were never mentioned in any document, until well after the auction. The inescapable conclusion was that the subject matter of the auction must have been the Mark and not shares of the Defendant company.

OTHER CIRCUMSTANCES:

29. First, the Mark was owed by the Defendant and not Mr. Lo. Looking objectively, Mr. Lo could not have intended to contract in his own name.

30. Second, in the Consent Letter, it was clearly stated that "If owned by Company, please fill in the name and position of the signatory". Mr. Lo had written his name, Hong Kong identity card number and position as Director. Clearly, he had intended to contract in his capacity as director of the Defendant.

31. Third, the Direction was issued by the Defendant and signed by Mr. Lo with the Defendant's chop annexed next to his signature. Clearly, Mr. Lo was acting on behalf of the Defendant company.

CONCLUSION:

32. After considering all of the surrounding circumstances, I found that Mr. Lo had contracted with Chung Sen as a director of the Defendant and not in his own personal capacity.

33. In analyzing who was the contracting party, I have already come to the conclusion that the subject matter of the auction was the Mark and not shares in the Defendant Company.

34. The Defendant was clearly in breach, when it contracted to sell the Mark but could not transfer the same in accordance to paragraph 7 of the Condition of Sale. Although the parties had attempted to negotiate a settlement, that negotiation was unsuccessful. The unsuccessful negotiation did not excuse the Defendant's breach.

35. In reaching these conclusions, I have considered the position of the present shareholders of the Defendant company. They had no part in any of the disputes. No fault can be attached to them. However, it must be noted that there are risks inherited in the purchase of shares in limited companies.

36. These risks can only be controlled by careful due diligent searches and tightly drafted legal documents. Good legal advice is a prerequisite in the purchase of share transactions and it appears that the Plaintiffs did receive them and the existing shareholders of the Defendant company did not. The existing shareholders can only look to the third parties for recovery of their losses.

JUDGMENT:

(1) Judgment is for the Plaintiff in the sum of HK$121,900;

(2) Together with interest on HK$121,900, calculated at the judgment rate from 28th May 1999 until payment;

(3) Costs in this action, including all costs reserved, be to the Plaintiff with certificate for counsel. The costs order is nisi, and will become final, unless application is received within 14 days after the date judgment is handed down.