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HCMP 1209/2003
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO. 1209 OF 2003
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IN THE MATTER of Hong Kong Uni-Honest Limited |
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and |
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IN THE MATTER of a Chinese Agreement dated 16 July 2002 made between the Plaintiffs and the 1st Defendants |
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BETWEEN
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WONG WAI KEUNG and YAU SUI CHING |
Plaintiffs |
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and |
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YING SHUDE and CHEN HAILIN |
1st Defendants |
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FUNG QINLI |
2nd Defendant |
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HONG KONG UNI-HONEST LIMITED |
3rd Defendant |
AND BETWEEN
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YING SHUDE |
Plaintiff |
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and |
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WONG WAI KEUNG and YAU SUI CHING |
1st Defendants |
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CHEN HAILIN |
2nd Defendant |
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(By 1st named 1st Defendant's Counterclaim) |
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Before: Deputy High Court Judge L. Chan in Court
Dates of Hearing: 8, 11-14 July 2005
Dates of Closing Submission: 5 October and 23 December 2005
Date of Judgment: 31 July 2006
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J U D G M E N T
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1. This action is about a dispute of whether the 1st Defendants had repudiated a sale of shares agreement which entitled the Plaintiffs to re-transfer to themselves the shares of a company that they had sold to the 1st Defendants. There is a further issue of whether this dispute had been settled between the parties. The 2nd named 1st Defendant, Chen Hailin, (“Chen”) was not represented and did not appear at the trial.
The joint venture
2. The company is Hong Kong Uni-Honest Limited (香港怡鴻股份有限公司), the 3rd Defendant herein. The underlying subject matter is a share of the toll collection right of a highway running from Wenjiazhen (溫家圳) to Houtian (厚田) in Jiangxi Province (江西省) in the Mainland (“the Highway”).
3. The 1st named Plaintiff is the husband of the 2nd named Plaintiff. They had since 1995 been negotiating with the Jiangxi Highways Development Company (江西工路開發總公司) (“the Highways Co.”) to jointly develop the Highway. The Highways Co. was a company belonging to the Jiangxi Provincial Communications Department (江西省交通廳) (“the Jiangxi Com. Dept.”). The Plaintiffs at that time engaged Chen to represent them in the negotiations with the Jiangxi Com. Dept. and the Highways Co. Chen was residing in Nanchang (南昌), the Provincial Capital of Jiangxi.
4. The Plaintiffs and the Highways Co. eventually reached a Chinese-Foreign Joint Venture Agreement sometime in 1997. Under this agreement, the Plaintiffs were supposed to inject funds for the construction of the Highway. The agreement needed the approvals of various Central Government Ministries and Provincial Government Departments before it could be performed. It took a long time for the approvals to be obtained. Before the approvals were in place, the Jiangxi Com. Dept. through the Highways Co. had already started with the construction of the Highway with its own funds. The construction was completed in February 1999, but the approvals had not been obtained by then.
5. The Plaintiffs and the Jiangxi Com. Dept. then changed the mode of their joint venture. The new mode of the Chinese-Foreign Joint Venture was for the Jiangxi Com. Dept. to sell the 3rd Defendant 56.09% of the right to operate and to collect toll along the Highway. The price was RMB¥766.55 million. The Plaintiffs had already incorporated the 3rd Defendant on 18 October 2000. The 3rd Defendant and the Highways Co. entered into a new Chinese-Foreign Joint Venture Agreement on 17 November 2000 (“the JV Agreement”) to carry out the new joint venture.
6. Under the JV Agreement, the 3rd Defendant and the Highways Co. would set up a joint venture company called Jiangxi Yichang Highway Development Company Limited (“the JV Co.”) to operate the Highway and to collect toll along it. The 3rd Defendant would own 56.09% of the shares of the JV Co. and the Highways Co. would own 43.91%.
7. The joint venture under the JV Agreement again had to be approved by the Central Government Ministries and Provincial Government Departments before it would be effective. The Jiangxi Com. Dept. submitted to the Ministry of Communications (交通部) a request for approval on 2 January 2001. The Ministry gave the approval on 7 August 2001.
8. The 3rd Defendant and the Highways Co. then submitted a joint venture feasibility report to the State Development Planning Commission (國家發展計劃委員會) (which became known as National Development and Reform Commission (國家發展和改革委員會) from 10 March 2003 onwards) (“SPC”) for approval. The SPC approved the joint venture on 15 July 2002. The approval letter required the 3rd Defendant to pay up the RMB¥766.55 million to the Jiangxi Com. Dept. within six months from the day when the JV Agreement would become effective.
9. The approval letter also provided that no organisation in the Mainland should provide any guarantee or pledge of any nature in respect of this sum. The intention was clearly to ensure that the foreign capital for this Chinese-Foreign Joint Venture should indeed be foreign in truth and in fact and not be Mainland capital masquerading as foreign capital. If the foreign capital should in fact come from the Mainland, then the joint venture would not be a Chinese-Foreign Joint Venture, but a joint venture of different Mainland entities. In that event, the approvals from the Central Ministries and Provincial Government Departments would also be frustrated and the intention of attracting foreign capital defeated.
10. On 25 July 2002, the Jiangxi Provincial Development Planning Commission (江西省發展計劃委員會) advised the Jiangxi Com. Dept. that the SPC had approved the joint venture and the Jiangxi Com. Dept. should go ahead with the joint venture and arrange for the payment thereof.
The First Agreement
11. Sometime in the first half of July 2002, Chen introduced the 1st named Defendant (“Ying”) to the Plaintiffs to negotiate for the purchase from the Plaintiffs their shares in the 3rd Defendant. After negotiations in Weizou City, Guangdong Province where the Plaintiffs resided, the parties entered into a Chinese Agreement dated 15 July 2002 (“the 1st Agreement”). It was drafted by Ying and was made between the 3rd Defendant and the 1st Defendants. Its certified English translation reads:
“Party A and Party B have reached the following agreement on a voluntary and fair basis and through friendly negotiations at Tian Yue Hotel, Weizhou, Guangdong in respect of the matters concerning the acquisition of Hong Kong Uni-Honest Limited (hereinafter referred to as “Uni-Honest”).
Clause 1: Party B shall acquire Uni-Honest Limited for Reminbi twelve million dollars. Party A agrees to this price.
Clause 2: Party B shall pay a first instalment of Reminbi two million dollars. Both parties agree that Party A shall transfer all the shares of Uni-Honest to Party B. Party B shall pay Reminbi one million dollars to Party A within 3 days after the signing of this agreement; and that after the valid legal documents about the transfer of shares have been prepared, Party B shall pay the balance of one million dollars to Party A at one go.
Clause 3: Party B shall pay the remaining balance of ten million dollars within 180 days after the date of approval of the Wen Hou Highway Joint Venture Project between Uni-Honest and Highway Development Corporation of the Transport Office of Jiangxi Province of China.
Clause 4: Both Party A and Party B emphasize that after the completion of the legal formalities of the transfer of shares of both Party A and Part B, Party A shall be responsible for all debts and rights of debts before the transfer of shares; and Party B shall not be concerned. Party B themselves shall be responsible for all debts and rights of debts after the transfer of shares and Party A shall not be concerned.
Clause 5: Both Party A and Party B unanimously acknowledge that the debts and rights of debts of both Party A and Party B are to be verified and approved by and made valid with the signature and chops of an official solicitor of a Hong Kong solicitors' firm.
Clause 6: Any matter which is not fully dealt with by this Agreement shall be resolved by friendly negotiation between Party A and Party B. All supplemental documents signed in the course of the performance of this Agreement shall have the same legal effect as this Agreement.
Clause 7: This Agreement shall become effective on the date of signing by Party A and Party B. This Agreement is signed in six copies. Each party keeps two copies and all have the same legal effect.”
The Second Agreement
12. After seeking legal advice from a Hong Kong lawyer, the Plaintiffs proposed a revised agreement as drafted by the Hong Kong lawyer. It was then executed by the parties and dated 16 July 2002 (“the 2nd Agreement”). Its certified English translation reads:
“Whereas
Hong Kong Uni-Honest Limited (hereinafter referred to as “the Company”) was established on 18th October 2000 (company registration number 734611). The Company has issued 10,000 shares each of Hong Kong one dollar. Wong Wai Keung (Hong Kong Identity Card No. H088508(A)) holds 6,000 shares while Yau Sui Ching (Hong Kong Identity Card No. P297266(6)) holds 4,000 shares.
Hong Kong Uni-Honest Limited (hereinafter referred to as “the Company”) and Jiangxi Highway Development Corporation signed an agreement on 17th November 2000 for the establishment of Jiangxi Yi Chang Highway Development Co. Ltd for the investment and operation of the Highway between Wen Jia Zhen and Hou Tian.
Transfer of shares
Now Wong Wai Keung and Yau Sui Ching (hereinafter referred to “Party A”) and Chen Hailin, holder of People's Republic of China Passport No. G03398024 and Ying Shude, holder of People's Republic of China Passport No. 147569048 (hereinafter referred to as “Party B”) have reached an agreement for transfer of the shares of the Company as follows:
1) Party A shall transfer the 10,000 shares of the Company under their names to Party B at Hong Kong dollars 12,000,000 (initials of Wong, Yau, Ying and Chen).
2) A deposit of Hong Kong dollars 2,000,000 shall be paid by Party B within one week of the signing of this contract.
3) The remaining balance of Hong Kong dollars 10,000,000 (initials of Wong, Yau, Ying and Chen) shall be paid by Party B within 6 months (initials of Wong, Yau, Ying and Chen) after the approval of the State Development and Planning Commission of the People's Republic of China in respect of the transfer of the toll collection right of the said Highway between Wen Jia Zhen and Hou Tian to Jiangxi Yi Chang Highway Development Co. Ltd.
4) Through friendly negotiation of both parties, Party A agrees to transfer the shares of the Company under their names to Party B after the receipt of the first payment (7,000 shares shall be transferred to Ying Shude's name and 3,000 shares shall be transferred to Chen Hailin's name). Party B agrees that if Party B fails to pay the remaining balance in accordance with clause 3 above, this Agreement shall be void; and hereby Mr Kwan Sik Tsang [Hong Kong Identity Card No. E623655(7)] of Chong, Leung & Co. is particularly authorized to arrange and handle the re-transfer of the shares of the Company, which have been transferred to Party B's names, to Party A's names with full authority in accordance with the Laws of Hong Kong.
5) Party A warrants that the Company has no debts.
6) This Agreement is prepared in quadruplicate. Party A and Party B each keep two copies.”
13. The 2nd Agreement differed from the 1st Agreement in several aspects. The sellers of shares were the Plaintiffs and not the 3rd Defendant. The consideration of 12 million was changed from RMB yuan to HK dollars. Clause 2 in the 1st Agreement provided that the 1st Defendants should pay RMB¥1 million deposit within three days after its signing. The other RMB¥1 million deposit would be payable after the valid legal documents for the transfer of the 3rd Defendant's shares had been prepared. The same clause in the 2nd Agreement required the 1st Defendants to pay HK$2 million within one week from its signing. Clause 3 in the 1st Agreement provided that the balance of RMB¥10 million had to be paid within 180 days after the joint venture was approved. In the 2nd Agreement, the HK$10 million had to be paid within six months after the SPC has given its approval to the transfer of the toll collection right to the JV Co.
14. After signing the 2nd Agreement, Ying paid the Plaintiffs on 16 July 2002 HK$10,000 as the share capital of the 3rd Defendant and RMB¥800,000 as part of the deposit. He paid the Plaintiffs on 17 July 2002 a further sum of RMB¥200,000 as further deposit. The Plaintiffs then transferred the shares of the 3rd Defendant to the 1st Defendants on 19 July 2002 at the ratio of 70% to Ying and 30% to Chen. (The Plaintiffs are seeking a declaration that these shares had been validly re-transferred to them on 16 January 2003.)
The first dispute and its resolution
15. The balance of the deposit was however not paid within one week of the making of the 2nd Agreement. The Plaintiffs through solicitors then wrote to the 1st Defendants on 8 August 2002 to rescind the 2nd Agreement, forfeit the RMB¥1 million deposit and demand the re-transfer of the shares of the 3rd Defendant to them.
16. The 1st Defendants replied through solicitors on 13 August 2002 and alleged that the deposit was RMB¥2 million and not HK$2 million. They further alleged that the remaining RMB¥1 million was to be paid by a third party who owed the 1st Defendant the same sum and that the parties had agreed that this payment obligation was deemed to have been fulfilled upon the 1st Defendants telling the third party on 24 July 2002 to pay the sum to the Plaintiffs. They further said that it was on 8 August 2002 that the 1st Defendants were advised that the third party had not paid the sum and they were willing to pay it to the Plaintiffs.
17. The Plaintiffs' solicitors replied on 15 August 2002 denying knowledge of the dealing between the 1st Defendants and the third party. The letter also pointed out that the alleged arrangement with the third party was not expressed in the 2nd Agreement. However, the 1st Defendants' solicitors on 20 August 2002 denied any breach of the 2nd Agreement. They further offered a cheque for RMB¥1 million in full and final settlement of the balance of the deposit. But the Plaintiffs' solicitors returned this cheque on 22 August and threatened proceedings. The correspondence continued.
18. On 11 September 2002, the Plaintiffs' solicitors offered the following terms to settle this dispute:
“1. That the Agreement of July 16, 2002 (‘the Agreement') shall be revived and proceeded accordingly;
2. That your clients agree the Agreement of July 15, 2002 was already superseded by the Agreement and ceased to take effect from signing of the Agreement;
3. That our clients agree to payment of further deposit of one million to be paid in RMB currency and the difference in the exchange rate between RMB and HK dollar on the total deposit (HK$2,000,000.00) shall be accounted for on completion. The exchange rate is hereby fixed at HK$1: RMB1.05. It follows on completion your clients shall pay RMB100,000.00 (being difference in exchange rate on the total deposit) plus HK$10,000,000.00 (or RMB10,500,000.00).
4. That the further deposit of RMB1,000,000.00 shall be deposited into Madam Yau's bank account (particulars of which set out in your letter of September 6, 2002) not later than noon on September 14, 2002;
5. Your acceptance on behalf of your clients of the offer herein before 5:00 p.m. on September 13, 2002 failing which this offer shall lapse.”
The 1st Defendants' solicitors accepted these terms by a letter of 12 September 2002. The 1st Agreement was therefore agreed to have been superseded by the 2nd Agreement and the currency of the consideration was confirmed to be Hong Kong Dollars.
The dispute on payment of the balance of consideration
19. On 17 September 2002, the Plaintiffs' solicitors wrote to the 1st Defendants' solicitors again. This letter is of some importance. It stated:
“We refer to your letter of September 13, 2002 and write to advise that our clients acknowledged receipt of the further deposit of RMB1,000,000.00
Our clients are therefore looking forward to your client's due performance of the Agreement of July 17, 2002. We take this opportunity of reminding your clients clause (3) thereof by virtue of which your clients are obliged to tender the balance of the consideration price on or before January 15, 2003 by referring to the date of approval which was issued on July 15, 2002.”
20. The 1st Defendants' solicitors replied on 18 September 2002 and stated the following:
“We refer to your letter yesterday and would like to point out that the date of the Agreement referred to in 2nd line of 2nd paragraph of your said letter should be 16 July 2002.
As to the date of approval of the project involved, we are seeking our client's instruction thereon.”
21. This letter did not refer to the 1st Agreement which was executed by the parties on 15 July 2002. It only referred to the 2nd Agreement of 16 July. The date of approval referred to in this letter must be the date of approval stipulated in the 2nd Agreement. Since the 1st Defendants' solicitors said that they would seek instructions on the date of approval, it could be expected that they would write again to confirm whether the date of approval was indeed 15 July 2002 as asserted by the Plaintiffs' solicitors.
22. The 1st Defendants' solicitors did write to the Plaintiffs' solicitors again. They said in their letter of 19 September:
“Further to our letter yesterday, we are instructed to inform you that our clients shall duly perform their obligations under the Agreement dated 16 July 2002.”
23. The 1st Defendants' solicitors did not argue that the approval day was not 15 July 2002 or that there have to be other approvals in addition to the approval by the SPC as stated in clause 3 of the 2nd Agreement. They also did not suggest that the 2nd Agreement or the obligations therein were subject to the 1st Agreement or any oral collateral agreement.
24. After the shares of the 3rd Defendant were transferred to the 1st Defendants on 19 July 2002 and the letter of advice by the Jiangxi Provincial Development Planning Commission to the Jiangxi Com. Dept. of 25 July 2002, the 3rd Defendant and the Highways Co. entered into a new Joint Venture Agreement dated 18 August 2002 (“the New JV Agreement”). The 3rd Defendant was represented by Ying as he had been appointed a director of the 3rd Defendant and the Plaintiffs had resigned from their directorships.
25. The New JV Agreement stated that it was made pursuant to the approval to the joint venture given by the SPC on 15 July 2002 and the parties would establish the JV Co. with shareholdings divided at the same ratio of 56.09% to 43.91%. The Agreement required the 3rd Defendant to pay the RMB¥766.55 million to the Jiangxi Com. Dept. within six months from the day when the Agreement would become effective. It also provided that the details of the management of the Highway should be stipulated in an Agreement for Regulating the JV Co. (“the JV Co. Regulation Agreement”).
26. The parties also entered into the JV Co. Regulation Agreement on 3 September 2002 and the 3rd Defendant was again represented by Ying in this agreement. This agreement provided that the 3rd Defendant should pay up in full the RMB¥766.55 million within six months from the issue of the business licence of the JV Co. This agreement was approved by the Ministry of Foreign Trade and Economic Cooperation (對外貿易經濟合作部) (“MOFTEC”) on 5 March 2003 and the Plaintiffs said that the RMB¥766.55 million had to be paid within six months from this day.
27. The day of 15 January 2003 came and went and the RMB¥100,000 plus HK$10 million as referred to in the letter of the Plaintiffs' solicitors dated 11 September 2002 were not paid. The Plaintiffs' solicitors on 16 January 2003 wrote to the 1st Defendants' solicitors and accepted the 1st Defendants' reputation of the 2nd Agreement on the ground that the said sums had not been paid. Mr Kwan of the Plaintiffs' solicitors also re-transferred the shares of the 3rd Defendant from the 1st Defendants to the Plaintiffs on 16 January 2003 pursuant to clause 4 of the 2nd Agreement.
28. On 20 January 2003, the 1st Defendants' solicitors replied as follows:
“We refer to your letter of 16 January 2003.
Clause 3 of the Agreement dated 16 July 2002 reads as follows:
3) 餘款港幣$10,000,000乙方在中華人民共和國國家計委批準將上述溫家圳至厚田高速公路的收費權轉讓給江西怡昌公路開發有限公司的6個月內支付.
(translation inserted)
[3) The remaining balance of Hong Kong dollars 10,000,000 (initials of Wong, Yau, Ying and Chen) shall be paid by Party B within 6 months (initials of Wong, Yau, Ying and Chen) after the approval of the State Development and Planning Commission of the People's Republic of China in respect of the transfer of the toll collection right of the said Highway between Wen Jia Zhen and Hou Tian to Jiangxi Yi Chang Highway Development Co. Ltd.]
As the transfer contemplated under the Clause has not taken place, the period of 6 months has not started to run. Accordingly, our client has no contractual duty to make any payment under the Clause at this stage, and has not breached any term of the Agreement.
For the avoidance of doubt, we reiterate on our client's behalf that our client will make the payment in accordance with the said Clause 3 within the prescribed time.”
29. The 1st Defendants' solicitors were obviously mistaken as clause 3 of the 2nd Agreement referred to the approval date and not the transfer date. The plaintiff solicitors pointed out this error on 22 January 2003 and insisted that time had started to run from the date when approval was granted.
30. On 23 January 2003, the 1st Defendants' solicitors put forward another ground. They said that no permission as referred to in clause 3 of the 2nd Agreement had ever been granted.
31. On 7 March 2003, the Plaintiffs' solicitors wrote and summarized that relevant events since the making of the JV Agreement on 17 November 2000. They also asked the 1st Defendants to admit that they had failed to pay the balance of consideration under 2nd Agreement and the Plaintiffs were therefore entitled to have the shares re-transferred.
Institution of these proceedings
32. The 1st Defendants' solicitors maintained on 26 March 2003 that the balance of purchase price was not yet payable. Before the 1st Defendants made this reply, the Plaintiffs had on 21 March 2003 issued these proceedings seeking the relief referred to above. The Plaintiffs, in seeking the declarations, relied on the terms of the 2nd Agreement and the variation by the exchange of letters on 11 and 12 September 2002. They regarded the 1st Agreement as having been superseded by the 2nd Agreement.
33. Apart from other ancillary relief, the Plaintiffs also sought some relief in relation to a purported transfer of 70% of the shares of the 3rd Defendant by Ying to one Feng Qunli (also spelt as Fung Qinli), the 2nd Defendant. Since both sides had denied any involvement with this transfer and Deputy Judge Poon has already entered judgment against the 2nd Defendant on 24 November 2003, I say no more about this.
Ying's case and analysis of it
34. Ying filed an affirmation on 1 September 2003 to oppose the Plaintiffs' application. This affirmation was adopted as part of his evidence in chief. These proceedings were later converted into an action as if it was commenced by a writ. The matters pleaded in the re-re-re-amended defence up to the time of the affirmation were those deposed to by Ying in this affirmation. Ying also made a counterclaim for rescission of the 1st and/or 2nd Agreements, specific performance of the Initial Settlement and/or Final Agreement as referred to below, damages in lieu of or in addition to rescission and refund of the deposit of RMB¥2 million.
35. Ying is a businessman in Shanghai. He operates a school in Shanghai. He is also a member of the Shanghai Political Consultative Committee.
36. Ying in his affirmationcontradicted several matters which have been spelt out in writing. He said that the writings did not mean what they said. He said the parties had initially arrived at an oral agreement for the 1st Defendants to purchase the shares of the 3rd Defendant at RMB¥12 million. At that time he was told by the plaintiffs that before the JV Co. could be set up, approvals were required from various Central Government Authorities, including MOFTEC, SPC, the Ministry of Communications, the State of Administration for Industry and Commerce (工商行政管理局) and the local Provincial Authorities. He was further told that the approvals were not mere formalities as the authorities were duty bound to ensure that the stipulated foreign capital had to be injected into the joint venture within the prescribed time. The whole process also involved wide discretionary powers of the authorities. The RMB¥766.55 million had to be paid to the Jiangxi Com. Dept. before the JV Co. could apply for transfer of the right to collect toll.
37. Ying further said that his major concern was to minimise the commercial risk of the investment of the 1st Defendants as the lack of any of these approvals could stop the joint venture. Therefore the oral agreement between the Plaintiffs and the 1st Defendants was that the RMB¥10 million of the consideration would only be payable within 180 days after the rights to operate the Highway and to collect toll for 25 years had been lawfully transferred to the JV Co. That would mean that the Plaintiffs had to procure the payment of RMB¥766.55 million to the Jiangxi Com. Dept. or the Highways Co. first and then obtained the toll collection right for the JV Co. before the 1st Defendants would be liable to pay them the remaining RMB¥10 million.
38. However, Ying said in the same affirmation that the Plaintiffs wanted to sell the 3rd Defendant's shares probably because they were unable or unwilling to invest the huge sum into the project or they feared that not all local approvals would be given and that would stop the project.
39. If Ying were right that the Plaintiffs were unable or unwilling to invest the huge some into the project, then they would not have agreed with the 1st Defendants on the terms as alleged by Ying. Those terms would require them to procure payment of the RMB¥766.55 million to the Jiangxi Com. Dept. before they could obtain the RMB¥10 million (and probably with reimbursement of the RMB¥766.55 million from the 1st Defendants). The RMB¥10 million constituted only 1.3% of RMB¥766.55 million and one wonders why the Plaintiffs would have agreed to such terms. If the Plaintiffs should have worried that they might not get all the central and/or local approvals, then there was even less reason for them to agree with the 1st Defendants in the terms as alleged by Ying. If they should fail to get all the approvals, the JV Co. would not obtain the toll collection right. They would then be unable to get the RMB¥10 million.
40. Ying further said that the oral agreement required its terms to be reduced into writing. Contrary to the evidence of the 1st named Plaintiff (“Wong”), Ying said that this draft dated 15 July 2002 was prepared by the Nevertheless, Ying admitted in cross-examination that this draft was indeed prepared by him and that was the 1st Agreement. Ying also regarded the 1st Agreement as a letter of intent as it was a skeleton agreement and a more detailed agreement might be signed at a later stage if necessary. But he confirmed that this initial agreement was also legally binding.
41. Regarding the 2nd Agreement which was drafted in traditional Chinese characters, Ying said that Wong had presented it to him in the afternoon of 16 July 2002 and told him that it was the advice of the Plaintiffs' Hong Kong lawyers that the 1st Agreement did not serve the purpose as the transaction would take place in Hong Kong. He was asked to sign the 2nd Agreement. He also referred to the differences between the 1st Agreement and the 2nd Agreement which have been highlighted above.
42. On the time for payment of the balance of the consideration, he further said that the necessary approval had not yet been given and the JV Co. had not been established. He also alleged that Wong had emphasised to him that if the 3rd Defendant could not obtain all the approvals for setting up the JV Co. and the right to operate and collect toll, the HK$10 million need not be paid.
43. If this was the case, Ying had not explained why he did not ask for these terms to be spelt out in full in the 1st or 2nd Agreement. It would have been easy to do so. In fact, he could have simply asked for the 2nd Agreement to state that the HK$10 million was only payable within six months after the toll collection right had been transferred to the JV Co. That was what he had alleged as a term of the oral agreement made on 15 July 2002. It would have been easy to express such a term in writing.
44. On the change of currency from RMB yuan to HK dollars, Ying said that Wong had advised him that since the 3rd Defendant was a Hong Kong company, the consideration had to be expressed in Hong Kong dollars even though the Plaintiffs would accept RMB¥12 million in full settlement of the consideration. If the consideration was really in RMB yuan but had to be expressed in HK dollars, they could have provided for a smaller figure in Hong Kong dollars which would be equivalent in value to RMB¥12 million, but that was not done.
45. Ying also said that the 2nd Agreement was only for the purpose of satisfying the Hong Kong lawyers and it was treated as supplemental in nature pursuance to clause 6 of the 1st Agreement. In case of conflict, he said the 1st Agreement would prevail. This assertion is difficult to accept because the 1st and 2nd Agreements made different provisions for the same matters. A careful reading of the 2nd Agreement shows that it was to supersede the 1st Agreement.
46. Regarding Ying's version of what Wong had allegedly told him, it was not supported by the subsequent correspondence. The correspondence in fact supported the Plaintiffs. If Ying was telling the truth, then the Plaintiffs must have reneged from what they had agreed when their solicitors wrote on 17 September 2002 and asked the 1st Defendants to pay the balance of HK$10 million on or before 15 January 2003. They made this demand by relying on the approval of the SPC on 15 July 2002. But Ying denied that this was the approval they had agreed. However, if the Plaintiffs should have reneged on their promise, Ying should have complained about it because it involved the time for payment of HK$10 million.
47. Instead of complaining against the Plaintiffs, the 1st Defendants' solicitors, after taking instructions on the approval day, only said on 19 September that the 1st Defendants would duly perform their obligations under the 2nd Agreement. They did not say that the six months would only start to run after all approvals were in place or after the right to collect toll had been transferred to the JV Co. Their reply impliedly concurred with the Plaintiffs that the approval day was 15 July 2002.
48. Ying tried to explain this away by saying in his affirmation that he had specifically asked his solicitors not to elaborate in the rely letter “in order to avoid any further unnecessary argument”. I find this explanation completely devoid of merit. The Plaintiffs were relying on the plain meaning of the wording of clause 3 of the 2nd Agreement. They made it plain that the deadline for payment was 15 January 2003. If they were wrong or their assertion was contrary to the true agreement, then the true agreement would not be the plain meaning of clause 3. If under the true agreement, the six months period had not yet started to count, it was of utmost importance for the 1st Defendants to point it out immediately. They should have done so in clear terms. They were then represented and advised by solicitors. If Ying was telling the truth, I cannot imagine any reasons for the 1st Defendants and their solicitors to have acted in the way they did. I also cannot comprehend what “further unnecessary argument” that Ying was trying to avoid. If there was any argument, it was an important one as it was on when the HK$10 million were payable. The argument, if there was one, should have been raised there and then and resolved as soon as possible. In fact, they had just resolved a dispute on the payment of deposit. They did so by exchange of letters on 12 September 2002.
49. However, the problem of the 1st Defendants' case does not stop here. On 16 January 2003, the Plaintiffs' solicitors accepted the 1st Defendants' reputation of the 2nd Agreement for want of payment of the HK$10 million. The 1st Defendants' solicitors, when replying on 20 January 2003, had obviously misunderstood the meaning of clause 3 of the 2nd Agreement. Clause 3 stipulated the payment deadline as six months from the approval by the SPC. But the 1st Defendants' solicitors said that the six months was from the transfer of the toll collection right to the JV Co. This interpretation error is gross because the meaning of clause 3 is plain.
50. Furthermore, despite their saying in the last paragraph that the 1st Defendants would pay within the time prescribed by clause 3 of the 2nd Agreement, they did not bother to state how the time was prescribed. If there was any oral agreement as alleged by Ying in his evidence, it had not found its way into writing yet. Since the interpretation error of the 1st Defendants' solicitors was plain and obvious, it did not escape the attention of the Plaintiffs' solicitors. They therefore wrote on 22 January 2003 as follows:
“We refer to your letter of January 20, 2003.
Your clients have clearly distorted the plain meaning of clause (3) which stipulates beyond any doubt that the time is to run from the date permission granted.”
51. The 1st Defendants' solicitors seemed to recognize their error, but they put forward yet another basis to defend the non-payment. They wrote on 23 January 2003:
“We refer to your letter yesterday. We are instructed that to date no permission referred to in Clause 3 of this Agreement has ever been granted. Our client is prepared to litigate on the interpretation of the said Clause. We are instructed to inform you that our clients reserve all their rights to claim against your clients for their wrongful exercise of rights under the Agreement.”
52. The new basis was not that there was no transfer of the toll collection right, it was the lack of any permission as referred to in clause 3 of the 2nd Agreement. But they did not say what approval from the SPC was required if the one dated 15 July 2002 was not the right one. They had not at that stage suggested that clause 3 had in fact contemplated other approvals from authorities other than the SPC. If they were still referring to an approval by the SPC, then there was no other approval that could have been contemplated apart from the one dated 15 July 2002. The Chinese legal opinions provided by both sides served to confirm this. So far the 1st Defendants had not ventilated any viable ground of defence for their failure to pay the HK$10 million.
53. Ying also alleged for the first time in his affirmation filed on 1 September 2003 that the 2nd Agreement was only a supplement to the 1st Agreement and the 1st Agreement was to prevail in case of conflict. That was also the first time when he alleged that the HK$10 million was only payable six months after the necessary approvals from various authorities for the establishment of the JV Co. and the transfer of toll collection right to the JV Co. had all been obtained. If these allegations were true, they should and would have been set forth in the letters of the 1st Defendants' solicitors in September 2002 or January 2003.
Ying's Chinese legal opinion
54. Ying also relied on a Chinese legal opinion prepared for him by a Chinese lawyer surname Yu. The lawyer said that the approval given by the SPC on 15 July 2002 only approved the feasibility of the joint venture. He said it did not approve the establishment of the JV Co. If any other authority should refuse to approve the setting up of the JV Co. or the transfer of the Highway, then the joint venture could not be established.
55. I think this interpretation of the scope of the approval is too narrow. The approval referred to the feasibility report which proposed the setting up of a Chinese foreign joint venture to operate the Highway and to collect toll along it. The report also provided details of the joint venture including the amount of foreign capital to be made available by the 3rd Defendant, the Chinese and English names of the joint venture company to be formed, the amount of its shares to be held by the joint venture partners and many other details of the proposed joint venture.
56. The SPC's approval specifically approved the go-ahead of this joint venture, the setting up of the JV Co., the foreign capital to be provided, the amount of shares of the JV Co. to be held by the joint venture partners, the period of the joint venture at 25 years and some other details. It may well be that other approvals from other authorities would be required before the JV Co. could be set up, but it does not mean that the SPC's approval did not approve the establishment of the JV Co. This was one of the approvals required.
57. Even assuming this part of the Chinese legal opinion were correct, it still does not alter the fact that under clause 3 of the 2nd Agreement, the six months had started to run from the date of this approval of the SPC. That was the bargain of the parties.
58. The Chinese Lawyer then interpreted clause 3 to impose the following prerequisites before the HK$10 million were payable. They were:
(1) Approval by the SPC;
(2) The said approval was for the transfer of toll collection right of the highway;
(3) The target of the transfer was the JV Co.; and
(4) Payment to be made six months after the satisfaction of the said conditions.
59. He argued that if clause 3 had intended the six months to run from the approval of the SPC, then it would not have been necessary to mention the transfer of toll collection right of the Highway to the JV Co. Alternatively, he said clause 3 could have simply stated that the HK$10 million would be due on or before 15 January 2003. Based on this interpretation and his arguments, he said clause 3 provided the HK$10 million to be payable within six months after the toll collection right had been transferred to the JV Co.
60. I do not agree with the interpretation and the arguments. Clause 3 no doubt mentioned about the transfer of the toll collection right of the Highway to the JV Co. This was simply a description of the approval to be given by the SPC. It was not a further condition that time would only run after the toll collection right had been transferred to the JV Co. Both the feasibility report and the SPC approval had referred to the JV Co. by name, though it had not been set up at the time when these documents were made. The SPS's approval surely referred to and approved what the joint venture partners intended to do and clause 3 referred to this approval specifically.
61. On the argument that the clause 3 could have simply stated 15 January 2003 as a deadline, I accept Wong's evidence that on 16 January 2002, he was still unaware that the SPC had already given the approval on 15 July 2002. He only learned about it ten odd days later. He therefore could not have stated 15 January 2003 in clause 3 as the payment deadline.
62. For the above reasons, I cannot see any basis for the interpretation and arguments put forward by the 1st Defendants' Chinese Lawyer. Such interpretation twisted the plain meaning of clause 3. I reject it.
Rejection of Ying's case on clause 3 of the 2nd Agreement
63. In the premises, I reject Ying's case that clause 3 of the 2nd Agreement did not represent the true agreement between the Plaintiffs and the 1st Defendants or that payment of HK$10 million and RMB¥100,000 (for the exchange difference of the deposit) were not due on 15 January 2003. I also reject his evidence of what Wong or the Plaintiffs had allegedly told and/or agreed with him on 15 and 16 September 2002 insofar as his evidence differed from Wong's evidence. I find that the Plaintiffs and the 1st Defendants had used the 2nd Agreement to supersede the 1st Agreement and there was no oral collateral agreement to the 2nd Agreement as alleged by Ying.
64. Since the HK$10 million and the RMB¥100,000 were not paid on or before 15 January 2003, the 1st Defendants had repudiated that the 2nd Agreement. The Plaintiffs were entitled to have the shares of the 3rd Defendant re-transferred to them. I also dismiss Ying's counterclaim for damages on the ground of the Plaintiffs' repudiation of the 1st and/or 2nd Agreement or for rescission of the 1st and/or 2nd Agreement and damages on the ground of misrepresentation. However, the matter does not end here.
The settlement Agreements and undertakings by Wong
65. After these proceedings have been commenced, the Plaintiffs issued a summons on 22 October 2003 seeking to appoint themselves as managers of the 3rd Defendant pending judgment in the proceedings. They made the application because the deadline for payment of the RMB¥766.55 million to the Jiangxi Com. Dept. had expired and there was only an extension of three to six months. They wanted to manage the 3rd defendant and to raise funds so as to save the joint venture.
66. Before the summons was heard, the parties met on 8, 9 and 10 November 2003 to discuss for a settlement of this litigation. They initially entered into a settlement agreement on 9 November 2003 (“the Initial Settlement Agreement”). Its certified English translation reads:
“Party A: Ying Shude, Chen Hailin
Party B: Wong Wai Keung, Yau Sui Ching
[must obtain order concerning Fung Qinli on 24 November]
Both Party A and Party B have legal dispute in respect of the transfer of the shares of Hong Kong Uni-Honest Limited. The following settlement was reached after a number of negotiations between both parties:
1. Party B agrees to withdraw the proceeding.
2. Party A and Party B own 80% and 20% respectively of Hong Kong Uni-Honest Limited. After “Fung Qinlin” Order is made, Party A pays Party B Reminbi 5,000,000 dollars (five million). Such a sum is to be paid by Party A with Reminbi cashier order to Gallant Y.T. Ho & Co. before 24th November 2003. Party A will be responsible for the continuation of implementation of the project and Party B will render their cooperation.
3. If Party A fails to complete the transfer of the operation right of the Wen Hou Highway Project to the joint venture company within 3 months after the Court order concerning “Fung Qinli” false shareholder has been made, Party A will unconditionally pay Reminbi 5,000,000 (five million) to Party B within the 4th month without being affected by the cooperation of the Chinese party. At the same time the respective shares of parties A and B will remain unchanged.
4. Parties A and B are entitled to a pre-emption right under the same conditions in the event of transfer of shares of the other party.
5. The final terms of this settlement agreement are to be prepared by the parties' solicitors after negotiation; and documents will be prepared in accordance with the above principles and will become effective after being signed by Parties A and B.”
67. However, they continued to negotiate and produced another settlement agreement dated 10 November 2003 (“the Final Agreement”). The descriptions of the parties were reversed. Its certified English translation reads:
“Party A: Wong Wai Keung, Yau Sui Ching
Party B: Ying Shude, Chen Hailin
Legal dispute occurred between Party A and Party B in respect of the transfer of shares of Hong Kong Uni-Honest Limited. The following terms of settlement have been accepted after a number of negotiations between both parties.
1. Party A is responsible for the withdrawal of the two proceedings against Party B. After Party A's withdrawal, Party A and Party B will go to the relevant department to deal with the formalities of shareholders of Hong Kong Uni-Honest Limited. The shareholding percentage of Party A and Party B of Uni-Honest is 80% for Party A and 20% for Party B. Party A continue to be responsible for the overall implementation of the project. Party B render their cooperation. Both parties share risks.
2. If Party A fails to complete the transfer of the operation right of Wen Hou Highway Project to the joint venture company within 3 months after the Court order concerning “Fung Qinli” false shareholder has been made, Party A will unconditionally pay Party B Reminbi five million dollars within the 4th month without being affected by the cooperation of the Chinese party. At the same time the respective shares of Parties A and B will remain unchanged.
3. If Party A complete the transfer of the operation right of the Wen Hou Highway Project to the joint venture company within 3 months after the Court order concerning “Fung Qinlin” false shareholder has been made, Party B will pay Party A Reminbi four hundred thousand dollars. If Party A is unable to complete it before the said deadline, apart from making payment of Reminbi five million dollars to Party B under Clause 2 above, Party B will not be required to pay further sums to Party A.
4. Parties A and B are entitled to a pre-emption right under the same conditions in the event of transfer of shares of the other party.
5. The final terms of this settlement agreement are to be prepared by the parties' solicitors after negotiation; and documents will be prepared in accordance with the above principles and will become effective after being signed by Parties A and B.”
68. The terms of the Final Agreement show that it was intended to be an agreement made between both Plaintiffs and both 1st Defendants. However, Chen was not present in the negotiation. Wong said in evidence that Ying was concerned that Chen might dispute Ying's authority to represent Chen. To allay Ying's concern, Wong gave Ying two undertakings both dated 10 November 2003. The certified English translations are as follows:
“UNDERTAKING
To: Mr. Ying Shude
Upon signing the Settlement Agreement between you and I, I shall take up the responsibility of dealing with the matter regarding the 30% shareholding of Mr. Chen Hailin, the shareholder of Hong Kong Uni-Honest Limited. No matter how it is dealt with, I hereby undertake that Mr. Ying Shude will ultimately maintain 20% shareholding of Hong Kong Uni-Honest Limited. If Mr. Chen Hailin continues to claim 30% shareholding of Hong Kong Uni-Honest Limited, I shall be responsible for transferring such shares to Mr. Chen Hailin.”
“UNDERTAKING
To: Mr. Ying Shude
If Mr. Chen Hailin does not agree to Mr Ying Shude signing the Settlement Agreement dated 10th November 2003 on behalf of Mr. Chen Hailin, Mr. Ying Shude will not bear any responsibility, and the proceedings brought by the Plaintiff, Mr. Wong Wai Keung against Mr. Ying Shude shall be dismissed, and [I] hereby make this undertaking.”
Further negotiation
69. On 11 November, the 1st Defendants' solicitors enclosed a draft consent order which was based on the terms of the Final Agreement for the consideration of the Plaintiffs' solicitors. It was in the form of a Tomlin Order. The schedule of this draft order reads:
“THE SCHEDULE
(a) The Plaintiffs and the 1st Defendants shall jointly declare, and shall jointly write to whom it may concern if necessary, that the Plaintiffs shall hold 80% of the issued shares in Uni-Honest Limited (‘the Company'), and that the 1st Defendants shall hold the remaining 20% of the issued shares.
(b) The Plaintiffs shall at its own costs file a Notice of Discontinuance against the 1st Defendants.
(c) The Plaintiffs shall proceed with the action herein against the 2nd Defendant and obtain an Order in their favour against the 2nd Defendant in terms of the Amended Originating Summons herein (‘the Order').
(d) If the Plaintiffs fail to obtain the Order, or if the Plaintiffs fail to transfer the right of operation of the subject highway to the joint venture company incorporated under the Joint Venture Agreement dated 3 September 2002 (‘the Transfer') within 3 months from the date of the Order, then the Plaintiffs shall pay to the 1st Defendants a sum of RMB5,000,000 as compensation. The said sum shall be payable within 4 months from the date of the Order, or payable immediately after the Court has made a ruling that the Order will not be granted, whichever is the later.
(e) For the avoidance of doubt, the respective shareholding of the Plaintiffs and the 1st Defendants in the Company shall remain unchanged regardless of the matters mentioned in paragraph (d) above.
(f) If the Plaintiffs successfully complete the transfer within the prescribed time set out in paragraph (d) above, the 1st Defendants shall pay to the Plaintiffs a sum of RMB400,000.
(g) For the avoidance of doubt, if the Plaintiffs fail to complete the Transfer within the said prescribed time, but successfully complete the Transfer thereafter, the Plaintiffs will still be liable to pay the compensation referred to in paragraph (d) above, but the 1st Defendants will not be liable to pay the said sum referred to in paragraph (e) above.
(h) Each party shall bear its own costs.”
70. On 12 November 2003, the 1st Defendants' solicitors wrote again and specifically put on record that a binding settlement agreement had been signed between the parties. They also complained that despite the binding agreement, the Plaintiffs still had not discontinued the proceedings, vacated the hearing scheduled on 24 November 2003 or replied to their letters.
71. On the same day, the Plaintiffs' solicitors faxed their draft consent Tomlin Order to the 1st Defendants' solicitors for consideration. The schedule of this draft order reads:
“THE SCHEDULE
(a) The Plaintiffs and the 1st Defendants shall jointly declare, and shall jointly write to whom it may concern if necessary, that the Plaintiffs shall hold 80% of the issued shares in Uni-Honest Limited (‘the Company') and that the 1st Defendants shall hold the remaining 20% of the issued shares. To this end, the Plaintiffs shall procure and cause:
(i) 2,000 shares of the issued shares in the Company to be transferred from the Plaintiffs to the 1st Defendants; and
(ii) such transfer shall be effectively completed within 7 days from the date hereof;
(b) Subject to the completion of paragraph (a) above, the Plaintiffs shall, and the 1st Defendants shall endorse the necessary application thereof pursuant to Order 21 rule 3 of the Rules of the High Court (Cap. 4) file a Notice of Discontinuance against the 1st Defendants with no order as to costs.
(c) The Plaintiffs shall proceed with the action herein against the 2nd Defendant and obtain an Order in their favour against the 2nd Defendant in terms of the Amended Originating Summons herein.
(d) After completion of (a) above if the Plaintiffs fail to transfer the toll right of the subject highway to the joint venture company incorporated under the Joint Venture Agreement dated 3rd September 2002 (‘the Transfer') within 3 months from the date of the said completion, then the Plaintiffs shall pay to the 1st Defendants a sum of RMB5,000,000 as compensation. The said sum shall be payable within 4 months from the date of the said completion.
(e) For the avoidance of doubt, the respective shareholding of the Plaintiffs and the 1st Defendants in the Company shall remain unchanged regardless of the matters mentioned in paragraph (d) above.
(f) If the Plaintiffs successfully complete the Transfer within the prescribed time set out in paragraph (d) above, the 1st Defendants shall pay to the Plaintiffs a sum RMB400,000. The said sum shall be payable within 30 days thereafter.
(g) For the avoidance of doubt, if the Plaintiffs fail to complete the Transfer within the said prescribed time, but successfully complete the Transfer thereafter, the Plaintiffs will still be liable to pay the compensation referred to in paragraph (d) above, but the 1st Defendants will not be liable to pay the said sum referred to in paragraph (f).”
72. On 19 November 2003, the 1st Defendants' solicitors wrote again as follows:
“We refer to our telephone conversation (Leung/Lee) on 19 November 2003.
We write to confirm that the parties have signed a settlement agreement and a letter of undertaking (copies enclosed). For the avoidance of doubt, we confirm that the said documents are valid and legally binding, unless and until they are varied in writing by the parties by consent.
We enclose a draft consent summons for your approval. This is drafted on the basis that any party is at liberty to apply to the Court to restore the hearing of the main action and/or your application for appointment of manager, in which case the parties shall be at liberty to file further affirmation according to a new schedule to be agreed. Please let us know if it is in order.”
73. The consent summons as enclosed was for staying the proceedings against the 1st Defendants and adjourning sine die the Plaintiffs' summons for appointment of managers. The Plaintiffs' solicitors replied on the same day as follows:
“We refer to your letter of even date and the enclosed settlement agreement and letter of undertaking both dated 10th November 2003.
We concur with your view and are so instructed that the documents enclosed are valid and legally binding on our respective clients. It is only a matter of executing a Consent Order in terms of your draft or our draft.
As spoken between your Mr Walter Lee and our Mr Desmund Leung this afternoon, we expect the Consent Order to be executed by this Friday, as we see no reason for delay especially when both drafts have been reviewed and your Mr Walter Lee indicated our draft is perferrable.
We also put on record that we do not agree the basis you suggested in the second paragraph of your said letter if the Consent Summons is executed.
We expect your confirmation as to which draft Consent Order is to be executed by today before 5:00 p.m. as you would appreciate Counsel on our side are expecting the Brief for 24th's appearance.”
I think the reference in this letter to the second paragraph of the 1st Defendants' letter was a mistake. It should have been the third paragraph of that letter.
74. Later on the same day, the Plaintiffs' solicitors wrote again in the following terms:
“We refer to our first letter and the telephone conversation between your Mr Walter Lee and our Mr Desmund Leung at about 5:45 p.m.
We were told over the telephone that you have not yet received instruction to proceed with the execution of the Consent Order despite it was openly agreed by all parties that the settlement agreement is valid and legally binding.
The steps now being taken by your firm and your clients are very much in conflict with the spirit contemplated in the settlement agreement.
Unless we have your confirmation by tomorrow not later than 11:00 a.m. that your firm are prepared to execute the Consent Order, whether per your draft or our draft, by 21st November 2003 before close of office, we shall dispatch Briefs to Counsel for hearing on 27th November 2003 in order to protect our client's interest.”
75. The 1st Defendants' solicitors disagreed and wrote a second letter on 19th November as follows:
“We refer to your letter of today's date. As you mentioned in your letter, the settlement agreement and the letter of undertaking both dated 10 November 2003 are valid and legally binding (unless and until they are varied by consent). Under Clause 1 of the settlement agreement, the Plaintiffs shall withdraw and discontinue ‘the two applications', i.e. both the Originating Summons and your application for appointment of manager. If you fail to vacate the hearing on 24 November 2003 and discontinue the main action, your clients shall be in breach of the settlement agreement.
It is not provided in the settlement agreement that the matter must be dealt with by way of a Tomlin Order. In any event, the Tomlin Order drafted by you does not accurately reflect the provisions of the settlement agreement and the letter of undertaking. In order to save time and costs, our client will seriously consider dealing with the matter by way of a Tomlin Order instead of a deed of settlement, but unless and until the wording of the proposed Tomlin Order can be agreed upon, the settlement agreement and the letter of undertaking are still legally binding and the parties shall comply with the provisions contained therein. Accordingly, please proceed to vacate the hearing on 24 November 2003 forthwith and discontinue the action against the 1st Defendants. Alternatively, all further proceedings shall be stayed, as proposed in the draft consent summons attached to our 1st letter of today's date. If your clients fail to do so, we shall have no alternative but to instruct Counsel to attend the hearing, and produce the settlement agreement and the letter of undertaking to the Court. Needless to say, we will reserve our right to seek costs against your clients.”
76. The 1st Defendants' solicitors were thus demanding the performance of part of clause 1 of the Final Agreement ahead of the ironing out of the deed of settlement or Tomlin Order. The Plaintiffs' solicitors disagreed and replied on 20 November 2003 as follows:
“We refer to your 2nd letter of 19th November 2003 which was faxed to our office at 19:04 hours.
We would like to draw your attention to clause (5) of the settlement agreement and it is obvious that your clients have no intention of carrying the settlement into effect despite we indicated your draft Consent Order is acceptable for execution regardless whether you are prepared to re-engross a fresh copy to reflect the minor amendments suggested by us.
We now enclose herewith copy of Consent Order per your draft without amendments and that of ours which you indicated is preferable. Both of them have been endorsed by us and it is up to you to endorse on whatever version your prefer. If we could dispose of this in the afternoon, there is a good chance we could hold the Briefs to Counsel.
In the event you prefer to come up with a third version which in your view would better reflect the intention of the parties, you could by all means prepare a draft and we could deal with this on morning of 24th November 2003. Our client would be most accommodating as long as the basic elements are there.
Just to clear off any doubts or illusions, our clients shall not vary any of the terms of settlement agreement.”
77. The Plaintiffs' solicitors were thus eager to have a final resolution of the dispute pursuant to clause 5 of the Final Agreement. In the end nothing was signed between the parties. One Mr Lee, a solicitor of the 1st Defendant's solicitors, said in an affidavit filed on 21 November 2003 that the 1stDefendants did not accept the draft Tomlin Orders because their terms would vary the terms of the Final Agreement and Wong's undertakings.
78. This was made plain by a letter of 24 November 2003 wherein Chen demanded Wong to transfer 30% of the 3rd Defendant's shares to him. If Chen was entitled to the 30% shares, the total shareholding of the 1st Defendants in the 3rd Defendant would amount to 50%. But the draft Tomlin Orders prepared by both sides only gave the 1st Defendants together 20% of the shares. That was the alleged difference between the terms of the Final Agreement and the undertakings on the one hand and the draft Tomlin Orders on the other as alluded to by Mr. Lee.
The dispute over the Final Agreement
79. Ying pleaded in his re-re-re-amended defence that the solicitors on both sides have stated in the correspondence that the Final Agreement and the two undertakings were valid and legally binding on the Plaintiffs and the 1st Defendants unless and until varied by consent. The Plaintiffs should therefore vacate the hearing on 24 November 2003 and discontinue the proceedings which they had not done. However, judgment was entered against the 2nd Defendant on 24 November 2003. Ying thus pleaded that under the Final Agreement, the time for the Plaintiffs to procure the transfer of the toll collection right to the JV Co. had started to run from 24 November, 2003. Since the Plaintiffs had failed to procure the transfer on or before 24 February 2004, they were liable to paythe 1st Defendants RMB¥5 million pursuant to the Final Agreement. Ying also said in evidence that the Final Agreement was to take effect immediately upon signing.
80. The Plaintiffs in their reply pleaded that the Final Agreement only bound the parties to use their best endeavours to negotiate for a final agreement which was to be prepared by their solicitors. This agreement was to give effect to the principal terms in the Final Agreement. If no such agreement could be agreed, there would not be any binding settlement agreement between the parties.
Did the Final Agreement take effect when signed
81. The issue between the Plaintiffs and Ying is whether the terms in the Final Agreement were immediately binding upon both Plaintiffs and both 1st Defendants when it was signed or it only bound the parties to exercise their best endeavours to negotiate for a settlement agreement based on the principal terms therein.
82. Ying did not explain Wong gave him the two undertakings. Wong's evidence was that in the Initial Settlement Agreement, Ying and Chen were to have 80% of the shares of the 3rd Defendant. However in the Final Agreement, Ying and Chen would only get 20% of those shares. It was a major change. When the Plaintiffs and Ying agreed on the Final Agreement, Chen had not yet arrived. Ying said he could not represent Chen in the Final Agreement. Wong then told Ying that he would deal with Chen. Wong also gave Ying the two undertakings. I accept this evidence of Wong as there was no other reason for Wong to have given Ying the two undertakings. These two undertakings were given by Wong to protect Ying's interest at Wong's expense in case Chen should deny Ying's authority to act for him. They were not given or addressed to Chen.
83. The terms of the Final Agreement showed that it was supposed to bind both Plaintiffs and both 1st Defendants. The exchange of draft consent Tomlin Orders and the re-re-re-amended defence confirmed this to be the case. However, before Chen had confirmed his acceptance of the Final Agreement, he could argue that he was not bound by it.
84. The re-re-re-amended defence however plead that the Final Agreement had been varied by the two undertakings, but that could not have been the case. If the Final Agreement was binding on the four of them, it could not have been varied by the undertaking given by Wong or the Plaintiffs to Ying alone. It could only have been varied by the consent of the four of them. If it was not yet binding on Chen but the intention was that it should bind him too, then it would only become effective when Chen agreed to be bound by it. The undertakings given to Ying alone could not have varied it before Chen had confirmed his acceptance of it. So it cannot be argued that it had been varied by the undertakings to the effect that Ying would have 20% of the 3rd Defendant's shares and Chen would have 30%.
85. I think the undertakings only provided that if Chen should refuse to accept the Final Agreement, Ying in the end would still get 20% of the 3rd Defendant's shares all for himself. The Plaintiffs would still have to withdraw the proceedings against Ying, but the other terms would require re-negotiation. For clause 2, there would have to be re-negotiation on the amount that the Plaintiffs should pay Ying if they should fail to procure the transfer of the toll collection right within three months. Clause 3 would also have to be renegotiated as it originally required the 1st Defendants together to pay RMB¥400,000 to the Plaintiffs. Without Chen, this clause cannot work. The pre-emption right in clause 4 has also to be renegotiated.
86. If Chen should accept the Final Agreement, then Chen and Ying would together obtain 20% of the shares of the 3rd Defendant. The proceedings would have to be withdrawn in relation to both of them.
87. The final terms would therefore depend on the attitude of Chen. It is therefore clear that the Final Agreement did not take effect upon its signing by the Plaintiffs and Ying. The existence of the two undertakings highlighted the uncertainty pending the confirmation by Chen of his position. I reject Ying's evidence on this.
88. Chen did confirm that he was bound by the Final Agreement. He did so through the 1st Defendants' solicitors in their letters of 11 and 12 November and the 1st letter of 19 November. These letters made it plain that Chen also subscribed to the Final Agreement. There was a clear indication of his confirmation of Ying's authority to act for him or his rectification of Ying's agency. That also rendered Wong's two undertakings spent.
89. After Chen had subscribed to the Final Agreement, there was no question that he could demand any share of the 3rd Defendant from Wong in addition to the 20% that he and Ying would share. As soon as he subscribed to the Final Agreement, it became binding on the four of them. But on 24 November 2003, he demanded Wong to transfer to him 30% of the 3rd Defendant's shares purportedly pursuant to Wong's undertaking to Ying. This demand was of course made on a wrong basis as the undertakings were not given to him.
90. I would also discuss a further argument of the plaintiff on the effect of the undertakings. The Plaintiffs argued that the undertakings were only given by Wong, hence, the 2nd named Plaintiff (“Yau”) would not be affected by them. I do not agree with this argument. The negotiation for the Final Agreement was done by Wong on behalf of the Plaintiffs. Yau was present throughout. The intent of the undertakings was to preserve some of the principles in the Final Agreement for further negotiation between the Plaintiffs and Ying if Chen should turn his back on the Final Agreement. I therefore hold that Yau is also bound by the two undertakings save and except that she would not be required to transfer her own shares in the 3rd defendant to Chen. The terms of the first undertaking showed that Wong had agreed to assume that task personally.
Dispute over the Final Agreement
91. However, there was the further question of whether the Final Agreement was binding even without complying with clause 5 or it only obliged the parties to exercise their best endeavours to negotiate for a final agreement to be prepared by their solicitors. It is instructive to look at the 1st Agreement which was drafted by Ying and to compare it with the Final Agreement.
92. Clauses 6 and 7 of the 1st agreement read as follows:
“Clause 6: Any matter which is not fully dealt with by this Agreement shall be resolved by friendly negotiation between Party A and Party B. All supplemental documents signed in the course of the performance of this agreement shall have the same legal effect as this Agreement.
Clause 7: This Agreement shall become effective on the date of signing by Party A and Party B. This Agreement is signed in six copies. Each party keeps two copies and all have the same legal effect.”
93. The Final Agreement did not have these clauses. It instead has a clause 5 which provided as follows:
“5. The final terms of this settlement agreement are to be prepared by the parties' solicitors after negotiation; and documents will be prepared in accordance with the above principles and will become effective after being signed by Parties A and B.”
94. The background leading to the making of the Final Agreement with clause 5 was the making of the 1st and 2nd Agreements. The 2nd Agreement was drafted by the Plaintiffs' solicitors but not signed before any solicitor. Wong said in evidence that he and Ying did not trust each other and the Final Agreement had to be confirmed by solicitors before it would be effective. The terms in the Final Agreement were for the reference of their solicitors who could follow or vary those terms.
95. Wong's evidence is supported by the wording of clause 5 which refers to a document to be prepared by solicitors after they had negotiated in accordance with the principles in the Final Agreement and the terms in that document would be the final terms. The reference to the terms of the Final Agreement as “principles” for “negotiation” between solicitors and the result of negotiation will be the “final terms” are in line with Wong's evidence. Clause 5 also provided that the document containing the final terms would become effective after being signed by the parties.
96. Furthermore, the letter of the Plaintiffs' solicitors dated 20 November 2003 ended by saying that the Plaintiffs “shall not vary any of the terms of the settlement agreement”. This shows an understanding that the terms in the Final Agreement were not immutable but could be altered.
97. Ying, however, said that the Final Agreement took immediate effect upon signing. He further said that he was worried that this document might be invalid. He thus asked the lawyers to just put it into the right format.
98. If that was the case, they would not have provided for “negotiation” to be conducted by the solicitors to reach the “final terms” and that the document containing the final terms would become effective after signing.
99. Ying further tried to make a distinction between Hong Kong law and the law of the Mainland. According to him a preliminary agreement in the Mainland called “協議”, which simply means agreement in English, is usually followed by a more detailed agreement. However, both the preliminary agreement and the detail agreement have legal effect. He said he made the 1st Agreement in accordance with the Mainland's law. However, when he made the Initial and Final Agreements, he did so according to the law of Hong Kong. Even if he were right on this, I still do not see how the purported difference in laws can feature in this case. The laws in Hong Kong do not prevent parties from making supplemental agreements to supplement or vary their original agreements.
100. On the proper approach to this task of construction, I would refer to paragraph 3-56 of The Law and Practice of Compromise, 5th edition:
“3-56 Problems occasionally arise when the parties have compromised their dispute but speak or write in terms which contemplate the drawing up of some further document setting the seal, as it were, on their agreement. The question arises whether the compromise is immediately binding or not binding until such document is executed. The question has been formulated thus:
‘… it is a question of construction whether the execution of the further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case there is no enforceable contract either because the condition is unfulfilled or because the law does not recognise a contract to enter into a contract. In the latter case there is a binding contract and the reference to the more formal document may be ignored'. (Von Hatzfeldt-Wildenburg v Alexander [1912] 1 Ch 284 at 288, per Parker J)
Since the question is one of construction with a view to ascertaining the intention of the parties, it is impossible to describe any particular situation which arises in the context of compromise as being in one category or the other. It is the significance attached by the parties to the future act which is the crucial factor. That is determined by construing the agreement as a whole.”
101. The question is one of construction with the view to ascertaining the intention of the parties. I would also refer to the statement of Lord Hoffman in Jumbo King Ltd v Faithful Properties Ltd & Anors [1999] 3 HKLRD 757 at 773F to 774B.
102. In the light of the background and the terms of the Final Agreement in particular those in clause 5, I find that after Chen had accepted the Final Agreement, the parties were only bound to negotiate in good faith through their solicitors in accordance with the principles in clause 1 to 4. If the negotiation should bear fruit, the final terms would be embodied in another document which would take effect upon signing. The process of negotiation leading to the signing of the final document was not a mere formality.
103. If the parties should have intended the terms of the Final Agreement to take immediate effect rather than to serve as principles for further negotiation, they could have adopted the wording of clause 7 of the 1st Agreement for clause 5 of the Final Agreement. If they should have intended this Agreement to take immediate effect pending the rendering of the same into a proper format by solicitors, they could also have adopted both clauses 6 and 7 of the 1st Agreement. The wording in the existing clause 5 is contrary to such intension. I accept Wong's evidence as his evidence is more reasonable in the light of the background and the terms of the Final Agreement. I reject Ying's evidence.
104. I also deal with a further point raised by the Plaintiffs in counsel's closing submissions. It was argued that since Wong and Ying had different understandings on the Final Agreement regarding their respective obligations to contribute to the RMB¥766.55 million capital, this Agreement was uncertain and not binding. I do not accept this argument. The meaning and effect of this Agreement were clear and the parties were obliged to negotiate in good faith in accordance with the principles therein. The fact that the parties had different subjective understandings of it could not have changed its objective meaning and effect.
Repudiation of the Final Agreement by the 1st Defendants
105. Despite the confirmation by Chen through the 1st Defendants' solicitors on 11, 12 and 19 November 2003 that the Final Agreement was binding on him and Ying, their solicitors in the 2nd letter of 19 November refused to sign either of the draft Tomlin Orders. They had previously shown preference for the one prepared by the Plaintiffs' solicitors. They instead only demanded the Plaintiffs to withdraw and discontinue the proceedings. The signing of either draft Tomlin Order would have stopped the proceedings as well, but the 1st Defendants did not favour the terms in the schedules of the drafts.
106. Their attitude was made plain by the affidavit of Mr Lee filed on 21 November and the demand letter of 24 November 2003. Mr Lee said that the 1st Defendants did not accept the draft Tomlin Orders produced by both sides as an order made according to either of them would vary the terms in the Final Agreement and the two undertakings. However, Mr Lee was not aware that the undertakings were only given to Ying and had in any event become spent upon Chen's acceptance of the Final Agreement.
107. In the letter of 24 November 2003, Chen demanded 30% of the 3rd Defendant's shares. This attitude was very much different from that as shown in the letter dated 11 November 2003 which enclosed the 1st Defendants' draft Tomlin Order. The terms in the schedule of that draft reflected the terms of the Final Agreement closely. There was thus a change in the 1st Defendants' attitude since the 2nd letter of 19 November by their solicitors.
108. From then onwards, the 1st Defendants had no intention of abiding by the Final Agreement and to negotiate in good faith for the final settlement terms. They only demanded the discontinuance of the proceedings and the withdrawal of the Plaintiffs' application for appointment of managers. However before the signing of the documents containing the final terms, the Plaintiffs were not obliged to do so.
109. Furthermore, even if the Final Agreement was binding without further documentation, it would be all the terms therein that would be binding and not just part of clause 1. The 1st Defendants were not entitled simply to demand the Plaintiffs to withdraw the proceedings and not to honour the rest of the terms.
110. The 1st Defendants' failure to negotiate in accordance with clause 5 and their refusal to sign either of the Tomlin Orders amounted to a repudiation of the Final Agreement. The repudiation can be clearly comprehended from the affidavit of Mr Lee which was filed and served on 21 November on their behalf.
Election of remedy by the Plaintiffs
111. The Plaintiffs accepted the repudiation of the 1st Defendants when they chose to go ahead with their application for appointment of managers and to proceed with these proceedings. Their decision to go ahead with the application and these proceedings also amounted to their election of remedy upon acceptance of the 1st Defendants' repudiation of the Final Agreement (see Lam Fung Ying v Ho Tung Shing [1993] 2 HKC 436 at 449G-450D). The other remedy open to them was to insist on negotiating pursuant to clause 5 of the Final Agreement. However if the 1st Defendants did not cooperate, there was little point for the Plaintiffs to continue to insist. In the premises neither the 1st Defendants nor Ying can defend the action by relying on the Final Agreement.
112. Since I have already held that the 1st Defendants had breached the 2nd Agreement, the Plaintiffs were therefore at liberty to have the shares of the 3rd Defendant re-transferred pursuant to clause 4 thereof.
Forfeiture of deposit
113. On the forfeiture of the RMB¥2 million deposit by the Plaintiffs, Ying pleaded in his re-re-re-amended defence that the forfeiture was a penalty as the transaction was over an interest in land and the sum exceeded the usual 10%. It was in fact just below 16% of the total consideration of HK$12 million.
114. The Plaintiffs argued against this in two ways. They argued that the forfeiture was not a penalty. The further argued that there was no forfeiture as clause 4 of 2nd Agreement was a condition subsequent or an option to terminate.
115. I deal with the second argument first. The first point to note is the lack of pleading for this point in the reply. It is also contrary to the express pleading of forfeiture in the statement of claim. In any case if clause 4 is properly construed, it merely meant that if the 1st Defendants should repudiate the 2nd Agreement in the particular way as stated therein, the Plaintiffs could accept that repudiation and put an end to the 2nd Agreement. It was not a stipulation of an event which would automatically terminate the 2nd Agreement or would give an option to either party to terminate it. It was a particular type of repudiation which, because of its importance, the parties had found it necessary to stipulate the consequence. The consequence as stipulated was an obvious one which could have been invoked by the Plaintiffs as a matter of law without any express stipulation. I do not think the Plaintiffs' second argument has any merit.
116. On the 1st Agreement, the Plaintiffs rely on Polyset Ltd v Panhandat [2002] 3 HKLRD 319. The majority of the CFA in that case took the view that a deposit should be a sum “reasonable as earnest money” and it is not the same as a “genuine pre-estimate of loss”. If the amount should exceed the conventional 10% of the total consideration, forfeiture would only be permitted if the party seeking to forfeit could justify it with some exceptional circumstances.
117. Such exceptional circumstance must relate to a true deposit's purposes as an earnest of performance and as compensation for the vendor's withdrawal of his asset from the property market pending completion, providing an objective justification for the higher sum. A vendor may also legitimately demand a larger quid pro quo for keeping his property off the market for a prolonged period though a lengthy completion cannot justify a larger percentage by way of an earnest of performance.
118. When the 2nd Agreement was made, the parties knew that the completion would be at least six months away. The news of the approval by the SPC on 15 July 2002 had not reached the Plaintiffs. Upon receipt of the deposit, the Plaintiffs had to transfer all the shares of the 3rd Defendant to the 1st Defendants. That amounted to handing the 3rd Defendant over to the 1st Defendants for them to operate pending completion. This was in fact what happened after the shares were transferred to the 1st Defendants on 19 July 2002. Ying had on behalf of the 3rd Defendant entered into the New JV Agreement and the JV Co. Regulation Agreement with the Highways Co. The Plaintiffs had not only withdrawn the property from the market, they had transferred the property to the 1st Defendants pending completion. After the transfer, they had no control over the 3rd Defendant. That certainly increased their risk of loss.
119. I accept that these are exceptional circumstances that would justify a larger deposit of 16% of the total consideration. I hold that the forfeiture of this deposit did not amount to a penalty.
Judgment
120. I therefore declare that the 1st Defendants have breached the 2nd Agreement by failing to pay the Plaintiffs HK$10 million and RMB¥100,000 on or before 15th January 2003 pursuant to clause 3 of the 2nd Agreement. I also declare that the Plaintiffs were entitled to have all the 3rd Defendant's shares re-transferred to them pursuant to clause 4 of the 2nd Agreement and these shares had already been lawfully re-transferred to them on 16 January 2003. I further declare that the 1st Defendants have ceased to be the directors of the 3rd Defendant since 16th January 2003. I think these declarations are enough for the Plaintiffs to confirm their positions as shareholders of the 3rd Defendant and to control it. I do not propose to grant any injunction against the 1st Defendants as I do not think it necessary to do so. The Plaintiffs are not claiming any damages. They are content with the re-transfer of the shares and the forfeiture of the RMB¥2 million deposit. I therefore make no order on damages. I also note in passing that the joint venture had failed because the Plaintiffs could not raise the RMB¥766.55 million capital in time.
121. I also dismiss the rest of Ying's re-re-re-amended counterclaim.
122. Though Chen was not represented and did not take part in the trial, he as the 2nd named 1st Defendant has made a counterclaim together with Ying. That counterclaim was amended on 1 December 2003 and has not been abandoned.
123. Ying on 23 June 2005 re-amended this counterclaim in his own name and it became Ying's re-amended counterclaim which was re-re-amended on 12 July 2005 and further re-amended on 5 October 2005. The amended counterclaim dated 1 December 2003 to which Chen is a party is still there. I therefore dismiss this amended counterclaim of Chen as well.
124. I also make a costs order nisi that the 1st Defendants do pay the Plaintiffs the costs of the action and the counterclaim up to 22 June 2005 and Ying do pay the Plaintiffs the rest of the costs of the action and the counterclaim from 23 June 2005 onwards.
Conduct unbecoming
125. Finally, I would make an observation on the conduct of Ying. The joint venture was a Chinese-Foreign Joint Venture and the SPC, when giving approval to it, made it clear that the foreign capital should not be sourced from the Mainland. Ying had however arranged a syndicated loan of RMB¥700 million from the Head Office, Hebei Branch and Jiangxi Branch of the China Industrial Bank to pay for this foreign capital. This loan was approved on 10 January 2004 though it was eventually not used. The conduct of Ying was contrary to the condition of the SPC's approval. He was asked about this in his oral evidence. He tried to justify this by saying that such infringement conduct was very common in the Mainland. Be that as it may, Ying is a member of the Shanghai Political Consultative Committee. Such conduct is unbecoming of such an office and not expected from him.
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(L. Chan)
Deputy High Court Judge |
Mr Wallace Cheung, instructed by Messrs Philip T F Wong & Co., for the Plaintiffs
Mr Andrew Mak, instructed by Messrs Gallant Y. T. Ho. & Co., for the 1st Defendant and 3rd Defendant
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