GOAL UPWARD INVESTMENT LTD v. OSMAN MOHAMMED ARAB AND ANOTHER

HCA 1355/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1355 OF 2016

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DECISION

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Introduction

1. The defendants are the court‑appointed liquidators of Golden Shield Holdings (Industrial) Limited (“the Company”), a listed company in Hong Kong.  The Company was wound up on 11 May 2015.  The plaintiff is a company incorporated in Seychelles.

2. Trading in the shares of the Company was suspended from1 April 2014 and the Stock Exchange has stated that it will determine whether to place the Company in the third delisting stage.

3. The defendants and the plaintiff entered into an exclusivity agreement on 14 April 2016 (“the Agreement”), whereby the plaintiff was given an exclusive right for a period of six months, from 14 April to13 October 2016, to negotiate with the defendants a restructuringagreement for the Company.

4. By notice, dated 15 May 2016 (“the Notice”), the defendants terminated the Agreement pursuant to its clause 8.2.

5. The plaintiff claims that the termination was unlawful and, on 23 May 2016, issued a Writ and Statement of Claim, claiming: (1) a declaration that the Notice and the purported termination are null and void; (2) adeclaration that the Agreement is still on foot and binding on the defendants; (3) specific performance of the Agreement; and (4) damages.

6. By summons, dated 1 June 2016, the plaintiff sought:

(1)  an interlocutory injunction that, pending further order or trial and prior to 13 October 2016, each defendant be restrained, whether by himself, herself or themselves, his, her or their servant(s), agent(s), director(s), officer(s), employee(s) orotherwise howsoever, whether on his, her or their own accountor on behalf of or in conjunction with any person, firm, companyor other entity, from engaging in any discussions or negotiations, and/or entering into any agreement and/or understanding, withany potential investor(s), person(s), company(ies) and/or entity(ies) (apart from the plaintiff) for the purpose of restructuring the Company; and

(2)  an order that the defendants withdraw the Notice.

7. By summons, dated 6 July 2016, the plaintiff sought the following orders, pursuant to Rules of the High Court, Order 14A, rule 1:

(1)  a declaration that the Notice and purported termination are null and void; and

(2)  a declaration that the Agreement is still on foot and binding on the defendants.

Background

8. Clause 8.2 of the Agreement is in the following terms:

“The Joint and Several Liquidators shall be entitled to terminate this Agreement after one month after the date of this Agreement by giving the Investor a notice in writing of not less than 7 days if the Joint and Several Liquidators, in their reasonable opinion and acting in good faith upon consultation with the Investor,determine that (i) the due diligence review on the target group tobe acquired by the Company or its subsidiary under the Proposal is not to the satisfaction of the Joint and Several Liquidators; or (ii) the Proposals are unlikely to succeed, due to the occurrence of a Specified Event, notwithstanding that the Proposals have beenor have been submitted to the Stock Exchange. For the avoidanceof doubt, the Joint and Several Liquidators shall have the absolutediscretion in determining whether and when to exercise the right to terminate this Agreement pursuant to this Clause 8.2.”

9. The term “Specified Event” is defined in clause 1.1 as:

“ ‘ Specified Event’ means an event occurring or matter arising on or after the date hereof and prior to the end of the Exclusivity Period have an adverse impact or effect on the Proposals which, from the Joint and Several Liquidators’ perspective, cause the Proposals unable to be accepted by the Stock Exchange.”

10. The Notice stated:

“Pursuant to Clause 8.2 of the Agreement, having determined thatthe restructuring proposal submitted to us is unlikely to succeed, I hereby give you notice that the Agreement shall be terminated with effect from 22 May 2016.”

11. The defendants sent the Notice to the plaintiff by facsimile transmission at 5:56 pm on 15 May 2016.

The plaintiff’s case

12. The plaintiff’s case is that the termination of the Agreement is null and void because only six days notice was given, whereas clause 8.2requires not less than seven days notice.  The plaintiff’s case is based on the following propositions:

(1)  15 May 2016 should not be counted because it was a fraction of a day;

(2)  22 May 2016 should not be counted because it was the day of the event, ie, termination.

13. When calculating the number of days for a notice to be effective,it is well established that fractions of a day are not generally taken into account and “not less than”should be construed in such a way that one of the days (either the day of giving the notice or the day of the event) should not be included: see The Securities and Futures Commission v The Stock Exchange of Hong Kong Limited [1992] 1 HKLR 135 at 147 (line 30).

14. In The Interpretation of Contracts Lewison 6^th ed, p 725 is the following:

“In general, fractions of a day are ignored in construing contracts, although the particular context may indicate that regard is to be had to fractions of a day, particularly where questions of priority may depend upon the precise time at which an event occurs.”

15. Also in Lewison, p 727, is the following:

“Where, under a contract, a period of time is expressed to run froma certain day, the day named is generally excluded in computing the period.”

16. And also in Lewison, p 726:

“…when a day is mentioned from which the time is to start running, fractions of a day ought to be disregarded and time should run from midnight.”

17. And Company Law in Hong Kong: Practice and Procedure (2016) at §5.036:

“In general, fractions of a day should be ignored in the computationof periods of time and hence the length of notice shall be calculatedon ‘clear day’ basis, ie exclusive of the day of service … and exclusive of the day on which the meeting is to be held.”

18. Mr Kwong, the plaintiff’s counsel, submitted that it is well established that a party seeking to rely on a contractual termination clause is required to comply strictly and meticulously with its terms.  See: CDVSoftware Entertainment AG v Gamecock Media Europe Limited & ors [2009]EWHC 2965 (Ch) at §55; Robin Ellis Ltd v Vinexsa International Ltd [2003] All ER 342 at §22; Chitty on Contracts Vol 1 32^nd ed, §22–051.

19. In determining a contract, the time requirements for giving notice are to be strictly complied with and their proper operation is to be treated as a condition precedent to valid contractual termination.  See: Hudson’s Building and Engineering Contracts 13^th ed, at §8–039; Keating on Construction Contracts 9^th ed, at §11–003.

20. Mr Kwong submitted that, applying these propositions andprinciples, 15 May 2016 should be excluded because, when the Notice wastransmitted, only a fraction of the day remained, and 22 May 2016 should beexcluded because it was the day of the event, ie, termination. Accordingly, only six days notice was given, contrary to Clause 8.2.

21. Mr Kwong submitted that the sole issue for determination is the adequacy and validity of the Notice, which is a matter of law andconstruction, such that it is appropriate and convenient for the court to exercise its jurisdiction under Order 14A.

22. Mr Kwong also submitted that the defendants have no defence, in which case it is unnecessary to consider the balance of convenience with regard to determining whether the injunction sought should be granted.

23. Although in the Statement of Claim the plaintiff pleads other grounds in support of its case that the Notice is not effective and void,including that no Specified Event has occurred and the defendants have notacted in good faith, the plaintiff did not rely on any of those other groundsin support of either its application for an interlocutory injunction or summaryjudgment under Order 14A. The other grounds are factual disputes not suitable for summary determination.

The defendants’ case

24. The defendants’ counsel, Mr Lam SC, submitted:

(1)  The injunction sought goes beyond the plaintiff’s contractual right. In particular, it ignores the defendants’ right to terminate the Agreement. Even assuming the termination is wrong, the defendants’ right under clause 8.2 remains intact and cannot be taken away.

(2)  Although the first order sought is in the form of an injunction,it is in substance an order for specific performance: an injunction that the defendants shall not negotiate with another party is the same as specific performance of their obligation to negotiate with the plaintiff exclusively. Hence, when considering whethersuch an injunction should be granted, the court should apply specific performance principles.  See: Snell’s Equity 33^rd ed, 2015, §17–005.

(3)  In reality, the grant of such an injunction most probably would be dispositive of the whole action because, pursuant to clause 4.2of the Agreement, the exclusivity period lapses on 13 October 2016 and there is no realistic chance that a trial can occur before that date.

(4)  It is not sufficient for the plaintiff to show that there are seriousissues to be tried and considerations of balance of conveniencedo not arise. The injunction should be granted only if the court is of the opinion that the defendants have no real chance of succeeding at trial. In other words, the court should treat the plaintiff’s summons as an application for summary judgment.  See: Mak Chi‑sing v A & A Continental Commodities Ltd[1983] HKLR 403 at 408A.  If the defendants are entitled tounconditional leave to defend, no injunction should be grantedbecause it will be unjust to effectively preclude the defendants from the right to a full trial.  See: Cayne v Global NaturalResources plc [1984] 1 All ER 225 at 233c–e, 236c–f, 238b–g  . 

(5)  It is arguable that the length of the Notice was sufficient.

Length of the Notice

25. I shall deal with the defendants’ last point first.

26. Mr Lam did not dispute that the Notice was transmitted at 5:56 pm on 15 May 2016 but submitted:

(1)  The natural and ordinary meaning of 7 clear days is 168 hours (7 × 24);

(2)  The common law rule of ignoring fractions of a day is not a rigid rule;

(3)  The common law rule was made at a time when there were noor few instruments for recording accurately the time of sendinga document. Modern fax machines record the time of sending   ; 

(4)  There is no logical reason to ignore the recorded time such thatthe 7 day period of 168 hours should be counted from 5:56 pm on 15 May 2016 so as to expire at 5:56 pm on 22 May 2016; hence,

(5)  Not less than 7 days notice was given.

27. Alternatively, if the common law rule applied the Notice was effective for the following reasons:

(1)  The question is how a reasonable recipient would have understood the Notice taking into account the relevant objective context;

(2)  In this case, the reasonable recipient must be credited with knowledge of the terms of clause 8.2, bearing in mind that the clause was referred to in the Notice;

(3)  The purpose of the Notice was to inform the plaintiff of thedefendants’ decision to terminate the Agreement. That purposeis relevant to the construction and validity of the Notice. Onewould expect that if a notice unambiguously conveys a decisionto determine, a court may ignore immaterial errors which would not have misled a reasonable recipient;

(4)  A reasonable recipient would have appreciated that the defendants wished to give 7 clear days notice but wronglystated that it would take effect from 22 May 2016. The Notice would have achieved its intended purpose;

(5)  A reasonable recipient would reject the possibility that thedefendants meant that unless they could terminate theAgreement on 22 May 2016, they did not want to terminate at all.  He would therefore understand the Notice to mean that the defendants wanted to terminate on 23 May 2016.  See: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749;

(6)  Even if the Notice was too short, it is open to the defendants to issue a fresh notice.

28. In my view, the Notice was too short and failed to comply with the requirements of clause 8.2 for the following reasons:

(1)  As this was a Notice regarding the serious step of terminating a contract, strict compliance with the time requirements was required;

(2)  The common law should be applied.  Mr Lam’s ingenious argument concerning modern devices and their capability to record time accurately would nevertheless require courts toproceed on the presumption that the particular machine whichwas the subject of particular proceedings was accurate and thatits operators had accurately set the time recording function.  Mr Lam did not establish any basis for such a presumption.  Moreover, arguably such a presumption would be rebuttable and I am not persuaded that it is appropriate in this applicationto set aside a common law rule which can be applied with some certainty and to adopt an approach which would open up new avenues of dispute in both law and fact; hence,

(3)  Applying the common law rule and excluding 15 May 2016 and 22 May 2016, I find that the Notice did not comply with the requirements of clause 8.2.

29. As for the submissions regarding how a reasonable recipient would construe the Notice, I reject the argument that a reasonable recipient would appreciate that the defendants wished to give 7 clear days notice.  Pursuant to clause 8.2 of the Agreement, the defendants were entitled toterminate the Agreement by giving “a notice in writing of not less than 7 days.”In other words, the defendants were entitled to give 7 days notice or 10 daysnotice or 15 days notice or some other period of notice, provided it was not less than 7 days. When one considers the Notice objectively, it is neither clear nor unambiguous that the defendants meant to give not less than 7 cleardays notice. Simply because the Notice refers to 22 May 2016, it does notfollow that the defendants intended to terminate the Agreement with effect from 23 May 2016 and not, say, 24 May 2016.

30. Mr Lam relied heavily on Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd but that case concerned a notice to terminate a lease, which was to be given by reference to a milestone date (13 January).  It was on that basis that the House of Lords held that a reasonable recipient with knowledge of the terms of the lease and of the milestone date would have been left in no doubt that the tenant wished to determine the lease on the milestone date but had wrongly described it as 12 January. In the presentcase, there is no milestone date and termination may take effect on any date, provided that such date is not less than 7 days from the date of notice.

31. In any event, it is clear that the defendants intended that termination was to take effect on 22 May 2016:

(1)  On 23 May 2016, the defendants made a public announcementon the Hong Kong Stock Exchange website informing the public that the Agreement had been terminated from 22 May 2016 and stated that it was their intention to continue to negotiate with the plaintiff on a non‑exclusive basis;

(2)  By a letter to the plaintiff’s solicitors, dated 18 May 2016, the defendant’s solicitors stated that the Agreement “shall be terminated on 22 May 2016.”

Relief

32. For the above reasons, I find that the Notice is null and void and of no effect.

33. At the beginning of the hearing Mr Kwong advised that the plaintiff was seeking only the injunction on the summons, dated 1 June2016, and only the declarations set out in the prayer for relief on the Statementof Claim. The claims for specific performance and damages were abandoned.

34. Regarding the injunction, Mr Kwong drew my attention to Snell’s Equity 33^rd ed, §18–035:

“A party to a contract has a right to its performance and not merelyto compensation for breach, and hence an injunction will be granted to restrain breaches of negative contracts almost as of right.”

35. Mr Lam submitted that the injunction sought is the same as specific performance of the defendants’ obligation to negotiate with theplaintiff exclusively, such that, the court should apply specific performance principles. Mr Kwong submitted that the injunction would not be specific performance in effect because it is not requiring the defendants to do anything   . 

36. I do not agree with Mr Kwong. The plaintiff clearly wishes togo back to negotiations. The defendants, as liquidators, are in a fiduciary position in relation to the Company, its creditors and shareholders and are obliged to do their best to seek potential investors and a restructuring of theCompany. Moreover, pursuant to clause 3 of the Agreement, the defendantsare obliged to act in good faith toward the plaintiff and to procure the entering into of a formal agreement.  The plaintiff is hoping to get the defendants back to negotiating with it exclusively without an express order for specific performance. In light of the defendants’ obligations an injunction would be, in effect, an order for specific performance.

37. Specific performance is a discretionary remedy and equity will not grant specific performance if it would be futile to do so: Snell’s Equity 33^rd ed, §17–020. In my view, it would be futile to grant the injunction for the following reasons:

(1)  The defendants consider that the plaintiff’s proposals are unlikely to succeed and, as a result, a Specified Event hasoccurred. For this reason, the defendants wish to terminate the Agreement.  (The plaintiff denies that a Specified Event has occurred but this issue will not be resolved, given that the plaintiff only pursued the length of notice point.)

(2)  As noted above the defendants are obliged to do their best to find investors and restructure the Company.

(3)  In the circumstances, it would be open to the defendants toissue a fresh termination notice in order to negotiate with other potential investors.

(4)  As noted in Snell’s Equity 33^rd ed, §17–020:  “… specific performance will be refused where the contract gives thedefendant the right to terminate it, since it is assumed he wouldexercise the right and render the order for specific performance nugatory”.

38. For the above reasons, I shall not grant the injunction sought.

39. On the Order 14A summons, dated 6 July 2016, Mr Lamsubmitted that summary disposal of this matter would not resolve all of the issues between the parties, including whether there had been a Specified Event and would not finally determine the cause. Hence, the court shouldrefuse relief. Mr Lam referred me to Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 in which the Barwick CJ and Jacobs J stated, at p 307:

“…A consequence of the declaration should be that the party submitto the performance of the contract on his part and to an order forspecific performance of the contract if that is appropriate. If such an order is not or cannot be made nor an inquiry into damages ordered then a declaration that on a certain day the contract has not been validly rescinded serves no purpose in the litigation. Before such a declaration is made the party seeking the declarationmay already have elected to treat the other party’s purported rescission as a repudiation and may have himself rescinded thecontract. All that has then been achieved is an issue estoppel if and when the claim for damages for breach of contract is pursued in other proceedings. …”

40. Mr Lam also submitted that, although resolving the issues does involve construction of the Agreement and the Notice, there are seriousfactual disputes relating to matters that will affect the validity of the Notice and the termination.

41. Mr Kwong’s position was that it would be better to give theplaintiff the chance to continue to negotiate exclusively with the defendantsrather than damages. He submitted that the declarations would let the partiesknow where they stand. Mr Kwong also submitted that, if successful withregard to the declarations, then the plaintiff does not need to argue the othergrounds set out in paragraph 11 of the Statement of Claim on which it is allegedthat the Notice is null and void, eg, that no Specified Event has occurred.

42. Order 14A, rule 1 provides:

“ (1) The Court may upon the application of a party or of its own motion determine any question of law or construction of any document arising in any cause or matter at any stage of the proceedings where it appears to the Court that–

(a) such question is suitable for determination without a full trial of the action; and

(b) such determination will finally determine (subject onlyto any possible appeal) the entire cause or matter or any claim or issue therein.

(2)  Upon such determination the Court may dismiss the cause or matter or make such order or judgment as it thinks just.   … ”

43. The approach the court should take in deciding whether to entertain an Order 14A application is set out in Rockwin Enterprises Ltd v Shui Yee Ltd [2003] 3 HKC 174 at §§18 – 21:

“18. Once seized of an application under O 14A, the court’s approach is essentially a three‑step approach:

(1) Is the relevant question one of law or of the construction of a document?

(2) If so, is that question one that should be determined under the O 14A procedure?

(3) If the answer to (2) is ‘yes’, what is the determination of thatquestion and what orders should the court make as a consequence of determining that question?

19. Usually, step (1) will cause little difficulty for the court to ascertain.

20. Step (2) requires the court to be satisfied of the following :

(a) That the question of law or construction is one that is suitable for determination without a trial. In other words, the court has all the necessary facts and matters before it in order to determine the question of law or construction.

(b) That if so suitable and should it be determined by the court, that it will finally determine (subject to a possible appeal) the entire cause or matter or any issue or claim therein.

(c) Even if the above two conditions are fulfilled, that the court in its discretion is satisfied that the question is one that ought to be determined under O 14A.

21.  It is clear that the court has a residual discretion whether or not to embark on a determination of a question under O 14A even where the first two requirements (set out in paras 20(a) and (b) above) are fulfilled. This is clear from the word ‘may’ in O 14A r 1(1) and from the authorities.”

44. The question is one of construction of a document and one that is suitable for determination without a trial because all necessary facts and matters were before me.

45. However, my construction of the Agreement and Notice, although in the plaintiff’s favour, is not determinative of the entire issue between the parties because the issue as to whether a Specified Event has occurred would remain unresolved. This issue should be resolved in a single set of proceedings and not left unresolved between the parties.  For this reason I decline to make the declarations sought.

46. Because the issue concerning a Specified Event would be unresolved, I also decline to make the declarations sought as matter of discretion. Given the obligations imposed on the defendants as noted above,I consider it most undesirable that they should be in the position of negotiating with the plaintiff exclusively when they consider that the plaintiff’s restructuring proposal is unlikely to succeed.

47. For these reasons, I dismiss the plaintiff’s summons, dated 1 June 2016 and the plaintiff’s summons, dated 6 July 2016.

48. The plaintiff has failed on both summonses.  Costs should follow the event and there will be an order nisi that the plaintiff pay thedefendants’ costs, with a certificate for two counsel, to be taxed if not agreed  .