CHUANG YUE CHIEN, EUGENE v. PARK HOTEL PROPERTY MANAGEMENT LTD AND OTHERS

HCA2363/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2363 OF 2007

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D E C I S I O N

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1. This is an application by the 1^st defendant to strike out the Statement of Claim pursuant to Order 18, rule 19.  Its alternative submission is that paragraph 2.3(2) and prayers 2 to 4 of the claim be struck out.

2. Counsel agree on the established legal principles applicable to a strike out application.  It is unnecessary therefore to elaborate upon them.  Suffice it to say that the 1^st defendant must demonstrate that the claim is obviously unsustainable.  The power to strike out should only be exercised in plain and obvious cases.

3. The action concerns the sale and purchase of a hotel by the plaintiff to the 1^st defendant.  The contractual mechanism for the transfer of the hotel to the 1^st defendant was not a conventional sale and purchase agreement but involved the sale and purchase of one share in a BVI Company and the assignment of a loan.  However, the underlying purpose is not in dispute, namely for the 1^st defendant to buy the hotel.

4. The price was agreed to be HK$200 million plus a sum equal to the “Net Assets” which was to be determined in accordance with Clause 6 of the agreement.

5. Clause 6 is central to this application.  The dispute concerns the provisions relating to the “Net Assets”.  In all other respects full effect was given to the agreement.  Completion took place on 16 May 2007 in accordance with the mechanism stipulated in the agreement.  The initial consideration of $170 million was paid and accepted.  A further sum of $15.985 million was also, on 21 August 2007, paid and accepted.  Further, since November 2007 the 1^st defendant has had the management control of the hotel.

6. As Clause 6 is at the heart of the matter, I shall, in outline, refer to each of the relevant sections within the clause.  It provides the mechanism for calculating the balance to be paid as “Net Assets”.

7. Clause 6.1 provides for a stock-taking.  This occurred and is not in issue.

8. Clause 6.2 provides for the preparation of a draft consolidated account.  This was done and is not an issue.

9. Clause 6.3 provides for the plaintiff’s auditors to prepare a draft statement of the Net Assets from the draft account for the purpose of a draft completion statement.

10. Clause 6.4 provides for the provision of the draft completion statement to the 1^st defendant’s accountants for their review and approval.  All this also was done.

11. Clause 6.5 states that the completion statement shall be binding in the event of agreement between the parties as to the figures.

12. Clause 6.6 provides a mechanism to resolve any dispute should there be no agreement (by the appointment of an independent firm of accountants).  It is also agreed that the plaintiff’s auditors and the 1^st defendant’s accountants did not agree the draft completion statement containing the draft net asset statement.

13. Clause 6.8 states that the balance, once determined (either by agreement between the auditors and accountants or by the independent duly appointed firm) shall be paid within seven days of the determination.

14. For the purposes of this application it is agreed that, as pleaded by the plaintiff, on 18 October 2007 Ms Ingrid Kwok, on behalf of the plaintiff and Mr Sammy Leung, on behalf of the 1^st defendant, reached an agreement that the balance due was $53,092,392.  It is also agreed, for the purposes of this application, that that agreement does not constitute a “determination” in accordance with Clause 6 of the agreement.

15. It is the plaintiff’s pleaded case that the 1^st defendant was obliged, pursuant to Clause 6.8 of the agreement, to pay the sum within seven days, namely on or before 25 October 2007.  They failed to do so.  The 1^st defendant did offer this sum in early December 2007 but it was rejected.

16. The plaintiff claims that the 1^st defendant’s failure to pay on or before 25 October 2007 entitled them to rescind the entire agreement.  They claim that the one share in the BVI Company be re-vested to them thus restoring both parties to their original positions.

Two limbs to 1^st defendant’s application

17. As referred to above, the 1^st defendant seeks a striking out of the entire Statement of Claim and a dismissal of the action.  Alternatively they say that, at least, paragraph 2.3(2) is unsustainable.  I consider it more logical to deal with paragraph 2.3(2) first.

(i)  Paragraph 2.3(2)

18. Paragraph 2.3 of the Statement of Claim is as follows :

“2.3   In so far as it may be necessary, the Plaintiff avers that as a matter of the construction of the Agreement and further or in the alternative also as a matter of the implied terms of the Agreement:

(1)   The time for the performance of the terms of the Agreement including in particular the time for the payment of monies shall be of the essence of the Agreement.

(2)   Notwithstanding the Completion, if the 1^st Defendant shall fail to pay the Balance the Plaintiff shall be at liberty to terminate the Agreement and to have the vendor and purchaser restored to the original position.”

19. The “restoring to the original position” is prayed for in prayers 2, 3 and 4 :

“2. An order that upon the Plaintiff’s tender of the sums previously received by the Plaintiff from the 1^st Defendant,

(1)   the 2^nd Defendant does re-assign and the 1^st Defendant does procure the re-assignment of the Share from the 2^nd Defendant to the Plaintiff.

(2)   The 1^st Defendant does re-assign the loan to the Plaintiff.

 3.  An order that the 3^rd Defendant does register the change of the re-assignment of the Share from the 2^nd Defendant to the Plaintiff;

 4.  An order that the 3 directors appointed to the board of the 3^rd Defendant consequent upon the completion of the Agreement be removed;”

20. The submission made by Mr Benjamin Yu SC, counsel for the 1^st defendant, is simply that even if (which is denied) there was a failure to pay the balance (in accordance with Clause 6 or otherwise) which constituted a repudiatory breach which had been accepted by the plaintiff, it would not, in any circumstances, enable the plaintiff to rescind the entire agreement as from the beginning.

21. I am satisfied that this submission is correct.  Mr Yu refers to authorities which make the point simply and clearly and to which I am satisfied there is no answer in law.  It is sufficient to quote Lord Wilberforce in Johnson v. Agnew [1980] AC 367, at 392 :

“    In this situation it is possible to state at least some uncontroversial proposition of law. 

  First, in a contract for the sale of land, after time has been made, or has become, of the essence of the contract, if the purchaser fails to complete, the vendor can either treat the purchaser as having repudiated the contract, accept the repudiation, and proceed to claim damages for breach of the contract, both parties being discharged from further performance of the contract; or he may seek from the court an order for specific performance with damages for any loss arising from delay in performance.  (Similar remedies are of course available to purchasers against vendors.)  This is simply the ordinary law of contract applied to contracts capable of specific performance.

  Secondly, the vendor may proceed by action for the above remedies (viz. specific performance or damages) in the alternative.  At the trial he will however have to elect which remedy to pursue.

  Thirdly, if the vendor treats the purchaser as having repudiated the contract and accepts the repudiation, he cannot therefore seek specific performance.  This follows from the fact that, the purchaser having repudiated the contract and his repudiation having been accepted, both parties are discharged from further performance.

  At this point it is important to dissipate a fertile source of confusion and to make clear that although the vendor is sometimes referred to in the above situation as ‘rescinding’ the contract, this so-called ‘rescission’ is quite difference from rescission ab initio, such as may arise for example in cases of mistake, fraud or lack of consent.  In those cases, the contract is treated in law as never having come into existence.  (Cases of a contractual right to rescind may fall under this principle but are not relevant to the present discussion.)  In the case of an accepted repudiatory breach the contract has come into existence but has been put an end to or discharged.  Whatever contrary indications may be disinterred from old authorities, it is now quite clear, under the general law of contract, that acceptance of a repudiatory breach does not bring about ‘rescission ab initio.’  I need only quote one passage to establish these propositions.  

  In Heyman v. Darwins Ltd. [1942] A.C. 356 Lord Porter said, at p. 399:

‘To say that the contract is rescinded or has come to an end or has ceased to exist may in individual cases convey the truth with sufficient accuracy, but the fuller expression that the injured party is thereby absolved from future performance of his obligations under the contract is a more exact description of the position.  Strictly speaking, to say that on acceptance of the renunciation of a contract the contract is rescinded is incorrect.  In such a case the injured party may accept the renunciation as a breach going to the root of the whole of the consideration.  By that acceptance he is discharged from further performance and may bring an action for damages, but the contract itself is not rescinded.’”

22. Based on the facts that are not in dispute in this case, it is clear that it is not open to the plaintiff to sue for anything other than the balance of the price.

23. The plaintiff cannot rely on implied terms to salvage its argument.  A suggestion of the existence of an implied term appears only in the affirmation evidence.  Reference is made to an “understanding” that if the plaintiff did not receive the balance, the entire agreement would be rescinded ab initio.  If pleaded such an implied term would plainly and obviously fail the test of it being necessary for business efficacy. 

(ii) Strike out entire Statement of Claim and dismiss the action?

24. Mr Yu submits that the court can and should go further than striking out paragraph 2.3(2) and prayers 2 to 4.

25. It is argued that the claim is logically flawed.  The plaintiff concedes that the balance was agreed outside Clause 6 but submits that the time for payment should be governed by a clause inside Clause 6, namely Clause 6.8.  Clause 6.8 requires payment of the balance within seven days of the determination of the balance in accordance with Clause 6.  The 1^st defendant’s argument simply is that no claim is sustainable for failure to pay by a certain date when the time provision is itself dependent on the payment being calculated by a specific mechanism which was not complied with.

26. In short, I do not think it would be correct to dismiss the entire claim on this basis at this stage.  It would be premature.  I accept the point made by Mr Paul Shieh SC, counsel for the plaintiff, that it is legally arguable that the parties were bound by the time provision regardless of how the balance was agreed.  As yet the claim has not been pleaded to by way of Defence and moreover, it is open to the plaintiff to amend its pleading.  Further, the extent of and terms of the oral agreement reached when the balance was settled are fact sensitive issues.

27. It is not appropriate to consider in detail the merits of the legal propositions upon which the plaintiff may rely.  The true thrust of this case now concerns the payment of the balance to finalise the transaction.  That issue remains on track after the deletion of paragraph 2.3(2).  The basis upon which it is currently claimed is not, in my judgment, plainly and obviously untenable.

CONCLUSION

28. I grant the strike out limited to paragraph 2.3(2) and prayers 2, 3 and 4.  In my judgment this was the more important part of the 1^st defendant’s summons.  The costs order should reflect that.  I make a cost order nisi that the plaintiff pays 75% of the 1^st defendant’s costs.