EMINENT INVESTMENTS (ASIA PACIFIC) LTD v. DIO CORPORATION

CACV 207/2016

[2019] HKCA 606

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 207 OF 2016

(ON APPEAL FROM HCA NO. 1292 OF 2011)

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J U D G M E N T

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Hon Kwan VP :

1.  I agree with the judgment of Cheung JA.

Hon Cheung JA :

I.   Appeal

2.  This is an appeal by the plaintiff (‘Eminent’) against the judgment of Recorder Shieh SC who dismissed its claim against the defendant (‘DIO’) for fees due to Eminent under a Financial Advisory Agreement (‘FAA’) dated 10 October 2008 and an addendum to the FAA (‘Addendum’) signed on 15 January 2009.  The Recorder dismissed Eminent’s claim on three grounds.  What concerns this appeal is the third ground, namely, as a matter of construction of the contractual documents, Eminent is not entitled to the fees claimed.

II.   Background facts

3.1   The following background facts are extracted from the judgment below.

3.2   Eminent is a Hong Kong company which used to carry on the business of providing financial advisory and consulting services.  It ceased carrying on business in or around March 2010.  DIO is a South Korean company carrying on the business of producing and marketing dental implant devices, related equipment and accessories.

3.3   In about mid 2008, DIO was exploring ways to raise additional capital and to expand its overseas business and brand.  To this end DIO wanted to obtain international (as opposed to domestic Korean) advice on fund raising matters.

3.4   DIO was introduced to Eminent by a middleman.

3.5   The introduction led to the eventual signing of the FAA and Addendum.

3.6   By January 2009 Eminent had assisted DIO in relation to a bond transaction and Eminent had charged separately for its services on the transaction.  

3.7   Without going into details, in April 2009 Eminent introduced to DIO a company called Dentsply International Inc (‘Dentsply’) which is a manufacturer and distributor of professional dental products.  On 9 April 2009, there was a telephone conference between DIO, Eminent and Dentsply, during which representatives from DIO introduced their company and business and representatives fromDentsply asked questions.  Representatives from DIO also asked representatives of Dentsply about their intention and interest.

3.8   The Recorder found that in this telephone conference the discussions were very general and the parties were only at the stage of getting to know each other (and each other’s intentions) better.  No particular types of deals or transactions or manner of fund raising or financing or investment were raised or discussed. 

3.9   Towards the middle or end of April 2009 Dentsply indicated that it was not interested in DIO.  However in 2010 there were further discussions between DIO and Dentsply which eventually led to a deal whereby

1)   Dentsply acquired less than 20% of the outstanding shares in DIO; and

2)   Dentsply Germany Investments GmbH, a German subsidiary of Dentsply, acquired KRW56.6 billion worth of convertible bonds issued by DIO.

3.10   The deal was announced on 9 December 2010.  Eminent issued its writ in this action on 20 September 2011 claiming transaction fees pursuant to the FAA based on 3% of the value of the transaction, as well as outstanding retainer fees.  The defence raised by DIO to Eminent’s claim is that in order to earn the success fee Eminent had to be the effective cause of the transaction with Dentsply and that Eminent’s introduction of Dentsply in April 2009 was not the effective cause to the transaction which ultimately took place.

III.   The FAA and Addendum

4.1   The FAA provided, where material, as follows :

‘ WHEREAS, the Company hereto has retained the Financial Advisor on a sole and exclusive basis to advise the Company with respect to its Corporate Governance, Equity Valuation, Financial & Accounting Analysis, Corporate Financial Planning, Strategic Capital Raising and other Corporate Financing activities.

WHEREAS, the Parties hereto desire to specifically state the services mentioned above and under this agreement to be provided to the Company by the Financial Advisor, the compensation to be received by Financial Advisor from the Company for providing such services, and the terms and conditions that shall govern the relationship between the Parties.

NOW THEREFORE, the Parties, for good and valuable consideration, by executing this Agreement agree to be bound by its terms and conditions as follows:

1)   TERM.  This Agreement shall be for a term of eighteen (18) months.  Notwithstanding the forgoing and except for earlier termination as otherwise provided for hereinafter, either Party hereto may terminate this Agreement upon thirty (30) days prior written notice.

2)   ENGAGEMENT & FEE STRUCTURE.

   i)   SERVICES TO BE PROVIDED BY FINANCIAL ADVISOR:

   (1)   Study and review the business operations, Company’s historical financial performance, Company’s financial forecast and all related business and corporate information provide [sic] by the Company

   (2)   To assist in the design and writing of the Company’s business plan to be presented to any potential investors and third parties

   (3)   On behalf of the Company, initiate the discussion and assist the Company to collect, analyze and organize business, financial, and legal information with third parties such as accountants, lawyers, auditor in order to achieve the goal

   (4)   On a best effort basis, advise the Company on Mergers & Acquisitions, Fund Raising, private placements or shareholder restructuring prior to any IPO or Secondary Listing

   (5)   Starting in 2009, on a quarterly basis, provide independent research services to the Company in the form of equity research reports to be provided for institutional investors

   (6)   Advise the Company in appropriate investor relations and communications strategy with the financial community and financial public relations firm(s)

      ii)   RETAINER FEES: Upon the execution of this Agreement, the Company agrees to pay the Financial Advisor a fixed retainer of US Dollars One Hundred Thousand (USD100,000), paid in two installments.  First installment, US Dollars Fifty Thousand (USD50,000) is due within seven (7) days upon signing of this agreement and second installment, US Dollars Fifty Thousand [USD50,000] is due sixty (60) days after the signing date of this agreement.

...

   iv)   TRANSACTION FEE:  Upon completion of any transaction for the Company.  The Company agrees to pay the Financial Advisor a success fee including and not limited to a three percent [3%] of the total transactional amount tied to any financial transaction related to Fund Raising or Private Placement or Shareholder restructuring, or Mergers & Acquisition for the Company.

3)   OBLIGATIONS OF THE COMPANY:

   ...

i)   The Company agrees that within a period of two (2) years after a termination of this Agreement, should the Company complete a transaction including and not limited to an secondary listing or fund raising with any third parties or receive funds from a financing source introduced by the Financial Advisor, the Company shall pay Financial Advisor its fees according to this Agreement or and any executed amendments thereof or a generally accepted market compensation in case the transaction compensation method is not explicitly stated in this agreement.’

 4)   MISCELLANEOUS:

   a)   Financial Advisor acknowledges that the Company will be providing confidential information to Financial Advisor. The Parties hereto agree that they will cooperate with each other and provide full due diligence, and that all conversations, documentation, or work products will be kept in the utmost confidence. The Company acknowledges that Financial Advisor will be providing confidential information to the Company.  Accordingly, the Company agrees that the information, including but not limited to, Financial Advisor’s database of investors, methods, systems and procedures, will be kept confidential and shall not, without the prior written consent of Financial Advisor, be disclosed by the Company, except to its attorneys, accountant and Board of Directors.  Financial Advisor intends to introduce the Company to its contacts, including private and institutional financing sources or strategic alliances.  The Company agrees that it will respect Financial Advisor’s relationships with these investors and other sources of financing and that the Company shall not participate in or permits the circumvention of any obligation to Financial Advisor created by this Agreement or any means.’  (emphasis added)

4.2   The Addendum amended certain provisions of the FAA which for the purpose of this appeal are not necessary to be reproduced here.

4.3   The two relevant clauses which entitle Eminent to charge fee are Clauses 2(iv) and 3 i).  The focus of the appeal is Clause 3 i) which deals with Eminent’s entitlement after the termination of the FAA.  There is no dispute that the FAA had been terminated.

IV.   The Recorder’s view

5.1   The Recorder said that the first question to resolve is the proper interpretation of the agreement.  It is apparent from reading the judgment, the Recorder did not begin the exercise simply by construing the language used in Clause 3 i).  Instead, he proceeded with the interpretation exercise by discussing whether Clause 3 i) is subject to any ‘effective cause’ requirement by way of implied term or ‘causal or proximity’ requirement by way of interpretation.

5.2   The Recorder held that clauses such as Clause 3 i) which provides for the earning of a transaction or success fee within a certain period after the termination of a contract, have colloquially been referred to as tailgunner clauses.  However, there is no automatic rule that applies immutably to such clauses.  The meaning of each tailgunner clause is ultimately a question of construction of the specific wordings used.  Different tailgunner clauses could well yield diametrically opposite constructions.

5.3   The Recorder then referred to the line of cases such as Brian Cooper & Co v. Fairview Estates (Investments) Ltd [1987] 1 EGLR 18, John D Wood & Co v. Dantata [1987] 2 EGLR 23, Foxtons Ltd v. Pelkey Bicknell Ltd [2008] All ER (D) 328 (Apr), MSM Consulting Limited v. United Republic of Tanzania [2009] EWHC 121 (QB), Edmond de Rothschild Securities (UK) Ltd v. Exillon Energy PLC [2014] EWHC 2165 (Comm) and others which laid out some basic principles governing the construction of such clauses.  The first four cases are concerned with fees claimed by an estate agent who introduced a tenant or a purchaser to the owner of a property.  The fifth one is concerned with a claim for fee for work done by an advisor who developed a strategy to persuade a troublesome shareholder to withdraw from activism against a company.  He held :

‘ 212.(9) On the wording of the transaction fee clause (clause 2(iv) in the FAA, and leaving aside the tailgunner clause for the time being because one has first to work out how Eminent was to earn its fee during the contract), the fee was earned “Upon completion of any transaction for the Company” (emphasis added). This connotes active involvement and participation by Eminent in the transaction. Therefore not only does it militate against a construction that mere introduction is enough, it in fact suggests that Eminent had to do something so as to enable to say that it has completed a transaction for DIO. In my view either the clause should be interpreted as requiring Eminent to be an effective cause in completing the transaction (for which a fee is claimed); alternatively an implied term as to effective cause is to be implied.’ (emphasis added)

5.4   The Recorder then considered the effect of the Clause 3 i) on Eminent’s ability to earn the transaction fees.  He held :

‘ 214. First, in my view as a matter of common sense, Eminent cannot be in a better position (in terms of the need to prove effective cause) if the transaction in question took place after termination rather than before. In other words if (say) a transaction took place in the eleventh month after the conclusion of the FAA (assuming no prior termination), Eminent would have to prove effective cause (according to my ruling above). Assuming that the transaction took place in the nineteenth month, or shortly after termination by notice, I can see no reason why Eminent can claim a transaction fee without having to prove effective cause also.

215.   Second, the language of the FAA suggests that Eminent’s entitlement to transaction fee is subject to the same requirements as if there had been no termination.  This is because in the tailgunner clause after setting out the various examples (secondary listing, etc) it went on to say “[DIO] shall pay [Eminent] its fees according to this Agreement.”  This must mean Eminent’s fees as claimable and calculated according to clause 2(iv).

216.   Third, the cluster of scenarios mentioned in the tailgunner clause namely “a (sic) secondary listing”, “fund rising with any third parties” and “receive funds from a financing source introduced by [Eminent]” should be seen in their proper context.  They were mentioned not by way of exhaustive definition but by way of examples.  The defining phrase is “a transaction”. However, it cannot mean any transaction.  In my view it can only hark back to the sort of transactions which, under the transaction fee clause (clause 2(iv)) would have entitled Eminent to a fee had the FAA not been terminated.

217.   Fourth, even if one were to look at the content of those cluster of scenarios mentioned within the tailgunner clause, there is this feature: two of the three scenarios (namely secondary listing and fund raising with any third parties) did not contain any limiting phrase linking them to Eminent.  Only the third one (“receive funds from a financing source introduced by Eminent”) contained a reference to Eminent.  However, the examples cannot be taken literally because otherwise it would mean that if DIO entered into a secondary listing transaction which had absolutely nothing to do with Eminent or work done by it, Eminent would still be able to claim transaction fee against it.  Or it would mean that if DIO succeeded in raising funds with a third party that it identified without involving Eminent in any way, Eminent would still be able to claim transaction fee.  That would make no sense.  The only way in which the scenarios can be rationalized is to read in the requirement that Eminent should be the effective cause for them.  And if the “effective cause” requirement is implied for the two scenarios of (i) secondary listing and (ii) fund raising from third parties, it must likewise be implied for the remaining one namely receiving funds from a financing source introduced by Eminent.  It is completely nonsensical and unnatural for the draftsman to want to internally distinguish among the three examples as to the application of the requirement of “effective cause”.  In my judgment the “effective cause” requirement is an overarching one, applicable to all three.

218.   It may well be said that if the contract contains a limiting factor of “effective cause” anyway, there would be no need to have a tailgunner clause because Eminent’s ability to earn a fee post‑termination would be taken care of by the “effective cause” argument.  It also raises the question of what would happen if a transaction was entered into (say) more than two years after termination but work done by Eminent prior to termination was the effective cause of that transaction — would Eminent still be able to claim success fee?  The point has not been argued before me but my tentative view is that the two year period could very well be a “long stop date” beyond which no fee would be payable for any services provided prior to termination.  This provides certainty to the parties and they would know that after two years there would be no more possibility of making or facing claims.  And in reality it would be rare for a transaction to be concluded two years after termination where the effective cause is work done by a party more than two years ago.  As I said, since the point has not been argued before me, this is my tentative view.  But on the facts and wording of the provisions in this case it makes more sense than a construction which awards a success fee to a party as long as a transaction occurs within two years of termination regardless of “effective cause”.’

5.5   The Recorder then found on the facts that Eminent was not the effective cause of the transaction with Dentsply.  He found that Eminent had arranged for the telephone conference but no particular types of deals or transactions or manner of fundraising or financing or investment were raised or discussed at that telephone conference.  The Recorder reviewed the contemporaneous communications and found that there is no suggestion or indication that a deal had already been hammered out or an understanding reached at the telephone conference.  The Recorder described how the deal between DIO and Dentsply eventually came about :

‘ 245. As to the deal that eventually materialised between Dentsply and DIO ..... DIO’s case is that it started off from certain negotiations between Friadent (a Dentsply subsidiary) with DIO in around May 2010 in respect of an OEM arrangement and that it was Friadent which made the initial approach. Charlie Lee (formerly with Eminent) had struck up a rapport with DIO during his time with Eminent and he was brought in by DIO to assist in communications with Friadant. Well into the parties’ work on the OEM front, in September 2010 Charlie Lee informed CEO Kim that Mr Bret Wise, CEO and Chairman of Dentsply, would like to go to Busan to visit DIO and DIO’s facilities. It turned out after his visit to DIO’s facilities that Mr Wise wanted to explore a greater partnership with DIO because he was very impressed by what he saw at DIO. Eventually the investment into DIO was made and an announcement was made.’

5.6   The Recorder held Eminent had failed to show that the work done by it under the FAA is the effective cause of the eventual deal between Dentsply and DIO.  He held :

‘ 254. For example there were emails:

   (1)   dated 6 September 2010 from Markus Boehringer to Charlie Lee;

   (2)   dated 16 September 2010 from Charlie Lee to senior management of Dentsply; and

   (3)   dated 20 September 2010 from Charlie Lee to Bill Jellison

in which an enormous amount of detail was gone into by way of provisionof further (and updated) information and discussion of the structure of the deal.  All these were not even on the horizon in April 2009.  It is quite clear that a lot of new work was done in 2010.  There was a visit to DIO facilities.  Up to date information was provided (financial fortunes of a company change all the time and it is a matter of common sense that businessman act on the basis of updated information, not on the basis of information seen a year ago). Deal structure as to level of ownership was mooted and “dangled”.  It was such new work (and not that telephone conference plus any preparatory work that had gone before that in 2009) which effectivelycaused the deal in 2010.  To call that telephone call the “effective cause” of the deal would be an opportunistic misuse and abuse of the English language.’

V.   The approach of the parties

6.1   The approach of the parties in this appeal has somewhat shifted from the approach of the Recorder below.  

1)   Eminent’s approach

6.2   Mr Suen (for the plaintiff) criticised the Recorder for adopting the implied term approach.  His construction of Clause 3 i) is not on the basis of an implied term of an effective cause or that it is subject to the causal or proximate requirement but by reference to the contextual background of the case.  He identified the key features of the FAA which include :

1)   Eminent was retained as advisor to advise DIO on wide range of finance-related matters including corporate governance, equity valuation, financial and accounting analysis, corporate financial planning, strategic capital raising and other corporate financing activities (recital paragraph 1).  The scope of work includes (i) study and review of business operations; (ii) design and writing of business plan; (iii) assisting DIO to collect, analyse and organise information with lawyer, accountant, auditor, etc; (iv) advising DIO on M&A, fund raising, private placements or shareholder restructuring; (v) providing independent research services; and (vi) advising DIO in appropriate investor relations and communications strategy (Clause 2(i)).  These are long-term ground works and goals.  They may be facilitative in general, but more likely than not would not be the effective cause of a transaction which materialises.

2)   The parties contemplated a long‑term collaborative relationship of 18 months, unlike a one‑off transaction in estate agencies.

3)   Eminent was retained on a ‘sole and exclusive basis’.  DIO could not engage other financial advisor during the term of the FAA.  The risk of multiple claims is not a concern.

4)   Under Clause 4(a), Eminent intended to ‘introduce’ DIO to its contacts, including private and institutional financing sources or strategic alliances.  DIO agrees that it will respect Eminent’s relationships with these investors and other sources of financing and that DIO shall not participate in or permit the circumvention of any obligation to Eminent created by the FAA or any means.

5)   Eminent was not retained as agent for a one‑off deal.  It was given no authority to negotiate and conclude transaction on behalf of DIO.  DIO can choose not to involve Eminent in the process.

6)   DIO can terminate the FAA upon 30 days’ prior written notice (Clause 1).  Eminent was thus in a vulnerable position.

6.3   Mr Suen argued that upon proper construction, the effect of Clause 3 i) is to introduce a conditional embargo on DIO against using any financing source introduced by Eminent in the 24 months post‑termination unless DIO pays Eminent fees :

1)    The requirement of ‘introduction’ in Clause 3 i) should be construed as meaning that the fee would be payable if Eminent was responsible for introducing (i.e. in the sense of ‘putting in contact’) the financing source in the sense that that financing source happens to (or subsequently) enter into the transaction, without Eminent being the effective cause.

2)   More precisely, Clause 3 i) should mean : ‘the fee would be payable if Eminent was responsible for introducing

(1)   the stock exchange at which the secondary listing was eventually completed, or

(2)   the third party with whom fundraising was eventually completed, or

(3)   the financing source from which funds were eventually received,

though Eminent was not an effective cause of the said transactions’.

3)   On its proper construction, the three scenarios in Clause 3 i) cannot be at large (i.e. it cannot mean ‘any transaction’).  However, the common thread in Clause 3 i) ought to be ‘introduced by Eminent’, not ‘the completion of which Eminent is the effective cause’.  The conditional embargo on DIO during the 24 months after the termination of the FAA requires DIO not to :

(1)   complete a secondary listing in an overseas stock exchange introduced by Eminent (i.e. put into contact in the sense of Clause 4(a) of the FAA, not with any implied term of effective cause), or

(2)   complete a fundraising with a third party introduced by Eminent (i.e. put into contact in the ‘Clause 4(a) sense’, not with any implied term of effective cause), or

(3)   receive funds from a financing source introduced by Eminent (i.e. put into contact in the ‘Clause 4(a) sense’, not with any implied term of effective cause),

unless (1) DIO is prepared to pay the equivalent transaction fee to Eminent, or (2) the period of 24 months is up.

6.4   Mr Suen argued that such construction is supported by the following six items of submissions :

1) Item 1. Clause 3 i) is not a tailgunner, or an extension of Clause 2(iv) :

(1)   Unlike the Clause 2(iv) (which Mr Suen accepts that it is subject to the implied term of effective clause), Clause 3 i) does not apply to ‘any transaction’.  The language of and triggers for payment under the two clauses are wholly different :

(i)   Under Clause 2(iv), the triggering event was ‘completion of any transaction for [DIO]’.  In contrast, under Clause 3 i), the subject matters are specified types of transactions, not ‘any transaction’ under Clause 2(iv).  Hence Clause 3 i) is not to achieve a time extension of Clause 2(iv).

(ii)   Clause 3 i) provides that within the 24 months after the termination of the FAA, if DIO completes certain ‘scenarios’ (i.e. not all transactions canvassed in the FAA), DIO has to pay Eminent fees computed according to the FAA or market practice.

(iii)   The transactions referred to in Clause 3 i) should not mean all the transactions intended to be covered under Clause 2(iv).  Otherwise, the clause need only refer to ‘any transaction’ as in Clause 2(iv).  There would have been no need and no point to name specific types of transactions in Clause 3 i).  The Court will not interpret a contract in such a way as to make an express term otiose or meaningless (Chitty on Contracts (32^nd Ed) at paragraph 13‑084).

(2)   Such construction is fortified by the placement of the Clause 2(iv) and Clause 3 i) under different sections of the FAA.  Clause 3 i) is put under the ‘Obligations of the Company [i.e. DIO]’, not under Clause 2 under ‘Engagement & Fee Structure’.  Clause 3 i) is not primarily intended to be a major fee provision or a major part of the ‘fee structure’.  Had Clause 3 i) been intended to achieve a time extension of Clause 2(iv), it should appear in Clause 2.

(3)   The Recorder failed to give effect to the language chosen by the parties, i.e. ‘introduced by [Eminent]’, despite acknowledging that where appropriate wording is used, parties can agree that a fee is earned by the mere fact of introduction without more.  It is telling that the sophisticated commercial parties chose ‘introduced by [Eminent]’ as the defining phrase for post‑termination transactions, not other formulation which might place a heavier onus on Eminent, such as ‘previously advised by Eminent’.  Such is the bargain of the parties, which should be given full effect.

2) Item 2.  The internal use and meaning of ‘introduction’ within the FAA, namely, Clause 4(a), where ‘introduction’ means putting the two sides into contact, not effective cause.

3) Item 3.  The FAA’s objective is to protect Eminent’s confidential database of contacts (provided by Eminent Clause 4(a)) from which DIO stands to benefit.

4) Item 4.  The FAA’s objective is to protect Eminent from potential claims by financing sources introduced by Eminent who eventually entered into transactions with DIO : see Clause 4(b), Clause 3 a).

5) Item 5.  The commercial sense in imposing a conditional embargo on DIO and the commercial context of financial advisory and investment banking.  This is by reference to the following matters : the engagement of Eminent as the sole and exclusive financial advisor, the matters identified in 3) and 4) above and the prevalence of clauses in financial advisory and investment banking field conferring entitlement to fees even when the advisors or banks do not arrange or facilitate the transaction (i.e. no requirement of ‘effective cause’) : see Deutsche Bank Securities Inc v Rhodes, 578 F Supp 2d 652 (SDNY 2008) at page 5; CIBC World Markets Corp v TechTrader, Inc, 183 F Supp 2d 605 (SDNY 2001); Lazard Freres & Co v Crown Sterling Management, 901 F Supp 133 (SDNY 1995); Chase Manhattan Bank, NA v Remington Products, Inc, 865 F Supp 194 (SDNY 1994); PaineWebber Inc v Campeau Corp, 670 F Supp 100 (SDNY 1987).  This is a fortiori the case when Clause 3 i) has the additional purpose of protecting Eminent’s confidential contacts and risk exposure.  Any suggestion of windfall on Eminent is misconceived.  In any event, it is not for the Court to meddle with contractual bargains because the Court thinks one party would have a raw deal where the contract is construed according to established principles.  As such, an effective cause requirement cannot be construed under Clause 3 i).

6) Item 6.  The context of Clause 3 i), being the 24-month post‑termination period when Eminent will not be providing the services contracted for under the FAA.Mr Suen focused on the issue of implied term under Item 6.  He referred to Eady J in Seymour Pierce v Grandtop International Holdings Limited [2010] EWHC 676 at paragraph 46, ‘to qualify the right to a success fee by reference to [an effective cause] requirement is clearly not a matter of business efficacy’.  He argued that one is not dealing with the sale of a house in an estate agency context.  One is dealing with raising finance on the rapidly changing international capital market.  The transactions are financial scenarios such as IPO, secondary listing, merger and acquisition, placements, fund raising, and financing : they require updated information and business plans of DIO, up‑to‑date appraisals and immediate negotiations, and are highly sensitive to the current market conditions.  As one is dealing with 24 months after termination of the FAA, in the context of such financing transactions, it must be plain that the parties did not envisage such a financing transaction (even with a source originally introduced by Eminent months ago) to be completed with the actual assistance of Eminent (for there would be none after termination of the FAA) or with Eminent as the effective cause.

6.4   If ‘the effective cause’ term was implied into Clause 3 i), Eminent would have to prove its services rendered many months ago prior to the termination of the FAA is the effective cause of a transaction entered into by DIO many months later during the 24 months which is almost impossible to attain (see Edmond de Rothschild Securities).

2)   DIO’s position

6.6   Although DIO supported the Recorder’s judgment on the requirement of ‘causal or proximity’ and the implication of effective cause, it first focused on the language used in Clause 3 i) itself.  Mr Sussex SC (together with Mr Zimmern) for DIO submitted that the correct approach to Clause 3 i) itself involved linking Eminent’s introduction of a transaction (which would include a counterparty) to DIO :

‘ ... should [DIO] complete a transaction (including and not limited to an [sic.] secondary listing or fund raising with any third parties or receive funds from a financing source) introduced by [Eminent]...’ (brackets and emphasis added)

6.7   He submitted that the three types of transactions (which for convenience have been placed in brackets above) set out in the clause are examples of or descriptions of transactions contemplated.  They are not exhaustive, as has been wrongly asserted by Eminent, because they follow the phrase ‘a transaction including and not limited to...’.  Being descriptive examples of ‘a transaction’, the introduction contemplated to be made by Eminent by Clause 3 i) must be to a transaction i.e. to a financing deal with a counterparty.  Not being exhaustive, the introduction must also apply to other transactions contemplated under the Agreement.  Any other construction would be strained.  He submitted that this construction also accords with business common sense.  He further referred to other provisions of the FAA to support his argument.

6.8   Mr Sussex had also made detailed written submissions in support of the Recorder’s approach which I will not repeat here because of my view below.

VI.   My view

1)   Contextual or literal interpretation?

7.1   There seems to be a dispute between the parties whether the Court should adopt the contextual or textual approach in interpreting the agreement between the parties.  In Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351, Ma CJ at [15] stated :

‘ 15. We have been referred to the very well-known statement of principle regarding the construction of contracts contained in the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society, to which can be added the judgment also of Lord Hoffmann NPJ in Jumbo King Ltd v Faithful Properties Ltd. What emerges from these cases – and other authorities on contractual interpretation – is the overall importance of context when construing contractual terms. The statements of principle in Investors Compensation Scheme and in Jumbo King refer time and again to the relevant background against which the relevant contract and contractual terms must be viewed. It is in my view not particularly helpful in most cases to refer to the “ordinary and natural meaning” of words because, as very often experience tells us, there can be much debate over exactly what is the ordinary or natural meaning of words. The surer guide to interpretation is context. Here, I would just add that in the area of statutory and constitutional interpretation, it is context that is key; context is the starting point (together with purpose) rather than looking at what may be the natural and ordinary meaning of words’.

7.2   In Arnold v Britton [2015] UKSC 36, certain observations by Lord Neuberger at [14]‑[23] about the Court looking at the language used by the parties and its natural meaning had been viewed by some quarters as a ‘row back’ from the guidance given by the UK Supreme Court in Rainy Sky SA v Kookmin Bank [2011] UKSC 50.

7.3   This apparent conflict was firmly rejected by the UK Supreme Court in Wood v Capita Insurance Services Ltd [2017] AC 1173. Lord Hodge JSC explained :

‘ 11 Lord Clarke of Stone-cum-Ebony JSC elegantly summarised the approach to construction in the Rainy Sky case [2011] 1 WLR 2900, para 21f. In the Arnold case [2015] AC 1619 all of the judgments confirmed the approach in the Rainy Sky case: Lord Neuberger of Abbotsbury PSC, paras 13‑14; Lord Hodge JSC, para 76 and Lord Carnwath JSC, para 108. Interpretation is, as Lord Clarke JSC stated in the Rainy Sky case (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause (the Rainy Sky case, para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299, paras 13, 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: the Arnold case, paras 20, 77. Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.

   12  This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: the Arnold case, para 77 citing In re Sigma Finance Corpn [2010] 1 All ER 571, para 12, per Lord Mance JSC. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.

   13  Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation.  Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement.  The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements.  Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals.  The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance.  But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement.  There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type.  The iterative process, of which Lord Mance JSC spoke in Sigma Finance Corpn [2010] 1 All ER 571, para 12, assists the lawyer or judge to ascertain the objective meaning of disputed provisions.

   14   On the approach to contractual interpretation, the Rainy Sky and Arnold cases were saying the same thing.’  (emphasis added)

2)   The language in Clause 3 i) is clear

7.4   In my view Lord Hodge’s explanation dismantled the rather superficial conflict argument of the ‘textual’ and ‘contextual’ approach.  Both are tools available for use in interpreting a document.  The choice depends on the nature of the documents itself.  Where the document is professionally prepared, sophisticated and complex, the textual approach may be adopted without the need to resort to the context or factual matrix of the case.  But where the document is informal, brief or not professionally drafted, a consideration of the context will assist. But even with professionally drafted documents, there may be inconsistencies or gaps which may be clarified by considering the context.  Inevitably, the task of interpretation must begin by first considering the language used.

7.5   On that basis, I agree with Mr Sussex’s interpretation of Clause 3 i) which provides a crisp and direct answer to the interpretation question.  In my view, the language of Clause 3 i) is clear enough to construe it as requiring Eminent to have introduced to DIO a transaction which the latter completed before Eminent is entitled to receive the fee.  To focus simply for the word ‘introduction’ would require the Court to ignore the rest of the phrase in that clause, namely, DIO completing ‘a transaction .... introduced by’ Eminent.  The three transactions named in Clause 3 i) is plainly descriptive and not exhaustive because they follow the phrase ‘a transaction including and not limited to’.  Accordingly there must be a link between the introduction and the transaction before Eminent is entitled to the fees.

7.6   However, Mr Sussex did not confine himself solely to the words used in Clause 3 i).  He also relied on the context by looking at the other relevant provisions of the FAA.  Reading the FAA as a whole, the wide ambit of Eminent’s tasks in Clause 2 is really geared towards Eminent helping DIO to attract potential investors and third parties (Clause 2(i)(2)).  In other words, to help DIO to raise funds.  This is apparent from Clauses 2(i)(3) and (4).  This accords with the Recorder’s finding that DIO wanted to seek capital to expand its business.  With this contextual background, the entitlement to a fee by Eminent is clearly not merely based on an introduction to DIO of a party but an introduction which led to a transaction.

7.7   Further, Clause 3 i) which is only effective for two years after a termination, points to a relation back to Clause 2(iv) of work required to be done by Eminent under the FAA, namely, the introduction of a transaction which raised funds for DIO and its completion which entitles it to receive fees.  This makes commercial sense.  Notwithstanding that Clauses 2 and 3 are under different sections of the FAA with different headings, the former being ‘Engagement & Fee Structure’ and the latter ‘Obligations of the Company’, it is plain that the fee under Clause 3 i) is to be calculated by reference, amongst other methods, to Clause 2(iv) which contemplated payment only upon completion of a transaction.  Hence Clause 3 i) cannot be looked at in isolation divorced from the other parts of the FAA.

7.8   In relation to the six specific arguments put forward by Mr Suen, I only need to address them briefly because I have in substance addressed the issue.

Item (1).   The term ‘tailgunner’ is not decisive.  I have already addressed the link between Clauses 2(iv) and 3 i).

Item (2).   To refer to the word ‘introduce’ in Clause 4(a) ignores the choice of words by the parties in Clause 3 i), namely, ‘a transaction...introduced by’ Eminent.

Items (3). and (4).   As Mr Sussex submitted, both Clause 4(a) (a restrictive covenant) and Clause 4(b) (indemnity) are self‑standing clauses that already provide protection to Eminent, and have little or nothing to do with the right of Eminent to fees triggered under Clause 3 i).

Item (5).  The argument by Mr Suen of a 24 months conditional embargo was not raised below.  It is an extremely strained argument.  As Mr Sussex pointed out Clause 3 i) is not a restrictive covenant (like Clause 4(a)), but instead places a positive obligation on DIO to pay Eminent fees in accordance with the FAA upon the completion of a transaction.

Item (6).   This deals with Mr Suen’s argument on implied term.  Based on the interpretation I have put upon Clause 3 i), it is not necessary to go into this topic.

7.9   Likewise, it is also not necessary for me to deal with the numerous cases on estate agent fees and their applications to other service providers who claimed fees based on introduction.

7.10   On the facts of this case, although Eminent introduced Dentsply to DIO, it did not introduce the completed transaction between Dentsply and DIO which would entitle it to receive fees.  I reach the same conclusion as the Recorder although by a slightly different route.

3)    Retainer fees

7.11   Mr Suen had put forward a ground of appeal on Eminent’s claim for retainer fees. The Recorder had invited the parties to address him on this point but Eminent did not make submissions and the Recorder did not deal with it in the judgment. As such it is not necessary for me to address it.  In any event, Mr Suen conceded that Eminent will only be entitled to the retainer fees if it is successful in its appeal.

VII.   Conclusion

8.  I would dismiss the appeal and make an order that Eminent is to pay DIO costs of the appeal with a certificate for two counsel.

Hon Au JA :

9.  I respectfully agree.