INSPIRING INVESTMENTS LTD v. CHUN HU HING AND ANOTHER

CACV 208/2018

[2020] HKCA 209

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 208 OF 2018

(ON APPEAL FROM HCA NO 2090 OF 2014)

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J U D G M E N T

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Hon G Lam J (giving the judgment of the Court):

1.  In the trial of the action, the plaintiff contended that the two defendants were jointly and severally liable for breach of contract. By his judgment dated 4 May 2018 (“Judgment”), L Chan J held that the 1^st defendant was liable to the plaintiff but dismissed the action as against the 2^nd defendant. The plaintiff now appeals to this court against that dismissal.

2.  The appeal was originally scheduled to be heard on 4 March 2020 but was adjourned as part of the general adjournment of proceedings implemented for public health reasons.  The plaintiff and the 2^nd defendant have consented to the disposal of the appeal based on written submissions without an oral hearing.

Background

Goldstone

3.  The action below arose out of certain loans made by the plaintiff to a company called Goldstone Apparel Concept Ltd (“Goldstone”). Goldstone is a company set up by the 1^st defendant in order to pursue the business of manufacturing, marketing and selling Guy Laroche Femme fashion wear in the Mainland.  The 1^st defendant had acquired a licence from Guy Laroche Femme for that purpose in 2008.

4.  The 1^st defendant was at all material times a shareholder and director of Goldstone.  The 2^nd defendant is the 1^st defendant’s son.  He was also a shareholder and, until 4 March 2014, a director of Goldstone.

The first convertible loan

5.  In 2010, through a mutual friend, the 1^st defendant became acquainted with Mr Ip Tak Chuen Edmond (“Mr Ip”).  As Goldstone was trying to source funding of $13,333,000 to develop the brand in the Mainland, the 1^st defendant asked if Mr Ip would be interested in taking part.  Discussions ensued and eventually resulted in Mr Ip agreeing to lend, through the plaintiff which was a company owned and run by him, $13,333,000 to Goldstone as a convertible loan.  The written agreement was entered into on 31 March 2010 between the plaintiff, Goldstone and the 1^st defendant.  The maturity date of the loan was 31 December 2015 or such later date as might be agreed.  The loan was convertible into shares of Goldstone based on a valuation of $66,665,000 for the entire company. The 1^st defendant guaranteed repayment of the loan.  The loan was advanced soon after the agreement.  We shall refer to this as the “first convertible loan”.

The $5 million loan from Mr Ip personally

6.  In November 2010, the 1^st defendant approached Mr Ip for more funding and he agreed to lend $5 million to Goldstone in his own name.  Under the written agreement, the loan was repayable on 15 May 2011.  Both defendants acted as guarantors of the loan.

7.  On 12 May 2011, Mr Ip received $2.5 million from their common friend on behalf of the defendants as partial repayment of this loan. 

The second convertible loan

8.  Shortly afterwards, in July 2011, the 1^st defendant approached Mr Ip and asked him for further funding for the project one last time.  It was eventually agreed that Mr Ip would, through the plaintiff, advance a further sum of $4,166,500, and that his right for the unpaid balance of the $5 million loan in the sum of $2.5 million would also be transferred to the plaintiff, making a total of $6,666,500.  The written loan agreement, dated 22 July 2011 and signed by the plaintiff, Goldstone and both defendants, provided that the loan of $6,666,500 was to mature on 21 July 2012 or such later date as agreed.  The loan was convertible into Goldstone’s shares based on the same valuation of $66,666,500 for the company.  Both defendants guaranteed repayment of the loan.  In addition, the 1^st defendant agreed to provide a property in Toronto he held jointly with his wife as security for the loan.  We shall refer to this as the “second convertible loan”.

The Sale of Shares Agreement

9.  In March 2012, a private equity investment fund, SAIF Partners IV LP (“SAIF”), was interested in investing in the project and acquiring shares in Goldstone, but requested that the first convertible loan be converted into shares and that the second convertible loan be postponed for two years to July 2014, as it did not want the funds it invested to be used for repaying these loans.  This was not acceptable to the plaintiff and on 5 June 2012 the 1^st defendant asked whether Mr Ip would agree to postpone repayment of the second convertible loan to 30 June 2013. 

10.  After further exchanges, by 17 June 2012 it seems to have been agreed that the first convertible loan would be converted into preferred shares on the same terms as SAIF’s investment, but there was not yet any agreement as regards the second convertible loan.  SAIF proposed that the 1^st defendant take over the loan personally (as debtor) and then find an investor to inject funds so that the loan could be repaid to the plaintiff.  Mr Ip however did not agree with this proposal.

11.  The 1^st defendant had a meeting with Mr Ip at his office on 21 June 2012.  On 22 June 2012 at 4:35 pm, the 2^nd defendant sent an email to Mr Ip in the name of both defendants, stating:

“ As we mentioned during our meeting yesterday, we will provide you with the following:

1) 20M HKD Preferred Shares

2) Dexter Chun and William Chun Personal Guarantee at 6.66M HKD

3) We will sell[1] your 6.66M HKD shares at Premium (aim at 2X of the current valuation of 66M HKD.) We should complete this transaction the latest by Dec 31^st, 2012.

4) Furthermore, to demonstrate our commitment and confidence, we pledge to [you] our property in Toronto.”

12.  On 24 June 2012, as a comfort to Mr Ip, the 1^st defendant sent an email to Mr Ip informing him that one of the existing shareholders in Goldstone, Suzanne Choo, was willing to buy 2,000 of the plaintiff’s preferred shares at a total price of approximately $1.12 million.

13.  The 1^st defendant had a meeting with Mr Ip again on 25 June 2012 over lunch to discuss the conversion of the plaintiff’s loans, during which he apparently gave Mr Ip a letter dated 22 June 2012 pledging his interest in the Toronto property in these terms:

“ In order to support your conversion of the second CB at HK$6,666,500 to preferred shares at Goldstone Apparel Concept Limited (GAC), at similar terms as SAIF, I, Dexter Hu Hing Chun (Canadian passport xxxxxx), have agreed to unconditionally assign to you my property in Toronto, Canada, at the following address: ...

This unconditional assignment terminates when I successfully sell your above GAC preferred shares, current value at HK$6,666,500, to another investor.  As discussed, I will try to sell your above preferred shares at a premium, which will be totally for your account. ...”

14.  After the lunch meeting, at 2:31 pm on 25 June 2012, the 1^st defendant wrote an email to Mr Ip and representatives of SAIF (copied to the 2^nd defendant).  The part of the email that related to the second convertible loan read as follows:

“ The Second CB Converted into Preferred Shares — Edmond proposed that he will give Chun Hu Hing a ‘put’ on his second CB converted preferred shares and I could put this in the market place at the price $10M until 31^st December 2012 for which I have to pledge my shares as security. Edmond is aware that I have to dispose some of my shares to bring in about RMB 5.5M to pay out those short term loans and he would not unreasonably withheld my rights to sell those shares. Kindly confirm.” [sic]

15.  Mr Ip, the defendants and SAIF’s representatives had a meeting on 26 June 2012.  Among other things, it was mentioned that Mr Ip had a “put” option in respect of the preferred shares converted from the second convertible loan.

16.  On 28 June 2012, the 1^st defendant sent an email to Mr Ip (copied to the 2^nd defendant) attaching a draft personal guarantee by both defendants and stating:

“ Please let us have your comments. If it is OK to you, I will sign and send you mine first. William is on the road and he will send you the signed copy next week.”

17.  Mr Ip did not propose any amendments to the guarantee.  The 1^st defendant executed the personal guarantee on or about 28 June 2012 in substantially the same terms as the draft (“Personal Guarantee”), which provided as follows:

“ BETWEEN

Chun Hu Hing ... and Chun Hung Wai ... (the ‘Guarantors’); and Inspiring Investments Limited, c/o Edmond Ip ... (the ‘Investor’).

...

1.  Conversion of HK$13,333,000 CB Loan to Preferred Shares

The Investor agrees to convert the CB Loan at HK$13,333,000 (CB Loan #1) plus accrued interest as GAC preferred shares.

2.  Conversion of HK$6,666,500 CB Loan to Preferred Shares

The Investor agrees to convert the CB Loan at HK$6,666,500 (CB Loan #2) plus accrued interest as GAC preferred shares on the following understanding:

i)  The Guarantors will help selling this lot of preferred shares at a price above the Investor’s cost (target at 1.5X the cost) by or before 31^st December, 2012.  All premium above the cost will go to the Investor.

ii)  Chun Hu Hing, one of the guarantors, has signed an Assignment Letter of a property at ... until this lot of preferred shares, converted from the CB Loan #2, is successfully sold to another investor.

3.  Guarantors of CB Loan Principal Amount

The Guarantors, being founding directors of GAC, agree to provide personal guarantees that the Investor will not lose any principal amount, ie HK$13,333,000 for CB Loan #1 and HK$6,666,500 for CB Loan #2.  The above guarantee is provided to the earlier date of either the Investor will have sold his holding of the GAC preferred shares or GAC hits Qualifying Public Offering — pre‑offering valuation at US$200M and raising new capital at least US$50M, as defined by SAIF investment closing document, on or before 30^th June 2016.”

18.  In the event, the 2^nd defendant did not sign the Personal Guarantee.

19.  On 29 June 2012, the plaintiff entered into a written agreement with, among others, Goldstone, for the acquisition of the preferred shares converted from the first and second convertible loans.  On the same date, the plaintiff, SAIF and other shareholders of Goldstone and the relevant companies also entered into a shareholders’ agreement.

20.  The plaintiff and the defendants, however, did not draw up any separate written agreement between themselves (other than the Personal Guarantee and letter “assigning” the Toronto property).  What the precise terms of their agreement were was one of the major issues in the trial. 

21.  By 31 December 2012, the defendants had not been able to arrange for the sale of the plaintiff’s shares converted from the second convertible loan. 

22.  By late 2013 or early 2014, the business had foundered.  The licence from Guy Laroche was terminated or surrendered; many employees had resigned and the Mainland operations had ceased, with numerous claims being raised by creditors.  The plaintiff’s shares in Goldstone had become worthless.

23.  The writ of summons in the action below was issued on 20 October 2014.

The relevant part of the parties’ cases

24.  The plaintiff’s case in the action was that there was a “Sale of Shares Agreement” between it and the defendants, made partly orally and partly in writing.  The oral part was contained in the discussions on 21 June 2012 between Mr Ip (on behalf of the plaintiff) and the 1^st defendant (on behalf of himself and the 2^nd defendant).  The written part was contained in the email from the 2^nd defendant to Mr Ip of 22 June 2012 at 4:35 pm, the email from the 1^st defendant to Mr Ip and SAIF’s representatives of 25 June 2012 at 2:31 pm, and the Personal Guarantee.

25.  According to the plaintiff, the Sale of Shares Agreement contained the following terms:

(1)  The plaintiff would convert the second convertible loan together with interest accrued thereon into 12,287 preferred shares (the “Preferred Shares”).

(2)  The plaintiff would forgo its right to seek repayment of the second convertible loan and interest from Goldstone.

(3)  In consideration for the plaintiff’s above obligations:

(i)  The 1^st defendant and/or the 2^nd defendant “would arrange the Plaintiff to sell the Preferred Shares to third parties for at least $6,666,500 by 31 December 2012” (“the 1^st Obligation”).

(ii)  In the event that the 1^st defendant and the 2^nd defendant fail to sell the Preferred Shares to third parties by 31 December 2012, the 1^st defendant and/or the 2^nd defendant would purchase them from the plaintiff at $6,666,500 (“the 2^nd Obligation”). 

(iii)  The 1^st defendant and the 2^nd defendant would execute a personal guarantee in favour of the plaintiff as security for their performance of the 1^st and 2^nd Obligations as set out above.

(iv)  The 1^st defendant would pledge his interest in his Toronto property to Mr Ip as security for his performance of the 2^nd Obligation.

26.  In their pleading the defendants stated that they did not agree or undertake to purchase the Preferred Shares from the plaintiff at $6,666,500 in the event that they were not sold to third parties by 31 December 2012.  It was admitted that the 1^st defendant executed a personal guarantee but averred that the 2^nd defendant did not execute any personal guarantee.[2] At the trial the defendants did not dispute they were obliged to assist the plaintiff to sell the Preferred Shares on 31 December 2012.[3]  The issue was whether by the 1^st Obligation, they had undertaken to procure the sale of the Preferred Shares or merely undertaken to make endeavours to procure the sale.  Another issue was whether the defendants had assumed the 2^nd Obligation.

The Judgment

27.  In his Judgment:

(1)   In respect of the 1^st Obligation, the judge found that both defendants were only obliged to “help selling” the Preferred Shares at a price above $6,666,500 on or before 31 December 2012, and did not have an absolute obligation to ensure such sale.[4]

(2)   The judge found that the 1^st defendant had assumed the 2^nd Obligation,[5] but that the 2^nd defendant had not.[6]

(3)   He held that both defendants had breached the 1^st Obligation in that they had not made reasonable endeavours to assist in the sale of the Preferred Shares by or even after 31 December 2012.[7]

(4)   He held that the breach of the 1^st Obligation resulted in the onset of the 2^nd Obligation which fell solely on the 1^st defendant, and did not result in any liability for either defendant to pay damages for breach of the 1^st Obligation itself.[8]

(5)   He held that under the 2^nd Obligation, the 1^st defendant had to purchase the Preferred Shares from the plaintiff within a reasonable time after 31 December 2012.[9]  The 2^nd Obligation was kept alive beyond that date but finally repudiated on 14 May 2014 when the 1^st defendant indicated that he was not in a position to pay $6,666,500 as he had no financial resources to do so.  This repudiation was accepted by the plaintiff by the service of the writ on the 1^st defendant in around October 2014.[10]

(6)   By October 2014, the Preferred Shares had no value.[11]

(7)   The judge rejected the defendants’ plea that the plaintiff had failed to mitigate its loss.[12]

28.  Accordingly, the judge gave judgment for the plaintiff against the 1^st defendant in the sum of $6,666,500 together with interest and costs.  As to the action against the 2^nd defendant, the judge made no order except an order for the plaintiff to pay the 2^nd defendant’s costs.

The appeal

29.  By supplementary notice of appeal dated 5 July 2019 which in effect replaced the original notice of appeal, the plaintiff now appeals against the Judgment, raising grounds which fall into two principal contentions.  As advanced in the written submissions of the plaintiff’s counsel, they are, in broad terms, that:

(1)   The 2^nd Obligation was binding not only on the 1^st defendant but also on the 2^nd defendant.  The 2^nd defendant was also in breach of it, and should therefore be ordered, jointly and severally with the 1^st defendant, to pay $6,666,500 to the plaintiff as damages for failing to purchase the Preferred Shares (“First Basis”).

(2)   As the plaintiff’s fall‑back position, if the First Basis fails, then the 2^nd defendant should be ordered to pay damages in the sum of $6,666,500 for breach of the 1^st Obligation (“Second Basis”).

30.  We deal with these two contentions in turn below.

First Basis

31.  In his oral evidence, Mr Ip explained that the 1^st Obligation was discussed at the meeting on 21 June 2012 but discussion of the 2^nd Obligation only started during the lunch meeting he had with the 1^st defendant on 25 June 2012.  He accepted that the 2^nd defendant did not attend that lunch meeting.  The 1^st defendant’s email issued immediately after this meeting (see §14 above) recorded Mr Ip’s proposal as a “put” (ie an option to put) of the Preferred Shares to the 1^st defendant with a pledge of the 1^st defendant’s shares in Goldstone as security.

32.  As to the meeting on 26 June 2012, Mr Ip’s oral evidence was set out in the Judgment at §44 as follows:

“ Court — And then in the 3^rd meeting on 26^th June, everybody was there including William.

Ip — Correct.

Court — And what was agreed?

Ip — The “put”, as far as I’m concerned, I asked Jason So, if he had read about this e‑mail too. And I said “if one day I would be the major shareholder would you be agreeable?” He said “no problem.

Court — Was there any discussion in this last meeting on 26^th that both Dexter and William were going to accept the “put” arrangement?

Ip — Well, for a start, the e‑mail on the 25^th, William was copied. So he should know about my requirement at the time to “put” the Preferred Shares to Dexter.

Court — But it didn’t include William Chun?

Ip — According to this, no.

Court — So William Chun was not affected by this arrangement?

Ip — On 26 when we talked, he was there.

Court — So it was talked about again, discussed again?

Ip — Yes.

Court — Not simply that after everybody had taken his seat, you just asked Jason So “whether you would mind if I one day would become the biggest shareholder?” And he nodded his head and said “ok”. Not as simple as that?

Ip — I did explain to him why I needed the “put”.

Court — You explained to Jason So.

Ip — I presume they heard it.

Court — Of course, they were in the meeting.

Ip — Right.

Court — You explained to Jason So why you needed the “put” from?

Ip — From? Well technically two of them, but I guess in writing, it’s only to Dexter. So I can only rely on the writing to say the “put” is to Dexter. And that’s ok, that’s acceptable to me.

Court — So you are not insisting that William Chun has also agreed to the “put” arrangement.

Ip — Well, I think in my mind the “put” is to them. But if he said he never agreed to it and I have no evidence to support it. I’m prepared to accept that as well.

Court — Alright.

Ip — But the “put” to Dexter is definitely agreed in my view.

Court — Because he has written it in the e‑mail.

Ip — Correct.

(Morning Break)

Court — Ms Ho, it seems that there is only good evidence against Dexter. Do you take a different view of that? From the evidence of Mr Ip.

Ho — In relation to the 2^nd obligation?

Court — Yes.

Ho — Yes, can I do a re‑examination on that part and try to see whether I can clarify that.

Court — What I’m considering is that, and of course it is ... It seems that Mr Ip is only keen on going after Dexter.

Ho — I think he is shaking his head, and that is not my instructions.

Court — Alright. Then let’s carry on.

Ho — Yes.

Ip — 我可唔可以補充吓呢，我唔係being inconsistent吓。我昨日都講咗呢個 “put”，個26號個meeting呢就係同Jason So講，就我又“put” 我要攞個 shares 做security。我昨日都講咗William 嘅shares係 relatively small. Didn’t talk about getting his shares as collateral security。所以我頭先講 in my own mind呢，個 “put” 係to both of them嘅，不過你問我有無strict evidence呢，我就話technically I can only say我無 documentary evidence 話specially同佢有講過 “put”，但唔等如in my own mind at the time when I talked about the “put”, it’s to both of them. It’s being consistent. I need protection from both of them. Right?

(Free translation: Ip — May I make a supplement? I am not being inconsistent. I said already yesterday that this “put”, at the 26^th meeting it was said to Jason So, that I also “put”, I had to take the shares as security. I had already said yesterday, William’s shares are relatively small. Didn’t talk about getting his shares as collateral security. Therefore, I just said that in my own mind, the “put” was to both of them, but you ask me if there is strict evidence, I therefore say technically I can only say I do not have documentary evidence that says specially (I) had talked with him on “put”, but it is not the same as in my own mind at the time when I talked about the “put”, it’s to both of them. It’s being consistent. I need protection from both of them. Right?)

Court — Alright.

(The 2^nd obligation in relation to William was not canvassed in the re‑examination of Edmond Ip.)” (italics in the Judgment)

33.  The judge’s reasoning, as expressed in his Judgment, is as follows.  The judge stated[13] that Mr Ip did not say directly that he sought the “put” option from both defendants and conceded there was nothing in writing that bound the 2^nd defendant to the 2^nd Obligation.  Mr Ip never said he had asked the 2^nd defendant or both defendants to accept the 2^nd Obligation or that he had said this to Mr Jason So, SAIF’s representative.  Mr Ip agreed he had no evidence to support his case on the 2^nd Obligation as against the 2^nd defendant and was prepared to accept that the 2^nd defendant never agreed to it.  Mr Ip’s focus was not on the 2^nd defendant because his shareholding was relatively small.  While Mr Ip maintained that in his mind at the time when he talked about the “put”, it referred to both defendants.  However, the judge reasoned, if it was only in Mr Ip’s mind, it would not suffice to fix the 2^nd defendant with liability for the 2^nd Obligation.

34.  The judge further doubted whether Mr Ip indeed had in mind both defendants when he discussed the “put” at the time, for three reasons.  First, the 1^st defendant’s email of 25 June 2012 at 2:31 pm raised the “put” for the first time, but only mentioned it was a “put” to the 1^st defendant, not the 2^nd defendant.  Secondly, Mr Ip’s subsequent emails asking for performance of the 2^nd Obligation were only addressed to the 1^st defendant and did not even mention the 2^nd defendant.  For example, in the email dated 15 July 2013 to the 1^st defendant, Mr Ip asked: “... just wonder how you propose settling your obligation to me in respect of the put option to you”; in the email dated 13 August 2013 to the 1^st defendant, Mr Ip said: “it does not seem likely that the Preferred Shares meant to be taken back by you at the end of 2012 is going to happen in the short term”.  Thirdly, the plaintiff’s statement of claim originally pleaded the 2^nd Obligation and its breach solely against the 1^st defendant.  The allegation was only extended to the 2^nd defendant by re‑amendment over 20 months later.[14]

35.  The judge accepted it was inherently probable for William to have agreed to both the 1^st and 2^nd Obligations and that if he was asked to shoulder the 2^nd Obligation, he would have agreed.[15] But he found that what was missing was the evidence that Mr Ip had required the 2^nd defendant to shoulder the 2^nd Obligation or that he agreed to do so.  Accordingly, there was no agreement between them on the 2^nd Obligation.[16]

36.  These are findings of fact by the trial judge and, as the plaintiff accepts, the Court of Appeal can only intervene if it is satisfied that the findings are plainly wrong or the judge had fallen into palpable errors that give rise to grounds for intervention by the appellate court: Ting Kwok Keung v Tam Dick Yuen & Others (2002) 5 HKCFAR 336, §42; China Gold Finance Ltd v CIL Holdings Ltd & Others (CACV 11/2015, 27 November 2015), §§11, 15-19.

37.  On this appeal Mr Jonathan Wong and, with him, Ms Jacquelyn Ng, neither of whom appeared below, submit that the parties’ conduct was “capable of giving rise to an unequivocal inference” that the 2^nd defendant “had been offered and had agreed to be bound by the 2^nd Obligation”, citing Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, §§38-39.

38.  In our view, the plaintiff’s submission evinces a confusion of two different concepts.  The question dealt with in Shanghai Tongji is the finding of a contract, not formed orally or in writing, but implied by conduct.  The law accepts that in certain cases, which are unusual, a contract may be inferred from conduct, where the conduct of one party may properly be understood objectively to constitute the offer to enter into a contract and the conduct of the other party may likewise be understood to constitute an acceptance of that offer: see The Aramis [1989] 1 Lloyd’s Rep 213, 224 and Allied Marine Transport Ltd v Vale Do Rio Doce Navegacao SA (“The Leonidas D”) [1985] 1 WLR 925, 936, both cited in Shanghai Tongji, at §§37 & 40 respectively.  But the court will not imply a contract on that basis lightly.  In order to do so it must be satisfied that the conduct is unequivocally referable to the contract contended for.  It is not enough if the conduct relied upon is capable of constituting an offer or acceptance as the case may be (Shanghai Tongji, §§38, 48).

39.  This, as it seems to us, is not what the plaintiff is contending or can contend for, as it has not advanced below any case of contract implied by conduct, nor has it pleaded the conduct that unambiguously constituted the offer and acceptance respectively.  The pleaded case and the case run below is that the Sale of Shares Agreement was made partly orally and partly in writing, not one to be implied from conduct.

40.  Implying a contract from conduct is quite different from a case where a disputed contract is said to have been formed orally, or partly orally and partly in writing, and the party contending for the contract seeks to rely on the parties’ conduct as the basis for inferring, as a fact, that the parties have orally said what they are alleged to have said based on which the contract is to be found.  This would simply be an exercise of fact‑finding by inference.  It is on this basis that we approach the plaintiff’s submissions.

41.  The first point taken on behalf of the plaintiff is that the strict segregation of identities between the defendants in the Judgment is unwarranted because the defendants had been liaising with Mr Ip as one without distinction.  We do not think this is an entirely accurate portrayal of the discussions at the time.  The 1^st defendant was clearly the main player in the project, and the main person (between the defendants) with whom Mr Ip communicated. He owned a far larger number of shares in Goldstone than did the 2^nd defendant.  He alone guaranteed the first convertible loan.  He alone pledged his interest in his Toronto property as security for the second convertible loan.

42.  The email which the 1^st defendant wrote immediately after the lunch meeting specifically referred to the 2^nd Obligation as an obligation of the 1^st defendant, and referred to the pledge of the 1^st defendant’s shares as security for that obligation.  As Mr Ip explained in his oral evidence, this had significance for SAIF, which was why he mentioned it to Mr Jason So at the meeting on the following day, because if the 1^st defendant failed to perform the 2^nd Obligation, it was possible that the plaintiff would claim the 1^st defendant’s pledged shares and thus become the largest shareholder in Goldstone.

43.  The fact that in some of the previous discussions the 1^st defendant had spoken for the 2^nd defendant, or vice versa, does not make it more likely than not that Mr Ip was referring to both defendants when he mentioned the “put” option in the presence of those at the meeting on 26 June 2012.  In fact, with the background knowledge of the email of 25 June, a reasonable person would have understood Mr Ip to be referring to the “put” option mentioned in the email, which clearly only mentioned putting the shares to the 1^st defendant.  Of course Mr Ip could have made expressly clear at the meeting that he required a put option from both defendants, but he never did so, even on his own evidence.  In that context, the 2^nd defendant’s silence at that meeting when the put option was mentioned cannot properly be regarded as an acceptance of the 2^nd Obligation on his part.

44.  It is argued that the judge had overlooked Mr Ip’s evidence that the 1^st defendant’s larger shareholding was only relevant to the pledge and that the put option was a separate question.  We do not think any error has been made out.  All that Mr Ip said in the evidence referred to was that the fact that he only sought the pledge from the 1^st defendant did not mean the 2^nd defendant was not included in the put option.  This is hardly positive evidence that Mr Ip actually sought the put option from the 2^nd defendant.  The fact is that the email of 25 June referred to the put option and the pledge of shares as a composite arrangement, and that was the setting against which the matter was raised on 26 June.  In addition, the judge gave three further reasons why he considered a put option from the 2^nd defendant was unlikely to have been in Mr Ip’s own mind (see §34 above).  None of these reasons is challenged in the plaintiff’s submissions on this appeal.

45.  Secondly, it is submitted that the Sale of Shares Agreement was made against the background that the 1^st and 2^nd defendants were joint and several guarantors of the second convertible loan, and that there was no reason why the plaintiff should prejudice itself by releasing the 2^nd defendant from personal liability.  It is not clear to us how this shows that there was any error in the judge’s findings.  It is correct that the 2^nd defendant had guaranteed the second convertible loan, and this explains why the judge said if the 2^nd defendant had been asked to shoulder the 2^nd Obligation, he would have agreed.  But this is no basis for inferring that Mr Ip actually asked the 2^nd defendant and he agreed.  As the judge found, Mr Ip did not have the 2^nd defendant in mind when he referred to the put option on 25 and 26 June 2012. 

46.  Further, from the point of view of the plaintiff at the time, the Sale of Shares Agreement would not release the 2^nd defendant from personal liability, for, according to the plaintiff, the 2^nd defendant (together with the 1^st defendant) had an absolute responsibility under the 1^st Obligation to procure the sale of the Preferred Shares at a price not lower than $6,666,500.  Although it was in the end held by the judge to be merely an obligation to use reasonable endeavours to procure a sale, this was not Mr Ip’s own understanding at the time.  So even if Mr Ip subjectively had no reason to release the 2^nd defendant from personal liability, this is no basis to infer that he would therefore have asked the 2^nd defendant to join in the 2^nd Obligation.

47.  Thirdly, the plaintiff relies on the Personal Guarantee and the 1^st defendant’s email to Mr Ip (copied to the 2^nd defendant) attaching the draft which stated “William is on the road and he will send you the signed copy next week”.  It is submitted that the 2^nd defendant’s agreement to the Personal Guarantee constitutes unequivocal conduct from which to infer his agreement to the 2^nd Obligation. 

48.  But the 2^nd defendant did not agree to the Personal Guarantee.  The undisputed evidence is that he never signed it and never reverted to Mr Ip about it.  Nor did Mr Ip, despite not having obtained the Personal Guarantee from the 2^nd defendant, take up the matter with the 2^nd defendant at any time.  There was no case run below that the 2^nd defendant was to be treated as a guarantor under the Personal Guarantee even though he did not sign it, whether on the basis that the 1^st defendant agreed to it as his agent or otherwise.

49.  The plaintiff also prays in aid clause 3 of the Personal Guarantee.  It is said that the judge erred in saying that the clause did not mention anything about the sale of the Preferred Shares.[17] Clearly what the judge was saying there was that the clause made no mention of the sale of the Preferred Shares to any of the defendants, as he went on to say it was therefore not a reference to the 2^nd Obligation.

50.  Furthermore, clause 3 actually guaranteed the principal of both the first and second convertible loans.  But the 2^nd defendant had not previously guaranteed the first convertible loan at all, and for that reason he found the Personal Guarantee objectionable and did not sign it.  The 2^nd defendant might well have signed the guarantee had that part been omitted, but the fact that he did not consider the other parts of the document objectionable is not a basis for finding that he was actually asked and agreed to join in the 2^nd Obligation.

51.  Counsel for the plaintiff also submit that the draft guarantee was provided to Mr Ip after the meeting on 26 June 2012, and showed the 2^nd defendant’s understanding after the meeting that he was not released from his personal liability.  In our view this takes the matter no further.  The draft guarantee, which the 2^nd defendant neither drafted nor signed, is not evidence of his understanding.  His position was that he would be prepared to take up potential personal liability to the extent of the second convertible loan (ie $6,666,500).  His original personal liability under the guarantee of the second convertible loan could not, however, without a proper legal basis, be deemed somehow to have “transformed” into the 2^nd Obligation.

52.  For these reasons the argument on the First Basis fails.

Second Basis

53.  The judge considered that the 1^st and 2^nd Obligations together provided a composite mechanism for the plaintiff to dispose of the Preferred Shares.  In the first instance, the 1^st Obligation required both defendants to make reasonable endeavours to procure the sale of the Preferred Shares at a price not less than $6,666,500 by 31 December 2012.  It is only if they failed to procure a sale that the 2^nd Obligation arose, requiring the 1^st defendant himself to purchase the Preferred Shares at that price. The performance of the 2^nd Obligation by the 1^st defendant would completely satisfy any loss suffered by the plaintiff from the breach of the 1^st Obligation.  If the 1^st defendant defaulted on the 2^nd Obligation, the plaintiff could pursue him for specific performance or damages.  The judge therefore concluded that the defendants’ failure to take steps to assist the sale of the Preferred Shares triggered the 2^nd Obligation on the 1^st defendant’s part, but did not result in any liability on the defendants to pay damages for breach of the 1^st Obligation.[18]

54.  The plaintiff argues that the judge erred in effectively treating the 2^nd Obligation as exempting the 2^nd defendant from compensatory liability arising from the breach of the 1^st Obligation.  Whilst this is not quite the correct way of characterising the judge’s conclusion, it seems to us arguable that once the 1^st Obligation was breached, there was a liability to pay damages, though the amount thereof would depend on the loss suffered which would in turn be affected by the performance of the 2^nd Obligation by the 1^st defendant.

55.  It is, however, in our view unnecessary to enter into a detailed discussion of this question, because:

(1)   Assuming there is a separate liability to pay damages for breach of the 1^st Obligation, such damages will in accordance with basic principles have to be assessed on a compensatory basis by reference to the position the plaintiff would have been in if the obligation had not been breached: Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, 39; Keep Point Development Ltd v Chan Chi Yim & others (2003) 6 HKCFAR 160, §§25-27. 

(2)   Since the 1^st Obligation was merely an obligation to make reasonable endeavours to procure a sale at the relevant price rather than an absolute obligation to ensure a sale, there was no guarantee that, even if it had been duly performed, the Preferred Shares would indeed have been sold to a third party for not less than $6,666,500. 

(3)   It is for the plaintiff to show by evidence what loss it actually suffered as a result of the defendants not having made reasonable endeavours.  This would depend on how likely a sale at the requisite price or above could have been procured had the defendants made reasonable efforts.  It is by no means obvious there was anything lost, and it seems to us that a proper examination of the question would involve the assessment of the opportunity lost.  The supplementary notice of appeal itself adopts this analysis, where it states that given the defendants’ duty was to use their best endeavours, “it necessarily follows that the relevant loss to the Plaintiff would be loss of a chance to secure a sale to a third party at least for HK$6,666,500”.[19]

(4)   In order to recover damages for loss of a chance, the plaintiff must prove as a matter of causation that it had a real or substantial chance as opposed to a speculative one; the court must then evaluate that chance as part of the exercise in the assessment of damages: Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602, 1614D.

(5)   However, there was no such claim for loss of a chance pleaded or run below.  If it had been raised, the shape of the evidence and the course of the trial might well have been different.  Accordingly, the claim cannot be advanced for the first time on appeal and the plaintiff’s counsel have, rightly in our view, abandoned that part of the supplementary notice of appeal.

(6)   There is no basis to assess damages against the 2^nd defendant in the sum of $6,666,500 as suggested by the plaintiff since there was no absolute obligation for him to procure a sale and no obligation on him to indemnify the plaintiff for any loss.

(7)   It follows that even if there is an independent liability on the 2^nd defendant to pay damages for breach of the 1^st Obligation, only nominal damages would be awarded.  This is not what is sought and is in any event pointless.  The question is therefore wholly academic.

Conclusion

56.  For these reasons, we dismiss the appeal.  There will be an order nisi that the plaintiff do pay the 2^nd defendant the costs of the appeal, to be taxed if not agreed, with a certificate for two counsel.