MAK KANG HOI v. HO YUK WAH DAVID

HCA14674/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.14674 OF 1999

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J U D G M E N T

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Introduction

1. In this action, the plaintiff seeks to recover the sum of $32 million being the balance of sums totalling $50 million paid to the defendant between February 1997 and March 1997 pursuant to successive agreements made between them.  By mid-July 1998, the defendant had repaid the plaintiff $18 million and the only issue between the parties is whether the plaintiff is entitled to recover the balance under the terms of the agreements made between them or otherwise in accordance with the pleaded case. 

The plaintiff’s pleaded case

2. The plaintiff’s case is that in reliance on representations by the defendant, the plaintiff entered into an agreement with the defendant in February 1997 whereby the plaintiff agreed to purchase from the defendant shares in a company called Greater Beijing Region Expressways Limited (“GBRE”) in anticipation of the listing on the Hong Kong Stock Exchange of the holding company of GBRE for $20 million and upon terms that if the holding company could not be listed by the end of July 1997, the defendant would refund to the plaintiff the purchase price paid by the plaintiff for the shares and when the holding company was listed, the defendant at his option could deliver the shares at a discounted price or repay within one month after listing a sum calculated in accordance with a formula agreed between them (the 1^st Agreement).  The purchase price under the 1^st Agreement was increased from $20 million to $30 million which was paid by the plaintiff to the defendant by 17 February 1997.  From the further and better particulars given by the plaintiff pursuant to request, it appears that the plaintiff intended to plead that the increase in the purchase price was for additional shares in GBRE.  On or about 20 February 1997, the plaintiff agreed with the defendant to purchase additional shares held by the defendant in GBRE for a further $20 million (the 2^nd Agreement), the other terms and conditions being the same as those of the 1^st Agreement.  The plaintiff paid a further $20 million to the defendant.  The listing of the holding company of GBRE did not take place by the end of July 1997 but in breach of the 1^st and 2^nd Agreements and despite repeated demand, the defendant failed or refused to repay the plaintiff the sums of $30 million and $20 million under the 1^st and 2^nd Agreements.  That appears to be the plaintiff’s primary case. 

3. In May 1998, the defendant agreed to repay the plaintiff the sum of $10 million, representing that arrangements were still being made for the listing of the holding company on the Hong Kong Stock Exchange.  The repayment was made but by July 1998, the listing of the holding company had not materialised.

4. A further repayment of $8 million was made in mid-July 1998 with the defendant representing that arrangements were still being made for the listing and would materialise soon.  Up to 1 September 1999, the listing had not materialised.  The plaintiff pleads as an alternative case that the 1^st and 2^nd Agreements were frustrated and the defendant is liable to repay the balance of $32 million.

5. Alternatively, it is pleaded that the 1^st and 2^nd Agreements were subject to an implied term that the holding company would be listed on the Hong Kong Stock Exchange within a reasonable time and the defendant had so warranted, that a reasonable time having been exceeded, the defendant is liable to repay the balance of $32 million or is liable for $32 million as the loss and damage arising from the defendant’s breach of warranty.

The defendant’s pleaded case

6. The defendant’s case as pleaded is that the agreements between the plaintiff and the defendant related to participation in the PRC Expressways Fund (“the Fund”), a vehicle for small investors who could not afford the minimum subscription for direct investment in GBRE which was US$10 million to pool their resources for an indirect interest in GBRE via the Fund.  As originally pleaded, the defendant’s positive case was that the defendant agreed to accept the plaintiff’s participation in the investment in the Fund in the form of a payment to the defendant without requiring the plaintiff to take up shares in the Fund in consideration of the defendant agreeing to make a cash payment to the plaintiff within one month after the listing of the holding company of GBRE the amount of which was to be determined by reference to the pricing of the 2^nd tranche private placement of GBRE as set out in the term sheet of the private placement of GBRE dated 5 December 1996 (“the December Term Sheet”).  This case was deleted on a re-amendment of the Defence and the positive case then put forward by the defendant as to the agreement made between the plaintiff and the defendant was that the plaintiff would through the defendant subscribe for redeemable preference shares of the Fund (“Fund shares”) and in the event of the Fund failing to redeem the Fund shares within one month after the flotation of the holding company of GBRE, the defendant would pay the plaintiff a sum computed by reference to the pricing of the 2^nd tranche of a private placement of GBRE shares as set out in the December term sheet.

7. The initial agreement for an investment of $20 million was then varied or superseded by subsequent agreements as contained in or evidenced by the defendant’s letters to the plaintiff dated 17 February 1997, 20 February 1997, 29 May 1998 and 15 July 1998, the principal change being the amount of the plaintiff’s investment in the Fund but with no departure from the underlying agreement that the plaintiff’s investment was in the purchase of Fund shares (the latter again asserted by way of re-amendment).  The defendant relies upon the various warnings in the documents issued in relation to the Fund and the placements of GBRE shares in addition to denying any representations or promises of profit from the anticipated listing.  In addition, the defendant denies that it was a term of any agreement that the plaintiff would be repaid the amount of any purchase price if the listing of the holding company did not materialise at the end of July 1997.

8. As to the repayments made by the defendant, the defendant’s case is that these were payments made on an ‘ex gratia’ basis to help the plaintiff ride out the impact of the economic turmoil in the region in 1997.

9. The defendant avers that arrangements for the listing of the holding company continue and he remains willing to fulfil his payment obligations in the event of the Fund failing to redeem the plaintiff’s Fund shares within one month after the listing of the holding company.  The defendant therefore denies that under the agreements made between him and the plaintiff, he is liable to repay the amounts claimed.

10. He denies the alleged implied terms and warranty and that a reasonable time has expired.  He further denies that the agreements have been frustrated.

11. By way of re-re-amendment made a month before the hearing, the defendant claimed by way of set-off and counterclaim the plaintiff’s share of expenses said to be incurred by GBRE in its application for listing up to the date of the alleged frustration in the event that there is a finding that the agreements have been frustrated.  The amount based on the plaintiff’s ‘pro rata’ share, said to be 4.73706%, is $11,371,228.

The witnesses

12. Although both the plaintiff and the defendant had made a number of witness statements, there was no direction that the witness statements should stand as evidence-in-chief and both the plaintiff and the defendant gave their evidence-in-chief from the witness box.  Theirs was the only oral evidence.

13. The statement of Loong Ping Kwan who was at the date of his statement an associate with the defendant’s firm was admitted without objection.

14. Understandably, given the time which had passed since the events of which they were giving evidence, neither the plaintiff nor the defendant had a good recall of the number, location and details of their meetings and conversations prior to and concerning the agreements between them.

15. Further, neither was a satisfactory witness.  I have therefore not been able to rely totally on either the evidence of the plaintiff or the defendant.  The facts, as I find them to be, are as follows.

The background facts

16. The plaintiff is a surveyor by profession who established his own firm in 1979 and incorporated it in 1983.  By his own account, his company was highly successful being the largest land-surveying company in Hong Kong in terms of turnover and employees.  However, increasingly over time the plaintiff devoted less attention to his profession and more to investments in property development in the form of developing ‘small houses’ in the New Territories and in stocks, primarily ‘blue chip’ stocks so that by 1997, his wealth consisted principally of such investments.

17. Through a fellow professional and friend, Francis Lau, the plaintiff came to know the defendant, a solicitor, who is the founding and senior partner of his own firm of solicitors David Y.W. Ho & Co.

18. In late 1992 and 1993, the three became co-investors, along with other friends, in property projects on the mainland, with Francis Lau being the majority shareholder and the most active in the search for and selection of suitable projects for investment.  All three were shareholders in the company which was the vehicle for investment, Tung Shun Enterprises Ltd.

19. Before leaving to found his own firm at the end of 1994, the defendant had been with a leading international firm in Hong Kong and had worked in Beijing and Guangzhou.  He had become the Senior Partner in charge of the China Property and Infra-Structure Group before his departure.  Upon starting his own firm, he continued to specialize in property and corporate finance work related to mainland property and infrastructure.  As a result, the defendant became interested in direct investment in property development and infrastructure projects on the mainland.

20. In 1995, the defendant established the Asia-Pac Infrastructure group of companies including Asia-Pac Infrastructure Development Ltd (“APID”) and Asia-Pac Expressways Investment Management Ltd (“APEIM”) which were 100% owned by him.  In 1996, together with a Mr Gao Jiaren, the defendant had incorporated GBRE in the British Virgin Islands.  GBRE held, through subsidiaries, interests in toll road projects on the mainland in the Beijing-Tianjin-Hebei region.  By October 1996, the defendant and Mr Gao were looking for investors in GBRE and were working towards a flotation and listing on a recognised stock exchange as part of expansion plans for GBRE. 

21. As at 10 October 1996, the date of the issue of the Confidential Information Memorandum prepared for the private placement of GBRE shares with institutional investors (“the GBRE 1^st tranche CIM”), all of the issued shares in GBRE were held by Miracle Chance Ltd which in turn was owned as to 65% by Mr Gao and 35% by the defendant through a company called Carnation Developments Ltd.  According to that document, the plan was to carry out a private placement in 1996 with an initial public offering (“IPO”) in the first half of 1997 and no later than 30 June 1997.  In the 1^st tranche private placement, 363,588 shares were offered for sale at US$412.60 per share with a minimum investment of US$10 million.

22. In late September 1996, the PRC Expressways Fund Ltd (“the Fund”) was established as a vehicle to enable individual investors to participate through it in investing in GBRE at the same time as the private placement was taking place.  Under an agreement made between GBRE and the Fund, the Fund was to subscribe for GBRE shares at a completion date which was the same as the final payment date for other 1^st tranche placees and was to invest a minimum of US$30 million.  Individual investors could purchase redeemable preference shares in the Fund with a minimum subscription of US$2 million at US$100 per share.  According to the Confidential Information Memorandum for the Fund (“the Fund CIM”) the preference shares were intended to be redeemed at the Fund’s option within six months of any listing or quotation of the shares of GBRE or its direct or indirect holding company and the Fund, upon such redemption, would distribute ‘pro rata’ to the Fund’s shareholders such shares representing the Fund’s interest in GBRE as were listed or quoted on a recognized securities exchange.  The maximum size of the Fund was US$100 million.  Against this background, inOctober 1996, the defendant became involved in selling GBRE shares to institutional investors and the Fund to individual investors.

23. The defendant clearly had a very substantial financial interest in the success of the private placement in the Fund and in any flotation.  On a projection based upon the Fund raising US$50 million and the other 1^st tranche placees just over US$100 million, the respective shareholdings in GBRE (after the increase of an additional 1,550,000 ordinary shares) would have been as follows :

The Fund	121,186
Other placees	242,372
Miracle Chance	900,000

24. The additional shares were to be issued and allotted to Miracle Chance as fully paid up without either Mr Gao or the defendant having to pay a cent.  The sponsor of the private placement was APID which was to receive a consultancy fee in the range of US$3 million to US$4.45 million for assistance already rendered and to be rendered in connection with the placement.  His firm was counsel to GBRE and was to receive professional fees in connection with the placement.  APID was also one of the sponsors of the Fund and the defendant’s firm was counsel to the Fund.  Approximately 5% of the gross proceeds raised by the Fund was to provide for costs and expenses including fees of professional advisers and agents.  It was also the defendant’s intention to subscribe for Fund shares although in the Fund CIM, it was stated that the Directors (which included the defendant) were not aware of any person who following the Fund placement would be directly or indirectly interested in 10% or more of the issued redeemable preference shares.  In the event, companies controlled by the defendant took up approximately two-thirds of the redeemable preference shares issued.

The October 1996 offer

25. So it was that in early October 1996, the defendant sent to the plaintiff under cover of a letter dated 7 October 1996 on the headed notepaper of David Y.W. Ho & Co. an invitation to apply for shares in the Fund, such application to be received no later than 18 October 1996.  Enclosed with the letter were documents referred to as “the Investment Presentation”, “Executive Summary”, “draft Term Sheet” and “Projects Map of Greater Beijing Region Expressways Limited”, a draft information memorandum for the Fund and an application form.  The letter also refers to “recent discussions” but neither the plaintiff nor the defendant gave evidence of any prior discussions.  On 10 October 1996, the defendant sent to the plaintiff the final version of the Fund CIM including a copy of the GBRE 1^st tranche CIM.  Again, this was sent under the headed notepaper of the defendant’s firm.  In the letter, the defendant informed the plaintiff of the tremendous response from potential investors to the GBRE private placement with over US$100 million already committed.

26. Once again, the defendant urged the plaintiff to apply for Fund shares.  The plaintiff was also requested to sign on the inside cover of the Information Memorandum at the space indicated and to return a photocopy of the signed page by way of acknowledgment “for our security purposes”.  No such signed page or photocopy was produced by either party nor does the defendant state that he received a photocopy of the signed page from the plaintiff.  It is clear that a signature is requested not “for security purposes” but as an acknowledgement that the reader accepts the health warnings in the document so such a designation was misleading.  It is common ground that the plaintiff did not make an application for shares in the Fund in response to the offer and according to the defendant, the plaintiff said that he was not really interested and turned down the invitation to invest.

The GBRE Fund raising and flotation

27. In the event, the 1^st tranche placement raised approximately US$95 million of which the Fund’s share was US$30 million, the minimum amount which the Fund document contemplated.  According to the expected time-table in the GBRE 1^st tranche CIM, the latest time for subscription for GBRE shares in the 1^st tranche private placement was noon, 15 October 1996 with payments for subscriptions being made by 23 October 1996.  According to the minutes of meeting of GBRE held on 3 April 1997, only one private placee met the date of 23 October 1996 for payment in full; other investors paid a proportion of the monies due for the allotted shares with a promise to pay the balance and the last 1^st tranche investor subscribed and paid in full in January 1997.  Even the Fund was only able to pay in cash US$6.8 million for the 72,210 shares allotted to it leaving a balance outstanding of US$23.2 million.

28. A 2^nd tranche placement was launched in December 1996.  The final Confidential Information Memorandum for the 2^nd tranche placement of GBRE shares was not produced by the defendant but the December Term Sheet shows that the placement was intended to raise a minimum of US$50 million and a maximum of US$100 million, that the expected IPO Listing Date was “Around 31^st March 1997, but not later than 30^th June 1997 subject to market conditions” and that the discount to net asset value of GBRE offered to investors on the placement was 45%.

29. As sponsors and lead underwriters, Wheelock Natwest Corporate Finance Ltd (“Wheelock”) had written on behalf of GBRE to the Stock of Exchange of Hong Kong Ltd (“the Exchange”) on 25 November 1996 seeking the Exchange’s guidance as to the suitability of a proposed initial public offering (“IPO”) of ‘Newco’ which was, through GBRE, to own interests in 10 expressways in the Beijing-Tianjian-Hebei area.  As part of the information offered to the Exchange, a tentative time-table for the listing was enclosed starting with submission of Form A1 on 18 December 1996, the Hong Kong IPO opening on 11 February 1997 and closing on 14 February 1997 and commencement of trading on 24 February 1997.  On 13 December 1996, the Exchange responded that the Listing Committee had met to consider to allow GBRE to make an application as an infrastructure company pursuant to an exception set out in Listing Rule 8.05(2) and had agreed on the basis of Wheelock’s submission, in principle and on a preliminary basis, that any future application made by GBRE could take advantage of the exemption.  The letter concluded with a warning that it should not be regarded as indicative of any final approval by the Exchange.

30. On 18 December 1996, Wheelock wrote to the Exchange on behalf of GBRE (with a copy of the letter to the defendant’s firm) to make an advance booking of an application for listing of the company to be incorporated as holding company of GBRE and enclosing the 2^nd proof of the prospectus.

Events leading to February 1997 Agreements

31. At some date, the defendant had sent to the plaintiff a draft of the Confidential Information Memorandum for the 2^nd tranche placement of GBRE shares dated 3 December 1996.  The plaintiff’s signature or initials appear on the front sheet in the space for signing by way of acceptance of the health warnings contained in the document.  However, this document was disclosed by the plaintiff not the defendant.  It appears that the plaintiff never returned the sheet to the defendant.  The plaintiff’s evidence in chief as to this document was that he did sign but cannot remember the circumstances in which he did so; he thinks he signed it in January or the beginning of February; that he did not study it in any detail but just flipped through it.  In giving evidence in chief, he did not associate the receipt of this document with the telephone conversation of which he gave evidence in which the defendant is alleged by him to have invited him to invest in GBRE and to profit from the intended listing. 

32. According to his evidence-in-chief, in this conversation, the defendant told him that the defendant was one of the majority shareholders of GBRE, that GBRE had a number of expressways which were highly profitable in or near Beijing, that GBRE had applied for a listing on the Hong Kong Stock Exchange and preliminary approval had been given, that the earliest the listing would take place was April, the later in June but definitely by July, that if he wanted to invest in GBRE, he could invest in the shares which the defendant held in GBRE and that the greatest discount the defendant could offer was 45% discount on NAV.  The defendant further said :

“As you are well aware, the discount offered for highway shares in the mainland is in the region of 10% -20% discount off NAV; in other words, as soon as it gets listed, you’ll definitely be able to earn a profit of about 30%.  Within one month of listing, I could either give you shares of GBRE for instant selling or cash.  If within one month, the price is higher than the IPO price, I’ll give you the difference; if it is lower than IPO, the price will be at the IPO price.  If no listing has taken place by the end of July, I will refund to you all the money you’ve invested in my GBRE shares.  You’ll have no downside; the more you invest in my GBRE shares, the more you’ll be able to gain.” 

According to the plaintiff, this is roughly what was said.

33. There are inconsistencies between the plaintiff’s evidence-in-chief as to the conversation and the document and what is stated in his 1^st witness statement.

34. In cross-examination, the plaintiff said that the telephone conversation probably took place some time in January before he left for Australia which was in mid-January.  In response to the question as to when was the first time he informed the defendant he was interested in investing in GBRE shares, he replied : “I think in January when he (meaning the defendant) told me to invest in GBRE stock.”  When asked why he changed his mind about investing in the project, the plaintiff repeated almost verbatim his evidence in chief about the contents of his telephone conversation with the defendant.  He was asked what impression the defendant give him about the terms offered in early January whether they were better or worse than those offered in October.  Initially, the plaintiff replied that he could not remember whether the terms were offered in early or mid-January; then, when pressed to answer, he replied that he could not make a comparison because he had not read the October document.  Finally, the plaintiff replied that he thought the terms were better because the defendant was very confident about the listing in June or July.

35. In cross-examination, the plaintiff replied to a question about the draft 2^nd tranche placement GBRE CIM that the copy might have been given to him by the defendant personally in January or February, possibly during the lunch meeting on 3 February 1997.  At this point, counsel for the defendant put to the plaintiff that this was not the defendant’s recollection without stating what the defendant’s recollection was as to the provision of the document to the plaintiff. 

36. The defendant, in chief, denied ever writing or speaking to the plaintiff between the 10 October 1996 and the lunch meeting on 3 February 1997 about the Fund or the GBRE project and denied the telephone conversation of which the plaintiff had given evidence.  As to the document, the defendant turned out to have no firm recollection when he gave it to the plaintiff.  When asked about it in chief, the defendant said that it was more likely that he sent it after the lunch meeting on 3 February 1997 or on 17 February 1997.  Later, the defendant said that he might not have brought along the document to the lunch meeting on 3 February 1997 but there were three possibilities; one was that he gave it on 3 February 1997, one was that he sent it after the meeting under cover of a compliment slip and one was that it was sent on 17 February 1997 when the plaintiff requested more information.

37. The defendant’s evidence in chief on these matters was completely inconsistent with his 1^st witness statement in which he had stated that he had no record of when he sent the draft 2^nd tranche CIM to the plaintiff but that he probably sent it in early 1997 in order to update him on the information about GBRE when the plaintiff contacted him and told him that he (the plaintiff) was interested in the investment.  His evidence in chief about never having spoken or written to the plaintiff about investing in the Fund or GBRE shares between the 10 October 1996 and the lunch meeting on 3 February 1997 was also totally inconsistent with his 1^st witness statement.  In that, he stated that the plaintiff started to show some keen interest in this investment opportunity in or about January 1997 and referred to the discussion about the plaintiff’s investment in or about January 1997 being initiated by the plaintiff at a time when the 1^st tranche placement of GBRE shares had been successfully completed, the proposed IPO of the holding company looked promising and there was keen interest from well known institutional investors in the proposed 2^nd tranche of the private placement.

38. It is common ground that in late January 1997, the defendant contacted the plaintiff about an investment opportunity to participate in the acquisition, through a joint-venture, of a prime commercial building in Beijing.  As the plaintiff was in Australia at the time, the defendant faxed a letter to him on 27 January 1997 with a brief proposal for participation.  According to the defendant’s letter, the acquisition agreement was to be signed by 5 February 1997 with completion by the end of February 1997.  Also, enclosed was a ‘confidentiality’ letter which the plaintiff signed and faxed back on 28 January 1997.  In evidence, the plaintiff said that he signed to acknowledge receipt when plainly a signature was intended to confirm his ‘confidentiality obligation’.  In handwriting, the plaintiff added a note to the defendant that he was returning to Hong Kong on 1 February 1997, asking the defendant to send the documents to his office before that date and saying “and meet you next week for further discussion”. 

39. On 1 February 1997, the defendant sent to the plaintiff a detailed version of the proposal for participation (“the ‘Hua Nan’ proposal”).  It did not however identify the property which was the subject of the proposed acquisition.  In the document, reference was made to the Asia-Pac Group and the GBRE fund-raising.  The claim was made that GBRE had successfully raised around US$135 million from its 1^st tranche private placement and was now finalising the 2^nd tranche of about US$100 million.  The document also stated that GBRE was applying for listing on the Exchange and was expected to be listed in the near future.

40. The defendant and the plaintiff met for lunch at the Mandarin on 3 February 1997.  It is common ground that at this meeting, they discussed the ‘Hua Nan’ proposal and GBRE.  There is however substantial conflict between their evidence as to what was said.  Having heard their evidence and assessed it against the background of known facts including the available contemporaneous documents and their manner of giving evidence, I find on the balance of probabilities that in December 1996, January and February and thereafter, the defendant was still very much involved with the GBRE project.  Whether he was raising money for himself or for GBRE it is not necessary for me to decide but he was certainly keen to amass as much money as he could.  This is contrary to his evidence that by this time, his attention was focused on the ‘Hua Nan’ project.

41. Although the defendant went to the meeting on 3 February 1997 to discuss the ‘Hua Nan’ project, he was also ready to discuss the GBRE project.  It is probable that the defendant brought with him the latest documents relating to the fundraising for GBRE including the December Term Sheet.  This document is referred to in the letter dated 4 February 1997 and the 45% discount to NAV comes from the Term Sheet.  When it came to the discussion of the GBRE project, he was, to borrow an expression, ‘maximum bullish’ since the application for listing appeared to be running smoothly and only a few days before, the IPO of a mainland infra-structure company had been massively oversubscribed on its flotation.  The defendant had every reason to expect a successful flotation of GBRE or its holding company and he told the plaintiff about the application for listing and what he termed ‘preliminary approval’.  I accept the plaintiff’s evidence that the defendant told him the listing was likely to take place at the earliest in April and if not, then in June or latest July. 

42. Seeing the plaintiff’s interest, the defendant outlined the terms upon which the plaintiff could invest. 

43. The nature of the investment discussed was not the purchase of either GBRE or Fund shares but an investment which enabled the plaintiff to benefit from the rise in the price of the listed company’s shares without owning them.  I accept though that the plaintiff may well have misunderstood what the defendant was offering since even when the plaintiff saw the letter of 4 February 1997, he was not able fully to understand it.  Even more significantly, when in cross-examination, the defendant was asked to explain how the formula in the 1^st numbered paragraph of the letter worked, all he could do was to reiterate that it was very simple.  This lead to a farcical re-examination when counsel for the defendant took him arithmetical step by arithmetical step through a calculation which was dictated to him by counsel.  In all probabilities, the formula was unworkable which may have been one of the reasons why the formula was much simplified in the letter of 17 February 1997.  So during the conversation, the plaintiff may well have misunderstood that the defendant was to allocate GBRE shares to him upon listing. 

44. I find that the statements made by the defendant as to the timing of the listing were not made by way of contractual promise; there was no warranty or guarantee that the listing would take place latest by the end of July.  All that the defendant was saying was by way of ‘sales talk’ reflecting the then expectation.  No doubt it played a part in inducing the plaintiff to invest.  The plaintiff accepted as much under cross-examination on the 5^th day of hearing when referred to the answer given by him in response to interrogatories in his affirmation of 29 May 2001. 

45. For his part, the defendant accepted that the investment which the plaintiff was making was intended to be a short term investment.  This question was in substance put twice to the defendant in cross-examination on the 17^th day of hearing.  At first, the defendant did not answer the question directly but when pressed to say whether he agreed, the defendant nodded in assent.

46. Thus, the February agreements fall to be construed against the background that an application for listing had been made and was apparently so far as known to the defendant on track for an IPO in April or June at the latest, July.

47. The defendant admits that there was discussion between himself and the plaintiff as to what would happen if there were no listing but his evidence is that he told the plaintiff there were a number of possibilities as exit strategies from the investment.  I do not accept the latter part of his evidence.  However, while I accept that the defendant in all probability did say that the plaintiff would get his money back if there were no listing, I do not accept that the defendant made an express contractual promise that the plaintiff would get his money back if the listing had not taken place by the end of July.

The February 1997 agreements

48. I therefore do not accept the totality of plaintiff’s evidence as to what was orally agreed between himself and the defendant at the meeting on 3 February 1997.  The plaintiff’s testimony as to what was agreed between him and the defendant, which his counsel described as unshaken in cross-examination, had the flavour of a set-piece committed to memory, word for word.  During his lengthy cross-examination, he even challenged counsel for the defendant by asking whether counsel wished him to repeat what the defendant had said.  I do not however rely on his demeanour in making these findings. 

49. Firstly, so far as the plaintiff’s case is that the defendant agreed to sell GBRE shares or had the option of delivering GBRE shares to the plaintiff, this is plainly inconsistent with the terms of the letters dated 4 February 1997 and 17 February 1997.  Even though these letters contain different terms and the latter supersedes the former, in neither letter does the defendant promise or agree or have the option to deliver GBRE shares to the plaintiff.  In both letters, what the defendant undertakes is to pay a sum of money to the plaintiff within one month after the listing of the holding company of GBRE calculated according to different formulae which enabled the plaintiff to benefit from any upside in the market price of the shares of the listed company. The plaintiff signed and accepted the terms in each letter.  There is no option or obligation on the defendant to deliver any shares to the plaintiff.  Secondly, if the plaintiff had agreed with the defendant that the defendant would deliver GBRE shares to him at the time of listing, it is unclear why the plaintiff should request the defendant to allot to him HK$25 million worth of GBRE shares at ‘IPO’ stage as he did in the handwritten note to the defendant at the bottom of the authorisation dated 24 February 1997 (Defendant’s Bundle 2/683).  If the agreement already made had been for the allotment of GBRE shares, the plaintiff would more likely have been requesting an allotment of a further HK$25 million worth of GBRE shares in addition to that already agreed.  The request made by the plaintiff is more consistent with there having been no such agreement prior to his request for allotment of GBRE shares at IPO stage.

50. As to the plaintiff’s case that the terms orally agreed by the defendant included an undertaking to return the amount invested by the plaintiff if the listing did not take place by the end of July 1997, I find that this was not expressly agreed by the defendant.  If such a term had been agreed, it is surprising that the plaintiff signed the letters dated 4 February 1997 and 17 February 1997 without insisting on the inclusion of this important term in writing.  At no time thereafter when asking for repayment did the plaintiff set down in writing that such a term had been orally agreed.  Even when the plaintiff’s solicitors first wrote to the defendant on the plaintiff’s behalf on 6 May 1999 demanding repayment of the balance of HK$32 million, the plaintiff’s case, stated to be on the basis of instructions, was that prior to the plaintiff advancing HK$50 million, the defendant represented to the plaintiff that the listing of the holding company of GBRE would be completed by about July 1997 and that the anticipated listing failed to materialize by July 1997.  It was not until the letter of 8 July 1999 that the case now pleaded by the plaintiff was set out in his solicitors’ letter for the first time. 

51. At the same time, I reject the defendant’s case that the agreement was that the plaintiff would subscribe through the defendant for Fund shares.  This was a case which the defendant tried to construct out of the documents well after the plaintiff commenced proceedings and never advanced in correspondence in response to the letters from the plaintiff’s solicitors dated 6 May 1999 and 8 July 1999.  Unlike many of the persons whom the defendant referred to as “sub-investors” in the Fund, the plaintiff had never applied for and had never indicated any interest in applying for Fund shares.  In any event, the defendant’s case was contradicted by his own evidence and by the fact that companies owned by him had pledged these shares to two financial institutions in December 1996 as shown by documents disclosed by the defendant during the course of the hearing.  At the date when the defendant made the agreements with the plaintiff, he had no Fund shares which he was in a position to transfer to the defendant or to hold on trust for him.

52. Whatever may have been the position as at 4 February 1997 after the plaintiff had signed and accepted its terms, this letter and the terms contained in it were superseded by the letter dated 17 February 1997 which related to the plaintiff’s investment of HK$30 million.  The terms of the 17 February 1997 letter are as follows :

“I refer to our recent discussions and the letter agreement dated 4^th February 1997 (‘Letter Agreement’), which will be superseded by the following:

1.    As agreed, you will provide to me HK$30,000,000 instead of HK$20,000,000.  The sum of HK$10,000,000 has been sent to me on 5^th February, 1997 and you will provide to me the balance HK$20,000,000 on or before 17^th February, 1997.

2.    Subject to the above, I will in full satisfaction of the above payments, within one (1) month after the listing of the holding company (‘LISTCO’) of Greater Beijing Region Expressways Limited (‘GBRE’), repay you an amount equivalent to the value of such number of LISTCO shares, representing X number of shares in GBRE, at the issue price of the initial public offering of LISTCO shares or at the closing market price of the LISTCO shares on the date preceding the date of repayment, whichever is higher.  X number of GBRE shares will be determined as follows:

	X =	A
		B
	A =	the total amount of your investment i.e. HK$30,000,000 (U$3,880,983 at the rate of 7.73)
	B =	the issue price per GBRE share in the second tranche private placement of GBRE as set out in the term sheet of the private
		placement of GBRE dated 5th December, 1996 subject to adjustments as stated therein

Please confirm your acceptance of the above by signing and returning a copy of this letter to me.”

53. It makes no reference to the Fund at all nor to the plaintiff acquiring any kind of interest in Fund shares.  The further investment of HK$20 million was covered by the letter dated 20 February 1997 and is in identical terms, with the exception of the amount invested.

54. Upon the proper construction of these letters, in return for the plaintiff’s payments in the stated amounts, the defendant is bound to make a payment to the plaintiff within one month after the listing of the holding company of GBRE of an amount calculated in accordance with the terms set out in the letters.  Thus, unlike an investment involving a purchase of GBRE shares or Fund shares which may have been made in the expectation of a listing but is nonetheless a complete transaction in itself, the agreement entered into between the plaintiff and the defendant is premised on the occurrence of a listing because only upon a listing could it be determined what the plaintiff was to receive in return for the money which he had paid.  If there is no listing, there must be a total failure of consideration on the part of the defendant as the plaintiff will have parted with his money for nothing.  The plaintiff is not wagering on there being a listing.

55. As there must be a listing for the agreement to be fulfilled in accordance with its terms, the defendant’s attempt to rely on the health warnings in the Confidential Information Memorandum against the plaintiff was disingenuous.  Those warnings applied and were meant to apply to subscriptions for GBRE shares and Fund shares.  They did not relate to the agreements between the plaintiff and the defendant.  A warning that there may be no listing is meaningless when the agreement can only be fulfilled when there is one.  Moreover, the agreements were entered into against the background of an extant application for listing on the Exchange which at the time of the discussions between the plaintiff and the defendant was running smoothly and according to the expected time-table.

56. The agreements are only workable if there is implied into them a term that the listing will take place within a reasonable time.  The agreements rested upon the basis of there being a listing of ‘Listco’ without which the amount due to the plaintiff could not be calculated.  Thus, if there was no listing, the defendant would be bound to repay the plaintiff the full amount of his investment.  However, without an express contractual date by which the listing should have occurred, the agreements would be unworkable and there must be an implied term that the listing would take place within a reasonable time of the making of the agreements. 

The purchase of GBRE shares

57. As already mentioned, on 24 February 1997, the plaintiff left a note for the defendant at the defendant’s office when he attended to sign an authorisation for an attorney in relation to the sale of a property in Vancouver.  The note said :

“Mr David Ho Please allot HK$25,000,000.  (Twenty-five million) worth of ‘GBRE’ shares to me at IPO stage.  Thanks”

58. The defendant has disclosed a note of a telephone conversation which he had with the plaintiff at 10.30 on 18 March 1997 in which is recorded in the defendant’s handwriting “IPO of [GBRE] wish to subscribe HK$25m @ IPO”.

59. Once again, the plaintiff and the defendant gave conflicting versions of the events leading to the acquisition by the plaintiff of 7,212 GBRE shares from the defendant’s company, APEIM.  It is not necessary to decide this conflict except that it has an important bearing on the credibility of the parties and on subsequent events.

60. At the date when the defendant sold these shares to the plaintiff for HK$25 million, the defendant knew that the listing was going to be at the least delayed if not derailed.  By this date, the Exchange had written to Wheelock to say that the Listing Committee had decided that the GBRE Group was not suitable for listing, Wheelock had submitted a further revised IPO proposal which had been turned down as notified in a letter dated 8 April 1997 which imposed conditions requiring to be fully met as a pre-condition for further consideration of the application for listing.  On 10 April 1997,Wheelock requested detailed reasons for the decision and indicated a formal appeal would be filed and on 21 April 1997, reasons were given.  All this must have been known to the defendant as the solicitor for and indirect shareholder in GBRE.  

61. Essentially, the defendant’s case as put to the plaintiff in cross-examination was that the defendant told the plaintiff that there would be a slight delay to the scheduled IPO of GBRE and that arising from the Exchange’s decision, despite the setback, the listing of GBRE would likely take place in September 1997.  Even on the defendant’s version, he was sailing pretty close to the wind; on the basis of the content of the latest letter from the Exchange, there was no apparent grounds for his optimism.  On the plaintiff’s version, the defendant told him nothing of the delays.  In light of the plaintiff’s clearly expressed wish to subscribe for shares at IPO stage, I have no hesitation in rejecting the defendant’s version.  I accept that it is inconceivable that the plaintiff would have bought HK$25 million worth of GBRE shares on top of the HK$50 million which he had already invested on the basis of a GBRE listing if the defendant had told him the true position.

62. Ultimately, the first amount which the defendant refunded to the plaintiff when a listing did not materialise in July 1997 was the purchase-price of these shares.  While the defendant sought to portray it as an act of goodwill on his part without any legal obligation, as a lawyer, the defendant must have known that he faced a grave risk of being sued for misrepresentation.

Expiry of reasonable time

63. An alternative case of the defendant is that reasonable time has not yet expired.  I reject that case.  Given the statements which the defendant made to the plaintiff prior to the agreements about the timing of the listing and the defendant’s admission that he understood that the plaintiff’s investment was intended to be a short-term investment, a reasonable time had certainly expired well before the plaintiff’s solicitors wrote to the defendant on 6 May 1999.  After all, while the listing was pending, the defendant had interest-free use of the plaintiff’s investment and the plaintiff was forgoing alternative investment opportunities for the HK$50 million paid to the defendant.  In the circumstances, I hold that a reasonable time had expired by the end of 1997.

The plaintiff’s demands for repayment

64. The defendant alleges that he kept the plaintiff informed of the position on the application for listing and I have already found that he did not.  The defendant did send to the plaintiff on 29 May 1997 a letter enclosing for his information a copy of the preliminary offering memorandum of US$275 million notes of GBRE prepared by Morgan Stanley & Co.  This gave no information about the listing.

65. The plaintiff’s case is that he first asked for his money back in August 1997, that is both the HK$50 million invested under the February letter agreements and the HK$25 million for the purchase of GBRE shares and that the defendant agreed to refund the HK$25 million first.  The defendant’s case is that the plaintiff did not ask for a refund of the HK$50 million but only asked the defendant to help him out, this being at a meeting on 29 April 1998, because he was in financial straits after the stock market collapse.  Insofar as it is necessary to do so, I find that the plaintiff was not in financial straits at this time or subsequently although he may well have used this as a ploy to persuade the defendant to repay when he found the defendant resistant to his demands for repayment.  The plaintiff produced documents showing that he was not in cash-flow difficulties at the time.

66. The only relevance of the demands is that although a reasonable time for the listing may have elapsed by the latest at the end of 1997, until the plaintiff had communicated to the defendant that he was not prepared to wait any longer for a listing, the defendant had no reason to refund the plaintiff’s investment under the agreements. 

67. The only clear evidence of a demand for the return of the entire investment of HK$50 million is the note which he left for the defendant on a copy of a Bloomberg release relating to the GBRE bonds and the legal battle between the defendant and Mr Gao which the plaintiff had received on 20 May 1998.  The note reads :

“I regret for the message to your secretary on Monday morning as I received the attached paper at 9.30 a.m. on Monday morning sent to my office by an unknown person that makes me very nervous about your promise on 29 April at China Club.  Referring to the balance $40,000,000, I give you 1/2 month to show my goodwill towards you and hopefully you can return the balance $40,000,000 to me on 15 July 1998 (at least $20,000,000 in Hong Kong dollars or [renminbi]) and I would call you up on 13 July 1998.  Many thanks and best wishes!”

68. On 29 April 1998, the plaintiff and the defendant had met at the China Club in the course of which the plaintiff had demanded repayment of the full sum of HK$50 million. This is corroborated by the terms of his note.  On 29 May 1998, exactly a month later, the plaintiff had gone to the defendant’s office.  Although the defendant had refused to see him, he had instructed Loong Ping Kwan in his firm to handle the plaintiff and to give him the cheque for HK$10 million.  The plaintiff was given a letter to sign.

69. The earliest date of which there is clear evidence that the plaintiff did require repayment of the full amount of his investment is therefore 29 April 1998.

70. The letter which the plaintiff was given to sign dated 29 May 1998 on its face related to the investment made under the letter of 20 February 1997.  Its purported effect is to supersede the letter of 20 February 1997, reduce the amount of the investment from HK$20 million to HK$10 million and to maintain the same terms of investment as in the 20 February 1997 letter to the outstanding amount of HK$10 million.  The letter concludes :

“Please confirm your acceptance of the above and receipt of the said cheque of HK$10,000,000 by signing and returning a copy of this letter to me.”

71. The plaintiff signed under the space above his name and below the words “Agreed and confirmed by”. 

72. The plaintiff’s evidence is that he signed to acknowledge receipt which was indeed one of the purposes of signing.  According to the statement of Loong Ping Kwan which was admitted without objection, Mr Loong showed the plaintiff the letter and told him that the letter dated 29 May 1998 superseded the letter dated 20 February 1997 but that all other terms would remain the same.

73. Mr Loong’s evidence about the letter dated 15 July 1998 is to similar effect.  The letter dated 15 July 1998 purports to supersede the letters dated 17 February 1997 and 29 May 1998, to reduce the amount of the plaintiff’s investment from HK$40 million to HK$32 million with the HK$32 million being invested on the same terms as previously.  The letter ends in the same way as the letter dated 29 May 1998.  Again, the plaintiff signed by way of apparent agreement and confirmation of its terms.  The plaintiff’s evidence is that he signed to acknowledge receipt of HK$8 million repayment.

74. These letters demonstrate the deviousness of the defendant’s character.  Both letters commence with the words “As discussed, I shall pay you HK$___________ by the enclosed cheque no. ________ on the following basis:”  Yet, as the defendant and the plaintiff both say, there was no further contact of any kind between the plaintiff and the defendant, after the defendant had telephoned the plaintiff to complain that his threats had upset the defendant’s secretary.  This had all taken place before the plaintiff left the handwritten note on the Bloomberg releases.  Thus, there was no discussion of any kind between the plaintiff and the defendant as to any continuing investment on the same terms as before.  The defendant had told the plaintiff he would not deal with him again and all dealings would be with Clement Loong Ping Kwan.  The statement at the beginning of the letters was thus plainly untrue, known to the defendant to be untrue and completely inconsistent with the note which the plaintiff left on the Bloomberg release on 29 May 1998.  Yet, the defendant seeks to rely on them as agreements binding on the plaintiff for the continued investment of HK$32 million.  I find that there were no such agreements between the plaintiff and the defendant and that the plaintiff signed to acknowledge receipt of the cheques.  The plaintiff did not agree to wait any further for a listing of the GBRE shares.

Frustration

75. The alternative way in which the plaintiff puts his case is that the essence and purpose of the agreements was that the plaintiff would pay a sum of money to the defendant in order to realise a gain on the IPO of GBRE.  Where the IPO is delayed and the prospects are such as to render the performance of the relevant contractual obligations radically different from that which was undertaken by the contract, the contract is frustrated.

76. The application for listing which was extant at the time of the agreements was not actively pursued after Morgan Stanley replaced Wheelock in 1997.  Having regard to the commercial purpose of the arguments and the facts I have found as to the investment made by the plaintiff being of a short-term nature as understood by and known to the defendant, I have no hesitation in holding, alternatively, that the agreements were frustrated.  Any later or subsequent application for listing is not what the parties contemplated or intended. 

77. The plaintiff therefore succeeds on this alternative case.

Counterclaim

78. The inflated counterclaim which the defendant put forward rests on the basis that if the agreements were frustrated, then under section 16 of the Law Amendment and Reform (Consolidation) Ordinance, the defendant is entitled to receive a proportion of expenses incurred before the discharge of the contract in or for the purpose of the performance of the contract referable to the plaintiff’s “interest” in GBRE through his alleged investment in the Fund of HK$50 million and in the GBRE shares of HK$25 million.  These expenses are now, on the reduced counterclaim, expenses in relation to the IPO share issue and fund raising expenses.

79. So far as both investments are concerned, the expenses incurred were not incurred by the defendant who is the party to the February agreements and they were not incurred in or for the purposes of the performance of the agreements with the plaintiff.  The plaintiff’s investment was not an investment in the Fund or GBRE shares.  In the case of the purchase and re-sale of the GBRE shares from and back to APEIM, the agreement was not discharged by frustration.  There is no merit to the counterclaim whatsoever and the defendant’s counterclaim is accordingly dismissed.

Summary

80. In summary, the plaintiff has failed in his primary case as pleaded but has succeeded on both of the alternative ways in which he has put his case.  The plaintiff is entitled to judgment in the sum of HK$32 million.  Although counsel for the plaintiff had in his written opening submitted that interest ought to be at least at the rate of prime + 1% by reference to the case of Komala Deccof & Co. S.A. v. Pertamina [1984] HKLR 219 has been addressed the subject and that it should run from the end of July 1997, no further argument has been addressed to me on the matter of interest.  Having regard to my findings as to the basis of the plaintiff’s investment and his demands for repayment, it is fair that interest should run from the date of the demand made on 29 April 1998 at the China Club.  The order nisi I make is that interest at the rate of prime plus 1% shall run from 29 April 1998 with annual rests up to the date of judgment.

Costs

81. I make the following order nisi on costs that unless either party applies within 14 days of handing down of judgment to set aside or vary the order :

(1)    The plaintiff do pay the defendant the defendant’s costs occasioned by the plaintiff’s application to re-re-amend the re-amended Statement of Claim which application was made and heard on the 1^st day of trial but withdrawn after argument.

(2)    Save as aforesaid, the defendant do pay the plaintiff the plaintiff’s costs of the action.