XCHRX NIU BAO GUO AND OTHERS v. LOK MAN AND OTHERS

HCA 3692/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3692 OF 2000

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J U D G M E N T

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1. This is an appeal from the judgment of Master Johnson Lam on the Plaintiffs' application for summary judgment against the 1st, 2nd and 3rd Defendants. Judgment was given on 4 September 2000 against the 1st and 2nd Defendants only for HK$2,775,500.00 with interest and costs. The 1st and 2nd Defendants have appealed against that judgment. They are represented by Miss Linda Chan. The Plaintiffs are represented by Miss Doris To.

2. The background and the undisputed facts may be given as follows.

3. The 1st, 2nd and 3rd Plaintiffs are related. The 1st Plaintiff, Niu Bao Guo, is the father of the 2nd Plaintiff, Madam Niu Yong Mei. The 3rd Plaintiff, Li Yi, is the husband of the 2nd Plaintiff. The Plaintiffs were and are resident at all times in Kunming, Yunnan, China.

4. The 1st Defendant, Madam Lok Man, also known as Carroll Lok, is the daughter of the 2nd Defendant, Madam Chan Tim Mui. The Defendants are Hong Kong residents.

5. Under an oral agreement between the parties in July 1996 ("the oral agreement"), the parties agreed to set up a limited company in Hong Kong for conducting trading business here. The company is known as Yun Fai International Development Ltd ("Yun Fai"). It was incorporated on 11 July 1996. The parties are the only directors and shareholders.

6. Other material terms of the oral agreement were as follows:

(1) The Defendants were responsible for acquiring the limited company and procedural matters in Hong Kong.

(2) The Plaintiffs were to own 70% of the shares in Yun Fai, the Defendants were to own 30%.

(3) A residential property in Hong Kong was to be purchased in the name of Yun Fai which should hold the entire beneficial interest on trust for the Plaintiffs. The Plaintiffs were to provide all purchase money for the property and the 1st Defendant was to procure the purchase and handle conveyancing matters.

7. Pursuant to the oral agreement, the Plaintiffs paid a total amount equivalent to the agreed sum of HK$2,775,500.00 which was deposited into Yun Fai's bank account on 2 January 1997, 12 March 1997 and 13 March 1997.

8. A provisional agreement for sale and purchase ("the provisional agreement") was entered into on 17 January 1997 for the purchase of a residential property known as Flat A, 5/F, Wing Hing Court, Nos. 110-116, Tung Lo Wan Road, Hong Kong ("the Property") at HK$3.1 million. The purchaser in the provisional agreement was not Yun Fai but a limited company incorporated on 3 January 1997 known as Citisuccess Company Limited, the 3rd Defendant herein. The 1st and 2nd Defendants were and are the only directors of the 3rd Defendant. The shareholders of the 3rd Defendant are two nominee companies having no relationship to the Plaintiffs. The date of completion under the provisional agreement was 10 March 1997.

9. The bulk of the money for the purchase of the Property being approximately HK$2.2 million was deposited into the account of Yun Fai on 12 and 13 March 1997. Completion only took place on 17 March 1997 when the Property was assigned to the 3rd Defendant. The shortfall between the purchase price and HK$2,775,500.00 was provided by the Defendants.

10. The Plaintiffs allege that the purchase of the Property in the 3rd Defendant's name was without the Plaintiffs' consent and contrary to the oral agreement. They claim against the 1st Defendant for HK$2,775,500.00 for money had and received by the 1st Defendant on the basis of total failure of consideration as the Property was not purchased in Yun Fai's name, contrary to the oral agreement.

11. The Plaintiffs have an alternative claim based on an agreement between the parties in Shenzhen on 3 December 1998 ("the December 1998 agreement"), evidenced by the minutes of a meeting of the board of directors written in Chinese and signed by the parties. There is no certified translation of the minutes and the English translation is not entirely accurate.

12. The material terms of the December 1998 agreement may be stated as follows.

13. The minutes were stated to be the meeting of the board of directors of three companies, namely, Yun Fai, Yun Fai International Holdings Ltd and the 3rd Defendant. The Plaintiffs were stated to be the shareholders in China of Yun Fai and of the 3rd Defendant, whereas the Defendants were stated to be the shareholders in Hong Kong of Yun Fai and the 3rd Defendant.

14. The agreement of all the shareholders as recorded in the minutes was in two parts.

15. The first part related to clarification of asset, being the Property. It was acknowledged that HK$2,775,500.00 was remitted by the Plaintiffs and it was agreed by all that the purchase price was HK$3.6 million and that the Property was to be transferred as the shareholders' private property because it was unsuitable to be used for business operations.

16. Two alternatives or options were set out for the transfer of the Property. The first alternative postulated the transfer of the Property to the Plaintiffs, in which event the Plaintiffs were to pay HK$824,500.00 for the balance of the purchase price and the transfer procedure would be arranged ("the 1st named event"). The second alternative was for the transfer of the Property to the Defendants, in which event the Defendants were to pay the Plaintiffs HK$2,775,500.00 and the method of payment would be separately agreed ("the 2nd named event").

17. The second part of the December 1998 agreement related to company operating expenses. The operating costs as agreed by the shareholders should be borne by the shareholders in the ratio of their respective shareholdings and to be settled every six months. If there was late payment, the shareholders would be subject to fixed penalty payment.

18. It is the Plaintiffs' case that by the letters of the Plaintiffs' solicitors to the 1st Defendant dated 15 February 2000 and 10 March 2000, the Plaintiffs requested the Defendants to transfer the Property to the Plaintiffs by offering to pay up to HK$544,500.00. It is alleged that in so doing, the Plaintiffs had offered to bring about the 1st named event under the December 1998 agreement. As the request was not complied with, the Defendants had thereby waived their right to bring about the 1st named event. The Plaintiffs were therefore entitled to performance of the 2nd named event, i.e. payment of HK$2,775,500.00 by the Defendants to the Plaintiffs. It is alleged that the Defendants were in breach of the December 1998 agreement in failing to perform the 2nd named event. The Plaintiffs claimed specific performance of the 2nd named event, alternatively damages for breach of the December 1998 agreement in the sum of HK$2,775,500.00.

Claim for money had and received

19. I have considered the affirmations, contemporaneous documents and the submissions made by counsel on behalf of the parties. My view on this claim is that there is a triable issue. The evidence is not one way. There is evidence in support of the Plaintiffs' case and evidence in support of the Defendants' contentions. I do not propose to go into the merits in detail. I would merely state my reasons shortly.

20. I cannot resolve at this stage the conflict between the parties whether the Plaintiffs had consented to the purchase of the Property in the name of the 3rd Defendant instead of Yun Fai. In arriving at the view that there is a triable issue, I am influenced by these documents:

(1) The layout plan of the Property faxed to the Plaintiffs in late January or early February 1997

It was written on the layout plan that the provisional agreement was enclosed. I must point out that it is denied by the Plaintiffs that the provisional agreement was enclosed although the Plaintiffs admitted they had received the fax of the plan.

(2) The fax dated 20 March 1997 from the Plaintiffs to the 1st Defendant

In this fax, the Plaintiffs suggested to resolve the problem relating to the purchase of the Property in that the Defendants were to take a 30% interest in the Property and share 30% of the costs and expenses at HK$1,053,876.00. I note that there was no complaint in this fax regarding the purchase of the Property in the 3rd Defendant's name.

(3) The fax dated 28 March 1997 from the 3rd Plaintiff to the Defendants

In this fax, the 3rd Plaintiff acknowledged that the purchase had been made in the 3rd Defendant's name instead of Yun Fai. The 3rd Plaintiff asked for the documents of the 3rd Defendant being the memorandum and articles, the business registration, the certificate of incorporation, the shareholders' particulars and the legal documents the Plaintiffs would be required to sign to have legal protection. Again, there was no complaint in that fax of the purchase being made in the 3rd Defendant's name.

(4) The fax dated 9 March 1997 from the 1st Defendant to the Plaintiffs

In this fax, the 1st Defendant gave information regarding the setting up of several companies and stated that the 3rd Defendant was set up to hold a property worth HK$3.5 million. I note that the Plaintiffs have denied receipt of this fax.

(5) Letter dated 4 April 1997 from Messrs Ko & Chow to the Plaintiffs

Messrs Ko & Chow were the former solicitors of the Defendants. In this letter, they confirmed that the Plaintiffs had 70% interest in the 3rd Defendant and Yun Fai International Holdings Ltd, and stated that a declaration of trust was signed by the Defendants in favour of the Plaintiffs. The solicitors further stated that all properties and assets owned by the two companies would be held in trust for the Plaintiffs in the same respective shares. The declaration of trust had not been provided by the Defendants to the Plaintiffs despite the request of the Plaintiffs' solicitors in their letter in February 2000. Nevertheless, the letter dated 4 April 97 is a clear acknowledgement on the Defendants' part that the Plaintiffs should have beneficial interest of 70% of the Property held in the 3rd Defendant's name.

(6) Minutes of the meeting on 3 December 1998

The meeting was of the board of directors of three companies including the 3rd Defendant. It was stated in the minutes that the Property was purchased at the price of HK$3.6 million after discussion of all shareholders.

Claim based on the December 1998 agreement

21. Four lines of defence are raised by the Defendants in respect of this claim.

22. Firstly, it is argued that the December 1998 agreement was void for uncertainty in that no time was specified for performance of the 1st named event or the 2nd named event under that part of the agreement dealing with clarification of asset. The short answer to this is that a term could be implied by law to give business efficacy to the agreement. Where no precise time for performance is specified and the act to be done is one in which both parties to the contract are to concur, the law implies that each party shall use reasonable diligence in performing his part (see Chitty on Contracts, 28 ed., vol. 1, para. 22-020). It does not appear to me that there is an arguable defence on the alleged uncertainty.

23. The second argument is advanced as an alternative to the first. It is argued that the December 1998 agreement had "lapsed" as a result of non-performance within a reasonable time. As there is an implied obligation that each party was to use reasonable diligence to perform his obligation, the Plaintiffs' first step in performance in the letter of their solicitors dated 15 February 2000 was more than 13 months after the agreement and this had come too late. My difficulty with this argument is that assuming that the Plaintiffs' action in performance came too late and the Plaintiffs were in breach of the implied obligation to use reasonable diligence to perform, there was no acceptance by the Defendants of the Plaintiffs' repudiation of the December 1998 agreement, at least not on paper. It is alleged by the 1st Defendant she had verbally told the Plaintiffs in 1999 that she would treat the December 1998 agreement as "void". However, it is denied by the Plaintiffs there was any such conversation. I am skeptical if there was any such communication from the 1st Defendant to the Plaintiffs.

24. Mere inactivity would generally not be regarded as acceptance of repudiation, and where repudiation has not been accepted, the contract is kept alive for both parties. I have grave reservations if there is an arguable defence that the December 1998 agreement had "lapsed" as a result of the alleged non-performance on the Plaintiffs' part.

25. In respect of the third ground of defence, it is submitted that the December 1998 agreement was in two parts, one part dealing with clarification of asset and the other part dealing with operating expenses. As there was no performance of the latter part, it is argued that the Plaintiffs cannot enforce one part without fulfilling their obligation under the other part.

26. Regarding the operating expenses, the Defendants have produced various statements of operating expenses, all except one were signed by the Plaintiffs. The Defendants allege that the Plaintiffs had agreed to bear 70% of the expenditure according to the Plaintiffs' shareholding in the companies. The total amount claimed to be payable by the Plaintiffs from July 1996 to January 1998 was HK$441,411.81 being operating expenses and HK$21,624.40 which related to the Plaintiffs' share of regular expenses of the Property up to February 1998. In addition, the Defendants claim that the Plaintiffs should bear 70% of the 1st Defendant's salary at HK$20,000 a month from February 1998 to February 2000 and the salary of a part-time assistant at HK$3,000 a month also in respect of the same period. However, no statement of operating expenses had been rendered by the Defendants to the Plaintiffs after February 1998. There was little evidence of any or any substantial business activity conducted during February 1998 to February 2000. The last item of the proposed counterclaim was in the sum of HK$289,284.60 being the difference between the Defendants' 30% interest and the unpaid balance of the purchase price in the sum of HK$765,957.00. The total of the proposed counterclaim came up to HK$625,024.73.

27. The Defendants have pointed to a fax dated 26 March 1998 from the 3rd Plaintiff to the Defendants stating that the amounts which the Defendants had paid in advance and to be reimbursed could be deducted from the proceeds of the sale of the Property if the Defendants should manage to sell the Property. The Defendants rely on this fax to say that even before December 1998, it was accepted by the parties that the debt due to the Defendants could be set off against the proceeds of the Property.

28. I am unable to accept the Defendants' argument that the Plaintiffs are not entitled to enforce that part of the December 1998 agreement relating to the clarification of asset because the Plaintiffs had not performed the other part of the agreement relating to the payment of operating expenses. What I am prepared to accept, for the purpose of the Order 14 application, is that there is an arguable set off in relation to the operating expenses of the company or companies payable by the Plaintiffs at least to the extent of HK$441,411.81 and HK$21,624.40 being regular expenses in respect of the Property, excluding the claim for the salaries of the 1st Defendant and the assistant after February 1998 of which I am skeptical due to the lack of supporting evidence.

29. The Plaintiff's claim is for HK$2,775,500.00. The arguable set off would only go to extinguish part of the claim. Even if there is an arguable set off to the full extent of the proposed counterclaim (of that I am skeptical), this would only extinguish the Plaintiffs' claim up to HK$625,024.73. To resist the application for summary judgment, the Defendants would still need to show a triable issue as to the balance of the claim.

30. I turn to the fourth and last line of defence raised by the Defendants. This is not an argument advanced before the Master and it is as follows. On the Plaintiffs' pleaded case, it is alleged that the Defendants had waived the right to performance of the 1st named event. Hence, the Plaintiffs are entitled to enforce performance of the 2nd named event, i.e. payment by the Defendants of HK$2,775,500.00. However, in the letter of the Plaintiffs' solicitors dated 15 February 2000 in which the Plaintiffs had purportedly offered the Defendants the option of performing the 1st named event, the Plaintiffs' solicitors had offered to pay only up to HK$544,500.00, not the amount of HK$824,500.00 as provided in the December 1998 agreement. As there was no or no effective performance of the Plaintiffs' obligation under the 1st named event, the Defendants could not be regarded as having waived their right to performance under the 1st named event.

31. I have doubts on the validity of the Plaintiffs' case that the Defendants had waived the right to performance under the 1st named event. On the evidence before me, I am unable to infer that by their failure to respond to the letter dated 15 February 2000, the Defendants had evinced an intention not to bring about the 1st named event. I am unable to arrive at a clear and firm view at this stage that the Plaintiffs are entitled to enforce performance of the 2nd named event independently of any offer to perform the 1st named event.

32. As I have doubts on the validity of the Plaintiffs' right to enforce performance of the 2nd named event on which the application for summary judgment is premised, it would not be appropriate to give summary judgment in this instance (see Billion Silver Development Ltd v. All Wide Investments Ltd [2000] 2 HKC 262). In my judgment, the appropriate order in this instance should be unconditional leave to defend. I would therefore allow the appeal and set aside the order for summary judgment of the Master and order instead that the Defendants are to have unconditional leave to defend. I will hear the parties on costs and directions for the further conduct of this action.