ACTIVE PROFIT LTD v. NISSHO IWAI HONG KONG CORPORATION LTD AND OTHERS

FACV No. 26 of 2005

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 26 OF 2005 (CIVIL)

(On appeal from CACV NOS. 320 AND 332 of 2003)

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J U D G M E N T

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Mr Justice Bokhary PJ :

1.  At the conclusion of the hearing we announced that, for reasons to be handed down later, the appeal was dismissed.  Upon counsel for the appellant accepting that he could not resist costs, we announced that the dismissal of the appeal would be with costs.  So the respondents have their costs here and in the courts below.  We now hand down our reasons for dismissing the appeal.  They are given by Lord Scott of Foscote NPJ for the Court. 

Lord Scott of Foscote NPJ :

Introduction

2.  This litigation has arisen out of a failed joint venture for the residential development of agricultural land.  The several commercial agreements entered into by the parties to establish their joint venture have a number of complexities and raise some, although not many, issues of construction.  These complexities and issues are responsible for the length of the judgments below : a judgment by Stone J of 183 paragraphs in favour of the plaintiff, Active Profit Ltd; and a judgment by Rogers VP of 121 paragraphs, concurred in by Le Pichon and Cheung JJA, allowing the defendants’ appeal and setting aside the order made by Stone J.  Active Profit has now appealed to this Court.  There are various subordinate issues with which we will have to deal but the main issue between the parties is a relatively short and simple one.  So we think it convenient to state at the outset what we think that issue is.

3.  The factual situation that has given rise to the issue can, in a very highly simplified form, be described as follows:

(i) A is the owner of a block of agricultural land in the New Territories.  The land has the potential for development for residential purposes.  A wants to realize the development value of his land.

(ii) A has two alternative ways of doing so.  He can sell the land, with its development potential, to a would-be developer.  In that case the purchaser, the would-be developer, will have to bear the costs, and accept the risks, of the development project.  The price at which the land is sold will involve a negotiated division of the development value inherent in the land.  Alternatively, A may decide to develop the land himself.  In that case he will have to bear the costs of the development and accept the risk that it may turn out to be less profitable than anticipated. 

(iii) A decides to pursue the latter alternative.  The costs of the proposed development will include the premium required by the Hong Kong Government to be paid as the price for authorizing the agricultural land to be used for residential purposes.

(iv) A decides that he needs a partner or partners with whom he can share the costs, and therefore the profits, of the proposed residential development.  B agrees to become such a partner and A and B agree that the costs of the proposed development shall be borne and the profits shall be shared equally between them.  They agree that the first $2 million of the proceeds of the development shall be treated as representing the value of A’s undeveloped land and shall go to A.  They agree also that if the necessary government authorization permitting the change of use of the land is not forthcoming within 12 months, their agreement shall be at an end.  And they agree that any substantial change in the nature of the proposed residential development will need the consent of both of them.  They expect the premium required by the government will be about $1 million.

(v) The government authorization is given within the 12 months but the premium required by the government to be paid is not $1 million but $4 million.  It is clear to both A and B that the development project cannot be profitably pursued.  So they do not take up the government authorization and do not pay the premium.

(vi) A then decides to revert to the first of the alternatives referred to in (ii) above and to sell the land to a developer.  He obtains a price of $3 million.

(vii) B claims to be entitled to a share in the $3 million on the ground that A, as B’s partner in the joint venture agreement, owed B fiduciary duties and that the $3 million, or some part of that sum, represents a profit made by A within the scope of those fiduciary duties.  B claims that A is therefore accountable to B for that profit.

4.  It seems to us plain that B’s claim must fail.  Any fiduciary duty owed by A to B was owed as a result and for the purposes of their joint venture agreement.  That agreement came to an end upon the collapse of the joint venture as envisaged at the time of the agreement, a collapse not brought about by either of them.  A could have agreed to allow the agreed joint venture to be extended so as to encompass the sale of the land to a developer.  But A was not obliged to do so and did not do so.  After all, B’s financial assistance was not needed in order for A to pursue the sale alternative.  If it could have been said that the existence of the joint venture and things done in pursuit of the joint venture had contributed to the enhanced price obtained by A on the sale of his land, B might have had the basis of a claim.  But not otherwise.  The facts, as outlined, are of a situation where the joint venture had collapsed, the parties had perforce reverted to their previous position and A was free to do what he liked with his land.

5.  The short issue in the present case is whether after the collapse of a proposed joint venture for the residential development of the agricultural land near Tai Wai, Shatin belonging to Beachshore Ltd (a company owned and controlled by Mr Kodera and Mr Cho, the 3^rd and 4^th respondents) the sale of that land to a developer involved a breach of any fiduciary or other duty owed to the appellant, Active Profit Ltd.

6.  Active Profit is, in our opinion, in the position of B in the example described above.  Mr Benjamin Yu SC, counsel for Active Profit, would probably protest that the actual facts relevant to Active Profit’s claim in this litigation are significantly different from those in the example.  In our opinion, they are not but we must describe the actual facts in order to show why that is so.  Mr Yu might also contend that B, in the example, would indeed have had a claim in equity to share in whatever profit A had made on the sale to the developer.  We will deal with that contention after describing the facts. 

The facts

7.  Mr Kodera and Mr Cho, through Beachshore, are in the position of A in the example.  They had been purchasing land in the Shatin area since 1988 and by 1990 had acquired a block of some 124,539 square feet of agricultural land.  They believed agricultural land in this area to be ripe for residential development.  They invited Sun Hung Kai Properties Ltd (“SHK”) to acquire a parcel of adjacent land with a view to a joint development.  SHK, through a subsidiary company, Tsuen Kwong, acquired the adjacent site.  Additional adjacent sites were also acquired and held in companies in which Beachshore and Tsuen Kwong were the shareholders.  All these sites were agricultural land.  Their development for residential purposes required government authorization for which a premium would be charged by the government.

8.  Mr Kodera and Mr Cho lacked, or were unwilling to provide, sufficient financial resources to cover the whole of their anticipated share of the development costs.  So they turned to Nissho Hong Kong (the 1^st respondent).  Nissho Hong Kong and its Japanese parent company (for convenience “Nissho Japan”) agreed to join the venture.  Highs Development Ltd (“Highs”), a Hong Kong construction company (also with a Japanese parent company) which hoped to obtain construction contracts from the proposed development, agreed to join the venture.  The joint venturers were Nissho Hong Kong, Nissho Japan, Milemore Ltd (the 2^nd respondent, a company owned and controlled by Mr Kodera) and Highs.  They agreed to participate in the development via a corporate vehicle, Mainplaza Investments Ltd (“Mainplaza”), in which Nissho Japan (2000 shares), Nissho Hong Kong (3000 shares), Milemore (2000 shares) and Highs (3000 shares) would become the shareholders.  Mainplaza was to acquire the development site (Property A) that had been put together by Mr Kodera and Mr Cho.  This, with some of the Tsuen Kwong owned land, was to be developed first.  The rest of the development was to follow.  The development was to be carried out by SHK and Mainplaza. 

9.  A Joint Venture Agreement dated 5 March 1993 was signed on behalf of each of the four joint venturers, the Mainplaza shareholders.  In Clause 1.1 of the Agreement, “Business” was defined as :

“… the business of [Mainplaza] as described in Clause 2 and such other business as the parties may agree from time to time in writing should be carried on by the company.”

and Clause 2.1 said that :

“The primary object of [Mainplaza] shall be to participate through Beachshore in the joint venture with the [owners of Properties B, C, and D] to carry out the Redevelopment …”

The expression “Redevelopment” was defined as including :

“(i)    the demolition of all existing building(s) erected on [Properties A, B, C and D];

 (ii)   … the construction of new building(s) to be erected, in accordance with such plans as may be approved from time to time by [the owners of Properties A, B, C and D] … and to form part of the Properties.” 

It is apparent from these provisions that unless the owners of the properties i.e. Beachshore in relation to Property A, otherwise agreed in writing, the only business that Mainplaza was to carry on was to be the proposed residential development of the Properties.  The joint venturers were to contribute to Mainplaza’s costs of the development in the same proportions as they held shares in Mainplaza.

10.  The Joint Venture Agreement referred also to the proposed purchase by Mainplaza of 96.9 per cent of the issued shares in Beachshore.  By this means Mainplaza would, in effect, acquire Property A.  This was to be the subject of a separate agreement between Mr Kodera and Mr Cho as vendors and Mainplaza as purchaser.  Clause 6.1 of the Joint Venture Agreement said that the four shareholders were to :

“… inject into [Mainplaza] by way of shareholder’s loan in the Joint Venture Proportions the respective advances in accordance with and for the purpose of carrying out [the agreement for the acquisition of the Beachshore shares] and the Joint Development Agreement [i.e. a development agreement between Beachshore, SHK and Tsuen Kwong] as may be required.”

And Clause 8.1 of the Joint Venture Agreement said that no shares in Mainplaza were to be transferred or disposed of by any of the shareholders without the consent of all the others.

11.  The agreement for the purchase by Mainplaza of the Beachshore shares, the so-called Share Acquisition Agreement (“the SAA”) was, like the Joint Venture Agreement, dated 5 March 1993.  The parties were Mr Kodera and Mr Cho as vendors of the shares and Mainplaza as purchaser.  The agreement provided for the sale to Mainplaza of 969 of the 1000 issued shares in Beachshore (Mr Kodera was to retain 31 shares) for a total price of $275,280,400 odd.  A deposit of $55,056,000 was paid to the vendors on the signing of the Agreement.  $15,241,143 odd of the price was to be dealt with by funding the repayment of a debt of that amount owing by Beachshore to a company owned and controlled by Mr Kodera and the balance was to be paid on completion.   Two important features of this Agreement are, first, the provisions in Clause 4 for the adjustment of the price depending on the size of the premium required by the government to be paid and, second, the provisions in Clause 7 about completion.

12.  The Clause 4 price adjustment provisions provided for the amount of the price to vary depending upon the rate of premium required to be paid and the gross floor area (“GFA”) of the permitted development.  The price of $275,280,400 was based upon an assumed premium rate of $1,200 per square foot and an assumed GFA of 305,470 square feet.  Clause 4 contained no lower or upper cut-off point, so it was conceptually possible that the premium rate required by the government would be so high as to reduce the price, bar the repayment of the $15,241,143 debt, to zero.  Clause 4 did not say anything about the repayment of the deposit in the event that the price, after adjustments, came below the amount of the $55 million odd deposit that had already been paid.  This seems a fair indication that the parties did not contemplate the possibility of such a thing.

13.  The Clause 7 provisions about completion said that completion was to take place within 7 days of Mainplaza being notified of the issue of an architect’s certificate certifying the permitted GFA and the rate of premium required.  A copy of the offer letter from the government was to be annexed to the certificate.  The clause went on to say that if the offer letter were not received by 31 July 1994 Mainplaza could rescind the Agreement and that if the offer letter were not received by 31 August 1994 :

“… this Agreement shall be at an end and of no further force and effect and none of the parties shall have any claims against the other save that the Vendors shall thereupon forthwith repay to the Purchaser the Deposit together with interest …”

14.  It is convenient at this point to note the difference between the respective positions of Mr Kodera and Mr Cho.  Mr Cho was an architect and it was he who had interested SHK in the proposed development (see his letter to SHK dated 27 March 1990).  He hoped to be engaged as architect for the proposed development and, of course, wanted to realize his share of the development value of the land held by Beachshore.  But he was not one of the joint venturers.  He had no interest in the Milemore shares.  Milemore was Mr Kodera’s company.  Milemore (and via Milemore Mr Kodera) was a joint venturer with an obligation to contribute to the costs of the development and an entitlement to participate in the expected profits of the development.  Mr Cho was not.  We have described Mr Kodera and Mr Cho as being in the position of A in the simplified model described in para.3 above.  But as to the two alternatives explained in para.3(ii), Mr Cho, in effect, chose the first of these.  The sale of the Beachshore shares to Mainplaza represented, for him, the sale of Property A and the realization of his interest in the development value of Property A.  But Mr Kodera, by contrast, chose the second alternative.  He retained, via Milemore’s shareholding in Mainplaza, a one-fifth interest in Property A and an interest in the profits of the proposed development but subject, of course, to an obligation to bear one-fifth of Mainplaza’s costs of the development.

15.  The two Agreements of 5 March 1993 preceded any contractual entry by Active Profit into the story.  It appears from a letter dated 9 January 1993 written on behalf of Nissho Hong Kong to Playmates Properties Ltd that broad agreement had been reached for Playmates Properties, or an associated company (in the event, Active Profit), to participate in the proposed joint venture as a “silent partner” of Nissho Hong Kong.  This broad agreement led to a formal Participation Agreement.  One party was Nissho Hong Kong.  Active Profit was a later substitute for the other party but nothing turns on the substitution and it is convenient to refer to Active Profit as the party to the 1 June 1993 Participation Agreement.  The Agreement recites Beachshore’s ownership of Property A (and the ownership by other companies of Properties B, C and D), recites the two 5 March 1993 Agreements and recites the agreement between Nissho Hong Kong and Active Profit for Active Profit’s participation in the joint venture for the development of Properties A, B, C and D “upon the terms and subject to the conditions hereafter mentioned”.  The Agreement contains a highly relevant definition of the “Joint Venture” in which Active Profit is to become a participant.  It says that “Joint Venture” means :

“… the joint venture agreement(s) between the [owners of the four Properties] whereby the [four Properties] will be surrendered by [their respective owners] to Government in exchange for the New Lot and the agreement(s) between the [owners] in connection with the development of the New Lot and disposal of units after the Exchange…”

The treatment of the respective corporate owners of the Properties, rather than the Mainplaza shareholders, as the joint venturers is a little confusing but the important point is the clear description of the Joint Venture as being the redevelopment of the composite site.

16.  Clause 2 of the Participation Agreement contained a declaration by Nissho Hong Kong that it would, upon completion of the purchase by Mainplaza of the Beachshore shares pursuant to the SAA :

“… hold 1/3 of its interests and rights in its shares and investments (including shareholder’s loan to Mainplaza) in Mainplaza and in the Joint Venture in trust for [Active Profit] …”

By 1 June 1993, the date of this Agreement, the deposit of $55 million odd payable to Mr Kodera and Mr Cho under the SAA had already been paid by Mainplaza and had been funded, as to a 30 per cent share, by Nissho Hong Kong by, presumably, a shareholder’s loan to Mainplaza (see Clause 6.1 of the Joint Venture Agreement – para.10 above).  The Clause 2 trust was a trust in favour of Active Profit that would come into existence on a future date, namely, the date on which completion of the purchase of the Beachshore shares would take place (see Clause 7 of the SAA – para.13 above).

17.  Clause 4 of the Participation Agreement dealt with the consideration to be paid by Active Profit to Nissho Hong Kong as the price for Active Profit’s participation in the Joint Venture.  The price was to be $27,528,040 of which $5,505,608 was to be (and was) paid immediately as a deposit.  The balance was to be paid on completion of the SAA i.e. the time when the Clause 2 trust would come into existence.  The price of $27,528,040 was to be subject to adjustment by reference to the same formula as was set out in Clause 4 of the SAA for the adjustment of the SAA price to be paid for the Beachshore shares.  It is worth emphasizing at this point that the trust property to which the Clause 2 trust would attach would be Nissho Hong Kong’s shares and interests in Mainplaza.  Those who hold shares in a company or make unsecured loans to a company do not thereby acquire any equitable interest in the assets of the company.  None of the Mainplaza shareholders, the joint venturers, had or were intended to acquire any proprietary interest, equitable or otherwise, in Mainplaza’s assets or in the Beachshore shares in particular.  The subject matter of the intended future trust was to be Nissho Hong Kong’s shares in Mainplaza, Nissho Hong Kong’s loans to Mainplaza and Nissho Hong Kong’s interest in the Joint Venture.

18.  Clause 8 of the Participation Agreement, headed “The Project Finance” was an acknowledgment that the Joint Venture Partners would arrange to provide the finance for the development project and that Active Profit “subject as herein provided” would have to contribute.  Clause 9 headed “Contribution”, then sets out the extent to which Active Profit had to contribute to the funding.  It says this :

“[Active Profit] shall be responsible for compliance with 1/3 of any funding obligations of [Nissho Hong Kong] as holder of 30% of the issued shares capital of Mainplaza under the [5 March 1993 Joint Venture Agreement] and [Nissho Hong Kong] shall hold all rights and benefits of such contribution by [Active Profit] in trust for [Active Profit].”

19.  It is, in our opinion, plain as a matter of construction that Clause 9 is dealing with the on-going funding for the development.  It is not dealing with the funding necessary for the completion by Mainplaza of its acquisition of the Beachshore shares and, through Beachshore, of Property A.  That has been dealt with by Clause 2.  Mr Yu has submitted that the “funding obligations” referred to in Clause 9 should be construed as covering the provision by Nissho Hong Kong of its share, first, of the $55 million odd deposit paid to Mr Kodera and Mr Cho and, secondly, of the balance of the price when completion of the purchase should take place.  We are unable to accept that submission.  It would render Clause 2 otiose.  It fails to read and construe the Participation Agreement as a whole.  Moreover, the deposit payable under the SAA had been paid before the date of the Participation Agreement.  And, as a final point, the consideration of HK$27,528,040 and the deposit of $5,505,608 payable to Nissho Hong Kong under the Participation Agreement are, in relation to the price payable and deposit paid by Mainplaza under the SAA, not far off 1/3 of the 30 per cent that was Nissho Hong Kong’s contribution proportion under the Joint Venture Agreement of 5 March 1993.  The consideration payable by Active Profit to Nissho Hong Kong was, plainly to our mind, related to the increased value Mainplaza would have on completion of the acquisition of the Beachshore shares.  Hence the Clause 2 trust.  The Clause 9 contributions were required for the purpose of on-going financial requirements of Mainplaza.  Accordingly, the coming into effect of the Clause 2 trust awaited the completion of the SAA, and the coming into effect of the Clause 9 trust awaited the contribution by Active Profit to some additional funding required for the furtherance of the re-development project.  Neither, in the event, ever happened.

20.  On 30 September 1993, Active Profit entered into a similar Participation Agreement with Milemore.  The contents of the two Participation Agreements are virtually identical.  The only relevant differences are (i) that in the Milemore Agreement, Active Profit was to acquire on completion of the SAA a 1/2 share of Milemore’s interests in Mainplaza; (ii) that the consideration and deposit respectively payable by Active Profit, $27,528,040 and $5,505,608 (the same as in the Nissho Participation Agreement) represented almost exactly 1/2 of Milemore’s contribution to the consideration and deposit payable to Mainplaza under the SAA; (iii) that Active Profit agreed (in Clause 7) to pay Milemore an arrangement fee of $13,275,000 payable as to $2,655,000 on or before 4 October 1993 and as to the balance on completion of the SAA, and (iv) that, under Clause 16 (which had no counterpart in the Nissho Participation Agreement), Milemore (in effect, Mr Kodera) was to be free for a 3-month period from 30 September to agree, at its absolute discretion, to any amendments to the SAA (under which Mainplaza was to acquire the Beachshore shares) but so that Active Profit, if it disliked the amendments, could terminate the Participation Agreement, in which case Milemore would have to refund, with interest, all money paid by Active Profit to Milemore under the Agreement.  Active Profit duly paid Milemore the deposit payable under the Participation Agreement.

21.   These two Participation Agreements, and the payment by Active Profit of the deposits, constitute the sheet anchor of Active Profit’s case.  Active Profit contends, correctly, that under each Agreement it became, as a “silent partner”, a joint venturer with the other contracting party, Nissho Hong Kong or Milemore, as the case may be.  It became, in effect, B in the para.3 simplified example.  It contends that it acquired, as soon as it had paid each deposit, an equitable interest in the shares in Mainplaza of each contracting party.  But the Clause 2 trust could not come into existence until the completion of the Beachshore’s purchase and the Clause 9 trust awaited the requirement for some further project financing, which never happened.  However, a complicating event occurred.  The SAA of 5 March 1993 was cancelled and its place was taken by an Agreement dated 9 September 1994, the so-called Share Subscription Agreement (“the SSA”), under which Mainplaza were to acquire the Beachshore shares and the price for them was to be paid in a quite different manner from that provided for in the SAA. 

22.  By mid-1994, however, and before the SSA had been signed, Mr Kodera and Mr Cho had become aware that the price adjustment provisions of the SAA would have a disastrous effect, from their point of view, if the rate of premium required by the government were overhigh.  The effect might be that on completion of the sale they would receive no payment at all.  So it was very strongly, indeed overwhelmingly, in their interest to negotiate an alteration in the price adjustment formula in the SAA that would protect them against that eventuality.  That was the background to a memorandum of agreement the parties to which were Mainplaza, Mr Kodera and Mr Cho.  The memorandum was backdated to 5 March 1993 (so as to correspond with the date of the SAA).  Mr Yu has submitted that the memorandum should be ignored on the ground that Stone J made no finding as to when it had been signed.  We do not accept that interpretation of the remarks about the memorandum made by Stone J at para.45 of his judgment.  He said this :

“[The memorandum] … bears the date 5 March 1993, but on the evidence was executed in mid-1994 and backdated …”

We read this sentence as a finding by the judge that the memorandum was signed by, or on behalf of, the parties to it in mid-1994.  The significance of the date of signing is that 31 August 1994 was the date on which the SAA, unless extended by the parties, would be at an end if the offer letter from the government specifying the premium rate and the GFA had still not been received.

23.  The memorandum was a one-page document, para.1(1) of which gave Mr Kodera and Mr Cho (the vendors of the Beachshore shares) the right to cancel the SAA if the premium rate set by the government was more than $1,560 per square foot unless Mainplaza agreed to pay the difference between  the actual premium and a premium calculated on the basis of a premium rate of $1,560 per square foot; and para.1(2) of which gave Mainplaza the right to cancel the SAA if the premium rate was set at less than $840 unless the vendors agreed to pay the difference between the actual premium and a premium calculated on the basis of a premium rate of $840.

24.  The effect of the mid-1994 memorandum was, therefore, to provide a maximum premium rate, and consequently, on the assumed GFA, a minimum price that Mr Kodera and Mr Cho would receive for their Beachshore shares.  It provided also a minimum premium rate, and consequently a maximum price that Mainplaza might have to pay.  Stone J treated this latter feature as little more than window-dressing, on the ground that, as he put it in para.129 of his judgment :

“… there could have been no realistic expectation of a premium being demanded at the lower end of the spectrum …”

But property values are notoriously vulnerable to sudden crashes and the inclusion of a provision to protect the purchaser (Mainplaza), and thus the joint venturers, seems prudent and fair.  Be that as it may, it seems to us plain that Mr Kodera and Mr Cho, having become aware of the potential damage to their interests if the premium rate were to be set at a rate much higher than had been expected at the time the price adjustment formula in the SAA had been negotiated, would not have agreed to an extension of the SAA beyond 31 August 1994 without the protection afforded by the memorandum agreement.

25.  Mr Yu has, with some justification, protested that Active Profit, which had become interested in the joint venture under the two Participation Agreements, was not told about this memorandum agreement, nor indeed about the SSA or the more formal Premium Agreement of 7 April 1995, until much later.  He represented the contractual protection given to Mr Kodera and Mr Cho under the memorandum agreement of mid-1994 and, later, under the 7 April 1995 Premium Agreement, as breaches of duty owed to Active Profit and as ineffective as against Active Profit.  There is, in our opinion, nothing in this point.  If nothing had been done, the SAA would have come to an end on 31 August 1994.  The joint venture would have ended with it and Active Profit’s only claim could have been for a return, with interest, of the deposits it had paid.  The conclusion that the joint venture was kept alive by Mr Kodera and Mr Cho because their interests as vendors of the Beachshore shares were protected by the mid-1994 memorandum agreement is, in our opinion, irresistible.  Both Stone J and the Court of Appeal treated the mid-1994 agreement and the 1995 Premium Agreement as effective as against Active Profit and were, in our opinion, right to do so. 

26.  The reason why it was thought necessary to substitute the SSA for the SAA is not entirely clear to us but the reasons are not material.  The effect of the SSA was that, instead of a purchase by Mainplaza of 969 of the 1000 issued shares in Beachshore, there was to be an allotment to Mainplaza of 39,000 new Beachshore shares ranking pari passu with the existing 1000 shares.  The 39,000 shares were to be issued at par and paid up on allotment.  The $260,039,256 that, under the SAA, had been payable for the 969 shares to be sold became, under the SSA, consideration payable by Mainplaza to Mr Kodera and Mr Cho for procuring the allotment of the 39,000 shares.  $55,056,000 was to be payable as a deposit but the deposit that had been paid under the SAA was treated as paid under the SSA. The amount of the consideration was subject to the same adjustment provisions, depending on the rate of premium and the permitted GFA, as had been contained in the SAA.  The completion provisions of the SSA were contained in Clause 7 :

(i) The issue of the 39,000 new shares was to take place at once and Mainplaza was to pay Beachshore the par value of the shares.

(ii) The balance of the consideration payable to Mr Kodera and Mr Cho was to be paid within 10 days of various conditions being complied with, of which one was the issue by the government of the offer letter stating the premium rate and the GFA applicable to property A and another was a formal Architects’ Certificate certifying the premium rate required and the permitted GFA.

(iii) But if the conditions were not complied with by 31 August 1995 (or any agreed extended date), Mainplaza was entitled to rescind the agreement, whereupon Mr Kodera and Mr Cho had to repay the deposit with interest from 5 March 1993 and Mainplaza had to transfer the 39,000 shares to them at par.

It is worth noting that the rescission right referred to under (iii) above was a right exercisable by Mainplaza.  The SSA gave no comparable right to Mr Kodera and Mr Cho.  But their position remained protected by the provisions of the mid-1994 memorandum agreement.

27.  The Premium Agreement of 29 August 1995 refers nowhere to the earlier mid-1994 memorandum agreement but the clear intention was that the formal 1995 Agreement would supersede the previous informal agreement and would take into account the changes brought about by the substitution of the SSA for the SAA.  The parties were Mr Kodera and Mr Cho of the one part and Mainplaza of the other part.  The Agreement gave the respective parties the same cancellation rights in relation to the SSA as the memorandum agreement had given them in relation to the SAA.  But the cancellation rights of Mr Kodera and Mr Cho could be extinguished if Mainplaza paid up the consideration, adjusted by reference to a premium rate of $1,560, within 7 days of the issue of the offer letter.  Paragraph 3(c) of the Agreement said that in the event that the cancellation rights should be exercised the deposit, with interest, had to be repaid and the 39,000 shares in Beachshore had to be transferred at par to Mr Kodera and Mr Cho.  At the date of this Agreement, 9 September 1994, the parties were expecting a premium rate of somewhere between $1,500 and $2,000 per square foot (see para.129 of Stone J’s judgment).  Active Profit knew nothing about the Premium Agreement until much later.

28.  There was a considerable delay before the all important offer letter was received.  The letter was dated 5 May 1997 and fixed a premium rate for Property A of $4,400 per square foot.  This rate of premium had very serious, and adverse, implications for the joint venture.  On 10 May 1997, SHK sent a fax message to Nissho Hong Kong expressing its dismay and Nissho Japan, in a letter to Mainplaza of 13 May 1997, said that the premium figure in the offer letter was “far beyond our budget and it is not possible for us to complete the [SSA]”.  They said “we are not in a position to proceed with the project”.

29.  Mainplaza did not, within the requisite 7 days of the offer letter, pay the consideration that would have been due under the SSA to Mr Kodera and Mr Cho on the footing of a premium rate of $1,560 per square foot.  Having regard to the $55 million deposit that had already been paid, a sum of about $100 million would have had to be paid.  In order to proceed with the joint venture and commence the development of Property A, not only the $100 million but also the premium that the government required, a sum of over $2,607 million (see the architects’ certificate of 12 May 1997) would have had to be found.  And then, of course, there would have been the building costs.  None of the joint venturers was willing to fund the proposed development having regard to the sums required to be found for that purpose.  As Mr Kodera put it in a note cited by Rogers VP in para.68 of his judgment :

“… it was blatant to all the shareholders of Mainplaza at the time that the Redevelopment had to be called off.”

Accordingly, Mainplaza formally resolved on 16 May 1997 not to proceed with the development.  The consideration payable under the SSA was not paid and Mr Kodera and Mr Cho became entitled to cancel the SSA.

30.  They did so.  The deposit of $55 million odd was, with interest, repaid to Mainplaza and the 39,000 shares in Beachshore were transferred by Mainplaza to Mr Kodera and Mr Cho at par.  The joint venture was at an end.  The position reached was the same as that in which A and B in the para.3 example found themselves (see sub-para.(v)).

31.  The Beachshore shares were subsequently sold by Mr Kodera and Mr Cho to SHK at a price calculated by attributing to Property A a value of about $1,300 per square foot.  The price was $376 million odd.  A substantial commission was paid by them to Nissho Hong Kong for arranging the sale.

The issues

32.  These being the relevant facts, the case is, to our mind, no different from that set out in our simplified para.3 model.  The two “premium” agreements, one made in mid-1994, the other dated 29 August 1995, represent a complication to the facts but make no difference to the legal analysis once it is accepted, as in our opinion it has to be, that the entry into them by Mr Kodera, Mr Cho and Mainplaza did not constitute a breach of any duty owed by any of them, or by any of the Mainplaza directors or shareholders, to Active Profit.  If it had not been for those agreements, the joint venture in which Active Profit had an interest would have run into the sands in 1994.

33.  Nor can Active Profit complain of the failure by Mainplaza to complete the SSA in May 1997 by finding the $100 million odd necessary to be paid to Mr Kodera and Mr Cho.  The purpose of the joint venture into which Active Profit had joined as a “silent partner” under the two Participation Agreements was the residential redevelopment of Properties A, B, C and D.  That purpose could only be changed if each of the four Mainplaza shareholders, Nissho Hong Kong, Nissho Japan, Milemore and Highs agreed.  Neither Nissho Hong Kong nor Highs had any contractual obligation to agree to an extension so as to permit, for example, the land to be retained by Mainplaza as part of a land bank for development at some future time or to be sold by Mainplaza to a developer such as SHK.  Nor did the two parties with whom Active Profit had entered into agreements, Nissho Hong Kong and Milemore, have any obligation to extend, for the benefit of Active Profit, the joint venture into which Active Profit had joined, let alone any obligation to procure Nissho Japan or Highs to agree to an extension.  The fact of the matter is that the level of premium required by the government under the offer letter of 5 May 1997 had so undermined the plans and commercial expectations of the joint venturers as to make it inevitable that the joint venture would collapse.  As it did.

34.  Mr Yu has submitted that as a result of the Participation Agreements, Nissho Hong Kong and Milemore owed fiduciary duties to Active Profit.  Some might prefer to describe those duties as contractual but we do not think the choice of adjective makes any difference.  Whatever the adjective, the duties owed would have included a duty not to do anything to prevent the joint venture into which Active Profit had been admitted from being pursued.  But it has not been suggested that this duty was broken.

35.  Mr Yu has submitted that, as a result of the payment by Active Profit of the deposits under the Participation Agreements, which were intended as reimbursement to Nissho Hong Kong and Milemore of part of their respective contributions to the deposits paid by Mainplaza to Mr Kodera and Mr Cho under the SAA (later treated as deposits paid under the SSA), Active Profit became a beneficiary under the trust referred to in Clause 2 of those Agreements and that the trust property in which Active Profit acquired a beneficial interest included the Beachshore shares.  The point of this submission was that it formed the foundation stone for a claim that, since the Beachshore shares were subject to the Clause 2 trust, the proceeds of sale when the shares were sold by Mr Kodera and Mr Cho, represented trust property and that Active Profit was entitled to a share in the proceeds of sale.  This, in our opinion, is a hopeless claim for a number of reasons.

36.  First, the Clause 2 trust was a future trust intended to come into being on completion of the sale of the Beachshore shares under the SAA.  Completion of the SAA required under Clause 7 the payment of the consideration, adjusted as necessary after the premium rate had become known, to Mr Kodera and Mr Cho.  The later substitution of the SSA for the SAA cannot have altered the time at which the Clause 2 trust came into existence.  The consideration was never paid to Mr Kodera and Mr Cho, so the Clause 2 trust never came into existence.

37.  In any event, Clause 2 of the Participation Agreement could not have given Active Profit any proprietary interest in the Beachshore shares that Mainplaza was acquiring.  The most that Active Profit could have claimed under a Clause 2 trust would have been an interest in the loans to Mainplaza made by Nissho Hong Kong and Milemore respectively for the purpose of reimbursing Mainplaza for part of the funds applied in paying the deposit to Mr Kodera and Mr Cho.  The loans were repaid to Nissho Hong Kong and Milemore and they repaid, with interest, the deposits Active Profit had paid them.

38.  Even if the Clause 2 trust had come into existence when, pursuant to the SSA, the 39,000 Beachshore shares were allotted to Mainplaza (i.e. treating the SSA as having altered the meaning of “completion” in the Participation Agreements) nonetheless Mainplaza’s ownership of those shares would have been subject to Mr Kodera and Mr Cho’s contractual right under the 1995 Premium Agreement to have the shares transferred to them at par if the consideration due to them under the SSA were not paid within 7 days after issue of the offer letter.  The consideration was not paid, the shares were accordingly transferred to Mr Kodera and Mr Cho and any interest which Active Profit might previously have had in those shares would have come to an end.

39.  And, finally, whatever duties were owed by Nissho Hong Kong and Milemore to Active Profit as a result of the Participation Agreements were owed for the purposes of the joint venture.  If the pursuit of the joint venture had produced something of value for the joint venturers, Active Profit might have been entitled to claim to share in that value.  But the joint venture never produced anything of value other than the 39,000 Beachshore shares which became vested in Mainplaza subject to a contractual obligation to transfer them to Mr Kodera and Mr Cho in the events which happened.

40.  Mr Yu sought also to establish a case via a fiduciary duty that he said was owed by Nissho Hong Kong and Milemore to Active Profit and that barred Nissho Hong Kong and Milemore from placing themselves in a position in which their interests conflicted with their duty.  He then, identifying Mr Kodera with Milemore, submitted that Mr Kodera had broken this duty by taking a transfer of the Beachshore shares from Mainplaza and then selling those shares to SHK.  It was not clear to us how this scenario implicated Mr Cho, who had never owed any fiduciary duty to Active Profit but, even in relation to Mr Kodera, the contention of breach of fiduciary duty cannot succeed.  Mr Yu helpfully placed before the Court a written statement of his core propositions.  Paragraph 7 said that “The core of the fiduciary obligation is a duty not to make and retain profits within the scope and ambit of the duty which conflicts or may conflict with his personal interest”.  The important words, in our opinion, are “within the scope and ambit of the duty”.  The duty owed by Milemore (which we are content for present purposes to regard as Mr Kodera’s alter ego) was owed for the purposes of the joint venture.  The scope and ambit of the duty was limited by the scope and ambit of the joint venture.  Prior to the commencement of the joint venture, Mr Kodera and Mr Cho, through Beachshore, were the owners of Property A.  They brought Property A, via Beachshore, into the joint venture for the purposes of the joint venture and for no other purposes.  On the collapse of the joint venture they were entitled, contractually, to have their property back.  Its value had not been enhanced by anything done in the pursuit of the joint venture or at the expense of the joint venturers.  In these circumstances it is, in our opinion, impossible to contend that after the collapse of the joint venture, there was any continuing duty, contractual or fiduciary, owed by Milemore/Kodera or by Nissho Hong Kong to Active Profit, save for the return to Active Profit of the deposits, with interest, that it had paid under the Participation Agreements.

41.  It follows that the transfer to Mr Kodera and Mr Cho of the Beachshore shares did not constitute any breach of any duty owed to Active Profit.  Mr Kodera and Mr Cho were free to do whatever they wished with the shares and to sell them to whoever they chose on what terms they wished.    

42.  This case raises no issue about the scope of fiduciary duties owed by one joint venturer to another.  The law is nowhere better stated than by Mason J (as he then was) in his judgment in the High Court of Australia in Hospital Products Ltd v. United States Surgical Corporation and Others (1984) 156 CLR 41 : see particularly at pp 96, 97 and 99.  Passages from his judgment were rightly cited both by Stone J and by Rogers VP and it is not necessary for us to repeat them.  Active Profit’s attempt to claim a part of the proceeds of the sale of the Beachshore shares to SHK is, in our opinion, hopeless and we regret the length of this judgment in explaining why.  We would dismiss this appeal for the reasons we have given, substantially the same reasons as those given by Rogers VP.  Active Profit must pay the costs of the appeal.