LUCKY ZONE HOLDINGS LTD v. WINNING BEAUTY INVESTMENTS LTD AND ANOTHER

HCA 784/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 784 OF 2012

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D E C I S I O N

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Introduction

1.  I have before me two applications for summary judgment pursuant to Order 14 of the Rules of the High Court against the two defendants in HCA 784/2012, and against two other defendants in HCA 785/2012. Though the parties are different, the actions arose from the same set of facts and the legal issues are the same.  The two applications were heard together.

The background

2.  The Plaintiff is a subsidiary of a company listed on the Hong Kong Stock Exchange, C Y Foundation Group Limited (“CY Foundation”). It is the registered holder of a convertible note dated 6 May 2008 in the principal amount of US$1,000,000 (the “1^st Convertible Note”), issued by the 1^st Defendant in HCA 785/2012 (“Lucky Belt”), pursuant to a subscription agreement of the same date between the Plaintiff as investor and/or subscriber and Lucky Belt as borrower and/or issuer and the 2^nd Defendant in that action (“Shek”) as guarantor.  A year later, the same parties entered into a similar subscription agreement dated 20 April 2009, pursuant to which a second convertible note dated 30 April 2009 in the principal amount of US$2,000,000 (the “2^nd Convertible Note”) was issued to the Plaintiff.

3.  At around the same time as the issue of the 2^nd Convertible Note, the Plaintiff became is the registered holder of a third convertible note dated 30 April 2009 in the principal amount of US$2,500,000 issued by the 1^st Defendant in HCA 784/2012 (“Winning Beauty”) pursuant to a subscription agreement dated 22 April 2009 between the Plaintiff as investor and/or subscriber and Winning Beauty as borrower and/or issuer and the 2^nd Defendant in that action (“Leung”) as guarantor.

4.  The material terms of the three sets of subscription agreement, convertible note instruments and convertible note are largely the same, except for the amount of principal loan, parties, interest rate and date of maturity.  The documents were drafted by lawyers and there is no dispute about the contents of the written terms of these documents.  They were duly executed by the parties.  The principal amounts of the loans were advanced to the 1^st Defendant of each action.  Under the terms of the three convertible note instruments, upon advancing the respective principal sum, the Plaintiff shall have two options:

(1) the share subscription option:

the right under clauses 6 and 7 of the respective convertible note instrument to exercise the option to subscribe for shares in Lucky Belt or Winning Beauty as appropriate according to a specific formula; and upon exercise of this option, the plaintiff would become a shareholder of the respective company but will not be entitled to receive repayment of the principal sums; or

(2) the redemption option:

the repayment of the respective principal sum, pursuant to clauses 4 and 8 of the respective convertible note instrument together with interest on the maturity date which was the third anniversary of the date of the respective convertible note; pursuant to clause 8.2, the Plaintiff may in its absolute discretion issue a redemption notice to the respective defendant whereupon the convertible note shall become immediately due and payable.

5.  On 19 August 2008, about three months after the issue of the 1^st Convertible Note, the Plaintiff and its sister company, Ace Plus Limited (“Ace Plus”), entered into a software license agreement respectively with BG Global Gaming Limited (“BG Global”) and Winning Asia Technology Limited (“Winning Asia”).

6.  Lucky Belt, Winning Beauty, Winning Asia, Take 1 Technologies Group Limited (“Take 1”) and BG Global are related companies.

The Plaintiff’s case, the defence and the issues

7.  There is no dispute that the Plaintiff advanced the three principal sums to the Defendants in accordance with the three sets of subscription agreement and convertible note instrument, was issued the three convertible notes, has not exercised the its right under the share subscription option but has exercised its right under the redemption options by issuing redemption notices upon maturity of the respective convertible note.  There is also no dispute that despite repeated demands for repayment, the interest and the principal amounts due under the three convertible notes were not repaid upon maturity.  On the face, the Plaintiff has a good cause of action against the Defendants and is entitled to judgment.

8.  The Defendants’ defence case is that the agreement between the Plaintiff and the Defendants was made partly orally, partly in writing and partly by conduct.  They rely on a prior oral agreement made during a dinner meeting in April 2008 before entering into the written subscription agreement and convertible note instrument leading to the issue of the 1^st Convertible Note.  Under the terms of the oral agreement, the Plaintiff would invest in the Defendants by way of convertible notes for developing gaming platforms to be supplied to the Plaintiff’s group for use in the People’s Republic of China; and upon delivery of the gaming software to the Plaintiff’s group, the Plaintiff will exercise its option to convert the investment into shares in the respective Defendants.  In reliance of this oral term, the Defendants entered into the written subscription agreements and convertible note instruments; and later caused BG Global and Winning Asia to enter into the software licence agreements with the Plaintiff and Ace Plus.  Alternatively, the Plaintiff’s options of redemption were abrogated, or the Plaintiff has waived its right to otherwise enforce those options.

9.  In the light of the background and facts which are not in dispute, the issues raised by the defence are: (1) whether it is credible that the parties had entered into a prior agreement in respect of the oral term; (2) if it is, whether the software under the two software licence agreements has been delivered to the Plaintiff; and (3) if it has been, whether the oral term provides a good defence or whether the Plaintiff’s right of redemption was otherwise abrogated or waived.

10.  Mr Kwong attacks the defence on four fronts.  First, he argues that the oral agreement is precluded by the exclusive agreement clause in the subscription agreements. Second, he argues that the alleged oral term is an affront to commercial sense, ie the oral term is not credible.  Third, he argues that the alleged oral term is too vague and uncertain.  Fourth, he submits that the Defendants’ arguments of abrogation and waiver are illogical and bad.

Existence of the oral term and commercial sense

11.  The parties are in hot dispute as to whether there was agreement on the oral term between the Plaintiff and the Defendants’ group in April 2008 prior to the execution of the documents relating to the 1^st Convertible Note.  This factual issue formed the basis of the Defendants’ defence and argument in resisting summary judgment.

12.  The Defendants’ case is that the Plaintiff and the Defendants had entered into a financing and investment arrangement for the Plaintiff to finance the gaming software development projects of the Defendants’ group to be supplied to the Plaintiff for use in the Republic of China and for the Plaintiff to invest in the Defendants’ group if the development projects were successful.  The subscription agreements, convertible note instruments and convertible notes were executed as a result of this financing and investment arrangement.  The Defendants said that prior to finalising this arrangement, Shek and Leung on behalf of the Defendants’ group and Theodore Cheng, Arthur Yeung and Michael Chan on behalf of the Plaintiff had a meeting at a Chinese restaurant in Causeway Bay in April 2008, during which the above arrangement was agreed.  Then all the logistics of the arrangement were left to Theodore Cheng’s lawyers. Theodore Cheng, Arthur Yeung and Michael Chan were respectively a director, chief operation officer and consultant of the Plaintiff’s parent company, CY Foundation.

13.  The Plaintiff disputes the existence of that meeting in April 2008 or that any such arrangement was agreed at the meeting, but did not call for any evidence from Theodore Cheng, Arthur Yeung and Michael Chan.  The Plaintiff produced two affirmations by its directors, Sik Siu Kwan and Gloria Cheung, denying there was such a meeting and arrangement and explaining their failure to produce evidence from Theodore Cheng and others because those people had left CY Foundation.  Gloria Cheung further alleged that Theodore Cheng had engaged in a series of prejudicial conducts to injure the interest of CY Foundation, had unsuccessfully instituted a civil action against CY Foundation and had been convicted of fraud against CY Foundation for which he was sentenced to five months’ imprisonment.  She said that Arthur Yeung and Michael Chan were associated with Theodore Cheng.  That may well explain why the Plaintiff might have difficulties in securing the cooperation of Theodore Cheng and his associates to give evidence for the Plaintiff, but not that it had actually encountered such difficulties or that those people could not be located. Nevertheless, I shall bear that and all the circumstances in mind when assessing the inference to be drawn for the Plaintiff’s failure to call Theodore Cheng and others to give evidence.

14.  Mr Li, counsel for the Defendants, argues that it is significant that there are numerous references made in the subscription agreements to the software projects and the requirement for the subsequent provision of the software to the Plaintiff’s group.  He submits that such references evidence the existence of the oral agreement.  He refers to the following clauses.

15.  Clause 2.2 of the subscription agreement dated 22 April 2009 in HCA 784/2012 provides:

“The Consideration shall be solely used by the Company for financing its manufacture/purchase of gaming machines, development of gaming software …”

Similarly, clause 2.2 of the subscription agreement dated 20 April 2009 in HCA 785/2012 provides:

“The Consideration shall be solely used by the Company for financing its manufacture/purchase of bingo machines.”

In these contexts, “Company” means the respective Defendant.

16.  Clause 3.1(i) and 3.3(n) of the subscription agreement dated 6 May 2008 in HCA 785/2012 provide:

“3.1(i)  the Company having entered into a supply agreement with Take 1 Technologies Group Limited (“Technologies Group”) for the supply of custom made bingo machines and other hardware as required by the Company and the Investor being satisfied with such terms in the agreement;

 3.3(n) the Company shall deliver to the Investor a supply agreement between Technologies Group and the Company;”

In these contexts, “Company” means Lucky Belt.  Take 1 subsequently became BG Global, a wholly owned subsidiary of Lucky Belt.

17.  There is no dispute that the loans were advanced to the Defendants for financing their development of gaming software and purchase of gaming machines.  There is no doubt that the Plaintiff has an interest in the development of the gaming software in order to fulfil its contractual obligations to its business partners in the People’s Republic of China.  The provisions quoted above together with the two software licence agreements clearly demonstrate that interest.  That was why the Plaintiff went to the extent of providing loans to the Defendants to enable them to develop the software.  This is not incredible.  It is also not incredible under such arrangements for the borrower to provide a share option to the lender so that the lender can share in the benefit of the borrower’s success in the development of the project which the lender financed, if the project turns out to be successful.  Such share options are usually exercisable at the lender’s absolute discretion depending on his assessment of the benefit which the project revealed and the risk.  The lender being the party with the funds is usually in a stronger bargaining position than the borrower who needs the funds to develop the project and to make money out of that project under some other contracts.  In the present case, the Plaintiff financed the Defendants’ development of the software to be sold to the Plaintiff’s group under separate software licence agreements.  If the development project turned out to be successful, the Plaintiff would, of course, wish to participate in the profit of the Defendants in the software licence agreements.  That is the fundamental purpose of the share option.  It makes commercial sense for the Plaintiff to ask for an option to be exercised at its absolute discretion to subscribe for shares in the Defendants.  That was what the parties agreed in clause 8.2 of the convertible note instrument, which stipulates that the Plaintiff shall have absolute discretion to decide whether to exercise the redemption option or the share subscription option.  The clause reads:

“ At any time after the date of this Instrument the Noteholder may in its absolute discretion give a Redemption Notice to the Company in respect of part or all of the Notes held by it, whereupon such Notes shall become immediately due and payable at a redemption amount equal to the Redemption Price.”

18.  The oral term alleged by the Defendants is that the Plaintiff will subscribe for shares if the project is successful and if the software has been delivered to the Plaintiff.  Putting aside for the time being Mr Kwong’s criticism that the word “successful” is vague and ambiguous, the alleged oral term is not an option but a commitment.  While the term is a matter of agreement and the share subscription option makes commercial sense, there is nothing to suggest the Defendants were in such a strong bargaining position as to be able to secure a departure from the usual norm of giving the lender a free choice to be paid by shares or by cash but to be commit to take shares in the Defendants instead.  Viewed in this light, the oral term is affront to commercial sense.

19.  Not only that, the alleged oral term is diametrically contradicted by clause 8.2 of the convertible note instrument, which stipulates that the Plaintiff shall have absolute discretion to decide whether to exercise the redemption option or the share subscription option.  If the parties had reached agreement on the alleged oral term, it is difficult to see how clause 8.2 could have found its way in the convertible note instruments created after reaching agreement on the oral term.  Clause 8.2 is found in all the three convertible note instruments.  These instruments were prepared and drafted by lawyers.  This alleged oral term is a very important term.  If the parties had reached agreement on this term, there is no reason why the Defendants had not told their lawyers about the oral term.  If they had done so, there is no reason why their lawyers would have inserted clause 8.2 in the convertible note instruments which are inconsistent with the oral term.  If clause 8.2 was a mistake, there is also no reason why this mistake should have repeated itself two more times.  The Defendants could provide no answer to all these questions.

20.  Furthermore, the alleged oral term sits very uncomfortably with the fact that the convertible notes are designed as negotiable instruments which are freely transferrable and with the exclusive agreement clause.  How can the alleged oral term be brought to the notice of a third party holder in due course?  How could the holder in due course know the convertible notes had become worthless because of the oral term?

21.  Mr Kwong submits that this is a classic case where some desperate debtors conjure up bare allegations to escape from a set of carefully prepared written agreements.  He argues that if there was such an oral term reached it would be most surprising that it was not raised by the Defendants when the redemption notices were issued and demands for repayment were made.  From the letters exhibited by the Plaintiff, it appears that the demand for interest was made in March 2012, while the demand for repayment of the principal sums was made in May 2012, but the Defendants did not respond. The first time the oral terms was raised was in their defence dated 5 July 2012 in respond to the Plaintiff’s statement of claim filed on 11 May 2012.  Had the parties reached agreement on such oral term, it is most surprising that the Defendants would not have promptly retorted.  There is an air of recent concoction in this assertion.

22.  While in this type of proceeding the court shall not embark on a mini trial on affidavit evidence, the Defendants’ assertions have to be believable.  That question has to be answered not by taking those assertions in isolation but by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.  In Re Safe Rich Industries Ltd [1994] HKLY 183, Bokhary JA, as he then was, said:

“ The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable. But it must be recognized – because failure to recognize it would create a debt‑dodger’s charter – that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as [is] either undisputed or beyond reasonable dispute.”

The oral term asserted by the Defendants is so inconsistent with commercial sense, the exclusive agreement clause and the nature of the convertible note as a negotiable instrument, that applying that test, the inevitable conclusion is that the oral term is unbelievable.  To hold otherwise would be to allow a debt‑dodger’s charter to prevail under the pretext of dispute of fact.

Whether the software has been delivered to the Plaintiff

23.  Another factual dispute is whether the software has been delivered to the Plaintiff.  In HCA 784/2012, the Defendants exhibited copies of two invoices with two delivery notes dated 1 March 2011 issued by Winning Asia to CY Foundation in respect of 300,000 items and 1,700,000 items software licence in the amount of HK$15 million and HK$85 million respectively. The copies of delivery notes were purportedly signed by someone on behalf of CY Foundation but with no chop affixed.  In HCA 785/2012, the Defendants exhibited two invoices dated 24 March 2011 issued by BG Global for Bingo terminals and servers in the amount of HK$14,959,000 and software licence in the amount of HK$15 million.  The Defendants also exhibited some correspondence between the parties solicitors disputing liability for the invoices.

24.  The Plaintiff strenuously disputes that the software has been delivered, but no details have been given.  The two delivery notes purportedly signed by CY Foundation did not have a chop on them.  That is very unusual for receipt of goods of that value. They do appear suspicious to me.  In respect of the invoices issued by BG Global, the parties had engaged in contemporaneous argument.  It appears that something had been delivered.  Despite I have some doubts about the delivery in HCA 784/2012, I think in the circumstances, delivery is a matter which should go to trial, if a finding is necessary.  For the purpose of an Order 14 application, I would determine the application on the basis that delivery had been effected.

Effectiveness of the exclusive agreement clause

25.  Credibility or otherwise of the oral term is not the strongest of the Plaintiff’s argument.  The thrust of Mr Kwong’s argument is that even if there was such an oral term it would have been excluded by clause 9.12 of the share subscription agreement in HCA 784/2012 or clause 9.12 of the share subscription agreement in HCA 785/2012.  That clause provides:

“ This Agreement constitutes the entire agreement between the parties hereto with respect to the matters dealt with herein and supersedes any previous agreements, arrangements, statements, understandings or transactions between the parties hereto in relation to the matters hereof.”

The alleged oral term relied on by the Defendants was reached at the dinner meeting in April 2008 well before the two share subscription agreements which were signed in May 2008 and April 2009.  Hence, Mr Kwong argues, by the operation of the above exclusive agreement clause, the oral term, if there was one, was expressly excluded unless reflected in the contractual document.  He quotes Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd’s Rep 611 § 7 per Lightman J; Edward Wong Finance Co Ltd v Profit Making Investment Ltd CACV 1049/2000 §33‑34, per Le Pichon JA and Wing Siu Co Ltd v Goldquest International Ltd [2002] 4 HKC 420, at 429B‑H §20‑21, per Ma J, as he then was.

26.  However, Mr Li submits that Inntrepreneur and Edward Wong Finance Co Ltd had been considered and doubted by the Court of Appeal in the later case of Natamon Protpakorn v Citibank, NA [2009] 1 HKLRD 455, at 465 §33‑34 and Fortis Insurance Company (Asia) Limited v Lam Hau Wah Inneo CACV 86/2010 at 74.  He argues that according to these later authorities, there is room for debate on the applicability and effectiveness of the entire agreement clause in situations where waiver and estoppel might be invoked.  Hence, if there is a believable case on factual basis for waiver and estoppels, the case should go to trial.

27.  In Natamon, the plaintiff was a customer of the defendant bank.  She relied on certain oral representations made to her by a vice‑president of the bank in relation to foreign exchange (“FX”) trading that she could enter into foreign exchange contracts with the bank and would be allowed to roll over the contracts at the original exchange rate provided she maintained sufficient margin (“the 2001 agreement”). Later, another officer took over the servicing of her account and confirmed the continuation of the 2001 agreement; although in June 2004, the parties agreed to revise the terms such that the FX contracts could only be rolled over for six months and at the prevailing exchange rate rather than the original rate (“the 2004 agreement”).  In August 2004, the bank closed out her FX contracts because of concerns about her sources of wealth and she was forced to actualise her losses.  The plaintiff sued the bank for breaches of the 2001 agreement or 2004 agreement.  The bank relied on its standard agreement which allowed the bank to terminate the plaintiff’s trading account at its absolute discretion and precluded any claim by the plaintiff for loss arising from such termination.  That clause provided:

“No amendment or waiver of any provision hereof or of any Contract, nor consent to any departure by the Account Holder therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.”

The plaintiff’s statement of claim was struck out by the bank at first instance.  The plaintiff’s appeal was allowed by the Court of Appeal.  After referring to Inntrepreneur and Edward Wong Finance Co Ltd, Cheung JA held that there was room for argument that the clause may not be applicable.  He said in §§30 to 35:

“30. In Inntrepreneur Pub. Co (GL) v. East Crown Ltd [2000] Vol 2 Lloyd’s Rep 611, the contract consisted of an ‘entire agreement clause’, namely,

‘ Any variations of this Agreement which are agreed in correspondence shall be incorporated in this Agreement where that correspondence makes express reference to this Clause and the parties acknowledge that this Agreement (with the incorporation of any such variations) constitutes the entire Agreement between the parties.’

31. Lightman J was of the view that

‘… such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save insofar as they are reflected and given effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence as is suggested in Chitty on Contract, 28^th ed., vol 1, par 12─102: it is to denude what would otherwise constitute a collateral warranty of legal effect.’

See also Edward Wong Finance Company Ltd v Profit Making Investment Limited & Others (CACV 1049/2000) where Inntrepreneur Pub Co (GL) was applied.

32. The editors of Chitty on Contracts, Vol 1, Paragraph 12─104 commenting on Lightman J’s statement, maintained the alternative explanation that the entire contract clause renders inadmissible extrinsic evidence to prove terms other than those in the written contract.

33. Collateral contract is an exception to the parol evidence rule, which precludes the admission of oral evidence to contradict the terms of a written agreement.  The collateral contract is, however, treated as an independent contract and therefore not subject to the rule.  Clause II 15 is an attempt to ‘internalize’ or to ‘formalize’ this rule in the relationship between the plaintiff and the defendant.  Although not expressly stated to be the case, this clause may also be in the nature of an ‘entire contract clause’.

34. I am prepared to accept, for the purpose of this application, that whether or not Clause II 15 applies depends on the construction of its terms.  However, even if by its wording it applies to this case, that is still not the end of the matter because Chitty, at paragraph 12─104, states that such a clause can be waived by a party who might otherwise have relied on it, citing SAM Business Systems Ltd v. Hedley & Co [2003] 1 All ER (Comm) 465.  That case was not referred to by the parties in this appeal. But as Sedley LJ recognized in I‑Way Limited World v Online Telecom Limited [2002] EWCA Civ 413, there is still room for debate on this issue because of the absence of decisive authority, and that summary judgment should not be granted on that basis (see also Langston Group Corporation v Cardiff City Football Club Ltd [2008] EWHC 535 (Ch)).  An example of such a clause being rendered ineffective is the case of Edwin John Phillips v Sa Sa International Holdings Ltd (HCA No A5190 of 2001), wherein the parties expressly agreed that certain oral terms should not be revealed to the public.

35. In my view there is clearly room for argument in this case that Clause II 15 may not be applicable having regard to the sequence of conduct of the defendant as described by the plaintiff.  Both Mr Lai and Ms Poh belonged to the senior management of the defendant, and they should be taken to know the terms of the Standard Agreement.  If the defendant was of the view that Clause II 15 governed the relationship of the parties, its conduct in allowing the plaintiff to trade on the terms as agreed by Mr Lai, its confirmation of the terms when Ms Poh took over from Mr Lai, taken together with its subsequent conduct in allowing the plaintiff to continue to roll over the contracts although with a limited duration, was fundamentally inconsistent with this avowed position.  The plaintiff stated that by relying on the confirmation she carried out further transactions, and further by relying on the revised terms she had executed six new contracts.  In my view the questions of waiver and estoppel, be it promissory or otherwise, are clearly matters that are available to the plaintiff.  This cannot be resolved in an interlocutory proceeding and should be canvassed at a full hearing at trial.”

(Emphasis added)

28.  Cheung JA quoted the entire agreement clause in Inntrepreneur and then Lightman J’s formulation and legal basis of the rule.  He treated the oral agreement as a collateral contract which is an exception to the parol evidence rule and that the entire agreement clause was an attempt of the parties to “internalize” the parol evidence rule in their contractual relationship.  He held whether the entire agreement clause applied depended on the construction of its terms and that such a clause can be waived.  This is a trite principle which cannot be doubted.  In Inntrepreneur, Lightman J proceeded on the construction that the entire agreement had the effect of excluding oral terms.  Then Cheung JA went on to hold in §35 that because of the bank’s subsequent conduct in allowing the plaintiff to trade on the terms of the 2001 agreement and 2004 agreement the question of waiver and estoppels arose.  The issue which Cheung JA said was open to dispute was the effect of waiver and estoppel on an entire agreement clause.  It was on his finding that there was evidence of waiver that he held that the dispute should be canvassed at a full hearing at trial.

29.  In Fortis Insurance Company (Asia) Limited, the issue was whether an entire agreement clause was a complete answer to the contentions that there was some agreement outside the terms of the written agreements themselves or that the principles of waiver and/or estoppel were available. The Court of Appeal also referred to Inntrepreneur.  Then while focusing on the question of waiver and estoppel, Kwan JA said she agreed with Cheung JA that there was room for debate on the applicability and effectiveness of the entire agreement clause in situations where waiver and estoppels might be invoked.  She had no criticism that on its true construction, the clause could not exclude other oral agreements.

30.  With respect to Mr Li, by no reading of these four cases can I come to the view that the Court of Appeal ever doubted the correctness of Lightman J’s dicta in Inntrepreneur which was followed in Edward Wong Finance Co Ltd.  I think what the Court of Appeal did in the later decisions was to add a gloss to the construction of an entire agreement clause such that whatever the construction given to that clause it may be rendered ineffective by reason of the general principle of waiver and estoppel.  Thus, the meaning and effect of an entire agreement clause is a question of construction; and whether that clause shall have that effect as intended by the parties may be subject to the principles of waiver and estoppel.  There are two questions involved: one is a question of construction, the other is a question of waiver and estoppels.  The Court of Appeal entertained no doubt in respect of the first question but thought there is room for debate in respect of the latter. It is important to note that the Court of Appeal in Natamon andFortis Insurance Company (Asia) Limited never for a moment suggested on the basis of construction that pre-contract oral negotiations or oral agreements are capable of defeating the express provisions of an entire agreement clause.  Also, the conduct in those two cases which constituted waiver or estoppels was conduct subsequent to the entire agreement clause.

31.  Returning to the undisputed facts and the assertions of the Defendants in the present case, the oral term outside the written agreement was made prior to the two share subscription agreements.  Assuming for the purpose of the present application that the software had been delivered to and accepted by the Plaintiff, there was no other conduct whatever on which to launch any argument of waiver or estoppel.  Furthermore, the clause relied on by the bank in Natamon related to variation of the written terms in future and not to representations, understanding in the past as in the present case.  The present case is clearly distinguishable from Natamon andFortis Insurance Company (Asia) Limited.  It can hardly be argued that on the true construction of the exclusive agreement clause that any oral terms reached prior to the share subscription agreements were rendered ineffective.  In fact, no such argument has been advanced.  Also, there was hardly any post-contract conduct on which the Defendants could launch any argument of waiver or estoppels.  The defence relying on the oral term fails as a matter of law and fact.

The alleged oral term is too vague and uncertain

32.  Next, Mr Kwong attacks the alleged oral term as being too vague and imprecise as to have sufficient certainty to found a valid contract.  He relies on Wing Siu Co Ltd v Goldquest International Ltd [2002] 4 HKC 420 at §19.  The oral term as asserted by Shek and Leung is in the follow term:

“And if the development was successful, the investments would be converted into shares upon delivery of the bingo/poker softwares.”

Even on the Defendants’ case, the Plaintiff is obliged to exercise the share subscription option if “the development was successful”.  Mr Kwong’s attack on this term is the absence of any objective yardstick to determine whether the development was successful and the notion of “success” was not even defined at all.  It is impossible to say with any degree of certainty whether the development was successful such that the Plaintiff is obliged to exercise the option.  The term is so vague as to be unworkable.  The total absence of evidence from the Defendant also demonstrates that not even the Defendants can point to any indicia of successfulness.  It is not for the court to create objective criteria of successfulness which the parties were too lazy to define for themselves.  I agree that the alleged oral term is so vague that even on the Defendants’ own version lacks sufficient certainty to found the existence of a contract.

Abrogation and waiver

33.  As for the Defendants’ alternative defence of abrogation and waiver, Mr Kwong submits that the defence is so illogical that it cannot even take off the ground.  The Defendants’ case is that the oral term was reached in April 2008 before the execution of the three sets of subscription agreements.  There is a total lack of evidence after the execution of those agreements that the Plaintiff or the parties have engaged in any conduct which gives rise to abrogation and waiver of the oral term.  I agree with Mr Kwong that this defence cannot even take off the ground.

Conclusion

34.  The alleged oral term relied on by the Defendants lacks commercial sense.  It is inconsistent with the express exclusive agreement clause of the share subscription agreements.  It is vague and imprecise.  When tested against the incontrovertible background, it is simply unbelievable that the parties had entered into such an oral term.  Even if they had, it is so vague and imprecise as to be capable of founding a validly legal binding contract.  Furthermore, on the true construction of the exclusive agreement clause, the alleged oral term, if there was such a term, is expressly excluded.  There is also no substance in the alternative defence of abrogation and waiver.  This is a classic case of desperate debtors conjuring up a bare allegation to delay an inevitable judgment under the pretext of dispute of fact.  There is no genuine dispute of fact or of the law.  The Defendants have failed to show a good defence.  Accordingly, I enter judgment for the Plaintiff against the two respective Defendants in the two actions.

35.  In HCA 784/2012, I award the Plaintiff against the 1^st and 2^nd Defendants, jointly and severally, the following sums:

(1)   the sum of US$2,500,000 being the redemption price of the convertible note dated 30 April 2008;

(2)   the sum of US$114,270.26 being accrued interest up to 11 May 2012; and

(3)   further interest at judgment rate on the principal sum of US$2,500,000 until payment.

I also make a costs order nisi that the 1^st and 2^nd Defendants shall pay the Plaintiff’s costs of this action on a party and party basis.  Such costs are to be taxed, if not agreed.

36.  In HCA 785/2012, I award the Plaintiff against the 1^st and 2^nd Defendants, jointly and severally, the following sums:

(1)   the sum of US$1,900,000 being the redemption price of the convertible note dated 6 May 2008;

(2)   the sum of US$268,834.78 being default interest up to 11 May 2012 pursuant to the terms of the convertible note dated 6 May 2008;

(3)   the sum of US$2,000,000 being the redemption price of the convertible note dated 30 April 2009;

(4)   the sum of US$202,556.84 being default interest up to 11 May 2012, pursuant to the terms of the convertible note dated 30 April 2009; and

(5)   interest at judgment rate on the principal sum of US$3,900,000 from 12 May 2012 until payment.

I also make a costs order nisi that the 1^st and 2^nd Defendants shall pay the Plaintiff’s costs of this action on a party and party basis.  Such costs are to be taxed, if not agreed.