XCHRX WILLIAMS (INTERNATIONAL) LTD. v. FIRST PACIFIC (INTERNATIONAL) LTD. AND ANOTHER

HCA 643/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 643 OF 2001

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J U D G M E N T

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1. This is an application for judgment under Order 14 against the 2nd defendant in proceedings arising out of a share sale and purchase agreement entered into between the parties on 25 February 1999, as amended by a supplemental agreement dated 3 September 1999, by which the plaintiff agreed to purchase from the 1st defendant the entire issued share capital of a company called FPD Guardforce Holdings Limited for the sum of US$120,000,000.00. Under the agreement, and as a party to it, the 2nd defendant, referred to in the agreement as "the Warrantor", gave certain warranties and indemnities in connection with its implementation, including matters relating to the considerable number of subsidiary companies of the Guardforce group affected by it, and in particular to pay the plaintiff amounts by way of repayment of part of the consideration in certain circumstances. The plaintiff now claims under that agreement payment in respect of three matters which have arisen which they say entitles them to such repayment.

2. These may be described as the "warranted management accounts adjustments claim", the "termination of the Smart Contract claim" and the "Transfer Companies/Indonesian properties claim". Under the first two the plaintiff claims in respect of losses for which they say that the 2nd defendant is obliged to repay them under the agreement, and under the third, in addition to payment for sums owing, they claim specific performance and a declaration of indemnity. I will deal with each in turn.

Warranted management accounts adjustments claim

3. When the agreement was entered into, a number of the subsidiary companies of the Guardforce group were not in a position at that stage to produce audited accounts for the last year, so that a proper valuation could be carried out, but only management accounts were available, which were warranted as correct by the defendants, and a provision for an adjustment was included in the agreement in the event that the audited accounts showed this not to be the case. The relevant clause of the agreement was clause 8(F) which reads as follows:

"(F) For each of the Group Companies for which the Vendor produced to the Purchaser Warranted Management Accounts prior to the date of this Agreement, if the profit or loss after taxation and minority interest and, in the case of any associated company, the share of such associated company's profit or loss attributable to the relevant Group Company, as shown in the final audited accounts (the Actual Net Result") of each such Group Company for that period is less in the case of a profit, or more in the case of a loss, than the net profit or loss as shown in its Warranted Management Accounts (the "Estimated Net Result"), then to the extent that the Actual Net Result is in excess of US$25,000 less than the Estimated Net Result (in the case of a profit) or more than the Estimated Net Result (in the case of loss), the Warrantor shall pay to the Purchaser (as repayment of the consideration) an amount calculated according to the formula set out below.

X = (A-E) x 12

Where

X is the amount payable by the Warrantor to the Purchaser

A is the Actual Net Result

E is the Estimated Net Result

(A-E) shall be treated as a positive figure"

4. In effect it provided for repayment to compensate for any difference greater than US$25,000.00 in the loss or profit of the group companies than that shown in the management accounts. In respect of three companies in the group, Guardforce Securities Services Ltd, ICTS (Thailand) C. Ltd and Guardforce International Transportation Ltd (South Africa Branch), the audited accounts, when produced by their accountants, did show such a difference and the plaintiff, in April 2000, requested repayment in terms of clause 8(F).

5. There seems to be no dispute that the accounts, on the face of them, do show the figures claimed by the plaintiff, and that, taking the accounts alone, the figure claimed in this part of HK$20,687,605.00 is correctly calculated. The 2nd defendant, however, does dispute that this sum is payable.

6. The principal case put forward by Mr Burns for the 2nd defendant to support his contention that there is an arguable defence in respect of this part is that, on a proper construction of clause 8(F), the intention was to compensate the plaintiff in the event that adjustments in the accounts resulted in a devaluation of the value of the group as a whole, and if there was no actual loss in this respect, then no repayment is required. In addition, in the affidavit of Mr William J. Scott filed on behalf of the 2nd defendant, maintains that the plaintiff was obliged, under clause 6(D) of the agreement, to give written particulars of their claim within two years of the date of the agreement, and this they have not done.

7. I can deal with this last point very shortly. Clause 6(D) relates solely to claims for breach of "Warranties" which are defined in the agreement as follows:

""Warranties" means the representations and warranties set out in Clause 5 and Schedule 2 and including, for the avoidance of doubt those warranties included in Part L of Schedule 2, and the Indemnified Warranties (but, for the avoidance of doubt, not the Indemnities); and"

8. Nothing in clause 8(F) can be interpreted as bringing the obligation to pay the amounts therein within that definition, and clause 8 is not referred to in that definition. In effect it stands alone. Which means that, for the purposes of this application, I must look at that clause and see whether it is capable of bearing the interpretation contended by Mr Burns.

9. First, is it possible for the clause to support a requirement that the group as a whole, and the intention of the entire transaction, should be taken into account when assessing whether a payment is due under the clause? The answer to this must be no. The clause carefully refers to each of the Group Companies throughout, clearly intending that they should be looked at individually, and the definition of warranted management accounts in clause 1 repeats this, stating that they are in relation to each Group Company. There is no suggestion in the clause that regard should be had to the agreement as a whole, or the overall intention of the transaction. Second, there is no reference to the profit or loss of the group, as opposed to that of the individual companies. While I agree with Mr Burns' submission that the clause is intended to be compensatory in nature, there is nothing in the clause to suggest that the plaintiff needs to be compensated only if it can show that there has been a loss when the entire group's accounts are considered, rather than the individual companies for which only management accounts were available at the time.

10. The clause could not be clearer in its intention, and it sets out a precise method of calculation of the sums payable under it. The plaintiff need do no more than show the difference between the audited accounts and the management accounts to establish their claim, and this they have done. I accordingly find that the 2nd defendant has failed to raise a triable issue under this part and the plaintiff is entitled to the sum claimed of HK$20,687,605.00.

11. Before leaving this part, I would mention an issue that arose in respect of documents referred to by Mr Scott, provided by the plaintiff in correspondence and at meetings, all claimed by the plaintiff to be "without prejudice" and therefore privileged. The matter is now academic as I have no difficulty in deciding this part of the claim on the interpretation of clause 8(F) alone, but I will refer to an argument of Mr Burns in this respect. His contention was that the documents, although marked "without prejudice" were supplied by the plaintiff, not in the course of negotiations for settlement, in which case there would be no doubt that they were privileged, but accompanied by an assertion of the correctness of their case. He further maintains that negotiations for settlement are not such, unless both parties are prepared to compromise, and attending a meeting to press your own case cannot be seeking a settlement.

12. I cannot agree with this argument. The frame of mind of a party communicating with another with a view to bring proceedings to an end, or to avoid such proceedings altogether, can only be taken into consideration in a limited way, and in particular, the fact that a party feels strongly that his case is correct, and that the other side should concede this, does not make any discussion between them any the less privileged, if the intention is to try to end the dispute. This situation is to be distinguished from that in Buckinghamshire County Council v Moran [1989] 2 All ER 225, where the defendant's letter, marked "without prejudice" was held to be a mere assertion of rights, in the opening shots of what might, and later did, become legal proceedings.

Termination of the Smart Contract claim

13. Prior to the agreement, the Guardforce group had a contract to supply services to Smart Communications Inc. in the Philippines. It was agreed that this contract would be terminated and not be a part of the agreement, except to the extent that the plaintiff would be compensated for any losses or expenses arising from that termination, which the plaintiff would have to administer after acquiring the group. The relevant provision of the agreement is clause 7(A)(i) which reads as follows:

"7. WARRANTOR'S INDEMNITIES

(A) Without restricting the rights of the Purchaser or its liability to claim damages on any basis in any event that any of the Warranties is breached or is untrue or misleading (subject to no double claims in respect of the same facts or circumstances), the Warrantor undertakes to the Purchaser that it will pay to the Purchaser, or as the case may be and if so requested by the Purchaser, the Group Company concerned (so far as possible and if so requested by the Purchaser by way of repayment of the consideration payable under this Agreement) an amount equal to all Losses suffered or incurred by the Purchaser or the Group Company concerned resulting directly or indirectly from:-

(i) the termination of the Smart Contract including, but not limited to, all redundancy and termination payments in relation to staff of FPD Guardforce Group, Inc., Knights Templar Security Services, Inc. ("Knights"), Javelin Security Services, Inc. ("Javelin"), Imperial Crown Security Services, Inc. ("Imperial Crown"), and Allied Technical Management Services Inc. ("ATMS"), no longer required as a consequence (including expatriate staff relocation costs), Group Company liquidation and closure costs, the sale or disposal of assets no longer required, the surrender or disposal of properties no longer required (including reinstatement costs) and all other costs of any Group Company as a consequence of such termination;"

14. Further provision are in clause 9(E) as follows:

"(E) The Warrantor confirms that it has given lawful notice to terminate the Smart Contract with such termination taking effect pursuant to a letter from Smart Communications, Inc. dated 23rd February, 1999. Without limiting the Purchaser's or any Group Company's ability to wind down or administer the closure and redundancy arrangements as referred to in Clause 7(A)(i) or limiting the Purchaser's rights under Clause 7(A)(i), the Purchaser will procure that the Purchaser or relevant Group Company consults with the Warrantor in relation to such general arrangements prior to their general enactment and will have regard to the Warrantor's reasonable requests in relation to the manner of the above arrangements."

15. Following the agreement, the plaintiff sent to the Philippines a team of expatriates to oversee the winding down of the Smart contract operation and payment of redundancy entitlements to staff there. Their claim under this part is for the costs of so doing, including the salaries and costs of the staff sent there, and the redundancy payment to a Mr Wagstaff, the managing director of that part of Guardforce. The 2nd defendant disputes this claim on two grounds: the first is reasonableness and whether the sums paid were properly incurred and justified; the second is that, under clause 9(E) there is an obligation on the plaintiff to consult with the 2nd defendant as to the arrangements, which they do not deny they did not do, being consequently in breach of this requirement.

16. In respect of the first ground, the Mr Chua for the plaintiff says that it has produced proper details of payments made, and that the 2nd defendant cannot show that they are unreasonable. As to the second, he says that, as the plaintiff was not obliged to act on the 2nd defendant's requests made under clause 9(E), it can have no effect on the 2nd defendant's obligation under clause 7(A). Mr Burns also added that a provision had already been made for $2,000,000.00 in respect of redundancies for three of the companies involved. I do not think this latter point is of any assistance to him as it is clear that no claim for redundancies is made for those companies.

17. It is clear that the 2nd defendant does not deny liability under this part of the claim, and that they wish to dispute the sums paid on the basis of reasonableness. I am not satisfied that the breach by the plaintiff of the requirement to consult makes them unable to claim, but it does strengthen the claim by the 2nd defendant that they, and the court, need to be satisfied of whether the amount sought was properly incurred and is a reasonable sum to have paid. It follows that it is right that the plaintiff have judgment under this part, but for damages to be assessed by a Master, with the costs of that assessment reserved to the Master in the event that he finds that nothing is due.

Transfer Companies/Indonesian Properties claim

18. It was a provision of the agreement that two companies of the group in Indonesia, P.T. Guardforce Indonesia and P.T. Guardfire Indonesia (the Transfer Companies), should not be part of the sale agreement and that the shares of these would be transferred to a company controlled by the 2nd defendant, that properties owned by one of the group companies would be sold to one of the 2nd defendant's companies, and two Indonesia joint ventures would be terminated. The relevant clause is 9(B):

"(B) The Vendor and the Warrantor hereby undertake that as soon as practicable and, in any event, without 6 months of Completion, they shall at their own costs procure:-

(i) the transfer of all the shares in the Transfer Companies currently held by any Group Companies to a company controlled by the Warrantor;

(ii) the purchase by a company nominated and controlled by the Warrantor of the two properties in Indonesia currently owned by Security Engineering Pte. Ltd, details of which are set out in paragraph D of Part A of Schedule 4 for the sum of HK$3,431,000 being the properties' book value as stated in the Warranted Management Accounts of Security Engineering Pte. Ltd as at the Accounts Date; and

(iii) the termination of:-

(a) the joint venture agreement entered into between Security Engineering Pte Ltd. and P.T. Bisnisindo Nugraha Pratama in relation to P.T. Guardforce Indonesia dated 31st December, 1995; and

(b) the joint venture agreement entered into between Guardfire Singapore Pte. Ltd and P.T. Bisnisindo Nugraha Pratama in relation to P.T. Guardfire Indonesia dated 31st December, 1995

and in each case on terms such that the relevant Group Company is fully released and discharged from all liabilities in respect of the matters set out at (i) to (iii) above."

19. It was recognized by the parties at an early stage after the agreement that there could be local procedural difficulties implementing this provision and the time limit of 6 months was accordingly extended to 9 months, namely to 25 November 1999. However, to date none of the 2nd defendant's obligations under this clause have been carried out, although I am told that matters are now proceeding to some extent. The plaintiff seeks specific performance of these obligations, payment of sums said to be owed by the Transfer Companies, and in respect of rent of the properties, and a declaration that the 2nd defendant indemnify the plaintiff in respect of any other losses relating to the transfer.

20. The 2nd defendant disputes these claims on a number of grounds. The first is that specific performance, being an equitable remedy in the discretion of the court, will not be awarded where an alternative remedy of damages is available. I have some sympathy for this argument, partly as it is clear that the transfers and purchases have never been entirely in the control of the defendants, and liability for the delay in acting may not entirely be theirs, and to a large extent because the plaintiff has failed to persuade me that, if, as seems likely, the defendants are in breach of their obligations, damages would not adequately compensate them for any losses, both already incurred and prospective. I am accordingly satisfied that specific performance, while available as a remedy in an appropriate case on an application for summary judgment, is not appropriate here.

21. Neither am I satisfied, to the extent that I need to be for the purposes of an Order 14 application, that the sums claimed in respect of loans and rent fall squarely under clause 7 of the agreement, as losses for which the 2nd defendant is liable. It may well transpire that they do, as indeed may any other losses caused as a result of the delay in effecting the transfers and sale. But the evidence before me does not justify such a finding at present and clearly requires proper evidence at trial to decide what, if anything, is owed, and by whom.

22. In respect of this part of the claim I therefore consider it right that the 2nd defendant have leave to defend.

Conclusion

23. There will accordingly be part judgment for the plaintiff: (1) for HK$20,687,605.00 under the warranted management adjustment claim; (2) for damages to be assessed under the termination of the Smart Contract claim; and unconditional leave to the 2nd defendant to defend the transfer companies/Indonesian properties claim.

Costs

24. As the plaintiff have been successful in the majority of its claims herein I consider that, subject to the right of the parties to return for further argument, the plaintiff should have the costs of this application, and the costs of the action in respect of the warranted management accounts claim, to be taxed, and I make an order nisi to that effect.