KOU LAU RU LING v. TSE SUI LUEN

CACV 294/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 294 OF 1999

(ON APPEAL FROM HCA 4669 OF 1999)

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J U D G M E N T

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Hon Ribeiro JA:

The issue on Appeal

1. On 26 August 1999, there came before Deputy Judge Li applications seeking specific performance under Order 86 brought by five different Plaintiffs in five separate actions which had all been instituted against the same Defendant, namely Tse Sui Luen. On 8 September 1999, Deputy Judge Li handed down judgment granting orders of specific performance in favour of the Plaintiffs. The Defendant now appeals against those judgments.

2. The facts, so far as material to this Appeal, may be treated as identical in each case and are not in dispute.

3. Pursuant to agreements all dated 2 March 1998, each Plaintiff purchased a parcel of shares in Tse Sui Luen Jewellery (International) Limited from one Michael Chan Lun Chong ("Michael Chan"). The company in question is a Bermuda company listed on the Hong Kong Stock Exchange.

4. On the same date, namely, 2 March 1998, each Plaintiff entered into an agreement under seal ("the Deed") with the Defendant in materially identical terms whereby the Defendant granted to each Plaintiff an option to require the Defendant to purchase the shares they were acquiring from Michael Chan. This option, which one may refer to as a "put option", if exercised, would require the Defendant to purchase the shares from the Plaintiffs at a specified price.

5. To exercise the put option, a notice had to be served in accordance with the terms of the Deed. On 6 March 1999, all the Plaintiffs sought to serve such notices on the Defendant.

6. The single issue upon which this Appeal turns is whether, as the Plaintiffs say, such notices were valid and gave rise to an obligation on the Defendant to buy the shares for the specified price or whether, as the Defendant contends, the notices were invalid so that no such obligation ever arose.

The terms of the Deed

7. The grant of the put option is effected by Clause 3.1 of the Deed in the following terms:-

"In consideration of the Grantee paying to the Grantor the sum of HK$1 (receipt of which is hereby acknowledged) and the agreements and covenants on the part of the Grantee herein contained, the Grantor hereby grants to the Grantee the right to require, at any time during the Option Period, the Grantor to purchase all or part of the Option Shares at the Option Price subject to the terms and conditions herein contained."

If the option is validly exercised, Clause 3.2 obliges the Defendant to procure the purchase of the Plaintiffs' relevant shares, or, failing that, to purchase them himself. I shall, for convenience, refer to this simply as a duty to purchase the shares.

8. Clause 3.1 makes it clear that the option is granted "subject to the terms and conditions" contained in the Deed and Clause 3.2 provides that the duty to purchase arises "upon the exercise of the Option as hereinafter provided". It follows that the Deed's provisions concerning the exercise of the option are of importance.

9. Clauses 4.1 and 4.2 deal with the exercise of the option in the following terms:-

"4.1 The Option may be exercised in respect of any or all of the Option Shares but can only be exercised once by the Grantee giving the Grantor the Option Notice during the Option Period specifying the number of Option shares in respect of which the Grantee exercises the Option.

4.2 An Option Notice, once given, may not be withdrawn except with the written consent of the Grantor."

10. Clause 10.1 requires all notices given under the Deed to be in writing and delivered, sent or faxed to the relevant party at a stipulated address.

11. Pausing here, it may be helpful to note what is not in issue. First, the Option Price is defined by the Deed itself as $2.10 per share and was duly used as the basis of the Plaintiffs' notices. Secondly, there is no dispute that the purported exercise of the option occurred "during the Option Period" as defined, namely, within a specified 14 day period. That short period has obviously long expired so that if the exercise attempted was invalid, the option will have disappeared forever.

12. The central dispute rests on the term "Option Notice" which is defined in the Deed as "the written notice exercising the Option substantially in the form set out in Schedule 1."

13. Schedule 1 sets out the notice in the form of a letter addressed to the Defendant as follows:-

"Option Notice

Mr Tse Sui Luen [at a specified address]

Dear Sir,

Re: Deed of Put Option dated 2nd March, 1998 entered into between Mr Tse Sui Luen and [the Plaintiff in question] ("the Deed")

I refer to the Deed. Capitalised terms used in the Deed shall have the same meanings herein.

Pursuant to Clause 4 of the Deed, I hereby give you notice of my intention to exercise the Option to the extent of /all of the Option Shares [Note].

I hereby warrant to you that the above stated Option Shares comprise      /all of the Sale Shares and a proportionate part/all of the Additional Securities. In the event that the aforesaid warranty shall be untrue, inaccurate or misleading in any respect, I shall indemnify you accordingly.

Your faithfully,

_____________

[The Plaintiff concerned]

Note: Please complete and delete as appropriate."

The notices served by the Plaintiffs

14. The Notices served by the Plaintiffs on 6 March 1999 followed the model provided in Schedule 1 but contained additional materials not provided for. One example, involving one particular Plaintiff, is set out as follows:-

"Option Notice

6th March 1999

Mr Tse Sui Luen [at a specified address]

Dear Sir,

Re: Deed of Put Option dated 2nd March, 1998 entered into between Mr Tse Sui Luen and [the Plaintiff in question] ("the Deed")

I refer to the Deed. Capitalised terms used in the Deed shall have the same meanings herein.

Pursuant to Clause 4 of the Deed, I hereby give you notice of my intention to exercise the Option to the extent of all of the Option Shares (that is, 550,000 Ordinary Shares). The Closing Date for completion will be 3:00 p.m. (Hong Kong time) on 19th March, 1999, that is the 14th day after the date hereof. My bank account details for payment of the aggregate Option Price (less all Hong Kong seller's ad valorem stamp duty, fixed duty on the instruments of transfer and half share of the CCASS fees as may be payable in respect of the sale of the Option Shares) for all of the Option Shares in the amount of HK$1,153,556 are as follows:-

[Details written in]

I hereby warrant to you that the above stated Option Shares comprise all of the Sale Shares and all of the Additional Securities. In the event that the aforesaid warranty shall be untrue, inaccurate or misleading in any respect, I shall indemnify you accordingly.

Your faithfully,

_____________

[The Plaintiff concerned]"

I have italicised the words and figures added to the matters contained in the form in Schedule 1 of the Deed.

15. The Defendant points out that in all the notices, the 19th March 1999 date referred to as the Closing Date is incorrect. It is common ground that the correct date was 20th March 1999. On this basis, the Defendant contends that the notices were void so that no put option was validly exercised during the Option Period, providing the Defendant with a complete defence.

Construction of the notices

16. In my judgment, the Defendant's argument fails. The correct approach to determining whether each notice served constituted a valid exercise of the put option is the approach laid down in the decision of the House of Lords in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749.

17. In the first place, one must ascertain the requirements contractually established as necessary for a valid exercise of the option. As appears from Clauses 4.1 and 10.1, together with the definition of "Option Notice" and Schedule 1, all set out above, such requirements are as follows, namely, that :-

(1) the Grantee (i.e., each Plaintiff) must give the Grantor (i.e., the Defendant) an Option Notice as defined;

(2) the exercise must take place during the Option Period;

(3) the notice must specify the number of Option shares in respect of which the Grantee exercises the Option;

(4) the notice must be in writing;

(5) the notice, in order to be an "Option Notice", must be substantially in the form set out in Schedule 1; and,

(6) the notice must be delivered, sent or faxed to the relevant party at a stipulated address.

Clearly, there is no contractually-imposed requirement to refer to or to attempt to identify the Closing Date as part of any notice exercising the put option. The notices in this case would have been perfectly valid if the offending sentence containing the reference to 19th March had been omitted. The exercise of the option is therefore not bad for non-compliance with any indispensable condition for its effective exercise (see Mannai at p 767 per Lord Steyn).

18. On the other hand, leaving aside for the moment the offending sentence, the contractually required conditions which I have listed were, in my view, all duly complied with. The crucial question therefore is whether the notices were rendered void by the addition of the reference to an incorrect Closing Date. This depends on the true construction of the notices, containing, as they do, the incorrect reference.

19. When approaching their construction, it is important to bear in mind the basic purpose of the notices. In Mannai, the notices were served in order to exercise an option to terminate a lease under a break clause. As Lord Steyn put it:-

"It is important not to lose sight of the purpose of a notice under the break clause. It serves one purpose only: to inform the landlord that the tenant has decided to determine the lease in accordance with the right reserved. That purpose must be relevant to the construction and validity of the notice. Prima facie one would expect that if a notice unambiguously conveys a decision to determine a court may nowadays ignore immaterial errors which would not have misled a reasonable recipient." (at p 768)

Lord Hoffmann adopted a similar approach as follows:-

"The clause does not require the tenant to use any particular form of words. He must use words which unambiguously convey a particular meaning, namely an intention to terminate the lease on 13 January." (at p 774)

20. In our case, the essential purpose of the notices was to inform the Defendant that each Plaintiff was invoking the right to require him to purchase the shares in question in accordance with the terms of the Deed.

21. Whether the notices succeeded in doing so unambiguously and without being misleading is a question that must be approached objectively. This was made clear by Lord Steyn in Mannai as follows :-

"The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene. ....... the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind. It follows that one cannot ignore that a reasonable recipient of the notices would have had in the forefront of his mind the terms of the leases. Given that the reasonable recipient must be credited with knowledge of the critical date and the terms of clause 7(13) the question is simply how the reasonable recipient would have understood such a notice. ......." (at pp 767-8)

22. In Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 897, Lord Hoffmann applied and expanded upon this approach to construction as follows (at pp 912-3) :-

"I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of 'legal' interpretation has been discarded. The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact,' but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749.

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] A.C. 191, 201:

'if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.'"

23. This is an approach which has been adopted by the Court of Final Appeal. In Jumbo King Ltd v Faithful Properties Ltd & Others [1999] 3 HKLRD 757 at p 773F-774B, Lord Hoffmann stated as follows:-

"The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended. In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant. Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words. If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other. The court is not privy to the negotiation of the agreement - evidence of such negotiations is inadmissible - and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession. Or one of the parties may simply have made a bad bargain. The only escape from the language is an action for rectification, in which the previous negotiations can be examined. But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail."

24. The notices in the present case may be seen to have the following features, namely :-

(1) Each was headed "Option Notice".

(2) Each was addressed to the Defendant and dated and served within the Option Period.

(3) Each had a caption referring to the Deed.

(4) Each adopted the abbreviations defined in the Deed.

(5) Each expressly stated: "Pursuant to Clause 4 of the Deed, I hereby give you notice of my intention to exercise the Option ......."

(6) Although each contained the erroneous reference to "the Closing Date for completion" as "3:00 p.m. (Hong Kong time) on 19th March, 1999," in each notice, this was immediately qualified by the words: "that is the 14th day after the date hereof."

In my judgment, applying the approach to construction discussed above and crediting the reasonable recipient with knowledge of the Deed's terms, each notice, taken as a whole, unambiguously conveys to such recipient each Plaintiff's decision to exercise the put option in accordance with the terms of the Deed. I do not consider that fairly viewed, there is any ambiguity that this is the meaning, nature and purpose of the notices. The erroneous date may therefore be ignored as immaterial.

The Defendant's arguments

25. By virtue of the reference to 19th March 1999 as the Closing Date, Mr Kenneth C.L. Chan, appearing for the Defendant, invited the Court to construe the notices as containing a demand that completion of the put option should take place a day earlier than stipulated in the Deed or alternatively, that the offending words introduced a material ambiguity as to whether that was being demanded. He submitted that the time of completion was of obvious importance since listed shares prone to price fluctuations were the subject-matter of the transaction. Accordingly, Mr Chan submitted that such notices at least arguably did not constitute a valid exercise of the option so that judgment under Order 86 should not have been awarded.

26. As I have already stated, it is my view that the notices, fairly construed, overwhelmingly demonstrate to any reasonable recipient the Plaintiffs' desire to exercise the option in accordance with the terms of the Deed and not any other regime. In my judgment, Mr Chan's proposed construction of the notices simply flies in the face of such features and cannot be accepted.

27. In his skeleton argument and oral submissions, Mr Chan stressed the rule, to be found in cases such as Hare v Nicoll [1966] 2 QB 130 (CA), that a party who seeks to exercise an option must comply strictly with the conditions stipulated for its exercise.

28. He sought also to buttress this argument by pointing to the distinction sometimes drawn between unilateral and synallagmatic contracts or obligations (developed primarily by Lord Diplock starting in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26) and submitting that where, as in the present case, a put option exists, this in essence involves a unilateral obligation on the promisor's part which is only triggered if the promisee strictly complies with the conditions specified.

29. In my view, these are propositions that can readily be accepted. However, they do not assist the Defendant since they beg the question as to the nature of the obligations which have to be strictly complied with for an exercise of the put option to be valid. That question takes us back to an examination of the terms of the contract and a construction of the notice served to determine whether it meets all the contractual requirements. This was recognized in Mannai itself where, at p 776, Lord Hoffmann stated as follows:-

"Lord Greene M.R. [in Hankey v Clavering [1924] 2 KB 326] said, at pp. 329-330, that because such notices have unilateral operation, the conditions under which they may be served must be strictly complied with. I have already said that this principle is accepted on both sides. But, as an explanation of the method of construction used in Hankey v Clavering, it begs the question. If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease. But the condition in clause 7(13) related solely to the meaning which the notice had to communicate to the landlord. If compliance had to be judged by applying the ordinary techniques for interpreting communications, there was strict compliance. The notice clearly and unambiguously communicated the required message. To say that compliance must be strict does not explain why some other technique of interpretation is being used or what it is.

A variation of this explanation is to say that the language of the notice must be strictly construed. But what does it mean to say that a document must be 'strictly' construed, as opposed to the normal process of ascertaining the intentions of the author? The expression does not explain itself. If it operates merely by way of intensification, so that the intention must be clear, unambiguous, incapable of misleading, then I think that the notice in this case satisfied the test at that level." (See also Lord Steyn at p 768E-H)

30. At the hearing, Mr Chan also sought leave to adduce evidence of identical letters written on 19 March 1999 pressing the Defendant for performance and indicating by their content that the solicitors who were acting for the Plaintiffs were then still labouring under their mistaken belief that the Closing Date was 19 March 1999. We have looked at those letters de bene esse but have decided not to admit them in evidence as we consider them irrelevant to any material issue.

31. Mr Chan also pointed out that, no doubt under the influence of such mistake, the Plaintiffs all issued their Writs on 19 March 1999, which was the day before performance was due of the Defendant's obligations triggered by the option notices. He submitted that this made the Writs premature, even assuming that the notices were valid.

32. In my view, that contention cannot succeed. In Khatijabai Jiwa Hasham v Zenab [1960] AC 316, the parties entered into a contract for the sale and purchase of land which provided for completion 6 months later. However, the defendant repudiated the contract and tore it up within a few minutes of signing it on the ground that she had never agreed to sell the whole two acres but only an area of half an acre. The plaintiff issued a plaint (the equivalent of a Writ) claiming specific performance some weeks before contracted completion was due. The defendant, like the Defendant in the present case, contended that the plaint was issued prematurely and that the plaintiff should have waited until there had been a failure to perform the contract within the period fixed thereby, notwithstanding that she had previously intimated her refusal to do so. This argument was rejected by the Privy Council.

33. Lord Tucker, who gave the advice of the of the Board stated (at p 329):-

"Their Lordships are of opinion that the fallacy of the submission consists in equating the right to sue for specific performance with a cause of action at law. In equity all that is required is to show circumstances which will justify the intervention by a court of equity. The purchaser has an equitable interest in the land and could get an injunction to prevent the vendor disposing of the property. The order for specific performance often falls into two parts. The first can be of a declaratory nature and the second contain consequential directions. The first of the forms in volume 3 of the seventh edition of Seton's Forms of Judgments and Orders, at p. 2136, is clearly suitable to a case where the time for performance may not have arrived even at the date of the order, but in such a case, in the event of subsequent non-performance the court would not require the issue of a fresh writ before making the consequential directions for performance."

Accordingly, in my view, the Writ cannot be said to have been prematurely issued in the present case and no ground for challenging the judgment arises in this context.

34. In all the circumstances, no arguable defences having been raised by the Defendant, I consider that the Appeal must be dismissed.

Hon Rogers JA:

35. In my view, once the question of construction of the notices has been decided, that is the end of the matter.

36. I have no doubt that the notices were valid exercises of the options. The notices were clear. The fact that the notices referred to the 19 March did not render the notices invalid. The references to 19 March can only have been, in the context, an obvious mistake. By that, I mean not only was it obvious on the face of the document that there was a mistake but the correct wording was also clearly obvious. The date of the 19 March could not stand together with the wording "14thday after the date hereof". If the matter rested there, it might be said that the necessary correction required to remove the inconsistency might not be obvious. But the reference to "Pursuant to clause 4 ...", in my view, seals the matter. There can be no doubt that the plaintiffs wished to comply with the original agreement and intended that the completion date should be the 14th day after service. The misstatement of the date was thus no more than a clerical or arithmetical mistake, the correct reading of which was obvious to a reasonable man properly cognisant of the relevant facts.

37. In those circumstances, once it is established that, on the proper construction of the notices, they were valid and effective, no later documents such as the letters of 19 March and indeed the issue of the writs in these actions can invalidate them. The fact that the plaintiffs may have proceeded on a misapprehension as to the correct date for the defendant to complete the purchase may only affect the rights between the parties, if that misapprehension had caused the plaintiffs themselves to act in breach of contract. In this case, that did not happen. The plaintiffs had done everything that they were required to do by the time for completion. They did nothing to repudiate the contract.

38. I agree that this appeal must be dismissed.

Hon Godfrey VP:

39. I agree with Ribeiro and Rogers JJA as to the true construction of the notices here. But, in any event, I cannot see that the unnecessary, incorrect (and inconsistent) statement in the notices, of 19 March 1999 as the contractual date for completion, operated to vitiate those notices. Even if (which I very much doubt) the notices could possibly be construed as a result of this error as demanding completion on the 13th day rather than on the 14th day after their date (in which case any treatment by the plaintiff of a failure by the defendant to complete on 19 March 1999 as a matter entitling the plaintiff to call off the deal would amount to a repudiation of the plaintiff's contractual obligations) such a demand would not affect the right of the plaintiff, having exercised the option, to claim specific performance of the contract thereby constituted in accordance with its terms; that is to say, with a completion date of 20 March 1999 rather than 19 March 1999. A claim for specific performance is not defeated merely by the fact that the claimant has misconstrued the contract and so mistakenly insisted on an incorrect date for completion. The court will simply ignore the mistake, and will make such an order as is appropriate to carry the contract into execution.

40. I, too, therefore, would dismiss this appeal. In the result, the appeal will be dismissed and subject to anything counsel may say, it will be dismissed with costs.