NG TUNG AND ANOTHER v. CHUNG HING TRANSPORTATION AND GODOWN CO LTD

cacv 352/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 352 of 2006

(on appeal from HCA NO. 2676 of 2004)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal from the judgment dated 8 September 2006 of Recorder A Chan SC awarding the plaintiffs damages (to be assessed) in their action against the defendant for breach of a right of pre-emption in respect of a property situated in Kwai Chung.  At the conclusion of the appeal hearing, judgment was reserved which we now give.

Background

3.  In 2003, Central F&B Management Co Ltd (“the company”) then owned as to 51% by the first plaintiff, as to 30% by Mr Chan Sui Chung (“Mr Chan”), as to 10% by the first plaintiff’s brother and as to the remaining 9% by a Mr Cheung, operated a restaurant in Central called Prince Fusion.  Hong Kong was struck by SARS at the time and the first plaintiff’s brother soon fell out with Mr Chan.  Those difficulties were resolved when Mr Chan acquired the shares of the first plaintiff’s brother, thereby becoming a 40% owner of the company.

4.  By February 2004, the first plaintiff and Mr Chan decided to go their separate ways and entered into negotiations which culminated in an agreement on 25 February 2004 for an amicable parting.  Since 1981, the first plaintiff had been operating a profitable fast food business called Wah Tak Canteen (“Wah Tak”) at the property.  The recorder found that Mr Chan agreed to swap his 40% shareholding in the company for the first plaintiff’s fast food business.  Mr Chan also agreed to “acknowledge the years of service” of Wah Tak’s staff and be responsible for their long service payments.  The first plaintiff and Mr Chan signed a home-made agreement dated 25 February 2004 to that effect.

5.  The recorder accepted the first plaintiff’s evidence that at the same time, it was also agreed that the first plaintiff would let the property to Mr Chan at a monthly rent of $26,000 for 10 years.  The home-made agreement made no reference to this because the first plaintiff considered that there should be a separate tenancy agreement.  Later the same day, he acceded to Mr Chan’s request to sell the property to him because Mr Chan was worried that Wah Tak would not be able to pay the rent.  The first plaintiff’s evidence which the recorder summarised in paragraph 7 of his judgment was as follows:

“… before[the first plaintiff] agreed Chan assured him that he was not interested in property speculation and promised to resell the Property back to [the first plaintiff] in one or two years if Wah Tak’s business was not sustainable (“the Pre-emption Right”).  [The first plaintiff] was emphatic about the importance of the Pre-emption Right.  They agreed on the price of HK$1.1 m which [the first plaintiff] described as “super low”.  [The first plaintiff] explained that the Property was purchased back in 1991 at HK$1.365 m and maintained that the Property had increased in value since that time.”

It was also the first plaintiff’s evidence that Mr Chan acting for and on behalf of the defendant and the plaintiffs entered into a preliminary agreement for the sale of the property that had been prepared by an estate agent on 25 February 2004.  Although the purchase price stated in the preliminary agreement was $950,000, the recorder accepted that Mr Chan had also given a cheque in the sum of $150,000 to the first plaintiff and that the purchase price was $1.1 million.  The preliminary agreement was superceded by a formal agreement dated 9 March 2004.  Schedule 12 to that agreement contained the right of pre-emption although it was described as a ‘condition precedent’.

6.  Completion took place on 4 April 2004.  Several months later, on 30 August 2004, the defendant sold the property to Best Rise International Ltd, a company connected with Mr Chan, for $950,000.  As found by the recorder, the purpose of that sale was to defeat the right of pre-emption.

This appeal

7.  The only issue that arises on this appeal concerns the validity of the right of pre-emption.  In the court below, the defendant was unsuccessful in impugning the validity of that right on the basis that it constituted a restraint on alienation and therefore void being contrary to public policy.

8.  Mr Wong SC (who did not appear below) challenged the correctness of the recorder’s decision.  The crux of his submissions was that the recorder had erred in law.  He submitted that the applicable law required that the court invalidate any condition attached to an estate that wholly or substantially prohibits alienation.  That was the question that ought to have been posed instead of an examination of that right against a rising and a falling market that had been carried out below.  It was further submitted that the fairness of the transaction is not a relevant consideration.

9.  Pausing here, as to this last point, it had originally been submitted that if, contrary to the defendant’s case, the fairness of the transaction were relevant, then the recorder had erred in overlooking part of the consideration for the purchase of the property which was the assumption of liability for making long service payments.  Mr Chan’s evidence was that it came to about $270000-$280000.  If that amount were added to the consideration of $1.1 million found by the recorder, there would have been no profit at all having regard to the resale price of $1.38 million.  But after being referred to paragraph 7 of the judgment and the terms of the home-made agreement (referred to in paragraph 4above), Mr Wong SC conceded that the conclusion reached by the recorder as to the consideration for the purchase of the property was one that was open to him.

10.  As to the relevant law, Mr Wong SC relied on Saliba v Saliba (1976) Qd. R. 205.  In that case, the plaintiff and the defendant were tenants in common in equal shares of a property they had purchased in 1967 for $8,151.  Two years later, they entered into an agreement whereby each of them agreed with the other that should he decide to sell his interest in the property he should first offer that half interest to the other for a price which represented one half of the original purchase price.  At the time of the trial in 1976 the value of the property had almost tripled.  Kneipp J noted the absence of evidence the price fixed at the time the payment was not an adequate price but he considered it “plainly foreseeable that the market value of this land might rise in the future”.  He was clearly concerned that the effect of the agreement was that the price might be “grossly inadequate”.  He held that the agreement (the effect of which was to confer on each party a right of first refusal in relation to the other’s share) was contrary to public policy and so void.

11.  In so holding, Kneipp J cited, inter alia, the decision of the High Court of Australia in Hall v Busst (1960) 104 CLR 26 (Dixon CJ, Fullagar and Menzies JJ, Kitto and Windeyer JJ dissenting) where the majority held that an agreement which constituted a restraint on the right of alienation is void.  The reasoning of the majority of the court deserves closer consideration and for that purpose it is necessary to summarise the relevant facts.

12.  In that case, the parties had been the vendor and purchaser on a sale of land in 1949.  By clause 3 of a collateral agreement, the purchaser agreed that he would not at any time “transfer assign set over or lease” the property without the prior written consent of the vendor.  Clause 4 provided that the purchaser would give the vendor one month’s prior notice of her intention to sell and during that period the vendor would have the first option of purchasing the land.  Clause 5 dealt with the purchase price.  The question which arose for a decision was whether the vendor was entitled to damages for breach of the agreement, the purchaser having disposed of the land without first obtaining his consent.  Dixon CJ and Menzies J (two members of the majority) considered clause 3 to be independent of the option and was void as being in total restraint of alienation.  Therefore the basis of their decision had nothing to do with the validity or otherwise of any right of first refusal.

13.  Of the majority, it was only Fullagar J who considered that the agreement gave a right of first refusal but that the restriction, being in restraint of alienation, was repugnant and void.  It is apparent from page 225 of his judgment that Fullagar J considered the fact (similar to what had happened in Hall) that the property had almost tripled in value by the time the breach occurred at the end of 1957 to be a relevant consideration.  Indeed, one of the authorities he relied on was In re Rosher (1884) 26 Ch D 801, a case involving a condition annexed to a bequest of property requiring the legatee or his heirs or any person claiming under him if he or they chose to sell during the lifetime of the testator’s widow, to offer the property to the widow for £3000.  The property was worth £15,000 at the time of the testator’s death.

14.  Agreements containing a right of first refusal are fairly common and it has not been suggested that they are all invalid as being in restraint of alienation.  As I understand it, the objection in the present case is that the price at which the property is to be sold if the right were to be exercised is a fixed price.  It was said that it was reasonably foreseeable that the price of the property would increase with time and that in fact the recorder had so found.  Notwithstanding Mr Wong SC’s submission that fairness is not a relevant consideration, implicit in his objection is the notion that the right of first refusal would operate unfairly vis-à-vis the defendant if he is obliged to sell to the plaintiff at a fixed price.  I apprehend that had the agreement provided for the purchase at market value at the date of the exercise of the right, there would have been no objection.

15.  The common law renders void any condition attached to an estate that imposes an absolute restriction on alienation of the estate by the grantee.  Such a condition is considered repugnant to an owner’s rights over his property.  But over time, the courts have upheld certain restrictions, thus giving rise to distinctions between total and partial restraints, the latter being permissible.  What is undoubtedly true is that not only are the cases difficult to reconcile, it is difficult to discern the ambit of what restraints are permissible or the principle underlying the exception.  See Pearson J in In re Rosher at 819; Cheshire and Burn’s Modern Law of Real Property, 16^th ed. p. 368.

16.  Turning to the right of pre-emption itself, the recorder found the resale price of $1.38 million to be at a premium of 25% over and above the price at which the property had been sold to the defendant in February 2004.  As noted in paragraph 9 above, there is no longer any challenge to that the finding.  Further, the recorder correctly considered that the sale to the defendant at $1.1 million had been below the market price given that the plaintiffs had originally purchased the property in 1991 for $1.365 million.  Whilst it is true that (at paragraph 41 of his judgment) the recorder remarked that “it is generally the case that landed properties increase in value with time”, the fact that there is this 25% margin is obviously an important factor and distinguishes it from the Australian cases to which reference has been made.

17.  Be that as it may, in the present case, the sale of the property and the grant of the right of pre-emption did not constitute a self-contained and independent transaction but formed part of a much broader transaction which also embraced the share swap and the assumption of responsibility for long service payments with which the sale and the right of pre-emption were inextricably linked.  These are not transactions that are independent of each other.  Rather, they constituted a comprehensive arrangement between the parties the purpose of which was to enable the defendant to divest himself of his interest in the company that operated Prince Fusion to the first plaintiff and so achieve an amicable parting with the first plaintiff in that enterprise.  In that sense, the circumstances in which the right of pre-emption arose may be said to be atypical.

18.  In my view the validity or otherwise of the partial restraint resulting from the right of pre-emption conferred on the plaintiffs has to be determined in the context of the much broader transaction.  Given the circumstances, the overall fairness of the transaction as a whole must be an important, if not the overriding, consideration.  Viewed objectively, having regard to all the circumstances, the transaction as a whole including the right of pre-emption itself cannot be said to be unfair at the time the parties entered into it.  I therefore see no basis upon which the right of pre-emption could be invalidated.

19.  For these reasons, I would dismiss the appeal.  I would also make an order nisi that the costs of this appeal be to the plaintiffs.

Hon Sakhrani J:

20.  I agree.

Hon Rogers VP:

21.  There will therefore be an order in terms of paragraph 19.