FOK CHUN YUE BENJAMIN v. FOK CHUN WAN IAN AND OTHERS

CACV 13/2014,
CACV 16/2014 and
CACV 17/2014
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 13, 16 and 17 OF 2014

(ON APPEAL FROM HCA NO. 2155 OF 2011)

________________________

________________________

(Heard together)

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JUDGMENT
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Hon Lam VP (giving the Judgment of the Court):

1.  From time to time, parties to litigation agree to compromise and, depending on the terms of the compromise agreement, legal proceedings could be held in abeyance pending the performance of the obligations under the agreement. Like other contracts, there could be disputes arising from the interpretation or performance of the terms of a compromise agreement. When such disputes arise, a party may come back to court to revive the legal proceedings which had been held in abeyance. Alternatively, a party may start a fresh set of proceedings in respect of causes of action stemming from the compromise agreement. This appeal concerns the terms on which the court decided to stay the legal proceedings in light of such disputes.

2.  Poon J made an order on 3 January 2014 for the stay of HCA 2155 of 2011 “save and except for the purpose of perfecting and implementing the Settlement Agreement [dated 3 August 2012] in full as expeditiously as possible”.   The present appeal raises the question whether in the circumstances of the present case, the learned judge was correct in making such order.  On behalf of the appellants (adopting the nomenclature in the judgment of the judge, we would refer to them as Ben, Nora and Pat), counsel submitted that the correct order should be a stay of the proceedings “temporarily pending the determination of [the disputes arising from the Settlement Agreement in] further proceedings to be instituted” by them.

3.  There is no dispute by any party at the hearing before us that the order of the judge does not prevent any party from starting a fresh action based on claims related to or stemming from the Settlement Agreement.  However, there are disputes as to whether the determination of some of the issues before the judge could give rise to implications like issue estoppel in the new proceedings.  At the beginning of this appeal, this court made it clear to the parties that it is not within the purview of these appeals to consider whether the determination by the judge gives rise to issue estoppel. If necessary, that question would have to be litigated in the context of the new set of proceedings.  

4.  Though counsel advanced different lines of argument before us, in essence we can concentrate on two important issues:

(a) Whether the judge was correct when he concluded that he could determine the construction of Clause 19(e) of the Settlement Agreement summarily; and

(b) If he was correct, whether he came to the right conclusion on the proper construction of Clause 19(e).

5.  After we reach a decision on these important issues, we shall then consider the extent to which it is necessary to address the other questions raised by counsel in these appeals.

6.  We shall start with a brief overview of the dispute between the parties.

The dispute between the parties

7.  The dispute revolves around the estate of the late Mr Fok Ying Tung Henry [“Mr Fok”] who passed away on 28 October 2006.  In section A1 and 2 of the judgment below, the judge summarized the three families of Mr Fok and his last will of 20 May 1978.  The main protagonists in these appeals are the children in the First Family.  Though there were differences in their respective position, without in any way ignoring such differences, broadly speaking (for the purpose of these appeals) we can place them into two groups: Ben, Nora and Pat (the appellants in these appeals) on the one side and Ian and Tim on the other side.  The other parties to the appeal (children and mothers in the 2^nd and 3^rd Families and the mother in the 1^st Family) played less prominent roles though they all appeared by counsel.  The aunt (named as the 2^nd Defendant in the proceedings) is involved in her capacity as the co-executrix of the estate.  The other co-executors are Ben and Ian.

8.  The business of Mr Fok was held and run principally through three corporate groups.  One of them is headed by Henry Fok Estates Limited which held interest in various subsidiaries [“the HFE group”].  The current focus of the dispute is the development projects in a place called Nansha, the hometown of Mr Fok in the mainland.  The interest was held in the form of shares in a company called Panyu Development Company Limited [“Panyu Development”] which together with a PRC party are the only shareholders in a PRC company which owns those projects.  The judge gave a short history of the corporate structure relating to the projects and how one share in Panyu Development (viz 50% of its issued shareholding), once held by another company called Yau Wing (a company in the HFE group), was transferred to another company called Fok Ying Tung Foundation Limited [“FYTF”], the head company of another corporate group of Mr Fok, in June 1997 at par value of $1.  At the same time FYTF granted an option to Yau Wing to buy back the share on or before 30 June 2007 again at par value. 

9.  For present purpose, it is not necessary to go into the details of the corporate structure.  The broad picture was that Ben, Nora and Pat had interests in the HFE group.  On the other hand, Mr Chang SC (appearing together with Mr Ronny Wong SC and Mr Nelson Miu for Ian) emphasized that FYTF is a charitable corporation as its memorandum and articles of association restricted its objects to charitable causes and there is a restriction against distribution of its assets to its members.  Thus, whilst it might not have mattered very much before the death of Mr Fok, as the matter now stands, from Ben, Nora and Pat’s points of view, there is an enormous difference between the share in Panyu Development being owned by FYTF or HFE group.

10.  The Nansha projects are valuable assets.  In turn, the share in Panyu Development is of very substantial value.  Mr Yu SC (appearing together with Ms Eva Sit for Nora) described it as “possibly the most significant asset as far as the first family members are concerned”. They had been financed by loans from the HFE group.  There are disputes between the parties as to the extent to which they continued to be financed by loans from the HFE group after the transfer in 1997.  Such disputes cannot be resolved summarily.  The case of Ben, Nora and Pat is that the HFE group continued to provide finance in the form of interest free unsecured loans even after the expiry of the option.  Again it is not necessary to go into details in this judgment. 

11.  The Yau Wing option was not known to Ben, Nora or Pat before the expiry of the same.  According to Ben[1], Ian mentioned in 2009 for the first time (and in general terms) that Yau Wing had an option to repurchase some assets from FYTF when Pat queried why HFE group advanced interest free and unsecured loans for the Nansha projects.  It was only on 25 November 2011, at a board meeting of FYTF where Ben, Ian and Tim were present that Ian revealed that the option had lapsed.  Ben’s evidence was that Ian said it was possible to engage a lawyer to advise on the grant of a further option to Yau Wing.

12.  Unlike Ben, Nora and Pat had no knowledge as to the lapse of the option (not until they read the KPMG interim report of March 2013, which was after the making of the Settlement Agreement).  It is their case that they believed HFE group through Yau Wing had interests in the Nansha projects when they entered into the Settlement Agreement. 

13.  Ben commenced the present action on 19 December 2011.  The judge summarised the nature of his claims and the history of proceedings at sections A3, A4 and A5 of his judgment.  At the initial stage, the claims were not about the Nansha projects.  Ben sought the removal of Ian and the aunt as co-executors of the estate.  After lengthy and intensive negotiations, parties reached a Settlement Agreement on 3 August 2012. However, Ben applied to restore his Order 14 application when parties came back to court in April 2013.  His case was that Ian and Tim failed to act in accordance with Clause 19(e) of the Settlement Agreement.  On the other hand, Ian and the aunt applied by summons for the stay of the action save for the purpose of perfecting and implementing the Settlement Agreement.  These led to the judge’s decision of 3 January 2014.

The Settlement Agreement

14.  To understand how the focus of the dispute shifted to the Nansha projects, we have to refer to the general scheme of the Settlement Agreement.  It was a multi-partite agreement executed by all the family members of Mr Fok and a number of companies.  It was a global settlement agreement.  Thus, under Recital C, all the signatories recognised that it is desirable to have a global family settlement, even including matters which do not arise directly in relation to the administration of the estate of Mr Fok.  It is clear that the agreement extended to matters which did not form part of the claims of Ben in the action.  The judge considered the provisions in the Settlement Agreement at some length at paragraphs 55 to 60 of his judgment. 

15.  The provisions of the Settlement Agreement are extensive, covering not only the interests of the children in the First Family, but also the interests of others.  For present purposes, we shall focus on the provisions relevant to the issues before us.   Under the scheme of the Settlement Agreement, Ben, Nora and Pat are to dispose of their interests and entitlements in HFE group to Ian and Tim.  But an important rider is that a new company (referred to as China Option Newco) [“Newco”] is to be set up before the disposal and each of the 5 children shall have identical voting and economic rights in respect of this company. Pursuant to Clause 19(e), in consideration of the payment of $1, Newco shall take up certain interest from HFE.  The clause reads:

“ In consideration of the payment at the HFE Completion by China Option Newco to HFE of HK$1 (the valid and sufficient receipt of which is hereby acknowledged), HFE, Ian and Tim shall procure the transfer to China Option Newco of the benefit of any option(s) that the HFE Group presently has or has had and which has been exercised and/or transferred either to an HFE Group company or any other entity, or is presently entitled to acquire or obtain, in or in respect of projects in mainland China (including but not limited to option(s) in respect of the projects in Nansha held by Panyu Development or any other entitles under FYTF), or if such transfer is not possible, such option(s) shall be held on trust for China Option Newco. HFE, Tim and Ian shall take all such steps as may be necessary to secure such rights and interests in the option(s) for the benefit of China Option Newco, including the right to sue and defend proceedings in the name of the grantees(s) of the option(s) and any necessary approvals from the relevant authorities or parties in order to give effect to this Clause 19(e). In the event that any option not exercised within one month prior to the expiry of the option, it shall be transferred and sold to HFE at HK$1.”

16.  Ben, Nora and Pat said that the intention of the parties was to hive off HFE’s interests in the projects in mainland China (including the Nansha projects) into Newco in which all 5 children shall have interest.  Though counsel for Ben appearing before the judge (not Mr Richard Todd and Ms Bonnie Cheng who appeared in the appeal for Ben) contended that he should construe Clause 19(e) if possible, he also submitted that the judge should not decide on the question of construction if he found it necessary to resolve any dispute of fact before he could rule on the proper construction of this clause.  Whilst Nora’s counsel (not Mr Yu) supported Ben’s position, her counsel also invited the judge not to determine the question of construction.  Pat’s counsel (not Mr Victor Joffe who appeared with Mr Kerby Lau for her in this appeal) adopted a neutral stance in respect of the stay applications.  However, her counsel also submitted to the judge that he should not decide the construction question.    

17.  Ben’s argument was that as Ian and Tim refused to perform their obligations to procure the transfer under Clause 19(e), as such they were in repudiatory breach of the Settlement Agreement.  Ben contended he had accepted repudiation and sought a partial rescission of the Settlement Agreement against Ian and Tim (but not against the other parties to the agreement).  Therefore they could no longer rely on the Settlement Agreement to prevent the prosecution of Ben’s Order 14 application. 

18.  As for Nora and Pat, their case was that Ian was guilty of material non-disclosure and the duty of good faith in the process of negotiation in his concealment to them as to the fact that the Yau Wing option had expired and there was nothing to be transferred under Clause 19(e).  On that ground, they could seek a rescission of the Settlement Agreement in toto. 

19.  On the other hand, the case of Ian and Tim is that the interest to be transferred is confined to a subsisting option that HFE group (more specifically Yau Wing) had at the time of the Settlement Agreement in respect of such projects.  Since the Yau Wing option had expired, there is nothing to be transferred. 

The decision of the judge on the construction of Clause 19(e)

20.  The judge held in favour of Ian and Tim in respect of the construction of Clause 19(e) and found that they had not acted in repudiatory breach of the Settlement Agreement.  As indicated by him in a direction given pursuant to Order 59 Rule 21(3) on 15 January 2014, the judge regarded his judgment as a summary determination of the substantive rights of the parties.  

21.  The judge came to his conclusion on the construction of Clause 19(e) by considering it together with Clause 4.  The latter clause provided for investigation by KPMG in the following terms:

“ In addition, KPMG shall also be engaged to conduct an investigation regarding any options(s) that the HFE Group may presently have or has had (if any) in projects in mainland China (including the projects in Nansha), including any option(s) or similar rights pursuant to any other instrument or oral arrangement (the Yau Wing Option) exercisable by either Yau Wing or any entities within the HFE Group … to repurchase any interest in Panyu Development or in any other projects in which Panyu Development is engaged from FYTF and report to the First Family Siblings and the companies concerned on the terms of any such option. Ian and Tim, as directors of Yau Wing, Panyu Development and FYTF shall procure any and all relevant information in relation to any of the aforesaid option(s) (including expired option rights) relating to Panyu Development be provided to the Executors and the Investigating Accountants.”

22.  His reasoning on construction can be found in paragraphs 130 to 134 (Section G3) of his judgment:

“ 130. First, Clause 4 clearly acknowledges the fact that whether the HFE Group, in particular Yau Wing, still presently has the Yau Wing Option, or whether the Yau Wing Option had already lapsed is an issue arising from the settlement negotiations that needs to be addressed.

131. Second, KPMG is therefore appointed to carry out the necessary investigation under Clause 4. The scope of the investigation covers any existing and expired option. However the investigation is only confined to any options or similar rights, whether the same are still in existence or had already expired. It does not extend to any other form of interests or rights.

132. Third, the transfer to be effected under Clause 19(e) is predicated on the finding made by KPMG under Clause 4. The tentative word “any” used in the expression “the benefit of any option(s) that the HFE Group presently has or has had and which has been exercised and/or transferred either to an HFE Group company or any other entity, or is presently entitled to acquire or obtain” clearly shows that the option may or may not exist, depending on the investigation by KPMG under Clause 4.

133. Fourth, the use of the words “presently has or has had and which has been exercised and/or transferred”, and “is presently entitled to acquire or obtain” in the same expression clearly refers to an option which is still in existence.

134.  Fifth, it follows that only an option which, according to KPMG’s investigation, is still in existence is to be transferred to China Option Newco under Clause 19(e).  It does not cover an expired option, of which the Yau Wing Option is one.”

23.  The judge said in paragraph 129 that he had regard to the relevant background which he set out in Section G2.1 and G2.2 of his judgment in coming to these conclusions.  At paragraph 140, the judge again referred to such background as accounting for the commercial sense of Clauses, 4, 18 and 19(e) even though at the time of the Settlement Agreement the Yau Wing option had already expired.

24.  In Section G2.1, the judge set out the history of the Nansha projects and the relevant corporate structure, including the events leading to the transfer of the one share in Panyu Development to FYTF and the lapse of the Yau Wing Option.  In Section G2.2, the judge focused on how Ben was informed about the lapse of the option from 25 November 2011 to July 2012.  He concluded by saying this at paragraph 116:

“ … Ben evidently did not trust Ian, and hence did not accept what Ian had said about the lapse of the Yau Wing Option at its face value and requested investigations to be carried out. This led to Clauses 4, 18 and 19(e) of the Settlement Agreement.”

25.  The judge was aware of Ben’s case that Yau Wing or the HFE group had the beneficial interest in the Nansha projects and that FYTF was a mere nominee holding the share for Yau Wing.  The option was the mechanism for Yau Wing to take back the legal title.  He discussed this line of argument at paragraphs 118 to 123.  He accepted that this is a serious issue which cannot be resolved without a trial.  But he decided it can be ignored for the purpose of construction.  At paragraph 124, he said:

“ Ben’s assertion that FYTF is and was at all material times a mere nominee holding the share in Panyu Development for Yau Wing is hotly disputed by Ian who has countered Ben’s allegations in great detail. Resolving them here without a trial is an impossible task. But for construing Clause 19(e), whether Ben’s case is established or not is irrelevant. I can safely ignore it and the underlying factual disputes when construing Clause 19(e).”

26.  He reached that conclusion because he regarded Ben’s case on beneficial ownership as being predicated upon Ben’s knowledge of the Option Letter.  Since Ben did not acquire such knowledge until after the execution of the Settlement Agreement, the judge reasoned that Ben could not have such a case in mind at the time of the agreement.  Hence, it could not be part of the relevant background, see paragraphs 125 to 126 of the judgment. 

27.  The judge did not address the question of commercial sense of these clauses from the angle of Nora and Pat.  Though he subsequently referred to their evidence in this regard, he dismissed the same as mere declaration of subjective intent which could not be admissible evidence for the purpose of construction, see paragraphs 150 and 151.

28.  The judge was also aware of the contention of Ben and Nora that Ian acted in breach of the duty to negotiate in good faith and misrepresentation by failing to disclose the Option Letter before the execution of the Settlement Agreement.  He addressed this aspect of the case at paragraphs 157 to 162.  He accepted that he could not resolve these disputes without a trial.  However, he considered that it would not matter for the purposes of determining the applications before him.  

The problems in the judge’s determination

29.  With great respect, we are of the view that the judge erred in the following aspects of his decision:

(a) In effect, the judge made a finding on the commercial purpose of clause 4 and 19(e) without hearing oral evidence when there are serious disputes on that very question between the parties;

(b) The judge failed to pay sufficient regard to the case of Ben, Nora and Pat on beneficial ownership and assumed that it was wholly dependent upon knowledge as to the Option Letter;

(c) There is no basis to support the conclusion that a transfer under Clause 19(e) was predicated upon a finding of a subsisting option by KMPG under Clause 4; and

(d) The judge wrongly concluded that he could make the order he did even though the disputes about Ian’s duty to disclose the Option Letter and misrepresentation are not resolved.

30.  We can understand the judge’s well-intentioned aspiration behind his attempt to prevail upon the parties to perfect and implement the Settlement Agreement in full as expeditiously as possible.  But there are limits to what a judge could achieve in light of the situation before him.  One must not lose sight of the two sets of application before him: on the one hand, there was an application by Ben (supported by Nora) for Order 14 judgment in his attempt to remove the co-executors; on the other hand, there was an application by Ian and the aunt for a stay of the action. We perfectly understand and agree with the judge that the Order 14 should not be allowed to proceed and a stay is in order.  However, it does not follow that the court must resolve the construction question summarily.  As the judge recognised at paragraph 174, the court can still order the action to be stayed pending the issue to be tried in a fresh action. 

31.  The crucial issue in this appeal is whether the judge should have exercised his discretion by embarking on a summary determination of the construction question in light of the differences between the parties involving serious issues which cannot be resolved without a trial. There was no application for specific performance of the Settlement Agreement before the judge.  Counsel accepted before us that the order of stay made by the judge on 3 January 2014 did not take effect as a decree of specific performance. This was not a case where parties came to court to seek an order summarily for the enforcement of a term of a settlement.   In light of the procedural history in which the matter came before the judge, the stay applications were made principally in response to the attempt by Ben to restore the Order 14 application.  Thus, at the highest what the judge could have done was to stay the action (including the Order 14 application).  Further, the underlying action is an application for the removal of the executors on grounds which do not relate to the performance of the Settlement Agreement.  As mentioned above, the Settlement Agreement encompassed matters not falling within the scope of the action.  In such procedural context, the judge could not have gone further to order the parties to perform the Settlement Agreement.  To achieve that, in light of the disputes between the parties (which the judge rightly held impossible to be resolved by the court without a trial), there has to be a separate action (whether by Ben or Ian or other parties involved) seeking the appropriate relief.

32.  At the same time, whatever order the judge made could not have prevented Ben, Nora or Pat from starting fresh actions challenging the validity of the Settlement Agreement or challenging Ian’s conducts in respect of the option.  The judge recognised this to be the case at paragraphs 146 and 169.  

33.  Reading paragraph 140 of the judgment together with Sections G2.1, G2.2 and G3, the judge had found the true intent of the Clause 19(e) was to provide for transfer of option which, according to KPMG’s investigation, was still in existence and he regarded this as making perfect commercial sense.  But this approach did not adequately address the case of Ben, Nora and Pat: at the time of the Settlement Agreement, they, to the knowledge of Ian and Tim, reasonably believed HFE Group had legitimate claim to the interest in the Nansha projects and that interest was to be hived off to Newco in order to achieve a corporate clean-break between them on the one hand and Ian and Tim on the other in respect of HFE Group.  Though Ben (unlike Nora and Pat) was aware of the expiration of the option, he proceeded on the basis that Ian had said it could be possible to procure the grant of another option on similar terms.  It is at least a triable question whether in such circumstances the judge’s finding on the true intent of those provisions would achieve what a reasonable person bearing in mind the context and background of the case would have understood the parties to achieve by Clause 19(e). 

34.  With respect, the judge had not fully appreciated the case of Ben, Nora and Pat in respect of the Nansha projects. By rejecting the relevance of Ben’s contention that FYTF was a mere nominee for Yau Wing on the question of construction, the judge seemed to be of the view that such case depended on the knowledge of Ben as to the contents of the Option Letter.  Thus, he considered the matter under the hearing “Ben’s reliance on the Option Letter” in Section G2.3 of his judgment.  But even before they had sight of the Option Letter, Ben, Nora and Pat were acting on the belief that they, through HFE Group, had indirect interest in the Nansha projects.  By agreeing to the disposal of their interest in HFE Group at the price stipulated under Clause 19(h), it was reckoned that their indirect interest in the Nansha projects would be secured through their new shareholdings in Newco and Clause 19(e).  These should be part of the relevant context and background for examining the true intent of Clause 19(e).     

35.  The judge thought that Ben, Nora and Pat could still pursue their case on nominee-ship of FYTF and Ian’s failure to procure the exercise of the Yau Wing option before its expiry.  However, the judge apparently overlooked the fact that pursuant to Clause 19(h), they had to transfer their interests in the HFE Group to Ian and Tim.  Once the transfer had been completed, Ben, Nora and Pat would cease to have any locus to pursue those claims.  

36.  Ben, Nora and Pat maintained they would not have entered into the Settlement Agreement if its true effect is that they would relinquish their indirect claims to whatever interest HFE Group might have in Nansha (through their shareholders’ interest in the HFE Group) if KPMG were to find that no option existed at the date of the agreement.  Based on the history of the dispute, we think it is an arguable proposition. 

37.  At paragraph 151 of the judgment, when he was dealing with Pat’s case, the judge observed that such belief was only the subjective intent on her part, implicitly holding that declaration of such intent could not be admissible for the construction exercise.  Such characterisation of their case, with respect, does not fully reflect the true import of the evidence.  At paragraphs 129 and 130 of Ben’s fourth affirmation, he said:

“ 129. As I have explained above, I had lengthy discussions with [the senior figure] about the imbalance in information between Ian on the one hand, and me, Pat and Nora on the other. I have described above the approach taken by [the senior figure], to which we all agreed - namely that Ian was to put all his "cards on the table", and that in turn we were expected to place trust in the information being produced. That mutual trust was the basis on which we all deal.

130. I have also described above the outline of what was said at the meetings of 5 May 2012 and 7 July 2012 about the interest in Panyu Development.  My understanding, based on those meetings, was that while we (other than Ian) remained in the dark as to the legal detail, lan's position (and thus the basis on which we all had to proceed, pursuant to [the senior figure]’s core principles) was that the HFE Group was entitled to recover the one share in Panyu Development, of which the HFE Group had originally been the 50% owner and which the HFE Group has been funding on an unsecured, interest-free basis since 1997.”

38.  Nora’s solicitors put her case in a letter of 5 August 2013 to similar effect at paragraphs 2 to 5:

“ 2. During the discussions which preceded the Settlement Agreement, [the senior figure] himself clearly reminded the parties that everyone must put all their cards face up on the table, that nothing was to be withheld and that the settlement must be fair and just. Nora relied upon the fact that all family members would do so, and that during the discussions she would be told anything which it was relevant to her to know for the purpose of entering into the Settlement Agreement. Indeed Nora had to rely upon all family members behaving in the way [the senior figure] had reminded them they should, because, as you know, Nora throughout the past many years knew very little about Father's business affairs, had never been a director in Father's companies and knew next to nothing about their structure, businesses, assets or value. All of this information, by contrast, was well-known or readily obtainable by Ian and Tim.

3. As you also know, the scheme of the settlement so far as it concerns Nora was that:

(1) she, Pat and Ben would receive Father's HFE investments and interests in projects in mainland China, including in Nansha, which were known to be of considerable value;

(2) subject to that, Pat, Ben and Nora would transfer their interests in and entitlement to HFE to Ianand Tim for a fixed sum, which would take into account their receipt of the investments or interests in mainland China; and

(3) Nora would receive certain other assets from Father's remaining Estate.

4. In relation to HFE, the aim therefore was that there would be a “Clean break” between Tim and Ian on the one hand, and Pat, Ben and Nora on the other. Subject to their receiving the value attributable to Father's investments and interests in mainland China, Ben, Pat and Nora were to sell their interests and entitlement to Tim and lan for a consideration of HK$2,500,576,000. That consideration is stated to represent 37.33% of the value of HFE, based on a valuation of HFE of HK$6,720,000,000. These figures were put forward and provided by Ian. We trust that it is indisputable that Nora did not have any information concerning the then financial position of HFE and she trusted, and in practice had to trust, Ian's valuation.

5. As regards Father's investments and interests in projects in mainland China (including Nansha), these were, as you know, to be hived off and be shared among the First Family Siblings equally.  This was to be effected bysetting up a new company, China Option Newco, in which they were to have equal shares.”

39.  Pat adopted the same position through her solicitors in a letter of 7 August 2013.

40.  Because of the lack of knowledge on the part of Ben, Nora and Pat as to the terms of the Yau Wing option and the non-disclosure of the Option Letter at that stage, it is necessary for the terms to be ascertained by KPMG pursuant to Clause 4 before Newco can eventually decide whether to exercise the option.  With respect, we do not agree with the judge’s conclusion that a transfer under Clause 19(e) must be predicated upon a finding of a subsisting option by KMPG under Clause 4. 

41.  In the construction of Clause 19(e), it is necessary to have regard to the relevant factual background and context in addition to the actual wordings in the agreement, see Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896; Jumbo King Ltd v Faithful Properties (1999) 2 HKCFAR 279 and Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101.  Though the rule in Prenn v Simmonds [1971] 1 WLR 1381 excluding subjective statements in pre-contractual negotiations as admissible evidence for the purpose of construction is still good law, the exclusion has no application when such evidence is used for other purposes such as establishing the facts which might be relevant background as known to the parties or to support a claim for rectification or estoppel, see Chartbrook Ltd v Persimmon Homes Ltd, supra.  The relevant principles have recently been discussed in Channel Green Ltd v Huge Grand Ltd CACV 174 of 2013, 29 Dec 2014 and it is not necessary for us to undertake a similar exercise in this judgment. 

42.  If the relevant context and background led the court to the conclusion that something had gone wrong with the language of a contract, the law does not require it to attribute to the parties an intention which a reasonable person would not have understood them to have.  As held by Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd, supra, at paragraphs 21 to 25, some mistakes in drafting can be corrected as a matter of construction. 

43.  This is not the occasion to consider at length the difference between correction by way of construction and the relief of rectification.  Sometimes, the same result can be reached by different routes, see Kowloon Development Finance Ltd v Pendex Industries Ltd (2013) 16 HKCFAR 336. 

44.  The judge was mindful of these principles, most of which he set out under Section G1 of his judgment.  What we are more concerned with in these appeals is whether the judge had applied those principles correctly to the facts of the present case.  

45.  As Mr Yu submitted, we do not have to determine conclusively on the question of construction in these appeals.  Actually, as elaborated below, there are very good reasons why we should not attempt to do so.  What we have to be concerned in these appeals is a rather narrow question: whether the judge should have determined the question summarily on the applications before him.    

46.  For present purposes, it suffices for us to say that the relevant context and background should include the imbalance in information as to the Yau Wing option, the nature of the disputes between the parties which the Settlement Agreement tried to resolve including the competing contentions on beneficial ownership of the Nansha projects, the knowledge of Ian and Tim had in respect of Ben, Nara and Pat’s contentions on the Nansha projects.  These were not addressed by the judge in his reference to the relevant context.  Perhaps it is understandable because, as acknowledged by the judge, there are serious factual disputes which cannot be resolved without a trial.  However, if those issues are resolved in the way as Ben, Nora and Pat put them,  in our view it is reasonably arguable that the phrase “the benefit of any option(s) that the HFE Group presently has or has had and which has been exercised and/or transferred either to an HFE Group company or any other entity, or is presently entitled to acquire or obtain, in or in respect of projects in mainland China” in Clause 19(e) should be given a wider construction than an option which KPMG found to exist at the time of the agreement. 

47.  We are also of the clear view that the judge should not embark on the final determination of the meaning of the clause in light of the substantive disputes on those issues which he acknowledged that the court was not in a position to resolve without a trial.  Making a summary determination on construction when the relevant context and background are subject to factual disputes may be tantamount, in effect, to a failure to have regard to such relevant context and background.     

48.  Further, from a case management point of view, there is little to be gained from a summary determination of the construction question at this stage.  We are of course mindful of the reluctance of an appellate court to interfere with a case management decision of a first instance judge and nothing said in this judgment shall be regarded as a departure from the well established principle in that regard.  However, since we are disagreeing with the judge on his construction of Clause 19(e), it falls for us to consider whether we should embark on a similar exercise and set out our views on construction.  In addition to the reasons given above pointing against the undertaking of a summary determination, we are now facing a situation quite different from that before the judge.  Ben and Nora are no longer pressing for proceeding with the Order 14 application.  As explained above, finality cannot in any event be achieved and, unless the parties resolved their differences by themselves (whether through mediation or otherwise) in the meantime, further litigations are unavoidable.  In those circumstances, not much purpose can be served by hiving off the question of construction for determination at this stage.  In light of the disputes between the parties, it would be best for all the issues to be resolved at one single trial rather than to have different issues to be determined on different occasions.  The carving out of an issue from the general disputes always carry with it the risk of delay and extra costs, bearing in mind the possibilities of appeals. 

49.  Hence, we are anxious that nothing said in this judgment shall inadvertently pre-empt the determination of the construction question at future proceedings.  For this reason, we hope we will be forgiven in not addressing the submissions of the parties on construction at length.  We have listened carefully to the arguments of counsel (which have been ably presented on behalf of all the protagonists) and we have also duly considered them. 

50.  Broadly speaking, Mr Chang contended that the judge was correct in view of the wordings of Clause 19(e) and emphasized the reference to “option” in it.  Counsel said the extension of the obligation to transfer (and the obligation to procure such transfer) to rights and interests other than a subsisting option or benefits of an option which had already been exercised is to conflate the concept of option with the interests in the underlying assets.  He further contended that given the charitable status of FYTF and the provisions of its articles and memorandum, which should form part of the factual matrix, the transfer could not be procured as a matter of law. As such, there cannot be any “entitlement” to acquire or obtain a further option or re-grant of an option from FYTF. Mr Leung and Mr Wong on behalf of their respective clients adopted Mr Chang’s submissions on construction.

51.  On the other hand, Mr Yu, Mr Joffe and Mr Todd argued that the judge’s construction failed to give effect to the words “presently entitled to acquire or obtain”.  Further, it is contended that the entitlement to have an option flows from the fact that FYTF merely holds the interest in Panyu Development as nominee or bare trustee.  They also referred to the differences in the subject matter set out in Clause 4 (without any reference to “presently entitled to acquire or obtain”) as compared with Clause 19(e) to challenge the judge’s construction of the obligation to transfer under Clause 19(e) being predicated upon a finding of subsisting option by KPMG under Clause 4.  However, their primary position in these appeals was that the court should not determine the question of construction at this stage as the factual matrix which is in dispute would have a significant bearing on the proper construction of the clause.

52.  For present purposes, we will not determine which construction should prevail.  We shall confine ourselves to this: we cannot rule out the construction urged by counsel for Ben, Nora and Pat as unarguable.    

The practice and procedure as to stay of proceedings due to disputes on settlement 

53.  Mr Chang also referred to the stance taken by Mr Poon SC (on behalf of Ben) before the judge.  It was Mr Poon’s submission before the judge that unless the court could rule beyond reasonable doubt that Ben’s construction has no merit, the court should not grant a stay of the action, citing King Prospect Trading Ltd v Tenbase Trading Ltd HCA 163 of 1996 in support of his contention. 

54.  However, as submitted by Mr Todd, Mr Poon also contended that if there were matters in dispute which had to be resolved before the court can properly construe the clause, such an exercise should not be undertaken at this stage.

55.  Though Le Pichon J (as she then was) did observe in King Prospect Trading, supra,as a matter of general practice that a stay would not be imposed unless the court was beyond all reasonable doubt that proceedings ought not to be allowed to continue, in our respectful judgment, the better view is that ultimately it is a matter of discretion and much depends on the circumstances of the case and the terms of the stay.  We agree with Mr Todd that there are fundamental differences between a stay on a permanent basis and a stay imposed temporarily as a matter of case management. And different considerations may apply between a case where the settlement only covers the subject matters raised in the underlying litigation and a case where the settlement (like the present instance) extends to subject matters beyond those disputes already before the court in the action to be stayed.  

56.  Recent authorities show that the power to stay proceedings must be exercised by reference to the circumstances of each case. In Schindler Lifts (Hong Kong) Ltd v Nikko Services Ltd CACV 250 of 2010, 29 November 2013, the court stayed an appeal pending the resolution of issues arising from a settlement agreement in a District Court action.  In Wong Loi Yeung v Pang Yuet Ho CACV 86 of 2014, 22 Dec 2014, the court refused to grant a stay of an appeal although there were pending disputes on a settlement agreement which would have to be litigated in a new set of proceedings.  The court proceeded to dismiss the appeal as the appellant was not ready to argue the same.  In that judgment, the Chief Judge observed that it was a matter of exercise of discretion based on the circumstances of each case.  This is in line with the commentary in Atkin’s Court Forms 2^nd Edition, 2013 Issue, Vol 12(1), paragraph 138. 

57.  The authorities also establish that except in very clear cases where the dispute over the settlement agreement can be readily resolved by a summary process, enforcement of the terms of a settlement agreement or challenges against the validity or enforcement of the same should be pursued by way of fresh actions. 

58.  In the present case, irrespective of the situation before the judge, Ben, Nora and Pat accepted before us that there should be a temporary stay of this action pending the resolution of the disputes over the Settlement Agreement in fresh actions.  Ben’s counsel indicated that Ben could issue the fresh action within 28 days from the handing down of our judgment. 

59.  We think this is the appropriate course to take.  Though strictly speaking the order of the judge did not prevent a fresh action challenging the Settlement Agreement to be commenced, the terms of the stay and the reasoning as set out in the judgment of the judge indicate that the stay ordered on 3 January 2014 was more than a mere temporary stay for case management purpose.  Further, by stating that the stay was ordered “save and except for the purpose of perfecting and implementing the Settlement Agreement in full as expeditiously as possible”, it carries the implication that the Settlement Agreement was affirmed by the court despite the challenges to its terms and enforceability by Ben, Nora and Pat.  For reasons already canvassed, we do not think this was a correct order to make in the present circumstances.

60.  Mr Leung submitted that the judge’s order did not have the effect of staying the action permanently and upon good grounds being shown, the stay as ordered by the judge can be lifted.  That may well be correct.  But, with respect, that is beside the point.  The important point is the purpose of the stay.  A court does not order a temporary stay without any purpose as it would be wrong in principle to do so.  The judge’s order is a stay “for the purpose of perfecting and implementing the Settlement Agreement in full as expeditiously as possible”.  But expeditious perfection and implementation of the agreement is not something which can be achieved in view of the substantive disputes between the parties both as to its effect and validity.  The proper course, for reasons canvassed, was to order a stay pending the resolution of those disputes.  

The other issues

61.  The other substantive issue which the judge had decided was the rescission claim by Ben.  It is accepted by all the parties that the judge did not rule on the case of rescission in toto by Nora and Pat.

62.  In view of our conclusions above, it is premature to consider the question of rescission.   Until the true effect of Clause 19(e) has been ascertained, it is difficult to assess the extent to which the obligations under clause 19 (which primarily affects Ben, Nora, Pat, Ian and Tim) can be regarded as severable from the other parts of the Settlement Agreement.  Given the considerations we set out above as to the undesirability of hiving off an issue from the overall dispute in the present circumstances, we do not wish to express a concluded view on the viability of partial rescission. 

63.  Whilst there are other issues raised in the written submissions placed before us, we do not find it necessary to deal with them for the purposes of deciding on the substantive outcome of these appeals. The appeals against the costs order below and the question of costs of these appeals will be dealt with later according to our directions below.  

Disposition

64.  We shall allow the appeal and set aside the order of 3 January 2014. In its place, we would order that the action be stayed pending the determination of the legal proceedings by Ben, Nora or Pat to be filed within 28 days concerning the Settlement Agreement.  We have been told that the parties may go through another attempt to reach amicable settlement with the assistance of a senior figure respected by the parties.  To cater for that, we also give liberty to Ben, Nora or Pat to apply for extension of time for the filing of their respective proceedings.

65.  Incidentally, whilst the shape and form of the legal proceedings by Ben, Nora and Pat would be a matter for them and those advising them, it appears to us that the primary disputes are between them, Ian and Tim.  We do not know whether it is achievable but perhaps it is worthwhile for the parties to consider whether there could be an arrangement by which the other parties’ involvement in the new actions could be minimized.  Having said that, much depends on the goodwill and good faith of the parties and the good sense of those advising them.  As far as the court is concerned, we expect parties and their legal advisers to bear in mind the underlying objectives in Order 1A Rule 1 and their duties under Rule 3.  Of course, it would even be better if the whole matter can be resolved amicably.  Parties do not need us to remind them of the advantage of mediation.   

66.  We also give the following directions for lodging of written submissions on costs:

(a) Ben, Nora and Pat shall lodge and serve their respective submissions on costs in these appeals and below (including whether any part of the costs should be borne by the estate) within 21 days from the handing down of this judgment;

(b) The other parties shall lodge and serve their respective submissions on costs within 21 days thereafter;

(c) Ben, Nora and Pat shall lodge and serve their reply submissions within 14 days thereafter; and

(d) Unless the court otherwise directs after reading the submissions, the question of costs shall be dealt with on papers without any oral hearing.  

67.  Lastly, we thank counsel for their valuable assistance in these appeals.