DA SHING GROUP LTD v. RICH PROMISE LTD

CACV 126/2020

[2021] HKCA 960

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 126 OF 2020

(ON APPEAL FROM HCA NO 1065 OF 2016)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.  This is the defendant’s appeal against the judgment of Deputy High Court Judge Kenneth Wong handed down on 22 April 2020 (“the Judgment”). The issue is whether the judge erred in his construction of a Memorandum of Understanding (“the MOU”) entered into by the plaintiff as the prospective purchaser and the defendant as the prospective seller on 13 February 2015 in respect of 50.46% of the shares held by the defendant in a listed company, Crocodile Garments Ltd (“the Shares” and “Listco”). The judge held in favour of the plaintiff’s construction and that the sum of $30 million paid by the plaintiff to the defendant (“the Subject Sum”), described in the MOU as “定金”, should be returned to the plaintiff when the negotiations of the sale and purchase fell through and the parties did not enter into a formal sale and purchase agreement.

2.  There is no express provision in the MOU providing that the Subject Sum should be refunded to the plaintiff in that event.  It is the defendant’s contention that the Subject Sum is non-refundable should the negotiations fail.  Mr Paul Lam SC^[1] submitted for the defendant that the Subject Sum was provided as monetary consideration and constituted the “most significant” part of the consideration moving from the plaintiff for the binding obligations undertaken by the defendant under the MOU in respect of: due diligence (the defendant shall use best endeavours to provide reasonable assistance and information to the plaintiff for the latter to carry out due diligence during the 60-day period^[2] within payment of the Subject Sum)^[3]; confidentiality (the defendant undertakes to keep confidential information disclosed to it by the plaintiff during the negotiations)^[4]; exclusivity (a “lock-out agreement” by which during the aforesaid 60-day period, the defendant shall not directly or indirectly negotiate, discuss, enter into any letter of intent etc. with any other third parties regarding the sale of the Shares)^[5]; other undertakings (during the aforesaid 60-day period, the defendant undertakes to use best endeavours to procure Listco to co-operate with the plaintiff and to continue with its ordinary course of business)^[6]; and costs and expenses (each party to the MOU shall bear its own costs and expenses regarding the acquisition proposal)^[7]. On the proper construction of the MOU, as the defendant had performed the binding obligations undertaken as stated above, there is no basis for the Subject Sum to be refunded when the defendant terminated the MOU and the supplemental MOU on 12 June 2015.

3.  The judge rejected the defendant’s contention that the Subject Sum is non-refundable on his textual and contextual analysis of the MOU.  Having considered the MOU and the relevant commercial background, he concluded that on the true construction of the MOU, the nature of the Subject Sum was “no more than earnest money to demonstrate the plaintiff’s sincerity in entering into the negotiation with the defendant”^[8] and the defendant is liable to return the amount to the plaintiff after the negotiations for the sale and purchase of the Shares fell through.

Background

4.  The relevant background matters, taken primarily from the Judgment, may be stated as follows.

5.  The plaintiff is a company incorporated in the British Virgin Islands beneficially owned by one Zhou Zhenke (“Zhou”). At the material time in 2015, Zhou ran substantial business in the Mainland but did not have any business in Hong Kong.

6.  The defendant was also incorporated in the British Virgin Islands and was and is beneficially owned by the late Dr Lam Kin Ming (“Lam”).

7.  Listco was established in 1952 and became a listed company in 1971.  It owns the clothing brand “Crocodile” which is well-known in Hong Kong.  At the material time, Lam was the executive director, chairman and chief executive officer of Listco and its controlling shareholder.

8.  Prior to the MOU, the plaintiff and the defendant (and the personnel behind them) had no previous dealings with each other and were complete strangers to each other. Zhou signed the MOU as the guarantor of the plaintiff’s obligations and Lam did so as the guarantor of the defendant’s obligations.

9.  In late 2014, Zhou intended to acquire a controlling interest in a Hong Kong listed company with principal business in real estate and in retail such as garment.  He was advised by his financial consultant Xu Lijian (“Xu”), a director of Feder Capital Management Ltd, that Listco met his criteria.  Zhou accepted the advice and explored that possibility by engaging middlemen to approach Lam, who was quite receptive.  The stock market in Hong Kong at the time was booming.

10.  Zhou met with the representative of Lam, Ko Ming Kin (“Ko”), in Shenzhen in late 2014 or early 2015.  Ko was the chief financial officer and company secretary of Listco.  The judge found it unlikely for Ko to have told Zhou at the first meeting that the defendant’s total acquisition cost was at least $2 billion or Ko’s valuation figure of Listco^[9]. He also held where there are conflicts between Zhou’s evidence and Ko’s evidence, he would prefer Zhou’s evidence^[10]. And the judge found Xu’s evidence generally credible^[11].  There is no appeal against any of the primary findings of fact made by the judge.

11.  After the first meeting, at the defendant’s request, the plaintiff and Zhou produced a bank reference certifying that a company related to the plaintiff and Zhou had a fixed time deposit of RMB 2,598,262,000 as at 5 February 2015.  In the absence of evidence showing any link between the amount of financial proof and the purchase price, the judge did not think the amount of financial proof was necessarily equal to the estimated amount of potential purchase price^[12]. He noted that to the contrary in the plaintiff’s internal proposal prepared on 5 February 2015, the estimated total acquisition cost was only $1.2092 billion, and there was no mention of any indication of the potential purchase price from the defendant^[13].

12.  There was a second meeting of the parties on 6 February 2015 at Listco’s office in Hong Kong.  It was attended by Zhou, Lam, Xu, Ko and others.  The judge found it more likely than not that the requirement for exclusive negotiation was not raised at that meeting^[14].

13.  On 6 February 2015, the closing price of Listco’s share was $0.53.  Hence, the market capitalisation of Listco was around $496 million^[15]. This represented a significant discount from Ko’s valuation of Listco in March 2015 (at $2.8 billion) and Xu’s preliminary valuation of the Shares when he submitted the list of potential acquisition targets to Zhou in December 2014 (at $1.236 billion).  The acquisition cost for the Shares (50.46 % of the issued share capital) would be around $1.4 billion based on Ko’s valuation.

14.  On 8 February 2015, the plaintiff revised the estimated total acquisition cost in its internal proposal to $0.526 billion.

15.  A first draft of the MOU was sent to the defendant on 11 February 2015 at 9:45 am (file name was “MOU Draft 1 revised”). This was adapted from an in-house standard form of Xu’s company Feder Capital.  It is in simplified Chinese characters^[16].  The document was not drafted by lawyers and was “not drafted with precision”^[17].

16.  After further negotiations, a revised draft (file name was “MOU Draft 4”) was sent to the defendant on 12 February 2015 at 8:24 pm.  This draft contained changes to clause 5 by which the characters “订金” were altered as “定金” and the characters “可退回” (meaning “may be refunded”) and the provision concerning the mechanism and timing for the Subject Sum to be repaid were deleted.  Mr Lam submitted these changes are critical and should be admitted as evidence in aid of the construction of the MOU.  The judge held that the evidence in relation to the amendments is inadmissible and if he was wrong he would attach no weight to them for the construction exercise^[18].  This holding is challenged on appeal. 

17.  MOU Draft 4 was further amended to become the final execution version that was sent to the defendant on 13 February 2015 at 11:20 am (file name was “MOU Draft 6 (Execution)”).

18.  The parties executed the MOU on 13 February 2015.  After the execution, Listco made a public announcement pursuant to the Takeovers Code on the same day.

19.  On 16 February 2015, pursuant to clause 5, the plaintiff caused to be remitted various amounts that made up the Subject Sum to the designated account of the defendant.  After the payment of the Subject Sum, negotiations for a formal agreement for the sale and purchase of the Shares ensued.  As mentioned, the negotiations failed and the defendant terminated the MOU and the supplemental MOU on 12 June 2015.  When the defendant refused to return the Subject Sum, the plaintiff brought this action.

Material provisions of the MOU

20.  Only some terms in the MOU are legally binding, being clauses 4, 5, 6, 7, 8, 9, 12 and 13.  The rest are not.  Clause 12 stipulates that except for the binding clauses, the purpose of the MOU is not to establish legal relationship, and does not constitute a contract with binding force between the plaintiff and the defendant.  It further provides that either party may terminate the negotiations proceeded between them in accordance with the MOU, albeit without prejudice to the application of clauses 4, 5, 6, 7, 8, 9, 11^[19] and 12 and either party’s right to pursue those clauses.

21.  For ease of reference, we set out the material clauses in the MOU verbatim in the simplified Chinese characters:

Clause 1: 定义

“「定金」 与以下第五项同义；

「有关日期」与以下第二项同义；…”

Clause 2: 谈判

“买方和卖方将尽最大努力，受限于协议的条款及细则进行谈判，签订具有约束力的出售与购买协议（「正式协议」）。而期限则由载于第5项所述买方支付定金之日起计60天之内（卖方和买方可以在双方达成共识后以书面形式延长限期）（「有关日期」），据此，买方将于无任何产权负担及所连同之附带权利，包括在完成日期或之后作出或支付的股息及分派的情况下，收购卖方所出售的股份（「股份收购」）。”

Clause 3: 正式协议

“正式协议须包含，(i) 由买方和卖方同意的交易的股份数量（「出售股份」）（ii）股份收购代价，（iii）由卖方按买方和卖方同意，提供一般惯常的陈述，保证及承诺（iv）买方担保人作为法定及实益拥有人同意担保买方按此谅解备忘录及正式协议之义务（v）卖方担保人作为法定及实益拥有人同意担保卖方按此谅解备忘录及正式协议之义务。…”

Clause 4: 尽职调查

“在载于第 5 条支付定金之日起至有关日期期间内，买方及/或其顾问及代理人对事务，财务事宜及集团业务进行他们认为适当的尽职调查。卖方须尽合理的努力，但须遵守上市规则及适用的监管要求，提供合理的帮助和信息，为买方及/或其顾问及代理的合理要求，提供合理的帮助和信息。”

Clause 5: 定金

“买方须于签署本谅解备忘录2营业日内存入金额为港币3,000万现金，作为定金（「定金」），到卖方指定帐户（「指定帐户」）。

指定帐户数据如下：

银行：HANG SENG BANK LTD

账戶号码：024-773-332838-001

账戶名称：RICH PROMISE LIMITED

银行分行：HEAD OFFICE

SWIFT CODE：HASEHKHH

定金应根据正式协议（如正式协议已订立），由买方从指定帐户支付予卖方，组成部分代价。”

Clause 6: 机密资料

“订约各方确认，谅解备忘录期内及正式协议的谈判过程中，订约各方可能会透露机密资料给对方。本协议双方同意接受并严格保密对方所披露的机密资料，并不会为自己的利益而使用或滥用全部或部分的机密资料，或透露机密资料给任何第三方，除了各自的董事，管理人员，雇员，代表，参与谈判或于对公司有保密责任的其他人士。买方特此进一步向卖方承诺，它只会仅用机密资料于评定和评估集团股份收购的目的，而不作其他用途。买方不会并促使其联系人不会直接或间接地使用机密资料而促使对卖方或本集团的商业优势。所有机密资料应保持为披露方的财产，如披露方要求另一方返还机密资料，另一方应返还机密资料。所有机密资料应保持于披露方，而披露方要求另一方返还机密资料，另一方应归还机密资料。订约各方同意，除需要通过法律或联交所法规或有管辖权的法院的命令或联交所及/或香港证券及期货事务监察委员的请求外，没有另一方事先同意，任何一方不得或不会披露任何有关公告，新闻稿或其他一般公众披露有关本谅解备忘录或条款，或据此拟进行的交易，有关同意不得无理拒絶或延迟。”

Clause 7: 排外性

“在载于第5条支付定金之日起至有关日期期间内，卖方不得直接或间接，对买方以外之任何关于出售待售股份之人士或实体，（i）招揽或发起要约，或（ii）发起或继续谈判或讨论，或（iii）进入任何协议或意向声明。”

Clause 8: 承诺

“卖方对买方承诺及契诺，在载于第5条支付定金之日起至有关日期期间内，在载于第5条支付定金之日起至有关日期期间内，卖方作为公司的控股股东，将尽合理努力，并遵守上市规则及适用的监管要求下（i）促使本集团与买方合作和提供买方和/或顾问和代理买方的信息收集期间可能被合理需要的信息，（ii）促使上市公司集团的事务在其日常业务过程中进行。”

Clause 9: 成本

“买方和卖方应就股份收购建议承担自己的费用和成本。”

Clause 12: 约束力

“买方和卖方同意，第4，5，6，7，8，9，12和13是有约束力的义务，对双方强制执行。

各方承认并确认，除第4，5，6，7，8，9，12和13，这份备忘录的目的不是建立法律关系，并不构成买方和卖方之间具有约束力的合同。据此拟进行的讨论，在不损害第4，5，6，7，8，9，11和12之应用和任何一方申索的权利下，可被任何一方终止。”

22.  The judge noted these salient points about the MOU.  First, a part of the MOU is legally binding and the remaining part is not.  In interpreting this document, it is necessary to bear in mind the interplay between the legally binding clauses and the non-binding clauses.  Second, the MOU was based on an in-house standard form of Xu’s company.  It was not drafted with precision.  Third, whilst there is no express provision stating whether the Subject Sum is refundable when the negotiations failed, clause 5 does provide for deposit of the Subject Sum and its treatment as part payment of the purchase price if and when a formal agreement for sale and purchase has been signed^[20].

The approach to interpretation

23.  The relevant principles of contractual interpretation are not in dispute.  We consider the guidance given by Lord Hodge JSC in Wood v Capita Insurance Services Ltd [2017] AC 1173 at §§11 to 13 of particular relevance to the present situation^[21]:

“11. … Interpretation is, as Lord Clarke JSC stated in the Rainy Sky case^[22] (para 21) a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause (the Rainy Sky case, para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299, paras 13, 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: the Arnold case^[23], paras 20, 77. Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.

12. This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: the Arnold case, para 77 citing In re Sigma Finance Corpn [2010] 1 All ER 571, para 12, per Lord Mance JSC. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.

13. Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation.  Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement.  The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements.  Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals.  The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement.  There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type.  The iterative process, of which Lord Mance JSC spoke in Sigma Finance Corpn [2010] 1 All ER 571, para 12, assists the lawyer or judge to ascertain the objective meaning of disputed provisions.”

24.  The judge went through the iterative process, checking the rival interpretations of the parties against the language and provisions of the MOU and had investigated its commercial consequences.  He had borne in mind the quality of the drafting (that it was not drafted with precision) when he undertook the textual and contextual analysis.  He was alive to the possibility (and eventually found) that clause 5 of the MOU was likely to be a “negotiated compromise” and that the negotiators were simply not able to agree more precise terms^[24].

25.  In this appeal, Mr Lam accepted that clause 5 was a negotiated compromise as found by the judge. He referred this court to the situation contemplated by Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1385C (“The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get ‘agreement’ and in the hope that disputes will not arise”)^[25].  He also drew our attention to how Staughton J described the court’s task in this kind of situation in an unreported case^[26] as quoted in Bouygues SA v Shanghai Links Executive Community Ltd [1998] 2 HKLRD 479 at 495A to C:

“When two businessmen wish to conclude a bargain but find that on some particular aspect of it they cannot agree, I believe that it is not uncommon for them to adopt language of deliberate equivocation, so that the contract may be signed and their main objective achieved. No doubt they console themselves with the thought that all will go well, and that the terms in question will never come into operation or encounter scrutiny; but if all does not go well, it will be for the courts or arbitrators to decide what those terms mean. In such a case it is more than somewhat artificial for a judge to go through the process, prescribed by law, of ascertaining the common intention of the parties from the terms of the document and the surrounding circumstances; the common intention was in reality that the terms should mean what a judge or arbitrator should decide that they mean, subject always to the views of any higher tribunal.”

26.  The above statements of Staughton J are consonant with what Mason J said in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981-1982) 149 CLR 337 at 352 to 353 that the construction of contract is centred on the presumed, rather than the actual, intention of the parties.  So when the issue is which of two or more possible meanings is given to a contractual provision, the court looks, “not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting.”^[27]

27.  Before we consider Mr Lam’s criticisms of the judge’s textual and contextual analysis, it is appropriate to consider first whether the judge ought to admit in evidence the amendments to clause 5 in MOU Draft 4 and if so what weight should be placed on the amendments as an aid to construction.

Admissibility of amendments to earlier draft

28.  The amendments to clause 5 of MOU Draft 4 read as follows:

29.  The judge discussed the relevant cases in Australia and England on the admissibility of pre-contractual exchanges as an aid to construction^[28]. He did not see any divergence of the principle adopted in the two jurisdictions.  On appeal, Mr Lam accepted that the law is as encapsulated in this statement in Lewison, The Interpretation of Contracts (7^th ed) in the heading of the section on “Deleted Words” discussed in §§3.13 to 3.22 of the work: “Despite older authority to the contrary, the court will nowadays often look at words which the parties have deleted from their contract in order to construe the words which remain, although they are an unsafe guide to meaning”.  That is the relevant principle stated by the English Court of Appeal in Narandas-Girdhar v Bradstock at §20: “if the fact of deletion shows what it is the parties agreed that they did not agree and there is ambiguity in the words that remain, then the deleted provision may be an aid to construction, albeit one that must be used with care.”

30.  It is pertinent to note also these passages in Mopani Copper Mines Plc v Millennium Underwriting Ltd which were approved in Narandas-Girdhar v Bradstock at §19.  In §121 of Mopani, Christopher Clarke J quoted with approval this passage from Keating on Construction Contracts^[29]:

“Where parties have made a contract in a document that contains deletions, to look at the deletions does not offend the principle discussed above which prevents reference to preliminary negotiations. The deletion is physically contained in the concluded contract. It is submitted that the court should first construe the retained words. If they are unambiguous, reference to the deletion is unnecessary. If they are ambiguous reference to deletions from printed documents should be permitted to see whether objectively they throw light on the meaning of the retained words.”

31.  Clarke J went on to explain the need for caution and why it is in limited circumstances that it may be appropriate to consider deletions as an aid to construction:

“122. Even if recourse is had to the deleted words, care must be taken as to what inferences, if any, can properly be drawn from them. The parties may have deleted the words because they thought they added nothing to, or were inconsistent with, what was already contained in the document; or because the words that were left were the only common denominator of agreement, or for unfathomable reasons or by mistake. They may have had different ideas as to what the words meant and whether or not the words that remained achieved their respective purposes.

123. Further, as Morgan J pointed out in Berkeley Community Villages Ltd v Pullen [2007] 3 EGLR 101: ‘Even in the cases where the fact of deletion is admissible as an aid to interpretation, there is a great difference between a case where a self contained provision is simply deleted and another case where the draft is amended and effectively re-cast. It is one thing to say that the deletion of a term which provides for “X” is suggestive that the parties were agreeing on “not X”; it is altogether a different thing where the structure of the draft is changed so that one provision is replaced by another provision. Further, where the first provision contains a number of ingredients, some assisting one party and some assisting the other, and that provision is removed, it by no means follows that the parties intended to agree the converse of each of the ingredients in the earlier provision.’ ”

32.  In The Golden Leader [1980] 2 Lloyds’s Rep 573 at 575, Lloyd J gave a similar explanation why the assistance to be gained from deletions must necessarily be limited:

“… the use of a word or phrase in the deleted part of the clause may throw light on the meaning of the same word or phrase in what remains of the clause. … But it seems to me quite another thing to say that the deletion itself has any contractual significance; or that by deleting a provision in a contract the parties must be deemed to have agreed the converse. The parties may have had all sorts of reasons for deleting the provision; they may have thought it unnecessary; they may have thought it inconsistent with some other provision in the contract; it may even have been deleted by mistake.”

33.  The judge considered de bene esse the evidence of Xu and Ko as to why the amendments and deletions were made to clause 5 in MOU Draft 4.  He noted the diverse positions taken by each in the negotiation of the MOU. He cautioned himself that accepting any of Xu’s evidence and/or Ko’s evidence of either party’s objective or intent, even if known to the other, would be totally dangerous.  As expounded by Lord Wilberforce in Prenn v Simmonds at 1385D, “it would be a matter of speculation how far the common intention was that the particular objective should be realised”, as “the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want”^[30].

34.  The judge took the view it was likely that the final version of clause 5 was agreed because that was the only way to get an “agreement” and the words remaining were the only common denominator of agreement. He accepted the submission of Mr Ambrose Ho SC for the plaintiff^[31] that clause 5 was a product of give and take and it is wholly speculative, unsafe and unhelpful, to make any finding of common intention out of such evidence from the parties.  He therefore ruled that the evidence in relation to the amendments, including the three drafts of the MOU, is inadmissible and if he was wrong about this, for the same reasons he had explained, he would attach no weight to the drafts for the construction exercise^[32].

35.  Mr Lam argued on appeal that notwithstanding his apparent acceptance of the judge’s finding that clause 5 was a “negotiated compromise”, the judge should nevertheless admit the deletions as an aid to construction because the deleted words showed “what the parties have failed and refused to agree on”, citing in support this statement in §9 of the majority judgment of the High Court of Australia in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12: “The deletions do not evidence a prior intent, which could have changed, but rather they identify a matter which, on the face of the document, was rejected by both parties”.

36.  Mr Lam did not rely on the alteration of the characters of “订金” to “定金”^[33]. He relied on the deletion of the characters “可退回” (meaning “may be refunded”) and of the provision concerning the mechanism and timing for the Subject Sum to be repaid in case no formal sale and purchase agreement is concluded.  He submitted that as the judge had held that clause 5 was a negotiated compromise, the final version of it was “not an oversight or accidental”; there is more reason why the judge should not have stressed the absence of any express provision stating that the Subject Sum is non-refundable.  He argued that the express wording of clause 5 is “unhelpful”, and the absence of express provision as to refundability is “inconclusive”.

37.  Even on Mr Lam’s contention, if the deletions are admissible as an aid to construction, the usefulness is very limited as he has acknowledged that the express wording of clause 5 is “unhelpful”.  He also accepted that deletions are “an unsafe guide to meaning”.  But in any event, we do not agree with him that the evidence on deletions should be admissible in this instance.

38.  It does not appear to us that the retained words in the final version of clause 5 are ambiguous in themselves.  There is no need to refer to the deleted words to ascertain whether objectively they could throw light on the meaning of the retained words.  If, contrary to our views, there is ambiguity in the retained words, we do not think the deletions would show “what it is the parties agreed that they did not agree” upon.

39.  This is not a situation in which the simple deletion of words which provide for the refund of a sum must be suggestive that the parties were agreeing on there being no refund in any circumstances.  As submitted by Mr Ho, the parties may have had different ideas for making the deletions of the three characters which mean “may be refunded” and the provision containing the mechanism and timing for the Subject Sum to be repaid if no formal agreement for sale and purchase is made, and whether the words that remained achieved their respective purposes.  As the judge has found, the remaining words were the only common denominator of agreement.  It is not appropriate to infer from these deletions that the parties must be deemed to have agreed the converse of each of the ingredients in the deleted characters and provision.

40.  We agree with the judge the deletions and the alteration of the characters from “订金” to “定金”do not necessarily mean that the parties had agreed that the Subject Sum was not refundable in any event^[34].  Even if recourse is had to the amendments, the judge cannot fairly be criticised for placing no weight on them in the circumstances.  Mr Ho is right that in disregarding the amendments, it is a distinction without a difference whether the judge held the evidence to be inadmissible or no weight should be attached to them.

41.  We reject also Mr Lam’s contention that just because clause 5 was a negotiated compromise, and the parties were “unable to agree to agree at more precise terms”, there is more reason the judge should not have stressed the absence of any express provision stating that the Subject Sum is non-refundable. We agree with Mr Ho this is a non-sequitur.

Textual analysis

42.  There is no dispute that the term “定金” does not have a fixed or definite meaning in Chinese language as to whether it is refundable^[35]. The judge’s textual analysis of the MOU may be summarised as follows.

43.  Clause 5 does not provide expressly whether “定金” (the Subject Sum) is refundable.  It provides that the purchaser should deposit the Subject Sum into the seller’s designated account and if a formal agreement is made, in accordance with the formal agreement, the purchaser is to pay the Subject Sum from the seller’s designated account to the seller and this is to constitute part of the purchase price.  This provision is telling and significant.  It signifies that if formal agreement has been entered into, the plaintiff was entitled to use the Subject Sum as part payment of the purchase price, notwithstanding that once the Subject Sum was deposited into the defendant’s designated account, the ownership of the money has passed to the defendant.  This “does not sit well” with the defendant’s contention that the Subject Sum was treated as monetary consideration moving from the plaintiff for the legally binding rights given to it in the MOU and is not refundable in any event^[36]. Nor is there any provision in the MOU suggesting that the Subject Sum should serve as monetary consideration of the defendant’s legally binding obligations in the MOU^[37].

44.  The judge rejected the defendant’s contention that the agreement to convert the Subject Sum into part payment of the purchase price represented a compromise or an exception to the agreement that the Subject Sum was not refundable.  It is unlikely for the parties to spell out the compromise or exception in the MOU but did not expressly spell out the primary consensus that the Subject Sum was paid as the consideration for the defendant granting the legally binding rights to the plaintiff under the MOU^[38].

45.  The judge rejected also the defendant’s contention that if the Subject Sum was refundable, it would mean “a complete return of the monetary consideration when such consideration has not totally failed”^[39]. He went through the respective obligations of the plaintiff and the defendant under the MOU, noting that each has its own obligations to fulfil. He noted Mr Lam’s emphasis on “monetary” consideration, but it is trite that consideration need not be monetary to be sufficient in law.  He found that there was sufficient consideration moving from both parties in the form of the parties’ mutual obligations for the binding provisions of the MOU^[40].

46.  Lastly, the judge found the Subject Sum “materially analogous” to the description of the payment made by the purchaser to the vendor “as deposit and in part payment of the said purchase money” in an agreement subject to contract in Chillingworth v Esche [1924] 1 Ch 97.  In holding that the deposit was recoverable by the purchasers, Pollock MR stated at 108: “There was no provision made in the documents which would justify the vendor in declining to return it; though if he had, by appropriate words, made provision for that in the document, such a provision could have been upheld.”  The judge regarded this reasoning apposite to the present situation.  There is no provision in the MOU which justifies the defendant in declining to return the Subject Sum and had the parties by appropriate words made provision for the non-refundability, such a provision could have been upheld.  Since there is no such provision, there is no basis justifying the defendant to refuse to return the Subject Sum to the plaintiff^[41].

47.  Mr Lam criticised the judge for having “over-emphasised” the lack of an express provision suggesting that “the Subject Sum was non‑refundable if the negotiation fell through, or that the payment of the Subject Sum was made in consideration of the rights granted to the plaintiff in [clauses 4, 7 and 8].”^[42]  The judge went on to say that “if that was the parties’ intention, there should have been an express clause making such provisions”.

48.  Mr Lam submitted that in the sentence just quoted, the judge had committed a “heresy” by asking “Why not say it?”  He quoted Lewison, The Interpretation of Contracts at §2.113 for this proposition: “Since almost any dispute about the interpretation of a contract involves rival meanings, it is seldom helpful to ask why the parties did not adopt one of those rival meanings in their contract.”

49.  It should be noted that the learned author also stated in §2.114: “However, the argument that ‘if the draftsman had meant that he could have easily said so’ does sometimes find favour.”  We do not think there is any rigid prohibition against asking the rhetorical question “if the parties meant that, why did they not say it”.  This should be approached with common sense.

50.  As pointed out by Mr Ho, the judge expressed the view that “the absence of an express provision is a weighty indication”^[43] that the Subject Sum was not intended to be monetary consideration for the legally binding provisions in the MOU and not refundable only after he carried out the contextual analysis.  This will be considered in the next part of our judgment.

51.  Mr Lam further submitted that the burden is on the plaintiff to show why it is entitled to the return of the Subject Sum paid to the defendant, and, at best, the absence of any express provision one way or other is neutral.  He also criticised the judge for drawing an analogy with the payment in Chillingworth v Esche as that case is distinguishable in that there were no legally binding rights and obligations of the parties as their agreement was made subject to contract.

52.  We do not think it is likely that the judge would have failed to appreciate that the parties in Chillingworth v Esche made an agreement subject to contract, as that fact was mentioned in the headnote and formed the basis of the discussion in the judgments of the English Court of Appeal. Notwithstanding the difference in that case that the parties did not have legally binding rights and obligations, there is similarity with the present case in that no binding agreement for sale and purchase was made and either party was at liberty to terminate the negotiations with no liability. We do not think the judge could rightly be criticised for adopting the reasoning in that case.  Whether there was any basis justifying the defendant to refuse to return the Subject Sum to the plaintiff would be more appropriately considered in the contextual analysis.

53.  In light of Mr Lam’s submission that the express wording of clause 5 is “unhelpful”, arguments that could assist the defendant’s case on appeal would seem to be those related to the contextual analysis. 

Contextual analysis

54.  The main plank of the defendant’s case on construction is that the Subject Sum serves as monetary consideration of the defendant’s legally binding obligations under the MOU.  After examining the commercial background and context at the time of the MOU, the judge came to the conclusion it is unlikely that the Subject Sum was intended by both parties to be monetary consideration for the binding provisions in the MOU.  His reasoning was along the following lines^[44].

55.  There is no doubt that the Subject Sum is a significant amount and the parties were complete strangers to each other.  If it was the defendant’s requirement that the Subject Sum was to be used as the consideration for its obligations under the MOU, and if the plaintiff had accepted this to be so, it is more likely than not that this would be expressly spelt out in the MOU as this would be the best protection against the complete stranger on the other side.  This however was not done.

56.  The plaintiff was in a fragile position.  Either party could walk away at any time during the negotiation, subject only to compliance with the binding clauses in the MOU.  There was every risk for the negotiation to fall through.  Whilst there was then an estimate of potential acquisition cost from each side, the two estimates varied significantly. Given the disparity as well as the volatility of the stock market, there could be serious difficulty in reaching an agreement on price, not to mention other terms.  At the time of the MOU, neither party could say with any confidence that a deal would be reached.  The Shares would only become valuable to the plaintiff if the sale and purchase materialised.  The risk of the total loss of the Subject Sum was not insignificant.  There was no evidence showing that the plaintiff was so eager to buy the Shares that it was willing to risk $30 million going down the drain (if the Subject Sum was non-refundable) should the negotiations fail.

57.  It is doubtful that the exclusive right to negotiate during the relevant period of 60 days was “extremely valuable” to the plaintiff, as contended by Mr Lam.  The evidence does not support a conclusion that insofar as the Shares were concerned, it was a seller’s market at that time. While the stock market was booming at the time, the Listco’s shares were trading at substantial discount of its market capitalisation.  While there was no evidence adduced by either party on why this was so, there was also no evidence showing whether the business of Listco was commercially so attractive to the extent that the Shares was, objectively, a “must have” for a potential buyer in particular the plaintiff.  There was no sufficient evidence to show that objectively a potential buyer at the time would be so keen to the extent that it would pay $30 million just for the “exclusive opportunity” to negotiate (and other obligations under the binding clauses of the MOU) and nothing else.

58.  The defendant alleged there were a number of potential buyers who had approached Dr Lam.  But not a single potential buyer was identified.  The judge found there was no good evidence to support a finding there was real and substantial likelihood that other interested buyers would approach Dr Lam.  He declined to find that the parties would have that perception at the time of the MOU.

59.  Besides, the exclusivity agreement under clause 7 of the MOU did not confer benefit on the plaintiff solely.  As the Shares represented the controlling stake in a listed company, the negotiation between the plaintiff and the defendant was price sensitive.  If the defendant was at the same time negotiating with third parties, the risk of being suspected of market manipulation and insider dealing might arise.  The exclusivity agreement in the MOU would offer protection from such risk to the defendant, thereby yielding benefits to both parties.

60.  As for other obligations under the binding clauses of the MOU (namely, the defendant rendering reasonable assistance during the due diligence exercise; confidentiality; carrying out Listco’s business in the ordinary and usual course), the judge did not consider they are necessarily benefits of value to the plaintiff.  These provisions were designed to facilitate the smooth conduct of the negotiations.  If the negotiations failed, such obligations undertaken by the defendant would become valueless.  The elaborate confidentiality provision expressly provided that confidential information relating to Listco cannot be used for any purpose other than the proposed acquisition.

61.  For the above reasons, the judge found that “no reasonable person having knowledge of the commercial context of the MOU and the commercial purpose of the Subject Sum would have understood the parties to have agreed that the Subject Sum would be retained by the defendant whether or not the intended deal would proceed”^[45]. He came to the view that “the absence of an express provision is a weighty indication that the Subject Sum was not the specific monetary consideration, or the price, for the defendant’s obligations in the MOU”^[46].

62.  The judge’s analysis is cogent and well thought through. There is no challenge to his primary or inferential findings of fact regarding the commercial background and context that he took into account.  It does not appear to us that Mr Lam has engaged the reasoning of the judge in his submissions on appeal.  Instead, he attempted to pick holes in the Judgment but has not demonstrated there are palpable errors of such nature which would warrant intervention by this court.  His arguments may be summarised as follows.

63.  He pointed to clause 7 of the MOU which gave rise to a lock‑out agreement, and the positive obligations assumed by the defendant on providing reasonable assistance and information for the plaintiff’s due diligence exercise and to use best endeavours to procure Listco to co‑operate with the plaintiff and continue with its ordinary course of business.  He contended that the Subject Sum is the “most significant” of the consideration provided by the plaintiff for the defendant to assume those negative and positive obligations.  He submitted that the judge had “missed the point” in holding that consideration moving from the plaintiff need not be monetary to be sufficient.  The defendant did not contend there would be a complete absence of consideration from the plaintiff if the Subject Sum did not form part of the consideration.  The pertinent question should be whether it was likely and realistic that the non-monetary obligations of the plaintiff were intended to serve as “the entirety” of the consideration provided by the plaintiff in return for the defendant’s negative and positive obligations.  He argued that the judge had “over‑emphasised” the absence of an express provision that the Subject Sum was the consideration for the defendant’s obligations and failed to give weight or sufficient weight to the value of the exclusive right to negotiate for the controlling stake of Listco and the access to confidential information.  He contended it is “self-evidently more commercially sensible and realistic” that consideration moving from the plaintiff also included the Subject Sum, which is the “most significant” of the consideration provided by the plaintiff.

64.  We reject Mr Lam’s submissions.  The judge had properly weighed the matters referred to by Mr Lam as well as other matters in considering the commercial background and context.  There is no basis to interfere with the judge’s weighing exercise.  Nor did the judge misunderstand the defendant’s submissions on consideration.  He was fully aware that the defendant “did not run a case that if the Subject Sum was refundable, there would be a total failure of consideration”^[47]. Having considered the mutual obligations assumed by each party, and bearing in mind that consideration need not be monetary to be sufficient in law, the judge concluded “there is no question of total failure of consideration, even in the event that the Subject Sum has to be refunded because the negotiation has failed.”  The defendant’s argument that there would be no monetary consideration (or that the “most significant” consideration would fail) as a result of the refund of the Subject Sum in that event is nothing to the point as there has been sufficient consideration moving from the plaintiff^[48]. We agree with the judge.

65.  Mr Lam attacked the holding that the provision in clause 5 (that the Subject Sum paid into the defendant’s designated account is to constitute part of the purchase price in the event that a formal agreement is made) “does not sit well with the defendant’s contention”^[49].  He submitted that this provision merely governs the situation if and when a formal agreement is made and does not address the treatment of the Subject Sum where no formal agreement is concluded.  There is nothing to this submission.

66.  Lastly, he contended that in holding that the Subject Sum was “no more than earnest money to demonstrate the plaintiff’s sincerity in entering into the negotiation with the defendant”^[50], it is impossible to understand what “sincerity” meant and what its practical significance was in this context.  He asked rhetorically what was the point of showing “sincerity” in negotiations by paying the Subject Sum that would be fully refundable, when the parties knew full well there was no contractual duty to negotiate.  He submitted that what the defendant was concerned about was not the plaintiff’s “sincerity” but its ability to complete the sale and purchase and the plaintiff had provided a bank reference to the defendant at the latter’s request.

67.  We do not accept these submissions.  Earnest money is a concept well known to the law.  As stated by Warrington LJ in Chillingworth v Esche at 112:

“Then it is said that unless the consequence of the payment of a deposit amounts to a guarantee to complete the purchase the payment of it is perfectly futile. I do not agree, because the purchaser by payment of a deposit shows that he means business. The purchaser has not bound himself, but in order to show a definite intention he is willing to part with money, and run the risk of the vendor spending the money and being unable to return it if negotiations are broken off. The purchasers contend that this is a deposit paid in anticipation of a final contract and nothing more. That seems to me to be the true view.”

Conclusion and costs

68.  None of the arguments raised by the defendant in this appeal are of merit.  We therefore dismiss the appeal.  It is not necessary to deal with the matters raised in the respondent’s notice seeking to affirm the Judgment on additional or alternative grounds.

69.  We have heard submissions on costs.  There is no dispute that costs of the appeal should follow the event.  We order the defendant to pay the plaintiff’s costs of this appeal, with a certificate for two counsel.