LO YUK SUI v. FUBON BANK (HONG KONG) LTD formerly known as INTERNATIONAL BANK OF ASIA LTD

CACV 47/2017

[2019] HKCA 261

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 47 OF 2017

(ON APPEAL FROM HCA 409/2005)

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J U D G M E N T

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The Court:

Background

1.  The Defendant was formerly known as International Bank of Asia Limited.  The events which give rise to the present dispute occurred at a time when it operated under its former name.  In this judgment, we shall refer to it as the Bank.

2.  In this action, the Plaintiff claims against the Bank for the breach of the terms of a letter of 16 October 2002 [“the Letter”] in failing to accept Option 1 in a debt restructuring proposal of 7 October 2002 in respect of the indebtedness of Century City International Holdings Limited [“CC”] towards the Bank.  Instead of choosing Option 1, on 30 September 2004 the Bank chose an Additional Option which was offered by CC on or about 10 September 2004.  Though that offer was made to financial creditors save for those with settled arrangements, CC did not take the stance that the Additional Option was not open for acceptance by the Bank.  At the same time, in a letter of 30 September 2004 Tommy Lam of CC stated that as far as the prior arrangement between the Plaintiff and the Bank was concerned, the rights of the Plaintiff were reserved.  As the Bank did not proceed under Option 1, the Plaintiff claims that because of that he lost the right to acquire a total of 444,120,000 Paliburg shares at $37.01 million by exercising an option to purchase the Restructured Loan as specified in the Letter [“the Cancellation Option”]. 

3.  After trial, in a judgment handed down on 8 January 2016 Ng J found in favour of the Plaintiff and awarded him damages in the sum of $51,719,000.  The Bank appealed against the judgment and the Plaintiff cross-appealed in respect of the quantum of damages awarded.

4.  We heard the appeal on 15 and 16 January 2019 and reserved our judgment.  This is our judgment to which each member of the Court has contributed.

5.  The Defendant was at all material times the chairman and ultimate major shareholder of CC and two other listed companies in the Paliburg group [“the Group”].  The relationship between the parties and the underlying developments leading to the issue of the Letter were set out by Ng J at [2] to [10] and [26] to [42] of the judgment below. 

6.  The background to the signing of the Letter was as follows.  The Bank had advanced loans to companies[1] within the Group secured by shares in Paliburg Holdings Limited [“Paliburg”], a subsidiary of CC.  Since late 1998, the Group was in financial difficulties and it had entered into negotiations with its financial creditors, including the Bank.  These financial creditors entered into a series of standstill agreements to facilitate the negotiations.  The last of the standstill agreements expired on 30 June 2001.

7.  The financial position of the Group did not improve and at the end of 2001, Paliburg defaulted in redeeming two series of bonds.  Thus, in addition to the existing financial creditors, the Group also faced pressure from the bondholders.  A settlement proposal was put forward by the Group to the bondholders in public joint announcements made on 16 November 2001 and 26 April 2002.  The proposal was finalized and on 2 August 2002 Paliburg and Regal Hotels International Holdings Limited (another listed company in the Group) entered into the Stanley Transfer Agreement for that purpose.  A joint announcement regarding that was made on 2 August 2002.  

8.  In that joint announcement, the Group further revealed that Paliburg had entered into an agreement for acquiring the entire share capital of Venture Perfect Investments Limited from companies connected with the Plaintiff [“the Paliburg Acquisition”].  The essence of the Paliburg Acquisition and the objection of the Bank to that transaction were highlighted by the Judge at [29] to [36] of the judgment.  For present purposes, it suffices to note that:

(a)  The Bank was concerned that the value of its security over the Paliburg shares it held would be diminished by the dilution of the shareholdings in Paliburg caused by the Paliburg Acquisition with the issue of Paliburg Convertible Preference Shares to the vendors;

(b)  The Bank was in a position to block the approval for the Paliburg Acquisition; and

(c)  The Bank was prepared to proceed with presentation of a winding up petition against CC and gave notice to such effect to CC.

9.  Though there were attempts from CC to persuade the Bank that the Paliburg Acquisition was necessary for the restructuring of the Group’s indebtedness, the Bank was not convinced.  In a letter of 2 September 2002 to CC, the Vice President of the Bank summed up its position as follows:

“ We have decided that it would be wrong for us to permit these connected transactions to proceed. Unless within 5 days of the date of this letter, they are publicity (sic) aborted, and satisfactory steps taken in their place to safeguard the interests of creditors and non-controlling shareholders, we intend to present a petition for the winding up of Century International Holdings Limited on the basis of the sums due on its guarantees to us. We will today be making formal demand under those guarantees.”

10.  By 2 September 2002, the amount of indebtedness of these companies towards the Bank ran to about $228 million whilst the security it held (by way of 370.1 million Paliburg shares) had a market value of about $22.2 million.  The Bank was not the only financial creditor of the Group[2].  In October 2002, the overall indebtedness of the Group was about $1.5 billion of which $1.1 billion was owed to financial creditors.  By virtue of the guarantee by CC, defaults in repayment of the loans to the companies in the Group gave the Bank the right to demand CC to repay (which the Bank did on 2 September 2002).  The failure to meet such demand put the Bank in a position to present a winding up petition against CC (which the Bank threatened to do in letters of 2 and 27 September 2002). 

11.  There were ensuing negotiations and in the evening of 16 September 2002 the Plaintiff offered his personal guarantee up to $37 million[3].  Though the Bank withheld presentation of a winding up petition, on 25 September 2002 it still did not find the offer from CC and the Plaintiff adequate to meet its concerns.  In a letter from the Bank to CC of that date, the Bank insisted on four pre-conditions[4] (previously put forward at a meeting on 16 September 2002) for withholding presentation of a petition.  

12.  On 26 September 2002, the independent financial adviser engaged by the Group, Deloitte Touche Tohmatsu [“DTT”], sent to the financial creditors a debt restructuring proposal in respect of CC [“the 2002 DRP”].  That proposal had different options for secured indebtedness and unsecured indebtedness.  For secured indebtedness, there were two options for the financial creditors to choose:

Option 1:   swap their indebtedness into a new bilateral secured 2-year loan at HK$0.10 for each one Paliburg share currently pledged.  Additionally, all secured lenders, except for HSBC, would receive CC Exchangeable Notes at HK$0.10 for each one Paliburg share currently pledged.  The Exchangeable Two-year Notes, which would be unsecured, would be exchangeable into Paliburg Shares at an exchange price of HK$0.30;

Option 2:   swap their indebtedness into CC Convertible Preference Shares (Series B) at a ratio of 5 preference shares for one Paliburg share currently pledged.

13.  For unsecured indebtedness, there were three options.  As the claim of the Plaintiff was in respect of obligations stemming from secured indebtedness, we need not be concerned with those options.

14.  The 2002 DRP was presented at a financial creditors meeting on 7 October 2002.  At the meeting, the Plaintiff indicated that the proposal was premised upon the Paliburg Acquisition being approved. Without the support from the financial creditors, he would withdraw the Paliburg Acquisition.   

15.  After further negotiations, three documents were executed on 16 October 2002 in respect of the loans advanced by the Bank:

(a)  The Letter signed by the Plaintiff and the Defendant;

(b)  A personal guarantee given by the Plaintiff to the Defendant in respect of the $228 million indebtedness of the two subsidiaries subject to the limit of $37.1 million.  The guarantee would only become effective upon the completion of the Paliburg Acquisition.  It would terminate upon the implementation of the Debt Restructuring Proposal when it would be replaced by another guarantee to be given by the Plaintiff in respect of the Restructured Loan; and

(c)  An undertaking by Grand Modern Investment Limited (a company under the ultimate control of the Plaintiff) to charge the Top-Up shares to the Bank as additional security upon the completion of the Paliburg Acquisition.

16.  As we shall explain, the resolution of this appeal hinges upon the construction of the Letter.  We set out the full terms of the Letter below:

“ Dear Sirs,

I refer to the personal guarantee to be given by me (the “Guarantor”) in the form attached (the “Guarantee”).

As referred to in the Guarantee, Century City presented a debt restructuring proposal on 7 October 2002 to its financial creditors (“Debt Restructuring Proposal”).

Unless the context requires otherwise, terms and expressions defined in the Guarantee and the Debt Restructuring Proposal shall have the same meanings when used herein.

1. International Bank of Asia Limited (the “Lender”) in principle will, subject to execution of formal documentation to the satisfaction of the Lender, accept Option 1 in respect of the Secured Debt and Option 1 in respect of the Unsecured Debt under the Debt Restructuring Proposal. This will involve in respect of the Secured Debt:

(a) a two years term loan of HK$37,010,000 on normal commercial terms satisfactory to the Lender including interest to be extended by the Lender to Century City; and

(b) HK$37,010,000 Exchangeable Notes to be issued to the Lender by Century City, such Exchangeable Notes being exchangeable into 148,040,000 ordinary shares in Paliburg.

2. On the occurrence of one of the following events:

(a) the implementation of completion of the Debt Restructuring Proposal; or

(b) Century City and the Lender among themselves entering into any formal settlement or restructuring agreements in respect of the Loans, or

(c) The Borrowers and the Lender among themselves entering into any formal settlement or restructuring agreements in respect of the Loans,

and provided that in each case:

(i)  Exchangeable Notes have been issued by Century City to the Lender; and

(ii)  the Guarantor has provided the Lender with a new personal guarantee as provided in clause 4.1 of the Guarantee in respect of any loan to be created by the Lender under the Debt Restructuring Proposal or the formal settlement or restructuring agreements as contemplated in paragraph 2(b) or paragraph 2(c) above (as the case may be)(“Restructured Loan”),

then the Lender will transfer 50 per cent. of the Exchangeable Notes issued to it to the Guarantor or such other persons as directed by the Guarantor upon completion of the purchase of the Restructured Loan in full as referred to in paragraph 4 below.

3. The Guarantor will have the right at any time during a period of two years from the creation of the Restructured Loan on seven days’ prior notice to purchase or procure the purchase of all or part of the Restructured Loan at a price equal to its principal amount or part thereof together with all unpaid interest accrued thereon.

4. Upon completion of the purchase of the Restructured Loan in full in accordance with paragraph 3 above, the Lender will assign and transfer all the Paliburg ordinary shares and/or convertible and/or exchangeable preference shares held as securities for the restructured Loan together with 50 per cent. of the Exchangeable Notes referred to in paragraph 2 above to the guarantor or such other persons as he may nominate.  For the avoidance of doubt, the Lender shall be entitled to retain 50 per cent. of the Exchangeable Notes issued to it notwithstanding and after completion of the purchase of the Restructured Loan in full.

5. The Lender agrees that if the Guarantor or his nominee purchases HK$37,010,000 of the principal amount outstanding of the Loans for a sum not less than the amount referred to in clause 2.2 of the guarantee, the Lender shall upon completion of such purchase assign and transfer to the purchaser all the Paliburg ordinary shares and/or convertible and/or exchangeable preference shares held by the Lender as securities for the Loans.

6. This letter shall be governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region.

Please confirm your agreement by countersigning and enclosed copy of this letter.”

Construction of the Letter

17.  Focusing on Clause 1 in the Letter, the Judge held that it created binding legal obligations[5].  He then rejected the construction of Clause 1 advanced by the then counsel for the Bank[6] that it only created an obligation conditional upon the Bank being satisfied with the formal documentation which the Bank had absolute discretion to reject on commercial grounds[7].  He held that the Bank could only reject Option 1 if it was genuinely dissatisfied with the documentation as opposed to commercial considerations[8].  As the Bank was evidently satisfied with the Debt Restructuring Agreement by signing on it[9], it could not rely on this condition to escape from the legal obligation to accept Option 1.  

18.  Counsel for the Bank also contended that it was not obliged to accept Option 1 because there had been changes in the restructuring agreement with the Additional Option being offered in September 2004.  He argued that there was an implied condition subsequent that there should be equal treatment of the Bank with other secured creditors.  Thus, if an Additional Option was available to the other financial creditors, the Bank should also have that option. 

19.  The Judge called this the DRP Implied Condition.  He rejected this contention[10] as he did not consider that such condition was necessary to give business efficacy to the agreement embodied in the Letter.  Nor did he consider the condition to be so obvious that “it goes without saying”.  He placed emphasis on the additional benefit of the personal guarantee of the Plaintiff which was conferred on the Bank but which was not available to other financial creditors and took the view that the Letter and the Guarantee constituted a “bundled deal”.   

20.  Before us, Mr Yu (who did not appear in the court below) argued the equal treatment point placing more emphasis on the context in which Option 1 was presented to the Bank when it was asked to execute the Letter.  As Mr Yu quite rightly pointed out, an important aspect of the context of the Letter was that there were, as we have seen above, only two options (for secured creditors) in the 2002 DRP.  Given that context, Mr Yu submitted that the words imposing the obligation were not used with reference to the possibility of the particular contingency which arose afterwards with the introduction of the Additional Option.  In other words, the Bank was only obliged to go for Option 1 in circumstances where only the two options in the 2002 DRP were open to the financial creditors.  This underlying state of affairs was the foundation for the contract embodied in the Letter.

21.  Counsel therefore submitted that an officious bystander would say that it goes without saying that if there were a change in the options available the Bank would no longer be bound to choose Option 1.  Mr Yu said this conclusion can be arrived at either on the basis of construction or implied term.

22.  On the other hand, Mr Jat submitted that the Judge was correct in rejecting the DRP Implied Condition as it was not necessary to have the same to give business efficacy to the agreement between the Plaintiff and the Bank and it was not so obvious as to go without saying. He placed emphasis that the Letter was part of the bundled deal which conferred a distinct benefit on the Bank by way of the personal guarantee of the Plaintiff.  Thus, the expectation was that the Bank would be treated differently from the other financial creditors.  The Bank was aware that the Plaintiff would not give his personal guarantee but for the “call option” and the Bank could not provide such “call option” unless it accepted Option 1.

23.  On the construction of the Letter, Mr Jat submitted that the reference to the Debt Restructuring Proposal was merely descriptive of Option 1.  It did not, counsel said, give the Bank the right to avoid its obligation to choose Option 1 if there were changes to the Debt Restructuring Proposal.

24.  We shall first discuss the proper approach in addressing the issues of construction and implied term.  Counsel referred to two decisions of Supreme Court of United Kingdom and two Privy Council decisions on these topics.  In Attorney General of Belize v Belize Telcom [2009] 1 WLR 1998 at [16] to [27], Lord Hoffmann observed that the implication of a term is an exercise in the construction of the instrument as a whole[11] and the ultimate question is what the instrument, read as a whole against the relevant background, would reasonably be understood to mean[12].  His Lordship, giving the judgment of the Board, highlighted the danger of detaching the phrase “necessary to give business efficacy” from the basic process of construction of the instrument[13]. 

25.  Those observations have given rise to much academic interest and discussion on the development of the law on implied term.  Subsequently, in Marks & Spencer plc v BNP Paribas Securities Services [2016] AC 742, the Supreme Court clarified that the law on implied term had not been changed.  Lord Neuberger PSC (with whom Lord Clarke, Lord Sumption and Lord Hodge JJSC agreed) explained the inter-relationship between the construction of the express terms and the implication of terms based on the presumed intention of the parties at [26] to [31].  His Lordship also cautioned against reading too much into the observations of Lord Hoffmann in Belize Telecom:

“26   I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. However, Lord Hoffmann’s analysis in the Belize Telecom case could obscure the fact that construing the words used and implying additional words are different processes governed by different rules.

27   Of course, it is fair to say that the factors to be taken into account on an issue of construction, namely the words used in the contract, the surrounding circumstances known to both parties at the time of the contract, commercial common sense, and the reasonable reader or reasonable parties, are also taken into account on an issue of implication. However, that does not mean that the exercise of implication should be properly classified as part of the exercise of interpretation, let alone that it should be carried out at the same time as interpretation. When one is implying a term or a phrase, one is not construing words, as the words to be implied are ex hypothesi not there to be construed; and to speak of construing the contract as a whole, including the implied terms, is not helpful, not least because it begs the question as to what construction actually means in this context.

28   In most, possibly all, disputes about whether a term should be implied into a contract, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Until one has decided what the parties have expressly agreed, it is difficult to see how one can set about deciding whether a term should be implied and if so what term. This appeal is just such a case. Further, given that it is a cardinal rule that no term can be implied into a contract if it contradicts an express term, it would seem logically to follow that, until the express terms of a contract have been construed, it is, at least normally, not sensibly possible to decide whether a further term should be implied. Having said that, I accept Lord Carnwath JSC’s point in paragraph 71 to the extent that in some cases it could conceivably be appropriate to reconsider the interpretation of the express terms of a contract once one has decided whether to imply a term, but, even if that is right, it does not alter the fact that the express terms of a contract must be interpreted before one can consider any question of implication.

29   In any event, the process of implication involves a rather different exercise from that of construction. As Bingham MR trenchantly explained in the Philips case [1995] EMLR472, 481:

‘ The courts’ usual role in contractual interpretation is, by resolving

ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power.’

…

31   It is true that the Belize Telecom case [2009] 1 WLR 1988 was a unanimous decision of the Judicial Committee of the Privy Council and that the judgment was given by Lord Hoffmann, whose contributions in so many areas of law have been outstanding.  However, it is apparent that Lord Hoffmann’s observations in the Belize Telecom case, at paragraphs 17-27, are open to more than one interpretation on the two points identified in paragraphs 23-24 and 25-30 above, and that some of those interpretations are wrong in law.  In those circumstances, the right course for us to take is to say that those observations should henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms.”

26.  Lord Carnwath JSC surveyed the judicial authorities decided after Belize Telecom and concluded that none of them regarded there to have been any relaxation of the traditional, highly restrictive approach to implication of terms[14].  At [68] to [71], His Lordship explained that there was no reason to depart from what had been said in Belize Telecom and reiterated that it was not necessary to draw a sharp distinction between interpretation and implication, emphasizing that the exercise of contractual interpretation is an iterative rather than sequential process:

“ 71. … The case seems if anything to illustrate an ‘iterative’, rather than sequential, process: see Lord Grabiner QC, ‘The Iterative Process of Contractual Interpretation’ (2012) 128 LQR 41. The results of different interpretative techniques were considered and compared, in the light of the language used and its business context, to achieve a result which best represented the assumed intentions of the parties.”

27.  In the later decision of the Supreme Court of United Kingdom, Trump International Golf Club v Scottish Ministers [2016] 1 WLR 85, Lord Hodge JSC (with whom all other members of the court, including Lord Carnwath JSC, agreed) followed the approach of Lord Neuberger in Marks & Spencer plc v BNP Paribas Securities Services, supra.  At [35], His Lordship said:

“ Interpretation is not the same as the implication of terms. Interpretation of the words of a document is the precursor of implication. It forms the context in which the law may have to imply terms into a document, where the court concludes from its interpretation of the words used in the document that it must have been intended that the document would have a certain effect, although the words to give it that effect are absent …”

28.  In the same case, Lord Mance JSC cautioned against adopting a too rigid or sequential approach to the processes of consideration of the express terms and of consideration of the possibility of an implication.  The reasons were to be found at [42] and [44]:

“ 42. … Without derogating from the requirement to construe any contract as a whole, particular provisions of a contract may I think give rise to a necessary implication, which, once recognised, will itself throw light on the scope and meaning of other express provisions of the contract.

…

44.     … it appears to me helpful to recognize that, in a broad sense as Lord Neuberger and Lord Clarke of Stone-cum-Ebony JSC recognise in the Marks and Spencer case at paragraphs 26 and 76, the processes of consideration of express terms and of the possibility that an implication exists are all part of an overall, and potentially iterative, process of objective construction of the contract as a whole.”

29.  In light of these authorities, it must be recognized that construction of express terms and implication of terms involve different techniques.  Though the overall exercise is an iterative one, in most (if not all) cases it would be appropriate to start from the construction of the express terms by reference to the context and surrounding circumstances known to the parties.   

30.  In respect of the proper test for implication of term, Mr Jat referred us to the Court of Final Appeal’s judgment in Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381 where the requirements identified by Lord Simon in BP Refinery v Shire of Hastings (1978) 52 ALJR 20 were adopted:

“ ... for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

31.  These requirements were commented upon by Lord Neuberger in Marks & Spencer plc v BNP Paribas Securities Services, supra at [21]:

“ I would add six comments on the summary given by Lord Simon in the BP Refinery case 180 CLR 266, 283 as extended by Bingham MR in the Philips case [1995] EMLR 472 and exemplified in the APJ Priti [1987] 2 Lloyd’s Rep 37. First, in Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 459, Lord Steyn rightly observed that the implication of a term was ‘not critically dependent on proof of an actual intention of the parties’ when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time at which they were contracting. Secondly, a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term. However, and thirdly, it is questionable whether Lord Simon’s first requirement, reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable. Fourthly, as Lord Hoffmann I think suggested in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, paragraph 27, although Lord Simon’s requirements are otherwise cumulative, I would accept that business necessity and obviousness, his second and third requirements, can be alternatives in the sense that only one of them needs to be satisfied, although I suspect that in practice it would be a rare case where only one of those two requirements would be satisfied. Fifthly, if one approaches the issue by reference to the officious bystander, it is ‘vital to formulate the question to be posed by [him] with the utmost care’, to quote from Lewison, The Interpretation of Contracts 5th ed (2011), p 300, paragraph 6.09. Sixthly, necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of ‘absolute necessity’, not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon’s second requirement is, as suggested by Lord Sumption JSC in argument, that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.”

32.  We respectfully agree with these comments.  In the more recent decision of the Privy Council in Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2, Lord Hughes (with whom Lord Neuberger, Lord Clarke and Lord Carnwath agreed) summarized the law at [7]:

“ It is enough to reiterate that the process of implying a term into the contract must not become the re-writing of the contract in a way which the court believes to be reasonable, or which the court prefers to the agreement which the parties have negotiated.  A term is to be implied only if it is necessary to make the contract work, and this it may be if (i) it is so obvious that it goes without saying (and the parties, although they did not, ex hypothesi, apply their minds to the point, would have rounded on the notional officious bystander to say, and with one voice, “Oh, of course”) and/or (ii) it is necessary to give the contract business efficacy.  Usually the outcome of either approach will be the same.  The concept of necessity must not be watered down.  Necessity is not established by showing that the contract would be improved by the addition.  The fairness or equity of a suggested implied term is an essential but not a sufficient pre-condition for inclusion.  And if there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement.”

33.  With these authorities in mind, the starting point must be the examination of the express provisions in the Letter before addressing the question of implied term by reference to the stringent requirements as discussed in the cases cited above.

34.  Paragraph 1 of the Letter provided that the Bank will, in principle, subject to execution of formal documentation to the satisfaction of the Bank, accept Option 1 in respect of the Secured Debt under the Debt Restructuring Proposal.  The Debt Restructuring Proposal was defined in the Letter as the 2002 DRP, not any DRP which might be offered to the financial creditors. 

35.  Paragraph 2 in the Letter set out the events which would trigger the Bank’s obligation to transfer 50% of the Exchangeable Notes to the Plaintiff.  The relevant triggering event under Paragraph 2(a) was the implementation or completion of the 2002 DRP, not any DRP which might be offered to the financial creditors.  In the present context, Paragraph 2(b) and (c) are not relevant since there had not been any bilateral settlement or restricting agreements between the Bank and CC or the borrowers.

36.  As stipulated in Paragraph 2, the obligation to transfer the Exchangeable Notes would only arise from the Plaintiff’s purchase of the Restructured Loan which were to be created under the 2002 DRP, not any loan that was to be created under other DRPs.

37.  Thus, the right of the Plaintiff to purchase the Restructured Loan under paragraph 3 and the obligation of the Bank to transfer Paliburg shares and 50% of the Exchangeable Notes to the Plaintiff under Paragraph 4 was premised upon such a loan being created upon the implementation of the 2002 DRP.

38.  Since the relevant Debt Restructuring Proposal was specifically and narrowly defined in the Letter as the 2002 DRP without provision for the variation or replacement of the 2002 DRP by another DRP which might be put forward subsequently, the Bank’s obligation in all these respects would only arise upon the approval and implementation of the 2002 DRP.

39.  As submitted by Mr Yu (and not disputed by Mr Jat), there could be different considerations as to the acceptability of Option 1 when compared with different alternative options.  The actual market value of the Exchangeable Notes could vary depending on the terms offered by way of alternative option.  Also, the commercial attractiveness of Option 1 vis-à-vis the alternative option would also vary if different alternative options were put forward.

40.  Hence, according to the terms of the Letter, the obligation assumed by the Bank under Paragraph 1 of the Letter was to choose Option 1 under the 2002 DRP.  As such, it was an obligation to make such a choice upon the contingency that the 2002 DRP was approved and implemented. This is set out by the express terms in the Letter without any need to refer to any implied term.

41.  In construing the Letter, the Judge concentrated on the qualification as to the satisfaction of the Bank with the formal documentation and failed to have regard to the reference to the 2002 DRP in the obligation of the Bank to choose Option 1. 

42.  As mentioned, counsel for the Bank only advanced a contention based on the Additional Option by reference to the DRP Implied Condition and failed to draw the Judge’s attention to the express references to the 2002 DRP in the Letter as highlighted above. 

43.  We cannot accept Mr Jat’s submission that the references to the 2002 DRP in the Letter were only part of the description of Option 1.  As explained, the obligation of the Bank to choose Option 1 was contingent upon the approval and implementation of the 2002 DRP.  It was an obligation to accept Option 1 when the choice between the 2 options under the 2002 DRP were given.  It was not an immediate obligation on the part of the Bank to settle with CC in accordance with the terms of Option 1. 

44.  If no restructuring of debts with the financial creditors could be achieved, it is obvious that Paragraph 1 of the Letter would not give rise to any obligation on the part of the Bank to act in accordance with Option 1 as if there were a restructuring of the debts with the Bank alone.  By virtue of the specific definition of the DRP as the 2002 DRP, the same consequence would fall on the parties if the restructuring of debts was achieved by a scheme other than the 2002 DRP.

45.  We are also not persuaded that the immediate giving of a personal guarantee by the Plaintiff to the Bank and “the bundled deal” have any bearing on the construction of the obligation of the Bank under Paragraph 1 of the Letter.  The Judge placed reliance on the guarantee and the “bundled deal” to conclude that the Letter created binding legal obligations on the part of the Bank and resolved the Dissatisfaction Point in favour of the Plaintiff.  Despite the submissions of Mr Yu to the contrary, we have no problem with such reasoning.  But the resolution of these points cannot assist in identifying the precise extent of the obligation undertaken by the Bank under the Letter. 

46.  As analysed above, the extent of such obligation was specifically defined by reference to the implementation of the 2002 DRP. Hence, in giving the personal guarantee, the Plaintiff assumed the risk that the benefit of the Call Option could not inure to him if the 2002 DRP could not be implemented.  This can be borne out by testing the matter with reference to the scenario where no restructuring was achieved subsequently.  The personal guarantee given by the Plaintiff would remain in place notwithstanding the failure to achieve any restructuring.  In our judgment, given the wording in the Letter, the same analysis is applicable when the 2002 DRP did not materialize.

47.  It should also be noted that as at the date when the Letter was executed, it was uncertain if the 2002 DRP or any other DRP would be approved.  As stated in a letter from the Plaintiff to the Bank on 11 October 2002[15], the consent of all the financial creditors was required for any DRP and it was impossible to procure the signing of a DRP before the deadline of 12 October 2002 originally proposed by the Plaintiff. 

48.  In October 2002, the top priority for the Plaintiff and the Paliburg Group was to push forward with the implementation of the Paliburg Acquisition without which the 2002 DRP would not be viable.  This was reflected in the letter of 11 October 2002 from the Plaintiff to the Bank.

49.  As it happened, the Paliburg Acquisition was approved on 16 October 2002 and completed on 11 December 2002.  Despite that, the 2002 DRP was not approved by the financial creditors.  The signing of the DRP was deferred, despite rounds of negotiations, from 2002 to 2004.  In particular, up to August 2004, the consent of a financial creditor called Shenyin Wanguo was not forthcoming[16].  By a letter of 24 September 2004, CC advised HSBC (the lead bank for all the financial creditors) that an additional option had been offered to Shenyin Wanguo and that a similar option would be offered to other financial creditors save those with settled arrangements.

50.  Thus, at the time when the Letter was executed and the personal guarantee of the Plaintiff was given to the Bank on 16 October 2002, the signing and completion of the 2002 DRP was by no means a certainty. Despite that, the Plaintiff gave the personal guarantee to the Bank to facilitate the Paliburg Acquisition’s approval. 

51.  It would have been possible to draft the Letter in such a way to encompass the contingency of variation of the 2002 DRP with the possibility of additional options being offered so that the Bank would be bound to choose Option 1 irrespective of such variations.  But the Letter was not drafted in such a way (and we cannot tell if such a draft would have been accepted by the Bank), and it is not open to the court to change the meaning of the terms in the Letter whether by way of construction or implication of terms.

52.  As regards the Judge’s rejection of the DRP Implied Condition, it was based on a flawed construction of the express terms (probably due to the failure of the then counsel for the Bank highlighted at [42] above).  In our judgment, in the present context, given the express references to the 2002 DRP in the Letter, it is, with respect, rather unhelpful and unnecessary to analyse the obligation of the Bank in terms of the convoluted DRP Implied Condition. 

53.  On our construction of the Letter, the Bank had not breached its obligations undertaken therein since the 2002 DRP had not materialized.

54.  As Mr Jat fairly accepted, the estoppel argument cannot avail his client if we were to conclude (as we have) that the Bank’s obligation to accept Option 1 was contingent upon the 2002 DRP being approved and implemented.  The Additional Option was only made known to the Bank on or about 24 September 2004.  The Bank informed CC on 30 September 2004 that they would accept the Additional Option.  There does not appear to be evidence of any representation by the Bank, after 24 September 2004, that it would still choose Option 1.  Nor does there seem to be any evidence of any detrimental reliance on any such representation on the part of CC between 24 and 30 September 2004.

55.  For the above reasons, the Bank must succeed in resisting the claims of the Plaintiff.  In the circumstances, we do not find it necessary or useful to deal with the other grounds of appeal run by Mr Yu.

56.  We allow the appeal and set aside the judgment below.

Quantum

57.  On the cross-appeal by the Plaintiff, given our conclusion on the Bank’s appeal and Mr Jat’s fair concession regarding the estoppel, we would briefly address the question of quantum.

58.  The Judge assessed damages based on the date of breach (30 September 2004) at $51,719,000.  He rejected the plaintiff’s claim for damages which were to be assessed as at 15 December 2006 at $125,094,000.  The basis of the plaintiff’s valuation is summarized by the Judge as follows :

“ 96.  In the present case, the date of the breach would be 30 September 2004 when the Bank chose the Additional Option instead of Option 1. Mr Lo’s case is that, had the Bank honoured its obligation elected Option 1, he would have been given the right (“Right”) to acquire a total of 444,120,000 Paliburg shares (“Shares”) (370,100,000 Paliburg shares originally pledged plus 74,020,000 Paliburg shares under 50% of the Exchangeable Notes) upon purchasing the Restructured Loan from the Bank by paying HK$37.01 million. Further, if Mr Lo had exercised the Right, the earliest date on which he would have obtained the Shares would be 15 December 2006, which was the maturity date of the Restructured Loan and the Exchangeable Notes. On that date, Mr Lo could have exercised the Cancellation Option to retain the pledged Paliburg shares to extinguish the Restructured Loan and also convert 50% of the Exchangeable Notes into Paliburg shares.”

59.  The Judge held that :

“ 122. Given that the present case is concerned with the failure of the Bank to transfer the Right to Mr Lo, rather than the Shares themselves, it is only logical that the appropriate basis of assessing damages should be valuing the loss of the Right, rather than the loss of the Shares. The Right, in substance a call option, is as much a chose in action as the Shares. On the evidence, there are established valuation methodologies to value call options as well as shares. In fact, the parties’ expert even managed to agree on the fair market value of the Right. In these circumstances, it is difficult to justify not assessing damages by reference to the loss of the Right.”

60.  Earlier the Judge held that :

“ 99. Subject to some immaterial differences, the Bank’s expert agreed with the methodology, assumption and parameters of Mr Lo’s expert. Importantly, both experts agreed that the fair market value of the Right as at 30 September 2004 was HK$51,719,000 and that as at 9 March 2005 [i.e. date of the writ] was HK$65,307,000.”

61.  In essence, Mr Jat’s submission is that there is no available market for the plaintiff to acquire the right.  Hence the ‘market value’ method of assessing damages on the date of breach of contract should not be adopted.  He further relied on Hooper v Oates [2014] Ch 287 and submitted that since the defendant had in effect argued that the plaintiff had not taken reasonable steps to mitigate his loss by going to the market to acquire the shares, the burden is on the defendant to plead this and adduce evidence on it.

62.  We are unable to accept Mr Jat’s submission.  The normal measure of damages has been summarised by McGregor on Damages 19^th Ed. paragraphs 4-002 and 4-004 :

“ 4-002 Contracts are concerned with the mutual rendering of benefits. If one party makes default in performing his side of the contract, then the basic loss to the other party is the market value of the benefit of which he has been deprived through the breach. Put shortly, the claimant is entitled to compensation for the loss of his bargain. This is what may best be called the normal measure of damages in contract.

…

4-004 (i) Non-performance. Where the breach of contract consists in failure to transfer property, the basic loss is the market value of the property, always deducting the contract price if it has not already been paid to the person in breach.” (emphasis added)

63.  As rightly submitted by Mr Yu, since it is the plaintiff who asserts this normal measure of damages should not be adopted because of his actual loss, the burden must be on him to show that there was no available market on the date of breach for him to acquire this right.  The plaintiff’s case before the Judge was that his ‘investment value’ method of assessment should be adopted.  He did not rely, nor did he adduce evidence, on the lack of an available market.  The plaintiff’s ‘investment value’ method of assessment was considered and properly rejected by the Judge.  In the circumstances, the Judge was clearly entitled to adopt the ‘market value’ method of assessment.  Further the experts for both parties had proceeded on the basis that there was an available market to acquire the right.  Realistically although the loss is the call option, the underlying subject matter of this call option is the Paliburg shares.  On this basis, the experts had no difficulty in working out the ‘market value’ of the right on the date of breach.

64.  The cross appeal is without merits and should in any event be dismissed.

Disposition 

65.  The Bank had paid the judgment sum and sought to recover the same with interest.  As held in MKKWH v RKSH [2018] HKCA 932, this Court can award interest for the sum so recovered. 

66.  We make an order in terms of the draft submitted by solicitors for the Bank on 15 February 2018.

67.  We wish to hear from the parties on the question of costs unless they can agree on the same.  We direct the parties to liaise with each other for that purpose.  If agreement cannot be reached within 28 days from the handing down of the judgment, the following directions shall apply:

(a)  The Bank shall lodge and serve submissions on costs (not more than 5 pages) within 42 days from the handing down of this judgment;

(b)  The Plaintiff shall lodge and serve submissions (not more than 10 pages) within 14 days thereafter;

68.  The Bank shall lodge and serve submissions in reply (not more than 10 pages) within 14 days after the Plaintiff’s submissions.