XCHRX JOY & PEACE.COM INC. v. TOPSHOW CONSULTANTS LTD.

HCA 3773/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3773 OF 2001

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J U D G M E N T

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1. This is an application for summary judgment brought under Order 14 rule 1 and Order 14A RHC.

History

2. Both parties are limited companies registered in the BVI. At the material time the defendant was the registered holder of 20 million shares in a company called Chinakids. net Limited (CNL) which was a member of a group of companies called Chinakids Group (CG) of which the parent company is Chinakids Holdings Limited (CHL).

3. There came a time when CHL decided to pursue a listing on the Growth Enterprise Market (GEM) in Hong Kong. Those in charge prepared for the purpose a draft prospectus. A copy produced and relied upon in these proceedings is not dated, save that the year 2000 is referred to in an accountant's report annexed. But it included a section headed "Expected Time-table". That recorded that applications for shares had to be in by 31 March 2000, that there would be an allotment announcement on 5 April 2000 and dealings in shares on the GEM could begin on 7 April 2000. The proposed listing entailed a reorganization of the CG. A feature of that was that CNL's business and assets would be absorbed by CHL, in consideration for CNL's shareholders being allotted shares in appropriate proportions in CHL.

4. In anticipation of this reorganization the defendant as vendor and the plaintiff as purchaser struck a deal the terms of which were reduced into an agreement dated 22 March 2000. That agreement is central to this litigation. Essential terms are as follows :

(1) The defendant agreed to sell and the plaintiff to purchase 25% of the defendant's shares in CHL allotted to it in terms of the intended reorganization;

(2) the purchase price of US$800,000 was due and payable on or before 20 March 2000;

(3) there was reference to the intention to pursue a listing on the GEM, but the planned reorganization and the sale and purchase was to proceed whether or not the listing succeeded;

(4) there was a clause whose terms I repeat in full :

"1.5 The Vendor represents and warrants that the information of [CHL] including its corporate structure and business operation, as stated in the latest draft prospectus of [CHL] for purpose of the listing are true and accurate without material omission."

(It is not disputed that the draft prospectus to which I have alluded is the document referred to.)

(5) upon the conversion of interest the defendant was required to formalize the transfer of 25% of its allotment in CHL and to deliver such shares to the plaintiff;

(6) there was a provision for remedies available to each party on default by the other; rescission was not excluded;

(7) the agreement was expressed to be the entire agreement, replacing any prior discussions, representation, understanding or agreement of any kind whatsoever;

(8) time was expressly made of the essence.

5. The plaintiff paid the purchase price on 26 March 2000. The listing was not successful. By 2 May 2001 the reorganization had not been completed; thus the defendant had not by then delivered to the plaintiff the shares in CHL the plaintiff had bought. By letter of that date by its solicitors the plaintiff alleged that the defendant was in breach of the agreement in that the reorganization and the delivery of its shares purchased in CHL had not been carried out in a reasonable time and purported to rescind of the agreement. As a consequence of that it sought reimbursement of the sum of US$800,000. It is worth noting that there was no magic about the date upon which the plaintiff announced rescission; in the words of counsel, Mr Chua, it finally decided that 'enough was enough'. I am told there was no notice or forewarning of the plaintiff's election. The defendant did not accept that it was in breach or refund the purchase price. The proceedings followed.

The Proceedings

6. The writ issued on 22 August 2001. The plaintiff claims breach of the agreement between the parties and asks for a declaration that it has validly rescinded the agreement and for a return of the US$800,000, interest, further or other relief and costs.

7. The defendant filed a defence dated 19 September 2001. It denies being in breach of the agreement. It denies there was any term whether express or implied that the reorganization and consequent allotment of shares in CHL would take place within a reasonable time; in any event, as the plaintiff well knew, it had no control over the timing. Although as at the date of its defence the reorganization had not by then been completed it was in the throes of taking place. The plaintiff was thus not entitled to rescind the agreement or to the relief sought.

8. Next the plaintiff by summons dated 17 October 2001 made this application, seeking to invoke the procedure for summary judgment under Orders 14 and 14A RHC for final judgment, as prayed for in the writ.

9. Affidavits were filed in support of and in opposition of the summons, and I come to these next.

The Evidence

10. Mr John Lee (Mr Lee) is a director and one of the two shareholders of the plaintiff. He filed an affidavit in support on 16 October 2001. Setting out the facts as already summarized, he went on to state, on the issue of time, as follows :-

"......by the very nature of the transactions in question, time must by necessary implication be of the essence, or, if not, the time for either the Listing or the Corporate Re-organization to have taken place has longed passed, for the following reasons. Firstly, the Agreement specifically provides (at Clause 5.2) that time shall be of the essence. Secondly, the nature of the business of the [CG] and the advanced status of the Group Re-organization. The nature of the business of the [CG] is detailed on pages 43 and 47 of the draft prospectus exhibited at "JLLW-2", where it is stated that the CG operates in the PRC as an internet technology provider and outside the PRC as an internet content provider and also engages in e-commerce. The advanced status of the Group Re-organization is detailed in the Accountants' Report on pages 112 to 123 of the draft prospectus exhibited at "JLLW-2". Thirdly, the volatility of the Growth Enterprise Market. There are now produced and shown to me marked Exhibit "JLLW-4" true copies of charts taken from Bloomberg L.P., showing the movements of the Hong Kong Growth Enterprise Market Index and two leading Growth Enterprise Market stocks, namely Tom.com Limited (stock code 8001) and Sunevision Holdings Limited (stock code 8008), for the period from 26th March 2000 to 8th October 2001. As this Honourable Court will note therefrom, there has been great volatility in the companies' shares which are traded on the Growth Enterprise Market in both the volume of turnovers and prices."

11. The evidence in reply and in opposition to the application came from Mr Alex Chan (Mr Chan) the solicitor representing the defendant and having conduct of its affairs and this action. He filed two affidavits, the first dated 3 November 2001. In that he made reference to the draft prospectus being in fact a draft and that the dates referred to under the head 'Expected Time-table', were targeted dates, upon which there could be no definite reliance. Furthermore, the listing and reorganization procedures were not undertaken by the defendant and so it had no control over the timing. He had reason to believe that once the listing was known not to succeed, the reorganization became a 'painstaking exercise as a lot of adjustments had to be made'.

12. By the date of his affidavit he had come to learn the reorganization was at an advanced stage and was scheduled to be complete by 16 November 2001. Referring to a telephone call made between Mr Lee and the beneficial owner and a director of the defendant, Mr George Shiuan, he gave an alternative reason for why the plaintiff now wants out. At paragraph 10 he stated :

"In relation to the Plaintiff's claim, I have been told by Mr Shiuan that Lee contacted him for the first time on the telephone in about the end of 2000 and that was the first time Mr Shiuan talked to Lee on the telephone about the Agreement. According to Mr Shiuan, Lee said that he did not want the shares and he then demanded refund of US$800,000 not on the basis of lapse of reasonable time after the Agreement but rather on the excuse that the world-wide plummeting of share prices of internet technology business."

13. In his second affidavit of 25 January 2002 he confirmed that reorganization was completed on 16 November 2001. On that date the parties became registered as shareholders of CHL, the plaintiff as to 1000 shares and the defendant 3000. By letter of 17 January 2002 the share certificate evidencing the plaintiff's holding was sent to its solicitors, who promptly returned it because the plaintiff no longer had an interest.

14. I now turn to consider the summary judgment applications.

Order 14 or 14A?

15. The plaintiff in a belt and braces approach seeks to invoke both orders. Order 14 is the appropriate course where the plaintiff claims that the defendant has failed to demonstrate that he has a defence or there are triable issues. If he is successful he is entitled to judgment forthwith thus avoiding the expense and delay of going to trial. The counter to that, if he fails, is that the defendant is given leave, conditionally or unconditionally, to defend, and the matter proceeds to trial in the usual way.

16. Order 14A rule 1 states in part :

"Determination of questions of law or construction (O.14A, r.1)

(1) The Court may upon the application of a party or of its own motion determine any question of law or construction of any document arising in any cause or matter at any stage of the proceedings where it appears to the Court that -

(a) such question is suitable for determination without a full trial of the action; and

(b) such determination will finally determine (subject only to any possible appeal) the entire cause or matter or any claim or issue therein.

(2) Upon such determination the Court may dismiss the cause or matter or make such order or judgment as it thinks just.

(3) The Court shall not determine any question under this Order unless the parties have either -

(a) had an opportunity of being heard on the question; or

(b) consented to an order or judgment on such determination."

17. Although not specifically spelt out, it is apparent that issues for determination are as follows :

(i) On a proper construction of the agreement, there being no express time limit for performance by the defendant, was it the parties' intention or an implied term that the reorganization and consequent transfer to the plaintiff would take place within a reasonable time of the date of agreement?

(ii) If so, by failing to comply within a reasonable time, was the defendant in breach, entitling the plaintiff to rescind, as it purported to do, on 2 May 2001?

18. This is an application to determine a question of construction, suggesting that it should properly be dealt with under Order 14A. Mr Li for the defendant did not concede that this was the proper time to deal with the question because, as he argued, there is the need to call further evidence and/or cross-examine. In effect be sought an order under Order 14 giving the defendant unconditional leave to defend so that disputes of fact can be resolved.

19. Having heard from the parties (under rule 1(3)a) I do not agree there are disputes of fact to be resolved. The outcome depends on a ruling as to the construction of the agreement. That expresses itself to be the entire agreement. I am satisfied that no further evidence or discovery would be of assistance or is necessary. Accordingly I propose to deal with the application under Order 14A.

20. I adopt, as my starting point, the text of Chitty on Contracts, 28th edition, beginning at 12.042:-

12.042 "Object of construction. The object of all construction of the terms of a written agreement is to discover therefrom the intention of the parties to the agreement. The rules which govern the construction of contracts are the same at law and in equity, for simple contracts and for specialties.

12.043 Intention of the parties. The task of ascertaining the intention of the parties must be approached objectively : the question is not what one or other of the parties meant or understood by the words used, but the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The cardinal presumption is that the parties have intended what they have in fact said, so that their words must be construed as they stand. That is to say the meaning of the document or of a particular part of it is to be sought in the document itself. One must consider the meaning of the words used, not what one may guess to be the intention of the parties. However, this is not to say that the meaning of the words in a written document must be ascertained by reference to the words of the document alone. In the modern law, the courts will, in principle, look at all the circumstances surrounding the making of the contract which would assist in determining how the language of the document would have been understood by a reasonable man.

12.044 Further it has long been accepted that the courts will not approach the task of construction with too nice a concentration upon individual words.

"The common and universal principle ought to be applied : namely, that [an agreement] ought to receive that construction which its language will admit, and which will best effectuate the intention of the parties, to be collected from the whole of the agreement, and that greater regard is to be had to the clear intention of the parties than to any particular words which they may have used in the expression of their intent." - Ford v Beech [1848] 11 QB 852, at p. 866.

21. In Jumbo King Limited v Faithful Properties Limited & Ors [1999] 2 HKCFAR 279 Lord Hoffmann said at p. 296 :-

"But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail."

22. Of course in this case there is not so much a linguistic problem but rather a linguistic vacuum, which the plaintiff says should be filled by the words it says will give commercial efficacy to the agreement and the intentions of the parties.

23. Again I turn to Chitty under the chapter head 'Implied Terms' beginning at 13.004 :-

13.004 "Intention of parties. In many cases, however, one or other of the parties will seek to imply a term from the wording of a particular contract and the facts and circumstances surrounding it. The court will be prepared to imply a term if there arises from the language of the contract itself, and the circumstances under which it is entered into, an inference that the parties must have intended the stipulation in question. An implication of this nature may be made in two situations : first, where it is necessary to give business efficacy to the contract, and, secondly, where the term implied represents the obvious, but unexpressed, intention of the parties. These two criteria often overlap and, in many cases, have been applied cumulatively, although it is submitted that they are, in fact, alternative grounds. Both, however, depend on the presumed intention of the parties.

13.005 Efficacy to contract. A term will be implied if it is necessary, in the business sense, to give efficacy to the contract. The general principle of law was thus stated by Bowen L.J. in The Moorcock [1889] 14 PD 64, at p. 68 :-

"Now, an implied warranty, or, as it is called, a covenant in law, as distinguished from an express contract or express warranty, really is in all cases founded upon the presumed intention of the parties, and upon reason. The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficacy to the transaction and preventing such a failure of consideration as cannot have been within the contemplation of either side; and I believe if one were to take all the cases, and there are many, of implied warranties or covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have."

In this situation, although there is an apparently complete bargain, the courts are willing to add a term on the ground that without it the contract will not work.

. . . . . .

13.007 Obvious inference from agreement. A term which has not been expressed may also be implied if it was so obviously a stipulation in the agreement that the parties must have intended it to form part of their contract. Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with a common, "Oh, of course". A term will not, however, thus be implied unless the court is satisfied that both parties would, as reasonable men, have agreed to it had it been suggested to them. The knowledge or ignorance of each party of the matter to be implied, or of the facts on which the implication is based, is therefore a relevant factor. Further, since the general presumption is that the parties have expressed every material term which they intended should govern their contract, whether oral or in writing, the court will only imply a term if it is one which must necessarily have been intended by them, and in particular will be reluctant to make any implication where the parties have entered into a carefully drafted written contract containing detailed terms agreed between them.

24. It is the presumption that the parties have expressed all that they intended to be bound by that the plaintiff by this application seeks to rebut.

25. Mr Chua put forward a number of grounds why on the evidence and in all the circumstances this has been achieved; I propose to deal with these in turn.

(a) "Were the listing to have succeeded, the draft prospectus' expected timetable targeted 5 April 2000, a scant 14 days after the date of the agreement: the agreement expressly provided that the reorganization and transfer would precede the listing. The parties surely intended to be committed to that sort of time frame." But the draft prospectus was just that, a draft. And the dates in the timetable were only, as headed, expected. In the absence of any express commitment in the agreement I fail to see how this should presuppose a timetable cast in stone upon which the parties by implication could rely. Further, although the draft prospectus is referred to in clause 1.5 already reproduced, a re-reading of the clause reveals that there is nothing in that clause which binds the defendant to any proposed timetable.

(b) "The purchaser was committed to pay the full purchase price on 20 March 2000 presupposing completion within a reasonable time." That invites the need to explore how the terms were negotiated. In the ordinary course this is not permitted, and is expressly forbidden in this agreement. As Lord Hoffmann said in Jumbo King (supra) :-

"If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other. The court is not privy to the negotiation of the agreement - evidence of such negotiations is inadmissible - and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession. Or one of the parties may simply have made a bad bargain."

(c) "Time was expressed to be of the essence. What is the purpose of this clause if not to commit both parties, the purchaser to pay the full price by due date, the vendor to pass title and deliver the shares within a time that was reasonable in all the circumstances, say a few weeks? Put another way, why would there be such a clause if there was, effectively, no time limit?" Where in a contract time is expressly stipulated to be of the essence or where because of the nature of the contract it is implicit that time shall be of the essence the parties are obliged strictly to observe the dates upon which performance is to take place, or risk being in breach. The difficulty about applying this proposition to this case is that the parties have not stipulated a date on or by which there is to be performance. Time can hardly be said to be of the essence when there is no contracted date. And there is the practical difficulty of establishing just when the date by which there must be performance has expired; "after a few weeks" is far too vague. I interpret the phrase to commit the parties to perform strictly within the time frames that are expressly provided for. This would require payment of the purchase price by the stated date (in fact it was paid six days late but no point is made of this) and for the defendant forthwith upon completion of the reorganization to complete the transfer of shares and other formalities. There is no evidence that it has not done so.

(d) "The nature of the business of CHL was arguably high risk and volatile, being an internet technology provider and based in an emerging market (the PRC), giving rise to fluctuations in the value of its stock. It would be against business efficacy and commonsense for there to be a time frame beyond a reasonable time for completion; weeks not months or years." I accept that Mr Lee's averments to this effect were not countered, and that investments on the GEM have a greater risk factor than the norm. But if this was to be recognized in a need for urgency why not expressly bargain for it? There is case law which recognizes that in contracts for the sale and purchase of shares dates should be exactly complied with because shares do fluctuate in value. But these cases presuppose a date in the first place. It may well be that the parties could not bargain for a date because of the uncertainty of the GEM listing and the defendant's lack of control over the reorganizing. But the plaintiff could have required an out clause. Perhaps it did and it was refused. But that is speculation and not for me to guess.

26. Of course a contract for due performance which expresses no time limit is not a charter for unreasonable delay. If undue delay can be established, the aggrieved party is entitled to give notice, calling for performance within a reasonable period of time; what is reasonable will depend on the facts and circumstances. Once that period has expired without performance then the aggrieved party can sue for breach. In this case there is evidence of delay but not undue delay. More importantly, there was no notice from the plaintiff calling for performance which preceded its announcement that there was a breach giving it the right to rescind.

27. In the circumstances I am not satisfied that this is a case for reading into the agreement an implied obligation by the defendant to perform within a reasonable period of time, namely a few weeks. It follows that by not having performed by 2 May 2000 it was not in breach and the plaintiff was not entitled to rescind.

The Result

28. In exercise of my power under Order 14A RHC I dismiss the plaintiff's claim and order judgment for the defendant. Costs nisi at first instance shall be to the defendant taxed if not agreed.