NEW TRAINING PROFESSIONAL LTD v. CHINA RARE EARTH HOLDINGS LTD

CACV 134/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 134 OF 2009

(ON APPEAL FROM HCA NO. 930 OF 2007)

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BETWEEN

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JUDGMENT

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Hon Tang VP:

1.  The defendant is a company incorporated in the Cayman Islands and listed in Hong Kong. There is no dispute that for the purpose of Mainland laws and regulations, the defendant is an overseas company （境外機構）. The plaintiff’s claim for damages for loss of a chance to earn a sum of US$180,000 under an agreement dated 13 February 2006 (“the agreement”) was dismissed by Deputy Judge Louis Chan. This is the plaintiff’s appeal.

2.  The facts can be taken from the judgment which is based principally on the witness statements of Mr Wu Siu Lam William, a director and supervisor （總監） of the plaintiff.

3.  In August 2005, the defendant wished to obtain a loan or credit facilities (“loan”) from a company in the General Electric Group of Companies (GE) in the sum of US$20,000,000.  GE required that the loan to be secured by a guarantee to be provided by an acceptable bank or financial institution.  Because the defendant’s assets were in the Mainland, the defendant was unable to procure any such guarantee in Hong Kong.  Nor, apparently could the defendant obtain any such guarantee in the Mainland.

4.  Mr Wu was introduced to the defendant as a person who might be able to help.  To cut a long story short, the matter culminated in the agreement under which the defendant agreed to pay the plaintiff a sum of US$200,000, US$20,000 of which as deposit, the balance in accordance with clause 5.2.2 of the agreement.  I will deal with clause 5.2.2 in greater detail in due course.

5.  Soon after, the defendant repudiated the agreement which was accepted by the plaintiff.

6.  The plaintiff sued the defendant for the payment of the deposit of US$20,000, HK$670,000 as wasted expenditure, and damages for loss of a chance as aforesaid.  After trial, the learned judge ordered the defendant to pay the plaintiff wasted expenditure of HK$269,300, and the deposit of US$20,000 but dismissed the plaintiff’s claim for damages for loss of a chance.

7.  It is clear from the witness statements of Mr Wu that what the parties contemplated was that the defendant would be the borrower from GE.  Furthermore, because of the status of the defendant as an overseas company, under the Mainland laws and regulations at the time, it could not directly obtain a guarantee from a bank or financial institution in the Mainland to guarantee the defendant’s borrowing from GE.  Mr Wu said the defendant being a “中國境外控股公司，原則上按照當時的中國法律，是不大可能直接要求中國大陸境內的銀行或金融機構作出貸款擔保”.  But that as a result of the plaintiff’s effort, the plaintiff discovered that it was possible to do so indirectly (“我們發現了一些可行的途徑去 ‘間接’ 為中國稀土找到一間銀行或金融機構願意和合法給中國稀土的融資計劃作出擔保”).

8.  Mr Wu said a Mainland subsidiary of the defendant could provide assets as security to a Mainland bank in return for a guarantee in favour of GE in respect of the defendant’s borrowing.  This is how Mr Wu put it in his supplemental witness statement:

「(7) …選擇了以中國稀土在中國境內的全資或控股子公司（下簡稱‘中國稀土國內的子公司’）為載體的‘間接’融資擔保工作方案（下簡稱‘間接融資擔保方案’）作為最終的工作定向。

(8)        這個工作方案簡單來說就是以中國稀土在中國境內的全資或控股子公司的國內資產質押給中國大陸境內的銀行或金融機構，以獲得銀行或金融機構的信貸額度。有了足夠的信貸額度，銀行或金融機構就能根據《擔保管理辦法》第二條及第四條規定‘經外匯局批准後，擔保人方能以保函、備用信用證、本票、匯票等形式提供對外擔保。’其中中國稀土國內的子公司為被擔保人，國內的銀行或金融機構為擔保人，美國通用為受益人。換言之，美國通用對中國稀土的貸款依然按原來的要求獲得足夠的擔保。如果中國稀土對償還貸款出現問題，國內的銀行或金融機構作為擔保人會以拍賣中國稀土國內的子公司所質押的資產來償還。情況就像某甲向銀行申請貸款，但由於某些原因甲不能達到銀行就申請貸款而要求的貸款擔保條件，於是甲就要求兒子乙以他個人的資產和信貸來為自己擔保。銀行在有了乙的擔保下，就能為甲按規定批出貸款。日後如果甲還不了貸款，銀行就會要求乙來償還。」

9.  It is noted that Mr Wu used the analogy of a father who wishes to borrow but for certain reasons could not do so.  The father asks his son to act as a guarantor using the son’s credit and assets as security to enable the father to borrow from a bank.  In due course, if the father could not pay the bank could ask the son to do so. 

10.  The defendant has pleaded in para. 17A of the amended defence that:

“17A. Further or in the alternative, it is averred that the Plaintiff is not entitled to any damages or other relief claimed for, as a matter of the law of Mainland China, it was not possible for the Plaintiff to secure the standby credit guarantee for the Defendant as envisaged under the Service Agreement. It is averred, inter alia, that:-

(1) Under 《境内机构对外担保管理办法实施细则》（‘实施细则’）第6條, a standby credit guarantee could only be arranged for ‘境内内资企业’；‘外商投资企业’；or‘境内机构在境外注册的全资附属企业及中方参股的企业’.

(2) Nevertheless, the Defendant was not ‘境内内资企业’；‘外商投资企业’； or ‘境内机构在境外注册的全资附属企业及中方参股的企业’.

(3)   In the premises, no approval would be granted to any standby credit guarantee under实施细则第9条, it was not possible for the Plaintiff to secure the standby credit guarantee for the Defendant.”

11.  That is supported by expert advice on Chinese law filed on behalf of the defendant:

「4.11 鉴於上述，中国稀土不属于98年实施细则所规定的‘境内内资企业丶外商投资企业和境内机构在境外注册的全资附属企业及中方参股的企业’；中国稀土不能成为98年实施细则第6条[ZB-2, pg.5]所述的，境内中资金融机构可以提供对外备用信用证担保的被担保人。」

12.  That advice was based on various Mainland laws and regulations.  I do not propose to go into any of such laws and regulations because it does not appear that they are in dispute. 

13.  The learned judge was also of the view that it was not feasible.  He said:

“55. Furthermore, there was the risk that even with everything lined up by the plaintiff, the People’s Bank of China and the relevant Government department(s) might not approve it, as it was a scheme that sidestepped the prohibition of guaranteeing the defendant direct. The initial contacts by Wu with the officials in December 2005 seemed to suggest that the officials would accept the scheme as workable and acceptable, but that was the early stage when no concrete terms had yet been drawn up and no potential guarantor found.

56. I would also note the oral evidence of Wu that the Merchant Bank and the defendant had already achieved a common intent, the deal had been agreed and the letter of guarantee would be issued upon an application by the defendant. However, in the light of the available objective evidence and in particular the requirements of the Bank, his view was surely over optimistic.

57.       Having considered all the evidence, I come to the conclusion that the plaintiff has not established a real and substantial chance that the Merchant Bank would, with the permission of the People’s Bank of China and the relevant Government department(s), issue the letter of guarantee.  I therefore find that the plaintiff is not entitled to any damages for the loss of the chance to profit from the consultancy contract.”

14.  On the other hand, the plaintiff has provided a legal advice from the Mainland by Everwin law office, which apparently stated that it was permissible for a Mainland subsidiary of the defendant to obtain a guarantee from a Mainland bank or financial institution in favour of GE, it seems (and it appears to be Mr Alan Ng’s submission) provided that the Mainland subsidiary was the borrower from GE.  This is what is stated in the expert report:

「基於上述理据，本所经办律师认为：

（一）中国稀土子公司属于中国法律法规规定的外商投资企业；

（二）在履行必要的对外担保审批手续的前提下，中国稀土子公司向招商银行申请开立以美国通用作为受益人的备用信用证用于对外担保符合《担保法》丶《担保管理办法》以及《担保实施细则》的有关规定。」 (My emphasis)

15.  But it is quite clear that it was not the contemplation of the parties that the borrower from GE would be a Mainland subsidiary rather than the defendant itself.

16.  However, Mr Alan Ng relies on the definition of Party A in the agreement.  Party A was defined as the defendant and its subsidiaries as follows:

「1.1 ‘甲方’是指中国稀土控股有限公司及其下属具有独立法人资格的全资或控股子公司。」

17.  On the basis of the definition, Mr Ng submitted that when the agreement referred to party A’s plan to obtain a loan or credit facilities from GE, one could say that was also the plan of the defendant’s subsidiaries.   See e.g. Recital (1) (協議書), clause 3.1 of the 協議條件.

18.  It is clear that that was not how the learned judge understood the agreement.  Nor was that a matter of complaint in the notice of appeal.  Indeed, the passages from Mr Wu’s supplemental statement quoted above do not support such understanding. 

19.  The notice of appeal stated that the learned judge’s conclusion that the plaintiff had not established a real and substantial chance to complete the purported deal is contrary to the learned judge’s own findings about the status of the deal in paras. 27, 28, 31, 46, 47, 48, 49 and 50 of the judgment.  I need only refer to some of these paragraphs. 

20.  In para. 28 it is said that Chan (the officer in charge of the Shenzhen branch of the Merchant Bank) “expressed that the guarantee arrangement was feasible subject to the question of fees”.  It is clear from the paragraphs leading to para. 28 that the guarantee was the guarantee referred to in para. 3 of the judgment, namely, one which the defendant was required to procure in order to enable the defendant to obtain a loan from GE. 

21.  In para. 47 the learned judge said:

“47. … Chen expressed the view that the scheme of guarantee was basically workable. …”

22.  That referred back, for example, to the following:

“45. The consultancy contract referred to the requirement of the proposed lender for a letter of guarantee to be issued by an acceptable financial institution to guarantee the repayment by the defendant of the proposed loan of US$20 million. The plaintiff’s task was to look for such an institution. The contract also required the plaintiff to liaise, discuss and negotiate with the institution so as to procure the issue of the letter on the most favourable terms to the defendant. The plaintiff also had to liaise with the defendant, the proposed lender and the financial institution with a view to accomplish the task in a short period. The deadline for the plaintiff was 30 April 2006.”

23.  There is no complaint in the notice of appeal that the learned judge had proceeded on the basis that the agreement contemplated a loan by GE to the defendant, and not a subsidiary of the defendant.

24.  In my view, it is clear that under the agreement, the plaintiff was obliged to procure a guarantee from a Mainland bank or financial institution in favour of GE to secure a loan by GE to the defendant, and that the balance of US$180,000 would only be payable in that event.  The fact that the defendant was referred to as Party A in the agreement and that party A was defined as the defendant and its subsidiaries does not alter the position.  Whether Party A refers to the defendant or its subsidiary must depend on the context.  The definition cannot be used to change the underlying objective of the agreement, namely, the obtaining of a guarantee which would enable the defendant to borrow from GE. 

25.  I turn to clause 5.2.2.  It provides that Party A shall pay the balance of US$180,000 by bank transfer within 5 days of Party A signing a formal loan agreement with an acceptable financial institution.  （于甲方与有关的可接受金融／财务机构的授权代表正式签订贷款协议后五个工作日内，甲方以银行转账方式交付）.  The expression 甲方 (Party A) is used twice in the original Chinese.  It is quite clear on the first occasion (in the Chinese but second occasion in my inexact translation), Party A referred to a Mainland subsidiary.  And that on the second occasion (in the Chinese and first in English), it refers to the defendant, the contractual party which was obliged to make the payment. 

26.  Clause 5.2.2 refers to Party A signing a loan agreement 貸款協議 with an acceptable financial institution.  It is clear in the context, an acceptable financial institution referred to one which was acceptable to GE.  See clause 3.3.  More importantly, one in connection with the defendant’s plan to borrow from GE.  However, the reference to “loan agreement” 貸款協議 is puzzling, since an acceptable financial institution would only provide a guarantee to GE.  The language was the subject of discussion between the plaintiff and the defendant.  It is unnecessary for me to go into any detail, but in Mr Wu’s e-mail of 18 February 2006 he said that the fund would come from GE,

“实际上，资金是从美国通用那里过来的”

In other words the “loan agreement” referred to in clause 5.2.2 would not result in any funds being provided by a Mainland financial institution.  This was said in clarification when the defendant suggested amending clause 5.2.2.

27.  Eventually, nothing came of the discussion, because the defendant wished also to reduce the deposit payable from US$20,000 to US$5,000.  I mention this in order to show that it is clear that the objective of the agreement was the provision of a guarantee to GE by an acceptable Mainland financial institution to enable the defendant to obtain a loan from GE.

28.  I turn to consider whether the plaintiff’s claim that it is entitled to damages for loss of a chance.  There is no dispute that the plaintiff should only succeed if it could prove that there was a real or substantial, rather than a speculative, chance in accomplishing that which it agreed to do under the agreement.  Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602.

29.  The evidence from the defendant’s expert is clear that under Mainland laws and regulations, that an indirect guarantee is not permissible.  The learned judge referred to it as sidestepping the prohibition of guaranteeing the defendant direct.  Para. 55 of the judgment.  For that reason, he did not believe that People’s Bank of China would approve it, and absent such approval, the Merchant Bank would not have issued such a guarantee. 

30.  For the above reasons, I have no doubt that the learned judge is right that the plaintiff’s claim for damages for loss of a chance is speculative.  I would dismiss the appeal with costs.

Hon Cheung JA:

31.  I agree with the reasons for judgment of Tang VP.  In any event in the light of the plaintiff’s failure to supply all the information required by the Merchant Bank, there was ample evidence for the Judge to conclude that the Merchant Bank might not proceed with the guarantee.  This together with the Judge’s view that approval from the relevant authority might not be obtained which was also amply justified by the nature of the arrangement which sidestepped the prohibition of guaranteeing the defendant direct means that the plaintiff had not established his case on the loss of chance.

Hon Kwan JA:

32.  I agree with the judgment of Hon Tang VP.