LAM LAI YI v. HO WING SZE AND ANOTHER

DCCJ 2221/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2221 OF 2006

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JUDGMENT

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Introduction

1.  P and D1 were friends.  D2 was D1’s boyfriend and cohabitant.  With their little experience and limited capital, they formed a company to operate a food shop.  Soon after commencement of business, P decided to discontinue and asked if D1 and D2 would buy out her 30% share.  D1 and D2 expressed an intention to do so.  They engaged in negotiations.  There was a consensus that a certified accountant would be engaged to evaluate the value of the company.  As to what such value would lead to, it constituted the bone of contention.    

2.  P says that there was an oral agreement (“the Agreement”), as evidenced by a resolution dated 30 August 2005 (“the Resolution”), that 30% of such value, whatever it might be, would be the price that D1 and D2 were bound to pay to buy out her share.  D1 and D2 say that as they (P, D1 and D2) had no idea of the possible value, the value would only be a reference to assist them (D1 and D2) to think of a price that they would eventually offer. 

Issues for this Court

3.  I have to determine the following issues:

(1)  Whether there was a binding agreement;

(2)  If so, what were the terms of the agreement;

(3)  Were D1 and D2 in breach of any terms;

(4)  If so, P’s remedies.

Facts not in dispute

4.  P and D1 were friends for years.  D2 was D1’s boyfriend and cohabitant.  

5.  In early 2005, they had come up with the idea of operate a small food shop to serve desserts and various kinds of foods.  In March 2005, they formed a company, Yummi Yummi Food Products Ltd. (“Company”).  In June 2005, they rented a shop space in Sunshine City, Ma On Shan.

6.  There had been some changes over the ensuing few months in the ratio and share capital each invested.  Of relevance would be the position in late June 2005 as follows:

P          $144,000           30%;

D1       $216,000            45%

D2        $120,000            25%

7.  In late July 2005, decoration works of the shop were completed.  The shop was named as “Yummi Café” (“Café”).  Trial run began on 23 July 2005.  Formal operation began on 29 July 2005.

8.  In a matter of days, there were soon arguments related to the operation of the Café between P on the one hand and D1 and D2 on the other hand.  P felt she was isolated.  Coupled with some family problem, she decided to disengage herself from the Café.  She wanted to get back what her share would be worth.  In August 2005, she asked if D1 and D2 would buy out her share. 

9.  The business was suffering a loss.  Despite that, D1 and D2 agreed to consider buying out P’s share because they (D1 and D2) intended to go on with the business.  P, D1 and D2 began to negotiate.  As none of them had much experience in business, they reached a consensus to appoint a certified accountant to evaluate the value of the Cafe as at 31 August 2005.  The value would be based on the Café as a going concern as opposed to being wound up. 

10.  There was an oral agreement (“Agreement”) reached.  Most, if not all, of the terms were subsequently reduced into writing in a resolution dated 30 August 2005 (“Resolution”) of the Company [p. 144].  In the present action, P argues that the Agreement was a binding contract of sale and purchase based on the as evaluated by the certified accountant.  To the contrary, D1 and D2 argue that no binding contract but only a value for reference to assist them (D1 and D2) to consider the price that they would eventually offer to pay.    

11.  Pursuant to the Agreement, D2 came to contact a firm of accountants, Maradebbie International Consultancy Limited (“Maradebbie”), as referred from the secretarial company which processed the incorporation of the Company.  They agreed to engage it to do the evaluation.  P agreed to pay for the fee.  D2 got Maradebbie’s evaluation in the form of successive sets of Profit and Loss Account and Balance Sheet.  There were one set dated 13 September 2005, eventually revised in the set dated 2 December 2005.  Based on the Agreement, P alleged that the price she was entitled to receive would be $102,824.40, being 30% of the value $342,747.99, as derived from the said evaluation dated 2 December 2005.             

12.  As scheduled before, P resigned from the duties in the Café on 20 September 2005. 

13.  There were ongoing attempts by the parties to find a solution but to no avail.  P, D1 and D2 later attempted to sell the café to a third party but to no avail.  One of such attempts was made on 14 December 2005 where D2 showed P an evaluation by another accountant on the winding-up basis.  The value would be $60,000.  P refused to take 30% of that value as the price.    

14.  In about January 2006, the café closed down and the tenancy was surrendered.      

15.  On 8 May 2006, P instituted the present action. 

P’s case

16.  P gives evidence.  She calls no witnesses.  It was orally agreed between D1, D2 and her that the 30% of the value evaluated by the certified accountant would be equal to the price that D1 and D2 were to pay to buy out her share.  The Resolution evidenced a binding contract.  Once a value was evaluated by a certified accountant, D1 and D2 would have to pay 30% of such value to buy out her share. 

D1’s and D2’s case

17.  D1 and D2 give evidence.  They call no witnesses.  The value was merely a reference to assist them (D1 and D2) to consider the price that they would eventually offer to pay. 

Closing submissions

18.  I have considered the oral and written submissions made by counsel for P and for D1 and D2 respectively.

My findings

Whether there was a binding agreement?

19.  The appointment of a certified account to evaluate the value would be consistent with either a concluded contract or an agreement to negotiate.  In World Food Fair Ltd v Hong Kong Island Development Ltd [2007] 1 HKLRD, Ribeiro PJ, who delivered the judgment of the Court of Final Appeal, disapproved of the way the Court of Appeal approached the subject of evidence purporting to establish the existence of a concluded contract.  He said, at 507 A-E:

27.  In my view, there is a circularity in the Court of Appeal’s approach.  In regarding payment of the deposit and the giving of possession for fitting out works as “performance” which decisively proved the existence of a concluded contract, the Court of Appeal implicitly assumes that there existed a concluded contract of which such acts constituted “performance”, which “performance” is then relied on to prove the existence of that very contract.

28.  Such acts are no doubt consistent with the existence of a concluded contract but they do not prove its existence.  They are no less consistent with being acts done in anticipation of a legally binding agreement with the parties confidently expected to enter into but which never materialized – which is what the judge was the position in the present case.

29.  It is not uncommon for parties in the course of negotiations which are still incomplete or subject to contract to pay deposits or to allow builders access to the premises.  Such acts are no doubt done with a view to commercial advantage but they involve the risk that the other party may decide to withdraw from the deal without any contract coming into being.  Many examples of such conduct can be found, for instance, in textbooks on the law of restitution regarding claims for recovery of expenses incurred or in respect of benefits conferred where anticipated contracts do not materialise.

20.  In order for an agreement to come into existence, the parties must agree on all the important terms, including price.  There is no dispute that there was a consensus that a certified accountant would be appointed to evaluate the value of the Café.  Such consensus was evidenced in writing by the Resolution as follows:

…… a certified accountant will be appointed to evaluate the value of the said company in order to determine the price for the transfer of the shares of the said company ……

21.  It was not in dispute that none of them had much business experience or an idea of the value of the Company.  The consensus did not contain a minimum price that P might have to receive or a maximum price that D might have to pay.  If P’s version is correct, P will have to sell even if the value turns out to be nominal, or alternatively D1 and D2 will have to buy even if it the value turns out to be astronomical.  The party did not even have a contractual right to query the evaluation or refer, as common sense would have dictated, to another accountant for another evaluation.  This is plain absurd.  I do not believe that it was their intention or that they had expressly or impliedly agreed to have this as a term of the Agreement.  I prefer the evidence of D1 and D2 in that the value was only a reference for them (D1 and D2) to think of a price that they would eventually offer.  I reject the evidence of P which ran to the contrary.    

22.  In my judgment, it was only an agreement to negotiate for the sale and purchase of P’s share.  In Chitty on Contracts, 30^th ed., Vol I, 2-136 refers to “An agreement to negotiate” as follows:

……[I]t has been held that an express agreement merely to negotiate is not a contract “because it is too uncertain to have any binding force.” (Chlllingworth v Esche [1924] 1 Ch. 91, 113)   It therefore does not impose any obligations to negotiate, or to use best endeavours to reach agreement or to accept proposals that “with hindsight appear to be reasonable.”  

If so, what were the terms of the agreement

23.  As seen from the aforesaid, the Agreement was in the nature of an agreement to negotiate.  There was no binding contract for the sale and purchase of P’s share.

Were D1 and D2 in breach of any terms

24.  It follows that D1 and D2 were not in breach of the Agreement. 

If so, P’s remedies

25.  P is not entitled to any reliefs sought in the Statement of Claim.    

Conclusion

26.  P might well have a claim to her share in the residual assets recouped from the winding-up of the Company.  However, P had not sought any reliefs, say, in the nature of an account and inquiry.  There is no evidence to pursue these unpleaded reliefs, either.  I am in no position to make any finding or order accordingly.  Insofar as the present action is concerned, I dismiss P’s claim.  D1 and D2 shall have costs of the action with certificate for counsel.  This costs order nisi shall become absolute after 14 days from today.