CHUNG FAI HOLDINGS LTD. v. D.H. INTERNATIONAL LTD.

CACV 229/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 229 OF 1999

(ON APPEAL FROM HCA 3351/1998)

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J U D G M E N T

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Hon Godfrey JA :

Introduction

1. This is an appeal from Mr Robert Kotewall SC (sitting as a Recorder of the Court of First Instance) who, on 22 July 1999, gave judgment under Order 14 of the Rules of the High Court in favour of the plaintiff Chung Fai Holdings Limited ("CF") against the defendant D.H. International Limited ("DH"). CF had claimed payment from DH of a fee which CF asserted DH was bound to pay for the introduction by CF to DH of an opportunity to secure an interest in a substantial shareholding in China Telecom (Hong Kong) Ltd ("CT"). DH raised a number of defences to this claim but the judge, finding none of them arguable, found in favour of CF. DH now appeals to this court.

The facts

2. These may be summarised as follows.

3. In October 1997, a listing of CT's shares on the Hong Kong Stock Exchange was imminent and the issue was expected to be substantially oversubscribed. Prior to the listing, arrangements had been made by the investment banking house of Goldman Sachs for the private placement of shares in CT including arrangements for the allotment of 5m or more of these shares to HK Nicekind Holdings Limited ("Nicekind"). Nicekind authorised one Yim Wai Ning ("Yim") to act as its agent in finding a purchaser for the beneficial interest in these shares at a price which would throw up a profit for Nicekind. Yim introduced this opportunity to one Tai King Wai ("Tai"), who accepted it on behalf of DH. The appropriate arrangements to give effect to the transaction were made in an agreement in writing dated 8 October 1997 and made between Nicekind and DH, which contained provisions under which Nicekind bound itself to subscribe for the shares; DH agreed to pay for them; and machinery under which the beneficial interest in the shares would be secured to DH. I shall call this agreement "the Nicekind/DH agreement".

4. On 9 October 1997, CF (a company associated with Yim) and DH entered into an agreement under clause 1 of which CF "guaranteed" that Nicekind would be allotted the shares and which provided by clauses 2 to 6 thereof as follows :-

"2.	DH shall on or before 5:00 p.m. on 15th October 1997 deliver to Messrs Baker & McKenzie for custody a banker's draft in the sum of HK$15 million drawn in favour of CF. If DH fails to hand the banker's draft to Messrs Baker & McKenzie within the above time, DH shall compensate HK$1 million to CF as liquidated damage.
3.	CF shall on or before 5:00 p.m. on 15th October 1997 deliver to Messrs Baker & McKenzie for custody a cheque accepted by DH in the sum of HK$1.5 million drawn in favour of DH.
4.	If Nicekind manages to be allotted shares in China Telecom in accordance with the Nicekind Agreement, DH shall, in accordance with the way stated in Clause 5 of this agreement, pay CF a fee of HK$3.00 multiplied by the money incurred in subscribing the number of shares (that number of shares shall base on the written evidence supplied by Nicekind in accordance with the Nicekind Agreement and confirmed by DH).
5.	If Messrs Baker & McKenzie does not receive any written objection from DH by 5:00 p.m. on the day when the shares of China Telecom commence to be listed for dealing in The Stock Exchange of Hong Kong Limited ("Hong Kong Stock Exchange"), Messrs Baker & McKenzie shall release the banker's draft in its custody to CF in accordance with Clause 2 of this Agreement. If the number of shares allotted to Nicekind is less than 5 million, CF shall, at the time the said banker's draft is released by Messrs Baker & McKenzie, deliver to DH a cheque drawn in DH's favour in a sum being the difference between HK$15 million and the amount of fee payable calculated in accordance with Clause 4 of this Agreement. If the number of shares allotted to Nicekind is more than 5 million, DH shall, at the time the said banker's draft is released to CF by Messrs Baker & McKenzie, deliver to CF a cheque drawn in CF's favour in a sum being HK$3.00 multiplied by the number of shares more than 5 million.
6.	Before 5:00 p.m. on the day when the shares of China Telecom commence to be listed for trading in The Hong Kong Stock Exchange, should Messrs Baker & McKenzie receive DH's written objection and an original written confirmation from Goldman Sachs that Nicekind has not been allotted any shares in China Telecom, Messrs Baker & McKenzie shall deliver the banker's draft under Clause 2 of this Agreement and the cheque under Clause 3 of this Agreement to DH."

5. I shall call this "the CF/DH agreement".

6. Tai knew that Yim was acting as an agent for Nicekind; what he did not know was what Yim was to get for doing so. In fact, under an agreement made between Nicekind and another company (not CF) associated with Yim, that company was to receive 40 per cent of the profit to be made by Nicekind out of its transaction with DH.

7. In due course, Nicekind was allotted the shares, but thereafter the arrangement between Nicekind and DH broke down and DH refused to pay CF's fee mentioned in clause 4 of the CF/DH agreement.

The case for CF

8. CF says that, as soon as Nicekind was allotted the shares, DH became liable to pay CF the fee agreed under clause 4 of the CF/DH agreement, and asserts that DH has no defence to its action.

The case for DH

9. DH says that it has a number of defences to the action, and that it ought, therefore, have leave to defend it.

The judgment below

10. The judge went through the defences one by one; he identified five heads of defence and (as I have already indicated) rejected all of them as unarguable. He summarised these heads of defence as follows :-

"1.	There was no oral agreement before the Written Agreement of 9th October 1997.
2.	There was no binding agreement as the agreement sued upon was not supported by consideration.
3.	The sum of HK$15 million was not payable by the Defendant to the Plaintiff under the Written Agreement because Nicekind was in breach of the First Nicekind Agreement in failing to open a jointly operated account with Goldman Sachs. This is pleaded as a condition precedent in paragraph 8A of the draft Amended Defence.
4.	Because the Plaintiff acted as agent for both the Defendant and Nicekind, it was disentitled to commission or the referral fees from the Defendant.
5.	The Plaintiff and Mr Yim were not registered dealers of securities under the Securities Ordinance and what they did amounted to dealing in securities in Hong Kong, therefore, the money is not recoverable because of illegality."

The grounds of appeal

11. Of these heads of defence, the second (that numbered 2) is no longer advanced as a defence. But, says Mr Benjamin Yu, SC (who appeared for DH on the appeal, and who argued it most attractively) all the other heads of defence are arguable so that, if we are in his favour on any one of them, DH is entitled to have leave to defend the action. We must therefore ourselves go, one by one, through the remaining four heads of defence. I shall call them the "oral agreement" defence; the "condition precedent" defence; the "double agency" defence; and the "illegality" defence.

The "oral agreement" defence

12. The argument here is simply that CF in its statement of claim has referred to the agreement as an oral agreement evidenced in writing; that the defendant denies the alleged oral agreement; and that on the plaintiff's own case, the CF/DH agreement is only part of the contract between the parties constituted by an oral agreement. In my judgment, all this is sophistry. It is as plain as a pikestaff on the face of the statement of claim that CF relies only on the CF/DH agreement and that this contains the whole agreement between the parties. Any infelicities of expression in the statement of claim in describing the agreement between the parties should be ignored, and may indeed be excused, for, in a sense, all (or almost all) written agreements, before they are reduced to writing, are preceded by oral agreements to make them. The fact that such oral agreements do not become and are not intended to become contractually binding until they are reduced to writing is a commonplace. No doubt, DH is entitled to say that there never was here any oral agreement between the parties having contractual effect. But since it clearly bound itself by entering into the CF/DH agreement, that fact is irrelevant.

The "condition precedent" defence

13. This raises a short point of construction. The event which, under clause 4 of the CF/DH agreement, triggers CF's right to its fee is the allotment of shares in CT to Nicekind in accordance with the Nicekind/DH agreement. DH argues that the words I have emphasised demonstrate that the fee was not to become payable unless and until there was opened a "share account" with Goldman Sachs as the initial stage of the procedure prescribed by the Nicekind/DH agreement for securing to DH the beneficial interest in the allotted shares. But, in my judgment, the words emphasised do not mean that at all; they are simply words of description of the shares in question, which are those shares in CT which are allotted to Nicekind under the Nicekind/DH agreement. The moment the shares are allotted to Nicekind, the fee becomes payable. What happens, or does not happen, after the allotment is neither here nor there so far as CF's entitlement to its fee is concerned.

The "double agency" defence

14. Clearly, you cannot accept instructions to act for a fee as an agent for a buyer if you have already accepted instructions to act for a fee as agent for the seller, unless you fully disclose all the material facts to the buyer and obtain his consent to your doing so: see e.g. Fullwood v. Harley [1928] 1 KB 498. If you fail to do so, you cannot recover your fee from the buyer. The reason is that by accepting instructions to act as agent for the buyer, you place yourself in a fiduciary relationship with the buyer and a duty of full disclosure is an incident of that relationship. It is implicit in the local cases cited to us by Mr Yu (Richard Ellis v. Van Hon-Tuon [1988] 1 HKLR 169 and L & D Associates v. Chan Man Chon Madalena [1987] 2 HKC 237) that the estate agents in those cases had accepted instructions to act as agents for the buyers as well as agents for the sellers and so had come under that fiduciary duty. But it seems to me quite impossible to conclude that on the facts of this present case, Yim was ever given or ever accepted instructions to act as agent for DH in any material sense, or had entered into any such relationship with DH as to constitute him a fiduciary with a duty to protect DH's interests where those interests conflicted with those of CF. He was Nicekind's agent, (as DH knew); and no-one else's. It is abundantly plain that as far as DH was concerned, he was acting only and solely for himself. He was under no duty to DH to disclose what he was getting from Nicekind to act as Nicekind's agent or how he was getting it. It is fair to observe that this suggested defence is not raised in the draft amended defence which was exhibited in DH's evidence filed on CF's application for summary judgment.

The "illegality" defence

15. It is suggested for DH that, on the facts, it is arguable that, for the purposes of the Securities Ordinance, Cap. 333, CF was a person carrying on the business of dealing in securities; that it was unlicensed to do so; and that accordingly, it cannot claim its fee. I would accept that if CF was an unlicensed dealer in securities, it could not claim its fee. But there is simply no evidence at all that CF was carrying on such a business. It is not good enough to suggest that maybe, after further inquiry, it may turn out that CF was in fact carrying on such a business.

Conclusion

16. Like the judge, I do not consider there to be any substance in any of the suggested defences. I would dismiss this appeal, with costs.

Hon Mayo JA:

17. A number of the issues raised by Mr Yu SC revolve around the question as to whether it was arguable that Mr Yim was acting as an agent for the defendant.

18. Mr Yu contended that the fact that it was common ground that there had been an agreement to pay a referral fee and that Mr Yim had in effect introduced the defendant to Nicekind was sufficient to establish this. In this connection he placed considerable reliance upon the case of Richard Ellis Ltd v Van Hong-tuon [1988] 1 HKLR 169 and L & D Associates v Chan Man Chon Madalena [1987] 2 HKC 237 where he submitted that for all material purposes the facts were similar to those of the instant case. Speaking for myself I would respectfully disagree. There were several distinguishing features. Perhaps the most important being that one of the issues which was ventilated was whether there had been agreement that the proposed purchaser would appoint the estate agent as his agent.

19. In the present case the situation was very different. Mr Yim certainly had not put himself forward as an agent. The parties had been concerned with one particular transaction. Mr Yim had stated that he could procure the allotment of 5 million shares in China Telecom to Nicekind at the issue price.

20. If the agreement in question is considered in detail, the nature of the plaintiff's commitment was to guarantee the allotment of the shares in accordance with the terms of the agreement.

21. It is clear from the affidavit evidence filed by Mr Tai on behalf of the defendant that it was certainly not his impression that Mr Yim was acting as his agent. Indeed the contrary impression is obtained from the affidavits.

22. The other important point to be borne in mind is that this was a one-off transaction on very specific terms. In my view the Recorder's analysis of the position cannot be faulted and I do not consider that it is even arguable that Mr Yim was acting in a capacity as the agent of the defendant. It is undoubtedly the case that he was the agent of Nicekind but that is an entirely separate matter.

23. Once this is established the arguments relating to the necessity for their to be full disclosure of all the benefits accruing to Mr Yim and his companies to Nicekind and the defendant fall away.

24. This also has some bearing upon the contention that the agreement was tainted with illegality consequent upon the non-compliance with the requirements of the Securities Ordinance, Cap. 333. If indeed it is the case that Mr Yim and his companies were themselves acting at arms length it is difficult for the defendant to make out a case that Mr Yim was assuming the role of a securities broker.

25. Even assuming that he was I do not consider that it is possible to make out a case that the contract is unenforceable on the grounds of illegality. In my view the Recorder was right in his assessment of the law on this subject. For all practical purposes this case is similar to Richardson Greenshields of Canada v Chow Paul [1989] 1 HKC 261 where Bokhary J (as he then was) held that the contract was enforceable. In this connection I agree with Mr Edward Chan SC's submission that similar considerations obtain in relation to the balance of an account due and owing and a claim for payment of commission.

26. The other main submission advanced by Mr Yu related to the construction of the agreement in question and whether the plaintiff had demonstrated beyond any argument that they were entitled to the amounts they were claiming.

27. The relevant clauses of the agreement were cited in the Recorder's judgment at p. 18 of the appeal bundle:

"This is the agreement made between the Plaintiff and the Defendant of 9th October 1997 whereas Chung Fai Holdings Ltd. ('CF') and D.H. International Limited ('DH') have negotiated the matters in relation to the arrangement as mentioned in the agreement between DH and HK Nicekind Holdings Limited ('Nicekind') dated 8th October 1997 ('Nicekind Agreement') to which Nicekind shall purchase and hold the shares in China Telecom through private placing from Goldman Sachs (Asia) L.L.C. ('Goldman Sachs'). As to the clause of payment of the referral fee for CF, the parties reach the following agreements:

1.	CF guarantees to DH that Nicekind shall be able to be allotted no less than 5 million shares in China Telecom through private placing from Goldman Sachs.
2.	DH shall on or before 5:00 p.m. on 15th October 1997 deliver to Messrs Baker & McKenzie for custody a banker's draft in the sum of HK$15 million drawn in favour of CF. If DH fails to hand the banker's draft to Messrs Baker & Mackenzie (sic) within the above time, DH shall compensate HK$1 million to CF as liquidated damage.
3.	CF shall on or before 5:00 p.m. on 15th October 1997 deliver to Messrs Baker & McKenzie for custody a cheque accepted by DH in the sum of HK$1.5 million drawn in favour of DH.
4.	If Nicekind manages to be allotted shares in China Telecom in accordance with the Nicekind Agreement, DH shall, in accordance with the way stated in Clause 5 of this agreement, pay CF a fee of HK$3.00 multiplied by the money incurred in subscribing the number of shares (that number of shares shall base on the written evidence supplied by Nicekind in accordance with the Nicekind Agreement and confirmed by DH).
5.	If Messrs Baker & McKenzie does not receive any written objection from DH by 5:00 p.m. on the day when the shares of China Telecom commence to be listed for dealing in The Stock Exchange of Hong Kong Limited ('Hong Kong Stock Exchange'), Messrs Baker & McKenzie shall release the banker's draft in its custody to CF in accordance with Clause 2 of this Agreement. If the number of shares allotted to Nicekind is less than 5 million, CF shall, at the time the said banker's draft is released by Messrs Baker & McKenzie, deliver to DH a cheque drawn in DH's favour in a sum being the difference between HK$15 million and the amount of fee payable calculated in accordance with Clause 4 of this Agreement. If the number of shares allotted to Nicekind is more than 5 million, DH shall, at the time the said banker's draft is released to CF by Messrs Baker & McKenzie, deliver to CF a cheque drawn in CF's favour in a sum being HK$3.00 multiplied by the number of shares more than 5 million.
6.	Before 5:00 p.m. on the day when the shares of China Telecom commence to be listed for trading in the Hong Kong Stock Exchange, should Messrs Baker & McKenzie receive DH's written objection and an original written confirmation from Goldman Sachs that Nicekind has not been allotted any shares in China Telecom, Messrs Baker & McKenzie shall deliver the banker's draft under Clause 2 of this Agreement and the cheque under Clause 3 of this Agreement to DH.

The rest of the Agreement contains the usual provisions in this type of Agreement."

28. Clause 4 is the most material clause. Mr Yu submitted that the requirement for the allotment to be "in accordance with the Nicekind Agreement" clearly indicated that what the parties had contemplated was that the beneficial interests of the defendant should be secured. In particular the joint account referred to in the Nicekind Agreement must have been opened so that the defendant could still exercise a measure of control over the moneys they had paid.

29. I do not think that any such inference can be drawn.

30. What has to be borne in mind is that the parties to the two agreements were not the same. The Nicekind Agreement was between the defendant and Nicekind and the agreement upon which the statement of claim was based was between the plaintiff and the defendant. The plaintiff would not have been concerned with what controls would be available relating to the moneys paid after they had been paid. This was a matter to be determined between the defendant and Nicekind.

31. Support for this interpretation of the position can be found from examining the other clauses of the agreement above cited.

32. In particular Clause 5 deals with the method of payment and these terms are not necessarily consistent with the terms contained in the Nicekind Agreement.

33. What is clear from a perusal of the relevant clauses is that Mr Yu's submissions are not sustainable. It is not possible to read into Clause 4 any requirement that the beneficial interests of the defendant have to be secured.

34. In my view none of the submissions advanced by Mr Yu convince me that the defendant is able to show that there are any triable issues in this case and accordingly I agree that the appeal should be dismissed.