ADVERTASIA STREET FURNITURE LTD v. CHINA OUTDOOR MEDIA INVESTMENT (HONG KONG) CO LTD

CACV 368/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 368 OF 2004

(ON APPEAL FROM HCCL NO. 145 OF 1999)

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J U D G M E N T

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Hon Tang JA (giving the judgment of the Court):

Introduction

1.  Stone J ordered specific performance of the contract (“the contract”), dated 21 April 1999, by which, the Plaintiff, Advertasia, agreed to sell to the Defendant, China Outdoor, the entire share capital of 4 companies, for HK$68 million.  Only 2 of these companies TM (Beijing) (“TMB”) and TM (Guangzhou) (“TMG”) are relevant to this appeal.  It is Advertasia’s case that these companies were parties to certain joint venture contracts (“JV contracts”) in Beijing and Guangzhou respectively.

Background

2.  Sopex International SA (“Sopex”) and Sedona International Holdings Limited (“Sedona”) have since 31 August 1998 been the owners of the issued share capital of Advertasia.  Since 1996, Advertasia has been the owner of all the issued share capital of TMB and TMG.

3.  Solothurn Limited (a BVI company) was owned or controlled by Messrs Du and Deparis.  Solothurn Limited was the owner of the entire share capital of Transit Media Network Limited.  TMB and TMG (both Hong Kong companies) were in turn wholly owned by Transit Media Network Limited.

4.  As a result of a 1^st Shareholders Agreement dated 23 January 1996, Transit Media Network Limited transferred its shares in TMB and TMG to Advertasia.  Advertasia became wholly owned by Cloud Peak Enterprises Limited (“Cloud Peak”).  Cloud Peak in turn were owned as to 55% by Sopex International SA and 45% by Solothurn Limited.

5.  As a result of a 2^nd Shareholders Agreement dated 31 January 1997, shares in Advertasia became owned as to 43.54% by Sopex International SA, 20.83% by Sedona International Holdings Limited and 35.63% by Solothurn Limited.

6.  Du and Deparis, in turn owned or controlled Rapidventures International Limited or the so-called Rapidventures group.  Rapidventures S.A.P.A.H. Limited was one of the Rapidventures International Limited’s subsidiaries and in any event, a member of the Rapidventures group.  Under both the 1^st and 2^nd Shareholders Agreements, Rapidventures International Limited was appointed manager, whose responsibilities included “organizing and managing (Cloud Peak’s subsidiaries (which included Advertasia, TMG and TMB’s) and joint ventures’ (which included the joint ventures in Guangzhou and Beijing) day to day activities”.  Clause 6.07(c), 1^st Shareholders Agreement, Clause 6.7, 2^nd Shareholder’s Agreement.  Thus, in effect, Du and Deparis were responsible for the day to day management of the joint ventures business, as well as Advertasia.

7.  As explained by Mr Preston, a Director of Advertasia, Sopex and Sedona were passive investors.  The relationship between Sopex and Sedona, and the management (Du and Deparis) deteriorated as 1997 progressed, such that it had become untenable to Sopex and Sedona.  A Deed of Reorganisation Agreement dated as of 12 December 1997, was made by Solothurn, Deparis, Du, Sopex, Sedona, Cloud Peak, Advertasia, Rapidventure International Limited and Transits Media Network Limited.  Mr Preston said in paras. 27 and 28 of his witness statement:

“	27.	The Deed of Reorganisation Agreement provided that the investors would loan Advertasia a sum of approximately HK$19.3 million (i.e. US$2.5million) which could be converted into shares. Deparis and Du were then given the option to buy out Sopex and Sedona for a sum of about US$12.5 million at any time between the date of signature of the Deed of Reorganisation Agreement and 31st August 1998. According to the agreement, failure to do so would result in Sopex and Sedona having the option to acquire the shares in Advertasia beneficially owned by Deparis and Du for a nominal sum. This agreement also included provisions for the resignation as directors of Deparis and Du.
	28.	Between the end of December 1997 and August 1998 the relationship between the management and the investors deteriorated yet further. The investors suspected that Deparis and Du were attempting to commit a fraud by setting up a parallel structure in Hong Kong, Macau and China to commercialise the assets of the joint ventures, i.e. the bus shelters, and to deprive Advertasia of the revenues derived therefrom as well as information in respect of all their commercial activities in China. Deparis and Du moved from Hong Kong to Macau and became almost impossible to communicate with, and had refused to give the board details of their whereabouts.”

8.  In August 1998, a complaint was made to the Commercial Crimes Bureau (“CCB”) by Mr Preston against Du and Deparis.

9.  On 31 August 1998, Sopex and Sedona exercised their options to purchase all the shares in Advertasia pursuant to the Deed of Reorganisation Agreement.

10.  Pursuant to the Deed of Reorganisation, 2 promissory notes, one for US$7,253,252 payable to Sopex and one for US$5,276,118 in favour of Sedona were issued jointly and severally by Solothurn, Deparis and Du.  Clause 4.2.  It is to be noted that these 2 promissory notes were to be transferred to China Outdoor under the Article 4.1(i)(c) of the contract. 

11.  China Outdoor is a member of the Clear Media Group of Companies and is owned by Clear Media Limited which is a main board, Hong Kong listed company.  The largest shareholder of Clear Media Limited is Clear Channel Communication Inc, which is listed on the New York Stock Exchange.

Events leading to the contract

12.  According to Mr Preston, Hainan White Horse Advertising Media Investment Co. Ltd., a subsidiary of China Outdoor was the largest outdoor media owner/operator in China.  Mr Preston said:

“	31.	… We subsequently discovered that Hainan White Horse Advertising Media Investment Co. Ltd (“HWH”), a subsidiary of COMI [China Outdoor Media Investment (Hong Kong) Company Limited], had signed an agreement with a company controlled by Deparis and Du (called Beijing Honglang Commercial and Trade Company Limited) to transfer the business and assets Advertasia had in China to HWH. The agreement was dated 16th September 1998 and the total consideration was some US$19 million. At the time this agreement was executed, HWH had apparently paid to Deparis about US$2 million by means of a deposit. We understood that Peter Cosgrove had personally negotiated this deal with Deparis and Du.”
	…
	33.	On 12th October1998, Peter Cosgrove of COMI, Peter Dyloco of Quilvest and myself met at the offices of Lovell White Durrant (Advertasia’s previous lawyers) with the lawyer Dale Fischer to discuss the situation. At this meeting Peter Dyloco and I made full disclosure of Peter Cosgrove of the issues facing us. These included the details of the first and second Shareholders Agreements that had been entered into, details of the Deed of Reorganisation Agreement and Advertasia’s complaint to the Commercial Crime Bureau. Peter Cosgrove, in the same meeting, asked many questions as to how the situation had arisen – all of which we answered fully and frankly.
	…
	36.	During this time, Peter Cosgrove stressed that COMI’s operation in China was well placed, and indeed the only company able, to resolve the issues both with Deparis and Du and the relevant Chinese authorities. Peter Cosgrove also said that COMI had relationships with the same joint venture partners and municipal authorities in China as Advertasia and, indeed, were Advertasia’s major competitor in China.”

13.  There was an attempt to reach a tripartite agreement involving Deparis and Du but that came to nothing.  But it is perhaps relevant to note that on 14 November 1998, Cosgrove and Preston met with Deparis and Du in Macau.  This is what Mr Preston said at paras. 40 and 41 of his witness statement:

“	40.	… We met with them at the Mandarin Oriental Hotel and spent a substantial part of the day discussing how a tripartite deal might be achieved. We also discussed in detail now they operated their parallel company structure, the issues with the joint venture partners relating to such a structure, how they would continue to ensure that Advertasia would not be able to regain operating control of the business in China without COMI and so on.
	41.	These discussions terminated as Deparis and Du believed that they would not receive sufficient money under COMI’s tripartite proposal to warrant their co-operation. At this point any hope that a tripartite deal could be achieved was dropped and it was decided that COMI and Advertasia would try to reach an agreement together.”

14.  That was followed by an attempt by China Outdoor to buy the “advertising and bus shelter operating rights under the joint venture contracts” from Advertasia.  But nothing came of that, because Mr Preston told Mr Cosgrove that Advertasia was not able to offer any warranties as to those rights.  It was Mr Preston’s evidence in chief, that Advertasia did not have, as China Outdoor knew, control over the joint ventures in China, and that Advertasia could not give any representations, warranties or guarantees at all in respect of what was going on in China.  That China Outdoor “knew a lot more about what was going on in our joint ventures in China than they did.”  That is why in the first draft Heads of Agreement in November 1998, there was a provision about Advertasia using their best endeavours to terminate joint ventures so that the rights to the bus shelters could be granted to White Horse “by means of an auction system” which Mr Preston did not understand.

15.  It is common ground that Mr Preston told Mr Cosgrove of China Outdoor of the type of problems which were referred to in the complaint to the CCB and that China Outdoor was aware:

“They knew that if they acquired TMB and TMG, there might well be at an operational level various problems that they were going to have to solve. They were acquiring, so they anticipated, an interest in the two joint ventures, fully aware of that potential problem.” (See Court Transcript Day 1, page 113, Mr Jonathan Harris, counsel for Chinese Outdoor)

16.  Then, at a meeting with Mr Preston and others on 21 April 1999:

“It was decided that we would sign an agreement that night (which Mr Preston would draft) without having our lawyers thoroughly negotiate its terms so that the transaction could finally be done.” (See para. 72 of Cosgrove’s witness statement dated 14 March 2003)

17.  There were not the warranties which one would expect to find in this type of contract.  It is clear that the only protection to China Outdoor in relation to the assets of the companies which shares it was acquiring was to be found in Article 1.1.

Article 1.1

18.  Article 1 of the contract is important and provides:

“	CONDITIONS PRECEDENT
	1.1	The consideration shall be paid and the Shares transferred providing that no party has received on or before Completion a valid notice or a copy of a notice stating that the joint venture licences and/or the bus shelter advertising operating rights have been terminated in respect of the businesses of the PRC joint ventures owned by the Subsidiaries in respect of the cities of Beijing and Guangzhou only. Or it is otherwise discovered that the JV contract attached in Appendix B are not valid or have been terminated. If any party becomes aware of such notice prior to Completion it shall provide a copy of such notice to the other party.”

19.  It is common ground that no JV contracts were ever attached, but that they referred to the Beijing and Guangzhou JV contracts.  These were Sino-Foreign Contractual Joint Ventures and were regulated by the Sino-Foreign Contractual Joint Venture Law of the PRC.  The JV contracts required the approval of the Ministry of Foreign Trade and Economic Cooperation (Moftec), or its provincial equivalent in Guangzhou, GFTEC.  Pursuant to the JV contracts, joint venture companies owned by the Sino and foreign parties were formed.  The Chinese and English names of the joint venture company in Beijing were “北京市公交候車亭廣告有限公司”and “Beijing Public Traffic Waiting Kiosk Advertising Company Limited”.  In Guangzhou, “廣州薩柏候車亭廣告有限公司” and“SAPAG Guangzhou Transportation Media Limited” were the Chinese and English names of the joint venture company.

20.  There were Chinese and English versions of these JV contracts which were signed by the parties thereto.  The Guangzhou JV contract was dated 25 December 1994 and the certificate of approval by GFTEC issued on 26 December 1994.  The Beijing JV contract was dated 2 July 1995 and Moftec’s certificate of approval was dated 19 October 1995.  Essentially, the joint venture companies were formed to carry on the business of operating street advertising in bus shelters in the respective cities.

21.  At the heart of China Outdoor’s appeal is their complaint that these JV contracts were not valid.  It is common ground that Moftec’s approval of the JV contracts was essential to the validity of these contracts.

22.  China Outdoor has argued that these JV contracts were invalid as at the date of completion, either because they were null and void or voidable because of the potential of future declaration of invalidity of these contracts. 

23.  It is Advertasia’s case that the foreign parties to these JV contracts were TMB and TMG respectively.  The Sino parties were Beijing Municipality Transport Advertising Company (北京市公交廣告公司) and Guangzhou Municipality Service Centre (廣州市機關服務中心) respectively.

24.  China Outdoor’s case below was that the JV contracts as approved by Moftec were not made by TMB or TMG but by Rapidventures S.A.P.A.H. Limited (“Rapidventures”), or that because of what the Judge described as approval irregularities, Moftec could withdraw its approval or set aside the JV contracts, or that such irregularities could be exploited by the Sino parties or Rapidventures.

25.  Mr Anthony Neoh SC, who appeared for China Outdoor before us, but not below, submitted that the true issue is not whether TMB or TMG entered into the JV contracts but whether they had been approved by the approving authorities (for the purpose of the appeal, the Court is only concerned with Moftec), as the foreign parties to those JV contracts.  He also repeated the submission, made on behalf of China Outdoor below, that given the irregularities and doubt over the identity of the foreign contracting parties, by analogy with conveyancing cases, there was “more than a fanciful risk” that the validity of the JV contracts could be challenged by the Sino parties, Rapidventures and/or Moftec.

26.  It is common ground that in the approval process only the Chinese versions of the JV contracts were submitted to the authorities.  There are some important differences between the Chinese and English versions, which will be dealt with later in the judgment.  In the Chinese version, the names of the foreign parties were given in Chinese only.

27.  Since the dispute is over the identity of the foreign parties approved by Moftec, it is helpful to note that in the Guangzhou JV contract, Articles 1 and 2 provide as follows: 

「第一章  总则 第1条 广州市机关服务中心（作为广州市政府机关直属单位，注册地点广州，广州市政府对其有担保地位）和埃威伊国际集团亚洲候车亭广告有限公司（作为埃威伊国际集团的子公司，注册地点香港，埃威伊国际集团对其有担保地位），根据一九八八年四月十三日《中华人民共和国中外合作经营企业法》，根据中国广告事业管理条例和中国其它有关法律规定，本着平等互利的原则，通过友好协商，同意在中华人民共和国广州市建立合作经营企业，双方同意签署本合同。） 第二章  合作各方 第2条   本合同的各方为： — 广州市机关服务中心（以下简称甲方），系在中国登记注册的公司，注册号：19048945-9，其法定地址为：中国广州市府前路18号，中心上级领导部门为广州市政府办公厅（有关证明见附件一）。 法定代表：总经理余小武先生，中华人民共和国公民，根据附件二，他有全权签署本合同。 — 埃威伊国际集团亚洲候车亭广告有限公司（以下简称乙方），系埃威伊国际集团的子公司，系在香港登记注册的公司，注册号：484496，其法定地址：香港干诺道中64-66号厂商会大厦21楼。 法定代表：总裁阿尔诺德、德帕里先生，法兰西共和国公民，根据附件三，叶建勋律师有全权签署本合同。」

28.  In the Beijing JV contract, the relevant passages from Articles 1 and 2 are as follows:

「第1条  北京市公交广告公司作为北京市公共交通总公司直属全资公司和埃威伊国际集团亚洲候车亭广告有限公司，作为埃威伊国际集团的直属公司，… 第2条  本合同的各方为： — 北京市公交广告公司（以下简称“甲方”），系在中国登记注册的公司，注册号：01007159，其法定地址为：北京市东城区交道口东大街64号。 法定代表：总经理宋瑞波先生，国籍：中国 — 埃威伊国际集团亚洲候车亭广告有限公司（以下简称“乙方”），系在香港登记注册的公司，注册号：477514，其法定地址：香港皇后大道中9号19楼。）」

29.  It is to be noted that although the foreign parties used the same Chinese names in these JV contracts, namely, 埃威伊國際集團亞洲候車亭廣告有限公司, they had different company registration numbers.  TMG and TMB’s company registration numbers were 484496 and 477514 respectively and these were the numbers which appeared in the Guangzhou and Beijing JV contracts respectively.

30.  It is also to be noted that they were both described as subsidiaries of “埃威伊國際集團” (Ai Wai Yi International Group), and that in the case of the Guangzhou JV contract, the subsidiary was said to be guaranteed by “埃威伊國際集團”.

31.  At the time of the Guangzhou JV contract, TMG’s registered names were:  Citiweal International Limited and “城福國際有限公司”.  On 4 July 1995, the Chinese name was changed to  “埃威伊國際集團亞洲候車亭廣告有限公司”.  On 7 September 1995, the names were changed to Transit Media Network (Guangzhou) Limited and “埃威伊 (廣洲) 有限公司” respectively.

32.  At the time of the Beijing JV contract, TMB’s registered names were Likewin International Limited and “麗運國際有限公司”.  The names were changed on 28 September 1995 to Transit Media Network (Beijing) Limited and “埃威伊國際集團亞洲候車亭廣告有限公司”.

33.  埃威伊has been romanized as “Ai Wai Yi”.

34.  Mr Neoh submitted that TMG and TMB were not parties to these JV contracts or not approved as such, and hence the joint venture contracts were invalid within the meaning of Article 1 of the contract.  We are prepared to proceed on the basis that if TMG and TMB were not parties to the JV contracts or not approved as such then for the purpose of Article 1 the JV contracts could be said to be invalid. 

35.  This is what the Judge said at para. 30 of the judgment:

“

30.

In addition, it seems evident, on the mass of documentation before the court, that it cannot seriously be doubted that since the inception of the Beijing and Guangzhou joint ventures that all parties have recognized that TMB and TMG, and not Rapidventures, have been acting as the foreign parties thereto, and that it is overwhelmingly probable that the phrase “Ai Wei Yi” in the Chinese language versions of the joint venture contracts referred to TMB and TMG. This is patent from the English version of those contracts, and in any event the company registration numbers on both English and Chinese versions of these contracts were those of TMB and TMG. Moreover, as Mr Tong pointed out, “Ai Wei Yi” has never been the registered Chinese name of Rapidventures, whereas the registered Chinese name of TMB was ‘Ai Wei Yi’ as at the date of the MOFTEC approval of the Beijing JV contract, whilst currently the registered Chinese name of TMG is a shorter version of ‘Ai Wei Yi’.

The Judge’s conclusion that TMG and TMB were parties to the JV contracts cannot be faulted.

36.  As the Judge said: “this is patent from the English version of those contracts …”.  Article 1 of the English version of the Beijing JV contract so far as relevant reads as follows:

“Beijing Municipality Transport Advertising Company is directly subordinate to Beijing Municipality Public Transport Company, its status is guaranteed by the Beijing Public Transport and Transit Media Network (Beijing) Limited is a subsidiary company of Transit Media Network Limited and its status is guaranteed by Transit Media Network Limited. The registration office is in Hong Kong. Both parties agree to establish a cooperative enterprise …”

Similarly, Article 2:

“Article 2 This agreement are signed by the following parties: Transit Media Network (Beijing) Limited (hereinafter called as Party B) is a subsidiary of Transit Media Network Limited. The company is registered in Hong Kong with its registration number 477514 and its legal address is 19/F, 9 Queen’s Road Central, Central, Hong Kong.”

37.  The English version of the Guangzhou JV contract reads as follows:

“Article 1 Guangzhou Municipality Service Centre (is directly subordinate to Guangzhou Municipality, registered in Guangzhou, Guangzhou Municipal Government offers guarantee to Guangzhou Municipality Service Centre) and Citiweal International Limited (is a subsidiary company of Transit Media Network Limited. The registration office is in Hong Kong. Transit Media Network Limited offers guarantee to Citiweal International Limited) agree to establish cooperative enterprises …” Article 2 This agreement are signed by the following parties: Citiweal International Limited (hereinafter called as Party B) is a subsidiary of Transit Media Network Limited. The company is registered in Hong Kong with its registration number 484496 and its legal address is 21st Floor, CMA Building, 64-66 Connaught Road, Central, Hong Kong.”

38.  There are thus important differences between the Chinese and English version in the names given to the foreign parties in the JV contracts.  The English versions of the Beijing and Guangzhou JV contracts were signed by the foreign parties using the names of Transit Media Network (Beijing) Limited and Citiweal International Limited respectively.  They were also signed by the Sino parties.  Thus, so far as the Sino parties were concerned, we do not believe they could be heard to say that they were contracting with Rapidventures.

39.  As for possible claims by Rapidventures, Mr Neoh submitted that Rapidventures could be revived under section 209A of the Companies Ordinance, Cap. 32 and make a claim in respect of these JV contracts.  China Outdoor accepts that Rapidventures was owned and controlled by Du and Deparis.  We believe any challenge by Rapidventures to be fanciful.  To give just one example, in the 2^nd Shareholders Agreement dated 31 January 1997, referred to in para. 5 above, to which Deparis and Du were parties and by which Rapidventures International Limited, (probably, the holding company of Rapidventures), was appointed managers, the recital made it clear that TMG and TMB were the foreign parties to the JV contracts in Guangzhou and Beijing respectively. 

40.  So far as Moftec is concerned, we need to consider the so-called approval irregularities before stating our view on first whether it could be said that Moftec had approved Rapidventures as the foreign parties to the JV contracts and not TMB or TMG as the foreign parties, or that because of such approval irregularities Moftec could set aside or withdraw the approvals which they had given.

Approval Irregularities

41.  In relation to the Beijing JV Contract first, China Outdoor relies on the following documents as showing that Moftec had approved Rapidventures as the foreign party: 

(1)	The incorporation and registration documents of Rapidventures S.A.P.A.H. Ltd (which had Hong Kong company registration number 452199). It is to be noted that the copy of the certificate of registration which was certified as correct by the Sino party has the Chinese name appearing under the English name “Rapidventures S.A.P.A.H. Limited”. The Chinese name did not appear on the original certificate. As the judge put it “the Certificate of Incorporation of Rapidventures had been physically altered to add the Chinese name ‘Ai Wai Yi’ (without the characters for ‘Limited’)”. As already noted Rapidventures did not have a registered Chinese name.
(2)	A letter from Hua Chiao Commercial Bank Limited. The letter is in Chinese. It reads as follows:
	「致：北京市公交廣告公司總經理宋瑞波先生
	埃威伊國際集團亞洲候車亭廣告公司資信
	茲証明埃威伊國際集團亞洲候車亭廣告公司，英文名稱 Rapidventures’s S.A.P.A.H. Limited)，其註冊資本為五百萬美元，而該司總部則位於香港皇后大道中9號19樓。
	上述資料，僅供參考，請予保密。」
	Again it is to be noted that the Chinese name appearing on the letter omitted the Chinese characters (有限) denoting (limited).
(3)	A letter dated 23 December 1994 from Edmund de Rothschild Banque. An uncertified Chinese translation from the original which was written in French was provided to Moftec. We must say that the letter as translated into Chinese was strangely worded. It purported to deal with the credit worthiness of “埃威伊國際集團亞洲候車亭廣告公司”. It also referred to that company as a member of the bank. However, it appeared from para. 21(a) of Mr Preston’s statement to the CCB dated 28 August 1998 that the bank might be holding “24% of the Rapidventure Group which in turn holds the bus shelter concessions in Tianjin”. Again, the Chinese name did not include the characters “有限” (limited).

42.  Mr Neoh submitted on the basis of these documents that since they purported to support the credit worthiness of Rapidventures, therefore Moftec in giving its approval must have thought that they were approving Rapidventures as the foreign contracting party.  We do not agree.  As noted, the foreign party was described in the JV Contract as the subsidiary of “埃威伊國際集團” (Ai Wai Yi International Group).  We believe it was more probable that Moftec understood the documents to relate to the “holding company” rather than the subsidiary.  The omission of the characters “有限” for “limited” in the 3 documents referred to in para. 41 above is significant.  埃威伊國際集團 (Ai Wai Yi International Group) was not a legal entity.  However, since Du and Deparis controlled the Ai Wai Yi group of companies it is perhaps possible loosely to refer to it as the “holding company” of the foreign party.

43.  As for Guangzhou the same bank letters were used.  Also, amongst the documents submitted was a Chinese-foreign Joint Venture (Cooperative) Project, Project Approval Form.  In that form the name given to the foreign party was “埃威伊國際集團公司” (Ai Wei Yi International Group) which was stated to have been incorporated in the UK with an address in London.  The name of the Legal Representative was given as Arnold Deparis.  Here having regard to the fact that the subsidiary was said to be guaranteed by the holding company we believe that it was more likely than not that the documents supplied were understood to relate to the holding company. 

44.  Even if there were approval irregularities, we agree with the Judge that there was simply no evidence that Moftec could revoke or terminate the approvals given.  Mr Neoh submitted that Moftec had intrinsic power to do so.  Whether Moftec had such power is a matter of PRC law. There is no evidence that Moftec had such power.  The judge said:

“

39.

… the burden of the expert evidence before the court is that, as a matter of PRC law, the joint venture contracts were valid and remained valid absent cancellation of such contracts.”

That is a finding of fact which the judge was entitled to make.

Validity of the JV contracts 

45.  Mr Neoh submitted rightly that the contract and in particular, Article 1.1 must be construed with regard to the purpose which it was to achieve.  Para. 26 of his skeleton submissions reads as follows:

“

26.

The clear commercial purpose of the Agreement was to enable the Defendant to gain title and possession of the joint ventures and their underlying bus shelter operating and advertising rights. This can be clearly derived from the terms of the Agreement and the surrounding circumstances, both before and after the Agreement, which forms the factual matrix to the Agreement. It is submitted that the learned Judge’s first mistake was to have ignored this important factual background and deemed this case as not “fact sensitive.”

46.  The commercial purpose of the agreement has to be ascertained objectively from all the relevant circumstances.  Whilst we accept that it would have been helpful if the Judge had dealt with the relevant background and circumstances in greater detail, fortunately, much of the background circumstances are not really in dispute.  On the factual background outlined by us, we do not believe that the objective commercial purpose of the agreement was as submitted by Mr Neoh.  Rather, it seems to us clear that both parties were aware that they were dealing with highly volatile and speculative situations in Beijing and Guangzhou.  The reality of the situation was that they were under Du and Deparis’ management.  It was not simply a matter of China Outdoor getting clear title to the shares in TMB and TMG and then to the JV Contracts.  The commercial purpose of China Outdoor could just as easily had been to acquire whatever interest Advertasia (through TMB and TMG) had in the JV contracts, and then to deal with the Sino parties and Du and Deparis as best they could.

47.  Mr Neoh submitted that China Outdoor have contracted for a clear title to the JV contracts and that they were buying the shares with a view to quiet enjoyment during the remainder of the period covered in the JV contracts of bus shelter advertising and operating rights connected with each such joint venture contract. 

48.  Mr Neoh has referred us to Article 4.1(i)(d), which provides:

“Provide any reasonable assistance to the Purchaser in respect of any authorisations or approvals as may be necessary in order to ensure that the Purchaser can appoint its representatives to the Board of the Directors of the joint ventures in the PRC belonging to the Subsidiaries. This shall include reasonable assistance in respect of any authorizations that may be necessary from MOFTEC or SAIC.”

However, it is clear that all that Advertasia had undertaken was to provide “any reasonable assistance”.  There is no warranty that the purchaser would be able to make the appointments. 

49.  We were also referred to Article 4.1(ii)(a), another badly drafted provision.  It seems that China Outdoor was to be responsible for all liabilities within the Mainland.  As is clear from the evidence, China Outdoor must have known that they were buying into potential litigation with Du and Deparis.  There was no indication that they would readily give up their “management” of the JV contracts or business.  Indeed, Article 4.1(c) contained an express assignment of “any and all claims” which Advertasia, may have against Du and Deparis.  China Outdoor was also fully aware that damages might be payable to the Sino parties in respect of the JV contracts.  Hence, they must have been aware of the risk of litigation with the Sino parties.  Yet, the only relevant protection to China Outdoor was Article 1.1.  The only warranty was that Advertasia “has good title of the shares” in the subsidiaries.

50.  There was no express warranty of title in Article 1.1.  Mr Neoh drew our attention to these words “… in respect of the businesses of the PRC joint ventures owned by the subsidiaries in respect of the cities of Beijing and Guangzhou only” (emphasis added).  But, we cannot treat this as a warranty of title in relation to the joint venture contracts.  Indeed, even if the joint venture contracts were valid, the businesses of the PRC joint ventures would not be owned by TMB or TMG.

51.  So one goes back to whether “it is otherwise discovered that the JV Contracts attached in Appendix B are not valid or have been terminated”.  In context, we believe “otherwise” to mean, otherwise than by a valid notice of termination.  We believe it in plain that only an actual termination on or before completion would entitle China Outdoor not to complete.  In relation to the discovery that “the JV Contracts” are invalid.  We believe that China Outdoor had to show that the JV Contracts were actually not valid as at the date on or before completion.

52.  Mr Neoh referred us to Hancock v Inland Revenue Commissioners [1999] STD (SCD) 287.  There the issue was whether the inspector was entitled to make further assessments under section 29(3) of the Taxes Management Act 1970, which enabled additional assessments to be made “If an inspector or the Brand discover, (certain matters) –”.  There it was decided that “discover” meant “has reason to believe”, “find” or “satisfy himself”.  Thus Mr Neoh submitted that the condition in Article 1.1 was not satisfied because China Outdoor had reason to believe that the JV contracts were invalid. 

53.  We have to construe Article 1.1 in its context.  In its context, we do not believe it was intended that China Outdoor could refuse to complete if it had reason to believe that the joint venture contracts were invalid.  We believe, in context, discover was used in the sense of “becoming aware for the first time”, in other words, China Outdoor becoming aware of the invalidity of the JV contracts.

54.  Mr Neoh also submitted that if the JV contracts were voidable as at completion date, they should be regarded as not valid.  We do not agree.  China Outdoor had to show that the JV contracts were actually not valid at or before completion.  In any event, there was no evidence that the JV contracts were voidable so this is not something which we need to decide.

Requisitions

55.  Mr Neoh also complained that Advertasia had failed to answer the requisition raised on title prior to completion.  Mr Neoh relied on the well-known decision of Active Keen Industries v Fok Chi Keung [1994] 1 HKLR 396.  However, the authorities on the conveyancing of properties are not helpful.  In the sale of landed properties the vendor is obliged to show as well as to make good title, and it is in the context of its obligation to show a good title that cases on the obligation to answer requisitions have to be understood.  As is clear from Active Keen, in conveyancing, the vendor is obliged to show a good title, so even if the title was good, if the vendor has failed to answer requisitions sufficiently the vendor could be held to be in breach of its obligation to show a good title. 

56.  Mr Neoh also relied on Lysaght v Edwards [1875-1876] 2 Ch. D 499 at 507 where Jessel M R said: “Now, what is the meaning of the term “valid contract”?  “Valid contract” means in every case a contract in form and in substance, so that there is no ground for setting it aside as between the vendor and purchaser – a contract binding on both parties.”  As the judge has said that dictum was made in the context of the construction of a will, “wherein the court had to reach a decision as to how to assess the rights of the testator, and in particular the issue of whether the contract there in issue was “valid” in the sense that it operated so as to convert realty into personality”.  The dictum does not support the submission that a contract would be regarded as not valid because it is arguably not binding on the parties.  A valid contract would convert realty into personality.  Whether it is valid or not would have to be determined in due course.  The conversion would take place even if it is arguably invalid provided it was in fact valid.  Similarly, a voidable contract, provided it had not been avoided. 

57.  So, here, the JV contracts were either valid or they were invalid.  The onus was on China Outdoor to show that they were invalid.  It was not enough to show that they were arguably not valid.  Of course if China Outdoor takes the view that the contracts were invalid they might refuse to complete.  If they turn out to be right they would have no liability towards Advertasia.

Audited Accounts

58.  Another submission advanced by Mr Neoh relates to the audited accounts.  4.1(e) of the contract required Advertasia to “Provide audited accounts issued by Ernst & Young in respect of the subsidiaries (except in case of Crown Max Development Limited)”.  The words “but such accounts will be qualified by the auditors” were part of the text but they had been crossed out.  Mr Neoh pointed to the fact that e.g. the audited account of TMG was qualified as follows:

“The Company had an interest in a subsidiary at the balance sheet date amounting to HK$10,841,838 comprising of a capital contribution. No reliable financial information on the subsidiary was available and there were no practical alternative audit procedures that we could perform to satisfy ourselves that the Company’s interest in the subsidiary is fairly stated at 31 December 1998”.

Mr Neoh invited us to note the deleted words.  We believe they are of doubtful assistance even if we were to assume (contrary to our belief) that it is legitimate to look at the deleted words.  See Chitty on Contracts General Principles, 28^th edition, 12-067.  We are unable to read what remained of the clause as requiring unqualified accounts.  Mr Neoh accepted that the accounts were qualified because the auditors were unable to provide proper consolidated accounts in accordance with GAP because they were unable to audit the accounts of the joint venture companies.  We do not believe that the agreement required that the audited accounts be unqualified. 

Side Agreement

59.  On the same date as the Beijing JV contract, the parties entered into a Side Agreement.  Now this Side Agreement was the subject of an arbitral award dated 10 July 2000 which decided that the Side Agreement was of no legal effect.  Mr Neoh contended that the Side Agreement was part of the Beijing JV contract and that since the Side Agreement was invalid, China Outdoor could refuse to complete under Article 1.1.  On the evidence, we must proceed on the basis that the Side Agreement was not intended to be attached to Appendix B.  The Judge has rejected the submission that the Side Agreement should be regard as part of the Beijing JV contract.  Mr Neoh accepted for the purpose of this argument, that the Beijing JV contract was not itself void as a matter of PRC law.  He did not contend that the Beijing JV contract on its own could not work or be made to work.  He drew attention to the difference in wording between clause 15 of the Beijing and Guangzhou JV contracts and submitted that obviously the Side Agreement provided what was missing from the Beijing JV contract.  Be that as it may, what we have to consider is whether the JV contracts referred to in Article 1.1 were invalid.  Since, it was rightly accepted that we are entitled to proceed on the basis that the Beijing JV contract on its own was effective and binding as a matter of PRC law (subject to Mr Neoh’s other submission regarding their validity) the judge’s conclusion could not be faulted.

Specific Performance

60.  Turning to the relief of specific performance, Mr Neoh submitted that the plaintiff in para. 49 of his skeleton submissions that:

“… “the occupier in possession” and constructive trustee of the estate under the Agreement (namely, the joint venture contracts and the bus shelters advertising and operating rights) for the benefit of the defendant, has neglected to preserve the joint venture businesses, which are now gone, as are the bus shelters operated by these joint ventures, and it is now impossible to achieve the commercial purpose behind the Agreement”

61.  We do not agree.  First, the subject matter of the contract were the shares in TMB and TMG, and not the assets of TMB and TMG.  Article 1.1 was a condition precedent (or as Mr Neoh preferred, a condition concurrent) to completion.  That, however, did not and could not change the subject matter of the sale.  Be that as it may, Advertasia, as vendor of the entire share capital in TMB and TMG, held those shares in trust for China Outdoor.  As such, Advertasia owed fiduciary duties, for the breach of which, the court may, in suitable circumstances, refuse specific performance.  However, the extent of such duties and whether in fact there were breaches of duty depend on all the circumstances and are fact sensitive.  Here, there was no pleading on the point.  They ought to have been pleaded under O. 18 r 8, RHC.  Furthermore, the matter was not raised or argued by counsel who appeared before the judge.  We are unable to conclude that on the facts of this case, it has been shown that Advertasia was in breach of any duty.

62.  As we have said it is clear that China Outdoor was aware that they were dealing with highly volatile and speculative situations.  In the circumstances, we see no ground upon which we can interfere with the judge’s exercise of discretion.

63.  Accordingly, the appeal is dismissed.

64.  We made an order nisi that the respondent is to have the costs of the appeal, such costs to be taxed, if not agreed.