DA SHING GROUP LTD v. RICH PROMISE LTD

HCA 1065/2016

[2020] HKCFI 588

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1065 OF 2016

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JUDGMENT

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A.  INTRODUCTION

1.  The question for determination in these proceedings is whether the prospective vendor (the defendant) is liable to return the money, in the sum of HK$30,000,000, deposited by the prospective purchaser (the plaintiff) into the defendant’s designated bank account, after the negotiation for purchase of shares in a listed company fell through.  

2.  It depends on the proper construction of a Chinese document entitled  “諒解備忘錄” (Memorandum of Understanding) dated 13 February 2015 (the “MOU”).  There is also a subsidiary issue on whether amendments in the drafts of the MOU are admissible in aid of the construction.

3.  The plaintiff was a limited company incorporated at the British Virgin Islands (“BVI”).  It was a wholly-owned subsidiary of Step Best Investments Limited (“Step Best”), another BVI company.  Mr Zhou Zhenke (“Mr Zhou”) held 95% of the shareholding in Step Best.  In 2015, he ran substantial business in the Mainland but did not have any business in Hong Kong.

4.  The defendant was also a company incorporated at BVI.  It was beneficially owned by Dr Lam Kin Ming (“Dr Lam”).

5.  The subject matter was the proposed sale and purchase of about 50.46% of the shareholding (the “Shares”) of and in Crocodile Garments Limited(the “Listco”). The Listco was listed at the Main Board of the Stock Exchange of Hong Kong.  Dr Lam was the executive director, chairman and chief executive officer of the Listco.  He was its controlling shareholder. As at 13 February 2015, he and the defendant were interested in an aggregate of 476,259,000 ordinary shares in issue, representing 50.90% of the entire issued share capital of the Listco.  The defendant alone held about 50.46%.

6.  The plaintiff and the defendant signed the MOU.  Mr Zhou signed as the plaintiff’s guarantor, and Dr Lam signed as the defendant’s guarantor, of the parties’ respective obligations in the MOU.

7.  Only some terms in the MOU are legally binding, namely Clauses 4, 5, 6, 7, 8, 9, 12 and 13[1] (collectively the “Binding Clauses”).  The rest are not.  Clause 12 stipulates that except the Binding Clauses, the purpose of the MOU is not establishing legal relationship, and does not constitute a contract with binding force between the plaintiff and the defendant.  It further stipulates that either party may terminate the negotiations proceeded between the parties in accordance with this MOU, albeit without prejudice to the application of Clauses 4, 5, 6, 7, 8, 9, 11[2] and 12 and either party’s right to pursue under those clauses.

8.  On 16 February 2015, pursuant to Clause 5 of the MOU, the plaintiff deposited a sum of HK$30,000,000 into a designated bank account of the defendant.  Clause 5 described this sum of money as “定金” in Chinese.  In the Chinese and English versions of the public  Announcement issued by the Lisco pursuant to the Takeovers Code, the Listing Rules and the Securities and Futures Ordinance on the same day after the MOU was signed on 13 February 2015, it was described as “按金”and“deposit” respectively.  I shall use “the Subject Sum” to describe it below.

9.  After the MOU was signed, negotiation for a formal agreement for sale and purchase of the Shares ensued.  It failed.  No formal agreement was signed.  The defendant refused to return the Subject Sum. The plaintiff commenced these proceedings claiming for its return.

B.  Material terms of the MOU

10.  The plaintiff contends that it is entitled to the refund of the Subject Sum under the MOU.  The defendant contends that there is no such entitlement on a true interpretation of the MOU. 

11.  It is pertinent to first note the material terms of the MOU.  Since the parties did not provide any agreed English translation or certified English translation of the MOU, these terms are set out in their original Chinese simplified characters as follows:

(1)  Recital (A):

“卖方是「上市公司」现已发行股本的50.46%合法及实益拥有人。”

(2)  Recital (B):

“卖方与买方已同意按谅解备忘录的条款商讨出售和购买由卖方直接或间接拥有若干股份。”

(3)  Clause 1:

“定义

在本协议中，除非文意另有所指：…

「上市公司」鳄魚恤有限公司是一家于香港注册成立的有限公司，并已在联合交易所香港联合交易所有限公司（「联交所」）主板市场上市（股份代号：122）并与上述（A）項同义；…

「定金」与以下第五项同义；…

「有关日期」与以下第二项同义；…”

(4)  Clause 2:

“谈判

买方和卖方将尽最大努力，受限于协议的条款及细则进行谈判，签订具有约束力的出售与购买协议（「正式协议」）。而期限则由载于第5项所述买方支付定金之日起计60天之内（卖方和买方可以在双方达成共识后以书面形式延长限期）（「有关日期」），据此，买方将于无任何产权负担及所连同之附带权利，包括在完成日期或之后作出或支付的股息及分派的情况下，收购卖方所出售的股份（「股份收购」）。”

(5)  Clause 3:

“正式协议

正式协议须包含，(i) 由买方和卖方同意的交易的股份数量（「出售股份」）（ii）股份收购代价，（iii）由卖方按买方和卖方同意，提供一般惯常的陈述，保证及承诺（iv）买方担保人作为法定及实益拥有人同意担保买方按此谅解备忘录及正式协议之义务（v）卖方担保人作为法定及实益拥有人同意担保卖方按此谅解备忘录及正式协议之义务。…”

(6)  Clause 4:

“尽职调查:

在载于第5条支付定金之日起至有关日期期间内，买方及／或其顾问及代理人对事务，财务事宜及集团业务进行他们认为适当的尽职调查。卖方须尽合理的努力，但須遵守上市规则及适用的监管要求，提供合理的帮助和信息，为买方及／或其顾问及代理的合理要求，提供合理的帮助和信息。”

(7)  Clause 5:

“定金：

买方须于签署本谅解备忘录2营业日内存入金额为港币3,000万现金，作为定金（「定金」），到卖方指定帐户（「指定帐户」）。

指定帐户数据如下：

银行：HANG SENG BANK LTD

账戶号码：…

账戶名称：RICH PROMISE LIMITED

银行分行：HEAD OFFICE

SWIFT CODE：HASEHKHH

定金应根据正式协议（如正式协议已订立），由买方从指定帐户支付予卖方，组成部分代价。”

(8)  Clause 6:

“机密资料

订约各方确认，谅解备忘录期内及正式协议的谈判过程中，订约各方可能会透露机密资料给对方。本协议双方同意接受并严格保密对方所披露的机密资料，并不会为自己的利益而使用或滥用全部或部分的机密资料，或透露机密资料给任何第三方，除了各自的董事，管理人员，雇员，代表，参与谈判或于对公司有保密责任的其他人士。买方特此进一步向卖方承诺，它只会仅用机密资料于评定和评估集团股份收购的目的，而不作其他用途。买方不会并促使其联系人不会直接或间接地使用机密资料而促使对卖方或本集团的商业优势。所有机密资料应保持为披露方的财产，如披露方要求另一方返还机密资料，另一方应返还机密资料。所有机密资料应保持于披露方，而披露方要求另一方返还机密资料，另一方应归还机密资料。订约各方同意，除需要通过法律或联交所法规或有管辖权的法院的命令或联交所及/或香港证券及期货事务监察委员的请求外，没有另一方事先同意，任何一方不得或不会披露任何有关公告，新闻稿或其他一般公众披露有关本谅解备忘录或条款，或据此拟进行的交易，有关同意不得无理拒絶或延迟。”

(9)  Clause 7:

“排外性

在载于第5条支付定金之日起至有关日期期间内，卖方不得直接或间接，对买方以外之任何关于出售待售股份之人士或实体，（i）招揽或发起要约，（ii）发起或继续谈判或讨论，或（iii）进入任何协议或意向声明。”

(10)  Clause 8:

“承诺

卖方对买方承诺及契诺，在载于第5条支付定金之日起至有关日期期间内，在载于第5条支付定金之日起至有关日期期间内，卖方作为公司的控股股东，将尽合理努力，并遵守上市规则及适用的监管要求下（i）促使本集团与买方合作和提供买方和／或顾问和代理买方的信息收集期间可能被合理需要的信息，（ii）促使上市公司集团的事务在其日常业务过程中进行。”

(11)  Clause 9:

“成本

买方和卖方应就股份收购建议承担自己的费用和成本。”

(12)  Clause 12:

“约束力

买方和卖方同意，第4，5，6，7，8，9，12和13是有约束力的义务，对双方强制执行。

各方承认并确认，除第4，5，6，7，8，9，12和13，这份备忘录的目的不是建立法律关系，并不构成买方和卖方之间具有约束力的合同。据此拟进行的讨论，在不损害第4，5，6，7，8，9，11和12之应用和任何一方申索的权利下，可被任何一方终止。”

(13)  Clause 13:

“ 如因本谅解备忘录發生爭議，双方应協商解决，協商不成，提交香港國際仲裁委員會仲裁。”

C.  Approach to interpret the MOU

12.  The starting point to note is that a part of the MOU is legally binding and the remaining part of the MOU is not.  In interpreting such a document, the Court needs to bear in mind the interplay between the legally binding clauses and the non-legally binding clauses.

13.  The next point to note is that the MOU was not drafted by lawyers.  It was based on an in-house standard form of a Feder Capital Management Limited (“Feder Capital”), of which Mr Xu Lijian (“Mr Xu”), Mr Zhou’s business adviser was a director. It was not drafted with precision. 

14.  The third point to note at this juncture is whilst there is no express provision stating whether the Subject Sum is refundable when the negotiation fell through, Clause 5 provides for deposit of the Subject Sum and its treatment as part payment of the purchase price if and when a formal agreement for sale and purchase has been signed.  It is necessary to examine this clause in the context of the MOU as a whole, put it in the wider relevant factual matrix, and consider whether there is any guidance which the factual matrix may provide as to the implications of the rival interpretations and ultimately the true meaning of the clause.

15.  There is no controversy over the principles of contractual interpretation.  I need not recite the long line of Hong Kong and English cases on contractual interpretation leading to recent judgments such as the Court of Appeal in Eminent Investment (Asia Pacific) Limited v Dio Corporation [2019] HKCA 606 and the UK Supreme Court in Wood v Capital Insurance Services Ltd [2017] AC 1173.  It will be sufficient to refer to the following three extracts which as I consider provide the most pertinent guidance in the circumstances of the present case.

16.  It has always been the case that in interpreting a contract, the Court should take account of both its language and its background.  Lord Neuberger said this in Arnold v Britton [2015] AC 1619 at 1627 at paragraph 15:

“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, para 14. And it does so by focusing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions.”

17.  Between the language and the background, the Court must be careful in striking a balance between the indications given by the language and the implications of the competing constructions, see the following exposition by Lord Hodge in Wood at 1179:

“10. The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. In Prenn v Simmonds [1971] 1 WLR 1381, 1383H—1385D and in Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) [1976] 1 WLR 989, 997, Lord Wilberforce affirmed the potential relevance to the task of interpreting the parties’ contract of the factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations. When in his celebrated judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913 Lord Hoffmann reformulated the principles of contractual interpretation, some saw his second principle, which allowed consideration of the whole relevant factual background available to the parties at the time of the contract, as signalling a break with the past. But Lord Bingham of Cornhill in an extrajudicial writing, “A New Thing Under the Sun? The Interpretation of Contracts and the ICS decision” (2008) 12 Edin LR 374, persuasively demonstrated that the idea of the court putting itself in the shoes of the contracting parties had a long pedigree.

11. Lord Clarke of Stone-cum-Ebony JSC elegantly summarised the approach to construction in the Rainy Sky case [2011] 1 WLR 2900, para 21f.  In the Arnold case [2015] AC 1619 all of the judgments confirmed the approach in the Rainy Sky case: Lord Neuberger of Abbotsbury PSC, paras 13—14; Lord Hodge JSC, para 76 and Lord Carnwath JSC, para 108.  Interpretation is, as Lord Clarke JSC stated in the Rainy Sky case (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense.  But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause (the Rainy Sky case, para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299, paras 13, 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: the Arnold case, paras 20, 77.  Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.

12. This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: the Arnold case, para 77 citing In re Sigma Finance Corpn [2010] 1 All ER 571, para 12, per Lord Mance JSC. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.

13. Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement.  The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements.  Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals.  The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance.  But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement.  There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type.  The iterative process, of which Lord Mance JSC spoke in Sigma Finance Corpn [2010] 1 All ER 571, para 12, assists the lawyer or judge to ascertain the objective meaning of disputed provisions.

14. On the approach to contractual interpretation, the Rainy Sky and Arnold cases were saying the same thing.

15. The recent history of the common law of contractual interpretation is one of continuity rather than change.  One of the attractions of English law as a legal system of choice in commercial matters is its stability and continuity, particularly in contractual interpretation.”

18.  The reminder that the Court should be astute to the possibilities such as that one side may have agreed to something which with hindsight did not serve his interest, or that a provision may be a negotiated compromise, or that the negotiators were not able to agree more precise terms, is particularly apposite to the present discussion.

19.  As mentioned above, the MOU was not drafted by lawyers, and was an adaptation from an in-house standard form of the plaintiff’s financial consultant.  Both the text (language) and the context (commercial background) should be considered in the exercise, as Mr Justice Cheung JA, adopting Lord Hodge’s approach, made the following remark at paragraph 7.4 of the Court of Appeal’s Judgment in Eminent Investment (Asia Pacific) Limited:

“In my view Lord Hodge's explanation dismantled the rather superficial conflict argument of the ‘textual’ and ‘contextual’ approach. Both are tools available for use in interpreting a document. The choice depends on the nature of the documents itself. Where the document is professionally prepared, sophisticated and complex, the textual approach may be adopted without the need to resort to the context or factual matrix of the case. But where the document is informal, brief or not professionally drafted, a consideration of the context will assist. But even with professionally drafted documents, there may be inconsistencies or gaps which may be clarified by considering the context. Inevitably, the task of interpretation must begin by first considering the language used.”

20.  Before I get into the unitary exercise, I shall comment on the credibility of the evidence of both parties’ witnesses and deal with some disputed factual evidence.

D.  The Witnesses

21.  Mr Zhou and Mr Xu gave oral evidence on behalf of the plaintiff.

22.  Mr Ko Ming Kin (“Mr Ko”) gave oral evidence on behalf of the defendant.  He represented the defendant and Dr Lam in negotiating with the plaintiff.  He was the Chief Financial Officer and Company Secretary of the Listco.

23.  Since the key question in these proceedings is the true interpretation of the MOU, there are not many material facts in dispute which require the Court to resolve.  It is sufficient for me to briefly comment on the credibility of the three witnesses.

24.  The defendant accepts that Mr Zhou’s evidence is, by and large, credible.  I agree.  Mr Zhou gave straightforward answers and were not evasive in admitting facts that he did not know.

25.  As to Mr Xu, the parties dispute whether he is an “independent” witness.  While there was no evidence showing that he had any interest in the outcome of these proceedings, Mr Xu readily accepted in his evidence that he and his company were commercially closely associated with Mr Zhou.  I do not find the notion of being independent is helpful in assessing his credibility.  Rather, I observe from his demeanour during cross-examination that he gave serious thought to every question put to him and answered each question in detail.  While the defendant criticizes him for being evasive and defensive, and in most cases, giving long but irrelevant answers, the defendant did not pinpoint any inconsistency among his answers.  I find his evidence generally credible.

26.  I treat Mr Ko’s evidence with serious caution.  I gravely doubt its reliability.  There are material inconsistencies between his oral evidence at the trial and the statements he made in his witness statements or contemporaneous document.  This may be demonstrated by the following instances:

(1)  Mr Ko stated in paragraphs 19 and 24 of his witness statement that at the meeting on 6 February 2015, Mr Zhou requested that after the signing of MOU, the defendant and Dr Lam should not discuss or negotiate any arrangement or enter into any agreement or memorandum in respect of the potential acquisition with any other party for a certain period.  However, during cross-examination, he said it was in fact not him but Mr Leung Kin Pang (“Mr Leung”), Mr Xu’s partner, who raised this request for exclusivity.

(2)  At paragraphs 6 and 7 of Mr Ko’s supplemental witness satement, he denied the plaintiff’s plea in the Amended Reply that the alteration of the term from “订 金” to “定金” in Clause 5 of the MOU was proposed by Mr Xu.  He stated that based on Dr Lam’s instructions, he “insisted” on the alteration as he understood that these two terms had different general meanings.  This statement is contrary to paragraph 38 of his earlier first witness statement.  In that paragraph, he mentioned that he only “noticed” the alteration in the revised draft of the MOU he received on 12 February.  His evidence changed again during cross-examination. When asked of the inconsistency, he admitted that he had no recollection of the alteration, and that the probability of him having insisted on it was low.  It is unnecessary for me to emphasize that Clause 5 is a very material term of the MOU.

(3)  In paragraph 34 of his witness statement, Mr Ko stated that in a telephone conference held on 12 February 2015, it was he who proposed treating the Subject Sum as part of the consideration for the Shares in the event that the parties could enter into a formal deal.  However, this could not be true.  It was not possible for Mr Ko to make this proposal, because in Clause 5 of the draft MOU that he received earlier on 11 February 2015, the provision containing such treatment had already been included.

(4)  Paragraph 29 of Mr Ko’s witness statement stated that it was Mr Zhou who proposed the exclusivity period to be of 45 days in the draft MOU he received on 11 February 2015.  However, in his oral evidence, he said that it was he who insisted on reducing the exclusivity period from 90 to 45 days.  He admitted during cross-examination that paragraph 29 was incorrect.

27.  For the above reasons, when there are conflicts between the evidence of Mr Xu and that of Mr Ko, in so far as they are necessary to be resolved for the construction exercise, I prefer Mr Xu’s evidence.  Likewise, when there are conflicts between Mr Zhou’s evidence and Mr Ko’s evidence, I prefer Mr Zhou’s evidence.       

E.  Facts relevant to the construction of the MOU

28.  The following are background facts that I find relevant to the construction of the MOU. 

E(1)  Before the parties met

29.  The Listco was established in 1952 and listed in 1971.  It owns the clothing brand “Crocodile”, which is known to many people in Hong Kong. 

30.  Before the MOU, the plaintiff and the defendant had no business dealing.  So as between Dr Lam and Mr Zhou.

31.  In around late 2014, Mr Zhou intended to acquire controlling interest in a Hong Kong listed company with principal business in real estate and also in retail such as garment.  According to Mr Xu, he advised Mr Zhou that the Listco met Mr Zhou’s criteria.  Among the potential target companies he identified, the Listco was Mr Xu’s first choice for recommendation.  Mr Zhou accepted his advice.  The plaintiff then proceeded to explore the chance to start a negotiation with the defendant.

32.  Mr. Ko told the Court that around that time, the stock market in Hong Kong was booming.  Some middlemen approached him and Dr Lam, asking whether Dr Lam would consider selling the Shares.  Dr Lam was quite receptive.

33.  Through his friend, Mr David Wan Ngar Yin (“Mr Wan”) and Mr Wan’s business associate, Mr Joseph Ling Kit Wah (“Mr Ling”), Mr Ko came to know of Mr Zhou’s interest in purchasing the Shares. Through their introduction, Mr Ko went to meet Mr Zhou in Shenzhen.        

E(2)  The first meeting

34.  Mr Zhou said the first meeting took place in the fourth quarter of 2014.  Mr Ko however said this meeting was held on 18 January 2015.  For reason he could not explain, he did not produce the printout of his diary which as he said had recorded relevant events for regulatory purposes.  I do not find this difference material.

35.  In this meeting, the parties introduced each other and discussed preliminarily the background information of the Listco and the intended sale and purchase of the Shares.  The parties were different on whether in this meeting, Mr Ko had informed Zhou that Dr Lam’s and his preliminary valuation of the Listco and the premium for the control of the Listco was at least HK$2 billion in aggregate. Mr Ko told the Court that he did.  This was denied by Mr Xu and Mr Zhou.

36.  The defendant contends that since the defendant had informed the plaintiff in the first meeting that the estimate total acquisition cost would be very substantial, at least HK$2 billion, the plaintiff would have considered that the Subject Sum represented only a very small portion of the total potential purchase price.  As such, the defendant submits that it made reasonable commercial sense the plaintiff to agree that the Subject Sum was non-refundable. 

37.  I find that it was unlikely for Mr Ko to have told Mr Zhou that the defendant’s estimate total acquisition cost was at least HK$2 billion.  

38.  It is necessary to interpose a fact here. On 6 February 2015, the closing price of the Listco's share was HK$0.53.  The Listco had 935,743,695 issued ordinary shares.  Therefore, the Listco's market capitalization was around HK$496 million (i.e. HK$0.53 x 935,743,695).  This amount of market capitalisation represented a significant discount from both (a) Mr Ko’s valuation of the Listco in March 2015, which included the book value, value of the brand “Crocodile”, the control premium, the Listco’s office and a piece of land in the Mainland, at HK$ 2.8 billion and (b) Mr Xu’s preliminary valuation of the Shares at HK$1.236 billion when he submitted the list of potential acquisition targets to Mr Zhou in December 2014.  Mr Ko stated in his witness statement that based on his valuation of the Listco at HK$2.8 billion, the consideration for the Shares, which were about 50.46% of the entire issued share capital of the Listco, should be around HK$1.4 billion.  That was what he told Mr Zhou in a telephone conference on 31 March 2015.

39.  In light of the significant discount of the then market value of the Shares from the respective valuations of Mr Ko and Mr Zhou mentioned above, I accept the plaintiff’s submission that any price discussion between the parties (including any valuation figures of the Listco and the Shares) would have constituted a piece of very price and market sensitive information.  In cross-examination, Mr Ko accepted that the Listco had to act discreetly in dealing with market sensitive information before an announcement was made.  Given also that he only met Mr Zhou and Mr Xu for the first time, I find it to be unlikely that Mr Ko would have disclosed such market sensitive information to Mr Zhou at the first meeting, when only preliminary discussion of the deal was held.  This finding is corroborated by Mr Ko’s evidence that the back-of-an-envelope valuation was prepared by him in a handwritten memo only in March 2015, i.e. after the MOU was signed and an announcement issued.

40.  After the first meeting, pursuant to the defendant’s request, the plaintiff and Mr Zhou procured a bank reference certifying that a company related to the plaintiff and Mr Zhou had a fixed time deposit of RMB2,598,262,000 as at 5 February 2015.   The defendant relies on Mr Xu’s evidence, that the amount of the plaintiff’s financial proof was based on the defendant’s request that it should not be less than HK$2 billion, and suggests that the defendant had already indicated to the plaintiff that the total cost involved would not be less than this sum.  However, in my view, the amount of financial proof was not necessarily equal to the estimated amount of potential purchase price[3], and there is no evidence showing that there was a link between the amount of financial proof and the purchase price.  To the contrary, in the plaintiff’s internal proposal prepared on 5 February 2015, the estimated total acquisition cost was only HK$1.2092 billion, and there was no mention of any indication of the potential purchase price from the defendant.            

E(3)  The second meeting

41.  The second meeting was held on 6 February 2015.  Mr Zhou went to meet Dr Lam at the Listco’s office in Hong Kong.  Ms Vanessa Lam (Dr Lam’s daughter), Mr Xu, Mr Leung, Mr Wan and Mr Ling were present at the meeting.

42.  The main dispute in relation to this meeting is whether Mr Leung had on behalf of the plaintiff raised the request for exclusive negotiation.  Mr Ko said so.  Mr Zhou and Mr Xu denied.  Mr Zhou said exclusivity requirement was a commonplace event and hence there was no need to mention it at the meeting.  Mr Xu said in their past transactions, all memorandums of understanding had the exclusivity clause.  Therefore, such clause was included in Federal Capital’s standard form, and found its way as Clause 7 of the MOU.

43.  I find it to be more likely that the requirement for exclusivity was not raised in the meeting on 6 February 2015, for the following reasons:

(1)  As discussed in section D above, when there were conflicts between the evidence of Mr Xu and Mr Zhou and that of Mr Ko, I prefer Mr Xu’s and Mr Zhou’s evidence.

(2)  As discussed in paragraph 26(1) above, Mr Ko said twice in his witness statement that it was Mr Zhou who raised the exclusivity request, but he changed the evidence during cross-examination to say in fact it was Mr Leung.  He did not offer any good reason for the change in evidence.

(3)  “Draft 1 revised” of the MOU was the earliest draft in the evidence.  It was sent from Mr Wan to Mr Ko on 11 February 2015 by e-mail.  Self-evidently, it was prepared from a standard form, as what Mr Xu told the Court.  The exclusivity clause (Clause 7) was then already included in the standard form.  The defendant’s counsel suggests that if the MOU was based on a template document used for similar transactions, it would be even more likely that Mr Leung would raise such a request in the meeting since it was a common provision included in the template used by Feder Capital.  I disagree.  There was no evidence that in the meeting on 6 February 2015 the parties had discussed the contents of the standard form for the MOU.  The standard form sets out terms for moving forward the negotiation, such as due diligence, expenses incurred in the negotiation and confidentiality etc.  The defendant did not explain, nor was there any evidence showing, why the exclusivity requirement in Clause 7 should or would have been singled out for discussion. 

I shall return to discuss Clause 7 of the MOU below.

E(4)  Amendments in the drafts of MOU and their admissibility

44.  After the “Draft 1 Revised” of the MOU was sent to the defendant, the parties negotiated on the terms of the MOU, with further drafts exchanged.

45.  The defendant produced three drafts of the MOU and sought to rely on them.  In particular, the defendant’s counsel highlight Clause 5 of “MOU Draft 4”.  “MOU Draft 4” was sent to Mr Ko from Mr Wan by e-mail on 12 February 2015.  In Clause 5 of this draft, the words “可退回” (literally translated as “may be refunded”) and the proviso concerning the mechanism and timing for the Subject Sum to be repaid were deleted.  The defendant’s counsel describe these amendments as critical.  They ask the Court to admit these amendments as evidence as an exception to the general exclusionary rule.

46.  Clause 5 of “MOU Draft 4” and the amendments made are set out below:

47.  I read the drafts of the MOU and heard the related oral evidence de bene esse.  I have now come to the view that these drafts should not be admitted as evidence, and that even if I am wrong and they should be so admitted, I would not attach any weight to these drafts for the construction exercise.  I shall state the reasons below.

48.  The first principle is that where a document appears to have been altered while the parties were negotiating, the court cannot look at it as it originally stood compared with the alterations which were made in it, to see whether those alterations will throw any light upon the question of interpretation, see generally Chitty on Contracts, 33^rd ed., paragraph 13-067.  This is because those alterations are unhelpful, as explained by Lord Wilberforce in the well-known English House of Lords’ judgment in Prenn v Simmonds [1971] 1 WLR 1381 at 1384-1385:

“The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact. Cardozo J thought so in the Utica Bank case [Utica City National Bank v Gunn (1918) 118 NE 607]. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get ‘agreement’ and in the hope that disputes will not arise. The only course then can be to try to ascertain the ‘natural’ meaning. Far more, and indeed totally, dangerous is it to admit evidence of one party’s objective – even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised.”

49.  In other words, pre-contractual exchanges are excluded as evidence because they are irrelevant to the question to be decided by the court, namely, what the parties would reasonably be taken to have meant by the language which they finally adopted to express their agreement, see the English House of Lords’ judgment in Chartbrook Ltd and another v Persimmon Homes Ltd and another [2009] 1 AC 1101 per Lord Hoffman at paragraph 33.  Even if they are admitted in exceptional cases, they are admitted not as evidence of what the clause in question mean, but as “background known to the parties” that may assist the interpretation. 

50.  In some occasions, the difference between evidence of what the contract means and evidence as background could be subtle or imprecise and the line is hard to draw.  In most of the cases, evidence on pre-contractual negotiation only reflects one party’s subjective intention on matters such as value of the subject matter of the contract, value of a particular term proposed, whether one proposed term can be given up and why and whether the other proposed term must be insisted and why.  Hence it is not admissible.  If it is capable of becoming evidence of the meaning of the contract subsequently agreed, it must be capable of showing that it, albeit at that time the contract had not yet been concluded, had already reflected the parties’ mutual or common intention on what they both (and I must emphasize not any one party alone) wanted the contract to be so.  But such cases would be exceptional.

51.  Moreover, even if such prior negotiations, whether orally, in writing or by conduct, do reflect the parties’ mutual intention on what the contract means, the value of such evidence may be very limited.  In the words of Mason J (as His Lordship then was) at the High Court of Australia in Coldelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352, such prior negotiations have likely been “superceded by, and merged in, the contract itself”.   

52.  Mason J concluded the general rule by drawing the distinction between “the actual intentions, aspirations or expectations of the parties before or at the time of the contract” and “the objective framework of facts within which the contract came into existence”. At 352 of Coldelfa Construction Proprietary Limited he stated:

“Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.”

53.  The defendant’s counsel submit that after stating the general rule, in the following paragraph, His Lordship proffered an exception:

“There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of a contract a meaning which the parties have united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances.”

54.  The defendant’s counsel rely on this passage of Mason J as the authority in support of their contention that deletions made in a draft contract may be admitted as an exception to the general rule. They submit that as there is no authority in Hong Kong binding on this Court holding that deletions in a draft contract may never be used to assist in construing a contract, the three drafts of the MOU, particularly the deletion in Clause 5, should be admitted as the evidence to prove the parties’ common intention that the Subject Sum was not refundable.  

55.  I am not certain if Mason J was really proffering that deletions made in a draft contract should be made an exception to the general rule.  It seems to me His Lordship’s emphasis was not on the parties’ refusal to include in the contract a provision, but instead was on ascertaining the presumed intention of the parties.  This emphasis can be understood from the paragraph at 353, which immediately follows the passage mentioned above, where Mason J said:

“The importance of this evolution of the law as it affects the construction of contracts is that it centres upon the presumed, rather than the actual intention of the parties.”

56.  In my view, it is in the course of ascertaining the presumed intention, which constitutes part of the background or surrounding circumstances, that the evidence is admitted in order to assist in the interpretation of the contract, when its language is ambiguous or susceptible of more than one meaning.  This is the fundamental premise for admitting evidence as factual matrix in aid of contract interpretation, as Mason J explained in the earlier passage of Coldelfa Construction Proprietary Limited at 352:

“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.”

57.  Therefore, it is not the deletion of words in a draft contract which brings in the exception to the general rule.  It is the evidence which bears out the parties’ presumed intention which makes it admissible.  If a deletion does not reflect the parties’ presumed intention, or is not derived from facts which are notorious knowledge of both parties, it will not be admissible.

58.  I do not see there is a divergence of the principle adopted in England and Australia.  In England, the exposition by Clarke J in Mopani Copper Mines plc v Millennium Underwriting Ltd [2008] 2 All ER (Comm) 976, paragraphs 120-123, which was approved by the English Court of Appeal in Narandas-Girdhar v Bradstock [2016] 1 WLR 2366 at paragraphs 18-20, reads as follows:

“120. The diversity of authority, of which Diplock J spoke, renders it difficult for a judge of first instance to recognise when recourse to deleted words may properly be made. The tenor of the authorities appears to be that in general such recourse is illegitimate, save that (a) deleted words in a printed form may resolve the ambiguity of a neighbouring paragraph that remains; and (b) the deletion of words in a contractual document may be taken into account, for what (if anything) it is worth, if the fact of deletion shows what it is the parties agreed that they did not agree and there is ambiguity in the words that remain. This is classically the case in relation to printed forms (Mottram Consultants Ltd v Bernard Sunley & Sons Ltd [1975] 2 Lloyd’s Rep 197; Timber Shipping Co SA v London & Overseas Freighters Ltd [1972] AC 1; Jefco Mechanical Services Ltd v Lambeth London Borough Council (1983) 24 BLR 1), or clauses derived from printed forms (Team Service plc v Kier Management and Design Ltd (1993) 63 BLR 76), but can also apply where no printed form is involved (Punjab National Bank Ltd v de Boinville [1992] 1 WLR 1138).

121. Support for that view may be found in the latest edition of Keating on Construction Contracts (2006) 8^th ed, para 3-007 which contains the following passage: ‘In this confusion the second school is generally to be preferred. Where parties have made a contract in a document that contains deletions, to look at the deletions does not offend the principle discussed above which prevents reference to preliminary negotiations. The deletion is physically contained in the concluded contract. It is submitted that the court should first construe the retained words. If they are unambiguous, reference to the deletion is unnecessary. If they are ambiguous reference to deletions from printed documents should be permitted to see whether objectively they throw light on the meaning of the retained words.

122. Even if recourse is had to the deleted words, care must be taken as to what inferences, if any, can properly be drawn from them. The parties may have deleted the words because they thought they added nothing to, or were inconsistent with, what was already contained in the document; or because the words that were left were the only common denominator of agreement, or for unfathomable reasons or by mistake. They may have had different ideas as to what the words meant and whether or not the words that remained achieved their respective purposes.

123. Further, as Morgan J pointed out in Berkeley Community Villages Ltd v Pullen [2007] 3 EGLR 101: ‘Even in the cases where the fact of deletion is admissible as an aid to interpretation, there is a great difference between a case where a self contained provision is simply deleted and another case where the draft is amended and effectively re-cast. It is one thing to say that the deletion of a term which provides for “X” is suggestive that the parties were agreeing on “not X”; it is altogether a different thing where the structure of the draft is changed so that one provision is replaced by another provision. Further, where the first provision contains a number of ingredients, some assisting one party and some assisting the other, and that provision is removed, it by no means follows that the parties intended to agree the converse of each of the ingredients in the earlier provision.’”

59.  Briggs LJ in Narandas-Girdhar summarized the principle at paragraph 20:

“For present purposes, the relevant principle is that if the fact of deletion shows what it is the parties agreed that they did not agree and there is ambiguity in the words that remain, then the deleted provision may be an aid to construction, albeit one that must be used with care.”

60.  I consider the principles enunciated by Mason J and Briggs LJ are the same.

61.  In the present case, the plaintiff’s counsel say there is no ambiguity on the language of the MOU.  In their written submissions, the defendant’s counsel suggest that their construction of the MOU should be preferred, but in the event that the Court considers that there is ambiguity, the deletions in the draft MOU are admissible to show as a matter of fact what it is that the parties concurred they did not agree.

62.  Obviously, there is no provision in the MOU explicitly stating that the Subject Sum, once paid by the plaintiff to the defendant, is in any event not refundable.  However, the fact that the words “可退回” (“may be refunded”) and the provision on the mechanism and timing for the return of the Subject Sum were deleted in Clause 5 of “MOU Draft 4” does not necessarily mean that the parties have agreed that the Subject Sum was not refundable in any event.  It is of course correct for the defendant’s counsel to say that there were only two mutually exclusive possibilities – that the Subject Sum was either refundable or non-refundable.  However, the deletions together with the alteration of the term from “订 金” to “定金” in Clause 5 of the same draft (as set out in paragraph 46 above) does not necessarily cause the Subject Sum becoming non-refundable.  The reasons or justifications for the parties to agree to the amendments could very often be multiple.  I do not accept the defendant’s counsel’s submission that by default, the deletions mean that the Subject Sum was intended to be non-refundable.

63.  While the defendant’s counsel place reliance on the deletions, little has been submitted on the alteration of the term from “订 金” to “定金” in Clause 5.  The risk of drawing wrong inferences, as contemplated by Clarke J in Mopani Copper Mines plc at paragraphs 122 and 123 as mentioned in paragraph 58 above, must be cautioned.

64.  Even if the drafts of MOU, particularly the amendments made to Clause 5, are admitted as evidence, in my view, they are unhelpful to the construction exercise that the Court is undertaking.    

65.  Mr Xu told the Court that it was he who proposed the amendment to clause 5 because under Article 89 of the Mainland’s Guarantee Law, the term “定金” meant to have the effect that the plaintiff would be entitled to the refund of the Subject Sum unless it did not perform its obligations under the MOU.  If this term was accepted by the defendant, according to him, given the special meaning that this term had under the Mainland law, and given the defendant’s insistence, there was no need to keep the words “可退回” (“may be refunded”) and the provision on the mechanism and timing for the return. Mr Xu said he had explained this intention to Mr Ling. 

66.  On the other hand, Mr Ko said to the Court he never heard of this special meaning of “定金” from the defendant or Mr Ling.  To the contrary, he orally made himself very clear to everyone that the Subject Sum could not be refunded.  As mentioned in paragraph 26 above, the credibility of Mr Ko’s evidence is doubtful. Particularly with regard to the issue of the amendments in Clause 5, as I have explained in paragraph 26(2) above, his evidence was inconsistent at various points in time.   

67.  But Mr Xu’s explanation is not helpful either.  In substance it is no more than his or the plaintiff’s subjective intention.  Furthermore, it is common ground that Hong Kong laws applies to the MOU[4]. Hence the special meaning of “定金” under the Mainland law is of no application.  Such subjective intention is misconceived. 

68.  Nonetheless, the aforementioned evidence of Mr Xu and Mr Ko is illustrative of how diverse each party’s position was during the negotiation of the MOU.  There was no evidence suggesting any possibility of consensus between the parties on the point in issue, namely, whether the Subject Sum was refundable or not in the event that no formal agreement for sale of the Shares could be signed.  Accepting any of Mr Xu’s and/or Mr Ko’s evidence falls into the danger of conducting a factual inquiry into the details of the pre-contract negotiations as expounded by Lord Wilberforce in Prenn referred to in paragraph 48 above.

69.  In my view, it was likely that the final version of Clause 5 was agreed because that was the only way to get an “agreement”.  The words remaining were the only common denominator of agreement.  It would be far more dangerous to admit evidence of either one party’s objective or intent.  

70.  I therefore accept the plaintiff’s counsel’s submission, and make the finding that the MOU, and Clause 5 in particular, was a negotiated compromise.  It was a product of give and take. The parties were unable to agree at more precise terms.  It is wholly speculative, hence unsafe and unhelpful, to make any finding of common intention out of such evidence from the parties. 

71.  To sum up, having considered the circumstances of the matter, I hold that the evidence of pre-MOU negotiation in relation to the amendments made, including the three drafts of MOU, is inadmissible.  If I am wrong and it is held to be admissible, for the same reasons explained above, I would attach no weight to those drafts for the construction exercise.

E(5)  Subsequent conducts after the signing of the MOU

72.  Subsequent conduct and statement of the parties after the contract has been entered are generally not relevant and not admissible, see Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222, per Mortimer NPJ at paragraph 22.

73.  Originally the defendant pleaded a further or alternative case that there was a collateral agreement made between Mr Ling and/or Mr Wan as the plaintiff’s agent on the one part and the defendant and Dr Lam on the other that the Subject Sum was non-refundable.

74.  In response, the plaintiff led evidence of various post-MOU facts, conducts and statements, such as the Listco’s announcement after the MOU, supplemental MOU extending the exclusivity period, drafts of financial and legal due diligence reports, drafts of sale and purchase agreement, the Listco’s announcements for further extension of the exclusivity period and subsequently termination of the MOU and supplemental MOU and the trading prices of the Shares at various stages before and after the termination of the MOU.  The plaintiff’s counsel submit that this evidence is relevant for ascertaining the terms of the alleged collateral agreement since it was not made in writing.

75.  In the defendant’s counsel’s written closing submissions, the case of collateral agreement is formally abandoned.

76.  The plaintiff’s counsel nonetheless invite the Court to bear in mind those pieces of evidence “in assessing commerciality and fairness”.

77.  The only live issue now before the Court is construction of the MOU.  There must be proper basis for enabling the Court to take consideration of the facts and conducts subsequent to the MOU in aid of the construction of the MOU.  “Commerciality and fairness” is no such basis. The plaintiff’s counsel’s invitation can only be refused.

78.  For completeness, I should also mention that the plaintiff’s counsel have also invited the Court to specifically look at the heads of agreement that the defendant signed with another unrelated party subsequently after the termination of the MOU and announced on 29 January 2016, which expressly provided that the deposit paid was refundable when the negotiation did not come to fruition and without fault of the intended purchaser.  The plaintiff’s counsel relies on Lord Hodge’s remark in Wood at paragraph 13 as mentioned in paragraph 17 above, that help may be drawn from considering “the purpose of similar provisions in contracts of the same type”. In my view, the reliance is not apposite.  In that passage, Lord Hodge was referring to interpretation of “a detailed professionally drawn contract which lack clarity” when help might be sought.  The MOU was not a detailed professional drawn contract.  Moreover, there was no evidence as to whether the said heads of agreement were drafted based on a standard form or by professionals.  I therefore doubt very much that the said head of agreements could be called “contracts of the same type” as the MOU.

F.  Construction of the MOU on the refundability of the Subject Sum 

79.  As discussed in section C above, against the parties’ rival constructions, the Court shall go through the iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated.

F(1)  Textual Analysis

80.  The Subject Sum paid by the plaintiff to the defendant was described in Chinese as “定金” in Clause 5 of the MOU.  The plaintiff contends that it was in the nature of earnest money, paid to the defendant to show the plaintiff’s sincerity in entering into negotiation with the defendant.  Hence, it should be refunded to the plaintiff when the negotiation fell through.  The defendant contends that the Subject Sum served as the monetary consideration for the positive and negative obligations assumed by the defendant, with corresponding rights and privileges conferred on the plaintiff, under the legally binding provisions in the MOU.  Hence, it would and could not be refunded to the plaintiff[5].  To do so would mean, in the defendant’s counsel’s description, “a complete return of the monetary consideration when such consideration has not totally failed”.  

81.  There is no dispute between the parties that the term “定金” does not have a fixed or definite meaning in Chinese language.  Nothing can be inferred or connoted from this term as to whether a sum paid as such is refundable or not.

82.  Nor is there a provision in the MOU expressly stating whether that the Subject Sum is refundable or otherwise, in the event that the negotiation falls through and no formal agreement for sale and purchase of the Shares is signed.

83.  In addition to requiring the plaintiff to deposit the Subject Sum into an account designated by the defendant, Clause 5 further provides that if the formal agreement has been entered into, the plaintiff, according to the formal agreement, may pay the Subject Sum from the designated account to the defendant, which shall constitute part of the purchase price.  I find this provision telling.  It has two points of significance, although it may be said they are two sides of the same coin.

84.  First, the parties agreed that notwithstanding the Subject Sum has already been paid by the plaintiff to the defendant, in the event that a formal agreement was concluded, the plaintiff could still use it as part payment of the purchase price. 

85.  Second, the stipulation signifies that if the formal agreement has been entered into, the plaintiff was entitled to use the Subject Sum to pay to the defendant as part payment of the purchase price. Practically speaking, since the Subject Sum were deposited into the defendant’s bank account, when the formal agreement has been signed, with the plaintiff’s consent, the defendant may convert the Subject Sum into part payment of the purchase price.  This is so notwithstanding that once the Subject Sum was deposited into the defendant’s designated account, the ownership of the money, as submitted by the defendant’s counsel, has been passed to the defendant (see footnote 5 above).

86.  This provision in Clause 5 does not sit well with the defendant’s contention.  If under the MOU the Subject Sum was treated as consideration moved from the plaintiff for the legally binding rights given to the plaintiff in the MOU (such as the right to exclusive negotiation with the defendant under Clause 7 and the right to assistance and information from the defendant during the plaintiff’s due diligence exercise under Clause 4) and was not refundable in any event, the Subject Sum should not be allowed to be used by the plaintiff to make part payment of the purchase price.

87.  It seems to be the defendant’s counsel’s suggestion that the agreement to convert the Subject Sum into part payment of the purchase price of the Shares (in the event that a formal agreement was concluded) represented a compromise made by the defendant or an exception to the agreement that the Subject Sum was not refundable.  I do not consider this provision could have been a compromise or exception.  If this was the case, the primary consensus (that the Subject Sum was paid as the consideration for the defendant granting the plaintiff various legally binding rights in the MOU) should have been expressly spelt out in the MOU.  It is unlikely for the parties to spell out only the compromise or exception to the primary consensus but leave out the primary consensus from which the compromise or exception is derived.

88.  The payment of the Subject Sum denotes the commencement of the relevant period defined in Clause 2 of the MOU.  The commencement of the relevant period triggers the obligations in Clauses 4, 7 and 8.  However, there is nothing in these three clauses suggesting that the Subject Sum was not refundable if the negotiation fell through, or that the payment of the Subject Sum was made in consideration of the rights granted to the plaintiff in these clauses.  Again, if that was the parties’ intention, there should have been an express clause making such provisions.  The defendant’s counsel submit that if the plaintiff did not pay the Subject Sum, it will have no right to enforce the defendant’s obligations.  While this is true, this can only show that there is a linkage between the plaintiff’s payment of the Subject Sum and the commencement of the relevant period and hence the defendant’s obligations under the MOU.

89.  Moreover, I do not find the defendant’s contention, that if the Subject Sum was refundable, it would mean “a complete return of the monetary consideration when such consideration has not totally failed” to be plausible.

90.  The defendant did not run a case that if the Subject Sum was refundable, there would be a total failure of consideration.  Under the MOU, the parties have respective rights and obligations.

91.  One may take an account of the plaintiff’s obligations.  Clause 5 requires the plaintiff to pay the Subject Sum within 2 business days.  Clause 6 obliges the plaintiff to keep all the information received from the defendant confidential and not to use such information for purposes other than assessing and evaluating the acquisition of the Shares, unless for compliance with the requirements by law or regulatory authorities. Under Clause 9, the plaintiff shall be responsible for its own costs and expenses incurred in this matter. 

92.  Turning to the defendant’s obligations, Clause 4 requires the defendant to provide the plaintiff with reasonable assistance and information during the plaintiff’s due diligence exercise. Clause 6 imposes the same confidential obligations on the defendant as the plaintiff.  Clause 7 requires the defendant not to make any proposal or offer to or negotiate with any party other than the plaintiff directly or indirectly in relation to sale of the Shares.  Clause 8 requires the defendant to use reasonable endeavour to procure the Listco to provide the plaintiff with reasonably needed information and to carry on its affairs in the usual ordinary course of business.  Clause 9 also requires the defendant to bear its own costs and expenses incurred in this matter.   

93.  It can be seen that the plaintiff and the defendant each has its own obligations to fulfill.  In my view, in answering the subject question, it is futile to say that the defendant’s obligations are more valuable than the plaintiff’s obligations. 

94.  The defendant’s counsel further submit that if the Subject Sum is refundable, there would be no monetary consideration, “not even a single cent”, provided by the plaintiff for the obligations assumed by the defendant.  I find this submission flawed for the following reasons.   

95.  Firstly, the defendant’s counsel emphasize the term “monetary consideration” but it is trite that consideration needs not be monetary to be sufficient in law.  Moreover, it is not that the plaintiff would not incur any money in proceeding with the negotiation.  As the defendant’s counsel accept in their written closing submissions, in performance of the MOU, the plaintiff would have incurred substantial costs and expenses in the due diligence as well as the negotiation of the terms in the draft formal agreement.  Clause 9 has prescribed that the plaintiff has to bear its own costs and expenses.

96.  Secondly, by virtue of the obligations that the plaintiff undertook in Clauses 5 (assuming, for the purpose of this point, such obligation is limited to payment of the Subject Sum as earnest money as contended for the plaintiff’s counsel), 6 and 9[6], sufficient consideration has been moved from the plaintiff.  The defendant makes no complaint that those legal binding clauses in the MOU are invalid because of lack of sufficient consideration.  The defendant’s counsel belittle the plaintiff’s obligations imposed in Clauses 6 and 9 by saying that these are “mutual” obligations.  However, mutual obligations by themselves signifies that there has been sufficient consideration in law moved from both parties.

97.  Therefore, it is not correct to say if the Subject Sum is not the consideration for the legally binding obligations of the defendant under the MOU, there would then be no consideration for such obligations.  As explained above, there is no question of total failure of consideration, even in the event that the Subject Sum has to be refunded because the negotiation has failed.  The argument that there would be no monetary consideration as a result of the refund of the Subject Sum in that event is nothing to the point and barking up the wrong tree.  It seems repetitive for me to say there has been sufficient consideration moved from the plaintiff.              

98.  In Clause 5, the Subject Sum was paid as “定金” and as part payment of the purchase price of the Shares (if the formal agreement was signed).  As explained above, similar to “deposit”, there is no definite meaning of “定金” as to whether it is refundable.  I find it to be materially analogous to the description of the payment of 240l. by the purchaser to the vendor “as deposit and in part payment of the said purchase money” in an agreement to purchase certain freehold land and a nursery “subject to a proper contract to be prepared” in the English Court of Appeal’s judgment in Chillingworth v Esche [1924] 1 Ch. 97.  In both Chillingworth and the present case, an agreement to negotiate a formal agreement, i.e. subject to contract, were involved.  And a sum of money was paid which, if a formal agreement (described as “proper contract” in Chillingworth) was entered into, would be used as part payment of the purchase price.

99.  There is no dispute that each contract must be interpreted individually, as held by Pollock M.R. in Chillingworth at 107-108:

“This case, however, does not involve a decision of what a deposit may be in all cases, but simply what it is in this particular case.

In Howe v. Smith … where the nature of a deposit was considered and the right of a purchaser to the return of it, Bowen L.J. said: “The question as to the right of the purchaser to the return of the deposit money must, in each case, be a question of the conditions of the contract.  In principle it ought to be so, because of course persons may make exactly what bargain they please as to what is to be done with the money deposited.  We have to look to the documents to see what bargain was made.”

100.  Pollock M.R. then made finding on the basis that there was no provision in the documents which justified the deposit to be non-refundable.  At 108 he said as follows:

“Therefore we have to consider what in fact was the effect of the document of July 10, 1922, not forgetting the contemporaneous documents, and to ask ourselves whether this deposit was by those documents intended to pass irrevocably to the vendor if the purchasers did not carry out the transaction. In all the circumstances of this case, I think the deposit is recoverable by the purchasers. There was no provision made in the documents which would justify the vendor in declining to return it; though if he had, by appropriate words, made provision for that in the document, such a provision could have been upheld.”

101.  Pollock M.R.’s reasoning is also apposite to the present discussion.  There is no provision in the MOU which justifies the defendant in declining to return the Subject Sum.  Had the parties, by appropriate words, made provision for the non-refundability, such a provision could have been upheld.  But since there is no such provision, there is no basis justifying the defendant to refuse to return the Subject Sum to the plaintiff.

102.  The central plank of the defendant’s case is that the Subject Sum serves as the monetary consideration of the defendant’s legally binding obligations in the MOU.  It is fraught with the difficulty that there is no provision in the MOU which suggests so.  The defendant’s counsel cite a number of cases concerning exclusivity agreement in Clause 7, or what is commonly called “lock-out agreement”.  But those cases can only show that a lock-out agreement is legal binding, and a breach of such agreement may be enforced by seeking specific performance and/or damages.  In the present case, there is no allegation that Clause 7 has been breached.  No light is shed on whether the Subject Sum is refundable.  The fact that Clause 7 is a lock-out agreement, and that the defendant has undertaken not to negotiate with other party during the relevant period when it was negotiating with the plaintiff for sale of the Shares, is neither here nor there.  It does not support the defendant’s contention that in true construction of the MOU, the Subject Sum is the consideration for the defendant’s obligations.

103.  The defendant’s counsel then submit that as a matter of business and common sense, it should not be the case that there was no monetary consideration provided by the plaintiff for the obligations assumed by the defendant.  I shall deal with this submission when analysing the factual matrix below.

F(2)  Contextual Analysis

104.  The important features of the commercial background which the defendant’s counsel highlighted are as follows:

(1)  The Subject Sum was a significant sum.

(2)   The “exclusive opportunity” to acquire the Shares was “extremely valuable” to the plaintiff, because the Shares represented a controlling interest in a listed company with long history and reputation and the Listco was the only company met Mr Zhou’s requirement.

(3)  If the Subject Sum could be refunded when the negotiation failed, there would be no monetary consideration from the plaintiff for that “exclusive opportunity”.

(4)  The stock market in Hong Kong was, though volatile, booming at that time.  Other potential purchasers had approached Dr Lam beforehand.  And there was a real and substantial likelihood that other interested purchasers would approach Dr Lam and expressed an interest over the sale of the Shares.

(5)  The total estimated cost of the proposed acquisition was, in the defendant’s counsel’s description, “astronomical”: not less than HK$2 billion according to the defendant’s estimation, and HK$1.526 billion according to the plaintiff’s estimation[7]. The Subject Sum was a “relatively insignificant sum”.

(6)  The plaintiff and the defendant were complete strangers.  Disclosure to a complete stranger of the Listco’s confidential information entails very significant risks.

                   The defendant’s counsel contend that given these objective facts, it is more likely that the Subject Sum was intended by both parties to be monetary consideration for the legally binding provisions in the MOU.

105.  I disagree.  After examining the commercial background and context at the time of the MOU, I find unlikely that the Subject Sum was intended by both parties to be monetary consideration for the Binding Clauses, for the following reasons:

(1)  There is no doubt that the Subject Sum is a significant amount.  If the mutual intention of the parties was to treat it as the price for the defendant’s obligations under the Binding Clauses, it is more likely that the parties should expressly spell this out in the MOU.

(2)  The Shares would only become valuable to the plaintiff if the sale and purchase has been materialized.  They can only be secured, or reasonably secured when a formal sale and purchase agreement has been signed.  There was every risk for the negotiation to fall through.  While Clause 2 of the MOU requires the parties to negotiate with best endeavour, Clause 12 expressly provides that Clause 2 is not binding.  Either party could walk away at any time during the negotiation, subject only to compliance with the Binding Clauses.

(3)  That the exclusive right to negotiation during the relevant period of 60 days is “extremely valuable” to the plaintiff is doubtful.  The Listco’s shares were then trading at significant discount, as mentioned in paragraph 38 above.  The evidence cannot justify a conclusion that so far as the Shares were concerned, at that time it was a seller’s market.  In other words, there is no sufficient evidence to show that objectively, a buyer at the time of the MOU would be so keen to the extent that it would pay HK$30 million just for the “exclusive opportunity” to negotiate (and other obligations under the Binding Clauses) and nothing else.

(4)  The exclusivity agreement under Clause 7 does not confer benefit on the plaintiff solely.  As submitted by the plaintiff’s counsel, since the Shares represented the controlling stake in a listed company, the negotiation between the plaintiff and the defendant was price sensitive.  If the defendant was at the same time negotiating sale of the Shares also with other third parties, the risk of being suspected of market manipulation and insider dealing might arise.  Hence the exclusivity agreement in Clause 7 would also offer protection to the defendant from such risk.  In this light, both parties yielded benefits from the operation of Clause 7.

(5)  I do not consider other obligations under the Binding Clauses are necessarily valuable to the plaintiff.  Rather in my view, these obligations, such as the defendant rendering reasonable assistance during the due diligence exercise, confidentiality and carrying out the Listco’s business in the ordinary and usual course, were there to facilitate the smooth conduct of the negotiation. They were means rather than benefits of value to be conferred on the plaintiff.  They could not be benefits of value because if the negotiation failed, such obligations from the defendant, including the provision of the Listco’s confidential information, would become valueless. This must be so given the requirement in Clause 6 that such information cannot be used for any purpose other than the proposed acquisition.  This was a very obvious but serious objective risk that must have occurred to the plaintiff, and indeed every potential buyer in this circumstance.

(5)  As mentioned above, while the stock market in Hong Kong was booming at that time, the Listco’s shares were trading at substantial discount of its market capitalization.  While there was no evidence adduced by either party on why this was so, there was also no evidence showing whether the business of the Listco was commercially so attractive, to the extent that the Shares was, objectively, a “must have” for a potential buyer and particularly the plaintiff.  It would all depend on whether negotiation could result in mutually acceptable terms.  

(6)  The defendant said there were a number of potential purchasers who have approached Dr Lam beforehand.  However, not one potential purchaser was identified.  Dr Lam and her daughter did not give evidence, and Mr Ko did not come up with any name either.  There is no good evidence to support a finding that there was a real and substantial likelihood that other interested purchasers would approach Dr Lam and expressed an interest over the sale of the Shares after the MOU was signed.  In the least, I do not find that the parties would have that perception at the time of the MOU.  Further, I do not consider that there is evidence showing that the plaintiff was so eager to buy the Shares that they were willing to take the risk of HK$30,000,000 dashing into the drain if the negotiation fell.

(7)  The submission that the Subject Sum was a “relatively insignificant sum” when compared with the potential acquisition cost is neither here nor there.  Any party in the plaintiff’s position must take into account the risk of the negotiation falling through, in which event the Subject Sum would become a total loss.  While there was then an estimate of potential acquisition cost from each side, the two estimates varied significantly.  Given the disparity as well as the volatility of the stock market as already raised by the defendant’s counsel, there could be serious difficulty in reaching an agreement on price, not to mention other terms.  In the least, at the time of the MOU, neither party could say with any confidence that a deal would be reached.  The risk of the total loss of the Subject Sum was not insignificant.

(8)  There is no dispute that the plaintiff and the defendant were complete strangers.  There was no mutual trust to each other.  As such, if it was the defendant’s requirement that the Subject Sum was to be used as the consideration for its obligations under the MOU, and if the plaintiff accepted this to be so, as against the not so trustworthy stranger on the other side, the best protection must be setting this out expressly in the MOU.  The defendant’s counsel submit that disclosure to a complete stranger of the Listco’s confidential information entailed very significant risks.  But the elaborate confidentiality provision in Clause 6 has addressed these risks in details.

(9)  Lastly, on the defendant’s contention, at any time during the negotiation, the defendant could decide to take the Subject Sum and let the negotiation fall through.  Since nothing, not any key terms, had been agreed, it would be too easy for the defendant to abandon the negotiation and keep the Subject Sum without any need to account to the plaintiff for anything.  The plaintiff’s position was so fragile.  I accept the plaintiff’s counsel’s submission that no reasonable person having knowledge of the commercial context of the MOU and the commercial purpose of the Subject Sum would have understood the parties to have agreed that the Subject Sum would be retained by the defendant whether or not the intended deal would proceed.

(10)  For the above reasons, in my view, the absence of an express provision is a weighty indication that the Subject Sum was not the specific monetary consideration, or the price, for the defendant’s obligations in the MOU.

106.  In light of the above analysis on the background, resonant with the textual discussion in section F(1) above, I find it to be more likely that the MOU was a negotiated compromise.  Its terms represented the farthest upon which the parties could agree.  And the Subject Sum was a sign of sincerity, that the plaintiff was serious in moving into negotiation with the defendant.

107.  Lastly, for completeness, I should mention that the defendant has pleaded implied term but it does not pursue the argument with any vigour.  I do not consider there is any basis supporting the implication of a term into the MOU that the Subject Sum was non-refundable. Further, as mentioned above, in its closing written submissions, the defendant has formally stated that it decides not to pursue its case on the collateral contract.   

(G)  Conclusion and Disposition

108.  In conclusion, having considered the MOU and the relevant commercial background, in my judgment, the nature of the Subject Sum was no more than earnest money to demonstrate the plaintiff’s sincerity in entering into the negotiation with the defendant.  I find that upon the true construction of the MOU, the defendant is liable to return the Subject Sum to the plaintiff after the negotiation for the formal agreement for sale and purchase of the Shares failed.

109.  I make an order that the defendant shall pay the sum of HK$30,000,000 to the plaintiff. 

110.  I make an order nisi that costs of this action be to the plaintiff with certificate for two Counsel.

111.  I thank the parties’ counsel for their helpful assistance.