ACTIVE PROFIT LTD. v. NISSHO IWAI HONG KONG CORPORATION LTD. AND ANOTHER

HCCL47/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST NO.47 OF 1998

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J U D G M E N T

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1. I have before me an application for interim payment by the Plaintiff herein against both Defendants. There are in fact two summonses : the first dated 16th September 1998 wherein the Plaintiff seeks an interim payment against the 1st Defendant in the sum of HK$5,506,608.00 plus interest on the basis that liability for the sum has been admitted, and against the 2nd Defendant, upon a like basis, in the sum of HK$8,160,608.00 plus interest. This application is taken out pursuant to Order 29 rule 10 and 11(1)(a), Rules of the High Court.

2. The second summons, dated 21st October 1998, seeks amendment to the initial application, wherein the Plaintiff seeks interim payment of the like sums pursuant to Order 29 rule 10 and 12(c) (wrongly stipulated on the face of the summons as rule 11(c)), Rules of the High Court, on the basis that if these proceedings proceeded to trial, the Plaintiff would be entitled to obtain judgment against the respective Defendants "for a sum in excess of or at least equal to" these specific sums claimed.

3. For all practical purposes, it is this amendment summons which has been at the centre of the argument on this application. Order 29 rule 12(c) is in the following terms :-

"Order for interim payment in respect of sums other than damages

12. If, on the hearing of an application under rule 10, the Court is satisfied --

...

(c) that, if the action proceeded to trial; the plaintiff would obtain judgment against the defendant for a substantial sum of money apart from any damages or costs,

the Court may, if it thinks fit, and without prejudice to any contentions of the parties as to the nature or character of the sum to be paid by the defendant, order the defendant to make an interim payment of such amount as it thinks just, after taking into account any set-off, cross-claim or counterclaim on which the defendant may be entitled to rely."

4. This application for interim payment is not mounted in isolation. This is hotly-contested litigation, involving claims arising from the proposed redevelopment of two sites in the New Territories, which litigation appears to be generating a good deal of heat. I am told that the number of interlocutory matters listed before the Court for the scheduled one day hearing on 2nd November 1998 totalled an accumulated 13 summonses within which, it is probably fair to say, the principal disputes for resolution involved the Defendants' application to strike out the Plaintiff's Re-Re-Amended Statement of Claim, an issue of specific discovery, and the question of interim payment.

5. The Defendants' strike out application was heard and determined at the outset, the Court dismissing the application at the conclusion of argument with costs to the Plaintiff in any event. Central to the Defendants' argument on the strike out was that the Plaintiff's 'participation' in the redevelopment was limited to the redevelopment contemplated by a Share Acquisition Agreement of 5th March 1993, and that it did not extend to any part of the extended redevelopment contemplated by the subsequent Share Subscription Agreement of 9th September 1994, the reason being that the earlier Share Acquisition Agreement had been 'frustrated' by reason of non-fulfillment of a pre-condition therein at Clause 7.2 thereof, namely, the fact that no offer letter regarding premium had been issued by Government by 31st August 1994.

6. In the event, the Court declined to grant the summary relief sought, on the basis, inter alia, that in all the circumstances not only did the case fall short of the "plain and obvious" Order 18 rule 19 benchmark, but that frustration was not a defence to a pre-existing liability to account, and that on its own case the Defendants had a clear obligation to account to the Plaintiff for the deposits, and the use thereof, contributed by the Plaintiff under what were termed, for shorthand purposes, the "Nissho Agreement" and the "Milemore Agreement" entered respectively between the Plaintiff and the 1st and 2nd Defendants on 30th September 1993.

7. It followed, therefore, that once the strike out had been resolved, the issue of interim payment naturally followed, given the necessary overlap between the arguments propounded by Mr Chang, S.C., who in opposing the strike out had put his case on the basis of contract, express trust and constructive trust. In fact, as Mr Chang pointed out, the history of this matter was instructive, in that the Defendants had continued to hold and to utilise the Plaintiff's deposits, and had made no allegation as to the frustration of the Nissho Agreement or the Milemore Agreement, until some 21/2 years later.

8. In the course of his submissions specifically upon the application for interim payment, Mr Chang, S.C., emphasised that it simply could not be disputed that the Plaintiff was entitled to receive its deposits back "on whatever basis", and that, in a nutshell, what the case now was ultimately about "is whether we can receive back more than the Defendants received back". In connection with the return of the monies which he maintained were undoubtedly due, Mr Chang, S.C., drew the Court's attention to the correspondence in the case whereby the Defendants had tendered the monies in question.

9. So far as the 1st Defendant was concerned, by letters dated 6th March 1997 and 26th March 1997, the solicitors for the 1st Defendant tendered and re-tendered to the Plaintiff's solicitors the sum of HK$5,505,608.00, and by letter dated 9th July 1997 the sum of HK$5,505,608.00 together with the sum of HK$1,301,103.37 in interest accrued at 5.9% per annum for the period 5th March 1993 to 6th March 1997. Thereafter by letter dated 13th August 1998, the solicitors for the 1st Defendant wrote to the Plaintiff's solicitors as follows :-

"... We are instructed once again to return to your client the deposit paid (or treated as paid) by your client to our client under the Participation Agreement dated 1 June, 1993 as novated by the Novation Agreement dated 30 September 1993 (collectively 'the Participation Agreement') as a result of the frustration of the Participation Agreement.

Enclosed please find our client's cheque No.622469 dated 13 August 1998 in the sum HK$7,273,933.86 drawn in your favour.

This sum of HK$7,273,933.86 is the sum total of the following :

(1) the deposit paid, namely, the sum $5,505,608.00; and

(2) interest on the sum of $5,505,608.00 calculated at the rate of 5.9% p.a. from 5 March 1993 up to and including 13 August 1998.

We look forward to the discontinuance of the above Action by your client. We also look forward to receiving from you your proposal as to costs."

10. So far as the 2nd Defendant is concerned, the solicitors acting for Milemore likewise alleged that the Milemore Agreement had been "frustrated" and discharged, and by letters dated 19th February 1997 and 8th March 1997, two cheques were tendered in the respective sums of HK$5,505,608.00 and HK$2,655,000.00. By their last letter dated 13th August 1998, Messrs Hastings & Co. wrote to the Plaintiff's solicitors in terms that :-

"We are instructed once again to return to your client the two deposits paid by your client to our client under the Participation Agreement dated 30th September 1993 which agreement has been frustrated",

and enclosed therewith a cheque for HK$10,504,272.42, which sum represented the sum of HK$8,160,608.00 (the total of the two deposits) together with interest upon the sum of HK$5,505,608.00 at the rate of 5.9% per annum from 30th September 1993 to 13th August 1998, and interest on the sum of HK$2,655,000.00 at the rate of 5.9% per annum from 4th October 1993 up to 13th August 1998.

11. Both such letters anticipated the discontinuance of the present action.

12. In response to this latest tender of the deposit monies together with interest, the Plaintiff's solicitors replied in essentially similar terms to both the solicitors for the 1st and 2nd Defendants. Part of these letters reflected the ongoing dispute as to specific discovery, which application is yet to be heard. However, so far as the tender of the deposit monies was concerned, the Plaintiff's solicitors observed as follows to the 1st Defendant's solicitors :-

"... Even if your client's claim that the Participation Agreement dated 1st June 1993 and novated by an Agreement dated 30th September 1993 ('the Agreements') are frustrated or otherwise terminated is correct (which we are not admitting), our client is still not just entitled to the return of the deposit paid by it with interest pursuant to the Agreements, but also to have an account of the use of the money from the date of payment until its return including any profit derived from the use of our client's money. In addition, your client is a constructive trustee of our client and holds our client's interest in the Shatin Development together with the profit derived from the use of our client's money in trust for our client. We will shortly amend our Statement of Claim to reflect this.

Whether your client's case is substantiated or not, it is obvious that our client is entitled to at least a sum equivalent to the deposit paid and interest thereon. We therefore propose that the deposit and interest be retained by our client in the meantime, pending determination of this action, and will be used to set off against any sum which the Court shall adjudge to be payable to our client. Please let us know whether this proposal is acceptable in the next seven days, failing which, an application will be made to Court for interim payment under O.29 r 10 of the RSC. In the meantime, we are retaining your cheque pending your reply."

13. The letter to the 2nd Defendant's solicitors was virtually identical, save that the reference to frustration referred only to the frustration of the Participation Agreement dated 30th September 1993, there being no novation in the case of the 2nd Defendant.

14. The argument contained within these letters anticipated the application for interim payment ultimately made to this Court. As Mr Chang, S.C., asserted, whatever further monies were forthcoming to the Plaintiff, it simply could not be gainsaid that the Plaintiff was entitled to the deposit monies plus interest, whatever the ultimate outcome of the present action.

15. However, what might reasonably have been anticipated, against this background, to be a relatively uncontroversial proposition, did not turn out to be so, Mr Edward Chan, S.C., for the 1st Defendant and Mr Alan Leong, S.C., for the 2nd Defendant fiercely opposing the application. In fact, Mr Leong, S.C., felt constrained to observe that whilst this is the Commercial Court, it is also a court of law, a proposition which is unexceptional in itself albeit the implication perhaps less so.

16. What was it, therefore, that aroused such concern? Whilst the Court did not have the advantage of detailed skeleton arguments within an argument which took place very much upon the coat-tails of the strike out, so to speak, the main point of opposition seemed to be that unless and until the Plaintiff accepted the Defendants' case as to frustration of the Share Acquisition Agreement, and indeed specifically pleaded it in these terms, the Plaintiff had no entitlement to these deposit monies. Mr Edward Chan, S.C. asserted that on the face of the present pleading "They have not pleaded a cause of action to which we say we are liable", whilst Mr Leong, S.C., asserted "If they want to keep their options open, they must pay the price", the price in this instance apparently being an express plea of frustration by the Plaintiff which would then enable the Defendants to pay into Court.

17. For my own part, even after the further consideration that I elected to give to this matter, I am unable to see the validity of the argument, which in the circumstances seems to me to verge upon legal sophistry. I find it difficult to accept a situation wherein, if at trial on the pleadings as they presently stand the Defendants were to succeed in their contention as to frustration, then in some wise the Defendants would not be required to return the deposits which on their own case must be returned at the conclusion of the Plaintiff's participation in the redevelopment project. Nor do I understand how the Defendants' contingent costs position is somehow compromised by the Plaintiff's present pleadings, in that I see no good reason why the Defendants' position could not have been protected in correspondence, or alternatively by payment into Court.

18. In response to the arguments mounted against the application, Mr Chang, S.C., repudiated the allegation that the Plaintiff was in some way playing "a trick" or alternatively was wrongfully gaining tactical advantage. Frustration in itself did not constitute a cause of action, he submitted, and by reason of the relevant contractual provision, if nothing else, the Defendants had accepted the obligation to return the deposit monies, a contractual obligation which existed independent of any trust. In a situation such as this, he submitted, the law "was not as impotent" as the Defendants' arguments invited the Court to believe; moreover, it was the Defendants who had a tactical agenda in attempting to force the Plaintiff into an unwanted and unwarranted election, whilst the Court of Appeal authority relied upon by Mr Chan, S.C., namely the case of Lee Shu Man v. Chu Wing Hung and Others [1996] 3 HKC 88 clearly did not assist in the particular circumstances of this case.

19. I agree with Mr Chang, S.C. I reject the argument mounted by the Defendants. In my judgment there is no good reason in the circumstances why the Plaintiff should wait any longer for the return of the deposit monies which, on the Defendants' own case, must be returned to the Plaintiff pursuant to the frustration of the Share Acquisition Agreement, nor in my view is there any good reason why the application falls foul of Order 29 rule 12(c). To the contrary. In my view the case falls squarely within the terms and requirements of that provision in terms of the high standard required.

20. At the conclusion of his application, Mr Chang, S.C., asked for an Order that in each instance his client should recover the principal sums of HK$5,506,608.00 and HK$8,160,608.00, together with interest in each case at the judgment rate from time to time prevailing for the period from 1st September 1994 to 9th July 1997; the rationale for this period, he submitted, was that 31st August 1994 represented the date of the alleged frustration, whilst 9th July 1997 was the first day upon which repayment of the deposit with interest was actually proffered, at least by the 1st Defendant.

21. After reflecting upon all the circumstances of this case, I am satisfied that it is appropriate to make an Order, which I hereby do, requiring the 1st and 2nd Defendants to make interim payments to the Plaintiff in the relevant principal sums, namely HK$5,506,608.00 and HK$8,160,608.00 respectively.

22. However, as to the question of interest, the details of this element tended to be diffused within the wider debate, and upon further consideration I am far from satisfied that I have a sufficiently precise grasp of the issue in each case. I would observe, however, that I consider that there is substance in Mr Chan, S.C.'s submission that any interest payment on an interim basis should take into account the possibility of the Defendants being proved correct at trial in terms of their frustration argument. Be that as it may. Absent agreement, the Court requires further assistance from junior counsel on this issue at a short appointment to be scheduled in the near future. At that hearing, I will also hear the parties as to costs, the precise terms of the Order, and as to any other matter arising.