JETCOM ENTERPRISES LTD v. DRAGON VICTORY TRADING LTD AND OTHERS

HCA 3512/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3512 OF 2003

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J U D G M E N T

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Introduction

1.  The 1^st defendant is a limited company incorporated under the Companies Ordinance, Cap. 32, on 17 November 1999.

2.  From December 1999 to 23 September 2003:-

(a)	the shareholders of the 1st defendant were:-
	(i)	the 2nd defendant (1,000 shares);
	(ii)	Madam Wong Pui Suk (the 2nd defendant’s wife) (1,000 shares);
	(iii)	Everstar International Limited (6,000 shares);
	(iv)	Leung Yee Enterprises Company Limited which subsequently changed its name to Yiu Leung Yee Tong Enterprises Company Limited (1,000 shares); and
	(v)	Meeting House (Property Agent) Limited (1,000 shares).
(b)	shareholders (i), (ii), (iv) and (v) and the 3rd defendant were the directors of the 1st defendant.

3.  By an assignment dated 14 January 2000, the 1^st defendant acquired Kowloon Inland Lot No. 7763 (29 Battery Street) and Kowloon Inland Lot No. 7596 (31 Battery Street) at the price of $11,500,000.

4.  A document called “Provisional Agreement for Sale and Purchase” dated 22 August 2003 (“the 22 August 2003 document”) signed on behalf of the plaintiff and by the 2^nd defendant, said to be “For and On Behalf of” the 1^st defendant, stated that the 1^st defendant agreed to sell and the plaintiff agreed to purchase 29 & 31 Battery Street at the price of $11,500,000.

5.  There were numerous alterations on the 22 August 2003 document.  The plaintiff made no attempt to adduce any evidence on the date when, the place where and the person by whom each alteration was made and on whether each alteration was agreed to by both the vendor and the purchaser under 22 August 2003 document.

6.  The 22 August 2003 document, as altered, contained the following provisions:-

(a)     The initial deposit of $1,000,000 “shall be paid [by the purchaser to the vendor] upon signing of this agreement” [clause (2)(a)];

(b)    The further deposit of $150,000 “shall be paid” by the purchaser to the vendor upon signing of the formal agreement on or before 5 September 2003 [clause (2)(b)];

(c)     The balance of the purchase price, i.e. $10,350,000 “shall be paid” by the purchaser to the vendor upon completion on or before 22 October 2003 [clause (2)(d)];

(d)    The vendor’s solicitors were altered from Messrs Yung Yu Yuen & Co. to Messrs Pang Wan & Choi (clause 6); and

(e)     The receipt clause for the initial deposit of $1,000,000 was left blank and the cheque number had been altered.

7.  On 29 August 2003, the plaintiff registered the 22 August 2003 document against 29 & 31 Battery Street by memorial no. 8994229.

8.  On 23 September 2003, the plaintiff issued the Writ in this action claiming:-

(a)     against the 1^st defendant, special performance of the 22 August 2003 document and/or damages for breach of the 22 August 2003 document;

(b)    against the 3^rd defendant, for damages for procuring the 1^st defendant to repudiate the 22 August 2003 document; and

(c)     against the 2^nd defendant, for damages for breach of warranty of authority.

9.  On 24 September 2003, the plaintiff registered this action as a lis pendens against 29 & 31 Battery Street by memorial no. 9008762.

10.  The main defence of the 1^st and 3^rd defendants is that the 2^nd defendant had no authority to sign the 22 August 2003 document on behalf of the 1^st defendant.  The 1^st defendant counterclaims an order vacating the registrations of the 22 August 2003 document and the lis pendens.

11.  The main defence of the 2^nd defendant, as pleaded in paragraph 6(a) of his Defence is that:-

“	(a)	As to paragraph 4 of the Statement of Claim, the 2nd Defendant says that Ms Kwong had inadvertently and erroneously written on the Agreement one ‘Jet Enterprises Limited’ as the purchaser.  For the avoidance of doubt, the 2nd Defendant avers that he entered into the Agreement for and on behalf of the 1st Defendant with the Plaintiff.
	(b)	Subject to the matters aforesaid, paragraph 4 of the Statement of Claim is admitted.”

12.  Paragraph 4 of the Statement of Claim pleads the 22 August 2003 document as an agreement made by the 1^st defendant.

Actual authority of the 2^nd defendant

13.  The plaintiff alleged in paragraph 15 of the Statement of Claim that 2^nd defendant had actual authority.  Not only did the plaintiff adduce no evidence on the 2^nd defendant’s actual authority, the plaintiff submitted through counsel in paragraph 7 of the “Skeleton Closing Submissions for the Plaintiff” that the “inescapable conclusion is that D2 did not have actual authority to sign the Agreement on behalf of D1”.

14.  The 2^nd defendant elected not to give evidence and did not call any witness.

15.  The 3^rd defendant and other witnesses called by the 1^st and 3^rd defendants testified that the 2^nd defendant did not have authority.  I accept the evidence of the 1^st and 3^rd defendants’ witnesses on this point.

16.  I find that the 2^nd defendant did not have any actual authority.

Ostensible/apparent authority of the 2^nd defendant

17.  The plaintiff alleged in paragraph 15 of the Statement of Claim that the 2^nd defendant had ostensible/apparent authority and sought to rely on the rule in Turquand’s case.

18.  In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Limited [1964] 2 QB 480 at pp. 505 – 506, Diplock LJ summarised the relevant law by stating four conditions which must be fulfilled to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent who had no actual authority to do so.  It must be shown:-

“	(a)	that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;
	(b)	that such representation was made by a person or persons who had ‘actual’ authority to manage the business of the company either generally or in respect of those matters to which the contract relates;
	(c)	that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and
	(d)	that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.”

19.  In Pacific Foundation Finance Limited v Fairyoung Holdings  Limited [1999] 3 HKLRD 153 at p. 157, Mortimer VP made the point that if a party seeks to rely upon the rule in Turquand’s case, it normally must be pleaded and that the rule is one of mixed law and fact.  Rogers JA agreed that a plea relying upon the rule in Turquand’s case is a plea of mixed fact and law (p. 160).

20.  In Hua Rong Finance Limited v Mega Capital Enterprises Limited and another [2001] 3 HKLRD 623 at paragraphs 22 and 23, Rogers VP held that matters which were not known to or acceded to by the company or any of the other directors were irrelevant for the purposes of considering ostensible authority; further held that none of the facts relied on in that case, whether taken alone or in combination, amounted to a representation by the company that the director in question had authority; and referred to the passage of Diplock LJ quoted above as setting out the requirements for a case of ostensible authority to succeed.

21.  In Yip Lai Fong and another v Sin Tung Hing and others, unreported, CACV 116 of 2003, 16 April 2004, Lam J (delivering the judgment of the Court of Appeal) held at paragraph 25 that for the purpose of ostensible/apparent authority, holding out must be made by some person or persons who have actual authority from the company to make the representation and that the contractor cannot rely on the representation by the director in question as to his own authority.

22.  The particulars pleaded in paragraph 15 of the Statement of Claim in support of the allegation that the 2^nd defendant had authority are:-

“	a.	The 2nd Defendant was/is at all material times a director and shareholder in the 1st Defendant.
	b.	The 2nd Defendant’s wife, Wong Pui Shuk, at all material times was/is also a director and shareholder in the 1st Defendant.
	c.	Ms. Kwong had been in regular contract with the 2nd Defendant since about March, 2000 concerning the marketing and sale of the said premises.
	d.	Prior to the signing of the Agreement, the 2nd Defendant produced to Ms. Kwong the originals of the tenancy agreements subject to which the said premises were sold.
	e.	The said tenancy agreements show that the 2nd Defendant was the authorised signatory for and on behalf of the 1st Defendant.
	f.	Prior to the signing of the Agreement, the 2nd Defendant told Ms. Kwong that all the shareholders in the 1st Defendant had agreed to sell the said premises to her client for HK$11,500,000.”

23.  Matter “a” is an attempt to carry the doctrine of presumed power too far.  A similar attempt was rejected by the English Court of Appeal in Houghton & Co. v Nothard, Lowe and Wills [1927] 1 KB 246 at pp. 266 & 267:-

“But even if Mr. Dart, and through him the plaintiffs, had been aware of the power of delegation in the articles of the defendant company, this would not in my judgment have entitled him or them to assume that this power had been exercised in favour of a director, secretary or other officer of the company so as to validate the contract now in question. The learned judge, indeed, has said that this follows from a well recognized line of cases, refers as an example to the case of In re Fireproof Doors, Ld. (1), and holds that the plaintiffs were entitled to assume that anything necessary to delegate any of the functions of the board to one director or two directors had been done as a matter of internal management. But, in my opinion, this is to carry the doctrine of presumed power far beyond anything that has hitherto been decided, and to place limited companies, without any sufficient reason for so doing, at the mercy of any servant or agent who should purport to contract on their behalf. On this view, not only a director of a limited company with articles founded on Table A, but a secretary or any subordinate officer might be treated by a third party acting in good faith as capable of binding the company by any sort of contract, however exceptional, on the ground that a power of making such a contract might conceivably have been entrusted to him.

24.  Counsel for the plaintiff abandoned matter “b” in his final submission.

25.  Matter “c” is at best a representation by the agent whose authority is in issue, not a representation by the principal sought to be bound.  There is no allegation that it was a matter which was known to or acceded to by the 1^st defendant or any of the other directors.

26.  The plaintiff has made no attempt to establish matters “d” or “e”.  No attempt has been made to identify any of the tenancy agreements which the intended sale was said to be subject to.  No attempt has been made to identify the tenancy agreements taken away by Ms Kwong, the estate agent, for photocopying.  In any event, there is no allegation that Ms Kwong or any official of the plaintiff had taken the trouble to look at the contents of any tenancy agreement prior to the signing of the 22 August 2003 document.

27.  Matter “f” is clearly a representation by the agent whose authority is in issue, not a representation by the principal sought to be bound.  There is no allegation that it was a matter which was known to or acceded to by the 1^st defendant or any of the other directors.

28.  The plaintiff has failed to show that the 2^nd defendant had any ostensible/apparent authority.

The plaintiff’s claims against the 1^st defendant

29.  The 2^nd defendant had no authority and the plaintiff’s claims against the 1^st defendant must be dismissed.

30.  I should add that even if 2^nd defendant had authority and assuming (without deciding) that a contract had been formed, I would still require a lot of persuasion to order specific performance.  The plaintiff has neither performed nor tendered performance of its obligations under the 22 August 2003 document.  The plaintiff has not satisfied me on a balance of probabilities that it has been ready, willing or able to perform.

The plaintiff’s claims against the 3^rd defendant

31.  It follows that the plaintiffs’ claims against the 3^rd defendant also fail and must be dismissed.

The 1^st defendant’s counterclaim

32.  It also follows that the registrations of the 22 August 2003 document and the lis pendens must be vacated.

The plaintiff’s claims against the 2^nd defendant

33.  In his final submission, the 2^nd defendant contended against the formation of any contract.  I drew his attention to paragraph 6 of his Defence and paragraph 4 of the Statement of Claim and asked if wished to say anything.  He said he had nothing to say.

34.  Formation of the contract was admitted by him in his pleading.  There is no application to amend and he is bound by his own pleading.

35.  I have already found that he had no authority.  I find further that he warranted that he had authority and conclude that he was in breach of his warranty of authority.

36.   The plaintiff has neither alleged nor proved any loss or damage.  Damages must therefore be nominal and I award the plaintiff the sum of $1.

Order

37.  I order that:-

(a)     The plaintiffs’ claims against the 1^st and 3^rd defendants be dismissed.

(b)    The registration of the 22 August 2003 document against 29 & 31 Battery Street by memorial no. 8994229 be vacated.

(c)     The registration of this action as a lis pendens against 29 & 31 Battery Street by memorial no. 9008762 be vacated.

(d)    Judgment in the sum of $1 be entered in favour of the plaintiff against the 2^nd defendant.

38.  I view the plaintiff’s action against the 1^st and 3^rd defendants as an opportunistic move which the plaintiff must pay for itself.

39.  I make an order nisi under Order 42 rule 5B(6) of the Rules of the High Court, Cap. 4, that the plaintiff do pay the 1^st and 3^rd defendants their costs of the action and of the counterclaim and that the 2^nd defendant do pay the plaintiff its costs of the action against the 2^nd defendant.