FCL CHINA DEVELOPMENT PTE. LTD AND ANOTHER v. LAI YUEN LING AND OTHERS

CACV 193/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 193 OF 2014

(ON APPEAL FROM HCA NO. 642 OF 2013)

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REASONS FOR JUDGMENT

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Hon Lam VP :

1. I agree with the judgment of Cheung JA.

Hon Cheung JA :

2. Deputy High Court Judge David Lok gave summary judgment respectively to the 1^st plaintiff against the four defendants for US$5,742,315.22 and to the 2^nd plaintiff against the 1^st, 3^rd and 4^th defendants for RMB 798,463.20.

3. The defendants appealed.  We dismissed the appeal at the conclusion of the hearing.

Background

4. The background of the case is succinctly set out by the Judge which I will gratefully adopt with supplements where necessary.   

1)   Tri-Partite Agreement

5. On 25 October 2006, a tri-parte framework agreement (‘the Tri-Partite Agreement’) was entered into between Qingdao State Enterprise (of the Qingdao Provincial Government), Hong Kong Fung Choi Co Ltd (‘Fung Choi’) and Frasers Centrepoint Ltd (‘Frasers Centrepoint’). Under Clause 6 of the Tri-Partite Agreement, Fung Choi and Frasers Centrepoint were to incorporate a company with a minimum registered capital of US$50 million to carry out a development project in Qingdao (‘the Qingdao Project’) on terms to be agreed between them.

2)   Joint Venture Agreement

6. On 16 March 2007, the 1^st plaintiff (affiliate of Frasers Centrepoint) on the one hand and the 2^nd, 3^rd and 4^th defendants (affiliates of Fung Choi) on the other hand entered into a joint-venture agreement to carry on the business under the Qingdao Project (‘the JV Agreement’).  The 1^st defendant was the sole shareholder of the 3^rd defendant.  The 3^rd defendant was the controlling shareholder of the 2^nd defendant which in turn was the sole shareholder of the 4^th defendant.  The 1^st defendant was also the sole director of the 2^nd, 3^rd and 4^th defendants. 

7. The main provisions of the JV Agreement are as follows:

1) the 1^st plaintiff was to subscribe for 65 shares in the 4^th defendant, whilst the 2^nd defendant was to subscribe for 34 shares in addition to the one share it already owned (Clause 6.01);

2) the funding of the 4^th defendant would be US$50 million, to be provided:

i) subject to the subscriptions having been completed, initially by shareholders’ loans in the respective sums of US$6.5 million and US$3.5 million to be provided by the 1^st plaintiff and the 2^nd defendant by the end of March 2007; and

ii) the balance would be advanced by the 1^st plaintiff and the 2^nd defendant to the 4^th defendant in the ‘specified proportion’ (initially the 1^st plaintiff 65% and the 2^nd defendant 35%: Clause 1.01) in the manner resolved by the board (Clause 8.01(a));

3) a wholly-owned foreign enterprise was to be established in Qingdao for the operation of the project (Clause 7.04);

4) the 1^st plaintiff would be entitled to appoint four of the six board members of the 4^th defendant which in turn controlled the wholly-owned foreign enterprise (Clause 9.02(a)); and

5) the 3^rd defendant guaranteed the 2^nd defendant’s obligations under the JV Agreement (Clause 12.11).

8. On 19 December 2006, Qingdao Fraser Real Property Development Co Ltd (‘Qingdao Fraser’) was incorporated as the wholly-owned foreign enterprise for the development project under the JV Agreement.  The name of Qingdao Fraser was subsequently changed to ‘Qingdao Huidafeng Trading Co Ltd’.

9. In compliance with their obligations under Clause 8.01(a) of the JV Agreement, the 1^st plaintiff and the 2^nd defendant injected the respective sums of US$6.5 million and US$1.5 million into Qingdao Fraser.

10. Unfortunately, there was a breakdown of trust and confidence between the parties.  The plaintiffs claimed that the 2^nd to 4^th defendants were in breach of the terms of the JV Agreement in that the 2^nd to 4^th defendants had failed to procure the issue of any shares of the 4^th defendant to the 1^st plaintiff, the 2^nd defendant failed to appoint directors nominated by the 1^st plaintiff to the 4^thdefendant’s board and the 2^nd defendant failed to inject the agreed sum of US$3.5 million into Qingdao Fraser (only US$1.5 million was paid).  On the other hand, the defendants complained that there was mismanagement of Qingdao Fraser by the plaintiffs.

Settlement Deeds

11. In order to resolve the dispute between the parties, the defendants agreed to buy out the plaintiffs’ interests in the Qingdao Project.  The parties therefore entered into two Settlement Deeds which are the subject-matters of the present claims.

12. The 1^st Settlement Deed was made between the 1^st plaintiff, the four defendants and Qingdao Frasers (‘the 1^st Settlement Deed’).   Its material provisions are as follows:

i) the 2^nd to 4^th defendants would pay the 1^st plaintiff the Settlement Amount of US$5,737,216.68 (‘the Settlement Amount’) on or before 17 April 2012 (Clauses 3.1 and 3.2).  The sum is the difference of US$6.5 million paid by the 1^st plaintiff less certain deductions.

ii) the sums referred to in Clauses 3.2 and 3.3 were used only for the purposes of arriving at the Settlement Amount and the 1^st plaintiff was under no liability in respect of Qingdao Fraser’s expenses or liquidation expenses, including any tax, fees and/or penalty (Clause 3.5);

iii) the 1^st defendant guaranteed the performance of the obligations on the part of the 2^nd to 4^th defendants (Clause 4.1);

iv) the 2^nd to 4^th defendants would liquidate Qingdao Fraser and, without affecting the defendants’ liability to pay the Settlement Amount and the 1^st defendant’s liability under the guarantee, would apply the proceeds obtained after the liquidation of Qingdao Fraser towards the payment of the Settlement Amount if the proceeds were received before 17 April 2012 (Clauses 5.3(a) and (b)); and

v) the liability of the 2^nd to 4^th defendants to pay the Settlement Amount under Clause 3.1, and the liability of the 1^st defendant under the guarantee, were not dependent on or in any way affected by the liquidation of Qingdao Fraser or its progress (Clause 5.3(c)).

13. At the same time, the 2^nd plaintiff entered into a Settlement Deed with the 1^st, 3^rd and 4^th defendants and Qingdao Fraser (‘the 2^nd Settlement Deed’).  Its material provisions are :

i) Qingdao Fraser acknowledged that it was indebted to the 2^nd plaintiff for the sum of RMB798,463.20 (as money paid by the 2^nd plaintiff to discharge the expenses of Qingdao Fraser) (‘the Agreed Indebted Amount’), which it agreed to repay the 2^nd plaintiff on or before 31 December 2011 (Clause 2.1); and

ii) the 1^st, 3^rd and 4^th defendants guaranteed the due and punctual payment of the Agreed Indebted Amount to the 2^nd plaintiff (Clause 3.1).

14. The Settlement Amount under the 1^st Settlement Deed was subject to adjustment:

i) under Clause 3.3(a), if the defendants within one month from the date of the deed could prove to the satisfaction of the 1^st plaintiff that any items set out in Appendix 1 were properly incurred by Qingdao Fraser, the Settlement Amount would be correspondingly reduced; and

ii) under Clause 3.3(b), if the 1^st plaintiff within the same period proved to the satisfaction of the defendants that the legal expenses set out in Appendix 2 of RMB 91,800 had been properly incurred, the Settlement Amount would be increased by 35% of that amount.

15. The defendants did not provide the requisite proof under Clause 3.3 within the time specified and so they lost the right to adjust the Settlement Amount.  On the other hand, the 1^st plaintiff, by emails dated 4 September and 21 December 2011, provided proof relating to the propriety of the legal expenses.  Accordingly, the Settlement Amount was increased by 35% of RMB 91,800 (RMB 32,130) = US$5,098.54, making a total of US$5,742,315.22 (US$5,737,216.68 + US$5,098.54).  The settlement sum under the 2^nd Settlement Agreement remained at RMB 798,463.20.

16. It is common ground that the defendants have not made any payment to the plaintiffs under any of the Settlement Deeds and the plaintiffs sued the defendants for these two sums.

Defence

17. The defendants opposed the summary judgment application on three grounds. 

18. First, in August and September 2007, Dr Han Cheong Fong (‘Dr Han’), the former Chief Executive Officer of the 1^st plaintiff, made a representation to the 1^st defendant that Frasers Centrepoint had reached an agreement with the Qingdao State Enterprise and/or Qingdao Provincial Government that the latter would not claim against Frasers Centrepoint or Qingdao Fraser for breach of the Tri-Partite Agreement, and that the Qingdao State Enterprise and Qingdao Provincial Government had agreed to release the capital injected into Qingdao Fraser by the parties after the dissolution of Qingdao Fraser.  As a result of this representation, it was the common intention of the parties that when they entered into the two Settlement Deeds that the payments under those deeds would be made using the capital released under the liquidation of Qingdao Fraser.  Since the liquidation process has yet completed and the representation given by Dr Han turned out to be incorrect, the defendants are not liable to make the payments under the Settlement Deeds (‘the misrepresentation defence’).

19. Second, the plaintiffs had actively prevented the defendants’ performance of the obligations under the Settlement Deeds by obstructing the liquidation of Qingdao Fraser.  The plaintiffs obstructed the liquidation because:

1) the plaintiffs had lost the financial accounts of Qingdao Fraser; and

2) no settlement has been reached between the plaintiffs and the External Economy and Trading Bureau and the Bureau is pursuing Qingdao Fraser for the alleged loss suffered by the Qingdao State Enterprise due to the failure of the Qingdao Project. 

20. However, the defendant later said that the plaintiffs, through Madam Ong-Koh Wee Nah (‘Madam Ong-Koh’), took away the books and records of Qingdao Fraser in late 2007 (‘the prevention defence’).

21. Third, by reason of the uncompleted liquidation of Qingdao Fraser, the defendants are unable to obtain their share of capital ‘locked up’ in Qingdao Fraser and they are therefore entitled to set-off the ‘locked up’ amount against the plaintiffs’ claims (‘the set-off defence’).

The Judge’s decision

22. The Judge rejected all three defences.

1) Misrepresentation

(1) The alleged misrepresentation was inconsistent with Clause 5.3(c) of the 1^st Settlement Deed which did not say that the settlement sum was to come only from the proceeds of liquidation of Qingdao Fraser.

(2) Clause 5.3(c) imposed a distinct liability on the 2^nd, 3^rd and 4^th defendants to make payment and on the 1^st defendant to guarantee the payment irrespective of the liquidation of Qingdao Fraser.

(3) This also applies to the 2^nd Settlement Deed which imposed a time limit of 2.5 months to make payment.

(4) Even if Dr Han had made the representation, Clause 5.3 of the 1^st Settlement Deed showed that it should not be relied upon.

(5) The representation was made four years before the Settlement Deeds.  It is incredible that the defendants had not made attempts to verify the accuracy of the representation before entering into the Settlement Deeds.

(6) The alleged misrepresentation was inconsistent with the stand of the Qingdao Provincial Government.  Qingdao Sifang District Development Co Ltd, by a letter dated 10 January 2008 to Qingdao Fraser, expressly stated that it would reserve all the rights to claim against Qingdao Fraser for the loss arising from the breach of the Tri-Partite Agreement by Frasers Centrepoint.  Further, the Qingdao Foreign Trade Cooperation Bureau, on 8 June 2009, agreed to reduce the registered capital of Qingdao Fraser from US$50 million to US$8 million. In October 2010, approval was also given to Qingdao Fraser to change its name, address and scope of business. 

(7) Since the defendants would be responsible for the liquidation of Qingdao Fraser, it could easily have verified the representation.

(8) The defendants were aware that the liquidation would take 18 months to complete yet they agreed to make payments within six months under the 1^st Settlement Deed and 2.5 months under the 2^nd Settlement Deed.

(9) It is doubtful if the plaintiffs had obstructed the liquidation.  The plaintiffs had actually demanded the defendants to provide the latest audited accounts of the 4^th defendant and not the other way round.

2) Prevention and set off

(10) In view of the estimated time of the liquidation and the deadlines for payment, the parties’ intention must be that the defendants would have to make the payments under both Settlement Deeds before the specified dates no matter what was the cause for the non-completion of the liquidation.

(11) These two defences were inapplicable to the 2^nd plaintiff who was only an affiliated company of Frasers Centrepoint in providing funds to cover certain expenses of Qingdao Fraser or providing consultancy services to Qingdao Fraser.  There was no duty on the 2^nd plaintiff to co-operate on the liquidation of Qingdao Fraser.

(12) The defendants did not immediately rely on these defences after the payments were due.  The defendants merely sought time for payment.  The misrepresentation defence was only raised in the defence and counterclaim and the prevention and set off defence came one year later in the rejoinder.

Grounds of appeal

23. The defendants relied on the same grounds in their appeal.

1)  Misrepresentation

24. The defendants contended that the plaintiffs had not produced any evidence from Dr Han himself to refute the allegation of misrepresentation and no reasonable explanation was given for this omission.  The denials by the plaintiffs were based on fragmented records and hearsay evidence.  The defendants contended that a misrepresentation which would justify rescission of a contract may be used as a defence to an action brought by the representor against the representee : Academy of Health and Fitness Pty. Ltd v Power [1973] VR 254 and Chitty on Contracts (31^st Ed., 2012) at pages 635 to 636, paragraph 6-114. 

25. Further the plaintiffs were not entitled to rely on any ‘entire agreement’ clause (Clause 6.1) in the Settlement Deeds.  An entire agreement clause does not preclude a claim in misrepresentation : AXA Sun Life Services Plc v Campbell Martin Ltd [2011] All ER (D) 206 (Feb) per Rix LJ.

26. In my view the Judge had not relied on the ‘entire agreement’ clause to reject the misrepresentation defence.  Rather he did so on the basis that this defence is incredible.  The authorities on summary judgment are clear that the burden is on the defendant to show that there are triable issues by way of a credible defence in order for the matter to proceed to trial.  The credibility of a defence is to be judged by all surrounding circumstances.  In my view the matters relied upon by the Judge clearly show that the misrepresentation defence is incredible in respect of the initial response by the defendants when the payments were due, the way this defence was first raised, the long time lapse between the alleged representation and the Settlement Deeds, the ability of the defendants to verify the representation and the inconsistencies between the alleged representation and the terms of the settlement that the parties had agreed upon as to the timing of the payments.  In my view the absence of direct evidence from Dr Han does not lessen the force of these matters against the misrepresentation defence.

2)  Prevention defence

27. The defendants submitted that there is an implied obligation in the Settlement Deeds that the plaintiffs must not obstruct the liquidation of Qingdao Fraser or to obstruct the release of the US$8 million capital injected into Qingdao Fraser.  The plaintiffs were in breach of this implied obligation and they would not be permitted to take advantage of their own wrong.  In Kensland Realty Ltd v Whale View Investment Ltd & Anor (2001) 4 HKCFAR 381 at paragraphs 96 to 98, the Court of Final Appeal per Ribeiro PJ held that :

‘ 96. On the basis of the foregoing discussion, it seems clear, based on the underlying principle that a person is not permitted to take advantage of his own wrong, that a contractual party who is in breach of an obligation owed to the other party, will be prevented from asserting rights or claiming benefits which arise in consequence of his breach. The cases also show that where this “prevention principle” applies, it may be given effect in different ways.

97. In many cases, it will be appropriate to implement it as a substantive principle of law that precludes the wrongdoer from taking advantage of his own wrong, whatever the contract may say and however clearly the contract may appear to confer on the wrongdoer an unqualified right to enjoy such advantages.  Cases like Rede v. Farr (1817) 6 M & S 121 and New Zealand Shipping Co Ltd v Société des Ateliers et Chantiers de France [1919] AC 1, may be considered examples.

98. In other cases, where appropriate, the courts give effect to the principle as one of construction, holding that the contractual terms with which they are concerned must be construed by applying the principle as a canon or presumption of construction: see Lewison, The Interpretation of Contracts (2^nd ed.) (Sweet & Maxwell) para. 6.08.’

28. The defendants submitted that Clause K of the Recital and Clause 5.3(b) of the 1^st Settlement Deed showed that it was the common intention of the parties to liquidate Qingdao Fraser and to apply the capital released from Qingdao Fraser as payment of the settlement sum towards the 1^st plaintiff.  There was an implied obligation imposed on the 1^st plaintiff not to obstruct the liquidation.

29. In my view the ‘prevention’ principle set out in Kensland Realty Ltd is well-established.  The difficulty of the defendants in this case is simply that they failed to show that there was such an implied obligation imposed on the plaintiffs under the terms of the settlement and the contemporaneous evidence does not show the plaintiffs have obstructed the liquidation.  Clause K of the Recital merely showed that it was the defendants who would be responsible for the liquidation.  Further Clause 5.3(b) which was so heavily relied upon by the defendants, does not assist them at all because it only makes it clear their liability to make payment is independent of the receipt of the proceeds of liquidation and payment thereof the 1^st plaintiff. 

‘ Clause 5.3(b) :

Without in any way affecting the liability and obligation of [D2], [D3], [D4] and Qingdao Fraser to pay the Settlement Amount under Clause 3.1 above and [D1]’s liability under the Guarantee under Clause 4 above, in the event that [D4] receives the proceeds of liquidation of Qingdao Fraser on or before 17^th April 2012, [D2], [D3], [D4] and [D1] agrees, forthwith upon receipt of the said proceeds, to apply the proceeds towards the payment or part payment to [P1] of the Settlement Amount.’

30. The defendants also relied upon Clause 4.1(c) of the 2^nd Settlement Deed.  I do not see how this clause would assist them.  Again it merely shows that the defendants were responsible for the liquidation but does not impose a corresponding implied obligation on the plaintiffs’ part.

31. Further the Judge was clearly not impressed with the evidence on the so-called obstruction on the part of the plaintiffs.

32. More importantly the evidence showed that the reason why the Qingdao City Foreign Trade Economic Cooperation Bureau did not approve the dissolution of Qingdao Fraser was because of Qingdao Fraser’s unilateral termination of the joint venture agreement and its failure to reach a compromise with the Qingdao Provincial Government.  The failure to produce books was not featured in the reason given for not approving the dissolution.  That failure was only said to have caused the authority not able to verify the income tax payable by Qingdao Fraser during the liquidation period.

3) Set off

33. The defendants claimed that due to the inability to get the US$1.5 million and US$6.5 million that they and the 1^st plaintiff had respectively injected into it, they were entitled to a set off of these sums from the plaintiffs’ claim.

34. Mr Victor Joffe, for the plaintiffs, argued that in order to rely on set off, the defendants have to show that they had a monetary claim against the plaintiffs for breach of contract or some other cause of action.  None was suggested.

35. On the other hand, Mr Felix Ng, for the defendants who conducted the appeal with ability, argued that the non-provision of books and records by the plaintiffs and the mispresentation provide the defendants with a defence in equitable set off, relying on Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] 1 AC 1056 at 1103, where Lord Brandon said that an equitable set-off may occur if there is a cross-claim ‘flowing out of and inseparably connected with the dealings and transactions which also give rise to the claim’.  Mr Ng also relied upon Doherty v Murphy [1996] 2 VR 553 and Derham, ‘Derham on the Law of Set-off’ (OUP, 2010) Ch. 4, paragraph 4.97 and 4.99.

36. In my view it is not necessary to resolve this issue here since the defendants had failed to establish by way of credible defence the basis of the mispresentation and prevention defences in the first place.

Adjustment

37. There is some belated suggestion that the settlement sum should be adjusted because of certain expenses paid by the defendants.  However, as the Judge rightly held, the defendants had failed to comply with the time limit for adjustment.

Conclusion

38. The Judge was correct in ordering judgment against the defendants.  The appeal was accordingly dismissed with costs to the plaintiffs.

Hon Yuen JA :

39. I agree with the judgment of Cheung JA.