SIDEPEC INTERNATIONAL LTD v. CHEUNG HING

HCA 829/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 829 OF 2010

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J U D G M E N T

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1.  Wong Chor Cheung (“Wong”) and the defendant (“Cheung”) each holds 50% issued shares in Wah Fung Forest Resources Ltd (“Wah Fung”). As representative of the plaintiff (“Sidepec”), Wong concluded an agreement for the purchase of Cheung’s shares in Wah Fung. Sidepec seeks specific performance of the sale and purchase agreement. Cheung disputes liability on the basis that the agreement has been terminated upon Sidepec’s default. He counterclaims for declaration to that effect and forfeiture of the payments received.

BACKGROUND

2.  Wong and Cheung had been friends since the 1960s.  In 1991, the two agreed to co-invest in a property, namely, at 3/F, 23 Plantation Road with car parking space B1, the Peak, Hong Kong (“the Property”). Wah Fung was a company owned by Wong and his family members; and now became the corporate vehicle to hold the Property.  Wong and Cheung became holders of 50% (or 6,000 shares) each in Wah Fung.  The Property has since been let for rent.

3.  Since 2002, Cheung wanted to sell the Property, which Wong agreed.  Nothing materialised.  In 2005, Cheung decided instead to dispose of his interest in the Propery by selling his shares in Wah Fung.  Wong had introduced offers to purchase Cheung’s shares in 2005 and 2006, but those offers were admittedly rejected by Cheung.

4.  Finally, Wong introduced Sidepec to purchase Cheung’s shares in Wah Fung.  Acting as Sidepec’s representative, Wong entered into an agreement with Cheung.  The agreement was admittedly partly written and partly orally made.  As far as the written part is concerned, it was written in Chinese and dated 12 July 2006.  The written agreement recorded that the consideration was HK$5,000,000.  The first payment of HK$300,000 was made on the same day.  As to the balance, the written agreement says “上述股份轉讓以总金額付清為准” (or essentially completion upon full payment).

5.  The oral part of the agreement is in dispute.

6.  In October 2006, Cheung received another sum of HK$30,000 from Wong.  In January 2007, he received a further sum of HK$50,000 from Wong’s wife.  Apart from the total sum of HK$380,000, Cheung has received no further payment for the sale of his shares in Wah Fung.

7.  There is no dispute that Wong and Cheung met in June 2007.  What happened during the meeting is in dispute.

8.  In July 2008, Sidepec, through solicitors, demanded and gave notice to complete the sale and purchase of Cheung’s shares on 31 August 2008 allegedly pursuant to the oral part of the agreement between the parties. In reply, Cheung disputed the alleged oral terms of their agreement.  Further correspondence ensued in September 2008, but not since then until some 20 months later.

9.  Due to his dissatisfaction with the situation, Cheung actually commenced action against Wong (HCA 336/2008) in March 2008.  Wah Fung was joined as a defendant.  In other words, Sidepec’s notice to complete mentioned above came after that.  That action was settled in March 2010.  By consent, Wong and Cheung agreed that Wah Fung should sell the Property and the proceeds of sale should be paid into court.

10.  Wong then entered into an agreement on behalf of Wah Fung to sell the Property.  On the ground that the intended sale was a sham and at gross undervalue without his prior knowledge, Cheung commenced another action and managed to obtain an interim injunction restraining the intended sale (HCA 925/2010)[1].

11.  Back to the present case.  After some late amendment of pleading and introduction of supplemental witness statements[2], this case proceeded to trial upon the understanding that Wong as well as Cheung and his wife would testify.

12.  However, 1 week before the trial, Sidepec applied for adjournment of the trial.  I ruled against Sidepec for reasons handed down in writing on 24 July 2013.  I shall not repeat my observations then, perhaps except for mentioning that the application was unmeritorious.

13.  When the case came for trial, Sidepec was no longer legally represented.  Purporting to appear on behalf of Sidepec was one Mr Wong Ka Fai.  This Mr Wong essentially explained that Sidepec had just been sold to his company; and he had just been appointed as a director of Sidepec.

14.  There was no compliance with O.5, r.6(3) of the Rules of the High Court; and it was not for this court to give leave to this Mr Wong to represent Sidepec: see BOC v Expert Promise Limited, HCMP 1136/2003 (17 September 2003) at §5.

15.  Sidepec did not propose to proceed with the trial on that day in any event.  Wong, the person who was behind the steer driving the deal between the parties from conception to conclusion and the only witness for Sidepec, did not show up in court.  When asked about that, the Mr Wong appearing suggested that Wong had just met a traffic accident in the Mainland that prevented him from attending the trial.

16.  According to the affidavit evidence filed for its last attempt to adjourn the trial (which, as mentioned, was dismissed), the former legal representatives of Sidepec were still in contact with Wong and there was no mention of any accident to him by 26 July 2013.  In other words, Wong happened to have met a traffic accident in those few days before the trial.

17.  I was hardly impressed by the development that had all to do with Sidepec and Wong just before the trial.  Considering all the circumstances, I could only treat Sidepec as absent and refuse effectively another attempt to adjourn the trial.

THE ISSUES

18.  The major dispute lies with the following issues:

(1)   the terms of the agreement;

(2)   the party in breach; and

(3)   the entitlement to relief.

19.  Cheung and his wife gave evidence by adopting their respective witness statements.  The latter essentially corroborated Cheung’s evidence in respect of the meeting with Wong on 12 July 2006 when the agreement was made.  Plainly their evidence was unchallenged.

THE TERMS OF THE AGREEMENT

20.  As mentioned, there is no dispute that the agreement between the parties was partly orally made.  According to Sidepec, or effectively Wong, he met with Cheung in the end of June 2006 at Mei Yee Lim Restaurant in Mongkok.  During the meeting, it was orally agreed that:

(1)   a sum of HK$300,000 would be paid upon entering into the agreement; and the balance of the purchase price for Cheung’s shares in the sum of HK$4,700,000 would be payable by instalments;

(2)   the timing and amount of each instalment would be entirely within the sole discretion of Sidepec; and

(3)   Cheung would have to allow Sidepec time to sell some of its real properties in order to raise the necessary fund; such period was expected to take about 1 to 2 years.

21.  Wong’s version of the oral part of the parties’ agreement was obviously not tested in court.  Yet it should also be noted that such version only came about in the following manner:

(1)   Up to the pre-trial review, the pleaded case of Sidepec (presumably upon the instructions of Wong) was that the oral part of the agreement was made before the meeting on 12 July 2006.  It was allegedly agreed between Wong (on behalf of Sidepec) and Cheung that completion and payment of the balance of the purchase price for Cheung’s shares would take place on a date to be agreed or upon reasonable notice by Sidepec to Cheung.  In other words, the alleged agreement to bilaterally agree on the completion date and Sidepec’s option to fix the completion date unilaterally by notice co-existed.

(2)   In the pre-action correspondence between the parties, Sidepec, through solicitors (again presumably pursuant to the instructions of Wong), put forward the same version of the alleged oral terms as to completion and payment.

(3)   It was only at the pre-trial review that the application to amend the pleading was made (orally).  Neither was there a formal application nor the draft amendment.  The formal application was only subsequently made, argued and allowed^[3].

(4)   Now the pleaded case of Sidepec is that the oral agreement was made during the meeting between Wong and Cheung at the time and place as Cheung contends.  But more importantly, the payment terms became that Sidepec had the liberty to pay the balance of the purchase price by instalments at such times and in such amounts at its sole discretion over a period of 1 to 2 years.

(5)   Irrespective of the explanation that might be given for the purpose of the application for amendment, Wong was not available for cross examination in respect of the change of such a crucial part of Sidepec’s case some 3 years after the commencement of action.

22.  As to Cheung, he gave the following account of how the parties’ agreement was reached:

(1)   During the meeting in end of June 2006 at Mei Yee Lim Restaurant in Mongkok, Wong represented to Cheung that it was his rich customer and friend in the Mainland who intended to purchase his shares in Wah Fung.

(2)   There would be an initial payment of HK$500,000 as deposit with completion and the balance of HK$4,500,000 payable in 2 months.

(3)   Cheung therefore attended the accountant’s office for signing an agreement on 12 July 2006.

(4)   However when the written agreement was presented to him, Cheung discovered that he was to be paid only HK$300,000, and Wong represented that the HK$200,000 balance of the deposit would be paid after his sale of some properties in Australia in 2 weeks.

(5)   Upon the above representation, Cheung signed the written agreement and received the HK$300,000.

23.  Cheung’s evidence was unchallenged. Objectively, I also find that Cheung’s version was in line with his circumstances around the time of the agreement.  The evidence, I accept, shows the following:

(1)  It was Wong who proposed the joint investment in the Property in the first place. Wong took charge of the handling of all the necessary procedures and rental collection from the Property while Cheung has his own business to run.

(2)   Since 2001-2002, Cheung became dissatisfied with, among other things, what Wong had done in relation to Wah Fung and the creation of encumbrances over the Property behind his back.  Through solicitors, Cheung put on record his complaints in as early as December 2002.

(3)   Whether the complaints were justified or not, the fact was that Cheung proposed to sell the Property in 2002; and Wong agreed to look for a buyer.

(4)   Without success, Cheung decided in 2005 that he would withdraw from the joint investment and dispose his interest in the Property by selling his shares in Wah Fung instead.

(5)   In November 2005, Wong produced a draft handwritten agreement, representing that one China Mark Asia Ltd offered to purchase Cheung’s shares at HK$5,000,000. Wong described the intended purchaser as an offshore corporation.  The purchase price would be paid by way of 10 monthly instalments, inclusive of a deposit of HK$150,000.  There is no dispute[4] that Cheung rejected this offer because he intended payment in one go or within a short time.

(6)   In February 2006, Wong came up with another offer from one Asia Mark Overseas Ltd to purchase Cheung’s shares at HK$5,000,000.  According to Wong, that was a BVI company.  By then, Cheung was seen prepared to consider payment by instalments and completion by the end of January 2007.  However the offer to Cheung was that the shares would be sold and paid for by instalments over a period of 12 to 24 months.  Further, 50% of the price would be paid in cash and the remaining 50% would be paid by exchange of properties.  There is no dispute[5] that Cheung rejected that offer as well.

(7)   There came the offer from Sidepec, again through Wong.  According to Cheung, Wong represented that this intended purchaser was his rich customer and friend who would pay deposit in the sum of HK$500,000 and the balance of the purchase price within 2 months.

(8)   However, when the written agreement was presented to Cheung on 12 July 2006, the payment terms were actually “付款方式：分批交易至完成全部股份買賣。首批交易：360 股 x @ HKD 833.33/每股。” (in other words, completion and payment by batches and  instalments; and the first batch to be sold would consist of 360 shares).

(9)   Cheung did not accept that.  Therefore Wong agreed to delete such payment term; and replace that by what is now found in the written agreement, namely, “上述股份轉讓以总金額付清為准” (essentially completion upon full payment).  Further, the description of the sum of HK$300,000 as the payment for the first batch of shares sold was deleted and replaced by the same being the first payment under the agreement.

24.  That there was no mention of the completion date in the agreement is obvious.  Yet it was a homemade written agreement.  Cheung specifically explained that he could have but, out of inadvertence, failed to add to the written agreement the other terms as to completion and payment of the balance of the purchase price for his shares.  In any event, both parties accepted and acted on the basis that these other terms were orally made.

25.  Cheung also stated his further conversation with Wong since the agreement in July 2007.  That included the time when he received the second payment of HK$30,000 and the third payment of HK$50,000.  It was about a week after receiving the HK$50,000 from Wong’s wife in January 2007 when Cheung spoke with Wong.  On that occasion, Wong promised Cheung that the completion would take place by the end of March 2007.

26.  The circumstances, as the evidence reveals, were such that Cheung was concerned about severing his tie with Wong and realising his interest in the Property, originally by sale of the Property or subsequently sale of his shares in Wah Fung.  Wah Fung has no business other than holding the Property.  The value of its shares hinges upon the value of the Property, which could be volatile in a market like Hong Kong.  That Cheung was reluctant to wait unduly is objectively understandable.

27.  Earlier on I pointed out the apparent uncertainty of the alleged term as to completion according to Sidepec’s original pleaded case.  The currently pleaded version does not sound better to Cheung.  The alleged completion and payment, not only by instalment but also entirely at the mercy of Sidepec, would mean that Cheung was locked to sell at a price over a possible period of 2 years without any say on the payment of the balance or date of completion or even interest compensation.  That would be even worse than the previous offer from Asia Mark Overseas Limited in February 2006 last rejected by Cheung, whereby interest at the annual rate of 5% was offered as compensation for any extension of the completion beyond 12 months.  In view of the circumstances leading to the agreement, it sounds incredible that Cheung became willing to accept lesser terms, as pleaded by Sidepec.

28.  I find what Cheung said to be the truth.

29.  Mr Lam was prepared to argue what if the terms were those as claimed by Sidepec or Wong[6]. As to that, I see the likelihood that the term as to completion and payment alleged by Sidepec (Wong), be it the original or newly pleaded version, may well be void for uncertainty.  However in view of the above findings, I need say no more on this alternative argument of Mr Lam’s.

THE PARTY IN BREACH

30.  I have considered the correspondence between the parties between 2008 and 2010 prior to the commencement of the present action as well as the explanation of Cheung in his statement.  In answering the purported notice to complete in 2008, Cheung stated in his letter dated 17 July 2008 that the alleged oral agreement (ie the original pleaded version) by Sidepec was untrue.  In reply to the purported notice to complete in 2010, Cheung stated in his letter dated 19 May 2010 that Wong was in breach of the oral agreement in failing to cause the completion and full payment for the shares in 2 months after the signing of the agreement; and that Wong kept on delaying the completion.  Cheung added that in about June 2007, he told Wong face to face that such delay was unacceptable and that the deal came to an end.

31.  Cheung was referring to the meeting with Wong at Nga Yuen Restaurant in Tin Lok Lane, Causeway Bay, in June 2007.  According to him, he informed Wong on that occasion in June 2007 that the deal with Sidepec had come to an end by reason of Wong (or Sidepec)’s failure to complete and to pay up by the extended completion date.  Whilst Sidepec (or Wong) suggested that Cheung only requested reasonable notice to complete as soon as it was ready, the fact was that nothing happened thereafter until the commencement of this action.  Cheung’s wife was present at the meeting and gave evidence in corroboration.

32.  I accept the evidence of Cheung and his wife in this respect.

33.  I also find that Cheung was entitled to terminate the deal.  The sale of the shares was merely the means to the end of disposal of Cheung’s interest in the Property.  In view of such underlying context and the circumstances leading to and surrounding the last extension of the completion date in January 2007 to the end of March 2007, I accept that such time was understood to be essential.

34.  Cheung has an alternative case.  Rescission by reason of misrepresentation is pleaded an alternative to termination.  Tracing the composition of Sidepec through the evidence, I can well understand why it occurred to Cheung that Sidepec was not a truly independent third party purchaser, as Wong represented to him, but somehow associated with Wong and his family members.

35.  However I put Cheung to election of his stance between termination and rescission, and Mr Lam confirmed that termination by reason of Sidepec’s repudiation is indeed his client’s primary case.  In view of the above conclusion, it is not necessary to consider rescission because of the alleged misrepresentation on the part of Wong.

ENTITLEMENT TO RELIEF

36.  The declaratory relief sought by Cheung should follow from the above conclusion.  What calls for consideration is the claim for forfeiture of the HK$380,000 that Cheung has received from Sidepec.

37.  Mr Lam accepted that whether Cheung is entitled to keep the amounts received depends on whether the sum was intended to be deposit or mere part payment: see Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234 (at §§7-12; 50-69; 90).  Mr Lam also accepted that the sum was not described as deposit in the written agreement dated 12 July 2006.  According to the documents, the 3 payments were said to be as the first payment, and the subsequent payments as the second payment and part payment respectively.

38.  The following circumstances are relevant:

(1)   The context of the deal between the parties was the disposal of interest in the Property by way of the sale and purchase of shares in the corporate vehicle holding it.  That a deposit was paid upon the entering into of the agreement as in an ordinary case of the sale and purchase of landed property should not be surprising.

(2)   Cheung’s case is that they were part payments of the balance of the agreed deposit of HK$500,000.  There is no principle of law that deposit could not be effected by more than one payment.  The first payment of HK$300,000 was indeed made upon the entering into of the agreement.  There is no evidence that the last 2 payments of HK$30,000 and HK$50,000 respectively were made as payment for particular lots of shares in Wah Fung; and thus mere part payment of the purchase price.

(3)   Through its then solicitors, Sidepec in July 2008 accepted in correspondence that it was to pay deposit for the purchase of the shares; and that was how the first HK$300,000 was paid.

(4)   In the hearing on 24 March 2010 before Yam J in HCA 336/2008, Wong described the payments as “訂金”[7] (ie deposit).

(5)   In his witness statement, Wong also described the first payment as “保證金”[8] (ie security or guarantee money).

39.  I accept Cheung’s evidence that deposit was agreed at HK$500,000.  The circumstances, I also find, suggest that the payments were meant to be part of the agreed deposit and to serve as earnest of performance, albeit serving as part payment of the purchase price as well, had the deal continued.

40.  The deposit represented 10% of the agreed price for Cheung’s shares.  There is no question of extraordinary amount or penalty.  I therefore find that upon Sidepec’s default, Cheung is entitled to forfeit the amounts received.

41.  Cheung is not claiming for the balance of the agreed deposit.  Nor is he claiming damages.

42.  As to Sidepec’s claim, Cheung also takes issue as to Sidepec’s entitlement to specific performance even if the terms of the agreement between the parties were as it alleges.  Referring to the fact that Sidepec is not known to possess any assets other than a real property in Hong Kong, which was subject to various all-moneys mortgages, as well as the correspondence between the parties in this respect, I can see why Mr Lam questioned whether Sidepec was and is ready and able to perform the agreement.  Sidepec’s evidence in this respect did not seem to have improved by the time of the trial.  Yet again, in view of the above conclusion, I propose to say no more on this.

CONCLUSION

43.  For the above reasons, I find that Cheung has terminated the Agreement upon acceptance of Sidepec’s repudiatory breach; and he is entitled to forfeit the part deposit in the sum of HK$380,000 paid by Sidepec under the Agreement.  The declaratory relief sought in these terms should be granted.

ORDER AND COSTS

44.  The claim is dismissed; and judgment on the counterclaim in terms as above.

45.  Following the event, Cheung shall have the costs of this action.  Mr Lam indicated that submissions may be made in respect of costs, in the event that his client succeeds.  I would just make a nisi order that Sidepec shall pay Cheung’s costs of the action, including any costs reserved, to be taxed, if not agreed.  The parties may exercise their liberty to apply for variation in 14 days or this costs order shall become absolute.

[1] On 7 April 2014, DHCJ Burrell in HCA 925/2010 set aside the relevant sale and purchase agreement and continued the injunction.   See also the succinct summary of the other related actions in that judgment.

[2] See the written decision of this court dated 3 June 2013.

[3] See written decision of this court dated 3 June 2013.

[4] Wong’s witness statement at §24

[5] Wong’s witness statement at §25

[6] Mr Lam indicated that in such event, he would not need to pursue this part of his submission (Section No.8).

[7] Transcript of that hearing was produced.

[8] Wong’s witness statement at §27.