YEUNG WEI SUNG AND ANTOHER v. KLH INVESTMENT LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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JUDGMENT

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1. The Plaintiffs and the Defendant each own 50% of Forecast Nominee Limited ("Forecast") which operates a seafood restaurant called Lung Mun Seafood Restaurant ("Restaurant"). The Restaurant occupies premises at 20 - 22 Praya Road West, Lei Yue Mun, under a Lease entered into with Fairwood Investment Company Limited ("Fairwood"). Fairwood is also owned as to 50% each by the Plaintiffs and the Defendant. In addition to the premises, the Restaurant also occupies adjoining land under a licence from government ("the Short Term Tenancy").

2. The 1st Plaintiff is a shareholder and director of the 2nd Plaintiff which is beneficially owned by the 1st Plaintiff and his family. The Defendant is a company owned or controlled by Henry Yeung Yee Hing ("Mr Y.H. Yeung") and his family. It should be mentioned that separate proceedings have recently been issued under s.168A of the Companies Ordinance against the Plaintiffs by the Defendant.

3. The question for determination in the originating summons is whether the Plaintiffs and the Defendant reached a concluded agreement relating to the operation of the Restaurant. The Plaintiffs seek a declaration that a concluded agreement exists and specific performance of that agreement.

4. The Restaurant has been in operation for well over 10 years. In 1994, it underwent extensive renovations. Thereafter, the Plaintiffs were responsible for the day-to-day management and operation of the business whilst the Defendant was responsible for the preparation of daily accounting requirements. The general manager of the Restaurant at the time was a nephew of the 1st Plaintiff. Several months thereafter, the relationship between the parties began to deteriorate. Proposals and counter proposals for the running of the Restaurant were made by the Plaintiffs and the Defendant through their respective solicitors to resolve the difficulties that had arisen. The material events, for present purposes, are set out below.

Chronology of events

(a) The July Agreements

5. The Plaintiffs made a proposal for a Franchise Agreement under cover of their solicitors' letter of 1 June marked "without prejudice and subject to contract". The proposal was that the franchisee (the Plaintiffs or the Defendant) enter into a Franchise Agreement with Forecast who would grant an exclusive right to operate the Restaurant in consideration of a monthly payment of $400,000. The franchisee would bear all the expenses and operational costs as well as profit tax on business income that is in excess of the initial $400,000 per month.

6. Following this letter, negotiations ensued and drafts were prepared of a Shareholders Agreement, a Franchise Agreement and a Lease ("the July Agreements"). These not only provided for the payment of the franchise fee but also a premium of HK$5 million to Forecast, rental payable by the franchisee to Fairwood of $160,000 a month as well as a franchise term of 4 years.

7. The July Agreements were rejected by the Defendant on 21 August 1995.

(b) Offer made to Defendant at Director's meeting of 14 October

8. At a director's meeting held on 14 October, revised proposals were made by the Plaintiffs on the basis that if they were to be rejected by the Defendant, they would be taken up by the Plaintiffs themselves. The proposals were

Mr Y.H. Yeung who attended the board meeting on behalf of the Defendant agreed to respond to the Plaintiffs' proposal by 16 October.

9. When no response was forthcoming, by an open letter dated 17 October, the Plaintiffs' solicitors wrote to the Defendant's solicitors setting a deadline for the Defendant's response.

(c) 18 October

10. By an open letter dated 18 October, the Defendant's solicitors wrote to decline the offer and further stating that "[the Plaintiffs] shall take up the Franchise as at 1 November 1995 in such essential terms as agreed during the meeting on 14 October 1995".

(d) 25 October

11. On 25 October, the Plaintiffs' solicitors wrote to confirm that the Plaintiffs would willingly take up the Franchise with effect from 1 November as discussed on 14 October "upon the following salient terms" which were seven in number, and as such, "any amendments to be made to the various agreements shall take into account the above main terms".

(e) 31 October

12. The Defendant returned to the Plaintiffs their draft Agreements with the Defendant's proposed amendments.

(f) 3 November

13. In a letter dated 3 November to the Plaintiffs' solicitors, the Defendant stated its position that the franchise does not take effect unless and until the Agreements have been executed and the premium paid.

(g) Plaintiffs' drafts of 9 November

14. On 9 November, the Plaintiffs forwarded a revised set of agreements to the Defendant. It referred to an agreement between the parties that the deposit for the Lease and the Franchise Agreement would not be necessary because the franchisee would be giving a performance bond. On the following day, the franchise fee and rental for the month of November were sent to the Defendant.

(h) Defendant's amendments of 25 November

15. The Defendant's amendments to the 9 November drafts were sent to the Plaintiffs on 25 November.

(i) Plaintiffs' reamendments of 30 November

16. The Defendant's amendments were further reamended by the Plaintiffs on 30 November. Under cover of a "without prejudice" letter, one of the main changes was the substitution of a security deposit of $1 million in lieu of the performance bond.

(j) Defendant's "offer" of 4 December

17. In a letter marked "without prejudice" from the Defendant's solicitors to the Plaintiffs' solicitors, the Defendant set out its objections to the reamendments sought to be introduced by the Plaintiffs on 30 November. In particular, it objected to the substitution of the performance bond by a security deposit of $1 million. These comments were followed by the following paragraphs:

(k) Telephone conversation of 5 December

18. The "offer" of 4 December was confirmed orally by the Defendant's solicitor to the Plaintiffs' solicitor over the telephone : see letter of 13 December from Plaintiffs' solicitors.

(I) Plaintiffs' "acceptance" of 5 December

19. On 5 December, the Plaintiffs' solicitors wrote in the following terms:

          In the premises, your client shall have the profit, if any, of the franchise business with effect from 1st November 1995."

Was there a concluded contract?

Leaving aside, for the moment, the effect of any qualification to which that letter may have been subject, such as "without prejudice" and/or "subject to contract", was the "offer" made on 4 December capable of acceptance?

20. The letter of 4 December cannot be read in isolation in determining whether the offeror evinced an intention to be bound as soon as the offer was accepted by the person to whom it was addressed. One has to look at the underlying drafts as amended by the Plaintiffs on 30 November to ascertain what exactly the offer involved.

21. Under the general umbrella of a Shareholders Agreement, the parties were to enter not only the Shareholders Agreement, but also to cause Forecast (owned by the Plaintiffs and the Defendant) to enter into a Franchise Agreement with the Defendant and to cause Fairwood (which again is owned by the parties) to enter into a Lease with the Defendant. The commencement date under the Shareholders Agreement was 1 November 1995. That was also the commencement date for the Franchise and the Lease. When the "offer" was made, it was already five weeks into the 4 year term.

22. Approaching the matter objectively, I do not think that any reasonable person would have been induced to believe that the Defendant intended to be bound by a franchise to operate a restaurant deemed to commence some five weeks prior to the offer. It would mean that the Defendant is offering to assume considerable financial obligations without the corresponding benefit that, as franchisee, it might or could expect the franchise to generate, had it been able to operate the franchise from 1 November, the commencement date. It would be different had the offer provided for a prospective commencement date in lieu of the commencement date in the drafts. But that is not the case before me.

23. If, contrary to my view, there was an apparent offer, what was the state of mind of the Plaintiffs? That question is relevant in determining whether the Defendant is actually bound by its apparent offer : see generally Chitty Vol. I at para.2-002. The history of negotiations between the parties, in other words, the matrix of facts surrounding this "offer", shows that all along the Plaintiffs as well as the Defendant did not regard themselves as bound until the Agreements had been executed. Nor was execution of the Agreements a mere formality : this is because the initial fee or premium of $3.5 million is only payable upon the signing of the Shareholders Agreement. It is plain from clauses 2 and 3 of the Shareholders Agreement that they are designed to ensure that the premium would find its way to the Plaintiffs and the Defendant through repayment of shareholders' loans and distributions as dividends/profits to the shareholders. However, they cannot become operative unless and until the Shareholders Agreement is executed.

24. The Plaintiffs were left in no doubt from the letter of 3 November that this was the Defendant's position. Whilst the Plaintiffs purported to say in their response of 5 December that they regarded themselves as the Franchisee since 1 November, that is inconsistent with their re-amendments of 30 November in which one of the main terms, the execution of a performance bond, was to be replaced by a $1 million security deposit. Indeed, counsel for the Plaintiffs submitted that the Plaintiffs' letter of 30 November constituted "a new offer" because the Defendant's amendments were not acceptable to the Plaintiffs.

25. That apart, it is significant that the Plaintiffs did not execute the engrossments sent to the Defendant with the letter of 5 December. Further, the Plaintiffs' contention that they were merely acting as agent or a caretaker or manager for the Defendant is contrived and does not accord with reality : given the acrimonious relationship between the parties, it is simply beyond contemplation that the Defendant would have agreed, on any footing, to the Plaintiffs acting as its agent to operate the franchise on its behalf. For these reasons, I find that the Plaintiffs could not have believed that the Defendant intended to be bound by its 4 December "offer".

26. If I were wrong on the first limb, there remains for determination the second limb of the issue before me which is whether there was an unqualified and unconditional acceptance by the Plaintiffs. Counsel for the Defendant submitted that the acceptance was not a "100% matching acceptance". He drew attention to the fact that unlike the 30 November drafts, clause 5.01 of the Shareholders Agreement sent to the Defendant omitted any mention of the Short Term Tenancy which is essential if the Restaurant is to continue in operation. This point has substance only if on the true construction of the 5 December letter, the "acceptance" was not of the drafts of 30 November but was based on the engrossments accompanying the "acceptance". If the former construction were to apply, the "discrepancy" is capable of being rectified.

27. The question of greater moment is the effect of the various payments required by the Plaintiffs. Counsel for the Plaintiffs submitted that the "request" for the five cheques set out in the 5 December letter did not render the acceptance conditional. Rather, the payments flowed from, or were consequential upon, the execution of the Agreements.

28. In my judgment, the payments requested reflected the Plaintiffs' reading of the 4 December offer, premised as they were on the assumption that the Plaintiffs would be deemed to have been acting as the Defendant's agent as from 1 November and, accordingly, were entitled to be reimbursed all expenditure incurred in connection with the franchise. The first of the payments was a sum of $529,861, representing the total amount of salaries paid to the employees of the Restaurant during the month of November, namely $429,861, together with a deposit payment of $100,000 for renovation work costing $231,200.

29. The renovation work referred to requires amplification. During the month of November 1995, certain renovation work was undertaken by the Plaintiffs without prior consultation with the Defendant. According to the Plaintiffs, work was undertaken for the purpose of repair and maintenance of the building and general cleaning up of the garden area including the removal of a concrete wall. The Defendant takes a different view. According to the Defendant, the work involved the demolition of the playground facilities at the garden of the Restaurant and the conversion of this area into an open space for the placing of an extra 7 to 8 dining tables. The Defendant also raised the possibility of enforcement action by the Urban Services Department because the work was unauthorized. However, this is not a matter that can be determined in these proceedings and for this reason, I do not propose to take this point into consideration. It should be mentioned in passing that the Defendant also appeared to take exception to clause 7.6.1 of the Franchise Agreement which provided that the Initial Fee "shall cover the renovation costs". On further consideration, it appears that the "renovation costs" in that clause has nothing to do with the renovation costs incurred by the Plaintiffs in November but are referable to renovation costs incurred during April to July 1994 : see Recital (E) to the Franchise Agreement.

30. There is no evidence to show that at the time of the "offer", the Defendant was aware that renovation work had been undertaken. This was first mentioned in the Plaintiffs' letter of 5 December. In these circumstances, it is impossible to attribute to the Defendant an intention of assuming partial liability for renovation costs at a time when it did not know either that renovation work was being carried out or the cost of such work. It is further unclear who is to be responsible for the unpaid balance of the renovation costs.

31. On its proper construction, the payments to be made by the Defendant referred to in the 5 December letter formed an integral part of the Plaintiffs' "acceptance". The Plaintiffs' acceptance was accordingly conditional. Alternatively, it amounted to a counter-offer which was never accepted by the Defendant.

32. Accordingly, for the reasons stated above, the "offer" of 4 December was not an offer that would have created a binding contract upon acceptance and, in any event, the "acceptance" of 5 December was conditional, inter alia, upon the payments referred to in the letter being made by the Defendant.

33. Counsel for the Plaintiffs referred to Branca v. Cobarro [1947] KB 854 and Yiu Yau Ping v. Fang Yee Lan [1992] 2 HKLR 167 at 174 for the proposition that a provisional agreement which calls for a formal agreement that will supersede it may nonetheless be a binding agreement. The proposition, is of course, well-established as a matter of law but those authorities are of little assistance when what has to be determined is whether or not a concluded agreement had been reached in the first place. As I have found there is no such concluded agreement, the application of the proposition encapsulated in those cases does not arise.

34. Submissions were also made on the effect of "without prejudice" communications. I was referred to Walker v. Wilsher (1889) 23 QBD 335, Chun Lee Engineering Co. Ltd. v. Hopewell Construction Co. [1989] 2 HKC 592 and Alleyn v. Thurecht [1983] 2 Qd.R. 706 at 718. However, in view of the conclusion I have reached, it does not become necessary for me to deal with these authorities and I do not propose to do so.

Rewriting the contract

35. Counsel for the Plaintiffs submitted that it was open to the Court to specify a date from which the franchise should start and that the renovation costs could be treated as an accounting matter. Presumably this reasoning is to be carried through to the first payment the Plaintiffs requested so that if a date after 30 November were to be specified, no such payment would be due. I do not see how that submission can be right. If the Court were to specify a commencement date for the franchise in substitution for the date of 1 November 1995, it would be rewriting the contract for the parties. That it may not do.

Order

36. The Plaintiffs' claim to the relief sought in the originating summons issued on 7 February 1996 is dismissed with costs.