NEXT CHAMPION LTD v. NGAN IN LENG AND OTHERS

CACV 91/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 91 OF 2008

(ON APPEAL FROM HCA NO. 2194 OF 2005)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal from orders of Deputy High Court Judge Carlson of 14 February 2008 made in Order 14 proceedings.  The judge affirmed the order of Master R Yu of 14 June 2007, and on the defendants’ summons under Ord. 14A, r.2 seeking the determination of three questions of law filed pending the appeal from the master’s order, made no order save as to costs.  At the conclusion of the hearing judgment was reserved which we now give.

Background

3.  The proceedings arise from the sale and purchase of shares in companies that ultimately owned the Casa Real Hotel in Macau for $1.25 billion.  The defendants were the vendors and the plaintiff the purchaser.  Prior to the sale, a Macanese company called Hang Huo Hotel Company Ltd (Macau) now known as GR Casa Real Company Ltd (“the company”) owned the hotel which had a casino licence.  The company was itself owned by Hang Huo (BVI) Ltd.  The defendants other than the fourth defendant owned 99% of the BVI company, the remaining 1% being owned by the fourth defendant.  Annexed to the judgment below are the “before” and “after” charts of the corporate structure.

4.  The parties entered into the sale and purchase agreement of the shares on 19 February 2005.  The completion date was 6 April 2005.  The agreement referred to three existing leases within the hotel building between the company and the respective lessees.  One of those leases was in respect of a sauna which operated on the third and fourth floors of the hotel.  It was a term of the agreement that the three leases (including that of the sauna) would be terminated and replaced by new leases on or before the completion date.

5.  Completion was postponed by mutual agreement to 31 May 2005.  By that date, although the plaintiff was in a position to complete, the leases had yet to be terminated by the defendants and some of their other obligations remained outstanding.

6.  On 31 May 2005, the defendants entered into a deed of undertaking (“the undertaking”) in order to enable the sale to go through.  This appeal concerns the defendants’ obligation and warranty under the undertaking to terminate the lease of the sauna and to give vacant possession by 31 August 2005.

7.  It was common ground below that the nature of the defendants’ obligation to “procure the termination of the existing lease agreements” was to “see to it” that, inter alia, the lease of the sauna would be terminated and vacant possession given by 31 August 2005.  That lease has not been terminated and to this day, the lessees remain in possession.  The master found that the defendants were in breach of the undertaking.  He held that the plaintiff was entitled to recover damages for that breach and ordered damages to be assessed.

8.  The defendants filed a notice of appeal against the master’s order and issued a summons under Order 14A, r.2 seeking the determination of three questions of law the answers to which, if in the defendants’ favour, would establish that triable issues exist that require the action to go to trial.  Those matters were heard together and culminated in the orders which form the subject matter of this appeal.

The undertaking

9.  The pertinent parts clause 1 of the undertaking are set out below:

“1.    In consideration of the Purchaser agreeing … not to require performance/fulfilment of the Outstanding Conditions prior to Completion and, subject as set out hereinbelow, agreeing to waive any claims for breach of the Warranties to the extent and only to the extent that the Outstanding Conditions have not been performed/fulfilled prior to Completion, the Vendors hereby, unconditionally and irrevocably, jointly and severally undertake with the Purchaser that the Vendors shall, at their own costs and expenses, procure performance/fulfilment of the Outstanding Conditions in the following manner (“Remedying Actions”):-

(i)   …

(ii)  procure the termination of the existing lease agreements in relation to the sauna, … situated in the Casa Real Hotel and the relevant tenants to vacate the relevant premises in each case, with effect from no later than 31 August 2005 (For the avoidance of doubt, (1) the Vendors, jointly and severally, shall be responsible for the payment of any and all damages, claims and compensation to the relevant tenants in connection therewith, whether pursuant to the existing lease agreements or otherwise; and (2) during the period from Completion until vacant possession of the premises are delivered to Hang Huo (Macau), Hang Huo (Macau) shall be entitled to payment of rental and other payments in accordance with the provisions of such existing lease agreements),

in each case, in compliance with all applicable laws and regulations.

The Vendors hereby, unconditionally and irrevocably, jointly and severally undertake with the Purchaser that the Vendors shall, indemnify and at all times keep the Purchaser indemnified and hold it harmless from the against any and all claims, demands, actions damages, losses, costs, obligations, penalties, liabilities, fines and expenses sustained by the Purchaser (including any diminution in the value of the assets of Hang Huo (BVI), Hang Huo (Macau) and/or the HK Co.) and any payment made or required to be made by the Purchaser or any of Hang Huo (BVI), Hang Huo (Macau) and/or the HK Co. as a result of or arising therefrom) directly or indirectly in consequence of the Outstanding Works or any of them not being performed or fulfilled prior to Completion or any related legal proceedings by or against the Purchaser and its subsidiaries (as the case may be) and, subject to any rights against the relevant contractors being pursued by the Purchaser and its subsidiaries (as the case may be), if requested by the Vendors in writing and at the costs of the Vendors and amounts so recovered by the Purchaser and its subsidiaries (as the case may be) being refunded to the Vendors, of the Remedying Actions or any of them not being performed or fulfilled in accordance with this Clause 1.”

Pausing there, it is to be noted that “Outstanding Conditions” was a collective reference to “Outstanding Works” (the subject-matter of the omitted sub-clause (i) above and not relevant to the present appeal) and “Outstanding Leases”.  The latter expression included the lease of the sauna.

This appeal

10.  Mr Barlow SC who appeared for the defendants submitted that there were triable issues of law and fact: that the judge erred in deciding summarily the questions of law relating to the construction of the scope of the indemnity agreement and that summary judgment should never have been granted because there was an issue of fact as to whether the plaintiff had breached its obligation of co-operation with the defendants.

The construction point

11.  The lease in respect of the sauna is a 10-year lease which is not due to expire until August 2013.  Under that lease, a copy of which was attached to a valuation report obtained by the plaintiff, the initial monthly rental was MOP$50,000 a month.  After the sauna had been in operation for 3 months, an additional sum representing a share of the profits to be agreed by the parties under a supplemental agreement would also be payable.  The subsequent supplemental agreement (if it exists) is not before the court and, in any event, its terms are not known to the plaintiff.  The company has been receiving rent of $50,000 per month since completion.  According to the valuation report, the market rent of the sauna as at 31 August 2005 was HK$580,000 a month.

12.  The defendants’ obligation under the undertaking is to indemnify the plaintiff

“from and against … losses …sustained by the [plaintiff] (including any diminution in value of the assets of … [the company] …)”

13.  Mr Barlow’s primary point was that the plaintiff could not have sustained any “loss” within the scope of that provision.  There were several strands to his argument.  First, it was said that any loss in future rental would be that of the company which is not a party to the undertaking.  Mr Barlow, citing the majority judgment of the English Court of Appeal in Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443 at 478 – 479, submitted that the judge was wrong to approach the question of the plaintiff’s loss on the basis that “every dollar lost of the subsidiary reduced the value of the parent’s shareholding by a like amount”.  Mr Barlow placed particular reliance on the following passage from the judgment of Hobhouse LJ (at 479 ll. 40-45):

“   The root principle which must be adhered to is that each company is a separate legal entity.  The property of one is not the property of another.  The plaintiff must prove its own financial loss in its own pocket and quantify it.  Any other approach is contrary to the decided authorities and the principle in Saloman v. A. Saloman & Co. Ltd.”

14.  Second, closely allied to the first point was the submission that the indemnity only covers indirect loss to the plaintiff.  Since what had to be ascertained was the “diminution in the value of the assets”, it would be wrong to consider only one asset of the company (i.e. the hotel) and disregard the other assets such as the casino licence.  It was submitted that if the value of the other assets had increased, that would offset any loss attributable to the lease of the sauna.  (The first and second points are hereafter collectively referred to as “the Gerber point”.)  Third, it was submitted that there can be no loss without an event of crystallisation.

15.  Mr Barlow’s submissions have to be considered in the context of the master’s order that the judge upheld. It was in these terms:

“1.    the Plaintiff is entitled to damages from the Defendants in respect of the Defendants’ breach of the Deed of Undertaking … by failing to procure the termination of the existing lease in relation to the sauna …and vacant possession of the premises …on or before 31 August 2005;

2. the damages referred to in paragraph 1 above be assessed by a Master.”

16.  All that the master has done by his order is to hold in the plaintiff’s favour on liability, having found the defendants to be in breach of the undertaking by their failure to terminate the lease of the sauna and to deliver vacant possession on 31 August 2005.  Quantum has yet to be assessed bya master.  The plaintiff will have to establish its loss in due course at the assessment hearing.  If it fails to do so, it may well be that it would not be entitled to be awarded anything more than nominal damages.  While the judge appeared receptive to the submissions of Mr Scott SC, counsel for the plaintiff, on the questions of law raised by the defendants, in my view, the defendants are not precluded in any way from raising the Gerber point at the assessment hearing and having that point determined.  In that connection, one of the issues that is likely to arise is whether the observations of Hobhouse LJ upon which Mr Barlow relies has any application to “a simple group of companies all operating within a single country and a single tax system”, assuming that Mr Scott SC (who appeared for the plaintiff) is able to establish that the plaintiff falls within that description.

17.  Turning to the third point raised by Mr Barlow, during the course of the hearing, Mr Barlow was asked to identify the relevant date for ascertaining the “diminution in value of the assets”.  There was much vacillation on the part of Mr Barlow on this question.  Ultimately he settled for 31 August 2005 and the date of the writ as the relevant start and end dates although initially Mr Barlow did suggest the date of the appeal hearing as the relevant end date.

18.  Quite why the exercise would involve two dates escapes me.  Clause 1 invites a direct comparison between the value of the company as at 31 August 2005 (1) without vacant possession of the sauna; and (2) with vacant possession of the sauna.  In my view, on the proper construction of clause 1, the difference in value is to be ascertained by reference to a single date, namely, 31 August 2005.  On that basis, Mr Barlow’s third point relating to crystallisation must go.

19.  Mr Barlow also prayed in aid the contra proferentum rule on the basis that the indemnity had been drafted by the plaintiff and any ambiguity in the scope of the undertaking must be construed against the plaintiff.  However, having been referred to the correspondence between the parties’ respective solicitors leading up to the execution of the undertaking as well as the third defendant’s affirmation, it is clear that the solicitors for both parties were involved in the drafting of the undertaking.  In those circumstances, the contra proferentum rule is not engaged, even assuming (contrary to my view) that an ambiguity as to the scope of the undertaking exists.

The lack of co-operation point

20.  Mr Barlow submitted that there is a triable issue fact as to whether the plaintiff had prevented or hindered the defendants’ performance of their obligation under the undertaking.

21.  In paragraph 10 of the affirmation dated 5 January 2007 from Siew Pek Tho, the chief financial officer of the Hang Huo group and the husband of the fourth defendant, Mr Siew deposed to the fact that the plaintiff had angered the lessees of the sauna by causing signage and advertising within the hotel and at its entrance to be removed without any prior consultation or payment of compensation.  This unilateral move on the part of the plaintiff allegedly adversely affected the business of the sauna.  It was said that this upset the lessees of the sauna who, as a result, refused to engage in discussions with the defendants for the termination of the lease.

22.  Mr Barlow submitted that this gave rise to the application of the “prevention principle” which is based on the underlying principle that a person is not permitted to take advantage of his own wrong.  Mr Barlow referred to the observations of Ribeiro PJ in Kensland Realty Ltd v Whale View Investment Ltd & Another [2002] 1 HKLRD 87 (at § 99):

“99.  Another possible manifestation of the underlying principle may be detected in cases where one party’s conduct is the cause of the other party’s failure to meet a condition precedent.  Here, the principle has in some cases been given effect by deeming the condition to have been met.”

The cases then referred to involved a contracting party either being in breach of an implied obligation or duty or preventing the fulfilment by the opposite party of a condition precedent.

23.  Mr Barlow submitted that by acting as it did, the plaintiff effectively undermined the defendants’ ability to perform their obligation.  Quite apart from the fact that the plaintiff was acting well within its rights, it not being suggested that the lessees of the sauna were entitled under the terms of the lease to erect signage and to advertise within the hotel, there was other relevant evidence from the defendants that shed light on the defendants’ failure to perform their obligation under the undertaking. 

24.  In the third defendant’s affirmation of 29 January 2007 she explained that the consideration of $1.25 billion was made up of cash of $750 million and of new shares in Golden Resorts Group valued at $500 million.  She asserted that it was orally agreed between Mrs Chu of the plaintiff and the third defendant not only that if the market value of the shares were to fall below $500 million Mrs Chu would personally buy the shares back from the defendants for that sum, but also that the third defendant would be permitted to operate one of the three new VIP gaming rooms which were to replace the sauna although neither term appears in the agreement of 19 February 2005.  The third defendant then deposed to events occurring in late August 2005 when Mrs Chu contacted her about the termination of the lease of the sauna.   By then the market value of the shares of the Golden Resorts Group had fallen to $275 million.  § 35 reads:

“I discussed Mrs Chu’s request with my father.  My father was becoming increasingly concerned at the low share price of Golden Resorts Group.  He instructed me not to help Mrs Chu and Golden Resorts Group to terminate the Existing Sauna Lease until Mrs Chu had kept her bargains …”

25.  Given that evidence, the “prevention principle” can have no application.  The defendants, on their own evidence, took no steps to terminate the lease of the sauna.

Conclusion

26.  For the reasons stated, no triable issue whether or of law or of fact arises.

27.  I would dismiss this appeal.  I would also order nisi of costs of this appeal in favour of the plaintiff.

Hon Barma J:

28.  I agree.

Hon Rogers VP:

29.  There will accordingly be an order in terms of paragraph 27.