HIGH ROUTE LTD v. WONG CHUNG KAI

CACV 51/2024, [2025] HKCA 42

On appeal from [2024] HKCFI 75

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 51 OF 2024

(ON APPEAL FROM HCA NO 320 OF 2019)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.  This is the plaintiff’s appeal against the judgment of Recorder William Wong, SC given on 12 January 2024 (“Judgment”)[1]. By the Judgment, the judge dismissed the plaintiff’s claims for return of deposits totalling $24 million for the sale and purchase of the entire shareholding in Keen Day International Limited (“Keen Day”) under a provisional agreement for sale and purchase dated 30 August 2018 (“PSP”), and for liquidated damages of $24 million, alternatively, damages to be assessed. Keen Day was and is the registered owner of a car parking building at No 2 Tuen Hing Road, Tuen Mun, New Territories situate at Section A of Tuen Mun Town Lot No 216 (“Property”), and the defendant its sole shareholder and director. The judge made a declaration that the plaintiff has repudiated the PSP and that the defendant has accepted the repudiation and he is entitled to forfeit the deposits.

2.  In gist, the judge dismissed the plaintiff’s claims because he rejected its contention that certain terms on due diligence investigation on Keen Day should be implied into the PSP such that completion would be conditional upon the plaintiff having completed the due diligence investigation and was satisfied with the results.

Background

3.  The relevant background facts may be stated as follows.

(1)  The PSP

4.  The plaintiff was incorporated about two months before the PSP was made. Its sole director, Choy Park Nang, was in charge of the transaction with the defendant. Mr Choy was a seasoned property investor and had experience in acquiring properties through the acquisition of the entire shareholding of companies which owned the targeted properties. The defendant was also experienced in property transactions. As the judge has found, both knew what they were doing[2].

5.  The plaintiff and the defendant entered into the PSP for the sale and purchase of the entire shareholding in Keen Day (“Sale Share”) at the price of $240 million. The plaintiff paid an initial deposit of $5 million upon the signing of the PSP. The estate agent in the transaction was Savills (Hong Kong) Limited (“Savills”) and the PSP, written in English and Chinese, was based on a form of provisional agreement devised by Savills. The PSP provided for the payment of a further deposit of $19 million and the signing of a formal agreement (“FSP”) on or before 28 September 2018. The plaintiff paid the further deposit on 26 September but no FSP was executed by the parties despite exchanges of a draft agreement between the plaintiff’s solicitors Kok and Ha (“KH”) and the defendant’s solicitors T H Koo & Co (“THK”) from 3 September 2018 to 9 November 2018. Completion was scheduled on 15 February 2019.

6.  The PSP contained these relevant provisions:

“2. On Completion Date and upon the payment of the balance of the Purchase Price by the Purchaser aforesaid, the Vendor shall:

(a) transfer and arrange for registration of the Sale Share into the name of the Purchaser or its nominee(s);

(b) deliver to the Purchaser or its nominee(s) all the relevant documents including the certificate of incorporation, common seal, chops, printed copies of the memorandum and articles of association, minutes of meetings and all statutory books and audited accounts made up to the Completion Date;

(c) deliver to the Purchaser the share certificate of the Sale Share and all other un-issued shares certificates of the Company;

(d) deliver to the Purchaser the notice of resignation of all the existing directors and secretary of the Company and arrange for the appointment of the new director(s) and secretary to be nominated by the Purchaser;

(e) procure the revocation of all existing bank account(s) (if any) opened and maintained by the Company;

(f) procure the Company to convene a meeting of the board of directors for the purpose of transacting and approving the aforesaid business and matters;

3. The Vendor hereby warrants and undertakes with Purchaser that:

(a) the Vendor is the sole beneficial owner of the Sale Share and there is no other shareholder;

(b) the Sale Share is not subject to any mortgage, charge, lien, pledge or any security of liabilities;

(c) the Vendor has the sole right to sell, transfer or otherwise dispose of the Sale Share without reference to any third party;

(d) the Company shall not issue or allot any further shares or declare dividends or alter its capital assets on or before the Completion Date;

(e) the Vendor warrants with the Purchaser that the Company is and shall not be involved in any legal proceedings or subject to any legal financial or tax liability and the Vendor undertakes to indemnify and keep indemnified the Purchaser and/or the Company against any such liability;

(f) The Guarantor[3] hereby irrevocably and unconditionally guarantee the due performance and observance by the Vendor of all undertakings and warranties given by the Vendor of and in relation to the Sale Share and Sale Debt[4] as contained in this Preliminary Agreement for Sale and Purchaser and the Formal Agreement for Sale and Purchase and shall indemnify and keep the Purchaser fully indemnified against any breach by the Vendor for a period of 2 years after completion.

(g) the Company has complied with all the legislation and statutory requirements including those under the Company Ordinance.

4. The Completion of the sale and purchase is conditional upon the Company and/or the Vendor can show good title to the Property in accordance with Section 13 of the Conveyancing and Property Ordinance, Chapter 219, laws of Hong Kong. If they fail to do so, the Purchaser shall be entitled to cancel this transaction and the Vendor shall refund all the deposit to the Purchaser forthwith.

…

7. Save and except the condition stated in Clause 4, should the Vendor fail to complete the sale and purchase herein under this Agreement, the Vendor shall immediately refund to the Purchaser all the deposits paid and also compensate the Purchaser with a sum equivalent to the deposits paid as liquidated damages and neither party shall be entitled to take any action to claim against the other for damages nor specific performance and the Vendor agrees to compensate Savills (Hong Kong) Limited the total amount of the service charge payable by the Vendor and the Purchaser to Savills (Hong Kong) Limited respectively pursuant to Clause 6 herein before as liquidated damages.

8. Save and except the condition stated in Clause 4, should the Purchaser fail to complete the sale and purchase herein under this Agreement, the Vendor shall be entitled to forfeit all the deposit paid by the Purchaser and neither party shall be entitled to take any action to claim against the other for damages nor specific performance and the Purchaser agrees to compensate Savills (Hong Kong) Limited the total amount of the service charge payable by the Vendor and the Purchaser to Savills (Hong Kong) Limited respectively pursuant to Clause 6 herein before as liquidated damages.”

Further, schedule 2 to the PSP contained these provisions:

“(3) The said premises is sold to the Purchaser on an “as is” basis, the Purchaser hereby acknowledges and accepts the existing condition of the said premises. The Vendor makes no warranty as to whether or not the said premises contains any unauthorized structures additions or alterations or any illegal structures. No requisition or objection whatsoever shall be raised in respect of any unauthorized structure additions alterations or illegal structures and the Purchaser shall not be entitled to withhold or delay but shall complete the purchase of the said premises notwithstanding any such unauthorized structure alterations or illegal structures in or affecting the said premises.

…

(4) The Purchaser acknowledge & accepts that the Vendor has received a letter/order from District Lands office Tuen Mun Lands Department dated 08/03/2018[5]. Reference No. (8) in DLOTM289/MGS/74111. The Purchaser will not raise any requisition regarding this letter/order. The Purchaser shall not be entitled to withhold or delay but shall complete the purchase of the said premises.”

(2)  The requisitions

7.  By a letter dated 3 September 2018 from KH to THK, KH asked for a draft formal agreement, title documents and corporate documents of Keen Day. By a letter dated 11 September 2018, THK informed KH that the defendant was preparing the audited financial statements and management accounts and would send them over as soon as they were available. The position was acknowledged by KH in its letter to THK dated 5 October 2018 and KH did not chase for the accounts and company documents.

8.  On 13 September 2018, THK sent over the title deeds of the Property to KH and a draft FSP, noting that the defendant had not approved the draft and reserved the right to make changes to it. Having received the title deeds, KH asked for a certified copy of the deed poll on 19 September 2018. This requisition was answered by THK by a letter of the same date. Thereafter, KH raised no further requisition on the title of the Property until close to completion about the Defect.

9.  The defendant had invested in some bonds which were held through Keen Day. In September 2018, in anticipation of the sale of the Property through Keen Day, the defendant sold all the bonds held by Keen Day so that the only asset held by Keen Day would be the Property.

10.  In October 2018, the parties negotiated on the terms of the FSP through their solicitors. On 23 October 2018, KH stated that all amendments to the draft FSP had been agreed upon. THK replied on the following day that it was still obtaining instructions from the defendant on the latest draft of the FSP. On 1 November 2018, KH sent THK a re-engrossed FSP with the plaintiff’s signature for the defendant to sign by 5 November 2018.

11.  On 6 and 7 November 2018, there were fliers advertising the sale of car parking spaces at the Property and naming KH as the solicitors in charge of the sale. Many estate agents attended the Property. However, the attempt to sell the car parking spaces was not successful. On 7 November 2018, KH wrote to THK noting that the defendant had failed and/or refused to sign the FSP and asked for the return of the engrossed FSP signed by the plaintiff. On 8 November 2018, KH stated that the terms of the FSP would need to be re-negotiated. Nothing further was heard from KH on the FSP.

12.  On 28 December 2018, THK sent to KH the documents of Keen Day including the audited reports from the date of incorporation on 27 March 2014 to 31 March 2017 (“2014-2017 Audited Report”) and for the year ended 31 March 2018 (“2018 Audited Report”) (collectively “28/12/2018 Documents”). Both sets of audited reports and financial statements were dated 24 December 2018.

13.  On the same date, KH wrote to the District Lands Office (“DLO”) about the Defect and asked for confirmation whether the contravention mentioned in the letter of the DLO to Keen Day dated 8 March 2018 had been remedied. The DLO replied on 24 January 2019 mentioning subsequent letters between Keen Day and the DLO regarding the Defect and that the DLO’s rights on the matter were reserved.

14.  By letter to THK dated 24 January 2019, KH raised numerous questions in relation to the 28/12/2018 Documents.

15.  On 31 January 2019, THK replied by letter to KH’s questions and provided additional documents of Keen Day (“31/1/2019 Documents”).

16.  By letter dated 12 February 2019, THK sent to KH the latest unaudited profit and loss account and the unaudited balance sheet of Keen Day, both from 1 January 2019 to 15 February 2019 (“12/2/2019 Documents”), and asked KH for the draft completion documents including the “Deed of Waiver” for approval as soon as possible.

17.  On 13 February 2019, two days before the scheduled completion, KH sent a letter to THK raising another series of questions including allegations on individual accounting transactions of Keen Day. The judge found that by coming up with multiple questions within a very short timeframe in the last few days leading up to the completion, the plaintiff had indicated that it was not going to complete the sale and purchase by around 13 or 14 February 2019[6].

18.  Completion did not take place on 15 February 2019. THK and KH exchanged the following correspondence that day:

(1)  By THK’s 1^st letter, THK stated that the queries in KH’s 13 February 2019 letter were frivolous and vexatious and for the purpose of wriggling out of the transaction. THK asserted that the defendant was not obliged to answer such queries and that all documents required under the PSP had been produced. Nonetheless, out of abundance of caution, THK provided additional documents and information to KH (“15/2/2019 Documents”).

(2)  By KH’s 1^st letter (received by THK at 14:02 hours), KH mentioned for the first time it was an implied term of the PSP that completion was “conditional upon [the plaintiff] being satisfied with the results of its due diligence investigation of the Company’s corporate, business, accounting and financial affairs (‘Due Diligence’)” and “Further or alternatively, it [was] an implied term that [the defendant] should satisfy [the plaintiff’s] Due Diligence”. KH then gave comments and observations on the answers of THK and stated that the plaintiff was dissatisfied with its due diligence.

(3)  By KH’s 2^nd letter (received by THK at 16:52 hours), KH asserted for the first time that Keen Day’s title to the Property was defective and defeasible because of the Defect, and disclosed for the first time its letter of 28 December 2018 to the DLO, and the DLO’s reply of 24 January 2019. KH demanded refund of the deposits totalling $24 million and liquidated damages of $24 million, thus rescinding the PSP on the basis that Keen Day’s title to the Property was defective and defeasible.

(4)  THK replied to KH’s 1^st and 2^nd letters by its 2^nd and 3^rd letters, stating that the defendant did not accept that the plaintiff was entitled to rescind and reminding the plaintiff that the purported title objection was expressly excluded by clause (4) in schedule 2 of the PSP. The plaintiff was also reminded that completion was to take place that day and its failure to complete would be tantamount to repudiation.

(5)  By KH’s 3^rd letter (received by THK at 18:18 hours), KH replied to THK’s 2^nd and 3^rd letters and reiterated the demands in KH’s 2^nd letter.

19.  By a letter to KH on 16 February 2019, THK on behalf of the defendant accepted the plaintiff’s repudiation of the PSP. The plaintiff issued the writ in this action on 1 March 2019 with the statement of claim.

(3)  The respective implied terms as pleaded

20.  The relevant implied terms pleaded in §4 of the statement of claim are essentially those asserted in KH’s 1^st letter on 15 February 2019 and they read as follows:

“(2) The Plaintiff shall be entitled to carry out its due diligence investigation on the business, financial, legal and all other aspects of the Company;

(3) Completion is conditional upon the Plaintiff having completed its due diligence investigation on all aspects of the Company and is satisfied with the results thereof. Further or alternatively, it is an implied term that the Defendant shall satisfy the Plaintiff on the due diligence it has conducted on the Company.”

The implied term in (2) shall be referred to as “DD Implied Term” and the implied term in (3) as “Completion Implied Term” and the two collectively as “P’s Implied Terms on DD”. These are the implied terms rejected by the judge and maintained by the plaintiff on appeal.

21.  The defendant pleaded different implied terms in §6 of his amended defence and counterclaim and the two relevant ones read as follows:

“(2) The Plaintiff was only entitled to raise question concerning Keen Day’s business, affairs and documents within a reasonable time after receipt of documents on Keen Day from the Defendant and/or before the completion date of 15 February 2019 on the sale and purchase of Sale Share (“the Completion Date”) and the question must be reasonable and necessary for the purpose of ascertaining that the Defendant could sell the Sale Share to the Plaintiff free from encumbrances and that Keen Day was not subject to any existing or certain legal, financial or tax liability (“the 1^st implied term on question about the Company”).

(3) The Defendant was not obliged to answer any question raised by the Plaintiff concerning Keen Day’s business, affairs and documents which was not raised within reasonable time after receipt of documents on Keen Day from the Defendant and/or before the Completion Date and/or which was frivolous or speculative and did not concern the ability of the Defendant to sell the Sale Share to the Plaintiff free from encumbrances or any existing or certain legal, financial or tax liability of Keen Day (“the 2^nd implied term on question about the Company”).”

The above implied terms of the defendant are specifically denied in §6 of the amended reply and defence to counterclaim.

22.  At the trial, the plaintiff objected to the implied terms advanced by the defendant and contended they are arbitrary and artificial limits to the due diligence that a purchaser is entitled to conduct in this kind of situation. The relevant contentions of the plaintiff’s trial counsel, Ms Prisca Cheung and Mr Jonathan Tsang, may be summarised as follows[7]:

(1)  There is no discernible basis to confine the plaintiff to only conducting due diligence on whether Keen Day is free from encumbrances or subject to any existing or certain legal, financial or tax liability. There cannot possibly be limits to what due diligence matters a purchaser can take into account.

(2)  There can be no proper yardstick for when a due diligence question raised by the purchaser would be deemed frivolous. Nor is it sensible to introduce a temporal limit on when due diligence questions can be raised.

(3)  The yardstick or test for determining whether a purchaser is satisfied with the results of a due diligence investigation must be a subjective one. The court could not restrict matters a purchaser could take into consideration, nor the matters which the purchaser felt uncomfortable with[8].

The Judgment

23.  The judge took the view that the single most important issue was whether the plaintiff can rely on its pleaded implied terms premised on business efficacy and obvious intention. He did not find it necessary to deal with the defendant’s implied terms, as it was accepted by Mr C Y Li, SC, who appeared for the defendant throughout with Mr Jeremy Kwong, that it would be the end of the analysis if the plaintiff’s implied terms are rejected.

24.  As summarised by Mr Li, the judge gave seven reasons for rejecting P’s Implied Terms on DD:

(1)  The net effect of P’s Implied Terms on DD would be that the plaintiff could walk away from the transaction so long as it was not satisfied with the results of its due diligence exercise. It is not the plaintiff’s pleaded case that its satisfaction of the due diligence exercise is subject to some reasonableness requirement applying an objective test. Whether the plaintiff was so satisfied is beyond the defendant’s control. The parties could not have intended something like this[9].

(2)  The effect of P’s Implied Terms on DD is inconsistent with clause 8 of the PSP. Clause 8 would be rendered otiose as the plaintiff could always exercise its right under P’s Implied Terms on DD to walk away from the transaction so long as it is not satisfied on due diligence before the defendant could invoke clause 8[10].

(3)  The context showed that the scope and extent of the due diligence exercise had to be further negotiated in the draft FSP. It is therefore inherently improbable that the parties had impliedly agreed in the PSP that the plaintiff could terminate the PSP as long as it is not satisfied with its due diligence without reference to the scope and depth of the same[11].

(4)  P’s Implied Terms on DD are vague and incapable of being formulated with precision. There is no yardstick as to when and how the plaintiff could be said to have completed its due diligence exercise, or what are the criteria for the plaintiff being “satisfied” with the results of its due diligence exercise.[12]

(5)  Any due diligence exercise is case specific and largely depends on the particular circumstances of the transaction and the parties. It is inherently improbable for such a fluid exercise to be implied without prior discussion or agreement, and without express terms to govern its scope and consequences[13].

(6)  The bargain reached under the PSP was for the protection of the purchaser to be achieved by the warranties, undertakings and indemnity given by the vendor and guarantor under clause 3. To introduce P’s Implied Terms on DD was to re-write the bargain for the parties[14].

(7)  P’s Implied Terms on DD amounted to a carte blanche for the plaintiff to walk away from the transaction at any time as (a) there was no limit on matters the plaintiff could take into account in its due diligence exercise; (b) there was no temporal limit for the due diligence exercise; and (c) whether the plaintiff was satisfied with its due diligence exercise was decided subjectively by the plaintiff alone. It is against commercial and common sense that in the absence of any express contractual provisions, the court should imply P’s Implied Terms on DD if the plaintiff was not subjectively satisfied with its due diligence exercise. It is perfectly normal and commercially workable for the parties to enter into the PSP without P’s Implied Terms on DD [15].

25.  The judge also held that the plaintiff was not entitled to rescind the PSP based on two other grounds it advanced at trial[16]. It is not necessary to mention them as there is no appeal against those rulings.

This appeal

26.  The two broad questions in this appeal are firstly, whether P’s Implied Terms on DD should be implied into the PSP, and secondly, whether the plaintiff was entitled to be dissatisfied with the results of its due diligence exercise. Mr Benjamin Yu, SC, who appeared for the plaintiff on appeal[17], submitted that both should be answered in the affirmative.

27.  Mr Yu approached the first question in a manner different from the plaintiff’s trial counsel. The plaintiff does not rely on the subjective approach as to whether it was satisfied with the due diligence. Whether the plaintiff should have been so satisfied is to be assessed by reference to the objective standard of a notional reasonable purchaser.

28.  As to the second question, the principal matter now relied on in support of the contention that the plaintiff was entitled to be dissatisfied with the results of its due diligence exercise was not pleaded in the statement of claim (of 11 pages) or the amended reply and defence to counterclaim (of 27 pages), but was raised for the first time in the plaintiff’s opening submissions at §18.3. This related to Keen Day’s existing liability as at the date of completion of $101 million odd (“$101 million Liability”) recorded in the 2018 Audited Report and was dealt with as one of the miscellaneous matters at the end of the Judgment. The judge rejected this as he took the view that this was not a complaint raised in the extensive pre-completion correspondence and, as a matter of common sense, it was “unlikely to the extreme” that the defendant would transfer the Sale Share to the plaintiff with an outstanding shareholder’s loan up to the limit of $101 million[18].

29.  The plaintiff would need an affirmative answer on both questions to succeed on appeal.

Ground 1: whether P’s Implied Terms on DD should be implied into the PSP

(1)  The legal principles

30.  The applicable principles are well-established. For a term to be implied into a contract, these five conditions must be met: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that it “goes without saying”; (4) it must be capable of clear expression; and (5) it must not contradict any express term of the contract.[19]

31.  Six comments have been made to the above five conditions: (1) the implication of a term was not critically dependent on proof of an actual intention of the parties when negotiating the contract, as one is not strictly concerned with the hypothetical answer of the actual parties but with that of notional reasonable people in the position of the parties at the time at which they were contracting; (2) a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed if it had been suggested to them; (3) it is questionable whether the first condition (reasonableness and equitableness) will usually add anything; (4) the second and third conditions (business efficacy and obviousness) can be alternatives; (5) if one approaches the issue by reference to the officious bystander, it is vital to formulate the question to be posed with the utmost care; (6) necessity for business efficacy involves a value judgment, the test is not “absolute necessity”; it may be a more helpful way of putting the second condition in that a term can only be implied if, without the term, the contract would lack “commercial or practical coherence” [20].

32.  Mr Yu placed emphasis on giving effect to the true intention of the parties at the time the contract was made in considering the requirement of necessity. He prayed in aid the statement in The Interpretation of Contracts by Sir Kim Lewison (8^th edition) at §6.85 that “the question what is necessary is not to be answered simply by asking whether the contract would work at all without the implied term, but whether, without the implied term, it would work in the way the parties might reasonably have expected it to work.” This echoes the original statement of the business efficacy test in The Moorcock[21], and the statement in the 6^th edition of the work was approved by Leggatt LJ in Equitas Insurance Ltd v Municipal Mutual Insurance Ltd[22].

33.  The statements in Lewison and Equitas Insurance Ltd arose from what Lord Steyn said in Equitable Life Assurance Society v Hyman [2002] 1 AC 408 at 459: “The implication is essential to give effect to the reasonable expectations of the parties.” Lord Steyn’s statement and the discussion of Leggatt LJ were made in the context in which a term is implied in the exercise of a contractual power so as to ensure that the power is not abused and is exercised in good faith. That was also the context of the implied anti-avoidance term considered in Tadjudin Sunny v Bank of America, National Association, CACV 12/2015, 20 May 2016, another case cited by Mr Yu. The doctrine of good faith in this context requires the contractual power to be exercised in a way consistent with the justified expectations of the parties arising from their agreement[23]. The present situation is in a rather different context.

34.  In the current edition of Lewison at §6.85, after quoting Lord Steyn’s statement and the author’s interpretation of that statement which was approved by Leggatt LJ, the author mentioned Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd which held that the test would only be satisfied “if, without the term, the contract would lack commercial or practical coherence”, and commented that “This appears to lay down a more stringent test”.

35.  Lord Steyn’s statement was mentioned specifically by Lord Neuberger in Marks & Spencer at §23. He stated that it would be wrong to treat this as diluting the test of necessity, as it is clear from what Lord Steyn said earlier on the same page that “The legal test for the implication of … a term is … strict necessity”, which was described as a “stringent test”. In §24, he emphasised there has been no dilution of the requirements which have to be satisfied before a term will be implied[24].

36.  The judge quoted[25] the helpful summary of Lord Hughes in Nazir Ali v Petroleum Company of Trinidad and Tobago[26], in which it was reiterated that a term is to be implied only if it is necessary to make the contract work and the concept of necessity must not be watered down.

37.  The law insisted on this strict requirement on implying a term into a contract because it is difficult to say with confidence what the parties must have intended when they made no provision for a matter in issue. As Bingham MR explained in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd[27], the omission may be due to oversight, or a deliberate decision, or the parties may suspect they are unlikely to agree on what is to happen in a certain eventuality and choose to make no provision in the hope that the eventuality will not occur. It is wrong for the court to fashion a term with the benefit of hindsight which will reflect the merits of the situation as they then appear.

38.  The PSP is a standard agreement (with special terms in schedule 2 to the agreement) devised by Savills to cater for the sale and purchase of a property effected through the sale and purchase of the entire shareholding of the company that holds the property. In contrast with the standard agreements of other estate agents in various local cases cited by Mr Yu[28], it made no provision of any due diligence investigation by the purchaser on the company, the scope or the timing of the due diligence, and the consequence where the purchaser is not satisfied with the due diligence results. The fact that express provisions were made in the standard agreements of other estate agents should not be taken into account in considering whether the requirement of necessity is satisfied for implying into the PSP the terms advanced by the plaintiff, as there is no evidence to account for why no provision on due diligence was made, other than the finding that both parties were experienced in property transactions and knew what they were doing.

(2)  The plaintiff’s submissions

39.  By changing the standard of satisfaction with the due diligence from a subjective to an objective assessment, Mr Yu sought to overcome the objections in the Judgment that P’s Implied Terms on DD amounted to a carte blanche for the plaintiff to walk away from the transaction so long as it was not satisfied with the results of its due diligence; that such terms are vague and incapable of being formulated with precision, with no yardstick or criteria for the plaintiff to be satisfied with its due diligence results; and that it is inherently improbable and against commercial and common sense for such terms to be implied into the PSP.

40.  His arguments may be summarised as follows.

41.  First, the requirement of necessity is satisfied.

(i)  There cannot be any doubt that the plaintiff would need to conduct due diligence into the financial affairs of Keen Day to ascertain whether the company was free from legal, financial or tax liabilities and risk. It is admitted in the defendant’s pleading there is an implied term that the plaintiff was entitled to raise questions concerning Keen Day that are reasonable and necessary for the purpose of ascertaining that the defendant could sell the Sale Share free from encumbrances and that Keen Day was “not subject to any existing or certain legal, financial or tax liability”. The judge also agreed to a certain extent that the parties did envisage some form of due diligence to be carried out[29].

(ii)  Once it is accepted that some form of due diligence was necessary in this transaction such that the DD Implied Term should be implied, the Completion Implied Term is necessary to give business efficacy to the PSP, as otherwise the due diligence would be an exercise in futility, just as it is pointless to imply a term that permits a purchaser to raise requisitions and an obligation on the vendor to answer them, unless there is also a term that enables the purchaser to refuse to complete the transaction if he (acting reasonably) is dissatisfied with the vendor’s answers to the requisitions. Without the Completion Implied Term, the plaintiff would be compelled to complete even if it discovers substantial risks and liabilities from its due diligence exercise.

(iii)  As the purchaser was given the option of purchasing the Property directly or indirectly through the purchase of the Sale Share[30], it must have been the parties’ intention that the purchaser in the latter transaction should be in a position no less favourable than the purchaser in the former transaction. This could only have been so if Keen Day were free from liabilities. To force the plaintiff to complete despite substantial liabilities would frustrate the entire purpose of the contract. The judge is wrong to separate the need to carry out some form of due diligence from the legal consequence of due diligence, and whether Mr Choy is a seasoned investor is wholly irrelevant[31].

42.  Second, P’s Implied Terms on DD are capable of clear expression.

(i)  The DD Implied Term can be formulated with precision. As admitted in the defendant’s pleading, the scope of due diligence would cover the business, financial, legal and all other aspects of Keen Day. The judge agreed this must be right as a matter of common sense[32]. The extent of due diligence was equally clear. It would be from the incorporation of Keen Day (a period of four years at the time of the due diligence exercise) up to the completion date, given that the defendant was obliged under clause 2(b) of the PSP to deliver on completion “all the relevant documents” of Keen Day including statutory books and audited accounts.

(ii)  The purpose of the due diligence exercise is clear. It is admitted in the defendant’s pleading there is an implied term that the plaintiff was entitled to raise reasonable and necessary questions for the purpose of ascertaining that the defendant could sell the Sale Share free from encumbrances and that Keen Day was not subject to any existing or certain legal, financial or tax liability. It would be a question for the court in applying the DD Implied Term whether the plaintiff has raised reasonable and necessary requisitions for the purpose of the transaction.

(iii)  The Completion Implied Term is equally clear. It is irrelevant that it is not the plaintiff’s pleaded case that its satisfaction of due diligence is subject to some reasonableness requirement applying an objective test[33], as this is a question of law and does not need to be pleaded. Whether a purchaser should have been satisfied with the due diligence results is to be assessed by reference to the objective standard of a notional reasonable purchaser, similar to the situation whether a purchaser is satisfied with answers to requisitions on title. The evidential burden is on the purchaser to satisfy the court that it was not satisfied on a reasonable and fair basis[34]. There is no carte blanche to allow the plaintiff to walk away from the transaction.

43.  Third, P’s Implied Terms on DD do not contradict any express term of the PSP.

(i)  P’s Implied Terms on DD are not inconsistent with clause 8. P’s Implied Terms on DD are consistent with the duty of the vendor in proving and giving a good title, and the purchaser’s right to refuse to complete if the purchaser – acting reasonably – is dissatisfied with the answers to requisitions.

(ii)  The warranties in clause 3 do not preclude P’s Implied Terms on DD. The defendant has admitted in his pleading there is an implied term that the plaintiff was entitled to raise reasonable and necessary questions concerning Keen Day for the purpose of ascertaining that the defendant could sell the Sale Share free from encumbrances and that Keen Day was “not subject to any existing or certain legal, financial or tax liability”. This shows that the defendant accepts that the warranties do not take the place of the need for due diligence.

(iii)  Clause 4 does not conflict with P’s Implied Terms on DD. This provision deals with the vendor’s failure to show good title to the Property, whereas the implied terms concern Keen Day itself.

(3)  Discussion of ground 1

44.  The plaintiff has changed its case on implied terms on appeal. By importing a reasonableness requirement to the due diligence exercise and contending that an objective standard should be applied in assessing satisfaction with the due diligence results, the objections from giving in effect a carte blanche to the plaintiff to walk away from the transaction and the vagueness of the implied term are to some extent reduced.

45.  We have reservations whether this significant change is permissible in the circumstances.

46.  First, the reasonable requirement and objective standard are key components of P’s Implied Terms on DD. There is no good reason why they should not be pleaded in the statement of claim.

47.  Second, the defendant pleaded different implied terms importing the requirement of reasonableness as to time (questions should be raised within a reasonable time after receipt of documents on Keen Day from the defendant) and scope (questions must be reasonable and necessary for the purpose of ascertaining that the defendant could sell the Sale Share free from encumbrances and that Keen Day was not subject to any existing or certain legal, financial or tax liability). The defendant’s implied terms are not only specifically denied by the plaintiff. It is averred in the amended reply and defence to counterclaim that the PSP is for the sale and purchase of the entire share capital and loan of Keen Day and the plaintiff will be assuming the entire affairs and liabilities of the company; that the warranties in clause 3 do not preclude the existence of a general entitlement to conduct due diligence on the company; and that the plaintiff is entitled to conduct due diligence investigation on the affairs of the company including but not limited to its corporate, accounting, business and financial affairs. [35]

48.  Hence, the plaintiff’s contention on appeal as to the scope of the due diligence being restricted by a reasonableness requirement is contrary to the denial and averment in its pleading and the stance adopted in the opening submissions of its counsel at trial mentioned in the earlier part of this judgment. Its contention that the objective standard of a notional reasonable purchaser should be adopted in assessing satisfaction of the due diligence result is contrary to the stance in the opening submissions of its counsel.

49.  Despite the above reservations, we will nonetheless consider the plaintiff’s new case for completeness, as it has been extensively argued on both sides.

50.  On the plaintiff’s new case, we do not think the strict requirement of the necessity test for implying a term into a contract is satisfied.

51.  P’s Implied Terms on DD have two components, the DD Implied Term and the Completion Implied Term. Even if some form of due diligence was envisaged, and the plaintiff had raised questions on various aspects of Keen Day after the accounts and other documents of the company were supplied on 28 December 2018 and subsequently, it does not follow that it must be necessary and obvious to imply a term giving a right to the purchaser to refuse completion in the event that the purchaser was not satisfied (by objective standard) with the due diligence result. This was probably what the judge meant in differentiating the need to carry out some form of due diligence and the legal consequences of due diligence[36].

52.  In the local cases cited where provision was made in the standard agreements of estate agents for due diligence to be carried out on the company by the purchaser of the entire shareholding, it was also provided that completion was conditional on the purchaser having completed his due diligence and was satisfied with the results[37]. It does not mean however that without the Completion Implied Term, the due diligence would be pointless and an exercise in futility. The PSP has provided for the legal consequences in other ways.

53.  Clause 3(e) provided for a warranty by the vendor that the company “is and shall not be involved in any legal proceedings or subject to any legal financial or tax liability” and the vendor undertakes to indemnify and keep indemnified the purchaser and/or the company against such liability. There is no time limit for the warranty and indemnity given by the vendor.

54.  Clause 3(f) provided for an irrevocable and unconditional guarantee (the guarantor was also a party to the PSP) of “the due performance and observance by the Vendor of all undertakings and warranties given by the Vendor of and in relation to the Sale Share and Sale Debt” contained in the PSP, and the guarantor shall indemnify and keep the purchaser fully indemnified against “any breach by the Vendor for a period of 2 years after completion”.

55.  The bargain made in the PSP was that if any of the warranties given by the vendor was not fulfilled, the remedy of the purchaser was to sue for breach of warranty and seek indemnification under clause 3. Mr Li further made the point that if there is fundamental breach of the terms of the PSP, the purchaser can invoke the remedy of rescission. He also pointed out it is telling that according to the evidence of the plaintiff’s property manager Ms Wong, if the plaintiff had known that Keen Day was not a “simple holding company whose only asset and business pertained to the Property” but “had actively engaged in other investments and trading activities”, she “would have requested for further indemnity and insisted on a much longer period of guarantee in order to protect the Plaintiff’s interests.”[38]

56.  It may be argued that the warranties, indemnities and guarantee in the PSP do not give as much protection to the purchaser as compared to a right to refuse completion by making the transaction conditional upon the purchaser being satisfied with the due diligence results. That is beside the point, as it was not the bargain made between the parties. The process of implying a term into the contract “must not become the re-writing of the contract in a way which the court believes to be reasonable, or which the court prefers to the agreement which the parties have negotiated.”[39] It cannot be said that the PSP would lack commercial or practical coherence without providing that the purchaser is entitled to refuse completion if he is not, acting reasonably, satisfied with the results of due diligence. The concept of necessity must not be watered down.

57.  The PSP also provided in clause 4 that completion is conditional upon the company and/or the vendor showing good title to the Property and that the purchaser is entitled to cancel the transaction with refund of the deposit if the vendor should fail to show good title. Clauses 7 and 8 made clear that completion is conditional only upon the condition in clause 4. All other situations where there is failure to complete would amount to breach of contract with the legal consequences provided in clauses 7 and 8. To imply a term that completion is conditional in an additional situation where the purchaser is not satisfied with the due diligence results would be inconsistent with the express terms in clauses 4, 7 and 8 and tantamount to re-writing the bargain of the parties[40].

58.  Thus, the implied term proposed by the plaintiff “does not fit with the substance of the parties’ rights and obligations under the express terms of the contract or their express allocation of the risk of the occurrence of a particular event”, and the existence of an express term covering what should constitute a condition precedent for completion “makes the co-existence of a further implied term on the same subject unlikely”[41]. If there is an express term in the contract which is inconsistent with the proposed implied term, “the latter cannot, by definition, meet [the tests for necessity], since the parties have demonstrated that it is not their agreement.”[42]

59.  We reject the plaintiff’s contentions on ground 1. It is not strictly necessary to consider ground 2 as the appeal would not succeed. We will consider ground 2 just for completeness.

Ground 2: whether the plaintiff was entitled to be dissatisfied with the due diligence results

60.  There is again a change of emphasis in that the main complaint now is the $101 million Liability, which did not feature expressly in the plaintiff’s pleadings[43] or in the witness statement of Ms Wong Ho Wan. It was only first raised in the opening submissions of the plaintiff at trial, in which it was contended that the status of the debts which made up the $101 million Liability remained uncertain upon completion and it was unclear whether Keen Day would “discharge or assign its debts to [the plaintiff]” upon completion, what the amount of indebtedness would be and to whom these debts would be owed[44].

61.  As mentioned earlier, the judge rejected these contentions in §§76 to 78 of the Judgment.

62.  Mr Yu contended that contrary to the judge’s finding[45], the $101 million Liability was raised by KH in the pre-completion correspondence. He referred the court to these letters:

(i)  KH’s letter to THK dated 24 January 2019

63.  KH referred to the 28/12/2018 Documents and raised numerous questions on the liabilities as stated in the audited financial statements. In §1, THK was asked to produce “all the supporting documents in respect of the audit of the reports and the financial statements of the Company including but not limited to all the ledgers, invoices, receipts, profits tax returns, tax computations, IRD profits tax assessments, correspondence with IRD, insurance certificates, bank account statements, loan agreements and any other contracts and documents”, for the assessment of KH.

64.  In §2(e), KH referred to the section of Current Liabilities in the 2018 Audited Report and noted that Keen Day “is indebted to a number of persons/corporations.” Among the liabilities recorded was the $101 million Liability[46]. KH asked THK to “disclose details of these loans/liabilities and their terms of repayment for [its] assessment.” In §2(f), KH referred to a “Loan from a Related Company/Loan Creditor” with an interest rate of 18% p.a., which was much higher than the usual lending rate and asked THK to disclose details of this loan and provide satisfactory justification that the interest expenses may be treated as tax deductible, for the assessment of KH.

65.  In §3(d), KH referred to the 2014-2017 Audited Report and asked THK to “disclose details of the loans/liabilities claimed” for its assessment.

66.  In §5, KH asked THK to “confirm and show that the Company has no existing litigation, threats of claim or litigation, contracts or liabilities (which do not expire by the Completion Date).”

67.  Mr Yu submitted that the question in §5 is the focus of the plaintiff’s complaint in relation to the $101 million Liability.

(ii)  THK’s reply to KH dated 31 January 2019

68.  In answer to §1, THK provided to KH the 31/1/2019 Documents. In answer to §2(e), THK referred to items (A)9, (B)8, (D)8 and (D)9 of the list attached to its letter in reply for details of the Current Liabilities of the company. In answer to §3(d), THK referred to item (A)9 of the attached list. By these answers, the names of the creditors were provided.

69.  As for §2(f), THK disputed that the interest rate of 18% p.a. was much higher than the usual lending rate and, without prejudice to its stance that no justification was required to be given, agreed for the defendant to sign a deed of tax indemnity on terms to be agreed if the interest expenses should transpire to be not deductible for tax.

70.  In answer to §5, THK replied that “save and except for the warranties already given by [the defendant] under Clause 3 of the [PSP], [the defendant] is not legally required to give further warranties/confirmation to [the plaintiff].”

(iii)  THK’s letter to KH dated 12 February 2019

71.  By this letter, THK provided the 12/2/2019 Documents to KH, which included the draft management accounts of Keen Day made up to 15 February 2019 (the completion date). Mr Yu pointed out that the draft management accounts still recorded Keen Day as owing substantial liabilities of $99,741,591.01.

72.  THK further stated that as completion was scheduled to take place on 15 February 2019, KH was asked to provide as soon as possible the draft completion documents including the Deed of Waiver and the Deed of Tax Indemnity and the completion letter for the approval of THK.

(iv)  KH’s letter to THK dated 13 February 2019

73.  In §1, KH complained that the 31/1/2019 Documents were far from complete or satisfactory and gave examples in §§1(b) to (e) why they were so. KH mentioned that the fund movements in the company were “rather unusual”, that “funds came in and out rapidly without any proper explanation”, that the identity of the fund providers and recipients was “improperly documented and/or recorded”, and stated that the plaintiff would not purchase a company which had been used as “a vehicle for channelling funds of dubious sources or purposes”.

74.  In §2(e), KH stated that THK had not satisfied its question as the names of the creditors were abbreviated and “their identity is a myth”. A similar statement was made in §3(d) regarding THK’s answer. In respect of §2(f), KH asserted that the plaintiff was not bound to accept any tax indemnity from the defendant.

75.  In §5, KH stated that THK’s answers “are dissatisfactory and not acceptable to [the plaintiff].”

(v)  THK’s 1^st letter to KH dated 15 February 2019

76.  Without prejudice to its stance that the questions raised by KH on 13 February 2019 were frivolous and vexatious and for the purpose of wriggling out of the transaction, in §§1(a) to (e), THK provided answers to the questions in those paragraphs. It was asserted that the transactions were made in the ordinary course of business of the company.

77.  In §§2(e) and 3(d), THK provided the full names of the creditors. In §5, THK maintained its position stated in its letter dated 31 January 2019.

78.  Mr Yu submitted that in light of the above letters, there can be no doubt that the plaintiff was concerned about the existing liabilities of Keen Day. THK never properly responded to the question with regard to showing that the company “has no existing … liabilities (which do not expire by the Completion Date).” It never provided any confirmation or showed how the $101 million Liability would be discharged before completion. None of THK’s letters mentioned the clearing of this liability prior to completion other than providing the names of various creditors. The draft management accounts of the company made up to the completion date still recorded it as owing substantial liabilities of $99 million odd. The judge was wrong to find that the $101 million Liability would be cleared by the time of completion as a matter of common sense. There is nothing in the evidence to suggest that this liability would be cleared by the time of completion. No assignment of loan or deed of waiver was ever signed. Because of the failure to provide satisfactory responses to KH’s queries and Keen Day was subject to significant liabilities up to the date of completion, the plaintiff was entitled to be dissatisfied with the results of its due diligence.

79.  In addition, the plaintiff also relied on its discovery of rapid and unusual movements of substantial funds in Keen Day which KH raised in the letter of 13 February 2019, to which THK replied in its 1^st letter dated 15 February that the transactions were in the ordinary course of business of the company. Mr Yu submitted that this answer was clearly unsatisfactory as the fund movements involved sums far greater than the value of Keen Day’s bond trading activities recorded in the financial statements as at 31 March 2017 and for this reason as well the plaintiff was entitled to be dissatisfied with the due diligence results.

80.  The judge found that the alleged concern about the $101 million Liability was not a complaint raised in the pre-completion correspondence and that this liability would be cleared off on completion as it is “unlikely to the extreme that the Defendant would transfer the Sale Share to the Plaintiff with an outstanding shareholder’s loan up to the limit of HK$101 million”[47]. These are findings of fact of the trial judge. On well-established principles[48], the appeal court should treat the findings with the utmost respect and not interfere with them unless it is shown that the judge had fallen into palpable errors sufficiently material to undermine his conclusions or that his findings of fact are such that no reasonable judge could have reached as his decision cannot reasonably be explained or justified.

81.  We are not persuaded that this high hurdle has been surmounted in this instance. Contrary to Mr Yu’s contention, there is sufficient evidence for the judge to make those findings.

82.  It was envisaged by both parties that Keen Day was indebted to the defendant when they negotiated the terms of the FSP during September to November 2018, and a draft deed of assignment was prepared for the purpose of the defendant assigning to the plaintiff all his rights and interests in the defendant’s loan to Keen Day. The amount of Keen Day’s liabilities was not known to the plaintiff at that stage and this became known when the audited accounts and draft management accounts made up to the completion date were provided to KH on 28 December 2018 and 12 February 2019.

83.  KH’s questions in respect of the current liabilities in the accounts were directed towards the details of the loans/liabilities, the identities of the creditors, and the interest rate which appeared to be higher than usual and might not be tax deductible. The amount of the current liabilities was as disclosed in the accounts. §5 of the questions in KH’s letter to THK dated 24 January 2019 (“Please confirm and show that the Company has no existing litigation, threats of claim or litigation, contracts or liabilities (which do not expire by the Completion Date)”) was in the nature of a ‘sweeping up’ question designed to ensure there was no existing or probable liability other than what was disclosed in the accounts, and it was reasonably understood by THK in that sense when it replied to this question in its letter to KH dated 31 January 2019.

84.  On the plain wording of §5 in KH’s letter to THK dated 24 January 2019, it could not be said that the plaintiff was explicitly or clearly seeking information as to how the defendant would discharge the current liabilities of Keen Day upon completion. The judge was entitled to find that the complaint regarding the $101 million Liability in the plaintiff’s submissions was not raised in the pre-completion correspondence. Had the discharge of such substantial liability on completion been a genuine concern of the plaintiff, one would not expect KH to raise a question about this in such an oblique manner, in contrast to the many questions clearly and persistently raised by KH on a host of matters arising out of the accounts and other documents of Keen Day.

85.  As to the other finding that it was “unlikely to the extreme” that this liability would not be discharged on completion, the judge accepted the evidence of the defendant, who had experience in property dealings, that “anyone would know in this type of deals all the other assets and liabilities of Keen Day would have to be cleared off”; that the $101 million Liability was either due to the defendant or the entities controlled by him and this outstanding liability could be dealt with internally; that his lawyers were fully aware of this and he had already instructed them to deal with the matter of clearing off the $101 million Liability; and that his book-keeping staff and his lawyers had made the necessary preparation for this to be accomplished by completion[49].

86.  The judge accepted the defendant’s case that the clearing off of the $101 million Liability, such as by signing an assignment of this liability, was a step only to be taken on completion, and he found that this was not done because in the last few days leading up to the completion, KH had come up with multiple queries within a very short timeframe indicating that it was not going to complete[50]. He found that the plaintiff was not ready and willing to complete the transaction on 15 February 2019[51].

87.  In light of the above, there is no basis for the appeal court to interfere with either finding of the judge.

88.  As to the complaint about unusual and rapid movements of substantial funds raised in KH’s letter dated 13 February 2019, this was not specifically addressed by the judge but is of little moment, in light of the judge’s acceptance of the defendant’s evidence that by around 13 or 14 February 2019, the plaintiff had decided to back out from the transaction[52]. In any event, we do not think the plaintiff was entitled to be dissatisfied with the due diligence results on the basis of this complaint, which related to fund movements in the accounts with a number of fund providers and recipients who were entities controlled by the defendant and could be dealt with internally. We accept Mr Li’s submissions that the fund movements had been fully explained by THK in its 1^st letter of 15 February 2019.

89.  There is nothing in Mr Yu’s point that the fund movements in 2016 (§1(d) of KH’s letter dated 13 February 2019) were far greater than the value of Keen Day’s bond trading activities as at 31 March 2017. As pointed out in THK’s 1^st letter of 15 February 2019, the transactions in 2016 were audited and the fund providers and recipients were entities controlled by the defendant. The transactions in 2018 (§1(c) of KH’s letter dated 13 February 2019), which had not been audited at the time of THK’s 1^st letter of 15 February 2019, were shown to be for the purchase of bonds in a table submitted by Mr Li[53].

90.  Ground 2 therefore fails.

Conclusion

91.  The plaintiff’s appeal is dismissed. There is no dispute that costs should follow the event. We order the plaintiff to pay the defendant’s costs of this appeal.