SUPER TOWN INVESTMENTS LTD v. IVES DEVELOPMENTS LTD AND OTHERS

HCA 86/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 86 OF 2006

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D E C I S I O N

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Background

1.  This is the Plaintiff’s appeal against the order of Master Andy Ho made on 30 November 2006 granting the Defendants unconditional leave to defend this action at the hearing of the Plaintiff’s application for summary judgment pursuant to Order 86 of the Rules of the High Court.  The Plaintiff’s claim against the 1^st and 2^nd Defendants is for a declaration that the Plaintiff has effectively rescinded an agreement dated 3 November 2004 (the “Agreement”) or for rescission of the Agreement and damages for repudiatory breach of the Agreement and that against the 3^rd and 4^th Defendants is for breach of guarantee under the Agreement and for an indemnity.  The Plaintiff’s claim against the 5^th to 7^th Defendants was dismissed by consent at an earlier stage. 

2.  The Plaintiff is a subsidiary of New World Development Company Limited (“New World”).  Leung Chi Kin (“Leung”) is the executive director of New World and the general manager of the New World group of companies as well as the representative of the Plaintiff.  The 5^th, 6^th and 7^th Defendants (collectively, the “Companies”) are owners of a property in Tai Wai (the “Property”) as tenants-in-common in equal shares.  Tsang Kai Yuen (“Tsang”) and Yeung Shiu Kin Eddie (“Yeung”) are the sole shareholders of the 5^th Defendant.  The 1^st and 2^nd Defendants are the sole shareholders of the 6^th and 7^th Defendants respectively.  

3.  At the height of the property market in March 1997, the Plaintiff entered into an agreement with some of the Defendants and their associates to purchase the Property for $790 million.  With the fall in the price of real property in 1998, the parties agreed to reduce the price of the Property to $382 million with completion extended to on or before 17 June 1999.  On that date, the parties agreed to further reduce the price to $325,610,115 with completion extended to on or before 17 June 2000.  Eventually, as vacant possession of the Property had not been obtained, the Plaintiff rescinded the agreement on 19 September 2000.

4.  On 3 November 2004, the Plaintiff, New World, Tsang, Yeung and the 1^st to 4^th Defendants entered into the Agreement under which Tsang, Yeung, the 1^st Defendant and the 2^nd Defendant (collectively referred to as the “Vendors”) agreed to sell and the Plaintiff agreed to purchase their shares of and in the 5^th to 7^th Defendant subject to certain Conditions Precedent.  New World is the guarantor for the performance of the Agreement by the Plaintiff as purchaser of the shares.  The 3^rd and 4^th Defendants are guarantors for the performance of the Agreement by the Vendors.

The legal principles applicable to an Order 86 application

5.  While the scope of application of Order 86 and Order 14 of the RHC are different, the legal principles applicable to an application for summary judgment under both Orders are the same.  These principles are well-established.  The cardinal principle is that a defendant ought not be driven from the judgment seat if he has an arguable defence.  Thus, summary judgment should only be given where it is a clear and obvious case and ought therefore not be tried: see Hong Kong Civil Procedure 2007 Note 86/4/1, Ng Lung Sang Anita v Lam Yuk Lan [1999] 4 HKC 106 and Chow Yim Woon v Lam Yung Ming [2000] 3 HKLRD 373.

6.  A concise statement of the standard approach in an application for summary judgment is to be found in the dicta of Ma J, as he then was, in Schindler Lifts (Hong Kong) Ltd v Ocean Joy Investments Ltd [2003] 1 HKC 438.  The court has to determine two questions: firstly, whether what the defendant says is believable as opposed to whether its version of events is to be believed; and secondly, if it is, whether what the defendant says amounts to an arguable defence in law.  In determining the first question, the court should not embark on a mini trial of the action on affidavit evidence.  The burden of proof is not a heavy one.  It is not the function of the court at this stage to assess if a defence will succeed at trial.  The court should not rule out a defence simply because it thinks the defence would not be believed by the trial judge because of some inherent weaknesses, save where what the defendant says is practical moonshine.  Insofar as the second question is concerned, summary judgment will not be granted if there are arguable defences or serious disputes of law: see Man Earn Ltd v Wing Ting Fong [1996] 1 HKC 225 and Ng Lung Sang Anita v Lam Yuk Lan [1999] 4 HKC 106.

Some relevant provisions of the Agreement and their effect

7.  The expressions used in the Agreement are defined in Clause 1.3.  The following definitions are pertinent:

Expression	Meaning
CP Date	2nd May 2005
Completion Date	The date falling fifteen (15) Business Days from the Purchaser or the Purchaser’s Solicitors being notified in writing by the Vendors or the Vendors’ Solicitors that the Conditions Precedent have been fulfilled.
Conditions Precedent	All the transactions and conditions precedents as set out in Clauses 2A.1 to 2A.5
First Extended CP Date	2nd August 2005
Second Extended CP Date	2nd November 2005
Warranties	The representations, warranties and undertakings on the part of the Vendor set out in Clause 6 and Schedule 4

8.  The Conditions Precedent are exhaustively set out in Clauses 2A.1 to 2A.5.  The other sub-clauses of 2A do not form part of the Conditions Precedent.  These Conditions Precedent are also distinct from other warranties, terms and conditions of the Agreement, which are contained in Clause 6 and Schedule 4.  Some Conditions Precedent are to be fulfilled by the Plaintiff and some by the Vendors.  Under Clause 2A.1, the Plaintiff shall extend a loan to the 7^th Defendant to enable it to complete the purchase of one third of the share in the Property.  Under Clause 2A.5(a), the Plaintiff shall, upon receipt of the settlement amount under Clause 2A.1, at its own cost make application to the High Court to vacate the charging orders registered against the Property.  Under Clauses 2A.2 to 2A4, the Companies undertake to procure certain transactions.  Under Clause 2A.5(b), (c) and (d), the Vendors shall procure certain other transactions.  Clause 2A.5(e) provides that the Vendors warrant to the Plaintiff:

“that the Companies are and shall remain the legal and beneficial owner of the Property (as tenants-in-common in equal shares) at Completion free from all encumbrances, save and except and subject to the Proceedings”.

Clause 2A.6 provides:

“Each of the Vendors and the Purchaser shall, at its own costs and expenses, use its reasonable endeavours to procure the fulfilment of the Conditions Precedent on its part to be fulfilled as soon as reasonably practicable and in any event on or before the CP Date.  The Vendors shall within a reasonable period of time give written notice to the Purchaser of the satisfaction of the Conditions Precedent with the Documentary Evidence annexed thereto.”

Thus, both the Plaintiff and the Vendors are under an obligation to procure the fulfilment of the relevant Conditions Precedent.

9.  Clause 2A.9 to 2A.13 provide that if the Conditions Precedent would not have been fulfilled on or before the CP Date, i.e. 2 May 2005, the Plaintiff would have an option to extend the deadline for fulfilment of the Conditions Precedent to the First Extended CP Date, i.e. 2 August 2005 and then to the Second Extended CP Date, i.e. 2 November 2005.  If the option would not have been exercised or if exercised but the Conditions Precedent would not have been fulfilled on or before the relevant Extended CP Date, the Agreement would be terminated with the appropriate consequences as provided for under the relevant Clauses 2A.10 to 2A.14. 

10.  It should be noted that the ‘CP Date’ or ‘Extended CP Date’ do not mean the date of completion of the Agreement, but the deadline for fulfilment of the Conditions Precedent.  Under Clause 1.3, the completion date for the Agreement shall be determined by the Vendors or their solicitors giving notice in writing to the Plaintiff or their solicitors that the Conditions Precedent have been fulfilled.  The completion date shall be fifteen business days from the date of such notice.

The circumstances leading to the present action

11.  Set out below are the circumstances leading to the Plaintiff’s application.  They are either common ground or based on incontrovertible evidence.  To facilitate an easy understanding of the Defendants’ case, I have interposed between the appropriate events the 4^th Defendant’s allegations on which the Defendants’ defence is based.  Those allegations are disputed by the Plaintiff. 

12.  The parties entered into the Agreement on 3 November 2004.  On 25 January 2005, one So Wing Kin (“So”) commenced action in HCA 155 of 2005 (“HCA 155/2005”) against inter alia, the 1^st, 3^rd, 4^th and 6^th Defendants for breach of an oral shareholders agreement relating to the 6^th Defendant, which might affect the 1^st Defendant’s right to dispose of its share in the 6^th Defendant.  So also registered his writ of summons in HCA 155/2005 as a lis pendens against the Property.  That action was subsequently dismissed by Deputy High Court Judge Louis Chan on 22 May 2006 after the present dispute had arisen.  Leung had been updated by the 4^th Defendant of the development in HCA 155/2005.

13.  On 26 September 2005, the Defendants’ solicitors, Messrs Johnson Stokes & Master (“JSM”) wrote to the Plaintiff’s solicitors, Messrs Vincent T K Cheung, Yap & Co (“VTKC”) seeking their confirmation that all the Conditions Precedent had been fulfilled.  VTKC replied on 7 October 2005 that they would revert as soon as they had instructions from the Plaintiff, but VTKC never responded to that enquiry.  In that letter, VTKC pointed out to JSM that in view of HCA 155/2005 they failed to see how the Vendors could complete the Agreement in selling the shares in the 6^th Defendant with its one-third share in the Property free from all claims and encumbrances.

14.  On 12 October 2005, JSM wrote to VTKC.  They took the view that the Vendors had fulfilled the Conditions Precedent and it would be up to the Plaintiff to decide whether to refuse completion of the Agreement in view of HCA 155/2005 or nevertheless to proceed with completion.  They wrote:

“… Under Clause 2A.6 of the Agreement, our clients were obligated to use their reasonable endeavours to procure the fulfilment of the Conditions Precedent as soon as reasonably practicable.  Our clients’ position is that they have now complied with this obligation and satisfactorily discharged their contractual obligations under the Agreement in this respect.  In accordance with the Agreement’s terms, Notice of Completion follows and this has been issued separately.

…

In summary, despite our clients fulfilling their contractual obligations, events have occurred through no fault of theirs which may disallow them from disposing of the Sale Shares free from encumbrances.  It would be up to your client to decide whether to refuse to purchase the Sale Shares for this reason or nevertheless proceed with the transaction.”

In a separate letter, JSM gave notice of fulfilment of the Conditions Precedent and informed VTKC that completion of the Agreement would take place on 2 November 2005 in accordance with Clause 1.3.  On the same day, the solicitors for Tsang and Yeung, Messrs Yu, Tsang & Loong (“YTL”) also sent a similar letter to VTKC in respect of the sale of their shares in the 5^th Defendant.

15.  The 4^th Defendant alleged that he and the 3^rd Defendant had a meeting with Leung on 18 October 2005 to discuss about the progress of HCA 155/2005 and about extending the completion date in return for an increase in the price for the Property.

16.  On 19 October 2005, VTKC replied to JSM reiterating their view that the Vendors would not be able to sell the shares together with the Property free from all claims and encumbrances.  They said that the Plaintiff was ready, able and willing to complete the Agreement and put on record that there was no waiver of any term and condition under the Agreement and would hold the Vendors liable for breach of the Agreement should they fail to perform all the obligations thereunder.  JSM wrote back enquiring the Plaintiff’s position regarding fulfilment of the Conditions Precedent.  Probably, JSM had second thought about the Vendors’ position as regards fulfilment of the Conditions Precedent.  But VTKC did not respond.

17.  The 4^th Defendant alleged that on 21 October 2005 he gave a draft proposal (the “1^st Proposal”) for extending the completion date with an increase in price prepared by Rin Lee of JSM to Leung for consideration.  On 25 and 27 October 2005, he had further discussion with Leung about extending the completion date to 15 December 2005 on condition that neither party would claim against the other party if no completion could take place.  The Defendants’ suggestion for increase in price of the Property was rejected by Leung.

18.  On 27 October 2005, VTKC wrote to JSM reiterating their view that HCA 155/2005 was an encumbrance over the Property and requested documentary evidence that that claim had been dismissed and the registration of the lis pendents vacated.  They also informed JSM the amount payable to the Plaintiff for the Settlement Amount Promissory Note in accordance with the terms of the Agreement.

19.  On 28 October 2005, JSM wrote to VTKC referring to the discussion between their respective clients on ways to resolve the difficulty caused by HCA 155/2005.  JSM also enclose a second draft proposal (the “2^nd Proposal”) on the terms of extending the completion date with no liability for failure to complete for VTKC’s consideration.

20.  According to the 4^th Defendant, he telephoned Leung to discuss with him about JSM’s 2^nd Proposal on the same day.  Leung did not object and told the 4^th Defendant to ignore what the solicitors had to say.  Leung also asked the 4^th Defendant to instruct JSM to reply to VTKC agreeing to the postponement of the completion date.

21.  On 29 October 2005, VTKC replied to JSM rejecting JSM’s 2^nd Proposal but confirming their agreement to extend the completion date to 15 December 2005 on the basis that the Agreement would remain in full force and effect.

22.  On 31 October 2005, JSM replied to VTKC confirming the Vendors’ agreement to extend the completion date to 15 December 2005 on the basis that the Agreement would remain in full force and effect. 

23.  The 4^th Defendant alleged that JSM’s letter dated 31 October 2005 was issued as a result of his oral agreement with Leung on 28 October 2005 that neither party would be liable if the Agreement could not be completed on 15 December 2005.  He also informed Leung that he had instructed JSM to reply to VTKC agreeing to the postponement of the completion date.

24.  On 1 November 2005, VTKC wrote recording an agreement between the Vendors and the Plaintiff to extend the completion date to 15 December 2005.  They wrote:

“We write to record the agreement of our respective clients to postpone the completion date specified in the Notices of Completion from “2^nd November 2005” to “15^th December 2005”.  The said postponement shall be effected on the basis that the Agreement dated 3^rd November 2004 shall remain in full forced in its entirety without prejudice to the positions taken by the parties respectively as expressed, in particular, in the letters previously exchanged between us including your letters dated 12^th October 2005, the letter dated 12 October 2005 from Messrs. Yu, Tsang & Loong and our letters dated 19^th and 25^th October 2005 to you and Messrs. Yu Tsang & Loong.

 In the meantime, all the rights and remedies of our clients are expressly reserved.”

25.  The 4^th Defendant alleged that he had spoke to Leung over the phone on 3 November 2005 and reiterated their oral agreement that neither party would be liable if the Agreement could not be completed on 15 December 2005.  Leung did not object but simply asked the 4^th Defendant to discuss with So as soon as possible.

26.  The Vendors were unable to persuade So to settle HCA 155/2005 and it became obvious that the encumbrance against the Property could not be removed before 15 December 2005.  On 14 December 2005, JSM wrote to VTKC enquiring if the Plaintiff would complete the purchase regardless of the encumbrance or to treat the Agreement as abortive.  VTKC did not respond.  No completion of the Agreement took place on 15 December 2005.

27.  On 16 December 2005, JSM wrote to VTKC and returned the deposit with interest on behalf of the 6^th Defendant.  They also put on record that VTKC had not responded to their enquiry on 19 October 2005 about the Plaintiff’s position regarding fulfilment of the Conditions Precedent.  On the same day, VTKC wrote to JSM and YTL demanding return of the deposit paid to the Vendors with interest and repayment by the 7^th Defendant of the amount due and owing under the Settlement Amount Promissory Note with interest in the amount of $46,062,372.06 direct to New World.  JSM replied to VTKC on the same day repeating what they had said in their earlier letter that day and said that the 7^th Defendant would only be required to repay the Settlement Amount Promissory Note within three months from the date of demand by the Plaintiff under clause 2A.13(b) of the Agreement.  JSM also reiterated that neither party would have any claim against the other under Clause 2A.13(c) of the Agreement.

28.  On 12 January 2006, the Plaintiff instituted the present action, claiming amongst other remedies, the sum of $42,432,211 under the Settlement Amount Promissory Note issued by the 2^nd Defendant to the Plaintiff and a lien or charge on the shares of the 5^th to 7^th Defendants, the Promissory Notes of the 5^th to 7^th Defendants and the Property for the said sum.  The Plaintiff also registered a lis pendens against the Property on 13 January 2006.  The Statement of Claim was filed on 29 March 2006.

29.  On 25 January 2006, JSM forwarded a cashier order for the sum of $46,706,623.51 in favour of New World representing the total amount of principal and interest calculated up to and inclusive of 25 January 2006 for redemption of the Settlement Amount Promissory Note.

30.  On 26 January 2006, VTKC wrote to JSM referring to JSM’s above letter and an alleged subsequent discussion between the 4^th Defendant and Leung.  VTKC returned the cashier order saying:

“We are instructed that our respective clients together with your client’s lender, Tai Wah Finance Company Limited, have come to certain agreement in respect of the caption matter and have requested for our return of the cashier order in the sum of HK$46,706,623.51 drawn in favour of New World Development Company Limited for your handling in consideration of our client agreeing not to exercise its right of foreclosure on or before 10^th February 2006.

Kindly note that the return is without prejudice to the right of foreclosure of our client under the Legal Charge and other relevant document(s) (if any) and the forbearance to exercise the right of foreclosure is subject to documentation (in such form to be approved by our client) having been executed by the parties and exchanged no later than 10^th February 2006.”

31.  The 4^th Defendant denied there was any such agreement as alleged in the above letter of VTKC.  According to the 4^th Defendant, he learned from Ho Chi Wai (“Ho”) of Tai Wah Finance Company Limited (“Tai Wah”) that Leung requested Tai Wah not to provide finance to the 2^nd Defendant for repaying the Settlement Amount Promissory Note.  He also exhibited a fax issued by Leung to Ho dated 25 January 2006 attaching a draft for discussion as evidence of the telephone conversation between Ho and Leung.

32.  On 27 January 2006, JSM wrote to VTKC categorically denying that their clients had requested return of the cashier order and any understanding or agreement to leave the matter pending until 10 February 2006.  In a separate letter, JSM re-tendered the cashier order.

33.  On 26 May 2006, the 1^st to 4^th, 6^th and 7^th Defendants applied to strike out part of the Plaintiff’s Indorsement on Writ and Statement of Claim regarding the claim mentioned in paragraph 27 above.  On 5 June 2006, Master Lung granted an Order by Consent to the above effect striking out paragraph 10 of the Indorsement on Writ and paragraph 11.1 of the Statement of Claim and paragraph (6) of the prayer in the Statement of Claim on the ground that they were frivolous, vexatious, an abuse of the process of the Court and/or disclose no reasonable cause of action.  The Plaintiff’s claims against the 5^th to 7^th Defendants were also dismissed by consent.

34.  On 5 July 2006, the Plaintiff took out the present application under Order 86 of the Rules of the High Court.  The application was dismissed by Master Andy Ho on 30 November 2006.

The 1^st to 4^th Defendants’ defences

35.  The 1^st to 4^th and 6^th to 7^th Defendants filed a defence on 24 May 2006 which contains nothing other than admissions and general denials.  However, since the issue of the present application for summary judgment, the 1^st to 4^th Defendants advanced four lines of defences, namely:

(1)    non-fulfilment of the Conditions Precedent of the Agreement;

(2)    an oral agreement between the 4^th Defendant on behalf of all the Defendants and Leung on behalf of the Plaintiff;

(3)    the Plaintiff should be estopped from pursuing its claim; and

(4)    the breach, if any, is only of warranty as opposed to breach of condition and would not entitle the Plaintiff to rescission.

36.  The 4^th Defendant explained the late revelation of the Defendants’ defence on the ground that at the time the Defendants were busy with preparation for the speedy trial of HCA 155/2005 and that subsequently senior counsel was on leave and not available for advice.  I accept the explanation as it is consistent with the progress in HCA 155/2005.  If any of the defences now disclosed raises a triable issue, the Defendants are entitled to leave to defend.

Non-fulfilment of the Conditions Precedent of the Agreement

37.  I have outlined the background facts in paragraphs 11 to 34 above.  On 26 September 2005, JSM sought confirmation from VTKC that all the Conditions Precedent had been fulfilled.  VTKC never responded to that enquiry.  Then on 12 October 2005, JSM informed VTKC that the Vendors’ position was that all Conditions Precedent had been fulfilled and gave notice for completion of the Agreement to take place on 2 November 2005 in accordance with Clause 1.3 of the Agreement.  Mr Edward Chan SC, counsel for the Plaintiff, submits that JSM’s letter of 12 October 2005 was self-evident that all Conditions Precedent had been met and it lies ill in the Defendants’ mouth now to argue that the Conditions Precedent had not been fulfilled.

38.  Mr Warren Chan SC, counsel for the Defendants, argues that the sale and purchase is not adversary litigation and the parties should deal with each other with total candour.  He complains that VTKC was less than frank in never responding to JSM’s enquiry if the Plaintiff considered that all Conditions Precedent had been fulfilled.  Mr Edward Chan SC replies that the duty of acting with total candour only applies to answering requisitions on title in a property transaction and not to an agreement for sale and purchase of shares.  I agree.  The regime under the Agreement was that there were many Conditions Precedent to be fulfilled by both parties before the Agreement would come into effect.  Under Clause 2A.6, both the Vendors and the Plaintiff have an obligation to procure fulfilment of Conditions Precedent on their part.  But most of the Conditions Precedent were to be fulfilled by the Vendors.  Under Clause 1.3, the only Vendors have the right to determine if the Conditions Precedent had been fulfilled and if so to bring the Agreement into effect by giving notice of fulfilment of Conditions Precedent to the Plaintiff or their solicitors.  Then the parties would proceed to completion on the CP Date.  If the Conditions Precedent were not fulfilled by the CP Date, i.e. if the Vendors did not give notice of fulfilment of Conditions Precedent on or before 2 May 2005, the Plaintiff had the option of extending the time for fulfilment of the Conditions Precedent to the First Extended CP Date, i.e. 2 August 2005, otherwise, the Agreement would be terminated with certain consequences.  Again, if the Conditions Precedent were not fulfilled by the First Extended CP Date, the Plaintiff had the option of further extending the time for fulfilment of the Conditions Precedent to the Second Extended CP Date, i.e. 2 November 2005, otherwise, the Agreement would be terminated in accordance with Clause 2A.13.  The Plaintiff had no further option to extend the CP Date beyond 2 November 2005.  Thus, under the Agreement it is for the Vendors and not the Plaintiff to decide if the Conditions Precedent had been fulfilled.  On the facts, the Vendors, through their solicitors, gave notice of fulfilment of Conditions Precedent on 12 October 2005.  In accordance with Clause 1.3, the parties would proceed to completion of the Agreement on 2 November 2005.

39.  Mr Warren Chan SC argues that whether or not the Conditions Precedent had been fulfilled is a question of objective fact but not subjective intention of the parties, let alone their assertions.  In effect, he is arguing that despite the notice given by JSM, on the objective facts, the Conditions Precedent had not all been fulfilled and that the Agreement should be terminated in accordance with Clause 2A.13 and further that there was no Agreement and no breach or repudiation of the Agreement.  As a legal proposition, I cannot dispute with Mr Warren Chan SC’s argument that whether the Conditions Precedent had been fulfilled is a question of objective fact, or I should say a question of mixed fact and law in the present case.  But on the incontrovertible facts of the present case, it is difficult to argue that the Conditions Precedent had not been fulfilled. 

40.  Under the Agreement, the Vendors were responsible for fulfilment of most of the Conditions Precedent and only the Vendors had the right to determine if the Conditions Precedent had been fulfilled.  It was upon their decision that the Conditions Precedent had been fulfilled that the Agreement was brought into effect and the parties would proceed to completion of the Agreement on the completion date.  The Vendors’ assertion forms part of the objective facts to be considered.

41.  What Mr Warren Chan SC submits as not having been fulfilled is the Vendors’ obligation under Clause 2A.5 which provides as follows:

“2A.5   As soon as practicable after the Companies shall, subject to the Proceedings, have become the registered and beneficial owners of the Property,

(e)   the Vendors warrant to the Purchaser that the Companies are and shall remain the legal and beneficial owner of the Property (as tenants-in-common in equal shares) at Completion free from all encumbrances, save and except and subject to the Proceedings.”

Mr Warren Chan SC says that the Vendors were Tsang, Yeung, the 1^st Defendant and the 2^nd Defendant, while the Companies were the 5^th to 7^th Defendants.  He argues that at the material time no warranty was given by the 5^th to 7^th Defendants.  I respectfully disagree.  The Condition Precedent were that the Vendors warrant certain state of affairs and not that the Companies warrant that state of affairs.  The fact that the Companies had became the registered and beneficial owners of the Property only triggered the obligation on the part of the Vendors to give the warranty.  It is not material that the Companies have not warranted.  It is not unusual for someone to warrant that another person would or would not do certain things.  A common example is the case of a guarantee where a guarantor guarantees the performance of a contract by another.  In the present case, the Vendors are shareholders of the Companies.  They have control over the Companies.  They are in the position and have the power and ability to give the warranty under Clause 2A.5(e), if they see fit.  I do not think there is any substance in Mr Warren Chan SC’s argument.  The issue is whether the Vendors have warranted and hence fulfilled that Condition Precedent. 

42.  Mr Warren Chan SC submits that the Condition Precedent under Clause 2A.5(e) could only be fulfilled by the Vendors performing a specific act or tendering a certain document giving the warranty, but the Vendors have done nothing in that connection.  Mr Edward Chan SC argues that on the proper interpretation of the Agreement, any such warranty had already been given by the Vendors by way of Clause 11.2 of Schedule 4 which contains a warranty in similar terms.  I do not think Mr Edward Chan SC could be right.  The warranty to be given under Clause 2A.5(e) is a Condition Precedent, the fulfilment of which determines whether there is a binding agreement, while the warranty under Clause 11.2 of Schedule 4 is a term of an existing, valid and binding agreement, the non-compliance of which constitutes a breach of the Agreement.  Another difficulty with Mr Edward Chan SC’s argument is that the warranty to be given under Clause 2A.5 shall be given as soon as practicable after the Companies had become the registered owner of the Property.  The 5^th Defendant became the registered owner of the one-third interest in the Property on 9 November 2004 after the execution of the Agreement on 3 November 2004 when the warranty under Schedule 4 had already been given.

43.  I think by giving notice of fulfilment of Conditions Precedent, the Vendors must be taken to have impliedly confirmed that the Condition Precedent under Clause 2A.5(e) had been fulfilled and must be taken to have given the warranty under Clause 2A.5(e).  The Vendors wanted to complete and asserted fulfilment of all Conditions Precedent which created certain contractual rights and obligations on the Plaintiff.  It would be unconscionable that they should be allowed to resile from that assertion when they realised they were unable to complete or to complete without being in breach of the Agreement by saying that they have not taken any specific act to warrant what was required under Clause 2A.5(e).  Their notice of fulfilment of Conditions Precedent must be taken against them.  They must be deemed to have given the warranty under Clause 2A.5(e) by their notice of fulfilment of Conditions Precedent.  Alternatively, they must be estopped by reason of that notice from asserting that the Conditions Precedent had not been fulfilled.  But, despite that I have formed a provisional view on the facts and on the law that this defence is unarguable, there are contrary arguments on both sides.  There is nevertheless a factual dispute about fulfilment of the Conditions Precedent under clause 2A5(c).  In addition, I do not think the legal issue raised by this defence is no more than a crisp legal question that the Defendants should be excluded from having the issue fully argued at trial.

The oral agreement

44.  Mr Warren Chan SC argues that even assuming that the Conditions Precedent of the Agreement had been fulfilled, there is a triable issue as to whether there was an oral agreement concluded between Leung of the Plaintiff and the 4^th Defendant on behalf of the other Defendants. 

45.  I have identified in the matrix of facts the occasions when the discussions between the 4^th Defendant and Leung leading to the conclusion of the alleged oral agreement were made.  According to Clause 1.3, the Second Extended CP Date, i.e. the last date for fulfilment of the Conditions Precedent was 2 November 2005.  There was no mechanism under the Agreement for any further extension of time for fulfilment.  If the Conditions Precedent were not fulfilled beyond 2 November 2005, the Agreement would be determined in accordance with Clause 2A.13.  Obviously, the Vendors were desirous to complete, otherwise they could have let the matter wait until 2 November 2005 and for the Agreement to lapse.  Instead, they instructed JSM to give notice of fulfilment of Conditions Precedent on 12 October 2005.  On their assertion that the Conditions Precedent were fulfilled, the Agreement became effective and the parties shall proceed to completion of the Agreement on 2 November 2005, which then became the completion date rather than the Second Extended CP Date for fulfilment of Conditions Precedent.  At the time, the parties were aware of the encumbrance on the Property caused by HCA 155/2005 and the lis pendens.  Apart from negotiation between the parties’ solicitors, Leung and the 4^th Defendant were also discussing on how to deal with the problem.  The following is the 4^th Defendant’s account of what took place between him and Leung.  This account is disputed by the Plaintiff.

46.  On 18 October 2005, the 3^rd and 4^th Defendants had a meeting with Leung at his office at the New World Tower.  They waited for almost half an hour before Leung received them.  They briefed Leung about the progress in HCA 155/2005 and that senior counsel advised to proceed with application for speedy trial instead of striking out that claim.  They also informed Leung that the District Lands Officer indicated that the Government would not proceed with land exchange with the Property in view of the lis pendens registered against the Property.  Leung indicated that the land exchange was crucial to the Plaintiff and the Property would be useless to the Plaintiff without the land exchange being approved.  Leung said that the Plaintiff would not proceed with completion of the Agreement should the Government refuse to process the land exchange.  As a result, Leung suggested to postpone completion of the Agreement by four weeks, during which period both parties should try to persuade So to vacate the lis pendens, failing which the Plaintiff would call off the deal.  Then the 3^rd and 4^th Defendants proposed to Leung that the Defendants would only agree to the postponement if the Plaintiff would increase the purchase price.  But Leung refused saying that the property market had fallen.  That meeting concluded without any agreement but with the 3^rd and 4^th Defendants indicating that they needed to consult their solicitors and financier, i.e. Tai Wah.  Before they parted, Leung reiterated that it was important to get So to vacate the lis pendens otherwise the Plaintiff would call off the deal.

47.  The 4^th Defendant then consulted Tsang Wing Wah of the Tsang Family who was then representing the vendor of the shares in the 5^th Defendant.  He also consulted Tai Wah and Rin Lee of JSM.  Rin Lee then prepared the 1^st Proposal for him to discuss with Leung, which the 4^th Defendant gave to Leung on 21 October 2005.  Paragraphs 7 to 9 of the recital of the 1^st Proposal read as follows:   

“7.   The Purchaser acknowledges and agrees that all the conditions precedent set out in the Agreement have been fulfilled, and that it is prepared to proceed with completion of the transactions under the Agreement but for the Plaintiff’s {i.e. So Wing Kin’s} claim against Fortunate Sky in the Action and the Lis Pendens.

8.  The Purchaser has requested the Vendors to extend the completion date to [*] 2005 to enable the Purchaser to approach the Plaintiff {i.e. So Wing Kin} with a view to persuading him to discontinue all his claims against Fortunate Sky in the Action and to vacate the registration of the Lis Pendens so that completion of the transactions under the Agreement can take place.

9.   In the circumstances, the Vendors and the other parties to the Agreement have agreed that the consideration for the purchase of the Sale Shares be increased in accordance with the provisions set out hereunder and that the date for completion of the Agreement be extended in accordance with the terms and conditions set out herein.”

(Words in {} are supplied by me)

48.  On 25 October 2005, the 4^th Defendant had a meeting with Tsang Wing Wah and Ho about postponing the completion of the Agreement.  The 4^th Defendant and Tsang Wing Wah agreed to the postponement on condition that neither party should claim against each other if no completion could take place, but Ho indicated that he needed time to consider.  Then the 4^th Defendant went to see Leung that afternoon.  At the meeting, the 4^th Defendant discussed with Leung about the 1^st Proposal.  Leung suggested to further postpone completion to 15 December 2005.  No agreement was reached at that meeting.

49.  By 27 October 2005, the 3^rd Defendant, Tsang Wing Wah and Ho had all reverted to the 4^th Defendant agreeing to postpone completion to 15 December 2005 on condition that neither party would claim against each other if the Agreement could not be completed.  The 4^th Defendant telephoned Leung and informed him of their agreement to postpone completion to 15 December 2005 on the above condition and told him that JSM would fax a draft proposal to VTKC on the following day for Leung’s consideration.

50.  Indeed, JSM wrote to VTKC on 28 October 2005 enclosing the 2nd Proposal.  Paragraphs 7 to 9 of the recital of the 2nd Proposal read as follows:

“7.     The Purchaser has indicated that it is prepared to proceed with completion of the transactions under the Agreement but for the Plaintiff’s {i.e. So Wing Kin’s} claim against Fortunate Sky in the Action and the Lis Pendens which also led to the Government withholding the land exchange process in respect of the Property since about March 2005.

8.    The Purchaser has requested the Vendors to extend the completion date to 15 December 2005 to enable the Purchaser to approach the Plaintiff {i.e. So Wing Kin} with a view to persuading him to discontinue all his claims against Fortunate Sky and Ives in the Action and to vacate the registration of the Lis Pendens so that completion of the transactions under the Agreement can take place.

9.    The Vendors and the other parties to the Agreement have agreed that the Completion Date be extended in accordance with the terms and conditions set out herein.”

(Words in {} are supplied by me)

The contents of these paragraphs in the 2^nd Proposal of 28 October 2005 are similar to those in the 1^st Proposal of 21 October 2005, except that the reference to increase in price has been excluded.  The contents of the operative parts of the two proposals are also similar except for the lack of mention of any price increase in the 2^nd Proposal.

51.  The 4^th Defendant rang Leung on 28 October 2005 to discuss about the 2^nd Proposal in JSM’s letter of the same date.  Leung told him that it would be useless if the solicitors wrote too much, that they could ignore the solicitors and that it would be sufficient if they as opposed to their solicitors could agree on the matter as the solicitors had to follow what the parties told them to do.  The 4^th Defendant then relayed to Leung the Vendors’ stance that they would agree to the postponement of completion on condition that neither party would claim against the other in case the Agreement could not be completed by 15 December 2005.  Leung did not object but simply asked the 4^th Defendant to instruct JSM to reply to VTKC confirming the postponement of completion to 15 December 2005.  It is therefore arguable that Leung impliedly agreed to the postponement on the condition suggested by the 4^th Defendant and the oral agreement was concluded at the end of that telephone conversation.

52.  On the following day, JSM received VTKC’s letter dated 29 October 2005 rejecting the 2^nd Proposal.  As agreed with Leung, the 4^th Defendant instructed JSM to confirm acceptance of the postponement of completion of the Agreement to 15 December 2005.  Accordingly, JSM wrote to VTKC on 31 October 2005 confirming the postponement with the Agreement remaining in full force and effect.

53.  On the same day, the 4^th Defendant informed Leung that he had duly instructed JSM to confirm the postponement.  Leung reassured him that they needed not pay attention to what the solicitors said for the solicitors had to follow what he and the 4^th Defendant told them to do.  The 4^th Defendant repeated that Tsang Wing Wah on behalf of the vendor of the 5^th Defendant only agreed to the postponement on condition that neither party would claim against the other in the event that there was no completion.  Leung then repeated that the date of completion of the Agreement be extended to 15 December 2005 and that in the meantime both of them should try to persuade So to vacate the lis pendens.  Then the 4^th Defendant repeated that it would be alright if neither party would claim against the other.  Leung acknowledged in agreement.  If the 4^th Defendant is believed, this was a confirmation of the oral agreement reached the day before.

54.  On 3 and 5 November 2005, the 4^th Defendant reported back to Leung his negotiation with So and repeated the Vendors’ stance to which Leung did not raise any objection.

55.  Mr Warren Chan SC submits that the account of the oral agreement by the 4^th Defendant is credible.  He argues that the Plaintiff was desirous of purchasing the Property and had exhausted their right to extension of the completion date and it was logical for the 4^th Defendant to demand an increase in price in exchange for the extension with no liability for failure to complete.  But the weakness of that argument is that it was based on the wrong premises that the Plaintiff has exhausted their right to extend the completion date.  It is true that the Plaintiff has exhausted their right to further extend the CP Date.  But, the Vendors issued the notice of fulfilment of Conditions Precedent on 12 October 2005 which brought the Agreement into effect with completion due on 2 November 2005.  The Vendors would be in breach of the Agreement if they would fail to complete on that day.  If the notice of fulfilment of Conditions Precedent had not been given, Mr. Warren Chan SC’s argument would have more force because the Agreement would then lapse on 2 November 2005 and the Plaintiff would lose the opportunity to purchase the Property. 

56.  Mr Edward Chan SC advanced a very forceful argument that the 4^th Defendant’s allegations are contrary to the contemporaneous correspondence between the parties’ solicitors and that at the time the Vendors knew they were unable to deliver the Property without encumbrance.  Hence there was no reason why Leung would have agreed to postpone completion and at the same time to release the Vendors from liability for failing to complete the Agreement on 15 December 2005.  I can recognise the force of that argument.  However, the contemporaneous documents are not all one-sided in favour of the Plaintiff.  I have quoted the recital of the 1^st Proposal of 21 October 2005 and that of the 2^nd Proposal of 28 October 2005.  They are supportive of the 4^th Defendant’s case.  If there were no request by Leung for postponement of completion and no request by the 4^th Defendant for increase in price, the 4^th Defendant would not have instructed Rin Lee of JSM on those matters and Rin Lee could not have drafted paragraphs 7 to 9 of the recital and the operative parts in the 1^st Proposal along those lines.  Likewise, if there were no firm request by Leung for postponement of completion to 15 December 2005 and no agreement that neither party would claim if completion would not take place, the 4^th Defendant would not have so instructed Rin Lee and Rin Lee could not have so drafted paragraphs 7 to 9 of the recital and the operative parts in the 2^nd Proposal along those lines.  The exclusion of the 4^th Defendant’s demand for increase in price in the 2^nd Proposal is also consistent with the 4^th Defendant’s account that the same was rejected by Leung as the property market was then falling.  Whatever might have been the parties’ legal position as regards the lis pendens and whether the Vendors would be in breach for failing to deliver the Property free from encumbrance because of the lis pendens, the recitals of the 1^st Proposal and the 2^nd Proposal reflect that the parties were labouring under the assumption that the Vendors have fulfilled the Conditions Precedent.  JSM’s letter of 12 October 2005 also suggests that the Vendors might be under an apprehension, rightly or wrongly, that the registration of the lis pendens was a supervening event which neither party would be responsible.  Under those circumstances, it is credible that since the Plaintiff was desirous of acquiring the Property for land exchange with the Government,  Leung requested postponement of completion in order to allow time for the Vendors to persuade So to vacate the lis pendens and for the Vendors to agree to the postponement only if neither party would be liable in case of non-completion.  

57.  The parties knew full well that completion of the Agreement could not take place on 2 November 2005 and even if it was to take place the Property would be encumbered.  It would be of no use to the Plaintiff who wanted the Property for land exchange with the Government.  The property market was still falling.  Given his knowledge and experience in the property market, Leung must know that even if the Plaintiff had a claim for breach of the Agreement, the damages recoverable would only be nominal.  It would serve the Plaintiff no useful purpose to complete the Agreement and be tied down with a capital investment in the Property which they could have no use.  Leung may as well take a gamble for the Plaintiff to see if the Vendors could persuade So to vacate the lis pendens if more time was given to the Plaintiff to complete.  The Plaintiff would have nothing to lose by agreeing to postpone completion with no claim on either side for failure to complete.  On the other hand, the position of the Vendors is obvious.  The sale of the Property had fallen through three times before.  But on this occasion, they knew that they could not deliver the Property free from encumbrance, for which they might be liable in damages.  Leung’s offer was a reasonable one to accept.  They would have nothing to lose.  Viewed in the totality of the evidence, I find the Defendants’ case about the oral agreement credible.   

58.  Then, there is the inexplicable conduct of the Plaintiff in returning the Vendors’ cashier order of $46,706,623.51 tendered by JSM on behalf of the Vendors in repayment of the Settlement Account Promissory Note due to the Plaintiff.  VTKC demanded repayment on 16 December 2005.  The Plaintiff issued a Writ of Summons against the Defendants claiming the repayment on 12 January 2006.  In accordance with the terms of the Agreement, the Vendors had three months from 15 December 2006 to pay.  JSM tendered repayment on 25 January 2006.  VTKC returned the cashier order on the very next day alleging the Vendors had requested return of the cashier order.  JSM re-tendered repayment on 27 January 2006.  The 4^th Defendant denied having made the alleged request for return of the cashier order.  He averred to his conversation with Ho who told him that on 25 January 2006, Leung told Tai Wah not to finance the repayment.  He also produced a fax from Leung to Tai Wah on 25 January 2006 as corroborating evidence that there was a conversation between Leung and Ho on that day.  None of these allegations were disputed by Leung.  Mr Warren Chan SC submits that these show that Leung was not credible and boost the credibility of the 4^th Defendant and his account of the oral agreement.  Leung’s inexplicable conduct is also suspicious.

59.  Mr Warren Chan SC further submits that the Writ of Summons which claimed, among other remedies, a lien over the shares of the 5^th to 7^th Defendants and the Property for the repayment due under the Settlement Account Promissory Note explains it all.  The Plaintiff also registered this Writ of Summons as a lis pendens against the Property on 13 January 2006.  Even accepting the Plaintiff’s case in its totality, the subject matter of the Agreement is the shares in the Companies as opposed to the Property.  The Plaintiff had no proprietary interest whatever in the Property and there could be no such lien over the Property.  That claim was obviously frivolous or vexatious and/or an abuse of the process of the Court.  That claim was struck out as such by consent of the parties on 5 June 2006.  The Plaintiff had set their eyes on the Property since March 1997.  Despite repeated reductions in price, they rescinded their agreement to purchase the Property twice.  Now the price was reduced to less than one-third of its value in 1997.  There must be some truth in the 4^th Defendant’s allegation that the Plaintiff was very desirous of purchasing the Property for land exchange purpose with the Government.  The irresistible inference is that the Plaintiff wished to keep their claim against the Property alive by returning the cashier order and to have their hands on the Property so that the Vendors could not deal with it other than with themselves.  This inference further boosts the credibility of the 4^th Defendant and his case about the oral agreement. 

60.  All in all, there are as many, if not more, indicators that the 4^th Defendant’s account of the oral agreement is believable.  The oral agreement also provides a complete defence to the Plaintiff’s claim. 

Estoppel

61.  Mr Warren Chan SC argues further that even if no oral agreement had been reached, the Plaintiff is estopped from insisting on the strict legal rights under the Agreement.  He argues that in reliance on Leung’s promise the Defendants agreed to postpone completion to 15 December 2005 and it would now be inequitable for the Plaintiff to go back on Leung’s promise.  He cited the English Court of Appeal case of David Emery, Joy Emery v UCB Corporate Services Limited [2001] EWCA Civ 675 and the Hong Kong Court of Appeal case of Pacific South (Asia) Holdings Ltd v Million Unity International Ltd [1997] HKLRD 1238 in support of his proposition.  However, the weakness of his argument is that it is difficult to see how it would be inequitable for the Plaintiff to insist on their right under the Agreement.  Mr Warren Chan SC argues that the Plaintiff was very desirous to complete and had exhausted their right to extend the CP Date while the Defendants were not bound to agree to any postponement of completion at the material time especially as their request for an increase in price had been rejected by Leung.  He argues that from the Defendants’ point of view it was then uncertain if So’s claim could be resolved, hence, it was normal and natural for the Defendants to protect themselves by insisting that any further extension of completion of the Agreement must be on the basis that the parties would not have any claim against each other should no completion then take place.  While that explains the reasonableness of the Defendants’ proposal and the credibility of the Defendants’ case, it fails to show how it would be inequitable for the Plaintiff to insist on their contractual rights under the Agreement.  The circumstances and the Defendants’ position have never changed.  If the Defendants would be liable for failure to deliver the Property unencumbered, they would be liable for failure to complete the Agreement with or without postponement of the completion date.  Mr Warren Chan SC referred to Schindler Lifts (Hong Kong) Ltd v Ocean Joy Investments Ltd [2003] 1 HKC 438, in which Ma J, as he then was, held that questions of unconscionability, injustice and equity can only be determined at trial.  However, the 4^th Defendant should have put his best case forward in his affirmation, but he nevertheless failed to show how it would be inequitable if the strict terms of the Agreement were to be enforced.  I do not think the Defendants could raise the defence of estoppel.

Plaintiff not entitled to rescission

62.  The Plaintiff’s defence is that the registration of the lis pendens by the Claimant against the Property constitutes an encumbrance on the title of the Property and hence a repudiation of the Agreement on the part of the Defendants by virtue of Clause 11.2 of Schedule 4.  Mr Warren Chan SC argues that registration of the lis pendens by So was not an act of the Defendants and could not have in any way evinced any intention on the part of the Defendants not to be bound by the Agreement.  Hence, he argues that the Defendants have not repudiated the Agreement.  Attractive as that argument may be, it cannot remove the fact that the registration of the lis pendens was nevertheless an encumbrance on the Property or on the title of the Property and would result in a breach of Clause 11.2 of Schedule 4.

63.  Mr Warren Chan SC then seeks to overcome that difficulty by drawing a distinction between an agreement for sale of property as opposed to one for sale of shares.  He submits that the 1^st to 4^th Defendants as vendors of the shares in the 5^th to 7^th Defendants who are joint owners of the Property have no proprietary interest in the Property.  He quoted the dicta of Woo J, as he then was, in Good Profit Development Ltd v Leung Hoi [1992] 2 HKC 539.  I have no quarrel with that proposition.  It is supported by the Court of Appeal decision in Oriental Peer Co Ltd v Terrian Ltd & Ors [1987] 2 HKC 61 and the House of Lords decision in Macaura v Northern Assurance [1925] AC 619.  He then argues that the breach founded on the encumbrance on a property in the context of an agreement for sale and purchase of shares of and in a company owning the property does not go to the root of the agreement and does not entitle the innocent party to treat himself as discharged.  Hence, Mr Warren Chan SC submits that the registration of the lis pendens by So only constitutes a breach of warranty and not of condition and would only give the Plaintiff a right to damages and not rescission.

64.  Whether a term of a contract is a condition is largely dependent on the express or implied intention of the parties unless otherwise provided by statute or so categorised as a result of previous judicial decision: see Chitty on Contracts, 29^th Ed, Vol 1, paragraph 12-040.  There are no statutory provisions or judicial decision relevant to an agreement of this kind.  In Pagnan S.p.A v Feed Products Ltd [1987] 2 Lloyd’s LR 601, Lloyd LJ said at 619:

“It is for the parties to decide whether they wish to be bound and, if so, by what terms, whether important or unimportant.  It is the parties who are, in the memorable phrase coined by the Judge, ‘the masters of their contractual fate’ …”

65.  Though the Agreement is one for sale and purchase of shares, its ultimate and the substantial purpose is transfer of the Property.  It is the Defendants’ case that the Plaintiff wanted the Property for land exchange with the Government and that the Government would not consider any land exchange if the title to the Property is encumbered.  It is also known to the Defendants that the Property would be of no use to the Plaintiff if it could not be used for the purpose of land exchange.  In that factual matrix, it is arguable that the intention of the parties was that the effect of the Agreement for all intents and purposes shall be the same as one for sale and purchase of property.  Hence, the encumbrance on the title of the Property caused by the lis pendens must be a breach which goes to the root of the Agreement.  Can I be satisfied that that was what the parties intended at the time they entered into the Agreement such that the Defendants are to be deprived of their chance to defend?  Though the inference to be drawn is strongly in favour of the Plaintiff in that the breach is a breach of condition, the Defendants’ case is nevertheless arguable as a question of law to say the very least.

Conclusion

66.  For the above reasons, I find that the Defendants have demonstrated a plainly arguable defence based on non-fulfilment of Conditions Precedent, the oral agreement and that the breach is one of warranty which does not entitle the Plaintiff to rescission.  There are serious disputes of facts involved in the first and second of the above defences which cannot and should not be resolved on affidavit evidence.  The first and third defences involve mixed questions of fact and law, for which summary judgment is also inappropriate.  These apart, the Plaintiff’s conduct in returning the Defendants’ cashier order is inexplicable and highly suspicious.  As was said by the Court of Appeal in Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262, if the judge had suspicions concerning the plaintiff’s case, the correct course for him to adopt is to give unconditional leave to defend so that all matters could be ventilated at trial.  This is clearly a case in which the old adage that if you have to sit down it is not a case for summary judgment applies.  In my view, the Defendants are entitled to unconditional leave to defend.  Accordingly, I uphold Master’s decision and dismiss the appeal.

67.  I also make an order that the costs of the appeal be in the cause with certificate for two counsel (including senior counsel), to be taxed if not agreed.