XCHRX DAWKINS LTD. v. SOURCE HOLDINGS LTD.

HCA 12748/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12748 OF 1999

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J U D G M E N T

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1. In the Statement of Claim, it was pleaded that pursuant to a written agreement dated 3 February 1993 ("the Loan Agreement"), the plaintiff lent to the defendant the sum of HK$20 million with interest accruing at 5% per annum.

2. It was further pleaded that Clause 3 of the Loan Agreement specified that the defendant would repay such loan "at such time and in such manner as mutually agreed by parties hereto". The Statement of Claim continues that in truth and in fact the parties did not and have not agreed the time and manner of repayment of the said loan. In the premises, the Loan Agreement, it is pleaded, is void for uncertainty. It is also stated that by implication of law, the said loan amount and all accrued interest is consequently repayable upon demand. The demand was said to be in a letter dated 28 July 1999 from the plaintiff's solicitors to the defendant's solicitors when the plaintiff demanded of the defendant repayment of the sum of HK$20 million.

3. It was pleaded that the plaintiff had waived interest during the currency of the loan but determining such waiver, will seek interest at the agreed rate of 5% per annum from the date of the writ to judgment and thereafter at the judgment rate until payment. The plaintiff now applies for final judgment against the defendant for the sum of HK$20 million, being the amount claimed in the Statement of Claim with interest and costs under Order 14, rule 1 of the Rules of the High Court.

4. Mr Swaine, who appears for the plaintiff, has submitted that the parties have never agreed the time and manner of repayment of the said loan. He submits that there is not a single issue to go to trial and that is because the defendant does not have a legal answer to the fatal defect inherent in the Loan Agreement : the Loan Agreement is not a binding agreement but only an agreement to agree. He submits that the making of a loan predicates repayment. A loan that is never repaid is, in substance, not a loan. The obligation to repay (with or without interest) is the quid pro quo for every loan. In point of principle, it is the only consideration given for the lender's promise to lend. Mr Swaine then quotes a passage from Chitty on Contracts, 28th Ed., para.38-221 :

"A contract of loan of money is a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of a promise express or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest."

Thus, he submits where the contract is silent because the parties have failed to stipulate a term for repayment, the court will imply an obligation on the part of the borrower to repay. He quotes another passage from Chitty on Contracts, para.38-230 :

"Where money is lent without any stipulation as to the time for repayment, a present debt is created which is generally repayable at once without any previous demand."

5. The provision in question, namely, para.3 of the Loan Agreement, states :

"The Borrower shall repay the Loan and interest thereon either in whole or in part or by instalment and at such time and in such manner as mutually agreed by parties hereto."

It was submitted that this repayment term was a nullity because no court could uphold a term for repayment which :

(1)	Does not stipulate the amount for repayment.
(2)	Does not stipulate the time for repayment.
(3)	Does not stipulate the method (i.e. lump sum or instalment) of repayment.
(4)	Requires the parties to "mutually agree" some or all of the above in some unspecified place at some unspecified time.

6. In support of this, Mr Swaine relies on para.2-116 of Chitty on Contracts :

"The parties to an agreement may be reluctant to commit themselves to a rigid long-term arrangement, particularly when prices and other economic conditions are likely to fluctuate. They sometimes attempt to introduce an element of flexibility by providing that certain terms are to be agreed later, or from time to time. The result of such a provision may be to make the agreement so uncertain that it cannot be enforced. In May & Butcher v. R. an agreement for the sale of tentage provided that the price, dates of payment and manner of delivery should be agreed from time to time. The House of Lords held that the agreement was incomplete as it left vital matters to be settled. .... Similarly, a lease at 'a rent to be agreed' is not a binding contract. In the above cases, the most natural inference to be drawn from the fact that the parties left such an important matter as the price to be settled by further agreement was that they did not intend to be bound until they had agreed on the price. Even where the points left outstanding are of relatively minor importance, there will be no contract if it appears from the words used or other circumstances that the parties did not intend to be bound until agreement on these points had been reached. A fortiori parties are not bound by a term requiring outstanding points to be agreed if that term forms part of an agreement which is itself not binding because it was made without any intention of entering into contractual relations."

7. Mr Swaine also relies on a passage in the judgment of Viscount Dunedin in May and Butcher, Limited v. The King (1934) 2 KB 17 at p.21 :

"... To be a good contract, there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Of course it may leave something which still has to be determined, but then that determination must be a determination which does not depend upon the agreement between the parties."

Another passage from The Law of Restitution by Lord Goff and Jones, 5th Ed., p.592, was relied upon :

"If the contract under which the money was paid was a void contract of loan, the money can be recovered as money lent. Thus, in Re Vince (1892) 2 QB 478, where the appellant had lent money to a trader who became bankrupt, under an agreement which was unintelligible and was, therefore, treated as void, the Court of Appeal held that he was entitled to prove for the unpaid balance of the loan simply as for money lent".

8. Mr Swaine's argument can be summarized in the following way : the original Loan Agreement has obliged the defendant to do nothing at all. The defendant is not obliged to "agree" a loan repayment time, amount or method (whether for principal or interest), and therefore can refuse ever to repay anything. In the absence of any such legal obligation on the part of the defendant, it has effectively given nothing for the bargain and therefore it is submitted this deprives the alleged agreement of any contractual force.

The defendant's reply

9. In opposition to the application, an affirmation was filed by a director of the defendant who was also a director of one of the three registered shareholders of the defendant.

10. In the affirmation, Mr Zhang Kang Ping set out the background to the formation of the defendant company. Mr Steven Kwan, a director of the plaintiff, had engaged in discussions with Mr Zhang, representing a company "Ringo" and another person, a Mr Wang, represented a third company "Shortridge". These three parties discussed a joint venture of acquiring a publicly listed company, "CMIC". The acquisition would require $400 million, $200 million of which was to be funded by bank loans and the other $200 million was to be funded by way of capital outlay on the part of the three parties.

11. Mr Zhang and Mr Wang agreed that Mr Kwan could take up 10% interest in the proposed acquisition of CMIC, and "Ringo" would take up 55% whilst the remaining 35% would be taken up by "Shortridge". A committee was formed for the purpose of the proposed acquisition and each of the intended joint venture partners was represented on the committee. Mr Zhang represented Ringo, Mr Wang represented Shortridge and Mr Kwan represented his own interest. For the purpose of the proposed acquisition, the defendant company was acquired as a joint venture vehicle. Many committee meetings were held between the parties and during those meetings, Mr Kwan's expertise in financial and corporate matters was relied upon by the other two parties.

12. In Mr Zhang's affirmation, he stated that Mr Kwan explained that if the initial investment was injected under the guise of a shareholder's loan, in proportion to each party's interest in the defendant company, they could recoup their investment through the "repayment" of the purported loans and interest on disposal of the defendant's assets. CMIC was intended to be a long term investment and if any of the shareholders could demand repayment of the loan, the defendant would be deprived of the necessary capital. Therefore it was agreed between Kwan, Wang and Zhang that no repayment would be made without the consent of all the shareholders. Each of the shareholders would make advances to the defendant company in proportion to the interest held by them in the company.

13. Mr Zhang also affirmed that the shareholders of the defendant also agreed that :

(a)	no "repayment" of the "shareholders' loans" would be made without the unanimous agreement of all three shareholders;
(b)	no "repayment" of the "shareholders' loans" would be made unless all three shareholders were paid at the same time; and
(c)	if any of the shareholders' loans were to be "repaid", each shareholder would be "repaid" in proportion to their shareholding in the defendant.

14. Mr Zhang affirmed that Kwan explained that Clause 3 of the Loan Agreement meant that any "repayment" of the shareholders' loans required the unanimous consent of all shareholders of the defendant. Each shareholder signed a similar Loan Agreement with the defendant believing and intending that the words "parties hereto" included all the shareholders of the defendant.

15. The submission by Mr Tang SC for the defendant is that the court has to look at the substance of the agreement and not the form. The substance of the Loan Agreement between the parties was that the loan would not be repayable until the parties agreed it should be repayable or repaid. The substance of the Loan Agreement was that this was one of three mutual loans by three shareholders to the company, each shareholder contributing or lending an amount which was equal to the number of shares to be held by it in the company. This was to enable the company to buy a listed company. The loans could not have been repayable immediately because then the company would not be in a position to buy the listed company. The agreement was that the loans would not be repayable unless there was a further agreement for repayment. The phrase "mutually agreed" in Clause 3 of the Loan Agreement means either :

(1)	a reference to the collateral agreement which provides for the circumstances under which there would be repayment; or
(2)	an agreement to be reached between the parties on some future date.

16. The substance of the matter was that the loans would not be repayable unless the parties agreed it should be repaid, in other words, in the absence of a new agreement, it is not repayable. Clause 3 of the Loan Agreement, as supported by the collateral agreement, specifies that the loan would not be repayable unless the shareholders unanimously agreed otherwise.

17. Counsel submits that whether there is a collateral agreement between the parties is a question of fact. The acquisition was going to cost $400 million, $200 million of which was to be funded by the shareholders. It would not have made any sense that a person could have taken part in a company to take over a listed company by only paying US$10 per share which was the face value of the shares to be issued by the defendant company. The defendant company was going to be used as a corporate vehicle and the shares to be issued to each shareholder would be in accordance with the investment percentage of the shareholders. The investments were called loans but were in substance capital contributions.

18. Mr Tang SC relies upon Chitty on Contracts, para.2-118, which says :

"Because the courts are 'reluctant to hold void for uncertainty any provision that was intended to have legal effect', they may sometimes give effect even to an agreement which provides for further terms 'to be agreed'."

The case of Snelling v. John G. Snelling Ltd [1973] 1 QB 87 was quoted to support that proposition. At para.2-119, it is stated that :

" Thus an agreement is not incomplete merely because it calls for some further agreement between the parties. Even the parties' later failure to agree on the matters left outstanding will vitiate the contract only if it makes it 'unworkable or void for uncertainty'. ..."

Further on in the paragraph, it is stated that :

"... All this is not to say that the courts will hold parties bound when they have not yet reached substantial agreement, but once they have reached such agreement it is not fatal that some points remain to be settled by further negotiation."

19. In Snelling v. John G. Snelling Ltd (supra), the plaintiff and his brothers, the 2nd and 3rd defendants, were directors of a family company which owed them considerable sums of money. At a time when there was a serious quarrel between the brothers, the company needed more capital and negotiations were entered into with a finance company for a mortgage. Efforts were made to overcome the dissension between the brothers with the result that the three of them entered into a written agreement which provided that in the event of a director voluntarily resigning, he would immediately forfeit all monies due to him from the company. The plaintiff issued a writ against the company claiming the monies due to him as at the date of his resignation. It was held that the company, being a stranger to the contract, was not entitled to rely on the terms thereof in their defence to an action against them by the plaintiff; nevertheless, where all the parties to the contract, including the company, the party to be benefited, were before the court, the proper order to make in the action by the plaintiff against the company in the light of the declaration granted to the 2nd and 3rd defendants, was to dismiss the plaintiff's claim for the reality of the matter was that the plaintiff's claim had failed and the order of the court ought to reflect that fact.

20. It was submitted that this was not an agreement to agree but an agreement which was made that the shareholders would not be paid unless a certain event happened and the event was the unanimous decision of all the parties. It was stated by Counsel that the other two shareholder companies of the defendant would be making application to be joined as defendants.

21. Mr Tang SC submits that there are a number of issues which can only be resolved at trial, namely :

(a)	whether the $20 million paid by the plaintiff to the defendant was in the nature of a capital contribution;
(b)	whether the loan was repayable otherwise "as mutually agreed by the parties hereto";
(c)	whether there was a contemporaneous collateral oral agreement in respect of repayment, namely, that the loan is not repayable except with the agreement of all three shareholders;
(d)	whether the Loan Agreement should be rectified so that the loan is not repayable except for the agreement of all three shareholders; and
(e)	whether the Loan Agreement is void for uncertainty.

Determination

22. In my view, given the background of what happened between the parties and the other two shareholders before the Loan Agreement in the instant case, and two similar loan agreements signed between the other two shareholders and the defendant company were signed, it is clearly a triable issue whether the sums advanced by the three shareholders, including the $20 million advanced by the plaintiff, were capital contributions or were out-and-out loans. Quite clearly, whether there was a contemporaneous collateral oral agreement which specified or manifested the parties' intention of the circumstances under which there would be repayment, is a matter which is dependent upon evidence to be adduced at the trial.

23. Linked with those two matters is, of course, the legal issue of whether the Loan Agreement in question is void for uncertainty. InMan Earn Ltd v. Wing Ting Fong [1996] 1 HKC 225, Godfrey JA, giving the judgment of the court, quoted from Bingham LJ in Crown House Engineering v. Amec Projects Ltd (1990) 6 Const LJ 141, at 154 :

"... Order 14 is for clear cases; that is, cases in which there is no serious material factual dispute and, if a legal issue, then no more than a crisp legal question as well decided summarily as otherwise. ... The procedure is entirely inappropriate where the plaintiff's entitlement to recover any sum is the subject of any serious dispute, whether of law or fact. ..."

24. Just because the loan in question would not be repayable unless and until there was agreement involving the agreement of the defendant itself is not, ipso facto, a reason for saying that the clause in the Loan Agreement is void for uncertainty. In Lloyds Bank International Ltd & Anor v. Dericourt Investments Ltd & Ors [1983] 2 HKC 691, the plaintiff sought to recover from a number of borrowers from it. One of the defences that the defendants in an application for summary judgment relied upon was that it was expressly agreed between certain borrowers and the plaintiffs' manager, that loans granted for the purchase of shares in the plaintiffs' company would not become repayable unless and until the borrowers could show a profit of at least 10% on their purchases. It was held by the court that that defence, together with the other defences raised, were sufficient to enable the defendants to oppose the application for summary judgment.

25. Two other cases quoted to me by the defendant lend support to the proposition that in a case such as the present one, the trial court should, after considering the evidence of the relevant witnesses, decide in the light of the background of what happened, what exactly it was that the parties were agreeing upon, namely, whether it was a straightforward loan or whether it was a capital contribution which should not be repayable until all the shareholders of the defendant company agreed. If it were a loan repayable upon demand, it may well be that the whole existence of the defendant company could be in jeopardy, if it had to give up a substantial portion of its paid-up capital to repay the initial capital investments by the shareholders.

26. In Potts' Executors v. Inland Revenue Commissioners [1951] AC 443, Lord MacDermott said at p.465 :

"... But this is not to say that all transactions of that kind are loans. They may be but incidents in some wider relationship, other than that of lender and borrower, and take, as it were, their colour from it. ... On the other hand, the kind of wider relationship to which I am referring may provide opportunity for transactions within it which are exceptional and beyond the normal scope of the relationship and which may properly be describable as loans and as nothing else."

27. In Voest Alpine Intertrading G.m.b.H v. Chevron International Oil Co. Ltd [1987] 2 LLR 547, at 561, Hirst J said :

"... In a commercial agreement the further the parties have gone on with their contract, the more ready are the Courts to imply any reasonable term so as to give effect to their intentions. When much has been done, the Courts will do their best not to destroy the bargain. When nothing has been done, it is easier to say there is no agreement between the parties because the essential terms have not been agreed. But when an agreement has been acted upon and the parties, as here, have been put to great expense in implementing it, we ought to imply all reasonable terms so as to avoid any uncertainties. ..."

28. In my judgment, therefore, there are clearly issues here which ought to proceed to trial. The application for summary judgment is therefore dismissed with costs, to be taxed if not agreed.