BONDS GROUP CO LTD v. KWAN DANIEL AND OTHERS

HCA 1861/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1861 OF 2017

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D E C I S I O N

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Application and opposition

1.  The plaintiff’s claim arises out of a homemade Chinese “公司股權轉讓意向書” signed by the defendants as vendors and “寶聲集團或旗下之成員公司”[1] as purchaser in April and May 2017 (“Letter of Intent”) for the sale and purchase, at HK$245 million, of 70%[2] of the issued ordinary shares (“Shares”) in Discreet Limited (“Company”), which company holds Lot 496 in Demarcation District 399 (the street address of which is 368 Castle Peak Road, Ting Kau, Tsuen Wan, New Territories) on which the residential development of 13 detached houses known as Grand Riviera (“Grand Riviera”) stands.

2.  By the specially indorsed writ of summons issued on 8 August 2017, the plaintiff claims primarily for specific performance of the agreement that it says is contained in the Letter of Intent or damages in lieu of or in addition to specific performance.

3.  Before the court is the plaintiff’s summons filed on 11 August 2017 for interlocutory injunctions to restrain the defendants from:

(1)  selling, mortgaging, charging, disposing of, encumbering, or dealing with the Shares;

(2)  causing or procuring the Company to sell, mortgage, charge, dispose of, encumber or deal with Grand Riviera;

(3)  causing or procuring the Company to issue any new shares or grant any option to purchase shares in the Company; and

(4)  causing or procuring the Company to appoint new or additional directors of the Company

until trial or further order (“Application”).

4.  The defendants oppose the Application on a number of grounds, one of which is that there is no serious issue to be tried on the plaintiff’s claim for specific performance.  This ground, if accepted, would dispose of the Application because the said injunctions are sought to prevent the frustration of the plaintiff’s claim for specific performance of the Letter of Intent by the disposal of the Shares or Grand Riviera before trial.

5.  One of the bases upon which the defendants say that there is no serious issue to be tried on the plaintiff’s claim for specific performance is that the plaintiff has already accepted the defendants’ repudiation of the Letter of Intent thereby terminating the same.

6.  For the record, the defendants also resist the Application on these further or other grounds:

(1)  First, they contest the plaintiff’s right to specific performance by further arguing that:

(a) The Letter of Intent does not constitute a binding agreement for the sale and purchase of the Shares that is capable of being specifically enforced, but is rather an agreement in principle only, with fundamental terms yet to be agreed upon.

(b) Damages would in any event be an adequate remedy for the plaintiff so that specific performance should, and would, not be ordered.

(c) The 3^rd defendant (“Mr Koon”) is undisputedly not a shareholder of the Company, and is thus not in a position to transfer any shares in the Company to plaintiff so that there is simply no viable claim for specific performance against him.

(2)  Second, the defendants question whether they would be able to successfully enforce the plaintiff’s undertaking as to damages. 

(3)  Third, the balance of convenience lies against granting the injunctions.

In light of my conclusions on the questions whether the Letter of Intent was terminated by the plaintiff’s acceptance of the defendants’ repudiation and, if so, whether the acceptance was vitiated by the defendants’ misrepresentation, it is not necessary for me, and I do not propose, to deal with these points.

Relevant background

Parties

7.  The plaintiff, a company within the Bonds group of companies, engages in various businesses including real estate investment and development.  Mr Anson Chan (“Mr Chan”) is the Chairman and CEO of the Bonds group of companies.  Mr Ho Shek Tim (“Mr Ho”) is the plaintiff’s General Manager.

8.  The Company is a property holding company and holds Grand Riviera.  The 1^st defendant (“Mr Kwan”) and the 2^nd defendants (“Mrs Kwan”), husband and wife, are the only registered shareholders of the Company (with Mr Kwan holding the majority of the shares).   Mr Kwan, Mrs Kwan and Mr Koon are the Company’s directors.

9.  Despite being described in the Letter of Intent as an “equity holder” (“權益持有人”) of the Company, Mr Koon, a friend of Mr Kwan, is not a shareholder of the Company and has disclaimed having any present legal or beneficial interest in the Company’s shares.  Both Mr Kwan and Mr Koon speak of an informal understanding between them that Mr Koon may in the future be allotted some shares (for his past contributions) but the timing of the allotment and the number of shares to be allotted to him is yet to be fixed.

Letter of Intent and material terms thereof

10.  Insofar as it is material for present purpose, the Letter of Intent contains the following terms:

(1) Clause 7:

“[被告人][原告人]雙方合組「前進有限公司」之新的董事會管理層。董事會由[被告人]委任兩席董事和[原告人]委任三席董事組成。

 7a.  [被告人]同意此地產發展項目「星悅海灣」之裝修、改造、重新設計、及銷售策略及執行，由[原告人]完全主導。[原告人]亦承諾在重大議題上，將提交公司董事會層面討論及表決。”

English translation:

“[The defendants] and [the plaintiff] together will form the board of directors and management of [the Company]. The board of [the Company] shall consist of 2 directors to be nominated by [the defendants] and 3 directors to be nominated by [the plaintiff].

7a. [The defendants] agree that the renovation, modification, redesign and sale strategy in respect of this property development project “Grand Riviera” and the execution thereof shall be led entirely by [the plaintiff]. [The plaintiff] warrants that major issues will be submitted to the board of directors [the Company] for discussion and voting.”

(2) Clause 10:

“[原告人]需於此簽署此「意向書」之日起計60天內完成盡職調查。

10a. [被告人]承諾在簽署此「意向書」之後，至雙方另行簽訂「前進有限公司股權買賣合約」之日或本「意向書」議解除或終止之日，未經[原告人]同意，[被告人]不得與任何第三方以任何方式就其所持有的「星悅海灣」及「前進有限公司」的股權出讓、或增資擴股事宜進行協商或談判。

10b.  如果[被告人]違反此「意向書」項下的相關規定，則[原告人]在簽署此「意向書」後所支出的與此「意向書」項下相關的所有費用的五倍，即港幣200萬元上限（含[原告人]聘請專業律師、會計師、投資顧問的費用及[原告人]職員投入本意向協議項下的所有費用等）由[被告人]承擔。”

English translation:

“[The plaintiff] should complete its due diligence review within 60 days from the execution of this Letter of Intent.

10a. [The defendants] warrant that after signing this Letter of Intent and until the date of execution of the “Agreement for Sale and Purchase of Shares in [the Company]” by the parties or the date of discharge or termination of this Letter of Intent, [the defendants] shall not, without the consent of [the plaintiff], in any way discuss or negotiate with any third party for the sale of “Grand Riviera” or the shares in [the Company] or the injection of capital into or the issuance of new shares in [the Company].

10b. In the event [the defendants] shall be in breach of the relevant provisions in this Letter of Intent, [the defendants] shall be responsible for 5 times the amount of all costs and expenses, with an upper limit of HK$2 million, incurred by [the plaintiff] after the signing of this Letter of Intent in connection with matters relating to this Letter of Intent (including the fees of professional lawyers, accountants and investment consultants engaged by [the plaintiff], and all costs and expenses incurred by the personnel of [the plaintiff] relating to matters under this Letter of Intent].”

(3) Clause 13:

“此「意向書」之終止

13a. 協商終止：此「意向書」簽署後，經[被告人]、[原告人]雙方協商一致，此「意向書」才可以終止。

13b. 違約終止：此「意向書」簽署後，一方發生違約情形，另一方可依本意向協議規定單方終止此「意向書」，及或追究相關違約之法律責任。”

English translation:

“Termination of this Letter of Intent

13a. Termination by mutual agreement: after this Letter of Intent is executed, it can only be terminated by mutual agreement between [the defendants] and [the plaintiff].

13b. Termination by breach: after this Letter of Intent is executed, if one party acts in breach, the other party can, in accordance with the provisions of this document, unilaterally terminate this Letter of Intent, and/or seek legal remedies for such breach.”

Meeting & telephone conversation on 31.5.2017

11.  On 31 May 2017, Mr Ho (the plaintiff’s General Manager) was summonsed to a meeting with Mr Kwan at the latter’s office.  In the course of this meeting, Mr Ho telephoned Mr Chan and Mr Chan and Mr Kwan spoke on the phone.  There is a dispute as to what was actually said at such meeting and telephone conversation.

12.  The plaintiff’s initial account of the events on 31 May 2017 is set out firstly in paragraphs 12 and 13 of the Statement of Claim dated 8 August 2017 by which the plaintiff avers:

“12. …, the 1^st Defendant informed the Plaintiff on 31^st May 2017 that the Defendants would not proceed with the sale of their shares, which was a clear breach of the Agreement and a wrongful repudiation thereof, …

13.  The Plaintiff was then willing to accept the Defendants’ wrongful repudiation of the Agreement on condition that the Defendants paid the sum of $2 million to the Plaintiff; the deadline for such payment was last extended to 15^th July 2017.” (emphasis added)

13.   Such pleading is then elaborated upon by Mr Chan in paragraphs 20 to 22 of his 1^st affirmation made on 10 August 2017 in support of the Application:

“20. On 31^st May 2017, [Mr Ho] received a telephone call from [Mr Kwan] who invited him to go to the registered office of [the Company] on the same day for an urgent meeting.

21. I was informed by [Mr Ho] that he attended the registered office of [the Company] at around noon time on 31^st May 2017; and at the said meeting, [Mr Kwan] informed [Mr Ho] that [he] wanted to terminate the [Letter of Intent] unilaterally. He also asked [Mr Ho] to stop all on-going due diligence work, and not to start on any additional due diligence work. [Mr Ho] informed [Mr Kwan] that due diligence had already begun; and the Plaintiff had also engaged various outside parties to perform the relevant due diligence work. As [Mr Ho] sensed the urgency of the matter, he immediately called me and asked me to speak on the telephone with [Mr Kwan] directly.

22. On this said telephone call, [Mr Kwan] told me that he wanted to unilaterally terminate the [Letter of Intent] and would not proceed with the sale of the shares of [the Company] to the Plaintiff. I told him that this was a clear breach of the Contract and a wrongful repudiation. Since [Mr Kwan] was apologising to me over the telephone, I informed him that the Plaintiff would accept the Defendants’ wrongful repudiation of the [Letter of Intent] on the condition that the Defendants pay a sum of HK$2 million to the Plaintiff as compensation. [Mr Kwan] expressed his willingness to compensate the Plaintiff.” (emphasis added)

14.  On the other hand, according to Mr Kwan, on 23 May 2017, he was informed by a Mr Anthony Man (“Mr Man”) of Kin Shing (Leung’s) General Contractors Limited (“Kin Shing”) which successfully tendered for the renovation work for Grand Riviera that due to their past experience on another renovation project, Kin Shing had serious doubts about the trustworthiness of the plaintiff and they would not agree to undertake the construction work in respect of Grand Riviera if the plaintiff should become the majority shareholder of the Company.  After considering Mr Man’s comment and warning, Mr Kwan decided to pull out of the deal with the plaintiff.

15.  Mr Kwan recalls the meeting with Mr Ho and the telephone conversation with Mr Chan on 31 May 2017 in paragraphs 35 and 36 of his affirmation made on 30 August 2017 in opposition to the Application:

“35. I therefore called for a meeting with Mr. Ho on 31 May 2017, at the registered office of the Company. At the meeting between myself and Mr. Ho:

(1) I told him that I wished to terminate the Letter of Intent and would not proceed with the sale. I frankly explained to Mr. Ho that I was informed by Kin Shing that the Plaintiff previously engaged Kin Shing for a renovation project at No.10 Beijing (sic) Road, but substantial sums were still unpaid and owing to Kin Shing. I told Mr. Ho that Kin Shing would not agree to be the Company’s contractor for the renovation of Grand Riviera if the Plaintiff were to become the majority shareholder.

(2) Upon hearing this, Mr. Ho told me that he was just about to engage solicitors and accountants to conduct due diligence on that day, but he had not yet done so. He also stated that he would have to inform Mr. Chan about my wish to terminate the Letter of Intent.

(3) Mr. Ho therefore called Mr. Chan immediately, and asked me to speak directly with Mr. Chan in the phone, which I did.  I told Mr. Chan that I wished to terminate the Letter of Intent and not to proceed with the sale of the shares in the Company.  Mr. Chan said that it was wrong for me not to keep my word, and given my decision not to proceed with the sale, I would have to pay HK$2 million as compensation as previously agreed.  I told him that I am willing to provide monetary compensation according to the calculation method agreed under the Letter of Intent.

36. After the aforesaid meeting with Mr. Ho and telephone conversation with Mr. Chan on 31 May 2017, it was clear to the parties that the Letter of Intent was at an end and the sale and purchase of the shares would not proceed.  The only remaining issue was the amount of compensation (if any) payable to the Plaintiff in accordance with the agreed formula under Clause 10b of the Letter of Intent.”

16.  Mr Chan replies by giving this changed account of the 31 May 2017 telephone conversation in paragraphs 18 to 25 of his 3^rd affirmation dated 5 September 2017:

“18. …. The telephone conversation between [Mr Kwan] and me was a short one, lasting only a few minutes. It was [Mr Ho] who called me and then handed the phone to [Mr Kwan].

19. [Mr Kwan] only told me that he had a change of heart, and he no longer wanted to sell the shares, he was also apologetic. On hearing that I was annoyed, and I told him that it was wrong for him not to keep his words (言而無信). During the brief phone conversation, I (representing the Plaintiff) merely reminded [Mr Kwan] of certain penalties for which he is liable under the Letter of Intent for his breach of contract. I believe I might have mentioned $2 million because I remembered that was the amount provided for in the Letter of Intent although I did not have a copy of it in hand when I was talking to [Mr Kwan] over the telephone.

20. [Mr Kwan] was however non-committal and I am sure no agreement of any kind was reached. Other than saying that he was sorry and that he would be responsible, [Mr Kwan] definitely had not said he was willing to pay monetary compensation according to the calculation method agreed under clause 10b of the Letter of Intent. That was entirely consistent with what [Mr Kwan] did later when he denied that the Letter of Intent was a legally binding contract.

21. Given the 1^st Defendant’s letter dated 18^th July 2017 (exhibit C1-14), it is but audacious for the 1^st Defendant now to say on oath that he all along agreed to pay monetary compensation.

22. When I mentioned payment of damages/compensation, I had in mind not just clause 10b but also clause 13 of the Letter of Intent which provides that the same can only be terminated by mutual agreement. I also expected the 1^st Defendant to know that as well, because after all clause 13 was added only towards the end of the negotiations immediately prior to the signing of the Letter of Intent.

23. As pointed out by the 1^st Defendant, at that time the parties have not sought legal advice because the Plaintiff was, and I expected that the 1^st Defendants would be, acting in good faith. To me as a layman, it takes two (both parties) to agree.

24. Absent an agreement on the amount of compensation and a promise to pay the agreed amount; there was simply no reason for the Plaintiff to make any choice/election about the 1^st Defendant’s proposed termination of the contract. Afterall, [Mr Kwan] might change his mind again and decide to proceed with the sale.

25. Apart from repeatedly apologizing to me, the 1^st Defendant simply did not say much over the telephone.  As deposed to above, I was annoyed and I therefore asked for [Mr Ho] and instructed [Mr Ho] not say anything more to [Mr Kwan], and I hung up.  I have definitely not told [Mr Kwan] that the Plaintiff agreed to terminate the sale.”

17.  While on the events on 31 May 2017, apart from whether the plaintiff accepted the defendants’ repudiation of the Letter of Intent, there is also an issue as to whether Mr Kwan mentioned to either Mr Ho or Mr Chan what Kin Shing’s Mr Man had told him and that was the reason why he backed out.  According to Mr Chan, Mr Kwan did not do so.  Mr Chan says this in paragraph 15 of his 3^rd affirmation:

“[Mr Kwan] must have deliberately withheld the information from me in an attempt to try to persuade me to agree to his proposed termination. Had I known the truth that [Mr Kwan]’s true reason for his wish to terminate was due not to his having a change of heart of not willing to sell, but a wish to co-operate with Kin Shing without prior consent from the plaintiff; I definitely would not have considered accepting his proposed termination. …”

18.  Mr Benjamin Chain, counsel for the plaintiff, deploys such evidence by Mr Chan to support an argument that Mr Kwan’s alleged failure to give the plaintiff the true reason behind the defendants’ repudiation, if found, amounted to misrepresentation, the effect of which would be to rescind and vitiate the plaintiff’s acceptance, if found.

Correspondence after 31 May 2017

19.  The meeting and telephone conversation on 31 May 2017 was followed by 5 days of silence and inaction between the parties.  The plaintiff made the first move on 5 June 2017 at 5:32 pm by sending to the defendants a letter signed by Mr Chan himself.  The second and third paragraphs of that letter read as follows:

“2017年5月31日下午12時30分關秩安先生約我方代表何錫添先生到貴方前進有限公司辦公室，並一併致電我方陳燿璋董事長，關秩安先生提出終止執行《意向書》的相關條款，並終止出售70%前進公司股權給寶聲集團；關秩安先生表示抱歉及願意賠償寶聲集團之損失。

按照《意向書》10b、13b項的規定，“如果甲方違反此《意向書》項下的相關規定 則乙方在簽署此《意向書》後所支出的與此《意向書》項下相關的所有費用的五倍，即港幤200萬元上限 由甲方承擔”。由於我司已展開盡職調查，所消耗的時間、費用已超過200萬元；所以現我方要求貴方於2017年6月7日前盡快將賠償金200萬元支付給寶聲(集團)有限公司，否則我方保留權利向貴方追究相關違約之法律責任。”

(emphasis added)

English translation:

“On 31 May 2017, at 12:30 pm, [Mr Kwan] asked our representative [Mr Ho] to meet at your office, and telephoned the chairman of our board of directors [Mr Chan]. [Mr Kwan] proposed to terminate the performance of the relevant provisions of the Letter of Intent, and to halt the sale of 70% shares in the [Company] to the Bonds Group; [Mr Kwan] conveyed his apologies and willingness to compensate the Bonds Group’s loss.

   According to clauses 10b and 13b of the Letter of Intent, “[if the defendants] shall be in breach of the relevant provisions in this Letter of Intent, [the defendants] shall be responsible for 5 times the amount of all costs and expenses incurred by [the plaintiff] after the signing of this Letter of Intent in connection with matters relating to this Letter of Intent, with an upper limit of HK$2 million”.  As we have already commenced the due diligence investigation, the time and costs incurred has already exceeded $2 million; hence we demand your side to pay compensation in the sum of $2 million to Bonds Group Company Limited as soon as possible before 7 June 2017, otherwise we reserve the right to claim against you for legal liability for the related breach of contract.” (emphasis added)

20.  Just about half an hour later, the defendants sent to the plaintiff a letter containing this paragraph:

“We refer to the discussion on 31 May 2017 between your [Mr Ho] and our [Mr Kwan] about the termination of the Letter of Intent entered into by us and you on 12 May 2017 and write to put on record that both of us agreed to the termination of the said Letter of Intent subject to honouring Clause 10b thereof. Please advise us the amount of the costs so far incurred by you for our verification. It is however understood that you have not yet engaged any professional adviser (including lawyer or accountant in relation to the transaction contemplated under the said Letter of Intent.” (emphasis added)

21.  The plaintiff responded on 7 June 2017:

“We refer to our letter of 5 June 2017 and your reply letter of the same date ….  We would like to reiterate Clause 10b of the Letter of Intent which states that “If Party A breaches any terms and conditions of this Letter of Intent, Party A shall compensate Party B, five times of the relevant costs incurred by Party B associated with this Letter of Intent, with a maximum cap of HK$2 million”.  Relevant costs incurred should include not only lawyers and accountants fees, but also charges and retainers paid or payable to internal or external consultants or employees.

As we have commenced our due diligence review of [the Company], its books and records and its underlying real estate project, current market conditions, etc., our cumulative costs incurred to-date have well exceed HK$400,000; and therefore the penalty for your breach of the Letter of Intent (at 5 times our costs) will be the maximum HK$2 million as OUR compensation.  Hence, we demand you to pay us, on or before 8 June 2017, the HK$2 million as compensation stated in the Letter of Intent.  Otherwise, we reserve all rights to claim against you for breach of contract.” (emphasis added)

22.  On 6 July 2017, the plaintiff provided to Mr Kwan some, and Mr Kwan asked the plaintiff if it had more, documents evidencing the costs and expenses incurred by the plaintiff in relation to the Letter of Intent.

23.  On 11 July 2017, the plaintiff sent to the Company for the attention of Mr Kwan a letter the last 2 paragraphs of which read as follows:

“In a meeting held on 31 May 2017, your [Mr Kwan] informed our [Mr Ho] that you intended to unilaterally cease execution of [the Letter of Intent], and you were willing to compensate us in accordance with Clause 10B of the Letter of Intent. For the record and as a matter of clarification, our Mr Ho told your Mr Kwan at the time that we were already deep into our due diligence review, although we had not yet appointed a lawyer to draft our formal Sale & Purchase Agreement.

Cumulative consultant fees paid or payable by us amount to more than HK$400,000; therefore, we hereby demand [the Company] to pay us, on or before 15 July 2017, HK$2 million (being the lesser of HK$2 million and 5 times our fees incurred) as our compensation in accordance with the terms of [the Letter of Intent].  Failing that, we will have no alternative but to commence legal action against you for breach of contract without further notice.”

24.  This was followed up by Mr Chan by these WhatsApp exchanges with Mr Koon on the following day:

Mr Chan:

“早晨，權哥，昨天我已寄出「最後警告信」給 關則師／前進有限公司… 促請他在7月15日或以前向 寶聲集團支付「交易違約金」，否則我方將正式起訴前進有限公司。

勞煩權哥對此事多加關注，以免「前進有限公司」面對不必要、也必輸的官司。”

Mr Koon:

“收悉﹗今天會與他見面，再提点他”

Mr Chan:

“好的… 勞煩你囉﹗”

English translation:

Mr Chan:

“Morning, elder brother Kuen, I have sent an “ultimatum” to [Mr Kwan]/[the Company] … urging him to pay “compensation for breach of contract” to Bonds Group on or before 15 July, otherwise would formally sue [the Company].

We trouble elder brother Kuen to be more concerned about this matter, so as to save [the Company] from facing litigation which is unnecessary and which it is bound to lose.”

Mr Koon:

“Noted! I will meet him today, will remind him again.”

Mr Chan:

“Good … thank you for the trouble!”

25.  The plaintiff’s ultimatum was met by the response, inter alia, that the Letter of Intent was not a contract and could not be enforced because it did not “constitute a definitive contract but signifies a genuine interest in reaching the final agreement subject to due diligence, or fulfilment of certain conditions”.  See the letter dated 18 July 2017 signed by Mr Kwan on the Company’s letterhead.

26.  On 8 August 2017, the plaintiff issued the writ of summons in this action.

27.  It is the defendants’ case that but for the intervention of the Application, the Company would have launched the sale of the Grand Riviera (which has been estimated to have an open market value of over HK$1,100,000,000) on 12 August 2017.

28.  Having seen the defendants’ evidence, the plaintiff’s latest position is that it does not object to a sale of the Grand Riviera at not less than HK$1,100,000,000 and seeks the interlocutory injunctions applied for subject to any such possible sale.

Meaning of “serious question to be tried”

29.  Generally, the court does not grant an interlocutory injunction unless the plaintiff’s claim raises a serious question to be tried.  See American Cyanamid Co v Ethicon [1975] AC 396 (HL), per Lord Diplock at 407G-H.  What is required is that the plaintiff has “prospects of success, which in substance and reality, exist”.  See Hong Kong Civil Procedure 2017, Volume 1, §29/1/10.

Whether specific performance claim raises a serious issue to be tried

Issues

30.  The question arising on the evidence summarised in paragraphs 11 to 25 above is, first, whether the plaintiff accepted the defendants’ repudiation of the Letter of Intent in the telephone conversation between Mr Kwan and Mr Chan on 31 May 2017 or by the correspondence thereafter (“Acceptance Issue”).

31.  Further, as mentioned in paragraphs 16 and 17 above, Mr Chain advances the proposition that even if the plaintiff is found to have accepted the defendants’ repudiation of the Letter of Intent, Mr Kwan is guilty of misrepresentation by failing to tell Mr Chan and Mr Ho that the defendants repudiated the Letter of Intent due to what Kin Shing said about its past dealings with the plaintiff and such misrepresentation would rescind and vitiate the plaintiff’s acceptance (“Misrepresentation Issue”).

32.  For the sake of completeness, I should also record that in §10 of his skeleton submission dated 6 September 2017, Mr Chain seeks to raise an issue as to whether there was even a “wrongful repudiation” or a “renunciation” of the Letter of Intent by the defendants.  In so contending, counsel seizes upon Mr Kwan’s words (in paragraph 35 of his affirmation as set out in paragraph 14 above) that he told Mr Ho and Mr Chan that he “wished to terminate the Letter of Intent” (Mr Chain’s emphasis), as opposed to, I suppose, telling them that he was terminating the Letter of Intent.

33.  I am afraid I do not see, in this context, any or any meaningful difference between Mr Kwan saying that he wished to terminate, and that he was terminating, the Letter of Intent. 

34.  And Mr Kwan was understood by Mr Ho and Mr Chan to be terminating the Letter of Intent there and then.  This is made clear by the second paragraph of the plaintiff’s letter dated 5 June 2017 signed by Mr Chan (quoted in paragraph 19 above).  Moreover, as pointed out by Ms Tong, the plaintiff’s case, as pleaded in paragraph 12 of the statement of claim, is that on 31 May 2017, the 1^st defendant informed the plaintiff that the defendants “would not proceed with the sale of their shares, which was a clear breach of the [Letter of Intent] and a wrongful repudiation thereof”.  The plaintiff goes on to plead in paragraph 13 that the plaintiff was then “willing to accept the Defendants’ wrongful repudiation of the [Letter of Intent] on condition that the Defendants paid the sum of HK$2 million to the Plaintiff”.  Such pleading is also consistent with paragraphs 21 and 22 of Mr Chan’s 1^st Affirmation (see paragraph 13 above).

35.  I discern no issue concerning whether the defendants repudiated the Letter of Intent.

Acceptance Issue

Applicable legal principles

36.  Whether the plaintiff’s claim for specific performance raises a serious issue to be tried is to be determined by the application of the following well established principles of contract law:

(1)  Where a party to a contract commits a repudiatory breach, the innocent party is given a choice to either affirm the contract so that the contract continues or accept the repudiation thereby bringing the contract to an end and discharging the innocent party from further performance. See Chitty on Contracts (32^nd Edition), Volume 1, §24-002.

(2)  Where the innocent party chooses to accept the repudiation, both parties are discharged from further performance of the contract.  The innocent party cannot thereafter insist upon performance of the contract by repudiating party by claiming specific performance. This follows from the fact that his acceptance of the defaulting party’s repudiation puts an end to the contract.  See Johnson v Agnew [1980] AC 367 (HL), per Lord Wilberforce at 392G-H and 398E-F; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL), per Lord Diplockat 849F-H.  See also Chitty on Contracts, supra, §24-052 and §24-054.

(3)  The same principles apply in the context of an anticipatory breach, where a party expresses an intention not to fulfil his part of the contract before the time for performance arrives.  In such circumstances, the innocent party may accept the renunciation, which has the effect of discharging the parties from further performance of their primary obligations.  See Chitty on Contracts, supra, §24-022. 

(4)  An act of “acceptance of repudiation” requires no particular form.  It does not have to be couched in the language of acceptance.  It is sufficient that the communication or conduct clearly and unequivocally conveys to the repudiating party that the innocent party is treating the contract as at an end.  See Vitol SA v Norelf Ltd [1996] AC 800 (HL), per Lord Steyn at 810H-811B. See also Chitty on Contracts, supra, §24-013 at p 1745.

(5)  The following may constitute acceptance of a repudiation:

(a) an unequivocal overt act which is inconsistent with the subsistence of the contract: see State Trading Corp of India Ltd v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277 (CA), per Kerr LJ at 286;

(b) where applicable, reliance on a contractual term which entitles the innocent party to terminate the contract: see Chitty on Contracts, supra, §24-013 at p 1746. 

(6)  Once the repudiation has been accepted, the acceptance cannot be withdrawn.  See Scarf v Jardine (1882) 7 App Cas 345 (HL), per Lord Blackburn at 360-361.  See also Chitty on Contracts, supra, §24-013 at p 1747.

37.  Mr Chain accepts these principles but stresses that:

(1)  The innocent party is entitled to a period of time to resolve whether he is going to affirm or terminate the contract.  See Cheung Chung Ping Stephen v Allcom Ltd [2010] 2 HKLRD 324, per Rogers VP at [21]-[22] (following Allen v Robles [1969] 1 WLR 1193 and what Rix LJ said in Stoczina Gdanska SA v Latvian Shipping Co [2002] 2 ALL ER (Comm) 768 at [87]).  See also Chitty on Contracts, supra, §24-002. 

(2)  Unless and until he elects to accept the repudiation, the contract continues to exist.

38.  Counsel for the defendants, Ms Sara Tong, does not quarrel with either of these propositions.

Whether acceptance on 31 May 2017?

39.  As noted earlier, the parties disagree as to what was said in the meeting and the telephone conversation on 31 May 2017.

40.  Mr Chain stresses time and again that the telephone conversation on 31 May 2017 was not an arranged discussion; that it was a short exchange lasting just a few minutes; that it was an exchange between 2 laymen and not lawyer to lawyer; that it was sprung upon Mr Chan who had no prior notice or inkling that the defendants wanted to back out of the Letter of Intent; that Mr Chan’s response was spontaneous; that such response would not have conveyed an election to Mr Kwan; that it would have made no commercial sense for Mr Chan to make any election in the absence of at least a promise by Mr Kwan to pay; and that the plaintiff’s subsequent express reservation of rights was entirely consistent with Mr Chan not having made any election.  I note and take into consideration all these points.

41.  However, that there should be no mini-trial on affidavits (of which I am reminded) does not mean that the court should turn a blind eye to the following evidence.

42.  Firstly, there are internal inconsistencies in the plaintiff’s own account of the 31 May 2017 telephone conversation, especially regarding the critical questions of whether Mr Chan accepted the defendants’ repudiation of the Letter of Intent (conditionally or otherwise) and whether Mr Kwan agreed to compensate the plaintiff or not. See paragraphs 13 and 15 above.  The plaintiff now disavows paragraphs 21 and 22 of Mr Chan’s 1^st affirmation and relies on paragraphs 19 to 25 of Mr Chan’s 3^rd affirmation.  The later version contradicts not only Mr Chan’s 1^st affirmation but also the plaintiff’s letters dated 5 June and 11 July 2017 (see paragraphs 19 and 23 above), which clearly relay the message that Mr Kwan indicated that he was willing to pay the plaintiff monetary compensation as stipulated in clause 10b.  The plaintiff has, however, not explained why Mr Chan said what he said in these letters or in paragraphs 21 and 22 of his 1^st affirmation and why he retracts from such earlier evidence.  In assessing whether the plaintiff’s claim for specific performance raises a serious issue to be tried, the court is entitled to have regard to the quality of the plaintiff’s evidence on such claim.  The presence of the said unexplained incongruities in the plaintiff’s evidence on such a crucial aspect of the dispute is, to my mind, relevant to whether the plaintiff could in substance and reality succeed in its claim for specific performance.

43.  Secondly and more importantly, in his letter dated 5 June 2017 for and on behalf of all the defendants to the plaintiff, Mr Kwan expressly asserted and put on the record that the parties agreed in the discussion on 31 May 2017 to the termination of the Letter of Intent subject to the defendants honouring of clause 10b thereof (see paragraph 20 above).  The defendants made the point in the first sentence of this letter and in plain and direct terms.  There was nothing ambiguous about what they were saying.  There was no room for misunderstanding. It was the first point made by the defendants in that letter.  It took up half of that very short one paragraph letter.  The plaintiff could not have missed it.

44.  Mr Chain deals with the defendants’ letter of 5 June 2017 by firstly questioning its timing, that is, it being sent half an hour after, though it was not on its face a response to, the plaintiff’s earlier letter of the same date and it being sent shortly after 6 pm (which was close to or after close of business). He notes that Mr Kwan has chosen not to inform the court whether he had read the plaintiff’s letter of 5 June 2017 when he wrote his letter of the same date.  He asks “why [Mr Kwan], on the face of it, wrote such a letter on that day at that hour out of the blue”.    

45.  Mr Chain further describes this letter as being “self created and self-serving” and the agreement mentioned therein “bogus” and somehow inconsistent with the defendants’ case that Mr Chan elected to accept the defendants’ repudiation in the telephone conversation on 31 May 2017.

46.  Mr Chain also draws my attention to clause 13a, which provides that “the Letter of Intent can only be terminated by mutual agreement”. 

47.  With respect, I think counsel misses the point.  What strikes me as material, but not dealt with by Mr Chain, is that the plaintiff did not in any way take issue with the defendants’ claim of an agreed termination in its letter dated 7 June 2017 (see paragraph 21 above).  And this letter was expressly a response by the plaintiff to the defendants’ letter of 5 June 2017. 

48.  I am unable to see anything suspicious about the defendants’ letter of 5 June 2017.  To the contrary, it would make perfect sense if the Letter of Intent was terminated by Mr Chan’s acceptance of the defendants’ repudiation pursuant to clause 13b when he spoke to Mr Kwan on 31 May 2017, leaving only the amount of compensation payable by the defendants to the plaintiff under clause 10b to be worked out and agreed.  One would not expect a layman to use legalistic phrases such as “repudiation”, “acceptance of repudiation” or “election to terminate”. However, I imagine a layman who is in repudiation of a contract would see the opposite party’s acceptance of the situation as an agreement to terminate the contract.

49.  On this state of evidence, had it been necessary for me to do so, I would have held Mr Chan’s evidence of his telephone conversation with Mr Kwan on 31 May 2017 to be incredible. 

50.  However, it is not necessary for me to so find.  I am prepared to proceed on the assumption that Mr Chan did not accept the defendants’ repudiation of the Letter of Intent in his telephone conversation with Mr Kwan on 31 May 2017 and that the Letter of Intent remained in subsistence as at the end of that exchange.  On this note, I turn to the plaintiff’s letters after 31 May 2017.

Whether acceptance after 31 May 2017?

51.  I refer to paragraphs 19, 21, 23 and 24 above which set out the plaintiff’s letters and WhatsApp message to the defendants after 31 May 2017, by which the plaintiff cited and relied on clauses 10b and 13b of the Letter of Intent and demanded for compensation as per clause 10b.

52.  In support of her submission that the plaintiffs thereby communicated to the defendants its acceptance of the defendants’ repudiation of the Letter of Intent, Ms Tong has taken me to Hansun Investment Ltd v Sincere Union Development Ltd [2008] 4 HKLRD 442, per Deputy High Court Judge Gill at [48]-[55]; So Siu Yung v Chan Tsan Tak, HCMP 1516/2011, unreported, 13 February 2012, per Deputy High Court Judge Burrell at [30]-[35] per DHCJ Burrell); and Zheng Chulin v Wo Kee Hong Kong Industrial Limited [2012] 4 HKC 522 (CA), per Kwan JA at [21]-[23]. These were all cases in which a request for the return of the deposit by a purchaser of land was held to constitute an act of unequivocal acceptance of the vendor’s repudiation, and preclude a subsequent claim for specific performance of the agreement for sale and purchase.[3]

53.  Mr Chain distinguishes these 3 authorities on the basis that the purchasers therein all claimed for the return of the deposits and that in none of them did the purchaser claim just damages. 

54.  I do not agree.  The return of a deposit paid under an agreement for sale and purchase is the “antithesis of keeping the contract to purchase alive” (in DHCJ Gill’s words in Hansun Investment Ltd v Sincere Union Development Ltd, supra, at [49]) because if the contract had been kept alive and eventually enforced against the vendor by a decree of specific performance, the vendor would have been entitled to retain such monies as part of the purchase price.

55.  By parity of reasoning, a demand or claim for the payment of damages to compensate the purchaser for costs and expenses that would have been wasted only in the event of a non-completion of the agreement is likewise inconsistent with the subsistence of the agreement.  This is so because if the contract had been kept alive and eventually enforced against the vendor by a decree of specific performance, the purchaser would have had to bear such sums as his costs of the transaction and could not have looked to the vendor for reimbursement of the same.  In this regard, I note that the Court of Appeal held a claim for damages for the agency fee and legal costs incurred by a purchaser of land to be plainly inconsistent with the subsistence of the contract.  See Kwan JA at [22] in Zheng Chulin v Wo Kee Hong Kong Industrial Limited, supra.

56.  I agree with Ms Tong’s submission on the effect of the plaintiff’s letters to the defendants after 31 May 2017.

57.  The second and third paragraphs of the plaintiff’s letter dated 5 June 2017 to the defendants (see paragraph 19 above), read objectively, clearly and unequivocally conveyed to the defendants that the plaintiff accepted the defendants’ repudiation of the Letter of Intent and was treating the Letter of Intent as at an end.

58.  More particularly, the plaintiff demanded the defendants to pay it HK$2 million. Such demand was made expressly pursuant to clauses 10b and 13b of the Letter of Intent (set out in paragraphs 10(2) and (3) above).  The former permits a party to terminate the Letter of Intent upon breach of the same by the other party. The latter provides for the compensation of the plaintiff in the event of the defendants’ breach.  Although it does not specify the kind of breach that triggers the defendants’ liability to compensate the plaintiff in accordance with the formula therein provided, on proper analysis, it is clear to me that clause 10b could be invoked by the plaintiff only upon the defendants’ refusal to proceed with the sale under the Letter of Intent.  The compensation payable by the defendants is based upon, and fixed with reference, to the costs and expenses incurred by the plaintiff in connection with the Letter of Intent after its execution (subject to a HK$2 million cap).  The plaintiff should be so compensated only if such costs and expenses would be wasted.  And they would be wasted only if the parties would not proceed with the transaction under the Letter of Intent.

59.  Mr Chain disputes the characterisation of the plaintiff’s letter of 5 June 2017 as a communication of the plaintiff’s acceptance of the defendants’ repudiation of the Letter of Intent.  He relies on the plaintiff’s (1) imposition of a deadline upon the defendants for compliance with the demand for compensation and (2) express reservation of rights at the end of the third paragraph of that letter.  He likens the plaintiff’s letter of 5 June 2017 to the letter written by employee in response to his employer’s repudiation of his contract of employment in Norwest Holst Group Administration Ltd v Harrison [1985] ICR 668 (CA).  There is nothing to stop the innocent party, while he was deliberating whether to affirm or terminate the contract, from making to the repudiating party an offer (as in Norwest Holst Group Administration Ltd v Harrison) to let it off the hook upon certain terms which, if accepted, would give rise to a second contract the effect of which is to discharge the first (repudiated) contract.  According to Mr Chain, this is what the plaintiff was doing by its letter of 5 June 2017.

60.  I have difficulty with Mr Chain’s argument.

61.  I cannot read from the letter in question any express or implied offer along the line suggested by counsel.  As I see it, such letter simply conveyed the plaintiff’s demand for compensation under clause 10b that would not have been payable by the defendants had the Letter of Intent not been terminated under clause 13b.

62.  Norwest Holst Group Administration Ltd v Harrison was very much a decision on its facts and is clearly distinguishable. 

63.  Briefly, the employer in that case repudiated the employee’s contract of employment by informing him that he would from 1 July 1982 no longer be employed as a director, to which position the employee was contractually entitled.  In response, the employee sent to the employer a letter headed “without prejudice”, stating that he regarded the employer’s letter as terminating his contract of employment as from 30 June 1982; that he would be pleased to receive 12 months’ salary and benefits in lieu of notice and that the employer should contact him if further discussion would assist an amicable resolution of the matter.  Seven days later the employee was told that the employer was no longer intending to remove his directorship from him.  The question arose as to whether the employer could withdraw the threatened breach.  This, in turn, depended on whether the employee had already terminated his contract of employment by accepting the employer’s breach thereof by his said letter.  In answering this question in the negative, the English Court of Appeal was much influenced by the fact that the employee’s letter was headed “without prejudice” and concluded with an invitation for further discussion that would assist an amicable resolution of the matter: per Cumming-Bruce LJ at 679D-680D; Neill LJ at 682D-F; and -Sir Denys Buckley at 683D-E.

64.  Neither of these features is present in the plaintiff’s letter of 5 June 2017.  In response to my observation that the plaintiff’s 5 June 2017 letter was not marked “without prejudice”, Mr Chain says that the plaintiff should be regarded as making an open offer.  I think counsel misses the point, noted by the court in Norwest Holst Group Administration Ltd v Harrison, that a “without prejudice” communication is by nature qualified whereas an open one is not.  In this connection, Cumming-Bruce LJ said at 679E-F:

“To my mind the effect of heading the letter “without prejudice” was to communicate to the recipient that the letter was to be regarded as a commencement of a process of negotiation or compromise, which at first sight is a communication of a very different kind from what it commonly called an open letter, stating in black and white the final stance taken upon an issue which has arisen between the parties.  You expect such a letter to open the compromise or bargaining field which of its nature means a change of position by the parties in the course of negotiation. That is a quite different stance from taking up an unequivocal position upon which the writer seeks to establish his legal rights.”

The other 2 members of the court made similar observations in the passages quoted above.

65.  Nor can I attach to the deadline for payment the significance attributed to it by Mr Chain.  One would expect any demand of the kind to be coupled by a time for compliance.

66.  As for the “reservation of right”, it does not per se indicate an intention to keep the agreement alive.  What could be, and was being, reserved were rights that were still available at the time of stating the reservation.  Read in context, the right being reserved by the plaintiff is that to claim damages in accordance with clause 10b of the Letter of Intent.  See Hansun Investment Ltd, supra, at [51] and So Siu Yung, supra, at [34].

67.  To conclude, I can find no serious issue to be tried that the plaintiff accepted the defendants’ repudiation of the Letter of Intent at the latest by its letter of 5 June 2017.  Indeed, the whole course of correspondence between the parties since 5 June 2017 clearly and unequivocally demonstrate that the parties regarded the Letter of Intent as having been terminated, and the only issue in dispute is the quantification of the compensation payable by the defendants to the plaintiff under clause 10b.

Misrepresentation Issue

68.  I am unable, and I do not propose, to resolve on affidavits whether Mr Kwan did or did not inform the plaintiff that the defendants wanted to withdraw from the Letter of Intent because of what they learnt from Kin Shing.

69.  The matter that I can and will address is, assuming that Mr Kwan did not do so, whether such omission amounts to a misrepresentation that can be relied upon by the plaintiff to vitiate its acceptance of the defendants’ repudiation of the Letter of Intent.

70.  This question takes up one sentence in Mr Chain’s skeleton submission: “Last but not least, the Plaintiff’s alleged election, if any, was or was arguably induced by the 1^st Defendant’s misrepresentation, see paragraph 15 of [Mr Chan]’s 3^rd affirmation.”  I think it is fair to say that Mr Chain has not taken this statement much further at the hearing.

71.  What Mr Chain is advancing is, as far as I understand the law of contract, a novel proposition.  He admits that he has no authority for it.  

72.  Although this is an application by the plaintiff for interlocutory injunctions in respect of which the court need only be satisfied that there is a serious issue to be tried on the merits, in face of a novel legal proposition unsupported by authority, the least that the court would expect from the party making the point are (1) a reason for the proposition that is sound in principle and/or policy and (2) an analysis of the scope, or elements or requirements for the operation, of the proposition. 

73.  First, on the former, the only point that Mr Chain can make is that the acceptance of a repudiation of contract is an act of election and as a matter of principle an election must be informed.  If Mr Chain were right, there would have to be a legal requirement that the party in repudiation of a contract should disclose to the aggrieved party the reason or true reason why he repudiates before the latter accepts the repudiation.  I am not aware of any such requirement.[4]

74.  Second, in response to Ms Tong and the court’s questions as to what is required to constitute a misrepresentation that vitiates an acceptance of a repudiation of a contract and whether it is the same as a misrepresentation that renders the contract induced thereby liable to rescission, Mr Chain simply says, “let us assume that it is the same”!  I am afraid, despite the low merit burden on the plaintiff, I cannot hold the existence of this new legal principle a serious issue to be tried on the basis of such an assumption, at least not without good reasons, which I have not been given.  In any event, as pointed out by Ms Tong, Mr Chain has not shown how these assumed elements can be found in the plaintiff’s evidence.

75.  I do not find the Misrepresentation Issue a serious issue to be tried.

Conclusion on “serious issue to be tried”

76.  For the abovementioned reasons, the Letter of Intent was terminated at the latest by the plaintiff’s acceptance of the defendants’ repudiation by letter dated 5 June 2017 so that there is no longer any subsisting agreement on which the plaintiff can found a claim for specific performance and the plaintiff is left with a claim in damages.

Orders

87.   I dismiss the Application and release the defendants from the undertakings given by them to the court on 18 August 2017.

88.   I also make an order nisi that the plaintiff should pay the defendants their costs of the Application, to be taxed on a party and party basis if not agreed, with certificate for counsel.