RICH FINE (HK) INVESTMENT LTD AND ANOTHER v. LEUNG YIU CHUEN

CACV 259/2018

[2021] HKCA 938

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 259 OF 2018

(ON APPEAL FROM HCA NO 1243 OF 2012)

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J U D G M E N T

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Hon Au JA (giving the Judgment of the Court):

A.  INTRODUCTION

1.  This is the defendant’s appeal against the judgment (“the Judgment”)  of Mimmie Chan J (“the Judge”)  rendered on 25 May 2018.  By the Judgment, the Judge found in favour of the Plaintiffs on the facts and held that the defendant was in repudiatory breach of an oral joint venture agreement (“JV Agreement”)  made in around October 2006.

B.  THE BACKGROUND FACTS

2.  In around 2006, the defendant informed the 2^nd plaintiff of an investment opportunity in a construction project in Ho Chung, Sai Kung (“the Project”).  The Project involved the construction of 10 small houses in the New Territories.  The developer of the project, Soon Grow Limited (“SG”), was looking for an investor to pay for all construction costs involved in return for 4 small houses after completion of the Project.

3.  The defendant himself, through his wholly owned corporate vehicle Rich Fine Engineering Limited, was the contractor for the construction of the small houses under the Project.

4.  According to the terms of the JV Agreement made in around October 2006, the 2^nd plaintiff and the defendant agreed to set up a corporate entity to pursue the aforesaid investment opportunity.  It was agreed that the 2^nd plaintiff was to have a 60% interest in the joint venture, whereas the defendant was to have a 40% interest.  In pursuance of the JV Agreement, the 1^st plaintiff was set up as the joint venture corporate vehicle.  The 2^nd plaintiff and the defendant became the registered shareholders of 60% and 40% of the issued shares of the 1^st plaintiff respectively.  Both the 2^nd plaintiff and the defendant were directors of the 1^st plaintiff. The annual return of the 1^st plaintiff dated 26 September 2007 states that the issued shares of the 1^st plaintiff are fully paid up.

5.  As part and parcel of the JV Agreement, the 1^st plaintiff entered into an agreement with SG on 17 October 2006 (the “Development Agreement”).  As provided in the Development Agreement:

(1)  The 1^st plaintiff and SG agreed to jointly develop the relevant land;

(2)  The 1^st plaintiff agreed to pay total construction costs of HK$12.6 million for the 10 small houses.

(3)  Upon completion of the Project, the small houses constructed would be distributed between the 1^st plaintiff and SG, with the 1^st plaintiff being entitled to be assigned 4 designated small houses (the “Designated Houses”), including the right to sell the property right to the Designated Houses.

6.  It is not disputed that in 2007, building licences were only procured for the construction of 9 (as opposed to 10)  small houses for the Project.  However, it remained the case that the 1^st plaintiff would be entitled to be assigned the 4 Designated Houses upon completion of the Project, and the 2^nd plaintiff and the defendant would continue to share the profits and costs of the joint venture in the ratio of 60/40.

7.  The construction of the small houses was completed in about November 2011.

8.  The plaintiffs’ case is that the defendant had never paid for his 40% share under the JV Agreement at all.  On this basis, the plaintiffs say that the defendant had repudiated the JV Agreement, which repudiation was accepted by the plaintiffs, and accordingly the JV Agreement had been terminated by breach.

9.  Separately, the plaintiffs also claim that of the 9 small houses built, the defendant and his family had unlawfully occupied and taken possession of three of the Designated Houses (the entirety of Houses 3 and 7, as well as the ground floor and 1^st floor of House 5, collectively “the Occupied Houses”).  On this basis, it is said that the defendant was in breach of his fiduciary duties owed to the 1^st plaintiff, and should deliver vacant possession of the Occupied Houses and pay mesne profits to the 1^st plaintiff.

10.  The defendant’s case, on the other hand, is that he had paid the construction costs for the Project using his own funds, and that the monies transferred by the 2^nd plaintiff to himself were used for other unrelated purposes.  Insofar as the Occupied Houses were concerned, the defendant’s pleaded case is that the 2^nd plaintiff had given “express consent and permission” for him to occupy Houses 3 and 7.[1]

C.  THE JUDGMENT

11.  The Judge found in favour of the plaintiffs on the facts.  She rejected the defendant’s assertion that he had contributed or should otherwise be deemed to have contributed to his share of the construction costs under the JV Agreement.  Accordingly, she found the defendant to be in repudiatory breach of the JV Agreement, and that the 2^nd plaintiff had accepted the repudiation by service of these proceedings in July 2012.

12.  On the issue of damages, the Judge accepted that as a result of the defendant’s failure to make his contribution, the 2^nd plaintiff had to take out bank loans to cover for the same, and that the 2^nd plaintiff should on that basis be entitled to damages in respect of the interest charged on those bank loans, in the sum of $2,290,931.66.

13.  The Judge also found that the defendant came into possession of and occupied the Occupied Houses without the 1^st plaintiff’s consent.  By occupying and procuring the occupation of the Occupied Houses without the 1^st plaintiff’s consent, the defendant was in breach of his fiduciary duties owed to the 1^st plaintiff, by putting his own interests above those of the 1^st plaintiff, and by depriving the 1^st plaintiff of the rental profit to which it would otherwise have been entitled from letting out the Occupied Houses at market rent[2].

14.  The Judge therefore entered judgment in favour of the plaintiffs and ordered the following reliefs on 25 May 2018 (“the Judge’s Order”):

(1)  There be a declaration that (a)  the defendant was in repudiatory breach of the JV Agreement, and that upon termination of the same, the defendant had no further interest or right under the JV Agreement; and (b)  the defendant was in breach of his fiduciary duties owed to the 1^st plaintiff;

(2)  The defendant do deliver vacant possession of the Occupied Houses to the 1^st plaintiff;

(3)  The defendant do pay to the 1^st plaintiff mesne profits at the monthly sum of $45,000 for each of the Occupied Houses; and

(4)  The defendant do pay to the 2^nd plaintiff damages in the sum of $2,290,931.66.

D.  THE GROUNDS OF APPEAL

15.  By a Supplemental Notice of Appeal dated 13 June 2019, the defendant advanced five grounds of appeal against the reliefs granted by the Judge.  They can be summarized as follows:

(1)  First, the Judge erred in law in finding that upon termination of the JV Agreement, the defendant had no further interest or right under the JV Agreement.  Specifically, it is contended that the Judge had wrongly held that upon such termination, the defendant’s interest in the joint venture, including his 40% shareholding in the 1^st plaintiff, would be “forfeited”. (“Ground 1”)

(2)  Second, the Judge erred in law in awarding damages to the 2^nd plaintiff in respect of his interest payments for the bank loans taken out to cover the defendant’s share of the construction costs, which claim was unpleaded.  Furthermore, the 2^nd plaintiff should not be entitled to such sum when, upon the termination of the JV Agreement, the defendant had no further interest under the JV Agreement. (“Ground 2”)

(3)  Third, the Judge was wrong to find the defendant to be in breach of his fiduciary duties owed to the 1^st plaintiff in respect of his occupation of the Occupied Houses, when the 1^st plaintiff had no title or interest in the Occupied Houses. (“Ground 3”)

(4)  Fourth, related to the above ground, the Judge was wrong to order the defendant to deliver vacant possession of the Occupied Houses and pay mesne profits to the 1^st plaintiff. (“Ground 4”)

(5)  Fifth, insofar as House 5 is concerned, the Judge was wrong to award mesne profits in the monthly sum of $45,000 (which was the market rent for the entirety of the 3-storey small house), when on the plaintiffs’ own case, they were only claiming that the defendant had unlawfully occupied the ground floor and 1^st floor of House 5.  It is also said that the Judge was wrong to adopt the figure of $45,000 as mesne profits. (“Ground 5”)

16.  It should also be noted that at the appeal hearing, Mr Li SC, for the defendant, fairly and rightly accepted that there is no basis to overturn the factual findings of the Judge in this appeal.

17.  We will deal with each of those grounds in turn.

D1.  Ground 1

18.  Ground 1 is advanced on the notion that the Judge held that the defendant had “forfeited” his interest in the joint venture, and hence his shareholding rights in the 1^st plaintiff, by reason of the termination of the JV Agreement upon the defendant’s repudiatory breach.  A closer examination of the Judgment however reveals that Ground 1 is based on a false premise.

19.  It is well-established that upon a contract being terminated by reason of an accepted repudiatory breach, the parties are discharged from further performance of the contract.  However, an accepted repudiatory breach does not bring about “rescission ab initio”, ie, to treat a contract as if it had never come into existence: Johnson v Agnew [1980] AC 367 at 392H-393B.  Under the general law of contract, a contract would only be rescinded if a vitiating factor (such as misrepresentation or duress)  is established.  It is hence wrong in law to say that the defendant would have “forfeited” all his accrued rights under the JV Agreement by reason of his repudiatory breach.

20.  This is particularly so when, in the present case, the parties’ interest in the joint venture is held through a corporate vehicle, namely the 1^st plaintiff.  Even if, by reason of the termination of the JV Agreement, the defendant is not entitled to any further interest under the JV Agreement[3], the consequential steps that need be taken in order to achieve the proper disposition between the 2^nd plaintiff and the defendant of their shareholding in the 1^st plaintiff (which is the entity entitled to the Designated Houses under the Development Agreement)  would need to be resolved by way of separate proceedings.

21.  It is thus unfortunate and a source of confusion that when the plaintiffs framed their case in the Re-Amended Statement of Claim, they sought a declaration that the defendant’s interest in the JV Agreement was “deemed to have been forfeited”[4], and made an averment in the Re-Re-Amended Reply and Defence to Counterclaim that “the Defendant is not entitled to be a shareholder of the 1^st plaintiff”[5].  It is also unfortunate that the implications of this point were not brought to the attention of the Judge at the trial below by either party.

22.  However, it does not appear to us that the Judge had fallen into error when resolving this dispute.  The Judge, quite rightly in our view, declined to go into the issue of whether the 2^nd plaintiff and the defendant had actually made capital contributions for the shares in the 1^st plaintiff issued to them.[6]  In deciding the appropriate relief to be granted, the Judge rightly held that by reason of the termination of the JV Agreement upon the defendant’s repudiatory breach, the defendant “had no further interest or right under the JV Agreement” (emphasis added).  The same may be said of the declaratory relief granted in the Judge’s Order.  There is no mention that the defendant’s accrued rights under the JV Agreement had been “forfeited”.  Nor was there mention that the effect of the Judgment was to alter the shareholding structure in the 1^st plaintiff.

23.  For this reason, it is plain to us that the Judgment did not have the effect of “forfeiture of interest” as claimed by the defendant. The whole premise upon which Ground 1 is advanced is misconceived.  We will therefore reject this ground.

D2.  Ground 2

24.  At the appeal hearing, Mr Chu for the plaintiffs conceded that his client would not contest Ground 2.  We are satisfied that this is proper and right concession, not least because the claim for interest as the basis of damages was never properly pleaded.  In particular, the fact that the 2^nd plaintiff had to take out bank loans to finance the construction costs (and on that basis incur interest payments that would not otherwise have been payable by the 2^nd plaintiff had there been no breach on the part of the defendant)  did not even feature in the pleadings.

25.  The lack of a proper plea is material.  It is the plaintiffs’ pleaded case that, given the accepted breach by the defendant, the 2^nd plaintiff is entitled to the full interest of the joint venture under the JV Agreement, which included all the profits (instead of 60%)  derived from the sale of all the Designated Houses.  However, the 2^nd plaintiff’s entitlement to such full benefit was only sustainable because he had contributed the full construction costs for building the houses.  Thus, it would be at least arguable as to whether the borrowing interest said to be incurred by the 2^nd plaintiff to enable him to contribute the full construction costs should be regarded as the 2^nd plaintiff’s loss without taking into account the additional benefit he has obtained[7].  In light of this, without a proper plea on damages based on borrowing interest, the defendant was prejudiced in not being in a position to properly answer and rebut the claim by way of a proper defence and filing of relevant evidence[8].  In the premises, there can also be no proper adjudication by the Judge on this question.

26.  On this basis, and upon Mr Chu’s concession, we allow the appeal on Ground 2 and set aside the part of the Judge’s Order that the defendant is to pay damages to the 2^nd plaintiff in the sum of $2,290,913.66.

D3.  Grounds 3 and 4

27.  Grounds 3 and 4 both relate to the defendant’s contention that he had not breached any fiduciary duties owed to the 1^st plaintiff by occupying the Occupied House because the 1^st plaintiff did not have any proper legal title in the Occupied Houses at the time when he and his family moved in[9].

28.  We are not convinced by this contention.

29.  As observed by the Judge at [35] of the Judgment, this contention in gist is saying that the defendant had a better title to the Occupied Houses than the 1^st plaintiff or that the 1^st plaintiff had no title to those houses at the relevant time to be in a position to claim vacant possession.  We agree with the Judge that there is no merit in this.

30.  First, the defendant had never pleaded such a defence[10].  Instead, in the Re-Re-Re-Amended Defence and Counterclaim, the defendant pleaded that the 2^nd plaintiff had given him “express consent and permission” to occupy Houses 3 and 7[11].  While the Judge rejected the defendant’s case on consent, as the Judge rightly pointed out, such averments made by the defendant are inconsistent with and contradict his argument that he has a better title and right to the Occupied Houses vis-à-vis the plaintiffs.[12]

31.  Second and further, it is the defendant’s own case and evidence that he had asked for the 2^nd plaintiff’s agreement to let out all the Designated Houses when they were not capable of being sold as the 1^st plaintiff had yet to formally obtained their legal title, but the 2^nd plaintiff refused[13]. In the premises, it is the defendant’s own case that the right to rent out these houses rested with the 1^st plaintiff to be exercised through the agreement of its directors / shareholders.

32.  In light of this, once the consent defence is rejected, the defendant must be in breach of his fiduciary to account to the principal (ie, the 1^st plaintiff)  secret profits made by occupying the Occupied House for his own benefit without the 1^st plaintiff’s consent or agreement[14].  This must also be the position in light of the defendant’s fiduciary duty as director owed to the 1^st plaintiff.

33.  In this respect, Mr Li further submitted at the hearing that the defendant’s fiduciary duty was informed and limited by the terms of the JV Agreement.  Given that under the JV Agreement, it was agreed expressly that the houses upon completion should be sold in the open market in return for profits to be shared, there would not be any breach of fiduciary duty even the defendant had occupied the Occupied Houses when they were incapable of being sold.

34.  As we indicated at the hearing, it is not open to the defendant to run this argument on the purported limited scope of the fiduciary duty as this was not pleaded whether expressly or impliedly in the Re-Re-Re-Amended Defence and Counterclaim.  In any event, this contention is without any merit in light of the defendant’s own case and evidence as mentioned at [31] above.

35.  For these reasons, there are no merits in Grounds 3 and 4 and we reject the same.

D4.  Ground 5

36.  Ground 5 relates to the short point that in making the order for mesne profits, the Judge failed to take into account the fact that the plaintiffs are only claiming that the defendant had unlawfully occupied two out of the three storeys of House 5.

37.  Mr Chu acknowledged that in the circumstances, the part of the Judge’s Order has to be varied, by the deduction of one-third of the amount of mesne profits awarded for House 5.

38.  We agree that this is an appropriate course to take. We therefore vary the Judge’s Order to the effect that insofar as House 5 is concerned, the relevant figure for mesne profits would be $30,000 per month.

39.  Before leaving this topic, we do not agree that the Judge had no evidential foundation to adopt the figure of $45,000 for the award of mesne profits.  Having reviewed the transcripts for the hearing below, it appears to us that it was common ground between the legal representatives for the plaintiffs and the defendant that the figure of $45,000 should be adopted.[15]

E.  DISPOSITION

40.  For the foregoing reasons, the appeal is partially allowed in respect of Grounds 2 and 5.  We will:

(1)  vary paragraph 2 of the Judge’s Order to the extent that the mense profit to be paid by the defendant for House 5 be reduced from $45,000 per month to $30,000; and

(2)  set aside paragraph 3 of the Judge’s Order for payment of damages by the defendant in the sum of $2,290,931.66.

41.  As to costs, in our view, the plaintiffs have successfully resisted the appeal, although the defendant did succeed in setting aside the order for damages in the sum of $2,290,931.66 and varying the order for mense profit.  Taking the matters in the round and giving recognition of the defendant’s partial success, it is just and fair to order that the plaintiffs are to have 70% of their costs of the appeal.  On the same basis, we will also vary the costs order below to the extent that the plaintiffs are to have 70% of the costs.