成都中泰交通建設發展有限公司 v. NEO CHINA LAND GROUP (HOLDINGS) LTD

HCA 2196/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2196 OF 2009

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JUDGMENT

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1.  This is a dispute arising out of a joint venture business relating to the development of certain lands in the city of Chengdu in the Mainland.

BACKGROUND

2.  The plaintiff, known as “成都中泰交通建設發展有限公司” (Chengdu Zhongtai Transportation Construction Development Co Ltd)(“Zhongtai”), is a company incorporated in the Mainland.

3.  The defendant, known as “Neo-China Land Group (Holdings) Limited, 中新地產集團(控股)有限公司” (“Neo-China”), is a company incorporated in Bermuda and listed on the main board of the Hong Kong Stock Exchange.

4.  Leadway Pacific Ltd (“Leadway”) is a company incorporated in the BVI and a wholly-owned subsidiary of Neo-China.

5.  中置(北京)企管理有限公司 (Zhongzhi (Beijing) Enterprise Management Co Ltd)(“Zhongzhi”) is a company incorporated in the Mainland and another wholly-owned subsidiary of Neo-China.

6.  Zhongtai and Neo-China entered into a framework agreement (“the 1^st Framework Agreement”) in around December 2006 concerning the co-development of 2 plots of land in Chengdu in the Mainland, namely No. 溫國儲[2006] 181-1 (“Land B”) and No. 溫國儲[2006] 181-2 (“Land A”)(collectively referred to as “the Lands”), which had been acquired by Zhongtai in about June 2006.

7.  Pursuant to the 1^st Framework Agreement:

(i)   Zhongtai and Neo-China were to form a joint venture company for the development of the Lands (preamble and clause 1);

(ii)   Zhongtai would hold 30% interest in the joint venture company, whilst Neo-China would hold 70% interest in the same (clause 2);

(iii)   within 24 months from the signing of the agreement, Neo-China shall purchase Zhongtai’s 30% equity interest in the joint venture company (clauses 2.2 and 4.1);

(iv)   meanwhile, Zhongtai would not participate in the daily operation and management of the joint venture company which would be solely handled by Neo-China, but Zhongtai was entitled to assign 1 director to join the board of directors of the JV Company (“the Board”) which consisted of 3 members (clause 2.3)

8.  The plan was to develop the Lands into a residential-cum-commercial complex (“the Project”).

9.  On 16 December 2006, Leadway entered into another framework agreement (“the 2^nd Framework Agreement”) with Zhongtai which was a modification of the partnership arrangement between the parties.  Pursuant to the 2^nd Framework Agreement, Zhongtai and Leadway were to incorporate a joint venture company for the development of the Lands, with Zhongtai and Leadway respectively holding 30% and 70% of the joint venture company’s shareholdings.

10.  On 30 January 2007, the joint venture company known as    “成都中新錦泰房地產開發有限公司” (Chengdu Neo-China Jintai Real Estate Development Co Ltd)(“the JV Company”) was incorporated for the Project.  Pursuant to the 2 Framework Agreements, Zhongtai and Leadway held 30% and 70% of its issued share capital respectively.  Articles 13 and 26 of the Articles of Association of the JV Company provided that any transfer of shares of the JV Company must be unanimously approved by the Board and thereafter, the procedures in relation to the change in shareholding must be undertaken.

11.  The JV Company had raised funds for the Project by obtaining mortgage loans from banks in the Mainland.  Further, the JV Company had to make certain payments to Zhongtai as the costs of the acquisition of the Lands.

12.  As part of such arrangement between the parties, Zhongtai, the JV Company, Neo-China and one “重慶中華企業房地產發展有限公司” (Chongqing Zhonghua Enterprise Real Estate Development Co Ltd)(“Chongqing Zhonghua”), which is another company incorporated in the Mainland wholly-owned by Neo-China, on 1 June 2008, entered into a Repayment Agreement (“the Repayment Agreement”), under which Zhongtai agreed to deliver the land use certificate of Land A to the JV Company in return of certain repayments to Zhongtai by the JV Company.  It is common ground that the JV Company had made all the payments to Zhongtai under the Repayment Agreement, and so such Agreement is not a subject matter of the claim.

13.  As part of the arrangement under the 2 Framework Agreements, Zhongtai, Neo-China, the JV Company and Zhongzhi, on 1 June 2008, entered into a Share Transfer Agreement (“the STA”) by which it was agreed, inter alia, that:

(i)   Zhongtai was to transfer its 30% shareholding in the JV Company to Zhongzhi for the consideration of RMB¥160,000,000 (clause 2);

(ii)   Zhongtai was to assist Zhongzhi to complete the registration of the change in the shareholding (clause 1);

(iii)   Zhongzhi undertook to make full payment of the consideration of RMB¥160,000,000 to Zhongtai by 30 December 2008, failing which interest of the arrears from 1 January 2009 to the date of full payment would have to be paid at the rate of 15% per annum (clause 5);

(iv)   should Zhongzhi fail to make full payment of the consideration of RMB¥160,000,000 to Zhongtai within 120 days after the due date, a penalty in the sum equivalent to 20% of the outstanding balance shall be paid to Zhongtai (clause 4);

(v)   the JV Company and Neo-China agreed to guarantee Zhongtai’s obligations to pay under the STA for 2 years starting from 31 December 2008 (clause 5.1);

(vi)   Neo-China and the JV Company undertook to obtain from their internal departments resolutions consenting to the external guarantee in accordance with the provisions of their articles of association, and to perform the formalities in relation to public notice (if any) and other relevant formalities (clause 5.2);

(vii)        Neo-China and the JV Company shall provide the requisite documents and an effective guarantee in accordance with clause 5 of the STA, and in this regard, Zhongtai, Neo-China and the JV Company intended to simplify the process by cancelling notarization and confirmed that the certification jointly executed by their respective lawyers that the documents provided by Neo-China and the JV Company were qualified and full (“the Certification Process”), and the guarantee provided was effective shall be adopted by Zhongtai and Zhongzhi as the condition precedent of the STA (clause 6); and

(viii)      the STA would be governed by the law in the Mainland (clause 7).

14.  It is common ground that the consideration of RMB¥160,000,000 for the shares transfer was to consist of 2 components: (i) the sum of RMB¥60,000,00 as being the capital injected by Zhongtai into the joint venture business; and (ii) the sum of RMB¥100,000,000 as being a reasonable profit to Zhongtai for the Project.

15.  On 14 June 2008, the same parties to the STA entered into another agreement which was supplemental to the STA (“the SA”). Clauses 1 and 2 of the SA read as follows:

“1, 鉴于丙方A是一家在香港联交所有限公司主板上市，股票代码为0563的公司。为了方便司法处理，凡因丙方A履行本补充协议项下担保义务及责任产生的所有争议，适用香港法律并按其解释，接受香港法院的非专属管辖。

2, 丙方A在此作为首要义务人无条件和不可撤销地向甲方担保，保证乙方将完全、尽责、按时地履行在《股权转让协议》项下的义务，承诺将应甲方要求及时履行与前述相同的责任。丙方A在本补充协议项下提供的担保是一项独立的、持续性的担保，无论乙方的义务因何等原因无效、效力待定或不能执行，均不受任何影响。为避免疑义，甲方可未先向乙方主张权利而直接向丙方A主张权利，而此举并不免除、减轻、影响或豁免乙方在《股权转让协议》中的责任。”

The English translations of the 2 clauses are as follows:

“1. Guarantor A [Neo-China] is a company listed on the Main Board of the Stock Exchange of Hong Kong Limited, whose Stock Code is 0563. In order to handle legal affairs conveniently, all disputes arising from the discharge of Guarantor A’s obligations and liabilities in relation to its guarantee under this Supplementary Agreement, shall be governed and interpreted by the laws of Hong Kong and accept the non-exclusive jurisdiction of the courts in Hong Kong.

2. Guarantor A hereby acts as the primary obligor, who unconditionally and irrevocably provides a guarantee to the Creditor [Zhongtai] in order to guarantee that the Debtor [Zhongzhi] will fully, diligently and duly discharge its obligations under the Repayment Agreement, and undertakes to duly discharge the same liabilities upon the request of the Creditor.  The guarantee provided by Guarantor A under this Supplementary Agreement is an independent and continuous guarantee, which shall not be affected in any manner if the Debtor’s obligations cease to exist for whatever reason or have an uncertain effect or become unenforceable.  For the avoidance of doubt, the Creditor is entitled to directly exercise its right against Guarantor A without first exercising its right against the Debtor, which however shall not discharge, derogate, affect or waive the Debtor’s obligations under the Repayment Agreement.”

16.  Subsequently, disputes arose between Zhongtai and Neo-China’s group of companies (“Neo-China Group”) and a host of legal proceedings in the Mainland ensured.  Particulars of these proceedings are listed out in the schedule attached to this Judgment.

17.  On 16 September 2008, Zhongtai and the JV Company settled their respective claims in actions (2008) 成民初字 No 712 and (2008) 成民初字 No 659 by entering into a mediation agreement (“the 1^st Mediation Agreement”).

18.  As for the suits in (2009) 成民初字 No 85 and (2009) 成民初字 No 222 (including the counterclaim therein), those were subsequently consolidated to be heard together.

19.  On 23 April 2009, another mediation agreement (“the 2^nd Mediation Agreement”) was reached in respect of the consolidated action of the suits (2009) 成民初字 No 85 and (2009) 成民初字 No 222.

20.  According to the terms of the 2^nd Mediation Agreement:

(i)   the consideration for the transfer of the 30% interest in the JV Company from Zhongtai to Zhongzhi was to be reduced from RMB¥160,000,000 to RMB¥120,000,000;

(ii)   the RMB¥120,000,000 was to be paid by 3 separate instalments:

(a)   RMB¥60,000,000 on 24 April 2009 by payment of the same into the account of the Chengdu Intermediate People’s Court;

(b)   RMB¥30,000,000 on 23 October 2009; and

(c)   RMB¥30,000,000 on 22 April 2010;

(iii)   the JV Company was to guarantee the payment of the 2^nd and 3^rd instalments totalling RMB¥60,000,000;

(iv)   Zhongzhi, Zhongtai and the JV Company would co-operate in the processing of all formalities and legal documents for the transfer of the shares and would by 27 April 2009 authorise Zhongtai to process such transfer.  Upon completion of the transfer formalities, Zhongtai could apply to the Chengdu Intermediate People’s Court for the release of the RMB¥60,000,000 paid in on 24 April 2009; and

(v)   Zhongzhi and Zhongtai were to withdraw the legal proceedings pending between them in (2009) 成民初字 No 222, and Zhongtai shall also apply to discharge all preservation orders previously obtained against the assets of the JV Company.

21.  The name of Neo-China did not appear as a party in the 2^nd Mediation Agreement.

22.  In accordance with the 2^nd Mediation Agreement, Zhongzhi and Zhongtai subsequently withdrew their respective claims in the Mainland court.  On 29 April 2009, approval for the transfer of 30% shareholding from Zhongtai to Zhongzhi was granted by the government authority.

23.  Pursuant to the 2^nd Mediation Agreement and by 3 payments totalling RMB¥120,000,000 in the respective sums of RMB¥60,000,000, RMB¥30,000,000 and RMB¥30,000,000 paid on 23 April 2009, 23 October 2009 and 22 April 2010, Zhongzhi discharged its liability to Zhongtai under the STA as varied by the 2^nd Mediation Agreement.

24.  On 30 October 2009, Zhongtai commenced the present proceedings in Hong Kong against Neo-China for:

(i)   RMB¥40,000,000, being the shortfall between the original consideration of RMB¥160,000,000 and the RMB¥120,000,000 paid by Zhongzhi;

(ii)   RMB¥32,000,000 as liquidated damages or penalty pursuant to clause 4 of the STA; and

(iii)   interest at the rate of 15% per annum pursuant to clause 5 of the STA.

ISSUES IN THE DISPUTE

25.  The claim of Zhongtai is one based on the guarantee as contained in clause 5.1 of the STA, which expressly stated that Neo-China would guarantee Zhongzhi’s obligation to pay for the consideration for the transfer of shares under the STA.  According to Zhongtai, the obligation of Neo-China as guarantor was varied by the following:

(i)   clause 2 of the SA which provided that the obligation of Neo-China as the guarantor shall be independent and not affected in any manner if Zhongzhi’s obligations cease to exist;

(ii)   the oral representation made by Mr Li Songxiao (酈松校)(“Mr Li”) and Mr Huang Shaoyuan (黄紹淵)(“Mr Huang”) of Neo-China to Mr Hua Hua (華樺)(“Mr Hua”) of Zhongtai  shortly before the making of the 2^nd Mediation Agreement that Zhongtai could claim the shortfall in the consideration for the transfer of shares together with interest and liquidated damages against Neo-China in Hong Kong (“the Oral Representation”).

26.  On the other hand, Neo-China denies that Mr Li or Mr Huang had ever made the Oral Representation to Mr Hua as alleged by Zhongtai.  In fact, the negotiation leading to the making of the 2^nd Mediation Agreement was conducted between Mr Hua of Zhongtai and Mr Huang of Neo-China without the involvement of Mr Li.  Further, it was agreed between them that the terms of the 2^nd Mediation Agreement would be in full and final settlement of all the disputes between Zhongtai and Neo-China Group (including Neo-China).  By that time, Zhongtai was allowed to pick one company in Neo-China Group to guarantee the obligations of Zhongzhi for the payment of the 2^nd and 3^rd instalments under the 2^nd Mediation Agreement, and Zhongtai eventually chose the JV Company as the guarantor (“the Oral Agreement”).  It was agreed that such guarantee would replace the previous guarantee given by the JV Company and Neo-China in the STA and the SA.

27.  The main issue in this dispute, therefore, relates to the contents of the discussions between the parties shortly before the making of the 2^nd Mediation Agreement: whether Mr Li or Mr Huang had made the Oral Representation as alleged by Zhongtai, or whether the parties had made the Oral Agreement as alleged by Neo-China (“the Main Issue”).  Mr Chan, counsel for Zhongtai, agrees that if the court were to find against Zhongtai on the Main Issue, Zhongtai’s claim against Neo-China must fail.  The dispute between the parties is, therefore, mainly a factual one.

28.  On the basis that the court is to find against Neo-China on the Main Issue, Neo-China has also put forward the following alternative grounds of defence (“the Alternative Issues”).

29.  Firstly, Mr Wong SC, counsel for Neo-China, submits that, according to the true construction of the terms of the STA and the SA, the obligation of Neo-China as the guarantor was co-extensive with that of Zhongzhi.  Since the liability of Zhongzhi for the transfer of shares was reduced according to the terms of the 2^nd Mediation Agreement and Zhongzhi had fully discharged its obligations under the said Agreement, the liability of Neo-China as the guarantor had similarly been discharged.

30.  Secondly, Neo-China is not liable under the guarantee contained in the STA because the condition precedent in clause 6 of the STA had not been complied with or fulfilled.  Further, under the law in the Mainland, the STA and the SA did not have any legal effect as the transfer of shares under the STA required the approval of the Wen Jiang City’s Commercial Bureau (“the Bureau”), and the Certification Process prescribed by clause 6 of the STA could not override such stringent legal requirement.  It is also Neo-China’s case that Zhongtai had failed to supply 2 documents, namely the resolution of the Board authorising the shares transfer (“the Board Resolution”) and the notice terminating Mr Hua as a director of the JV Company (“the Termination Notice”), to Neo-China or the JV Company prior to the making of the 2^nd Mediation Agreement, and as a result the JV Company was not able to obtain the approval from the Bureau for the transfer of shares.  In such circumstances, the STA had not taken effect as a valid agreement.

31.  Thirdly, the default interest and liquidated damages under the STA are not recoverable as these are penalties under the law of the Mainland and the common law of Hong Kong.

THE MAIN ISSUE

32.  For the purpose of this Judgment, I will focus on the Main Issue.  As I see it, this case can be disposed of by the determination of the Main Issue alone. 

33.  Since the Main Issue involves a factual dispute, I will have to deal with the evidence adduced by the parties on such issue.

34.  At the trial, Zhongtai has called 5 witnesses to testify on its behalf: Mr Hua, Mr Chen Zuliang (陳祖良)(“Mr Chen”) and Mr Sun Lianfa (孫聯法)(“Mr Sun”) of Zhongtai, Madam Wang Biyun (王碧雲) who was the Mainland lawyer acting for Zhongtai in respect of the Certification Process (“Madam Wang”), and Mr Lawrence Shu (束小江) who is Zhongtai’s expert on Mainland law (“Mr Shu”).  The evidence of Madam Wang and Mr Shu is mainly related to matters involved in the Alternative Issues.

35.  On the other hand, Neo-China has called Mr Huang, Mr Ma Bigui (馬碧贵) who a Mainland lawyer acting for Neo-China Group during the formal execution of the 2^nd Mediation Agreement, Mr Yang Biao (楊彪) of Neo-China (“Mr Yang”), and Professor David Chen (陳乃蔚) who is Neo-China’s expert on Mainland law (“Professor Chen”).  The evidence of Professor Chen is mainly related to matters involved in the Alternative Issues.

(i)      The evidence of Zhongtai on the Main Issue

36.  Mr Hua is the main witness for Zhongtai on the Main Issue.  He is a director of Zhongtai.  At the material time, he was assigned by Zhongtai to join the Board of the JV Company.  At present, he and Mr Chen own about 37% and 30% shareholdings of Zhongtai respectively.  He was also Zhongtai’s representative responsible for the Project.

37.  Mr Hua gives the court an account as to how Zhongtai had obtained the Lands from the government, and how Zhongtai and Neo-China Group had made the 2 Framework Agreements for the development of the Land. 

38.  He also tells the court as to how the JV Company had raised a loan of RMB¥200,000,000 by using Land B as the security.  He confirms that Zhongtai had contributed a total of RMB¥60,000,000 as the capital for the JV Company.

39.  According to Mr Hua, he had supplied all the necessary documents to enable Neo-China or the JV Company to obtain the approval for the shares transfer from the Bureau.  He recalls a meeting with Mr Huang and a few representatives of the JV Company and Neo-China on 5 April 2008, in which he signed the Board Resolution endorsing the shares transfer.  Further, he signed the Termination Notice on 20 June 2008 and he asked Mr Chen to pass the document to the JV Company in order to obtain the approval for the shares transfer from the Bureau.

40.  Mr Hua tells the court as to how the parties had made the STA and the SA.  In fact, he had sought legal advice from Zhongtai’s lawyer in Hong Kong regarding the terms to be used in the SA.

41.  Mr Hua also tells the court as to why the parties’ relationship started to turn sour on or about 20 June 2008.  On that day, the JV Company obtained the land use certificate of Land A from the government authority.  On the following day, Mr Hua received a phone call from the Agricultural Bank of China and he learnt that the JV Company had, without first obtaining the consent of Zhongtai, tried to raise a mortgage loan by using the fresh land use certificate of Land A.

42.  Mr Hua agrees that Zhongtai had started the first legal action against Neo-China Group in the Mainland on 23 June 2008.  In this action, Zhongtai sought to recover the loan of RMB¥140,000,000 from the JV Company.  On 24 June 2008, Zhongtai had obtained an order from the Mainland court to freeze the assets of the JV Company.  On 31 July 2008, Zhongtai commenced another legal proceedings against the JV Company to claim for the sum of RMB¥50,000,000 under the Repayment Agreement.  On 16 September 2008, the parties to these actions entered into the 1^st Mediation Agreement.

43.  Mr Hua also tells the court about the Oral Representation made by Mr Li before the execution of the 2^nd Mediation Agreement.  By that time, Mr Li told him that Neo-China Group only had about RMB¥120,000,000 in the Mainland office, and that was the maximum amount that could be offered by Neo-China to settle the proceedings in the Mainland.  As to the shortfall in the consideration for the shares transfer (ie RMB¥40,000,000) and interest and liquidated damages, Mr Li told him that Zhongtai could claim against Neo-China in Hong Kong.  After the making of the Oral Representation, the parties decided to settle the case.  Mr Hua and Mr. Li then gave instructions to Mr Chen and Mr Huang respectively to go to the court in Chengdu to formally execute the 2^nd Mediation Agreement.

44.  As to the reason why Zhongtai had not insisted to have the Oral Representation be reduced into writing, Mr Hua explains that he had sought advice from Zhongtai’s Mainland lawyer, who told him that it was not permissible under the law of the Mainland to include the terms of the Oral Representation in the 2^nd Mediation Agreement.

45.  Mr Hua agrees that he had not mentioned the involvement of Mr Li in his 1^st witness statement, but he denies Neo-China’s suggestion that he only introduced Mr Li into the picture because Mr Li would no longer be available to testify on behalf of Neo-China.

46.  Zhongtai’s second witness is Mr Chen.  He confirms that Mr Hua and Mr Huang were the respective representatives of Zhongtai and Neo-China responsible for the Project.  After a long negotiation between the parties, Mr Hua told him that the parties had agreed on a settlement and Mr Hua instructed him to go to the Chengdu court to formalise the agreement.  He confirms that he did not take part in the negotiation process and it was Mr Hua who was responsible to conduct the negotiation on behalf of Zhongtai.  However, Mr Hua did mention the Oral Representation to him.

47.  The last factual witness on the Main Issue is Mr Sun.  As he did not take part in the negotiation leading to the making of the 2^nd Mediation Agreement, his evidence is not particularly helpful to the court in determining the merits of the Main Issue.

(ii)     The evidence of Neo-China on the Main Issue

48.  The main witness for Neo-China on the Main issue is Mr Huang.  At the material time, he was the Executive President of the South West Region of Neo-China Group in the Mainland, and he was responsible for various matters relating to the Project.  He left Neo-China in 2011.

49.  He tells the court various details relating to the execution of the STA and the SA, and how the parties had co-operated relating to the development under the Project.  The relationship between the parties was in fact quite harmonious before the commencement of the first legal proceedings by Zhongtai in the Mainland in June 2008.

50.  On 24 June 2008, Mr Huang received a notice from the court about the freezing of the assets of the JV Company.  According to Mr Huang, this incident was a great insult to him and he felt that Mr Hua had cheated him.  He was also heavily criticised by his superiors in Neo-China Group about his handling of the matters.  Zhongtai’s legal proceedings had caused tremendous loss to the JV Company because it could not put various properties of the Project in the market for sale.

51.  After the commencement of the various legal proceedings, the parties conducted negotiation with a view to resolve their disputes. The 1^st Mediation Agreement was made in September 2008, which mainly dealt with Zhongtai’s claim under the Repayment Agreement.

52.  Mr Huang confirms that the negotiation leading to the 2^nd Mediation Agreement was only conducted between Mr Hua and himself.  The negotiation lasted for a few months and they had quarrels during the discussions.  Although he reported to Mr Li, the latter was not directly involved in the negotiation process.  He also confirms that the Oral Agreement was made between the parties on around 20 April 2009.  By that time, Neo-China took the view that Zhongtai was at fault for bringing all the legal proceedings against the JV Company and so the consideration for the transfer of shares was reduced from RMB¥160,000,000 to RMB¥120,000,000.  It was also agreed between the parties that Neo-China Group would only provide guarantee for payment of the 2^nd and 3^rd instalments in the total sum of RMB¥60,000,000, and such guarantee would replace the previous guarantee provided by the JV Company and Neo-China under the STA and the SA.  The new guarantee would be provided by one of the companies in Neo-China Group, and Zhongtai eventually picked the JV Company as the guarantor.  Mr Huang confirms that the terms of the Oral Agreement were in full and final settlement of all the claims between Zhongtai and Neo-China Group.

53.  Mr Huang also denies that Zhongtai had, prior to the making of the 2^nd Mediation Agreement, supplied the Board Resolution or the Termination Notice to him for the purpose of obtaining the approval for the shares transfer from the Bureau.

54.  After the making of the Oral Agreement, he went to the United States.  Upon his return in June 2009, he was transferred to Xian.  Since he had completed all the works relating to the Project, he had no further involvement with the Project after the making of the 2^nd Mediation Agreement.  He left Neo-China in about April or May 2011.

55.  According to Mr Huang, Mr Li was a shareholder of Neo-China in 2008 but he sold his shares to Shanghai Industrial Urban Development Group Ltd in 2009.  He is not sure whether Mr Li is now still holding any shares of Neo-China.

56.  Neo-China’s 2^nd factual witness is Mr Ma who acted for Neo-China Group and the JV Company in the formal execution of the 2^nd Mediation Agreement.  According to Mr Ma, before the formal signing of the 2^nd Mediation Agreement, Mr Huang told him that: (i) the sum of RMB¥120,000,000 was to settle the entire Zhongtai’s claim for shares transfer price of RMB¥160,000,000, the default interest and liquidated damages; and (ii) Neo-China’s liability as guarantor under the STA and the SA would be replaced by a RMB¥60,000,000 guarantee to be provided by the JV Company.

57.  Neo-China’s 3^rd factual witness is Mr Yang.  He is a member of the existing management team of Neo-China Group.  As he did not take part in the negotiation leading to the making of the 2^nd Mediation Agreement, his evidence is not particularly helpful to the court in determining the merits of the Main Issue.

(iii)    Assessment of the evidence

58.  Having carefully considered all the evidence of the present case, I find the Main Issue in favour of Neo-China.

59.  Firstly, I have grave reservation about the creditability of Mr Hua’s evidence, as there are serious inconsistencies in his evidence about the making of the alleged Oral Representation, in particular as to who actually made the Oral Representation to him before the execution of the 2^nd Mediation Agreement.

60.  Whether Neo-China had made the Oral Representation is a very important aspect of Zhongtai’s claim, and so I do not expect serious inconsistencies in Mr Hua’s evidence about such issue.  Unfortunately, this is the case here.

61.  In his 1^st witness statement dated 8 June 2011, Mr Hua claimed that Mr Huang’s Oral Representation was the reason why Zhongtai consented to the 2^nd Mediation Agreement, and no mention was made about Mr Li whatsoever.  In Mr Hua’s 2^nd witness statement dated 3 August 2011, Mr Li was brought into the picture for the first time.  According to Mr Hua, Mr Li in fact approached him 2 days before the conclusion of the 2^nd Mediation Agreement and Mr Li made the same Oral Representation.  In other words, both Mr Li and Mr Huang had made the Oral Representation to him.  The changes went on in Mr Hua’s 3^rd witness statement dated 24 December 2012 with the complete diminution of Mr Huang’s role.  In this statement, Mr Hua confirmed that: (i) it was impossible that he would have negotiated with Mr Huang as Mr Huang was not someone who could make decisions on behalf of Neo-China; and (ii) prior to Zhongtai’s entering into the 2^nd Mediation Agreement, the one with whom he negotiated was Mr Li.  At the trial, Mr Hua confirms that the negotiation was conducted by Mr Li alone on behalf of Neo-China Group, and Mr Li was the one who made the Oral Representation.

62.  I agree with Mr Wong that these changes are obvious and quite unexplainable.  If Mr Li had made the Oral Representation, I just cannot understand why Mr Hua would have omitted to mention even the slightest participation of Mr Li in his 1^st witness statement.  Further, if Mr Huang was not involved in the negotiation, I cannot understand why Mr Hua stated in his 1^st witness statement that Mr Huang’s Oral Representation was the reason why Zhongtai consented to the 2^nd Mediation Agreement.

63.  Mr Hua’s viva voce evidence also does not sit well with the allegations made by Zhongtai in the pleadings.  In the original Reply dated 11 February 2010 and the Amended Reply dated 1 December 2010, Zhongtai pleaded that Mr Huang consented to the settlement agreement on behalf of Neo-China.  No mention of Mr Li was made then in the Reply and the Amended Reply.

64.  In the Re-Amended Reply dated 3 October 2011 (ie more than a year later), Zhongtai pleaded for the first time the alleged Oral Representation by both Mr Huang and Mr Li.  Again, it is difficult to understand why Zhongtai only brought Mr Li into the picture for the first time in the pleading at such a late stage of the proceedings.  If Mr Li also made the Oral Representation, which was replied upon by Zhongtai in assenting to the 2^nd Mediation Agreement, it would be quite impossible for Zhongtai to have omitted to plead the same at the outset.  Neither would it be possible that Zhongtai would have asserted that Mr Huang was the one who consented to the 2^nd Mediation Agreement on behalf of Neo-China.

65.  It is clear that Zhongtai has tried to minimise Mr Huang’s role in the making of the Oral Representation by shifting it to Mr Li.  As Mr Li had never been in the witness list of Neo-China, Mr Wong suggests in the cross-examination of Mr Hua that it was a deliberate move by Zhongtai making it more difficult for Neo-China to rebut Zhongtai’s case on the Oral Representation.  As I cannot find any logical reason to explain Zhongtai’s ever-changing stance on the issue, there is some substance in Mr Wong’s suggestion.

66.  The inconsistency in Zhongtai’s case also extends to the contents of the Oral Representation.  According to the Re-Amended Reply dated 3 October 2011, Mr Huang and Mr Li only told Mr Hua that Zhongtai could claim for the shortfall in the shares transfer price (ie RMB¥40,000,000) against Neo-China in Hong Kong.  It did not cover the claim for interest and liquidated damages.  The position remained the same in the Re-Re-Amended Reply dated 24 December 2012.  It was only on Day 5 of the trial that Zhongtai made an application to further amend the Re-Re-Amended Reply to include interest and liquidated damages as part of the terms of the Oral Representation. Apparently, this resulted from the evidence of Mr Hua at the trial who confirms that it was an express term of the Oral Representation to cover the claim for interest and liquidated damages.  As Zhongtai’s claim for interest and liquidated damages is a substantial one the quantum of which amounting to nearly half of the claim, it is again difficult to explain why Zhongtai had omitted the reference to such material term of the Oral Representation in the earlier pleadings and witness statements.  In my judgment, this casts serious doubt on the creditability of Zhongtai’s case on the Oral Representation.

67.  Secondly, Mr Hua’s evidence about the cause of the tension between Zhongtai and Neo-China is also inconsistent with the documentary evidence.  According to Mr Hua, the parties obtained the land use certificate of Land A on 20 June 2008.  On the following day, he received a call from the Agricultural Bank of China, in which he was asked whether Zhongtai wanted to take out a loan with the said land use certificate. Zhongtai was very upset because the JV Company had tried to obtain a loan using the freshly obtained land use certificates without consulting Zhongtai. Zhongtai then conducted an urgent meeting, during which Mr Hua accepted the advice of Zhongtai’s lawyers to make an application to the court to freeze the assets of the JV Company.  Zhongtai eventually made such application in the Mainland court.

68.  The problem with such evidence is that the court documents in the Mainland proceedings show that Zhongtai had taken steps to prepare the application for the preservation order as early as 20 June 2008. That can be shown by the date (ie 20 June 2008) in the certificate issued by one 上海雙鷗置業有限公司as the guarantor for Zhongtai in the application for the preservation order.  Although Mr Hua tried to distant himself from the handling of the legal proceedings, it is just difficult to explain why the said certificate was pre-dated the call from the Agricultural Bank of China.  I have also considered the possibility that the date on the certificate was a genuine mistake, but it is hard to explain why someone could have made such a serious error in this piece of court document.  At least, this casts doubt on the creditability of Mr Hua’s evidence and tilts the balance in favour of Neo-China’s case.

69.  On the other hand, Mr Huang gives his evidence in a straightforward and consistent manner.  The viva voce evidence given by Mr Huang is detailed, coherent and consistent with Neo-China’s pleaded stance as well as Mr Huang’s own written witness statements.  He has remained unshaken despite the vigorous cross-examination by Zhongtai’s counsel.

70.  Further, Mr Huang is an independent witness who has no personal interest in the outcome of these proceedings.  This is to be contrasted with the position of Mr Hua and Mr Chen who are currently the 2 major shareholders of Zhongtai.

71.  In addition, Mr Huang’s evidence is, to a great extent, corroborated by the evidence of Mr Ma.  Mr Ma is a qualified lawyer in the Mainland who has no direct interest in this case.  Although Neo-China may still be one of his clients, I do not accept that Mr Ma, being a professional himself, would have put his reputation at stake by fabricating the evidence in support of  Neo-China’s claim.  Furthermore, his evidence is clear and consistent and so I accept his evidence as the truth.

72.  In my judgment, the terms in the 2^nd Mediation Agreement are also consistent with Neo-China’s case.  The 2^nd Mediation Agreement expressly provided for a guarantee by the JV Company in respect of the payment of the 2^nd and 3^rd instalments in the total sum of RMB¥60,000,000 by Zhongzhi.  This shows that the provision of guarantee was a subject of the discussions between the parties during the negotiation.  If the guarantee provided by the JV Company and Neo-China had remained intact, it was quite unnecessary for the JV Company to provide the additional guarantee under the 2^nd Mediation Agreement.  Further, unlike the terms in the STA, this guarantee was provided by the JV Company alone.  This seems to suggest some sort of arrangement to release the liability of Neo-China under the original guarantee.  At the very least, the terms in the 2^nd Mediation Agreement are consistent with Mr Huang’s evidence on the Oral Agreement.

73.  Mr Chan, counsel for Zhongzhi, has made lengthy submissions to attack the creditability of Neo-China’s case on the Main Issue.  I have considered all these arguments contained in Mr Chan’s final submissions and I do not accept that they affect the creditability of Neo China’s case in any way.  In this Judgment, I do not propose to deal with each of these arguments as most of them are clearly without merit.  I will only focus on the main arguments put forward by Mr Chan.

74.  Firstly, in trying to attack the independence of Mr Huang as a witness, Mr Chan submits that Mr Huang is a shrewd and biased person and he obviously has “an axe to grind” against Mr Hua.  As admitted by Mr Huang himself, the institution of the legal proceedings against the JV Company was a great insult to him, and Mr Chan therefore suggests that Mr Huang seeks to take revenge on Mr Hua by fabricating the evidence against Zhongtai.

75.  I do not share such observation.  To me, Mr Huang is more than frank in disclosing all the details of his dealings with Zhongtai in respect of the Project and the negotiation with Mr Hua leading to the making of the 2^nd Mediation Agreement.  In providing such details, Mr Huang also tells the court, in a candid manner, how he felt about Mr Hua.  Despite that, Mr Huang has no financial interest in the outcome of the proceedings and so I do not accept that he would have fabricated the evidence against Zhongtai just for the purpose of taking his personal revenge, if any, against Mr Hua. In my judgment, Mr Huang is just a direct and straightforward witness and his frankness should be affect the creditability of his evidence.

76.  Mr Chan also seems to suggest that Mr Huang was not “senior” enough to make decisions relating to the terms of the settlement agreement, and so it was likely that the Oral Representation was in fact made by Mr Li who was Mr Huang’s superior.

77.  I do not accept such argument.  Although Mr Huang had to take instructions from his superior regarding the terms of the settlement agreement, that does not mean that Mr Huang had no authority to conduct the negotiation on behalf of Neo-China Group.  In fact, Mr Hua accepts, at least in his earlier witness statements, that the negotiation had all along been conducted by Mr Huang on behalf of Neo-China and Mr Li only participated in the latter part of the negotiation.  Mr Chen, which is Zhongtai’s own witness, also confirms that Mr Hua and Mr Huang were the 2 persons responsible for matters relating to the Project.  In such circumstances, Mr Huang’s position in the hierarchy of Neo-China’s management team has nothing to do with his authority to conduct the negotiation on behalf of Neo-China.

78.  Mr Huang has been cross-examined extensively about his evidence of the non-provision of the Board Resolution and the Termination Notice by Zhongtai.  According to Mr Chan, Mr Huang admitted in his evidence that the main concern for the JV Company in June 2008 was to obtain the land use certificates of the Lands, and so it is doubtful whether the JV Company had pressed Zhongtai for the said documents in June 2008 as alleged by Mr Huang.  Further, according to Mr Huang, Zhongtai was in desperate need of funds and therefore had every incentive to proceed with the shares transfer registration as soon as possible under the STA.  In such case, Mr Hua should have supplied the Board Resolution and the Termination Notice to the JV Company without any delay.

79.  Further, Mr Huang has been asked about the 2 versions of the Board Resolution in the JV Company’s file: one Board Resolution stating the shares transfer consideration as RMB¥60,000,000 and the other unsigned Board Resolution stating the consideration as RMB¥160,000,000.  Mr Huang has also been questioned about the document titled “Shareholders’ Resolution” dated 23 June 2008 addressing to the Industrial and Commercial Bank.

80.  In my judgment, there were ample reasons for Mr Hua to delay the provision of the Board Resolution and the Termination Notice. Once Mr Hua had tendered these documents, Mr Hua would cease to be a director of the JV Company.  It was provided in the Articles of Association that the Board was required to approve certain important decisions of the JV Company, including the raising of loan by mortgaging the assets of the JV Company.  If Zhongtai were to lose its seat in the Board, Zhongtai would lose control over such important matters, in particular there were then still a lot of understanding matters relating to the granting of the land use certificates and the application for loan using such certificates as security.  Hence, I reject Mr Chan’s submission and accept Neo-China’s evidence about the non-provision of the Board Resolution and the Termination Notice.

81.  Further, Mr Huang is able to provide ready and straightforward answers regarding the circumstances under which the said documents (ie the 2 versions of the Board Resolution and the Shareholders’ Resolution dated 23 June 2008) were prepared, and I see nothing illogical with the answers provided by him.  Hence I do not accept that Mr Chan’s queries would affect the creditability of Mr Huang’s evidence.

82.  Mr Chan has also tried to attack Neo-China’s case by pointing out some “inconsistencies” in the evidence between Mr Huang and Mr Yang, for example, whether Mr Li was stationed in the Mainland or in Hong Kong at the material time.  In my judgment, these so-called “inconsistencies” are quite immaterial.  Further, Mr Yang is only a member of the existing management team of Neo-China Group and he was not directly involved in the management of the Project at the material time.  In such circumstances, I do not expect them to give completely identical evidence on such immaterial issues.

83.  I also would not speculate as to why Mr Huang was transferred to Xian after the completion of his negotiation with Mr Hua leading to the making of the 2^nd Mediation Agreement.  The court must decide the case based on facts and not on speculation.  Further, Mr Huang was not involved in matters relating to the Project after June 2009, and so it would be unrealistic for him to deal with matters after Zhongtai issued the demand letter for the claim at a much later stage.  In any event, what happened after the issuance of the demand letter is not a material issue in the case.

84.  In trying to attack the defence case, Mr Chan is also asking the court to draw adverse inference against Neo-China on the ground that it has failed to call material witnesses to testify at the trial, including at least 6 former senior officers of Neo-China Group who were involved in Neo-China Group’s dealings with Zhongtai at the material time, namely, Mr Li, Mr Liu Yi, Mr Sun Pengxiang, Mr Yuan Kun, Madam Liu Yan and Mr Zhang Rongshan.  Similarly, adverse inference should be drawn against Neo-China because it has failed to produce material documents to support its case, namely the reports made by Mr Huang to the head office relating to the execution of the STA and the 2^nd Mediation Agreement.

85.  Despite the able submission of Mr Chan, I do not accept that the court should draw such adverse inference against Neo-China.  Whether the court should draw such inference depends on the facts of each individual case.  Here, some of these key personnel were allegedly involved in the execution of the STA, the SA and the Repayment Agreement.  However, the execution of these agreements and the oral discussions leading to the making of these documents have never been material issues in the case, and one should not lose sight of the fact that the main dispute relates to the negotiation leading to the conclusion of the 2^nd Mediation Agreement.  In this regard, Neo-China has called all the relevant personnel, namely Mr Huang (though he is now not working for Neo-China), to testimony on its behalf.  Further, the roles played by these so-called key personnel are only revealed by the witnesses when they are cross-examined in the witness box, and so it would quite unrealistic to expect Neo-China to arrange these witnesses, assuming that they are readily available, to come to court to testify under such circumstances.

86.  Mr Li may be a more important witness.   However, it is clear that Mr Li has already left the management of Neo-China Group and so Neo-China may not be able to secure his attendance at the trial.  Further, it is Zhongtai’s original pleaded case and Neo-China all along pleaded case that Mr Li was not involved in the making of the Oral Representation or the Oral Agreement prior to the formal execution of the 2^nd Mediation Agreement, and I accept the evidence of Mr Huang that he alone was responsible for conducting the negotiation with Mr Hua.  In such circumstances, I am not prepared to draw any adverse inference against Neo-China’s case by reason of the absence of Mr Li as a witness.

87.  Mr Chan also makes a complaint about the missing reports made by Mr Huang to Mr Li, Mr Liu Yi and Neo-China’s Board of Directors in respect of the STA, the Repayment Agreement and the 2^nd Mediation Agreement.  Apparently, Mr Huang had sent the reports to the head office of Neo-China Group in Beijing, but Mr Yang, being a member of the existing management team of Neo-China Group, says that he is not aware of the existence of these reports.

88.  Again I refuse to draw any adverse inference against the defence case by reason of the absence of these reports.  Firstly, Mr Huang had not been involved in matters relating to the Project after June 2009 and he left Neo-China in 2011.  In such case, he was not closely involved in the preparation of the defence case.  He reveals the existence of these reports first time at the trial.  Apparently, the management of Neo-China Group has changed after the acquisition of shares by the new owner.  Under such circumstances, it is quite possible that the reports were misplaced and their whereabouts are unknown.  Further, if the reports were to contain anything which is inconsistent with Mr Huang’s evidence, Mr Huang can simply conceal the existence of these reports at the trial.  The fact that Mr Huang is prepared to reveal the existence of certain documentary evidence which may or may not support his testimony, in my judgment, actually adds weight to the creditability of his evidence.

89.  I would also add 2 more observations about the Main Issue.  Firstly, both parties try to attack the creditability of the counterparty’s case on the ground that the evidence did not make very much commercial sense.  As I see it, the arrangement between the parties in relation to the Project was a complicated one, in particular that related to the funding of the Project.  The funding arrangement would involve the payment for the costs of the acquisition of the Lands and the raising of loans to finance the Project itself.  It involved a lot of loans and payments between the parties.  Since the main dispute between the parties (ie the Main Issue) is a narrow one which relates to the discussions of the parties shortly before the execution of the 2^nd Mediation Agreement, both parties have not provided the court with a complete picture about the funding arrangement of the Project.  The information is only provided to the court on a piece-meal basis.  Without knowing the full picture, it is very difficult for the court to make a judgment as to whether a particular action of a party did make any commercial sense.  Hence, the factor of commercial reasonableness carries very little weight in my fact-finding exercise.

90.  Secondly, both parties try to challenge the counterparty’s case by arguing that there was no contemporaneous document to record down the terms of the Oral Representation or the Oral Agreement. However, this is very much a double-edged argument because there are reasons to suggest that both sides should have reduced the terms of the Oral Representation or the Oral Agreement into writing.  Mr Hua at one stage claims that he had been advised by the Mainland lawyer that it was not possible to include the terms of the Oral Representation in the 2^nd Mediation Agreement.  Assuming that this was right (which I have great reservation), there was nothing to prevent the parties to record down the terms in a separate document.  Hence, the absence of contemporaneous document is very much a neutral factor which does not tilt the balance in either party’s case.

91.  Based on the aforesaid analysis, I prefer to accept Neo-China’s evidence on the Main Issue on the balance of probabilities. As Mr Chan accepts that Zhongtai’s claim should be dismissed by reason of such adverse finding of fact, I dismiss the claim accordingly. 

(iv)     The pleading issue

92.  In fact, Mr Wong has lodged a more fundamental attack on Zhongtai’s claim based on a pleading issue.  According to Mr Wong, the underlying theme of the Statement of Claim in its various versions proceeded on the basis that Neo-China is liable by reason of the terms of the STA and SA.  It was only in the Re-Amended Reply that Zhongtai introduced a new plea which ultimately becomes its main case, namely the Oral Representation allegedly made by Mr Li or Mr Huang.  At the trial, Zhongtai seems to advance an unpleaded case premised on the alleged Oral Representation as some kind of a collateral contract made between the parties.  Mr Wong therefore submits that Zhongtai should not be permitted to rely on the Oral Representation as it is a material fact in support of the claim and the same should have been pleaded from the very outset in the Statement of Claim.

93.  There is some force in such argument.  At the trial, it seems that Zhongtai is trying to establish its claim against Neo-China based on the Oral Representation as some kind of collateral contract made between the parties.  If that is the case, Zhongtai’s cause of action should have been expressly pleaded in the Statement of Claim and not in the Reply.  Despite that, it has been made clear by Mr Chan in his Opening Submission that Zhongtai’s claim is one based on the STA as varied by the terms in the SA and the Oral Representation.  Further, Mr Wong for Neo-China has dealt with the Oral Representation thoroughly both in the examination of witnesses and in his final submission.  Hence, there is no misunderstanding between the parties that Zhongtai is relying on the Oral Representation as part of its claim.  As observed by Chief Judge Ma, as he then was, in Wing Hang Bank Ltd v Crystal Jet International Ltd & Ors [2005] 2 HKLRD 795 at pp 799-780, when facing similar kind of pleading argument, the court is ultimately guided by what is fair and just in the circumstances.  As the conduct and the flow of the trial are proceeded on the basis that the existence of the Oral Representation is one of the issues, if not the main one, my view is that Zhongtai should not be barred by technicalities of pleading to run its case based on the Oral Representation.

94.  Since Zhongtai’s claim is dismissed by reason of my factual finding on the Main Issue, this pleading point now becomes an academic issue.

THE ALTERNATIVE ISSUES

95.  By reason of my finding on the Main Issue, it is also unnecessary for me to deal with the Alternative Issues raised by the parties. However, since counsel for both parties have made considerable submissions on the Alternative Issues, I feel obliged to deal with these issues briefly in this Judgment.

(i)      The nature of the liability under the STA and the SA

96.  There is serious dispute between the parties about the true nature of the liability of Neo-China under the STA and SA. According to Zhongtai’s case, the wordings in the STA and SA clearly show that the liability of Neo-China is independent and not affected in any way by the subsequent reduction in the liability of Zhongzhi.  On the other hand, Mr Wong submits that the liability of Neo-China under the STA and SA is that of a guarantor in the true sense.  Its liability is only co-extensive with that of the principal debtor.  As the liability of Zhongzhi had been discharged by its payments under the terms of the 2^nd Mediation Agreement, Neo-China’s liability had similarly been discharged.

97.  In my judgment, this is wholly an non-issue in view of the subsequent discussions between the parties prior to the making of the 2^nd Mediation Agreement.  In New Zealand Bloodstock Leasing Limited v Glyn Crawford Morse Jenkins & Ors, unreported, Civ 2004-404-5795 (19 April 2007), which is a New Zealand High Court decision cited to me by Mr Chan, no matter what is the underlying obligation under the guarantee under the contractual document, it is open to the parties “to amend aspects of the rights and obligations flowing from the nature of that relationship as between the creditor and guarantor.”

98.  In the present case, it is common ground that the parties did touch upon the liability of Neo-China under the guarantee in their discussions prior to the making of the 2^nd Mediation Agreement.  It is also true that the parties relied on the contents of such discussions in entering into the 2^nd Mediation Agreement.  In such circumstances, no matter what was the nature of the liability under the guarantee as contained in the STA and SA, such obligation had been amended by the parties in the subsequent discussions.  Hence in my judgment, the court can comfortably determinate the merits of the case by reference to the Main Issue without making a ruling on the nature of Neo-China’s liability under the STA and SA.

(ii)     The legal status of the STA under the law of the Mainland

99.  Even if the court were to accept Zhongtai’s case on the Oral Representation, Neo-China argues that it should not be liable under the guarantee contained in the STA and SA, because under the law in the Mainland, the STA had not come into effect unless and until the approval for the transfer of shares had been obtained from the Bureau.

100.  Both Mr Shu and Professor Chen have given evidence on this particular issue.  According to Mr Shu, the STA was still a valid and effective agreement even before the granting of the approval for the transfer of shares of the JV Company which was a joint venture business.  On the other hand, Professor Chen, by quoting the relevant statutes and judicial decisions relating to joint venture business in the Mainland and various judicial interpretations issued by the Supreme People’s Court in the Mainland, is of the view that the STA had not taken effect unless and until the approval for the transfer of shares had been granted by the Bureau.

101.  Mr Shu and Professor Chen are reputable experts and I am sure that they are trying their best to assist the court to determine this particular issue.  But having carefully their evidence, I prefer to accept the expert opinion of Professor Chen, the main reason being that his opinion is supported by the judicial interpretations issued by the Supreme People’s Court and various judicial decisions.

102.  The problem with Mr Shu’s expert opinion is that there is very little authority supporting his view.  Although there is no concept of stare decisis in the Mainland courts, what is the law in the Mainland on a particular issue would depend very much on how the judges would decide such issue in the courts.  I agree with Professor Chen that, under the practice now in the Mainland, the courts would attach considerable weight to the judicial interpretations issued by the Supreme People’s Court in deciding cases.  Further, although decided cases are not strictly binding, judges may also consider judicial decisions in other courts when deciding similar issue. As Professor Chen’s expert opinion is supported by various judicial interpretations and judicial decisions, I prefer to accept his expert opinion relating to the legal status of the STA in the Mainland.

103.  However, such finding may not be able to assist Neo-China’s case on the Alternative Issues.  Professor Chen’s evidence only focuses on the question as to whether the STA had taken effect before the granting of the approval by the Bureau.  He has not addressed the issue as to whether, once the approval had been granted by the Bureau, the effect of which on the rights and obligations of the parties under the agreement itself.  Professor Chen has not suggested that the STA was not a valid agreement, he only says that the STA had not taken effect pending the approval by the Bureau.  In such circumstances, once the approval had been granted, the parties should honour all the promises given by them in the agreement itself.

104.  In the present case, it is clear that the transfer of shares was ultimately approved by the Bureau on 29 April 2009.  In my judgment, once this approval was granted, the parties would have to honour all the promises given previously pursuant to the shares transfer transaction. Further, both Zhongtai and Neo-China Group had treated the STA, the SA and the agreement made by the parties before the making of the 2^nd Mediation Agreement as valid agreements and performed their obligations accordingly.  In such circumstances, I do not accept that Neo-China can simply avoid liability by relying on the non-granting of the approval.

105.  Again, this discussion is only an academic exercise.  

106.  Neo-China also seeks to run another argument at the trial.  The parties to the STA are Zhongtai, Zhongzhi, Neo-China and the JV Company.  However, instead of the said 4 parties appearing in the certification certificates issued by the lawyers for the purpose of the Certification Process (“the Certification Certificates”), the name Chongqing Zhonghai (who was party in the Repayment Agreement) appeared in the Certification Certificates instead of Zhongzhi.  By reason of such defect in the Certification Certificates, Neo-China argues that the Certification Process had not been completed and as a result the STA had yet taken effect.

107.  At the trial, I disallow Neo-China’s application to amend the pleading to introduce such new argument.  Obviously, whether the naming of non-contracting party in the Certification Certificates would affect the validity of the Certification Process is a matter of Mainland law, and the parties should be entitled to adduce additional evidence, either from Mainland law expert or factual witnesses, on this particular issue.  If the court were to allow the amendment of the pleading at such a late stage of the proceedings, the trial would have to be prolonged and even adjourned.   This should be avoided and so I exercised the discretion refusing Neo-China’s application to amend the pleading to introduce such new defence.

(iii)    The claim for liquidated damages and interest

108.  I now turn to the last Alternative Issue as to whether, in the case that Neo-China is liable for the claim, Zhongtai is able to claim for the liquidated damages and interest as specified in the STA.

109.  As I prefer the expert evidence of Professor Chen, I accept that, under the law in the Mainland, the courts do have the power to adjust the quantum of liquidated damages if it is excessive.   Unfortunately, the experts are not able to supply the court with any useful information as to how the courts would exercise such power.  In the absence of such information, I would proceed on the basis that the law in the Mainland is the same as that in Hong Kong when approaching the issue of liquidated damages.  Because of such reason, it does not matter which law, whether the law in the Mainland or that in Hong Kong, is applicable in considering the issue.

110.  The STA provided for a 15% interest rate in the case of late payment and a fixed sum equivalent to 20% of the outstanding balance if the payment was not made within 120 days after the due date.  In the absence of any evidence showing that the liquidated damages and interest provided for in the STA are genuine pre-estimates of Zhongtai’s loss, I am of the view that those are penalties as they are sums fixed in terrorem. The predominant contractual function of the provision was to deter Neo-China Group from breaking the STA and not to compensate Zhongtai for the breach. Hence, if Neo-China is liable, Zhongtai should only be able to claim the sum of RMB¥40,000,000, being the shortfall in the shares transfer price, against Neo-China together with normal commercial interest.

CONCLUSION

111.  I want to stress once again that Zhongtai’s claim is dismissed because of my factual finding on the Main Issue.  It therefore follows that all the observations I make in respect of the other issues are strictly obiter.

112.  Based on the aforesaid analysis, I dismiss Zhongtai’s claim.  I also make an order nisi that the costs of the action be to Neo-China with certificate for 2 counsel, which shall be made absolute 14 days after the date of the handing down of this Judgment.

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