ONG YIP CHUNG AND OTHERS v. TERRACE ON THE PEAK (HONG KONG) LTD

CACV 410/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 410 OF 2002

(ON APPEAL FROM HCA NO. 749 OF 1994)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge Fung given on 23 September 2002 whereby he gave judgment in favour of the plaintiffs and ordered that the defendant should pay $2 million together with interest and costs. After hearing the appellant, this court did not require to hear submissions on behalf of the plaintiffs. This appeal was accordingly dismissed with reasons to be given in writing.

Background

2. The judgment below sets out the full background and details of this action. No comment or criticism has been made in respect of the judge's findings of the background facts. It is unnecessary therefore to set out the full facts herein since reference can be made to the judgment below. It suffices for the purposes of this appeal to recite the fact that following discussions between the 1st and 3rd plaintiffs and Messrs Ron Brown ("Brown"), Mark Ashton and Philip Kung, Brown sent the 1st and 3rd plaintiffs three documents on 15 October 1993. They were:

(a) a covering letter ("covering letter");

(b) a memorandum entitled "Offer for Subscription of 500,000 shares of HK$1 each" in the defendant ("memorandum"); and

(c) an application for shares in the company ("application").

3. The important point which emerged from these documents is that there was an invitation to subscribe for shares in the defendant company. The memorandum commenced by indicating that the invitation was to a selected number of individuals and corporations. Paragraph 1 indicated that 500,000 shares were being offered and that "if all are subscribed" they would constitute 50% of the share capital of the defendant. There was to be a shareholders' loan of $9 for each $1 share. Payment was to be by instalments which were set out under clause 2 which contained the important clause:

"If any amount payable by an applicant shall not be paid as and when the same shall become due, THL may cancel your right to subscribe the shares. In that event, those portions of the Shareholders' Loans that already have been advanced to the Company still shall be subject to the conditions set out below."

In Appendix I, there was set out under clause A headed "Procedure for Application":

"Completion of the application form will constitute irrevocable instruction and authority by the applicant to Messrs Richards Butler, Solicitors, to present the accompanying cheque(s) or cashier order(s) for clearance, to collect and hold the cleared funds as stakeholder, and to release such funds to the Company upon receipt of written confirmation from the Company that the applicant's application for Shares has been accepted, in whole or in part."

Finally reference should be made to the application form which contained the provision:

"In Consideration of your acceptance of my/our application for Shares and the Company's approval of this transfer, I/we also agree and undertake to the Company to contribute a shareholder's loan to the Company on the conditions set out in the Memorandum. I/We enclose a cheque/cashier order for ____________________, drawn payable to 'Minigo Limited/Richards Butler Client Escrow Account' being payment of the first instalment of my/our shareholder's loan and of the subscription money for any Shares allocated to me/us.

...

Completion of this application form will constitute irrevocable instruction and authorization by the applicant to Messrs. Richards Butler, Solicitors, to present the accompanying cheque(s) or cashier order(s) and any subsequent cheque(s) or cashier order(s) in payment of my/our full obligation under the Memorandum for clearance, to collect the cleared funds as stakeholder, and to release such funds to the Company upon receipt of a written confirmation from the Company that the applicant's application for Shares has been accepted, in whole or in part."

There was nothing in the memorandum or application which indicated that the application could not be withdrawn pending acceptance. In any event it was not the defendant's case that the application could not be withdrawn.

4. The 1st to 4th plaintiffs sent a cheque to Minigo Limited/Richards Butler Client Escrow Account for $2 million for the first instalment. That was forwarded by Brown to Richards Butler under cover of a letter which, amongst other things, said that:

"Only after all monies are in place will the respective company's board determine how to allocate such company's shares, the application of monies towards such company's equity/debt capital and issue share certificates."

The cheque was duly deposited into Richards Butler's account but, apparently, that firm was not aware of the contents of the memorandum or the application.

5. A receipt was eventually issued by Richards Butler, apparently after request. The parties were even then, however, beginning to fall apart. On 28 October 1993, Brown wrote to the 1st plaintiff setting out his views as to how the 5% fee for the promoters should be financed. That was one of the matters in contention.

6. Entries in the account ledger of Richards Butler show that nearly $900,000 was removed from the client escrow account on the instructions of Brown and used to pay part of the lease deposit, as well as stamp duty, legal fees and government fees.

7. On 1 November 1993, Brown again wrote to the 1st plaintiff. Amongst other things it was said that Philip Kung would be providing the plaintiffs, Brown and Ashton, with weekly status reports. A copy of the tenancy agreement for the restaurant was also enclosed. On 3 November, the 1st plaintiff wrote to Brown, Ashton and Kung referring to bank account application forms which had been given to Kung on the previous day, asking that they should be signed and returned so that Richards Butler could be asked to credit HK$4 million into the account. The only explanation which has been offered in respect of the figure of $4 million is that it was written on the basis that the 1st plaintiff considered that there would be $2 million from the plaintiffs and $2 million from Brown, Ashton and Kung still in the client escrow account with Richards Butler. On 15 November, the 1st plaintiff wrote to Ashton and referred to the $2 million which had been paid by the plaintiffs. In doing so, he said:

"As my money is deposited in Richard Butler Client Escrow Account, I am in doubt who has the right to use the money. Till today I have not given any consent to release any money."

8. That was followed by a letter of 23 November from Brown to the 1st plaintiff. Amongst other things that said:

"At this juncture, it is important for you to understand that, under the Memorandum/Application's terms, your group merely applied to become an investor in 500,000 shares of Minigo, and to make a loan to Minigo, each being subject to our group's acceptance of that application. Because your group was not to pay in its full share of HK$5 million until 18 December 1993, your group could not become a shareholder or have directors of Minigo before then."

The letter concluded with the paragraph:

"If your group is dissatisfied with the manner in which we have been managing our project, in light of the clarifications above about your own group's status as potential investors in our company, you should discuss this with your other investors and determine whether and how you wish to proceed in respect of your further HK$3 million obligation. Our group already have done so."

9. In his witness statement Brown referred to the 1st plaintiff having given instructions to terminate the service of the defendant's original and preferred contractor and that another contractor, the 1st plaintiff's choice, had been substituted. He exhibited a letter of 17 November in which the agreement terminating the services of the first contractor was confirmed. Brown also referred to the fact that the 1st plaintiff apparently insisted on a more "stylish and upmarket atmosphere" to the restaurant rather than the "middle-market atmosphere food-court" designed to cater for tourists and tour groups which had been envisaged previously.

10. The second instalment which was due from the plaintiffs on 18 November was not paid and the correspondence appears to have continued. One notable letter was on 1 December when Brown wrote to the 3rd plaintiff refuting her assertions in respect of what had been said to have been an oral agreement. That letter ended with the following paragraph:

"Therefore, if your group cannot agree with or accept anything stated by us, other than on your own terms, in light of our own clarifications of your group's current status in respect of our company, you should determine whether you desire to continue your proposed investment in our project. Should you choose not to proceed under the terms of the subscription documentation, we will consider you to have cancelled your subscription for shares in Minigo Limited, with all attendant consequences."

11. The final instalment due from the plaintiffs on 18 December, was, again, not paid. It was not until 17 January that the plaintiffs' solicitors wrote to the defendant giving notice that the plaintiffs' application for 500,000 shares was withdrawn. A full refund of the HK$2 million was also demanded.

12. The only oral testimony at trial was that of Brown. Our attention has been drawn to two passages where Brown clearly said that the defendant had never cancelled the plaintiffs' right to subscribe for shares. Although Mr Bell, on behalf of the defendant, sought to suggest that Brown had been mistaken in this, there is no basis for that suggestion. Hence, there is no question of the paragraph quoted above in clause 2 in the memorandum, under the heading "Terms of Subscription", having come into operation.

13. It was the defendant's primary case, both in the court below and in this court, that the defendant had accepted the plaintiffs' application and offer to subscribe for shares. Whilst it was admitted that such an acceptance had not been communicated to the plaintiffs, either in writing or orally, it was said that the offer was accepted by conduct. It was said that knowledge and communication of that acceptance could be inferred from the conduct of the parties and that, in consequence, the plaintiffs had been in default of the second and third payments and the defendant had been entitled to treat the $2 million as shareholders' loans under the agreement.

14. The judge considered all the facts in the case very carefully. He set them all out. He set out all the arguments of the defendant. He came to the conclusion in paragraph 56 of the judgment:

"In all the circumstances, I reject the evidence of Brown and find that the defendant has not accepted the application for subscription by conduct, nor communicated it to the plaintiffs. The plaintiffs were entitled to withdraw the application as they did on 17 January 1994. There was no binding contract between the parties."

15. Faced with that finding, Mr Bell, on behalf of the defendant, says that the finding was a matter of inference from the facts and that this court is entitled to draw its own conclusions. It may be true that when a finding of fact is an inference said to be derived from underlying facts an appellate court may more easily be able to reach its own conclusions as to what inferences should be drawn, in the circumstances of this case, I do not see that this court could come to any other conclusion than that to which the judge came.

(2) In fact, the contemporaneous documentary evidence goes the other way. The correspondence from the 1st plaintiff (referred to in paragraph 7 above) shows that in November 1993 (a month after the rental deposit, etc were paid), the plaintiffs were still under the assumption that their money was still in the Richards Butler Client Escrow Account. The defendant did not correct that assumption in the correspondence that followed. On the contrary, Brown's letter of 23 November 1993 said that "at this juncture ... your group [the plaintiffs] merely applied to become an investor ... and to make a loan ..., each being subject to our group's acceptance of that application".

(3) That is a clear indication that the understanding of both sides then was that the plaintiffs' application had not yet been accepted, so that the plaintiffs' money should (under the terms of the application) still have been in the Richards Butler Client Escrow Account. In those circumstances, the use of the plaintiffs' money the previous month does not prove acceptance of the plaintiffs' application, it only proves unauthorised use by the defendant of the plaintiffs' money.

(4) As for Mr Bell's submission that the terms of the covering letter allowed the money to be used as and when required, it is clear that that was on the assumption that the application for subscription was accepted. This is shown in covering letter itself in which Brown wrote - "this will allow the shareholders to fund the project as it requires, prior to opening".

17. Mr Bell went on to refer to a number of matters in relation to the running of the defendant's business which he said showed that the plaintiffs, or at least the 1st plaintiff, had been involved. This included the provision of the copy of the tenancy agreement, the reference to the weekly statements that would be provided, the 1st plaintiff's involvement in the opening of the bank account and the change of the contractors for the restaurant as well as the changes in the design of the restaurant at the 1st plaintiff's behest. Not only were all these matters carefully considered by the judge but, in my view, they do not overcome the clear inference derived from the correspondence that would have led the 1st plaintiff to believe that that $2 million had remained in the Richards Butler Client Escrow Account. Indeed, their own letters written after part of the money had been removed from that account clearly showed that they were written upon the basis that the plaintiffs' $2 million remained in the escrow account. What is more, Richards Butler were never informed of the terms between the parties upon which the money was in the escrow account. Still less were they informed that the plaintiffs' application for shares had been accepted and on that basis the money could be removed from the escrow account.

The claim for money had and received

18. On the finding that the plaintiffs had withdrawn their application for shares before their application had been accepted or their right to subscribe for shares had been cancelled, the $2 million which they had paid was clearly money paid in contemplation of a contract which never came into existence. In those circumstances, the plaintiffs would be entitled to the return of their money.

19. The basis upon which the return of the $2 million was resisted was that it was said that the money had been used for the payment of the rental deposit. Quite apart from the fact that the rental deposit is just that, namely a deposit which would be returned at the end of the tenancy and therefore it is money put on deposit and not money spent, the claim must fail because, according to the terms of the memorandum and the application, that money should have remained in the escrow account of Richards Butler. Whether the terms of the removal of the money had been dishonest or otherwise, the fact is that it should not have been removed and the defendant cannot rely upon its removal, contrary to the terms of those documents, as a ground for refusing relief under this heading.

Hon Le Pichon JA:

20. I agree.

Hon Yuen JA:

21. I agree.