LO YUK SUI v. FUBON BANK (HONG KONG) LIMITED formerly known as INTERNATIONAL BANK OF ASIA LIMITED

FAMV No. 422 of 2019

[2020] HKCFA 6

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 422 OF 2019 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL

FROM CACV NO. 47 OF 2017)

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REASONS FOR DETERMINATION

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Mr Justice Fok PJ:

1.  We dismissed this application for leave to appeal at the conclusion of the hearing.  These are our reasons for doing so.

2.  This application for leave to appeal arises out of an action in which the applicant claimed against the respondent bank for breach of contract, specifically for breach of the terms of a letter dated 16 October 2002 setting out options for the restructuring of the debt of a group of companies of which the applicant was chairman and ultimate major shareholder.

3.  At trial, it was the applicant’s case that the letter imposed an obligation on the respondent, as one of the group’s secured creditors, to accept a particular restructuring option, referred to as “Option 1”.  There were various grounds advanced in support of that construction of the respondent’s contractual obligation, including the inter-relationship of a guarantee given by the applicant to the respondent at the time of the execution of the letter.

4.  On the other hand, it was the respondent bank’s position that it was not obliged to accept Option 1 due to changes in the debt restructuring proposal set out in the letter, referred to in the courts below as the “2002 DRP”.  It was the respondent’s case that the later changes to the original debt restricting proposal, which also involved other creditors of the group, resulted in another option, called the “Additional Option”, being available to it to choose.

5.  The trial judge (Ng J) rejected the respondent’s contentions and held in favour of the applicant’s contractual claim and awarded him damages of HK$51,719,000.[1]

6.  On appeal, the respondent bank challenged the trial judge’s construction of the letter and argued that, properly construed, the letter only imposed an obligation on it to choose Option 1 where there were only the two options under the 2002 DRP for it to choose from at the time of the letter.  It was the respondent’s case that, if (as occurred) there was a change of circumstances so that the Additional Option became available to the financial creditors, then that option should also become available to the respondent to choose in preference to Option 1. This argument was advanced as a matter of construction or implied term.

7.  The Court of Appeal (Lam VP, Cheung and Barma JJA) agreed with the respondent and upheld its argument as a matter of construction of the letter.  Particular emphasis was placed on the fact that the letter referred specifically to the 2002 DRP (which contained only 2 options) and to its continued existence.  This could be said to be the underlying assumption or basis made in the contract.  Once this assumption or basis was changed by the availability of the Additional Option, the 2002 DRP changed in a material way and accordingly the respondent bank could not be held to its original obligation.  It therefore set aside the judgment entered in favour of the applicant.[2]

8.  The applicant seeks leave to appeal suggesting that two questions of great general or public importance are involved in the appeal, namely:

“(1) Whether it is necessary for a pleader to plead all the legal consequences to which the pleaded facts validly lead, with the effect that the parties would be barred from contending different legal consequences on appeal?

(2) What is the correct approach of the Court in determining the commercial background and purpose and evaluating its relevance in the construction of a contract?”

9.  We were not persuaded that Question 1 is reasonably arguable.  The rules of pleading are set out in the Rules of the High Court[3] and parties are protected against being taken by surprise on appeal by points of law not raised below by the well-established practice laid down in Flywin Co. Ltd. v Strong & Associates Ltd.[4]  There is no requirement in the RHC for a party to plead the legal consequences of particular facts[5] and the rules are permissive as to the raising of points of law in pleadings.  That this represents the present position is confirmed by its endorsement by the Chief Justice’s Working Party on Civil Justice Reform.[6]

10.  As regards the applicant’s reliance on the obiter dictum of Yuen JA in Mui So Bing v Wan Chi Shing,[7] this was not, as we read it, suggesting a rigid requirement to plead legal consequences flowing from the pleaded facts.  Instead, that dictum is to be understood in the context of that particular case where the plaintiff had pleaded a specific legal consequence (resulting trust) “and nothing else”,[8] so that when, on appeal, the plaintiff then sought to assert an alternative legal consequence (and therefore one inconsistent with the only consequence pleaded), it necessarily took the other side, and the court, by surprise.

11.  In any event, underlying the applicant’s case that Question 1 above is involved in the appeal is the contention that, as a matter of fact, the respondent did not plead that, as a matter of construction of the letter, that it was not in breach of contract because the 2002 DRP had not materialised. 

12.  This, however, does not appear to be correct since the respondent’s pleaded case does assert that its obligation to accept Option 1, if binding, ceased to apply because an option for the group’s restructuring other than those offered in the 2002 DRP was offered by the group to its financial creditors.[9] Although that pleading did pray in aid other legal contentions in support, the underlying contention that the difference between the 2002 DRP and the ultimate debt restructuring agreement reached released the respondent from the obligation of accepting Option 1 was pleaded.  Moreover, and in any event, the respondent’s case as to the construction of the letter was expressly raised in its Notice of Appeal and the arguments leading to the Court of Appeal’s decision as to the proper construction of that letter were advanced without objection by the applicant, who could not reasonably claim to have been taken by surprise by the point.

13.  Question 2 does not, in our view, raise a question of great general or public importance.  It is a well-established principle that a court will take into account the commercial background and purpose of a transaction when construing a contract and this is not a principle that requires any clarification.  When a court undertakes that exercise and reaches a view as to the meaning of a particular contract in the light of its commercial background and purpose, it is necessarily reaching a decision which is fact sensitive.

14.  In the present case, the Court of Appeal took the commercial background and purpose of the letter into account and concluded that, because of the specific and narrow definition of the 2002 DRP in the letter, the respondent’s obligation to accept Option 1 would only arise on approval and implementation of that 2002 DRP.  In so concluding, the Court of Appeal construed the language of the letter in its context but also took into account the commercial acceptability of Option 1 compared to different alternative options as well as the significance of the applicant’s personal guarantee and the argument that the letter and guarantee were to be treated as “a bundled deal”.  We were not persuaded that, in reaching its conclusion, the Court of Appeal has applied any wrong principle or approach and there is no need for this Court to answer Question 2.

15.  The applicant also sought leave to appeal on the “or otherwise” basis but, as has been consistently held, the grant of leave to appeal to this Court on that basis is “an exceptional course”.[10]

16.  In advancing the application for leave to appeal on the “or otherwise” basis, the applicant was essentially seeking to contest the correctness of the Court of Appeal’s conclusion regarding the proper construction of the letter and to invite this Court to reinstate the trial judge’s contrary construction.  Thus, it was contended that the Court of Appeal’s construction of the letter was plainly wrong for a variety of reasons, including the arguments that it produces a commercially absurd result, was not pleaded, and is a construction arrived at without reference to other provisions of the letter.

17.  Save in exceptional circumstances, that is not an exercise which this Court will undertake.  Notwithstanding the arguments advanced on behalf of the applicant by Mr Jat Sew Tong SC,[11] we are not persuaded that the present case is so exceptional as to justify the grant of leave on this basis.  The Court of Appeal applied the law correctly and arrived at a conclusion as to the proper construction of the letter.  We are not satisfied that there is any exceptional reason to justify this Court undertaking the construction exercise for a third time.

18.  For these reasons, we dismissed the application for leave to appeal, with costs.