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

HCA 409/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 409 OF 2005

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J U D G M E N T

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Introduction

1. This is a dispute concerning the legal effect, if any, of a letter dated 16 October 2002 (“Letter”) signed by the Plaintiff (“Mr Lo”) and countersigned by the Defendant (“Bank”).

2. Mr Lo is a prominent local businessman. He is and at all material times was the chairman and ultimate majority shareholder of three related companies listed on the Hong Kong Stock Exchange:

(1)  Century City International Holdings Limited (“CC”) at the top;

(2)  Paliburg Holdings Limited (“Paliburg”) in the middle; and

(3)  Regal Hotels International Holdings Limited (“Regal”) at the bottom.

3. CC and its group of subsidiary companies (collectively “Group”) were badly affected by the Asian financial crisis. Since late 1998, the Group had entered into debt restructuring negotiations with their financial creditors, including the Bank.

4. The Letter was executed by the two parties shortly after the presentation of a debt restructuring proposal dated 7 October 2002 (“2002 DRP”) to the Group’s financial creditors. At the time of the 2002 DRP, the total indebtedness of the Group was in the region of HK$1.5 billion, of which HK$1.1 billion were owed to secured creditors including the Bank. The 2002 DRP offered two options to these secured creditors known as “Option 1”, the mechanics of which will be explained later in this judgment, and “Option 2” [1] which is irrelevant for present purposes.

5. The opening paragraphs of the Letter state:

“I refer to the personal guarantee to be given by me (the “Guarantor”) in the form attached (the “Guarantee”).

As referred to in the Guarantee, Century City presented a debt restructuring proposal on 7 October 2002 to its financial creditors (“Debt Restructuring Proposal”).

….

1. International Bank of Asia Limited (the “Lender”) in principle will, subject to execution of formal documentation to the satisfaction of the Lender, accept Option 1 in respect of the Secured Debt and Option I in respect of the Unsecured Debt under the Debt Restructuring Proposal…” (emphasis added)

6. The personal guarantee referred to in the Letter (“Guarantee”) was also dated 16 October 2002 and was executed by Mr Lo in favour of the Bank at about the same time as the Letter. As recited in the Guarantee, HK$228 million were outstanding under term loans granted by the Bank in 1998 (“Loans”) to two companies within the Group. The Loans were secured by CC’s guarantee. It is common ground that the Loans were also secured by 370.1 million Paliburg shares pledged with the Bank. By the Guarantee, Mr Lo personally guaranteed the repayment of the Loans, but limited to HK$37.01 million plus interest.

7. As things turned out, the 2002 DRP went through a number of revisions and the debt restructuring exercise was only completed in late 2004. Meanwhile, in May 2004, the Group dropped Option 2 from its debt restructuring proposal owing to lack of interest from creditors. In September 2004, the Group offered, in addition to Option 1, what is called the “Additional Option”[2] to secured creditors except for those with “settled arrangements”. The gist of this Additional Option is that a secured creditor would “purchase” the Paliburg shares pledged with it at the agreed price of HK$0.13 per share and the debt to that creditor would be reduced by the “purchase” price accordingly.

8. On 28 September 2004, the Bank informed the Group that it had decided to elect the Additional Option instead of Option 1.

9. Two days later, on 30 September 2004, the Bank, along with other creditors, entered into one composite written debt restructuring agreement with the Group (“Debt Restructuring Agreement”). This lengthy document set out both Option 1 and the Additional Option for the creditors to choose.

10. In line with its earlier indication, the Bank elected the Additional Option of “purchasing” the 370.1 million Paliburg shares at HK$0.13.  Mr Lo regarded this election on the part of the Bank a breach of the agreement contained in the Letter.

11. On 9 March 2005, Mr Lo issued the Writ of Summons herein claiming specific performance alternatively damages. At the commencement of this trial, Counsel for Mr Lo indicated that he would opt for damages from the Bank.

The Parties’ case

12. Mr Lo’s primary case is straightforward. He contends the legal effect of the Letter is that, in consideration of his giving the Guarantee in favour of the Bank, the Bank irrevocably committed itself to elect Option 1.

At this junction, it may be pertinent to explain the mechanics of Option 1 and its practical effect on the Group, the Bank and Mr Lo.

13. Under Option 1, the following arrangement would replace the existing loans from financial creditors to the Group:

(1)  A secured creditor would advance to the Group a two‑year term loan (“Restructured Loan”) equivalent to HK$0.1 per Paliburg share then held by the creditor as security for the existing loan.

(2)  The Restructured Loan would be secured by the Paliburg shares then held by the creditor plus a top-up security of 1.5 Paliburg shares for each such Paliburg share (“Top‑up Security”).

(3)  The secured creditor would also receive two‑year exchangeable notes (“Exchangeable Notes”) equivalent in value to HK$0.1 per Paliburg share then held by the creditor.  The Exchangeable Notes would be exchangeable for Paliburg shares upon maturity at HK$0.25 per share.

(4)  The Restructured Loan would contain a cancellation option (“Cancellation Option”) which would allow the secured creditor to retain the Paliburg shares originally pledged (but not the Top-Up Security) in extinguishing the Restructured Loan upon its maturity.

14. Specifically as between the Bank and the Group, its election of Option 1 would entail the following:

(1)  The Bank would grant a Restructured Loan in the sum of HK$37.01 million, secured by the 370.1 million Paliburg shares already pledged to the Bank, plus 555.15 million Paliburg shares as Top-Up Security.

(2)  The Bank would receive Exchangeable Notes in the principal amount of HK$37.01 million, exchangeable into 148.04 million Paliburg shares upon maturity ie after 2 years, at HK$0.25 per share.

(3)  Upon maturity of the Restructured Loan ie after 2 years, the Bank would have the right to demand full repayment and release all securities upon payment or exercise the Cancellation Option by retaining the 370.1 million Paliburg shares in cancellation of the Restructured Loan.

15. However, as between the Bank and Mr Lo, the Bank’s election of Option 1 would have the following consequences:

(1)  Pursuant to Clause 3 of the Letter, Mr Lo would have the right to purchase the Restructured Loan within two years at a price equal to (i) its principal amount ie HK$37.01 million and (ii) all unpaid accrued interest.

(2)  Pursuant to Clause 4 of the Letter, upon completion of the purchase of the Restructured Loan in full in accordance with Clause 3, the Bank would assign to Mr Lo the 370.1 million Paliburg shares together with 50% of the Exchangeable Notes (which would be exchangeable into another 74.02 million Paliburg shares at the price of HK$18.505 million ie HK$0.25 per share).

16. By reason of the aforesaid, Mr Lo contends that, on the basis of the Bank’s election of Option 1, it gave Mr Lo the right to acquire the 370.1 million Paliburg shares and 50% of the Exchangeable Notes [3] by purchasing the Restructured Loan from the Bank. On the other hand, by electing the Additional Option, the Bank simply “purchased” the 370.1 million Paliburg shares at HK$0.13 in reduction of the Group’s debt. The Bank could then convert the balance of the outstanding amount due (which would be unsecured) into CC Convertible Preference Shares, pursuant to an option available to it as one of the Group’s unsecured creditors.

17. Mr Lo’s fallback position is that, in the event the Letter is held not to constitute a legally binding contract or contain any legally binding obligation, the doctrine of estoppel by convention (“Estoppel Point”) applies in that:

(1)  Both Mr Lo and the Bank have all along acted on the common assumption that the Letter was legally valid and binding. 

(2)  Mr Lo would inevitably suffer detriment if the Bank was allowed to resile from that common assumption since, on the basis of that common assumption, Mr Lo has (i) not taken steps to seek the Bank’s confirmation of its intention to abide by the terms of the Letter and (ii) not purchased Paliburg shares in the stock market when prices were low. 

(3)  It would be unjust and unconscionable to allow the Bank to deny or otherwise dispute the existence of a legally binding contract between them.

18. In its Re-amended Defence, the Bank disputes liability to Mr Lo on a number of grounds, the central theme of which is either (i) the Letter did not constitute a legally binding contract (or contain any legally binding obligation) or (ii) it ceased to be legally binding upon the failure of certain implied conditions subsequent. 

19. First, there was no intention to create legally binding relationship (“No Intention Point”).

20. Second, there was no consideration for the Letter (“No Consideration Point”).

21. Third, an implied condition subsequent that there should be no significant alteration of the options in the 2002 DRP has failed (“Material Alteration Point”).

22. Fourth, an implied condition subsequent (“DRP Implied Condition”) that no further option(s) other than those contained in the 2002 DRP would be offered to the financial creditors and that all financial creditors would accept one of the options in the 2002 DRP has failed “Additional Option/Equal Treatment Point”. 

23. Fifth, an implied condition subsequent (“Timing Implied Condition”) that the Group’s restructuring exercise would take place within a reasonable time from 16 October 2002 has failed (“Reasonable Time Point”).[4]

24. Lastly[5], Clause 1 of the Letter was expressly conditional upon the execution of formal documentation to the satisfaction of the Bank. As the Debt Restructuring Agreement failed to embody the two options under the 2002 DRP but contained the Additional Option, the Bank was dissatisfied with the documentation and was under no obligation to elect Option 1 (“Dissatisfaction Point”).

25. On the first day of trial, Mr Smith SC, entirely properly in my view, indicated that the Bank no longer relied on the “No Consideration Point” and the “Material Alteration Point”.As summarized and refined in paragraphs 4 to 6 of Mr Smith SC’s opening, the Bank’s main focus has shifted to the Dissatisfaction Point, the Additional Option/Equal Treatment Point and the Reasonable Time Point. The Bank argues that since the Debt Restructuring Agreement contained a completely new option ie Additional Option which was not present in the 2002 DRP, it was dissatisfied with the documentation and was under no obligation to elect Option 1. Further, by reason of the non-fulfilment of the two implied terms, it was no longer under any obligation to elect Option 1 by September 2004.

The Commercial Background

26. The Letter, the Guarantee and other contemporaneous documents were prepared and executed by the parties against the backdrop of lengthy debt restructuring negotiations between the Group and their financial creditors, including the Bank, since late 1998, threats of legal action by inter alia the Bank since 2001 and a commercial transaction entered into by Paliburg in 2002 known as the “Paliburg Acquisition”. The Paliburg Acquisition featured prominently in the negotiations between the Group, Mr Lo and the Bank in the months leading up to the signing of the Letter in October 2002. Fortunately, while the commercial background is complex, it is well‑documented and is largely not in dispute. As both parties emphasise the importance of not just the actual wording used, but also the context and the commercial background against which the Letter was signed: Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896; Jumbo King Ltd v Faithful Properties (1999) 2 HKCFAR 279; Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, it would be necessary to delve into the context and commercial background in some detail.

27. In the course of the restructuring negotiations with financial creditors, the Group had entered into a number of standstill agreements under which the financial creditors agreed to refrain from enforcing their security over the Group’s assets while the arrangement remained in place. The last of the standstill agreements expired on 30 June 2001. In July 2001, the Bank gave notice to CC of its intention to take recovery action. In September 2001, the Bank served a demand for repayment of the Loans. No legal action was however taken.

28. Meanwhile, Deloitte Touche Tohmatsu (“Deloitte”), appointed by the Group to advise on debt restructuring, conducted an independent financial review and presented debt restructuring proposals to financial creditors at various times in 2002. As revealed in Deloitte’s “Independent Financial Review” dated 11 January 2002 (“Review”), while the Group were the majority shareholder of Paliburg, most of the Group’s Paliburg shares had already been pledged to financial creditors. At the same time, Paliburg itself was also in financial difficulties.  At the end of 2001, Paliburg defaulted in redeeming two series of bonds amounting to over HK$3.6 billion. The Review contained inter alia a proposal for settlement with the Paliburg Bondholders involving the transfer of Paliburg’s assets and the issue of new Paliburg shares to them in exchange for the cancellation of the bonds.

29. On 2 August 2002, a Joint Announcement by CC, Paliburg and Regal (“Joint Announcement”) revealed that Paliburg had entered into an agreement with three vendors (“Vendors”) for the acquisition (“Paliburg Acquisition”) of the entire share capital of Venture Perfect Investments Limited (“VPI”), an information technology company. In return, Paliburg would issue 3,450 million to 4,750 million convertible preference shares (“Paliburg Convertible Preference Shares”) to the Vendors. The Joint Announcement also revealed that, on the same day, CC had entered into a share swap agreement with the Vendors (“Share Swap”).

30. The commercial justification of the Paliburg Acquisition was that, given VPI’s information technology business and cash reserve of HK$70 million, the Paliburg Acquisition benefited Paliburg not only by widening its business portfolio but also by enhancing its cash position.

31. As revealed in the Joint Announcement, the Vendors were all connected persons of CC and Paliburg: (i) Grand Modern Investments Limited was effectively owned as to approximately 81.7% by Mr Lo and 3.3% by the Group; (ii) Select Wise Holdings Limited was effectively owned as to 60% by the daughter of Mr Lo; and (iii) 100% of Splendid All Holdings Limited was held by Mr Lo as trustee.

32. Hence, the Paliburg Acquisition constituted a connected transaction for CC and Paliburg and approval of their independent shareholders was required for the completion of the Paliburg Acquisition. Similarly, the Share Swap also constituted a connection transaction of CC. On 26 August 2002, a notice of special general meeting (“SGM”) of Paliburg was circulated for the meeting to be held on 18 September 2002. An important item on the agenda was to consider and approve the Paliburg Acquisition.

33. If the Paliburg Acquisition were completed, and upon the full conversion of the Paliburg Convertible Preference Shares by the Vendors, CC’s holding in Paliburg would be significantly diluted, from 59.2% to possibly as low as 19.4%. In consequence, the value of the Paliburg shares pledged with financial creditors, including the Bank, would also be heavily diluted. The Vendors would become the majority shareholders of Paliburg.

34. The Bank strongly objected to the Paliburg Acquisition, primarily due to its dilutive effect. This is reflected in the Bank’s internal memo of 7 August 2002. 

35. On 2 September 2002, the Bank wrote to CC expressing without reservation its strong objection to the Paliburg Acquisition on the basis inter alia that it would adversely affect the Bank’s interest as pledgee of the Paliburg shares. It also threatened to wind up CC.

36. Since the Bank, as pledgee, controlled about 16% of all Paliburg issued shares, it was in a very position to block the resolution for approving the Paliburg Acquisition. This was reflected by the fact the poll demanded for inter alia the resolution on the Paliburg Acquisition was deferred from 18 September 2002 to 2 October 2002. It was further deferred to 16 October 2002.

37. Meanwhile, Mr Lo engaged in continuous negotiations with the Bank to persuade it to let the Paliburg Acquisition to go through, the details of which need not be gone into, save that in the course of such negotiations, the Bank requested Mr Lo should give his personal guarantee in respect of the Loans by letter dated 11 September 2002. On 16 September 2002, the Bank held a meeting with Mr Lo in which the Bank’s request for a personal guarantee was reiterated. The request for a personal guarantee was again reiterated in a letter dated 25 September 2002 to CC and a letter dated 27 September 2002 to Deloitte.

38. In response to the Bank’s request for his personal guarantee, Mr Lo made it clear to the Bank that he would only be prepared to give a personal guarantee for about HK$37 million on condition inter alia that the Bank would give Mr Lo “a call option to buy back the Paliburg shares (existing and top-up) for HK$37 million plus interest”. This is reflected in the Bank’s internal email dated 16 September 2002 and a letter dated 17 September 2002 from CC to the Bank.

39. On or about 7 October 2002, Deloitte presented the 2002 DRP to all the financial creditors for their consideration.

40. By letter dated 8 October 2002 to the Bank, CC put forward a proposal based on Option 1, under which Mr Lo would offer a personal guarantee with a “Guarantor’s Call Option” in the following terms:

“The Guarantor will have the right, at any time during the two‑year period … to require [Bank] to transfer and/or sell to the Guarantor … (i) part or all of the Secured 2 Year Loan [ie HK$37.01 million], at its face amount (together with accrued interest, if any), together with a pro-rata portion of the underlying security as collateral and the Exchangeable Note …”

41. In a meeting held on 10 October 2002, Mr Lo agreed that under the “Guarantor’s Call Option”, the Bank could keep 50% of the Exchangeable Notes.

42. Against the above backdrop, between 10 October 2002 and 16 October 2002, the parties’ legal advisers viz Linklaters and Clifford Chance, prepared documentation to set out the terms of Mr Lo’s personal guarantee and the call option. 

43. Eventually, the Letter and the Guarantee[6] were executed by Mr Lo and the Bank.

The Issues

44. The principal issues which call for adjudication are:

(1)  Whether the Letter constituted a legally binding agreement between Mr Lo and the Bank (“Issue 1”).

(2)  The proper construction of the Letter, particularly Clause 1 (“Issue 2”).

(3)  The Dissatisfaction Point - whether, for the purpose of Clause 1, the Bank was not satisfied with the formal documentation ie the Debt Restructuring Agreement so that the obligation to elect Option 1 was not triggered (“Issue 3”). 

(4)  The Additional Option/Equal Treatment Point – Whether the Letter ceased to be legally binding by reason of the DRP Implied Condition not being satisfied (“Issue 4”).

(5)  The Reasonable Time Point - Whether the Letter ceased to be legally binding by reason of the Timing Implied Condition not being satisfied (“Issue 5”).

(6)  The “Estoppel Point” (“Issue 6”).

(7)  Assessment of damages (“Issue 7”). This will involve the Court deciding the correct basis of assessment: value of the Shares or value of the Right.

45. In view of the issues identified by the parties’ written submissions and the extensive documentary evidence available, the scope of factual disputes is limited and credibility of witnesses is not a significant factor in resolving such factual disputes as are present. Nevertheless, this court has carefully considered the testimony, as well as the demeanour, of all witnesses, and assessed it against the documentary evidence and the known and undisputed surrounding circumstances of this case.  In so far as may be necessary, this court’s factual findings will involve a consideration of the credibility of witnesses. But mostly, the facts set out herein are this court’s findings of fact based on the contemporaneous documents or those which are not in dispute.

Issue 1 – whether the Letter is legally binding

46. Before I examine the evidence more closely, it would assist if I direct myself on the relevant legal principles.

47. The starting point is that parties reaching an express agreement of a commercial character are presumed to intend it to have legal effect, unless the contrary is shown.  The onus of proving that there was no such intention is on the party who asserts that no legal effect is intended, and the onus is a heavy one.  In deciding whether the onus has been discharged, the court will be influenced by the importance of the agreement to the parties, and by the fact that one of them acted in reliance on it: New World Development Co Ltd v Sun Hung Kai Securities Ltd (2006) 9 HKCFAR 403 at [14].

48. In ascertaining the parties’ intention, the court applies an objective test. Even if the words used may be indicative of the agreement being non-binding, such descriptions should by no means be given decisive weight.  Not only must the text be fully examined, but one must also look at the entire relevant circumstances, to determine whether the provisions in question were intended to have contractual force: Chong Cheng Lin Courtney v Cathay Pacific Airways Ltd [2011] 1 HKLRD 10.

49. In my judgment, the Bank has failed to discharge the onus of proving the parties did not intend the Letter to be legally binding. On the contrary, it is clear from the objective surrounding circumstances that the Letter, which was executed together with the Guarantee[7] as a package, was intended to be legally binding. 

50. In this regard, I consider the following objective circumstances to be important.

51. First and foremost, the three documents ie the Letter, the Guarantee and the Grand Modern Undertaking, all dated 16 October 2002, were executed by the parties as one integral deal. While it is theoretically possible that parties can intend some documents of a deal to be legally binding while others to be not, they have to make their intention very clear in order to achieve that effect.

52. In this regard, the parties have engaged highly reputable law firms to prepare, revise and finalise the Guarantee, the Letter and other legal documentation as a package deal. Save for the Letter, no one suggests the other documentation was not intended to be legally binding. Had the parties intended the Letter to be a non-binding statement of present intention only, their lawyers would have no difficulty in saying so expressly in the Letter itself to ensure that no legal obligation would arise from it. But that is not what the Letter says.  Quite on the contrary, the language of the Letter as a whole indicates that it was intended to have legal effect – the Letter even contained a governing law clause in Clause 6.

53. Second, an internal memo dated 7 August 2002 showed that, while the Bank was concerned with the Paliburg Acquisition’s dilution effect on the Paliburg shares it held as security, it also saw this as an opportunity to extract a personal guarantee from Mr Lo, given its ability to block the Paliburg Acquisition with its voting rights.  It was noted in an internal memo dated 12 October 2002 that “Michael [Ipson] commented [the Bank] had apparently pushed YS Lo as far as [it] could. YS Lo would be personally on the hook through the guarantee. The meeting agreed this is the best alternative available”. In another internal memo dated 29 November 2002, it was stated that it was a “major step forward ” for the Bank to obtain the Guarantee since Mr Lo had refused to give it to financial creditors in previous negotiations.

54. At first, the Bank demanded, inter alia,that Mr Lo should give a personal guarantee for the entire Loans. In reply, Mr Lo insisted that he was only prepared to guarantee up to HK$37 million and he must be given a “call option” to buy back the Paliburg shares held by the Bank: see Bank’s internal email dated 16 September 2002; letter dated 17 September 2002 from CC to Bank; Letter dated 8 October 2002 from CC to Bank. Mr Franklin Lam accepted that from 16 September 2002 onwards, Mr Lo made it very clear in the negotiations that he would only be prepared to give a personal guarantee if he was given the “call option”.  Mr Ipson admitted that he knew that Mr Lo regarded the “call option” as critical and that the Guarantee and the “call option” were interlinked parts of the same transaction: see Bank’s 2^nd internal memo dated 7 October 2002.

55. Third, while it is true that Clause 1 of the Letter uses phrases like “in principle” and “subject to execution of formal documentation to the satisfaction of the [Bank]”, an agreement is not incomplete merely because it calls for some further agreement between the parties. Commercial agreements are often intended to be binding in principle even though the parties are not at the time able or willing to settle all the details.  Once they have reached substantial agreement, it is not fatal that some points, even important ones, remain to be settled by further negotiation: Chitty on Contracts 31^st Ed. Vol. 1 at paras. 2-129 & 2-130.

56. By way of illustration, it was held in Beta Investments SA v Transmedia Europe Inc [2003] EWHC 3066 at [43], that the mere use of the words “subject to more complete documentation” did not prevent the agreement in question from having binding effect if overall it was clear that was so intended. In this regard, this court accepts Mr Jat SC’s submission that the language of Clause 1 only emphasised the formal restructuring agreement to be executed by Group and the financial creditors should be acceptable to the Bank [8] but it did not mean that the Letter was merely a non-binding letter of present intent.

57. To conclude, looking at the matter objectively against the commercial reality at the time, it is my firm view that the Letter was intended to be legally binding and I shall so find. 

Issues 2 & 3 – Construction of Clause 1 and the Dissatisfaction Point

58. These two issues can conveniently be considered together.

59. Just to recap, Clause 1 is in these terms:

“1.  International Bank of Asia Limited (the “Lender”) in principle will, subject to execution of formal documentation to the satisfaction of the Lender, accept Option 1 in respect of the Secured Debt and Option I in respect of the Unsecured Debt under the Debt Restructuring Proposal…”  (emphasis added)

60. Mr Smith SC refers this court to a line of authorities on the proper construction of clauses similar to Clause 1 of the Letter ie clauses imposing obligations which are conditional upon one party to the contract being satisfied with certain matters. I need only refer to three: North Shore Demolitions Ltd v McKay [1978] 1 NZLR 454;Meehan v Jones (1982) 42 ALR 463; Pacific Dunlop Garments Ltd v Fundamental Global Ltd [2014] 6 HKC 339. The general effect of these authorities is that in construing such clauses, the court should apply a subjective test to the issue of whether that party to the contract is or is not satisfied with the matters which by definition require his satisfaction. In my respectful view, these authorities are good illustrations of the well-established principle of construction of contract that effect must be given to the clear wording of the provision that one is concerned with.

61. In Meehan v Jones (1982) 42 ALR 463, the High Court of Australia considered an agreement for sale and purchase of land which stipulated a special condition that the purchaser received “approval for finance on satisfactory terms and conditions”. At p 469, Gibbs CJ explained the purpose and effect of such a condition as follows:

“Such a condition is generally entirely for the protection of the purchaser, and it is the satisfaction of the purchaser, not that of some hypothetical reasonable man, that will satisfy the condition. No doubt it may be implied that the purchaser will act honestly in deciding whether or not he is satisfied. ”

62. At p 475-6, Mason J (as he then was), while agreeing the test is subjective, elaborated on what should be implied into the contract in order to safeguard against that party acting capriciously or turning a binding, albeit conditional, obligation into a mere option:

“The primary object of the condition being the protection of the purchaser, it is sensible to treat it as stipulating for finance that is satisfactory to the purchaser or his nominee, subject to an implied obligation that he will act honestly, or honestly and reasonably, in deciding whether to accept or reject proposals for finance.

  ….

To say that a “subject to finance” or “subject to finance on satisfactory terms and conditions” clause denotes finance which is satisfactory to the purchaser is not to say that he has an absolute or unfettered right to decide what is satisfactory. To concede such a right would certainly serve the object of the clause in protecting him. But it would do so at the expense of the legitimate expectations of the vendor by enabling the purchaser to escape from the contract on a mere declaration that he could not obtain suitable finance. With some justification the vendor can claim that the agreement made by the parties is not an option but a binding contract which relieves the purchaser from performance only in the event that, acting honestly, or honestly and reasonably, he is unable to obtain suitable finance.

  ….

The judgment of the purchaser as to what constitutes finance on satisfactory terms is not an unfettered discretion – it must be reached honestly, or honestly and reasonably.”

63. Adopting the subjective test is only the beginning, rather the end, of the court’s task in construing Clause 1. The next and more important question is what are the matters which the Bank must be dissatisfied with in order to avoid the obligation of electing Option 1.

64. On this crucial issue, this court has no doubt that Mr Jat SC’s construction of Clause 1 is correct. In a nutshell, he submits that what the Bank had agreed under Clause 1 was this: provided the “formal documentation” implementing the 2002 DRP contained Option 1 and was in a form satisfactory to the Bank, it was obliged to elect Option 1. Conversely, the Bank would not be obliged to elect Option 1 if, but only if, it was genuinely dissatisfied with the documentation, as opposed to any other reason such as commercial considerations.

65. It seems to this court this construction of Clause 1 must be the correct one, for a number of reasons.

66. First, this construction best accords with the commercial purpose of the transaction the parties intended to achieve. By the “bundled deal” negotiated in 2002, the Bank agreed in principle to elect Option 1 if it was implemented in the eventual and formal Debt Restructuring Agreement in a form satisfactory to the Bank. In this way, the Bank would immediately get the additional security ie the Guarantee it desired from Mr Lo, and Mr Lo would in principle get his “call option” if Option 1 was contained in the Debt Restructuring Agreement to be executed.

67. Second, some meaning has to be given to the words “subject to the execution of formal documentation” to the satisfaction of the Bank. What those words mean is that what the Bank had to be dissatisfied with in order to avoid electing Option 1 is the “formal documentation” it was asked to execute. If the Bank’s obligation to elect Option 1 was subject to its satisfaction in the general sense, there would be no need to add the words “execution of formal documentation” before the words “to the satisfaction of [the Bank] ”. In other words, Clause 1 can simply read “subject to the Bank’s satisfaction, it will elect Option 1.”

68. Third, the Bank’s construction of Clause 1 in effect gave it a discretion to decide whether to elect Option 1 or the Additional Option, provided that it had honestly considered the matter and reached an honest decision. In other words, the Bank’s construction of Clause 1 turned an in principle binding agreement to elect Option 1 into a mere option to consider and if honestly thought fit elect it or reject it. This is exactly the sort of mischief Mason J discussed and sought to avoid in Meehan v Jones.

69. Once the meaning of Clause 1 is properly understood, the Dissatisfaction Point can be disposed of quickly.

70. As Mr Jat SC submits, there is no evidence that the Bank made any decision, let alone a bona fide decision, that the “formal documentation” i.e. the Debt Restructuring Agreement was not to its satisfaction. In my view, quite on the contrary, the Bank was clearly satisfied with the “formal documentation” as contained in the Debt Restructuring Agreement by signing on it, along with other creditors. That lengthy document contained both Option 1 and the Additional Option for the creditors to choose. This court was told, in the course of Mr Jat SC’s oral closing submissions, that at least Bank of China chose Option 1. The Bank, in accordance with its own commercial considerations, chose the Additional Option instead.

71. Mr Franklin Lam’s Supplemental Witness at paragraph 4 stated that the Bank chose the Additional Option “in view of the improved property and hotel industries, the substantial upside in choosing [the same] if the share price of Paliburg stayed at around the then prevailing level, and the relatively short lock-up period of three months”. None of these factors had anything to do with “formal documentation”. 

72. In cross-examination, Mr Franklin Lam[9] accepted that the decision to elect the Additional Option was one based on commercial considerations.  As the person endorsing the Bank’s internal memo dated 22 September 2004, Mr Franklin Lam obviously understood that the Bank’s decision to elect the Additional Option had nothing to do with “formal documentation”.

73. It seems to this court clear as daylight that the Bank chose the Additional Option not because of any dissatisfaction with the documentation, but for an altogether different reason, ie its own commercial calculation. To its credit, the Bank admits as much in the Supplemental Witness Statement of Mr Franklin Lam and paragraph 35 of its Closing Submissions. There is no and there cannot be any suggestion that in so doing, the Bank was acting mala fides. This court has no doubt the Bank was acting honestly in its best commercial interest in rejecting Option 1 and electing the Additional Option. The question is whether it was legally entitled to do so. For the reasons stated above, the answer is no.

Issue 4 – The Additional Option/Equal Treatment Point

74. In my view, the Bank fails to establish the existence of the DRP Implied Condition. It naturally follows that the Bank must fail in establishing there was a failure of this implied condition subsequent.

75. In Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381, 391J-392B, the Court of Final Appeal, adopting the approach of the majority decision in BP Refinery (Westernpoint) Pty Ltd v Shire of Hastings(1978) 52 ALJR 20 at 26, held that in order for a term to be implied into a contract, the following conditions must be satisfied:

(1)  it must be reasonable and equitable;

(2)  it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3)  it must be so obvious that “it goes without saying”;

(4)  it must be capable of clear expression;

(5)  it must not contradict any express term of the contract.

76. On the Bank’s case, the DRP Implied Condition should be implied into the Letter because Mr Lo and the Bank must have expected that the Bank would insist upon equal treatment along with other secured creditors in the Debt Restructuring Agreement. Hence, if the Additional Option was available to other financial creditors, the Bank would insist that this option should also be available to it.

77. The Bank’s contention cannot be accepted.

78. First and foremost, the DRP Implied Condition was not necessary to give business efficacy to the agreement between Mr Lo and the Bank as contained in the Letter.  As held by this court on Issues 2 & 3 above, the agreement between Mr Lo and the Bank, contained in Clause 1 of the Letter, merely obliged the Bank to accept Option 1 on condition that the formal documentation was drafted to its satisfaction. This was perfectly workable whether or not the Debt Restructuring Agreement contained the Additional Option, Option 2 or otherwise. In other words, the Letter would be perfectly effective and workable without the DRP Implied Condition.

79. Second and equally important, this court is not satisfied that the DRP Implied Condition was so obvious that “it goes without saying”. In fact, the opposite should be the case. This is because the Letter and the Guarantee constituted a “bundled deal” which conferred a distinct benefit to the Bank not available to other financial creditors ie Mr Lo’s personal guarantee. The precise point of the “bundled deal” and the expectation of the parties to the Letter was that the Bank was treated differently from other financial creditors. It therefore could not be obvious to the officious bystander that “it goes without saying” the Bank would be treated equally with other financial creditors. Putting it in another way, it could not be obvious to the officious bystander that “it goes without saying” the Bank would have the cake and eat it.

80. Third, Mr Jat SC submits, and this court accepts, that the Bank has failed to distinguish between Mr Lo’s position and the Group’s position. Whether or not the Group intended, in 2002 or otherwise, that all the financial creditors were to be treated equally, that could not be regarded as indicative of Mr Lo’s intention.  As between Mr Lo and the Bank, the Bank was clearly treated differently from the other financial creditors by virtue of the personal guarantee it successfully extracted from him in October 2002.

81. For these reasons, the Bank fails on Issue 4.

Issue 5 – The Reasonable Time Point

82. In my judgment, the Bank fails to establish the existence of the implied condition subsequent relied upon. I stress “condition subsequent ” for a reason which will become apparent later. It also follows that the Bank must fail in establishing there was a failure of it. 

83. The Bank’s closing submissions on this point are protracted but can be summarized as follows for the present purpose.

84. Generally speaking, where a contract does not fix a date for the fulfillment of a condition or the performance of an act, the law requires the condition to be fulfilled or the act performed within a reasonable time. The Bank prays in aid Aberfoyle Plantations Ltd v Cheng [1960] AC 115, 124 at which Lord Jenkins said:

“(i) Where a conditional contract of sale fixes a date for the completion of the sale, then the condition must be fulfilled by that date; (ii) where a conditional contract of sale fixes no date for completion of the sale, then the condition must be fulfilled within a reasonable time.” (emphasis added)

85. The Bank submits it cannot be disputed that its obligation under (Clause 1 of) the Letter was conditional upon the execution of a debt restructuring agreement and Mr Lo cannot conceivably argue there was no time limit on the completion of the debt restructuring exercise. As there was no express time limit for the exercise, the Letter must necessarily impose a deadline for completion of the debt restructuring exercise within a reasonable time. The question what is a reasonable time involves consideration of a wide range of factors but, for various reasons put forward by the Bank, a reasonable time had clearly elapsed by September 2004. Therefore, the Bank’s obligation to elect Option 1 had also expired.

86. With respect, these submissions are unacceptable.

87. First, the Letter does not impose an express obligation on Mr Lo to fulfill a condition or perform an act e.g. to procure the completion the restructuring exercise of the Group. The Group’s restructuring exercise had to be carried out by the Group with the participation (or, better still, cooperation) of their financial creditors. There is also no suggestion that the Letter imposes an implied obligation on Mr Lo to do so in accordance with Kensland Realty Ltd v Whale View Investment Ltd supra.

88. Second, even if it is sought to be argued that the its obligation under (Clause 1 of) the Letter was conditional upon the Group completing the debt restructuring exercise within a reasonable time, the Bank still fails to explain why the Group’s act (or rather default) should be a condition subsequent as opposed to a term (be it a “condition”, “warranty” or an “intermediate” term[10]) of the Letter. Assuming for the sake of argument that the Group’s default can be treated as Mr Lo’s default, Mr Lo’s breach of a term of the Letter may entitle the Bank to elect between accepting the contract as repudiated or affirming it. But it is trite law that there must be an election by the party not in fault before the contract comes to an end[11].

89. In the present case, while all parties wished the Group’s debt restructuring exercise to complete sooner rather than later, both the Bank and Mr Lo knew full well that it could be a drawn out process involving the other financial creditors, and hence the time for completion of the exercise was something beyond the control of Mr Lo or the Group. In these circumstances, this court is not satisfied that it must be necessary to give business efficacy to the Letter or it must be so obvious that “it goes without saying” that completion of the restructuring exercise within a reasonable time is a condition subsequent so that the Letter would automatic lapse after that time.

90. In my view, the Reasonable Time Point is clearly an afterthought. Had the Bank taken the view that the Letter automatically lapsed by virtue of the non-completion of the debt restructuring exercise within a reasonable time, it would surely have raised the point in 2003 or 2004, but at the latest before it signed the Debt Restructuring Agreement on 30 September 2004. But it is clear from the evidence that the Bank never suggested to Mr Lo that Clause 1 of the Letter automatically had lapsed as a result of delay in the restructuring exercise. In fact, the Reasonable Time Point was not even in the original Defence filed in May 2005. The Bank’s in‑house legal counsel Mr Ivan Young[12] was asked about this and, not surprisingly, he could not explain why that was so[13]. 

91. Third, this court is also not persuaded that a reasonable time had elapsed before the signing of the Debt Restructuring Agreement. Although numerous purported factors have been put forward by the Bank, they are no more than ex post facto justifications. The Bank was never able to suggest or explain what a reasonable period should be (after the signing of the Letter) for the debt restructuring exercise to complete. This is again unsurprising given that neither the Bank nor Mr Lo could predict how long the exercise would take. Rather, it asserts, conveniently, that a reasonable time had clearly elapsed by the time the Debt Restructuring Agreement was signed. This is in fact contradicted by the Bank’s internal memo dated 13 April 2004 that it considered the Letter would only expire in October 2004.

92. Of course, the fact that neither the Bank nor Mr Lo could predict how long the debt restructuring exercise would take would not have prevented them from inserting an “expiry” date, so to speak, in the Letter. But they had not. When asked about this in cross-examination, Mr Franklin Lam confirmed it was a conscious decision of the Bank’s senior management that the Letter should not contain an “expiry” date.[14]

93. In these circumstances, this court is not satisfied that the Reasonable Time Point has merits. That answers Issue 5.

Issue 6 – Estoppel Point

94. As indicated in paragraph 90 of Mr Lo’s closing submissions, the Estoppel Point only arises for determination in the event that this court rules in favour of the Bank that the Letter did not create binding legal relationship. In view of this court’s conclusions above, the point does not arise for consideration and no useful purpose will be served for this court to rule on it on the hypothesis that one or more of the above issues were decided in favour of the Bank.

Issue 7 - Damages

Preliminary

95. It is well-established that damages for breach of contract are designed to put the claimant in the position that he would have been in had the contract been performed: Chitty on Contracts  para.26‑021. It is equally well‑established that normally damages should be assessed as at the date of breach, unless it would give rise to injustice – in which case the court has power to fix such other date as it deems appropriate in the circumstances: Chitty on Contractsparas. 26-014 & 26‑086.

96. In the present case, the date of the breach would be 30 September 2004 when the Bank chose the Additional Option instead of Option 1. Mr Lo’s case is that, had the Bank honoured its obligation elected Option 1, he would have been given the right (“Right”) to acquire a total of 444,120,000 Paliburg shares (“Shares”) (370,100,000 Paliburg shares originally pledged plus 74,020,000 Paliburg shares under 50% of the Exchangeable Notes) upon purchasing the Restructured Loan from the Bank by paying HK$37.01 million. Further, if Mr Lo had exercised the Right, the earliest date on which he would have obtained the Shares would be 15 December 2006,[15] which was the maturity date of the Restructured Loan and the Exchangeable Notes. On that date, Mr Lo could have exercised the Cancellation Option to retain the pledged Paliburg shares to extinguish the Restructured Loan and also convert 50% of the Exchangeable Notes into Paliburg shares.

97. In the present case, the parties have put forward two possible ways for the assessment of damages ie Valuation of the Right and Valuation of the Shares.

Valuation of the Right

98. The first alternative is by valuation of the Right. As explained by Mr Lo’s expert:

“26. The premise of value for valuation of the Rights should represent the value that can be sourced from the market hypothetically for the Rights, for the Rights were not granted by [the Bank] to Mr. Lo … This basis is best presented by the definition of fair market value as stated in paragraph 4 [16] above.

27. With the Cancellation Option, holder of the Restructured Loan has the sole discretion in deciding to keep the pledged shares of Paliburg or not. In this connection, taking over the Restructured Loan essentially means the possession of the pledged shares of Paliburg on a known future date. Therefore, the Rights can be regarded as a share call option granted to Mr. Lo by [the Bank] to purchase both the pledged 370,100,000 shares of Paliburg of the Restructured Loan and 74,020,000 shares of Paliburg with a consideration of HK$37,010,000 (i.e. HK$0.10 per share of Paliburg), which is the full principal amount of the Restructured Loan, and any unpaid interest accrued thereon.” (emphasis added)

99. Subject to some immaterial differences, the Bank’s expert agreed with the methodology, assumption and parameters of Mr Lo’s expert. Importantly, both experts agreed that the fair market value of the Right as at 30 September 2004 was HK$51,719,000 and that as at 9 March 2005 was HK$65,307,000.

Valuation of the Shares

100. The second alternative is by Valuation of the Shares ie to take the difference between (a) the value of the Shares and (b) the sum which Mr Lo was required to pay the Bank i.e. HK$37.01 million.

101. As publicly-listed share prices fluctuate over time, this alternative raises an acute issue of when the Shares should be valued.

102. Mr Jat SC submits that the Shares should be valued as at 15 December 2006. On this basis, the damages arrived at by Mr Lo’s expert is HK$125,094,000. On the Bank’s calculation, the damages should only be HK$50,925,760. It did so on the basis that the Shares should be valued as at 30 September 2004. 

103. Mr Lo’s rationale in choosing 15 December 2006 is that was the earliest date on which he could exercise the Right to obtain the Shares. The Bank’s rationale in choosing 30 September 2004 is that was the date of breach and that Mr Lo ought to have purchased the same number of Paliburg shares from the market as soon as he considered, which he did, the Bank had committed a breach of contract.  At this juncture, this court wishes to first resolve the differences between the parties on the valuation methodology.

104. Mr Lo’s expert explained his methodology in these terms:

“51. The premise of value for valuation of the Shares should represent the value that can be realized by owning and holding the Shares as if the Shares were transferred to Mr. Lo after his exercise of the Rights …The said value may or may not require a market for exchange to be realized as the value of a stock can also be realized through receipts of dividend. Hence, this basis is believed to be best presented by the definition of investment value as stated in paragraph 5 above instead of the fair market value where the blockage discount is likely to be present, in the course of an arm’s length transaction of the Shares.

52. With reference to the valuation scope as required under paragraph 2 of the Summons in above paragraph 18, the valuation of the Shares is restricted to the Shares themselves and entitlements directly derived from owning the Shares without any further investment…” (emphasis added)

105. For reasons explained below, this court is not satisfied that the “investment value basis” adopted by Mr Lo’s expert is a proper basis to value the Shares.

106. First, according to paragraph 5 of his report, “investment value” is defined as “the value to a particular investor based on individual investment requirements and expectations” under the ASA Business Valuation Standards. While the Bank’s expert has adopted the International Valuation Standards, the definition of “investment value” is similar:

“Para. 28(b): The second [basis of valuation] is to indicate the benefits that a person or an entity enjoys from ownership of an asset. The value is specific to that person or entity, and may have no relevance to market participants in general. Investment value and special value as defined in these standards fall into this category.” (Emphasis added).”

107. In accordance with the definition, Mr Lo’s expert has taken into account the fact that Mr Lo, as the majority shareholder of Paliburg, had no urgency or immediate need to sell the Shares to realise their value. Further, he emphasised the fact that Mr Lo kept on increasing his shareholding in Paliburg since 2004 and, as a majority shareholder, he could direct the future development of Paliburg.

108. Mr Smith SC submits, and this court accepts, as a matter of law, this methodology is unsuitable for the purpose of assessing contractual damages by reason of the well-established principle that damages are assessed objectively without taking into account circumstances peculiar to a plaintiff.

109. As Lord Esher MR stated in Rodocanachi, Sons & Co. v Milburn Brothers (1886) 18 Q.B.D. 67 at 76-7:

“But what is to be the rule in getting at the value of the goods? If there is no market for such goods, the result must be arrived at by an estimate, by taking the cost of the goods to the shipper and adding to that the estimated profit he would make at the port of destination. If there is a market there is no occasion to have recourse to such a mode of estimating the value; the value will be the market value when the goods ought to have arrived. But the value is to be taken independently of any circumstances peculiar to the plaintiff…”

110. The abovementioned principle was confirmed by the House of Lords in Williams Bros v Ed T Agius Ltd [1914] A.C. 510, in which Lord Dunedin stated at 523 that:

“The general principle is expressed by the learned judges in both cases in identical words. Erle C.J., Willes, Keating, and Montague Smith JJ., in Redmayne's Case say: “The market value of the goods was the value in the market, independently of any circumstances peculiar to the plaintiff (the buyer).” And the very same phrase is used in the counter case of Rodocanachi by Esher M.R. and Lopes L.J. Lindley L.J. says that there is no difference between the two cases.” (Emphasis added.)

111. While the two cases cited by Mr Smith SC are concerned with sale of goods, in principle, the same rule should apply whether the subject matter of the contract is goods or some other property, for instance, a “call option” of listed shares. For this reason alone, the adoption of “investment value” methodology is objectionable in principle.

112. Second, it seems that the explanation of this “investment value” methodology by Mr Lo’s expert is so completely divorced from reality that this court is simply unable to accept it as a matter of principle. 

113. The following exchanges in the morning of Day 7 of trial between Mr Smith SC / Mr Lo’s expert and the bench / Mr Lo’s expert illustrate the point:

“Q. Yes. And therefore surely one would say, when valuing that block of shares on that date, that one needs to apply blockage discount, because there's a huge number of shares which can't be traded all in one go?

A. Well, to my opinion, I don't think so, because one should apply the blockage discount when the lot of shares has to be sold in the market. And for this case, I don't think Mr Lo should have -- should sell the shares in the market in order to realise the value of his shares. Because as referred to the stock price of -- quoted from the stock exchange, that represents the general perception of present value of dividends to be received from holding the shares. So in my opinion, to realise the value of the shares, Mr Lo can just sit back and enjoy the dividends to be received in the future. And in that case, simply by holding shares should not involve any application of the blockage discount.

HIS LORDSHIP: How long do you think Mr Lo would have to sit on 444 million shares in order to accumulate dividends to the value of HK$162 million?

A. Well, to realise the value, Mr Lo would just hold the shares for perpetuity. HIS LORDSHIP: That's why I'm asking you.

A. Yes.

HIS LORDSHIP: No one lives in perpetuity.

A. But that's the present value -- I mean, the expected

value of the shares.” (emphasis added)

114. During his re-examination by Mr Jat SC, Mr Lo’s expert gave further explanation in these terms:

“Q. As to the right, what's the difference between valuating that and valuating the shares?

A. Because for the rights, if one wants to realise the value of the rights, it has to sell in the market, instead of just sitting back. Because there is no dividends and no economic benefits simply by holding the rights.

Q. Is there any other valuation method for valuating the market value of the rights?

A. Sorry?

Q. Is there any other method for valuating the market value of the rights?

A. Yes, there are a couple of methodologies to value the value of rights.

Q. You've chosen the fair market value basis?

A. Yes.

Q. Compare that to the valuation of the shares. I think in my learned friend's cross-examination, you described your method as investment value as opposed to fair market value.

A. Yes.

Q. Can you explain very simply what's the difference between the two?

A. Investment value is the expected value a particular investor would expect by holding the asset. And for the fair market value, it is -- the value represents the value between two, a willing buyer and willing seller, in the open market.

Q. So for fair market value, it necessarily involves an exchange?

A. Yes.

Q. What about for investment value basis?

A. Investment value, it depends on the holder of the asset. And it does not necessarily involve any transactions.

Q. So why, in very simple terms, do you think the investment value basis is more appropriate for the circumstances of this case?

A. Well, given the state of Mr Lo, he can simply -- well, he is the controlling shareholder of the subject company, and he can simply enjoy the dividends by holding the shares.” (emphasis added)

115. From the oral testimony of Mr Lo’s expert, one can see that his methodology in valuing the Shares is based on the assumption that Mr Lo did not have to sell the Shares in the market in order to realize their value - all he had to do was to hold on to them in perpetuity. It may well be that for some commercial purposes e.g. valuing a business for public listing or even for sale by private treaty, the adoption of “investment value” methodology is acceptable. It is not for the present purpose.

116. As no other basis has been suggested by Mr Lo’s expert for valuing the Shares, his quantification of damages must be rejected.

Valuation of Right or Valuation of Shares

117. Mr Jat SC submits that, in the circumstances of this case, Valuation of Shares is the more appropriate basis to compensate Mr Lo. The reasons put forward by Mr Jat SC are these.

118. There is no dispute Paliburg shares have shown a rise in share price from HK$0.198 as at 30 September 2004 to HK$0.365 as at 15 December 2006. There is also no dispute that Mr Lo has been accumulating Paliburg shares after they resumed trading since 11 October 2004.  As a matter of fact, Mr Lo explained that, by the time of his supplemental witness statement, he owned approximately 132.2 million Paliburg shares. Hence, had the Bank not acted in breach of the Letter, Mr Lo would have exercised the Right to acquire the Shares by purchasing the Restructured Loan. Lastly, Mr Jat SC prays in aid the fact the Bank, no doubt relying on its own expert evidence, submitted at para. 108 of its opening submissions, that damages should be assessed by valuing the Shares.

119. With respect, I disagree.

120. Dealing with the last point first, it is well-established that the court is not bound to accept the evidence of an expert even if it is uncontradicted. Instead, the court must arrive at its own independent view of whether and if yes to what extent to the expert evidence put before it is acceptable: Traffic Stream Infrastructure Co Ltd v Full Wisdom Holdings Ltd (2004) 7 HKCFAR 442 at para. 21.

121. In my judgment, Valuation of the Right basis is in line with the established principles and object in assessing contractual damages. As explained in McGregor on Damages 19^th Ed. paras. 4-002 & 4-004:

“4-002 Contracts are concerned with the mutual rendering of benefits. If one party makes default in performing his side of the contract, then the basic loss to the other party is the market value of the benefit of which he has been deprived through the breach. Put shortly, the claimant is entitled to compensation for the loss of his bargain. This is what may best be called the normal measure of damages in contract.

….

4-004 (i) Non-performance. Where the breach of contract consists in failure to transfer property, the basic loss is the market value of the property, always deducting the contract price if it has not already been paid to the person in breach.” (emphasis added)

122. Given that the present case is concerned with the failure of the Bank to transfer the Right to Mr Lo, rather than the Shares themselves, it is only logical that the appropriate basis of assessing damages should be valuing the loss of the Right, rather than the loss of the Shares. The Right, in substance a call option, is as much a chose in action as the Shares. On the evidence, there are established valuation methodologies to value call options as well as shares. In fact, the parties’ expert even managed to agree on the fair market value of the Right. In these circumstances, it is difficult to justify not assessing damages by reference to the loss of the Right. Putting it in another way, assessing damages by reference to the loss of the Shares is an unnecessarily indirect and roundabout way to quantifying Mr Lo’s loss caused by the Bank’s breach of contract. To the credit of Mr Lo’s legal advisers, this Valuation of the Shares proposition is an ingenious way of enhancing the quantum of his claim, in light of the rise in value of the Shares between the date of breach and the date when the Right was exercisable.

123. Lastly, on the assumption that it is appropriate to adopt Valuation of Shares as the proper basis, this court is satisfied that the date of valuation should be the date of breach ie 30 September 2004, and no injustice would be occasioned to Mr Lo in so holding. On Mr Lo’s own evidence, he has increased his shareholding in Paliburg from October 2004 onwards to April 2013 from 4.45% to 11.86%. It rather suggests he had the inclination and the means to accumulate further Paliburg shares during that period if required. If so, it is not unreasonable to expect him to purchase the Shares as soon as reasonably practicable after the Bank’s breach of contract.

Conclusion on damages

124. For the reasons given above, this court is satisfied that assessment of damages should be based on the valuation of the Right. This court is also satisfied that it is proper to assess damages as at the date of breach ie 30 September 2004. In these premises, damages will be assessed at HK$51,719,000.

125. In the event that assessment of damages should be based on the valuation of the Shares, this court is also satisfied that it is proper to assess damages as at the date of breach ie 30 September 2004 in which case the arithmetic would drive down the quantum damages to HK$50,925,760. However, given the Bank’s concession at paragraph 72 of its closing submissions, damages will also be assessed at the higher figure of HK$51,719,000.

Disposition

126. There shall be judgment in favour of the Plaintiff in the sum of HK$51,719,000 with interest at the commercial rate of prime plus 1% from 30 September 2004 to the date of judgment, and thereafter at judgment rate until payment.

127. There shall be an order nisi that costs of the action be to the Plaintiff to be taxed if not agreed, with certificate for two counsel.