XCHRX FISCALINK INTERNATIONAL LIMITED AND ANOTHER v. YIU YU SUM ALEX AND OTHERS

HCA5913/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5913 OF 1997

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J U D G M E N T

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Introduction

1. This is the Plaintiff's appeal against the order of Master Barnes dated 1st June 1999 :-

(a) striking out paragraph 24 of the Re-amended Statement of Claim against the 2nd Defendant;

(b) consequential upon the striking out of paragraph 24 of the Re-amended Statement of Claim above, striking out the whole Statement of Claim against the 2nd Defendant; and

(c) dismissing the Plaintiff's claim against the 2nd Defendant.

2. The Plaintiff's claim against both the 1st Defendants and the 2nd Defendant can be summarised as follows. A written agreement in Chinese dated 15th January 1997 ("the Chinese Contract") was entered into by the Plaintiffs as assignees. At paragraph 24 of the Re-amended Statement of Claim :-

"It is averred that the Chinese Contract was made with both the 1st Defendants and 2nd Defendant as vendors ... for [the] sale and purchase of both the shares in the 2nd Defendant and [some real properties]."

On the other hand, it is the Defendants' case that only the 1st Defendants were the vendors (or assignors) of the Chinese Contract. Further, the transaction between the Plaintiffs and the 1st Defendants was purely a sale and purchase of shares in the 2nd Defendant. Thus, there is no basis for the Plaintiffs to make the plea in paragraph 24 of the Re-amended Statement of Claim, or to commence this action against the 2nd Defendant.

3. The Plaintiffs also contended that the relevant circumstances relating to their claims include the following. From about 1993 to about the date of the Chinese Contract, the Plaintiffs (which in this Judgment is also to include the individuals related to the first named Plaintiff) became acquainted with a Ms Kwok and a Mr Yam. Through them the Plaintiffs were able to obtain a number of real properties earlier. As a result the Plaintiffs trusted Kwok and Yam. Kwok and Yam made a number of representations to the Plaintiffs regarding some real properties in Peng Chau Island, including a representation that they would procure a company (later known to be the 2nd Defendant) to become the owner of those real properties. The Chinese Contract was entered into by the Plaintiffs as a result of these representations. As stated above, in paragraph 24 of the Re-amended Statement of Claim, the Plaintiffs contended that it was a sale and purchase of both the 2nd Defendant's shares as well as the said real properties. The Plaintiffs alleged that the Defendants' representations were false and commenced this action. The Plaintiffs' alternative case is based on the Defendants' breach of an implied term of the Chinese Contract to prove and show good title.

4. It is trite law that in an application to strike out pleadings, whether made under the Rules of the Court or the Court's inherent jurisdiction, it is only in plain and obvious cases that recourse should be had to this summary procedure, see the Supreme Court Practice 1999, Vol.1 paras.18/19/6, 18/19/18 and 18/19/27.

5. It is accepted by the parties that whether the Re-amended Statement of Claim against the 2nd Defendant ought to be struck out depends on whether the case against the 2nd Defendant is plainly and obviously unsustainable (or is an abuse of process). The answer to this question depends on the true meaning and nature of the Chinese Contract. The construction of a contractual document can be approached in one of two ways :-

(a) by looking purely at the document within its four corners; or

(b) by looking both at the circumstances surrounding the making of the contract as well as its express provisions.

The Relevant Provisions of the Chinese Contract

6. Leaving aside the question of the surrounding circumstances or factual matrix at the time of the Chinese Contract, this Chinese Contract is an obvious model of inconsistencies, confusions and ambiguities.

7. The following parts of the Chinese Contract are consistent (at least arguably) with the Plaintiffs' contentions that (1) the Chinese Contract was a sale and purchase of real properties as well as shares, and (2) the contracting parties included the 2nd Defendant :-

(a) recital (c) stating that "the Assignors own all the titles to [the real properties]";

(b) the parts of the following clauses stating in effect that there was to be an assignment of the real properties, namely, clauses (1), (2), (4) and (5). For example, there were references to the particulars of the real properties and the obtaining of the title deeds to those properties.

8. The parts of the Chinese Contract consistent with the Defendants' case that it was a pure sale and purchase of shares not involving the 2nd Defendant are :-

(a) the definition of Assignors (namely, the 1st Defendants);

(b) recitals (a) and (b) stating in effect that the Assignors (that is, the 1st Defendants) own the shares of the 2nd Defendant and that they agreed to sell and the Plaintiffs agreed to buy their entire shareholding;

(c) the parts of the following clauses stating in effect that it was a sale and purchase of shares, namely, clauses (1) and (2); and

(d) the way in which the Chinese Contract was signed respectively by the Plaintiffs and the 1st Defendants.

The Surrounding Circumstances

9. The question of the relevance of surrounding circumstances was touched upon in various cases including the following :-

(a) In Prenn v Simmonds [1971] 1 WLR 1381 :-

"In construing a written agreement evidence of negotiations or of the parties' intentions ought not to be received by the court, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the 'aim' of the transaction."

(b) In Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 :-

"What the court must do must be to place itself in thought in the same factual matrix as that in which the parties were." (at page 997C per Lord Wilberforce)

(c) In Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 :-

"... I should preface my explanation of my reasons with some general remarks about the principles by which contractual document are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of 'legal' interpretation has been discarded. The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred by Lord Wilberforce as the 'matrix of fact,' but the phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intend. They are admissible only in an action for rectification ...

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars, the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax ...

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense preposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had ... ." (emphasis supplied)

10. The Plaintiffs argued that the following factual matrix are relevant :-

(a) The 2nd Defendant was incorporated on 28th November 1996 but acquired by the 1st Defendants on 13th December 1996, about a month before the agreement;

(b) there were only 8 shares issued and the paid up capital of the 2nd Defendant was only $8;

(c) the 1st Defendants are the sole shareholders and directors of the 2nd Defendant;

(d) the Plaintiffs had never met the 1st Defendants and had never heard of the names of either the 1st or 2nd Defendants until the time of the making of the contract;

(e) the Plaintiffs had been discussing with Yam and Kwok since 1993 for the acquisition of land. The plan was that the land would be acquired by a company called Long Lucky Investment Limited ("Long Lucky") and the shares Long Lucky would be sold to the Plaintiffs;

(f) the Plaintiffs had paid over $2.5 million for the purpose of the shares in Long Lucky with a view of acquiring the land through the acquisition of Long Lucky. There were a number of instances where problems arose as to who were the actual shareholders entitled to sell the shares in Long Lucky;

(g) the plan failed because Long Lucky could not acquire the land; and

(h) the contract was entered into through the approach of Yam and Kwok who offered this deal to enable the Plaintiffs to get the land. There was never any direct contact between the Plaintiffs and the Defendants.

11. The Plaintiffs also relied on other circumstances as set out in paragraph 12 of the Plaintiffs' written submissions which I do not consider necessary to set out in detail.

12. On the other hand, the primary position of Counsel for the 2nd Defendant is that the Chinese Contract is so clear and self-explanatory that it is improper to look at the surrounding circumstances. Alternatively, the 2nd Defendant contended that the only proper and admissible factual matrix or surrounding circumstance to be considered is that the Plaintiffs had at one stage agreed to purchase the shares of the other company, Long Lucky. This shows that the parties intended that the Plaintiffs were to acquire the real properties by means of the purchase of the shares of a company (which at the end turned up to be the 2nd Defendant).

Conclusion

13. Because of the conclusions which I have reached regarding the wordings in the Chinese Contract, I consider it is arguable whether it is improper to consider the surrounding circumstances or the factual matrix at the time of the Chinese contract.

14. Counsel for the parties will understand why the details of their industrious submissions regarding the different meanings to be given to different parts of the Chinese Contract are not gone into in this judgment. In an interlocutory appeal such as the present, the Court will not wish to make comments on points which may be raised again in later stages of the proceedings and which may give the litigants a false impression of the prospect of success or failure of their respective case.

15. I will therefore only say that I find that there are at least the following issues which render it impossible to say, at this stage, whether the Plaintiffs' claim against the 2nd Defendant is plainly and obviously an abuse of process, namely :-

(a) (as stated above) whether the Chinese Contract is so clear and self-explanatory that it is improper to consider the surrounding circumstances or factual matrix at the time of the Chinese Contract;

(b) if it is proper to consider such surrounding circumstances or factual matrix, what were the relevant or admissible surrounding circumstances or factual matrix; and

(c) in either case, whether upon a true construction of the Chinese Contract, it is a pure contract for the sale and purchase of the 2nd Defendant's shares, or whether it is one for the sale and purchase of both the 2nd Defendant's shares as well as the land owned (or to be owned) by the 2nd Defendant.

16. The appeal is therefore allowed and the Master's Order is set aside.