ACHIEVE GOAL HOLDINGS LTD v. ZHONG XIN ORE-MATERIAL HOLDING CO LTD

CACV 6/2019

[2020] HKCA 51

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 6 OF 2019

(ON APPEAL FROM HCA NO 1987 OF 2005)

________________________

________________________
(By original action)

________________________
(By counterclaim)

________________________

J U D G M E N T

________________________

Hon Kwan VP:

A. INTRODUCTION

1.  On 15 December 2018, Au-Yeung J handed down a judgment (“the Judgment”) in the trial of a counterclaim which lasted for 11 days.  The plaintiffs by counterclaim[1] were referred to as “the Bai Jun Camp”.  The defendants by counterclaim[2] were referred to as “the Angola Camp”[3].  By the Judgment, it was ordered that Angola shall pay RMB 1 million to Bai Jun with interest at prime rate plus 1% from 21 December 2005 to judgment and thereafter at judgment rate till payment.  The counterclaim of the Bai Jun Camp for a declaration that Angola was not entitled to the 50% shareholding in Zhong Xin and an order for transfer of the shareholding to Bai Jun was dismissed.

2.  This is the appeal of the Bai Jun Camp.  Four broad issues are raised on appeal.  For ease of reference, the abbreviations and nomenclature used in the Judgment are adopted.

3.  The first issue relates to the construction of a joint venture agreement in Chinese (“the JV Agreement”) made between Bai Jun and Angola in December 2004.  The material words are 融資投入 in clause 1.2. The question is whether Angola’s contractual obligation was to provide direct capital injection to Zhong Xin (Bai Jun Camp’s case) or just to arrange for Zhong Xin to obtain finance (Angola Camp’s case), as consideration for Angola to obtain 50% shareholding in Zhong Xin (the Construction Issue).

4.  The second issue is whether Angola was in breach of its obligations in the JV Agreement, and whether this agreement was terminated by Bai Jun on 22 June 2005 or by Angola on 10 October 2006 (the Termination Issue).

5.  The third relates to the consequence of breach of contract and termination (the Consequence Issue).

6.  The last issue relates to whether the present action had been settled by a written agreement purportedly made between Bai Jun and Angola dated 20 May 2009 (“the Settlement Agreement”) (the Settlement Agreement Issue).

B. THE BACKGROUND

7.  I gratefully adopt the comprehensive account of the background matters in section B of the Judgment.  I set out the relevant parts as follows.

“B1.  The Action and the protagonists

8.  The original action in these proceedings was commenced by Achieve Goal, a BVI company against Zhong Xin (a BVI company) for recovery of a sum of HK$20 million lent by the former to the latter under a loan agreement dated 14 February 2005 (the “Loan Agreement”). As a result of the Settlement Agreement dated 20 May 2009 between Bai Jun and Angola (the “Settlement Agreement”, the validity of which is disputed by Bai Jun Camp), Achieve Goal discontinued the original action on 22 July 2009 with leave of the Court.

9.  The counterclaim centres around the JV Agreement (《合作協議書》) dated 1 December 2004 between Angola (a BVI company) and Bai Jun (a Hong Kong company). In broad terms, under the JV Agreement, Angola and Bai Jun shall jointly establish the Joint Venture Company (“JV Company”) named Zhong Xin in the BVI, which would, together with a PRC entity known as Yulin City Yu Yang District Changle Industrial and Trading Ltd (榆林市榆陽區常樂工貿有限公司) (“Changle I&T”), establish a Sino-foreign Joint Venture Company (“SJV Company”) named Yulin Changlebao Mining Corporation Limited (榆林市常樂堡礦業有限公司) (“CLB”) for the purpose of carrying on a Coal Mine Project in Yulin, Shaanxi.

10.  50% of the shares of Zhong Xin are legally owned by Clarigain (a BVI company) on trust for Bai Jun. As regards Clarigain and Bai Jun:

(a)  They are both corporate vehicles of Xie He Ping (謝和平) (“Xie”) and Gao Hai Yan (高海燕) (“Gao”), who are husband and wife.

(b)  Since around June 2009, Xie/Gao engaged in protracted disputes with some third parties with respect to their ownership in Bai Jun. The disputes resulted in, amongst other things, an arbitral award dated 3 June 2010 issued by the Xi’an Arbitration Commission (the “Xi’an Award”) and the judgment of To J in HCA 1315/2009 & HCA 466/2012 dated 11 August 2016 (“To J’s Judgment”) holding in their favour.

11.  The other 50% of the shares of Zhong Xin are owned by Angola. As regards Angola:

(a)  It was originally wholly owned by Zhao (趙兵), through his wife Zhong Wenxin (鍾文心) and his company Asian Resources Limited.

(b)  On 14 February 2005, Achieve Goal, a company owned by Ng and 3 other individuals, acquired 20% interests in Angola.

(c)  On 6 June 2005, Angola settled its 50% shareholding in Zhong Xin to Ng to be held on trust for Angola.

(d)  On 26 October 2007, Zeng Wei (曾衛) (“Zeng”), Li Tao (李濤) (“Li”) and Chan Mok Wo (陳木和) (“Chan”) became the new shareholders in Angola and Achieve Goal.

(e)  Since around October or November 2009, Zeng became the sole owner of Angola and Achieve Goal.”

“B2. 2003 – September 2004: events prior to the JV Agreement

13.  Since around 2003, the Yulin Government kick started the process of recruiting foreign capital and investment (招商引資) in respect of the state-owned coal mines in the region, which were intended to be converted into Sino-foreign Joint Venture upon foreign investment (改制合資). According to Gao’s testimony on Day 4, there were more than 10 small-scale coal mines (including the Coal Mine) available for investment at the material time, all of which were then suffering losses.

14.  Xie/Gao were interested in investing into the Coal Mine as foreign parties.

15.  In or about late April / early May 2004, Zhao on behalf of Angola on the one hand, and Xie/Gao on behalf of Bai Jun on the other, agreed to cooperate on the Coal Mine Project. It is Bai Jun’s pleaded case that an oral agreement was reached containing the following terms (the “Oral Agreement”):

(a)  Angola and Bai Jun would establish a JV Company for investing in the Coal Mine Project.

(b)  Angola and Bai Jun would respectively hold 60% and 40% shareholding in the JV Company.

(c)  A SJV Company for running the Coal Mine Project would be established. The JV Company and the PRC party would respectively have not less than 70% interest and not more than 30% interest in the SJV Company.

(d)  Angola shall provide “cash capital injection” of US$ equivalent to RMB50 million for the Coal Mine Project and would further provide to Bai Jun RMB2 million cash for Bai Jun to progress with the various procedural matters relating to the Sino-foreign Joint Venture.

16.  There existed an unsigned《合作協議書》between Angola and Bai Jun dated May 2004 (the “Unsigned Agreement”) which contained, amongst others, the following terms:

(a)  Part 1, Clause 1: Angola and Bai Jun shall jointly establish Zhong Xin and shall respectively hold 60% and 40% shareholding in Zhong Xin.

(b)  Part 1, Clause 2: Zhong Xin would establish a SJV Company in the PRC, which shall have registered share capital of US$ equivalent to RMB50 million. Zhong Xin shall hold not less than 70% shareholding in the SJV Company by injecting cash, whereas the PRC entity shall hold not more than 30% shareholding in the SJV Company by injecting assets including coal mine assets.

(c)  Part 2, Clause 1: Angola shall be responsible for procuring finance of US$ equivalent to RMB50 million as the registered capital of the SJV Company (負責融資相當於人民幣5000萬元的等值美元，部分用作合資公司註冊資本). The JV Company shall inject the registered capital into an account maintained in the PRC within the stipulated time pursuant to the relevant PRC regulations for verification of capital (註冊資本按國家有關規定在規定時間內，以海外公司之名義匯入國內帳戶，並接受當地工商部門驗資).

(d)  Part 2, Clause 2: Bai Jun shall use the project as injection and be responsible for completing the preparation works for the establishment of the SJV Company and the project (以項目投入並負責完成常樂堡煤礦及合資公司的所有前期工作).

(e)  Part 3: Angola shall pay Bai Jun RMB2 million as initial fees and expenses within 1 week from the date of the agreement.

(f)  Part 4: Time shall be of the essence.

17.  During cross-examination on Day 3, Gao accepted that the terms of the Unsigned Agreement were basically consistent with her recollection as to the terms of the document which they were about to sign (基本上是一致的) but in the end did not. That included the payment of RMB2 million within 1 week and the shareholding of Zhong Xin and the PRC entity in the SJV Company. The only notable difference was that the obligation of “負責融資” under the Unsigned Agreement was purportedly portrayed as provision of “cash capital injection” in the Oral Agreement.

18.  On 11 May 2004, Zhong Xin was incorporated in the BVI as the JV Company. On 26 May 2004, 60, 24 and 16 shares of Zhong Xin were allotted to Angola, Xie and Gao respectively at the nominal consideration of US$1 for each share. Zhao, Phoebe Sun (an assistant of Zhao), Gao and Xie were appointed as the first directors of Zhong Xin. It is Xie/Gao’s case that they held their shareholding in Zhong Xin on trust for Bai Jun.

19.  On 29 July 2004, the Yulin Government and Zhong Xin entered into a《中信礦業集團參與榆陽區人民煤礦改制擴建合同書》in respect of the Coal Mine Project. The agreement set out the broad framework of the Sino-foreign joint venture, whereby Zhong Xin undertook to inter alia inject RMB50 million into the SJV Company (Part 2). It was envisaged that there would be a further joint venture agreement (“合資合同”) detailing the obligation of the parties.

20.  Angola did not pay the RMB2 million to Bai Jun or make any payment to Zhong Xin in accordance with their terms of cooperation. Due to difficulty in procuring financing (“由於融資工作遇到了一些困難…資金暫時無法到位”), Angola decided to withdraw from the Coal Mine Project and Zhong Xin. See Angola’s letter dated 13 September 2004 to Bai Jun. As such, on 15 September 2004, Angola transferred its 60 shares of Zhong Xin to Xie/Gao. Zhao and Phoebe Sun also resigned as directors of Zhong Xin.”

“B3. November 2004 – February 2005: the JV Agreement, the SJV Agreement and the Supplemental SJV Agreement

21.  In around November 2004, Bai Jun and Angola were in touch again on the Coal Mine Project. Subsequently, they entered into the JV Agreement dated 1 December 2004 (which, according to Gao, was only signed on 21 December 2004; this is in dispute). I set out the material terms[4] which are relevant to this dispute:

“1.  投資合作

1.1  甲乙雙方在英屬維京爾群島共同成立中信礦業集團有限公司[Zhong Xin]。

1.2  甲方以相當於人民幣5000萬元的等值美元的融資投入，持有中信礦業公司50% 的股權，乙方以常樂堡煤礦項目及其組建的合資公司進入中信礦業公司，持有中信礦業公司的50%的股權。[underline added]

…

1.4  中信礦業公司將在中國陝西省榆林市成立一中外合資公司[CLB]。合資公司的中方合作股東爲：原人民煤礦改制后的持股職工組建的法人公司常樂工貿有限公司 [Changle I & T]。

1.5  合資公司註冊資本為人民幣7100萬元。中信礦業公司以相當於人民幣5000萬元的等值美元的現金投入並持有合資公司70% 的股權，職工公司持有合資公司30% 權益，以全部資產投入：其中包括作價不超過人民幣1200萬元的採礦權證(4平方公里採礦區)、700畝土地使用權證及人民煤礦現存的所有生產設備等。

…

2.  雙方的責任和承諾

2.1  甲方和乙方在簽訂本協議后的2個工作日内按照各自的股權比例完成和完善有關中信礦業公司的法律手續。

2.2   甲方在本協議簽訂後的10個工作日內將相當於人民幣2000萬元的等值美元(具體美元金額將照實際匯率折算)匯入中信礦業公司的帳戶。中信礦業公司將相當於人民幣2000萬元的等值美元作為合資公司第一期的註冊資本。該部分註冊資本將根據中國政府的有關有求，在規定的時間匯入中國陝西國內合資公司的帳戶，並接受當地工商部門驗資。[underline added]

2.3  甲方負責中信礦業集團公司的日常管理費用。

2.4  甲方同意支付乙方人民幣700萬元的前期費用，用於成立中信礦業公司及組建合資公司相關的必要開支。其中，在登記機關要求開立驗資帳號3日內，支付人民幣200萬元(“1^st RMB2 million”)；在合資公司獲得4平方公里採礦區的採礦權證後，支付人民幣200萬元(“2^nd RMB2 million”)；在合資公司獲得附件二中2.86平方公里的探礦權證後，支付人民幣300萬元(“the RMB3 million”)。所有發生的費用須作帳，直至中信礦業公司及合資公司正式運作為止。發生的費用將按實際用途作為合資公司或中信礦業公司的指出，分別計入合資公司或中信礦業公司的帳目。

2.5   乙方負責在本協議簽訂後的90個工作日內完成成立合資公司和工商註冊登記等項工作。同時完成常樂堡煤礦4平方公里區域的採礦權的權屬變更和陝西省地礦局所屬的2.86平方公里採礦權的轉讓及變更手續。上述權屬變更的出價不超過本協議規定的價格。

2.6  乙方承諾合資公司獲得的有關採礦權，採礦權及土地使用權的有關權屬證書都已得到有關政府部門的審核通過，不存在任何潛在的糾紛或被有關部門罰處的風險。

3.  中信礦業公司的組成及經營原則

3.1  中信礦業公司設立董事局。董事局由六名董事組成，其中三名由甲方委派，三名由乙方委派。

3.2  中信礦業公司有關下列事項的決定必須獲得80% 以上的董事同意：

…

(7)  中信礦業公司融資、擔保、借貸等事宜。

4.  違約責任

4.1  甲方須按本協議第2部分2.2、2.3、2.4條款的內容及承諾，按時將相[5]2000萬元人民幣的等值美金匯入中信礦業公司帳戶，以便按規定及時支付用於合資公司第一期的註冊資本金。同時須將乙方的前期費用按所做承諾按時匯入乙方指定的銀行帳戶。若甲方未能按以上條款履行其承諾，則視為違約，本協議將終止。同時甲方須支付乙方200萬元人民幣的賠償金。[underline added]

4.2  乙方須按本協議第2部分2.5、2.6條款的內容及承諾，在合資公司成立之後，按時完成4平方公里採礦權證、2.86平方公里採礦權權屬的變更及過戶手續。否則視為違約，並賠償甲方200萬元人民幣的賠償金。[underline added]

4.3  若甲方未能按期支付合資公司註冊資本金餘額，將由乙方出資補上，甲方在中信礦業公司的股份則按比例相應降低。

…

7.  本協議應受香港法律管轄，並根據香港法律加以詮釋，如發生異議將於香港法庭訴訟。”

22.  At around the same time, by the《合資經營合同》 dated 12 December 2004 (the “SJV Agreement”), Zhong Xin and Changle I&T agreed to establish a SJV Company named CLB in the PRC for the purpose of running the Coal Mine Project.  The SJV Agreement contained inter alia the following terms:

(a)  Clauses 10 and 11:  Zhong Xin shall contribute RMB49.7 million as CLB’s registered share capital, whereas Changle I&T shall contribute assets equivalent to RMB21.3 million (including cash and coal mine assets) as CLB’s registered share capital.

(b)  Clause 12:  The RMB49.7 million shall be contributed by 3 instalments: the 1^st instalment of RMB20 million shall be injected upon the registration of CLB; the 2^nd instalment of RMB20 million shall be injected one year after the establishment of CLB; and the remaining RMB9.7 million shall be injected two years after the establishment of CLB.

(c)  Clause 14:  If either party failed to contribute the registered capital within time, after negotiation (經雙方協商後), the other party could make the contribution and obtain the relevant shares.

(d)  Clauses 20 and 25:  Zhong Xin and Changle I&T shall respectively nominate 5 and 2 persons to be the directors of CLB.  Zhong Xin shall nominate the Chairman and the Finance Manager, whereas Changle I&T shall nominate the General Manager.

23.  On 28 December 2004, Zhong Xin passed a board resolution nominating Zhao, Ng, Zuo Wei Qi (左維琦) (“Zuo”), Xie and Gao to be the directors of CLB, and Xie to be the Chairman and legal representative of CLB.

24.  On or about 29 December 2004, Angola paid the 1^st RMB2 million under Clause 2.4 of the JV Agreement to CLB’s account pursuant to the instructions of Bai Jun dated 25 December 2004.

25.  On 30 December 2004 and 31 December 2004, board resolutions of Zhong Xin were passed to:

(a)  appoint Zhao and Ng as directors of Zhong Xin;

(b)  approve the transfer of Xie/Gao’s 50 shares of Zhong Xin to Angola at the nominal consideration of US$1 per share; and

(c)  approve the transfer of Xie/Gao’s remaining 50 shares of Zhong Xin to Clarigain (which were to be held on trust for Bai Jun).

26.  In January 2005, Zhao produced to Xie/Gao two letters dated 5 January 2005 issued by China Mineral Acquisition Corporation (“CMAC”) and Morgan Stern Merchant Bank Ltd respectively, stating that they intended to invest in Zhong Xin for its joint venture in CLB.  Those two letters, together with an account summary of CMAC showing that there were US$20 million on its account, were notarised on 17 January 2005 and submitted to the PRC authority for the purpose of setting up CLB (Gao’s testimony on Day 4).

27.  On the next day, ie 18 January 2005, the business permit of CLB was issued.  Zhao, Ng, Zuo, Xie and Gao (nominated by Zhong Xin), and Zhang Xin Tian (張新田) (“Zhang”) and Zhao Xi You (趙世有) (nominated by Changle I&T) were appointed as directors of CLB.  Xie and Zhang were respectively appointed as Chairman and General Manager of CLB.

28.  On 5 February 2005, Xie (on behalf of Zhong Xin) and Zhang (on behalf of Changle I&T) signed the 《合資經營合同的補充協議》 (the “Supplemental SJV Agreement”). The purpose of that Agreement, as stated in the recital, was to “確保合資公司順利完成出資和驗資程序”.  It contained, amongst others the following terms:

(a)  Clause 1:  Within 60 days of the agreement, Changle I&T shall inject assets and cash equivalent to RMB21.3 million as capital contribution, whereas Zhong Xin shall inject RMB20 million as capital contribution.

(b)  Clause 4:  After the completion of the capital contribution, Zhong Xin and Changle I&T shall jointly engage an accountant firm to produce a report of capital verification.

(c)  Clauses 10 and 11:  The Supplemental SJV Agreement shall be submitted to the relevant authority for approval and shall take effect after such approval.”

“B4.  February 2005 – March 2005: the Loan Agreement

29.  On 7 February 2005, the board of Zhong Xin (attended by Zhao and Gao) resolved, amongst others,that through the arrangement of Angola (“在本公司股東 [Angola] 的安排下”), Zhong Xin agreed to borrow HK$20 million from “Sunspring International Group Limited” (“Sunspring”), and the relevant loan agreement be approved.  Sunspring was subsequently amended to Achieve Goal on the board minutes with the signature of Zhao and Gao.

30.  On 8 February 2005, Zhao, Ng, Xie and Gao signed a written board resolution to increase the quorum for board meeting to 3 directors.

31.  On 14 February 2005:

(a)  by the Loan Agreement between Achieve Goal (signed by Ng) and Zhong Xin (signed by Zhong Jian (鍾健), the brother-in-law of Zhao, with Zhong Xin’s common seal), Achieve Goal agreed to lend and Zhong Xin agreed to borrow HK$20 million at an interest rate of 7% p.a.. 

(b)  Clause 6A.04 of the Loan Agreement provided that Zhong Xin shall pledge its 70% shareholding in CLB as collateral, but it was apparent that Zhong Xin never did so.

(c)  HK$20 million was remitted to Zhong Xin’s account pursuant to the Loan Agreement as drawdown of the loan.  Of the HK$20 million, HK$13 million was remitted from Angola’s account and HK$7 million was remitted from Ng’s account. According to a 《委托付款協議書》dated 13 February 2005, since Achieve Goal did not have a bank account in Hong Kong, Achieve Goal had to remit the loan proceeds through Angola and Ng.

(d)  20% shareholding in Angola was transferred to Achieve Goal.

32.  On 15 February 2005, HK$19 million (equivalent to RMB20,132,400 applying the prevailing exchange rate of HKD1:RMB 1.0596) was remitted to CLB’s account from Zhong Xin’s account for the purpose of paying up the 1^st instalment of CLB’s registered share capital.

33.  On 5 March 2005, a board meeting of Zhong Xin was held in Xi’an. All the directors of Zhong Xin (Xie, Gao, Zhao and Ng) attended. According to the board minutes prepared by Gao, it was resolved that Wang Xin Sheng (汪新生) (“Wang”) shall be appointed as the Finance Manager of CLB, and that Zhao and Ng shall be responsible for procuring finance (融資) for Zhong Xin.”

“B5.  March 2005 – December 2005: the transfer of the mining rights and exploration rights to CLB

34.  On 28 March 2005, CLB obtained the mining permit in respect of the 4 sq. km coal mine.

35.  On 5 April 2005, the valuation report of the exploration rights of the 2.19 sq.km coal mine (which, according to Gao, was equivalent to the 2.86 sq.km coal mine) was filed with 陝西省國土資源廳. The exploration rights were valued as RMB5.37 million.

36.  On 4 August 2005, 陝西省國土資源廳 wrote to CLB (copied to 陝西省地質礦產勘查開發局, the transferor of the exploration rights) mentioning that:

(a)  a report had been submitted by CLB requiring mediation on the price of the transfer of the exploration rights;

(b)  the report submitted by CLB expressed that because of the change of valuation method in 2004 by the state, there was disagreement between CLB and the transferor and they were unable to sign the transfer agreement;

(c)  it was however inappropriate for 陝西省國土資源廳 to conduct a mediation as the dispute was a matter between CLB and the transferor.

37.  On 9 August 2005, Wang issued a declaration to the bank in Yulin making certain allegations against Xie.

38.  On 21 August 2005, the PRC court froze the foreign currency account of CLB.

39.  On 24 September 2005, CLB passed a board resolution to make payment to 陝西省地質礦產勘查開發局 for the exploration rights.

40.  On 14 October 2005, 陝西省國土資源廳 approved the joint application of 陝西省地質礦產勘查開發局and CLB to transfer the exploration rights.

41.  The foreign currency account of CLB was unfrozen on 21 October 2005.

42.  On 21 December 2005, CLB obtained the exploration permit of the 2.86 sq. km coal mine.”

“B6.  May 2005 – 2008: commencement of HCA 1284/2005 and this Action, and the evolution of Bai Jun’s claims

43.  By a letter dated 18 May 2005, Bai Jun’s solicitors wrote to Angola stating, amongst others that:

(a)  Pursuant to Clause 2.2 of the JV Agreement, Angola shall remit HK$20 million to Zhong Xin’s account within 10 days of the signing of the agreement. It was only after repeated request that Angola remitted the sum to Zhong Xin’s account on 14 February 2005. This constituted a breach;

(b)  Angola was in breach of Clause 2.4 of the JV Agreement in failing to pay the 2^nd RMB2 million to Bai Jun after CLB obtained mining rights to the 2.86 sq.km coal mines;

(c)  In respect of Angola’s failure to remit the funds on time under Clause 2.2, Bai Jun would only give a stern warning to Angola;

(d)  Angola shall pay $2 million to Bai Jun within 10 days after receiving the letter.

44.  Subsequently, by a letter dated 30 May 2005, Bai Jun’s solicitors wrote to Angola alleging that Angola was in breach of Clauses 1.2, 2.2 and 2.4 of the JV Agreement, asking Angola to remedy the breaches within 5 working days.

45.  By a letter dated 22 June 2005, Bai Jun allegedly accepted the repudiation of Clauses 1.2, 2.2 and 2.4 of the JV Agreement by Angola and demanded Angola to return all of its Zhong Xin shares to Bai Jun.

46.  On 6 July 2005, Bai Jun commenced HCA 1284/2005 against Angola, seeking the return of Angola’s 50% shareholding in Zhong Xin and damages. Angola filed a Defence on 5 October 2005, contending, amongst others, that on the true construction of the JV Agreement, it had no obligation to provide direct capital injection to the JV Company, and its obligation was to procure the necessary finance in the sum of RMB50 million to be provided to the JV Company.

47.  By letters dated 9 August 2005 and 6 September 2005, Achieve Goal’s solicitors alleged that Zhong Xin was in breach of the Loan Agreement, including the failure to pay the arrangement fee of HK$600,000 under the Loan Agreement. Achieve Goal therefore claimed the loan amount and interest on the basis that the events of default had been triggered.

48.  On 15 September 2005, the board of Zhong Xin resolved to pay HK$600,000 to Achieve Goal as the arrangement fee under the Loan Agreement. Gao voted in favour of the said resolution. Xie did not attend the board meeting.

49.  On 10 October 2005, Achieve Goal commenced the original action in these proceedings against Zhong Xin, claiming the loan amount of HK$20,000,000 and interest.

50.  On 2 January 2006, in a board meeting of Zhong Xin attended only by Gao and Xie (and notwithstanding that a resolution had been passed to increase the quorum of board meeting to 3 – see §0 above), it was purportedly resolved that:

(a)  Angola shall, in pursuance of the JV Agreement, inject US$ equivalent to RMB20 million into Zhong Xin by 12 January 2006 to enable Zhong Xin to pay the same to CLB as the 2^nd instalment of capital contribution. If Angola failed to do so, Bai Jun would be responsible for the same pursuant to Clause 4.3 of the JV Agreement, and after that Bai Jun shall immediately obtain 20% shares of Zhong Xin from Angola;

(b)  Zhong Xin shall repay the loan amount of HK$20 million to Achieve Goal by 14 February 2006; and that given the associated relationship between Angola and Achieve Goal and the share ratio of Angola and Bai Jun in Zhong Xin, the two shareholders of Zhong Xin shall each bear a repayment obligation of HK$10 million.

51.  On 23 February 2006, Achieve Goal applied for summary judgment against Zhong Xin. At the hearing of the summary judgment application on 14 August 2006, Zhong Xin gave an undertaking that Bai Jun would apply to be joined as a claimant to Zhong Xin’s counterclaim in this Action and to sue Angola for specific performance of the JV Agreement.

52.  On 13 September 2006, Zhong Xin applied to amend the Defence and Counterclaim. On 3 October 2006, Zhong Xin took out a further summons to join Bai Jun as the 2^nd Plaintiff (by Counterclaim) and to amend the Defence and Counterclaim.

53.  By a letter dated 10 October 2006, Angola asserted that by wrongfully claiming that the JV Agreement had been terminated in HCA 1284/2005, Bai Jun had wrongfully repudiated the JV Agreement, and Angola thereby accepted the wrongful repudiation by Bai Jun and terminated the JV Agreement.

54.  The amendments to the Defence and Counterclaim and joinder of Bai Jun were allowed on 27 October 2006. The amendments abandoned the claim for Angola’s 50% shareholding in Zhong Xin and affirmed the JV Agreement. It was specifically pleaded in §7(h) that:

“For the avoidance of doubt, Bai Jun and, insofar as is necessary, Zhong Xin hereby confirm that, without prejudice to their rights otherwise including rights to remedies for damages for breach of contract and specific performance of the JV Agreement, they hereby abandon any claim against Angola for termination or rescission of the JV Agreement as a result of the repudiatory breach of the same by Angola and affirm the JV Agreement.”

55.  Thus, for a very long period of time from October 2006 until July 2015 when the Bai Jun Camp made their latest amendments, it had been contending that the JV Agreement shall continue to subsist.

56.  On 13 September 2007, Clarigain applied to substitute Zhong Xin in the counterclaim as a response to Angola and Zhao’s application to strike out the counterclaim on the basis that it was issued without Zhong Xin’s authority. The joinder was allowed on 28 February 2008.

57.  On 25 February 2008, an application was made by Bai Jun (and Clarigain as the intended 1^st Plaintiff in the counterclaim) to further amend the Defence and Counterclaim, alleging that by reason of Bai Jun’s capital injection of RMB29,567,600 on 1 February 2008 and 2 February 2008 into CLB and Clause 4.3 of the JV Agreement, Angola’s 50% shareholding in Zhong Xin should be reduced by 59.49% and the same should be held on trust for Bai Jun.

58.  On 9 July 2008, Bai Jun discontinued HCA 1284/2005.”

“B7.  August 2007 – February 2008: change of ownership of Angola and the Purported Capital Injection by Clarigain/Bai Jun”

“61.  On 6 October 2007, Clarigain passed a board resolution resolving to, as shareholder of and on behalf of Zhong Xin, inject the outstanding capital contribution into CLB (the “Purported Capital Injection”).  The resolution expressly stated that such capital injection shall not concern its shareholding and interest in Zhong Xin.

62.  According to the record, Zeng, Li and Chan became the new shareholders and directors of Angola and Achieve Goal on 26 October 2007. …”

“65.  On 1 and 2 February 2008, Clarigain injected a total of US$4,172,590 into CLB’s account purportedly as the outstanding capital contribution made by Zhong Xin. This Purported Capital Injection was made without any board resolution of Zhong Xin.”

“B8.  May 2008 – March 2009: Gao/Xie transferring their interests in Bai Jun to Liu/Keeneye Group, and the legal proceedings in the PRC

66.  On 20 May 2008, Xie/Gao were involved in a blood-shed incident whereby Zhang and Wang suffered injuries (“the Blood-Shed Incident”).  Xie/Gao were subsequently arrested and held in custody.

67.  On 15 July 2008, Xie/Gao entered into a share transfer agreement whereby they agreed to transfer their shareholding in Bai Jun to Keeneye Holdings Limited (“Keeneye”), a company owned and controlled by Liu Jian Shen (劉建申) (“Liu”), a Shaanxi representative of the National People’s Congress, in return for Liu’s assistance to procure their release from detention.

68.  On 17 July 2008, Changle I&T commenced proceedings in the Shaanxi Intermediate People’s Court against Zhong Xin and Bai Jun (with Angola and CLB being joined as third parties), contending that the Purported Capital Injection by Bai Jun (via Clarigain) in the name of Zhong Xin was invalid and it shall have pre-emption rights to acquire 42% shareholding in CLB as represented by such capital injection (the “PRC Proceedings”).

69.  On 27 August 2008:

(a)  A supplemental share transfer agreement (the “Supplemental Keeneye Agreement”) (the two agreements transferring the Bai Jun shares are together referred to as the “Keeneye Agreements”) was entered into between between Xie/Gao as transferors and Keeneye and New Purple Golden Resources Development Limited (“New Purple”, a company also owned by Liu) as transferees. Under Clause 2, Keeneye/New Purple agreed that the shareholding which Bai Jun might obtain from Angola in the litigations shall belong to Xie/Gao.

(b)  Keeneye/New Purple became the registered shareholders of Bai Jun. Wang Li (王李) and Lu Ying (呂瑩) were appointed as directors of Bai Jun by a board of resolution of Bai Jun signed by Xie/Gao. See Form D2A dated 27 August 2008 received by the Company Registry on 2 September 2008.

70.  On 16 September 2008, Angola as third party in the PRC Proceedings also made a claim that by reason of the invalidity of the Purported Capital Injection, it shall have pre-emption rights to acquire Zhong Xin’s 42% shareholding in CLB.

71.  On 23 September 2008, by a written resolution, Keeneye and New Purple passed a written shareholders’ resolution to remove Xie/Gao as directors of Bai Jun.

72.  On 20 October 2008, Keeneye/New Purple transferred their Bai Jun shares to Daynew Assets Management Limited (“Daynew”) and Far Orient Holdings Limited (“Far Orient”).  Daynew and Far Orient are also companies owned by Liu.  The 4 companies of Liu are collectively referred to as the “Keeneye Group”.

“B9.  May 2009 – July 2009: the Settlement Agreement, the PRC Court Sanctioned Settlement, and the stay of this Action

76.  By an agreement dated 16 May 2009 (“Liu-Zhang Agreement”), Liu agreed to sell his entire shareholding in Bai Jun (indirectly owned by him) to Zhang at a consideration of HK$150 million. Pursuant to the agreement, Liu shall coordinate with Zhang to discontinue the litigations in the Hong Kong courts.

77.  By the Settlement Agreement dated 20 May 2009 between Angola (signed by Li) and Bai Jun (signed by Wang Li), it was agreed, amongst others, that:

(a)  Angola and Bai Jun shall apply to the Shaanxi Higher People’s Court (“Shaanxi HPC”) to seek the court’s approval for the settlement of the dispute in relation to the Purported Capital Injection.

(b)  Angola and Bai Jun shall settle all court proceedings in Hong Kong and the PRC, including the withdrawal by Bai Jun of its counterclaim in this action and the discontinuance of Achieve Goal’s original action.

(c)  Angola and Bai Jun confirmed the validity of the JV Agreement, and Angola’s obligation under the JV Agreement was to procure finance in the sum of US$ equivalent to RMB50 million for Zhong Xin.

(d)  Angola and Bai Jun confirmed that the HK$20 million advanced by Achieve Goal to Zhong Xin would be repaid by Angola, and the outstanding capital contribution in the sum of RMB30 million shall be borne by Angola and Bai Jun equally.”

“80. On 2 June 2009, Xie/Gao commenced HCA 1315/2009 to set aside the transfer of their shares in Bai Jun to the Keeneye Group. …”

“83.  On 29 June 2009, Changle I&T (acted by Zhang), CLB (acted by Zhang), Angola (acted by Li), Bai Jun (acted by Wang Li and Lu Ying) and Zhong Xin (acted by a PRC lawyer Liu Jian Chong (劉建倉) engaged by the Old IRs) settled the PRC Proceedings on the following terms as sanctioned by the PRC Court (the “PRC Court Sanctioned Settlement”):

(a)  CLB shall return the outstanding capital contribution made by Bai Jun via the account of Clarigain, and after further discussion between the shareholders of Zhong Xin, Zhong Xin shall on its own make a fresh capital contribution to CLB.

(b)  After the making of the fresh capital contribution, Changle I&T shall withdraw all its claims against Zhong Xin in respect of any alleged failure to make capital contribution.

(c)  Changle I&T and Angola shall withdraw all their claims for pre-emption rights and other relief.”

“86.  The trial of this original action was fixed for 22 July to 4 August 2009 before Chung J (“the Original Trial”).  However, on 22 July 2009, in purported performance of the Settlement Agreement, Achieve Goal obtained leave to discontinue the original action in this action.

87.  On 24 July 2009, this action was stayed with liberty to apply pending the resolution of the dispute over the ownership of Bai Jun.”

“B10.   July 2009 – 2016: the disputes over Bai Jun’s shareholding

88.  On 17 July 2009, the Xi’an Arbitration Commission accepted the arbitration request of Keeneye and New Purple in respect of the Keeneye Agreements.

89.  On 24 August 2009, Xie/Gao counterclaimed against Keeneye and New Purple to set aside the Keeneye Agreements on the ground of “顯失公平、乘人之危” under PRC law.

90.  By an agreement dated 15 October 2009, Xie/Gao agreed to sell the entire shareholding in Zhong Xin to Ma Mao Gen (馬茂根) (“Ma”) at a consideration of RMB380 million, following (a) the recovery of their shareholding in Bai Jun from the Keeneye Group; and (b) Bai Jun’s recovery of Angola’s 50% shareholding in Zhong Xin.”

“92. On 3 June 2010, the Xi’an Arbitration Commission handed down the Xi’an Award revoking (撤銷) the Keeneye Agreements.”

“95. On 17 May 2011, Ma and Zhang entered into an agreement whereby Ma agreed to purchase the shares of the Keeneye Group from Zhang for RMB190 million.”

“97.  On 29 May 2012, Xie/Gao amended their Statement of Claim in HCA 1315/2009 adding the pleas that as a result of the Xi’an Award, the Keeneye Agreements and the appointment of Wang Li and Lu Ying as directors are “null and void ab initio”, and Daynew/Far Orient were not bona fide purchasers for value without notice.  The relief sought included, amongst others, a declaration that the Settlement Agreement was null and void and of no legal effect.

98.  At around the same time, HCA 466/2012 was commenced by Ma against Xie/Gao. In that action, Xie/Gao claimed that Ma was in breach of the agreement between them by, amongst others, covertly reaching an agreement with Zhang to purchase the shares of the Keeneye Group.  Ma contended that the settlement with Zhang was done pursuant to an oral agreement between himself and Xie/Gao in May 2011.”

“100.  HCA 1315/2009 and HCA 466/2012 were tried together.  On 11 August 2016, To J found in favour of Xie/Gao (“To J’s Judgment”), holding, amongst others, that:

(a)  The oral agreement in May 2011 as alleged by Ma was concocted, and Xie/Gao were entitled to terminate their agreements with Ma.

(b)  The Xi’an Award was binding and final as against Keeneye and New Purple in relation to the Keeneye Agreements. Daynew and Far Orient were remote recipients and not bona fide purchasers for value without notice, and Xie/Gao were thus entitled to recover the Bai Jun shares from them.

101.  Without analysing the appropriateness of the terms of the declarations, To J granted the declarations sought in Xie/Gao’s Amended Statement of Claim, including the declaration that the Settlement Agreement was null and void and of no legal effect.”

“B11. October 2009 – present: the subsequent development in this Action, and the unsuccessful challenges against the PRC Court Sanctioned Settlement”

“109. On 30 June 2015, this Court ordered that the stay of this Action be lifted. The matter therefore proceeded to trial.

110.  By amendments made on 28 July 2015, the Bai Jun Camp deleted the plea about affirmation of the JV Agreement, and the discontinued claim in HCA 1284/2005 for Angola’s 50% shareholding in Zhong Xin was added for the first time in this Action.”

C. THE JUDGMENT

8.  At the trial, the Construction Issue and the Termination Issue were referred to as the “Stage 1 Issue”, and the Settlement Agreement Issue was referred to as the “Stage 3 Issue”[6].

9.  Gao was the only witness to give oral evidence for the Bai Jun Camp.  Zeng and Li, two of the present directors of Angola and Achieve Goal, gave oral evidence for the Angola Camp. Gao was the only witness with first-hand knowledge of the circumstances relevant to the Construction Issue and the Termination Issue.  The Angola Camp was unable to contact Zhao so did not call any witness directly involved in the making of the JV Agreement.  The evidence of Zeng and Li was in relation to the Settlement Agreement Issue. Gao’s evidence, though crucial, was treated with caution by the judge[7]. Zeng, whose role on the Settlement Agreement was limited, was found to be evasive.  Li was found to be untruthful and was completely shaken in cross-examination[8].

10.  The judge found in favour of the Angola Camp on the Construction Issue.  She held that on the true construction of the JV Agreement, the obligation of Angola was to arrange finance for Zhong Xin, instead of providing direct capital injection to Zhong Xin[9].

11.  On the Termination Issue, the judge held as follows:

(1)    In light of the finding that Angola’s contractual obligation was merely to arrange finance for Zhong Xin, Angola’s procurement of the Loan Agreement dated 14 February 2005 was due performance of its obligation, but it was in breach of clause 2.2 in being out of time[10].  This delay in performance did not, however, entitle Bai Jun to terminate the JV Agreement[11].

(2) Bai Jun was in breach of its obligation under clause 2.5 of the JV Agreement in failing to cause the mining permit to be issued in time in that the permit was obtained one working day late and was liable to pay liquidated damages of RMB 2 million to Angola under clause 4.2.  But as Angola could have applied the liquidated damages receivable by way of legal set-off against its liability to pay the 2^nd RMB 2 million being part of the RMB 7 million preliminary expenses it was obliged to pay Bai Jun under clause 2.4, Angola was not in breach[12].

(3) As the exploration permit was only obtained on 21 December 2005, Bai Jun was in breach of its obligation under clause 2.5 in failing to cause this permit to be issued in time and was liable to pay liquidated damages of RMB 2 million under clause 4.2.  Angola’s liability to pay RMB 3 million being the last instalment of the RMB 7 million preliminary expenses arose under clause 2.4 when the exploration permit was obtained on 21 December 2005.  Bai Jun was not entitled to terminate on 22 June 2005 on the basis of Angola’s failure to pay the RMB 3 million as the condition to pay was not fulfilled prior to that date.  Netting off the liquidated damages receivable against Angola’s liability to pay the RMB 3 million, Angola was liable to pay RMB 1 million to Bai Jun.[13]

(4) Bai Jun had no valid ground to terminate on 22 June 2005, and its wrongful termination entitled Angola to terminate the JV Agreement on 10 October 2006[14].

12.  On the Consequence Issue, the judge held that even if Bai Jun had valid cause to terminate the JV Agreement, it is not entitled to the return of Angola’s 50% shareholding in Zhong Xin as there had not been total failure of consideration[15].

13.  As for the Settlement Agreement Issue, the judge found that the Settlement Agreement was signed sometime between 21 June and 6 July 2009 but was deliberately backdated to 20 May 2009 and that it was invalid, as Wang Li, who signed on behalf of Bai Jun, had no actual or apparent authority to do so[16].

14.  In this appeal, Bai Jun sought to set aside the orders made in the Judgment and in substitution a declaration be made that Angola is not entitled to the 50% shareholding in Zhong Xin registered in its name and it is to transfer forthwith the shareholding to Bai Jun.

15.  The four broad issues raised on appeal will be considered in the order as mentioned at the outset.

D. THE CONSTRUCTION ISSUE

D1. The general principles on construction

16.  The general principles have been set out by the Judge at Section E1 of the Judgment. The ones that are particularly relevant for present purpose may be stated as follows:

(1) The construction of a contract is an attempt to discover what a reasonable person would have understood the parties to have meant.  This is done by identifying the meaning of the relevant words, (a) in light of the natural and ordinary meaning of those words, the overall purpose of the contract, any other provisions of the contract, the facts known or assumed by the parties at the time at the time the contract was made, and common sense, but (b) ignoring subjective evidence of any party’s intentions. (Marley v Rawlings [2015] AC 129 at §19, per Lord Neuberger of Abbotsbury, PSC)

(2) The background knowledge which would reasonably have been available to both parties in the situation in which they were at the time of the contract includes anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912H to 913A, per Lord Hoffmann; Arnold v Britton [2015] AC 1619 at §21, per Lord Neuberger of Abbotsbury, PSC)

(3) Reliance placed on commercial sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed.  Except in a very unusual case, the parties have control over the language they use in a contract and must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.  A court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. (Arnold v Britton at §§17 and 20, per Lord Neuberger of Abbotsbury, PSC)

(4) Interpretation is a unitary exercise. Where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But in striking a balance between the indications given by the language and the implications of the competing constructions, the court must consider the quality of drafting of the clause (the poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention), and it must be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest. (Wood v Capita Insurance Services Ltd [2017] AC 1173 at §11, per Lord Hodge JSC; Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299 at §16, per Mance LJ)

(5) Where the disputed provision is open to two possible interpretations, the unitary exercise involves an iterative process, by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated.  Once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each. (Wood v Capita Insurance Services Ltd at §12, per Lord Hodge JSC; In re Sigma Finance Corpn [2010] 1 All ER 571 at §12, per Lord Mance JSC)

(6) In construing a contract, all parts of it must be given effect where possible, and no part of it should be treated as inoperative or surplus.  Whilst the presumption against surplusage is unlikely to be useful in interpreting a standard form contract, it is a relevant consideration in a bespoke contract drafted by the parties to meet the exigencies of a particular and significant commercial arrangement. (Secretary of State for Defence v Turner Estate Solutions Ltd [2015] EWHC 1150 (TCC) at §62, per Coulson J)

D2. Facts found by the judge of the circumstances relevant to the Construction Issue

17.  The judge made these pertinent findings relating to the background and factual matrix for the Construction Issue.

18.  Gao and Xie were sophisticated business persons. Gao possesses a PhD in economics and had rich business experience in Mainland China, having worked with Hutchison Whampoa for ten years. She claimed to have set up over a hundred Sino-foreign joint venture enterprises and had worked with people from corporate legal departments. Xie was the CEO of a large state-owned enterprise in the metals sector and the CEO of another large state-owned enterprise in the real estate sector[17].

19.  Zhao represented to Gao that he was a manager of several funds. He had no prior business relationship with Gao and Xie before they met in March or April 2004[18].

20.  The background in which Gao and Xie entered into the Oral Agreement with Zhao was “strange”[19]. Gao had not done any due diligence regarding Zhao or the companies he named as fund providers before entering into the Oral Agreement or the JV Agreement[20]. Gao claimed she had learned from a trustworthy friend Dr Jiang in November 2004 of funds of US$20 million in the books of China Mineral Acquisition Corporation, which was a company of Zhao’s business partner. This evidence was rejected as “incredible”[21].

21.  The Unsigned Agreement dated May 2004 tallied with Gao’s recollection of the terms of the document she and Zhao were then about to sign[22].

22.  The pleaded case of Angola on 3 June 2009[23], verified by a statement of truth of Zhao, was that in early 2004, “a provisional understanding was reached between the parties whereby Zhao (through … Angola) would pay a sum by way of direct capital injection into the said coal mine projects via a joint venture vehicle (later known as Zhong Xin), which in turn would become the foreign joint venture partner of a PRC entity owning the relevant rights to the said coal mine projects”. (emphasis added)  This plea was amended only in November 2015[24] to the effect that the provisional understanding was evidenced by the Unsigned Agreement discovered by Angola in August 2015, and that “Angola would be responsible for the procurement of financing equivalent to USD equivalent of RMB 50,000,000 part of which would be used as the registered capital of the PRC entity”. (emphasis added)  The judge found it “inconceivable” Zhao would have got the obligation previously pleaded wrong[25].

23.  By November 2004, Gao and Xie had committed Zhong Xin to contractual obligations with the Yulin Government to inject RMB 50 million into the SJV Company.  They were under pressure to come up with funds.  Even though Zhao had disappointed them once by breaching the Oral Agreement, they approached him again for co-operation, as they had not found better investment offers[26].

24.  The investment in the Coal Mine Project was risky.  The Coal Mine was one of many small-scale, state-owned coal mines with problems of low production, low profit, safety hazards, and various problems with employees.  There were about ten mines in the vicinity of the Coal Mine, all were suffering losses and seeking investors, although the Coal Mine was of better quality because of its potential in expanding the mining areas[27].

25.  Since the spring of 2003, Xie and Gao had incurred significant expenses of some millions on preliminary work.  They were not willing to invest their own monies if this could be avoided and wanted to source other capital[28].

26.  The JV Agreement was not professionally drafted[29]. It was Zhao’s idea to add the characters “融資” before “投入” in clause 1.2[30]. The payment schedule of ten working days in clause 2.2 was proposed by Zhao[31]. The JV Agreement was based on the Unsigned Agreement with input from both sides and because of the previous failure Gao had included two “preventive provisions” not found in the Unsigned Agreement: Zhao’s obligation was reduced to raising the first tranche of RMB 20 million as specified in clause 2.2, with an exit provision in clause 4.1 if he could not do so; and if the balance of RMB 30 million was not available, Angola’s shareholding in Zhong Xin could be reduced accordingly as provided in clause 4.3[32].

D3. The natural and ordinary meaning of clause 1.2

27.  The relevant obligation of Angola as consideration for the transfer to it of 50% shareholding in Zhong Xin was stipulated in the first part of clause 1.2 in the JV Agreement.  The entire provision read as follows:

“甲方以相當於人民幣5000萬元的等值美元的融資投入，持有中信礦業公司50% 的股權，乙方以常樂堡煤礦項目及其組建的合資公司進入中信礦業公司，持有中信礦業公司的50%的股權。”

28.  The Judgment focussed on the meaning of the characters “融資投入”. There is no dispute that “投入” means injection. As for “融資”, a convenient starting point is its dictionary meaning.  Mr Edward Chan, SC for the Bai Jun Camp[33] referred this court to the definitions of “融資” in 《現代漢語詞典》 (2002 年增補本):

(1)  “通過借貸、租賃、集資等方式而使資金得以融合並流通”; and

(2)  “通過借貸、租賃、集資等方式而得以融合並流通的資金”

29.  Two things should be noted about the above definitions.

30.  First, the term “融資”, which may be loosely translated as “financing”, is non-specific as to the method by which financing is carried out for funds to be made available.  The definition gives as examples three different ways that financing may be done – debt financing, equity financing and financing lease.  In An English-Chinese Glossary of Securities, Futures and Financial Terms (4^th ed) published by the Hong Kong Securities and Futures Commission, the equivalent terms in Chinese used in the Mainland, Hong Kong and both places for “debt financing”, “equity financing” and “finance lease/financial lease/financing lease” are as follows:

“debt financing 債務融資 (兩); 舉債籌資 (港)”

“equity financing 股本融資; 集資 (兩); 股權融資; 股票融資; 增股融資; 權益籌資; 產權理財 (內); 發行股票籌措資金 (港)”

“finance lease/financial lease/financing lease 融資租賃; 財務租賃 (兩); 融資租購; 金融租賃 (內)”

31.  It is clear from the Glossary that the term “融資” in itself gives no indication as to the method by which the financing is to be done and characters have to be added to “融資” to make clear the method to be deployed for the financing.  In this instance, there is no finding on the evidence as to what method or methods was envisaged by the parties for the financing to be carried out as mentioned in clause 1.2.  On the wording of the provision, it cannot be assumed that this would be done by debt financing or debt financing alone.

32.  Second, “融資” as defined in the dictionary can be used as a verb or a noun.  When used as a noun, this refers to funds obtained through financing by the methods mentioned above as examples – debt financing, equity financing, financing lease, and the like.  Mr Rimsky Yuen, SC for the Angola Camp[34] contended that it is “bizarre” to read the words “融資” as “funds that have been financed”, as the Chinese words to that effect should read “融得的資金”.  This contention must be rejected in light of the meaning in the dictionary given to “融資” when used as a noun.

33.  Mr Yuen also contended that the words “融資”, being the subject-matter to be “投入”, clearly meant the service of arranging financing for Zhong Xin.  It is best to analyse the sentence concerned with regard to the parts of speech in Chinese grammar (語法) to see whether this contention can be made good.  The relevant sentence is a compound sentence (複句).  To facilitate analysis, I will split this up as follows: 

“甲方(i) 以(ii) 相當於人民幣5000萬元的等值美元(iii) 的(iv) 融資(v) 投入(vi)”

34.  “甲方” in (i), which was defined in the JV Agreement to mean Angola, is the subject (主語) of this sentence. “以” in (ii) is not a verb as contended by Mr Chan but is a 介詞[35], “以” has the same meaning as “把” in this sentence and expresses the relationship of the composite predicate (謂語) made up of the parts in (iii), (iv) and (v) and the verb “投入” in (vi) at the end to the subject at the start in (i).As for the components in the predicate, “融資” in (v) is a noun qualified by (iii) and (iv).  On an analysis of Chinese grammar, the meaning of the relevant sentence is tolerably clear.  It means that Party A (ie Angola) is to inject funds in US dollars equivalent in value to RMB 50 million obtained through financing.  The entity or object that is the recipient of the injection is not expressed in this sentence and would have to be ascertained from the context of the JV Agreement. As discussed below, the object that is the recipient of the injection of funds is Zhong Xin.

35.  Purely from a grammatical angle, I am unable to construe this sentence as meaning that Angola was to provide the service of arranging financing for Zhong Xin of US dollars equivalent in value to RMB 50 million as its injection or contribution.  On the natural and ordinary meaning of this sentence, I do not think it can be interpreted that the financing was to be arranged for or on behalf of Zhong Xin.  I am inclined to agree with Mr Chan that rather different wording or at least much clearer wording would need to be used for the sentence to have that meaning, such as “安排中信融資作為投入”.

36.  The judge was persuaded by the submission of Mr Victor Dawes, SC that the words “融資” would be surplusage or redundant if the sentence is construed to mean that Angola was to inject funds obtained through financing, as the way in which Angola was to come up with the funds was of no relevance to Bai Jun and if it was intended that Angola’s obligation was to inject funds, the JV Agreement could have used other terms that were used in the agreement, such as “現金投入, 支付, 負責”[36]. I do not agree that the words “融資” would be surplusage if they are construed to mean the funds obtained through financing.  I do not think it can be assumed Bai Jun would not be concerned as to how Angola was to come up with the funds, as, after all, Zhao had disappointed Xie and Gao once when Angola decided to withdraw from the Coal Mine Project and Zhong Xin earlier, stating in its letter to Bai Jun dated 13 September 2004 that the funds were not in place for the time being due to the difficulty in procuring financing (“由於融資工作遇到了一些困難 … 資金暫時無法到位”). 

37.  As for different terms used in JV Agreement denoting injection or payment, I do not attach much significance to them as the context in which those terms were used in other parts of the agreement is rather different in contrast with clause 1.2.  The term “現金投入” in clause 1.5 denotes the obligation of Zhong Xin to inject cash into the SJV Company named CLB (pursuant to clause 11.2 of the SJV Agreement)[37], in contemplation that Angola would, by “融資投入”, inject funds into Zhong Xin.  As for the term “支付”, this is deployed in the context of the payment of preliminary expenses provided in clause 2.4.

38.  Mr Yuen also contrasted the use of the term “進入” in the second half of clause 1.2 (“乙方以常樂堡煤礦項目及其組建的合資公司進入中信礦業公司，持有中信礦業公司的50%的股權”) with “投入” in the first half to make the point that the obligation of Bai Jun was not to “inject” the Coal Mine assets (which were not owned by it) into Zhong Xin but to “enter into” Zhong Xin by the Coal Mine Project and the SJV Company that it formed.  It was envisaged that Bai Jun would procure the Coal Mine assets to be transferred from the Mainland partner Changle I&T to CLB and procure Zhong Xin to subscribe to the shares in CLB.  So just as Bai Jun was not obliged to inject assets of its own into Zhong Xin, Angola was not obliged to inject its own funds into Zhong Xin but would merely procure financing for or on behalf of Zhong Xin.

39.  Even if “進入” in the second half of clause 1.2 was used in contradistinction to “投入” for the reason as suggested by Mr Yuen, I do not think this is a sufficiently powerful indicator to suggest that the obligation of Angola was not to inject into Zhong Xin the funds it obtained through financing.

D4. The context of the entire JV Agreement

40.  I turn to consider other parts of the agreement relevant to the construction of clause 1.2. Mr Yuen pointed out that as a matter of structure, clause 1.2 was inserted at the outset of the agreement and is the very first clause which stated the basis of the parties’ co-operation in respect of Zhong Xin.  He submitted that the rest of the parties’ obligations in the ensuing provisions should be read in light of and/or subject to clause 1.2.  That may be one consideration.  The other consideration is to see whether the other provisions in the agreement would be consistent with one or the other of the rival constructions of clause 1.2.

41.  Clause 2.2 provided that Angola shall within ten working days of the signing of the agreement remit the US dollar equivalent of RMB 20 million into the account of Zhong Xin (“甲方在本協議簽訂後的10個工作日內將相當於人民幣2000萬元的等值美元 … 匯入中信礦業公司的帳戶”).  Clause 4.1 similarly provided that Angola shall pursuant to clause 2.2 duly remit within time the US dollar equivalent of RMB 20 million into the account of Zhong Xin (“甲方須按本協議第2部分 2.2 、2.3、2.4條款的內容及承諾，按時將相2000萬元人民幣的等值美金匯入中信礦業公司帳戶”).  As the judge had recognised, clause 2.2 required Angola to remit cash and if Angola’s obligation in clause 1.2 is construed to mean merely arranging finance for Zhong Xin, clause 1.2 would appear to be inconsistent with clause 2.2[38], and I would add, clause 4.1. I should also point out it is apparent from clauses 2.2 and 4.1 that the recipient entity of the financing of Angola must be Zhong Xin.

42.  In clause 2.4, an obligation was imposed on Angola to make payment of preliminary expenses in the total sum of RMB 7 million by three instalments (“甲方同意支付乙方人民幣700萬元的前期費用”). This obligation to pay preliminary expenses was also referred to in clause 4.1 by which the obligations under clause 2.2 and 2.4 were treated in a similar way (under clause 2.2 the funds were to be remitted into the bank account of Zhong Xin, under clause 2.4 the funds were to be remitted into the designated account of Bai Jun), and in the event that Angola is unable to comply with its obligation under any of these provisions, this shall be treated as a breach of contract, the agreement shall be terminated and Angola shall pay Bai Jun compensation of RMB 2 million.  This is another pointer that the RMB 20 million referred to in clause 2.2 (being part of the obligation under clause 1.2) is regarded as a payment obligation of Angola.

43.  Clause 3.2(7) provided that where Zhong Xin is to enter into transactions such as financing, providing a guarantee, borrowing, it is necessary to have the consent of more than 80% of its directors (“中信礦業公司有關下列事項的決定必須獲得80%以上的董事同意: 中信礦業公司融資 … 事宜”)[39]. Mr Chan made the point that where it was intended to refer to the situation of Zhong Xin obtaining financing, express wording to this effect was used, in contrast to clause 1.2.  This seems to me to be a valid point.

44.  Clause 4.3 provided that if Angola is unable to pay within time the remaining registered capital of the SJV Company, Bai Jun shall contribute capital to make up the shortfall, and the shareholding of Angola in Zhong Xin shall be reduced by proportion correspondingly (“若甲方未能按期支付合資公司註冊資本金餘額，將由乙方出資補上，甲方在中信礦業公司的股份則按比例相應降低”).  Mr Chan submitted that in this provision, Angola’s obligation was described as “支付”, to make payment for the registered capital of the SJV Company, and this militates against the construction that its obligation was merely to arrange financing for Zhong Xin.

45.  The judge had considered clause 4.3, but thought that this provision was of no assistance in construing clause 1.2, taking the view that clause 4.3 only referred to the balance of the registered capital (ie RMB 30 million) and did not cover the first tranche of RMB 20 million[40]. I am inclined to differ from the judge.  The obligation of Angola as provided in clause 1.2 pertained to funds in US dollars equivalent to RMB 50 million obtained through financing, and no distinction was drawn between the first tranche of RMB 20 million and the rest.  There is no justification to differentiate Angola’s obligation under clause 1.2, such that it was obliged to arrange finance for Zhong Xin in respect of the first tranche and the obligation to make payment would apply to the balance of RMB 30 million.  I would agree with Mr Chan’s submission.  It seems to me that clause 4.3 is inconsistent with Angola’s construction of clause 1.2.

46.  Mr Chan further contended that the words “註冊資本金餘額” in clause 4.3 referred not only to the remaining RMB 30 million, as the judge had held[41], but must refer to whatever was outstanding of the RMB 50 million required to be injected into the registered capital of the SJV Company. I am inclined to agree with the judge that on its plain wording, clause 4.3 did not govern rights arising from payment (or rather non-payment) of the first tranche of RMB 20 million as this was governed by the “exit provision” in clause 4.1.  In other words, upon Angola’s breach of its obligation to pay the first tranche, the rights of Bai Jun are provided in clause 4.1, being the right to terminate the JV Agreement and the entitlement to receive compensation of RMB 2 million.  The effect of clause 4.3, as the judge had held, is that if Angola had paid the balance of RMB 30 million, it could keep its 50% shareholding in Zhong Xin.  If Angola had not paid and Bai Jun had paid the balance, Angola’s shareholding would be diluted to 20%.  The above construction I place on clause 4.3 does not affect Bai Jun’s construction of clause 1.2.

47.  Construing the relevant sentence in clause 1.2 in the context of the entire agreement, I am inclined to think that Bai Jun’s interpretation is to be preferred.  On this interpretation, there is no apparent inconsistency between clause 1.2 and any of the other provisions that have been discussed.  That cannot be said if Angola’s interpretation of clause 1.2 is adopted.  Mr Yuen’s approach is to read those other provisions in light of Angola’s construction of clause 1.2.  But that would lead to a strained reading of the other provisions if the payment obligation of Angola stipulated in clauses 2.2, 4.1 and 4.3 is interpreted to mean that Angola was “to cause” the funds to be remitted to Zhong Xin. 

D5. The factual matrix – the Oral Agreement and the Unsigned Agreement

48.  I turn to the Oral Agreement. According to Bai Jun’s pleaded case, under the Oral Agreement Angola shall provide “cash capital injection” of US dollars equivalent to RMB 50 million for the Coal Mine Project.  Until Angola’s defence and counterclaim was amended in November 2015, Angola had averred (verified by a statement of truth of Zhao who was then in control of Angola), there was a “provisional understanding” by which Angola was to pay a sum by way of “direct capital injection” via Zhong Xin.  This was the single most important obligation of Angola.  As the judge had found, it was inconceivable that Zhao could have got this wrong.

49.  The judge however found this criticism fell away as a result of Gao’s confirmation of the terms of the Unsigned Agreement[42]. Her reasoning is that Gao had accepted in cross-examination that the terms of the Unsigned Agreement were basically consistent with the Oral Agreement. She construed clause 2.1 of the Unsigned Agreement to mean that Angola’s obligation was to arrange finance for Zhong Xin to be injected into the registered capital of the SJV Company and this is inconsistent with an obligation of Angola to provide “cash capital injection” as pleaded (“甲方負責融資相當於人民幣5000萬元的等值美元…部分用作合資公司註冊資本。註冊資本按國家有關規定在規定時間內，以海外公司[Zhong Xin]之名義匯入國內帳戶…”)[43].

50.  The judge also accepted Mr Dawes’ submission there was no reason why the intention of the parties under the JV Agreement should depart so radically from their intention a few months ago under the Oral Agreement, such that Angola would undertake a much more burdensome obligation to provide money, particularly so since Angola would only obtain 50% instead of 60% shareholding of Zhong Xin and that Angola had withdrawn from the Oral Agreement in September 2004 precisely because of lack of funds and difficulty in procuring finance[44].

51.  I do not agree with the judge’s construction of clause 2.1 of the Unsigned Agreement.  As submitted by Mr Chan, the words “甲方負責融資” (Party A was responsible for arranging finance) are not necessarily inconsistent with an obligation of Angola to make cash capital injection.  These words by themselves do not indicate expressly the financing that Angola was responsible to arrange was for or on behalf of Zhong Xin.  They could just as well mean that Angola was responsible to arrange financing for itself, to be remitted to Zhong Xin for injection into the registered capital of the SJV Company.  The stipulation that the injection into the registered capital of the SJV Company was to be done in the name of Zhong Xin (“註冊資本…以海外公司[Zhong Xin]之名義匯入國內帳戶”) does not necessarily mean that the financing which Angola was responsible to arrange was for or on behalf of Zhong Xin.  

52.  I accept that clause 2.1 of the Unsigned Agreement may not be as clearly worded as clause 1.2 of the JV Agreement.  I do not think it necessary to resolve the ambiguity in the construction of clause 2.1.  For present purpose, it is sufficient to conclude that clause 2.1 is not inconsistent with an obligation of Angola to provide cash capital injection to Zhong Xin, which was to be used as Zhong Xin’s contribution to the registered capital of the SJV Company.

53.  One is left with the Oral Agreement, and the pleaded case common to both parties (until Angola’s pleading was amended in November 2015) that the obligation of Angola under the Oral Agreement was to provide capital injection.  This is not subjective evidence of what one party had understood to be the term of the Oral Agreement but is the pleaded case common to both.  The judge had found it inconceivable that Zhao could have got this major obligation wrong in the previous pleading. Viewed in that light, and accepting it was unlikely that the parties would have made a radical departure as regards Angola’s single most important obligation in the joint venture when they entered into the JV Agreement a few months later, the Oral Agreement provides further support as factual matrix on the true intention of the parties leaning in favour of Bai Jun’s construction. 

D6. Commercial sense

54.  On behalf of the Bai Jun Camp, these submissions were made as indicating that the construction of Angola does not make commercial sense:

(1) The Coal Mine Project was very valuable.  As stated in Annex 2 to the JV Agreement, the realised net profit for 2004 was RMB 13.75 million with a forecast that this would reach RMB 30 to 40 million the following year, following the intended expansion of production[45]. Bai Jun had incurred significant expenses of some millions on preliminary work[46]. By the time of the JV Agreement, the SJV Agreement had been signed and Zhong Xin was to secure a 70% interest in this lucrative project with a cash capital injection of RMB 49.7 million. It is commercially unrealistic for Bai Jun to give away 50% shareholding in Zhong Xin to Angola merely in return for some brokerage service to arrange finance for Zhong Xin.

(2) The overall purpose of the JV Agreement was for Zhong Xin to obtain funds to be injected to the SJV Company as capital to fulfil Zhong Xin’s obligation under the SJV Agreement. The JV Agreement did not make any provision of the terms for the financing to be arranged by Angola.  If this was to be debt financing, the key terms on the loan that Angola must negotiate (such as the duration, security, drawdown date) were not specified.  Nor was any provision made for a veto power reserved to Zhong Xin or Bai Jun if there were stringent or unreasonable terms in the financing arranged by Angola or any power to deny Angola the right to obtain the shareholding of Zhong Xin in this situation.  Angola’s construction is just a recipe for disaster.

55.  As to (1), this must be weighed against the judge’s finding that the investment in the Coal Mine was risky[47] and that Gao and Xie were under pressure to come up with funds for injection into the SJV Company by November 2004[48] – which, as submitted by Mr Yuen, may support Angola’s contention why a reasonable investor would be reluctant to make a direct capital injection and why Bai Jun was prepared to give Angola 50% shareholding in return for its obligation to arrange finance for Zhong Xin.  I do not think the matters urged upon us in (1) are sufficiently cogent on one side or the other for a proper and definite inference to be drawn.

56.  The judge was not troubled by the matters raised in (2).  She reasoned that if Angola’s obligation was really to arrange finance, it was always up to Zhong Xin to negotiate the terms and decide whether to accept them and if the terms of the loan were unreasonable, it would be up to Zhong Xin/Bai Jun to veto the loan and ultimately Bai Jun would have the right to terminate the JV Agreement for Angola’s breach.  She took the view that Angola’s construction was “perfectly workable”[49].  Mr Yuen further submitted there is an implied term in law that when the performance of a contract requires co-operation, the other contracting party has a duty to take reasonable steps to co-operate[50]. And it is well established in law that a person cannot take advantage of his own wrong[51]. So if Bai Jun exercised the veto power unreasonably, it could not complain about Angola’s failure to remit the sum under clause 2.2 since its own breach had prevented Angola’s performance of the JV Agreement. 

57.  I have difficulty with the above approach and do not think the legal principles as mentioned would assist.  The term “融資” is non-specific as to the method by which the financing is to be carried out.  There is no finding on the evidence of any consensus as to the kind of financing to be undertaken, whether it was debt financing, equity financing or a mixture of both.  It is not possible to resort to the implied terms to co-operate or to act reasonably when the fundamentals or basics of the financing are left uncertain.  I am not persuaded that the JV Agreement is workable on Angola’s construction.  In the absence of consensus on the fundamentals, merely to have Angola arrange some kind of financing for Zhong Xin is unlikely to achieve the overall purpose of the JV Agreement, which was to obtain funds for Zhong Xin to be injected as capital for the SJV Company.

58.  The judge took the view that on Angola’s construction, the financing would be arranged by Angola for or on behalf of Zhong Xin, such that Bai Jun and Angola, as equal shareholders of Zhong Xin, would each bear 50% of its financial obligations indirectly and this was in accordance with business common sense and tallied with Gao’s description of ensuring equal injection, equal shareholding, equal benefit, equal obligation, equal management and equal say on important matters[52].  But this is premised on a workable basis for Angola to discharge its obligation to procure financing for Zhong Xin.  Besides, I do not think it can be said that on Bai Jun’s construction, Angola’s obligation, which was to make cash capital injection to Zhong Xin, was contrary to commercial sense.

59.  The judge rightly held that the subsequent Loan Agreement and the circumstances in which it was signed are irrelevant to the Construction Issue and recognised that her findings as to the circumstances of the signing of the Loan Agreement in section E7 of the Judgment are not admissible evidence for this purpose[53]. So I do not propose to go into those matters or the contentions raised on behalf of the Bai Jun Camp in that regard.

D7. Conclusion on the Construction Issue

60.  Taking into account the indications given by the language, the context of other provisions in the JV Agreement, the overall purpose of the agreement, the factual matrix, and considerations of commercial sense, I take a different view from the judge on the Construction Issue.  I hold that the correct construction of Angola’s obligation under clause 1.2 of the JV Agreement was to inject funds in US dollars equivalent to RMB 50 million, to be obtained through financing, into Zhong Xin.

E. THE TERMINATION ISSUE

E1. The issues raised on appeal

61.  The central issue here is whether Bai Jun was entitled to terminate the JV Agreement when it did so on 22 June 2005. Bai Jun contended it was entitled to do so on account of one or both of these breaches of contract committed by Angola: (1) the failure to provide capital injection to Zhong Xin and to remit the first tranche of RMB 20 million within ten working days of the signing of the agreement, contrary to clauses 1.2 and 2.2 (“the 1^st Breach”); and (2) the failure to pay the 2^nd RMB 2 million, being part of the RMB 7 million to reimburse Bai Jun for preliminary expenses, upon CLB obtaining the mining rights of four sq km coal mines on 28 March 2005, contrary to clause 2.4 (“the 2^nd Breach”).

62.  Mr Chan had also relied on two other breaches of Angola, the failure to pay RMB3 million, being the last instalment of the preliminary expenses, upon CLB obtaining the exploration rights of 2.86 sq km coal mines on 21 December 2005, contrary to clause 2.4; and the failure to pay RMB 30 million being the balance of the capital injection to Zhong Xin (the second instalment of RMB 20 million was due on 18 January 2006, which was one year after the incorporation of CLB[54]), contrary to clauses 1.2 and 4.3.  But as submitted by Mr Yuen, and also accepted by Mr Chan, these breaches as alleged are irrelevant to Bai Jun’s purported termination on 22 June 2005 because they all arose after that date.  I do not propose to deal with them.

E2. The 1^st Breach

63.  The judge held that Angola’s procurement of the Loan Agreement dated 14 February 2005 was due performance of its obligation, but Angola was in breach of clause 2.2 in that the performance was out of time.  This was due to her construction that Angola’s contractual obligation was to procure financing for or on behalf of Zhong Xin.  As I have held that on a proper construction Angola’s contractual obligation was to provide direct capital injection to Zhong Xin, it follows that by procuring Zhong Xin to enter into the Loan Agreement with Achieve Goal to borrow HK$20 million[55], Angola had failed to discharge its obligation under clause 1.2.  This was a complete failure to perform the contractual obligation, not just a delay to remit the funds within time as stipulated in clause 2.2 as found by the judge, and was a repudiatory breach which would entitle Bai Jun to terminate the JV Agreement as well as liquidated damages of RMB 2 million under clause 4.1.

64.  Mr Yuen contended that the obligation of Angola had been performed as the remittance had been made, albeit belatedly, and Achieve Goal had abandoned its claim for the recovery of the loan from Zhong Xin when it discontinued the original action in these proceedings on 22 July 2009.  This contention is to no avail.  The fact remains there was a complete failure to perform the contractual obligation when Bai Jun exercised its right to terminate the JV Agreement on 22 June 2005.

65.  As for the purported affirmation in §7(h) of the amended defence and counterclaim of Zhong Xin and Bai Jun filed in these proceedings on 31 October 2006 that they “abandon any claim against Angola for termination or rescission of the JV Agreement as a result of the repudiatory breach of the same by Angola and affirm the JV Agreement”[56], this is of no legal consequence as the JV Agreement had effectively been terminated before that date.

66.  On the basis there was merely delay in performance of the obligation in clause 1.2 as the judge had construed, she found that there was waiver of this breach by the letters of Bai Jun’s solicitors to Angola dated 18 and 31 May 2005[57]. Whatever conclusion the judge had reached regarding waiver of the breach in delay in complying with clause 2.2, the solicitors’ letters cannot be regarded as waiver of the breach in the complete failure to perform the obligation to provide capital injection in clause 1.2.

67.  For the above reasons, Bai Jun was entitled to terminate the JV Agreement on 22 June 2005 for the 1^st Breach. 

E3. The 2^nd Breach

68.  There was no dispute that Angola was in breach of clause 2.4 in that it had failed to pay the 2^nd RMB 2 million on 28 March 2005.  Angola claimed that Bai Jun was in breach of clause 2.5 in failing to cause the mining permit to be issued within time and was liable to pay liquidated damages to Angola of RMB 2 million pursuant to clause 4.2.  Angola relied on a legal set-off[58] of the two identical amounts to contend that the 2^nd Breach was not made out.

69.  There was much discussion in the Judgment whether Bai Jun was late by one “working day” in causing the mining permit to be issued and hence in breach of clause 2.5, as this turned on how working days should be calculated (whether it should be based on the Hong Kong or the Mainland calendar[59]) and when the period of the 90 working days in clause 2.5 should run (whether it should run from the date appearing on the JV Agreement, or the actual date of signing the backdated document[60]). If the reckoning should be from the actual signing date (21 December 2004), it would not matter whether the Hong Kong or Mainland calendar was adopted.  The judge took the view that time should be counted from the date to which the agreement was backdated (1 December 2004) and that it should be based on the Hong Kong calendar.  She held that the mining permit was obtained one working day late and Bai Jun had breached clause 2.5 which would entitle Angola to liquidated damages of RMB 2 million, available in a legal set-off against Angola’s liability to pay Bai Jun the 2^nd RMB 2 million[61].

70.  I do not think it is necessary to go into the question whether Bai Jun was in breach of clause 2.5 and whether there was a valid legal set-off, as I have held that Angola was in breach of clause 1.2, which would entitle Bai Jun to liquidated damages of RMB 2 million under clause 4.1. Assuming that legal set-off is available to Angola, even if Bai Jun was in breach of clause 2.5, the liquidated damages of RMB 2 million which Bai Jun should pay Angola under clause 4.2 should be set off against the liquidated damages of RMB 2 million which Angola was liable to pay Bai Jun under clause 4.1.  Hence, Angola’s liability to pay the 2^nd RMB 2 million under clause 2.4 was not met and the 2^nd Breach was established.  This provided an additional basis of Bai Jun’s entitlement to terminate the JV Agreement on 22 June 2005.

E4. Conclusion on the Termination Issue

71.  For all the above reasons, I arrive at a different conclusion from the judge on the Termination Issue.  I hold that Bai Jun was entitled to and had validly terminated the JV Agreement on 22 June 2005.

F. THE CONSEQUENCE ISSUE

F1. The judge’s ruling and the issues on appeal

72.  Having validly terminated the JV Agreement on 22 June 2005, the next issue is whether Bai Jun is entitled to the return of Angola’s 50% shareholding in Zhong Xin.  The judge dealt with the Consequence Issue on the premise that she had erred in the Construction Issue and the Termination Issue.

73.  The judge rejected Angola’s contention there was no room for restitution of the shares held by Angola in Zhong Xin in view of clause 4.1, which provided for the consequences of Angola’s breach (termination of the contract and liquidated damages of RMB 2 million), and held that clause 4.1 would not bar a claim for the return of Angola’s shares[62].

74.  She agreed with Bai Yun’s submission that Angola’s entitlement to 50% shareholding in Zhong Xin was conditional upon its making the RMB 20 million direct capital injection under clause 2.2, but rejected the contention that the entitlement to shareholding was also conditional upon the payment of preliminary expenses of RMB 7 million under clause 2.4, as the latter did not form part of the consideration for the shares[63].

75.  As to whether there had been total failure of consideration, the judge rejected Angola’s submission that its payment of the 1^st RMB 2 million being part of the preliminary expenses would militate against there being a total failure of consideration, as the preliminary expenses did not form part of the consideration for the shares[64].  She accepted Angola’s submission that as Angola had caused RMB 20 million to be remitted to Zhong Xin, albeit as a loan made to Zhong Xin instead of by way of direct capital injection to Zhong Xin as contractually stipulated, and as Zhong Xin had used the money for injection to the registered capital of CLB to satisfy the condition for obtaining the shareholding in CLB, any failure of consideration was not total[65].  Bai Jun had not caused Zhong Xin to return the loan of HK$20 million, and although Bai Jun/Zhong Xin might have a cause of action to set aside the Loan Agreement as at the termination date of the JV Agreement, the judge regarded this as water under the bridge as a result of the discontinuance of the original action for recovery of the loan by Achieve Goal[66].

76.  As the consideration was not total, the judge held that Angola could retain the shares in Zhong Xin. She ruled that it could retain its 50% shareholding and this would not be reduced to 20% under clause 4.3.  On its plain wording, clause 4.3 did not govern rights arising from payment of the first tranche of RMB 20 million and what it did was to give Angola an option to pay the balance of RMB 30 million.  If Angola had paid, it could retain its 50% shareholding; if it had not and Bai Jun had paid, Angola’s shareholding would be diluted to 20%.  The date of Bai Jun’s termination of the JV Agreement had come before the due date for Angola to exercise its option under clause 4.3, and as the agreement had been terminated, clause 4.3 could not be revived after termination.  Further, as Bai Jun had abandoned its claim under clause 4.3 in the Stage 2 Issue based on the subsequent injection through Clarigain of RMB 29.7 million into Zhong Xin, it should not be permitted to re-assert its case founded on this provision[67].

77.  The crucial issue here is whether there has been a total failure of consideration so that Angola is not entitled to retain its 50% shareholding in Zhong Xin, notwithstanding the RMB 20 million which was made available to Zhong Xin and which had been injected to the registered capital of CLB.

78.  Mr Yuen sought to argue on appeal the 1^st RMB 2 million that Angola had paid pursuant to clause 2.4 should be treated as part of the consideration for the transfer of 50% of the shares, but this is not covered by the respondent’s notice.  In any event, I agree with the judge’s ruling against Angola in this respect.

F2. If there has been total failure of consideration

79.  Where the benefit conferred takes the form of money, the failure of basis must be total (Goff & Jones: The Law of Unjust Enrichment (9^th ed) at §12-16).  “When one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise.” (Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 at 48, per Lord Simon LC).

80.  In order to identify the basis on which money was paid, or other benefits conferred, the transaction must be closely analysed.  The transferor may receive a benefit from the transferee, but it does not follow that the basis for the transfer has been satisfied, as failure of basis must not be confused with receipt of benefit.  The benefit must be (or at least part of) what was understood to be the basis of the transfer. (Goff & Jones, at §§12-24, 13-01, 13-05, 13-06).

81.  In The Julia [1949] AC 293, Lord Simonds, having quoted the above dictum of Lord Simon LC, went on to say at 316 that “the receipt by the promisee of something which the promisor did not promise will not prevent a total failure of consideration”.  In that case, it was held that what the buyers bought was 500 tons of rye, not an undertaking endorsed on a delivery order which was a part of the machinery by which the sellers were to carry out their bargain.  Hence, the sellers performed neither all, nor in any material sense, a part of what they were required to do under the contract and the buyers obtained no part of what they had contracted to buy and there was total failure of consideration.  Lord MacDermott said at 323: “the buyer has not got any of what he paid for and the fact that part of the machinery of fulfilment or some incidental benefit has come to his hands is by the way”. 

82.  Applying the above principles to the present situation, the receipt of HK$20 million as a loan to Zhong Xin was an incidental benefit which Bai Jun had not bargained for under clause 1.2 of the JV Agreement.  As it did not constitute performance of Angola’s contractual obligation, there was failure of the basis for the transfer.  The receipt of a benefit which was not the contractually promised benefit was by the way, and must not be confused with failure of basis.  In my judgment, there has been a total failure of consideration.

83.  Having reached the above conclusion, I do not think it necessary to deal with other arguments advanced by Mr Chan, such as the one premised on Bai Jun’s rejection of any benefit conferred (on the assumption that the loan made to Zhong Xin could be regarded as consideration); or another based on the construction of clause 4.3 of the JV Agreement that Angola’s entitlement to 50% shareholding was conditional upon the full payment of RMB 50 million capital injection (which I do not agree with, I have considered this provision under the Construction Issue); or a contention based on the assumption that the loan of HK$20 million could be regarded as partial performance so that the shares representing the unpaid part of RMB 50 million should still be recoverable by Bai Jun.

84.  I hold that as there has been a total failure of consideration, Bai Jun is entitled to recover the 50% shareholding from Angola.

G. THE SETTLEMENT AGREEMENT ISSUE

85.  The Bai Jun Camp sought to argue on appeal that having found the Settlement Agreement was deliberately backdated to mislead the courts in Hong Kong and the Mainland, the judge should have held that the Settlement Agreement was unenforceable on account of illegality.  Further, it sought to argue that the judge should also have held that the Settlement Agreement was unenforceable as it was signed by Wang Li purportedly on behalf of Bai Jun when he had no actual authority to act as a director.

86.  These contentions are of little moment to the resolution of this dispute, as the judge had held that this action has not been settled by the Settlement Agreement in that it was signed by Wang Li without authority to settle and it was dishonest and irrational for Angola’s representatives to rely on the apparent authority of Wang Li[68].  I do not propose to deal with them.

H. CONCLUSION AND COSTS

87.  For the above reasons, I would allow the appeal of the Bai Jun Camp and set aside that part of the Judgment dismissing the counterclaim of the Bai Jun Camp for a declaration that Angola was not entitled to the 50% shareholding in Zhong Xin and an order for transfer of the shareholding to Bai Jun.  In lieu thereof, I would make a declaration and an order as mentioned aforesaid.

88.  The judge had ordered the Angola Camp to bear 30% of the costs of the Bai Jun Camp of the whole action on indemnity basis[69]. In respect of the costs below, I would direct the Bai Jun Camp to serve submissions of not more than five pages within 14 days of the handing down of this judgment and the Angola Camp to serve submissions in answer of not more than five pages within 14 days thereafter.  This would then be dealt with on paper.

89.  For the costs of this appeal, I would make an order nisi that the Angola Camp should pay the costs of the Bai Jun Camp, with a certificate for two counsel.  Any application to vary this order nisi should be made within 14 days of the handing down of this judgment.

Hon Cheung JA:

90.  I agree with the judgment of Kwan VP.

Hon Yuen JA:

91.  I agree with the judgment of Kwan VP.