THE APPLIED RESEARCH COUNCIL vs WIRELESS LOGIC TECHNOLOGIES LIMITED & others

HCA 16952/1999

BETWEEN

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J U D G M E N T

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1. This is the appeal of the 2^nd, 3^rdand 4^thdefendants against the order of Master Lung dated 17 September 2001, in terms of which he granted summary judgment to the plaintiff against the 2^nd to 4^th defendants in the sum of $4,928,523.06, together with interest thereon. 

2. The plaintiff is a quasi‑governmental organisation which at the material times, inter alia, provided a funding scheme to investors in and developers of information technologies.

3. A parent company of the 1^stdefendant had developed a telecommunication technology for the development of spread spectrum IC’s for long range,cordless phones, and applied to the plaintiff in the name of the 1^stdefendant for a loan in order to further develop the technology in Hong Kong.

4. There is no dispute that on 28 January 1994 the plaintiff and the 1^stdefendant entered intoan agreement in terms of which the plaintiff agreed to make a $10 million loan facility available to the 1^st defendant for the purpose of further developing its aforesaid technology in Hong Kong.  The amount of the loan was later, by agreement, reduced to $5.5 million.

5. On 31 January 1994 and in support of the loan agreement, each of the 2^nd, 3^rd and 4^thdefendants entered into a Guarantee and Indemnity agreement with the plaintiff, guaranteeing the repayment of the loan by the 1^st defendant.

6. Certain instalments were paid by the 1^st defendant, but with effect from 23 October 1997 it has defaulted on its repayments.  Demands were duly made by the plaintiff of the 1^st defendant under the loan agreement, and of the 2^nd to 5^thdefendants under their Guarantees, but no further payments have been made.

7. On 29 October 1999, the plaintiff instituted these proceedings to recover the outstanding amount of the loan together with interest thereon, against the 1^st defendant in terms of the loan agreement and against the 2^nd to 5^th defendants in terms of the Guarantee and Indemnity agreements.  On 9 February 2000 the 2^nd to 4^th defendants entered a defence, denying liability for the said sum or any part thereof.  On 14 December 1999 the plaintiff obtained default judgment against the 1^st defendant; and on 17 September 2001 the plaintiff obtained summary judgment against the 2^nd to 4^thdefendants, against which the 2^nd to 4^th defendants now appeal.

8. The defence entered by the 2^nd to 4^th defendants to the plaintiff’s claims is to the effect that following negotiations between James Wong, then the President and Chief Executive Officer (“CEO”) of the 1^st defendant, who was acting on behalf of all the defendants, and various representatives of the plaintiff between April 1998 and September 1999, Mr Ivan Lee on behalf of the plaintiff orally indicated to Mr Wong that his settlement proposals were agreeable in principle to the plaintiff, in terms of which proposals the plaintiff would waive the outstanding debt owed by the 1^st defendant and release the 2^nd to 5^th defendants from their liabilities under their Guarantees and Indemnities, in return for the 1^st defendant’s agreement to license its technology to two Hong Kong local industry companies under a no‑licensefee and royalty‑free arrangement.

9. The defendants alleged that by virtue of the plaintiff’s aforesaid communication of its agreement in principle to James Wong’s settlement proposals, the plaintiff had duly waived the outstanding sum due by the 1^st defendant and released each of the 2^nd to 4^th defendants from their liabilities under the Guarantees and Indemnities undertaken by them; in the alternative that in reliance on the plaintiff’s communication of its agreement in principle to the settlement proposals, the 2^nd to 4^th defendants have altered their legal positions by investing their funds as capital investment in a company which is a future’s commission merchant, and the plaintiff is thereby estopped from demanding repayment from the 2^nd to 4^th defendants under their Guarantees.

10. Mr Ho on behalf of the defendants has not adduced any submissions in support of the defence of waiver, confining his arguments to the alternative defence of promissory estoppel.  He submitted that the circumstances as presented in the pleadings and supported by the affirmation evidence clearly gave rise to an equitableestoppel—or at the very least arguablyso, which would suffice for present purposes —whereby the plaintiff is precluded from enforcing its strict legal rights under the Guarantees against the defendants.  The matter should therefore go to trial, and the defendants be given unconditional leave to defend. 

11. The relevant principles applicable to an Order 14 application were re‑stated by the Court of Appeal in Mass InternationalLtd v. Hillis Industries Ltd [1996] 1 HKC 434 at page 439 : the defendant

“must show that there are triable issues.  He has to satisfy the court that he has a ‘real or bona fide defence’... If he makes an allegation, it must be credible or believable in the light of the evidence placed before the court.  As BokharyJA said in Re Safe Rich Industries Ltd (CA 81/1994, unreported) :

The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable.  But it must be recognized – because failure to recognize it would create a debt‑dodgers’ charter – that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.”

12. Mr Lam submits that the factual allegations upon which the defendants’ defence of estoppel depends, are entirely devoid of credibility when looked at in the context of all the surrounding facts and the affirmation evidence filed.

13. The quintessential allegation upon which the defence rests is that, following negotiations from April 1998 onwards between James Wong on behalf of the defendants and the plaintiff’s representatives, Mr Ivan Lee, on behalf of the plaintiff, “had orally indicated to Mr Wong that the (settlement) Proposal was agreeable in principle to the plaintiff and the plaintiff would take some time to examine the relevant license particulars.  The agreement was not reduced into writing” (paragraph 7(2) of the Defence). 

14. It was purportedly in reliance upon that alleged oral representation — which representation was allegedly further reinforced by Ms Jenny Wong later, on behalf of the plaintiff, advising the 1^st defendant to make further investments to perfect the technology first so as to satisfy the further inquiries of the plaintiff — that the defendants alteredtheir position to their detriment, which they did, according to James Wong’s affirmation evidence, by making further investments in the technology, and they also turned down an offer which they received to purchase the technology — which they would not have done but for the plaintiff’s alleged representations.

15. In his 1^st affirmation (which was filed shortly before the summary judgment application was heard by the Master), James Wong affirmed inter alia as follows : 

“During the negotiation [from April 1998 to September 1999], Mr. Ivan K.B. Lee of the Plaintiff had on behalf of the Plaintiff orally indicated to me that the Proposal made by me was acceptable in principal, but they had to examine the relevant licence particulars (“the Settlement Agreement”).  Further Mr. Ivan K.B. Lee had advised us to perfect the Technology and ensure that the same was suitable for the local environment and market.  He supplemented that we should make further investment to achieve the said purpose and satisfy the inquiries from the Plaintiff.  The Agreement was, however, not reduced into writing.”

16. In his 2^nd affirmation (which was filed just two days before the present hearing), James Wong affirmed inter alia as follows :

“After hearing of the Settlement Proposal, Mr. Ivan Lee replied that he needed to take further instructions from his superior...In about the end of August or early September 1999, I had an e‑mail correspondence with Mr. Ivan Lee and Ms. Jenny Wong respectively.  Mr. Ivan Lee indicated that the Plaintiff’s Board of Directors had considered the Settlement Proposal and they agreed to accept the same in principal.  They considered that the 1^st defendant was a leading company in the field of SST in Hong Kong and the Technology was a valuable one.  He requested detailed product and technology information.  In good faith, I subsequently submitted a large volume of product information and description of our technology.”

17. It is obviously important, in assessing the believability of the defendants’ aforesaid allegations, to examine the allegations against the contemporaneous correspondence between the parties, consisting of e‑mails, letters and faxes, which were referred to in detail by both counsel in their submissions. 

18. It is to be noted in the first place that the only definite response which was recorded in writing by the plaintiff to the settlement proposals, was its rejection of such proposals contained in the letter from Ivan Lee, the assistant secretary of the plaintiff on 24 December 1998 :

“We cannot accede to your request to repay the outstanding loan by transferring to the Council two royalty‑free licenses of your spread spectrum radio technology.  The Council does not operate as a technology transfer agent and your proposal is in effect asking the Council to find two local buyers of your technology.

I attach herewith the updated schedule of the outstanding loan for your reference...”

19. Mr Lam acceptsthat this was not the plaintiff’s last word on the subject, rather it was the end of what he termed the “first phase” of the negotiations; further negotiations in relation to the settlement proposals did ensue thereafter. 

20. It is notable that nowhere in the correspondence is there any written representation from the plaintiff to the effect that the settlement proposals were acceptable in principle to it.

21. Equally noteworthy is the complete absence in the correspondence of any reference by James Wong or anybody else on behalf of the defendants to the alleged communication by the plaintiff to James Wong that the settlement proposals were agreeable in principle to it.

22. Mr Ho in his submissions cautioned against expecting any “lawyer‑like” response from James Wong or his colleagues.  Nevertheless as experienced businessmen it would be reasonable to expect that they would, for their own protection, at least have requested the plaintiff to confirm in writing its agreement in principle to the settlement proposals, before they proceeded to act upon such alleged representation by allegedly investing further sums in perfecting the technology and turning down an offer to purchase the technology.  However no such request was made, nor is there any reference whatsoever in the correspondence to the alleged agreement in principle by the plaintiff to the settlement proposals.

23. The above considerations would not of course in themselves decisively militate against the credibility of the defendants’ assertion that the plaintiff had orally communicated its agreement in principle to the settlement proposals.  However the matter goes much further than that.

24. The Minutes of a meeting of the plaintiff’s Board of Directors on 9 September 1999 reads inter alia as follows :

“5.The Secretary reported that Council’s lawyer had issued demand letters before legal action to the two companies and to the guarantors of the loans.  As agreed by Directors in the previous meeting, the Secretariat would initiate legal actions against the concerned parties.

With regard to the integrated circuit for long‑range, wireless telephone developed by Wireless Logic Technologies, initial assessment from industry specialistsrevealed that similar products were already available in the market.  In fact, the Telecom Technology Centre of the Hong Kong Productivity Council was providing consultancy services on this technology.  Accordingly, Wireless Logic’s offer of two free licences to use the technology to set off the loan would not be viable.”

25. The Minute provides a clear indication of the Plaintiff’s Directors’ state of mind as at 9 September 1999, namely that the settlement proposals were “not viable” for the reasons noted in the Minute; indeed letters before action had already been issued to the defendants.

26. I note that in the meantime, on 6 September 1999 Ms Jenny Wong, the assistant secretary to the plaintiff, had e-mailed James Wong in the following terms :

“We are still considering the way forward based on the information you sent to us earlier on the spread spectrum wireless technology.

I will let you know the answer as soon as possible.

In the meantime, please contact me should you feel there are other information that the Directors should take into consideration.”

In a later e-mail on the same day Jenny Wong wrote as follows :

“I write further to my e-mail earlier today.

I should like to know whether you have licensedthe technology and/or chip‑set, to other manufacturers?  If yes, can I obtain a reference from them?”

27. Further correspondence followed in which James Wong informed Jenny Wong that the technology had been licensed to a company in California, and on 18 September Jenny Wong indicated that she would like to obtain a reference letter from that company, and asked James Wong to request such.

28. Mr Ho submitted, and I accept, that these e‑mails strongly suggested that, notwithstanding that demand letters before action had on 28 August 1999 been issued to the defendants for repayment of the loan, the plaintiff was at the same time still, at that stage, keeping negotiations open.

29. The next and final correspondence between the parties consisted of two faxes which were sent by James Wong to the plaintiff for the attention of Jenny Wong on 2 February and 14 February 2000.  In his fax of 2 February 2000, James Wong explained that since their last correspondence the 1^st defendant had ceased operations and formally filed for bankruptcy in the United States, and that he had been appointed the CEO of a company called ThinkCore Communications Incorporated.  He continued inter alia as follows : 

“I am writing in reference to the outstanding loan that the now‑defunct Wireless Logic Technologies Ltd. owed to the HK Applied Research Council...

Proposal : ThinkCore would be willing to consider offering a royalty‑free license to two Hong Kong OEM manufacturers.  ... In return we ask that the HKARC to drop the outstanding lawsuit against Wireless Logic and all its individuals, and that HKARC to forgive the outstanding loan plus interest.

We believe this is a win‑win arrangement for all parties concerned.  First, the two recipient Hong Kong OEM companies will benefit from the transfer of a leading‑edge technology... Secondly, the HKARC needs no longer to spend substantial legal and administration costs in a prolonged litigation process...

I urge you to put forth my offer to the Council’s Director for consideration.  If you are interested, I would be more than happy to arrange for a face‑to‑face meeting with your management in the very near future at your convenience...”

30. In his following fax to the plaintiff, which is also addressed to the attention of Jenny Wong (andthough undated, it is common ground was written on 14 February 2000) James Wong wrote as follows :

“I will be in Hong Kong on business from 6 March through 7 March.  If possible, I would like to arrange a meeting with your Director to discuss the possibility of my licensing proposal... I could make a full presentation of this leading‑edge technology that can help bring competitiveness to the Hong Kong industry...

I hope you will give it due consideration.  If interested, please let me know by return fax or e‑mail...

I look forward for your early reply.”

31. Mr Lam has understandably placed great emphasis on these last two faxes as being completely inconsistent with James Wong’s assertion that the plaintiff had in September 1999 communicated its agreement in principle to hissettlement proposals.  (It is to be noted that the faxes were both issued after the present proceedings were instituted on 29 October 1999.)

32. On behalf of the defendants, Mr Ho has argued that the plaintiff’s oral communication that the settlement proposal was agreeable in principle to it, must be viewed against the background of the previous dealings between the parties, and in particular the fact that the plaintiff had allegedly adopted the same modus operandiprior to the conclusion of the loan agreement between the parties in 1993, at which time, as affirmed by James Wong :

“14.In or about September/October 1993, we were informed by Mr.Young that the Plaintiff had agreed in principal that a sum of HK$10 million be granted to the 1^st Defendant, subject to the final approval by the Board of Directors of the Plaintiff.  Mr. Young added that the said fund would be provided by way of reimbursement, i.e. the 1^st Defendant had to incur the necessary expenses (on research and development) first and then the Plaintiff would reimburse the 1^st Defendant of the same.  At that time, no concrete term or condition of the said funding arrangement was concluded between the parties.

15.Mr. Young explained that since its directors, who were mostly “outsiders”, only had meeting once a month or 2 months and there was a long list of matters for them to discuss, it was not feasible for the 1^st Defendant to wait for a formal Board resolution before starting its works in Hong Kong.  Besides, in order to gain the trust and confidence of the Board, the 1^st Defendant must start its project immediately so that some “fruits” could be seen before the press conference for fund granting...

17.Unlike ordinary commercial dealings, we were not able to have any meticulous discussion of the proposed funding arrangement with the directors of the plaintiff directly.  Further, since the contact person, Mr Young, was a Senior Government Official, we had no doubt of his representations... In reliance on what Mr Young told us and the plaintiff’s agreement in principle, the 1^st defendant started its project in Hong Kong.  On 28 January 1994, the plaintiff and the 1^st defendant entered into the Loan Agreement under which a loan facility of HK$10 million was granted to the 1^st defendant.  Before the making of the Loan Agreement the project was started and money had been incurred by the 1^st defendant...”.

33. However, a closer examination of the facts in relation to the plaintiff’s expressed agreement in principle in 1993 to provide funds to the defendant reveals significant differences, when compared to the facts upon which the defendants purportedly relied in relation to the alleged agreement in principle to the settlement proposals in 1998.

34. In the first place, as affirmed by James Wong, in 1993 Mr Young : 

“promised to issue a letter to the 1^st defendant confirming that the plaintiff had agreed in principle that the fund be granted to the 1^st defendant.” 

He did issue such a letter on 11 October 1993, in the following terms :

“I am pleased to inform you that the Board of Directors of the Hong Kong Applied R & D Fund Company Limited (this company) has at its eighth Board meeting held on 6 October 1993, agreed in principle to provide funding support of up to a maximum amount of HK$10 million to your company for the captioned project, in a form to be agreed upon at a later stage.

The in-principle support will, however, be conditional upon : 

(a)positive outcome of due diligence on the key personnel involved in the captioned project, such as Mr. John T. Lee and Mr. Danny Wong;

(b)presentation of proof from your side that resources for the remaining project cost, amounting to approximately HK$24 million, will be available for the project; and

(c)a mutual agreement on the terms and conditions for the funding to be provided.

In relation to (a) above, you are invited to submit a proposal as regards the form of funding support which will be acceptable to you as the basis of further negotiation.

Needless to say, nothing herein shall bind the Company unless and until a proper legal agreement has been executed by both parties.”

35. Since the 1993 agreement in principle to provide funding support to the defendants was reduced to writing, and furthermore was clearly expressed to be conditional, and not binding upon the parties until such time as a proper legal agreement had been executed by them, those facts provide no support for the suggestion that the defendants were induced or lulled by the aforesaid events in 1993 into relying on the plaintiff’s alleged agreement in principle to James Wong’ssettlement proposals in 1998 — of which there is no written record whatsoever.

36. I am mindful that a summary judgment application must not be permitted to become a mini trial of the issues on the affidavit evidence filed.  That however is a different exercise from testing the believability of the factual assertions upon which the defendants’ defence relies, by examining them against all the affidavit evidence filed, including the contemporary correspondence between the parties.

37. I agree with Mr Lam’s submission that by all standards of common sense and commercial reality, it is incredible that if such an agreement in principle to the defendants’ settlement proposals had indeed been communicated to the defendants, it has not at any time been reduced to writing, nor is there any reference whatsoever to it anywhere in the correspondence.  Per contra,in all his letters to the plaintiff throughout the correspondence, right up to 14 February 2000 (well after the plaintiff had launched the present proceedings against the defendants), James Wong continued to repeat his settlement proposals and urged the plaintiff to accept them, or at least to give him an opportunity to present them in person.

38. I note that even after demand letters before action were sent to the defendants on 28 August 1999, the defendants did not make any reference to the alleged agreement in principle; they simply failed to reply to such letters.  The present defence was first raised by them in their Defence filed on 9 February 2000. 

39. I note further, although the point would be far from decisive if it stood on its own, that it is in any event inherently improbable that the plaintiff would have committed itself to waive such a large sum when, on any version of the facts, it was still pursuing outstanding queries in relation to the technology and requiring the defendants to make further improvements therein, and the particulars of the proposed licensing arrangements had not yet been worked out.

40. Mr Lam submitted that even if the defendants’ factual assertions were accepted, they would not give rise to a promissory estoppel I agree.  As I have indicated above, Mr Ho has not sought to support the defendants’ initial defence as pleaded that the parties had concluded a valid and binding settlement agreement — no doubt based upon a recognition of the fact that an agreement in principle only does not in law constitute a binding contract. 

Chitty on Contracts, 28^th edition, 1999, Volume 1, paragraph 2-103.

41. The defendants’ defence of estoppel could only succeed upon proof of a clearand unambiguous promise by the plaintiff. 

Bank of India v. Surtani Murlidhar Parmanand trading as Ajanta Trading Corporation, CACV196/1992.

“viewed in the context of the relevant circumstances, I do not think any such promise or representation would have the requisite degree of certainty necessary in promissory estoppel.” (per Nazareth JA — as he then was — at page 11)

“In the alternative to his argument based on collateral contract, Mr Remedios seeks to rely on promissory estoppel – hoping thus to avoid the consequences of, as he put it, ‘ambiguity or lack of clarity’, fatal under contract.  But for estoppel he is driven to relying on the same matters as he relies on for collateral contract.  That dooms the alternative argument to failure.” 

(per Bokhary JA — as he then was — at page 14)

42. In the present case, even on the defence version there were important issues still to be agreed in relation to the alleged agreement in principle by the plaintiff to the settlement proposals, namely in relation to the exact specification of the technology, the licensing arrangements and from whom, how and when the technology could be transferred.  In other words, on either version of the facts the essential foundation upon which the defence of promissory estoppel would necessarily depend, namely a clear and unambiguous promise by the plaintiff, was lacking.

43. The defendants have failed to satisfy the threshold onus of demonstrating that they have a “real or bona fide defence” to the plaintiff’s claims, or that any triable issues have been raised.  The Master was in my view right to grant summary judgment to the plaintiff.

44. In the event the defendants’ appeal is dismissed, and I grant an order nisi that the defendants are to pay the costs of the appeal.