LO SHING KIN v. SY CHIN MONG STEPHEN

CACV 148/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 148 OF 2012

(ON APPEAL FROM HCA NO. 2392 OF 2009)

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J U D G M E N T

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Hon Kwan JA:

1. This is the defendant’s appeal against the judgment of Deputy Judge Seagroatt on 7 June 2012. The plaintiff’s claim arose out of the dishonour of a post-dated cheque for $40 million drawn by the defendant in favour of the plaintiff pursuant to a settlement agreement dated 18 November 2008 (“the Settlement Agreement”). By the judgment, the defendant was ordered to pay the plaintiff $29,645,550.16 with interest, being $40 million less $10,354,449.84, which were the proceeds of sale of part of the shares in the transaction that had been disposed of by the plaintiff in the market.

2. The defendant raised five defences at the trial: misrepresentation, lack of consideration, economic duress, mistake and variation of the Settlement Agreement by an oral agreement.  He failed on all of them.

3. The primary ground of appeal relied on by the defendant in this appeal is mutual mistake at common law.  It was submitted that the parties entered into the Settlement Agreement on the basis of a fundamental common mistake such that the Settlement Agreement was void ab initio.  As the Settlement Agreement was void for mistake, the plaintiff would have no recourse against the defendant for the dishonoured cheque on the grounds of mistake and/or total failure of consideration.  Alternatively, if the defendant should fail on the basis of mistake at common law, he would rely on common mistake in equity based on Solle v Butcher [1950] 1 KB 671 at 692 and ask the court to grant rescission of the Settlement Agreement under its equitable jurisdiction.

The background

4. I will first set out the relevant background matters, taken from the judgment below and from a list of undisputed facts placed before the judge.

5. At all material times, the plaintiff was the sole director of Silver Ball Limited (“Silver Ball”) and the defendant was the sole director of Elite Dragon Limited (“Elite Dragon”).  Elite Dragon held convertible bonds which could be converted to 100 million shares of a company listed on the Hong Kong Stock Exchange, Bel Global Resources Holdings Limited (“Bel Global”).  The defendant was at all times the chairman, chief executive officer and an executive director of Bel Global.

6. On 23 May 2008, the plaintiff as the authorised representative of Silver Ball and the defendant as the authorised representative of Elite Dragon entered into an agreement in Chinese[1] (“the SPA”) by which Silver Ball agreed to purchase 100 million shares in Bel Global from Elite Dragon at the price of $1.20 per share.  The total consideration of $120 million was to be paid by cheque to the defendant, as the designated payee of Elite Dragon, on or before 29 May 2008.  A supplemental agreement was also entered into by the parties on 23 May 2008 by which they agreed the steps for Elite Dragon to convert its convertible bonds to 100 million shares to enable it to perform the SPA.

7. The SPA contained a “lock up” clause and a “buy-back” clause in these terms:

“(4) The Buyer guarantees and warrants to the Seller that the Buyer shall not sell the Shares within 3 months from the completion date (hereinafter the “Lock-up Period”).

(5) If the average closing price of the Shares falls below HK$1.20 per share in the last 15 trading days of the Lock‑up Period, the Buyer may sell the Shares to the Seller at HK$1.20 per share and the Seller agrees to repurchase the same.”

8. The judge found the SPA was without doubt an agreement at arms’ length[2].

9. Completion duly took place on 29 May 2008.  The plaintiff delivered to the defendant a bank draft of $120 million made payable to him.  The bonds were converted into 100 million shares in Bel Global and a share certificate was issued to Silver Ball on 27 May 2008 and delivered to the plaintiff.

10. The Lock-up Period took effect upon completion of the sale and purchase.

11. On 26 August 2008, the trading of the shares of Bel Global on the stock exchange was suspended pending the release of an announcement relating to price sensitive information.  On 16 September 2008, Bel Global announced the termination of its intended acquisition of equity interests in certain companies, which was the reason disclosed earlier for the suspension in trading.  The day before, Lehman Brothers had announced its bankruptcy which dealt a serious blow to markets around the world.  Trading in the Bel Global shares resumed on 17 September 2008.  Its share price fell by more than 50% after the resumption of trading.

12. On 5 September 2008, the solicitors for Silver Ball, DLA Piper, wrote to the defendant and Elite Dragon requiring them to buy back 100 million shares in Bel Global at $1.20 per share pursuant to the “buy-back” clause.  DLA Piper stated that:

(1)  the Lock-up Period was from 29 May 2008 to 28 August 2008;

(2)  the last 15 trading days within the Lock-up Period were 7, 8, 11 to 15, 18 to 21 and 25 to 28 August 2008; and

(3)  the average closing price per share for such15 trading days was $1.17, which was below $1.20 per share.

13. Elite Dragon sent a letter in reply through its solicitors Messrs Edward C T Wong & Co (“Edward Wong”) dated 11 September 2008 and asserted that the obligation to buy back the 100 million shares did not arise.  The following points were made in that letter:

(1)  the Lock-up Period was from 30 May 2008 to 29 August 2008;

(2)  the last 15 relevant trading days within the Lock-up Period were 1, 4, 5, 7, 8, 11 to 15, 18 to 21 and 25 August 2008; and

(3)  the average closing price per share for those 15 trading days did not fall below $1.20 per share.

14. On 22 September 2008, DLA Piper replied to the letter of Edward Wong and reiterated that the relevant last 15 trading days were as stated in their letter of 5 September.  Even assuming the Lock-up Period was from 30 May 2008 to 29 August 2008, the last 15 trading days would be 8, 11 to 15, 18 to 21, and 25 to 29 August 2008 and the average closing price per share for those 15 trading days was $1.17, which was below $1.20 per share.  DLA Piper repeated their demand that Elite Dragon was to buy back the 100 million shares under clause (5) of the SPA and if there was no confirmation within three days, Silver Ball would accept Elite Dragon’s repudiation of the SPA and might dispose of the shares in the market without further notice and claim damages for its loss.

15. Edward Wong issued two letters in reply to DLA Piper.  By the letter of 24 September 2008, they stated that their client was checking and preparing records of the relevant price for the relevant period and maintained that the average closing price per share was $1.20.  By the letter of 3 October 2008, they enclosed a table with data extracted from the Hong Kong Stock Exchange setting out the closing price of the shares on the last 15 trading days as mentioned in their letter of 11 September 2008 and showing that the average closing price per share was $1.21.  They asserted that the obligation to buy back the shares had not arisen.

16. As the judge had observed, the suspension of trading of the shares on 26 August 2008 took effect about two or three days before the end of the Lock‑up Period, which according to the parties’ respective solicitors, was on 28 or 29 August 2008.  The solicitors’ difference in computation of the average closing price of the shares over the last 15 trading days of the Lock‑up Period in the “buy-back” clause was due to the dispute as to whether the days on which trading in the shares was suspended should be regarded as trading days within the meaning of that clause.

17. During September to November 2008, the plaintiff and the defendant had a number of meetings and discussions by telephone in which they discussed how to settle their dispute.  Eventually, they agreed to sign the Settlement Agreement on 18 November 2008, which was drawn up and witnessed by the same solicitor who had prepared and witnessed the SPA and supplemental agreement.  As the judge had found, the Settlement Agreement was made at arms’ length and was a genuine, uncomplicated compromise[3].

18. The Settlement Agreement was made between the plaintiff and the defendant.  The title of the agreement was “Settlement Agreement of the disputes of the sale and purchase of the Shares”[4].  The preamble recited that the parties represented their respective companies to sign the SPA and the supplemental agreement and that they voluntarily entered into the Settlement Agreement “in order to deal with the disputes of the seller and the purchaser under the [SPA] and the supplemental agreement”.  By clause 1, it was recorded that at the time of the signing of the Settlement Agreement, the defendant issued a personal cheque[5] of $40 million in favour of the plaintiff and that the defendant warranted the plaintiff will receive $40 million with the cheque before 1 October 2009.  Clause 2 provided that upon the plaintiff presenting the cheque for payment and receiving the $40 million, the plaintiff shall deposit not less than 71 million of the shares held by Silver Ball in Bel Global into the defendant’s designated securities account.  In the event the cheque was not honoured upon presentation, the plaintiff reserved his right to claim in accordance with the SPA and the supplemental agreement against the defendant or Elite Dragon.  Clause 3 provided that upon the performance of clauses 1 and 2, “the disputes between the seller and the purchaser under the [SPA] and the supplemental agreement shall be regarded as settled”.  By clause 4, the defendant warranted that before the plaintiff presented the cheque for payment, the defendant shall hold not less than 16% of the shares in Bel Global and shall remain its major shareholder through himself and Elite Dragon.

19. The defendant stopped payment of the cheque on 25 September 2009.  It was dishonoured when the plaintiff presented it for payment on 9 October 2009.  The writ was issued on 30 November 2009.

The trial and judgment below

20. An order was made by a master on 1 November 2009 giving leave to the parties to file expert evidence as to the meaning of “trading day” in clause (5) of the SPA.  Pursuant thereto, a supplemental joint statement was made by the experts dated 13 July 2011.  The experts agreed there is no accepted single definition of “trading day” in securities/stocks trading customs, usage and practice in Hong Kong.  They also agreed (for different reasons) that any day on which trading in the Bel Global shares is suspended cannot be regarded as a “trading day” in the context of the SPA.

21. The judge declined to admit the evidence of the experts, and did not think the joint view of the experts was really expert evidence.  No issue was taken by the defendant about this on appeal.  The judge took the view that the meaning of “trading day” in the context of the SPA was a matter of construction of the SPA and a matter of fact for him to find, if necessary.  That also was accepted by the defendant on appeal.

22. The judge did not deem it necessary to find what “trading day” meant in the SPA and declined to be drawn into the dispute if the defendant was indeed obliged to buy back the shares under clause (5) and to allow the defendant to re-open the argument, as that dispute was settled by the Settlement Agreement[6].  He found no basis to impugn the Settlement Agreement on any of the grounds raised by the defendant and gave judgment for the plaintiff.

The defendant’s arguments in this appeal

23. Ms Roxanne Ismail, who was not the trial counsel, appeared with Mr John Hui in this appeal and raised these arguments premised on mutual mistake at common law.

24. Although the judge had declined to examine if Elite Dragon was liable to Silver Ball to re-purchase the shares in clause (5) of the SPA, he had proceeded on the basis that Elite Dragon had such an obligation, as he had found that the defendant respected the view of DLA Piper and that the defendant accepted he had an obligation to buy back the shares, notwithstanding the letters of Edward Wong to the contrary.  This was not a case in which the parties took different positions as to whether there was liability to re-purchase the shares.  The factual findings below were that both the plaintiff and the defendant were operating on the basis that the obligation to re-purchase under clause (5) was triggered. In support of these matters, Ms Ismail pointed to paras 12, 14 and 15 of the judgment.  I will come back to these and other relevant paragraphs in the judgment.

25. Insofar as the meaning of “trading day” is a matter of construction, and not a term of art for which the assistance of experts is required, the proper construction of “trading day” in the context of clause (5), which is concerned with the average closing price of Bel Global, must be a day on which Bel Global had a closing price and therefore a day on which there was trading in such shares.  As trading in the Bel Global shares was suspended during the last few days of the Lock-up Period, and there was no trading in these shares on those days, the relevant last 15 trading days were as stated in the letter of Edward Wong dated 11 September 2008 and the average closing price per share did not fall below $1.20 per share.

26. According to the defendant’s evidence, he only became aware of this after the plaintiff had brought this action and he instructed solicitors to defend the action.

27. Once it is understood there was no obligation to re-purchase on a proper construction of the SPA, and given the factual findings that both had operated on the basis there was such an obligation, there was a common mistake and the Settlement Agreement was entered into on the basis of that common mistake.

28. It was submitted that the misconception which was essential to the liability to re-purchase had rendered the subject matter of the Settlement Agreement essentially and radically different from the subject matter the parties believed to exist (Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255 at 268F).

29. It was further submitted that the elements which must be present if common mistake is to avoid a contract at common law were satisfied in this instance: there was a common assumption as to the existence of a state of affairs; there was no warranty by either party that that state of affairs existed; the non-existence of the state of affairs was not attributable to the fault of either party; the non-existence of the state of affairs had rendered contractual performance impossible; the state of affairs was the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure was to be possible; and neither party had undertaken responsibility for the subsistence of the assumed state of affairs (Great Peace Shipping Ltd v Tsavliris Salvage Ltd [2003] QB 679 at paras 76 and 84).

30. Ms Ismail added that the reference to the impossible contractual performance test is not limited to literal, physical impossibility but extends to cases where the “contractual adventure” is impossible, that is where the contractual purpose cannot be fulfilled, citing the comments in Misrepresentation, Mistake and Non-Disclosure by Cartwright, 3^rd ed, para 15-23 at page [751].

31. To sum up, it was contended that when the Settlement Agreement was made, both the plaintiff and the defendant positively believed that Elite Dragon was liable to re-purchase the shares.  Neither had warranted that the re-purchase obligation had been triggered.  Neither was responsible for whether this obligation was triggered or not.  This mistaken belief that the obligation had been triggered was the foundation for, and essential to, the making of the Settlement Agreement, as the discharge of the mutual obligations pursuant to the obligation to re-purchase was the subject matter of the Settlement Agreement.  The mistake was as to the existence of the subject matter, not just the quality of the subject matter.  And as the subject matter of the Settlement Agreement did not exist, that agreement could not be performed and the subject matter of the contract was essentially and radically different from the subject matter the parties had believed to exist.  There was therefore no consideration for the Settlement Agreement.  Accordingly, the Settlement Agreement was void and the plaintiff had no recourse against the defendant for the dishonoured cheque on the grounds of mistake and/or total failure of consideration.

32. I do not accept the above arguments for a number of reasons.

The defendant’s case as pleaded and the case advanced below

33. Firstly, the argument raised above on common mistake was simply not pleaded in the amended defence and counterclaim.

34. The defendant’s case on mistake was pleaded on two bases – a unilateral mistake on the defendant’s part and a common mistake of both the plaintiff and the defendant[7].

35. In respect of the unilateral mistake on the defendant’s part, it was pleaded in paragraph 34 that by reason of the misrepresentations in the letters of DLA Piper dated 5 and 22 September 2008[8], the defendant entered into the Settlement Agreement in the mistaken belief that:

“(a) the average closing price of the Shares in the last 15 trading days of the Lock-up Period was lower than $1.20 per share, and

(b) Elite Dragon was under an obligation by virtue of Clause 5 of the [SPA] to to re-purchase the Shares from Silver Ball at the price of HK$1.20 per share.”

36. It should be noted that what was asserted in this appeal to be a common mistake was pleaded as a unilateral mistake on the defendant’s part.

37. For mutual mistake, it was pleaded in paragraph 35 that the Settlement Agreement, which was made by the plaintiff and the defendant purely in their personal capacity[9], and was not binding on Elite and Silver Ball in that no consideration was provided by the plaintiff who knew or should have known that the obligation to re-purchase the shares was not triggered[10], was entered into under a mutually mistaken belief that:

“(a) The Settlement Agreement was binding on Silver Ball and/or Elite Dragon.

(b) Silver Ball was bound to deliver 71,000,000 shares in [Bel Global] in accordance with Clause 2 of the Settlement Agreement.

(c) The entering into of the Settlement Agreement would achieve a full and final settlement of the Alleged Dispute between Silver Ball and Elite Dragon under the [SPA] and the Supplemental Agreement.”

38. The “Alleged Dispute” was defined in the pleading[11] as “the alleged dispute arising out of Clause 5 of the [SPA] as pleaded in paragraphs 16 to 18 below”, namely, the dispute attributable to the position taken in the letters of DLA Piper regarding the computation of the average closing price of the last 15 trading days and whether the re-purchase obligation was triggered.

39. It is apparent that the common mistake pleaded in the amended defence and counterclaim was very different from that asserted in this appeal.

40. I have set out the relevant parts of the pleading in some detail because it was argued by Ms Ismail that the defence of common mistake she advanced in this appeal was pleaded in the plea of common mistake in paragraph 35, which made reference to paragraph 26, and paragraph 26 in turn made reference to paragraphs 16 to 18.  This is simply not a proper reading of the defence.  It is patently clear that it was not pleaded both parties were mutually mistaken in the belief that the average closing price of the shares in the relevant period had fallen below $1.20 and that the obligation of Elite Dragon to re-purchase the shares was triggered.

41. Moreover, the contention sought to be advanced on appeal that both parties were mistaken in the belief the re-purchase obligation was triggered is contrary to:

(1)  the defendant’s case as pleaded, which alleged that:

“In the circumstances, the Plaintiff knew or ought to have known that in each and every case in subparagraphs (c) to (f) above, the average closing stock price of the last 15 trading dates of the Shares did not fall below HK$1.2. As such, the Plaintiff knew or ought to have known that the obligation to repurchase the Shares by Elite Dragon stipulated in Clause 5 of the [SPA] has never been triggered, and Elite Dragon was never required to repurchase Shares from Silver Ball.”[12]

“Such alleged contractual rights [of Silver Ball under the SPA and the supplemental agreement] were clearly invalid and bad which was known or ought to have known [sic] by Silver Ball and/or the Plaintiff for the reasons pleaded in paragraphs 16 -18 above and such that the forbearance to enforce the alleged contractual rights (which was non-existent under the [SPA] and the Supplemental Agreement) by Silver Ball was not good consideration at all.”[13]

(2)  the defendant’s case, as argued by his counsel at the trial, to the effect that the plaintiff knew or ought to have known that he did not have a valid claim against the defendant for the re-purchase of the shares so there was no genuine and bona fide dispute between the parties and hence the Settlement Agreement should be set aside[14].

42. Mistake for present purpose implies a positive state of mind (see the authorities cited in Bank of China (Hong Kong) Ltd v Keen Lloyd Energy Ltd & Anr, CACV 132/2011, 23 March 2012, para 30 (1) and (2)).  It must be shown that both parties entered into the Settlement Agreement under a positive belief which was incorrect, rather than merely not having thought about a particular issue or just making no assumptions about a particular issue.  The previous pleading and case previously advanced by the defendant are wholly inconsistent with the latest case of a positive belief of both parties that the re-purchase obligation was triggered.  In Bank of China (Hong Kong) Ltd v Keen Lloyd Energy Ltd, a plea of common mistake was struck out on the basis it was plainly unsustainable in the absence of positive belief by both parties and the previous inconsistent plea of fraudulent, reckless or negligent misrepresentation put forward by the defendant (paras 30 (1) to (10)).

43. Ms Ismail submitted that the judge did not address any objection based on the failure to plead this common mistake in his judgment, so we should not be concerned with it on appeal and it would be unfair to shut out the defendant from relying on this defence, as his trial counsel had advanced the argument of common mistake in his closing submission[15] on much the same basis as she has done.

44. I do not accept her submissions.  As Mr Wong Yan Lung, SC, who appeared for the plaintiff in this appeal[16], has pointed out it was not the case that the plaintiff’s counsel at trial had accepted that the defendant could advance the present case of common mistake on the existing pleading.  He referred us to an agreed list of issues dated 21 May 2012 submitted to the judge at the commencement of the trial, in which the plaintiff had flagged the point that it was not agreed that the common mistake now advanced on appeal was an issue raised on the defendant’s pleading[17].  As for the case of mistake advanced by the defendant’s trial counsel in his closing submission, the plaintiff’s trial counsel was just not called upon by the judge to address him in closing.  And it is entirely understandable that the judge did not address in his judgment any pleading objection that might have been raised by the plaintiff, because on the facts as found by him (which I will come to), there was no common mistake as now alleged.

45. Common mistake must be distinctly raised in the pleading and the factual basis in support must be properly pleaded.  As Lord Atkin had observed in Bell v Lever Brothers, Ltd [1932] AC 161 at 261 in a similar context, in holding that the pleading on examination was confined to a unilateral, not mutual, mistake: “the Court of Appeal cannot without amendment decide a case upon an unpleaded issue of law which depends upon an unpleaded issue of fact.”  See also Lord Blanesburgh at 198, in which he indicated that he was prepared to allow the appeal solely on the ground that no case other than the pleaded case was open to the respondents in the House of Lords, and mutual mistake had not been pleaded.

46. There is also the matter that the common mistake now sought to be raised is inconsistent with the defendant’s case as pleaded and as argued at the trial.  Although under Order 18 rule 12A of the Rules of the High Court[18], a party may in any pleading make an allegation of fact which is inconsistent with another allegation of fact in the same pleading, (a) he must have reasonable grounds for so doing[19]; and (b) the allegations must be made in the alternative.  This rule is not intended to enable a party to plead opportunistic or speculative contentions.  A pleading is required to be verified by a statement of truth notwithstanding that the party has made inconsistent allegations of fact in it (Order 41A rule 2(2)).  Here, there was no alternative plea of the common mistake now relied on.  It is unnecessary to consider if the defendant would have reasonable grounds in so doing had he advanced the plea of mutual mistake in the alternative.

47. I agree with Mr Wong that Ms Ismail’s argument on common mistake in this appeal was but an afterthought, and must be rejected on the ground that it was not pleaded in the defence, quite apart from other reasons.

The factual findings of the judge

48. Secondly, the plea of mutual mistake is not open to the defendant on the findings of the judge.

49. Ms Ismail argued that the judge had made a finding that the defendant positively believed the plaintiff to be right there was liability to re-purchase the shares and accepted that he had this obligation.  Counsel relied in particular on these parts of the judgment:

“14. … As far as he was concerned DLA Piper’s calculation and claim were well founded. … He respected their view as lawyers of repute. It did not matter to him what Edward C T Wong & Co, the Solicitors instructed to act on his behalf by his son, said in reply to DLA Piper as long as it could buy him time. It was therefore to be a stalling exercise. It was clear from his evidence that he was not concerned with any dispute over the calculations. He accepted that he had an obligation to buy back the shares. …”.

50. As Mr Wong has submitted, para 14 of the judgment must not be taken in isolation.  He drew our attention to these paragraphs of the judgment and emphasised the following parts which I have put in italics below:

“15. I am quite satisfied that there was no misrepresentation by the Plaintiff or his Solicitors in making the claim on the calculations set out in their letter.  The Defendant through his Solicitors had every opportunity of disputing those calculations and maintaining a defence to the claim, as indeed they did.  No one could have been under any misapprehension about the issue at all.  In fact it never operated on the Defendant’s mind. His sole concern was to achieve a negotiated settlement with the Plaintiff on a personal basis.  He conceded that the Plaintiff had him “over a barrel” to use a common metaphor.”

“30. The Solicitors were putting forward their calculations. There may or may not be an error in their calculations. Certainly the two firms of Solicitors disagreed on the calculations but they were both putting forward, very properly, the argument on behalf of their respective clients. Only one of them could have been right. But the Defendant was not concerned with that. He was prepared, for his immediate purpose, to accept DLA Piper’s proposition at face value. … In any event the Plaintiff [sic[20]] was so concerned to negotiate a settlement that, even though he respected DLA Piper’s reputation, he was not in any way concerned to see whether his own Solicitors agreed or disagreed with the Plaintiff’s Solicitors. It did not operate on his mind so as to effect a settlement he would not otherwise have sought to obtain.”

“31. … In my judgment the position is clear cut on the facts. The Defendant was never under any illusion as to the facts or his obligations under the original agreement or the settlement agreements. He made no mistake. At best it could only have been a unilateral mistake and that affords him no defence.”

51. It is quite clear from the above that the judge did not make any finding that the defendant had positively believed that the proposition asserted by DLA Piper was correct, so as to give rise to a contractual obligation to re-purchase the shares, despite the self-serving statements in the defendant’s evidence, which Ms Ismail has taken us to[21].  To the contrary, the judge found that the defendant was only prepared, for his immediate purpose, to accept DLA Piper’s proposition at face value and he was not concerned to see whether Edward Wong agreed or disagreed with DLA Piper[22]. The judge found that this particular issue did not operate on the defendant’s mind at all.  He was never under any illusion as to the facts or his obligations under the SPA.

52. Besides, the views expressed in the letters of DLA Piper were merely propositions, as the judge had held, not representations as to any state of facts.  And Edward Wong had come up with a different construction of “trading days” in the contract.  Neither party was in possession of any exclusive information which could put one in a stronger position than the other.  I agree with Mr Wong it is incredible and impermissible for the defendant to mount an argument on mistake as to subject matter on the basis of DLA Piper’s proposition.  The judge had rejected the defence as pleaded as a “contrived, manufactured and cynical further attempt to extricate [the defendant] from a situation entirely of his own making in which he displayed a total lack of bona fides”[23].

53. There was no finding the plaintiff had proceeded on the basis that the defendant had accepted he was under an obligation to re-purchase the shares.  Edward Wong was authorized by the defendant to put forward a contrary proposition in their letters of September and October 2008, and the proposition in those letters was maintained to all outward appearance.  To the plaintiff, the defendant had not accepted he was liable to re-purchase the shares.  Hence, there was a dispute.  There was no common mistake.

54. As found by the judge, the defendant was anxious to negotiate a settlement with the plaintiff for his own immediate purpose.  The defendant conceded that the plaintiff had him “over a barrel”.  The global financial market had just experienced a meltdown following the collapse of Lehman Brothers.  The share price of Bel Global had fallen by more than 50% after the resumption of trading.  Any substantial sale of shares by the plaintiff would further depress the share price.  This was the defendant’s complaint that he was driven to entering into the Settlement Agreement by the economic duress and illegitimate pressure allegedly exerted by the plaintiff.  The defendant realized that unless he could get the plaintiff to withhold legal proceedings (as threatened in the letter of DLA Piper dated 22 September 2008) and to withhold selling the shares of Bel Global in the market, he as the ultimate major shareholder of Bel Global would be heading for financial disaster.  That was his immediate purpose in seeking a settlement with the plaintiff.

55. It was against this background that the Settlement Agreement was concluded.  By virtue of the Settlement Agreement, the defendant could cause the plaintiff to retain most of Silver Ball’s shares in Bel Global (to the extent of 71 million) in the following ten months, and avoided any “fire sale” by the plaintiff. As the judge has found in these parts of the judgment:

“18. It was clear that the Defendant had in fact bought the time that he appeared so desperately to seek. Not only that, he was now able to stave off his financial obligation for ten months by means of the post‑dated cheque. The Plaintiff had certainly stayed his hand and some would say generously so. Moreover the Plaintiff was taking a significant reduction in the amount of his claim. Instead of HK$120 million for the return of 100 million shares he was receiving only HK$40 million for at least 71 million shares, a potential loss of over HK$45 million for those shares. … The settlement was clearly of substantial advantage to the Defendant[24]. It involved a considerable loss nonetheless for the Plaintiff. No doubt he thought it was better to salvage what he could from what was, for him, a disastrous business venture. But it was an “arm’s length” agreement for both of them even if to the casual observer the real gainer was the Defendant. This was a genuine, uncomplicated compromise.”

“32. It is unarguable that the Defendant has benefited to a considerable extent from the tactics he has employed to try and avoid his obligation under the agreement and settlement agreement, whereas the Plaintiff “leant over backwards”, to use a common metaphor, to give him the chance to salvage his situation and in so doing has lost a significant amount of his capital investment.”

56. It is clear from the terms of the recitals and the body of the Settlement Agreement that there were disputes between the seller and the purchaser under the SPA and the purpose of that agreement was to deal with the disputes.  Ms Ismail submitted it should be construed that the parties had a common assumption that the obligation to re-purchase the shares was triggered and their only dispute was how that obligation was to be enforced or performed, given that the defendant did not have the money to re-purchase 100 million shares at $120 million and the plaintiff had, by 12 November 2008, sold some of the shares in the market, holding 72,526,000 out of the 100 million shares bought under the SPA.  She contended that the dispute referred to in the Settlement Agreement that was compromised was a dispute as to the enforcement or performance of the obligation to re-purchase, and as the re-purchase obligation did not exist, the contractual purpose of the Settlement Agreement could not be fulfilled and the agreement was impossible to perform.

57. This seems to me an untenable construction of the Settlement Agreement.  For one thing, this interpretation of the dispute compromised in the Settlement Agreement is inconsistent with the defendant’s pleading that the “Settlement Agreement would achieve a full and final settlement of the Alleged Dispute between Silver Ball and Elite Dragon under the [SPA] and the Supplemental Agreement”[25], and “Alleged Dispute”, as I have mentioned earlier, was defined as “the alleged dispute arising out of Clause 5 of the [SPA] as pleaded in paragraphs 16 to 18 below”[26], namely, the dispute attributable to the position taken in the letters of DLA Piper regarding the computation of the average closing price of the last 15 trading days and whether the re-purchase obligation was triggered.

58. For another thing, this construction of the disputes in the Settlement Agreement is quite simply unreal, and does not accord with the meaning this would convey to a reasonable person with all the background knowledge, most notably the different positions taken by the solicitors on both sides as to whether the obligation to re-purchase was triggered (Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at paras 8, 26, 39, 78).  It was not a construction advanced in the court below and the factual background alleged in support of this construction was not put to the plaintiff or his witness Ms Lu Yong Yu.

59. It is well settled law that a settlement of a bona fide dispute cannot be subsequently challenged by a party contending that he had been mistaken as to the true merits of the respective arguments in the dispute (The Law and Practice of Compromise by Foskett, 7^th ed, para 2.16).  By entering into the Settlement Agreement, the parties agreed to “park” their differences on the dispute whether the obligation to re-purchase the shares was triggered without resorting to litigation.  As stated by Vaughan Williams J in Huddersfield Banking Co Ltd v Henry Lister & Son Ltd [1895] 2 Ch 273 at 278: “… if the arrangement come to was a compromise of doubtful rights and a give-and-take arrangement, parties to it could not afterwards have the compromise set aside because upon obtaining fuller information they thought they had made a bad bargain.”

60. In Brennan v Bolt Burdon (a firm) & Ors [2005] QB 303 at para 35, Bodey J had this to say regarding a defence of common mistake that was raised to re-open a compromise:

“There is not an operative common mistake where there is doubt as to the law concerned and where the party wishing to reopen the contract [to compromise] went ahead with it (the contract) anyway.

As Lord Hope of Craighead said in the Kleinwort Benson case [1999] 2 AC 349, 410:

“Cases where the payer was aware that there was an issue of law which was relevant but, being in doubt as to what the law was, paid without waiting to resolve that doubt may be left on one side. A state of doubt is different from that of mistake. A person who pays when in doubt takes the risk that he may be wrong – and that is so whether the issue is one of fact or one of law.” ”

61. The observation of Longmore LJ in rejecting a plea of mistake in Perpertual Trustee Co Ltd & Anr v BNY Corporate Trustee Services Ltd & Anr [2010] Ch 347 at para 108 is of similar effect:

“Once a party appreciates that an assumption underlying a contract may be legally questionable, that party will usually bear the risk that that assumption will turn out to be false. There is then no room for mistake.”

62. Ms Ismail referred us to Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners & Anr [2007] 1 AC 558 in which there was further discussion of Lord Hope’s aforesaid statement in the Kleinwort Benson case by Lord Hoffmann at paras 26 and 27 and Lord Hope at paras 64 and 65, and the case of Marine Trade SA v Pioneer Freight Futures Co Ltd BVI & Anr [2009] EWHC 2656 (Comm) at paras 69 to 76 in which Flaux J considered Lord Hope’s earlier statement with regard to the relevant statements of Lord Hoffmann and Lord Hope in Deutsche Morgan Grenfell.

63. For present purposes, it is unnecessary to subject Lord Hope’s statement in the Kleinwort Benson case to close analysis in the light of the statements in subsequent cases.  Suffice it to say that in the present context of an agreement to compromise, Lord Hope’s earlier statement, which is capable of further refinement as was said in the subsequent authorities, is pertinent and relevant.  A party who was in a state of doubt but nevertheless went ahead with an agreement to compromise must be regarded to have taken the risk that if the question was fully litigated, it might turn out that he was wrong.  Mistake would not arise in this situation as Lord Hoffmann has explained in Deutsche Morgan Grenfell at paras 26 and 27.

Applying the law to the facts

64. The plea of common mistake fails at the first hurdle – on the pleading and on the facts as found by the judge.

65. There was no common assumption that the obligation to re-purchase the shares was triggered.  To the contrary, there was a dispute whether the obligation was triggered, and the parties agreed to “park” the dispute when they entered into the Settlement Agreement.  Even if the defendant had erroneously attached too much weight to the proposition of DLA Piper at the time he entered into the Settlement Agreement, and with hindsight on taking further legal advice was convinced that DLA Piper was wrong, the mistake was not one that would render the subject matter of the Settlement Agreement essentially and radically different from the subject matter which the parties believed to exist, or would render the Settlement Agreement impossible to perform.

66. As pointed out by Mr Wong, the subject matter of the Settlement Agreement was not the obligation to re-purchase the shares and the agreement did not require the defendant or Elite Dragon to re-purchase the 100 million shares pursuant to clause (5) of the SPA.  The subject matter that gave rise to the Settlement Agreement was the dispute as to whether the re-purchase obligation was triggered and the purpose of the agreement was to resolve this dispute without resorting to litigation.  Whatever weight or merit the defendant should have attached to DLA Piper’s proposition in the dispute would have made no difference to the subject matter of the Settlement Agreement, nor would this have made it impossible to fulfil the contractual purpose of the Settlement Agreement.

67. I reject the plea of mutual mistake at common law.  The argument on absence of consideration likewise fails.  As found by the judge, the plaintiff had furnished ample consideration for the Settlement Agreement, which is unnecessary to repeat.

68. Ms Ismail raised an alternative argument premised on the equitable jurisdiction to rescind an agreement for common mistake in circumstances that fall short of those in which the common law would hold a contract void.  As the argument of common mistake fails on the facts and the pleading, it is not necessary to canvass this alternative argument and whether the doctrine of equitable mistake should still be accepted as good law in Hong Kong in view of the decision of the English Court of Appeal in the Great Peace case.

69. The appeal is therefore dismissed with costs to the plaintiff, with a certificate for two counsel.

Hon Fok JA:

70. I agree with the judgment of Kwan JA.

Hon Barma JA:

71. I agree with the judgment of Kwan JA.