CHAN KWOK FAI v. ONWARD ELECTRICAL & SUPPLIES CO LTD

HCA3600/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3600 OF 2003

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J U D G M E N T

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1. The plaintiff applies for summary judgment under Order 14 of the Rules of the High Court, for an injunction restraining the defendant from disposing or transferring any of its business or assets to any other parties by tender or otherwise; specific performance; and damages for wrongful repudiation of contract.

2. The defendant is a company in creditor's voluntary liquidation. It carried out its production in the PRC. Some of its plant and machinery was charged to East Asia Heller Ltd ("the Mortgagee"). The liquidator is Mr Li Man Wai ("the Liquidator"). After his appointment he advertised the sale of the defendant's PRC assets.

3. On 28 June 2003 the plaintiff submitted a tender, using the defendant's or the Liquidator's tender form, for purchase of the defendant's whole business with liability, in the sum of $1,100,000.00 whereof $300,000.00 was expressed as being the price of the business and $800,000 for "machineries mortgaged to bank".

4. The tender required a deposit of $300,000.00 to be paid over on submission of it. The tender had the choice to buy all the assets or singly or to purchase the whole business with liability or purchase the whole business without liability. Clause 5 of the tender form reads :

"For the sale of the assets and business, it shall take effect upon confirmation of the title of the new buyer is obtained from the Customs and Excise Department or related authority of China."

5. In a box on the tender form the plaintiff wrote the following in manuscript :

"(1) (Tenderer) shall pay $100,000 to the Liquidator and $200,000 to the bank as deposits;

(2) After receiving confirmation in respect of the transferability of the assets and debt and after receiving the approval from the PRC Customs and Excise Department, other relevant PRC government authorities and the landlord, (Tenderer) should further pay $200,000 to the liquidator and $600,000 to the bank; and

(3) If my offer was accepted, I would employ the existing employees to continue the business in the same address."

6. It is not in dispute that after the tender had been submitted the Liquidator telephoned the plaintiff and as a result of their discussion the plaintiff increased the tender to a total of $1,300,000.00. According to the Liquidator, this was done because the Mortgagee would only accept an offer of $1,000,000.00 for the machinery mortgaged to it. The deposit was not increased.

7. On 7 July 2003 the Liquidator wrote to the plaintiff in these terms :

"I refer to your tender lodged with the undersigned on 28 June 2003 and advise that your offer has been accepted by both the bank and the liquidator.

We have instructed Messrs Lily Fenn & Partners to prepare the necessary sales and purchase agreement and shall revert to you in due course...."

8. On 17 July 2003 Messrs Lily Fenn & Partners ("Lily Fenn") wrote to the plaintiff advising that they acted on behalf of the Liquidator and continuing :

"We write to inform you that the Liquidator has tentatively accepted the terms of offer made by you in respect of the Tender regarding sale and purchase of certain assets of the abovenamed company. Please find enclosed the said Tender document duly signed by you for your easy reference.

Further, we have also received a sum of HK$300,000.00 payable by you being the deposit and partial payment payable on the tender. The said sum is now being held in trust for you in our client's account. Please find enclosed herewith our Official Receipt of the said sum for your kind retention.

The Liquidator has accepted your offer and the subject items are not, as between the Liquidator and you, be at your sole risk. You are hereby advised to take out proper insurance coverage on the subject items for your own protection and benefit.

In the meantime, we are in the course of preparing the necessary documents in order to transfer the legal title of the subject items and shall let you have the draft documents for approval in due course."

9. Then on 25 July Lily Fenn again wrote to the plaintiff referring to a draft agreement for sale and purchase sent to him by e-mail and estimating their own costs at a maximum of $30,000.00. They went on to say that legal advice had been obtained from a PRC lawyer that if the machinery had been imported free of tax and duty, it was under a period of 5 years' supervision. Application for release of supervisions was required for transfer of ownership. The total costs for handling of the release of the machinery was estimated at US$13,000 to US$19,000 inclusive of their own costs but exclusive of disbursements such as the charges payable to the relevant Government departments. They asked for written instructions with relevant documents if the plaintiff wished them to proceed with obtaining the release of the machinery.

10. The plaintiff instructed Messrs Philip Tsui & To ("Philip Tsui"). On 14 August 2003 they wrote to Lily Fenn regarding the latter's draft agreement which referred to a sale and purchase of assets but not of the whole business of the defendant. They asked for a revised draft agreement with proper schedules for approval. They also said that under the agreement the defendant should agree to use its best endeavours to obtain (or to assist the plaintiff to obtain) the relevant approval from the PRC authorities and other third parties.

11. On 16 August 2003 the Lily Fenn wrote to Philip Tsui a letter containing the following paragraphs :

"We are instructed by our client, the Liquidator of the captioned company, that the Liquidator is unable to obtain approval from the landlord of the premises to release the assets in subject. As a result of this, the agreement for sale is incapable of being enforced.

In such circumstances, we are further instructed by our client to rescind the said agreement and to refund a sum of $300,000.00 being stakeholder money paid by your client."

12. On 18 August the plaintiff's solicitors replied that the approval of the landlord was not a condition under the express terms of the tender. On 22 August the defendant's solicitors came back, saying that the agreement for sale was incapable of being enforced because the assets could not be physically transferred. There were apparently some attempts by the plaintiff, after that, to deal directly with the landlord and pay him off.

13. On 28 August the solicitors for the Mortgagee advised the defendant's solicitors that an offer from one Fair-Rack Electrical Asia (HK) Ltd of $1,000,000.00 for the machinery mortgaged to it. The plaintiff is a director of this company.

14. On 4 September 2003 the plaintiff's solicitors advised the defendant's solicitors that the plaintiff would be out of Hong Kong until 10 September. On the following day the Liquidator instructed the solicitors that the landlord in the PRC had never agreed to sell the machinery, assets or stock in the factory. The landlord had complained that someone removed the machinery by force on 27 August, and had agreed to abandon the lien over the factory contents if its debts were paid by 8 September. The Liquidator instructed that he and the Mortgagee would have no objection in principle to the sale, provided that the purchaser would acknowledge that both the Liquidator and the Mortgagee were selling the interest and rights over the plant and machinery, stock and other assets held, and were not liable for the physical condition, Customs clearance and delivery of the assets sold; that the balances of $200,000.00 and $800,000.00 were paid to the Liquidator and Mortgagee respectively, and the landlord paid off to release his lien, by 8 September 2003.

15. This letter was copied to the plaintiff's solicitors who advised the defendant's solicitors again that the plaintiff was out of Hong Kong until 8 September. On that day, however, the Liquidator by e-mail to the plaintiff invited a new tender from the plaintiff. It is pertinent to note that the new tender documents contained the following clause :

"The Tenderer shall be responsible for the application for the recognition of the right of possession by the new buyer from the Customs and Excise Department or the related authorities of China."

16. On 9 September the defendant's solicitors sent a cheque to the plaintiff's solicitors in purported refund of the tender deposit. The plaintiff's solicitors replied that the Liquidator was in breach of the previous tender agreement, and in breach of his duty of care to the defendant company. They accepted the cheque without prejudice to the plaintiff's rights. They issued the Writ on 26 September.

17. In its Defence, which is more like a witness statement than a pleading, the defendant raised the following points :

(1) It was expressly stated in Clause 5 of the invitation to tender that the sale was subject to the condition precedent that there was clearance from the PRC Customs and Excise Department and confirmation of the relevant governmental authorities on the ownership of the purchaser. This invitation did not set out the date of completion. Nor did the offer made by the plaintiff.

(2) The agreement between the parties was "subject to contract".

(3) The Liquidator could not pass a good title of the assets to the plaintiff, therefore the defendant rescinded the contract by the letter of 16 August 2003.

(4) The plaintiff had put up a new offer to the Mortgagee.

(5) The defendant could not physically transfer the assets to the plaintiff and so the condition precedent could not be fulfilled.

(6) The plaintiff failed to comply with the defendant's demand made on 5 September 2003 to pay the balance by 8 September, therefore the defendant had invited a new tender.

18. In argument the defendant's solicitor relied mainly on the so-called condition precedent.

19. I do not think there is anything in the "subject to contract" point. It is true that in his affirmation the Liquidator says, inter alia, that on 17 July 2003, Lily Fenn served a notice that the offer was accepted, subject to contract, and gave an official receipt for his deposit held as stakeholder money. I have set out above the terms of that letter. It does not say that there is acceptance subject to contract. It is true that the word "tentatively" is used in one paragraph and that the deposit is said to be held in trust for the plaintiff but then it goes on to repeat that the Liquidator has accepted the offer and, significantly in my view, that the subject items are at the plaintiff's risk. The inference must be that property in them was intended to pass to the plaintiff.

20. In any event the terms of the Liquidator's own letter of 7 July clearly show outright acceptance. If a party has accepted an offer in this way I do not see how it can be made "subject to contract" thereafter.

21. There was also some suggestion that no time for completion had been agreed and therefore the contract was not complete. There is nothing in this because a term of "reasonable time" would be implied.

22. The real question is whether the terms of the plaintiff's offer and the Liquidator's acceptance can be interpreted as containing a condition precedent. It is as well here to set out the principles of interpretation set out by Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society, [1998] WLR 896 at 912 :

"I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 3 All ER 237 at 240-42, [1971] 1 WLR 1381 at 1384-1386 and Reardon Smith Line Ltd v. Hansen-Tangen, Hansen-Tangen v. Sanko Steamship Co. [1976] 3 All ER 570, [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of 'legal' interpretation has been discarded. The principles may be summarised as follows.

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

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

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co. Ltd v. Eagle Star Life Assurance Co. Ltd [1997] 3 All ER 352, [1997] 2 WLR 945.

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v. Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201 :

' if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.'"

23. It is clear from the evidence of the Liquidator that the problem with this contract only arose some time in middle or late July 2003 when he found out that a lot of money would have to be paid to the Chinese Customs and Excise Department. This information first appears in the Lily Fenn's letter of 25 July 2003. So far as the background matrix of fact is concerned, at the time of the offer and the acceptance, all that the parties knew of the customs requirements was contained in Clause 5, set out above, i.e. that there was a requirement of Customs clearance, and the sale would take effect on that clearance being obtained; but there was nothing as to who should obtain the clearance or what it was to cost.

24. The plaintiff took the option to purchase the whole business with liability. The liabilities were set out. It would not make "business common sense" for a tenderer to tender on any other basis than that of known liabilities. No liability to make payment to the Chinese Customs and Excise Department was mentioned.

25. The plaintiff then made his offer. It contained a term as to the time of full payment which was to be after clearance from Customs and the landlord. It is agreed that 10 months' rent was outstanding; the plaintiff knew he had to pay that. But he did not know of any payment due to the Customs; nor was the offer made on the basis that the plaintiff would pay it. As I read the offer the term merely relates to the time; the balance is to be paid once the formalities are carried out. The offer was accepted on that basis without any further condition.

26. I do not see how a condition precedent of Customs clearance can be read into the contract here. In any event such a condition would have to be fulfilled by one party or the other and there is no way to imply which party should fulfill it.

27. It seems to me that the simple fact here is that the Liquidator has invited tenders, and then accepted a tender without knowing that a lot of money would have to be paid to obtain Customs clearance, and has thereafter tried by various means to get out of the contract or shift the liability for payment on the plaintiff as tenderer. Those various means included reliance on the landlord's refusal to release the machinery when in any event payment of the landlord was a matter for the plaintiff and a blatant attempt to get the plaintiff to comply with a deadline unilaterally set and which, to the defendant's knowledge was unlikely to be met.

28. There is no defence here; the defendant's case is "frivolous and practically moonshine". See Man Earn Limited v. Wing Ting Fong, [1996] 1 HKC 225.

29. There will accordingly be judgment for the plaintiff in terms of the Order 14 summons, with the costs of the action, including the costs of the summons, to be taxed if not agreed.