THE NEW CHINA HONG KONG GROUP LTD (In liquidation) AND ANOTHER v. AIG ASIAN INFRASTRUCTURE FUND LP AND OTHERS

CACV 24/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 24 OF 2008

(ON APPEAL FROM HCCL NO. 97 OF 2000)

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J U D G M E N T

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Hon Tang VP:

Introduction

1.  This is the defendants' appeal.

2.  On 18 March 1994, Sichuan Highway Construction and Development General Corporation, (“SHC”) and The New China Hong Kong Highway Ltd (“NCHK Highway”) entered into a joint venture agreement (“JVA”) to build the Chengdu-Mianyang Expressway (“the Expressway”) in Sichuan Province, PRC.  SHC was the investment arm of the Sichuan Province Department of Communications.

3.  Under the JVA, the Sichuan Chengmian Expressway Co Ltd would be established as a sino-foreign co-operative enterprise (“co-operative enterprise”) for the construction, operation and maintenance of the Expressway.  The co-operative enterprise was duly established on 8 June 1994.  SHC and NCHK Highway were the only shareholders in the co-operative enterprise.  The JVA provided for completion of the Expressway:

“within 3 years from the date of establishment of the Co-operative Enterprise”

The duration of the co-operative enterprise was 30 years at the end of which the Expressway had to be surrendered without compensation.

4.  The Expressway as envisaged in the JVA began at Sanhechang, running through Xindu, Tangjiasi, Guanghan, Zhoujiacitang (this section has been called the Dajian Road), Deyang, Baima, finally ending at Mojia.  Both the Dajian Road and the segment from Baima to Mojia were existing toll roads which were required to be upgraded to an Expressway under the JVA.  During the construction of the Expressway, it was envisaged that some toll would be collected in respect of both the Dajian Road and the Baima to Mojia section. 

5.  Clause 7.2 of JVA provided that during the period of construction as well as the first five years after completion, the net income would be distributed to NCHK Highway.  Further, in essence, Clause 7.2(3) provided that the minimum toll income for the 1^st year after completion should not be less than RMB 220 million, and that SHC would be responsible to make good any deficiency. 

6.  On the same date of the JVA, a guarantee (“the Guarantee”) was given by the Sichuan Provincial Trust and Investment Corporation (“SPTIC”) in favour of NCHK Highway.  Under the Guarantee, SPTIC guaranteed, inter alia, the minimum toll income payable by SHC under clause 7.2(3).

7.  The JVA was amended by the 1^st Supplemental Agreement to JVA (“1^st Supplemental Agreement”) dated 25 March 1996 and the 2^nd Supplemental Agreement to JVA of 6 August 1997 (“the 2^nd Supplemental Agreement”).  I will deal further with these supplemental agreements in due course, however, it is convenient to mention now that as a result of the 1^st Supplemental Agreement, the minimum toll guarantee was removed and under 2^nd Supplemental Agreement, the Expressway was re-routed, such that the original Dajian Road would not be incorporated into the Expressway but the Expressway would begin at Baihelin going from there directly to Baima.  As a result of this re-routing, the deadline for completion under the JVA was extended to 31 December 1998.

8.  The total investment for the development and the construction of the Expressway and its ancillary facilities was RMB 1.353 billion, of which NCHK Highway was required to contribute 60%, namely, RMB 811.8 million by instalments.  The New China Hong Kong Group Ltd (“NCHK Group”) was the sole indirect shareholder of NCHK Highway holding 1 share of USD 1 each. 

9.  In order to raise funds for its investment under the JVA, NCHK Highway engaged Goldman Sachs (Asia) Ltd (“Goldman Sachs”) to act as placement agent for the purpose of inviting investors to subscribe for 4,759,291 newly issued shares.  Prior to the issue of such new shares, NCHK Highway had an authorized capital of USD 50,000 divided into 50,000 shares with a par value of USD 1 each.  For the purpose of the placement, the authorized capital was divided into 5,000,000 shares with a par value of USD 0.01 each.  According to the draft placement memorandum produced by Goldman Sachs, the placement would consist of 4,759,291 newly issued shares of which the NCHK Group as Founding Member would subscribe, by a wholly-owned subsidiary, for 1,160,000 shares at the subscription price of USD 25 each.  NCHK Group would also subscribe for 479,291 shares at par (“the par shares”).  The remainder, namely 3,120,000 shares at the subscription price of USD 25 each, was offered to investors. 

10.  By the Subscription Agreement dated 15 October 1994 made amongst others, between the 1^st to 4^th defendants, therein called “the Investors” and “NCHK Group” (“the Founding Member”), the 1^st to 4^th defendants subscribed for a total of 3,120,000 shares at the subscription price of USD 25 each for a total sum of USD 78 million.  The 5^th to 9^th defendants are subsidiaries of or related companies to the Investors to whom title to the subscribed shares was transferred. 

11.  The 1^st plaintiff, the NCHK Group, is in liquidation.  The 2^nd plaintiff, Evercheer Holdings Ltd (“Evercheer”) was a wholly-owned subsidiary of a publicly-listed company in Hong Kong, Century City International Holdings Limited (“Century City”).  Evercheer was incorporated for the specific purpose of acquiring NCHK Group’s interest in NCHK Highway.  That transaction was completed in April 1998.  In January 1999, in discharge of a monetary liability, Century City transferred its interest in Evercheer to a company known as Crux Assets Ltd, which is a wholly-owned subsidiary of Shenyin Wanguo, a listed company in Hong Kong.  The 2^nd plaintiff, Evercheer, sues in its own right as assignee of all the rights and causes of action accrued in favour of NCHK Highway, and NCHK Group, as 1^st plaintiff, is nominal only; it sues by its attorney, Evercheer, pursuant to a power of attorney dated 23 January 1999, and as a trustee for Evercheer pursuant to a declaration of trust of the same date.

12.  It is obvious that the par shares represented a significant benefit to NCHK Holdings.  Roughly speaking, although the Founding Member and the Investors would respectively provide approximately 27.11% and 72.89% of the capital, as a result of the par shares, the Founding Member would be entitled to 34.44% and the Investors 65.56% of the profits.

13.  Mr Jason So Kwan Cheung (“Mr So”), who was then a director of Emerging Markets Partnership, the principal advisor to the 1^st defendant, was involved in the 1^st defendant’s investment in NCHK Highway, and the administration of matters concerning the investment.  In his witness statement filed on 12 November 2005, he pointed out that although the draft Placement Memorandum had stated that the par shares would be retained by NCHK Group directly or indirectly for a period ending on the earlier of six months after the shares became listed on any stock exchange or the 2^nd anniversary of the “closing date” of the share subscriptions, there was no pre-condition that NCHK Group had to fulfil in order to obtain these par shares.  He said that “was altered as required by the Investors”.

14.  As a result, clause 7(2) of the Subscription Agreement provided:

“(2)   The Founding Member or its relevant wholly-owned Subsidiary shall deposit the Par Shares subscribed by it and the Founding Member and/or its Subsidiary shall deposit 120,000 Shares other than the Par Shares with the Escrow Agent on the first Funding Date. The Escrow Agent shall hold the Par Shares and the said 120,000 Shares and any and all dividends or other distribution paid in respect thereof in accordance with the Escrow Agreement. The Founding Member agrees that until termination of the Escrow Agreement none of the Shares to be deposited with the Escrow Agent pursuant to this provision may be pledged, charged, mortgaged or otherwise encumbered except as a result of the Escrow Agreement.”

15.  The Escrow Agreement dated 31 October 1994 was made between NCHK Group, the Investors, and Victor Chu & Co., the Escrow Agent. 

16.  Mr So went on to explain:

“13.   In a broad sense, the intended effect of the Escrow Agreement was that if NCHK Group would see to it that the Expressway was completed within 3 years from the first Funding Date (i.e. ensure that NCHK Highway would begin to get the guaranteed annual income of RMB 220 million within 3 years from the date the Investors pay the first tranche of their investment) and there was no breach of the Joint Venture Agreement, or of the Guarantee, which had not been cured by the Guarantor and there was no repudiation of liability, then the 479,291 Par Shares together with the 120,000 ‘full value’ Shares would be distributed to NCHK Group or its nominee. But if the Expressway was not completed within the said 3 years and there was any breach of the Joint Venture Agreement or the Guarantee or repudiation of liability as aforesaid, then all the Escrow Shares, including the 120,000 ‘full value’ Shares would be distributed pro rata amongst all the shareholders. In other words, the Investors believed that the value of the project would be reduced if the conditions in clause 6 of the Escrow Agreement arose, so the Investors should obtain a higher percentage ownership in the project as compensation.”

17.  As noted, apart from the par shares, the shares to be placed in escrow included 120,000 shares for which the full subscription price was payable (“the 120,000 subscription shares”).  As Mr So further explained, the audited financial statements of NCHK Highway for the year ended 31 December 1994 showed that a development fee of USD 10 million had been credited to NCHK Group and that placement expenses and preliminary expenses in the sum of USD 3,205,029 were reimbursed by NCHK Highway in addition to the development fee.  The 120,000 subscription shares were meant to represent a discount of such fees. 

18.  Since the JVA provided that the net income during the period of construction would be distributed to NCHK Highway, the portion of such income attributable to the par shares and the 120,000 subscription shares (hereinafter referred to collectively as to “the Escrow shares”) would also be held under the Escrow Agreement.  The Escrow shares, together with distributions of dividends thereon, would be paid into an account in the name of Victor Chu & Co. (“the Escrow Account”). 

19.  Depending upon certain specified conditions, the Escrow shares and the money in the Escrow Account (“the Escrow money”) would either be:

(1) taken entirely by NCHK Group (clause 5); or

(2) distributed among all shareholders pro rata (clause 6); or

(3) dealt with in accordance with what might be called a transitional mechanism under clause 7.

It may be useful to note that under clause 6, the Escrow shares and Escrow money would be distributed rateably to all the shareholders.  In that case NCHK Group would not have “earned” the Escrow shares and money and the shareholders would benefit according to their respective capital contribution.

20.  In mid-1999, by letters dated 28 June 1999 and 5 and 6 July 1999, the defendants gave instructions to the Escrow Agent for the Escrow Shares and Escrow money to be distributed pro rata pursuant to clause 6.  That was done. 

21.  In 2000, the present claim was brought by the plaintiffs for, inter alia, a declaration that the defendants were not entitled to distribution under clause 6, as well as for specific performance of the Escrow Agreement, so as to give effect to clause 5 thereof.  

22.  Clauses 5 and 6 of the Escrow Agreement provide as follows:

“5. Unless the Escrow Agent shall have released the Escrow Shares and all moneys in the Escrow Account pro rata among all the Investors and the Founding Member pursuant to the provisions of Clause 6 below, the Escrow Agent shall release the Escrow Shares and all moneys in the Escrow Account to the Founding Member (or its nominee) if the Escrow Agent shall receive written instructions (not to be unreasonably withheld or delayed) from all of the Investors to the effect that the Completion Date has occurred and that, to their knowledge, there is not continuing any breach of the Joint Venture Agreement, or of the Guarantee, which has not been cured by the Guarantor.

6.  The Escrow Agent shall distribute the Escrow Shares and all moneys in the Escrow Account pro rata among all the Investors and the Founding Member according to the number of Shares which they or their respective Subsidiaries have subscribed for under the Subscription Agreement if it shall receive written instructions (not to be unreasonably withheld or delayed) from all of the Investors to the effect that (a) the Completion Date has not occurred on or prior to the third anniversary of the first Funding Date or such later date as may be determined by special resolution of the Shareholders which is passed by votes representing 90% or above of the issued share capital of the Company and (b) either (i) there is continuing a breach of the Joint Venture Agreement, or of the Guarantee, which has not been cured by the Guarantor, or (ii) Sichuan Highway Corporation or the Guarantor has asserted in writing that neither Sichuan Highway Corporation nor the Guarantor has any liability under the Joint Venture Agreement or the Guarantee to compensate the Co-operative Enterprise for any losses incurred by the Co-operative Enterprise caused by the failure of the Completion Date to occur on or prior to the third anniversary of the first Funding Date, other than for the reasons specified in the last sentence of Clause 5.1(4) of the Joint Venture Agreement. …”

23.  Effectively, there would be a distribution under clause 6 if the Completion Date had not occurred on or prior to the 3rd anniversary of the first Funding Date or such later date as may be determined by a 90% special resolution of the Shareholders of NCHK Highway (clause 6(a)); and either:

(a)  there is a continuing breach of the JVA, or of the Guarantee, which has not been cured by the Guarantor (Clause 6(b)(i)); or

(b) SHC or the Guarantor has asserted in writing that neither SHC nor the Guarantor has any liability under the JVA or the Guarantee to compensate the Co-operative Enterprise for any losses incurred by the Co-operative Enterprise caused by the failure of the Completion Date to occur on or prior to the third anniversary of the first Funding Date, other than for the reasons specified in the last sentence of Clause 5.1(4) of the JVA (Clause 6(b)(ii)).

24.  For the defendants to succeed in upholding pro rata distribution, both clauses 6(a) and 6(b)(i) or (ii) had to be satisfied; but for the plaintiffs to succeed in getting the entirety of the Escrow shares and Escrow money, they must show that neither clause 6(a) nor clause 6(b)(i) was satisfied.  The learned judge held that the defendants have satisfied clause 6(a) but not clause 6(b).  He accordingly held that the distribution under clause 6 was wrongful and made a declaration accordingly. 

25.  As a result of further submissions made to the learned judge after the judgment was handed down in relation to the drawing up of the formal order, the learned judge’s order included the statement that the declaration that the distribution made by Victor Chu & Co. to the 1^st to 9^th defendants or their nominees in 1999 under clause 6 of the Escrow Agreement was wrongful, was made

“…without prejudice to the parties’ respective positions with regard to Clause 7 of the Escrow Agreement dated 31^st October 1994.”

26.  I will not deal with clause 7 because, in my opinion, the appeal should be allowed.  In any event, I would have remitted the matter to the learned judge for his further consideration.

The appeal

27.  At trial the defendants contended that clause 6(a) had been satisfied because the Completion Date had not taken place within the stipulated deadline and clause 6(b) had been satisfied in 3 different ways:

(1) Breach of Guarantee – clause 6(b)(i);

(2) Breach of JVA – clause 6(b)(i);

(3) Written denial of liability in respect of the Guarantee by SPTIC  – clause 6(b)(ii)

28.  All these issues are relevant in the appeal and I will take them in turn. 

Completion Date (Clause 6(a))

29.  “Completion Date” was defined in clause 1 of the Escrow Agreement as the later of the occurrence of two events, namely – 

“the later of the date on which (a) the whole Expressway (as defined in the Placement Memorandum) shall have been completed and open for traffic and toll collection and(b) the independent supervising engineers engaged by (NCHK Highway) pursuant to the (JVA) shall have certified that the Expressway has been constructed in accordance with the standards described in Clause 5.1(1) of the (JVA).”

30.  The 3^rd anniversary of the 1^st Funding Date was 31 October 1997.  It is common ground that there was no resolution by the shareholders to extend the Completion Date.  It is common ground that Parsons Brinckerhoff (“PB”) a firm of consulting engineers could be regarded as the independent supervising engineer.

31.  However, as Mr Paul Shieh SC (together with Mr Godfrey Lam, SC, for the defendants) submitted:

“(1)   (the learned judge) was inclined to hold (contrary to Ds’ submission) that the deadline for ‘Completion Date’ to occur had changed from the 3rd anniversary of the first Funding Date (i.e. 31/10/1997) to 31/12/1998 (Judgment §133-135);

(2) (the learned judge) rejected Ds’ submission that the whole Expressway (as defined in the Placement Memorandum) had not in fact been completed even by 31/12/1998 on the ground that Ds had failed to discharge the ‘evidential burden’ (Judgment §129-130);

(3) (the learned judge) rejected Ps’ submission that the PB Letter of 12/4/1999 [3/44/889] satisfied the definition of Completion Date (Judgment §139-144);

(4) (the learned judge) rejected Ps’ submission that Ds had or breached any duty to ensure that PB in fact issue the relevant certificate (Judgment §146)”

32.  The plaintiffs relied on a letter dated 12 April 1999 issued by PB as the requisite certification but Stone J held that that letter (“the PB letter”) was out of time (“bearing the date of 12 April 1999” – para. 144 of the judgment) and in any event “non-compliant” with the requirements of the Escrow Agreement as a matter of substance (“carefully worded (indeed, clearly qualified) terms” – para. 144).  On this basis, he held that “Completion Date” as defined had not occurred by the deadline (as extended) and hence the requirement for distribution prescribed by Clause 6(a) had been satisfied.

33.  I have no doubt that Stone J’s decision on the PB letter is correct.  The definition of Completion Date in the Escrow Agreement is clear.  It is the later of two dates.  The first date is the date of the completion of the Expressways, and the second, the date of certification by the supervising engineer.  Certification by PB on 12 April 1999 was too late.  With respect, I cannot agree with Mr Rimsky Yuen, SC, who together with Mr M C Law, appeared for the plaintiffs, that the date on which the PB letter was issued was irrelevant: it was sufficient that it certified that completion in accordance with the relevant standard had taken place on or before the stipulated date.  In support, Mr Yuen relied on the fact that the definition of “Completion Date” used the words “shall have certified” (as opposed to words such as “issued the certificate”).

With respect, I do not agree.  I have set out the relevant definition in para. 29 above.  The words are too clear to require explanation.

34.  Mr Yuen also submitted that the defendants were obliged to procure the certification by PB.  That submission was rejected by the learned judge.  With respect I agree.  I can see no basis upon which to hold that the Investors were obliged under the Escrow Agreement to procure such certification.  It was submitted that because, at the material time, the Investors controlled the Board of NCHK Highway, the Investors were obliged under the Escrow Agreement to procure certification by PB.  But NCHK Highway was not a party to the Escrow Agreement.  Nor was PB under any contractual obligation to NCHK Highway to certify.  Nor was there evidence that the plaintiffs were not in a position to ask for certification. 

35.  On clause 6(a), another issue is whether by necessary implication or by estoppel, the Completion Date must be taken to have been extended to 31 December 1998.  As noted in para. 31(1) above, the learned judge was inclined to hold that it had been so extended.

36.  The learned judge said:

“134. It is as plain as a pikestaff that the date for ‘completion’ of the Expressway formally having been extended under the 2^nd Supplemental Agreement to 31 December 1998, the mutual (and very obvious) intention of the parties involved on each side was that this should constitute the operative Completion Date.

135.  Accordingly, at first blush the present submission strikes me as opportunistic and wholly without merit, and had this been the only point I would have been inclined to find that notwithstanding the absence of the relevant resolution, the stipulated deadline must by necessary implication have been regarded as thus changed, as indeed was recognized by the 2^nd Supplemental Agreement; alternatively it seems to me that in the circumstances there would have been a strong argument in principle for holding that in such circumstances an estoppel by convention arose which served to preclude the defendants from taking this point, given that there seems to have been no doubt in anyone’s mind that the true operative Completion Date had become 31 December 1998.”

37.  The Date of Completion had been extended twice.  First, by the 1^st Supplemental Agreement.  But no point has been taken about this extension.  The second amendment was by the 2^nd Supplemental Agreement, when the Expressway was re-routed.  The Completion Date was extended to 31 December 1998.

38.  As Mr Yuen’s submission showed, the Investors were aware of and participated in the discussions leading to the making of the 2^nd Supplemental Agreement.  For example, there was a resolution in writing by all the shareholders of NCHK Highway finalized on about 6 October 1997, resolving that the company should enter into the 2^nd Supplemental Agreement.  There was a similar board meeting at the 4^th board meeting in NCHK Highway on 25 September 1997.

39.  It is unnecessary to refer to the ample evidence of the Investors’ involvement and participation in the affairs of NCHK Highway and the joint venture through December 1998.  They have been clearly established. 

40.  Mr Yuen submitted that as the Escrow Agreement was part and parcel of the arrangement which provided for the investments in and the financing for the Expressway and that it was executed pursuant to the Subscription Agreement which was made to enable the NCHK Group to raise funds for constructing the Expressway, the Escrow Agreement should be considered together with the overall arrangement brought about by the Subscription Agreement and the JVA, and the variation subsequently made thereto.  I agree. 

41.  But the language of clause 6(a) is clear.  It required completion:

“on or prior to the third anniversary of the first Funding Date or such later date as may be determined by special resolution of the Shareholders …”

There was no such resolution.  So construction of clause 6(a) cannot help the plaintiffs.

42.  That is why the plaintiffs relied on an implied amendment of the Escrow Agreement or estoppel by convention. 

43.  So far as amendment of the Escrow Agreement by necessary implication is concerned, it was not suggested that the Escrow Agreement could not work without an extension of the Completion Date to coincide with the Completion Date under the 2^nd Supplemental Agreement. 

44.  I agree with Mr Shieh that had the Investors been asked:

“… whether, in agreeing (qua NCHK Highway’s shareholders) to extend the JVA deadline (so that there would be no breach as between SHC and NCHK Highway), they were also extending the Escrow Agreement deadline so that they would lose the potential right to call for a Clause 6 distribution as against NCHK Group, it is extremely unlikely that they would have said ‘of course’. In fact they would have been more likely to say ‘Of course not! Why should we be giving up what is already ‘in the bag’ for us vis-à-vis NCHK Group?’”

45.  I also agree that the extension of the Completion Date under the JVA by either the 1^st and/or 2^nd Supplemental Agreements could co-exist with an unamended clause 6(a) of the Escrow Agreement.  It simply meant that absent a variation by 90% agreement of the Investors, the Completion Date remained the same under the Escrow Agreement such that clause 6 of the Escrow Agreement might become operative.

46.  As may have been noted, under the JVA the Completion Date was 3 years from the date of establishment of the co-operative enterprise (8 June 1994), in the Escrow Agreement it was 3 years from the 1^st funding date (31 October 1994).  The two dates are different.  Nor was it necessary for the two dates to be the same.  The JVA and the Escrow Agreement served different purposes.  The parties to JVA were SHC and NCHK Highway.  Neither of whom was party to the Escrow Agreement.  If the Expressway could not be completed by the stipulated deadline, SHC had to compensate NCHK Highway for loss (clause 5.1(4)).  I agree with Mr Shieh that, in considering whether to agree to extend the deadline under the JVA, or whether to agree to either the 1^st or 2^nd Supplemental Agreement, the focus of the defendants as shareholders of NCHK Highway would have been on the relationship between NCHK Highway and SHC.  This would include not just matters of legal entitlement, but also practical commercial considerations.  But their position under the Escrow Agreement was different.  They might or might not agree to an extension.  Bearing in mind the reasons for the Escrow Agreement (Mr So’s evidence quoted in para. 16 above is illuminating), I can see no reason why the defendants should necessarily agree to an extension.  I do not know whether the Supplemental Agreements were financially advantageous to NCHK Highway.  If they were not, why should the defendants agree to allow the NCHK Group to have the sole benefit of the Escrow shares and Escrow money?  But even assuming that their position had been improved, as Mr Shieh rhetorically asked: why should they give up their right under the Escrow Agreement? 

Estoppel by convention

47.  The various elements of estoppel by convention have been explained by Ribeiro PJ in Unruh v Seeberger [2007] 10 HKCFAR 31 at para. 133.  One element is that:

“… the parties must enter into some legal relationship on the basis of an assumption that is shared by or common to them both.  The commonality of the assumption is what marks out estoppel by convention as a distinct form of estoppel.”  Per Ribeiro PJ.

48.  There is no evidence that there was any mistaken belief or assumption by the plaintiffs that the deadline under Clause 6(a) of the Escrow Agreement (as distinct from the deadline under the JVA) had been extended to 31 December 1998.  There was no witness who had testified as to the state of mind, thinking or understanding of NCHK Group at any time. 

49.  The extension of the Completion Date under the JVA to 31 December 1998 was made by the 2^nd Supplemental Agreement on 6 August 1997, before the 2^nd plaintiff acquired NCHK Group’s interest in NCHK Highway.  In any event, there was no evidence as to their state of mind or understanding regarding any extension of the deadline for ‘Completion Date’.

50.  Indeed, when Century City conducted due diligence exercise before acquiring the 2^nd plaintiff, it asked the Escrow Agent whether Clause 7 of the Escrow Agreement was in operation.  The Escrow Agent’s reply to Linklaters (solicitors for Century City) on 10 March 1998 was that “ ... no amendment [to the Escrow Agreement] has been made by the parties; hence the provisions of Clause 7 should be in effect now” (which presupposed that Completion Date as defined had not occurred by the original deadline of 31 October 1997).  As for Shenyin Wanguo, who acquired the 2^nd plaintiff in January 1999, (by letter dated 12^th January 1999) Lovells (then acting for the Investors) informed Shenyin Wanguo that the Investors did not consider that Completion Date as defined had occurred.

51.  Nor was there any evidence whatsoever to suggest that the defendants were labouring under the required mistaken assumption. Nothing to that effect had been put to any of defendants’ witnesses at trial.  Even if there was a mistaken assumption on the part of both the plaintiff and the defendants, the plaintiffs had not pleaded, or adduced any evidence to show, how they would otherwise have acted at the material time that renders it unjust for the defendants to insist on the stipulated deadline being unchanged, i.e. 31 October 1997.  I see no basis for the finding of an estoppel by convention in favour of the plaintiffs.

52.  The learned judge also said in para. 123 of his judgment:

“123. The plaintiffs also point to the fact that within the period from 31 October 1997 (the original Completion Date) to 31 December 1998 there never was any suggestion by the Investors as to non-completion of the Expressway, and that had they taken the view, as now espoused, that the Completion Date remained at 31 October 1997, doubtless instructions accordingly would have been given to the Escrow Agent – yet the fact remained that none of the Investors had demanded distribution until after the Expressway was completed and had been opened for traffic on 21 December 1998, and only after the NCHK Group, on 7 January 1999, itself had requested distribution from the Escrow Account under Clause 5 thereof.”

53.  But there was no evidence that as a result of such conduct or omission the plaintiffs had acted to their detriment in any way.  Nor has this been relied on in the pleadings by the plaintiffs.  So, I would hold that the Completion Date under the Escrow Agreement had remained 31 December 1997.

54.  Having regard to my views on clause 6(a), I do not believe it is necessary to deal with the defendants’ respondents’ notice to respondents’ notice that the other ingredient of ‘Completion Date’ namely completion of the whole Expressway and opening for traffic/toll collection had not occurred before the extended deadline.

Clause 6(b)

55.  It is the defendants’ case that clause 6(b) had been breached in three different ways:

(1) breach of guarantee - clause 6(b)(i);

(2) written denial of liability by SPTIC in respect of the Guarantee – clause 6(b)(ii).

(3) breach of JVA - clause 6(b)(i);

 (1)    breach of guarantee, clause 6(b)(i)

56.  By a letter to NCHK Highway dated 23 April 1996 (“the 1996 letter”), SPTIC asserted that the Guarantee was of no effect.  SPTIC wrote:

“… Since the Joint Venture Agreement signed by your company and the Development General Corporation was not approved and validated by our Government department, the Guarantee signed by our company also has not become operative. In view of that, our company hereby declares that we are not responsible for any guarantee obligation on the cooperative construction of the Chengdu-Mianyang Expressway by your company and the Development General Corporation.

In April 1996, our company was informed that your company and the Development General Corporation had reached new consensus on the cooperative construction of the Chengdu-Mianyang Expressway, and signed a new agreement. Our company did not take part in the aforesaid matter. At the same time, according to the spirit as stated in the document No.[1995] 2226 issued by the State Development Planning Commission, our company hereby states clearly that we do not intend to give guarantee obligation relating to the cooperative construction of the Chengdu-Mianyang Expressway participated by your company.”

57.  Mr Shieh contended that the 1996 letter was a breach of Clause 6(b)(i).  Clause 6(b)(i) requires:

“(i) there is continuing a breach … of the Guarantee, which has not been cured by the Guarantor …”

Mr Shieh submitted that the 1996 letter was a continuing breach by the Guarantor.

58.  With respect, I do not agree. 

59.  It is clear that the SPTIC letter was written before the time had arrived at which SPTIC was bound to perform its obligation under the Guarantee.  So at best the SPTIC letter was an anticipatory breach of the Guarantee. 

60.  An unaccepted repudiation has no legal effect.  In the famous words of Asquith LJ it is:

“a thing writ in water and of no value to anybody.”  Howard v Pickford Tool Co. Ltd [1951] 1 KB 417, 421.

61.  Mr Shieh relied on the fact that the SPTIC letter had not been retracted and thus remained a continuing breach. 

62.  In Fercometal v Mediterranean Shipping Co [1989] AC 788, it was submitted that Braithwaite v Foreign Hardwood Co. [1905] 2 KB 543 was authority that:

“… where a party repudiates, the non-repudiating party, who does not accept the repudiation and affirms the continued existence of the contract, is thereby absolved from tendering further performance under the contract while the repudiatory attitude is maintained. The obligations of the innocent party are not revived until the repudiating party gives reasonable notice of his change of heart and is once again able and willing to perform the contract.”

63.  That submission was rejected by Lord Ackner with the concurrence of the other law lords, at 805:

“I therefore conclude that the decision in Braithwaite [1905] 2 K.B. 543 is not an authority for the proposition advanced by the appellants, alternatively if it is, then it is wrong. When A wrongfully repudiates his contractual obligations in anticipation of the time for their performance, he presents the innocent party B with two choices. He may either affirm the contract by treating it as still in force or he may treat it as finally and conclusively discharged. There is no third choice, as a sort of via media, to affirm the contract and yet to be absolved from tendering further performance unless and until A gives reasonable notice that he is once again able and willing to perform. Such a choice would negate the contract being kept alive for the benefit of both parties and would deny the party who unsuccessfully sought to rescind, the right to take advantage of any supervening circumstance which would justify him in declining to complete.”

64.  I agree with the learned judge, though for different reasons, that there had not been a continuing breach of the Guarantee under clause 6(b)(i).  In fairness to the learned judge, this precise argument does not appear to have been raised before him. 

(2) written denial of liability

65.  The defendants relied on the 1996 letter as a breach of clause 6(b)(ii), namely, that:

“… the Guarantor has asserted in writing that neither (SHC) nor the Guarantor has any liability under the (JVA) or the Guarantee to compensate the Co-operative Enterprise for any losses incurred by the Co-operative Enterprise caused by the failure of the Completion Date to occur on or prior to the third anniversary …”

66.  Clause 6(b)(ii) has to be considered together with clause 6(b)(i).  Clause 6(b)(i) is concerned with continuing breaches of the JVA or Guarantee.  Clause 6(b)(ii) requires a mere assertion in writing.  Mr Yuen submitted that the assertion under clause 6(b)(ii) could only be made after:

“the failure of the Completion Date to occur on or prior to the third anniversary …”

However, we have heard little submission on this, and I prefer to decide this issue on a different basis.

67.  Mr Shieh relied on the 1996 letter as a continuing assertion by the Guarantor.  He submitted that an assertion of no liability must have included an assertion of no liability:

“… to compensate … for any losses incurred by the Co-operative Enterprise caused by the failure of the Completion Date to occur on or prior to the third anniversary …”

It was essential to Mr Shieh’s submission that the 1996 letter be regarded as a continuing assertion.

68.  For the reasons given by me when dealing with the 1996 letter as a continuing breach of the Guarantee, I do not believe the unaccepted repudiation of an anticipatory breach could be regarded as a continuing assertion for the purpose of clause 6(b)(ii).

69.  On the evidence it was clear NCHK Highway had by letters dated 8 May 1996 and 23 September 1996 written by Victor Chu & Co. on their behalf, refused to accept the purported repudiation.  I might add that only NCHK Highway was entitled to accept the repudiatory breach by the Guarantor, which, failing acceptance by NCHK Highway, as Lord Ackner said:

“… the contract (was) kept alive for the benefit of both parties …”

70.  Since the 1966 letter could not be regarded as a continuing assertion by NCHK Highway, I do not believe it could be regarded as such by the defendants.

(3) breach of the JVA

71.  Under Clause 5.1(4) of the JVA, SHC was responsible for acquiring for the co-operative enterprise the land use right in relation to all the land for the Expressway including its ancillary facilities.  This was to be done within the overall fixed fee of RMB 1,153 million.  Any extra expenses or costs were to be shouldered by SHC.

72.  Clause 5.4 of the JVA provided that, inter alia, a breach of clause 5.1(4) would be deemed a violation of the obligations under the JVA:

“… and that defaulting party shall be liable to compensate the other party for all losses and expenses thus incurred.”.

73.  Two specific breaches of the JVA, among others, were pleaded and relied upon at trial (para. 58(3) & (4) of the Re-Amended Points of Defence and Counterclaim), namely that:

(1) SHC had failed to acquire all the relevant land use right as provided in Clause 5.1(4) of the JVA.

(2) SHC had failed to transfer to the co-operative enterprise the land use and management rights over the 23.5 km stretch of road which was already being built between Baima and Mojia and to deliver the relevant deeds and title documents, as required by Clause 5.2(2) and (3) of the JVA.

(3) In particular, it was pleaded in para. 58(3) that the issue of the relevant land use right certificates were necessary to “signify the acquisition of the relevant land use rights”.

74.  It is necessary to look at the plaintiffs’ pleaded response in some detail.  They had pleaded:

“31.   As to paragraph 58(3):

(1) It is denied that the provisions of clause 5.1(4) of the Joint Venture Agreement imposed any obligation on Sichuan Highway Corporation to acquire any land use right of any land required for the construction of the Expressway or any land use right of any land required for any ancillary facilities for the duration of the joint venture, or at all.

(1A)  Further or in the alternative, even if the provisions of Clause 5.1(4) of the Joint Venture Agreement imposed any obligation on Sichuan Highway Corporation to acquire any land use right of any land required for the construction of the Expressway or any land use right of any land required for any ancillary facilities for the duration of the joint venture (which is denied), it is averred that such land use right was already obtained by Sichuan Highway Corporation. Insofar as it is necessary, the Plaintiffs shall refer to and rely upon, inter alia, the following:

(i)  Notice concerning the Relevant Issues Relating to the Operation of Chengdu-Mianyang Expressway through a Sino-foreign Joint Venture (Ref No. Department of Communications, (1994) 271) dated 16^th June 1994;

(ii)  Legal opinion from Sichuan Lawyers Office dated 16^th July 1994;

(iii) Approvals issued by Sichuan Province State Land Authority for resumption of land used for construction of the Expressway dated 23^rd September 1994 and 27^th November 1996.

(1B)   Further and in any event, it is denied that Clause 5.1(4) of the Joint Venture Agreement imposed any obligation on Sichuan Highway Corporation to acquire any land use right certificates as alleged or at all. Insofar as it is necessary, the Plaintiffs shall refer to and rely upon the letter dated 19^th March 1998 issued by Chu together with its enclosures, namely, notices issued by the State Land Management Bureau dated 26^th May 1988 and 19^th February 1990. 

(2) Paragraph 58(3) is otherwise not admitted.”

75.  On such pleadings, it is clear that:

(i)  the defendants alleged that land use certificate were required for the land use rights

(ii)  for the reasons pleaded

(a)  the plaintiffs denied that SHC were required to provide the land use rights or they had been provided, and

(b) that in any event SHC was under no obligation to provide any land use certificates.

76.  It is obvious that under the JVA, SHC was under an obligation to provide all the relevant land use rights under clause 5.1(4) of the JVA, and that failure to do so would be a breach of JVA.  Also, if land use certificates were required for the acquisition of the relevant land use rights, failure to do so would be a breach of JVA.  Mr Yuen has not contended otherwise.

77.  So, the issues before us was reduced to a single point, namely, whether SHC was obliged to provide the land use certificates. 

78.  It appeared to have been the common view of SHC and NCHK Highway that land use certificates were required and that they were the responsibility of SHC to procure under the JVA.  But as Lord Reid said in James Miller and Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 572 at 603:

“I must say that I had thought that it is now well settled that it is not legitimate to use as an aid in the construction of the contract anything which the parties said or did after it was made. Otherwise one might have the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different a month or a year later.”

79.  It is a question of construction whether land use certificates are required for the land use rights.  The JVA did not refer to land use certificate in terms.  The JVA was governed by the law of the Peoples Republic of China.  No expert evidence on PRC law was produced.

80.  Although on the evidence, it seems clear that both NCHK Highway had conducted themselves or made statements which showed that they had regarded it to be SHC’s contractual obligation under the JVA to procure land use certificates, such evidence cannot be used as an aid in the construction of the JVA.

81.  In considering the material relied on by Mr Shieh, it is important to have regard to what is admissible for the construction of the JVA.  As I have said conduct and statements made after the contract are not, subject to irrelevant exceptions, admissible as an aid to construction of the JVA.  On the other hand, evidence which may be regarded as part of the factual matrix for the construction of the JVA is admissible, although the weight to be placed on such evidence may vary.

82.  Mr Shieh relied on the Procedure on Inspection and Acceptance of Highway Project upon Completion promulgated by the Ministry of Communications on 15 November 1995 under Jiao Gong Lu Fa No. 1081 of 1995 (“the Procedure”), B2/795, which applied:

“… to all highway projects involving newly built or re-built highways within (the PRC), including those with major renovation or minor improvement works.”  Article 2

83.  In the Procedure, under Appendix A, Part 1 Comprehensive documents, the documents required to be filed by the communication departments in charge included “Land requisition map and certificate of land use right.” Para. (3)(iv).

84.  Mr Shieh also relied on the memorandum from DOC (the Sichuan Provincial Department of Communications) to Shenyin Wanguo, which stated:

“2. Regarding the delivery of the Land Use Right Certificate: we promise that the Construction Directorate will apply for the certificate on time. On striving for obtaining the Land Use Right Certificate within the first half of this year, before that the toll charging and other benefits of the Co-operative Enterprise will not be affected.”  B7/223/2908

The memorandum was signed by Mr Yu Weiduo.  Mr Yu was a director of SHC but he signed the memorandum as the vice director of DOC.

85.  Mr Tse Po Shing, from the 2^nd defendant, dealt with the requirement of the land use certificate in paras. 15-16, 38-40 of his witness statement.  In para. 15 he said the obligation on the part of SHC to provide the land use certificates:

“had been confirmed by the Construction Directorate to the Co-operative Enterprise by letter dated 12 January 1999 and by the Director of the DOC of Sichuan to Shenyin Wanguo by letter dated 17 March 1999.  In this regard, it is important to note that (SHC) is the investment arm of DOC and as at early 1999 Mr Yu Wei Do held the positions of both director of (SHC) and Deputy Director of DOC.”

He had explained earlier that:

“The Construction Directorate was a task force set up by the Department of Communications of Sichuan Province (‘DOC’) for the purpose of construction of the Expressway.”

The letter of 17 March 1999 referred to by Mr Tse was a reference to the memorandum referred to in para. 84 above.

86.  I believe both the Procedure and the memorandum are matters which could be taken into consideration in the construction of the JVA.

87.  Mr Tse went on to say that:

“40.   The lack of such land use right certificate had in part posted hindrance when an application was made to the Central Government in 1999 for a certificate that the Expressway had been properly completed. In this connection I refer to the regulation for issuance of completion certificate dated 15 November 1995. Appendix A to this regulation stipulated that land use right certificate was one of the required documents. Eventually, in the present case, it was only after going through a great deal of negotiation and a special approval procedure that the Completion Certificate was finally issued by DOC on behalf of the Ministry of Communications on 5 November 2003.”

88.  There was also the memo of 9 February 1999 [3/42/876] by Dr L H Wang (who was responsible for the daily running and operation of the joint venture that):

“3. … the landuse certificate is essential to our investment ...

4.  The key issue here is when can we be guaranteed to obtain the land use certificate soon. Party A should as well responsible for the cost of such certificate application.”

89.  In a letter addressed to the Provincial Government of Sichuan dated 21 August 2000, from the Co-operative Enterprise, it was said:

“Upon the completion of the construction of the Chengdu-Mianyang Expressway, it was for the China party to apply to the Bureau of Land and Resources for the certificate of land use right in relation to the northern section of Dajian Highway and the Expressway. Having enquired with the Bureau of Land and Resources, the China party learnt that, during the construction period, (since) it was the commanding office of the communications department which was responsible for the requisition of land, at present, a land premium of over 20,000 Yuan per mu has to be paid by the enterprise using the land before the certificate of land use right can be issued to the joint enterprise, i.e. at least over 200 million Yuan. Chengdu-Mianyang Expressway is a sino-foreign joint venture project, and the China party injected Dajian Highway and the expressway as the condition for cooperation. During the 30 years of joint enterprise, the land would be used for the project lawfully by the joint enterprise. So, it is hoped that the provincial government can mediate and exempt the land premium.”  B9/315/3663

90.  I believe that para. 4 of the Dr L H Wang’s memo is a possible aid to construction insofar as it is evidence of the Land Bureau’s estimated costs for the issue of the land use certificate, since it is clear that para. 4 was so understood.

91.  Finally, Mr Tse said the government completion certificate was issued on 5 November 2003 after a good deal of negotiations.

92.  Mr Yuen relied, as was pleaded in para. 31(1B) of the Reply, on a letter written Victor Chu & Co. on 19 March 1998 to Zhongwei Law Firm for legal advice, concerning whether the co-operative enterprise should obtain the land use right certificate for the land occupied by the Expressway.  The letter CB3/29/781 - 783 is important and reproduced below:

“Concerning whether the Cooperative Enterprise should obtain the land-use right certificate for the land occupied by the highway, the land is, according to our understanding, neither the property of the Cooperative Enterprise nor allocated by the State to the Chinese Party for use as the condition of cooperation. The Cooperative Enterprise has already obtained the concession from the relevant authority to construct and operate the highway on the land within the range of the highway, and may collect tolls but does not own the land occupied by the highway.

We attach herewith Article 56 in the reply (Ref: [1988] Guo Tu Han Zi) of the State Land Administration to Sichuan Province Land Administration. Paragraph 2 of the document states that the land occupied by roadbed of the highway shall be registered with the land administrative authority of the local county-level people’s government with no certificate issued. It is specified at the end of the same paragraph that there was different treatment in respect of application for land use right certificate for land occupied by roadbed of the highway and other used land.

Moreover, we also attach herewith Doc No. 15 in the reply (Ref: [1990] Guo Tu Han Zi) of the State Land Administration to Guizhou Province Land Administration concerning the issuance of certificate for land reserved along both sides of the highway. The reply also specifies that only registration shall be made for such land use and no certificate will be issued.

Will your esteemed firm please consult the State land department about the relevant issues and confirm your legal opinions in writing as soon as possible.”

93.  No advice from Zhongwei Law Firm has been produced.

94.  I cannot regard Victor Chu & Co.’s letter as supportive of the plaintiffs’ case.  In the letter, Victor Chu & Co. enclosed a copy of a statement issued by the state land administration namely 1988 Guo Tu Han Zi Doc No. 56, dated 26 May 1988.  However, a closer reading of the original document shows that that document was concerned with highways and railways operated by government departments.  It would appear that under that document, no land use certificate was necessary in those cases.  But that document was not concerned with highways operated by joint ventures and therefore does not seem to have any application.  Another government document which was included in Victor Chu & Co.’s letter was issued by the State Council dated 19 February 1990.  That related to the province of Guizhou, and had no application to Sichuan. 

95.  As for the document referred to in para. 31(1A), Mr Yuen did not rely on them in his submissions.  I must say I do not believe those documents would assist him. 

96.  On such evidence, the question is whether the defendants have sufficiently proved their case that land use certificate were required under the JVA regarding the land required for construction of the Expressway and ancillary facilities for the duration of the joint venture.

97.  This is what the learned judge said in his judgment:

“101. Like arguments – both as to the defendants’ evidential burden and as to the veracity of the underlying issues – must also arise within the alternative limb of Clause 6(b)(i) in terms of the question of a continuing breach of the Joint Venture.

102.  In my view, in face of the argument which has been mounted with reference to Joint Venture breach, it also is not possible on the present state of the evidence fairly to evaluate the respective strongly adverse contentions concerning toll rates, tax benefits and land use rights prayed in aid by the defendants under this head – indeed at one stage argument veered alarmingly towards the minutiae of the insufficiency of the number of remote-controlled cameras at the Moija substation on the Expressway – and absent appropriate evidence going to a formulated plea upon such issues nothing is to be gained by the court being drawn into a detailed debate in which no fair conclusion on the probabilities presently is possible, and wherein the court cannot in good conscience hold that the defendants’ particular contentions have been established to the requisite standard of proof.

103.  This aspect epitomises a particular difficulty in this case, which has arisen by reason of the defendants’ attempt, primarily as a matter of necessary inference on the available papers, to uphold the veracity of allegations which, if established, would serve to produce the desired ‘fit’ within the rubric of Clause 6(b)(i), thereby facilitating the submission that there is an uncured and continuing breach of the Joint Venture and/or of the Guarantee, and thus in turn justifying the call on the Escrow Account and the distribution therefrom – and this despite the fact, as Mr Chan repeatedly has emphasised, that in the circumstances this represents an “unreal debate” in litigation in which not only are the entities directly relevant to these issues not before the court, but that there is not even direct evidence available upon such issues which, in the event, remain unpleaded.

104.  It follows from the foregoing, therefore, that in my judgment Mr Chan SC must succeed in his submissions regarding non-compliance (or, perhaps more accurately, the fact of unproven compliance) with the terms of Clause 6(b)(i).  I so hold.”

98.  On the basis of these paragraphs, Mr Shieh contended that the learned judge had not considered whether SHC had breached the JVA as contended by the defendants because:

(1) The matter was unpleaded.

(2) The entities “directly relevant” to the issues of breach of the JVA were not before the court.

(3) The issue of breach of the JVA involved the “minutiae” of the insufficiency of the number of remote-controlled cameras at the Mojia substation on the Expressway.

(4) There was no direct evidence available on the issues concerning breach of the JVA.

99.  I have not found these paragraphs easy.  I agree with Mr Shieh that the number of remote-controlled cameras is only relevant to the issue whether the Expressway had been “completed” within the meaning of the Escrow Agreement: see Defence para. 31(3A).  It was not relied upon as a breach of the JVA.  As to the absence of relevant entities before the court, I do not believe that was the basis of the court’s decision.  The learned judge was merely repeating counsel’s forensic point that it was “an unreal debate”.  The 1^st plaintiff and the Investors were the only parties to the Escrow Agreement.  SHC and NCHK Highway were not necessary or proper parties.

100.  In para. 103, the learned judge seemed to have endorsed the plaintiffs’ then leading counsel, Mr Warren Chan’s submission that:

“there is not even direct evidence available upon such issues which, in the event, remained unpleaded.”

101.  Perhaps the learned judge was saying no more than that he was not satisfied that there had been a breach of the JVA relating to the land use rights.  As noted above, the two breaches of the JVA have been clearly pleaded by the defendants, so if by “such issues” the learned judge had included the two pleaded breaches, he was wrong.

102.  The fact remained that the learned judge appeared not to have dealt specifically with the defendants’ pleaded case.

103.  It is necessary for us to do so.  As May LJ said in Morris v London Iron and Steel Co Ltd [1988] 1 QB 493 at 504:

“… Judges and tribunals of fact should make findings of fact in relation to matters before them if they can. In the exceptional case, however, a judge conscientiously seeking to decide the matter before him may be forced to say ‘I just do not know:’ indeed to say anything else might be in breach of his judicial duty. In most cases, although in some cases it may be difficult, they can do just that. Judges should, so far as is practicable and so far as it is in accordance with their conscientious duty, make findings of fact.”

104.  On the material before me, though not without diffidence, I have come to the conclusion, that the defendants have succeeded in establishing that SHC was obliged under under clause 5.1(4) of the JVA to obtain land use certificates.  The evidence is thin, but having regard to all the circumstances, including in particular, the pleadings, I believe that is the correct decision.

105.  This is not a case where the trial judge had, after a consideration of the evidence, come to the conclusion that the defendants’ case on breaches of the JVA have not been established.  In that kind of case, I would not interfere.

As regards Land Use and Management Rights relating to Early Stage Construction

106.  The defendants also contended that SHC had failed to transfer to the JV the land use and management rights over the 23.5 km stretch of road which was already built between Baima and Mojia and to deliver the relevant deeds and title documents as required by clause 5.2(2) and (3) of the JVA. 

107.  Clause 5.2(2) and (3) of the JVA required SHC to:

(1) transfer to the co-operative enterprise within 15 days of its establishment (meaning the establishment of the co-operative enterprise) the “land use and management rights” over the 23.5 km stretch of road which was already being built between Baima and Mojia (which, it will be recalled, was the earliest segment to be delivered) and

(2) deliver the relevant deeds and title documents.

108.  The assignment of the right to use and management of the “Early Stage Construction” was a condition precedent for the Subscription Agreement: clause 2(1)(b) [2/12/410].

109.  Again, I believe the issue here is whether clause 5.2(3) of the JVA obliged SHC to obtain land use right certificates. 

110.  An addition issue raised by Mr Yuen is estoppel.

111.  Mr Yuen submitted:

“(a)    Under clause 2.1(b) of the Subscription Agreement, ‘production of documentary evidence in form and in substance satisfactory to all of the parties (including the Investors) of the assignment of the right to use and management of the Early Stage Construction and the right to collect toll charges referred to in’ clause 5.2 of the JVA was made a condition precedent to the Investors’ obligation to subscribe for shares in NCHK Highway. [Core 2:12:410]

(b) Prior to Evercheer’s request for distribution under clause 5 of the Escrow Agreement in early 1999, the Investors did not complain about the lack of land use right certificate for the Early Stage Construction (or the other parts of the Expressway). Instead, they subscribed and paid for the shares in NCHK Highway pursuant to the Subscription Agreement.”

112.  I agree with Mr Shieh that no estoppel has been established.  Waiver of a condition precedent is not necessarily waiver of the requirement of the land use certificates.  The evidence shows that the requirement of the land use certificate had remained an active issue.

Conclusion

113.  I have had the advantage of reading Yuen JA’s judgment in draft.  Although, with respect, I do not agree that the defendants could rely on SPTIC’s letter dated 23 April 1996 for the purpose of clause 6(b)(i) or clause 6(b)(ii), but should I be wrong on that, I respectfully agree with Yuen JA on the effect and consequence of that letter.

114.  For the above reasons, I am of the view that the defendants have satisfied both clause 6(a) and clause 6(b)(i).  That being the case, I would allow the appeal.  I would also make an order nisi as to costs to be paid to them, both here and below.

Hon Yuen JA:

115.  I have had the benefit of reading the draft judgment of Tang V-P and I agree with it save in respect of the treatment of the SPTIC letter and its impact on cl.6 of the Escrow Agreement. 

116.  It has been said that SPTIC’s letter dated 23 April 1996 declaring that it was not responsible for any obligations under the Guarantee was only an anticipatory breach.  However in my view, even if SPTIC’s letter may only have been an anticipatory breach vis-a-vis NCHK Highway when it was sent, it was never retracted (whether expressly or by conduct) and there was no evidence that SPTIC was acting under any mistake of fact or law in taking or maintaining that position.  The position expressed in the letter continued to be SPTIC’s stand at all material times thereafter and the real issue is whether it satisfied the provisions of cl.6 of the Escrow Agreement. 

117.  Therefore in my view it is necessary for this court to see if the Defendants have satisfied with this letter either

-  cl.6(b)(i): “there is continuing a breach ... of the Guarantee, which has not been cured by the Guarantor”; or

-  cl.6(b)(ii): “[SHC] or the Guarantor has asserted in writing that neither SHC nor the Guarantor has any liability under the [JVA] or the Guarantee to compensate the Co-operative Enterprise for any losses incurred by the Co-operative Enterprise caused by the failure of the Completion Date to occur on or prior to the third anniversary of the first Funding Date ...”.

Clause 6(b)(i): Breach of guarantee?

118.  The first issue is whether the SPTIC letter constituted a breach of the Guarantee.   With respect to the learned judge, I consider that the Defendants had made such an allegation in the pleadings (para. 62(3) Re-Amended Points of Defence and Counterclaim) which was denied by the Plaintiffs (para. 32 Re-Amended Points of Reply and Defence to Counterclaim) and thus the issue fell to be decided.  This was accepted by leading counsel acting for the Plaintiffs at trial (Transcript, Day 2, pp.6-7; Appeal Bundle A,317).  There were two reasons given by SPTIC in the letter for denying responsibility under the Guarantee.  

(1) Non-approval by government department

119.  First, SPTIC alleged that the JVA was not “approved and validated by our Government department” (in the original, “not approved and validated by a/the department(s) of the government of our country”).  The relevant department(s) was/were not identified. 

120.  I shall first examine this unparticularized allegation.  SHC was itself the investment arm of the Department of Communications of the Sichuan provincial government.  There is clear documentary evidence that the provincial government had expressly approved the JVA in 1994 (see the document entitled “Official Reply” dated 23 May 1994 from the Sichuan Provincial Development and Planning Commission: Appeal Bundle B1, 332). 

121.  As far as the central government was concerned, the document from the State Planning and Planning Commission dated 18 January 1996 shows the central government’s dissatisfaction with the provincial government’s failure to follow administrative procedure but there was no evidence that under PRC law, that failure rendered the provincial government’s actions ultra vires such as to render the JVA void (Appeal Bundle B3, 921). 

122.  Accordingly on the available evidence I am not satisfied that SPTIC could deny liability on that ground alone. 

(2) Variation of JVA

123.  The second reason given by SPTIC was that it “did not take part in the [new agreement]” meaning the 1^st Supplemental Agreement.  This has been construed broadly to mean that the 1^st Supplemental Agreement has effected a variation to the JVA which SPTIC had guaranteed and that it has not given consent to such variation.  

-    Terms of guarantee

124.  To understand the parties’ arguments, it is necessary to note the relevant terms of the Guarantee.

125.  First, the Guarantee was not a blanket guarantee of all of SHC’s obligations and liabilities under the JVA.  Instead SPTIC guaranteed that SHC would fulfil and perform the liabilities, obligations and undertakings listed in 5 specific categories, as follows (in summary form):

(1)   SHC would contribute a stated sum of capital investment and financing;

(2)   SHC would design and construct the Expressway within budget and within time;

(3)   SHC would assign the pre-completed part of the Expressway;

(4)   SHC would guarantee that NCHK Highway would obtain its share of profits (the parties’ respective proportions having been set out in cl.7.2(2) and cl.7.2(3) of the JVA) converted into foreign exchange for overseas remittance; and

(5)   SHC would “top-up” any deficiencies to meet the minimum expected toll income. 

These were defined as “the Guaranteed Liabilities”.  Other obligations of SHC fell outside the scope of SPTIC’s guarantee.

126.  Secondly, the Guarantee specifically provided that “subject to the prerequisite that the burden of the Guaranteed Liabilities will not be increased, any alterations of the Co-operation Agreement made by [SHC] and [NCHK Highway], or grace period or any other allowance granted to [SHC] by [NCHK Highway] in respect of fulfilment or payment shall not discharge the Guarantor from its liabilities” (Emphasis added). 

-    Arguments on increase of burden of the Guaranteed Liabilities

127.  The Plaintiffs have argued that SPTIC’s burden as guarantor has been increased because of the amendment of cl.8.5(5) of the JVA by cl.16 of the 1^st Supplemental Agreement.  Accordingly SPTIC was entitled to refuse to honour the Guarantee, it has not breached the Guarantee and so cl.6(b)(i) was not satisfied. 

128.  The Defendants have argued first that there is uncontradicted evidence that the general manager of SPTIC was informed of the 1^st Supplemental Agreement.  There is nothing in this argument as it does not mean SPTIC consented to it.   Secondly the Defendants have argued that cl.8.5(5) was not a Guaranteed Liability at all, and so its amendment by cl.16 of the 1^st Supplemental Agreement did not affect SPTIC.  They also argued that in any event, the amendment did not increase the burden of the Guaranteed Liabilities.  Accordingly SPTIC was in continuing breach of the Guarantee by maintaining the stand asserted in their letter dated 23 April 1996 and they (the Defendants) were justified in giving instructions to the Escrow Agent for pro rata distribution in June 1999.

-    Clause 8.5(5) JVA

129.  Under cl.8.5(5) of the JVA, SHC warranted that if the government were to permit another road to be built alongside the Expressway (which I will call for convenience “the Other road”), the Cooperative Enterprise would have the right to build it.  Pausing there, I agree with the first part of the Defendants’ submission that the performance of cl.8.5(5) of the JVA did not fall within any of the 5 categories of Guaranteed Liabilities. 

-    Amendment by clause 16, 1^st Supplemental Agreement

130.  However in my view, that is not the end of the matter.  Although the original cl.8.5(5) did not contain a Guaranteed Liability, we cannot ignore the substance of its amendment.  Clause 16 of the 1^st Supplemental Agreement amended cl.8.5(5) by adding a provision that if the Cooperative Enterprise chose not to build the Other road and SHC did, and if the Other road caused loss to the toll income of the Expressway, then SHC would have to adjust the distribution of income from the Expressway to NCHK Highway to compensate for the loss, such compensation to be calculated in accordance with the amended cl.7.2(3) of the JVA.  In my view it is clear that this amendment increased SHC’s Guaranteed Liability under sub-para.125(4) above.

131.  The Defendants have argued that the 1^st Supplemental Agreement was entered into on the instructions of the central government to lessen the burden on SHC, and they point to the amendment of cl.7.2(3) of the JVA effected by cl. 11 of the 1^st Supplemental Agreement.  By that amendment, the last part of cl.7.2(3) was deleted.  The deleted part had provided for an adjustment in the ratio of distribution if the minimum toll income was not achieved.

-    Discussion  

132.  It is true that pursuant to the amendment of cl.7.2(3), NCHK Highway lost the right to a minimum toll income.  It is also true that compensation under the amended cl.8.5(5) would only be payable if a number of contingencies occur, i.e. the Other road would be built not by the Cooperative Enterprise but by SHC, and that its operation caused direct loss to the Expressway. 

133.  However I do not agree with the Defendants that the burden of SHC (and its guarantor SPTIC) would not be increased.  Pursuant to the 1^st Supplemental Agreement, NCHK Highway would be entitled to a larger share of income distribution if the Other road caused loss – even if the Expressway had already achieved the minimum toll income.  The following example is an illustration.  Say the minimum toll income agreed under the original JVA for a certain period was 220m RMB p.a.  If the Expressway was achieving income of 230m RMB p.a., that would have achieved the minimum and SHC would not be liable to pay any sums to NCHK Highway for “top-up” under the original JVA.  If however the Other road was built and caused the Expressway income to drop from 230m RMB p.a. to 225m RMB p.a., then pursuant to the amendment SHC would have to pay 5m. RMB p.a. to the Co-operative Enterprise by adjusting the distribution ratio or using “other feasible measures”.  Accordingly I take the view that the amendment effected by the 1^st Supplemental Agreement would increase the burden of the Guaranteed Liability set out in sub-para.125(4) above.  Irrespective of protestations to the contrary made on behalf of NCHK Highway, in my view objectively SPTIC was entitled to refuse to honour the Guarantee due to the variation to which it had not given consent. 

134.  For that reason, I consider that there was no continuing breach of the Guarantee under cl.6(b)(i) of the Escrow Agreement.  In view of this conclusion, it is not necessary to consider the issue whether the Defendants’ statement to the Escrow Agent that there was “in all probability” a subsisting breach of the guarantee was sufficient to trigger distribution under the Escrow Agreement, nor the issue whether the  Defendants had knowledge of the letter before they gave instructions to the Escrow Agent for distribution under cl.6.

Clause 6(b)(ii): sufficient assertion of no liability? 

135.  The Defendants have also relied on the SPTIC letter of 23 April 1996 as a denial of liability triggering a right to pro rata distribution under cl.6(b)(ii).  In paragraphs 110-111 of Stone J’s judgment, the learned judge dismissed the Defendants’ argument on three grounds.  I do not agree with the first ground for the reasons set out in para. 116 above.  As for the second, I think it can be safely assumed that delay in completion would lead to loss of toll income.  However I agree with the learned judge on the third ground. 

136.  Before dealing with this argument, I think it should be noted that cl.6(b)(ii) was an addition to what were otherwise reciprocal provisions under cl.5 of the one part and cl.6(a) and (b)(i) of the other part.

Under cl. 5,

-  if there was no delay and no breach, the Escrow shares and money would be given to the Founding Member exclusively;

under cl.6(a) and (b)(i),

-  if there was a delay and there was a breach, the Escrow shares and money would not be given to the Founding Member exclusively, but would be distributed pro rata.

It would be noted that under cl.6(b)(i), it was for the Investors themselves to prove that there was a breach of the JVA or the Guarantee.  That would require the Investors to have detailed knowledge of the project, but of course when the Escrow Agreement was made, the NCHK Group had not yet fallen into financial difficulties and the Investors would not have anticipated that they would end up participating so actively in the project.   At the time of the Escrow Agreement, the Investors would not have the means of proving a breach of the JVA or Guarantee without the cooperation of the NCHK Group.  That was the factual matrix of the alternative in cl.6(b)(ii), which provided that if there was loss due to delay, the Investors could claim the Escrow shares and money pro rata – even if the Investors themselves were not in a position to prove a breach of the JVA or Guarantee – if “[SHC] or the Guarantor has asserted in writing that neither SHC nor the Guarantor has any liability under the [JVA] or the Guarantee to compensate the Co-operative Enterprise for any losses incurred by the Co-operative Enterprise caused by the failure of the Completion Date to occur on or prior to the third anniversary of the first Funding Date ...”).  (Emphasis added).

137.  Like the learned judge, I consider that cl.6(b)(ii) should be construed literally, i.e. that it would only operate if SHC or SPTIC makes an assertion stating that both of those parties were not liable to pay compensation.  It must not be forgotten that the Escrow Agreement was drafted and approved by the parties’ legal advisers and the attestation clauses showed that no less than 4 different solicitors’ firms were instructed for the 5 parties involved.  If it had been intended that SHC or SPTIC would only need to assert in writing that it has no liability to pay compensation under the JVA or the Guarantee (as the case may be), it would have been easy to say so.

138.  I accept that it may be unusual to expect an entity to make assertions about the legal position of another entity, but it is to be noted that SHC and SPTIC were both closely connected to the Sichuan Provincial Government, and so one would not expect them to take conflicting positions.  Further as I have noted earlier (para. 136), the alternative in cl.6(b)(ii) gave an additional advantage to the Investors beyond the reciprocal provisions in cl.5 and cl.6(a) and (b)(i).  That explains why the Investors’ additional advantage was restricted to a situation where loss has been suffered but one of the related mainland parties has asserted that no-one (on the mainland side) would be responsible for the loss.  It would be understandable why the parties agreed that the Investors faced with that rather desolate situation could look to the Escrow shares and money as compensation for their loss.      

139.  For those reasons, I take the view that the SPTIC letter (in which it only denied its own liability but did not deal with SHC’s liability under the JVA) does not satisfy cl.6(b)(ii) of the Escrow Agreement.

Breach of the JVA - land use certificates an implied term

140.  In respect of breach of the JVA, apart from the matters set out in the Vice-President’s judgment with which I respectfully agree, I would add that in my view the procurement of land use certificates was necessarily implied in the express term of the contract that SHC was to acquire the land use rights. 

141.  In my view it is inconceivable that whilst the parties intended that SHC had a legal duty to acquire the land use rights for the Cooperative Enterprise, yet it did not need to produce the certificates which are documentary evidence of such acquisition.  The Expressway was a substantial project for the Cooperative Enterprise.  The highway by its very nature occupied various tracts of land over large distances (some 90-100 km from east to west) and was intended to last for decades (with income to be shared for 30 years).  The participants of this enormous project must have intended that the acquisition of land use rights (covering those distances and that period of time) should include production of the certificates which were the essential documentary evidence of such acquisition.

142.  It should also be noted that cl.5.1(4) of the JVA included land use rights for the Early Stage Construction land, and cl.5.2 stipulated that SHC was responsible (at its own expense) for completing all documentary formalities for assigning its land use rights to the Cooperative Enterprise.  If that was required for the Early Stage Construction land, there was no good reason why it was not required for the land for the rest of the Expressway which was roughly equivalent in length.  In my view it was the obvious intention of the parties, even if unexpressed, that it was SHC’s obligation to procure land use certificates for all the land used for the Expressway.  This view is supported by the unequivocal conduct of Dr Wang, the NCHK Highway appointee to the Board of the Cooperative Enterprise (see his memorandum of 9 February 1999, Appeal Core Bundle 3,876) and the other matters which have been set out in the Vice-President’s judgment, not least of which was the fact that the certificates were  necessary for the authorities’ certificates of completion of the Expressway. 

Order

143.  I would allow the appeal and order that the Plaintiffs’ action be dismissed with costs here and below.  I do not think it is necessary to make any orders in respect of the Counterclaim as sought in the Notice of Appeal.

Hon Burrell J:

144.  I have had the advantage of reading the draft judgments of both Tang VP and Yuen JA. This litigation has given rise to complex and difficult issues of both law and fact. As with most appeals coming from the Commercial Court the ‘big picture’ was big indeed. As can be seen from the judgment of Stone J the combined efforts of both counsel and the court caused the issues to be honed down into a debate concerning the effect of a single clause, clause 6 of the Escrow Agreement. The case, as stated by the plaintiff’s leading counsel at trial “begins and ends with clause 6”.

145.  That having been said, clause 6 on its own has also given rise to complex and difficult issues of both fact and law. The end result is that this court has formed a view in respect of one aspect of clause 6(b)(i) which Stone J felt unable to do. That view has resulted in the reversal of the decision at first instance.

146.  There is a general consensus here and below that the defendants are able to rely on clause 6(a). Indeed the plaintiff’s leading counsel at trial was willing to assume that to be the case and concentrate his submissions solely on clause 6(b).

147.  The sub issue within clause 6(b)(i) where this court has decided in favour of the defendants concerns the narrow issue of whether or not the failure to provide the land use certificates constitutes a breach of the JVA, thereby enabling the defendants to come within clause 6 as a whole. Proof of any part of either 6(b)(i) or (ii) being sufficient for such purposes having already availed themselves of clause 6(a).

148.  At trial the court acceded to the plaintiff’s submission that in relation to the claimed breach of the JVA “not only are the entities directly relevant to theses issues not before the court but there is not even direct evidence available upon such issues which, in the event, remain unpleaded”. It is with this carefully considered holding, that the alleged non compliance was unpleaded and unproven, that this court differs. I agree with paragraph 105 of the judgment of Tang VP where he says that this is not a case where the trial judge concluded, on an analysis of the evidence, that the defendants had failed to establish a breach of the JVA. Rather he felt constrained from addressing the issue.

149.  I agree (per Tang VP paragraph 73 et seq.) that the issue was sufficiently pleaded and that it is necessary for this court to make a decision. Yuen JA agrees with the reasons given by Tang VP that SHC was indeed obliged to obtain land use certificates and that their failure to do so constitutes a proven continuing breach of the JVA. I also agree.

150.  Thus the defence, having on appeal clawed its way into one part of clause 6(b)(i), must succeed.

151.  For the sake of completeness I agree that the defendants’ attempt to come within the provisions of clause 6(b)(ii), which failed below, have also failed on appeal and neither have they succeeded is establishing any continuing breach of guarantee as provided for in the alternate part of 6(b)(i). Further comment would be academic and is unnecessary.

152.  I too would allow the appeal whilst sharing Tang VP’s comment at paragraph 104 “though not without diffidence”.

Hon Tang VP:

153.  The appeal is allowed with a cost order nisi here and below in favour of the defendants.