J.J. Raper v. International Consolidated Investments Ltd

CACV000022/1975

IN THE SUPREME COURT OF HONG KONG

(APPELLATE JURISDICTION)

CIVIL APPEAL NO.22 OF 1975

(On Appeal from O.J. 165, 206, 261, 282 & 284/74)

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Coram: Briggs, C.J., Huggins & McMullin, JJ.

Date of Judgment: 27 October 1975

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JUDGMENT

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Huggins, J.:

1. This is primarily a case involving the interpretation of an agreement by which five actions were compromised. That agreement was incorporated into a Tomlin Order. By it the parties agreed, inter alia, that the Appellant should sell to the Respondent his shares in two companies (Faber Merlin Limited of Hong Kong and Cedar Fashions Limited), whilst Faber Merlin Limited would sell to the Appellant its shares in the St. Piran Mining Company Limited. All these companies except Cedar Fashions were party to one or other of the actions being compromised. Mr. CHANG Ming-thien (also party to two of the actions being compromised) was, as I understand it, a director of the respondent company as well as Chairman of the board of directors of Faber Merlin Limited of Hong Kong. The Appellant agreed to give undertakings and warranties as seller in respect of the first two companies and other undertakings and warranties in respect of four other companies connected with the litigation. The relevant clauses of the Agreement were:

The Agreement also provided the machinery for settling the form of the undertakings and warranties and, in the event, Mr. Michael Wheeler, Q.C. was appointed to settle it. The Appellant was dissatisfied with Mr. Wheeler's decision and declined to execute a document incorporating the undertakings and warranties so settled. The Respondent obtained from Leonard, J. an order declaring that the Appellant should be deemed to have given undertakings and warranties in the form settled by Mr. Wheeler and the Appellant now appeals.

2. The substance of the complaints made to us is that Mr. Wheeler did not fulfil his mandate and, in addition, made some assumptions of fact which were wrong. It is in relation to the first of those points that Mr. Wheeler had, at the outset, to interpret the Agreement: what did the parties mean by "such usual undertakings and warranties as are usually included in share(s) vending agreements" or, more accurately, what must they be taken to have meant by those words? It is now apparent that they did not understand themselves to be agreeing to the same thing, but we have to interpret the words in which they chose to express their respective intentions according to the established canons of interpretation.

3. What is "usual" is a matter of fact and would be known to persons of experience in the particular field of activity concerned. The parties thought (and we should assume rightly thought) that Mr. Wheeler's experience would enable him to say what undertakings and warranties were usual in share vending agreements. Difficulty has arisen because what the Agreement required him to do was to "settle" the form of the undertakings and warranties. This was inevitable in the circumstances, because the parties were in a frame of mind which made any kind of agreement extremely difficult. However, as I understand it, "settling" involved tailoring the "usual" undertakings and warranties to the requirements of the present case. The important thing is that the first step in the process was the entirely objective one of deciding what were the usual undertakings usually included in share vending agreements, for those were to be the materials on which Mr. Wheeler was to work. What is alleged by the Appellant is that Mr. Wheeler never approached his task in that way but, instead, asked himself what undertakings and warranties he thought should have been agreed between the parties. Leonard, J. in the court below not only seems to have been of opinion that that was Mr. Wheeler's approach but also that it was the right approach. The judge said:

"What [Mr. Wheeler] has endeavoured to do is to fix undertakings and warranties which he would usually require in the particular circumstances".

That would make nonsense if the judge by "in the particular circumstances" meant "in the particular circumstances of this case" and I take it he meant "in cases where the facts are substantially the same as in this case". Even so, what Mr. Wheeler would usually require would not necessarily be the "usual" undertakings and warranties and those were what he was required to settle. With respect, therefore, I cannot agree entirely with the learned judge: the parties had made their agreement and it was too late to alter the terms.

4. What has caused me great difficulty has been to decide whether Mr. Wheeler did adopt the approach attributed to him. There was certainly material which suggested that he did. That material is contained in a note which accompanied his draft undertakings and warranties and to which those undertakings and warranties were expressly subject. Let me say at once that no criticism attaches to Mr. Wheeler for having appended the note: it could well have been the quickest, cheapest and most convenient method of assisting the parties to dispose of their differences, despite the fact that it turned what he had done into a provisional settling of the undertakings and warranties. The alternative would have been for him to refuse to settle the undertakings and warranties until the facts which he assumed had been placed before him as concluded facts. In the event that might have been the better course, but that is neither here nor there. Had he done that the Appellant would have had no ground upon which to base his first contention, even if in truth Mr. Wheeler had approached his task wrongly. The main passage in the note which appears to me to tend to support the first contention is in para.2, where Mr. Wheeler says:

"But I would frankly have preferred it if the Vendor had felt able to join with the Purchaser in instructing their respective English counsel to give me orally whatever additional information and explanations I felt might be desirable in order to produce undertakings and warranties which were best suited to the facts of the case." (The emphasis is mine).

Can we assume that the "undertakings and warranties ... best suited to the facts of the case" would necessarily be among the "usual" undertakings and warranties? If so, then the Appellant's complaint is groundless, but I do not think we are bound to make any such assumption. On the other hand, I am reluctant to infer that Mr. Wheeler misdirected himself as to the terms of his mandate unless compelled to do so. Mr. Wheeler's note was not a formal document and one should not expect that it would be drafted with the same nicety of language as the undertakings and warranties themselves. Mr. Wheeler might say: "You must pay me the courtesy of assuming that I did not misinterpret my mandate. When I referred to producing 'undertakings and warranties which were best suited to the facts of the case' of course I meant 'usual undertakings and warranties which were best suited to the facts of the case': I did not think it necessary to spell that out in full". Mr. Sherrard submits that he would not be entitled to say that and he relies on other passages as indicating that Mr. Wheeler was in error. For my part I attach no significance to Mr. Wheeler's use of the words "selection of undertakings etc.": it seems to me that selection might be involved whether he adopted the right or the wrong approach. More important is the statement:

"My basic understanding of the position which lay behind the Tomlin Order is as follows:-",

after which Mr. Wheeler set out a number of facts (agreed or assumed) upon which his conclusion had been based. Amongst other things he

"assumed that warranties etc. were required because the Vendor was better placed to know the true position in FM (HK) than the Purchaser. FM (HK) was a public company quoted on various Stock Exchanges in Hong Kong".

It is said that the vendor was not better placed to know the true position and on the evidence before the Court I would be prepared to say the balance of probabilities was against his being in a better position. However, that is not what was assumed: the Respondent could have required the undertakings and warranties for a reason which was unsound and there is no evidence at all as to the reason why the Respondent did in fact require them. At the same time I find it difficult to believe that what are the "usual" undertakings and warranties depend upon the reason why such undertakings and warranties are required: they would not become "usual" unless there were some good reason why they had been required in a majority of cases in the past. Would different undertakings and warranties have been "usual" if the reason the usual undertakings and warranties were required was something other than that assumed by Mr. Wheeler? He is the expert in such matters and I cannot say he is wrong in inferring that they would, but I confess that it seems very strange to me. Then Mr. Wheeler says:

"more elaborate warranties are required in relation to the sale of 100% of the share capital of the (private) Cedar Fashions".

He uses the same word "required" in relation to several of the "settled" undertakings and warranties. He had not been asked to decide what was "required" but to settle what was "usual". It might have been relevant that one or more of the "usual" undertakings and warranties were not required but undertakings or warranties which were "required" might not be "usual". As against all this, it is to be observed that in para.5 of his note Mr. Wheeler mentioned a warranty in relation to tax matters which was "usual" in England but which he thought might not be usual in Hong Kong, where the tax legislation is different. From this it is apparent that he did have in mind that he was concerned with what was "usual". I do not think it profitable to analyse the language of the note further. The judge has found that Mr. Wheeler adopted an approach which we are all satisfied would be wrong and the question is whether on the whole of the documents before him Leonard, J. was justified in making that finding. Although there were undoubtedly strong reasons for suspecting that Mr. Wheeler may have adopted the wrong approach, I would not put it higher than that. Accordingly if there had been only this one point on the appeal I would reluctantly have felt compelled to hold in favour of the judge's order, though for different reasons from those which persuaded him. As it happens I think the appeal must be allowed on the second point and we will be in a position to indicate our doubts on the first point to Mr. Wheeler, thus giving him an opportunity to reconsider the whole matter if in fact he did proceed upon the wrong basis.

5. As to the second point we are brought back to para.3 of Mr. Wheeler's note, where he sets out his "basic understanding of the position which lay behind the Tomlin Order". It is the statements and assumptions of fact which then followed that are alleged to vitiate his conclusion. Mr. Zimmern submits that even if there are errors of fact they are not material errors. In one instance it may be, as he contends, that the error would favour the Appellant rather than the Respondent, but for the rest I do not think it is open to us to say that something which is "basic" is not material. If, therefore, the Appellant can point to even one basic "fact" which is erroneous it seems to me that this Court should not allow to be enforced the order now challenged, though what form our order should take will require careful consideration. Mr. Sherrard says that one error of fact appears in the undertakings and warranties themselves in para.2(B)(2), for it is there said "that during the period from the balance sheet date to the completion date Cedar Fashions carried on business in the normal way". Mr. Zimmern concedes that in fact the company was for all practical purposes defunct and was not so carrying on business, but he seeks to avoid sending the case back to Mr. Wheeler by agreeing to excise those words which, in effect, required the Appellant to tell a lie. However, Mr. Sherrard is able to point to other errors which could not be overcome in this way. In para.3(b) of his note Mr. Wheeler says:

"St. Piran Mining, a private company, was a wholly-owned subsidiary of FM(HK) and in turn had two private wholly-owned subsidiaries, namely Siamese Tin and Bangrin Tin".

The same assumptions are made again in para.4(a). There is now before the Court unchallenged evidence that St. Piran was not a private company or a wholly owned subsidiary of Faber Merlin Limited of Hong Kong. As it seems to me, that is enough to required that Mr. Wheeler be asked what alteration is required to the undertakings and warranties he has provisionally settled.

6. Next Mr. Sherrard says that para.4 of the note appears to suggest that in deciding which of the "usual" undertakings and warranties would be appropriate to the present cases it is material to ascertain the relative knowledge of the vendor and purchaser as to the financial affairs of the company whose shares are the subject matter of the transaction. Therefore, he submits, Mr. Wheeler should be informed that one of the directors of the purchasing company and one of his co-plaintiffs were respectively chairman of the board of directors and managing director of Faber Merlin Limited of Hong Kong and had been in de facto control of that company for at least a year before the Agreement of Purchase and Sale. I think there is substance in this contention, although the matter cannot be allowed to rest there, because the Respondent may well wish to give evidence of the Appellant's knowledge of the financial affairs of the company and the Respondent is as much entitled as is the Appellant to have all relevant facts before Mr. Wheeler. The difficulty is that someone may have to decide what is merely evidence and what is fact, but it may be that the best course would be in the first place to ask Mr. Wheeler whether, assuming the Appellant's evidence on this point to be true, that would affect his conclusion. Only if his answer were "yes" would it become necessary to decide upon the appropriate method of ascertaining the relevant facts upon this issue of knowledge.

7. A similar point arises on para.4(c) of the note, where Mr. Wheeler made several assumptions as to the reason why warranties were required concerning a company associated with Faber Merlin Limited of Hong Kong and the future relationship between the purchaser and that associated company. As I have said, I assume that such warranties are "usual" and that these assumptions are relevant to the question whether they are appropriate. If the assumptions are relevant then the Appellant is entitled to have their accuracy confirmed. In this instance Mr. Sherrard does not assert that the assumptions are wrong but merely that they may be wrong. In my view it is enough that the Appellant is entitled to have any relevant facts determined and is not bound to concede the truth of the assumed facts. It so happens that the assumptions made have led to a conclusion unfavourable to the Appellant. Had Mr. Wheeler made other (wrong or even possibly wrong) assumptions which had led to a conclusion unfavourable to the Respondent, I cannot believe that the Respondent would have thought it just that the Court should lend its weight to that conclusion

8. In the result I think the appeal should be allowed. As to what ought now to be done I would like to hear counsel. I cannot forebear from expressing my doubts whether the matter in issue is of sufficient importance to justify protracted litigation as to the terms of the undertakings and warranties, although I recognise the right of the parties to have the "t"s crossed and the "i"s dotted if they wish. I would hope that they could now agree to submit to Mr. Wheeler, with the judgments of this Court, an agreed statement of facts relating to the matters which he has indicated he considers material. If they cannot agree, we may have to give directions for the trial of issues of fact and as to the further instructions which must be given to Mr. Wheeler.

Representation: