Achieve Goal Holdings Ltd v. Zhong Xin Ore-material Holding Co Ltd
Read the full judgment text of CACV 6/2019 on BabelCite. This Court of Appeal judgment was delivered on 17 January 2020 before Kwan VP, Cheung JA, Yuen JA.
Contract law – construction of joint venture agreement – clause 1.2 of JV Agreement in Chinese (融資投入) – whether Angola's obligation to obtain 50% shareholding in Zhong Xin was to provide direct capital injection or merely to arrange finance – proper construction requires consideration of natural and ordinary meaning, context of entire agreement, factual matrix (including Oral Agreement, Unsigned Agreement and pleaded cases) and commercial sense – held: obligation was direct capital injection of US dollar equivalent of RMB 50 million obtained through financing – Contract law – termination of joint venture agreement – whether Bai Jun entitled to terminate JV Agreement on 22 June 2005 – whether Angola's procurement of HK$20 million loan to Zhong Xin (rather than direct capital injection) constituted repudiatory breach of clause 1.2 – whether failure to pay 2nd RMB 2 million under clause 2.4 established further breach – whether letters of solicitors amounted to waiver – held: yes, Bai Jun validly terminated – Restitution / unjust enrichment – total failure of consideration – whether loan made to Zhong Xin to be distinguished from contractual obligation of direct capital injection – whether incidental benefit prevents total failure of consideration (Goff & Jones, Fibrosa, The Julia) – held: total failure of consideration established as loan was incidental benefit not bargained for – Bai Jun entitled to recover 50% shareholding in Zhong Xin – Settlement Agreement – whether action settled by 20 May 2009 Settlement Agreement allegedly backdated and signed by Wang Li without authority – held: action not settled, appeal arguments on illegality and authority of no moment – Appeal allowed – declaration that Angola is not entitled to 50% shareholding in Zhong Xin and order for transfer of shareholding to Bai Jun – costs to be dealt with on paper for costs below, and order nisi for costs of appeal with certificate for two counsel.
Legal issues: Construction of clause 1.2 of the JV Agreement - nature of Angola's obligation · Whether Bai Jun validly terminated the JV Agreement on 22 June 2005 · Whether Bai Jun is entitled to the return of Angola's 50% shareholding in Zhong Xin · Settlement Agreement Issue
Outcome: Appeal allowed. The Court of Appeal held that Bai Jun validly terminated the JV Agreement on 22 June 2005, that there was a total failure of consideration, and that Bai Jun is entitled to recover the 50% shareholding in Zhong Xin from Angola. The part of the Judgment dismissing the counterclaim for a declaration and order for transfer is set aside, and in lieu thereof a declaration is made that Angola is not entitled to the 50% shareholding in Zhong Xin and an order is made for transfer of the shareholding to Bai Jun.
Cited by 23 cases · Cites 5 cases
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CACV 6/2019 [2020] HKCA 51 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 6 OF 2019 (ON APPEAL FROM HCA NO 1987 OF 2005) ________________________ BETWEEN
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________________________ J U D G M E N T ________________________ Hon Kwan VP: A. INTRODUCTION 1.On 15 December 2018, Au-Yeung J handed down a judgment (“the Judgment”) in the trial of a counterclaim which lasted for 11 days. The plaintiffs by counterclaim[1] were referred to as “the Bai Jun Camp”. The defendants by counterclaim[2] were referred to as “the Angola Camp”[3]. By the Judgment, it was ordered that Angola shall pay RMB 1 million to Bai Jun with interest at prime rate plus 1% from 21 December 2005 to judgment and thereafter at judgment rate till payment. The counterclaim of the Bai Jun Camp for a declaration that Angola was not entitled to the 50% shareholding in Zhong Xin and an order for transfer of the shareholding to Bai Jun was dismissed. 2.This is the appeal of the Bai Jun Camp. Four broad issues are raised on appeal. For ease of reference, the abbreviations and nomenclature used in the Judgment are adopted. 3.The first issue relates to the construction of a joint venture agreement in Chinese (“the JV Agreement”) made between Bai Jun and Angola in December 2004. The material words are 融資投入 in clause 1.2. The question is whether Angola’s contractual obligation was to provide direct capital injection to Zhong Xin (Bai Jun Camp’s case) or just to arrange for Zhong Xin to obtain finance (Angola Camp’s case), as consideration for Angola to obtain 50% shareholding in Zhong Xin (the Construction Issue). 4.The second issue is whether Angola was in breach of its obligations in the JV Agreement, and whether this agreement was terminated by Bai Jun on 22 June 2005 or by Angola on 10 October 2006 (the Termination Issue). 5.The third relates to the consequence of breach of contract and termination (the Consequence Issue). 6.The last issue relates to whether the present action had been settled by a written agreement purportedly made between Bai Jun and Angola dated 20 May 2009 (“the Settlement Agreement”) (the Settlement Agreement Issue). B. THE BACKGROUND 7.I gratefully adopt the comprehensive account of the background matters in section B of the Judgment. I set out the relevant parts as follows.
C. THE JUDGMENT 8.At the trial, the Construction Issue and the Termination Issue were referred to as the “Stage 1 Issue”, and the Settlement Agreement Issue was referred to as the “Stage 3 Issue”[6]. 9.Gao was the only witness to give oral evidence for the Bai Jun Camp. Zeng and Li, two of the present directors of Angola and Achieve Goal, gave oral evidence for the Angola Camp. Gao was the only witness with first-hand knowledge of the circumstances relevant to the Construction Issue and the Termination Issue. The Angola Camp was unable to contact Zhao so did not call any witness directly involved in the making of the JV Agreement. The evidence of Zeng and Li was in relation to the Settlement Agreement Issue. Gao’s evidence, though crucial, was treated with caution by the judge[7]. Zeng, whose role on the Settlement Agreement was limited, was found to be evasive. Li was found to be untruthful and was completely shaken in cross-examination[8]. 10.The judge found in favour of the Angola Camp on the Construction Issue. She held that on the true construction of the JV Agreement, the obligation of Angola was to arrange finance for Zhong Xin, instead of providing direct capital injection to Zhong Xin[9]. 11.On the Termination Issue, the judge held as follows:
12.On the Consequence Issue, the judge held that even if Bai Jun had valid cause to terminate the JV Agreement, it is not entitled to the return of Angola’s 50% shareholding in Zhong Xin as there had not been total failure of consideration[15]. 13.As for the Settlement Agreement Issue, the judge found that the Settlement Agreement was signed sometime between 21 June and 6 July 2009 but was deliberately backdated to 20 May 2009 and that it was invalid, as Wang Li, who signed on behalf of Bai Jun, had no actual or apparent authority to do so[16]. 14.In this appeal, Bai Jun sought to set aside the orders made in the Judgment and in substitution a declaration be made that Angola is not entitled to the 50% shareholding in Zhong Xin registered in its name and it is to transfer forthwith the shareholding to Bai Jun. 15.The four broad issues raised on appeal will be considered in the order as mentioned at the outset. D. THE CONSTRUCTION ISSUE D1. The general principles on construction 16.The general principles have been set out by the Judge at Section E1 of the Judgment. The ones that are particularly relevant for present purpose may be stated as follows:
D2. Facts found by the judge of the circumstances relevant to the Construction Issue 17.The judge made these pertinent findings relating to the background and factual matrix for the Construction Issue. 18.Gao and Xie were sophisticated business persons. Gao possesses a PhD in economics and had rich business experience in Mainland China, having worked with Hutchison Whampoa for ten years. She claimed to have set up over a hundred Sino-foreign joint venture enterprises and had worked with people from corporate legal departments. Xie was the CEO of a large state-owned enterprise in the metals sector and the CEO of another large state-owned enterprise in the real estate sector[17]. 19.Zhao represented to Gao that he was a manager of several funds. He had no prior business relationship with Gao and Xie before they met in March or April 2004[18]. 20.The background in which Gao and Xie entered into the Oral Agreement with Zhao was “strange”[19]. Gao had not done any due diligence regarding Zhao or the companies he named as fund providers before entering into the Oral Agreement or the JV Agreement[20]. Gao claimed she had learned from a trustworthy friend Dr Jiang in November 2004 of funds of US$20 million in the books of China Mineral Acquisition Corporation, which was a company of Zhao’s business partner. This evidence was rejected as “incredible”[21]. 21.The Unsigned Agreement dated May 2004 tallied with Gao’s recollection of the terms of the document she and Zhao were then about to sign[22]. 22.The pleaded case of Angola on 3 June 2009[23], verified by a statement of truth of Zhao, was that in early 2004, “a provisional understanding was reached between the parties whereby Zhao (through … Angola) would pay a sum by way of direct capital injection into the said coal mine projects via a joint venture vehicle (later known as Zhong Xin), which in turn would become the foreign joint venture partner of a PRC entity owning the relevant rights to the said coal mine projects”. (emphasis added) This plea was amended only in November 2015[24] to the effect that the provisional understanding was evidenced by the Unsigned Agreement discovered by Angola in August 2015, and that “Angola would be responsible for the procurement of financing equivalent to USD equivalent of RMB 50,000,000 part of which would be used as the registered capital of the PRC entity”. (emphasis added) The judge found it “inconceivable” Zhao would have got the obligation previously pleaded wrong[25]. 23.By November 2004, Gao and Xie had committed Zhong Xin to contractual obligations with the Yulin Government to inject RMB 50 million into the SJV Company. They were under pressure to come up with funds. Even though Zhao had disappointed them once by breaching the Oral Agreement, they approached him again for co-operation, as they had not found better investment offers[26]. 24.The investment in the Coal Mine Project was risky. The Coal Mine was one of many small-scale, state-owned coal mines with problems of low production, low profit, safety hazards, and various problems with employees. There were about ten mines in the vicinity of the Coal Mine, all were suffering losses and seeking investors, although the Coal Mine was of better quality because of its potential in expanding the mining areas[27]. 25.Since the spring of 2003, Xie and Gao had incurred significant expenses of some millions on preliminary work. They were not willing to invest their own monies if this could be avoided and wanted to source other capital[28]. 26.The JV Agreement was not professionally drafted[29]. It was Zhao’s idea to add the characters “融資” before “投入” in clause 1.2[30]. The payment schedule of ten working days in clause 2.2 was proposed by Zhao[31]. The JV Agreement was based on the Unsigned Agreement with input from both sides and because of the previous failure Gao had included two “preventive provisions” not found in the Unsigned Agreement: Zhao’s obligation was reduced to raising the first tranche of RMB 20 million as specified in clause 2.2, with an exit provision in clause 4.1 if he could not do so; and if the balance of RMB 30 million was not available, Angola’s shareholding in Zhong Xin could be reduced accordingly as provided in clause 4.3[32]. D3. The natural and ordinary meaning of clause 1.2 27.The relevant obligation of Angola as consideration for the transfer to it of 50% shareholding in Zhong Xin was stipulated in the first part of clause 1.2 in the JV Agreement. The entire provision read as follows:
28.The Judgment focussed on the meaning of the characters “融資投入”. There is no dispute that “投入” means injection. As for “融資”, a convenient starting point is its dictionary meaning. Mr Edward Chan, SC for the Bai Jun Camp[33] referred this court to the definitions of “融資” in 《現代漢語詞典》 (2002 年增補本):
29.Two things should be noted about the above definitions. 30.First, the term “融資”, which may be loosely translated as “financing”, is non-specific as to the method by which financing is carried out for funds to be made available. The definition gives as examples three different ways that financing may be done – debt financing, equity financing and financing lease. In An English-Chinese Glossary of Securities, Futures and Financial Terms (4th ed) published by the Hong Kong Securities and Futures Commission, the equivalent terms in Chinese used in the Mainland, Hong Kong and both places for “debt financing”, “equity financing” and “finance lease/financial lease/financing lease” are as follows:
31.It is clear from the Glossary that the term “融資” in itself gives no indication as to the method by which the financing is to be done and characters have to be added to “融資” to make clear the method to be deployed for the financing. In this instance, there is no finding on the evidence as to what method or methods was envisaged by the parties for the financing to be carried out as mentioned in clause 1.2. On the wording of the provision, it cannot be assumed that this would be done by debt financing or debt financing alone. 32.Second, “融資” as defined in the dictionary can be used as a verb or a noun. When used as a noun, this refers to funds obtained through financing by the methods mentioned above as examples – debt financing, equity financing, financing lease, and the like. Mr Rimsky Yuen, SC for the Angola Camp[34] contended that it is “bizarre” to read the words “融資” as “funds that have been financed”, as the Chinese words to that effect should read “融得的資金”. This contention must be rejected in light of the meaning in the dictionary given to “融資” when used as a noun. 33.Mr Yuen also contended that the words “融資”, being the subject-matter to be “投入”, clearly meant the service of arranging financing for Zhong Xin. It is best to analyse the sentence concerned with regard to the parts of speech in Chinese grammar (語法) to see whether this contention can be made good. The relevant sentence is a compound sentence (複句). To facilitate analysis, I will split this up as follows:
34.“甲方” in (i), which was defined in the JV Agreement to mean Angola, is the subject (主語) of this sentence. “以” in (ii) is not a verb as contended by Mr Chan but is a 介詞[35], “以” has the same meaning as “把” in this sentence and expresses the relationship of the composite predicate (謂語) made up of the parts in (iii), (iv) and (v) and the verb “投入” in (vi) at the end to the subject at the start in (i).As for the components in the predicate, “融資” in (v) is a noun qualified by (iii) and (iv). On an analysis of Chinese grammar, the meaning of the relevant sentence is tolerably clear. It means that Party A (ie Angola) is to inject funds in US dollars equivalent in value to RMB 50 million obtained through financing. The entity or object that is the recipient of the injection is not expressed in this sentence and would have to be ascertained from the context of the JV Agreement. As discussed below, the object that is the recipient of the injection of funds is Zhong Xin. 35.Purely from a grammatical angle, I am unable to construe this sentence as meaning that Angola was to provide the service of arranging financing for Zhong Xin of US dollars equivalent in value to RMB 50 million as its injection or contribution. On the natural and ordinary meaning of this sentence, I do not think it can be interpreted that the financing was to be arranged for or on behalf of Zhong Xin. I am inclined to agree with Mr Chan that rather different wording or at least much clearer wording would need to be used for the sentence to have that meaning, such as “安排中信融資作為投入”. 36.The judge was persuaded by the submission of Mr Victor Dawes, SC that the words “融資” would be surplusage or redundant if the sentence is construed to mean that Angola was to inject funds obtained through financing, as the way in which Angola was to come up with the funds was of no relevance to Bai Jun and if it was intended that Angola’s obligation was to inject funds, the JV Agreement could have used other terms that were used in the agreement, such as “現金投入, 支付, 負責”[36]. I do not agree that the words “融資” would be surplusage if they are construed to mean the funds obtained through financing. I do not think it can be assumed Bai Jun would not be concerned as to how Angola was to come up with the funds, as, after all, Zhao had disappointed Xie and Gao once when Angola decided to withdraw from the Coal Mine Project and Zhong Xin earlier, stating in its letter to Bai Jun dated 13 September 2004 that the funds were not in place for the time being due to the difficulty in procuring financing (“由於融資工作遇到了一些困難 … 資金暫時無法到位”). 37.As for different terms used in JV Agreement denoting injection or payment, I do not attach much significance to them as the context in which those terms were used in other parts of the agreement is rather different in contrast with clause 1.2. The term “現金投入” in clause 1.5 denotes the obligation of Zhong Xin to inject cash into the SJV Company named CLB (pursuant to clause 11.2 of the SJV Agreement)[37], in contemplation that Angola would, by “融資投入”, inject funds into Zhong Xin. As for the term “支付”, this is deployed in the context of the payment of preliminary expenses provided in clause 2.4. 38.Mr Yuen also contrasted the use of the term “進入” in the second half of clause 1.2 (“乙方以常樂堡煤礦項目及其組建的合資公司進入中信礦業公司，持有中信礦業公司的50%的股權”) with “投入” in the first half to make the point that the obligation of Bai Jun was not to “inject” the Coal Mine assets (which were not owned by it) into Zhong Xin but to “enter into” Zhong Xin by the Coal Mine Project and the SJV Company that it formed. It was envisaged that Bai Jun would procure the Coal Mine assets to be transferred from the Mainland partner Changle I&T to CLB and procure Zhong Xin to subscribe to the shares in CLB. So just as Bai Jun was not obliged to inject assets of its own into Zhong Xin, Angola was not obliged to inject its own funds into Zhong Xin but would merely procure financing for or on behalf of Zhong Xin. 39.Even if “進入” in the second half of clause 1.2 was used in contradistinction to “投入” for the reason as suggested by Mr Yuen, I do not think this is a sufficiently powerful indicator to suggest that the obligation of Angola was not to inject into Zhong Xin the funds it obtained through financing. D4. The context of the entire JV Agreement 40.I turn to consider other parts of the agreement relevant to the construction of clause 1.2. Mr Yuen pointed out that as a matter of structure, clause 1.2 was inserted at the outset of the agreement and is the very first clause which stated the basis of the parties’ co-operation in respect of Zhong Xin. He submitted that the rest of the parties’ obligations in the ensuing provisions should be read in light of and/or subject to clause 1.2. That may be one consideration. The other consideration is to see whether the other provisions in the agreement would be consistent with one or the other of the rival constructions of clause 1.2. 41.Clause 2.2 provided that Angola shall within ten working days of the signing of the agreement remit the US dollar equivalent of RMB 20 million into the account of Zhong Xin (“甲方在本協議簽訂後的10個工作日內將相當於人民幣2000萬元的等值美元 … 匯入中信礦業公司的帳戶”). Clause 4.1 similarly provided that Angola shall pursuant to clause 2.2 duly remit within time the US dollar equivalent of RMB 20 million into the account of Zhong Xin (“甲方須按本協議第2部分 2.2 、2.3、2.4條款的內容及承諾，按時將相2000萬元人民幣的等值美金匯入中信礦業公司帳戶”). As the judge had recognised, clause 2.2 required Angola to remit cash and if Angola’s obligation in clause 1.2 is construed to mean merely arranging finance for Zhong Xin, clause 1.2 would appear to be inconsistent with clause 2.2[38], and I would add, clause 4.1. I should also point out it is apparent from clauses 2.2 and 4.1 that the recipient entity of the financing of Angola must be Zhong Xin. 42.In clause 2.4, an obligation was imposed on Angola to make payment of preliminary expenses in the total sum of RMB 7 million by three instalments (“甲方同意支付乙方人民幣700萬元的前期費用”). This obligation to pay preliminary expenses was also referred to in clause 4.1 by which the obligations under clause 2.2 and 2.4 were treated in a similar way (under clause 2.2 the funds were to be remitted into the bank account of Zhong Xin, under clause 2.4 the funds were to be remitted into the designated account of Bai Jun), and in the event that Angola is unable to comply with its obligation under any of these provisions, this shall be treated as a breach of contract, the agreement shall be terminated and Angola shall pay Bai Jun compensation of RMB 2 million. This is another pointer that the RMB 20 million referred to in clause 2.2 (being part of the obligation under clause 1.2) is regarded as a payment obligation of Angola. 43.Clause 3.2(7) provided that where Zhong Xin is to enter into transactions such as financing, providing a guarantee, borrowing, it is necessary to have the consent of more than 80% of its directors (“中信礦業公司有關下列事項的決定必須獲得80%以上的董事同意: 中信礦業公司融資 … 事宜”)[39]. Mr Chan made the point that where it was intended to refer to the situation of Zhong Xin obtaining financing, express wording to this effect was used, in contrast to clause 1.2. This seems to me to be a valid point. 44.Clause 4.3 provided that if Angola is unable to pay within time the remaining registered capital of the SJV Company, Bai Jun shall contribute capital to make up the shortfall, and the shareholding of Angola in Zhong Xin shall be reduced by proportion correspondingly (“若甲方未能按期支付合資公司註冊資本金餘額，將由乙方出資補上，甲方在中信礦業公司的股份則按比例相應降低”). Mr Chan submitted that in this provision, Angola’s obligation was described as “支付”, to make payment for the registered capital of the SJV Company, and this militates against the construction that its obligation was merely to arrange financing for Zhong Xin. 45.The judge had considered clause 4.3, but thought that this provision was of no assistance in construing clause 1.2, taking the view that clause 4.3 only referred to the balance of the registered capital (ie RMB 30 million) and did not cover the first tranche of RMB 20 million[40]. I am inclined to differ from the judge. The obligation of Angola as provided in clause 1.2 pertained to funds in US dollars equivalent to RMB 50 million obtained through financing, and no distinction was drawn between the first tranche of RMB 20 million and the rest. There is no justification to differentiate Angola’s obligation under clause 1.2, such that it was obliged to arrange finance for Zhong Xin in respect of the first tranche and the obligation to make payment would apply to the balance of RMB 30 million. I would agree with Mr Chan’s submission. It seems to me that clause 4.3 is inconsistent with Angola’s construction of clause 1.2. 46.Mr Chan further contended that the words “註冊資本金餘額” in clause 4.3 referred not only to the remaining RMB 30 million, as the judge had held[41], but must refer to whatever was outstanding of the RMB 50 million required to be injected into the registered capital of the SJV Company. I am inclined to agree with the judge that on its plain wording, clause 4.3 did not govern rights arising from payment (or rather non-payment) of the first tranche of RMB 20 million as this was governed by the “exit provision” in clause 4.1. In other words, upon Angola’s breach of its obligation to pay the first tranche, the rights of Bai Jun are provided in clause 4.1, being the right to terminate the JV Agreement and the entitlement to receive compensation of RMB 2 million. The effect of clause 4.3, as the judge had held, is that if Angola had paid the balance of RMB 30 million, it could keep its 50% shareholding in Zhong Xin. If Angola had not paid and Bai Jun had paid the balance, Angola’s shareholding would be diluted to 20%. The above construction I place on clause 4.3 does not affect Bai Jun’s construction of clause 1.2. 47.Construing the relevant sentence in clause 1.2 in the context of the entire agreement, I am inclined to think that Bai Jun’s interpretation is to be preferred. On this interpretation, there is no apparent inconsistency between clause 1.2 and any of the other provisions that have been discussed. That cannot be said if Angola’s interpretation of clause 1.2 is adopted. Mr Yuen’s approach is to read those other provisions in light of Angola’s construction of clause 1.2. But that would lead to a strained reading of the other provisions if the payment obligation of Angola stipulated in clauses 2.2, 4.1 and 4.3 is interpreted to mean that Angola was “to cause” the funds to be remitted to Zhong Xin. D5. The factual matrix – the Oral Agreement and the Unsigned Agreement 48.I turn to the Oral Agreement. According to Bai Jun’s pleaded case, under the Oral Agreement Angola shall provide “cash capital injection” of US dollars equivalent to RMB 50 million for the Coal Mine Project. Until Angola’s defence and counterclaim was amended in November 2015, Angola had averred (verified by a statement of truth of Zhao who was then in control of Angola), there was a “provisional understanding” by which Angola was to pay a sum by way of “direct capital injection” via Zhong Xin. This was the single most important obligation of Angola. As the judge had found, it was inconceivable that Zhao could have got this wrong. 49.The judge however found this criticism fell away as a result of Gao’s confirmation of the terms of the Unsigned Agreement[42]. Her reasoning is that Gao had accepted in cross-examination that the terms of the Unsigned Agreement were basically consistent with the Oral Agreement. She construed clause 2.1 of the Unsigned Agreement to mean that Angola’s obligation was to arrange finance for Zhong Xin to be injected into the registered capital of the SJV Company and this is inconsistent with an obligation of Angola to provide “cash capital injection” as pleaded (“甲方負責融資相當於人民幣5000萬元的等值美元…部分用作合資公司註冊資本。註冊資本按國家有關規定在規定時間內，以海外公司[Zhong Xin]之名義匯入國內帳戶…”)[43]. 50.The judge also accepted Mr Dawes’ submission there was no reason why the intention of the parties under the JV Agreement should depart so radically from their intention a few months ago under the Oral Agreement, such that Angola would undertake a much more burdensome obligation to provide money, particularly so since Angola would only obtain 50% instead of 60% shareholding of Zhong Xin and that Angola had withdrawn from the Oral Agreement in September 2004 precisely because of lack of funds and difficulty in procuring finance[44]. 51.I do not agree with the judge’s construction of clause 2.1 of the Unsigned Agreement. As submitted by Mr Chan, the words “甲方負責融資” (Party A was responsible for arranging finance) are not necessarily inconsistent with an obligation of Angola to make cash capital injection. These words by themselves do not indicate expressly the financing that Angola was responsible to arrange was for or on behalf of Zhong Xin. They could just as well mean that Angola was responsible to arrange financing for itself, to be remitted to Zhong Xin for injection into the registered capital of the SJV Company. The stipulation that the injection into the registered capital of the SJV Company was to be done in the name of Zhong Xin (“註冊資本…以海外公司[Zhong Xin]之名義匯入國內帳戶”) does not necessarily mean that the financing which Angola was responsible to arrange was for or on behalf of Zhong Xin. 52.I accept that clause 2.1 of the Unsigned Agreement may not be as clearly worded as clause 1.2 of the JV Agreement. I do not think it necessary to resolve the ambiguity in the construction of clause 2.1. For present purpose, it is sufficient to conclude that clause 2.1 is not inconsistent with an obligation of Angola to provide cash capital injection to Zhong Xin, which was to be used as Zhong Xin’s contribution to the registered capital of the SJV Company. 53.One is left with the Oral Agreement, and the pleaded case common to both parties (until Angola’s pleading was amended in November 2015) that the obligation of Angola under the Oral Agreement was to provide capital injection. This is not subjective evidence of what one party had understood to be the term of the Oral Agreement but is the pleaded case common to both. The judge had found it inconceivable that Zhao could have got this major obligation wrong in the previous pleading. Viewed in that light, and accepting it was unlikely that the parties would have made a radical departure as regards Angola’s single most important obligation in the joint venture when they entered into the JV Agreement a few months later, the Oral Agreement provides further support as factual matrix on the true intention of the parties leaning in favour of Bai Jun’s construction. D6. Commercial sense 54.On behalf of the Bai Jun Camp, these submissions were made as indicating that the construction of Angola does not make commercial sense:
55.As to (1), this must be weighed against the judge’s finding that the investment in the Coal Mine was risky[47] and that Gao and Xie were under pressure to come up with funds for injection into the SJV Company by November 2004[48] – which, as submitted by Mr Yuen, may support Angola’s contention why a reasonable investor would be reluctant to make a direct capital injection and why Bai Jun was prepared to give Angola 50% shareholding in return for its obligation to arrange finance for Zhong Xin. I do not think the matters urged upon us in (1) are sufficiently cogent on one side or the other for a proper and definite inference to be drawn. 56.The judge was not troubled by the matters raised in (2). She reasoned that if Angola’s obligation was really to arrange finance, it was always up to Zhong Xin to negotiate the terms and decide whether to accept them and if the terms of the loan were unreasonable, it would be up to Zhong Xin/Bai Jun to veto the loan and ultimately Bai Jun would have the right to terminate the JV Agreement for Angola’s breach. She took the view that Angola’s construction was “perfectly workable”[49]. Mr Yuen further submitted there is an implied term in law that when the performance of a contract requires co-operation, the other contracting party has a duty to take reasonable steps to co-operate[50]. And it is well established in law that a person cannot take advantage of his own wrong[51]. So if Bai Jun exercised the veto power unreasonably, it could not complain about Angola’s failure to remit the sum under clause 2.2 since its own breach had prevented Angola’s performance of the JV Agreement. 57.I have difficulty with the above approach and do not think the legal principles as mentioned would assist. The term “融資” is non-specific as to the method by which the financing is to be carried out. There is no finding on the evidence of any consensus as to the kind of financing to be undertaken, whether it was debt financing, equity financing or a mixture of both. It is not possible to resort to the implied terms to co-operate or to act reasonably when the fundamentals or basics of the financing are left uncertain. I am not persuaded that the JV Agreement is workable on Angola’s construction. In the absence of consensus on the fundamentals, merely to have Angola arrange some kind of financing for Zhong Xin is unlikely to achieve the overall purpose of the JV Agreement, which was to obtain funds for Zhong Xin to be injected as capital for the SJV Company. 58.The judge took the view that on Angola’s construction, the financing would be arranged by Angola for or on behalf of Zhong Xin, such that Bai Jun and Angola, as equal shareholders of Zhong Xin, would each bear 50% of its financial obligations indirectly and this was in accordance with business common sense and tallied with Gao’s description of ensuring equal injection, equal shareholding, equal benefit, equal obligation, equal management and equal say on important matters[52]. But this is premised on a workable basis for Angola to discharge its obligation to procure financing for Zhong Xin. Besides, I do not think it can be said that on Bai Jun’s construction, Angola’s obligation, which was to make cash capital injection to Zhong Xin, was contrary to commercial sense. 59.The judge rightly held that the subsequent Loan Agreement and the circumstances in which it was signed are irrelevant to the Construction Issue and recognised that her findings as to the circumstances of the signing of the Loan Agreement in section E7 of the Judgment are not admissible evidence for this purpose[53]. So I do not propose to go into those matters or the contentions raised on behalf of the Bai Jun Camp in that regard. D7. Conclusion on the Construction Issue 60.Taking into account the indications given by the language, the context of other provisions in the JV Agreement, the overall purpose of the agreement, the factual matrix, and considerations of commercial sense, I take a different view from the judge on the Construction Issue. I hold that the correct construction of Angola’s obligation under clause 1.2 of the JV Agreement was to inject funds in US dollars equivalent to RMB 50 million, to be obtained through financing, into Zhong Xin. E. THE TERMINATION ISSUE E1. The issues raised on appeal 61.The central issue here is whether Bai Jun was entitled to terminate the JV Agreement when it did so on 22 June 2005. Bai Jun contended it was entitled to do so on account of one or both of these breaches of contract committed by Angola: (1) the failure to provide capital injection to Zhong Xin and to remit the first tranche of RMB 20 million within ten working days of the signing of the agreement, contrary to clauses 1.2 and 2.2 (“the 1st Breach”); and (2) the failure to pay the 2nd RMB 2 million, being part of the RMB 7 million to reimburse Bai Jun for preliminary expenses, upon CLB obtaining the mining rights of four sq km coal mines on 28 March 2005, contrary to clause 2.4 (“the 2nd Breach”). 62.Mr Chan had also relied on two other breaches of Angola, the failure to pay RMB3 million, being the last instalment of the preliminary expenses, upon CLB obtaining the exploration rights of 2.86 sq km coal mines on 21 December 2005, contrary to clause 2.4; and the failure to pay RMB 30 million being the balance of the capital injection to Zhong Xin (the second instalment of RMB 20 million was due on 18 January 2006, which was one year after the incorporation of CLB[54]), contrary to clauses 1.2 and 4.3. But as submitted by Mr Yuen, and also accepted by Mr Chan, these breaches as alleged are irrelevant to Bai Jun’s purported termination on 22 June 2005 because they all arose after that date. I do not propose to deal with them. E2. The 1st Breach 63.The judge held that Angola’s procurement of the Loan Agreement dated 14 February 2005 was due performance of its obligation, but Angola was in breach of clause 2.2 in that the performance was out of time. This was due to her construction that Angola’s contractual obligation was to procure financing for or on behalf of Zhong Xin. As I have held that on a proper construction Angola’s contractual obligation was to provide direct capital injection to Zhong Xin, it follows that by procuring Zhong Xin to enter into the Loan Agreement with Achieve Goal to borrow HK$20 million[55], Angola had failed to discharge its obligation under clause 1.2. This was a complete failure to perform the contractual obligation, not just a delay to remit the funds within time as stipulated in clause 2.2 as found by the judge, and was a repudiatory breach which would entitle Bai Jun to terminate the JV Agreement as well as liquidated damages of RMB 2 million under clause 4.1. 64.Mr Yuen contended that the obligation of Angola had been performed as the remittance had been made, albeit belatedly, and Achieve Goal had abandoned its claim for the recovery of the loan from Zhong Xin when it discontinued the original action in these proceedings on 22 July 2009. This contention is to no avail. The fact remains there was a complete failure to perform the contractual obligation when Bai Jun exercised its right to terminate the JV Agreement on 22 June 2005. 65.As for the purported affirmation in §7(h) of the amended defence and counterclaim of Zhong Xin and Bai Jun filed in these proceedings on 31 October 2006 that they “abandon any claim against Angola for termination or rescission of the JV Agreement as a result of the repudiatory breach of the same by Angola and affirm the JV Agreement”[56], this is of no legal consequence as the JV Agreement had effectively been terminated before that date. 66.On the basis there was merely delay in performance of the obligation in clause 1.2 as the judge had construed, she found that there was waiver of this breach by the letters of Bai Jun’s solicitors to Angola dated 18 and 31 May 2005[57]. Whatever conclusion the judge had reached regarding waiver of the breach in delay in complying with clause 2.2, the solicitors’ letters cannot be regarded as waiver of the breach in the complete failure to perform the obligation to provide capital injection in clause 1.2. 67.For the above reasons, Bai Jun was entitled to terminate the JV Agreement on 22 June 2005 for the 1st Breach. E3. The 2nd Breach 68.There was no dispute that Angola was in breach of clause 2.4 in that it had failed to pay the 2nd RMB 2 million on 28 March 2005. Angola claimed that Bai Jun was in breach of clause 2.5 in failing to cause the mining permit to be issued within time and was liable to pay liquidated damages to Angola of RMB 2 million pursuant to clause 4.2. Angola relied on a legal set-off[58] of the two identical amounts to contend that the 2nd Breach was not made out. 69.There was much discussion in the Judgment whether Bai Jun was late by one “working day” in causing the mining permit to be issued and hence in breach of clause 2.5, as this turned on how working days should be calculated (whether it should be based on the Hong Kong or the Mainland calendar[59]) and when the period of the 90 working days in clause 2.5 should run (whether it should run from the date appearing on the JV Agreement, or the actual date of signing the backdated document[60]). If the reckoning should be from the actual signing date (21 December 2004), it would not matter whether the Hong Kong or Mainland calendar was adopted. The judge took the view that time should be counted from the date to which the agreement was backdated (1 December 2004) and that it should be based on the Hong Kong calendar. She held that the mining permit was obtained one working day late and Bai Jun had breached clause 2.5 which would entitle Angola to liquidated damages of RMB 2 million, available in a legal set-off against Angola’s liability to pay Bai Jun the 2nd RMB 2 million[61]. 70.I do not think it is necessary to go into the question whether Bai Jun was in breach of clause 2.5 and whether there was a valid legal set-off, as I have held that Angola was in breach of clause 1.2, which would entitle Bai Jun to liquidated damages of RMB 2 million under clause 4.1. Assuming that legal set-off is available to Angola, even if Bai Jun was in breach of clause 2.5, the liquidated damages of RMB 2 million which Bai Jun should pay Angola under clause 4.2 should be set off against the liquidated damages of RMB 2 million which Angola was liable to pay Bai Jun under clause 4.1. Hence, Angola’s liability to pay the 2nd RMB 2 million under clause 2.4 was not met and the 2nd Breach was established. This provided an additional basis of Bai Jun’s entitlement to terminate the JV Agreement on 22 June 2005. E4. Conclusion on the Termination Issue 71.For all the above reasons, I arrive at a different conclusion from the judge on the Termination Issue. I hold that Bai Jun was entitled to and had validly terminated the JV Agreement on 22 June 2005. F. THE CONSEQUENCE ISSUE F1. The judge’s ruling and the issues on appeal 72.Having validly terminated the JV Agreement on 22 June 2005, the next issue is whether Bai Jun is entitled to the return of Angola’s 50% shareholding in Zhong Xin. The judge dealt with the Consequence Issue on the premise that she had erred in the Construction Issue and the Termination Issue. 73.The judge rejected Angola’s contention there was no room for restitution of the shares held by Angola in Zhong Xin in view of clause 4.1, which provided for the consequences of Angola’s breach (termination of the contract and liquidated damages of RMB 2 million), and held that clause 4.1 would not bar a claim for the return of Angola’s shares[62]. 74.She agreed with Bai Yun’s submission that Angola’s entitlement to 50% shareholding in Zhong Xin was conditional upon its making the RMB 20 million direct capital injection under clause 2.2, but rejected the contention that the entitlement to shareholding was also conditional upon the payment of preliminary expenses of RMB 7 million under clause 2.4, as the latter did not form part of the consideration for the shares[63]. 75.As to whether there had been total failure of consideration, the judge rejected Angola’s submission that its payment of the 1st RMB 2 million being part of the preliminary expenses would militate against there being a total failure of consideration, as the preliminary expenses did not form part of the consideration for the shares[64]. She accepted Angola’s submission that as Angola had caused RMB 20 million to be remitted to Zhong Xin, albeit as a loan made to Zhong Xin instead of by way of direct capital injection to Zhong Xin as contractually stipulated, and as Zhong Xin had used the money for injection to the registered capital of CLB to satisfy the condition for obtaining the shareholding in CLB, any failure of consideration was not total[65]. Bai Jun had not caused Zhong Xin to return the loan of HK$20 million, and although Bai Jun/Zhong Xin might have a cause of action to set aside the Loan Agreement as at the termination date of the JV Agreement, the judge regarded this as water under the bridge as a result of the discontinuance of the original action for recovery of the loan by Achieve Goal[66]. 76.As the consideration was not total, the judge held that Angola could retain the shares in Zhong Xin. She ruled that it could retain its 50% shareholding and this would not be reduced to 20% under clause 4.3. On its plain wording, clause 4.3 did not govern rights arising from payment of the first tranche of RMB 20 million and what it did was to give Angola an option to pay the balance of RMB 30 million. If Angola had paid, it could retain its 50% shareholding; if it had not and Bai Jun had paid, Angola’s shareholding would be diluted to 20%. The date of Bai Jun’s termination of the JV Agreement had come before the due date for Angola to exercise its option under clause 4.3, and as the agreement had been terminated, clause 4.3 could not be revived after termination. Further, as Bai Jun had abandoned its claim under clause 4.3 in the Stage 2 Issue based on the subsequent injection through Clarigain of RMB 29.7 million into Zhong Xin, it should not be permitted to re-assert its case founded on this provision[67]. 77.The crucial issue here is whether there has been a total failure of consideration so that Angola is not entitled to retain its 50% shareholding in Zhong Xin, notwithstanding the RMB 20 million which was made available to Zhong Xin and which had been injected to the registered capital of CLB. 78.Mr Yuen sought to argue on appeal the 1st RMB 2 million that Angola had paid pursuant to clause 2.4 should be treated as part of the consideration for the transfer of 50% of the shares, but this is not covered by the respondent’s notice. In any event, I agree with the judge’s ruling against Angola in this respect. F2. If there has been total failure of consideration 79.Where the benefit conferred takes the form of money, the failure of basis must be total (Goff & Jones: The Law of Unjust Enrichment (9th ed) at §12-16). “When one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise.” (Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 at 48, per Lord Simon LC). 80.In order to identify the basis on which money was paid, or other benefits conferred, the transaction must be closely analysed. The transferor may receive a benefit from the transferee, but it does not follow that the basis for the transfer has been satisfied, as failure of basis must not be confused with receipt of benefit. The benefit must be (or at least part of) what was understood to be the basis of the transfer. (Goff & Jones, at §§12-24, 13-01, 13-05, 13-06). 81.In The Julia [1949] AC 293, Lord Simonds, having quoted the above dictum of Lord Simon LC, went on to say at 316 that “the receipt by the promisee of something which the promisor did not promise will not prevent a total failure of consideration”. In that case, it was held that what the buyers bought was 500 tons of rye, not an undertaking endorsed on a delivery order which was a part of the machinery by which the sellers were to carry out their bargain. Hence, the sellers performed neither all, nor in any material sense, a part of what they were required to do under the contract and the buyers obtained no part of what they had contracted to buy and there was total failure of consideration. Lord MacDermott said at 323: “the buyer has not got any of what he paid for and the fact that part of the machinery of fulfilment or some incidental benefit has come to his hands is by the way”. 82.Applying the above principles to the present situation, the receipt of HK$20 million as a loan to Zhong Xin was an incidental benefit which Bai Jun had not bargained for under clause 1.2 of the JV Agreement. As it did not constitute performance of Angola’s contractual obligation, there was failure of the basis for the transfer. The receipt of a benefit which was not the contractually promised benefit was by the way, and must not be confused with failure of basis. In my judgment, there has been a total failure of consideration. 83.Having reached the above conclusion, I do not think it necessary to deal with other arguments advanced by Mr Chan, such as the one premised on Bai Jun’s rejection of any benefit conferred (on the assumption that the loan made to Zhong Xin could be regarded as consideration); or another based on the construction of clause 4.3 of the JV Agreement that Angola’s entitlement to 50% shareholding was conditional upon the full payment of RMB 50 million capital injection (which I do not agree with, I have considered this provision under the Construction Issue); or a contention based on the assumption that the loan of HK$20 million could be regarded as partial performance so that the shares representing the unpaid part of RMB 50 million should still be recoverable by Bai Jun. 84.I hold that as there has been a total failure of consideration, Bai Jun is entitled to recover the 50% shareholding from Angola. G. THE SETTLEMENT AGREEMENT ISSUE 85.The Bai Jun Camp sought to argue on appeal that having found the Settlement Agreement was deliberately backdated to mislead the courts in Hong Kong and the Mainland, the judge should have held that the Settlement Agreement was unenforceable on account of illegality. Further, it sought to argue that the judge should also have held that the Settlement Agreement was unenforceable as it was signed by Wang Li purportedly on behalf of Bai Jun when he had no actual authority to act as a director. 86.These contentions are of little moment to the resolution of this dispute, as the judge had held that this action has not been settled by the Settlement Agreement in that it was signed by Wang Li without authority to settle and it was dishonest and irrational for Angola’s representatives to rely on the apparent authority of Wang Li[68]. I do not propose to deal with them. H. CONCLUSION AND COSTS 87.For the above reasons, I would allow the appeal of the Bai Jun Camp and set aside that part of the Judgment dismissing the counterclaim of the Bai Jun Camp for a declaration that Angola was not entitled to the 50% shareholding in Zhong Xin and an order for transfer of the shareholding to Bai Jun. In lieu thereof, I would make a declaration and an order as mentioned aforesaid. 88.The judge had ordered the Angola Camp to bear 30% of the costs of the Bai Jun Camp of the whole action on indemnity basis[69]. In respect of the costs below, I would direct the Bai Jun Camp to serve submissions of not more than five pages within 14 days of the handing down of this judgment and the Angola Camp to serve submissions in answer of not more than five pages within 14 days thereafter. This would then be dealt with on paper. 89.For the costs of this appeal, I would make an order nisi that the Angola Camp should pay the costs of the Bai Jun Camp, with a certificate for two counsel. Any application to vary this order nisi should be made within 14 days of the handing down of this judgment. Hon Cheung JA: 90.I agree with the judgment of Kwan VP. Hon Yuen JA: 91.I agree with the judgment of Kwan VP.
Mr Edward Chan SC and Mr Clark Wang, instructed by Kwok, Ng & Chan, for the 1st and 2nd Plaintiffs by counterclaim (Appellants) Mr Rimsky Yuen SC, Mr Victor Dawes SC and Mr James Man, instructed by Stevenson Wong & Co, for the 1st and 2nd Defendants by counterclaim (Respondents) [1] Clarigain Enterprises Ltd (“Clarigain”) and Bai Jun Tian Cheng Ltd (“Bai Jun”) [2] Achieve Goal Holdings Ltd (“Achieve Goal”), Angola Group Holdings Ltd (“Angola”), Zhao Bing (“Zhao”), Ng Chi Kong (“Ng”) and Zhong Xin Ore-Material Holding Co Ltd (“Zhong Xin”) [3] The 3rd to 5th defendants by counterclaim – Zhao, Ng and Zhong Xin – did not take part in the trial or this appeal. [4] The headings in the JV Agreement, not set out in the Judgment, are also stated here. [5] Two characters “當於” are clearly missing after the character “相” as a result of a clerical error, see the phrase “相當於” used in clauses 1.2 and 2.2 in a similar context. [6] The “Stage 2 Issue” which relates to the Purported Capital Injection and Bai Jun’s claim for 20% of the shares of Zhong Xin from Angola under clause 4.3 of the JVA (see §§61, 65 and 50(a) of the Judgment) did not require adjudication at the time of trial even though evidence was led on this issue. See Judgment, §§114, 117. [7] Judgment, §120 [8] Judgment, §§123, 126, 127 [9] Judgment, §§248, 254 [10] Judgment, §258 [11] Judgment, §§288 to 294 [12] Judgment, §§259(a), 260 to 270 [13] Judgment, §§280 to 287, 321 [14] Judgment, §294 [15] Judgment, §§306 to 321 [16] Judgment, §§403, 431, 510 and 511 [17] Judgment, §§162, 163 [18] Judgment, §164 [19] Judgment, §161 [20] Judgment, §§164, 175 [21] Judgment, §§174, 181 [22] Judgment, §§17, 158 [23] Re-amended Defence and Counterclaim of Angola and Zhao in these proceedings, §15 [24] The deleted version in the Re-Re-amended Points of Defence to the Plaintiffs’ Points of Counterclaim filed by Achieve Goal and Angola in November 2015 was not verified by Zhao or any one on behalf of Angola who could be expected to have knowledge of the Oral Agreement and/or the Unsigned Agreement. No explanation was furnished why Zhao had made an error as to the obligation of Angola in the previous pleading. [25] Judgment, §§204, 205 [26] Judgment, §§187, 194 [27] Judgment, §§13, 169, 170, 188, 194 [28] Judgment, §§170, 191, 192, 194 [29] Judgment, §156 [30] Judgment, §183 [31] Judgment, §149 [32] Judgment, §§184, 201 [33] With Mr Clark Wang [34] With Mr Victor Dawes, SC and Mr James Man [35] The closest to 介詞 in English grammar is a preposition, which expresses relationship of a noun or pronoun to other words of a sentence. 介詞 is derived from the verb in Chinese language of ancient times and though it is mainly used to express the relationship of a noun or pronoun to other words of a sentence, it can also be used to express relationship of an act to other parts of the sentence. (《簡明實用漢語語法教程》馬真著, 北京大學出版社 (1998年), p 33-34, 157) [36] Judgment, §§141 to 143, 157, 248 [37] As found by the judge, the SJV Agreement was signed before the JV Agreement. See Judgment, §§22, 261, 266. [38] Judgment, §144 [39] The judge expressed the view at §152 that “中信礦業公司融資” in clause 3.2(7) plainly meant raising of loan. I fail to see why this must be so, in light of the dictionary meaning of “融資”. But this is immaterial to the point made here by Mr Chan. [40] Judgment, §§155, 318 [41] Judgment, §318 [42] Judgment, §205 [43] Judgment, §§17, 159 [44] Judgment, §§185, 186 [45] Judgment, §136 [46] Judgment, §192 [47] Judgment, §§188, 194 [48] Judgment, §§187, 194 [49] Judgment, §§154, 157 [50] Citing Chitty on Contracts (33rd ed), vol 1, §14-023 [51] Citing Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381 at §§91 to 99 [52] Judgment, §195 [53] Judgment, §§207, 247 [54] Pursuant to clause 12 of the SJV Agreement [55] Although HK$20 million was borrowed by Zhong Xin, only HK$19 million (equivalent to RMB 20,132,400 at the exchange rate at the time, see Judgment at §32) was injected into CLB and clause 2.2 of the JV Agreement only required remittance of RMB 20 million. [56] The present pleading of the Bai Jun Camp has deleted this plea, see Judgment §292 [57] Judgment, §§288 to 291 [58] Judgment, §259(a), in contradistinction to an equitable set-off, which is different in nature and is governed by different procedural considerations, see Fearns v Anglo-Dutch Paint & Chemical Co Ltd [2011] 1 WLR 366 at §§13 to 16, 19 to 23, 25 to 26, 33 to 36. [59] Judgment, §§261 to 265 [60] Judgment, §§266 to 267 [61] Judgment, §§269, 270 [62] Judgment, §§297, 306, 310 [63] Judgment, §§296, 307 to 309 [64] Judgment, §§311(a), 312 [65] Judgment, §§311(b), 313 to 315 [66] Judgment, §§314, 207 [67] Judgment, §§316 to 319 [68] Judgment, §511 [69] Judgment, §§526 to 528 |
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