Inspiring Investments Ltd v. Chun Hu Hing and Another
Read the full judgment text of CACV 208/2018 on BabelCite. This Court of Appeal judgment was delivered on 22 April 2020.
1. In the trial of the action, the plaintiff contended that the two defendants were jointly and severally liable for breach of contract. By his judgment dated 4 May 2018 (“ Judgment ”), L Chan J held that the 1 st defendant was liable to the plaintiff but dismissed the action as against the 2 nd defendant. The plaintiff now appeals to this court against that dismissal.
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CACV 208/2018 [2020] HKCA 209 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 208 OF 2018 (ON APPEAL FROM HCA NO 2090 OF 2014) ____________
____________ Before: Hon Cheung, Au JJA and G Lam J in Court Dates of Written Submissions: 5 and 19 February, 17 March 2020 Date of Judgment: 22 April 2020 _________________ J U D G M E N T _________________ Hon G Lam J (giving the judgment of the Court): 1.In the trial of the action, the plaintiff contended that the two defendants were jointly and severally liable for breach of contract. By his judgment dated 4 May 2018 (“Judgment”), L Chan J held that the 1st defendant was liable to the plaintiff but dismissed the action as against the 2nd defendant. The plaintiff now appeals to this court against that dismissal. 2.The appeal was originally scheduled to be heard on 4 March 2020 but was adjourned as part of the general adjournment of proceedings implemented for public health reasons. The plaintiff and the 2nd defendant have consented to the disposal of the appeal based on written submissions without an oral hearing. Background Goldstone 3.The action below arose out of certain loans made by the plaintiff to a company called Goldstone Apparel Concept Ltd (“Goldstone”). Goldstone is a company set up by the 1st defendant in order to pursue the business of manufacturing, marketing and selling Guy Laroche Femme fashion wear in the Mainland. The 1st defendant had acquired a licence from Guy Laroche Femme for that purpose in 2008. 4.The 1st defendant was at all material times a shareholder and director of Goldstone. The 2nd defendant is the 1st defendant’s son. He was also a shareholder and, until 4 March 2014, a director of Goldstone. The first convertible loan 5.In 2010, through a mutual friend, the 1st defendant became acquainted with Mr Ip Tak Chuen Edmond (“Mr Ip”). As Goldstone was trying to source funding of $13,333,000 to develop the brand in the Mainland, the 1st defendant asked if Mr Ip would be interested in taking part. Discussions ensued and eventually resulted in Mr Ip agreeing to lend, through the plaintiff which was a company owned and run by him, $13,333,000 to Goldstone as a convertible loan. The written agreement was entered into on 31 March 2010 between the plaintiff, Goldstone and the 1st defendant. The maturity date of the loan was 31 December 2015 or such later date as might be agreed. The loan was convertible into shares of Goldstone based on a valuation of $66,665,000 for the entire company. The 1st defendant guaranteed repayment of the loan. The loan was advanced soon after the agreement. We shall refer to this as the “first convertible loan”. The $5 million loan from Mr Ip personally 6.In November 2010, the 1st defendant approached Mr Ip for more funding and he agreed to lend $5 million to Goldstone in his own name. Under the written agreement, the loan was repayable on 15 May 2011. Both defendants acted as guarantors of the loan. 7.On 12 May 2011, Mr Ip received $2.5 million from their common friend on behalf of the defendants as partial repayment of this loan. The second convertible loan 8.Shortly afterwards, in July 2011, the 1st defendant approached Mr Ip and asked him for further funding for the project one last time. It was eventually agreed that Mr Ip would, through the plaintiff, advance a further sum of $4,166,500, and that his right for the unpaid balance of the $5 million loan in the sum of $2.5 million would also be transferred to the plaintiff, making a total of $6,666,500. The written loan agreement, dated 22 July 2011 and signed by the plaintiff, Goldstone and both defendants, provided that the loan of $6,666,500 was to mature on 21 July 2012 or such later date as agreed. The loan was convertible into Goldstone’s shares based on the same valuation of $66,666,500 for the company. Both defendants guaranteed repayment of the loan. In addition, the 1st defendant agreed to provide a property in Toronto he held jointly with his wife as security for the loan. We shall refer to this as the “second convertible loan”. The Sale of Shares Agreement 9.In March 2012, a private equity investment fund, SAIF Partners IV LP (“SAIF”), was interested in investing in the project and acquiring shares in Goldstone, but requested that the first convertible loan be converted into shares and that the second convertible loan be postponed for two years to July 2014, as it did not want the funds it invested to be used for repaying these loans. This was not acceptable to the plaintiff and on 5 June 2012 the 1st defendant asked whether Mr Ip would agree to postpone repayment of the second convertible loan to 30 June 2013. 10.After further exchanges, by 17 June 2012 it seems to have been agreed that the first convertible loan would be converted into preferred shares on the same terms as SAIF’s investment, but there was not yet any agreement as regards the second convertible loan. SAIF proposed that the 1st defendant take over the loan personally (as debtor) and then find an investor to inject funds so that the loan could be repaid to the plaintiff. Mr Ip however did not agree with this proposal. 11.The 1st defendant had a meeting with Mr Ip at his office on 21 June 2012. On 22 June 2012 at 4:35 pm, the 2nd defendant sent an email to Mr Ip in the name of both defendants, stating:
12.On 24 June 2012, as a comfort to Mr Ip, the 1st defendant sent an email to Mr Ip informing him that one of the existing shareholders in Goldstone, Suzanne Choo, was willing to buy 2,000 of the plaintiff’s preferred shares at a total price of approximately $1.12 million. 13.The 1st defendant had a meeting with Mr Ip again on 25 June 2012 over lunch to discuss the conversion of the plaintiff’s loans, during which he apparently gave Mr Ip a letter dated 22 June 2012 pledging his interest in the Toronto property in these terms:
14.After the lunch meeting, at 2:31 pm on 25 June 2012, the 1st defendant wrote an email to Mr Ip and representatives of SAIF (copied to the 2nd defendant). The part of the email that related to the second convertible loan read as follows:
15.Mr Ip, the defendants and SAIF’s representatives had a meeting on 26 June 2012. Among other things, it was mentioned that Mr Ip had a “put” option in respect of the preferred shares converted from the second convertible loan. 16.On 28 June 2012, the 1st defendant sent an email to Mr Ip (copied to the 2nd defendant) attaching a draft personal guarantee by both defendants and stating:
17.Mr Ip did not propose any amendments to the guarantee. The 1st defendant executed the personal guarantee on or about 28 June 2012 in substantially the same terms as the draft (“Personal Guarantee”), which provided as follows:
18.In the event, the 2nd defendant did not sign the Personal Guarantee. 19.On 29 June 2012, the plaintiff entered into a written agreement with, among others, Goldstone, for the acquisition of the preferred shares converted from the first and second convertible loans. On the same date, the plaintiff, SAIF and other shareholders of Goldstone and the relevant companies also entered into a shareholders’ agreement. 20.The plaintiff and the defendants, however, did not draw up any separate written agreement between themselves (other than the Personal Guarantee and letter “assigning” the Toronto property). What the precise terms of their agreement were was one of the major issues in the trial. 21.By 31 December 2012, the defendants had not been able to arrange for the sale of the plaintiff’s shares converted from the second convertible loan. 22.By late 2013 or early 2014, the business had foundered. The licence from Guy Laroche was terminated or surrendered; many employees had resigned and the Mainland operations had ceased, with numerous claims being raised by creditors. The plaintiff’s shares in Goldstone had become worthless. 23.The writ of summons in the action below was issued on 20 October 2014. The relevant part of the parties’ cases 24.The plaintiff’s case in the action was that there was a “Sale of Shares Agreement” between it and the defendants, made partly orally and partly in writing. The oral part was contained in the discussions on 21 June 2012 between Mr Ip (on behalf of the plaintiff) and the 1st defendant (on behalf of himself and the 2nd defendant). The written part was contained in the email from the 2nd defendant to Mr Ip of 22 June 2012 at 4:35 pm, the email from the 1st defendant to Mr Ip and SAIF’s representatives of 25 June 2012 at 2:31 pm, and the Personal Guarantee. 25.According to the plaintiff, the Sale of Shares Agreement contained the following terms:
26.In their pleading the defendants stated that they did not agree or undertake to purchase the Preferred Shares from the plaintiff at $6,666,500 in the event that they were not sold to third parties by 31 December 2012. It was admitted that the 1st defendant executed a personal guarantee but averred that the 2nd defendant did not execute any personal guarantee.[2] At the trial the defendants did not dispute they were obliged to assist the plaintiff to sell the Preferred Shares on 31 December 2012.[3] The issue was whether by the 1st Obligation, they had undertaken to procure the sale of the Preferred Shares or merely undertaken to make endeavours to procure the sale. Another issue was whether the defendants had assumed the 2nd Obligation. The Judgment 27.In his Judgment:
28.Accordingly, the judge gave judgment for the plaintiff against the 1st defendant in the sum of $6,666,500 together with interest and costs. As to the action against the 2nd defendant, the judge made no order except an order for the plaintiff to pay the 2nd defendant’s costs. The appeal 29.By supplementary notice of appeal dated 5 July 2019 which in effect replaced the original notice of appeal, the plaintiff now appeals against the Judgment, raising grounds which fall into two principal contentions. As advanced in the written submissions of the plaintiff’s counsel, they are, in broad terms, that:
30.We deal with these two contentions in turn below. First Basis 31.In his oral evidence, Mr Ip explained that the 1st Obligation was discussed at the meeting on 21 June 2012 but discussion of the 2nd Obligation only started during the lunch meeting he had with the 1st defendant on 25 June 2012. He accepted that the 2nd defendant did not attend that lunch meeting. The 1st defendant’s email issued immediately after this meeting (see §14 above) recorded Mr Ip’s proposal as a “put” (ie an option to put) of the Preferred Shares to the 1st defendant with a pledge of the 1st defendant’s shares in Goldstone as security. 32.As to the meeting on 26 June 2012, Mr Ip’s oral evidence was set out in the Judgment at §44 as follows:
33.The judge’s reasoning, as expressed in his Judgment, is as follows. The judge stated[13] that Mr Ip did not say directly that he sought the “put” option from both defendants and conceded there was nothing in writing that bound the 2nd defendant to the 2nd Obligation. Mr Ip never said he had asked the 2nd defendant or both defendants to accept the 2nd Obligation or that he had said this to Mr Jason So, SAIF’s representative. Mr Ip agreed he had no evidence to support his case on the 2nd Obligation as against the 2nd defendant and was prepared to accept that the 2nd defendant never agreed to it. Mr Ip’s focus was not on the 2nd defendant because his shareholding was relatively small. While Mr Ip maintained that in his mind at the time when he talked about the “put”, it referred to both defendants. However, the judge reasoned, if it was only in Mr Ip’s mind, it would not suffice to fix the 2nd defendant with liability for the 2nd Obligation. 34.The judge further doubted whether Mr Ip indeed had in mind both defendants when he discussed the “put” at the time, for three reasons. First, the 1st defendant’s email of 25 June 2012 at 2:31 pm raised the “put” for the first time, but only mentioned it was a “put” to the 1st defendant, not the 2nd defendant. Secondly, Mr Ip’s subsequent emails asking for performance of the 2nd Obligation were only addressed to the 1st defendant and did not even mention the 2nd defendant. For example, in the email dated 15 July 2013 to the 1st defendant, Mr Ip asked: “... just wonder how you propose settling your obligation to me in respect of the put option to you”; in the email dated 13 August 2013 to the 1st defendant, Mr Ip said: “it does not seem likely that the Preferred Shares meant to be taken back by you at the end of 2012 is going to happen in the short term”. Thirdly, the plaintiff’s statement of claim originally pleaded the 2nd Obligation and its breach solely against the 1st defendant. The allegation was only extended to the 2nd defendant by re‑amendment over 20 months later.[14] 35.The judge accepted it was inherently probable for William to have agreed to both the 1st and 2nd Obligations and that if he was asked to shoulder the 2nd Obligation, he would have agreed.[15] But he found that what was missing was the evidence that Mr Ip had required the 2nd defendant to shoulder the 2nd Obligation or that he agreed to do so. Accordingly, there was no agreement between them on the 2nd Obligation.[16] 36.These are findings of fact by the trial judge and, as the plaintiff accepts, the Court of Appeal can only intervene if it is satisfied that the findings are plainly wrong or the judge had fallen into palpable errors that give rise to grounds for intervention by the appellate court: Ting Kwok Keung v Tam Dick Yuen & Others (2002) 5 HKCFAR 336, §42; China Gold Finance Ltd v CIL Holdings Ltd & Others (CACV 11/2015, 27 November 2015), §§11, 15-19. 37.On this appeal Mr Jonathan Wong and, with him, Ms Jacquelyn Ng, neither of whom appeared below, submit that the parties’ conduct was “capable of giving rise to an unequivocal inference” that the 2nd defendant “had been offered and had agreed to be bound by the 2nd Obligation”, citing Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, §§38-39. 38.In our view, the plaintiff’s submission evinces a confusion of two different concepts. The question dealt with in Shanghai Tongji is the finding of a contract, not formed orally or in writing, but implied by conduct. The law accepts that in certain cases, which are unusual, a contract may be inferred from conduct, where the conduct of one party may properly be understood objectively to constitute the offer to enter into a contract and the conduct of the other party may likewise be understood to constitute an acceptance of that offer: see The Aramis [1989] 1 Lloyd’s Rep 213, 224 and Allied Marine Transport Ltd v Vale Do Rio Doce Navegacao SA (“The Leonidas D”) [1985] 1 WLR 925, 936, both cited in Shanghai Tongji, at §§37 & 40 respectively. But the court will not imply a contract on that basis lightly. In order to do so it must be satisfied that the conduct is unequivocally referable to the contract contended for. It is not enough if the conduct relied upon is capable of constituting an offer or acceptance as the case may be (Shanghai Tongji, §§38, 48). 39.This, as it seems to us, is not what the plaintiff is contending or can contend for, as it has not advanced below any case of contract implied by conduct, nor has it pleaded the conduct that unambiguously constituted the offer and acceptance respectively. The pleaded case and the case run below is that the Sale of Shares Agreement was made partly orally and partly in writing, not one to be implied from conduct. 40.Implying a contract from conduct is quite different from a case where a disputed contract is said to have been formed orally, or partly orally and partly in writing, and the party contending for the contract seeks to rely on the parties’ conduct as the basis for inferring, as a fact, that the parties have orally said what they are alleged to have said based on which the contract is to be found. This would simply be an exercise of fact‑finding by inference. It is on this basis that we approach the plaintiff’s submissions. 41.The first point taken on behalf of the plaintiff is that the strict segregation of identities between the defendants in the Judgment is unwarranted because the defendants had been liaising with Mr Ip as one without distinction. We do not think this is an entirely accurate portrayal of the discussions at the time. The 1st defendant was clearly the main player in the project, and the main person (between the defendants) with whom Mr Ip communicated. He owned a far larger number of shares in Goldstone than did the 2nd defendant. He alone guaranteed the first convertible loan. He alone pledged his interest in his Toronto property as security for the second convertible loan. 42.The email which the 1st defendant wrote immediately after the lunch meeting specifically referred to the 2nd Obligation as an obligation of the 1st defendant, and referred to the pledge of the 1st defendant’s shares as security for that obligation. As Mr Ip explained in his oral evidence, this had significance for SAIF, which was why he mentioned it to Mr Jason So at the meeting on the following day, because if the 1st defendant failed to perform the 2nd Obligation, it was possible that the plaintiff would claim the 1st defendant’s pledged shares and thus become the largest shareholder in Goldstone. 43.The fact that in some of the previous discussions the 1st defendant had spoken for the 2nd defendant, or vice versa, does not make it more likely than not that Mr Ip was referring to both defendants when he mentioned the “put” option in the presence of those at the meeting on 26 June 2012. In fact, with the background knowledge of the email of 25 June, a reasonable person would have understood Mr Ip to be referring to the “put” option mentioned in the email, which clearly only mentioned putting the shares to the 1st defendant. Of course Mr Ip could have made expressly clear at the meeting that he required a put option from both defendants, but he never did so, even on his own evidence. In that context, the 2nd defendant’s silence at that meeting when the put option was mentioned cannot properly be regarded as an acceptance of the 2nd Obligation on his part. 44.It is argued that the judge had overlooked Mr Ip’s evidence that the 1st defendant’s larger shareholding was only relevant to the pledge and that the put option was a separate question. We do not think any error has been made out. All that Mr Ip said in the evidence referred to was that the fact that he only sought the pledge from the 1st defendant did not mean the 2nd defendant was not included in the put option. This is hardly positive evidence that Mr Ip actually sought the put option from the 2nd defendant. The fact is that the email of 25 June referred to the put option and the pledge of shares as a composite arrangement, and that was the setting against which the matter was raised on 26 June. In addition, the judge gave three further reasons why he considered a put option from the 2nd defendant was unlikely to have been in Mr Ip’s own mind (see §34 above). None of these reasons is challenged in the plaintiff’s submissions on this appeal. 45.Secondly, it is submitted that the Sale of Shares Agreement was made against the background that the 1st and 2nd defendants were joint and several guarantors of the second convertible loan, and that there was no reason why the plaintiff should prejudice itself by releasing the 2nd defendant from personal liability. It is not clear to us how this shows that there was any error in the judge’s findings. It is correct that the 2nd defendant had guaranteed the second convertible loan, and this explains why the judge said if the 2nd defendant had been asked to shoulder the 2nd Obligation, he would have agreed. But this is no basis for inferring that Mr Ip actually asked the 2nd defendant and he agreed. As the judge found, Mr Ip did not have the 2nd defendant in mind when he referred to the put option on 25 and 26 June 2012. 46.Further, from the point of view of the plaintiff at the time, the Sale of Shares Agreement would not release the 2nd defendant from personal liability, for, according to the plaintiff, the 2nd defendant (together with the 1st defendant) had an absolute responsibility under the 1st Obligation to procure the sale of the Preferred Shares at a price not lower than $6,666,500. Although it was in the end held by the judge to be merely an obligation to use reasonable endeavours to procure a sale, this was not Mr Ip’s own understanding at the time. So even if Mr Ip subjectively had no reason to release the 2nd defendant from personal liability, this is no basis to infer that he would therefore have asked the 2nd defendant to join in the 2nd Obligation. 47.Thirdly, the plaintiff relies on the Personal Guarantee and the 1st defendant’s email to Mr Ip (copied to the 2nd defendant) attaching the draft which stated “William is on the road and he will send you the signed copy next week”. It is submitted that the 2nd defendant’s agreement to the Personal Guarantee constitutes unequivocal conduct from which to infer his agreement to the 2nd Obligation. 48.But the 2nd defendant did not agree to the Personal Guarantee. The undisputed evidence is that he never signed it and never reverted to Mr Ip about it. Nor did Mr Ip, despite not having obtained the Personal Guarantee from the 2nd defendant, take up the matter with the 2nd defendant at any time. There was no case run below that the 2nd defendant was to be treated as a guarantor under the Personal Guarantee even though he did not sign it, whether on the basis that the 1st defendant agreed to it as his agent or otherwise. 49.The plaintiff also prays in aid clause 3 of the Personal Guarantee. It is said that the judge erred in saying that the clause did not mention anything about the sale of the Preferred Shares.[17] Clearly what the judge was saying there was that the clause made no mention of the sale of the Preferred Shares to any of the defendants, as he went on to say it was therefore not a reference to the 2nd Obligation. 50.Furthermore, clause 3 actually guaranteed the principal of both the first and second convertible loans. But the 2nd defendant had not previously guaranteed the first convertible loan at all, and for that reason he found the Personal Guarantee objectionable and did not sign it. The 2nd defendant might well have signed the guarantee had that part been omitted, but the fact that he did not consider the other parts of the document objectionable is not a basis for finding that he was actually asked and agreed to join in the 2nd Obligation. 51.Counsel for the plaintiff also submit that the draft guarantee was provided to Mr Ip after the meeting on 26 June 2012, and showed the 2nd defendant’s understanding after the meeting that he was not released from his personal liability. In our view this takes the matter no further. The draft guarantee, which the 2nd defendant neither drafted nor signed, is not evidence of his understanding. His position was that he would be prepared to take up potential personal liability to the extent of the second convertible loan (ie $6,666,500). His original personal liability under the guarantee of the second convertible loan could not, however, without a proper legal basis, be deemed somehow to have “transformed” into the 2nd Obligation. 52.For these reasons the argument on the First Basis fails. Second Basis 53.The judge considered that the 1st and 2nd Obligations together provided a composite mechanism for the plaintiff to dispose of the Preferred Shares. In the first instance, the 1st Obligation required both defendants to make reasonable endeavours to procure the sale of the Preferred Shares at a price not less than $6,666,500 by 31 December 2012. It is only if they failed to procure a sale that the 2nd Obligation arose, requiring the 1st defendant himself to purchase the Preferred Shares at that price. The performance of the 2nd Obligation by the 1st defendant would completely satisfy any loss suffered by the plaintiff from the breach of the 1st Obligation. If the 1st defendant defaulted on the 2nd Obligation, the plaintiff could pursue him for specific performance or damages. The judge therefore concluded that the defendants’ failure to take steps to assist the sale of the Preferred Shares triggered the 2nd Obligation on the 1st defendant’s part, but did not result in any liability on the defendants to pay damages for breach of the 1st Obligation.[18] 54.The plaintiff argues that the judge erred in effectively treating the 2nd Obligation as exempting the 2nd defendant from compensatory liability arising from the breach of the 1st Obligation. Whilst this is not quite the correct way of characterising the judge’s conclusion, it seems to us arguable that once the 1st Obligation was breached, there was a liability to pay damages, though the amount thereof would depend on the loss suffered which would in turn be affected by the performance of the 2nd Obligation by the 1st defendant. 55.It is, however, in our view unnecessary to enter into a detailed discussion of this question, because:
Conclusion 56.For these reasons, we dismiss the appeal. There will be an order nisi that the plaintiff do pay the 2nd defendant the costs of the appeal, to be taxed if not agreed, with a certificate for two counsel.
Written submissions by Mr Jonathan Wong and Ms Jacquelyn Ng, instructed by Ince & Co, Solicitors for the Plaintiff The 1st Defendant was not represented and did not take part Written submissions by Mr Adrian Lai and Mr Raymond Tsang, instructed by Leung, Tam & Wong, Solicitors for the 2nd Defendant [1] The 1st defendant had amended on the draft email for this to read “We will try our best to sell”, but the 2nd defendant sent out the unamended version to Mr Ip. [2] Paras 18‑19 of the Defence. [3] Para 57 of Judgment. [4] Paras 52‑63 of Judgment. [5] Paras 64‑77 of Judgment. [6] Paras 80‑90 of Judgment. [7] Paras 91‑101 of Judgment. [8] Paras 102‑107 & 127 of Judgment. [9] Para 108 of Judgment. [10] Para 110 of Judgment. [11] Paras 111‑125 of Judgment. [12] Paras 129‑133 of Judgment. [13] Para 80 of Judgment. [14] Paras 82‑86 of Judgment. [15] Para 87 of Judgment. [16] Para 89 of Judgment. [17] Para 79 of Judgment. [18] Paras 103–107 of Judgment. [19] Para 10 of supplementary notice of appeal. | |||||||||||||||||||||
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