Da Shing Group Ltd v. Rich Promise Ltd
Read the full judgment text of HCA 1065/2016 on BabelCite. This High Court CFI judgment was delivered on 22 April 2020.
1. The question for determination in these proceedings is whether the prospective vendor (the defendant) is liable to return the money, in the sum of HK$30,000,000, deposited by the prospective purchaser (the plaintiff) into the defendant’s designated bank account, after the negotiation for purchase of shares in a listed company fell through.
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HCA 1065/2016 [2020] HKCFI 588 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1065 OF 2016 ____________
____________ Before: Deputy High Court Judge Kenneth Wong in Court Date of Hearing: 19-21, 24, 25 June 2019 and 2 October 2019 Date of Judgment: 22 April 2020 _________________ JUDGMENT _________________ A. INTRODUCTION 1.The question for determination in these proceedings is whether the prospective vendor (the defendant) is liable to return the money, in the sum of HK$30,000,000, deposited by the prospective purchaser (the plaintiff) into the defendant’s designated bank account, after the negotiation for purchase of shares in a listed company fell through. 2.It depends on the proper construction of a Chinese document entitled “諒解備忘錄” (Memorandum of Understanding) dated 13 February 2015 (the “MOU”). There is also a subsidiary issue on whether amendments in the drafts of the MOU are admissible in aid of the construction. 3.The plaintiff was a limited company incorporated at the British Virgin Islands (“BVI”). It was a wholly-owned subsidiary of Step Best Investments Limited (“Step Best”), another BVI company. Mr Zhou Zhenke (“Mr Zhou”) held 95% of the shareholding in Step Best. In 2015, he ran substantial business in the Mainland but did not have any business in Hong Kong. 4.The defendant was also a company incorporated at BVI. It was beneficially owned by Dr Lam Kin Ming (“Dr Lam”). 5.The subject matter was the proposed sale and purchase of about 50.46% of the shareholding (the “Shares”) of and in Crocodile Garments Limited(the “Listco”). The Listco was listed at the Main Board of the Stock Exchange of Hong Kong. Dr Lam was the executive director, chairman and chief executive officer of the Listco. He was its controlling shareholder. As at 13 February 2015, he and the defendant were interested in an aggregate of 476,259,000 ordinary shares in issue, representing 50.90% of the entire issued share capital of the Listco. The defendant alone held about 50.46%. 6.The plaintiff and the defendant signed the MOU. Mr Zhou signed as the plaintiff’s guarantor, and Dr Lam signed as the defendant’s guarantor, of the parties’ respective obligations in the MOU. 7.Only some terms in the MOU are legally binding, namely Clauses 4, 5, 6, 7, 8, 9, 12 and 13[1] (collectively the “Binding Clauses”). The rest are not. Clause 12 stipulates that except the Binding Clauses, the purpose of the MOU is not establishing legal relationship, and does not constitute a contract with binding force between the plaintiff and the defendant. It further stipulates that either party may terminate the negotiations proceeded between the parties in accordance with this MOU, albeit without prejudice to the application of Clauses 4, 5, 6, 7, 8, 9, 11[2] and 12 and either party’s right to pursue under those clauses. 8.On 16 February 2015, pursuant to Clause 5 of the MOU, the plaintiff deposited a sum of HK$30,000,000 into a designated bank account of the defendant. Clause 5 described this sum of money as “定金” in Chinese. In the Chinese and English versions of the public Announcement issued by the Lisco pursuant to the Takeovers Code, the Listing Rules and the Securities and Futures Ordinance on the same day after the MOU was signed on 13 February 2015, it was described as “按金”and“deposit” respectively. I shall use “the Subject Sum” to describe it below. 9.After the MOU was signed, negotiation for a formal agreement for sale and purchase of the Shares ensued. It failed. No formal agreement was signed. The defendant refused to return the Subject Sum. The plaintiff commenced these proceedings claiming for its return. B. Material terms of the MOU 10.The plaintiff contends that it is entitled to the refund of the Subject Sum under the MOU. The defendant contends that there is no such entitlement on a true interpretation of the MOU. 11.It is pertinent to first note the material terms of the MOU. Since the parties did not provide any agreed English translation or certified English translation of the MOU, these terms are set out in their original Chinese simplified characters as follows:
C. Approach to interpret the MOU 12.The starting point to note is that a part of the MOU is legally binding and the remaining part of the MOU is not. In interpreting such a document, the Court needs to bear in mind the interplay between the legally binding clauses and the non-legally binding clauses. 13.The next point to note is that the MOU was not drafted by lawyers. It was based on an in-house standard form of a Feder Capital Management Limited (“Feder Capital”), of which Mr Xu Lijian (“Mr Xu”), Mr Zhou’s business adviser was a director. It was not drafted with precision. 14.The third point to note at this juncture is whilst there is no express provision stating whether the Subject Sum is refundable when the negotiation fell through, Clause 5 provides for deposit of the Subject Sum and its treatment as part payment of the purchase price if and when a formal agreement for sale and purchase has been signed. It is necessary to examine this clause in the context of the MOU as a whole, put it in the wider relevant factual matrix, and consider whether there is any guidance which the factual matrix may provide as to the implications of the rival interpretations and ultimately the true meaning of the clause. 15.There is no controversy over the principles of contractual interpretation. I need not recite the long line of Hong Kong and English cases on contractual interpretation leading to recent judgments such as the Court of Appeal in Eminent Investment (Asia Pacific) Limited v Dio Corporation [2019] HKCA 606 and the UK Supreme Court in Wood v Capital Insurance Services Ltd [2017] AC 1173. It will be sufficient to refer to the following three extracts which as I consider provide the most pertinent guidance in the circumstances of the present case. 16.It has always been the case that in interpreting a contract, the Court should take account of both its language and its background. Lord Neuberger said this in Arnold v Britton [2015] AC 1619 at 1627 at paragraph 15:
17.Between the language and the background, the Court must be careful in striking a balance between the indications given by the language and the implications of the competing constructions, see the following exposition by Lord Hodge in Wood at 1179:
18.The reminder that the Court should be astute to the possibilities such as that one side may have agreed to something which with hindsight did not serve his interest, or that a provision may be a negotiated compromise, or that the negotiators were not able to agree more precise terms, is particularly apposite to the present discussion. 19.As mentioned above, the MOU was not drafted by lawyers, and was an adaptation from an in-house standard form of the plaintiff’s financial consultant. Both the text (language) and the context (commercial background) should be considered in the exercise, as Mr Justice Cheung JA, adopting Lord Hodge’s approach, made the following remark at paragraph 7.4 of the Court of Appeal’s Judgment in Eminent Investment (Asia Pacific) Limited:
20.Before I get into the unitary exercise, I shall comment on the credibility of the evidence of both parties’ witnesses and deal with some disputed factual evidence. D. The Witnesses 21.Mr Zhou and Mr Xu gave oral evidence on behalf of the plaintiff. 22.Mr Ko Ming Kin (“Mr Ko”) gave oral evidence on behalf of the defendant. He represented the defendant and Dr Lam in negotiating with the plaintiff. He was the Chief Financial Officer and Company Secretary of the Listco. 23.Since the key question in these proceedings is the true interpretation of the MOU, there are not many material facts in dispute which require the Court to resolve. It is sufficient for me to briefly comment on the credibility of the three witnesses. 24.The defendant accepts that Mr Zhou’s evidence is, by and large, credible. I agree. Mr Zhou gave straightforward answers and were not evasive in admitting facts that he did not know. 25.As to Mr Xu, the parties dispute whether he is an “independent” witness. While there was no evidence showing that he had any interest in the outcome of these proceedings, Mr Xu readily accepted in his evidence that he and his company were commercially closely associated with Mr Zhou. I do not find the notion of being independent is helpful in assessing his credibility. Rather, I observe from his demeanour during cross-examination that he gave serious thought to every question put to him and answered each question in detail. While the defendant criticizes him for being evasive and defensive, and in most cases, giving long but irrelevant answers, the defendant did not pinpoint any inconsistency among his answers. I find his evidence generally credible. 26.I treat Mr Ko’s evidence with serious caution. I gravely doubt its reliability. There are material inconsistencies between his oral evidence at the trial and the statements he made in his witness statements or contemporaneous document. This may be demonstrated by the following instances:
27.For the above reasons, when there are conflicts between the evidence of Mr Xu and that of Mr Ko, in so far as they are necessary to be resolved for the construction exercise, I prefer Mr Xu’s evidence. Likewise, when there are conflicts between Mr Zhou’s evidence and Mr Ko’s evidence, I prefer Mr Zhou’s evidence. E. Facts relevant to the construction of the MOU 28.The following are background facts that I find relevant to the construction of the MOU. E(1) Before the parties met 29.The Listco was established in 1952 and listed in 1971. It owns the clothing brand “Crocodile”, which is known to many people in Hong Kong. 30.Before the MOU, the plaintiff and the defendant had no business dealing. So as between Dr Lam and Mr Zhou. 31.In around late 2014, Mr Zhou intended to acquire controlling interest in a Hong Kong listed company with principal business in real estate and also in retail such as garment. According to Mr Xu, he advised Mr Zhou that the Listco met Mr Zhou’s criteria. Among the potential target companies he identified, the Listco was Mr Xu’s first choice for recommendation. Mr Zhou accepted his advice. The plaintiff then proceeded to explore the chance to start a negotiation with the defendant. 32.Mr. Ko told the Court that around that time, the stock market in Hong Kong was booming. Some middlemen approached him and Dr Lam, asking whether Dr Lam would consider selling the Shares. Dr Lam was quite receptive. 33.Through his friend, Mr David Wan Ngar Yin (“Mr Wan”) and Mr Wan’s business associate, Mr Joseph Ling Kit Wah (“Mr Ling”), Mr Ko came to know of Mr Zhou’s interest in purchasing the Shares. Through their introduction, Mr Ko went to meet Mr Zhou in Shenzhen. E(2) The first meeting 34.Mr Zhou said the first meeting took place in the fourth quarter of 2014. Mr Ko however said this meeting was held on 18 January 2015. For reason he could not explain, he did not produce the printout of his diary which as he said had recorded relevant events for regulatory purposes. I do not find this difference material. 35.In this meeting, the parties introduced each other and discussed preliminarily the background information of the Listco and the intended sale and purchase of the Shares. The parties were different on whether in this meeting, Mr Ko had informed Zhou that Dr Lam’s and his preliminary valuation of the Listco and the premium for the control of the Listco was at least HK$2 billion in aggregate. Mr Ko told the Court that he did. This was denied by Mr Xu and Mr Zhou. 36.The defendant contends that since the defendant had informed the plaintiff in the first meeting that the estimate total acquisition cost would be very substantial, at least HK$2 billion, the plaintiff would have considered that the Subject Sum represented only a very small portion of the total potential purchase price. As such, the defendant submits that it made reasonable commercial sense the plaintiff to agree that the Subject Sum was non-refundable. 37.I find that it was unlikely for Mr Ko to have told Mr Zhou that the defendant’s estimate total acquisition cost was at least HK$2 billion. 38.It is necessary to interpose a fact here. On 6 February 2015, the closing price of the Listco's share was HK$0.53. The Listco had 935,743,695 issued ordinary shares. Therefore, the Listco's market capitalization was around HK$496 million (i.e. HK$0.53 x 935,743,695). This amount of market capitalisation represented a significant discount from both (a) Mr Ko’s valuation of the Listco in March 2015, which included the book value, value of the brand “Crocodile”, the control premium, the Listco’s office and a piece of land in the Mainland, at HK$ 2.8 billion and (b) Mr Xu’s preliminary valuation of the Shares at HK$1.236 billion when he submitted the list of potential acquisition targets to Mr Zhou in December 2014. Mr Ko stated in his witness statement that based on his valuation of the Listco at HK$2.8 billion, the consideration for the Shares, which were about 50.46% of the entire issued share capital of the Listco, should be around HK$1.4 billion. That was what he told Mr Zhou in a telephone conference on 31 March 2015. 39.In light of the significant discount of the then market value of the Shares from the respective valuations of Mr Ko and Mr Zhou mentioned above, I accept the plaintiff’s submission that any price discussion between the parties (including any valuation figures of the Listco and the Shares) would have constituted a piece of very price and market sensitive information. In cross-examination, Mr Ko accepted that the Listco had to act discreetly in dealing with market sensitive information before an announcement was made. Given also that he only met Mr Zhou and Mr Xu for the first time, I find it to be unlikely that Mr Ko would have disclosed such market sensitive information to Mr Zhou at the first meeting, when only preliminary discussion of the deal was held. This finding is corroborated by Mr Ko’s evidence that the back-of-an-envelope valuation was prepared by him in a handwritten memo only in March 2015, i.e. after the MOU was signed and an announcement issued. 40.After the first meeting, pursuant to the defendant’s request, the plaintiff and Mr Zhou procured a bank reference certifying that a company related to the plaintiff and Mr Zhou had a fixed time deposit of RMB2,598,262,000 as at 5 February 2015. The defendant relies on Mr Xu’s evidence, that the amount of the plaintiff’s financial proof was based on the defendant’s request that it should not be less than HK$2 billion, and suggests that the defendant had already indicated to the plaintiff that the total cost involved would not be less than this sum. However, in my view, the amount of financial proof was not necessarily equal to the estimated amount of potential purchase price[3], and there is no evidence showing that there was a link between the amount of financial proof and the purchase price. To the contrary, in the plaintiff’s internal proposal prepared on 5 February 2015, the estimated total acquisition cost was only HK$1.2092 billion, and there was no mention of any indication of the potential purchase price from the defendant. E(3) The second meeting 41.The second meeting was held on 6 February 2015. Mr Zhou went to meet Dr Lam at the Listco’s office in Hong Kong. Ms Vanessa Lam (Dr Lam’s daughter), Mr Xu, Mr Leung, Mr Wan and Mr Ling were present at the meeting. 42.The main dispute in relation to this meeting is whether Mr Leung had on behalf of the plaintiff raised the request for exclusive negotiation. Mr Ko said so. Mr Zhou and Mr Xu denied. Mr Zhou said exclusivity requirement was a commonplace event and hence there was no need to mention it at the meeting. Mr Xu said in their past transactions, all memorandums of understanding had the exclusivity clause. Therefore, such clause was included in Federal Capital’s standard form, and found its way as Clause 7 of the MOU. 43.I find it to be more likely that the requirement for exclusivity was not raised in the meeting on 6 February 2015, for the following reasons:
I shall return to discuss Clause 7 of the MOU below. E(4) Amendments in the drafts of MOU and their admissibility 44.After the “Draft 1 Revised” of the MOU was sent to the defendant, the parties negotiated on the terms of the MOU, with further drafts exchanged. 45.The defendant produced three drafts of the MOU and sought to rely on them. In particular, the defendant’s counsel highlight Clause 5 of “MOU Draft 4”. “MOU Draft 4” was sent to Mr Ko from Mr Wan by e-mail on 12 February 2015. In Clause 5 of this draft, the words “可退回” (literally translated as “may be refunded”) and the proviso concerning the mechanism and timing for the Subject Sum to be repaid were deleted. The defendant’s counsel describe these amendments as critical. They ask the Court to admit these amendments as evidence as an exception to the general exclusionary rule. 46.Clause 5 of “MOU Draft 4” and the amendments made are set out below:
47.I read the drafts of the MOU and heard the related oral evidence de bene esse. I have now come to the view that these drafts should not be admitted as evidence, and that even if I am wrong and they should be so admitted, I would not attach any weight to these drafts for the construction exercise. I shall state the reasons below. 48.The first principle is that where a document appears to have been altered while the parties were negotiating, the court cannot look at it as it originally stood compared with the alterations which were made in it, to see whether those alterations will throw any light upon the question of interpretation, see generally Chitty on Contracts, 33rd ed., paragraph 13-067. This is because those alterations are unhelpful, as explained by Lord Wilberforce in the well-known English House of Lords’ judgment in Prenn v Simmonds [1971] 1 WLR 1381 at 1384-1385:
49.In other words, pre-contractual exchanges are excluded as evidence because they are irrelevant to the question to be decided by the court, namely, what the parties would reasonably be taken to have meant by the language which they finally adopted to express their agreement, see the English House of Lords’ judgment in Chartbrook Ltd and another v Persimmon Homes Ltd and another [2009] 1 AC 1101 per Lord Hoffman at paragraph 33. Even if they are admitted in exceptional cases, they are admitted not as evidence of what the clause in question mean, but as “background known to the parties” that may assist the interpretation. 50.In some occasions, the difference between evidence of what the contract means and evidence as background could be subtle or imprecise and the line is hard to draw. In most of the cases, evidence on pre-contractual negotiation only reflects one party’s subjective intention on matters such as value of the subject matter of the contract, value of a particular term proposed, whether one proposed term can be given up and why and whether the other proposed term must be insisted and why. Hence it is not admissible. If it is capable of becoming evidence of the meaning of the contract subsequently agreed, it must be capable of showing that it, albeit at that time the contract had not yet been concluded, had already reflected the parties’ mutual or common intention on what they both (and I must emphasize not any one party alone) wanted the contract to be so. But such cases would be exceptional. 51.Moreover, even if such prior negotiations, whether orally, in writing or by conduct, do reflect the parties’ mutual intention on what the contract means, the value of such evidence may be very limited. In the words of Mason J (as His Lordship then was) at the High Court of Australia in Coldelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352, such prior negotiations have likely been “superceded by, and merged in, the contract itself”. 52.Mason J concluded the general rule by drawing the distinction between “the actual intentions, aspirations or expectations of the parties before or at the time of the contract” and “the objective framework of facts within which the contract came into existence”. At 352 of Coldelfa Construction Proprietary Limited he stated:
53.The defendant’s counsel submit that after stating the general rule, in the following paragraph, His Lordship proffered an exception:
54.The defendant’s counsel rely on this passage of Mason J as the authority in support of their contention that deletions made in a draft contract may be admitted as an exception to the general rule. They submit that as there is no authority in Hong Kong binding on this Court holding that deletions in a draft contract may never be used to assist in construing a contract, the three drafts of the MOU, particularly the deletion in Clause 5, should be admitted as the evidence to prove the parties’ common intention that the Subject Sum was not refundable. 55.I am not certain if Mason J was really proffering that deletions made in a draft contract should be made an exception to the general rule. It seems to me His Lordship’s emphasis was not on the parties’ refusal to include in the contract a provision, but instead was on ascertaining the presumed intention of the parties. This emphasis can be understood from the paragraph at 353, which immediately follows the passage mentioned above, where Mason J said:
56.In my view, it is in the course of ascertaining the presumed intention, which constitutes part of the background or surrounding circumstances, that the evidence is admitted in order to assist in the interpretation of the contract, when its language is ambiguous or susceptible of more than one meaning. This is the fundamental premise for admitting evidence as factual matrix in aid of contract interpretation, as Mason J explained in the earlier passage of Coldelfa Construction Proprietary Limited at 352:
57.Therefore, it is not the deletion of words in a draft contract which brings in the exception to the general rule. It is the evidence which bears out the parties’ presumed intention which makes it admissible. If a deletion does not reflect the parties’ presumed intention, or is not derived from facts which are notorious knowledge of both parties, it will not be admissible. 58.I do not see there is a divergence of the principle adopted in England and Australia. In England, the exposition by Clarke J in Mopani Copper Mines plc v Millennium Underwriting Ltd [2008] 2 All ER (Comm) 976, paragraphs 120-123, which was approved by the English Court of Appeal in Narandas-Girdhar v Bradstock [2016] 1 WLR 2366 at paragraphs 18-20, reads as follows:
59.Briggs LJ in Narandas-Girdhar summarized the principle at paragraph 20:
60.I consider the principles enunciated by Mason J and Briggs LJ are the same. 61.In the present case, the plaintiff’s counsel say there is no ambiguity on the language of the MOU. In their written submissions, the defendant’s counsel suggest that their construction of the MOU should be preferred, but in the event that the Court considers that there is ambiguity, the deletions in the draft MOU are admissible to show as a matter of fact what it is that the parties concurred they did not agree. 62.Obviously, there is no provision in the MOU explicitly stating that the Subject Sum, once paid by the plaintiff to the defendant, is in any event not refundable. However, the fact that the words “可退回” (“may be refunded”) and the provision on the mechanism and timing for the return of the Subject Sum were deleted in Clause 5 of “MOU Draft 4” does not necessarily mean that the parties have agreed that the Subject Sum was not refundable in any event. It is of course correct for the defendant’s counsel to say that there were only two mutually exclusive possibilities – that the Subject Sum was either refundable or non-refundable. However, the deletions together with the alteration of the term from “订 金” to “定金” in Clause 5 of the same draft (as set out in paragraph 46 above) does not necessarily cause the Subject Sum becoming non-refundable. The reasons or justifications for the parties to agree to the amendments could very often be multiple. I do not accept the defendant’s counsel’s submission that by default, the deletions mean that the Subject Sum was intended to be non-refundable. 63.While the defendant’s counsel place reliance on the deletions, little has been submitted on the alteration of the term from “订 金” to “定金” in Clause 5. The risk of drawing wrong inferences, as contemplated by Clarke J in Mopani Copper Mines plc at paragraphs 122 and 123 as mentioned in paragraph 58 above, must be cautioned. 64.Even if the drafts of MOU, particularly the amendments made to Clause 5, are admitted as evidence, in my view, they are unhelpful to the construction exercise that the Court is undertaking. 65.Mr Xu told the Court that it was he who proposed the amendment to clause 5 because under Article 89 of the Mainland’s Guarantee Law, the term “定金” meant to have the effect that the plaintiff would be entitled to the refund of the Subject Sum unless it did not perform its obligations under the MOU. If this term was accepted by the defendant, according to him, given the special meaning that this term had under the Mainland law, and given the defendant’s insistence, there was no need to keep the words “可退回” (“may be refunded”) and the provision on the mechanism and timing for the return. Mr Xu said he had explained this intention to Mr Ling. 66.On the other hand, Mr Ko said to the Court he never heard of this special meaning of “定金” from the defendant or Mr Ling. To the contrary, he orally made himself very clear to everyone that the Subject Sum could not be refunded. As mentioned in paragraph 26 above, the credibility of Mr Ko’s evidence is doubtful. Particularly with regard to the issue of the amendments in Clause 5, as I have explained in paragraph 26(2) above, his evidence was inconsistent at various points in time. 67.But Mr Xu’s explanation is not helpful either. In substance it is no more than his or the plaintiff’s subjective intention. Furthermore, it is common ground that Hong Kong laws applies to the MOU[4]. Hence the special meaning of “定金” under the Mainland law is of no application. Such subjective intention is misconceived. 68.Nonetheless, the aforementioned evidence of Mr Xu and Mr Ko is illustrative of how diverse each party’s position was during the negotiation of the MOU. There was no evidence suggesting any possibility of consensus between the parties on the point in issue, namely, whether the Subject Sum was refundable or not in the event that no formal agreement for sale of the Shares could be signed. Accepting any of Mr Xu’s and/or Mr Ko’s evidence falls into the danger of conducting a factual inquiry into the details of the pre-contract negotiations as expounded by Lord Wilberforce in Prenn referred to in paragraph 48 above. 69.In my view, it was likely that the final version of Clause 5 was agreed because that was the only way to get an “agreement”. The words remaining were the only common denominator of agreement. It would be far more dangerous to admit evidence of either one party’s objective or intent. 70.I therefore accept the plaintiff’s counsel’s submission, and make the finding that the MOU, and Clause 5 in particular, was a negotiated compromise. It was a product of give and take. The parties were unable to agree at more precise terms. It is wholly speculative, hence unsafe and unhelpful, to make any finding of common intention out of such evidence from the parties. 71.To sum up, having considered the circumstances of the matter, I hold that the evidence of pre-MOU negotiation in relation to the amendments made, including the three drafts of MOU, is inadmissible. If I am wrong and it is held to be admissible, for the same reasons explained above, I would attach no weight to those drafts for the construction exercise. E(5) Subsequent conducts after the signing of the MOU 72.Subsequent conduct and statement of the parties after the contract has been entered are generally not relevant and not admissible, see Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222, per Mortimer NPJ at paragraph 22. 73.Originally the defendant pleaded a further or alternative case that there was a collateral agreement made between Mr Ling and/or Mr Wan as the plaintiff’s agent on the one part and the defendant and Dr Lam on the other that the Subject Sum was non-refundable. 74.In response, the plaintiff led evidence of various post-MOU facts, conducts and statements, such as the Listco’s announcement after the MOU, supplemental MOU extending the exclusivity period, drafts of financial and legal due diligence reports, drafts of sale and purchase agreement, the Listco’s announcements for further extension of the exclusivity period and subsequently termination of the MOU and supplemental MOU and the trading prices of the Shares at various stages before and after the termination of the MOU. The plaintiff’s counsel submit that this evidence is relevant for ascertaining the terms of the alleged collateral agreement since it was not made in writing. 75.In the defendant’s counsel’s written closing submissions, the case of collateral agreement is formally abandoned. 76.The plaintiff’s counsel nonetheless invite the Court to bear in mind those pieces of evidence “in assessing commerciality and fairness”. 77.The only live issue now before the Court is construction of the MOU. There must be proper basis for enabling the Court to take consideration of the facts and conducts subsequent to the MOU in aid of the construction of the MOU. “Commerciality and fairness” is no such basis. The plaintiff’s counsel’s invitation can only be refused. 78.For completeness, I should also mention that the plaintiff’s counsel have also invited the Court to specifically look at the heads of agreement that the defendant signed with another unrelated party subsequently after the termination of the MOU and announced on 29 January 2016, which expressly provided that the deposit paid was refundable when the negotiation did not come to fruition and without fault of the intended purchaser. The plaintiff’s counsel relies on Lord Hodge’s remark in Wood at paragraph 13 as mentioned in paragraph 17 above, that help may be drawn from considering “the purpose of similar provisions in contracts of the same type”. In my view, the reliance is not apposite. In that passage, Lord Hodge was referring to interpretation of “a detailed professionally drawn contract which lack clarity” when help might be sought. The MOU was not a detailed professional drawn contract. Moreover, there was no evidence as to whether the said heads of agreement were drafted based on a standard form or by professionals. I therefore doubt very much that the said head of agreements could be called “contracts of the same type” as the MOU. F. Construction of the MOU on the refundability of the Subject Sum 79.As discussed in section C above, against the parties’ rival constructions, the Court shall go through the iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated. F(1) Textual Analysis 80.The Subject Sum paid by the plaintiff to the defendant was described in Chinese as “定金” in Clause 5 of the MOU. The plaintiff contends that it was in the nature of earnest money, paid to the defendant to show the plaintiff’s sincerity in entering into negotiation with the defendant. Hence, it should be refunded to the plaintiff when the negotiation fell through. The defendant contends that the Subject Sum served as the monetary consideration for the positive and negative obligations assumed by the defendant, with corresponding rights and privileges conferred on the plaintiff, under the legally binding provisions in the MOU. Hence, it would and could not be refunded to the plaintiff[5]. To do so would mean, in the defendant’s counsel’s description, “a complete return of the monetary consideration when such consideration has not totally failed”. 81.There is no dispute between the parties that the term “定金” does not have a fixed or definite meaning in Chinese language. Nothing can be inferred or connoted from this term as to whether a sum paid as such is refundable or not. 82.Nor is there a provision in the MOU expressly stating whether that the Subject Sum is refundable or otherwise, in the event that the negotiation falls through and no formal agreement for sale and purchase of the Shares is signed. 83.In addition to requiring the plaintiff to deposit the Subject Sum into an account designated by the defendant, Clause 5 further provides that if the formal agreement has been entered into, the plaintiff, according to the formal agreement, may pay the Subject Sum from the designated account to the defendant, which shall constitute part of the purchase price. I find this provision telling. It has two points of significance, although it may be said they are two sides of the same coin. 84.First, the parties agreed that notwithstanding the Subject Sum has already been paid by the plaintiff to the defendant, in the event that a formal agreement was concluded, the plaintiff could still use it as part payment of the purchase price. 85.Second, the stipulation signifies that if the formal agreement has been entered into, the plaintiff was entitled to use the Subject Sum to pay to the defendant as part payment of the purchase price. Practically speaking, since the Subject Sum were deposited into the defendant’s bank account, when the formal agreement has been signed, with the plaintiff’s consent, the defendant may convert the Subject Sum into part payment of the purchase price. This is so notwithstanding that once the Subject Sum was deposited into the defendant’s designated account, the ownership of the money, as submitted by the defendant’s counsel, has been passed to the defendant (see footnote 5 above). 86.This provision in Clause 5 does not sit well with the defendant’s contention. If under the MOU the Subject Sum was treated as consideration moved from the plaintiff for the legally binding rights given to the plaintiff in the MOU (such as the right to exclusive negotiation with the defendant under Clause 7 and the right to assistance and information from the defendant during the plaintiff’s due diligence exercise under Clause 4) and was not refundable in any event, the Subject Sum should not be allowed to be used by the plaintiff to make part payment of the purchase price. 87.It seems to be the defendant’s counsel’s suggestion that the agreement to convert the Subject Sum into part payment of the purchase price of the Shares (in the event that a formal agreement was concluded) represented a compromise made by the defendant or an exception to the agreement that the Subject Sum was not refundable. I do not consider this provision could have been a compromise or exception. If this was the case, the primary consensus (that the Subject Sum was paid as the consideration for the defendant granting the plaintiff various legally binding rights in the MOU) should have been expressly spelt out in the MOU. It is unlikely for the parties to spell out only the compromise or exception to the primary consensus but leave out the primary consensus from which the compromise or exception is derived. 88.The payment of the Subject Sum denotes the commencement of the relevant period defined in Clause 2 of the MOU. The commencement of the relevant period triggers the obligations in Clauses 4, 7 and 8. However, there is nothing in these three clauses suggesting that the Subject Sum was not refundable if the negotiation fell through, or that the payment of the Subject Sum was made in consideration of the rights granted to the plaintiff in these clauses. Again, if that was the parties’ intention, there should have been an express clause making such provisions. The defendant’s counsel submit that if the plaintiff did not pay the Subject Sum, it will have no right to enforce the defendant’s obligations. While this is true, this can only show that there is a linkage between the plaintiff’s payment of the Subject Sum and the commencement of the relevant period and hence the defendant’s obligations under the MOU. 89.Moreover, I do not find the defendant’s contention, that if the Subject Sum was refundable, it would mean “a complete return of the monetary consideration when such consideration has not totally failed” to be plausible. 90.The defendant did not run a case that if the Subject Sum was refundable, there would be a total failure of consideration. Under the MOU, the parties have respective rights and obligations. 91.One may take an account of the plaintiff’s obligations. Clause 5 requires the plaintiff to pay the Subject Sum within 2 business days. Clause 6 obliges the plaintiff to keep all the information received from the defendant confidential and not to use such information for purposes other than assessing and evaluating the acquisition of the Shares, unless for compliance with the requirements by law or regulatory authorities. Under Clause 9, the plaintiff shall be responsible for its own costs and expenses incurred in this matter. 92.Turning to the defendant’s obligations, Clause 4 requires the defendant to provide the plaintiff with reasonable assistance and information during the plaintiff’s due diligence exercise. Clause 6 imposes the same confidential obligations on the defendant as the plaintiff. Clause 7 requires the defendant not to make any proposal or offer to or negotiate with any party other than the plaintiff directly or indirectly in relation to sale of the Shares. Clause 8 requires the defendant to use reasonable endeavour to procure the Listco to provide the plaintiff with reasonably needed information and to carry on its affairs in the usual ordinary course of business. Clause 9 also requires the defendant to bear its own costs and expenses incurred in this matter. 93.It can be seen that the plaintiff and the defendant each has its own obligations to fulfill. In my view, in answering the subject question, it is futile to say that the defendant’s obligations are more valuable than the plaintiff’s obligations. 94.The defendant’s counsel further submit that if the Subject Sum is refundable, there would be no monetary consideration, “not even a single cent”, provided by the plaintiff for the obligations assumed by the defendant. I find this submission flawed for the following reasons. 95.Firstly, the defendant’s counsel emphasize the term “monetary consideration” but it is trite that consideration needs not be monetary to be sufficient in law. Moreover, it is not that the plaintiff would not incur any money in proceeding with the negotiation. As the defendant’s counsel accept in their written closing submissions, in performance of the MOU, the plaintiff would have incurred substantial costs and expenses in the due diligence as well as the negotiation of the terms in the draft formal agreement. Clause 9 has prescribed that the plaintiff has to bear its own costs and expenses. 96.Secondly, by virtue of the obligations that the plaintiff undertook in Clauses 5 (assuming, for the purpose of this point, such obligation is limited to payment of the Subject Sum as earnest money as contended for the plaintiff’s counsel), 6 and 9[6], sufficient consideration has been moved from the plaintiff. The defendant makes no complaint that those legal binding clauses in the MOU are invalid because of lack of sufficient consideration. The defendant’s counsel belittle the plaintiff’s obligations imposed in Clauses 6 and 9 by saying that these are “mutual” obligations. However, mutual obligations by themselves signifies that there has been sufficient consideration in law moved from both parties. 97.Therefore, it is not correct to say if the Subject Sum is not the consideration for the legally binding obligations of the defendant under the MOU, there would then be no consideration for such obligations. As explained above, there is no question of total failure of consideration, even in the event that the Subject Sum has to be refunded because the negotiation has failed. The argument that there would be no monetary consideration as a result of the refund of the Subject Sum in that event is nothing to the point and barking up the wrong tree. It seems repetitive for me to say there has been sufficient consideration moved from the plaintiff. 98.In Clause 5, the Subject Sum was paid as “定金” and as part payment of the purchase price of the Shares (if the formal agreement was signed). As explained above, similar to “deposit”, there is no definite meaning of “定金” as to whether it is refundable. I find it to be materially analogous to the description of the payment of 240l. by the purchaser to the vendor “as deposit and in part payment of the said purchase money” in an agreement to purchase certain freehold land and a nursery “subject to a proper contract to be prepared” in the English Court of Appeal’s judgment in Chillingworth v Esche [1924] 1 Ch. 97. In both Chillingworth and the present case, an agreement to negotiate a formal agreement, i.e. subject to contract, were involved. And a sum of money was paid which, if a formal agreement (described as “proper contract” in Chillingworth) was entered into, would be used as part payment of the purchase price. 99.There is no dispute that each contract must be interpreted individually, as held by Pollock M.R. in Chillingworth at 107-108:
100.Pollock M.R. then made finding on the basis that there was no provision in the documents which justified the deposit to be non-refundable. At 108 he said as follows:
101.Pollock M.R.’s reasoning is also apposite to the present discussion. There is no provision in the MOU which justifies the defendant in declining to return the Subject Sum. Had the parties, by appropriate words, made provision for the non-refundability, such a provision could have been upheld. But since there is no such provision, there is no basis justifying the defendant to refuse to return the Subject Sum to the plaintiff. 102.The central plank of the defendant’s case is that the Subject Sum serves as the monetary consideration of the defendant’s legally binding obligations in the MOU. It is fraught with the difficulty that there is no provision in the MOU which suggests so. The defendant’s counsel cite a number of cases concerning exclusivity agreement in Clause 7, or what is commonly called “lock-out agreement”. But those cases can only show that a lock-out agreement is legal binding, and a breach of such agreement may be enforced by seeking specific performance and/or damages. In the present case, there is no allegation that Clause 7 has been breached. No light is shed on whether the Subject Sum is refundable. The fact that Clause 7 is a lock-out agreement, and that the defendant has undertaken not to negotiate with other party during the relevant period when it was negotiating with the plaintiff for sale of the Shares, is neither here nor there. It does not support the defendant’s contention that in true construction of the MOU, the Subject Sum is the consideration for the defendant’s obligations. 103.The defendant’s counsel then submit that as a matter of business and common sense, it should not be the case that there was no monetary consideration provided by the plaintiff for the obligations assumed by the defendant. I shall deal with this submission when analysing the factual matrix below. F(2) Contextual Analysis 104.The important features of the commercial background which the defendant’s counsel highlighted are as follows:
The defendant’s counsel contend that given these objective facts, it is more likely that the Subject Sum was intended by both parties to be monetary consideration for the legally binding provisions in the MOU. 105.I disagree. After examining the commercial background and context at the time of the MOU, I find unlikely that the Subject Sum was intended by both parties to be monetary consideration for the Binding Clauses, for the following reasons:
106.In light of the above analysis on the background, resonant with the textual discussion in section F(1) above, I find it to be more likely that the MOU was a negotiated compromise. Its terms represented the farthest upon which the parties could agree. And the Subject Sum was a sign of sincerity, that the plaintiff was serious in moving into negotiation with the defendant. 107.Lastly, for completeness, I should mention that the defendant has pleaded implied term but it does not pursue the argument with any vigour. I do not consider there is any basis supporting the implication of a term into the MOU that the Subject Sum was non-refundable. Further, as mentioned above, in its closing written submissions, the defendant has formally stated that it decides not to pursue its case on the collateral contract. (G) Conclusion and Disposition 108.In conclusion, having considered the MOU and the relevant commercial background, in my judgment, the nature of the Subject Sum was no more than earnest money to demonstrate the plaintiff’s sincerity in entering into the negotiation with the defendant. I find that upon the true construction of the MOU, the defendant is liable to return the Subject Sum to the plaintiff after the negotiation for the formal agreement for sale and purchase of the Shares failed. 109.I make an order that the defendant shall pay the sum of HK$30,000,000 to the plaintiff. 110.I make an order nisi that costs of this action be to the plaintiff with certificate for two Counsel. 111.I thank the parties’ counsel for their helpful assistance.
Mr Ambrose Ho SC and Mr Jonathan Wong instructed by Deacons for the plaintiff Mr Paul Lam SC and Mr Vincent Lung instructed by Ince & Co. for the defendant [1] Clause 13 is a dispute resolution clause. It provides that if dispute arises from this MOU, the parties should reconciliate with a view to resolve it, and that if it cannot be resolved after reconciliation, it may be referred to Hong Kong International Arbitration Centre. It is not known whether the parties had undergone reconciliation. In any event, the parties submitted to the jurisdiction of this Court for resolution of the present dispute instead of arbitration without objection. [2] Clause 11 concerns counterparts of the MOU which does not have bearing in these proceedings. [3] For example, there might be a financial need to cater for the possibility of a take-over offer required to be made to the minority shareholders pursuant to the Takeovers Code. [4] There was a sentence in “MOU Draft 1 revised” stating that the MOU was governed by Hong Kong laws but this sentence was deleted in “MOU Draft 6 (Execution)”. It was not known why it was deleted. But both parties do not dispute Hong Kong laws applies in the interpretation of the MOU. [5] The defendant’s counsel emphasize that once the Subject Sum was paid, its ownership has been passed to the defendant. Therefore, absent any express provision requiring refund, it could not be refunded. [6] I agree with the defendant’s counsel’s submission that from its language, Clause 4 imposes no obligation on the plaintiff that it must conduct the due diligence. However, whilst the plaintiff has the right to choose not to do any due diligence, if the plaintiff is prepared to pay the Subject Sum as earnest money to show sincerity and good faith, and chose to start the negotiation for the formal agreement with best endeavour as contemplated under (albeit non-binding) Clause 2, it would not be realistic for the defendant to argue that due diligence was something which would not happen, and that the plaintiff would not incur substantive costs and expenses in the due diligence exercise. [7] As mentioned in paragraph 40 above, according to the plaintiff’s internal proposal prepared on 5 February 2015, the estimated total acquisition cost was HK$1.2092 billion. |
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