Achieve Goal Holdings Ltd v. Zhong Xin Ore-material Holding Co Ltd

CACV 6 /2019

[2020] HKCA 546

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)

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BETWEEN

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(By original action)

AND BETWEEN

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(By counterclaim)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.On 17 January 2020, we handed down our judgment (“CA Judgment”) allowing the appeal of the 1^st and 2^nd plaintiffs by counterclaim (“the Bai Jun Camp”) and reversing the judgment of Au-Yeung J on 15 December 2018 (“CFI Judgment”) given after an 11-day trial of the counterclaim in this action.

2.The 1^st and 2^nd defendants by counterclaim (“Achieve Goal” and “Angola”, collectively “the Angola Camp”) issued a notice of motion on 9 March 2020 seeking leave to appeal against the CA Judgment to the Court of Final Appeal and raising two questions for determination in the intended appeal.  They also rely on the “or otherwise” limb.

3.We do not propose to summarise the background set out in Section B of the CA Judgment.  By our judgment, we set aside part of the CFI Judgment dismissing the counterclaim of the Bai Jun Camp and declared that Angola was obliged under a joint venture agreement in Chinese (“JV Agreement”) to inject funds in US dollars equivalent to RMB 50 million, to be obtained through financing, into Zhong Xin Ore-Material Holding Co Ltd (“Zhong Xin”); that Bai Jun was entitled to and had validly terminated the JV Agreement on 22 June 2005; and that Angola is not entitled to the 50% shareholding in Zhong Xin now registered in its name and is holding the same on trust for Bai Jun since 22 June 2005.  We ordered Angola to forthwith transfer its 50% shareholding in Zhong Xin to Bai Jun.

4.Four broad issues were raised in the appeal to the Court of Appeal. They were the Construction Issue (construction of Angola’s obligation under clause 1.2 of the JV Agreement), the Termination Issue (whether Angola was in breach of its obligations and whether the JV Agreement was terminated by Bai Jun on 22 June 2005), the Consequence Issue (the consequence of breach of contract and termination, whether Bai Jun is entitled to the return of Angola’s 50% shareholding in Zhong Xin), and the Settlement Issue (whether this action had been settled by a settlement agreement dated 20 May 2009 purportedly made between Bai Jun and Angola).

5.The main focus of the appeal before us was the Construction Issue, discussed in Section D of the CA Judgment (§§16 to 60).  We found in favour of Bai Jun’s construction.  The Consequence Issue in Section F took up §§72 to 84.  We held that there has been a total failure of consideration and Bai Jun is entitled to recover the 50% shareholding in Zhong Xin from Angola.  The Settlement Issue in Section G took up only two paragraphs in §§85 and 86.  We did not deal with the contentions because we took the view that they are of little moment to the resolution of this dispute.

6.The two questions said to be of great general or public importance are set out in Section A of the notice of motion and concern the Consequence Issue and the Settlement Issue respectively.  They read as follows:

“(1) What should be the approach of the court in identifying the basis of the transfer in an unjust enrichment claim on the ground of total failure of basis after the contract was discharged by breach? (“Question A1”)

(2) Where the defence of lack of actual authority to enter into an agreement has not been pleaded by the principal, how the court should approach the question of burden and standard of proof? (“Question A2”)”.

7.The Construction Issue is the subject of challenge under the “or otherwise” ground. It is contended that the CA Judgment was manifestly wrong in finding in favour of Bai Jun’s construction.

Question A1

8.The case of the Angola Camp was that on the true construction of the JV Agreement, Angola was only obliged to arrange for Zhong Xin to obtain finance and not to make a direct capital injection to Zhong Xin.  This construction was upheld by the judge. Angola carried out its obligation by causing Zhong Xin to enter into a loan agreement to borrow RMB 20 million from Achieve Goal.  The judge found that the loan agreement was procured by false representation^[1], it was in very harsh terms^[2] and signed under the most bizarre circumstances^[3]. But as Angola had caused the RMB 20 million to be remitted to Zhong Xin, and Zhong Xin had used the money for injection to the capital of a sino-foreign joint venture called “CLB” to satisfy the condition for obtaining 70% of the shareholding in CLB, any failure of consideration was not total, so Bai Jun is not entitled to the return of Angola’s 50% shareholding in Zhong Xin ^[4].

9.The Court of Appeal held that the true construction of the JV Agreement was that Angola was obliged to inject capital into Zhong Xin, to be obtained through financing, and Angola was in breach of its contractual obligation^[5]. We held that the receipt of the RMB 20 million as a loan to Zhong Xin was an incidental benefit which Bai Jun had not bargained for under the JV Agreement and as it did not constitute performance of Angola’s contractual obligation, there was failure of the basis for the transfer and a total failure of consideration^[6].

10.Mr Victor Dawes, SC ^[7] submitted on behalf of the Bai Jun Camp the correct principle is that the basis of the transfer should be tested by reference to identifying the benefit bargained for under the contract, which should in turn be determined by identifying the essential purpose of the contract, from the perspective of the claimant, as a matter of objective analysis drawing inferences from the nature of the transaction and the language of the contract, paraphrasing the statements of Stadlen J in Giedo Van der Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB) at §§272, 285 to 286 in applying Lord Goff’s test in Stoczia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 at 588D (the test being “not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due”).

11.Mr Dawes contended (as he had done before the judge) that applying the correct principle, the essential purpose of the JV Agreement between Angola and Bai Jun is to obtain, via Zhong Xin, 70% shareholding in CLB for the purpose of carrying on a coal mine project, and this essential purpose was fulfilled when Angola caused RMB 20 million to be remitted to Zhong Xin, which applied the money to obtain the 70% shareholding in CLB.  The Court of Appeal should have held that the receipt of RMB 20 million was part of the essential bargain contracted for by Bai Jun (even though Angola’s performance was in breach of the JV Agreement as held by the Court of Appeal), instead of just an incidental benefit.  There was no total failure of consideration and Angola should be allowed to retain its 50% shareholding in Zhong Xin.

12.But as rightly pointed out by Mr Edward Chan, SC^[8] for the Bai Jun Camp, the general test as to what constitutes a total failure of consideration or failure of basis of transfer was not doubted before the Court of Appeal^[9].  The only dispute before us was the application of the legal principles, which are well established. The test identified and applied in the CA Judgment at §§79 to 81 is the same test propounded in Giedo Van der Garde BV v Force India Formula One Team Ltd at §272, namely, that “the question is to be determined by reference to identifying ‘the benefit bargained for under the contract or purported contract’ and ignoring real benefits received by the payer if they are not the benefit bargained for”.

13.We agree with Mr Chan that Question A1 is essentially an issue as to how to apply the well-established principles of total failure of consideration to the facts of the present case and that the benefit bargained for or the basis of transfer under the JV Agreement is an issue of contractual interpretation.  The JA Agreement is a very special contract designed to cater for the rather unusual opportunity of the privatization of previously state-owned coal mines in the Mainland.

14.We do not think this question raises a legal principle that requires any further clarification. Besides, the question of construction of such an unusual contract with its special features is not of great general or public importance (GDH Limited v Creditor Co Limited, CACV 353/2008, 3 August 2010, §3(4); Hyundai Engineering and Construction Company Limited v Vigour Limited, CACV 128/2004, 20 February 2006, §4).

15.For the above reasons, we decline to exercise our discretion to grant leave to appeal on this question. It is not necessary to consider the further submissions whether the application of established principles to the present case in the way as contended by the Angola Camp is reasonably arguable.

Question A2

16.This question seeks to raise a pleading point, which was not dealt with in the CA Judgment.

17.As submitted by Mr Chan, the legal principles on lack of actual authority are as stated by the judge^[10]. The principal is obliged to plead lack of authority but upon such pleading, the party asserting the existence of authority bears the onus of proving the same.  Question A2 does not raise any contradiction that needs to be reconciled.  The real complaint of Angola is that the issue of lack of actual authority of Wang Li to sign the Settlement Agreement on behalf of Bai Jun has not been pleaded properly in the Points of Reply of the Bai Jun Camp, notwithstanding the extensive pleadings at §§35 and 35A.  But that is a question peculiar to the facts of this case.  Besides, it is among the agreed list of issues whether the Settlement Agreement was enforceable for lack of actual/ostensible authority of Wang Li who purported to enter into the same on behalf of Bai Jun.

18.There is no question of great general or public importance arising. It would not be appropriate to grant leave to appeal for this question.

“Or otherwise” ground

19.The Angola Camp invokes the “or otherwise” ground on the basis that the CA Judgment is manifestly wrong in its rulings on the Construction Issue and the Consequence Issue and in failing to deal with its pleading point concerning the lack of actual authority.  It repeats the arguments made on appeal.

20.Granting leave to appeal on the “or otherwise” ground is an exceptional course and is not a course that the Court of Final Appeal will undertake regarding the proper construction of a contract which is fact sensitive, save in exceptional circumstances (Lo Yuk Sui v Fubon Bank (Hong Kong) Ltd formerly known as International Bank of Asia Ltd, FAMV 422/2019, 12 March 2020, §§13, 15 to 17).  In any event, the usual practice is to leave it to the Appeal Committee to decide whether to grant leave on this basis. 

Conclusion and costs

21.For the above reasons, we refuse to grant leave to appeal to the Court of Final Appeal. We order the Angola Camp to pay the costs of the Bai Jun Camp of this application, which we assess summarily at $335,400.

Mr Edward Chan SC and Mr Clark Wang, instructed by Kwok, Ng & Chan, for the 1^st and 2^nd Plaintiffs by counterclaim (Appellants)

Mr Victor Dawes SC and Mr James Man, instructed by Ince & Co, for the 1^st and 2^nd Defendants by counterclaim (Respondents)