Giant Harvest Ltd v. Nan Hai Corporation Ltd and Another

HCA 2072/2018, HCA 2560/2018 and HCA 2632/2018

[2021] HKCFI 870

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2072 OF 2018, 2560 OF 2018 AND 2632 OF 2018

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BETWEEN

(by original action)

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AND BETWEEN

(by counterclaim)

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(consolidated by the Order of Master Ho dated 5 December 2018)

Before:  Deputy High Court Judge MK Liu in Chambers

Date of Hearing:  29 March 2021

Date of Decision:  29 March 2021

Date of Reasons for Decision:  31 March 2021

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REASONS FOR DECISION

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1.The dispute in these proceedings is between two group of companies concerning the sale and purchase of some cinema business in Mainland China. For ease of reference, I would call Giant Harvest Limited (“Giant Harvest”) and Orange Sky Golden Harvest Entertainment (Holdings) Limited as the OSGH Parties, and True Vision Limited (“True Vision”) and Nan Hai Corporation Limited as the NH Parties.

2.By an Amended Summons filed on 4 September 2020 (“the Amended Summons”), the NH Parties sought leave to adduce expert evidence on:

(1)  Mainland Chinese tax law;

(2)  valuation of cinema box office revenue; and

(3)  Mainland Chinese fire and safety regulations,

in the context of the dispute between the parties.

3.The Amended Summons was heard and dismissed by Master Winnie Tsui on 28 August 2020.  On 11 September 2020, the NH Parties lodged an appeal against the master’s decision.  Subsequently, the NH Parties issued 2 summonses on 22 February 2021 and 8 March 2021 respectively for leave to adduce new evidence in the appeal (“the 2 New Evidence Summonses”).

4.On 29 March 2021, after hearing submissions from the parties, I dismissed the appeal and the 2 New Evidence Summonses.  I also awarded costs to the OSGH Parties, with a certificate for 2 counsel.  These are my reasons for the decision.

The principles

5.An appeal hearing under Order 58 is a de novo hearing.  Subject to the restriction in Order 58 rule 1(5), the hearing before me is an actual rehearing as if the application came before me for the first time[1].

6.As prescribed in Order 58 rule 1(5), no new evidence may be received in the hearing of an appeal except on special grounds.  It is not in dispute that for new evidence to be received in the hearing of an appeal under Order 58, the conditions laid down in Ladd v Marshall[2] have to be satisfied, namely whether the evidence:

(1)  could not have been obtained at the hearing below with reasonable diligence;

(2)  would have a very important effect on the mind of the court; and

(3)  is of a sort which inherently is not improbable.

7.As to the admission of expert evidence, the principles have been set out by the Court of Appeal in Shenzhen Futaihong Precision Industry Co Ltd v BYD Company Limited & Others[3]:

(1)  The subject matter of the opinion must fall within an area in which expert evidence may properly be given.  This calls for consideration of (a) whether the subject matter is such that a person without experience in that area of knowledge would not be able to form a sound judgment on the matter without the assistance of expert evidence; and (b) whether the subject matter of the opinion forms part of a body of knowledge or experience which is sufficiently organized or recognized.

(2)  The witness must be qualified as an expert to give the evidence of the type in question.

(3)  The witness’ evidence must be relevant and necessary to the issues being litigated, in the sense that the evidence must be helpful to the court in resolving any issue in the case justly.  Evidence will not be helpful where the issue to be decided is one on which the court is able to come to a fully informed decision without hearing such evidence.

(4)  The expert evidence must be both relevant and necessary. 

8.In assessing whether leave should be given for introducing expert evidence on a particular issue, it has to be borne in mind that the admission of expert evidence should be really necessary for the resolution of the dispute between the parties.  Adducing irrelevant and unnecessary expert evidence would lead to wastage on time and costs.  As said by Lam J (as he then was) in Chok Yick Interior Design & Engineering Co Ltd v Lau Chi Lun[4]:

“7. I wish to stress that application for expert directions is not a mere formality. It is an integral part of the case management process. As a trial judge, I have seen far too many cases where the lack of proper preparation of expert evidence resulted in unnecessary costs and time spent on evidence which is of no help to the resolution of the dispute. And such wasteful exercise cost the parties a great deal of money, not only in terms of the fees paid to the experts, but also legal costs spent on paying for the lawyers’ reading, understanding of the reports, discussing the matter with the experts and then the time (and costs) of the lawyers explaining and exploring the expert evidence with the judge by way of submissions and the examination and cross-examination of the experts during trial. Very often, it is not only the party responsible for the mismanagement of expert evidence who has to pay such costs, similar costs have to be incurred (at least on an upfront basis) by his opponent.

8.  Such wastage is not consistent with the underlying objectives set out in Order 1A Rule 1.  ……”

Mainland Chinese tax law

9.Pursuant to a sale and purchase agreement dated 25 January 2017 (“the SPA”), Giant Harvest agreed to sell to True Vision all the issued shares in City Entertainment Corporation Ltd, which held substantially all the shares in Orange Sky Golden Harvest Cinemas (China) Company Ltd (“Orange China”), which in turn operated 76 cinemas in Mainland China through its subsidiaries.

10.One of the claims made by Giant Harvest against True Vision is for RMB3.01 million (“the Settlement Sum”) pursuant to Clause (8) of a confirmation letter dated 28 July 2017 signed by the OSGH Parties and the NH Parties (“the Confirmation Letter”).  In essence:

(1)  Orange China through its subsidiary operated the Shenzhen Yabao Cinema (“Shenzhen Yabao”), and was in a pre-existing litigation before the Mainland court with the landlord (“Yabao Litigation”).

(2)  Clause 8 of the Confirmation Letter provides that Giant Harvest would bear all costs (“成本”) and be entitled to all benefits, compensation and damages arising out of the Yabao Litigation.

(3)  The Settlement Sum is comprised of (a) damages payable by the landlord to Orange China of RMB3.5 million (“Yabao Damages”) and (b) a refund of the deposit previously paid by Orange China of RMB0.5 million, less (c) legal fees payable to Orange China’s Mainland lawyers.

(4)  Giant Harvest claims it is entitled to the whole of the Settlement Sum, since “成本” in the form of legal fees has already been accounted for.

(5)  True Vision contends that “成本” would include any additional cost that Orange China would have to shoulder arising from the Settlement Sum, which includes Mainland Chinese corporate tax liability of RMB875,000 in relation to Orange China’s receipt of the Yabao Damages (“Yabao Tax”), and which liability, even if not immediately payable, would remain with Orange China for 5 years after the year of receipt (ie after the financial year ending 2018) under applicable Mainland Chinese corporate tax law. Accordingly, True Vision says that the time for release of the Settlement Sum has not yet arrived and Giant Harvest’s claim is premature.

11.Against the aforesaid background, the NH parties contend that it would be necessary to have expert evidence on the Mainland Chinese tax law in these proceedings.

12.There is no dispute that Mainland Chinese tax law is a subject matter which forms a sufficiently organised body of knowledge for an expert opinion to be given.

13.The NH Parties proposed to call Mr Ron Ma (“Mr Ma”), a Mainland Chinese lawyer specialises in Mainland Chinese taxation law, to be their expert. 

14.Ms Eva Sit SC (leading Ms Esther Mak) for the NH Parties submits that in Clause 8 of the Confirmation Letter, the meaning of “成本” covers all liabilities that Orange China would have to shoulder relating to the Settlement Sum.  Accordingly, the factual question of whether Orange China was still liable for the Yabao Tax at the time of the writ is an issue to be resolved in these proceedings, and the answer to this question turns on Mainland Chinese tax law.

15.In my view, even if the true meaning of “成本” in Clause 8 of the Confirmation Letter is the one contended by the NH Parties, there is no reason to introduce expert evidence on the Mainland Chinese tax law in these proceedings.

(1)  As submitted by Mr Bernard Man SC (leading Mr Anthony Chan) for the OSGH Parties, it is clear that Shenzhen Yabao is not part of the sale and purchase under the SPA.

(a)  Preamble C(b) of the SPA expressly excludes the dispute concerning Shenzhen Yabao from the sale and purchase, meaning Giant Harvest has not sold its interest or liability in the dispute.

(b)  Clause 8 of the Confirmation Letter reconfirms that Shenzhen Yabao is not part of the sale and purchase under the SPA.  It also expressly stipulates that any income and compensation from the Shenzhen Yabao dispute would be enjoyed by Giant Harvest, who would also bear the liability arising from the dispute.

(2)  Pursuant to Clause 8 of the Confirmation Letter, Giant Harvest should be entitled to have the Settlement Sum.  The NH Parties argue that Orange China (which they now own and control after the SPA) may have to pay tax on the Settlement Sum, and hence they are entitled to withhold the Settlement Sum.  I agree with Mr Man that this is an unarguable defence.  The suggestion that the NH Parties are entitled to keep the Settlement Sum pending the outcome of whether Orange China needs to pay any tax is absurd as the NH Parties would effectively get a 5-year interest free loan at the expense of the OSGH Parties when both sides have expressly agreed (as per clause 8 of the Confirmation Letter) that it is Giant Harvest who would get the benefit of the Settlement Sum.  Further, there is also no reason why the NH Parties are entitled to keep the entire Settlement Sum (ie RMB3.01 million) when the potential tax liability is, according to the NH Parties’ case, only RMB875,000.

16.As a matter of fact, about half of the 5-year period as pleaded in the NH Parties’ case has elapsed.  Orange China has not paid any tax as a result of the receipt of the Settlement Sum in 2018.  The Mainland tax authority has also not required Orange China to pay any tax in relation to the Settlement Sum.  In my view, it would not be desirable to complicate these proceedings by introducing expert evidence to cover a contingency (ie Orange China is required to pay a tax in relation to the Settlement Sum) which may not occur.

17.In the event that Orange China is required to pay any tax as a result of the receipt of the Settlement Sum at a point of time in future, the NH Parties may request Giant Harvest to reimburse them pursuant to Clause 8 of the Confirmation Letter when Orange China’s liability to pay the tax arises.  If Giant Harvest refuses to accede to that request, the parties may resolve the difference between them through another set of proceedings.  However, in that litigation, it would not be necessary to have any expert evidence on the Mainland Chinese tax law, for Orange China’s liability to pay the Mainland tax would be an actuality in that scenario.  At that time, the crux of the matter would only be the true meaning of Clause 8 of the Confirmation Letter.

18.For all these reasons, I am of the view that there should not be introduction of expert evidence on the Mainland tax law as suggested by the NH Parties here and now.

Valuation of cinema box office revenue and Mainland Chinese fire and safety regulations

19.True Vision has two counterclaims against the OSGH Parties.  For the present purposes, only the following counterclaim is relevant.

20.True Vision counterclaims for contractual compensation of RMB380 million pursuant to Schedule 6 to the SPA. True Vision’s case is as follows:

(1)  One of the most valuable cinemas operated by the Orange China group was万象城影城 in Shenzhen (“MIXC Cinema”), with a commercial value of no less than RMB380 million and made up approximately 10% of the total annual box office of OSGH’s Mainland China cinema businesses.

(2)  The lease of MIXC Cinema (“the MIXC Lease”) was due to expire on 27 September 2018 (“the Expiry Date”), after the anticipated execution and completion of the SPA.

(3)  True Vision says that given the commercial importance of the MIXC Cinema, the parties negotiated and agreed on a mechanism, whereby:

(a)  Giant Harvest had an obligation to procure an extension of the MIXC Lease; failing which

(b)  Giant Harvest would be liable to compensate True Vision for the resultant diminution in value of Orange China, which liability could be

(i)  discharged in kind, by Giant Harvest procuring new leases for substitute cinemas (primarily from a list of 5 listed in Schedule 5 to the SPA, “Schedule 5 Cinemas”) which value would be commensurate with the value of the MIXC Cinema; or

(ii)  discharged in cash.

(4)  Scenario (3)(a) above is provided for in Clause 8.2 of the SPA.

(5)  Scenario (3)(b)(i) above is provided for in Clause 8.3 to 8.5 of the SPA and Schedule 5 thereto, namely: 

(a)  Giant Harvest could choose to procure leases for some or all of the Schedule 5 Cinemas (which Orange China hitherto did not have leases) to be entered into, as long as the combined annual box office and/or commercial value of the same exceed that of the MIXC Cinema.

(b)  Further, for any of such new lease to be entered into (“Substitute Cinema Contract”), they must be either on prescribed terms, or the terms had to be agreed to by True Vision.

(c)  Still further, if the combined commercial value of the Schedule 5 Cinemas secured by Giant Harvest in the aforesaid manner is less than that of the MIXC Cinema, Giant Harvest would have to pay compensation to True Vision, in the amount of the difference between the two.

(6)  Scenario (3)(b)(ii) above is provided for in §§2.3-2.4 in Schedule 6 to the SPA, which stipulate:

(a)  payment by Giant Harvest to True Vision of the Compensation Amount (RMB380 million, where no Substitute Cinema Contract is entered into);

(b)  payment by Giant Harvest to True Vision of compensation in the sum of the difference (where the commercial value of the Schedule 5 Cinemas secured is less than that of the MIXC Cinema); or

(c)  payment by True Vision to Giant Harvest of incentive payment (where the commercial value of the Schedule 5 Cinemas secured exceed that of the MIXC Cinema), based on a percentage to such difference in value.

21.True Vision contends that that having regard to the aforesaid context, the SPA, properly construed, contained the terms that the Schedule 5 Cinemas secured could only be treated as compensation in kind such that their stipulated commercial value could be brought into account and deducted from the Compensation Amount if the Schedule 5 Cinemas in question are:

(1)  objectively capable of achieving the stipulated annual box office revenue for the same specified in Schedule 5; and

(2)  objectively capable of meeting all applicable Mainland Chinese laws and regulations for the purpose of operating as a cinema.

22.Giant Harvest has procured Substitute Cinema Contracts to be entered into with respect to 3 of the 5 Schedule 5 Cinemas, ie Beijing Great Wall Cinema, Shanghai Xinhui Cinema and Shenzhen Xinhui Cinema.

23.True Vision says that none of these contracts satisfied the contractual requirements to qualify as Substitute Cinema Contracts.  However, for the present purposes, only the matters concerning Shanghai Xinhui Cinema and Shenzhen Xinhui Cinema would be relevant.

24.True Vision argues that:

(1)  For the Shanghai Xinghui Cinema, its substandard structural specifications and location rendered it objectively incapable of attaining the stipulated box office revenue.

(2)  For the Shenzhen Xinghui Cinema:

(a)  its (substandard) structural specifications and location rendered it objectively incapable of attaining the stipulated box office revenue; and

(b)  it did not and was not objectively capable of meeting all applicable Mainland Chinese laws and regulations for the purpose of operating as a cinema, including Mainland Chinese fire and safety regulations, since its structural configuration rendered it incapable of complying with the Mainland Chinese Code for Fire Protection of Buildings. 

25.True Vision’s case is that it was not aware of the aforesaid problems when it entered into the SPA.

26.With respect, notwithstanding the eloquent submissions of Ms Sit, I am not persuaded that the NH Parties have made out a case justifying the introduction of the expert evidence as proposed by them.

27.As submitted by Mr Man, on 28 July 2017, more than 6 months after the execution of the SPA, the OSGH Parties and the Nanhai Parties signed the Confirmation Letter.  Clause 15 of the Confirmation Letter provides that the parties agreed that if the signed leases of Shanghai Xinghui Cinema and Shenzhen Xinghui Cinema complied with the terms set out in Schedule 4 thereto, the cinemas would be treated as successful Substitute Cinemas for the purpose of clauses 8.3 and 8.5 of the SPA.  The question would therefore simply be whether the signed leases of the 2 cinemas complied with the terms stated in Schedule 4 to the Confirmation Letter.  The court therefore has no need to decide whether Shanghai Xinghui Cinema and Shenzhen Xinghui Cinema should be regarded as a successful Substitute Cinema on a proper construction of the SPA or by implication, for the OSGH Parties and the Nanhai Parties have already separately agreed that they would deem or treat the 2 cinemas as successful Substitute Cinemas if their leases complied with the terms in Schedule 4 to the Confirmation Letter.

28.As per Schedule 5 to the SPA and Schedule 4 to the Confirmation Letter, the commercial value (商業價值) of each Substitute Cinema should be the agreed annual box office revenue (約定年票房) x 4.75.  The term “約定年票房” is not defined in the SPA and in the Confirmation Letter.  As to the true meaning of the term “約定年票房” in the context of the SPA and the Confirmation Letter, counsel have different views.

(1)  Mr Man submits that in respect of each Substitute Cinema in Schedule 5 to the SPA and in Schedule 4 to the Confirmation Letter, “約定年票房”is the figure of the annual box office revenue of that cinema as agreed by the parties.  Thus, it would not be necessary to have any mechanism to verify the “約定年票房” of any cinema in the said schedules, for the “約定年票房” of a particular cinema is a figure assigned to that cinema by the agreement of the parties.

(2)  Ms Sit submits that “約定年票房” of a particular cinema is the annual box office revenue which the cinema would be objectively capable to achieve in a particular year.  The OSGH Parties have to show that a particular substitute cinema can objectively achieve the relevant “約定年票房”, and only then the substitute cinema can be treated as an acceptable substitute.

29.Since I am dealing with interlocutory matters, I refrain from expressing a final view on the true meaning of the term “約定年票房” in the context of the SPA and the Confirmation Letter.  I would only say that there is force in Mr Man’s submissions.  A problem in Ms Sit’s submissions is that if Ms Sit’s construction is correct, “約定年票房” must be referring to a specific year.  However, which year should be the specific year is unknown or unclear.

30.For the sake of discussion, even if Giant Harvest has to show that the Shanghai Xinghui Cinema and the Shenzhen Xinghui Cinema meet the “約定年票房”, I am of the view that the issue should not be resolved by the expert evidence proposed by the NH Parties. 

31.It is not in dispute that the Shanghai Xinghui Cinema has been in operation at all times.  As to whether Shanghai Xinghui Cinema has achieved the agreed annual box office revenue (約定年票房) in a particular year, this is a question of fact which can be answered by reference to simple arithmetic and evidence readily available.  A person without expert assistance could tell that based on the agreed annual box office revenue (約定年票房), what should be the required daily box office revenue.  By counting the number of the tickets sold and with prices of the tickets in hands, it would be easy to calculate the daily box office revenue and the annual box office revenue.  The task is a simple one.

32.I have been told that the Shenzhen Xinghui Cinema has not been in operation for some time.  In order to estimate the annual box office revenue of the Shenzhen Xinghui Cinema, I am of the view that one would need to have the annual box office revenues of some other similar cinemas as comparables.  Based upon these comparables, some adjustments would be made in order to arrive at an estimated annual box office revenue of the Shenzhen Xinghui Cinema.  I appreciate that expert evidence would be necessary in this exercise.  However, the expert evidence now proposed by the NH Parties is not of this kind.

33.The NH parties proposed to have Mr Lau Chun Kong (“Mr Lau”) as their expert to give expert evidence on cinema box office revenue.  Mr Lau is a professional surveyor and a managing director at Colliers International, with more than 30 years of property experience in valuation, real estate consultancy and investment sales market in Hong Kong, Mainland China and Asia.  With respect, I really do not see why it would be necessary to conduct any property valuation in this case.

34.Ms Sit submits that the market rental values of the Shanghai Xinghui Cinema and the Shenzhen Xinghui Cinema can be found out through the investigations to be conducted by Mr Lau, and the market rental values would reflect the annual box office revenues.  With respect, I am unable to agree.  In my view, the rentals being paid by a cinema and the box office revenue of that cinema are two different matters.  A cinema paying expensive rentals may not be able to have a satisfactory box office revenue, if its management is unsatisfactory.  On the contrary, a cinema not in a prime location and paying modest rentals may have very good business due to its successful management.  The rentals being paid by a cinema does not necessarily reflect its box office revenue.

35.If there is any necessity to find out the “約定年票房” of the Shanghai Xinghui Cinema and Shenzhen Xinghui Cinema, the matters should be approached in the way as set out in [31] and [32] above.  Further, both the Shanghai Xinghui Cinema and Shenzhen Xinghui Cinema are listed as agreed substitute cinemas in Schedule 5 to the SPA and Schedule 4 to the Confirmation Letter.  In my judgment, it would not be necessary to investigate whether the Shenzhen Xinghui Cinema has complied with the Mainland Chinese fire and safety regulations for the purpose of these proceedings in any event. 

The 2 New Evidence Summonses

36.By the 2 New Evidence Summonses, the NH Parties proposed to introduce the 2^nd and the 3^rd affirmations of Tang Ying Kit (“Mr Tang”) in the hearing of the appeal.

(1)  The 2^nd affirmation of Mr Tang gives further details of Mr Lau’s credentials and exhibits his supporting statement.

(2)  The 3^rd affirmation of Mr Tang proposes to have a new expert to give evidence on Mainland Chinese fire and safety regulations, since the original expert became unavailable due to some development after the hearing before the master on 28 August 2020.

37.For the reasons set out in the above, none of the matters deposed in these affirmations would have a material impact on the outcome of the NH Parties’ application as per the Amended Summons.  Further, in relation to the 2^nd affirmation of Mr Tang, I am not satisfied that the contents thereof are something which would not have been obtained before the hearing on 28 August 2020 with reasonable diligence.  In my judgment, the Ladd v Marshall threshold is not met.  I therefore dismissed the 2 New Evidence Summonses.

Costs

38.Costs should follow the event.  Mr Man sought a certificate for 2 counsel.  Ms Sit did not dispute these.  I therefore awarded costs to the OSGH Parties, with a certificate for 2 counsel.

Disposition

39.For the reasons above, I made the order as set out in [4] above is made.

40.Lastly, it remains for me to thank all counsel for the helpful assistance rendered to the court.

Mr Bernard Man SC leading Mr Anthony Chan, instructed by Kennedys, for the plaintiff (by original action) and the 1^st and 2^nd defendants (by counterclaim)

Ms Eva Sit SC leading Ms Esther Mak, instructed by Linklaters, for the 1^st and 2^nd defendants (by original action) and the plaintiff (by counterclaim)