Bill Chao Keh Lung v. Don Xia
Read the full judgment text of CACV 425/2002 on BabelCite. This Court of Appeal judgment was delivered on 13 June 2003.
1. The defendant was the founder of a private company called Teleway Communications Limited ("Teleway"). He was a director and majority shareholder of Teleway until June 1999.
Cites 3 cases
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CACV 425/2002 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 425 OF 2002 (ON APPEAL FROM HCA 9289 OF 2000) _____________________
_____________________ CACV 427/2002 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 427 OF 2002 (ON APPEAL FROM HCA 9289 OF 2000) _____________________
_____________________ Coram: Hon Cheung JA, Hon Ma JA and Hon Waung J in Court Date of Hearing: 30 April 2003 Date of Judgment: 13 June 2003 __________________ J U D G M E N T __________________ Hon Cheung JA : Teleway 1.The defendant was the founder of a private company called Teleway Communications Limited ("Teleway"). He was a director and majority shareholder of Teleway until June 1999. 2.In 1996, Teleway and a mainland company formed a joint venture through a company called Unicom Media Limited ("Unicom"). 3.In 1998, the plaintiff was appointed as the Chief Financial Officer and Vice President of Unicom. Under his terms of employment, the plaintiff was allotted some Teleway shares. 4.Disputes arose between the defendant and Mr. Wellington Yu ("Mr. Yu") who was another board member of Teleway. In order to maintain his control of Teleway, the defendant secured the support of the plaintiff. In return, the defendant agreed to transfer additional shares in Teleway to the plaintiff. The Agreement 5.In August 1998, the plaintiff and the defendant signed an agreement in which the defendant agreed to transfer 30,000 of his shares in Teleway to the plaintiff. This agreement was subsequently replaced by an agreement entitled Teleway Common Shares Transfer Agreement ("the Agreement") signed by the parties in October 1998. 6.By the Agreement, the parties agreed that the defendant would sell and the plaintiff would buy 30,000 Teleway common shares ("the shares") at the fixed price of US$10 per share. The payment schedule was as follows :
7.The Agreement was signed by the defendant on 11 October 1998 and by the plaintiff on 12 October 1998. 8.Clause 3 of the Agreement further provided that the shares would be transferred to the plaintiff "once all the payments being made, but all economic rights of the 30,000 shares will be with (the plaintiff) upon the first closing". 9.It is common ground between the parties that the "first closing" and the "second closing" were 5 November 1998 and 16 June 1999 respectively. Accordingly, the fourth payment was due on or before 6 July 1999 and the fifth payment was due on or before 13 December 1999. 10.According to the plaintiff, the term "economic rights" in the Agreement included the immediate right to the dividends of the shares. 11.The Agreement specified that the first two payments had already been paid by the plaintiff. The plaintiff had also paid the third instalment of US$30,000. Hence the plaintiff had paid a total of US$60,000. The disposal of Teleway shares 12.Teleway and the mainland company each held shares in Unicom. 13.Mr. Yu and his faction on the board in Teleway had started an action in the High Court against the defendant and Teleway seeking, among other things, injunctions which would have prevented the transfer of Teleway shares. The action was eventually settled in February 1999. However, there were still some outstanding matters that needed to be resolved under this settlement. 14.In August 1998, a US company called R. H. Donnelly Inc. ("Donnelly") had agreed to invest in Unicom. In order to ensure that Donnelly would complete the investment, the outstanding issues between the defendant and Mr. Yu had to be resolved first. To that end, the defendant agreed to give up his entire shareholding in Teleway to Mr. Yu. 15.On 3 June 1999, the defendant and Mr. Wellington Yu agreed that the defendant would transfer his shares in Teleway and received about 41.7% of the shares owned by Teleway in Unicom. These shares were to be held by the defendant through a company called Optimum Pacific Limited （"Optimum"）. Unicom was subsequently renamed ChinaBig.com Limited. The actual transfer of the defendant's shares in Teleway took place on 16 June 1999. 16.The disposal by the defendant of his shares represented the disposal of his entire holding in Teleway. The plaintiff's claim 17.The plaintiff alleged that the defendant by disposing of his entire shareholding in Teleway had repudiated the Agreement because he would no longer be able to sell the 30,000 shares to him. He accepted the repudiation and the Agreement was brought to an end. He claimed damages against the defendant. 18.The defendant denied that he had repudiated the Agreement or the plaintiff had accepted the repudiation. The judgment 19.Deputy High Court Judge Carlson found for the plaintiff and gave judgment to the plaintiff in the sum of US$555,750 which was the market price of the shares at the contractual time for delivery less the contract price. The appeals 20.The defendant now appeals against the judgment. The plaintiff also appeals on the ground that the judge had not awarded him the dividends of the shares which had been distributed but retained by the defendant. The defendant's appeal 21.On the defendant's appeal, the three issues are :
Liability 22.It is apparent from the case that the issue of liability must be determined first. Unless liability is resolved in the plaintiff's favour, the question of damages will not arise. On this basis, we invited counsel for the parties to address us on the question of liability first. The basis of the liability 23.The renunciation or repudiation relied upon by the plaintiff was alleged to have taken place in June 1999 when the defendant disposed of the whole of his shareholdings in Teleway. The plaintiff also relied in the pleadings on the impossibility of performance by the defendant of the Agreement, although Mr. Carolan, counsel for the plaintiff, informed the Court that he did not or did not need to rely on this. 24.The judge found that the defendant, by disposing of his entire shareholding in Teleway, had renounced the Agreement. He further found that the plaintiff accepted this alleged renunciation or repudiation by not paying the fourth instalment of HK$150,000 which was due on 6 July 1999. 25.Although the plaintiff had also in the Amended Statement of Claim relied on other matters as the basis of his acceptance of the renunciation, he did not seek to argue these other points on appeal, there being no respondent's notice to this effect. The principles 26.It is sufficient for the purpose of this appeal to state the following principles on renunciation, impossibility of performance and anticipatory breach.
Anticipatory breach 27.Under the Agreement, the defendant would only be required to transfer the shares to the plaintiff in mid December 1999 which was six months away from the alleged repudiation. The alleged breach by the defendant was therefore in the nature of an anticipatory breach. 28.In order to succeed on liability, the plaintiff must establish that the disposal by the defendant of his Teleway shares would cause a reasonable man to conclude that he no longer intended to be bound by the Agreement. Reason for the disposal 29.The judge found that when the defendant disposed of his entire Teleway shareholding in June 1999, he did not do so in order to sabotage or undermine the Agreement. He did this in order to ensure that Donnelly would complete the purchase of Unicom. There is no cross-appeal on this point. The finding 30.The judge found that the defendant had renounced or repudiated the Agreement because after the agreement with Mr. Yu on 3 June 1999 he put it beyond his ability to perform the Agreement. He no longer had Teleway shares, he only had Unicom shares. He could not provide what he had contracted to sell. As Mr. Yu and his supporters wished to remove the defendant from Teleway, they would not be interested to sell their shares to him. The judge held that the defendant had not demonstrated or called evidence that he would be able to buy the shares from these shareholders. It was in the region of speculation. Following the fallout with Mr. Yu, the other shareholders were unlikely to sell their shares to the defendant. Further there would be additional problems regarding the valuation of the Teleway shares and whether the defendant would be able to afford to purchase the Teleway shares. The judge referred to the e-mail of 23 November 1999 of the defendant in which he said that he did not have a lot of cash at hand or other assets. Renunciation and impossibility of performance 31.It would appear from the above that although the judge said the defendant had renounced the Agreement, this conclusion was not so much based on the reasonable man test but rather on impossibility of performance. This by itself would not necessarily affect the finding, because the matters relied upon by the judge may equally constitute the evidence upon which a reasonable man may form a view as to whether the defendant had intended no longer to be bound by the Agreement or not. 32.However, even on this basis, I do not consider that either the reasonable man test or impossibility of performance has been satisfied in this case. 33.In order to deal with this question it is important to bear in mind the period of time in which the defendant had disposed of his shares on 3 June 1999 and the plaintiff's acceptance of the repudiation on 6 July 1999 when the Agreement was terminated. This is a very short period of time. Within this short period the focus can only have been on the event of 3 June 1999 when the defendant was said to have renounced the Agreement. By then the defendant still had six months to complete the Agreement. When he disposed of the shares, he did not tell the plaintiff that he would not perform the Agreement in December 1999. 34.What the defendant had contracted to sell, however, was not a specific lot of 30,000 Teleway shares. They were simply 30,000 Teleway shares. According to the annual return of Teleway for the period ending 25 July 1999, Teleway had 25 shareholders excluding the defendant. The plaintiff was already one of them. The total number of shares of Teleway was 707,047. The 30,000 shares under the Agreement therefore constituted less than 5% of the share structure of the Teleway. These facts clearly reveal that it was not a foregone conclusion that on 3 June 1999 it would be impossible for the defendant to perform the Agreement (which it will be recalled was only required to be completed on 13 December 1999). It was possible for him to get the shares from the other shareholders to complete the sale bearing in mind that the quantity was only 5% of the total share structure of Teleway. 35.The burden was on the plaintiff to show repudiation or impossibility of performance. Apart from the disposal by the defendant of his shares in June 1999, all that the plaintiff could do to prove his case was to produce a letter of inquiry dated 31 May 2001 (by the solicitors) to Lim Seng Gee who was one of the shareholders of Teleway and who only held 23,586 shares, as to whether he wished to sell the shares to the defendant on or before 13 December 1999. The reply was in the negative. In my view, this did not show any indication that the defendant would not be able to obtain the shares from the other shareholders. 36.As to whether the defendant could ever acquire the shares to complete the Agreement, it is important to bear in mind the evidence of the defendant was that in the subsequent negotiations with the plaintiff, the plaintiff had not indicated that he still wanted the Teleway shares. Rather, the plaintiff seemed more keen to have an interest in Unicom. In these communications, the defendant said that if the plaintiff had insisted on the Teleway shares, it was possible that he could buy them from the other shareholders. This stance was never challenged by the plaintiff. 37.As to the financial position of the defendant, it is clear that his statement in one e-mail that he had no cash must be considered in the context of what he had said. A fair reading of the e-mail is that he was simply saying that he was not as rich as the plaintiff. This is a long way away from saying that he would be unable to buy the shares to fulfill the Agreement. 38.In my view the plaintiff had failed to discharge the burden that, by disposing of his Teleway shares in June 1999, the defendant had, as a matter of fact, rendered the Agreement to be impossible to perform. 39.Likewise on these facts a reasonable man could not possibly have said that on 3 June 1999 the defendant did not intend or was not able to perform his promises. The plaintiff had failed to show that the Agreement was repudiated by the defendant. Acceptance 40.Further even if it could be said that the defendant had repudiated the Agreement, I do not agree that the plaintiff had accepted the repudiation by not paying the fourth instalment. The principles 41.Lord Steyn in Vitol S.A. v. Norelf Ltd. [1996] A.C. 800 stated the following principles on acceptance :
42.In Vitol S.A., Lord Steyn was concerned with the question of whether a failure to perform a contractual obligation by the aggrieved party could, as a matter of law, be ever capable of constituting an unequivocal acceptance by him of the repudiating party's repudiatory breach of the contract. He stated that, as a matter of law, it could be the case. He stated that :
The special circumstances obviously had to be determined by the particular contractual relationship and the particular facts of the case. 43.The principles in Vitol S.A. were accepted by this Court in Kar Ho Development Co. Ltd. v Axis Investment Ltd. [2001] 1 HKC 86 where it was held that the conduct relied on as constituting the acceptance of the repudiation must not merely unequivocally convey to the repudiating party that the aggrieved party is treating the contract as at an end, but must also unequivocally convey to the repudiating party that the aggrieved party is treating the contract as at an end because of the repudiating party's repudiatory breach of the contract. 44.This Court held in that case, which was a striking out application, that the purchaser's failure to pay for the purchase price of the contract when called upon do so could not be regarded as an unequivocal acceptance of the seller's repudiatory breach to complete the building on time for a number of reasons : The purchaser might not have been able to raise the balance of the purchase price. Or it might have wanted to pull out of the purchase because of a decline in the property market, and the flat was no longer worth what it had agreed to pay for it. Without being told what the reason for the failure to complete was, there was no way that the vendor would inevitably have realized that the purchaser was pulling out of the purchase because of the vendor's failure to complete the buildings. Non-payment equivocal 45.Under the Agreement the plaintiff had to pay the fourth instalment on 6 July 1999. He did not do so. The only basis in which acceptance was said to have occurred here was by the non-payment of the fourth instalment. This again puts the case into a very narrow focus. Although the pleading had relied on other matters as evidence of acceptance (which were denied by the defendant) as I have said there was no respondent's notice by the plaintiff. This is not as surprising as one may initially think because the plaintiff has to show that the repudiation was accepted on 6 July 1999 in order to explain his subsequent conduct after the alleged repudiation by the defendant. 46.When the plaintiff did not pay the fourth instalment, he did not inform the defendant that the reason was due to the defendant's repudiation. At that stage the defendant had not informed him that he would no longer perform the Agreement. The non-payment was at best an equivocal act. 47.Further, there are two other matters which further strengthened the argument that the non-payment could not be an unequivocal act of acceptance. 48.First, there were earlier discussions between the parties for the plaintiff to apply the dividends paid in respect of the 51,000 shares (i.e. the 30,000 shares under the Agreement and his own 21,000 shares) as partial payment for the fourth instalment. Hence the non-payment on 6 July 1999 could well be an attempt by the plaintiff to implement this discussion. In other words he had chosen to continue with the Agreement but only set off the payment with the dividends. 49.Second, the evidence of the plaintiff was that he had not received the letter of 14 June 1999 from the defendant's solicitors informing him of the disposal of the Teleway shares. Although he had heard of this matter in June 1999, it was only on 23 August 1999 that he received confirmation from Mr. Yu of the disposal by the defendant. The plaintiff was unable to contact the defendant in July and August 1999. The plaintiff agreed that he did not make the payment despite not having clarified the matter with the plaintiff. At that stage the plaintiff could not possibly have known what the defendant intended to do with the Agreement. He further stated that he was then still considering using the dividends as partial payment. This being the state of the evidence, it can hardly be said that the non-payment on 6 July 1999 was an unequivocal acceptance of the defendant's repudiation. Subsequent events 50.Rather ingeniously, the plaintiff seeks to rely on events subsequent to July 1999 to show that the non-payment was an unequivocal acceptance. This may be an attempt to rely on what Lord Steyn said about a failure to perform may sometimes be given meaning by special circumstances. If I understand the plaintiff's case, the argument runs thus : the subsequent discussions were settlement negotiations rather than discussions on the basis that the Agreement was still alive. They were explicable on the basis that the Agreement had already been terminated. Thus this showed that the non-payment was an acceptance of the repudiation. 51.In my view it is incorrect. First, the act relied upon as acceptance must be unequivocal at the time it was performed. An equivocal act cannot be turned into unequivocal act by subsequent events. Lord Steyn's reference to special circumstances must be those already present at the time of the non-performance of contract by the aggrieved party so that the repudiating party would understand it as an acceptance of his repudiation. 52.Second, the subsequent discussions contained in the contemporaneous correspondence by e-mail do not assist the plaintiff at all. They do not reveal any indication on the plaintiff's part that he had ever regarded the defendant had repudiated the Agreement or that he had accepted the repudiation. 53.On the contrary, any objective reading of this correspondence must show that the plaintiff had chosen to keep the Agreement alive with the hope of getting a share in the Unicom venture. In fact the judge had commented that the correspondence created "a sense of unreality" about what was said by the plaintiff of his acceptance of the repudiation in July 1999. This unreality is further highlighted by the letter dated 23 September 2000 from the plaintiff's solicitors to the defendant stating, among other things, that,
When the plaintiff commenced the action in September 2000, this letter was pleaded as the basis of the acceptance. Although the plaintiff no longer relied on this letter as the acceptance, this really casts doubt on his case that he had accepted the repudiation in July 1999. The correspondence 54.In the e-mail of 1 November 1999, the defendant referred to the discussion on how to resolve the Agreement. This e-mail assumed that it was still alive. He stated that :
55.On 23 November 1999, the defendant further wrote :
Again, the assumption was that the Agreement was still alive. 56.The written response of the plaintiff came on 15 December 1999. There was not the slightest indication that the Agreement had already come to an end. He stated that :
57.The matter then seemed to be left at bay until August 2000, when the plaintiff wrote on 12 August 2000 :
It is clear from this that as far as the plaintiff was concerned, one of the options open to the parties was the performance of the Agreement. 58.The defendant's response on 15 August 2000 was :
59.There were further correspondence and then on 22 August 2000 the defendant wrote :
60.The plaintiff's response on 25 August 2000 was :
I accept that the plaintiff was here saying that as the defendant no longer had the shares, the Agreement could not be continued, but the question still remains : did the plaintiff accept the repudiation in July 1999? The tone and content of the letter as well as the other correspondence I have referred to, point to the contrary. The matter then turned sour and the plaintiff's solicitors issued the letter dated 23 September 2000. Intention of the plaintiff 61.The correspondence plainly shows that it was not until 25 August 2000 that the plaintiff began to hint that the Agreement was at an end. His position was only unequivocally stated by his solicitors on 23 September 2000 that he had accepted the defendant's repudiation and the Agreement had come to an end. This, however, was not the way the plaintiff ran his case. His primary position was that the Agreement had been terminated in July 1999. Even if the plaintiff could show he had tried to terminate the Agreement in August or September 2000, it was already too late. By that time, he himself was in breach by failing to make payment of the fourth and fifth instalments. 62.The plaintiff also alleged that in October and November 1999 when the defendant was still asking the plaintiff to pay the instalments in order to complete the Agreement, he had verbally told the defendant that he could not pay him because the defendant did not have the Teleway shares. 63.The judge did not make a finding on this conversation. In any event even if the plaintiff had said this, this is still a long way away from his own case that he had in June 1999 treated the defendant's disposal of the shares as repudiation and had in July 1999 accepted the repudiation. At the very least this is inconsistent with the stand of the plaintiff as revealed in the solicitors' letter of 23 September 2000. There is no indication that the solicitors had misunderstood the plaintiff's position. 64.The judge held that the plaintiff was adopting a tactical approach of trying to obtain a settlement from the defendant for his breach of the Agreement. 65.That may well be the intention of the plaintiff but the ultimate test is whether a reasonable man in the position of the repudiating party would consider the plaintiff's failure to pay as an acceptance of the repudiation. The answer must be no. Defendant's appeal allowed 66.Accordingly the plaintiff fails in his claim against the defendant both on the ground of repudiation and acceptance. This being the case it is not necessary to consider the question of damages. Further as the defendant has only adopted a defensive position and did not raise any counterclaim based on any breach on the plaintiff's part, it is no need to consider any further matter regarding the Agreement. The appeal is allowed and the judgment is set aside. Plaintiff's cross appeal dismissed 67.The plaintiff claims that he is entitled to the dividend on a pro-rata proportion of the 30,000 shares which he had already paid. 68.He claims that he is entitled to this dividend as a separate and distinct claim from his claim for damages against the defendant for repudiation of the Agreement. 69.I will refrain from deciding on whether the plaintiff is entitled to dividends despite the fact that he had not paid for the balance of the purchase price. The judge had not made a finding on the matter. Mr. Warren Chan, S.C., counsel for the defendant, had not addressed us on this issue. The difficulty now faced by the plaintiff is that while the claim for dividend was pleaded as part of his claim for damages by reason of the defendant's repudiation, he had never pleaded it as a separate and distinct claim independent from his claim based on repudiation. Further the judge was never asked to consider this claim on that basis. That being the position, I will decline to consider it now. 70.The plaintiff's cross appeal is accordingly dismissed. Costs 71.There will be an order nisi that the defendant is entitled to the costs of the appeal (both in respect of his appeal and the plaintiff's cross appeal) and the costs below. Hon Ma JA : 72.I agree with the Order proposed by Cheung JA. 73.I also agree with the reasons contained in his judgment for allowing the defendant's appeal. All I would add in relation to the aspect of acceptance of breach is that the facts of the present case starkly demonstrate the application of the principle that where a repudiatory breach takes place, in order to terminate the contract, the so-called innocent party must clearly and unequivocally accept the repudiation. If he does not do so, he will run the risk of being in breach himself were he not to perform his side of the bargain and thereby allow the original wrongdoer to 'turn the tables' on him : see Frost v. Knight (1872) LR 7 Exch. 111; Avery v. Bowden (1855) 5 E&B 714, (1856) 6 E&B 953. The basis for this conclusion (often ignored in the business world) is that unless a contract is terminated, it remains in existence for the benefit of the wrongdoer as well as the innocent party. 74.I would also take the opportunity again to reiterate the point that there is no halfway situation whereby the innocent party is able to keep the contract alive and yet not perform his obligations arising thereunder. Any misconceptions in this regard arising from the case of Braithwaite v. Foreign Hardwood Co. Ltd. [1905] 2 KB 543 (and the numerous cases that followed this decision) have now been swept away by the decision of the House of Lords in Fercometal SARL v. Mediterranean Shipping Co. SA [1988] AC 788. 75.As for the plaintiff's cross appeal, I would dismiss it for the following additional reason. Mr. Carolan relies on clause 3 of the Agreement (see paragraph 8 above) to argue that in any event, even if his client did not succeed on establishing liability on the defendant's part, the plaintiff should be entitled to dividends anyway. He submits, quite simply, that clause 3 says that all economic rights in the shares would pass to the plaintiff upon the "first closing" and this was therefore irrespective of whether or not the Agreement was ultimately completed. I am unable to agree with this. In my view, clause 3, properly construed, was a conditional clause whereby the passing of economic rights to the plaintiff was made on the assumption that completion of the whole Agreement would take place. It was a device which was intended to allow the plaintiff to make use of the shares at a relatively early stage before completion, but completion there had to be. Otherwise, even if the sale of the shares did not go through (and particularly as in the present case, where the defendant was not at fault), the plaintiff would still have the benefit of the economic rights to the shares. This would be quite absurd. Hon Waung J : 76.I agree with the judgment of Cheung JA and the judgment of Ma JA.
Representation: Mr. Paul Carolan instructed by M/S Robertsons for the plaintiff Mr. Warren Chan S.C. and Mr. Liu Kin Man instructed by M/S F. Zimmern & Co. for the defendant |
Cases cited in this judgment
Further hearings and rulings under CACV 425/2002