Bonds Group Co Ltd v. Kwan Daniel and Others
Read the full judgment text of HCA 1861/2017 on BabelCite. This High Court CFI judgment was delivered on 12 December 2022.
1. In this action, the plaintiff claims against the 1 st to 3 rd defendants for damages for breach of contract in respect of a “公司股權轉讓意向書” [Letter of Intent for Company Share Transfer] entered into between the defendants as sellers (described as “甲方” [Party A]) and “寶聲集團或旗下之成員公司” [Bonds group or its member companies] as purchasers (described as “乙方” [Party B]) [1] in April and May 2017 (the “ LOI ”) of 70% of the ordinary share capital of a company known as Discreet Limited (the “ Company ”) and
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HCA 1861/2017 [2022] HKCFI 3674 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1861 OF 2017 __________________________
__________________________ Before: Deputy High Court Judge Douglas Lam SC in Court. Dates of trial: 16-17, 20, and 24 June 2022 Date of Judgment: 12 December 2022 _______________ J U D G M E N T _______________ I. INTRODUCTION 1.In this action, the plaintiff claims against the 1st to 3rd defendants for damages for breach of contract in respect of a “公司股權轉讓意向書” [Letter of Intent for Company Share Transfer] entered into between the defendants as sellers (described as “甲方” [Party A]) and “寶聲集團或旗下之成員公司” [Bonds group or its member companies] as purchasers (described as “乙方” [Party B])[1] in April and May 2017 (the “LOI”) of 70% of the ordinary share capital of a company known as Discreet Limited (the “Company”) and the subsequent management of the affairs of the Company. The principal asset and business of the Company were the development of 13 detached houses known as “Grand Riviera” situated at 368 Castle Peak Road, Ting Kau, Tsuen Wan, New Territories, on Lot No. 496 in D.D. 399 (the “Development”). 2.On the original writ indorsed with statement of claim dated 8 August 2017, the primary relief sought by the plaintiff was specific performance of the LOI. In this connection, the plaintiff issued a summons on 11 August 2017 seeking interim injunctions and orders in aid of its prayer for specific performance (the “Injunction Application”). 3.The Injunction Application was heard by Lisa Wong J on 8 September 2017, and by a Decision dated 18 September 2017 (the “Decision”), her Ladyship dismissed the application on the grounds that there was no serious issue to be tried that the LOI could still be subsisting, it being clear that the same had been terminated at the latest by 5 June 2017. The plaintiff was therefore left with a claim (if any) against the defendants in damages (see §76 of the Decision). 4.On the first day of the trial, I made an order in terms of a consent summons dated 20 June 2022 whereby it was agreed that the action against the 3rd defendant (“Mr Koon”) was to be discontinued with no order as to costs. Unless otherwise stated, references to the defendants below are references solely to the 1st and 2nd defendants (or “Mr and Mrs Kwan”) and references to the parties are references solely to the plaintiff and the 1st and 2nd defendants. II. BACKGROUND 5.The factual background of the action, insofar as relevant, is not in serious dispute, save for the contents of a telephone conversation which took place on 31 May 2017 between Mr Kwan and Mr Anson Chan (“Mr Chan”), the plaintiff’s chief executive officer and director. At this juncture, I need only summarise briefly the events leading to the present action having regard to the agreed chronology filed by the parties and the respective opening and closing submissions of Mr Jonathan Wong, counsel for the plaintiff, and Mr Law Man-Chung SC[2], counsel for the defendants. 6.The defendants, who are husband and wife, were at all material times the only registered shareholders of the Company, a Hong Kong incorporated company. The Company’s issued share capital comprised, inter alia, 5,900,000 ordinary shares of HK$10 each, of which Mr Kwan held 5,880,020 and Mrs Kwan held 19,980. Mr Koon, a friend of Mr Kwan, did not hold any registered shares of the Company, but was described in the LOI as having some beneficial interest in the Company. 7.The dispute between the parties arises out of the LOI, the primary subject matter of which was, as mentioned above, the sale and purchase of the defendants’ 70% shareholding of the Company (the “Subject Shareholding”). Although discussions between the parties commenced in late 2015, the process took on momentum after the valuation of the Development was agreed in principle at HKD 800,000,000. 8.There is no dispute that the LOI was not professionally drafted. The first draft, which was a simple document with some 9 lines of Chinese text, was emailed by Mr Kwan to the plaintiff’s general manager, one Ho Shek Tim (“Mr Ho”) on 8 April 2017. The plaintiff then reverted with its own version, which was substantially more detailed and drafted in Chinese by one 洪亮 [Hong Liang] (“Mr Hong”), who Mr Ho said was the chief financial officer for one the plaintiff’s projects in Beijing. It was the latter draft upon which amendments were made and which eventually became the LOI. In their initial discussions, the parties contemplated a sale of only 50% of the Company’s shareholding and that management powers would be shared equally. However, the position evolved, and the parties eventually agreed to the sale of 70% of the Company’s shareholding (i.e., the Subject Shareholding) and the plaintiff assuming management control of the Company through the appointment of a majority of directors on the board. 9.The LOI was signed by Mr Chan on behalf of “寶聲集團” [Bonds group] and Mr Koon on 20 April 2017. Mr and Mrs Kwan signed later on 13 May 2017. The LOI comprised some 13 clauses on two single-spaced typewritten pages. For ease of reference, I reproduce the LOI in full in the Annex 1A to this Judgment, together with an informal English translation for convenience: Annex 1B. Needless to say, I have considered the disputes as to the meaning of its terms on the basis of the original Chinese version. 10.After the execution of the LOI, the plaintiff commenced the due diligence process pursuant to the 60-day window provided by clause 10 of the LOI. The plaintiff contends that it engaged external professionals for this purpose and had incurred significant costs, although this is disputed by the defendants. 11.On 31 May 2017, Mr Kwan unexpectedly informed Mr Chan by telephone that he wished to terminate the LOI (the “May 31 Conversation”). The contents and effect of the May 31 Conversation are hotly disputed, this being the primary factual dispute between the parties at the trial. Mr Kwan contends that an agreement was reached between him and Mr Chan during that conversation as to the termination of the LOI and the measure of compensation for such termination. Such an agreement was then “re-confirmed” in subsequent correspondence between the parties. The plaintiff, on the other hand, contends that no agreement was in fact reached in the May 31 Conversation or the subsequent correspondence and therefore the normal measure of damages should apply for the defendants’ repudiation of the LOI. 12.I should also add that following the refusal of Lisa Wong J to grant injunctive relief, Mr and Mrs Kwan subsequently entered into an agreement on 8 January 2018 with third parties disposing, inter alia, 100% of their shareholding in the Company. 13.I will come back to various aspects of the background in greater detail when I examine the issues below. III. ISSUES TO BE DETERMINED 14.For convenience, I adopt with minor modification the list of issues set out in Mr Wong’s Closing Submissions (which was not seriously disputed by Mr Law SC). 15.The first issue is whether the LOI constituted a binding contract between the parties, which the defendants deny on the grounds that the parties did not intend the LOI to be binding, or it was insufficiently certain or complete to have contractual force. 16.The second issue (assuming that the LOI did constitute a binding contract) is whether, on its proper construction, the agreed formula for measuring damages in clause 10b of the LOI is concerned solely with a breach of clause 10a (a provision prohibiting Party A from negotiating with third parties during the due diligence period), as contended by Mr Wong; or whether it is concerned with breaches of LOI generally, including any anticipatory breach of the same, as contended by Mr Law SC. 17.The third issue is, irrespective of the proper interpretation of clause 10b, whether there was a mutual consensus reached during the May 31 Conversation for the compensation to be made by the defendants pursuant to the mechanism in Clause 10b. 18.The fourth issue is whether the plaintiff is entitled to damages and the quantum of such damages, pursuant to the mechanism in clause 10b or in general damages for breach of contract (as the case may be). IV. FIRST ISSUE: WAS THE LOI BINDING ON THE PARTIES? 19.Both parties approached this issue solely as one of construction of the LOI. It is not pleaded by either of the parties that the meaning or enforceability of the LOI was affected by the parties’ communications or conduct either before or after entering into the LOI – for instance, by way of part performance or some form of estoppel. 20.The requirements for a binding contract are well established, namely, that (1) the parties have reached an agreement; which (2) is intended to be legally binding; (3) is supported by consideration; and (4) is sufficiently certain and complete to be enforceable. 21.Mr Wong’s case is straightforward - the LOI was intended to be a binding contract and all the essential terms for the sale and purchase of the Subject Shareholding and the subsequent management of the Company had been agreed, including:
Further, the fact that the LOI envisaged the execution of further formal agreements was, in the circumstances of this case, no bar to the LOI being enforceable, and any matters which had not been agreed can be resolved by the parties acting in good faith and adopting the standard of reasonableness. 22.On the other hand, Mr Law SC submitted that the LOI lacked terms essential for a binding contract for the sale and purchase of the Subject Shareholding. In particular, there are no provisions for the date of completion and the date of payment for the Subject Shareholding. By “completion”, I understand this to mean that the date on which the Subject Shareholding was to be transferred by Party A to Party B. 23.For convenience, I summarise here the clauses relevant to completion and payment:
24.Mr Wong accepts that the LOI does not provide for a date of completion or of payment of the purchase, but he submitted that these omissions do not render the LOI unenforceable as clauses 4, 5 and 11 of the LOI provide a sufficient framework by which the time for payment (and completion) may reasonably be determined. PRINCIPLES ON INCOMPLETE CONTRACTS 25.A useful starting point can be found in Halsbury’s Laws of England (5th edition 2019) Vol. 22 at §68:
26.It can be seen that the significance of incompleteness or missing terms is potentially two-fold: (1) it may signify that the parties have not yet finished reaching an agreement, and therefore, there was no intention (or no such intention can be inferred) between them to be bound without further negotiation and agreement of additional terms; or (2) the parties have reached an agreement between them, but due to the fact that they have failed to agree on terms which are essential to a binding contract, what they have agreed is too uncertain to be legally enforceable. I shall refer to (1) as a want of intention to be bound; and (2) as a want of essential terms – that these concepts are distinct can also be seen from Yu Man Fung Alice v Chiau Shing Chi Stephen (unreported) [2020] HKCFI 2923, where Coleman J explained at §24:
27.Of course, whether parties entered into a concluded contract is a matter to be looked at objectively (see e.g., World Food Fair Ltd v Hong Kong Island Development Ltd [2006] 9 HKCFAR 735 at §35). That is so whether the situation is one of want of intention to be bound or want of essential terms. In the case where there is a written document, as in the present, the Court will of course look primarily to the contents of that document. 28.As I understand from Mr Law’s submissions, he relies upon both a want of intention to be bound and a want of essential terms. He began by referring the Court to the line of authorities originating from the decision of the Hong Kong Court of Final Appeal in Kwan Siu Man v Yaacov Ozer (1997-98) 1 HKCFAR 343. In that decision, Litton PJ said at p 355C-F:
In a concurring judgment, Bokhary PJ said at p 362J-363H:
And at p 364E:
29.Mr Law SC recognised, of course, that the LOI is not an agreement (or purported agreement) for the sale of land but for the shares of a limited company. However, he referred the Court to the decision of the Court of Appeal in Ch’ng Poh v. China Everbright Ltd (unreported) CACV 3805/2001, 23 October 2002. That case was concerned with a claim for damages for breach of an oral agreement for the sale and purchase of the shareholding of a corporate vehicle or “shell company”, which had no assets other than a house in Jardine’s Lookout. The judge below found that no oral agreement had been concluded. Dismissing the plaintiff’s appeal, Le Pichon JA (with whom Rogers VP and Yuen JA agreed) held at §17:
30.Mr Law SC further referred the Court to Tsang Wing Man v Chung On Ling (unreported) CACV 129/2015, 4 October 2016. In that case, the parties signed a purported sale and purchase agreement in Chinese in respect of a property in Tai Po. No completion date was specified, but rather, the completion date was stated to be, “…within 3 days according to the sale and after completion of the property owned by the Purchaser at Longgang District, Shenzhen City, Guangdong.” The plaintiff sought specific performance of the agreement. As at the date of trial, the plaintiff’s Shenzhen property remained unsold. After referring to the passages of the Court of Final Appeal in Kwan Siu Man cited above, the Court of Appeal continued at §§65-67:
WAS THERE A WANT OF INTENTION TO BE BOUND? 31.Mr Law SC submitted, first, that it was “implausible for the parties to intend the [LOI] to be binding”. In Kwan Siu Man at 355A-B, Litton PJ referred to Clifton v. Palumbo [1944] 2 All ER 497, where Lord Greene MR said this at 499E:
32.He submitted that the present case is a fortiori and asked rhetorically why the parties (when the identity of Party B was not even identified) would intend to be bound by a 2-page home-made document entitled “意向書” [Letter of Intent] based upon a draft made by Mr Hong in Beijing without the involvement of lawyers, especially when the size of the Development, the amount of capital involved, and the purchase price were all very significant. Further, the transaction was not a simple sale and purchase of shares of a shelf company. It was plainly envisaged in the LOI that the Company was to carry out substantial refurbishment works prior to any sale of units in the Development, and the parties would operate the Company as a joint venture. 33.It was also highly improbable, he submits, that the parties (who had not been acquainted with each other and never had any prior commercial dealings) would allow essential terms, i.e., date of payment and the date of completion, to be dealt with through “the standard of reasonableness”, especially when it was common knowledge that the property market in Hong Kong is “highly volatile”. The fixing of the completion date was of considerable commercial importance and an essential term. Without any agreement on such important term, the Court should be slow to find that a binding contract has been concluded. 34.Notwithstanding Mr Law SC’s persuasive submissions, it is clear in my judgment that the parties intended themselves to be legally bound by the terms of the LOI. 35.First, unlike the initial draft from Mr Kwan, the LOI is a relatively detailed document setting out various rights and obligations of the parties both prior to and after the sale and purchase of the Subject Shareholding. It is a far cry from the situation, for instance, in Clifton v. Palumbo. 36.More importantly, the parties agreed in terms that the LOI was to be binding. Clause 13 provides that:
37.Further, as pointed out by Mr Wong, the formality of the LOI and the fact it was only signed after a process of negotiation involving numerous drafts and a period of deliberation by the defendants also point to the parties’ intention to create legal obligations. 38.In the circumstances, there was no want of intention to be bound. WAS THERE A WANT OF ESSENTIAL TERMS? 39.Mr Law SC submitted that as essential terms are missing, the LOI could not be a binding contract. In particular:
40.I first address (3) above. I should mention here that in a footnote of the Decision, Lisa Wong J noted that, “A reason why the defendants to not regard the [LOI] as binding… is that the identity of the purchaser is left open. However, nothing turns on this for present purpose”. 41.Although the plaintiff asserted (without any apparent particulars) in the amended statement of claim that “寶聲集團” [Bonds Group] (on behalf of which Mr Chan signed the LOI) was a reference to the plaintiff (the Chinese name of which is 寶聲(集團)有限公司), in my view, this is far from clear on the face of the LOI. Even more ambiguous is the fact that Party B is described not merely as “寶聲集團” but as “寶聲集團或其下之成員公司” [Bonds group or members companies under the group]. 42.Needless to say, certainty as to identity of the parties is fundamental to the existence of a binding contract. However, in their amended defence dated 7 December 2017 (after the date of the Decision), although the defendants did not expressly admit that Party B was to be equated with the plaintiff, they did not specifically deny it either. More importantly, they then proceeded to plead that, inter alia:
43.Unsurprisingly, in its reply dated 18 January 2018, the plaintiff pleaded that,
44.In the light of the amended defence, the plaintiff’s assertion in its reply is unassailable. In the circumstances, it is no longer open to Mr Law SC to resurrect the issue (apparently flagged before Lisa Wong J) that the lack of certainty as to Party B’s identity is a factor to be taken into account against the LOI being a binding agreement. 45.As to completion and payment dates being essential terms lacking from the LOI, I address first the question of whether the Kwan Siu Man line of authorities requires me to find that the absence of agreement of a completion date renders the LOI non-binding for want of essential terms. In my judgment, it does not:
46.The present case is therefore clearly distinguishable from Kwan Siu Man and Ch’ng Po. In the absence of any authority binding on me, I do not think it is right to expand the principle in Kwan Siu Man beyond contracts for the sale of landed property in Hong Kong, or contracts for the sale of a corporate vehicle which are “in truth and in substance” the sale and purchase of the underlying landed property. 47.As mentioned above, the threshold for the Court in finding that a contract is void for uncertainty is high, namely, that it would be “legally or practically impossible to give the agreement, or that part of it, any sensible content.” 48.In this regard, Mr Wong referred me to the decision of the Court of Appeal in Chan Wan Chuen Snaky v Express Tourist Bus Company Limited [2020] HKCA 471 where the Court held at §§29.1-29.4:
49.The following passage from the UK Supreme Court’s decision in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (UK Production) [2010] UKSC 14 at §49(6) is also illuminating:
(recently cited by Godfrey Lam JA (sitting as an additional judge of the Court of First Instance) in Bespark Technologies Engineering Limited v A-Tech M & E Engineering Limited [2022] HKCFI 3024 (30 September 2022) at §70) 50.Bearing these principles in mind, is the LOI void for uncertainty due to want of essential terms? In my judgment, it is not. 51.I agree with Mr Wong that the terms of the LOI provide a sufficient framework to proceed with the sale and purchase of the Subject Shareholding even if the parties were to fail (as in the present case) to enter into the formal agreements envisaged in clauses 3 and 11, namely, the Intended SPA and the shareholders agreement:
52.Given the premature termination of the LOI, it is unnecessary for the Court to determine how the parties should proceed and what the precise obligations of the parties would be. Rather, the above exercise is merely to demonstrate that, whilst not ideal, the absence of completion and payment dates in the LOI are not an insurmountable bar to the performance of the LOI, such that their absence would render it “legally or practically impossible to give the agreement, or that part of it, any sensible content.” 53.As to Mr Law’s argument that the standard of reasonableness is inapplicable due to clause 3 providing that the precise payment schedule is subject to confirmation in the Intended SPA to be formally signed between the parties, it is clear from authorities such as Donwin Productions and RTS Flexible Systems Ltd that an expectation between the parties to enter into a fuller or formal agreement with additional terms is no bar to the parties being bound to a partial agreement. Indeed, the parties are expected in such circumstances to negotiate in good faith so as to settle outstanding details which were to be incorporated (see e.g., Chan Wan Chuen Snaky at §30). 54.Hence, for the reasons above, I find that the LOI constituted a binding agreement between the parties. V. SECOND ISSUE: SCOPE OF CLAUSE 10B 55.As mentioned above, the issue here is whether, on its proper construction, the mechanism in Clause 10b is applicable solely to a breach of Clause 10a (as contended by the plaintiff) or whether it is concerned with breaches of LOI generally, including any anticipatory breach (as contended by the defendants). 56.It is helpful to set out clause 10 here:
(English translation):
57.There is no dispute between the parties that clause 10b is a form of liquidated damages clause. Although the plaintiff pleaded in its reply that the clause is unenforceable as a penalty clause, Mr Wong confirmed at the trial that he no longer pursued such plea. The only remaining question, therefore, is the clause’s scope of application. Again, the parties have approached the issue solely as one of construction, and neither has pleaded rectification or any estoppel by convention. 58.The starting point is the opening phrase of the clause, “如果甲方違反此『意向書』項下的相關規定…”. The ambiguity here is whether the word “此” refer to “『意向書』” (i.e., this “LOI”), or “項” (i.e. this “clause”). If it were the latter, then the words, “『意向書』” would be superfluous, and the meaning would be much more naturally expressed by simply stating, “如果甲方違反此 『意向書』 項下的相關規定…” or “如果甲方違反此 『意向書』 項下的相關規定”. The use of the words, “意向書” followed by the words “項下” suggests instead the meaning, “clauses under this LOI”, i.e., all of the clauses of the LOI and not merely clause 10. Hence, focusing just on the words “此『意向書』項下” alone, the clause appears to be intended to apply to a breach of the LOI generally by Party A. 59.On the other hand, the words, “相關” [relevant] in describing “規定” [provisions] might be said to narrow the “clauses under this LOI” to those that are “relevant”. The provisions that are relevant here are arguably those that are relevant to this clause, i.e., clause 10, including clause 10a. This is at least supported by the positioning of clause 10b as a subclause of clause 10, which whilst not by itself conclusive, nonetheless sheds light on the intention of the clause. Clause 10 is concerned with due diligence and clause 10a is a prohibition solely against Party A from conducting any negotiations with third parties pending (presumably) the execution of formal documentation. 60.The difficulty with the argument that clause 10b is intended to have general rather specific application to a breach of clause 10a is that the former interpretation does not sit well with the overall context of the LOI. It is well established that:
at Yu Man Fung Alice (supra) at §21 61.First, clause 10b is concerned only with breaches by Party A, i.e., the sellers, and not Party B, the purchaser. If, for instance, the value of the Development suddenly depreciated in value after the LOI, and it was the purchaser that sought to terminate the LOI, then clause 10b would have no application – the normal measure of damages would apply, it being clear from clause 13b that a defaulting party is liable for breach of contract. 62.As a matter of business common sense, it is difficult to see why the parties would have intended such a disparity in consequences between a similar breach by the purchaser or the seller. 63.Further, whilst parties are of course free to decide when liquidated damages are to apply, clause 10b would be a remarkably blunt instrument as a pre-estimate of loss of the buyer if it were to apply to any breach by sellers. Although the sellers’ primary obligation in the LOI is to transfer the Subject Shareholding to the purchaser, there are a number of other ancillary obligations, a breach of which might not have entitled the innocent party, i.e., the purchaser, to terminate the LOI. For instance, in the plaintiff’s amended statement of claim, it is alleged that “…the total indebtedness of the Company was in excess of $450 million which was a breach of warranty by the defendants as provided by clause 6 of the [LOI].” In such circumstances, the formula in clause 10b would have no bearing at all to the anticipated resulting loss. 64.On the other hand, one can see as a matter of business common sense why a clause prohibiting a party from negotiating with third parties pending the drawing up of formal documentation would be coupled with a liquidated damages clause. Such negotiations put the position of the counterparty (usually the buyer in a case such as the present) at risk, including the risk of the seller exploring better prices or terms with other potential buyers whilst having secured “a floor” with the existing buyer. Actual damages in such cases may be difficult to prove, especially if those negotiations with third parties do not come to fruition. Even if the seller does terminate the contract, if the contract price is close to the market price, unless the buyer is able to compel specific performance, the buyer’s provable loss would in most cases only be out of pocket the expenses incurred, which may not be significant. A liquidated damages clause based on a multiple of expenses incurred may thus be a practical way of discouraging such conduct by the seller. 65.There can be no dispute that the wording of clause 10b is somewhat ambiguous. This is perhaps unsurprising since, as mentioned above, the LOI was based on a draft from someone in Beijing. It is interesting to note, however, that the original draft from Mr Hong already contained clause 10b and was retained in its original form in the signed version of the LOI. 66.Doing the best I can to ascertain objectively the intention of the parties, for the reasons above, I find that the mechanism for ascertaining damages in clause 10b does not have general application to all breaches of the LOI, but is confined to breaches of clause 10a. VI. THIRD ISSUE: MUTUAL CONSENSUS IN MAY 31 CONVERSATION? 67.As mentioned above, the issue here is whether there was a mutual consensus reached during the May 31 Conversation for compensation by the defendants based on the mechanism in clause 10b, which was based on a multiple of due diligence expenses incurred with a ceiling of HKD 2 million. This issue is independent of the true meaning and scope of clause 10b, as it concerns whether, as a matter of fact, the parties agreed in the May 31 Conversation that the mechanism in clause 10b should apply. 68.A useful starting point is the parties’ affidavit evidence that was placed before Lisa Wong J at the Injunction Application, which is helpfully summarised in detail in §§11 to 26 of the Decision and which I do not repeat here. The reader is referred to those paragraphs of the Decision. 69.In Mr Chan’s witness statement made on 26 July 2018, he described the May 31 Conversation as follows:
70.This account of the May 31 Conversation is slightly different from the two versions in his 1st affirmation dated 10 August 2017 and his 3rd affirmation dated 5 September 2017 placed before Lisa Wong J in the Injunction Application (and quoted in §§13 and 16 of the Decision). Her Ladyship found the two versions internally inconsistent, especially regarding the question of whether Mr Chan accepted the defendants’ repudiation of the LOI (see §42 of the Decision). On the basis of those affirmations, she was prepared to find that Mr Chan’s evidence of the May 31 Conversation then before her to be “incredible”. The account in Mr Chan’s witness statement seeks to place a gloss so as to reconcile his previous accounts but maintains that no agreement on compensation was reached. 71.In cross examination, Mr Chan maintained that Mr Kwan expressed a “willingness to compensate” but no commitment on any specific amount or time was given. Mr Kwan was “non-committal” and did not say anything certain, including any specific calculation, amount or time. Mr Chan said that he made an offer of HK$2 million, a figure which he remembered from the LOI (which was not in front of him at the time), and had that been accepted by Mr Kwan, then that would have been the end of the matter. He insisted that clause 10b was never mentioned in the conversation. 72.Mr Kwan’s account in his witness statement dated 17 May 2018 mirrored the account in his affirmation (which is set out in §15 of the Decision):
73.In cross-examination, Mr Kwan said he missed out mentioning specifically in his witness statement a reference to clause 10b in the May 31 Conversation. Also, when asked why he did not say in his witness statement that Mr Chan expressly agreed to the formula he proposed for compensation, Mr Kwan replied that Mr Chan “did not object”, which to his understanding meant that “he agreed”. 74.It is well known that human memory is imperfect and can evolve over time, and even honest recollections between what was said in a conversation years ago can differ between participants to the conversation. In assessing the respective credibility of conflicting accounts, I remind myself of the principles helpfully summarised by Poon J (as the Chief Judge then was) in Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd (unreported) HCA 1975/2005 (unreported), 28 July 2011, at §24:
75.In my view, the correspondence between the parties immediately or shortly following the May 31 Conversation serves both as a useful starting point and guide. Passages of these correspondence have been set out in §§19 to 25 of the Decision and it is unnecessary to repeat them in full here. However, I highlight the following which I find particularly relevant. 76.In the plaintiff’s Chinese letter dated 5 June 2017 (the “June 5 Letter”), which was drafted by Mr Ho and Mr Chan and signed by Mr Chan, it referred to Mr Kwan’s proposal to terminate the LOI and his “willingness to compensate” for the plaintiff’s loss. The letter then referred to clause 10b and 13b, quoted the mechanism in clause 10b and followed with a demand for compensation of HKD 2 million. 77.It is not entirely clear on the face of the June 5 Letter whether Mr Chan’s reference to the mechanism in clause 10b was due to (1) his belief that clause 10b (contrary to my finding above) applied generally to breaches of the LOI, including Mr Kwan’s anticipatory breach in the May 31 Conversation; (2) an agreement or consensus between him and Mr Kwan in the May 31 Conversation that clause 10b shall be the basis of compensation for the termination proposed by Mr Kwan; or (3) both. 78.About half an hour later, Mr Kwan sent a reply letter in English to the plaintiff as follows (the “June 5 Reply”):
79.In cross-examination, Mr Kwan explained that he had inadvertently omitted referring also to Mr Chan in the letter. In my view, nothing turns on this. Rather, the critical point of this letter is that Mr Kwan was writing “…to put on record that both of us agreed to the termination of the said Letter of Intent subject to honouring Clause 10b thereof”. Mr Kwan then asked the plaintiff to advise the defendants of the costs incurred so far, although he understood that none had been incurred to date. 80.The plaintiff replied by letter to the defendants two days later (the “June 7 Letter”), with the letter being signed by Mr Chan’s sister, Lily Chan (“Ms Chan”), as director of the plaintiff. Significantly, as observed by Lisa Wong J in §47 of the Decision, the plaintiff took no issue in that letter with what Mr Kwan’s statement on record that an agreement had been reached as to the termination of the LOI subject to honouring Clause 10b. 81.Ms Chan did not give evidence, but Mr Chan explained in cross examination that she (who, together with Mr Chan and their brother, were the “bosses” of the family company) was not handling the negotiations but stepped in to help in relation to the June 7 Letter as he may not have been around at the time. Mr Chan described her sister as someone who is very careful and would not sign anything without looking at its contents. She would also have discussed with him and Mr Ho before signing, and Mr Chan knew the “general text of [the letter]” even if not a “precise handle on every word”. 82.Mr Chan accepted that there was no rebuttal in the June 7 Letter to Mr Kwan’s assertion of an agreement, which he described as “ludicrous”, but explained that his sister pursued a “softer tone” and that the June 7 Letter was a “counteroffer” similar to the offer he had made to Mr Kwan in the May 31 Conversation. He further said that the HKD 2 million figure and the deadline for payment of 8 June 2017 were not terms contained in clause 10b, and there was thus no agreement with Mr Kwan – “silence is not acceptance”, he added. 83.There was then some correspondence regarding the expenses incurred by the plaintiff in due diligence to date. On 11 July 2017, the plaintiff wrote a further letter to the Company for the attention of Mr Kwan (the “July 11 Letter”), which was signed by Mr Chan and sent by registered mail and by hand to the Company. In the letter, it is said that:
84.The significance of this letter for present purposes is the express reference in the May 31 Conversation that Mr Kwan was willing to compensate the plaintiff in accordance with clause 10b. This is in contrast to §20 of his 3rd affirmation dated 5 September 2017, where he said on oath that, “…Mr Kwan definitely had not said he was willing to pay monetary compensation according to the calculation method agreed under clause 10b of the [LOI].” Mr Ho, in his evidence, said he also saw the letter before it was issued and that he had no opinion (or disagreement) as to its contents. 85.On 18 July 2017, the defendants replied by letter to the plaintiff stating that, inter alia, whilst the defendants were still seeking legal advice, they were of the view that LOI was in essence an agreement to agree, and therefore, “not a contract and cannot be enforced.” (the “July 18 Letter”). 86.Having heard the oral evidence of Mr Chan, Mr Kwan and Mr Ho, and having considered the versions of events in the affirmations and witness statements and the contemporaneous documents, my findings are as follows:
87.For the reasons above, therefore, I find that a mutual consensus was in fact reached between the parties that the compensation to be made by the defendants for the termination of the LOI would be pursuant to the mechanism in Clause 10b. Whether (1) the parties agreed to terminate the LOI by “mutual consensus” on terms as to compensation (as pleaded by the defendants); or (2) the plaintiff accepted the defendant’s anticipatory breach with an agreement as to the measure of compensation arising therefrom; (which are of course legally distinct concepts) does not matter much from a practical point of view. It is unlikely that either Mr Kwan or Mr Chan would have appreciated the distinction at the time. However, taking into account the evidence as a whole, I find that it more likely to be the latter (and I so find), especially given that Mr Kwan effectively presented Mr Chan with a unilateral termination on 31 May 2017, rather than the parties negotiating a termination as such. VII. FOURTH ISSUE: DAMAGES AND QUANTUM 88.It follows from my findings above that the measure of compensation payable to the plaintiff is to be calculated in accordance with the formula in clause 10b. 89.The difficulty for the plaintiff is that the plaintiff has not pleaded any alternative case as to damages to cater for this situation. In §§23-25 of its amended statement of claim, the plaintiff pleaded its loss and damage as follows:
90.There is no mention of damages being assessed in accordance with clause 10b or any averments as to the expenses incurred up to 31 May 2017 in the due diligence process in the event that clause 10b were to apply (whether on construction of the LOI or by agreement). To be fair, in Mr Chan’s witness statement he did set out some details on the due diligence work performed and the professional parties engaged. Some agreements and invoices were also sent by the plaintiff to the defendants in the correspondence following the May 31 Conversation. In particular, there were, inter alia:
91.At the trial, Mr Wong submitted that the Court should, despite the fact that it has not been pleaded, nonetheless take these materials into consideration in assessing damages in the event that damages fell to be measured in accordance with clause 10b. 92.Mr Law SC, perhaps unsurprisingly, strongly objected to such an approach. He submitted that the evidence was not straightforward, and allowing the plaintiff to introduce a new case on damages at this late stage would cause substantial prejudice and unfairness to the defendants. For instance, as accepted by Mr Chan in cross-examination, Mr Chan was the 100% owner of Visionary, which he said provided consultancy services to the Bonds group. This gives rise to the question of whether Visionary’s charges were genuinely incurred or fell within the scope of clause 10b. 93.The principles on pleadings are well established. As Ma CJ reminded litigants in Kwok Chin Wing v 21 Holdings Limited (2013) 16 HKCFAR 663 at §21:
94.The issue of whether any due diligence costs had in fact been incurred by the plaintiff was in fact raised by the defendants as early as the June 5 Reply, when Mr Kwan said that, “It is however understood that you have not yet engaged any professional adviser (including lawyer or accountant in relation to the transaction contemplated under the [LOI]).” Further, after receiving copies of the agreements and invoices from the plaintiff, in the July 18 Letter, Mr Kwan reiterated his understanding from Mr Ho that professional teams were only about to be appointed on 31 May 2017. In cross-examination, when asked why he did not pay the sums in the invoices provided by the plaintiff, he said that he “suspected the authenticity” of the receipts. 95.There may well have been strategic reasons for the plaintiff not to have pleaded an alternative case on damages. Be that as it may, in the light of Mr Law’s objections, I do not think that it would be fair to allow Mr Wong to introduce a new case at this late stage. The fact that some of these matters were raised in plaintiff’s witness statement is neither here nor there. The plaintiff pleaded a specific case on damages in its statement of claim and did not raise any alternative plea. Had it done so, the defendants would have had a proper opportunity to challenge the plaintiff’s evidence as to whether any due diligence had in fact commenced and whether, and if so how much, costs have in fact been incurred. VIII. CONCLUSION AND COSTS 96.It follows that the Court, having rejected the plaintiff’s pleaded case on damages and in the absence of an alternative case on damages, the plaintiff is confined to nominal damages of HK$1 for the defendant’s anticipatory breach of the LOI. 97.As to costs, the starting point of course is that costs follow the event. I bear in mind, however, the following matters which are relevant. 98.Although I have found that the defendants were in anticipatory breach of the LOI, the defendants were for practical purposes the successful party in this action, as they prevailed in resisting the plaintiff’s claim for substantial damages. 99.The issue as to whether the defendants were in breach of the LOI was not in serious dispute, save as to the defendants’ case that the LOI was not a binding agreement, which I have rejected. Considerable time, however, was spent in submissions and in this Judgment on the issue. 100.Both parties adduced expert reports and called their experts on the market value of the Subject Shareholding as at 31 May 2017 pursuant to the Order of Master Hui dated 21 November 2018 to address the quantum of damages had the normal measure of damages applied. The plaintiff adduced the evidence of Mr Alnwick Chan, a surveyor at Knight Frank and the defendants called Mr Paul Varty, also a surveyor. Both experts were in agreement throughout as to the methodology to be adopted in ascertaining the value of the Subject Shareholding, although the experts reached somewhat different conclusions as to its value. In short, both Mr Alnwick Chan and Mr Varty based their respective opinions on the value of the Subject Shareholding by taking the market value of the Development, less HKD 450,000,000 (being the agreed cap on the Company’s indebtedness) and making certain deductions and discounts. 101.Notwithstanding the exchange of expert reports and the production of a joint expert report dated 2 April 2019 (over two years before the trial) no objection was raised by the plaintiff either in correspondence, the pre-trial review or in its written opening submissions as to the expertise of Mr Alnwick Chan or the valuation methodology adopted and agreed by Mr Varty. 102.In his cross-examination of Mr Alnwick Chan, however, Mr Law SC raised for the first time that the methodology adopted by Mr Alnwick Chan and Mr Varty was wrong in law and should be rejected altogether and that neither he nor Mr Varty, as surveyors, had the requisite expertise to give an opinion on the value of the Subject Shareholding. 103.With the greatest respect to Mr Law SC, I am not impressed with such an argument being raised out of the blue and kept up the defendants’ sleeves even in opening submissions. Irrespective of the merits of his submissions in this regard (which are disputed by Mr Wong) and the well-established principle that the Court is not bound by the expert evidence before it, I agree with Mr Wong that the defendants’ conduct smacks of an ambush and is in my view inconsistent with the letter and spirit of the underlying objectives of the Civil Justice Reform. 104.It is unnecessary in the circumstances of this case for me to form a view as to whether the methodology agreed by the experts is correct or not. However, in the light of the stance taken by the defendants (and maintained in their closing submissions), I think it is appropriate to deprive the defendants of the costs of the expert evidence, as the defendants have themselves disavowed the same. 105.Having regards to the above and adopting a broad-brushed approach, I make an order nisi that the defendants do have 60% of the costs of the action to be taxed on a party and party basis if not agreed, with certificate for two counsel, save that the costs of the expert evidence (including the costs of engaging the defendants’ expert, the defendants’ expert reports, and the time spent at trial with the experts) be excluded from the defendants’ costs. 106.Last but not least, I thank both teams of counsel for their assistance in this interesting case.
Mr Jonathan Wong, instructed by MinterEllison LLP for the plaintiff Ms Law Man-Chung SC and Mr Meyrick Wong, instructed by Huen & Partners for the defendants Annex 1A 公司股權轉讓意向書
甲乙雙方經友好協商合作投資上述物業項目『星悅海灣』,現決議如下: 1. 『星悅海灣』物業定價為港幣八億元正。 2. 乙方將投入資金和甲方合作,達到甲乙雙方各佔『前進有限公司』70%公司權益。甲方須承諾『前進有限公司』完全擁有『星悅海灣』100%產權;且『前進有限公司』並無除『星悅海灣』之外的其他投資;
3. 乙方投入資金为港幣二億四千五百萬元正(『星悅海灣』物業定價八億元減除銀行貸款四億五千萬元後的餘額的70%)是用於購買甲方於『前進有限公司』之股權70%。乙方的具體付款時間表待雙方正式簽署的『前進有限公司股權買賣合約』確認。 4. 乙方願意首支付港幣一億四千萬元正予甲方,作為購買70%股權之用。 5. 乙方將餘下購買股權尾數一億零五百萬元正在24個月內按照『星悅海灣』樓盤銷售進度,償還餘款給甲方。未償還之欠款計算利息(以年利率2·5 %計算)。 6. 前進有限公司向銀行贷款總額度在股權轉讓完成時應為四億五千萬港元。出售『星悅海灣亅收入的款項優先用於償還此銀行貸款。 7. 甲乙雙方合組『前進有限公司』之新的董事會管理層。董事會由甲方委任兩席董事和乙方委任三席董事組成。
8. 『星悅海灣』以出售為主，但如對外銷售不如理想,甲乙雙方亦可在雙方同意下,考慮雙方按股權比例分配現樓。 9. 『星悅海灣』售樓收益除淨後甲乙雙方各按股權比例分配利潤。 10. 乙方需於此簽署此『意向書』之日起計60天內完成盡職調查。
11. 乙方或乙方委託的第三方，在盡職調查中如無重大負面的發現,即未發現存在對本次交易有實質性影響的重大事實(或發現該等重大事實但經雙方友好協商得以解決);且乙方的盡職調查(含律師、會計師、銷售顧問)報告完成後的10個工作內,甲乙雙方儘早完成簽署『前進有限公司股權買賣合約』及『股東協議書』：甲方同时向乙方提供有关『星悅海灣』及『前進有限公司』的股權、債權債務等方面的『承诺函』。 12. 甲乙雙方需將此合作投資保密。 13. 此『意向書』之終止
Annex 1B Letter of Intent regarding equity transfer of company [English translation]
It is now resolved as below upon amicable negotiation between Party A and Party B, regarding the joint investment in the above mentioned property project [Grand Riviera]: 1. The price for the property, [Grand Riviera], is fixed at HK$ 800,000,000. 2. Party B shall inject funds to cooperate with Party A, so that both Party A and Party B will each have 70% interest in [Discreet Company]. Party A shall undertake that [Discreet Company] wholly owns 100% property right of [Grand Riviera]; in addition, [Discreet Company] does not have other investment except [Grand Riviera]; and that the total indebtedness of [Discreet Company] cannot exceed HK$ 450,000,000.
3. Party B shall inject funds of HK$ 245,000,000 (70% of the remaining sum upon the deduction of bank loans in the sum of HK$ 450,000,000 from the property price of [Grand Riviera] in the sum of HK$ 800,000,000) for the purchase of the 70% shareholding of Party A in [Discreet Company]. The specific time table for payment of Party B will be confirmed upon the formal signing of the [Agreement for the sale and purchase of the equity of [Discreet Company]] by both parties. 4. Party B agrees to first pay to Party A HK$ 140,000,000 for the purchase of 70% shareholding. 5. Party B shall pay Party A the remaining sum HK$ 105,000,000 for the purchase of the equity within 24 months in accordance with the sale progress of [Grand Riviera]. Interest will be charged on the outstanding debts (at the rate of 2.5% per annum). 6. The total loan limit of Discreet Company from bank(s) should be HK$450,000,000 at the time of completion of the equity transfer. The sale proceeds from [Grand Riviera] shall be prioritized to repay this bank loan. 7. A new management of board of directors of [Discreet Company] will be jointly formed by Party A and Party B. The board of directors will be comprised of two directors to be appointed by Party A and three directors to be appointed by Party B.
8. [Grand Riviera] is mainly for sale. If external sale is not satisfactory, Party A and Party B, by mutual consent, can consider to allocate the existing flats in accordance with the ratio of shareholding of both parties. 9. The net profit from the sale proceeds of [Grand Riviera] shall be shared by Party A and Party B in accordance with the ratio of shareholding. 10. Party B shall finish due diligence exercise within 60 days from the date of signing this [Letter of Intent].
11. If Party B or a third party appointed by Party B, makes no material negative finding during the due diligence exercise, namely, no material facts which can substantively affects this transaction is found (or in the event that such material fact is found but resolved through amicable negotiation of both parties) ; in addition, within 10 working days upon the completion of the due diligence report (including lawyers, accountants, sales consultants) of Party B, Party A and Party B shall as soon as practicable complete the signing of [Agreement of the sale and purchase of the equity of Discreet Company] and [Agreement of shareholders]; Party A shall at the same time provide Party B with a [Letter of Undertaking] concerning the shareholding, creditor’s rights, debts and etc. of [Grand Riviera] and [Discreet Company]. 12. Party A and Party B shall keep this joint investment confidential. 13. The termination of this [Letter of Intent]
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及『前進有限公司』的股權出讓、或增資擴股事宜進行協商或談判。
物業名稱
而『前進有限公司』之總負債不能超過港幣四億五千萬元正。
及『前進有限公司』的股權出讓、或增資擴股事宜進行協商或談判。Cases cited in this judgment
Other judgments that cite this case
Further hearings and rulings under HCA 1861/2017