Harrots Ltd. v. Great Hope Investments Ltd. and Another
Read the full judgment text of HCA 2786/2002 on BabelCite. This High Court CFI judgment was delivered on 16 August 2002.
1. The plaintiff applied for an interlocutory mandatory injunction that the defendants do sign the written resolution of Allman Holdings Limited ("Allman") :
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HCA002786/2002 HCA2786/2002 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO.2786 OF 2002 -------------------------
------------------------- Coram: Deputy High Court Judge Fung in Chambers Dates of Hearing: 14 and 15 August 2002 Date of Judgment: 16 August 2002 ------------------------- J U D G M E N T ------------------------- 1.The plaintiff applied for an interlocutory mandatory injunction that the defendants do sign the written resolution of Allman Holdings Limited ("Allman") :
The background 2.The plaintiff and the two defendants are shareholders of Allman. Their respective shareholdings are : plaintiff, 30%; 1st defendant, 50%; 2nd defendant, 20%. 3.Allman is a BVI company. The primary object of Allman is to hold the entire issued share capital of PSC, a Californian corporation, which in turn is a general partner in SCA, a California general partnership which owns and operates the resort at Squaw Creek, California. PSC holds about 36.22% of SCA. 4.The plaintiff is owned by the family of Dr Geoffrey Yeh ("Dr Yeh"). The 1st and 2nd defendants are related and are owned by the family of Mr Kenneth Ting. There are altogether six partners in SCA. Apart from Allman, the two families separately control interests in other partners of SCA. There is a dispute as to the total share in SCA by the two families. The other non-related partner is Tiger Dove LLC, owning 10% of SCA. 5.Under the Partnership Agreement, the resort is to be managed exclusively by the Managing Partner, acting by itself or through delegates or agents. The day-to-day management of the resort (e.g. room, food and beverage) is delegated to Benchmark Management Partnership, Inc. The Managing Partner retains wide power as to the asset management and development of the resort, e.g. :
6.By the Agency and Management Agreement dated 24 June 1992, RJV Properties, Inc. was appointed by PSC as the Agent to act as the Managing Partner of SCA. In March 1998, the Agent successively succeeded as the agent. All the successive agents are controlled by Dr Yeh. The authority of PSC under the Partnership Agreement is delegated to the Agent. However, there are limitations as to the authority of the Agent, e.g. any decision to proceed with Phase II of the resort. 7.Dr Yeh and Mr Kenneth Ting had personal and business relationship which went back some 20 years. They are brothers-in-law, and at some stage have cross held directorships in the respective groups of companies. 8.The respective rights and obligations of the plaintiff and the defendants as shareholders of Allman are regulated by a Joint Venture Agreement dated 19 June 1992. This case is concerned with clause 7.10 of the Joint Venture Agreement :
The "Company" referred to is Allman. The "California Company" referred to is PSC. 9.The Joint Venture Agreement stipulates a maximum of six directors on the board. The 1st defendant can elect three directors (Mr Kenneth Ting, Chairman; Mr Alan Chan and Mr William Li); the 2nd defendant can elect one director (Mr Ivan Ting); the plaintiff can elect two directors (Dr Yeh and Mr V-Nee Yeh). Mr V-Nee Yeh resigned in late June 2002 without replacement. 10.In April 2001, the defendants discovered that the Agent had undertaken entitlement work or feasibility study on Phase II without approval and the costs were accounted under Phase I. They complained about the accounting treatment and instructed the Agent to stop. In August, the Agent circulated all the partners for consent to carry out the feasibility test study but none was given. In June 2002, the defendants discovered the Agent was still carrying out such work and had spent US$600,000 in 2002. The Agent stated that it understood consent was given for the entitlement work but not the actual development. Mr Ivan Ting asked Mr V-Nee Yeh to stop the Agent but Mr Yeh said he could not order the Agent around. By June, Mr V-Nee Yeh and Mr Ivan Ting agreed to seek legal advice to deal with the Agent. 11.The defendants complained against the performance of the Agent:
12.On 21 June 2002, the 1st defendant requested the holding of a shareholders' meeting of Allman. Dr Yeh replied that it was not in the best interests of Allman to press with undue haste. 13.On 9 July 2002 the shareholders' meeting of Allman was held. Despite the objection of Dr Yeh, the 1st and 2nd defendants voted for the resolution with the following effect :
The resolution was passed by a majority of 70% to 30%. 14.Following the shareholders' meeting, the directors of PSC passed the resolution terminating the agency of the Agent. Dr Yeh voted against the resolution but the representatives of the 1st and 2nd defendants constituted the majority. PSC then issued a letter dated 9 July 2002 to the Agent terminating the agency on 9 September 2002. 15.On 18 July 2002, the Plaintiff issued the writ and Statement of Claim seeking, inter alia :
The legal principles 16.The principles in relation to the grant of interlocutory mandatory injunctions are summarised by Chadwick J in Nottingham Building Society v. Eurodynamics Systems plc. [1983] FSR 468, 474 :
17.The summary above was approved by the English Court of Appeal in Zockoll Group Limited v. Mercury Communications Limited [1998] FSR 354. The issues 18.The issues are :
Interpretation of clause 7.10 19.The plaintiff complained that the defendants were in breach of clause 7.10 of the Joint Venture Agreement by procuring the resolutions of Allman and PSC in the absence of the unanimity of the shareholders. The defendants alleged that there was no breach. 20.In construing clause 7.10 of the Joint Venture Agreement the object of the court is to give effect to what the contracting parties intended. Mr Whitehead submitted that the parties' relationships and the background surrounding the transaction so far as known to the parties are relevant, and in particular, that Allman is a "quasi-partnership" (in the sense described by Lord Wilberforce in In re Westbourne Galleries Limited [1937] AC 360, 379). 21.The plaintiff's interpretation is that the words "procure, so far as they are able", qualify the action to be taken (or not), and the resolution to be taken (or not), and not the issue of unanimous consent, i.e., the duty of each shareholder is not to try their best to get unanimous consent, but to try their best to procure that no action is taken, and no resolution is passed, if there is no unanimous consent. 22.Mr Whitehead, SC, for the plaintiff, underscored the requirement of unanimity by referring to other provisions of the Joint Venture Agreement :
23.It was submitted that under clause 7, unanimity of the shareholders is required for the fundamental matters, whereas in other matters, simple majority suffices under clause 4.2. 24.Mr Whitehead submitted that even if the defendants were right that clause 7.10 only requires the best endeavours to achieve unanimity, the defendants have failed to do so as they have circulated the partners and discussed with prospective agents in June, well before there was any purported discussions with the plaintiff just before the voting. At any rate, there is a serious issue to be tried as to whether there is such breach. 25.As an ancillary point, the complaints against the Agent lie in assertions only at this stage. Whether the Agent is liable to be dismissed by reason of a loss of confidence generated by misdeed also raises issues for trial. 26.Mr Whitehead submitted that in the event the plaintiff succeeds at trial and the mandatory injunction is granted and the parties are at deadlock, and there being no provision in the Joint Venture Agreement for the resolution thereof, the parties are at liberty to seek the appropriate remedy from the BVI Companies Court. 27.The defendants' interpretation of clause 7.10 is that the shareholders shall use their best endeavours to achieve unanimity. If there is not possible on a matter which is reasonable and in the best interest of the company, voting is by a majority. 28.Mr Ronny Wong, SC, for the defendants, submitted that in interpreting clause 7, the court should only look at the sectional interest of Allman without looking to the partnership level of SCA. At the Allman level, the shareholdings are : the defendants majority of 70%; and the plaintiff minority of 30%. 29.Clause 7 is a negative covenant. Upon its proper construction, it was submitted that it provides that no action is to be taken by the shareholders subject to two separate exceptions :
30.Mr Wong submitted that "so far as they are able" cannot simply mean the corporate capacity of the shareholders. It qualifies the unanimity of consent, and claws in the equitable considerations that Allman is a quasi partnership company as well as the shareholders' contractual obligations under the Joint Venture Agreement. 31.On the one hand, by reason of the relationship of the parties, the shareholders should use their best endeavours to seek unanimous consent. 32.On the other hand, the contractual obligations of the shareholders are :
And these oblige the shareholders to do what is in the best interests of Allman so as to generate the maximum achievable profits available for distribution. 33.In the absence of unanimous consent, the majority shareholders are able to terminate the agency, if their contractual obligations otherwise dictate. 34.Clause 7 on the one hand protects the minority by obliging the majority to seek unanimous consent. On the other hand, it protects the majority to enable it to act in the best interest of the company in case of unreasonable withdrawal of consent. It is a compromise. 35.Mr Wong also referred to other clauses in the Joint Venture Agreement which stipulate a strict requirement of unanimous consent :
36.The deadlock provision in clause 13 did not cover clause 7.10. That militates further against the requirement of unanimity of consent as it could not be intended that there be either stalemate or winding up. 37.After hearing the arguments, I feel assured to a sufficiently high degree that the plaintiff may establish a breach at trial for the purpose of considering an interlocutory mandatory injunction. Breach of negative covenant 38.Mr Wong submitted that all the authorities cited by the Plaintiff, such as Nottingham Building Society, Zockoll Group, etc. are concerned with ordering an act which has not yet taken place. Here, the alleged breach of the negative covenant has taken place. What the plaintiff is doing is to re-formulate that covenant into a positive form, and to seek an interlocutory mandatory injunction on the re-worded covenant. No authority has been cited for the exercise of that jurisdiction. The plaintiff has delayed in obtaining an injunction to prevent the defendants from voting. It is not entitled now to unravel the resolution passed. 39.The power to grant injunctions derives from section 21(L) of the High Court Ordinance (Cap. 4). The jurisdiction of section 21(L) is very wide. It imposes no fetter on the jurisdiction of a judge to do what is just and equitable in all circumstances, subject to established principles which have grown up by precedent (see White Book (HK) 2002, paragraph 29/1/3). 40.In considering whether to grant an interlocutory injunction the court was primarily concerned not with whether the injunction was mandatory or prohibitory but whether the injustice suffered by the defendant if the injunction was granted and the plaintiff later failed at trial was greater than the injustice to the plaintiff if the injunction was not granted and he later succeeded at trial (see Films Rover International Limited & Ors v. Cannon Films Sales Limited [1987] WLR 670, per Hoffman J). 41.I am satisfied that there is jurisdiction to entertain the plaintiff's application. Specific Performance 42.Mr Wong in his skeleton argument submitted that if the plaintiff's interpretation on clause 7.10 be right, the mandatory injunction amounts to a stipulation that the Agent will be retained as agent unless there should at some time be a unanimous vote to the contrary. For a mandatory injunction to be granted at an interlocutory stage, the court needs a high degree of assurance that it will appear at trial that the injunction is rightly granted. Such assurance is not possible here. The agency, if reinstated, would be of indefinite duration and potentially for the life of the resort venture, absent agreement by the Plaintiff to terminate it earlier. The court will not enforce such an arrangement where trust and confidence are elements of the relationship and such trust and confidence have broken down. 43.In Co-operative Insurance Limited v. Argyll Stores Limited [1998] AC 1, the House of Lords held that the settled practice of the court not to grant a mandatory injunction requiring the carrying on of a business was soundly based, bearing in mind, in particular, the difficulty of drawing up the order with sufficient precision to avoid wasteful litigation regarding compliance with it and that the defendant might suffer far greater loss by having to comply with the order than the plaintiff would suffer from the contract being broken, thus putting the plaintiff in an unjustly favourable bargaining position. 44.Mr Whitehead submitted that the issue before the court is not the enforcement of the contract for the services of the Agent as such, but the alleged breach by the defendants to vote in a certain manner under the Joint Venture Agreement. The Agency and Management Agreement is a distinct contract between PSC and the Agent and they are not parties before the court. The court is only concerned with enforcement of the Joint Venture Agreement between the parties. 45.In any case, there is no inflexible rule that as soon as any element of personal service or continuous services can be discerned in a contract, the court will, without more, refuse performance. 46.In Posner & Ors v. Scott-Lewis & Ors [1987] 1 Ch. 25, Mervyn Davies J at pp.34-35 referred to C.H. Giles & Company Limited v. Morris [1972] 1 WLR 370 per Megarry J at p.318 :
47.Mervyn Davies J at p.35 further referred to Tito v. Waddell (No. 2) [1977] Ch. 106, per Sir Robert Megarry V-C, at p.321 :
48.Mervyn Davies J said at p.36 that :
49.In Co-operative Insurance Limited, the House of Lords held that the grant or refusal of specific performance remained a matter for the discretion of the judge and the settled practice might well be departed from in exceptional circumstances. The House of Lords did not express disagreement with the a fortiori class referred to by Megarry J in C.H. Giles. 50.Mr Whitehead submitted that the present case falls within the a fortiori class. The order sought is well defined and the passing of a resolution does not require continuing superintendence of the court which may be difficult to enforce. 51.Further, the remedy of damages will not be adequate to the plaintiff in the event it established a breach of clause 7.10 at trial. There will certainly be damage to the plaintiff in the context of the Joint Venture Agreement and the quasi partnership, which will be difficult to assess. There is at least some degree of assurance that the mandatory injunction will be granted in the event the plaintiff can prove the breach at trial. 52.Mr Wong sought to distinguish the authorities by relying on the negative covenant point. With respect, I do not see such a distinction. 53.Following upon Mr Whitehead's point that the Agency and Management Agreement is a distinct contract between PSC and the Agent and they are not parties before the court, Mr Wong submitted that even if the court is to order the defendants to vote their shares in Allman to rescind the resolution passed and to instruct PSC to withdraw the termination notice to the Agent, the court will be acting in vain as the management of PSC is vested in its directors and not its shareholder, to wit, Allman. The directors must, according to their fiduciary duty, act independently in the best commercial interest of PSC and there is no guarantee that they will withdraw the termination notice. They are not parties before the court and are not subject to the sanction of the court. Hence, the court shall not make an order in vain. 54.Mr Whitehead submitted that the court will not be acting in vain. One will be overlooking the evidence, reality and common sense to speculate that the director of PSC will not act on a resolution of the shareholder of PSC :
55.Mr Whitehead submitted that in reality, Allman terminated the agency. He asked rhetorically if PSC's directors were to act independently of Allman, why the need for Allman's shareholders' meeting on 9 July 2002? PSC is referred to specifically in clause 7 in order to stop it from going on a frolic of its own. 56.On the grant of a final mandatory injunction, I am assured to a sufficiently high degree that in the event of a breach being established, damages may not be sufficient remedy and final mandatory injunction may issue. As to the acting in vain point, I am satisfied that there is every likelihood that the directors of PSC will be acting in accordance with the resolution of PSC which Allman through its shareholders including the 1st and 2nd defendants are able to procure. The court will not be acting in vain if in its discretion the order sought is granted. Balance of justice 57.Mr Wong reiterated that the parties are at Allman level and one should not look at prejudices beyond that level. With respect, I disagree. It is a balancing exercise and all relevant factors must be considered. 58.Mr Whitehead submitted that the following factors weigh in favour of the plaintiff :
59.On the other hand, Mr Wong relied on the following :
60.I have dealt with the acting in vain point and I shall not repeat myself. 61.I do not find that the Plaintiff has been guilty of any delay disentitling it to equitable relief. Looking at the relationship of the families, litigation must have been a matter of last resort. There were frank discussions at the shareholders' meeting. When it transpired that the defendants were to vote in any event, Dr Yeh requested that the lack of unanimity be recorded, and intimated the resort to litigation. I do not find that the plaintiff has hence acted unreasonably. 62.I note that there has been a loss of trust and confidence between the defendants and the Agent. But the issue of termination must be in the context of the Joint Venture Agreement, which is the ultimate issue for the trial. At this stage, I do not think it a determinative factor, though a relevant factor in the consideration. As to the risk of further unauthorised spending by the Agent on the Phase II project, it must be seen in the light of the ongoing litigation here and in California. At any rate, it is a pecuniary matter as to which the remedy of damages will be sufficient. There is no submission that the undertaking offered by Dr Yeh is not good. 63.Both parties have filed opinions on Californian law as to whether HSBC could call in the loan in the event of non-compliance of a term in the commitment letter. It is not necessary for me to resolve this issue. Suffice it to say that there is a real risk of disruption to SCA's finance in the weighing process. 64.Notwithstanding that the resolution has been passed, looking at all the circumstances and especially that no new agent has been appointed yet, I accept the plaintiff's submission that the order seeks to maintain the status quo. It will cause less disruption both as to the agency and the credit. As to the risk of frustration of any future shareholders' or directors' meeting to reconsider clause 7.10, that must also be considered in the light of the result of the present litigation. 65.If the defendants were to succeed at trial, the grant of the interlocutory relief will simply delay the termination until trial. If the interlocutory relief is denied and the plaintiff were to succeed at trial, the appointment of the new agent will be a fait accompli, which may entail financial consequences if not litigation for its removal. 66.I am satisfied that the balance of justice weights in favour of the plaintiff. In the premises, I shall grant the interlocutory order prayed for.
Representation: Mr Robert Whitehead, SC, leading Mr Stewart Wong, instructed by Messrs F. Zimmern & Co., for the Plaintiff Mr Ronny Wong, SC, leading Mr Andrew Bullet, instructed by Messrs Richards Butler, for the 1st and 2nd Defendants |