Okachi (Hong Kong) Co Ltd v. Nominee (Holding) Ltd

HCA4596/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4596 OF 2000

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BETWEEN

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Before : Deputy High Court Judge Poon in Court

Dates of Hearing :  19 – 23, 26, 30 July 2004 and 5 – 8 July 2005

Date of Judgment : 8 August 2005

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J U D G M E N T

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I.  Introduction

1.The plaintiff is a broker in futures trading.  Before the Reform, which I will describe in Section III below, it was a member of the Hong Kong Future Exchange (“HKFE”), holding two fully paid up ordinary shares therein.

2.The defendant is a limited company owned by Mr Philip Yuen Pak Yiu (“Mr Yuen”) and his wife.  Mr Yuen is a solicitor.  Qualified in the early 1960s, he is the senior partner of Messrs Yung Yu & Yuen (“YYY”).  At all material times, YYY acted for the defendant.

3.In early 1999, as a result of serious defaults by its customers, the plaintiff was in need of cash.  It decided to sell one of its two shares in HKFE (“the Share”).  At about the same time, the defendant desired to become a member of HKFE and came to know, through a third party, of the plaintiff’s intention to sell the Share.  Negotiations then ensued.  Eventually, the parties entered into an agreement dated 14 June 1999 whereby the plaintiff agreed to sell the Share including all rights and benefits appertaining thereto for HK$1,850,000 (“the Agreement”).  At all material times until the Agreement was executed, the parties’ identity was unknown to each other.

4.Earlier on 11 June 1999, the defendant had, through YYY, paid the said price of HK$1,850,000 to the plaintiff’s solicitors, Messrs J. Chan & Lai (“JCL”) as stakeholder, to be released to the plaintiff upon completion of the sale and purchase of the Share.

5.The present disputes arose out of the Agreement.  At the heart of the disputes is this fundamental question : who had acted in repudiatory breach of the Agreement which entitled the other side to rescind?  There is a separate question as to whether the defendant was guilty of misrepresentation which entitled the plaintiff to rescind.

II.  Salient features of the Agreement

6.The Agreement contained the following salient features.

A.  Applications to SFC and HKFE

7.The foremost of all is the defendant’s applications to HKFE for membership and to the Security and Future Commission (“SCF”) for dealership.

8.At the time of the Agreement and before the Reform, membership in HKFE was tied with a member’s dealership approved by SFC.  In order to be qualified as a member of HKFE, a person must also obtain approval for his registration as a dealer by SFC under the Commodities Trading Ordinance (“the Ordinance”).  Thus upon an application for transfer of its share, which had to be approved by HKFE, HKFE would only give such approval if the intended transferee had obtained approval from SFC to be registered as a dealer under the Ordinance.  In the case of a corporate transferee, approval must also be obtained from SFC for registration of a dealing director accredited to it.

9.The Agreement thus obliged the defendant to make the requisite application to SFC for dealership and to HKFE for membership upon SFC’s approval : Clauses 3.2 and 3.3.

10.Other important features are related, one way or the other, to these applications.

B.  The parties’ obligations towards the applications

11.The plaintiff shall upon execution of the Agreement deliver to the defendant’s solicitors as stakeholders all requisite documents including the Share Certificate, the Form of Transfer, the sold note and an application for Transfer of the Share to the defendant addressed to HKFE to facilitate the defendant’s application to HKFE for membership as soon as practicable thereafter : Clause 3.1.

12.Clause 3.2 required the defendant, in short, to complete the procedures of the application with SFC promptly.

13.Clause 3.3 required the defendant to take out the application with HKFE as soon as practicable after the approval by SFC and to use the best endeavours in order to succeed in such application promptly and, again in short, to complete the procedures.

C.  The parties’ undertakings towards the applications

14.The plaintiff undertook to use its best endeavours to provide such assistance as was appropriate and typical of transaction such as contemplated under the Agreement to the defendant in connection with the defendant’s application for membership of HKFE : Clause 4.3.

15.The defendant undertook to use its best endeavours to ensure the success of the applications; to pursue the same promptly; and in connection therewith to promptly and regularly provide to the plaintiff copies of all correspondence between the defendant, HKFE and SFC : Clause 4.4.

D.  The defendant’s representation

16.Under Clause 4.2, the defendant represented and warranted that it shall be in every respect qualified for membership and dealership and that there is no reason why any of such applications should not be wholly successful without delay.

E.  Completion

17.Completion of the sale and purchase of the Share would take place within seven days after receipt of HKFE’s approval or SFC’s approval, whichever shall be the later but shall not in any circumstances take place after 15 months of the Agreement (“the Expiry Date”) : Clause 5.1.

18.Clause 5.2 went on to make provision on the meaning of such approval and the computation of the seven days period.  Clause 5.3 required the defendant to forthwith notify the plaintiff of the approvals and stipulated that its failure to do so shall not affect the defendant’s obligation to complete within the period set out in Clause 5.1.

F.  Nomination of a substitute

19.Should the defendant’s application to HKFE for membership fail, Clause 3.4 allowed the defendant to nominate and substitute, before the Expiry Date, a new transferee for the Share in its stead.  However, Clause 3.4 is subject to Clause 6.2, which provided that the nomination by the defendant of a third party pursuant to Clause 3.4 shall not in any event relieve the defendant from complying the terms and performing all the obligations of the Agreement.

G.  Time was of the essence

20.Finally, under Clause 7.1, time was of the essence of the Agreement.

21.As will be seen in a moment, the parties’ disputes essentially turn on a proper interpretation of the Agreement.  I will come back to some of the more important terms in greater detail.

III.  The Reform

22.The Agreement was made at the time when the securities and futures exchange market was about to undergo a major overhaul.  It all began on 3 March 1999 when the Financial Secretary announced a comprehensive reform of the market in Hong Kong.  The reform included fundamental changes in the market structure to be achieved through the demutualization and merger of the five recognized and approved market operators in Hong Kong (including HKFE) under a single holding company, namely, the Hong Kong Exchanges and Clearing Limited (“HKEC”).

23.On 31 July 1999, details of the proposed merger were published in a joint announcement in the press by, among others, HKFE and HKEC.  It would take the form of schemes of arrangement one of which involved HKFE (“the Future Exchange Scheme”).  The schemes were expected to take effect on or before 31 January 2000.  One of the important features of the reform was that membership and trading right in HKFE would be separated.

24.On 3 September 1999, the scheme document (“the Scheme Document”) was issued.  Under the Futures Exchange Scheme, upon the Effective Date :

(1)	HKFE would become a wholly owned subsidiary of HKEC.
(2)	All the ordinary and standard shares in HKFE would be cancelled.
(3)	Shareholders in HKFE would be allotted with shares in HKEC or given cash compensation for each share in HKFE held.  This was referred to as the Cancellation Consideration.
(4)	Shareholders who were members of HKFE immediately prior to the Effective Date would automatically become the Exchange Participants and be granted one Futures Exchange Trading Right for each share in HKFE held.

25.The Scheme Document also stipulated :

“

In order to receive the Cancellation Consideration under the Futures Exchange Scheme it will be necessary to be registered as a Futures Exchange Shareholder immediately prior to the Effective Date.  For any transfer of Futures Exchange Shares to be registered it is necessary, among other things, for the admission of the transferee to be approved by the Board in accordance with the Articles of Association of the Futures Exchange.  The latest time at which such approval may be given will be the last meeting of the Board before the Effective Date held for such purpose.  The date of such meeting of the Board (being the Transfer Approval Deadline) (“TAD”) will be notified to Futures Exchange Shareholders by the Futures Exchange in writing at least 14 days in advance, and will also be announced in the Newspapers, and will be not less than 14 days before the Effective Date.  Transferors and transferees of Futures Exchange Shares should ensure that all requirements for admission of the transferees as Futures Exchange Shareholders shall have been met before [TAD] so that their applications for admission will be considered by the Board at that meeting.”

26.On 2 February 2000, HKFE informed its shareholders that TAD would be 21 February 2000, after which applications for admission as a member of HKFE would not be considered and that the Effective Date of the Futures Exchange Scheme would fall on 6 March 2000.

iv.  The Windfall

27.As announced, the Futures Exchange Scheme became effective on 6 March 2000.  By then, completion of the sale of the Share under the Agreement had not taken place.  The Share was cancelled upon which the plaintiff was allotted 1,393,500 shares in HKEC (“the HKEC Shares”).  It was also granted the Futures Exchange Trading Right and became an Exchange Participant.

28.The shares in HKEF had since become very valuable.  On 3 August 2000, it stood at HK$16.7 per share.  The HKEC Shares were worth some HK$23 million.  This was indeed a huge, unexpected windfall arising from the Reform (“the Windfall”).  The parties do not shy away from the fact that by engaging in this action, what they are really fighting for is the Windfall.

V.  The plaintiff’s claims

29.By notice dated 15 March 2000, the plaintiff purported to rescind the Agreement on the ground of repudiation and misrepresentation.  Later on 8 May 2000, the plaintiff commenced the present action seeking declaratory relief and damages.

30.The amended statement of claim alleged that the defendant had acted in repudiatory breach of the Agreement in that :

(1)	It had failed to make or pursue the applications to HKFE and SFC promptly or without delay and to use its best endeavours to ensure the success of those applications and to comply with all rules, regulations, conditions and requests of HKFE and SFC.
(2)	It had failed to promptly and regularly provide to the plaintiff with copies of all correspondence between it and HKFE and SFC.

31.The amended statement of claim further alleged an oral misrepresentation and misrepresentation under Clause 4.2 of the Agreement.  At trial, the oral misrepresentation was no longer pursued, leaving only Clause 4.2. 

VI.  The defendant’s defence and counterclaim

32.The defendant denied that it was guilty of any repudiatory breach or misrepresentation as alleged.  It contended that the plaintiff’s purported rescission was itself wrongful.  Such conduct amounted to repudiation of the Agreement which was accepted by the defendant by filing of its defence and counterclaim on 3 August 2000.

33.The defendant further alleged that the plaintiff was in breach of trust and accordingly sought an account and tracing and/or proceeds received by the plaintiff referable to the Share and damages.  Such damages should be assessed by reference to the value of the HKEC Shares as at 3 August 2000, which, as noted above, stood at some HK$23 million.

VII.  Repudiation

34.I will first consider the fundamental question as to who had acted in repudiatory breach of the Agreement which entitled the other party to rescind.  I will begin by looking at the parties’ arguments so as to identify the main issues for determination.

A.      The parties’ arguments

35.The plaintiff’s primary argument is simple and straightforward.  The relevant provisions on celerity and diligence in the Agreement, namely, Clauses 3.2, 3.3, 4.4 are all conditions.  But the defendant had failed to make the requisite applications to SFC and HKFE as soon as practicable and promptly had failed to use it best endeavours to pursue them.  Such conduct constituted a repudiatory breach.  In support, Mr Wong, SC, appearing for the plaintiff, relied on a host of cases including Hydraulic Engineering Company v. McHaffie [1878] 4 QBD 670, Elliott v. Lord [1883] 52 LJPC 23, King’s Old Country Limited v. Liquid Carbonic Canadian Corporation Limited [1942] 2 WWR 603, IBM United Kingdom Ltd v. Rockware Glass Ltd [1980] FSR 335, The Post Chaser [1981] 2 Lloyd’s Rep 695, Hyundai Engineering and Constructive Co. Ltd v. Vigour, HCCT100/2003, unreported, 14/4/2004, Reyes J.

36.The defendant’s primary arguments may be summarized thus.

37.First, Mr Aiken, SC, appearing for the defendant, submitted that those terms of celerity and diligence are innominate terms.  He relied on Hong Kong Fir Shipping Co. Ltd v. Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, Bremer v. Vanden [1978] 2 Lloyds’ Rep. 109 and Homyip Investment Ltd v. Chu Kang Ming Trade Development Co. Ltd [1995] 2 HKC 458.  He argued that the consequences of breach of these terms, if any, are not so serious as to deprive the plaintiff of substantially the whole benefit of the Agreement.  Insofar as the plaintiff is concerned, the benefit of the Agreement was to receive payment for the share, which, by agreement had been delayed for 15 months.  The plaintiff was protected from delay by receiving interest, liquidated damages and damages generally.  It may claim damages but is not entitled to rescind.  I will call this the Construction Point.

38.Mr Aiken next contended that that the plaintiff’s complaint about delay in performance was premature and its purported rescission, misconceived.  Such conduct itself amounted to repudiation : Chao Keh Lung Bill v. Con Xia [2003] 4 HKC 660.  Mr Aiken made two points in this regard :

(1)	The defendant had under Clause 5.1 of the Agreement 15 months from the date of the Agreement, that is, before the Expiry Date, to make the requisite applications and complete the sale.  The contractual period for completion was not up yet when the plaintiff purported to rescind on 15 March 2000.  He relied on Greater London Council v. The Cleveland Bridge and Engineering Co. Ltd, 34 BLR 57 in support.  I will call this the Completion Point.
(2)	The terms of celerity and diligence did not justify rescission until and unless notice had been given of a precise deadline for performance and the defendant had failed to perform accordingly.  The plaintiff had never given such notice.  In the absence of such notice, time for the performance of those obligations could not be made an essence of the Agreement.  In support, Mr Aiken, relied on British and Commonwealth Holdings Plc v. Quadrex Inc. [1989] 1 QB 842 and Joy & Peace.com Inc. v. Topshow Consultants Ltd [2002] 2 HKC 143.  I will call this the Notice Point.

39.Finally, Mr Aiken argued that even if there was repudiation as alleged :

(1)	The plaintiff had by conduct affirmed the continued existence of the Agreement.
(2)	The plaintiff was in breach of Clause 4.4 of the Agreement by failing to render assistance to the defendant in its applications to HKFE and SFC, it is therefore not entitled to rescind.
(3)	It was inequitable to allow the plaintiff to rescind and hence to keep the windfall.

B.  Main issues

40.The following main issues arise from the parties’ primary arguments :

(1)	On a proper construction, whether Clauses 3.2, 3.3 and 4.4 are conditions or innominate terms.
(2)	Whether the plaintiff’s purported rescission was premature because of the Completion Point and the Notice Point.
(3)	Had the defendant committed the repudiatory breach as alleged?
(4)	If yes :
	(a)	Had the plaintiff by conduct affirmed the continued existence of the Agreement?
	(b)	Had the plaintiff committed any breach of Clause 4.4 and if yes, what is the consequence of such breach?
	(c)	Will equity intervene to deprive the plaintiff’s right to rescind?

I will look at them in turn.

C.      Issue 1 : Whether conditions or innominate terms

41.In my view, whether Clauses 3.2, 3.3 and 4.4 are, on a proper construction, conditions is the most crucial question in this action.  In light of Mr Aiken’s written submissions on the Construction Point, it is useful to first set out the correct approach on construction.

1.  Approach on construction

42.In Hong Kong Fir, the disputes arose from a charterparty.  The charterers contended, inter alia, that they were entitled to repudiate by reason of a breach by the owners of their obligation to deliver a seaworthy vessel.  It was held that although the owners were admittedly in breach, the vessel being unseaworthy on delivery by reason of an insufficient and incompetent engine room staff, seaworthiness was not a condition of the charterparty a breach of which entitled the charterers at once to repudiate.  After an admirable analysis of the law, Lord Diplock said at p.70:

“

There are, however, many contractual undertakings of a more complex character which cannot be categorized as being ‘conditions’ or ‘warranties’… Of such undertakings all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a ‘condition’ or a ‘warranty’…”

43.Relying on Hong Kong Fir, Mr Aiken seemed to have suggested that in determining whether a contractual provision is a condition or not, the court should look at the consequences of breach.  With respect, this approach must be wrong, a similar argument having been firmly rejected by the House of Lords in Bunge Corporation v. Tradax SA [1981] 1 WLR 711.

44.In Bunge, the buyers were obliged under Clause 7 of the contract to give at least 15 days’ notice of probable readiness of vessels.  The buyers were five days late in giving such notice.  The sellers then declared the buyers in default and claimed damages for repudiation.  The House of Lords, in dismissing the buyers’ appeal, held that the court required precise compliance with stipulations as to time wherever the circumstances of the case indicated that that would fulfill the intentions of the parties and that in general, time was of the essence in mercantile contracts.  The House also held that in a mercantile contract when a term had to be performed by one party as a condition precedent to the ability of the other party to perform another term especially an essential term such as the nomination of a single loading port, the term as to time for the performance of the former obligation would in general fall to be treated as a condition.  Thus Clause 7 was a condition because until the requisite notice had been given the sellers could not know for certain which loading port they should nominate so as to ensure that the contract goods would be available for loading on the ship’s arrival at that port before the end of the shipment period.

45.The buyers in Bunge, relying on Hong Kong Fir, argued that Clause 7 was an innominate term.  A breach of it, both generally and in relation to that particular case might be inconsequential, i.e. not such as to make performance of the sellers’ obligation impossible.  If that were so, it would be wrong to treat it as a breach of condition.  Hong Kong Fir would require it to be treated as a warranty.  This argument was firmly and unanimously rejected by the House.  For present purposes, it is sufficient to quote Lord Roskill’s speech at pp.725–726 :

“	My Lords, I find nothing in the judgment of Diplock L.J. in the Hong Kong Fir case [1962] 2 Q.B. 26 which suggests any departure from the basic and long standing rules for determining whether a particular term in a contract is or is not a condition and there is much in the judgment of Sellers L.J. with which Upjohn L.J. expressly agreed, to show that those rules are still good law and should be maintained.  They are enshrined in the oft quoted judgment of Bowen L.J. in Bentsen v. Taylor, Sons & Co. [1893] 2 Q.B. 274, 281 :
	‘	There is no way of deciding that question except by looking at the contract in the light of the surrounding circumstances, and then making up one’s mind whether the intention of the parties, as gathered from the instrument itself, will best be carried out by treating the promise as a warranty sounding only in damages, or as a condition precedent by the failure to perform which the other party is relieved of his liability.’
	….
	My Lords, the judgment of Diplock L.J. in the Hong Kong Fir case is, if I may respectfully say so, a landmark, in the development of one part of our law of contract in the latter part of this century.  Diplock L.J. showed by reference to detailed historical analysis, contrary to what had often been thought previously, that there was no complete dichotomy between conditions and warranties and that there was a third class of term, the innominate term.  But I do not believe Diplock L.J. ever intended his judgment to afford an easy escape route from the normal consequences of rescission to a contract breaker who had broken what was, upon its true construction, clearly a condition of the contract by claiming that he had only broken an innominate term.  Of course when considering whether a particular term is or is not a condition it is relevant to consider to what other class or category that term, if not a condition, might belong.  But to say that is not to accept that the question whether or not a term is a condition has to be determined solely by reference to what has to be proved before rescission can be claimed for breach of a term which has already been shown not to be a condition but an innominate term. ….”

46.Lord Roskill then concluded at p.727 that the basic principles of construction for determining whether or not a term is a condition remain as before and that it is wrong to use the language employed by Diplock LJ in Hong Kong Fir as directed to the determination of the question which terms of a particular contract are conditions and which are only innominate terms.

47.I will therefore reject the approach suggested by Mr Aiken.  It follows that his contention that the plaintiff is, for one reason or another, adequately protected against the consequences of a breach of those terms of celerity and diligence is simply irrelevant to construction.

2.  Construing the terms

48.Following the correct approach on construction, I will look at Clauses 3.2, 3.3 and 4.4 in the context of the entire Agreement, which in turn must be construed against the surrounding factual matrix at the time of its making.  Particular regard should be given to the parties’ underlying commercial aims and objectives in entering into the Agreement, the commercial importance of these terms in relation to the Agreement, and the importance of commercial certainty : see BS & N Ltd (BVI) v. Micado Shipping Ltd (Malta) (The “Seaflower”) [2001] 1 Lloyd’s Rep. 341, per Jonathan Parker LJ at paras.86–87, at p.354.

49.The primary commercial aim and objective of the parties entering into the Agreement is plainly the sale and purchase of the Share.  However, in order to complete the sale, approvals from HKFE and SFC, as pre-requisites, must be obtained.  Approvals of course entail applications in the first place.  Here lies the commercial significance of the defendant’s applications to HKFE and SFC.  The whole train of events leading to completion starts with the defendant’s applications to HKFE and SFC.  Making the applications is thus not only an essential but also an indispensable step in the defendant’s performance of its contractual obligations.  The very commercial objective of the Agreement, namely the completion of the sale of the Share, is achievable only if the defendant takes out the applications.

50.I next consider the commercial importance of the timing for taking out the applications by the defendant.  When the applications are made would, in normal course of events, have a definite bearing on when approvals would be obtained and hence the time for completion.  Normally, the sooner the applications are made, the sooner the approvals will be obtained.  The Agreement does not set a precise time limit for the defendant to make the applications.  What it does is to impose various obligations on the parties to ensure that the applications would be timely made with best endeavours as follows :

(a)	On the plaintiff’s part :
	(1)	It has to deliver, upon the execution of the Agreement, all the requisite documents to the defendant to facilitate the latter’s application to HKFE as soon as practicable thereafter (Clause 3.1).
	(2)	It must also use its best endeavours to assist the defendant in such application (Clause 4.3).
(b)	On the defendant’s part :
	(1)	It shall make the application to HKFE as soon as practicable after the plaintiff’s delivery of the documents under Clause 3.1.  This is clear from the wording of Clause 3.1, which obliges the plaintiff to deliver the requisite documents to the defendant to facilitate its application to HKFE as soon as practicable thereafter.  (Emphasis supplied.)  The parties must have intended that the defendant should make the application as soon as practicable after the plaintiff’s delivery of documents.  This reading is supported by Clause 4.4 : see (4) below.
	(2)	It shall make the application to SFC and promptly complete all prescribed forms and so forth : Clause 3.2.  Contrary to Mr Aiken’s submission, Clause 3.2 plainly requires the defendant to make the application to SFC promptly.  It dose not make sense if, as contended, the defendant is required only to complete the form promptly but is not required to submit the same to SFC in order to prosecute the application.  This is further contrary to the requirement under Clause 4.4 : see (4) below.
	(3)	It shall, as soon as practicable after SFC’s approval, apply to HKFE for membership and shall use its best endeavours to ensure its success (Clause 3.3).
	(4)	It undertakes to use its best endeavours to ensure the success of the applications, to pursue the applications promptly and to comply with all the rules, regulations, conditions and requirements of HKFE and SFC (Clause 4.4).

51.The parties’ intention is clear.  Although no precise time limit has been fixed, the defendant should make the applications to HKFE and SFC promptly and as soon as practicable and with best endeavours after the execution of the Agreement and in any event after the plaintiff has delivered the requisite documents under Clause 3.1.  Given the importance of the applications and the timing when they are to be made, the parties must have attached great commercial significance to the timely performance with best endeavours of the above obligations on the part of the defendant.

52.I next come to the importance of commercial certainty.  In case of a time clause in a commercial contract, certainty is of particular importance : The Seaflower, per Jonathan Parker LJ at para.84, at p.354.  The court will require precise compliance with stipulations as to time wherever the circumstances of the case indicate that this would fulfill the intention of the parties.  Broadly speaking, time will be considered of the essence in mercantile contracts and in other cases where the nature of the contract or the subject matter or the circumstances of the case require precise compliance : Bunge, per Lord Wilberforce at p.716 and Lord Roskill at p.729.

53.This well-established principle was applied by Goff J (as he then was) in the Post Chaser case, supra, even though the time for performance was not fixed.  There the provision that “declaration of ship to be made to Buyers in writing as soon as possible after vessel’s sailing” was held to be a condition of the charterparty because it constituted an essential step in the seller’s performance of his contractual obligations.  It was also an important step since once such a declaration had been made the buyer could then appropriate goods from the ship so declared in performance of his obligations to a particular sub-buyer to whom he had already agreed to sell goods of the same contractual description.  After citing Lord Wilberforce’s speech in Bunge at p.716 (see paragraph 52 above), Goff J went on to say at pp.699–700 :

“

…[The] circumstances of the present case indicated strongly that precise compliance is required in relation to stipulation as to time for performance for the declaration of the ship… It is true that the time for compliance is not fixed, but the requirement that the declaration should be made ‘as soon as possible after vessel’s sailing’ indicates that speedy declarations are regraded as important.”

54.In my view, Goff J’s observation is equally apt in the present case.  In light of the commercial significance attached to the defendant’s obligations to make timely applications to HKFE and SFC with best endeavours under Clauses 3.2, 3.3 and 4.4, strict compliance of those provisions is of the essence of the Agreement.  In other words, they are conditions.

55.Mr Aiken argued that these terms of celerity and diligence are innominate terms.  He first relied on Hong Kong Fir, to support the proposition that where there can be various kinds of breach of a term, it is impossible to ascribe to it the character of a condition.  As a general proposition, it must be right.  However, it has no application if the term in question is a time clause which fixes the time for performance of which there can be only one kind of breach possible.  In Bunge, Lord Wilberforce in rejecting a similar argument by the buyers on the time clause then before the House (Clause 7), had this to say at p.715 :

“	This argument, in my opinion, is based upon a dangerous misunderstanding, or misapplication, of what was decided and said in Hongkong Fir.  That case was concerned with an obligation of seaworthiness, breaches of which had occurred during the course of the voyage.  The decision of the Court of Appeal was that this obligation was not a condition, a breach of which entitled the charterer to repudiate.  It was pointed out that, as could be seen in advance the breaches, which might occur of it, were various.  They might be extremely trivial, the omission of a nail; they might be extremely grave, a serious defect in the hull or in the machinery; they might be of serious but not fatal gravity, incompetence or incapacity of the crew.  The decision, and the judgments of the Court of Appeal, drew from these facts the inescapable conclusion that it was impossible to ascribe to the obligation, in advance, the character of a condition.
	Diplock L.J. then generalized this particular consequence into the analysis which has since become classical.  The fundamental fallacy of the appellants’ argument lies in attempting to apply this analysis to a time clause such as the present in a mercantile contract, which is totally different in character.  As to such a clause there is only one kind of breach possible, namely, to be late, and the questions which have to be asked are, first, what importance have the parties expressly ascribed to this consequence, and secondly, in the absence of expressed agreement, what consequence ought to be attached to it having regard to the contract as a whole.”

56.Clauses 3.2, 3.3 and 4.4 are not stipulations fixing the time for performance.  But they are time related provisions in the sense that due performance of which will impact on the completion of the transaction.  The parties, as I have demonstrated, must have regarded strict compliance of these terms as extremely important.  And as rightly pointed out by Mr Wong, they can be breached in one way only.  The thrust of Lord Wilberforce’s speech quoted above is applicable here.  I therefore reject Mr Aiken’s contention.  

57.Mr Aiken next relied on Bremer v. Vanden, supra.  There, the relevant contractual provision in GAFTA 100 provided that the contract was to be cancelled in case of prohibition of export preventing fulfillment and that the seller shall so advise the buyer without delay.  The House of Lords held that on a proper construction of the provision, where there was an embargo which prevented fulfillment of the contract, the contract was cancelled.  Such cancellation could not be conditional upon the advice by the seller of the reasons without delay.  The mere failure to advise without delay would not affect the cancellation of the shipment which was already produced by the embargo.  Mr Aiken submitted that Bremer v. Vanden is applicable here.

58.In Post Chaser, the seller relied on Bremer v. Vanden and raised an argument analogous to that of Mr Aiken.  Goff J dealt with the argument at p.699 thus :

“	…. He also relied upon the decision of the House of Lords in Bremer Handelsgesellschaft m.b.H. v. Vanden Avenne-Izegem P.V.B.A., [1978] 2 Lloyd’s Rep. 109, in which it was held that a provision of GAFTA 100, requiring sellers to advise buyers without delay of a prohibition of export or other event preventing fulfilment, was no more than an innominate term; and he submitted that the requirement in the present case relating to the time of the ‘declaration of shipment’ should likewise be so classified.
	I am unable to accept this submission. ….”

Goff J then dealt with the commercial importance for speedy declarations : see paragraph 53 above.  He then went on at p.770 :

“

…. Furthermore, this clause is very different from the prohibition clause in GAFTA 100, where the required advice does not form part of the machinery of performance, and in any event forms part of a clause under which the occurrence of an event within the clause operates automatically to determine the contract, irrespective of the giving of the requisite advice.  It follows that, on this point, I find myself to be in agreement with the conclusion of the Board of Appeal.”

59.In my view, the distinction drawn by Goff J is equally apt in the present case.  I fully agree with Mr Wong’s submission that Bremer v. Vanden is wholly different from the present case, where the very root of the Agreement, namely completion, is to be significantly affected by the defendant’s strict compliance of its obligations in making and pursuing the applications.

60.Finally, Mr Aiken relied on Homyip, supra.  There, Cheung J (as he then was) held that an “as is” clause in a provisional sale and purchase agreement for a property was an innominate term because the property was purchased without any inspection.  Thus the breach of the term did not entitle the plaintiff to rescind unless he could show that the breach deprived him of substantially the whole benefit of the agreement.  Cheung J’s conclusion on the effect of the “as is” clause in Homyip is readily explainable on the ground that the parties did not attach much commercial significance to it so as to render it to be a condition.  Here, as I have demonstrated, the parties must have attached much commercial significance to Clauses 3.2, 3.3 and 4.4, rendering them to be conditions.

61.For the above reasons, I reject the Construction Point and hold that Clauses 3.2, 3.3 and 4.4 are all conditions.

D.  Issue 2 : Whether the plaintiff’s rescission premature

62.As noted above, the defendant is relying on the Completion Point and the Notice Point in support of its contention that the plaintiff’s purported rescission was premature.  I first consider the validity of the Completion Point.

1.  The Completion Point

63.Mr Aiken argued that the time for performance of the defendant’s obligations to pursue the applications must be measured against the time given for completion, which is 15 months under Clause 5.1.  In other words, the defendant had 15 months to obtain the approvals and to take out the applications.

64.This Point calls for a proper construction of Clause 5.1 of the Agreement, which in its entirety reads :

“

Subject to Clause 6.1, completion of sale and purchase of the Share (‘Completion’) shall take place at such place, time and date as the Vendor may reasonably require, within seven days after receipt of the approval of [HKFE] approving the Purchaser’s application for membership or the approval of [SFC] approving the Purchaser’s application for registration as a dealer under the Ordinance, whichever shall be the later but shall not in any circumstances take place later than 15 months from the date hereof (‘the Expiry Date’).”

65.Completion of the sale of the Share is tied to and dependent on approvals.  However, approvals are within the absolute discretion of HKFE and SFC.  There is no guarantee that the approvals will be obtained and if so when.  It is therefore impracticable and indeed impossible to fix any precise time for the defendant to obtain the approvals to enable completion to take place.  The parties thus agree, under Clause 5.1, that completion should take place within seven days after receipt of either approval, whichever shall be the later.  The agreed time for completion is no doubt of the essence of the Agreement : see Clause 7.

66.Clause 5.1 must be read together with Clauses 3.2, 3.3 and 4.4 which oblige the defendant to take out the applications timely and with best endeavours.  The parties could not have intended to give the defendant 15 months to make the applications and obtain approvals.  If they did, the defendant could be as tardy as it wanted to be in making the applications so long as they obtained the approvals before the Expiry Date.  All the references to celerity and diligence in Clauses 3.2, 3.3 and 4.4 would become wholly meaningless.  Such a construction will defeat the very commercial objective that the parties had in entering into the Agreement.  It is objectionable : Consolidated Bathurst Export Ltd v. Mutual Boiler & Machinery Insurance Co., 112 DLR (3d) 49, per Estey J at para.26.

67.What then is the intention of imposing the Expiry Date?  As noted, completion of the Agreement will depend wholly on the success of the applications to HKFE and SFC.  Approvals are however in the absolute discretion of HKFE and SFC.  They are simply beyond the control of the parties.  That being the case, it makes perfect commercial sense for the parties to provide for the eventuality where the defendant’s applications, without any default of either party, may just fail.  They make two provisions.  The first is Clause 3.4, which enables the defendant to nominate a substitute to take up the Share before the Expiry Date.  The second is the deadline of 15 months in Clause 5.1 for the Agreement to expire whereupon the parties will be relieved from further contractual obligations.  The deadline will also take care of two further possible scenarios : (a) the applications to HKFE and SFC by the nominee fail; and (b) the applications, whether by the defendant or the nominee, are without any default of the parties unduly delayed.

68.Expiry Date thus simply means what it says.  The Agreement will expire after 15 months if no completion takes place by then.  It cannot be equated with completion date.  It does not give the defendant 15 months to take out the applications as contended.

69.To complete the discussions on the Completion Point, I only need to briefly deal with the Greater London Council case, supra.  Mr Aiken relied on this case for the proposition that the plaintiff cannot require the defendant to complete earlier than the contractual deadline.  Mr Wong disagreed that this case is an authority for that proposition.

70.For my part, I do not think it is really necessary to go into that case in detail.  Mr Aiken’s submission can be adequately dealt with by looking at the basic principle, which is this.  Where there is a contractual provision stipulating, without more, the time for performance of an obligation, the party obliged to so perform is not in breach until the end of the time limit : Halsbury’s Laws of England, (4^th edn), Vol.9(1), para.928, at p.683.  This general principle does not assist the defendant for the simple reason that the time for taking out the applications by the defendant is not 15 months as contended.

71.For the above reasons, I reject the Completion Point.

2.  The Notice Point

72.I then come to the Notice Point.  To recap, Mr Aiken argued that the terms of celerity and diligence do not justify rescission until and unless notice is given of a precise deadline for performance and the defendant had failed to perform accordingly.  In support of his contention, he relied on British and Commonwealth Holdings Plc., supra and Joy & Peace.com Inc., supra.

73.I will look at these two cases in greater detail below.  To test the correctness of Mr Aiken’s proposition, it is useful, I believe, to begin with some basic, well-established general principles on time of performance of a contract.  They are set out below.

74.Where there is a contractual provision stipulating the time for performance of an obligation, the party obliged to so perform is not in breach until the end of the time limit : Halsbury’s Laws of England, (4^th edn), Vol.9(1), para.928, at p.683.

75.Where a party to a contract undertakes to do an act, the performance of which depends entirely on himself, and the contract does not specify the precise time for performance or merely uses indefinite words such as “with all dispatch”, the law implies an obligation to perform the act within a reasonable time having regard to all the circumstances of the case : Chitty on Contract, (29^th edn), Vol.1, para.21-020, at p.1246.

76.While a contract does not fix the time for performance, it may contain provisions that are time related such as “ as soon as possible”, “directly” and “immediately”.  These provisions do not fix time limit for performance.  But they tie the time for performance to the manner in which the obligation is to be performed.  There is a wealth of authorities to support the proposition that they carry legally enforceable obligations.  Whether there is a breach of such provisions and the consequences of the breach depend on the circumstances of the case.

77.Time for performance can be made essence of the contract by :

(1)	express provision; or
(2)	implication arising from the circumstance of the contract or the nature of the subject matter,

so that the fixed time for performance must be exactly complied with : Chitty on Contract, ibid, para.21-013, at pp.1240–1241.  

78.Where time was not originally of the essence of the contract, but one party has been guilty of undue delay, the other party may give notice requiring the contract to be performed within a reasonable time.  What is reasonable time is dependent on all the facts and circumstances of the case.  Notice making time of the essence of the contract can be given in relation to any term of the contract, entitlement to give notice is not confined to essential terms of the contract : Chitty on Contracts, ibid, para.21-014, at p.1242.

79.The distinction between time being of the essence by way of a contractual provision and time being made of essence of contract by reasonable notice is important.  They carry different consequences :

(1)	In the former case, the effect of declaring time to be of the essence is to elevate the term to the status of a condition, with the consequences that a failure to perform by the stipulated time will entitled the innocent party to rescind and to claim damages : Chitty on Contract, ibid, para.21-015, at p.1243.
(2)	In the latter case :
	“	…. notice does not serve to make time of the essence so far as the obligations in the original contract are concerned, because one party cannot unilaterally vary the terms of a contract by turning what was previously a non-essential term of the contract into an essential term : the notice ‘has in law no contractual import.’  The effect of the notice is rather to bring to an end the interference of equity with the legal rights of the parties so that the entitlement of the innocent party to terminate future performance of the contract is then governed solely by ordinary common law rules.  Given that the notice cannot have the effect of turning the non-essential term of the contract into a condition, the party giving the notice can only terminate where the failure of the other party to comply with the terms of the notice goes to the root of the contract so as to deprive that party of a substantial part of the benefit to which he was entitled under the terms of the contract.  Failure to comply with the terms of the notice can therefore only be used as evidence of a repudiatory breach; it is not a repudiatory breach per se.”
	See Chitty on Contracts, ibid, para.21-017, at pp.1244–1245.

80.Two propositions may be derived from the above general principles.

81.First, where contractual stipulations as to time or relating to time are essence of the contract, it means that they are conditions.  Strict compliance is necessary.  If there is any failure to perform, it amounts to a repudiatory breach.  No notice for performance is required.  This accords with the general principle that normally no request for performance is necessary and the promisor is bound to perform his contractual obligation without being requested to do so : Chitty on Contract, ibid, para.21-010, at p.1238.

82.Second, where the time stipulations are not of the essence, it means that they are not conditions of the contract.  Notice to call for performance may be given, although the notice does not turn the time stipulations into conditions.  Failure to comply with the notice may be evidence of repudiatory breach and not a repudaitory breach per se.

83.Here, as I have already held, although Clauses 3.2, 3.3 and 4.4 do not fix the time for performance, they are all conditions.  No notice to call for performance is required.

84.I now return to the two cases cited by Mr Aiken.

85.In Quadrex, the contract specified that completion was to take place as soon as reasonably practicable after certain preliminaries had been fulfilled but no date had been fixed or was capable of precise determination from the contract.  The English Court of Appeal held that in the circumstances time was not originally of the essence of the completion of the agreement; but that the commercial nature of the contract was such that if time had been specified for completion, it would have been of the essence and the plaintiff, the innocent party, was entitled to make time of essence by serving a reasonable notice to complete even the defendant had not been guilty of improper or undue delay.

86.The facts in Quardex are clearly distinguishable.  Time was not of the essence of the contract there because no date had been fixed or was capable of precise determination.  Here, although no time had been fixed under Clauses 3.2, 3.3 and 4.4, they are conditions which significantly affect the time of completion by linking it to the manner in which the applications are to be made.  They must be strictly complied with.

87.In Joy & Peace.com Inc., the defendant agreed to sell to the plaintiff the former’s shares in a company which was then pursuing a listing exercise.  The plaintiff had already paid for the shares but the agreement contained no date for transfer of the shares.  At the end, the listing exercise was unsuccessful.  The plaintiff purported to rescind the agreement on the ground that the delivery of the shares had not been carried out in reasonable time.  The plaintiff relied on a term in the contract that time was of the essence and argued that this commit the defendant to deliver the shares within a reasonable time, say, a few weeks.  Deputy Judge Gill rejected this argument and ruled that the time of the essence provision had no application in the absence of any fixed contractual date.

88.Again, Joy & Peace.com Inc. is distinguishable on the facts.  There, the contract made no provision for time or manner of performance at all.  Time was simply left at large.  Here, Clauses 3.2, 3.3 and 4.3 impose obligations on the defendant to take out the applications as soon as practicable and promptly with best endeavours.

89.For the above reasons, the Notice Point must fail.

3.  Rejecting the defence

90.There being no substance in both the Completion Point and the Notice Point, the defence that the plaintiff’s purported rescission was premature must fail.

E.  Issue 3 : Whether the defendant had repudiated

1.  The law

91.I now turn to consider if the defendant is guilty of the repudiatory breach of the Agreement as alleged.  I will begin with a brief summary of the principles on terms of celerity and diligence that I am able to derive from the authorities relied on by Mr Wong.

92.First, the obligations imposed by terms of celerity and diligence are to be assessed objectively : Elliott v. Lord, supra, where the Privy Council held that the charterers were in breach of the contractual provision of “prompt dispatch in loading” although the delay was caused by an insufficient supply of coal, which was not within their control.

93.Second, to do a thing “as soon as possible” means to do it within a reasonable time, with an understanding to do it within the shortest possible time : Hydraulic Engineering Company v. MaHaffle, supra, per Baramwell LJ at p.676; followed in King’s Old Country Limited v. Liquid Carbonic Canadian Corporation Limited [1942] 2 WWR 603, per Dysart J at p.606.  In my view, this expression is equally applicable to the term “promptly”.  With a slight change, it can be adapted to “as soon as practicable”, which reads : to do the thing “within a reasonable time, with an understanding to do it within the shortest practicable time”.

94.Third, in a case where a party had agreed to act “as soon as possible”, he must be taken to have agreed to proceed with reasonable diligence and that he was in a position and had the means and ability to do so.  He would not be excused by alleging that the means were in fact not available or the means available were such that would delay his performance : Hydraulic, supra, per Bramwell LJ at p.674 and Cotton LJ at p.677.  The same should, in my view, be applicable to the contractual obligations of acting “promptly” and “as soon as practicable”.

95.Fourth, “using best endeavours” means that the party so undertakes shall take all reasonable steps which a prudent and determined man acting in his own interests and anxious in completing the transaction would have taken.  Second-best endeavours will not do.  If that person fails to use proper skill and care in going about the task that he undertakes to do with his endeavours, or that he deliberately delays or procrastinate the pursuit of that object, or going about doing it in such a way disregarding the interests of the person to whom he has given his undertaking, he fails in his obligations : see IBM United Kingdon Ltd v. Rockware Glass Ltd, supra.

96.Finally, failure to observe these terms of celerity may amount to a repudiatory breach of the agreement which entitles the other party to rescind : Hyundai Engineering and Constructive Co. Ltd v. Vigour Ltd, supra.

2.  The evidence

97.With the above principles in mina, I now turn to the evidence, which is not seriously in dispute.

98.Pursuant to Clause 3.1 of the Agreement, the plaintiff on 14 June 1999 through JCL sent to YYY the Agreement duly executed by the parties, an undated bought and sold note and instrument of transfer in respect of the Share.  Further on 21 June 1999, the plaintiff gave notice to HKFE of its intention to transfer the Share to the defendant.  On 6 July 1999, JCL sent to YYY copy of resolutions dated 14 June 1999 signed by all directors of the plaintiff authorizing the sale of the Share to the defendant.

99.The undisputed evidence shows that the defendant did not take out the applications with HKFE and SFC until February 2000, some eight months after the execution of the Agreement.  It is convenient to consider the defendant’s conduct by reference to different stages chronologically.

(a)  The initial steps before October 1999

100.On 30 June 1999, YYY wrote to HKFE, making enquiry of the necessary procedure for the application for HKFE membership.  HKFE sent a membership application form and information package to YYY on 15 July 1999.  Mr Yuen was then out of town.  After his return, the defendant began searching for a suitable dealing director in August or September 1999.  Earlier, Mr Yuen had already made some enquiries with his friends in the trade for suitable candidates.

101.The defendant initially intended to recruit a Mr Cui Jian Hua (“Mr Cui”) as a part-time dealing director accredited to it.  Mr Cui was then a dealing director of RMH Limited.  But he was unable to act as a part-time dealing director accredited to the defendant simultaneously. 

102.Then in September 1999, Mr Yuen approached a Ms Wei Xiao Min (“Ms Wei”) to act as dealing director.  But according to Mr Yuen, the defendant found Ms Wei to be over-qualified for the job.  Mr Yuen also contacted a Mr Gordon Leung (“Mr Leung”), whom he had known for several years.  Mr Leung was then a dealing representative and a commodity trading representative, having just resigned from Cresvale Far East Ltd as its senior sales manager on 1 August 1999.  Despite these contacts, the defendant did not take any step in making the applications to SFE and HKFE.

(b)  Attempt to sub-sale the Share between October and December 1999

103.What the defendant did then was to pursue a sub-sale of the Share.  This was motivated by two principal reasons.  First, Mr Yuen did not wish to go through the trouble of getting the defendant qualified to be HKFE member.  Secondly, Mr Yuen wanted to make a quick profit out of the sub-sale.  As early as August 1999, Mr Yuen had already come to know about TAD.  By October 1999, after the issue of the Scheme Document, Mr Yuen became aware of the “compensation package” offered to HKFE members upon the merger.  The cash alternative, if opted, would possibly amount to some HK$5.4 million for a share in HKFE.  This was of course much higher than the price under the Agreement (HK$1,850,000).

104.The defendant received three to four offers through some brokers.  Eventually, it decided to sub-sell the Share to CSC Futures (HK) Ltd (“CSC”) for HK$4,550,000.  The negotiations with CSC began in October 1999.  After a series of correspondence between lawyers, by letter dated 15 November 1999, CSC’s solicitors asked for the plaintiff’s consent to the sub-sale.  By letter dated 16 November 1999, YYY replied that it would obtain the plaintiff’s consent.  The lawyers then engaged in further correspondence on the terms of the sub-sale agreement.  It is not necessary to dwell on the details of those terms except to note two points.  First, completion of the sub-sale was set at three months in order to meet TAD.  Second, if the sale could not be completed before TAD, the sub-sale agreement would be automatically cancelled.

105.On 13 December 1999, YYY wrote to JCL, alleging that the defendant had been unable to find a suitable dealing director and therefore would like to nominate CSC to take up the Share pursuant to Clause 3.4 of the Agreement.  YYY asked the plaintiff to write to HKFE to confirm that it had no objection to the sub-sale.  By a separate letter of the same date, YYY advised JCL that HKFE had informally approved CSC to become a member of HKFE upon completion of transfer the Share.  YYY requested the plaintiff to write HKFE a letter of confirmation for transfer of the Share to CSC.

106.By letter dated 22 December 1999, the plaintiff, through JCL, refused to give consent to the sub-sale.  By letter dated 24 December 1999 to JCL, YYY claimed that the defendant had the right to nominate and substitute a transferee under Clause 3.4 of the Agreement and alleged that the plaintiff was in breach of Clause 4.3 by refusing to assist.  By letter dated 29 December 1999 to YYY, JCL requested the defendant to provide correspondences between the defendant, HKFE and SFC pursuant to Clause 4.4 of the Agreement.

107.Eventually, the sub-sale was not proceeded with when on 7 January 2000 the defendant returned the initial deposit to CSC.

108.In the course of correspondence between the parties’ solicitors, there was an argument as to whether the defendant was entitled to invoke Clause 3.4.  But at trial, Mr Yuen in the course of his evidence readily conceded, and rightly so in my view, that the defendant had no such right.  For the pre-conditions to the exercise of nominating a substitute prescribed there simply did not exist at the time.

(c)  Applications to HKFE and SFC before TAD (21/2/00)

109.The defendant then took steps to make the requisite applications to SFC and HKFE.

110.The application to HKFE must be supported by a detailed Business Plan.  The plan should cover, among other things :

(1)	The markets in which the defendant proposed to participate.
(2)	Financial position.
(3)	Dealing and supporting system which must include but not limited to :
	(a)	modus operandi of the trading accounts including account opening procedures, order procedures, margining and monitoring procedures; and
	(b)	back office management system, margining and risk control capabilities.
(4)	Expected client base.
(5)	Client accounts documentation.
(6)	Organizational structure including a list of the defendant’s key personnel, their job specification and relevant experience.

111.The plan was a sophisticated document which required expertise in the trade to prepare.  Through a broker, Mr Yuen was introduced to Mr Brian Fung (“Mr Fung”) of Kaiser Futures Limited (“Kaiser”) in October 1999.  Mr Fung was himself a registered dealing director.  It was not until end of January 2000 that Mr Fung drew up the plan for the defendant (“the Plan”).  Mr Yuen said in oral evidence that he took the time to “hatch” the Plan.  In my view, it is but a lame excuse.  The defendant was at that time engaging in the sub-sale of the Share.  Obviously, there was no reason then to ask Mr Fung to proceed with drafting the Plan.

112.According to Mr Yuen’s evidence under cross-examination, Mr Fung did not charge anything for preparing the Plan because Mr Fung was in fact a buyer with whom Mr Yuen had an understanding to sell the Share.  The alleged understanding was that Mr Fung would be given a right of first refusal or option to buy the compensation shares in HKEC at market price.

113.Other than the Plan, the defendant must also find a suitable dealing director.  By the end of January 2000, the defendant approached a Mr Kwong Dak Shing (“Mr Kwong”) to act as its dealing director.  Mr Kwong was then a dealing director accredited to Kaiser.  He was a sub-ordinate of Mr Fung.  The defendant verbally agreed with Mr Kwong that he would operate the defendant upon commencement of its business as a future trader.

114.On 9 February, YYY on behalf of the defendant lodged an application to HKFE for membership supported by the Plan prepared by Mr Fung.  In this application, Mr Kwong was said to be responsible for both the dealing division and internal control and compliance.  YYY also submitted an application to SFC for registration as dealing director on behalf of Mr Kwong and as dealer on behalf of the defendant.

115.On 10 February 2000, the defendant, through YYY, applied to HKFE for transfer of the Share.  Correspondences with HKFE and SFC then ensued.  On 14 February 2000, SFC requested the defendant to provide a letter stating that Mr Kwong would surrender his registration as dealer accredited to Kaiser upon approval of the defendant’s application for registration.  On 17 February 2000, YYY informed SFC, among other things, that Mr Kwong was unable to surrender his dealer status with Kaiser immediately.  On 18 February 2000, SFC advised that defendant that in the absence of a qualified supervisory dealing director, the defendant would not be able to satisfy SFC that it was able to perform the functions of a commodity dealer efficiently, honestly and fairly and this its fitness and properness to be registered.  The defendant was asked to reply within seven days whether it would like to have its applications determined by SFC.

116.In the end, the defendant did not pursue the application with Mr Kwong as the proposed dealing director.

117.Mr Yuen was cross-examined on the application with Mr Kwong as the dealing director.  Two points arose.  First, earlier in his affirmation filed in reply to interrogatories on 9 July 2003, Mr Yuen said that since Mr Kwong was still working for Kaiser at the time and he had to give notice of resignation.  He therefore could not join the defendant.  But he admitted under cross-examination that Mr Kwong was only prepared to join the defendant when it was ready for its business and since it was not, Mr Kwong did not join the defendant.  Second, Mr Yuen also admitted under cross-examination that he knew that the defendant would not be able to start doing business upon approvals because the defendant had not even started setting up its own office, hire any staff or install the computer system.  All these preparatory steps would take at least a few months after approval to complete.  That being his evidence, it is doubtful if the purported statement in the Plan that Mr Kwong would resign from Kaiser upon the successful application to SFC was genuine at all.

118.What the defendant did next was that on 21 February 2000, it submitted two fresh applications to SFC for registration of Ms Wei and Mr Leung as dealing directors.  HKFE was informed of these applications on the same day.

119.On 23 February 2000, HKFE advised the defendant that it would not proceed further with its applications for membership and transfer of the Share since the defendant had failed to obtain approval for admission or transfer of the Share before the TAD (21 February 2000).  The defendant was advised that it might apply for Exchange Participantship.

120.On 26 February 2000, JCL informed YYY that the plaintiff had received HKFE’s letter dated 11 February 2000 addressed to YYY in respect of the defendant’s application for membership and transfer of the Share.  JCL chased YYY to provide copy correspondence between the defendant, HKFE and SFC.

121.On 1 March 2000, YYY provided to JCL copy correspondence between the defendant, HKFE and SFC between 9 and 23 February 2000 without the enclosures contained therein.  The plaintiff then learned that the defendant had not made the requisite applications until 9 February 2000.

(d)  Post-Effective Date applications

122.On 10 March 2000, YYY advised HKFE that the defendant would continue with its application for dealing directorship with SFC since it was a prerequisite for the application for Exchange Participantship under the new rules.  What followed were the defendant’s endeavours to pursue the applications for dealership with SFC and application for Exchange Participantship with HKFE.  At the end, the application for Exchange Participantship was deemed to have been refused by HKFE on 20 November 2000 on the ground that the defendant had failed to fulfill certain conditions set out in HKFE’s letter dated 25 August 2000.  The applications with SFC and HKFE were later withdrawn on 18 December 2000.

3.  An overwhelming case of repudiation

123.In my view, the evidence is overwhelming.  Under the Agreement, the defendant must pursue the applications with SFC and HKFE promptly and as soon as practicable, that is, within the shortest practicable time.  It must also use its best endeavours.  In order to make the applications successful, the defendant must have a business plan which satisfied HKFE’s requirements, a suitable dealing director accredited to it, and an office fully equipped and ready for business upon approvals being given.  However, after making some initial search for a dealing director in August or September 1999, the defendant went astray and engaged in attempts to sub-sell the Share.  Instead of performing its obligations under the Agreement, the defendant wanted to get a quick profit by sub-selling the Share.  It spent three months in so doing under the misapprehension that it had such a right of sub-sale under Clause 3.4.  And the defendant did it with full knowledge that after TAD, no transfer of the Share would be considered by HKFE.  It was only after the purported sub-sale to CSC failed in December 1999 that the defendant began to take the preparatory steps for making the applications in January 2000.  The first applications were not made until 9 February 2000.  Even then, the applications were doomed to failure because Mr Kwong, the proposed dealing director, would definitely not join the defendant for the simple reason that the defendant was not even ready for its business.  When the second applications were made with Ms Wei and Mr Leung on 21 February 2001, it was already too late.  HKFE would not have approved the transfer of the Share any way.  

124.The lapse of eight months from the time of the Agreement until the applications were made in February 2000 is inordinate and inexcusable.  In my view, the defendant had clearly acted in repudiatory breach of the Agreement.  And I so find.

F.  Issue 4(a) : Had the plaintiff affirmed?

125.This brings me to the defendant’s submission on affirmation.  The defendant’s argument is this.  By asking the defendant for correspondence with SFC and HKFE on 29 December 1999 and 26 February 2000, the plaintiff had elected to affirm the Agreement.

126.The law is well-settled.  Where a party to a contract was faced with the choice whether to affirm or rescind the contract, in order to render his election irrevocable he had to have knowledge not only of the facts which gave rise to the election but also of the right of election itself.  A person could not be treated as having elected to affirm a contract unless he had unequivocally demonstrated to the other party that he intended to proceed with it.  The issue of election is a question to be decided on the evidence.  See Peyman v. Lanjani [1985] 1 Ch 457.

127.Mr Wong submitted that the defendant’s submission on affirmation could not get off the ground.  The plaintiff’s evidence is that until the plaintiff obtained on 1 March 2000 from the defendant copies of the correspondence that it had with HKFE and SFC, all that the plaintiff was aware was that the defendant claimed that it had been unable to find a dealing director and was seeking the plaintiff’s consent to sub-sell.  The purported sub-sale, without more, would not amount to repudiation.  The plaintiff had along been kept in the dark as to what had actually happened.  It was confused and was then taking legal advice.  Mr Wong asked rhetorically : How can the defendant be said to have elected to affirm the Agreement when it had been kept in the dark as to what had happened and was merely exercising its contractual right under Clause 4.4 for correspondence to find out what had happened : Atureliya Walendagodage Henry Senanayake v. Cheng [1966] AC 63.  I agree.

128.This contention of affirmation must fail.

G.  Issue 4(b) : Had the plaintiff committed any breach which disenabled it from rescinding?

129.Mr Aiken submitted that the plaintiff had been in breach of Clause 4.4 of the Agreement which obliged the plaintiff to use its best endeavours to provide such assistance as is appropriate to the defendant in pursuing the applications.  He relied on the admitted failure by the plaintiff to provide a copy of the Scheme Document to the defendant, and to notify the defendant of TAD and the option to take the cash alternative instead of the shares in HKCE.

130.In my view, the admitted failure on the part of the plaintiff did not constitute a breach of Clause 4.4 because the Scheme Document, TAD or the cash alternative would not assist the defendant’s applications.  Even assuming that it was a breach on the part of the plaintiff as contended, its effect must be considered in context.  Mr Yuen admitted in his oral testimony that in or about August 1997, he was already aware of TAD and the cash alternative.  Shortly after its release in September 1999, Mr Yuen had already looked at the Scheme Document.  But he did not cause the defendant to take the steps to pursue the applications with HKFE or SFC at all.  That being the case, there can be no room for any suggestion that such a breach on the part of the plaintiff would have any effect on the defendant’s failure to take out the applications at all.  There is no substance in this complaint.

131.The defendant in its pleadings alleged that the plaintiff is in breach of certain provisions in Clause 4.1.  This allegation is not supported by the evidence before me.  It does not take the defendant’s case on Issue 4(b) any further.

H.  Issue 4(c) : Will equity intervene?

132.Mr Aiken submitted that it would be inequitable to allow the plaintiff to rescind the Agreement thus enabling it to keep the Windfall referred to in Section IV above.  He relied on William Sindall Plc v. Cambridgeshire County Council [1994] 1 WLR 1016.  With respect, William Sindall, a case on misrepresentation, has no application to a case of rescission upon acceptance of a repudiatory breach.  In such a case, there is simply no room for equity to intervene.  The innocent party is entitled as a matter of law to rescind if he chooses to do so.  The court has no jurisdiction to deprive him of the remedy.  For completeness, I will briefly deal with the two matters that Mr Aiken relied on in this regard.  He first referred to the plaintiff’s alleged failure to give assistance under Clause 4.4, which I have already dealt with.  He next complained that the plaintiff had failed to give consent to the sub-sale to CSC under Clause 3.4.  This complaint is wholly unmeritorious.  Even Mr Yuen himself accepted that the defendant had not right to sub-sell the share to CSC as alleged. 

I.  Conclusion

133.For the above reasons, none of the grounds raised against the plaintiff’s claim on repudiation succeeds.  For this reason alone, the plaintiff is entitled to judgment.  Mr Wong submits that I need to consider misrepresentation only if I do not find in favour of the plaintiff on its primary case of repudiation.  That being his position, I will just leave the plaintiff’s case on misrepresentation without any discussion or finding.

VIII.  Counterclaim

134.What remains is the counterclaim.  I only need to deal with it briefly.

135.The defendant’s counterclaim is premised on the contention that the plaintiff had acted in repudiatory breach by rescinding the Agreement on 15 March 2000 prematurely.  In light of my findings in Section VII above, this must fail.

136.The defendant also sought to support the counterclaim by an alternative argument.

137.Under Clause 5.5 of the Agreement, in the case where there may be any dividends, bonuses or any other distributions or payments accrued and received or receivable by the plaintiff in respect of the Share as form the date of signing of the Agreement up to Completion (both days inclusive), the plaintiff shall from Completion hold the same on trust for the defendant.  Mr Aiken also prayed in aid Clause 1.1 whereby the sale of the Share included all rights and benefits appertaining thereto to be accrued from the date of the execution of the Agreement.  Thus, he argued that the Share included the HKEC Share.  Upon cancellation of the Share, there was no longer any need to apply for the approvals from HKFFE and SFC to become a member of HKFE.  The Agreement concerned the obtaining of approvals had become meaningless and obsolete.  The defendant was therefore entitled to proceed to completion and the plaintiff’s letter of 15 March 2000 was repudiatory.

138.I am unable to accept this alternative argument.  In my view, it is fundamentally flawed.  On a proper construction of the Agreement, the Cancellation Share that the plaintiff received upon implementation of the Share could not have fallen within the subject matter of the sale : see generally Ferrand on Contract and Conveyance (4^th edn), pp.169–170.  Such a construction is an unwarranted attempt to rewrite the Agreement.  So is the submission that the provisions for obtaining approvals had become meaningless and obsolete after the cancellation of the Share.

139.The defendant’s counterclaim must fail.

IX.  Orders

140.I will enter judgment for the plaintiff for :

(1)	A declaration that the plaintiff was entitled to rescind the Agreement by reason of the defendant’s repudiatory breach thereof.
(2)	A declaration that the plaintiff had been lawfully rescinded by the plaintiff.
(3)	An order that the defendant do forthwith return, or cause its solicitors to return, to the plaintiff the share documents which had been deposited with the defendant’s solicitors as stakeholder pursuant to Clause 3.1 of the Agreement.

141.As to the plaintiff’s relief for damages for breach of the Agreement, no submissions have been advanced.  I will therefore direct that the parties should in the first instance agree on the proposed order to be made in this regard and submit the same to court for approval within 14 days from the date of handing down of this judgment; failing agreement, they should lodge with court their written submissions within 14 days thereafter.

142.I will dismiss the defendant’s counterclaim in its entirety.

143.On costs, the usual order should apply.  I will therefore make an order nisi that the plaintiff shall have the costs of the entire action, including any costs reserved, to be taxed if not agreed.

Mr Horace Wong, SC and Ms Nancy Ngai, instructed by Messrs J. Chan & Lai, for the Plaintiff

Mr Nigel Aiken, SC, Mr Kenneth Chow and Mr Kenneth Wong, instructed by Messrs Yung, Yu, Yuen & Co., for the Defendant