Advertasia Street Furniture Ltd v. China Outdoor Media Investment (Hong Kong) Co Ltd
Read the full judgment text of FACV 27 of 2005 on BabelCite. This Court of Final Appeal judgment was delivered on 15 December 2006 before Bokhary PJ, Chan PJ, Ribeiro PJ, Nazareth NPJ, Millett NPJ.
Contract – share sale agreement – condition precedent – interpretation – 'valid' – Sino-foreign joint venture – approval by PRC authorities – whether 'valid' includes 'not liable to be set aside' – whether joint venture contracts in which TMB and TMG were parties had received approval from MOFTEC and GFTEC – discrepancy between Chinese and English versions of joint venture contracts and supporting documents – role of foreign party's identity and creditworthiness in the approval process – whether concurrent findings of lower courts bound the appellant – share sale consideration HK$68 million – completion scheduled 5 May 1999 – Court of Final Appeal allows appeal unanimously with costs here and below, setting aside judgment for the respondent and the order for specific performance – fresh evidence application admitted de bene esse, no order made. The natural and ordinary meaning of 'valid' in art. 1.1 is not extended to include 'not liable to be set aside' – 'valid' in this context requires the contract to be null and void, not merely voidable – the crucial time under the clause is the date scheduled for completion, and a less stringent criterion cannot apply to the second alternative. Under PRC law the establishment of a joint venture between a Chinese and a foreign party requires approval by the relevant state authority, and approval is of the joint venture as a whole as proposed in the contract, including the identity and financial standing of the foreign party. On the evidence, the documents submitted to MOFTEC and GFTEC, and the approval certificates issued by them, identified the foreign party as 埃威伊國際集團亞洲候車亭廣告有限公司 (Ai Wei Yi) and described a company called Rapidventures as the foreign party; none of the documents referred to TMB or TMG. The joint ventures actually operated on the ground by TMB and TMG were not the joint ventures approved by the Chinese state authorities, and so their joint venture contracts were invalid. The purchaser was entitled to refuse to complete. The Court of Final Appeal held that the lower courts' findings were not concurrent on the real issue and the purchaser was not precluded from arguing the point. Appeal allowed with costs here and below.
Legal issues: Construction of the word 'valid' in the condition precedent (art. 1.1) · Whether the joint venture contracts had been validly approved under PRC law · Concurrent findings and preclusion from re-argument
Outcome: Appeal allowed; judgment in favour of Advertasia set aside.
Cited by 1 case
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FACV No. 27 of 2005 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION FINAL APPEAL NO. 27 OF 2005 (CIVIL) (ON APPEAL FROM CACV NO. 368 OF 2004) _______________ Between
_______________ Court: Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ, Mr Justice Nazareth NPJ and Lord Millett NPJ Dates of Hearing: 13, 14 and 15 November 2006 Date of Judgment: 15 December 2006 _________________________ J U D G M E N T _________________________ Mr Justice Bokhary PJ: 1.For the reasons fully stated in the judgment of Mr Justice Chan PJ with which I entirely agree and in the concurring observations of Mr Justice Ribeiro PJ, I feel unable to share the view taken by the courts below and would accordingly allow the appeal with costs here and below. Mr Justice Chan PJ: 2.The respondent (“Advertasia”) brought a claim against the appellant (“China Outdoor”) for specific performance, equitable damages and interest arising out of an agreement made on 21 April 1999 for the sale by Advertasia to China Outdoor of the entire issued share capital of four companies which are wholly owned by Advertasia (“the share sale agreement”). The trial judge (Stone J) gave judgment in favour of Advertasia for the relief claimed. This was upheld by the Court of Appeal (Le Pichon, Cheung and Tang JJA). China Outdoor now appeals to this Court. The terms of the share sale agreement 3.The consideration for the sale of the shares in these four subsidiaries of Advertasia was $68 million. It was understood by the parties that each of these subsidiaries had entered into a joint venture contract with a business partner in the Mainland for the management and operation of street advertising in bus shelters in each of four different Mainland cities. The purpose of purchasing these shares was clearly the acquisition of the operating and advertising rights in the bus shelters in these cities or (as the Court of Appeal put it) whatever interest in those rights which these subsidiaries had or might have under the joint venture contracts. The validity of the respective joint venture contracts was thus of vital importance to the purchaser, China Outdoor. 4.The consideration was to be paid by two instalments: $50 million on completion and $18 million on or before 30 June 2000 (Art. 2.1). Completion was to take place on 5 May 1999 at 5 p.m. (Art. 3.1). There was a condition precedent for the completion of the sale and purchase (“condition precedent”). This was contained in art. 1.1 which provided as follows:
5.It should be noted that the words at the end of the first sentence “or it is otherwise discovered that the J.V. contracts attached in Appendix B are not valid or have been terminated” were added by hand in the agreement before execution. This further illustrates the importance China Outdoor attached to the validity of these joint venture contracts. 6.No contracts were attached to Appendix B of the agreement. But it is accepted that the parties referred to the contracts for the joint ventures in Beijing and Guangzhou. The present dispute concerns the subsidiaries of Advertasia, namely, Transit Media Network (Beijing) Limited (“TMB”) and Transit Media Network (Guangzhou) Limited (“TMG”), which were involved in the joint ventures in these two cities respectively. The dispute between the parties 7.Completion never took place. The reason given by China Outdoor for refusing to complete was that shortly before the date for completion, it had discovered certain facts which showed that the joint venture contracts for Beijing and Guangzhou were not valid or were liable to be set aside; that being the case, the condition precedent was not satisfied and it was entitled not to complete. This was disputed by Advertasia which contended that the joint venture contracts in question were valid at the time scheduled for completion and that even if they were liable to be set aside at a future date, China Outdoor had to complete first and seek rectification of the relevant contracts later, if necessary. 8.The main dispute between the parties was thus whether the condition precedent was met or not. Two matters arise for consideration. First, what, upon a true construction of art. 1.1, was meant by “valid”, whether it includes “not liable to be set aside” as contended by China Outdoor (the “construction issue”). Second, whether it has been shown that the joint venture contracts in question were not valid at the time of completion in that they had not been approved by the respective Chinese state authorities (“the validity issue”). 9.On the validity issue, a large volume of documents and materials were produced in court and a good deal of oral evidence, including expert evidence on the relevant PRC law, was given at the trial. But at the end of the day, the most important documents which need to be examined closely are the joint venture contracts in question and the documentation submitted to the respective Chinese state authorities responsible for granting approval for these contracts. This is because the real question, as becomes clearer at a later stage, is what was the joint venture which the relevant Chinese state authority in Beijing and Guangzhou respectively had purported to approve; whether it was the joint ventures involving TMB and TMG which were approved. 10.To understand the parties’ contentions, it is necessary to go briefly into the background and the relevant facts in this case. Background 11.Advertasia is a company incorporated in Hong Kong. It was originally owned and controlled by Solothurn Limited, a BVI company (“Solothurn”) through another Hong Kong company. In August 1998, Advertasia became wholly owned and controlled jointly by Sopex International SA (“Sopex”) and Sedona International Holdings Limited (“Sedona”) through two shareholders agreements dated 23 January 1996 and 31 January 1997 respectively, a deed of re-organisation agreement dated 12 December 1997 and the exercise of an option under that deed. 12.Solothurn was previously owned and controlled by Mr Arnold Deparis and Mr Du Jianping. Deparis and Du were in the advertising business and the controlling figures of a BVI company called Rapidventure Group. They had connections in the Mainland. Through these connections, they secured certain operation and advertising rights in bus shelters in several Chinese cities. They did this by means of various companies incorporated in Hong Kong which entered into joint venture contracts with Chinese business partners in these cities. These companies are now owned and controlled by Advertasia which acquired ownership and control through the shareholders agreements mentioned above. It was the sale of the shares of four of these companies which was the subject matter of the share sale agreement. 13.It is to be noted that when these joint venture contracts were entered into with the Chinese partners in 1994 and 1995, it was Deparis and Du who were the persons in control of these companies. Even after they had sold their interests in Advertasia (owned through Solothurn) to Sopex and Sedona, they continued to manage Advertasia and its subsidiaries for a while pursuant to the deed of re-organisation agreement mentioned above. The present owners of Advertasia alleged that during this period of management, Deparis and Du had fraudulently taken away the business of Advertasia and its subsidiaries and transferred such business to companies set up by themselves. This led to a report by Advertasia to the Commercial Crimes Bureau and resulted in certain litigation by Advertaisa against Deparis and Du. Whatever is the outcome of the investigations and litigation, it is not relevant to the present appeal. Suffice it to say that Advertasia had serious differences with these two men. 14.China Outdoor is also in the advertising business. In 1998, it was desirous of participating in the operating and advertising rights in bus shelters in Mainland cities by acquiring these rights from Advertasia. Through various negotiations, it came to be aware of the differences Advertasia had with Deparis and Du. Several proposals had been discussed but came to nothing because Advertaisa was not able to give any warranties in relation to these rights. 15.Finally, the parties entered into the share sale agreement. While there were still no warranties or representations given by Advertasia (except the warranty in art. 4.1(i)(f) as to good title to the shares), the condition precedent in art. 1.1 with the addition of the handwritten words was included in the agreement and was thought to provide a way out of the deal for China Outdoor in case it was discovered that the joint venture contracts were not valid. Refusal to complete 16.Before the date for completion, China Outdoor’s Chinese lawyers conducted various searches at the Chinese state agencies as part of the due diligence exercise. The results of these searches gave rise to serious concern to China Outdoor with regard to the validity of the joint venture contracts for Beijing and Guangzhou. The matter was first raised in a letter dated 1 May 1999 from China Outdoor’s solicitors to Advertasia but only in relation to the joint venture in Guangzhou and later in another letter dated 5 May 1999, this time in relation to the joint ventures in both Beijing and Guangzhou. 17.The letter further suggested that Advertasia should rectify the situation which involved the Chinese authorities issuing new approval certificates and new business licences in respect of the joint ventures in these two cities. 18.In a reply dated 6 May 1999, Advertasia simply disagreed with China Outdoor’s solicitors, contending that the condition precedent in the sale of shares agreement had been met and urging China Outdoor to complete. Subsequent discussions were held between the parties with the attendance of Chinese law experts on the effect of the discrepancies discovered in the records on the validity of the contracts under PRC law, the possibility of rectification of the records, who was responsible for applying for rectification and when this should be done. Nothing came out of such discussions. These matters were also argued at length at the trial and in these appeals. However, as can be seen below, these matters have distracted the attention of the parties from the real issues in this case. Approval of joint ventures involving foreign parties 19.The reason why China Outdoor alleged that the joint venture contracts for Beijing and Guangzhou were invalid or liable to be set aside was that such contracts had to be approved by the relevant Chinese state authorities before they could come into effect and that the results of the searches made by its lawyers revealed that there were grounds to support the conclusion that the joint venture contracts in question had not been validly approved or were liable to be set aside because approval was given to the wrong parties. 20.Under the Sino-Foreign Contractual Joint Venture Law of the PRC and the Sino-Foreign Co-operative Joint Venture Law Implementing Rules, the establishment of a joint venture in the Mainland between a Chinese business enterprise and a non-Chinese enterprise (described as a Chinese party and a foreign party respectively) requires the approval of the department in charge of foreign economic relations and trade under the State Council (art. 5 of the Law and art. 6 of the rules). The joint venture enterprise so established also requires registration and the granting of a business licence by the administrative authority for industry and commerce (art.6 of the Law and art. 8 of the Rules). In the case of the joint venture in Beijing, it required the approval of the Ministry of Foreign Trade and Economic Co-operation (“MOFTEC”) and in the case of the joint venture in Guangzhou, the state authority was the Guangzhou Foreign Trade and Economic Committee (“GFTEC”). The registration and granting of a business licence was the responsibility of the State Administration of Industry and Commerce (“SAIC”) which, it is said, is the equivalent of the Companies Registry in Hong Kong. 21.The applications for approval, registration and business licence must be accompanied by supporting documents. The documents which are required by art. 7 of the Rules to be submitted for consideration include the joint venture contract, the Articles of Association of the joint venture enterprise (usually a company registered in China), the business licence or proof of registration and a certificate of creditworthiness of each party (art. 7(3) and (4)). All supporting documents must be submitted in Chinese, except that proof of registration and the certificate of creditworthiness provided by the foreign party may be in other languages. 22.When the establishment of a joint venture is approved, an approval certificate is issued (art. 8) and the contract and/or the Articles of Association of the joint venture become effective as of the date of issuance of the approval certificate (art.11). 23.It should be noted that although under the rules, it is the establishment of the joint venture which requires approval, the joint venture contract and the company to be formed to carry out the joint venture is not valid or effective without the approval. It is unrealistic to say that the approval authority is concerned only with the approval of the joint venture and not the contract which governs such joint venture or the company to be formed pursuant to that contract. Before approval can be given to the joint venture, the authority has to be satisfied that it is proper and in the interests of the state to have such a joint venture business. The purpose of requiring all relevant documents and materials (including certificates of creditworthiness) to be submitted for examination is to ensure that the proposed joint venture is feasible and workable and that the parties to the joint venture are financially sound and capable of carrying on the joint venture business. The financial position of the foreign party is a particularly important factor in the decision whether to grant approval because usually, as in the present case, the Chinese party is a state-owned organisation and its financial capability would not be a problem; and more often than not, again as in the present case, it is the foreign party which is responsible for contributing a greater portion of the investment capital. The joint ventures contracts for Guangzhou and Beijing 24.As I have mentioned earlier, each of these contracts was a joint venture agreement made between a Chinese party and a foreign party for the management and operation of street advertising in bus shelters in these two cities respectively. It contained various terms and conditions governing the management and operation of the business, its organisation and the rights and obligations of the parties. For present purposes, it is not necessary to deal with the terms and conditions of these contracts other than what is discussed below. 25.The Guangzhou joint venture contract was executed on 25 December 1994 both in Chinese and in English. There are differences between the two versions. But it is accepted that it was the Chinese version which was submitted for approval by the relevant authority and that in any event, it had precedence over the English version. 26.In the Chinese version, the Chinese party was a state-owned organisation. The foreign party was recorded as one called by a Chinese name: “埃威伊國際集團亞洲候車亭廣告有限公司”. Translated into English, it reads as: Ai Wei Yi International Group Asian Waiting Kiosk Advertising Company Limited (“Ai Wei Yi”). It was described as a subsidiary of and guaranteed by a company which was called by a Chinese name: “埃威伊國際集團” (which, translated into English, reads as: Ai Wei Yi International Group). The foreign party was also stated to be a company registered in Hong Kong with the registration number of 484496 and a registered address in Connaught Road Central, Hong Kong. The joint venture company to be formed was called both by the Chinese name of 廣州薩柏候車亭廣告有限公司 and the English name of Sapag Guangzhou Transportation Media Limited. On the last page of this document, the Chinese name and chop of “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi) appeared at the place for execution. 27.The Beijing joint venture contract was executed 6 months later, on 2 July 1995, both in Chinese and English. Again there are differences between the two versions. 28.In the Chinese version, the Chinese party was also a state-owned organisation. The foreign party was recorded as one called by a Chinese name: “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi) which was the same as that appearing in the Guangzhou contract. It was also described as a subsidiary of a company called by the Chinese name of “埃威伊國際集團” which was the same as the one mentioned in the Guangzhou contract. The foreign party, although having the same Chinese name as the foreign party in the Guangzhou contract, was stated as a company registered in Hong Kong but with a different registration number: 477514 and a registered address in Queen’s Road Central, Hong Kong. The joint venture company to be formed pursuant to this contract was to be called “北京市公交候車亭廣告有限公司” in Chinese and Beijing Public Traffic Waiting Kiosk Advertising Co Ltd in English. Similarly, on the last page of this document, the Chinese name and chop of “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi) appeared at the place for execution. 29.It can be seen that in the Chinese versions of both contracts, there was no mention of the names TMB and TMG respectively. Nor was Transit Media Network Limited (which was supposed to be their holding company) mentioned. The foreign party in each case was identified by the same Chinese name but a different company registration number. 30.It was only in the English versions that the names of TMB, TMG and Transit Media Network Limited appeared. In the Guangzhou contract, the foreign party was recorded as Citiweal International Limited which was described as a subsidiary of and guaranteed by a company called Transit Media Network Limited. On the last page, there was the name of Citiweal International Limited and yet the Chinese chop was that of “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi). In the Beijing contract, the foreign party was recorded as TMB which was again described as a subsidiary of and guaranteed by the same Transit Media Network Limited. On the last page, the English name TMB appeared but the Chinese chop of “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi) was also placed there. 31.In relation to the information contained in these two contracts, the following facts which were revealed upon searches made at the Hong Kong Company Registry are not in dispute:
Documents submitted to Chinese state authorities for approval 32.Searches at the SAIC discovered that certain documents were submitted for examination in support of the application for approval. No search could be made of MOFTEC or GFTEC. But it is assumed and the parties accept that the documents and materials in the SAIC files would also have been available to MOFTEC and GFTEC. Working on that basis and bearing in mind that documents must be submitted in Chinese, the following documents relevant to the present appeal were found: (i) Beijing joint venture
(ii) Guangzhou joint venture
33.It is significant to note that in these official files, there was no copy of the certificate of incorporation of either TMB or TMG, whether in their respective original names or present names. Nor was there any other document relating to these two companies. 34.It can be noticed at once from the above documents (which were in Chinese or with Chinese translations) that to the Chinese state authorities, in each case, approval was sought for a joint venture involving a Chinese party (which was a state-owned organisation) and a foreign party called “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi); and all the supporting documents (including the altered certificate of incorporation) related to this “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi) with some references to Rapidventures. The name of TMB appeared only in the English version of the Beijing contract. For the Guangzhou contract, the name of TMG was nowhere mentioned in both the Chinese and English versions; only Citiweal International Limited, its original name, appeared in the English version. There is no evidence that the English versions of these contracts were submitted for examination. But even if they were, the Chinese versions took precedence. Legitimate concern 35.From the above review of the relevant joint venture contracts and the documentation submitted to the Chinese approval authorities, it is fair to say that the differences between the Chinese and English versions of the contracts, the results of the company searches and the discrepancies between the contracts and the supporting documents do give rise to a real doubt as to whether the joint ventures with TMB and TMG had been approved and what it was that was purportedly approved by MOFTEC and GFTEC. The construction issue – meaning of “valid” in art. 1.1 36.Faced with this state of affairs, even the Chinese law experts called by Advertasia accepted that the documents relating to Rapidventures found in the official files should be replaced by those relating to TMB and TMG, such as their respective certificates of incorporation and bank reference letters. Based on their evidence, there were sufficient grounds to support the view that the joint venture contracts in question could be liable to be set aside unless the documents relating to Rapidventures were replaced by the relevant and correct documents relating to TMB and TMG. If China Outdoor’s argument on the construction issue (that is, “valid” includes “not liable to be set aside”) is right, it was entitled to refuse completion. However, in my view, this submission must fail. 37.Article 1.1 begins by imposing concurrent obligations on the parties to the agreement on completion: payment of the consideration and the transfer of the shares in the four subsidiaries. This is subject to two alternative events happening: first, either party receiving on or before completion a valid notice stating that the joint venture licences and/or bus shelter advertising operating rights have been terminated in respect of Beijing and Guangzhou; or alternatively, it is discovered that the joint venture contracts relating to Beijing and Guangzhou are not valid or have been terminated. We are only concerned with the second alternative. 38.The time for these two alternatives to happen must be on or before the date for completion. This is specified in relation to the first alternative but not in relation to the second alternative. But it cannot be argued to the contrary. Completion is to take place on a specified date. Time is of the essence under the agreement. The parties need to know whether they should take steps to complete or not. The crucial date for serving the notice or raising the issue of invalidity must be on or before completion. This is not in dispute and China Outdoor has done that. 39.What Outdoor seeks to put forth as one of its arguments in this Court and in the courts below is that in relation to the second alternative, what is sufficient is the discovery of facts showing that the relevant contracts are subject to serious doubts or liable to be set aside. That is, as the judge rightly pointed out, tantamount to submitting that “valid” includes not voidable. 40.This was rightly rejected by both the judge and the Court of Appeal. Apart from the fact that this is contrary to the natural and ordinary meaning of the word “valid”, it is also inconsistent with the rest of the clause. The crucial time under this clause is the date scheduled for completion and not any subsequent date. The notice required to be served under the first alternative must be one stating that the relevant licences and/or rights have been terminated on or before completion. The same words are also used in latter part of the second alternative: it must be shown that the contract in question has already been put to an end. It would be odd for a different and less stringent criterion to be adopted for showing that the contract is not valid. 41.In the context of this clause, there is no room for the argument that so long as there are facts which cast doubts on the validity of the relevant joint venture contracts and that these contracts may be rendered invalid at a subsequent date, the contracts are not valid and the condition precedent is not satisfied. In any event, this is a conclusion which is not supported by the expert evidence on PRC law. 42.In my view, upon the true construction of art. 1.1, in order to lawfully refuse completion, China Outdoor must show that at the date specified for completion, there were facts which provided reasonable grounds for concluding that the joint venture contracts for Beijing and Guangzhou were invalid in the sense that they were null and void and not just voidable. The validity issue - China Outdoor’s case 43.On the validity issue, China Outdoor’s case is that the joint venture contracts were not made with TMB and TMG as the foreign parties or alternatively, it was Rapidventures and not TMB and TMG which was approved as the foreign party to the respective joint ventures contracts. Although they are put as alternatives, they are in fact two different questions: the first involves a consideration of which was the foreign party which was the party to the joint venture contract that was executed and subsequently performed; and the second involves a consideration of which was the foreign party which was the party to the joint venture contract that was approved by the Chinese state authority. Whether contracts made with TMB and TMG 44.On the first alternative, the arguments advanced by China Outdoor (i.e. the contracts were not made with TMG and TMB) were rejected by the judge. He found as a matter of fact that the foreign parties to those joint venture contracts were TMB and TMG which had executed the relevant contracts and that these contracts had been performed for several years and not subject to any possible challenge by the Chinese parties. The Court of Appeal agreed with the judge, saying that as far as the Chinese parties were concerned, TMB and TMG were recognised as the foreign parties to these contracts. 45.In my view, this must be correct. In each case, the Chinese party knew whom it was dealing with; it also signed the English version of the contract and thus must be aware of the English name of the foreign party: in the Beijing contract, the foreign party was stated as TMB (even although at that stage, it was still called Likewin International Limited which subsequently changed its name to TMB); and in the Guangzhou contract, the foreign party was stated as Citiweal International Limited with a parent company called Transit Media Network Limited. In any event, the joint venture had been working for a few years and it is now too late for the Chinese party to take objection on this point. Hence, it is clear that vis-a-vis the parties to the joint ventures, TMB and TMG were indeed recognised as the foreign parties in the respective contracts. That was and must be the position on the ground. The real issue as formulated 46.But what was the position as seen by MOFTEC or GFTEC? What was the joint venture MOFTEC or GFTEC had purported to approve? Which was the foreign party to the joint venture contract that was approved? That, in my view, is the real issue. For, if the joint venture on the ground was not the one approved by these two state authorities, it had never become valid and effective, whether on the date scheduled for completion or at any time. It would then follow that the condition precedent was not satisfied. 47.During the course of the hearing before this Court, the real issue was formulated by the Court and agreed by counsel as follows: whether it was discovered prior to completion that the contracts for the joint ventures in which TMG and TMB were engaged were invalid for lack of approval of those contracts, such lack being due either to approval having been given instead to a joint venture contract in which Rapidventures was the foreign party or to approval having been purportedly been given to a joint venture contract in which the foreign party was a non-existent entity. Put in another way: which joint venture had been approved: the one on the ground (i.e. with TMB or TMG) or the one as presented for approval (i.e. with Rapidventures as alleged by China Outdoor or with a non-existing entity)? 48.This issue, in a slightly different form, was raised by counsel as a subsidiary point before the judge and in a more focused way before the Court of Appeal. China Outdoor’s submissions were rejected by the judge and the Court of Appeal. Thus, Mr Ronny Tong SC leading Mr Alexander Stock for Advertasia submitted that China Outdoor was bound by such concurrent findings and precluded from arguing the same point again unless there were exceptional circumstances. On the other hand, Mr Anthony Neoh SC leading Mr Andrew Mak for China Outdoor submitted that he was not so bound. 49.Were there concurrent findings on this issue? This can only be answered by examining how the courts below dealt with this point, what they had found and what were the reasons for their findings. 50.The judge accepted that the documents submitted to MOFTEC (and presumably also GFTEC) were not accurate, but held that the approval was given to the enterprise set up pursuant to the joint venture to which a business licence was issued, and that as a matter of PRC law (accepting the evidence given by the experts), the joint venture contracts in question were valid and remained valid in the absence of a cancellation or revocation of the approval. 51.With respect, the judge missed the issue. He seemed to have taken the view that all that was required to be approved was the joint venture company which was to be formed under the joint venture contract and that since approval had been given to this joint venture company, the contract must be valid until that approval was set aside. This approach failed to address the issue as to which joint venture was actually approved by the Chinese state authority. By confining the approval given by the authority to the joint venture company to be formed, the judge had also misunderstood the approval scheme and overlooked the purpose behind it. As I said in the earlier part of this judgment, approval was of course given to the establishment of the joint venture, but what the Chinese state authority was in effect consenting to was the whole joint venture as proposed in the contract. 52.On the same issue, the Court of Appeal dealt with it in a different way. It was held that as far as the approval authorities were concerned, it could not be said that they had approved Rapidventures as the foreign party to the joint venture contracts and not TMB and TMG. The Court took the view that it was more probable that MOFTEC and GFTEC as the case was might have understood the documents submitted to it to relate to the holding company rather than the subsidiaries. The discrepancies discovered from the documentation presented to the approval authorities were considered by the Court as “approval irregularities” and there was no evidence that MOFTEC or GFTEC could revoke or terminate the approvals given. 53.Those being the conclusions and reasoning of the Court of Appeal, it is clear that there were hardly any findings on this point which could be considered as concurrent. 54.As to the Court of Appeal’s conclusions, with respect, I do not think they are supported by the evidence. The position is clear from the documents and materials to which I have referred in detail earlier. 55.In each case, the Chinese state authority was faced with an application for the approval of the establishment of a joint venture pursuant to a joint venture contract. The documents were mainly in Chinese. The contract presented showed that the foreign party was “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi). The other supporting documents also confirmed that this was the foreign party: the certificate of incorporation, the bank reference letters, the application form for registration, and the powers of attorney. It was a party with good financial backing, excellent credit and vast experience in the advertising field. It was the share capital of this company (referred also as Rapdiventures in some documents) which was looked at, not that of the holding company. The documents were clear on their face; they related to the company described as “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi). This name and that of the so-called holding company “埃威伊國際集團” were different. There was no basis for saying that the relevant authority mistook these documents to be relating to its holding company. True it is that there was a company registration number in the certificate of incorporation and strictly speaking that could have been checked. However, the name of this foreign party “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi) was in most of documents submitted for examination, not only the documents submitted by the foreign party but also those provided by the Chinese party. The appearance of a company registration number in the midst of all these documents simply faded into insignificance. 56.The reasonable and also most probable inference one can draw is that it was the joint venture contract with a foreign party by the name of “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi) which was submitted for approval and it was this joint venture with a foreign party by this name which was scrutinised by the Chinese state authority. Approval was no doubt granted on this basis. 57.Approval could not have been given to TMG or TMB. As discussed earlier, TMG was not mentioned anywhere in the Guangzhou contract. Only its former name Citiweal International Limited appeared in the English version. TMB was only mentioned in the English version of the Beijing contract and this name was only adopted after execution of the contract and shortly before approval was given. Furthermore, in each case, whichever was the foreign party to the joint venture that was approved, it was clear that approval was given on the basis that the foreign party concerned had substantial financial backing, good credit and great experience in the advertising field. Obviously at the time of approval of these contracts, neither TMB nor TMG fit into such category. 58.It is indeed revealing to look at the approval documents issued by the authorities because they showed what was on the mind of the relevant authority and also cast light on the question as to what was the joint venture which they had purported to approve. The following relevant approval or consent certificates were found in the files: (i) Beijing joint venture
(ii) Guangzhou joint venture
59.The evidence was therefore overwhelming. For whatever motive or reason, in both cases, the respective Chinese party and Deparis and Du (representing the foreign party in each case) intended to seek approval of a joint venture with “埃威伊國際集團亞洲候車亭廣告有限公司”(Ai Wei Yi) as the foreign party; and in support of the application, they chose to submit documents and materials which indicated that it was a joint venture with a company with this name. Approval by the relevant Chinese state authority was given to such a joint venture. It was not a joint venture with either TMB or TMG as the foreign party which the Chinese state authority had approved or intended to approve. The joint venture contracts entered into with TMB or TMG never obtained the approval of MOFTEC and GFTEC respectively. This is sufficient for China Outdoor’s purpose. Whether it was Rapidventures or a non-existing entity that was approved is immaterial. 60.For these reasons, the facts discovered by China Outdoor showed that there were strong reasonable grounds to come to the conclusion that the joint venture contracts in question were not valid at the date scheduled for completion. China Outdoor was entitled to refuse to complete the agreement. In the light of this conclusion, it is not necessary to deal with the other submissions advanced by China Outdoor. 61.I should mention that there was an application before this Court issued by China Outdoor to adduce fresh evidence in the form of certain documents issued by MOFTEC purporting to revoke or withdraw the approval it had given in 1995 and the expert opinions on the effect of such revocation or withdrawal. The purpose of this exercise was apparently in answer to the Court of Appeal’s comment that there was no evidence the MOFTEC had the power to do so or was prepared to do so. This application was opposed and the documents were admitted on a de bene esse basis. In the light of the conclusions which I have reached, I do not find it necessary to rehearse the events leading to these documents or China Outdoor’s application. I would make no order on it. Conclusion 62.The appeal must be allowed and the judgment given in favour of Advertasia be set aside. The parties have agreed that costs should follow the event. I would make an order that China Outdoor should be paid its costs here and below, to be taxed if not agreed. Mr Justice Ribeiro PJ: 63.I agree with the judgment of Mr Justice Chan PJ. As we are disagreeing with the judgments below, I wish to add some observations of my own, adopting the facts as set out in detail by his Lordship. 64.The dispute concerns a contract dated 21 April 1999 (“the Share Sale Agreement”) between the defendant and the plaintiff for the purchase by the defendant, for the sum of HK$68 million, of all the shares in four Hong Kong companies which were the plaintiff’s wholly-owned subsidiaries and participants in mainland joint ventures. 65.For present purposes, only two of the four companies matter, namely, those involved in joint ventures in Guangzhou and Beijing respectively.
66.The defendant wished to acquire the Hong Kong parties’ interest in those joint ventures. It was known to both parties that the plaintiff had experienced serious problems with the individuals who had operated the joint ventures and, in negotiations with a view to the defendant’s acquisition, the plaintiff made it clear that it was unwilling to give any warranties as to the underlying business. The Share Sale Agreement which eventuated was therefore a relatively sparse document providing essentially for the sale to the defendant of all the plaintiff’s shares in its four subsidiaries for the said sum of $68 million, with completion to take place on 5 May 1999. 67.The only safeguard stipulated by the defendant took the form of a condition precedent (clause 1.1) which was in the following terms:
68.The italicised words are what this case is about. Notwithstanding the complexity of the facts, the dispute boils down to a single issue: was the defendant entitled to refuse to complete the Share Sale Agreement on the ground that it had discovered, prior to 5 May 1999, that the relevant joint venture contracts were “invalid”, as it had claimed to have done. 69.At the trial and in the Court of Appeal, there was much debate as to whether the word “invalid” in this context extended to a case where the defendant could show by expert evidence that the joint venture contracts were “liable to be set aside”. The courts below held that it is incapable of bearing that meaning. In common with Chan PJ, I agree, first as a matter of language, and secondly, because the time limited for completion strongly points to the necessity for establishing the relevant invalidity prior to 5 May 1999 when completion was to take place. A concept of “invalidity” based on an open-ended potential for the contracts to be set aside sits uncomfortably with that provision. 70.It is however clear, and not in dispute, that for the relevant joint venture contracts to be valid, approval was required under the Sino-Foreign Contractual Joint Venture Law of the PRC and the Sino-Foreign Co-operative Joint Venture Law Implementing Rules (which are examined in detail in Chan PJ’s judgment). 71.The fundamental question is therefore whether the joint venture contracts could be said to be “invalid” on the ground, not that they might later be set aside, but that they had never received the governmental approval which, under mainland law, was a condition of their validity. As Mr Ronny Tong SC accepts, this involves asking whether the defendant was entitled to assert on the basis of the facts it had discovered prior to the date for completion that, on the balance of probabilities, the necessary regulatory approvals had not been obtained for the joint ventures in which TMG and TMB were engaged. 72.The defendant’s case is that in its “due diligence” exercise during the period pending completion, it discovered that the documents which had been put forward on the plaintiff’s behalf to secure the approvals from the mainland authorities were documents which, on their face, related to joint ventures involving different (and possibly non-existent) entities and were not the joint ventures being operated on the ground by TMG and TMB with their respective mainland partners. The defendant contends that the documents submitted falsely represented that the joint ventures for which approval was sought would be undertaken, on the Hong Kong side, by an entity which had or was imminently to have a capital of US$5 million and was known in Chinese as “埃 威 伊 國 際 集 團 亞 洲 候 車 亭 廣 告 有 限 公 司” (transliterated in the courts below as “Ai Wei Yi”), with the documents strongly suggesting (falsely) that this was the Chinese name of a Hong Kong company known in English as Rapidventures SAPAH Limited (“Rapidventures”). TMG and TMB were HK$2 companies. Approvals obtained in this manner obviously did not constitute approvals of the joint ventures arising out of the joint venture contracts signed by TMG and TMB, so that, the defendant contends, their contracts, which are crucial to clause 1.1 of the Share Sale Agreement, were invalid. 73.As Chan PJ demonstrates, the approvals obtained on the strength of the documents submitted cannot be regarded on any reasonable basis as approvals of the joint ventures springing from the contracts to which TMG and TMB were parties. It follows that the defendant was entitled to conclude, that, on the balance of probabilities, their joint ventures were never approved and so, on the evidence, that their joint venture contracts were invalid as a matter of mainland law. 74.Stone J in my view rightly rejects the argument based on a construction of the word “valid” to embrace “not liable to be set aside”. However, his Lordship proceeds to find comfort in the fact that “Upon the totality of the evidence there can be no question but that, as a matter of fact, the foreign parties to the joint venture contracts were TMB and TMG, and not [Rapidventures]”, and that this was known to both parties. That is no doubt correct, however, the critical question is whether that joint venture, operating on the ground, was the joint venture which had received the necessary approval. Stone J does not, with respect, appear to have attached sufficient weight to this difficulty. I do not think his Lordship’s suggestion that it was merely the joint venture company itself that was approved is correct. Approval, as the documents required to be submitted show, relates principally to the foreign joint venture partner – its creditworthiness and so forth – and it is only pursuant to such approval that the joint venture as a whole is permitted to proceed. Accordingly, if the proposed foreign joint venture partner is misidentified in the application process, the joint venture subsequently operated on the ground by a different company cannot be said to have received approval. 75.In the Court of Appeal, on this crucial point, Tang JA (giving the judgment of the Court) noted the “irregularities” in the documents submitted but adopted an interpretation of those documents leading to the conclusion that the approving authority had probably “understood the documents to relate to the ‘holding company’ rather than the subsidiary”. With respect, it is hard to see the basis for such an interpretation. There was no evidence to suggest that an entity named “埃 威 伊 國 際 集 團 亞 洲 候 車 亭 廣 告 有 限 公 司” (“Ai Wei Yi”) was at any material time the holding company of TMG and TMB. Moreover, the evidence clearly indicated that the documents submitted had to relate to the intended foreign partner in the joint venture. It is hard to see how getting approval on the basis of documents submitted about a company other than the intended joint venture partner, even if it was the holding company, constituted getting the approval necessary to secure the validity of the joint venture contracts in question. 76.For the foregoing reasons, I agree that the appeal must be allowed with costs here and below. Mr Justice Nazareth NPJ: 77.I agree with the judgment of Mr Justice Chan PJ and the judgment of Mr Justice Ribeiro PJ. Lord Millett NPJ: 78.I agree with the judgment of Mr Justice Chan PJ and the judgment of Mr Justice Ribeiro PJ. Mr Justice Bokhary PJ: 79.The appeal is unanimously allowed with costs here and below.
Mr Anthony Neoh SC and Mr Andrew Mak (instructed by Messrs Allens Arthur Robinson) for the appellant Mr Ronny Tong SC and Mr Alexander Stock (instructed by Messrs Clyde & Co) for the respondent |
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