Global Bridge Assets Ltd and Others v. Sun Hung Kai Securities Ltd

HCA317/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 317 OF 2008

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Before : Hon Suffiad J in Chambers

Date of Hearing : 25 February 2009

Date of Decision : 22 April 2009

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DECISION

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1.This is an application by the defendant to strike out the Statement of Claim in respect of the claims by all three plaintiffs.

The pleaded case of the plaintiffs

2.The 1^st and 3^rd plaintiffs are BVI companies while the 2^nd plaintiff is a company incorporated in the Republic of Seychelles.

3.The defendant is a Hong Kong company and part of the Sun Hung Kai group of companies.

4.In May 1993, there was set up a joint venture (“the JV”) between the defendant and partner from the People’s Republic of China (called “the PRC JV partner”) whereby the defendant held 40% of the JV shares while the PRC JV partner held 60%.  The JV operated a power plant in Hubei province of China.

5.By a Supplemental JV Contract on 13 June 1997, with the agreement and consent of all concerned as well as the government authorities, the PRC JV partner transferred 40% of its holdings in the JV to the 3^rd plaintiff.

6.By Article 9 of the JV Memorandum, the defendant was obliged to contribute US$10 million to the JV capital but had only contributed US$7 million.

7.Arbitration proceedings took place in China between the 3^rd plaintiff and the PRC JV partner in 1999.  On 19 July 2000 the Arbitration Commission ordered (inter alia) the defendant to contribute the outstanding US$3 million, but the defendant had still not complied therewith.

8.Before mid-2001, negotiations were ongoing between the 1^st plaintiff and Whirlwind Holdings Ltd (“Whirlwind”) for the sale by Whirlwind of KPI shares to the 1^st plaintiff (KPI being a company incorporated in Bermuda but with its shares listed on the Hong Kong Stock Exchange up to 8 March 2004).  Those negotiations were conducted by Chin Kam Chiu for the 1^st plaintiff and by Cheng Chao Ming, Jenson (“Cheng”) and his wife Madam Cheung Lai Na (“Madam Cheung”) for Whirlwind.

9.Madam Cheung was also armed with a letter of authorization dated 21 January 1999 from the defendant which authorized her to deal with the defendant’s share in the JV.

10.Resulting from those negotiations, a Sale and Purchase Agreement dated 3 August 2001 was entered into between the 1^st plaintiff, Whirlwind and Cheng whereby Whirlwind sold to the 1^st plaintiff 169,500,000 shares of KPI for HK$33,900,000.  Cheng acted as guarantor and gave a guarantee, covenants and warranties to the 1^st plaintiff as to the affairs of KPI.

11.The 1^st plaintiff completed the Sale and Purchase Agreement on or about 28 September 2001.

12.During the negotiations leading to the Sale and Purchase Agreement, the 1^st plaintiff raised concerns it had as to securities or guarantees if Whirlwind or Cheng failed to perform their obligations in respect of the sale of the KPI shares.

13.David Hui, a director of the defendant, and Madam Cheung, both of them acting on behalf of the defendant, gave an oral guarantee on behalf of the defendant to the 1^st plaintiff that the defendant undertook to guarantee due performance by Whirlwind and Cheng of their obligations arising from the Sale and Purchase Agreement, and that the defendant will transfer its 40% holdings in the JV to the 1^st plaintiff or its nominee if Whirlwind or Cheng failed to perform their obligations (paragraph 17 Statement of Claim refers).

14.It was also pleaded that there was a collateral contract between the 1^st plaintiff and the defendant as well as a collateral warranties given by the defendant that the defendant will transfer its 40% shares in the JV if Whirlwind or Cheng failed to perform their obligations under the Sale and Purchase Agreement.

15.It was further pleaded that the defendant warranted and represented to the plaintiff in July/August 2001 that the defendant was in a position to transfer its 40% shares in the JV to the 1^st plaintiff pursuant to the guarantee and the collateral contract.

16.After the Sale and Purchase Agreement was signed, Whirlwind and Cheng failed to perform their obligations thereunder and the 1^st plaintiff, by letter dated 13 September 2001 to Whirlwind and the defendant, complained of such breaches and notified the defendant that it would enforce the guarantee and/or collateral contract.

17.At a Board Meeting of the JV, the defendant promised that it would pay the US$3 millionand transfer its 40% holdings in the JV to the 1^st plaintiff.  The defendant also reiterated the representation that it had obtained the written consent of the PRC JV partner to transfer its holdings in the JV to the 1^st plaintiff.

18.In purported performance of the guarantee and/or collateral contract, the defendant entered into a Capital Transfer Contract with the 2^nd plaintiff (being the nominee of the 1^st plaintiff) on 12 October 2001 whereby the defendant agreed to transfer 40% of its shares in the JV to the 2^nd plaintiff at the nominal consideration of $1.

19.In May 2003, the 1^st and 2^nd plaintiffs discovered that the defendant had never obtained the written consent of the PRC JV partner to transfer its holdings in the JV to the 2^nd plaintiff, a matter deliberately concealed by the defendant before that date.

20.The claim by the 1^st plaintiff is that the defendant was in breach of the guarantee, the collateral contract and the collateral warranty given by the defendant.

21.It was also pleaded that the representation made by the defendant was a negligent, reckless or fraudulent misrepresentation by the defendant.

22.The claim by the 2^nd plaintiff is that the defendant was in breach of the Capital Transfer Agreement by failing to transfer its 40% shareholdings in the JV to the 2^nd plaintiff.

23.The claim by the 3^rd plaintiff is that the defendant had failed to pay the outstanding US$3 million towards the JV capital. 

Application to strike out the claim of the 1^st plaintiff

24.The application to strike out the 1^st plaintiff’s claim is made on the basis that the claim by the 1^st plaintiff is bad for want of a memorandum in writing signed by the defendant.

25.Reliance is placed on section 13 of Law Amendment and Reform (Consolidation) Ordinance (“LARCO”).

26.In making this application, it was submitted by the defendant that effectively the claim by the 1^st plaintiff was based on the representations or assurances alleged to have been made or given orally by the defendant concerning the character, conduct, credit, ability trade or dealings of Whirlwind or Mr Cheng in the sale of the KPI shares to the 1^st plaintiff under the Sale and Purchase Agreement.

27.I am unable to accept that submission by the defendant for the following reasons.

28.In England, there exist section 4 of the Statute of Frauds 1677 which reads as follows :

“No action shall be brought… whereby to charge the defendant upon any special promise to answer for the debt default or miscarriages of another person… unless the agreement upon which such action shall be brought or some memorandum or note thereof shall be in writing and signed by the party to be charged therewith or some other person thereunto by him lawfully authorized.”

29.Formerly, section 4 of the Statute of Frauds was introduced into Hong Kong by section 12 of LARCO.  However, that section was repealed in Hong Kong in 1972.  Given that section 12 was repealed in Hong Kong, it would therefore appear that after its repeal in 1972, a guarantee is actionable in Hong Kong even if not evidenced by any memorandum in writing signed by the party charged.

30.In England, section 4 of the Statute of Fraud was supplemented by section 6 of the Statute of Frauds Amendment Act 1828, commonly known as Lord Tenterden’s Act.

31.Section 6 of the Statute of Frauds Amendment Act 1828 was introduced because the decision in Pasley v Freeman (1789) 3 Term. Rep. 51 held that an action would lie for a fraudulent misrepresentation by word of mouth only of the credit or solvency of another.  This decision therefore opened the door to evasion of section 4 of the Statute of Frauds 1677.

32.In Hong Kong, section 13 of LARCO, being the equivalent of section 6 of the Statute of Frauds Amendment Act 1828, is worded as follows :

“No action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade or dealings of any person, to the intent or purpose that such other person may obtain credit money or goods thereupon, unless such representation or assurance is made in writing, signed by the party to be charged therewith.”

33.Firstly, I accept the plaintiff’s submission that paragraph 17 of the Statement of Claim which pleads the oral guarantee relied on by the 1^st plaintiff in its claim, is no more than a typical guarantee given by a third party to guarantee the performance of the obligations by Whirlwind and Cheng under the Sale and Purchase Agreement.  It contained no representation or assurance within the ambit of section 13 of LARCO.

34.Therefore given that section 12 of LARCO has now been repealed from the statute books in Hong Kong, nothing stands in the way of the defendant in relying on an oral guarantee as what is pleaded by the 1^st plaintiff in paragraph 17 of the Statement of Claim.

35.Secondly, in so far as the Collateral Contract and Collateral Warranty relied on and pleaded by the 1^st plaintiff in its claim, whatever representation or assurance given orally by the defendant was warranting its own ability (and not that of another person) to transfer or procure the transfer of its own 40% shares in the JV in favour of the 1^st plaintiff or its nominee pursuant to the Guarantee given or the Collateral Contract.

36.Therefore since it was not a warranty given in relation to another person, section 13 of LARCO does not even begin to kick in, and has no application.

37.For these reasons, the defendant’s application to strike out the 1^st plaintiff’s claim must fail.

Application to strike out the claim of the 2^nd plaintiff

38.The application to strike out the claim of the 2^nd plaintiff is brought on the basis that the claim by the 2^nd plaintiff is in breach of the Deed of Waiver and Indemnification.

39.There is no dispute that on the same day that the 2^nd plaintiff entered into the Capital Transfer Agreement with the defendant, they also entered into a Deed of Waiver and Indemnification (“the Deed”).

40.Under the Deed, the 2^nd plaintiff covenanted not to sue the defendant.  The covenant is in very wide terms.

41.The defendant submitted that the claim now brought by the 2^nd plaintiff was in breach of the covenant not to sue the defendant.

42.On the other hand, it was submitted by counsel for the plaintiffs that the covenant not to sue only has application where the defendant has duly performed its obligation under the Capital Transfer Agreement.

43.In deciding on the disputed issue between them, I take the view that the disputed issue is effectively one of construction of the terms of the Deed.

44.In the circumstances, the terms of the Deed will need to be looked at.

45.Firstly, it is to be noted that the Deed refers in its Recital the Capital Transfer Agreement and the JV as well as the interest of the defendant in the JV which is also defined.  Moreover, it is stated in the Recital that it was in consideration of the defendant entering into the Capital Transfer Agreement that the 2^nd plaintiff agreed to provide the waivers and the indemnities set forth in the Deed.

46.Secondly, the significant wording of the Waiver clause (clause 1) and the Covenant not to Sue (clause 2) are as follows :

“1  Waiver

1.1 [The 2^nd plaintiff] hereby releases and forever discharges [the defendant] and each of… collectively the ‘Releasees’), and each of them separately and collectively, from any and all claims, liens, demands, causes of action, obligations, damages and liabilities of any nature whatsoever, known or unknown, that [the 2^nd plaintiff] ever had, now has or may hereafter claim to have in respect of any claims (the ‘Released Claims’) arising against any of the Releasees, including (but not limited to) claims relating to or arising from the Interest, the Joint Venture or any transaction related thereto.

1.2 [The 2^nd plaintiff] hereby agrees to cause each of its subsidiaries and affiliates to forbear from pursuing any Released Claims which they may have against [the defendant], its subsidiaries or affiliates, or their assets.

2    [The 2^nd plaintiff’s] Covenant Not to Sue

[The 2^nd plaintiff] covenants and agrees that it will never, by itself or with any person or in any way, commence, aid in any way, except as required by due legal process, prosecute or cause or permit to be commenced or prosecuted, any action or other proceedings based upon any claim which is the subject of the releases set forth in Article I hereof.  This Deed shall be deemed breached by [the 2^nd plaintiff] and a cause of action shall be deemed to have accrued immediately upon [the 2^nd plaintiff]’s commencement or prosecution of any action or proceedings against any of the Releases contrary to this Deed.”

47.From the wording used in the above two clauses, it is clear that the issue in dispute between the parties must necessarily turn upon the proper construction of the agreement between them in respect of the “Released Claims” defined in clause 1 above.

48.In this connection, it is important to see what has been stated in the Recital to the Deed.  The wording of the Recital is as follows :

“WHEREAS, pursuant to the [Capital Transfer Agreement] between [the defendant] and [the 2^nd plaintiff] of even date, [the defendant] has transferred to [the 2^nd plaintiff] any and all interest (the ‘Interest’) which it may have in [the JV], a Sino-foreign equity joint venture company established in Hubei Province, the People’s Republic of China ;

WHEREAS, in consideration of [the defendant]’s entering into the [Capital Transfer Agreement], [the 2^nd plaintiff] agrees to provide the waivers and indemnities set forth herein to [the defendant];”

49.In the first recital, the sentence which states that pursuant to the Capital Transfer Agreement, the defendant ‘has transferred’ to the 2^nd plaintiff any and all interest which it may have in the JV, the use of the words “has transferred” would suggest :

(a)  not only that the Waiver and the Covenant Not to Sue was given only upon the defendant fulfilling those obligations of transferring its interest in the JV to the 2^nd plaintiff pursuant to the Capital Transfer Agreement; but also

(b) that the “Released Claims” would not encompass that obligation of the defendant to transfer its interests to the 2^nd plaintiff under the Capital Transfer Agreement, since if that obligation has, according to the Recital, been completed, it cannot be contemplated by the parties that if the obligation was not fulfilled, the 2^nd plaintiff would release the defendant from having to meet that obligation.

50.This application, being in the nature of a striking out application, it is not necessary for me to come to any firm decision as to the proper construction to be put on clauses 1 and 2 of the Deed, suffice to say for present purpose, I only need to come to the conclusion that the stance taken by the 2^nd plaintiff is arguable.

51.If the striking out application is to succeed, the defendant will have to show that it is a plain and obvious case for striking out.

52.For the reasons given above, this is far from such a plain and obvious case, since I take the view that it is arguable for the plaintiff to put forward the argument that it did.

53.Accordingly, the application to strike out the claim by the 2^nd plaintiff also fails.

Application to strike out the claim of the 3^rd plaintiff

54.The application to strike out the claim of the 3^rd plaintiff for the payment of the outstanding US$3 million by the defendant is based on the 3^rd plaintiff having no locus to claim for the outstanding US$3 million.

55.The argument by the defendant relating to the claim by the 3^rd plaintiff is that the order of the Arbitration Commission for the defendant to make good the outstanding balance of US$3 million was an award to the JV and not an award to the 3^rd plaintiff.  As such the plaintiff has no locus in claiming for the US$3 million.

56.The stance taken by the 3^rd plaintiff is simply that the 3^rd plaintiff, being one of the partners of the JV, has an interest in seeing and ensuring that the outstanding contribution by the defendant is duly made to the JV.  In this respect, the 3^rd plaintiff says that the obligation of the defendant in paying up its contribution is a continual obligation.  The 3^rd plaintiff is merely seeking to enforce that continuing obligation by the defendant and the award of the Arbitration Commission merely confirms that obligation of the defendant to make good the US$3 million.

57.Whilst I can accept that the 3^rd plaintiff, being one of the partners of the JV has an interest in seeing that the defendant fulfils its obligation to make the proper contribution toward the JV, the claim as pleaded in the Statement of Claim does not reflect that the claim now by the 3^rd plaintiff is made on behalf of the JV, nor is the JV a party to these proceedings.  Instead, the way the claim by the 3^rd plaintiff is framed would appear, on its wording, to be a claim by the 3^rd plaintiff itself.

58.That, however, can be cured by an amendment to the pleadings.

59.It is also trite law that if the matter can be cured by an amendment to the pleadings, a court would be slow to order striking out.

60.The application to strike out the claim by the 3^rd plaintiff, would, in all the circumstances be such a case.

61.I therefore decline to strike out the claim by the 3^rd plaintiff but instead allow 14 days to the plaintiffs to make the necessary application for amendment in order to put the claim by the 3^rd plaintiff on its proper footing.

Conclusion

62.For the reasons above, the defendant’s application for striking out the Statement of Claim is dismissed.

Costs

63.There will be a costs order nisi that the defendant pays the costs of and occasioned by this application to the plaintiffs in any event.

Mr Rimsky Yuen, S.C. instructed by Messrs Waller Ma Huang &Yeung, for the 1^st, 2^nd and 3^rd Plaintiffs

Mr Steven Kwan, instructed by Messrs Leland Chu & Co.,  for the Defendant