Ion Global (Bvi) Ltd and Others v. Lam Po Chiu Mark

FAMV No. 3 of 2011

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 3 OF 2011 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL

FROM CACV NO. 46 OF 2010)

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Between:

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Appeal Committee: Mr Justice Bokhary PJ, Mr Justice Chan PJ and Mr Justice Ribeiro PJ

Date of Hearing: 17 June 2011

Date of Determination: 27 June 2011

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DETERMINATION

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Mr Justice Ribeiro PJ:

1.The plaintiff and a Mr Richard Covey formed a software and e-business consultancy company which became known as e2e Business Solutions Ltd (“e2e”).  The plaintiff held 150,001 shares while Mr Covey held 2,850,009 shares.

2.The 1st defendant, a BVI company, was at the material time wholly-owned by the 2nd defendant (a holding company registered in the Cayman Islands).  The 3rd defendant was found by Stone J at trial[1] to have been the controlling mind of the 1st and 2nd defendants, echoing the view of Deputy Judge Carlson in earlier proceedings that the 3rd defendant was the “eminence gris under whose influence the directors and executives of these two companies take their lead in the overall conduct … of these companies’ affairs.”  He was therefore found, in effect, to be a shadow director of the other defendants.

3.By a contract dated 14 February 2000, the 1st defendant acquired e2e shares from the plaintiff and Mr Covey which, together with newly issued shares, gave it a 55% interest and therefore control.  It left the plaintiff with a 3.56% interest, represented by 120,001 shares.

4.The parties’ intention had been to secure a public listing for e2e on the NASDAQ exchange.  However, in case that did not occur, the plaintiff was to have a put option as a means of disposing of the balance of his shares to the 1st defendant. 

5.The present proceedings were brought by the plaintiff alleging that the 1st defendant is in breach of the agreement by failing or refusing to honour the put option which the plaintiff had sought to exercise on 18 February 2003.  He alleges that the 2nd and 3rd defendants are liable for inducing that breach.

6.At the trial, Stone J dismissed the action on the ground that the put option clause had been so drafted as to render it incapable of being exercised.  The problematical clauses provide as follows:

Closing Date shall mean 22 March 2000 or such later date as may be agreed between the Parties.

13.02  Subject to the Purchaser’s rights under Section 14, the Put Option may be exercisable by the Sellers with effect from the date falling 2 years from the Closing Date (the “Put Option Vesting Date”) provided that

(a)   ...

(b)   the Warrant Certificate shall have been duly issued by the Company to the Purchaser in accordance with Section 14.04 prior to the Put Option Vesting Date.”

14.04  Date of Issue.  The Revenue Warrants shall be issued in the form of the Warrant Certificate attached as Exhibit C which shall be executed as a deed by the Company and delivered to the Purchaser on the date falling 24 months from the Closing Date (the “Issue Date”) and shall be exercisable for a period of 12 months from the date of their issuance, provided that in the event of any public offering of the Company or an (“Acceleration Event”) occurring before the Issue Date, the Purchaser shall be entitled at its sole discretion  to receive Revenue Warrants in accordance with Section 14.01 above ...

7.Stone J held that the words “from the date falling 2 years from the Closing Date” in clause 13.02 and the words “the date falling 24 months from the Closing Date” in clause 14.04 had exactly the same meaning so that the condition for exercising the put option laid down by clause 13.02(b) could never be met: the Warrant Certificate could never be issued “prior to” the Put Option Vesting Date.  Stone J therefore found that there was no breach of the contract since the put option had not been validly exercised and, it followed, that the 2nd and 3rd defendants were not liable for inducing any breach.

8.The Court of Appeal[2] reversed Stone J and gave judgment for the plaintiff against all three defendants in the sum of US$741,937 plus interest.  Rogers VP held that it could never have been the parties’ intention to draw up a contract containing a put option that could never be exercised. 

9.Mr Edward Chan SC,[3] makes the following criticisms of the Court of Appeal in support of the leave application, namely:

(a) that the Court of Appeal never explained how the difficulty of construction considered crucial by Stone J could be overcome and had wrongly concluded that on Stone J’s construction, the put option clause was nugatory since it was in fact capable of being operated in the circumstances caught by the proviso in clause 14.04;

(b) that the Court of Appeal failed to deal at all with the liability of the 2nd and 3rd defendants and had wrongly failed to recognize that even if the 1st defendant was in breach, it did not follow that the elements of the tort of inducing a breach of contract had been made out against those defendants, the constituents of those elements raising questions of great general or public importance fit for decision by the Court.

10.In our view, for the reasons which follow, the application for leave to appeal must be refused.

The 1st defendant’s application

11.Mr Chan SC rightly accepts that the peculiarities of the agreement’s drafting giving rise to the dispute as to its proper construction are case-specific and raise no questions of the required general or public importance.  On that ground alone, we would refuse the 1st defendant leave to appeal.  There is no basis for leave on the “or otherwise” basis.

12.We would add that the result arrived at by the Court of Appeal is amply justifiable.  It was an essential term of the bargain that the plaintiff and Mr Covey should be able to put the balance of their shares to the purchasers if the company did not become publicly listed.  A refusal of a put option would have been “the ultimate deal breaker”[4] according to the plaintiff (whose evidence on all material factual matters the Judge accepted[5]).  The option was obviously not intended to be nugatory and the contract contained an elaborate formula for working out the put option price.  Thus, as Lord Hoffmann stated in Investors Compensation Scheme Ltd v West Bromwich Building Society:[6]

“... if one would ... conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to parties an intention which they plainly could not have had.”

13.In our view, the apparent conflict between the two clauses is readily resolvable.  The condition for exercising the put option laid down by clause 13.02 is that the Warrant Certificate must have been “duly issued ... in accordance with Section 14.04 prior to the Put Option Vesting Date”.  It therefore makes it clear that the act of “duly” issuing such a Certificate “in accordance with” that clause is something which can and does take place “prior to” the Vesting Date.  In other words, it requires Section 14.04 to be construed as providing for such a Certificate to be issued prior to the Vesting Date. 

14.While the relevant provisions may be interpreted, as they were by Stone J, as referring to identical periods, thus posing a problem for a “prior” issue of the Warrant Certificate, the court is not bound to adopt such an interpretation.  As the learned authors of Chitty on Contracts,[7] point out:

“... ‘from’ may be taken to be either inclusive or exclusive, although the general assumption is that the day of the date, act or event is to be excluded in the computation. The principle, however, is not an absolute one, and the wording of the contract or the intention of the parties may indicate a contrary construction.”

15.The wording of clause 13.02 does, in our view, indicate an intention that the periods in the two clauses should be differently construed.  To cite Chitty again:

“If the words used in an agreement are susceptible of two meanings, one of which would validate ... the particular clause in the instrument, and the other render it void, ineffective or meaningless, the former sense is to be adopted. ... Thus, if by a particular construction the agreement would be rendered ineffectual and the apparent object of the contract would be frustrated, but another construction, though in itself less appropriate looking to the words only, would produce a different effect, the latter interpretation is to be applied, if that is how the agreement would be understood by a reasonable man with a knowledge of the commercial purpose and background of the transaction.”[8]

16.In our view, the period of “2 years from the Closing Date” should be construed as exclusive of the Closing date itself (and therefore ending on 22 March 2002, when the right to exercise the put option vests), whereas the period of “24 months from the Closing Date” in clause 14.04 should be construed as inclusive (and therefore ending on 21 March 2002, by which time the Company was bound to issue the Warrant Certificate, being an event occurring prior to the Put Option Vesting Date).

17.The compelling conclusion is accordingly that the put option was validly exercised with effect from its vesting date, putting the 1st defendant in breach of the contract by failing to honour it.  We do not consider the contrary reasonably arguable.  For this additional reason, we refuse the 1st defendant leave to appeal.

The leave application of the 2nd and 3rd defendants

18.Since Stone J held that there was no breach of contract, he did not consider it possible to reach a final view on the liability of the 2nd and 3rd defendants for inducing a breach of contract.[9] However, we do not agree with Mr Chan SC’s submission that the Judge did not proceed to make findings capable of establishing their liability in the event that his construction of the contract was reversed on appeal.

19.Thus, Stone J found that the 3rd defendant was the controlling mind and effectively a shadow director of the other two defendants;[10] that on 20 November 2000, the 3rd defendant had told the plaintiff “the terms of the [Agreement] would not be honoured unless Messrs Covey and Lam were willing to renegotiate that which Mr Yip considered a poor and ‘badly negotiated’ deal from the viewpoint of [the 2nd defendant]”;[11]  that the plaintiff’s attempts to have the put option discussed at e2e board meetings were rejected or ignored in November and December 2002;[12] and that the plaintiff’s attempt at exercising the put option met with no response.[13]

20.Stone J’s reached the following conclusions:

“...I entertain little doubt that relatively early in the game that Mr Yip indeed had come to the view that the Put Option in question – which under the Principal Agreement potentially had applied both to Mr Lam, the current plaintiff, and to Mr Covey, his former partner – represented too expensive a contractual commitment, and that Mr Yip firmly had set his face against any payout upon this basis for the e2e shares then residually held by Messrs Lam and Covey. On the available evidence it is tolerably clear that nothing occurred in the operation of this CDC group absent Mr Yip’s imprimatur, and to hold otherwise in my view would be to fly in the face of the clear commercial reality.”[14]

“...in so far as there had been a contractually operable Put Option consequent upon the issuance by Mr Lam of his Put Option Notice – which I have held that there was not – I have no doubt that Mr Yip would have made it his business to decide and/or influence whether payment would be made for Mr Lam’s remaining shares upon the basis of the Put Option formula appearing within the Principal Agreement.”[15]

21.In our view, while expressed in somewhat oblique terms (no doubt because of his prior decision that there was no breach), the findings made by the Judge sustain liability on the part of both the 2nd and 3rd defendants once one concludes that there had indeed been a breach of the agreement by the 1st defendant.  There is no doubt that the 3rd defendant and through him, the 2nd defendant (which wholly-owned the 1st defendant and of which the 3rd defendant was found effectively to be a shadow director), were fully aware of the terms of the agreement and that the plaintiff had served notice under clause 13.02 for the exercise of his put option.  The Judge’s findings justify the conclusion that the 3rd defendant and through him, the 2nd defendant, deliberately caused the 1st defendant to fail or refuse to honour its contractual commitment to purchase the plaintiff’s remaining shares pursuant to the put option.  We do not consider the contrary to be reasonably arguable.  Mr Chan SC’s suggestion that these are questions requiring a re-trial is, happily, not to be accepted.

22.We accordingly dismiss the application and make an order nisi that the applicants pay the costs of this application to the respondent.  Any representations in support of a different costs order must be lodged in writing with the Court and served within 7 days from the date of this Determination. Any written submissions in reply must be lodged and served within 7 days thereafter.  If no such submissions are lodged, the order as to costs shall stand as an order absolute without further direction.

Mr Edward Chan SC and Mr Eric Lau (instructed by Messrs Wong Poon Chan Law & Co) for the applicants

Mr Paul Shieh SC and Mr Bernard Man (instructed by Messrs S.K. Lam, Alfred Chan & Co) for the respondent