Read the full judgment text of CACV 235/2010 & CACV 236/2010 on BabelCite. This Court of Appeal judgment was delivered on 14 June 2012 before Yeung VP, Kwan JA, Lam J.
Civil law – contract – oral agreement to exchange securities – whether concluded and binding agreement – proper law of contract – PRC law – validity of foreign economic contract under PRC law – writing requirement – retrospective effect of Contract Law – reliance relationship (掛靠) in PRC law – beneficial interest in land – misrepresentation – breach of warranty – conversion – demand and refusal – interest – double interest as penalty – costs depriving successful defendant of costs. The 1st plaintiff HF Enterprises and the 2nd plaintiff HF Shenzhen (sister companies) brought claims against the defendant Agricultural Bank of China for breach of contract, misrepresentation, breach of warranty and conversion. The claims arose from an alleged oral agreement on 9 July 1996 to swap two LUCs (representing two lots of land in Longgang District, Shenzhen, held in the name of Lung Shing Property as security for a consolidated $26 million facility) for five LUCs (representing other lots of land owned by HF Shenzhen). The bank held both sets of LUCs for 26 months without effecting the exchange, and on 14 September 1998 informed HF Enterprises that its application to use the five LUCs as new security in exchange was refused. The plaintiffs sued; the bank counterclaimed for outstanding principal and interest under four facilities (about $24.1 million plus interest of about $36.3 million). Held, dismissing both appeals: (1) the oral consensus reached on 9 July 1996 was merely an agreement to agree or an agreement subject to approval by the credit approval committee, not a concluded binding agreement, given the bank's consistent practice of requiring credit approval committee approval before any binding facility was created; (2) the proper law of any concluded agreement was PRC law, as the closest and most real connection was with the PRC; (3) even if concluded, the agreement was not in writing as required by article 7 of the Foreign Economic Contract Law and could not be retrospectively validated by the Contract Law; (4) HF Shenzhen had not established that under PRC law a 'reliance beneficiary' of land held by a 'reliance owner' could enforce rights against a third party; (5) no actionable misrepresentation as the representation could only convey an intention to process the application; (6) no breach of warranty as there was no concluded agreement; (7) no conversion as there was no overt act such as demand and refusal prior to 17 September 1998; (8) the double interest awarded by the PRC courts under article 229 of the Civil Litigation Law is a penalty and not enforceable in Hong Kong, though the trial judge gave the wrong reason for this conclusion; (9) the trial judge's exercise of discretion on interest rates and on depriving the successful defendant of the costs of the claim (under the principles in Ritter v Godfrey) was not interfered with, save for variation to include a certificate for two counsel on the counterclaim costs. Plaintiffs' appeal in CACV 235/2010 dismissed; defendant's appeal in CACV 236/2010 dismissed. The costs order of the counterclaim was varied to include a certificate for two counsel. The defendant was awarded 80% of the plaintiffs' costs of appeal in CACV 235/2010 with a certificate for two counsel, and ordered to pay the plaintiffs' costs of appeal in CACV 236/2010 with a certificate for two counsel.
Legal issues: Whether there was a concluded and binding agreement to exchange the securities · Whether PRC law was the proper law of the agreement · Whether the agreement was valid under PRC law · Whether HF Shenzhen has any interest in the land represented by the two LUCs under PRC law · Whether there was actionable misrepresentation · Whether there was breach of warranty · Whether there was conversion of the five LUCs · Whether the orders on interest were correct · Whether the trial judge was correct in depriving the defendant of the costs of the claim
Outcome: Plaintiffs' appeal in CACV 235/2010 dismissed; defendant's appeal in CACV 236/2010 dismissed. The trial judge's orders stand save that the costs order of the counterclaim is varied to include a certificate for two counsel.
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