Hong Jing Co Ltd v. Zhuhai Kwok Yuen Investment Co Ltd
Read the full judgment text of CACV 63/2011 on BabelCite. This Court of Appeal judgment was delivered on 17 July 2012.
1. In 2004 the Zhuhai Municipal Government (珠海市政府) (‘Zhuhai Government’) in the Mainland encountered financial difficulties arising from investments carried out by two of its investment vehicles, namely, Zhu Kuan (Hong Kong) Co. Ltd 珠光(香港)有限公司(‘Zhu Kuan HK’) a company incorporated in Hong Kong and Zhu Kuan Group Company珠光集團有限公司(‘Zhu Kuan Group’) a company incorporated in Macau. These two companies were wound up by the Hong Kong Courts at the end of 2004 by a petition presented by the Standard C
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CACV 63/2011 and IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NOS. 63 & 254 OF 2011 (On Appeal from HCA 156/2006) ____________
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____________ J U D G M E N T ____________ Hon Cheung JA: Background of the case 1.In 2004 the Zhuhai Municipal Government (珠海市政府) (‘Zhuhai Government’) in the Mainland encountered financial difficulties arising from investments carried out by two of its investment vehicles, namely, Zhu Kuan (Hong Kong) Co. Ltd 珠光(香港)有限公司(‘Zhu Kuan HK’) a company incorporated in Hong Kong and Zhu Kuan Group Company珠光集團有限公司(‘Zhu Kuan Group’) a company incorporated in Macau. These two companies were wound up by the Hong Kong Courts at the end of 2004 by a petition presented by the Standard Chartered Bank. Zhu Kuan Group was also adjudged ‘bankrupt’ in Macau. The indebtedness of these two companies to creditors was nearly HK$8,000 million. 2.The defendant was a vehicle used by the Zhuhai Government to carry out restructuring of the debts. It signed a Memorandum on Restructuring dated 22 July 2005 with Standard Chartered Bank and the liquidators of the two wound-up companies to reorganise the debts. 3.Bank of China Group Investment 中銀集團投資有限公司 (‘BOCGI’) is a company belonging to the Bank of China group of companies. It was also one of the creditors of the two companies which were indebted to it in a sum of not less than $800 million. BOCGI refused to participate in the restructuring of the debts with the other creditors. Instead it chose to deal with the restructuring of its own debts. 4.The securities held by BOCGI in respect of the debt were three pieces of substantial properties, one in Macau and two in Zhuhai. BOCGI had taken steps in September 2005 to enforce the Macau security. This was followed by discussion between the Zhuhai Government and BOCGI which eventually reached an understanding on 26 October 2005 that the Zhuhai Government would arrange the defendant or an investor designated by the defendant to purchase the debts owed by the two companies to BOCGI valued at about HK$806 million for the sum of HK$700 million. The purchase must be completed by the end of November 2005. 5.As the Zhuhai Government did not have sufficient finance to pay the debts, investors had to be found. The plaintiff was approached by two estate agents to acquire the debts. The plaintiff was interested and entered into negotiation with the Zhuhai Government beginning from 26 October 2005. A total of five meetings were held. Eventually on 11 November 2005, the plaintiff and the defendant signed a Memorandum of Understanding (‘P’s MOU’). The relevant clauses are Clauses 5, 6 and 7 which were the only clauses in the P’s MOU stated to have contractual effect. Clause 5
Clause 6
Clause 7
6.It is not disputed that the understanding of the parties was that upon purchasing the debts, the plaintiff would take part in and support a restructuring by way of a scheme of arrangement, which if successful, would discharge the debts and the properties would become unencumbered. The defendant would then procure the transfer of the properties to the plaintiff. 7.It is also not disputed that the understanding of the parties was that of the $810 million, BOCGI would receive $700 million while the defendant would receive $110 million. The $110 million was to be used by the Zhuhai Government for the repayment of debts it owed to other creditors. 8.On Saturday 19 November 2005, the plaintiff provided four solicitors’ cheques totalling HK$50 million and a ‘bank reference’ from Bank of China (‘BOC’) which stated that ‘Fit Profits Limited’ (‘FPL’) had a current account with BOC and Future Leader Management Ltd (‘FLML’) had a balance of ‘high 9-digit figure’ as at 18 November 2005 (‘the Bank Reference Letter’). 9.The cheques were cleared on Wednesday 23 November 2005. 10.On Friday 25 November 2005 the Zhuhai Government received an application from See Good Investment Limited (‘See Good’) to acquire the BOCGI debts and properties. See Good is a BVI company. 11.On Saturday 26 November 2005, Paul Hastings, solicitors for the defendant, sent a draft confidentiality agreement to the plaintiff for its signature. The plaintiff signed the document. 12.Also later on the same day, Paul Hastings solicitors on behalf of the Zhuhai Government wrote to BOCGI stating,
13.The plaintiff and the defendant did not reach any concluded deal before the end of the exclusivity period on 30 November 2005. 14.On 2 December 2005, the defendant signed another Memorandum of Understanding with Sei Pou Estate Development Ltd (‘Sei Pou’) for Sei Pou to acquire the BOCGI debts and properties for $810 million. 15.In the meantime, the plaintiff continued to ask for information relating to the debts and properties and press for report on the progress of the case. 16.Eventually in the afternoon of 30 December 2005, the defendant invited the plaintiff to participate in a tender / auction on the following day. The purpose of the tender / auction was to ascertain whom the defendant would introduce to BOCGI to purchase the debts. The plaintiff took part in the auction the next day and submitted a bid of $880 million. However, it also unilaterally amended the terms of the tender documents. Its bid was declared invalid. 17.There was only one other party taking part at the tender / auction, namely Sei Pou. Its successful bid was of $871,990,000. Sei Pou is a Macau company. It was incorporated on 28 November 2005. It bears the same Chinese name as See Good. 18.In 2009, Sei Pou successfully acquired the debts and securities from BOCGI after re-structuring. The plaintiff’s claim 19.The plaintiff contended, among other things, that under the P’s MOU, the defendant was duty bound to use its best or reasonable endeavours in good faith to reach an agreement with BOCGI for the purpose of purchasing the debts and properties so as to enable the plaintiff to complete the sale of the debts and properties in accordance with the P’s MOU (‘the fundamental obligation’). The defendant was also under a duty not to negotiate with any third party during the exclusivity period or any extended period. The defendant was also its fiduciary. 20.The plaintiff contended that the defendant had failed in these duties. The defendant had not proceeded expeditiously in its negotiation with BOCGI in acquiring the debts. It had not advanced the plaintiff’s interest and had instead advanced the interest of Sei Pou and its predecessor See Good during the exclusivity period (‘the double dealing’). 21.The plaintiff asked the defendant to account for HK$171,990,000 (being $871,990,000 paid by Sei Pou, less $700 million due to BOCGI) as constructive trustee, alternatively the plaintiff claimed damages for breach of fiduciary and contractual duties. The defence 22.The defendant denied that it was in breach. It claimed, among other things, that the plaintiff had failed to provide assets proof (‘Asset Proof’) which was one of the condition precedents to the performance of the defendant’s obligation under the P’s MOU. As such the defendant was not bound by Clauses 5, 6 and 7 of the P’s MOU. 23.It also denied that it had negotiated with See Good / Sei Pou during the exclusivity period. As Sei Pou was successful in its bid, pursuant to the terms set out in the auction documents, the defendant introduced Sei Pou to BOCGI to purchase the debt. 24.It further claimed that during the exclusivity period it had attempted to purchase the debts from BOCGI without success. BOCGI had fundamentally changed its stance and insisted that the $700 million it had initially agreed to accept would only cover $652 million worth of debt directly held by it but would not cover another portion of the debts worth $154 million which it held indirectly through Bank of China. Further negotiations were required to be undertaken by the Zhuhai Government with BOCGI which only agreed to revert to its original stance on 6 December 2005 (‘change of stance’). Accordingly there was no possibility that the deal contemplated in the P’s MOU could have been completed by 30 November 2005. 25.The defendant denied that it was the plaintiff’s fiduciary. The two judgments 26.On 20 December 2010, at the conclusion of an 18-day hearing held between October and December 2010, Yam J determined the issue of liability in favour of the plaintiff and gave his reasons in writing on 10 March 2011 (‘the 1st judgment’). This hearing was pursuant to an order for split trial on liability which was to include a determination on the legal basis upon which damages were to be assessed together with other directions on the assessment of damages. The Judge, apart from finding liability in favour of the plaintiff, did not address these other matters. 27.The plaintiff then issued a summons dated 9 May 2011 seeking directions on these matters. A further hearing was held on 27 October 2011 in which the Judge made a determination on these other matters (‘the 2nd judgment’). His reasons for the 2nd judgment were delivered on 23 February 2012. 28.The defendant now appeals against both judgments. Overview 29.This is a complex case with numerous factual and legal issues strenuously contested by the parties. One serious problem of the judgments below is the lack of specific findings on many of the important factual issues which led to arguments on the soundness of the Judge’s determination. 30.So that one may have a proper overview of the case, I would address the following issues: A) The 1st judgment 1) What was the nature of the defendant’s obligation under the P’s MOU? 2) Was Asset Proof a condition precedent to the defendant’s obligation? 3) Did the plaintiff furnish sufficient Asset Proof? 4) Was the exclusivity period extended? 5) Was the defendant in breach of its obligations? 6) If it was, did the plaintiff prove that the defendant’s breach caused its loss? 7) Was there a change of stance by BOCGI? 8) Whether the plaintiff had waived the defendant’s breach by taking part in the tender / auction? 9) Should the plaintiff mitigate its loss? 10) What was the proper law of the P’s MOU? 11) Is the striking out order made by the Judge correct? Under the 2nd judgment 12) Are the orders made under the 2nd judgment correct? A. Under the 1st Judgment 1. Nature of the defendant’s obligation under the P’s MOU I) The Judge did not make a determination 31.The Judge did not deal with the nature of the defendant’s obligation under the P’s MOU which had been canvassed by the parties at the trial. II) The plaintiff’s view 32.Mr. Dennis Chang SC, counsel for the plaintiff (together with Ms Gekko Lan and Mr. Newman Lam) contended that there was a fundamental obligation on the part of the defendant, which was implied in order to give effect to business efficacy of the P’s MOU, that it must make best or at least reasonable endeavours in good faith to approach BOCGI for the purpose of reaching an agreement. The defendant was also under an obligation not to negotiate with third parties. The defendant was also its fiduciary. III) The defendant’s response 33.Mr. Benjamin Yu SC, counsel for the defendant, (together with Mr. Paul Shieh SC and Mr. M. K. Liu) on the other hand contended that its obligation was merely to observe the requirement of the exclusivity period set out under Clause 7. During this period, it would merely deal with the plaintiff. Outside the exclusivity period, the defendant was entitled to deal with any third party and did not owe any duty to the plaintiff. 34.The defendant contended that its role was no different in nature from that of an estate agent in seeking to secure a deal. Chitty on Contracts, Hong Kong Specific Contracts (2nd Ed), paragraphs 1—128 stated that
35.Further the plaintiff’s earnest money is fully protected, as it would be kept by the solicitors and returnable within 7 days of demand with interest. 36.The defendant argued that there was no room for the implied term. IV) My view on the defendant’s obligations 37.1) That during the exclusivity period the defendant was only entitled to negotiate with the plaintiff is clear. However, this was not the only contractual obligation of the defendant under the P’s MOU. It was required to approach BOCGI to reach a deal on the sale of the debts and properties so as to enable the plaintiff to acquire the debts and properties in turn from the defendant. This requirement is apparent from the terms of the P’s MOU. Given the requirement of the defendant’s obligations, I see no difficulty in implying a duty on the defendant to use its best or at least reasonable endeavours in good faith. 2) This obligation can be ascertained from the various clauses of the P’s MOU beginning with Clause 5. The defendant agreed to acquire the debts and properties from BOCGI on the premise that the plaintiff agreed to pay HK$810 million to acquire those debts and properties from the defendant. One just cannot ignore these express words which imposed this obligation on the defendant and say that the defendant’s obligation was merely not to deal with third parties during the exclusivity period. 3) Clause 6 provided that if the defendant reached an agreement with BOCGI before 30 November 2005 the earnest money paid by the plaintiff would be used as the deposit in the agreement in respect of the plaintiff’s acquisition of the BOCGI debts and properties. This shows that the defendant’s obligation is linked to the steps to be performed by the plaintiff. 4) While only Clauses 5, 6 and 7 had been expressly agreed by the parties to have contractual effect, other clauses in the P’s MOU further support the existence of the implied term. 5) Clause 9 provided that,
6) This clause provided for the steps to be taken to give effect to Clause 5, namely, (1) an agreement between the defendant and BOCGI to purchase the BOCGI debts and properties; (2) an agreement between the defendant and the plaintiff for the defendant to resell the debts to the plaintiff and pre-sell the properties to the plaintiff; (3) these two agreements were to be executed at the same time; and (4) the terms of the agreement between the plaintiff and the defendant were to be further discussed between the plaintiff and the defendant. 7) Clause 8 provided that
8) This clause required the plaintiff to pay the sum of $810 million (less the earnest money of $50 million) before the signing of the agreement between the defendant and BOCGI and within 3 days from the plaintiff’s confirmation of the content and format of the agreement between the defendant and BOCGI. 9) The linkage of these two agreements shows that the defendant’s obligation goes beyond the suggested restricted obligation of not dealing with third parties during the exclusivity period. This further supports the implied term relied upon by the plaintiff. There is no reason to read down Clause 5 to the extent that it only deals with the defendant acting in the role of an estate agent and not dealing with third parties during the exclusivity period. 10) Mr. Chang used the analogy of a provisional agreement in the sale and purchase of land to describe the nature of the P’s MOU. Such an agreement, which came into existence before the formal agreement, is nonetheless a binding and enforceable agreement. In my view the existence of the fundamental obligation is supported by the analysis put forward by Mr. Chang. 11) Mr. Yu referred to Clause 7.3 which he said gives the plaintiff a right to ‘veto’ any agreement reached by the defendant. He argued that this shows that the plaintiff’s money was never at risk even if the defendant reached agreement with BOCGI. In my view the so called ‘veto’ right in Clause 7.3 must be read subject to other clauses which show that the agreement between the defendant and BOCGI, on the one hand, and the agreement between the plaintiff and the defendant, on the other hand, are closely intertwined and which explains why the plaintiff is to confirm the terms of the agreement reached by the defendant with BOCGI. The effect of the clauses read as a whole shows that Clause 7 does not give the plaintiff a ‘veto’ right to refuse to purchase the debts and properties at the consideration of $810 million when the defendant had reached an agreement with BOCGI. Rather, it acknowledges the plaintiff’s position as the ‘end user’ which has agreed to acquire the debts and properties. Likewise the defendant would be in breach of the P’s MOU (Clauses 5 and 6.1) if, after having reached an agreement with BOCGI, it then refused to sell the debts and the properties at the price of $810 million. 12) Mr. Yu argued that the fundamental obligation requirement should not be implied in the P’s MOU. He referred to Rhodia International Holdings v. Huntsman International LLC [2007] 2 Lloyd’s Rep 325 at 335 where Deputy High Court Judge Flaux QC discussed the distinction between using best endeavours on the one hand, and using reasonable endeavours on the other hand. Mr. Yu argued that there being a distinction between these two concepts, the court should not imply such a term because it may not be what the parties have intended. In Trollope & Colls Ltd. v. North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 Lord Pearson at 609 held that
13) In my view this does not advance the defendant’s case further. The requirement of best or reasonable endeavours is advanced in the alternative. Considering the context of the P’s MOU, it is necessary to give business efficacy to the contract of an implied term on either one of the alternatives. 14) Mr. Yu further relied on the authorities which stated that the duty of good faith should not be implied in pre-contractual negotiations. 15) (1)(a) In Walford v. Miles [1992] 2 AC 128 the parties negotiated for a sale of business and property from the defendants to the plaintiffs. The parties then reached an oral agreement that the defendants would negotiate with the plaintiffs exclusively and terminate any negotiations then current between the defendants and any other competing purchasers. The oral agreement did not specify any duration. The plaintiffs sued on the oral agreement and pleaded that there was an implied term that so long as the defendants continued to sell, they would continue to negotiate in good faith with the plaintiffs. (b) The English Court of Appeal held that the oral agreement was an agreement to negotiate and as such was not enforceable. The House of Lords dismissed the plaintiff’s appeal and Lord Ackner at 138 commented on the suggested duty to negotiate in good faith. He held that such a duty is ‘as unworkable in practice as it is inherently inconsistent with the position of a negotiating party’. He stated that,
(c) However it should be pointed out that Lord Ackner at 139 expressly recognized the validity of a lockout contract:
(d) He observed that the oral agreement in that case
(e) He held that this deficiency cannot be cured by holding that the defendant’s obligation not to deal with the third party shall continue ‘for such time as is reasonable in all the circumstances’ because that would indirectly impose upon the defendant a duty to negotiate in good faith. (2) In Hyundai Engineering & Construction Co Ltd v. Vigour Ltd [2005] 3 HKLRD 723, this Court, per Rogers VP at 733, referred to Lord Ackner’s judgment and stated that
(3) See also Little v. Courage Ltd. (1994) 70 P&CR 469 which also adopted Lord Ackner’s view. 16) Mr. Yu further referred to Hang Wah Chong Investment Co. Ltd. v. AG [1981] 1 WLR 1141 where the Privy Council rejected the process of ‘piling implication upon implication’ in construing the condition of a landlord giving consent to the development of a piece of land. 17) The cases cited by Mr. Yu do not assist. The P’s MOU is not a pure lockout agreement where the plaintiff and the defendant would only negotiate with each other. As pointed out earlier, the P’s MOU also imposed a contractual duty on the defendant to approach and reach a deal with BOCGI on the sale of the debts and properties. It is in this context that the duty to use best or at least reasonable endeavours in good faith arises. 18) What has been discussed so far is the contractual obligation of the defendant. The plaintiff’s case is that the defendant also owed a fiduciary duty as well. Mason J (as he then was) in Hospital Products Limited v. United States Surgical Corporation and others (1984) 156 C.L.R. 41 at 96-97 addressed the characteristics of a fiduciary relationship:
19) Mason J at page 97 addressed the relationship of contractual and fiduciary duties:
20) Mason J at page 99 addressed the conflict of acting in one’s own interest and the obligation to act in the interest of another:
21) Mason J’s view was cited with approval by the Court of Final Appeal in Active Profit Ltd v. Nissho Iwai Hong Kong Corporation Ltd. & Others [2006] 4 HKLRD 467 at 483 and in Kelly v. Cooper [1993] AC 205 at 215. 22) As stated by Mason J in Hospital Products Ltd,the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship, although the terms of the contract can modify the extent and nature of the fiduciary duty (see Henderson v. Merrett Syndicates Ltd [1995] 2 AC 145). 23) In my view, the elements of confidence and trust on the defendant, and dependence and vulnerability of the plaintiff which are crucial elements in a fiduciary relationship were present in the relationship between the plaintiff and the defendant: (1) The negotiations in relation to the purchase of the BOCGI debts and properties were conducted by the defendant. The steps to be taken and the content of the negotiation were within the peculiar knowledge of the defendant. This necessarily required the plaintiff to repose confidence and trust in the defendant with the implied duty of the defendant to pursue the matter in good faith with best or reasonable endeavours. (2) The ability of the plaintiff to acquire the debts and the properties was dependent on the action to be taken by the defendant. This dependency and vulnerability of the plaintiff are implicit in the provisions of the P’s MOU on the structure of the agreements to be entered into in the event of a successful acquisition. (3) This together with the defendant’s obligation under Clause 7 to provide all reasonable and necessary information and assistance to the plaintiff, that it would let the plaintiff know the terms it had agreed with BOCGI and the plaintiff’s confirmation of those terms, underline and support the existence of an obligation on the part of the defendant to act in the interests of the plaintiff which is the foundation of a fiduciary duty. (4) The consequence is that while the defendant has a legitimate interest to earn the disclosed profit, it would be in breach of its fiduciary duty if it did not make best or at least reasonable efforts in good faith to approach BOCGI to reach an agreement, or if it negotiated with third parties behind the plaintiff’s back. 2. Was Asset Proof condition precedent to the defendant’s obligations? I) The defendant’s case on Asset Proof 38.The defendant contended that its duty only arose under the P’s MOU when the plaintiff provided it with the Asset Proof in addition to the provision of the earnest money. This is a condition precedent which in this context means a contractual obligation that must be performed by one party before another contractual obligation of the counter-party arises (Lewison : The Interpretation of Contracts 5th Ed at paragraph 16-02). The requirement is needed to ensure that the plaintiff has the financial means to acquire the debt. II) Asset proof is not condition precedent 39.1) Whether this term is a condition precedent or a contractual term of some other character must depend on (1) the form of the clause itself, (2) the relation of the clause to the contract as a whole, (3) general considerations of law. See Bremer Handelsgesellschaft Schaft v Vanden Avenne Izegem [1978] 2 Lloyd’s Rep. 109 at 113. 2) The applicable test is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean (Chartbrook Ltd and another v Persimmon Homes Ltd and another [2009] 1 AC 1101 at 1112). In Rainy Sky SA v. Kookmin Bank [2011] 1 WLR 2900 it was held by Lord Clarke of Stone-cum-Ebony JSC that
3) The relevant parts of the P’s MOU dealing with earnest money and Asset Proof are Clauses 6 and 7. The starting point is that Clause 6 requires the plaintiff to provide the earnest money and Asset Proof before 20 November 2005. Under Clause 7 the exclusivity period of 11 November 2005 to 30 November 2005 will take effect from the time of the plaintiff providing the earnest money only. Clause 7 did not include the furnishing of Asset Proof as a condition precedent before the defendant’s obligation would arise. 4) The P’s MOU came into being after a series of meetings and discussions between the parties. In the light of the clear words of Clause 7, I disagree with the defendant’s contention that the condition precedent in Clause 7 included the plaintiff furnishing Asset Proof as well as the earnest money. As Lord Hoffmann summarised the position in Chartbrook Ltd at paragraph 14,
5) I do not consider that there is anything wrong with the language in the P’s MOU. Further it is not necessary and there is no basis to imply this term contended by the defendant because a bank reference letter gives no guarantee that money will be available when needed. Objectively speaking, its importance is far less than real money being handed over. The $50 million was already a substantial sum. Under Clause 6.1 it would be treated as a deposit once an agreement was reached. It is also liable to be forfeited in the event of default by the plaintiff (Polyset Ltd v. Panhandat Ltd (2002) 5 HKCFAR 234 at paragraph 36). 6) As the Asset Proof requirement was not a condition precedent, the exclusivity period between 11 November 2005 and 30 November 2005 was effective after the plaintiff furnished the earnest money. 3. Did the plaintiff furnish sufficient Asset Proof? I) The contention 40.The defendant complained that the Bank Reference Letter was flawed in two ways. First, it does not link the two companies, namely FLML and FPL with the plaintiff, as it does not mention any relationship between them. Secondly, a ‘high 9-digit figure’ referred to in the letter could not be taken to mean that the plaintiff had over HK$760 million in BOC’s account. 41.There was a dispute between the parties whether Madam Chu of the plaintiff had informed the defendant on 11 November 2005 that the investor behind the plaintiff was one Mr. Cheung Lap Kwan and Mr. Cheung intended to use the two companies to hold the three properties. The Judge held that,
II) My view on Asset Proof 42.1) The Judge had not made findings on the conflict of evidence of whether Madam Chu had disclosed the names of the two companies to the defendant. In the solicitors’ correspondence it was never asserted by the plaintiff’s solicitors that Madam Chu had already made the disclosure. The reasons given by the Judge were also not adequate. 2) However, taking an overview, my view is that the defendant must have accepted that the Asset Proof furnished by the plaintiff was adequate. 3) The Bank Reference Letter together with $50 million was provided by the plaintiff to Paul Hastings on 19 November 2005. No issue was taken by Paul Hastings on the adequacy of the Bank Reference Letter. 4) On 21 November 2005 at the meeting between Madam Chu and representatives of the defendant, no issue by the defendant was taken on the Bank Reference Letter. On the contrary Madam Chu was told that the defendant was contacting BOCGI to discuss the acquisition of the debt. 5) On 22 November 2005, the plaintiff wrote to the defendant (addressed to the Financial Service Department (‘FSD’) of the Zhuhai Government) stating that it had complied with the P’s MOU in providing the Asset Proof. Again no issue was taken by the defendant on the Bank Reference Letter. 6) Although the defendant first raised the issue of adequacy of the Bank Reference Letter on 26 November 2005, thereafter it still requested the plaintiff to sign the confidentiality agreement relating to the transaction contained in the P’s MOU. 7) Paul Hastings had by letter dated 28 November 2005 made a further request for a reference letter, but when it was refused by the plaintiff’s solicitors, it had not made any further request and certainly had not indicated that the P’s MOU had come to an end because inadequate Asset Proof had been furnished. 8) On the contrary upon the plaintiff’s request for information under Clause 7.2 of the P’s MOU, the defendant on 28 November 2005 provided the Memorandum on Restructuring of 22 July 2005. 9) Accordingly the defendant must have accepted the adequacy of the Asset Proof or elected not to insist on strict compliance of the requirement. Handley : Estoppel by Conduct and Election stated at paragraph 14-006 to 14-008 that
10) Mason J in Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 655 stated that
11) The plaintiff argued that the election occurred after the plaintiff wrote to FSD on 22 November 2005 to confirm it had complied with the P’s MOU and no disagreement was raised by the defendant. I disagree. As pointed out in Sargent and also Large Land Investment Ltd v. Cheung Siu Kwai [2003] 1 HKLRD 313 at paragraph 15(4), there must be communication of the election to the other party in clear and unequivocal terms. Further in Sargent, Mason J held that the party who has the right to elect is not bound to elect at once. At that stage I do not regard that there was clear and unequivocal communication of election. However, the events that unfolded afterwards are sufficient to show that the defendant had indeed elected to treat the Asset Proof as sufficient. 12) In this connection it is sufficient to briefly mention that even the bank reference letters provided by See Good (which was later reused by Sei Pou) also did not relate to any account of See Good / Sei Pou and these letters likewise did not provide proof that the money would be provided by the shareholders to See Good / Sei Pou. Ultimately, as Mr. He Ning Ka 何寧卡 (‘Mr. He’), the vice-mayor of the Zhuhai Government stated, he was not interested in who the plaintiff’s backers were as long as the plaintiff could come up with the money. 4. Was the exclusivity period extended? I) The Judge’s decision 43.The next question is whether the exclusivity period had been extended after it expired by effluxion of time on 30 November 2005. The Judge rejected the plaintiff’s evidence that the exclusivity period was orally extended by a representative of the defendant. 44.The Judge’s reasoning was that because he found that the defendant had negotiated with a third party i.e. See Good before 25 November 2005 and acted as if such contract had only begun on 1 December 2005, the defendant would not endanger itself by extending the exclusivity period. II) The plaintiff’s position 45.In this appeal, Mr. Chang no longer relied on any oral extension but maintained that there was an implied extension of the exclusivity period. He further argued that the defendant is estopped from relying on the time limitation. 46.Mr. Chang argued that the evidence is clear that the defendant wanted to keep the plaintiff ‘in play’ even after the expiry of the exclusivity period whilst keeping the plaintiff in the dark as long as possible. The defendant never told the plaintiff about its signing of the SPMOU with Sei Pou. It also did not volunteer returning the earnest money nor did the plaintiff ask for its return upon expiry of the original stipulated period. At no stage did the defendant tell the plaintiff that it was not or no longer pursuing negotiations for the purpose of re-selling the debts and pre-selling the properties to the plaintiff under Clause 5 of the P’s MOU. That the plaintiff had been proceeding under the belief that the P’s MOU was subsisting was clearly evidenced by the contemporaneous letters written by solicitors on behalf of the plaintiff on 1, 22 and 29 December 2005 respectively, which relied on the P’s MOU each time, and the defendant never replied that the P’s MOU was by then ineffective. The updated bank reference provided to Paul Hastings on 30 December 2005 was in reliance on representations made by the defendant’s representatives that the defendant had been directed to reach agreement with BOCGI in accordance with the P’s MOU on or before the weekend. This was evidenced in the plaintiff’s solicitor’s letter dated 29 December 2005. The plaintiff was not aware of the intended tender / auction to be held on 31 December 2005 until the late afternoon of 30 December 2005. III) My view on extension 47.1) I disagree that the exclusivity period had been extended by implication or that the acts / representations done by the defendant could ground a case of estoppel. Looking at the matter objectively it is difficult to find that the acts / representations of the defendant during this period can lead the plaintiff to believe that beyond 30 November 2005, the plaintiff would still have the exclusive right to purchase. Under the P’s MOU, the earnest money held by Paul Hastings could at any time have been demanded by the plaintiff with interest. While the acts of the defendant may support the plaintiff’s case that Asset Proof was treated as sufficient under the P’s MOU, they cannot give rise to a fresh agreement for another exclusivity period. The defendant’s witness said that after 30 November 2005, the parties could still talk if the plaintiff wished to proceed but the exclusivity period provision had no effect. 2) The plaintiff had relied on the prevention principle, namely, a person is not permitted to take advantage of his own wrong, to preclude the defendant from relying on the expiration of the exclusivity period. Ribeiro PJ observed in Kensland Realty Ltd v Whale View Investment Ltd & Another (2001) 4 HKCFAR 381 that:
3) However, before the prevention principle can be invoked there are two limitations: (1) It is necessary to show the relevant party’s ‘wrong’ involves his breach of the contract in respect of an obligation owed to the other party (Kensland Realty Ltd, paragraph 44). (2) It is necessary to show a causal connection i.e. the contractual rights or benefits which the relevant party is seeking to assert or claim arise as a direct consequence of that prior breach (Kensland Realty Ltd, paragraph 95). The case cited by Ribeiro PJ under the second limitation is instructive: (a) Nina’s Bar Bistro Pty Ltd v MBE Corp (Sydney) Pty Ltd [1984] 3 NSWLR 613, was a case involving sale of a restaurant which was subject to the parties obtaining consent from the lessor for the restaurant’s lease to be assigned to the purchaser, the parties being under an obligation to use their best endeavours to secure such consent. Such consent was not obtained and the purchaser was held to be in breach of the best endeavours obligation. The question was whether, in such circumstances, the purchaser was entitled to terminate the contract. (b) Mahoney JA (giving the principal majority judgment) stated:
(c) On the facts, the court was not satisfied that the purchaser’s failure to obtain consent of the lessors was causally related to such breach, the probability being that such consent would in any event not have been given. The purchaser was therefore held entitled to terminate notwithstanding its prior breach. 4) Hence before the prevention principle can be invoked, breach and causation must be proved. As will be discussed later under the causation issue, these matters have yet to be resolved. Accordingly this Court cannot determine whether there was an extension of the exclusivity period under the prevention principle. 5. Was the defendant in breach of its obligation? I) The three breaches 48.The plaintiff relied on three instances of breach by the defendant: 1) delay in approaching BOCGI; 2) double dealing; 3) not informing the plaintiff of the change of stance by BOCGI. 49.The Judge found there was double dealing and provided reasons for his finding. At the concluding part of his judgment he only stated there was breach by the defendant in respect of delay and not informing the plaintiff of the change of stance by BOCGI but he provided no elaboration for his determination on these two matters. II) Delay in approaching BOCGI 50.1) In my view the defendant was in breach. It is clear from the evidence of the defendant that BOCGI had imposed a deadline of 30 November 2005 to conclude the agreement and there was pressure on the Zhuhai Government to achieve a resolution on 30 November 2005. After the P’s MOU was reached on 11 November 2005, there would be very little time left to achieve the deal. The urgency to proceed with negotiation with BOCGI by the defendant is apparent since the original date for payment of the good faith money on 25 November 2005 was moved forward to 20 November 2005. Mr. He stated that efforts that were made to achieve an agreement with BOCGI should have been made immediately following the signing of the P’s MOU. Guan Li 權力 (‘Mr. Guan’), the managing director of the defendant agreed that there was nothing to prevent the defendant from starting negotiation immediately after the signing of the P’s MOU and making arrangements conditional upon the payment of the earnest money. 2) However, I agree with Mr. Yu that the defendant’s duty would only start upon the plaintiff fulfilling its obligation in tendering the earnest money. This is the only reasonable way to construe the commencement of the duty. The plaintiff only furnished the cheques for the earnest money to Paul Hastings on 19 November 2005 which were cleared on 23 November 2005. In this connection, in respect of Mr. Yu’s argument that payment by cheque does not constitute legal tender (Camberra Investment Ltd v. Chan Wai Tak [1989] 1 HKLR 568 per Hunter JA at 574 ‘An effective tender required cash or its equivalent’), I note that the issue of cash payment was simply not taken by Paul Hastings when the cheques were tendered. Hence any duty on the part of the defendant would only have commenced from 23 November 2005. 3) But after that, nothing was apparently done by the defendant until 26 November 2005 (Saturday) when the deadline was 30 November 2005 (i.e. the following Wednesday). By the letter of 26 November 2005, Paul Hastings wrote to BOCGI that the Zhuhai Government was ‘inclined through a third party to acquire the debts at the price of $700 million’. It did not mention that the plaintiff was willing to acquire the debts. It merely stated that the Zhuhai Government had contacted the third party and Paul Hastings would approach BOCGI the next week. It did not say when in the next week it would approach BOCGI. This is in the context of three remaining working days before the deadline: Monday (28th), Tuesday (29th) and Wednesday (30th). This is clear evidence that the defendant had not fulfilled its best or reasonable endeavours. If it was to be said that the deal could be concluded by Wednesday 30th November, then clearly the burden must be on the defendant to establish this. In my view it had failed to show that it would be so able. I hold that the defendant had breached the fundamental obligation by reason of its delay in not proceeding with the negotiation with BOCGI expeditiously. III) Double dealing 1) Background 51.The Judge further accepted the plaintiff’s case that the defendant had failed to advance the plaintiff’s interest with BOCGI but had instead advanced the interest of another party, namely See Good, resulting in See Pou successfully acquiring the debts from BOCGI. 52.It is the defendant’s case that the Zhuhai Government received an application from See Good (‘the SG Application’) to acquire the debts on 25 November 2005. Amongst the documents included in the SG Application were a draft Memorandum of Understanding between the defendant and See Good (‘Draft SGMOU’) to acquire the debts and properties for the sum of $810 million and bank reference letters on the assets of the directors of See Good. Zhang Song 張松 (‘Mr. Zhang’) was the director of the FSD and the Deputy Secretary General of the Zhuhai Government. Mr. Zhang and his assistant, Chen Yu Rong 陳玉榮 (‘Madam Chen’) (the vice director of FSD) received the SG Application from the Office of the Zhuhai Government on 29 November 2005. They discussed the SG Application but decided not to pass it on to Mr. Quan, the managing director of the defendant in order to avoid conflict, until 1 December 2005. 53.On 1 December 2005 Mr. Zhang decided to approach See Good. The FSD passed the SG Application to the defendant. At around 1 pm of the same day Mr. Zhang asked Madam Chen to instruct Mr Quan and Liao Ke 劉科 (‘Mr. Liao’), of the Zhu Kuan Restructuring Office of the Zhuhai Zhu Kuan Group Holding Company Limited 珠海市珠光集團控股有限公司 to approach See Good for discussion. Madam Chen confirmed that she asked Mr. Quan to contact Mr. Liao and later instructed Mr. Liao to contact See Good to discuss with Paul Hastings and to hurry up with the drafting of a Memorandum of Understanding based on the Draft SGMOU. 54.A first draft was sent by Paul Hastings to Zhu Kuan Holdings on the same day at 5:15 pm and the second draft was sent on 2 December 2005 at 11 am. The parties signed a Memorandum of Understanding (‘SPMOU’) on the same day. It was signed by Mr. Quan on behalf of the defendant. 2) The Judge’s decision on double dealing 55.The Judge relied on three matters in finding for the plaintiff on the issue of double dealing: (1) Similarity between the draft SGMOU included in the SG Application (the Judge referred to this as SGMOU-1) and the P’s MOU; (2) The speed of the negotiation between See Good and the defendant; and (3) Paul Hastings’s letter dated 26 November 2005. 56.In respect of each of these three matters the Judge held that,
3) The defendant’s submission 57.Mr. Yu argued that the Judge’s decision was wrong. In gist he argued that: (1) The Judge based his decision on inferences drawn on the documents but he had totally ignored the primary evidence of Mr. Zhang and Madam Chen which refuted any allegation of negotiation with See Good during the exclusivity period. (2) The Judge wrongly placed the burden on the defendant to dispel suspicions when the plaintiff had not particularized its claim on double dealing. (3) The Judge misconstrued the documents. The defendant’s witnesses had specifically stated that Paul Hastings’ letter of 26 November 2005 was issued because of the P’s MOU. 4) The plaintiff’s response 58.The response from the plaintiff is that although the Judge did not expressly address the evidence of the defendant’s witnesses, he must have by implication rejected their evidence. Furthermore it argued that the evidence adduced at the hearing supported the Judge’s view and this Court is invited to rely on the matters identified in the plaintiff’s amended respondent’s notice, the gist of which are: (1) None of the defendant’s witnesses was able to provide a credible explanation as to how See Good / Sei Pou could, without prior discussion with the defendant or with those with power to speak for the defendant, have produced the draft SGMOU on 25 November 2005. The information released to the public or otherwise in the public domain about the restructuring of the Zhuhai companies as suggested by the defendant did not explain the kind of details in the draft SGMOU. (2) The defendant, on its own case, was only an ‘operation platform’ for the restructuring of the debts of the Zhuhai companies. It relied on negotiations conducted and acts done on its behalf by officials or in the name of the Zhuhai Government (including in particular FSD) and the ex-staff of the Zhuhai companies or current staff of Zhu Kuan Holdings (who were subject to directions of FSD). The undisputed evidence shows that the defendant’s own solicitors in the relevant correspondence treated them and the defendant as one under the same client’s reference. Moreover, in the defendant’s answers to the plaintiff’s request for further and better particulars, correspondence whether written in the name of the Zhuhai Government or pursuant to instructions of Zhu Kuan Holdings and / or other acts done by officials of the Zhuhai Government were treated as the defendant’s acts. The defendant is estopped from contending otherwise. Further, Mr. Liao and Mr. Huang Hai Tao 黃海濤, staff members of Zhu Kuan Holdings were treated as persons in FSD. (3) Neither Mr Liao nor Mr Wilson Yiu the solicitor in charge of the case from Paul Hastings was called to give evidence and all adverse inferences must be drawn against the defendant. 5) My view on double dealing 59.1) Mr. Yu relied on Nina Kung v. Wang Din Shin (2005) 8 HKCFAR 387 in which Litton NPJ at paragraphs 472 and 489 described the defendant as putting forward an ‘unalleged and unspoken conspiracy’ of the deceased conspiring with others to put forward forged testamentary documents and Ribeiro PJ at paragraph 276 commented that the reasoning by the trial judge had the ‘pernicious effects’ of imposing a burden on the plaintiff to dispel suspicious circumstances. While the plaintiff in this case had pleaded double dealing, the defendant complained about the absence of particulars of this plea which gives rise to ‘specious opportunism’ (per Yuen JA in Chan Kong v. Chan Li Chai Medical Factory (Hong Kong) Ltd [2009] 2 HKLRD 455 at paragraph 15. 2) Whether there is an adequate plea must be considered in the context of the case. I do not think that the plaintiff can be criticized for pleading in general terms that the defendant had been engaged in double dealing. After all it had no direct knowledge of the operation of the Zhuhai Government. The plaintiff’s pleaded case is that the defendant ‘acted through itself and / or the Zhuhai Government’ in committing breaches of the P’s MOU. I proceed with the analysis on this basis. 3) On the evidence, the role played by the defendant itself in the restructuring was minimal. It was used as a platform in the restructuring and Mr Quan had been described by Mr Chang as a rubber stamp, which was not seriously challenged. Mr Quan had said instructions to him would be from FSD. It was FSD of the Zhuhai Government which was in charge of facilitating and supervising the restructuring. 4) Mr. Zhang and Madam Chen were the persons-in-charge of FSD who had the responsibility for the restructuring. They had denied any double dealing on their part. They had given an account of how they dealt with the SG Application when it was received by FSD on 29 November 2005. Mr. Zhang stated that neither he nor his side had given instructions to deal with Paul Hastings. He said that the letter issued on 26 November 2005 was because of the P’s MOU. 5) The Judge had not addressed the credibility of Mr. Zhang or Madam Chen. If it is said that the defendant had acted through FSD then it is essential for the Judge to make a finding on the credibility of Mr. Zhang and Madam Chen’s evidence. 6) Could it then be said that their testimonies on the denial of double dealing were inherently incredible? In dealing with this issue I accept that the plaintiff had put forward a strong case that the details contained in the draft SGMOU were unlikely to be accessed by See Good from the public domain. Although previously there was another interested party, namely, 新興地產(澳門)有限公司(‘Sun Hing’), it did not proceed with the application. The P’s MOU offered a price of $810 million which was only agreed on 11 November 2005. This was the exact figure offered by See Good in the SG Application. Further the reference in Clause 7.5 of the draft SGMOU, namely, Paul Hastings had advised See Good to seek independent advice regarding the proposed transaction, could only mean that See Good had been so advised by Paul Hastings, who was instructed by the Zhuhai Government in the restructuring of the Zhuhai Government’s debts. The instruction was given to Paul Hastings by Mr. Liao. In the absence of evidence from Paul Hastings that it had been independently approached by See Good, one can infer from the evidence that See Good had indeed negotiated with someone from the Zhuhai Government (I use this term in a general sense) about the purchase of the debts and also it had been advised in respect of the negotiation by Paul Hastings who was the lawyer for the Zhuhai Government in this transaction. This indicated that negotiations had taken place prior to 25 November 2005 as the SG Application together with the draft SGMOU was received on 25 November 2005. But the defendant had chosen not to call See Good or lawyers from Paul Hastings to address this point. Mr. Yu’s argument that the plaintiff could easily have called Paul Hastings as its own witness missed the point. Paul Hastings could refuse to testify on the ground of legal privilege. 7) Mr. Yu submitted that if Clause 7.5 of the SGMOU was inserted at the request of Paul Hastings during previous discussion, then there ought to be in existence a draft or written communication emanating from Paul Hastings suggesting the inclusion of the Clause and those documents ought to be disclosed. Yet the only documents that were disclosed were those in relation to the SG Application. There was no other document. Mr. Yu submitted that one should not lightly draw an inference against Paul Hastings that it was complicit in any negotiation. 8) This is a cogent point but the involvement of Paul Hastings could easily have been clarified if lawyers from Paul Hastings were called to give evidence on why Clause 7.5 appeared in the draft SGMOU. Clearly the defendant must have taken a conscious decision not to call lawyers from Paul Hastings. This being the case, Clause 7.5 is clearly a matter which the Court can rely upon in assessing whether the defendant had engaged with See Good in negotiations during the exclusivity period. 9) Likewise the defendant had not called Mr. Liao as a witness. Certainly Mr. Liao had played an active role in this case. After all he had given instructions to and liaised with Paul Hastings. He gave instructions to Paul Hastings to issue the letter of 26 November 2005. He contacted Sei Pou after the defendant decided to negotiate with it. According to Madam Chen, Mr. Liao also later provided the information that BOCGI wanted to increase the price. He arranged the meeting on 29 November 2005 in which the defendant tried to persuade BOCGI not to increase the price. He was involved in drafting the letter of 30 November 2005 (‘Letter 232’) in which the defendant asked Bank of China not to increase the price. He was present at the meeting on 6 December 2005 with BOCGI in which the price for the purchase was finally resolved. He was also involved with the drafting of a summary of that meeting. 10) However, these factors would not necessarily give rise to the only inference that the FSD had a role to play in relation to the negotiation with See Good. Equally probable is that some departments / officers in the Zhuhai Government, other than the FSD and its officers, had carried out negotiation with See Good. Although the FSD was in charge of the co-ordination and supervision of the restructuring, the evidence showed that the demarcation of duty was not so strict that one can rule out the involvement of other departments / officers. Mr. He, the vice mayor was present in one of the meetings leading up to the P’s MOU. He also approached Mr. Xiao Kang 肖剛 (‘Mr. Xiao’) of Bank of China in Beijing. Mr. Xian Wen 冼文, another vice mayor was also involved in persuading BOCGI not to increase the price on 29 November 2005. After all it was the Zhuhai Government which was in serious financial difficulties. 11) The Judge had made no finding whether some other departments / officers had negotiated with See Good. In any event, even if there was such a finding, this would not be sufficient to attribute this negotiation to the defendant / FSD, unless there is a finding that, (1) departments / officers in the Zhuhai Government other than the defendant / FSD and their officers had full authority on behalf of the Zhuhai Government to find potential investors to acquire the BOCGI debt; (2) their acts were binding on the defendant / FSD; and (3) the defendant / FSD and their officers were aware of the negotiation with See Good by the other departments / officers during the exclusivity period. 12) Viewed in this context, the three reasons relied upon by the Judge, namely, the content of the draft SGMOU, the speed in which the SGMOU was finalized and the letter of Paul Hastings dated 26 November 2005 are not determinative of the issue. 13) Further, in respect of the letter of 26 November 2005, before it can be said that it was issued to advance the interest of See Good, a further finding is required on whether there was a fundamental change in the method of acquiring the debts from BOCGI. The letter stated that「珠海市人民政府傾向透過第三方以港幣7億元收購……債權及抵押權益」(The People’s Government of the Zhuhai is inclined to purchase, through a third party, for HK$700 million…the debts and the securities…). Whether this signalled a departure from the original position of the defendant acquiring the debt from BOCGI first, to a new approach of direct purchase by a third party from BOCGI must be resolved. 14) In a case such as this, it is unsatisfactory (although it can be relied upon as a last resort) to decide a crucial issue such as whether the defendant was in breach by resorting to burden of proof. It is not helpful to say that although the plaintiff carried the legal burden, the evidential burden had shifted to the defendant and since the operation of the Zhuhai Government was within the knowledge of the defendant it had failed to discharge the evidential burden. The issue is too complex to be resolved in this manner. I am not convinced that express findings cannot be made in this case. The Judge certainly had not said so. The need for a judge to give adequate reasons for his decisions is well established: Oriental Daily Publisher Ltd v. Commissioner for Television and Entertainment Licensing Authority [1998] 4 HKC 505 at 514. The defendant had referred to instances where a judgment was set aside due to the inadequacy of reasons such as Zhuo Cui Hao v. Ting Fung Yee [1999] 3 HKC 634 and 香港特別行政區訴CKS (HKSAR v. CKS) CACC 472/2010. As observed by Gleeson NPJ in HKSAR v. Egan (2010) 13 HKCFAR 314 at 437 the adequacy of reasons in the circumstances of a particular case is to be considered in the light of the purposes that are served by the obligation to give reasons. 15) In the present case a finding by the Judge on the issues I have identified is vital to the determination of double dealing. While this Court had been referred to the transcript of evidence including that of Mr. Zhang and Madam Chen, this only provides a snapshot of their evidence. In a trial which spanned over so many days, this Court must be extremely cautious in assuming the role of fact finding which clearly was within the province of the Judge who had the benefit of seeing a complete picture of the case as the evidence unfolded at the trial. This is clearly a case in which the Court will require an input from the Judge on finding of fact. The glaring inadequacy in this case leaves the Court with no choice but to order a re-trial. IV) Informing the plaintiff of change of stance 60.The defendant contended that on 28 November 2005 it became aware that BOCGI had demanded a higher price for the sale of the debt. The Judge found that BOCGI had not changed its stance. As will be discussed later, the change of stance issue has to be determined afresh in the trial. Hence no decision can be made by this Court at this stage on this topic. I would like to add that, if there was a change of stance, then clearly this was information which the defendant was required to provide the plaintiff under Clause 7.2 of the P’s MOU and the defendant would be in breach if it did not inform the plaintiff. 6. Causation 61.The law is clear that even if the defendant was in breach of contract, there must be a causal connection between the defendant’s breach and the plaintiff’s loss: Sykes and others v. Midland Bank Executor and Trustee Co. Ltd and others [1971] 1 QB 113. The legal burden rests on the plaintiff to show not merely breach but also that the breach caused the loss: Bonnington Castings Ltd v. Wardlaw [1956] AC 613 at 619 and Barnett v. Chelsea and Kensington Hospital Management Committee [1969] 1 QB 428 at 438. This brings into focus the issue of change of stance by BOCGI. This issue is that, if there was indeed a change of stance, whether this would preclude the defendant from completing the deal with BOCGI irrespective of whether it was in breach. As can be seen, my view is that the Judge’s decision on change of stance cannot stand and a retrial is required. Until a determination has been properly made on the issue of change of stance the Court cannot properly address the issue of causation. The issue of causation is related to whether the plaintiff’s chance of acquiring the debts and properties was a substantial or speculative one. This will be discussed at a later part of this judgment. 7. Was there a change of stance by BOCGI? I) Defendant’s case 62.It was the defendant’s case that on 28November 2005, BOCGI fundamentally changed its negotiating stance and insisted that the initial price of HK$700 million which it had been prepared to accept for the purchase of the debts would only cover HK$652 million worth of debts directly held by it and the purchase price would not cover another portion of debts worth HK$154 million which it held indirectly through Bank of China. The change in stance would drastically affect the feasibility of acquiring the debts from BOCGI. After the efforts of the Zhuhai Government, BOCGI changed back to its original position on 6 December 2005 and the agreement with BOCGI was only finalized in late December 2005. The defendant argued that even if it had been in breach of duty or contract, in view of the change in attitude of BOCGI, there was no chance that the deal contemplated in the P’s MOU could have been completed by 30 November 2005. II) The Judge’s decision 63.The plaintiff denied that there was any change of stance by BOCGI. The Judge rejected the defendant’s contention that there was a change of stance by BOCGI. He gave the following reasons:
III) My view on change of stance 64.1) It is true from the evidence that there was a lack of explanation of what would happen to the indirect debt of $154 million if BOCGI insisted that the price of $700 million would only cover the direct debt of $652 million. It is also true that Mayer Brown JSM (‘JSM’), Solicitors for BOCGI, had in its letter of 12 October 2010 stated that BOCGI could not find documents regarding the change of stance. 2) However, the Judge had not made any express findings on the evidence of the defendant’s witnesses who testified on the change of stance by BOCGI. On 28 November 2005 Mr. Zhang and Madam Chen heard from Mr. Liao about the change of stance by BOCGI. On 29 November 2005 a meeting was held between Mr. Xian and Cao Gang 曹剛 (‘Mr. Cao’) of BOCGI in which BOCGI maintained its stance that the $700 million would only cover its direct debt. It was then decided that Mr. He, the vice-mayor, who was a former subordinate and an acquaintance of Mr. Xiao, the managing director of Bank of China, would approach Mr. Xiao directly. A letter (‘Letter 232’) was drafted for him to bring to Mr. Xiao. He flew to Beijing and met Mr. Xiao and persuaded him to maintain the understanding reached on 27 October 2005 on the sale of the debts. Mr. Xiao then agreed to send his subordinates to Zhuhai to facilitate the discussion on this topic with BOCGI, Bank of China Hong Kong and Bank of China Macau. Eventually at a meeting held on 6 December 2005, BOCGI agreed to sell the debts without any increase in price. 3) The plaintiff complained that Madam Chen did not refer in her witness statement to the discussion of change of stance in the meeting of 29 December 2005 and also Mr. He did not disclose in his witness statement that he had visited Mr. Xiao in Beijing. These are clearly matters that would require a finding by the Judge. 4) Further, when the Judge said BOCGI also could not find the various documents alleged to have been sent by the defendant to persuade it not to change its stance, he had not properly taken into account what JSM had produced on subpoena from BOCGI’s file, namely an internal memorandum of BOCGI dated 29 November 2005 (the Judge in paragraph 51 of this judgment referred to this document as a letter sent by BOCGI to the Zhuhai Government) and a faxed copy of Letter 232 from the Zhuhai Government to Bank of China. 5) The internal memorandum of BOCGI dated 29 November 2005 stated that Mr. Xian and two others from the Zhuhai Government attended BOCGI to discuss the purchase of the debt. It stated that: ‘BOCGI informed the Zhuhai Government that: (1) It had received Zhuhai Government’s letter on the purchase [i.e. Paul Hastings’ letter of 26 November 2005] and had reported the matter to the Head Office. (2) It would need further instructions from the Head Office before it could respond to the letter. The Zhuhai Government emphasized that: (1) The price proposed by Zhuhai Government to acquire the debt could not be raised. If Bank of China were to raise the price again, Zhuhai Government might abandon the restructuring, causing greater loss to creditors. (2) The proposal by Zhuhai Government to sign the sale and purchase agreement through a third party remained unchanged. (3) It hoped that the Head Office would respond to its proposal soon.’ 6) While the Judge had said the authenticity of this internal memorandum was doubtful by reference to the handwritten corrections to the date and page number, which are minor matters, he had not made any finding on the veracity or accuracy of the content of the document, particularly where it stated that the Zhuhai Government had stated that it could not raise the price of $700 million and referred to the effect of Bank of China raising the price ‘again’. One would expect the Judge to make a finding whether this supported the defendant’s claim of a change of stance by BOCGI. 7) The other document disclosed from the BOCGI file was the faxed Letter 232 which was received by BOCGI on 1 December 2005. The letter specifically referred to the previous understanding reached on 27 October 2005 of acquiring the debts for $700 million, the information received by the plaintiff on 28 November 2005 of the change of stance by BOCGI on the price and the meeting of 29 November 2005. The letter asked Bank of China to respond to its proposal made on 29 November 2005. It is again necessary for the Judge to consider whether the content of this letter further supported the defence’s case on change of stance. 8) The Judge referred to the courier receipts. He held that while the receipts showed that something was sent to Bank of China Beijing and BOCGI, they did not show what was actually sent. Madam Chen’s evidence was that the Letter 232 was faxed and also sent by courier. Although the original of Letter 232 was no longer in the BOCGI file, in my view the Judge still had to address the issue whether the document which had been sent by courier was Letter 232 or was some other document. In any event the Judge had to address the relevance of the faxed Letter 232 disclosed by BOCGI. 9) The defendant had disclosed a document entitled ‘The debt of the Zhu Kuan Group and restructuring development, Meeting Summary’ (‘The Meeting Summary’). It summarised the meeting on 6 December 2005 in which it was agreed by the parties that they would proceed with the purchase price of $700 million (although the price payable for the debts of Bank of China Hong Kong and Bank of China Macau would have to be adjusted upwards). Again the Judge had not addressed the issue whether this document supported the defendant’s case that BOCGI had a change of stance which was only brought back on track on 6 December 2005. 10) In my view the Judge cannot simply ignore the primary evidence, and his decision based on the documentary evidence was flawed, with the consequence that the Judge’s decision on change of stance cannot stand and the issue has to be determined afresh as well. This determination may involve a determination of the following issues as well. What caused BOCGI to change its stance at such a late stage when the deadline of 30 November 2005 was imposed by BOCGI itself who had reached a consensus with the defendant on 27 October 2005? Was it caused by the defendant putting forward a different method in the acquisition of the debts? 8. Whether the plaintiff had waived the defendant’s breach by taking part in the tender / auction I) The defendant relied on waiver 65.The defendant argued that by participating in the tender / auction, the plaintiff had waived its rights under the P’s MOU. Related to this is the alleged oral assurance by the plaintiff’s agent i.e. Mr. Xiao that the plaintiff would abide by the rules laid down by the Zhuhai Government on the tender / auction. At the trial below, the defendant further relied on an undertaking signed by the plaintiff for the tender as evidence in support of waiver. This is no longer relied upon by the defendant. 66.The Judge rejected the defendant’s claim of waiver. II) My view on waiver 67.1) This point can be shortly disposed of. If the defendant was in breach of the P’s MOU during the exclusivity period (which I found had not been extended), the plaintiff’s accrued rights would not be affected in any way by its participation in the tender / auction. There is no evidence that the plaintiff had knowledge of the defendant’s breach by double dealing (subject to determination on retrial). Although the defendant stated that the plaintiff itself had said that it had heard of the defendant entering into an agreement with Sei Pou, this is a long way away from the plaintiff, with full knowledge of its right, waiving these rights. No waiver by election took place if Hong Kong law (which I find to be the case in the later part of the judgment) applies: see Handley. 2) Likewise, even if the matter is governed by Mainland law, the defendant had not pleaded nor adduced any expert evidence which may show a different approach. On the contrary, as observed by the Judge
68.In the event that Mainland law applies to the tender / auction I agree with Chu JA’s judgment on this topic. However, since I have determined Hong Kong law to be the proper law, Chu JA’s analysis will not affect the outcome of this appeal. 9. Should the plaintiff mitigate its loss I) The defendant’s argument 69.The defendant further argued that even if the plaintiff was unable to conclude the purchase during the exclusivity period by reason of the defendant’s breach, the plaintiff was under a duty to mitigate its loss. The opportunity to do so was at the auction and the plaintiff should not have defaced the auction documents. If it had not defaced the paper, it would have been able to successfully bid for the debts and properties at $880 million. II) My view 70.1) The defendant had not pleaded that the plaintiff ought to have mitigated its loss by submitting a proper tender. This is a matter which is clearly required to be pleaded under Order 18, rule 12(1)(c) of the Rules of the High Court. The defendant had pleaded the tender and relied on the statement of Lord Denning in In re Vandervell’s Trust (No.2) White v. Vandervell Trustees Ltd [1974] 1 Ch 269 at 321 that where the material facts are pleaded, a party can rely on a legal consequence not explicitly flagged in pleading. In my view what Lord Denning said must be considered in its context. In this case, the defendant’s argument is disingenuous. It pleaded tender in support of its express plea on waiver. In so doing clearly it had recognized the need to flag the legal consequence. I fail to see why the plea of mitigation should be treated differently. 2) But more importantly what I have said about the plaintiff not waiving its rights by participating in the auction applies equally to the defendant’s argument on mitigation. The duty to mitigate did not arise until the plaintiff knew or ought to have known that the defendant had breached the P’s MOU. Chitty on Contracts 30th Vol 1, Paragraph 26–109 stated that:
10. Proper Law of the contract I) Hong Kong law or Mainland law? 71.The Judge held that the P’s MOU is governed by Hong Kong law. The defendant challenged this and submitted that it is governed by Mainland law. It argued that the contract has little connection with Hong Kong. The plaintiff is a Macau company. The defendant is a company incorporated in the Mainland and controlled by the Zhuhai Government. The P’s MOU was made in Zhuhai. The underlying securities were all situated in Macau or Zhuhai. The P’s MOU contemplated negotiations to take place between the defendant and BOCGI. Although BOCGI was registered in Hong Kong, there was no express stipulation as to where such negotiations must take place; certainly there was no contemplation that negotiations must take place in Hong Kong. An example is the meeting on 6 December 2005 held in Zhuhai and attended by BOCGI and representatives of Zhuhai Government. II) My view on the proper law 72.1) The applicable proper law is the one with which the transaction has its closest and most real connection. The test is best summarised in Re United Railways of the Havana and Regla Warehouses Ltd [1960] Ch 52, 91 per Jenkins LJ:
See also First Laser Ltd v. Fujian Enterprises (Holdings) Co. Ltd (Court of Appeal) [2011] 2 HKLRD 45 and (Court of Final Appeal) (FACV 6/2011, Judgment dated 6 July 2012). 2) In my view the Judge is right in finding Hong Kong law to be the proper law of the contract. The place of residence / business of the plaintiff and the defendant is respectively in Macau and Zhuhai so this factor alone is not sufficient to identify the natural seat and the law to which it belongs. The negotiation and signing of the P’s MOU took place in the Mainland. This is of course a relevant factor to be considered but in the overall scheme of thing, this factor does not play a significant part in identifying the proper law. The negotiation between the defendant and BOCGI did not only take place in Zhuhai as suggested by the defendant, but also in Hong Kong as well, as shown by Mr. Xian’s meeting with BOCGI on 29 November 2005. Again this factor does not assist. 3) In my view what is more important is the subject matter of the P’s MOU and the place of performance of the subject matter. The subject matter is the acquisition of the debts owing by two non-Mainland registered companies (the two companies were incorporated in Hong Kong and Macau respectively) to a Hong Kong company BOCGI. The debts are in the form of a chose in action created by loan agreements and securities documents which expressly provided for Hong Kong law to be the governing law. It is only after a successful acquisition of the debts that the underlying securities can be released. Of the three properties secured under the loans, two are in the Mainland and the third and most substantial one is located in Macau. Hence the location of the securities is not a factor that points conclusively to Mainland law as the proper law. While the mortgage of the two Zhuhai properties specified the governing law to be Mainland law, it is not suggested that the mortgage of the Macau property is also governed by Mainland law (which is most unlikely). 4) Furthermore the performance of the P’s MOU was in Hong Kong. The earnest money was paid to Paul Hastings, a firm of Hong Kong lawyers, as stakeholders. If the deal is successful, this money will become the deposit for the price of $810 million. The completion of the transaction was envisaged to be in Hong Kong. The plaintiff’s own lawyers are Hong Kong lawyers. 5) In my view Hong Kong law is the one with which the transaction in question has the closest and most real connection. 6) The only matter that needs to be discussed on this topic is that the Judge also found that, even if the proper law is Mainland law, Hong Kong Courts can hold the defendant liable as a constructive trustee. The Judge referred to Dicey, Morris & Collins, at paragraph 34-049 that:
7) Dicey & Morris cited Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271 (CA) and other cases in support of this proposition. The Court of Final Appeal in First Laser Ltd. endorsed this approach. In Kuwait Oil Tanker Co SAK there was expert evidence of Kuwaiti law which could be characterized as fiduciary under English law. In First Laser Ltd, this Court held that the proper law of the contract is Mainland law. This Court further held at paragraph 71(6)-(8) that the plaintiff, in order to rely on Kuwait Oil Tanker Co SAK to make the defendant liable as constructive trustee, must demonstrate that the Mainland law requires the defendants to disgorge the benefit it received from the transaction. 8) In this case there is no expert evidence on Mainland law on this issue. Hence the Judge’s view that,
does not support his conclusion that the defendant is liable as a constructive trustee if Mainland law applies. However since I have concluded that the proper law in this case is Hong Kong law, this part of the judgment is now irrelevant. 11. Striking out 73.1) This conveniently brings me to the interlocutory appeal against the striking out order made by the Judge. This matter arises this way. Paragraph 30 of the amended statement of claim pleaded that,
2) This plea was amended in the re-amended statement of claim by the inclusion of the following:
3) Paragraph 59 of the defendant’s amended defence originally pleaded that,
4) In response to the amendment made by the plaintiff, the defendant further pleaded under paragraph 59, the following:
5) The Judge ordered the defendant’s amendment to be struck out. He further ordered paragraphs 59 to 63 of the defendant’s Supplemental Expert Report on Mainland Law dated 21 September 2010 which addressed the issue of Mainland law not recognizing implied term and fiduciary duty to be struck out. 6) The Judge in essence held that the defendant’s new amendment was not a consequential amendment arising from the plaintiff’s amendment. He held that if the defendant wanted to include the new amendment, it ought to have done so well in advance and not just three weeks before the commencement of the trial starting on 13 October 2010. The Judge’s striking out order was made on 6 October 2010. 7) In my view the Judge was correct. The starting point is that foreign law is a question of fact. It must be pleaded and proved by expert evidence. The court cannot take judicial notice of foreign law, though it be notorious law: Lazard Bros. & Co. v. Midland Bank Ltd. [1933] AC 289 at p. 297. In the absence of evidence, foreign law is presumed to be the same as English law: El-Ajou v. Dollar Land Holdings Plc (No. 1) [1993] 3 All E.R. 717 at 736. As held in MCC Proceeds Inc. v. Bishopsgate Investment Trust Plc & Ors. [1999] CLC 417, paragraph 10:
8) When the plaintiff included the new amendment, the defendant had not pleaded or filed evidence that Mainland law is different on implied term or constructive trust apart from saying that the proper law is Mainland law. Hence the plaintiff’s amendment merely stated the obvious which was based on the state of pleadings and evidence then available. Once this is recognized, the defendant’s new amendment was clearly not consequential upon the plaintiff’s amendment. Leave to amend was needed by the defendant in the first place. I am not prepared to say that the Judge had wrongly exercised his discretion when he made the striking out order bearing in mind that the trial was to start shortly. The action was commenced in 2006. In any event this point is now academic in view of my decision that the proper law is Hong Kong law. B. The 2nd judgment 12. Orders made under the 2nd Judgment I) Jurisdiction 74.The defendant argued that the Judge did not have further jurisdiction after he had given the 1st judgment and he could not consider the plaintiff’s summons on the further directions regarding assessment (citing Kwok Siu Ming Simon v Rothschild Bank AG and Others, HCCL 140/1997, 2nd September 2005 and A Solicitor v The Law Society of Hong Kong, CACV 246/2004, 30th March 2007). It does not appear that when the Judge gave the 1st judgment on liability, the defendant had drawn to his attention that he had not dealt with the directions as required of him. On the other hand the plaintiff argued that the Judge had jurisdiction and relied on Roche v Chief Constable of Greater Manchester Police [2005] EWCA Civ 1454, Hicks v Russell Jones & Walker [2009] 1 WLR 487 and Man Ping Nam v Man Fong Hang (2007) 10 HKCFAR 140. It is not necessary to consider these cases. The Court has to take a practical approach: since the Judge had provided the 2nd judgment, this Court will consider it. If this course is not adopted, the alternative will be to ignore the 2nd judgment and remit the matter so that the directions are to be considered and argued afresh. This cannot be satisfactory. II) Terms of the 2nd judgment 75.The 2nd judgment provided that, 1) The defendant is liable to the plaintiff as a constructive trustee for all unauthorized profits / commissions received, the amount of which is to be assessed at the quantum part of the trial. 2) Damages suffered by the plaintiff in respect of the defendant’s breach of the P’s MOU are to be assessed on the basis that the plaintiff had lost the chance of acquiring the properties (‘the properties’) as defined in P’s MOU and the chance lost is 100%. 3) The date by reference to which valuation evidence is to be prepared shall be 1st October 2009. 76.The other parts of the 2nd Judgment addressed issues of expert reports, discovery, witness statements and the length of the assessment hearing. III) Issues arising from the 2nd judgment 1) Election on remedies 77.The orders granted both an account for profit and damages to be assessed. The law requires the plaintiff to make an election of these two remedies. He is required to make the choice when, but not before, judgment is given in his favour and the judge is asked to make orders against the defendant: Personal Representatives of Tang Man Sit v. Capacious Investments Ltd. [1996] 1 AC 514. But as observed in Island Records Ltd. v. Tring International Plc. [1996] 1 WLR 1256 per Lightman J at 1259,
78.This was not done when the order for split trial was made. The question of election was again not raised when the Judge proceeded with the summons to deal with the directions that were required of him. In this appeal, Mr. Chang asked for the election to be given after this Court rendered this judgment as it is not clear on what basis the defendant’s liability will be determined. The fiduciary duty claim is based on double dealing while the contractual claim is based on the breach of the fundamental obligation. 79.As there will be a retrial on liability, I will order the plaintiff to make an election within 14 days of the judgment given in the retrial. 2) Account for profits 80.Mr. Yu argued that the plaintiff knew very well from the very beginning that even if everything went well under the P’s MOU, amongst the HK$810 million paid by the plaintiff, HK$700 million would be paid to BOCGI and the remaining HK$110 million would be kept by the defendant for the purpose of the restructuring exercise. The order presently made is that the defendant must account for all unauthorized profit because the plaintiff’s case is that the entire sum of $171,990,000 was unauthorized. The outcome of the assessment is that this sum will be awarded. This will mean awarding the plaintiff an amount representing the value of the lost bargain, whilst at the same time, giving to the plaintiff the amount which the defendant would have earned in the transaction. 81.In my view Mr. Yu has a valid point. But Mr. Chang assured the Court that (and he said he had likewise informed the Judge) that the amount is at large. Since the amount remains to be assessed, I will simply state the position of the parties on this issue. 3) Loss of chance I) The principle 82.Assuming the defendant cannot establish BOCGI had a change of stance which would prevent the P’s MOU from being concluded on 30 November 2005, the discussion then moves to the plaintiff’s lost opportunities or chance in acquiring the debts. 83.Loss of chance is an identifiable head of loss:
84.The plaintiff may claim that in the absence of the defendant’s breach of contract, he might have obtained a benefit; this consequence was not certain to follow proper performance of the contract but the breach deprived it of the opportunity to benefit from it. This question usually arises in two broad situations. First, where the hypothetical consequence involves the hypothesis of the plaintiff’s act. Second, when it involves that of a third party (cf. Chitty, paragraph 26-042). This case is concerned with the second situation, namely, whether BOCGI would have concluded the deal with the defendant so as to benefit the plaintiff. 85.Where the plaintiff claims that, in the absence of the breach of contract by the defendant, the third party would have acted in a particular way, so as to benefit the plaintiff, he need not prove that hypothetical act would have occurred on the balance of probabilities. Provided that the plaintiff can prove that in the absence of the breach there was a ‘real’ or ‘substantial’ (not a speculative) chance of the third party’s act, the Court must assess the chance of that act resulting (usually as a percentage) and then discount the claimant’s damages for his loss by reference to that percentage (Chitty, paragraph 26-044). Stuart-Smith LJ observed in Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602 at 1614 that,
II) Nature of the chance 86.1) Mr. Yu submitted that the chance in fact encompasses two chances. The first being the chance to acquire the debts before 30 November 2005 and the second being the chance to acquire the properties after acquiring the debts. 2) In my view, looking at the matter as a whole, realistically the plaintiff’s payment of $810 million was not just for the resale of the debts from the defendant to the plaintiff but also for the pre-sale of the properties by the defendant to the plaintiff. If an agreement was reached between the defendant and BOCGI on 30 November 2005 under the P’s MOU, the defendant would already be subject to a binding obligation to re-sell the debts and pre-sell the properties to the plaintiff under P’s MOU (Clauses 5 and 6.1), regardless of whether by this time formal agreements would be ready to be signed. This is only subject to the provision under Clauses 9 and 10 that the plaintiff could only acquire the properties after the completion of the restructuring. The chance is, as Mr. Chang submitted, to acquire (through the acquisition of the debts and the rights in the pre-sale of the properties), the properties shortly after the completion of the restructuring. III) The defendant’s view on the prospect of the chance 87.Mr. Yu then submitted that the Judge was wrong to assess the loss of chance at 100%. He argued that the chances of the plaintiff getting the debts on or before 30 November 2005 (i.e. the defendant and BOCGI signing a transfer of debts agreement before 30 November 2005) is uncertain and is dependent on the acts and conduct of BOCGI. It cannot be 100%. Quite apart from the fact that there was another potential bidder, BOCGI might require some time to consider the draft transfer agreement and might not have wished to rush to sign the same. 88.Further, after acquiring the debts, the chance of the plaintiff (being a mortgagee) acquiring the ownership of the underlying securities, i.e. the properties, is still not 100%. Any purchaser of the debts, in order to get the properties, must go through a number of steps in the restructuring which are identified in the memorandum on restructuring: a global restructuring agreement being successfully signed by all the relevant parties; the Hong Kong court giving an order to stay permanently the winding up orders against the two companies in Hong Kong; the Hong Kong court approving the two companies’ scheme of arrangement in Hong Kong; the Macau court giving an order to stay permanently the winding up order against Zhu Kuan Group Co. Ltd. in Macau, or approving Zhu Kuan Group Co. Ltd.’s scheme of arrangement in Macau or settlement proposal in Macau; the liquidators handing over all the originals of the security documents and the originals of the corresponding discharges to the defendant; the assets transfer agreement between the liquidators and the defendant coming into force, and the liquidators handing over the originals of the title documents of the properties to the defendant; and the Macau government consenting to the transfer of the Macau land to the designated transferee. Each of those steps involves uncertainty and the successful carrying out of each step was dependent upon the acts and conducts of a number of different third parties. The consent of a sufficient majority of creditors is required. IV) The plaintiff’s view 89.Mr. Chang, on the other hand, submitted that the ‘test of the pudding is in the eating’. There is no evidence that it was anticipated that any particular problem might result in the failure of the restructuring. The reality is that the restructuring was successfully completed. He further sought reliance on the ‘Bwllfa principle’ established in Bwllfa and Merthyr Dare Steam Collieries (1981) Ltd v. Pontypridd Waterworks Co [1903] AC 426 (HL) namely, where the court undertaking an assessment of damages has knowledge of what actually happened, it need not speculate about what might have happened but should base itself on the known facts (McGregor, paragraph 8-100). V) My view on substantial chance 90.1) In Bwllfa the owners of coal mines gave the undertakers notice under statute, that they intended to work the coal. The undertakers replied by a counter-notice requiring the mine owners not to work and stating their willingness to make compensation. In an arbitration to assess the compensation, the mine owners gave evidence to prove that coal rose in value after the date of the counter-notice. The House of Lords held that the evidence was admissible. Lord Macnaghten at 431 held that
2) In Golden Strait Corpn v. Nippon Yusen Kubishika Kaisha [2007] 2 AC 353 there was a repudiatory, though not anticipatory, breach of a charter-party by the charterers. The charter was a time charter for a seven-year period and at repudiation had nearly four more years to run. The owners claimed the normal measure of damages based upon the difference between the charter rate and the lower market rate for the four years but, because the contract would have entitled the charterers to cancel on the outbreak of the Second Gulf War between the UK and Iraq some 14 months after the repudiation, it was held by a majority of the House of Lords, affirming the decision of the courts below, that the owners’ claim for damages ran only for this shorter period. Lord Scott of Foscote at 382 citing the Bwllfa principle held that,
3) McGregor at paragraph 8-083 to 8-090 commented that it was inappropriate to rely on the Bwllfa principle in assessing lost chance. It referred to a line of cases where the claimants’ claims were struck out due to solicitors’ mishandling of proceedings and stated that:
4) Despite this criticism, my view is that based on the authorities, the Court is entitled to take into account what had actually transpired in this case to see whether the plaintiff’s chance of acquiring the debts and properties was real and substantial or speculative. The eventual successful restructuring supports the plaintiff’s case that its chance was a real and substantial one. 5) Further from the evidence of the defence, it is clear that if there was no change of stance and if the defendant had not breached the P’s MOU, it was not anticipated that there would be any problem at all to achieve the deal with BOCGI to implement the P’s MOU. 6) I accept Mr. Chang’s submission that ‘reaching an agreement’ (達成協議) under Clause 6 of the P’s MOU does not require the signing of a written formal agreement as the Framework Agreement dated 31 December 2005 took a few weeks to be implemented after the defendant and BOCGI had reached the consensus on 6 December 2005. The defendant had not so pleaded, although in this appeal, it seems to assert this requirement. This is not consistent with the time frame contemplated in the P’s MOU. 7) In arriving at this conclusion, I further took into account the following. While the plaintiff had the legal burden of proving that it had a real and substantial, as opposed to a negligible or speculative, chance of success, the evidential burden of proving the contrary shifted to the defendant. Generally speaking, when evaluating the plaintiff’s chances of success, one would expect the court to tend towards a generous assessment given that it was the defendant’s negligence which lost the plaintiff the opportunity of succeeding in full or fuller measure: McGregor at paragraph 8-083 referring to Mount v. Barker Austin [1998] P.N.L.R. 493 CA. This is what Parker LJ described in Browning v Brachers [2005] EWCA Civ 753 as giving the plaintiff ‘a fair wind in establishing the value of what he has lost.’ VI) Quantification of the chance 91.While taking the generous approach into account, as the Court is also at the same time performing a prospective looking exercise, a 10% deduction for contingent risk will be a fair way of assessing the percentage of chance. As Lord Reid observed in Davies v. Taylor [1974] A.C. 207, 213 and applied in Allied Maples Group at 1631 and 1621:
VII) Substantial chance even if BOCGI changed stance? 92.Mr. Chang further argued that even with a change of stance by BOCGI, the plaintiff would still have a substantial chance. In my view this argument has difficulties. The time taken to resolve the change of stance was nine days from 28 November to 6 December 2005. On the basis that the defendant should proceed on 23 November 2005, it is not realistic to assume that the deal will be achieved with this time frame. On this basis, the plaintiff would not have a substantial chance to acquire the debts. 4) Valuation date I) The Judge’s date 93.The next issue is to consider the date of valuation which the Judge decided to be 1 October 2009 (this date was shortly after the completion of the restructuring on 25 September 2009). The plaintiff relied on this date in its claim or relief. II) The defendant’s position 94.The defendant had not suggested any alternative date before the Judge. Mr. Yu now submitted that it was wrong to use 1 October 2009. He submitted damages should be assessed at the time of the breach. Upon the Judge’s findings on liability, the time of the breach occurred in late November 2005. That should be the reference time for the purpose of assessing of damages. Alternatively he submitted that the precise timing of the completion of restructuring is unknown at the time but the parties must have acted on the basis of some contemplated completion date and the only one which was explicitly mentioned was a year later. 95.He further submitted that the price of HK$871,990,000 which Sei Pou offered to pay for the tender is cogent evidence of the value of that right. Damages should be assessed at the difference between what Sei Pou was prepared to pay less the contract sum. III) My view on valuation date 96.1) I do not agree that it is correct to assess the damages by reference to what Sei Pou was prepared to pay at the tender. Mr Chang argued that this presupposes that the contractual bargain was to re-sell the chance for a profit which was not the case. But more importantly, in my view, while recognizing that the damages are to be assessed at the time of breach, to use the purchase price by Sei Pou as the basis of valuation is contrary to the contractual principle of assessment of damages stated by Parke B in Robinson v Harman (1848) 1 Exch 850, 855 and affirmed in 2007 by the House of Lords in Golden Strait Corporation, namely,
2) Had the contract with the defendant been performed, the plaintiff would have been entitled to keep the properties (and indeed was obliged to do so) for one year. It must be on this basis that the valuation date is to be considered. To use the Sei Pou price which came into being at the end of December 2005 will be to ignore the accrued right of the plaintiff. Under the P’s MOU the parties clearly contemplated that the restructuring would take time to complete. Under Clause 10.2 of the P’s MOU the plaintiff undertook that within the period of the debt restructuring of the two companies as provided by its terms (i.e. not less than 1 year), it shall not enforce its mortgagee rights in the subject assets. That in my view must be the reference date for the valuation. Hence, the valuation date should be 1 December 2006. 3) Although the Court may take future events into account, I disagree in this case that the valuation should be based on a date shortly after the successful restructuring in 2009. It is by fortuitous events that the restructuring was only completed at that time. To choose this date as the reference date will be to ignore the intention of the parties expressed in the P’s MOU. 4) Accordingly the quantum of compensation should be the difference of the value of the properties as at 1 December 2006 ($X) and the sum of $810 million as discounted by 90% of the chance i.e. ($X - $810 m) X 90%. Conclusion 97.The appeal is allowed and there will be a retrial in accordance with the determination I have made on the issues as identified. 98.It remains for me to express my indebtedness to counsel for their invaluable assistance. Costs 99.The parties are invited to lodge written submissions on costs within 14 days. Hon Yuen JA: 100.I agree with the judgment of Cheung and Chu JJA. Hon Chu JA: 101.I agree, for the reasons given by Cheung JA, that the defendant’s appeals against the two judgments should be allowed and the case be remitted to the Court of First Instance for a re-trial. 102.For the sake of completeness, I would deal briefly with the issue of the validity of the tender / auction held on 31 December 2005 (“the Tender”) assuming Mainland law were to apply. Validity of the Tender under Mainland law 103.One of the plaintiff’s arguments in response to the defendant’s plea that the plaintiff has waived the breaches of the P’s MOU by taking part in the Tender is that the Tender was invalid and the plaintiff’s act of participation in the Tender was null and void under the mainland law. 104.The plaintiff’s case is that the Tender was governed by the Law of the PRC on Tenders and Bids (中華人民共和國招標投標法) (“Tender Law”) and the Guangdong Regulations on the implementation of the Tender Law (廣東省實施《中華人民共和國招標投標法》辦法) (“Guangdong Regulations”). The plaintiff complains that the Tender was in breach of: (i) Article 24 of the Tender Law which requires reasonable notice to be given for submission of tender; (ii) Regulation 26 of the Guangdong Regulations which requires no less than 20 days’ notice be given; and (iii) Article 28 of the Tender Law which requires a re-tender where the number of bidders fall below three. Accordingly, the plaintiff says that the Tender was invalid by reason of Article 58(5) of the General Principles of the Civil Law (中華人民共和國民法通則) (“Civil Law”). 105.The defendant does not dispute that the requirements as to notice and minimum number of bidders under the Tender Law and the Guangdong Regulations have not been met. The defendant however says that the two laws do not apply to the Tender. 106.The trial Judge accepted the plaintiff’s submissions and held (at paragraph 66 of the Judgment) that the Tender was in breach of the Tender Law and the Guangdong Regulations and was accordingly invalid by virtue of the Civil Law. 107.The issues on appeal are: (1) whether the Tender Law and the Guangdong Regulations apply to the Tender; and (2) if the Tender was contrary to the Tender Law and Guangdong Regulations, does it provide the plaintiff with an answer to the defendant’s waiver plea. 108.The thrust of Mr Shieh SC’s argument is that the Tender Law and the Guangdong Regulations only apply to tenders for the procurement of goods and services and where the bidders offer to provide goods or services in return for payment or remuneration, but do not apply to a case where the bidders are making a bid for purchase. 109.There is no definition of “tender” and “bid” (招標投標) in the Tender Law and the Guangdong Regulations. The defendant’s mainland law expert, Professor Wang, gave two reasons why the Tender Law and the Guangdong Regulations do not apply. The first is that the transaction to which the Tender relates is not one which is required by the Tender Law to be conducted through tenders. Secondly, he referred to several provisions in the Tender Law dealing with the requirements for tenders for the procurement of supply of goods or services or completion of project / item (項目). He contended that these provisions show that the Tender Law (and consequently the Guangdong Regulations) only covers these categories of tenders. The plaintiff’s mainland law expert, Mr Poon, on the other hand, referred to the dictionary meaning of “tender” and” bid” (招標投標) in support of his view that the Tender Law has a general application. He argued that the categories of tenders specifically mentioned in the Tender Law are only illustrative and not exhaustive. 110.In considering this issue of foreign law, this court is entitled to draw on our knowledge of the common law and of the rules of statutory construction: see MCC Proceeds Inc v. Bishopgate Investment Trust [1999] CLC 417, 421 at paragraph 13 applied in Shenzhen Development Bank v. New Century Holdings (unreported) HCA 2976 of 2001, paragraphs 25-27. 111.Article 2 of the Tender Law provides that the Tender Law applies to all tender and bidding activities carried out within the territory of the PRC[1]. Similarly, Regulation 2 of the Guangdong Regulations provides that the Regulations apply to all tender and bidding activities carried out within the administrative district of the Guangdong Province[2]. These are wide provisions that import no restrictions to the application of the two laws. 112.Mr Shieh (as did Professor Wang) places great emphasis on Article 41 of the Tender Law and Regulation 37 of the Guangdong Regulations. Under Article 41, a successful bid must fulfill one of two conditions, namely, (1) it is to the maximum extent able to satisfy each of the comprehensive assessment criteria stipulated in the tender documents (“Condition (1)”); and (2) it is able to satisfy the substantive requirements specified in the tender documents and is also the lowest bid, provided it is not below cost (“Condition (2)”)[3]. Regulation 37 sets out the categories of tender that must fulfill Condition (1) (viz. tenders for services, operation franchise, construction works and information network engineering involving complex technologies) and those that must fulfill Condition (2) (viz. tenders for general construction works and purchase of goods)[4]. Mr Shieh submits that as between the categories of tender set out in Regulation 37, they exhaustively define the tenders governed by the two legislations. It is further submitted that the categories of tender referred to in Regulation 37 are all for the procurement of goods and services and involve payments to the successful bidders. The Tender, which involves the successful bidder making a purchase from the tenderer, therefore falls outside the scope of the Tender Law and the Guangdong Regulations. 113.However, Article 41 of the Tender Law and Regulation 37 of the Guangdong Regulations have to be read in the context. Article 40, which precedes it, provides that the bid evaluation committee shall adjudicate on and compare the bids in accordance with the criteria and methods identified in the tender documents[5]. The opening sentence of Regulation 37 is in identical terms. Reading Articles 40 and 41 together, it is clear that in the evaluation and selection of bids, the starting point is the criteria specified in the tender documents and that Article 41 is not exhaustive, but is illustrative of the basis upon which bids are to be evaluated and selected. Regulation 37, viewed as a whole, is to the like effect. The categories of tenders stated in Regulation 37 are not intended to be exhaustive. There is no justification for reading the Tender Law and the Guangdong Regulations as applying only to tenders for the procurement of goods and services in return for payment or remuneration. 114.That the Tender Law and the Guangdong Regulations are to be read as applying generally to all tender and bidding activities carried out in mainland China is supported by a book on the annotated meaning of the Tender Law (《中華人民共和國招標投標法》釋義), which both parties’ experts accept to be authoritative. In the annotation to Article 2 of the Tender Law, it is stated (at pp. 7-8, bundle C2/10/1534-1535) that as far as the scope of the Tender Law is concerned, it applies not only to tenders that are required by law to be carried out, but also to all other tender and bidding activities. It is further stated that as long as the tender and bidding activities are carried out in the country, they must comply with the procedures prescribed by the Tender law[6]. The book also points out that the Tender Law contains a number of provisions which are directed specifically to compulsory tenders (強制招標). 115.Mr Shieh refers to another passage in the book (at p. 6, bundle C2/10/1533) which states that the Tender Law applies to tender and bidding activities, that is, the conduct of publishing terms and requirements for procuring works, goods and services to attract bidders to compete and of selecting the transacting party in accordance with prescribed procedures[7]. It is submitted that the use of the term “that is” (即) qualifies and defines the tender and bidding activities to which the Tender Law applies. This passage, however, is explaining the objectives of the Tender Law, which is evident from its conclusion that the Tender Law targets activities that include invitation and submission of bids, opening of tender and assessment of tenders as well as administrative supervision and regulation of tender and bidding activities by government departments[8]. The passage should not be read as defining “tender” and “bid” for the purpose of the Tender Law. 116.Given that the Tender is governed by the Law, it has contravened the Tender Law and the Guangdong Regulations with regard to the requirements on notice and the number of participating bids. 117.Under Article 58(5) of the Civil Law, civil acts that violate the laws shall be null and void[9]. The trial Judge is therefore correct in finding that the Tender is invalid by reason of its being in contravention of the Tender Law and the Guangdong Regulations. 118.Miss Lan seeks to argue further that the plaintiff’s act of participation in the Tender is also null and void. There are two difficulties with this argument. Firstly, the effect of Article 58(5) is that civil acts that contravene the law shall be null and void. It is not the plaintiff’s case that its act in participating in the Tender is against the law. Secondly, the plaintiff’s argument in the court below, and which was accepted by the trial Judge, was that as a result of its being in breach of the Tender Law and the Guangdong Regulations, the Tender was invalid. There is no finding that the plaintiff’s act in participating in the tender was also rendered null and void by Article 58(5) of the Civil Law. There is no respondent’s notice on this point. 119.At the trial, the plaintiff had argued that the Undertaking it gave to the defendant for the purpose of the Tender was null and void by reason of Article 58(3) of the Civil Law[10] because it had no alternative but to sign it. As the defendant no longer relies on the Undertaking in this appeal, the plaintiff has advanced no arguments in this respect. 120.Turning to the second issue on the validity of the Tender, since it does not follow from the fact the Tender was invalid that the plaintiff’s act in participating in the Tender was also invalid, and given that the plaintiff is not seeking to set aside the sale of the Debts to Sei Pou, the invalidity of the Tender under the mainland law has no bearing on the issue of whether the plaintiff has waived the defendant’s breaches of the P’s MOU.
Mr Denis Chang SC, Ms Gekko Lan and Mr Newman Lam, instructed by Dominic Y.K. Lai & Co., for the plaintiff Mr Benjamin Yu SC, Mr Paul Shieh SC and Mr Liu Man Kin, instructed by Paul Hastings, for the defendant [1] 「在中華人民共和國境內進行招標投標活動，適用本法。」 [2] 「在本省行政區域內進行招標投標活動，適用本辦法。」 [3] 「第四十一條 中標人的投標應當符合下列條件 (一) 能夠最大限度地滿足招標文件中規定的各項綜合評價標準； (二) 能夠滿足招標文件的實質性要求，並且經評審的投標價格最低；但是投標價格低於成本的除外。」 [4] 「 第三十七條 評標委員會應當按照招標文件中確定的評標標準和方法對投標文件進行評審和比較。 服務、特許經營項目或者技術特別複雜的建設工程、信息網絡工程等，採用綜合評價的辦法評標。投標應當能夠最大限度地滿足招標文件中規定的各項綜合評價標準。 一般性建設工程、貨物採購採用最低投標價的辦法評標。投標應當能夠滿足招標文件實質性要求，並且經評審的投標價格最低；但投標價格低於成本的除外。」 [5] 「 評標委員會應當按照招標文件確定的評標標準和方法，對投標文件進行評審和比較。」 [6] 「 只要是在我國境內進行的招投標活動，都必須遵循一套標準的程序，即《招標投標法》中規定的程序。」 [7] 「 《招標投標法》 的適用對象是招標投標活動，即招標人對工程、貨物和服務事先公布採購條件和要求，吸引眾多投標人參加競爭，並按規定程序選擇交易對象的行為。」 [8] 「總之，《招標投標法》 的調整對象既包括招標、投標、開標、評標、定標等各個環節的活動，也包括政府部門對招標投標活動的行政監督、規範。」 [9] 「第五十八條 下列民事行為無效Top of Form: … (五) 違反法律或者社會公共利益的；…」 [10] 「第五十八條 下列民事行為無效Top of Form: ... (三) 一方... 乘人之危，使對方在違背真實意思的情況下所為的；...」 Please refer to FAMV1/2013, FAMV2/2013, FAMV4/2013 & FAMV5/2013 for the relevant appeal(s) to the Court of Final Appeal. |
Cases cited in this judgment
Further hearings and rulings under CACV 63/2011