BILL CHAO KEH LUNG v. DON XIA

HCA9289/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL ACTION NO. HCA 9289 OF 2000

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J U D G M E N T

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1. Following a five day trial, I handed down judgment in this case on 8 August this year in which I gave judgment in favour of the plaintiff in the sum of US$495,750. On 13 August, the plaintiff's solicitors wrote a letter to the court pointing out that the judgment required amendment in two respects.

2. Firstly, that the plaintiff was only required to give credit to the defendant for US$240,000 and not US$300,000 as expressed in paragraph 40 of the judgment. This was because the undisputed evidence was that he had already paid the defendant US$60,000 on account of the US$300,000 which he was required to pay for the shares which were the subject matter of the action and the payment of US$60,000 on account had already been recognised earlier in the judgment.

3. Secondly, that because the judgment was silent as to a claim for dividends which formed part of the prayer in the statement of claim and in its subsequent amendments, I should now make some pronouncement on that matter, preferably by awarding the plaintiff those dividends.

4. Having regard to these matters, I directed that the case should be relisted for further argument. That argument has now been addressed to me by Mr Carolan for the plaintiff and Mr Stokes for the defendant, both of whom of course were counsel at the trial. I am grateful to them for their assistance in this matter.

5. I have had no difficulty in rectifying a clear oversight on my part as to the US$60,000 which the plaintiff had already paid for which I had intended to give him credit and which, when I came to write paragraph 40 of the judgment, I had overlooked. It seems very clear to me that this situation is of the sort contemplated by the "slip rule". My intention had been to give the plaintiff that credit. I now take this opportunity to put right that error on my part.

6. Therefore, the judgment must be amended to the effect that the amount of the judgment will be increased by this sum to US$555,750. I will return to the precise terms of the amendment presently.

7. The next matter concerning the dividends is not as straightforward. What Mr Carolan says is that where the judgment is silent on a claim that was before me and upon which I was addressed by both counsel, that I should at least have made reference to it and on the merits have awarded the plaintiff a further US$115,500. Putting aside the merits and the arithmetic which is said to justify the sum of US$115,500 as dividends, I need to consider the nature of the jurisdiction which I am being asked to exercise.

8. Mr Stokes, who of course resists this application, has drawn my attention to the cases which bear on the exercise of my powers in such circumstances. But before I refer to two of the modern cases, I should indicate the status of my judgment and the order that comes from it.

9. Although the judgment itself is complete, the order has not been drawn up, perfected nor entered in the record of the court. In such circumstances it is open to me to recall my order for amendment or rectification and make any consequential alterations to my judgment. (See Re: Harrison's Shares (1955) Chancery 260 and Hong Kong Civil Procedure 2002 Order 42/1/3 page 617, 42/1/19 page 620 and Order 20/8/6 page 349.) It follows, as Jenkins LJ said in Re:Harrison's Shares supra at page 284, that the court should only exercise its discretion to do so "judicially and not capriciously".

10. The first of the more recent cases which indicate when that power should be exercised is Stewart v Engel [2000] 3 All ER 518. It is not necessary to refer to the facts of that matter but Sir Christopher Slade who gave the leading judgment of the majority made clear that whilst this power served a very useful purpose, it was one which should be exercised cautiously and sparingly. He adopted at page 524b-c some "helpful examples" given by Neuberger J in Re: Blenheim Leisure (Restaurants) Limited (No. 3) [1999] Times 9 November which were the following: "a plain mistake on the part of the court, a failure of the parties to draw to the court's attention a fact or point of law that was plainly relevant or discovery of new facts subsequent to the judgment being given. Another good reason was if the applicant could argue that he was taken by surprise by a particular application from which the court ruled adversely to him and that he did not have a fair opportunity to consider."

11. The headnote to the report summarises the effect of the judgment. "In such circumstances, if the court had no power to reconsider its order before it was drawn up, the prejudiced party's only remedy would be by way of appeal from that order. Although an appeal in those circumstances would itself have a good chance of success, common sense suggested that in such cases the judge who had made the order should himself have the power to vary it before the appeal procedure had to be set in motion.....The existence of exceptional circumstances was a prerequisite to the exercise of the jurisdiction."

12. The other decision was that of Rix LJ sitting at first instance in the Commercial Court in Noga v Abacha [2001] 3 All ER 513. Rix LJ was even more emphatic is in his observations that the court's jurisdiction to reconsider its judgment (I quote from the headnote of the report) "could only be exercised in a case which raised considerations in the interests of justice which were out of the ordinary, extraordinary or exceptional. An exceptional case did not have to be uniquely special and "strong reasons" was perhaps an acceptable alternative to "exceptional circumstances"."

13. He further observed that there were cases "where an error of fact or law might be too plain for argument and it was better that the error was corrected without imposing on the parties the need for an appeal". I pause here to observe that the failure by me to give the plaintiff credit for the US$60,000 is a clear example of that sort of situation. Rix LJ then observed that "it was wrong, however, for a judge to be treated to an exposition such as would be presented to a Court of Appeal. If in such circumstances a judge should be tempted to open up reconsideration of his judgment, an appeal would not be avoided: it would be inevitable. Every case would become subject to an unending process of reconsideration followed by appeal, both on the issues of reconsideration and on the merits."

14. Whilst recognising the effect of these judgments, Mr Carolan submits that where the judgment is silent on the matter of dividends, I should revisit my judgment and deal with this issue one way or the other and, as I have said, preferably, in his client's favour.

15. Mr Stokes submits that judgments commonly do not deal with every matter which is in controversy between the parties. That would not justify a party coming back before the judge and applying to him to pronounce on a particular aspect of the case upon which he has said nothing in his judgment. I agree with Mr Stokes.

16. Unless there is something which clearly amounts to an oversight or error of the type that I have just cured, the court should be slow in going back over the arguments and, in effect, ruling on something which is not expressly apparent in the judgment. Save for what are intended to be "exceptional circumstances" or for "strong reasons", whichever label one cares to attach to it, I should not go back over the argument. Ultimately a judgment, right or wrong, must stand on its merits and the appropriate forum for that discussion is the Court of Appeal.

17. I do not intend to embark on what would amount to an unseemly exercise in self-justification. The judgment is there for examination as a whole and in the event of an appeal the Court of Appeal will have to deal with any shortcomings that it is said to contain. I therefore decline to go further than I already have.

18. Accordingly, paragraph 40 will be amended to read as follows: "Accordingly, there must be judgment to the plaintiff in the sum of $555,750. This is arrived at by multiplying $26.525 by 30,000 shares which equals $795,750, less the $300,000 which the plaintiff would have had to pay for the shares. But credit must also be given to him for the $60,000 which he has already paid. Interest must also be added to this from the date of the writ until judgment, 1 per cent above United States prime rate. Costs will follow the event. The defendant pay the plaintiff's costs of the action, to be taxed if not agreed, on a party and party basis. This will be an order nisi."

19. As to the costs of this application, I have already heard argument on this issue on, inter alia, the basis of the order that I have just made. Whilst it seems to me that the plaintiff has had to come to get this order, the defendant has also had to appear to resist, successfully, as matters have turned out, on the argument as to the dividends. My order on costs should therefore reflect both of these aspects. I will say that the defendant should pay half of the plaintiff's costs of this application.

Representation:

Mr Paul Carolan, instructed by Messrs Robertsons, for the Plaintiff

Mr David Stokes, instructed by Messrs Minter Ellison, for the Defendant

HCA9289/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9289 OF 2000

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J U D G M E N T

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1. This is an action for an alleged breach by the defendant of an agreement dated 12 October 1998 ("the Agreement") (3:167) whereby the defendant agreed to sell to the plaintiff 30,000 of his shares for US$300,000 in a company called Teleway Communications Ltd ("Teleway"). These shares were to be paid for by the plaintiff by instalments as follows :

(i) US$15,000 by 5 August 1998;

(ii) US$15,000 by 30 August 1998;

(iii) US$30,000 by 31 October 1998;

(iv) US$150,000 within 20 days of the "second closing", to which I will make further reference, the relevant date being 6 July 1999; and

(v) US$90,000 within 180 days after the "second closing", the relevant date being mid-December 1999.

The plaintiff has paid the first three instalments totalling US$60,000.

2. On 3 June 1999 the defendant entered into an agreement, the background and nature of which will require careful explanation in due course, whereby he divested himself of his entire shareholding in Teleway. The plaintiff's case therefore is that by doing so the defendant put it beyond his ability to perform his agreement with the plaintiff. He is therefore to be taken as having repudiated the Agreement. This was in breach of contract whereby the plaintiff was entitled to accept that repudiation, which he did by declining to pay any further instalments under the Agreement, and he now claims damages for the defendant's breach of it. That rather simple exposition of the nature of this case hardly does justice to the evidence which underlines the dispute and the subtleties of the party's attitude towards one another following the defendant's sale of his shares in Teleway. All of this will need attending to in the course of this judgment.

3. It is helpful to start with a short biographical note of the plaintiff and the defendant because that may assist in understanding their respective approaches to each other following the defendant's sale of his shares.

4. Both of them are experienced men of commerce. The plaintiff, who speaks flawless English with a distinct North American accent and who appears to have strong connections with the Uinted States, has had long experience in the field of corporate finance and in the raising of capital and in bringing investors together to pursue business ventures. He is clearly the older of the two men. The defendant represents the younger generation of modern Chinese entrepreneur. He has spent some time in Australia, has become an Australian citizen and has developed skills and connections in the field of media and communications. Of the two he is perhaps the less cosmopolitan and his English, whilst very good, retains the tones of his native Putonghua. Having seen them in the witness box for some time and having regard to what they have said and why they have said it leaves me in no doubt of their well-developed sense of shrewdness and commercial nous which I will demonstrate when I come to a number of e-mail communications that passed between them following the defendant's sale of his Teleway shares.

5. The background to this matter is as follows. The defendant founded Teleway in 1996 and remained a director and major shareholder until 6 July 1999. In January 1997, he held six of the company's eight issued shares. His then associate Mr Zheng Yu held the other two. In November 1996, a Joint Venture was entered into between Teleway, China United Telecommunications Corporation (HK) Ltd ("China Unicom HK"), a wholly-owned subsidiary of China United Telecommunications Corporation ("China Unicom") which was one of only two enterprises licensed to build and operate telecommunications and related businesses on the Mainland. This joint venture was established to develop the first "electronic" Yellow Pages Directory for the Mainland. Much work was done by the defendant and Teleway's staff in gathering together information, data and computer databases which a venture such as this required. The joint venture was carried into effect through a company set up for this purpose called Unicom Media Ltd ("Unicom") which was incorporated on 25 April 1997. Teleway held 9 million of the 15 million issue shares in Unicom and China Unicom HK held the remaining six million. In January 1997 Mr Wellington Yu ("Mr Yu") a person well-experienced in raising venture capital joined Teleway and replaced Mr Zheng Yu as a director. On 23 January 1997, the defendant and Mr Yu entered into a Shareholders Agreement whereby Mr Yu was allotted 64,260 Teleway shares and the defendant's was increased to 499,740 shares.

6. Following Unicom's formation the well-known American company R.H. Donnelly Inc. was approached in November 1997. It is the largest operator of Yellow Pages in the United States. It was approached with a view to it becoming a significant partner in this venture. In March 1998 Unicom employed Mr Harvey Leong to assist in the location of further partners, he having 20 years experience in the "Yellow Pages" and telecom's industries. He was given 6,000 Teleway shares as an incentive. At about this time Mr Yu introduced the plaintiff to the defendant. The plaintiff was introduced prior to his appointment, on 20 April 1998, as Chief Financial Officer and Vice-President of Unicom. According to the defendant this was to be a temporary arrangement until a more permanent candidate took over, who was to be nominated by R.H. Donnelly. Under the terms of his employment, the plaintiff was also allotted Teleway shares which was done by way of incentive for his work at Unicom. Shortly after the plaintiff's appointment, difficulties began to emerge in the relationship between the defendant and Mr Yu concerning the running of Teleway. Mr Yu informed the defendant that, with his associates, he now considered himself as having control of Teleway. The plaintiff, having been appointed to such a pivotal position with Unicom then proceeded to become much involved in the negotiations with R.H. Donnelly Inc. Sensing his difficulties with Mr Yu's faction in retaining control of Teleway the defendant then solicited the plaintiff's support over this matter. The parties came to an agreement about this. The plaintiff would support the defendant in the Teleway boardroom dispute with a view to the defendant retaining control of Teleway. The defendant procured the plaintiff's appointment to the Teleway board and promised to give him additional Teleway shares. According to the defendant, the plaintiff agreed to help him provided he was made the director of Teleway and given these additional shares in Teleway. This was agreed and the defendant took the plaintiff and Mr Harvey Leong, who had also pledged support in the boardroom dispute, to see his solicitors to discuss their strategy and presumably the legal implications of what they wished to do.

7. By August 1998, R.H. Donnelly had given an oral indication that it was serious in going forward with the project with Unicom. At a board meeting, the plaintiff spoke up for the defendant and urged Mr Yu and the rest of the board to resolve their differences. On 4 August (the next day) the plaintiff and the defendant signed an agreement transferring 30,000 of the defendant's shares in Teleway to the plaintiff. Under this agreement, the plaintiff paid the defendant the first two instalments of US$15,000 each on 5 August and 30 August 1998. In mid August, Donnelly signed a formal letter of intent to pursue the venture with Unicom. In the meantime, the share transfer agreement between the plaintiff and the defendant had been amended in relation to the rights attaching to the shares to which I do not need to make further reference. Then on 12 October that original agreement was replaced by the one which is the subject of this action. By then of course, the plaintiff had made the first two instalment payments and shortly afterwards in early November 1998 he paid US$30,000 being the 3rd instalment which was due on 31 October. The defendant has sought to make a point on late payment of this instalment, but it was accepted, there has been significant explanation as to why it did not arrive on 31 October, and so for present purposes there is nothing in the point.

8. On 23 October 1998, Donnelly signed a subscription and shareholders agreement, the other parties being China Unicom HK, China Unicom, Teleway and Unicom. This substantial document starts at page 1 of bundle 4(1). It provides for a US$24.5 million investment by Donnelly to be paid in phases described as "closings". In the agreement the value placed on each Teleway share was US$67.

9. Notwithstanding this, all was not well with the Teleway board. Mr Yu and his faction on the board started an action in the High Court against the defendant and Teleway seeking, inter alia, a number of declarations in respect of a board meeting held on 26 September 1998 and injunctions which would have prevented the transfer of further Teleway shares. Clearly the impact of these proceedings on further "closings" in the Donnelly agreement could have been fatal. Fortunately, in February 1999, the defendant and Mr Yu representing himself and all the other plaintiffs in the High Court action agreed a resolution of that action. This was recorded in a Memorandum of Settlement Agreement dated 10 February 1999. The broad effect of the agreement was that Mr Yu and his associates would resolve their connection with the existing Teleway company leaving the defendant in control of Teleway. Teleway shares would be issued to Mr Yu and he and his associates would then form a separate company of their own into which they would inject their Teleway shares. The effect of this settlement was that there would have been a dilution of the Teleway shares. The plaintiff was well aware of the terms of this agreement. Its consequence was that the defendant would have remained in possession of more than sufficient Teleway shares to be able to transfer some of them to the plaintiff subject to a pro rata increase in the number of shares to be transferred in order to produce the equivalent of the 30,000 old Teleway shares which he had agreed to sell to the plaintiff under the Agreement. This February 1999 settlement with Mr Yu would therefore have posed no difficulties for either of the plaintiff or the defendant. The plaintiff has specifically recognised this in his evidence before me. So far so good; but the situation then changed both dramatically and quickly.

10. There was a meeting on 3 June 1999 between Mr Yu, the defendant and their advisers. The original agreement between them settling their High Court action still left unresolved a number of other outstanding issues. These issues required agreement before Donnelly would feel sufficiently comfortable about the wisdom of injecting further cash into the joint venture for the "second closing" on 16 June 1999. The last minute negotiations, which were, according to the defendant tough and conducted against very strict time constraints were finalised in the early hours of the morning. They produced the second agreement between Mr Yu's faction and the defendant which resulted in the defendant ceding control of Teleway to Mr Yu and his associates. In so doing, he had to give away his Teleway shareholding as originally constituted. He no longer held Teleway shares, 30,000 of which he had agreed to transfer to the plaintiff under the Agreement of 12 October 1998. The mechanics of the 3 June 1999 agreement need to be explained because a real point has arisen, which requires resolution by me, as to whether, notwithstanding the arrangements brought about on 3 June 1999, in substance the defendant was still able and willing to perform his obligations to the plaintiff under their agreement.

11. This agreement of 3 June 1999 is that 3:333. Its effect is set out in the accompanying facsimile from Sinclair Roche & Temperley on the preceding page. The defendant transferred all his shares in Teleway and received 47.75818% of the shares owned by Teleway in Unicom which he would hold through his BVI company Optimum Pacific Ltd. What this meant was that he now only held Unicom shares and no Teleway shares. I will leave over the consequences of this change of events when I consider whether the defendant by entering into these arrangements put it beyond his capacity to perform his agreement with the plaintiff. One matter that can now be disposed of shortly and which arises from the 3 June agreement is that I am satisfied, irrespective of the outcome of this action, that the defendant did not enter into the 3 June agreement in order to deliberately sabotage, or put less strongly, deliberately undermine what he and the defendant had agreed in October 1998 for the sale of 30,000 of his Teleway shares. In my judgment, the course of events following the bringing of the High Court action by Mr Yu in December 1998 against the background of a potentially massive investment by Donnelly required a comprehensive settlement of the Teleway board's infighting in such a way that the Donnelly participation was to be unequivocally secured. The commercial considerations of the Donnelly investment assumed paramount importance. I have listened with care to the defendant's explanations as to how and why he settled on the terms of the 3 June agreement. I have every reason to believe that what he had agreed with the plaintiff in October 1998 was then relegated to a position of minor importance by virtue of the pressures of his negotiations on "the main event" which was settling with Mr Yu, saving the Donnelly "second closing" and, it needs to be said, reaping the enormous financial advantages of Donnelly's participation. I have no doubt that he hoped to be able to come to some form of accommodation with the plaintiff after the event. There is no evidence of any deliberate sharp practice on his part at the time that he concluded his 3 June agreement with Mr Yu. That view of the evidence, whilst perhaps of some comfort to the defendant, does nothing to assist in resolving the legal issue of whether he is to be taken to have repudiated the agreement with the plaintiff and whether the plaintiff in turn accepted that repudiation by not paying the 4th instalment.

12. I now turn to the communications between the parties following the 3 June agreement and the non-payment by the plaintiff of the 4th instalment of US$150,000. Now of course, after the event, with battle lines drawn in this litigation there are accusations of repudiation made against the defendant, and counter accusations of non-payment by the plaintiff due to lack of funds which are made against him by the defendant. The tone and flavour of what is now said contrasts sharply with the contemporaneous communications which were cordial and solicitous, almost to the point of being disingenuous, when contrasted with the current state of affairs.

13. To understand the position properly, I need to recite parts of the relevant e-mail messages exchanged between the parties.

14. The plaintiff's evidence (2:24(para.8)) is that he first learnt of the effect of the agreement of the 3 June later the same month when he was told about it by Mr Harvey Leong. Once he learnt of the agreement from Mr Leong he says that he tried to contact the defendant but was not able to do so. He has described the defendant as being elusive at this time (2:24(8)). Having heard the defendant, I do not believe that he was deliberately trying to avoid the plaintiff. The plaintiff says the first official communication that he received about the new arrangements was a letter dated 23 August 1999 from Mr Yu. This is at 3:207.

15. The first exchange between the parties on this matter was when the plaintiff sent the defendant an e-mail on 21 August 1999 in these terms (4(1):236-1) :

"Dear Don,

Finally, I signed up internet at SZ. When would you have time to meet? You are welcome to come to SZ and stay in our home. Or we can meet in HK. Like to catch up with you a bit. My time is quite flexible. Looking forward to seeing you.

Bill"

The uniformed observer could never imagine from this message that the plaintiff had any source of grievance against the defendant who had two and a half months previously, in breach of their agreement, sold shares part of which he had contracted to sell to the plaintiff. The next message in sequence appears to be dated 18 October (4(1):236-2). The parties had already met at a wedding reception where there had been little opportunity to speak of their differences and then had met again on or about 13 October in Hong Kong. The message reads :

"Dear Don,

It was great to chat with you last Wednesday in HK. Afterwards, I went with Harvey to see your new office at the China Resources building. It is a nice location and set up. When would you have time so we can get together again to complete our arrangement - resolve the share option and plan for further collaboration. It would be very helpful if you could e-mail me an outline of what's your thinking before we meet.

Thanks,

Bill"

The issue is mentioned with circumspection. One could not imagine that anything was amiss. The defendant replies on 1 November more directly (4(1):236-3) :

"Bill,

Sorry for being late in sending you this email. As to how resolve the issue of incomplete execution of the agreement on Teleway shares, during our meeting a week ago, I offered you to complete the transaction even you have missed the payment schedule which we agreed. You have indicated that instead of completing the transaction, you would like to seek some other alternative solution if I can agree. As you can expect, I was involved in a number of Internet transaction lately, I have not thought about this issue over after our meetings some 10 days ago. Sorry for be too busy lately to give you a proposal before you leave for the U.S. tomorrow. Once I figured out that what would be a fair way to resolve this issue once for all, I will write you.

Have a safe and present trip!

Don"

It would appear from this message that they had met again on 24 October. The reply from the plaintiff comes unhurriedly on 22 November (4(1):236-5) :

"Dear Don,

How's everything?

I received your email after I left SZ and couldn't reply until now. As you know, Shirley and I are in the States to visit our daughters. I'll be back to SZ in early December.

By the way, I am still enthused about the Amazon project. I believe there is definitely potential. I'll call you when I get back to see if we can collaborate again for another JV.

Best Regards,

Bill Chao"

The subject of this litigation gets no mention at all, but the defendant comes back with more urgency and directly the following day (4(1):237). The second and third paragraphs bear repetition here :

"As to the intended transaction for the old Teleway shares between you and me, even if you have missed the payment schedule for such a long time, for the goodwill for my part, I will give you until the end of November, 1999 to complete the transaction as contemplated in the agreement we signed last year. I am afraid that this is the last time I can extend the completion date. Please do talk to relevant party to get additional information on Unicom Media soon to make an informed and best decision for you. I trust that you understand well that the intended deal between you and me bears a good deal of risk on the both side.

If you decide to give up this date this time, I am still open to consider other possibilities. As you know, I don't have a lot of cash at hand or any other tangible assets as you do. I do have a lot of ideas in my mind and projects at hand, hence I need a lot of good people. I certainly believe that you can certainly make good contributions while getting duly rewarded for your effort. The longer for you to make decision, the less freedom I would have in terms of considering different options. China's entering into WTO opens new opportunities for all of us doing Internet and telecom related business.

Let's move quickly and get into action.

Best regards,

Don"

On 9 December (237-1) the plaintiff replies to say that he will go to the defendant's office at Zuhai to discuss a proposal with Amazon and their outstanding issue over the Teleway shares. Following their meeting, he sent an e-mail on 12 December where the Teleway shares issue merits no mention but there is detailed material as to how to go forward with a possible Amazon joint venture. Three days later on 15 December, the plaintiff sent a further e-mail message (237-3). The first paragraph concerns Amazon, the second is as follows :

"Don,

I sent this to cyberlabs last Sunday. In case, you haven't read it, I sent this to chinabig address as well. As we talked last Friday, I'd like to move forward with the Amazon project as a management team member to make it happen. So, basically, I'll exchange my services for equity. After we get organized, I believe that we can raise some venture capital to get it started.

As far as my Teleway shares, the simplest way to resolve may be : keep in your Optimum account. You figure it out what is a fair equity portion for me (what I paid. Teleway loan payment and others). Then, we can agree with a note from you. I'll ride with you. Whenever you dispose the shares I'll take whatever I own. If you agree with the concept, please think about a formula so we can get it behind us. Thanks for the trouble.

Looking forward to hearing from you,

Best regards,

Bill"

This message certainly engages the issue whilst not adopting any sort of confrontational tone.

16. In terms of e-mail messages before me the trail then goes cold until the plaintiff's message on 12 August the following year. See (4(1):238) :

"Subject : Old Teleway shares

Dear Don, How's the cold? Hope it's getting better. Regarding the Old Teleway shares, we need to get it resolved. You suggested that there are 3 options : 1. Return the money I invested. 2. Allow me to complete the original deal. 3. Somewhere in between 1 and 2 above. Since the splitting of old Teleway complicating the matter some what, the option 3 seems more realistic. What I may be interested is to get a note from you to receive a % of your Optimum holding to exchange the old note. You original idea of granting this stock option is an award to assist you to get Unicom Media a strategic partner. You know that I appreciate your trust and generous gesture. At the same time, I believe that I made some positive impact - the special dividend payment, the two years payback of Teleway loans with a 11% interest!! Now, I'd suggest that you give me an offer. What's fair is fair. I think that I got all the short end. The bonus you suggested to the old Teleway board, but I never received any. Wellington still mad at me being too close to you. Anyhow I felt that I've done a lot, but I got the most blame from China Unicom and RHD. Could you do some thinking and send me an e-mail or get together soon to make a resolution. Thanks so much.

Bill"

This was followed by the defendant's reply on 15 August (4:238) :

"Hi Bill,

My email is [email protected]. Thank for your email and as you know, I got a bit sick lately. As all the Internet companies these days are fighting for their very survival, maybe I have overworked lately.

As to your proposal, I too think that we should reach a reasonable settlement so that we can all concentrate on what we have to now and in the future.

I will let you know soon after I give it a bit of thinking and perhaps consultation with other concerned people.

Don"

The plaintiff's evidence is that what he was trying to do was to produce a positive response from the defendant by gentle non-confrontational prodding. This is why the tone of his e-mail messages were so conciliatory and did not raise any accusations that the defendant was now in breach of the agreement. He had decided to avoid any legalistic approach, hoping that this would be the more productive course to take.

17. From mid-August and even after the plaintiff's solicitor sent the defendant a letter before action on 23 September 2000, the tone whilst more businesslike and firmer left open room for discussion and resolution of their differences. I have reproduced enough of these to give a proper representative account of their substance and nature. The remainder are at (4(1):238-252).

18. From this evidence, I need to determine two major issues of law. Did the agreement of 3 June put the defendant in breach of the Agreement of 12 October 1998? And secondly, was the mere failure to pay the 4th instalment, once it became due constitute an acceptance of the defendant repudiation?

19. I have already held that the 3 June agreement does not represent a deliberate attempt by the defendant to put himself in breach of his contract with the plaintiff. It came about through force of circumstances. Mr Stokes, who appears for the defendant has correctly submitted that the plaintiff bears the burden to show that what the defendant did amounts to a repudiation of the contract. The position is succinctly analysed in the current addition of Chitty at 25-027 and 25-028 as follows :

" Impossibility. Where one party has, by his own act or default, disabled himself from performing his contractual obiligations in some essential respect, the other party will be entitled to treat himself as discharged. The inability to perform his contractual obligations must be established on the balance of probabilities and the fact that a party has 'entered into inconsistent obligations does not in itself necessarily establish such inability, unless these obligations are of such a nature or have such an effect that it can truly be said that the party in question has put it out of his power to perform his obligations.' ......

Impossibility and renunciation. In most cases where the impossibility created by one party has manifested itself by conduct, the innocent party will rely upon renunciation by conduct rather than impossibility, because renunciation is so much easier to establish. Renunciation is to be preferred because the innocent party need only show that the conduct of the party in default was such as to lead a reasonable man to believe that he did not intend, or was not able, to perform his promise; whereas if the innocent party relies upon impossibility he must show that the contract was in fact impossible of performance due to the other party's default. ......"

Mr Stokes submits that entry into the 3 June agreement is not and cannot be categorised as a renunciation or repudiation of the parties own agreement.

20. I am invited by Mr Stokes to look at the real substance of the matter. He says that the defendant still retained the ability to deliver in substance what the parties had bargained for save in a different form. Before 3 June the defendant was in a position to provide Teleway shares. After that he would have been able to provide shares in Unicom derived from his original holding in Teleway shares. Merely a question of calculating equivalence. Once that was achieved the value of what was bargained for by the plaintiff would be provided to him in the form of Unicom shares. Whilst the label might be different the underlining assets would be identical. Accordingly, substantial, and in all events, sufficient performance could have been forthcoming from the defendant. Mr Stokes seeks to reinforce his point by referring to the plaintiff's reaction to what would have happened to the defendant's holding in Teleway shares under the terms of the originally proposed agreement with Mr Yu in February 1999 which would have seen the defendant remaining in Teleway and Mr Yu and his associates departing. The plaintiff accepts that he would have been satisfied to take the diluted new Teleway shares under that agreement provided he received pro rata more new Teleway shares equalling 30,000 old Teleway shares.

21. Mr Stokes submits this demonstrates the plaintiff's attitude to his shareholding and that for practical purposes Unicom shares post the 3 June agreement would have been to the same effect.

22. In my judgment, there can be no parallel between performance arising from the February 1999 arrangement where the plaintiff would have received a true equivalent to the 30,000 Teleway shares, by getting more new Teleway shares equal to 30,000 original Teleway shares, and what the plaintiff could have provided following the 3 June agreement. After the 3 June agreement he had no Teleway shares. He had Unicom shares. He could not provide what he had contracted to sell. I have indicated that he had not deliberately set out to breach his agreement with the plaintiff but what he should have done, in my judgment, was to come to a further agreement with the plaintiff to take into account the post 3 June arrangements once they had taken effect. He made no such attempt, although in April 1999, when the February 1999 proposal was the one that was expected to come to fruition he wrote to Teleway's solicitors (see 4(2):400) to say that he would be making a private share transfer between the two of them according to the agreement that they had entered into. Come the events of June no such thoughts appeared to have been expressed save that he now says that he had lost touch with the plaintiff and could not find him. He has not persuaded me that he made sufficient efforts to locate him and I am satisfied that there is no question of the plaintiff having deliberately taken steps to avoid the defendant. Mr Stokes has raised the question of whether the defendant, if given the opportunity, and had the plaintiff gone on to demonstrate his good faith by paying the 4th instalment and shown himself as being serious about going on with the agreement would, in fact, have been able to go out and purchase Teleway shares in order to comply with his obligations with the defendant. What Mr Carolan, on the plaintiff's behalf, says is that this can be no more than ex post facto speculation on the part of the defendant that he might have been able to provide such shares had he been put to it. The fact of the matter was that the Yu faction wished to remove the defendant from Teleway for which he was amply compensated by the agreement of 3 June.

23. Nobody would have been interested in selling the defendant their shares, either to him directly, or at his request, through him, to the plaintiff. The fact to the matter is that he has simply not demonstrated this at all. He has called no evidence to this effect and I am afraid that this must at best remain in the realms of speculation. In any event, I am far from persuaded that following the "fall out" of his disagreement with Mr Yu, that the shareholders would have been disposed to treat with him on the sale of their shares. Another matter concerns the question of valuation of Teleway shares at that time. It remains a mute point as to whether he would have felt inclined to pay the asking price for such shares or indeed whether he could have afforded the asking price. It should be remembered that he did mention to the plaintiff in his e-mail of 23 November 1999 (4:(1)237) that he did not have a lot of cash at hand or other assets.

24. On this evidence, therefore, I am satisfied that in entering the agreement on 3 June, the defendant put it beyond his ability to perform his agreement with the plaintiff and that accordingly, he repudiated, or renounced, his agreement with the plaintiff. This therefore, entitled the plaintiff to accept that renunciation and so open the way for him to sue, as he now does, for damages. If that is so, then did the plaintiff accept that repudiation? He declined to pay the 4th instalment. Was this sufficient in the circumstances? Had he written a letter as soon as he learnt of the 3 June agreement placing on record that by divesting himself of his Teleway shares the defendant had put himself in a position whereby he could no longer sell the plaintiff 30,000 Teleway shares and that this amounted to a repudiation of their agreement which he accepted , then the matter would have been much more straightforward. The series of e-mails to which I have drawn attention serves to complicate this aspect to the case. These parties instead of confronting the problem head on decided to embark on a leisurely courtship which lasted for over a year until the plaintiff instructed his solicitors to send the demand letter on 23 September 2000. It is this correspondence, leaving aside their motives for having adopted this attitude, which has created a sense of unreality about what is now said, particularly on the plaintiff's behalf.

25. Mr Carolan submits that as a matter of law the matter can only admit of one result once the court has found a breach by the defendant. The defendant had divested himself of his shares 20 days before 6 July 1999 when the 4th instalment of US$150,000 became due. The defendant was then in repudiatory breach and remained so unless or until an offer of substituted performance was made and accepted by the plaintiff.

26. One of the defendant's points has been, that in truth, the plaintiff was never going to be in a position to complete payment of the instalments because he had spent money on the purchase of a home in Shenzhen and he therefore lacked the necessary funds. This is denied by the plaintiff who says that he had more than sufficient assets to deal with these instalments. As to this, in my view, the real answer is that it is hardly open to the defendant to suggest this now where he had disposed of these shares 20 days before the 4th instalment was due.

27. From this, I come to what I regard as the really crucial aspect to this matter. Did the plaintiff accept the defendant's breach?

28. In this regard it is more convenient to start with Mr Stokes's submissions. Firstly he says that the acceptance of repudiation must be clear and unequivocal. Much will turn on the particular circumstances of the case. Chitty at 25-012 records the position as followed :

" Acceptance of repudiation. Where there is an anticipatory breach, or the breach of an executory contract, and the innocent party wishes to treat himself as discharged, he must 'accept the repudiation.' An act of acceptance of a repudiation requires no particular form. It is usually done by communicating the decision to terminate to the party in default, although it may be sufficient to lead evidence of an 'unequivocal overt act which is inconsistent with the subsistence of the contract ... without any concurrent manifestation of intent directed to the other party.' Unless and until the repudiation is accepted the contract continues in existence for 'an unaccepted repudiation is a thing writ in water.' Acceptance of a repudiation must be clear and unequivocal and mere inactivity or acquiescence will generally not be regarded as acceptance for this purpose. But there may be circumstances in which a continuing failure to perform will be sufficiently unequivocal to constitute acceptance of a repudiation. It all depends on 'the particular contractual relationship and the particular circumstances of the case'. An example of a failure to perform which has been suggested as sufficient to constitute an acceptance is the following:

'Postulate the case where an employer at the end of the day tells a contractor that he, the employer, is repudiating the contractor and that the contractor need not return the next day. The contract does not return the next day or at all. It seems to me that the contractor's failure to return may, in the absence of any other explanation, convey a decision to treat the contract as at an end.' (See Vitol SA v. Norelf Ltd [1996] A.C. 800, 811.)

The requirement that the acceptance be communicated 'clearly and unequivocally' is likely to mean that it is only where there has been a failure to carry out an act in relation to the party in breach that silence or inactivity will be sufficiently unequivocal for this purpose ..."

29. The plaintiff relies on the fact that he declined to pay the 4th instalment once he learnt of the effect of the 3 June agreement. Mr Stokes contends that this could not, and did not, convey unequivocally, or at all, the message to the defendant that the plaintiff was treating their agreement as at an end. Neither did it convey to him that he was treating the agreement as at an end because he had entered into the 3 June agreement and the share transfers that followed it. That would have been an easy matter for the plaintiff to do but he did not do so. So far as the defendant was concerned, the failure to pay the 4th instalment by the plaintiff could have been for a variety of reasons including a lack of funds which according to the defendant's evidence was in fact the reason given. The leading case on this aspect is the House of Lord's decision in Vitol SA v. Norelf Ltd [1996] A.C. 800 which was subsequently refer to by the Court of Appeal in Hong Kong in Kar Ho v. Axis [2001] 1 HKC 86. The speech of Lord Steyn (812D) makes clear that "a failure to perform may sometimes be given a colour by special circumstances and may only be explicable by a reasonable person in the position of the repudiating party as an election to accept the repudiation".

30. In this matter, I am required to look at the particular circumstances of the case to decide whether non-payment is to be properly interpreted in this way. In this regard, the nature of the breach and the plaintiff's reaction to it are crucial. The e-mail exchanges need to be properly understood in the context of what the plaintiff is now saying which is that he declined to pay the 4th instalment because of the effect of the 3 June agreement. The temptation for the plaintiff to engage in some ex post facto reasoning is obvious but such reasoning should not be allowed to prevail in the outcome of this case.

31. The party's mutual obligations were clear. Firstly, the defendant would transfer 30,000 Teleway shares on payment of the instalments. I consider, as I have already found, that once the defendant entered into the 3 June agreement, he deprived himself of any realistic prospect of performing his side of the bargain. On such facts, it is not sufficient for me just to note the failure to pay the 4th instalment by the plaintiff and say that in all the circumstances that is only explicable as an acceptance of the defendant's renunciation. All the circumstances include the post renunciation communications and discussions between the two of them. These exchanges need to be given a proper sense or meaning in terms of a requirement cast on the plaintiff to show an unequivocal acceptance of the defendant's renunciation. I am not helped by the fact that both sides chose to adopt such an oblique approach to the issue, which I have already considered and commented upon. The e-mail messages amply demonstrate that. I need to interpret their effect.

32. I have come to the conclusion that the proper analysis of the evidence and the surrounding circumstances is that the failure to pay the 4th instalment can only be explicable as an unequivocal acceptance of the defendant's renunciation. The defendant had divested himself of the subject matter of the contract. The plaintiff was entitled to cease making further payments, which he did. The e-mails up to the letter before action on 23 September 2000 when properly analysed and having regard to the parties' explanations in the trial as to why they addressed the issue in this way do not have the effect of showing an ambivalence on the part of the plaintiff, as to whether he had or had not accepted the defendant's renunciation. Whilst it would have been infinitely preferable had he dealt with the defendant more plainly I accept his evidence that what he was seeking to achieve was an acceptable proposal from the defendant to adequately compensate him for his breach of the agreement. He is not to be taken as having accepted that the agreement was still alive. He was looking for ways in which, by amicable resolution, the defendant could compensate him for the breach. None was forthcoming and consequently he went to his solicitors resulting in the letter before action on 23 September 2000.

33. The plaintiff has therefore demonstrated a breach and an unequivocal acceptance of that breach. Mr Stokes has also addressed me on the question of whether the plaintiff has been guilty of a breach of contract himself by virtue of his failure to pay the 4th instalment. This could only have been a live issue if my finding had been that the plaintiff had not accepted the defendant's renunciation with the effect that he was to be taken as treating the contract as a subsisting one. Mr Stokes has addressed an argument based on the plaintiff's failure to pay the remaining instalments and that the defendant's e-mail of 23 November 1999 (4(1):237) amounted to an unequivocal acceptance of the plaintiff's breach by virtue of his failure to pay. Given my earlier findings these submissions can be of no effect. They simply do not apply that the facts as found by me.

34. The next matter concerns the duty on the plaintiff to mitigate his losses. Mr Stokes says that in the course of their discussions in about October 1999, the defendant made the plaintiff an offer to transfer to him shares in Unicom to the value of the 30,000 Teleway shares which were the subject of their agreement in return for the plaintiff paying the outstanding balance of US$240,000. His case is that the plaintiff declined because he lacked the funds. In so declining, Mr Stokes submits that the plaintiff has failed to mitigate his loss. This line of argument first emerged in the Re-amended Defence, paragraph 23A, but it seems to me that Mr Stokes faces very real evidential difficulties in seeking to make good such a point. The defendant agreed with Mr Carolan in cross-examination that his offer of Unicom shares never made any reference to the number of Unicom shares nor to the method of calculating the equivalent amount of shares. The ratio of 10.6:1 appears to have been broached but nothing came of that. All that this amounted to was an attempt to negotiate as to a means to resolve the effects of the 3 June agreement. Nothing came of it. It would be wrong on this evidence to now elevate all of these discussions to a position of the plaintiff having failed to accept Unicom shares in exchange and therefore having failed to mitigate his loss. This was far too imprecise. Nothing concrete was on the table for him to accept in mitigation. Mr Stokes's point must therefore fail.

35. I now come to the final and very substantial issue of quantum. Firstly, what is the measure of damages? Mr Stokes has submitted that I should adopt what he says is the normal measure of damages for the sale of shares, which is the market price of the shares at the contractual time for delivery less the contract price. Authority for this proposition is found in McGregor on Damages, Chapter 23 paragraph 1102 :

"This (measure) represents the amount that the buyer must obtain to put himself in the position he would have been in had the contract been carried out, since to do so he must buy equivalent shares in the market." (See Shaw v. Holland [1846] 15 MW 136.)"

36. This measure is relatively simple to apply in a publicly-listed company where the share price is easily available on a day to day basis. This is not so with a private company such as Teleway. Mr Carolan is content to adopt the same approach and submits that notwithstanding that Teleway is a private company values had been placed on its shares before and after the relevant contractual date, namely the sale of shares to R.H. Donnelly and PCCW and that these valuations can be used as very effective guidelines to assess value at the contractual date of delivery for these 30,000 shares. I therefore propose to take the measure as set out in paragraph 1102 of McGregor, which the parties appear to be in agreement about as the appropriate one.

37. The far more problematic aspect to this is calculating the plaintiff's loss against that yardstick. Quite apart from the fact that this is a private company, I have the added difficulty of having no evidence of an accounting nature as to the value of the company shares at the date of contractual delivery which would have been 13 December 1999 when the 5th instalment was due and when the defendant would have had to deliver the shares. In reply to these concerns, Mr Carolan submits that I do not require such evidence and then he rather cheerily suggests that I can take the value placed on these shares for the Donnelly transfer being $67 a share, its investment having been agreed in October 1998, some 14 months before the relevant date for the purposes of this case. Alternatively, at the bottom end of the scale, as it were, he draws attention to a value of $49.6 placed on the shares by Mr Yu in his letter to shareholders dated 23 August 1999 (3:206) which came after the Donnelly transactions "second closing" on 16 June 1999. Either valuation, or anything in between, would produce a massive success for the plaintiff, $1,761,414 on $67 down to $1,363,500 on the $49.6 value. Mr Carolan's point is that these are real values worked out for the purposes of an actual sale of shares in Teleway. The other benchmark taken by Mr Carolan is one which relates to a September 2000 transaction in which PCCW (the telephone, and telecommunications group), through its subsidiary Cybernet, purchased a substantial interest in Unicom, by now renamed ChinaBig.com. The value of each ChinaBig share for that transaction came in at US$3.56. These calculations have been very helpfully related by Mr Carolan in what are described as "voluntary Further and Better Particulars of paragraph 5(d) of the Amended Statement of Claim". The starting point for this valuation is the offer by PCCW which is set out in Mr Yu's letter to shareholders dated 24 September 2000 (3:225) in which he recommends acceptance of this offer. In providing these voluntary particulars, Mr Carolan has traced back what that share price would represent in old Teleway shares, which the plaintiff should have been sold by the defendant, by applying the correct multiplier of 10.61 to produce equivalence between Teleway shares and ChinaBig shares. The result which appears on the second page of the voluntary particulars is that on this US$3.536 valuation per ChinaBig share, each Teleway share would be worth US$37.51696 which in turn means that 30,000 Teleway shares would be worth US$1,125,508.80. If this value is adopted, the plaintiff's damages would be this amount less the $300,000 which he would have had to pay under the agreement. Damages would therefore come to US$825,508.80.

38. Mr Stokes counters with a number of points. His main submission is that the plaintiff has simply failed to prove his case as a matter of evidence. In such circumstances all that he gets back is the US$60,000 that he has already paid in three instalments which has always been on offer. Mr Stokes says this because whilst there are values before and after the relevant date of 13 December 1999, there is simply no evidence of values for on or around this date. The plaintiff must prove his case and he has simply not done so. That is the primary submission. Next, Mr Stokes says that even if I find these transactions and their values helpful and persuasive, I am bound to note significant differences between the purchase of a very large strategic shareholding by two powerful investors, and the value that might be applied to a modest enough sale of 30,000 shares. He has also referred to the terms under which these powerful investors purchased their shares receiving a number of warranties and conditions designed to protect themselves and give themselves rights of recourse in the future. Reference is made to (4(1)53) and (3:296-297) for Donnelly and PCCW respectively. The argument here is that such substantial shareholdings protected by warranties and rights of recourse come at a price and in such circumstances, these large investors would be required to pay a higher price per share to acquire that degree of control and protection. I am certain that Mr Stokes must be correct in that submission.

39. Where does all this leave me? The plaintiff has clearly suffered a loss by virtue of non-performance of the contract by the defendant. I must find a value for these shares as at 13 December 1999. The Donnelly and PCCW transactions are of assistance in that they provide parameters in a volatile market and a falling market during 1999 and into 2000. I must do my best. That does not entitle me to carte blanche to make an educated guess. I must have regard to the relevant evidence and to all the circumstances of the matter. This was an agreement for the sale of a small block of shares. The market was falling, I know that because the defendant had complained to the plaintiff that he was having to work long hours to keep his head above water during those difficult times. Doing my best, it seems to me that the 30,000 shares using the 10.61 multiplier formula to work through from Teleway to Unicom (ChinaBig) would have been US$2.5 per share which would translate back to US$26.525 per Teleway share (multiplying US$2.5 by 10.61). US$67 in October 1998 was very much at the peak of the market and then one needs to factor into that the size and conditions attaching to the Donnelly investment. US$49.6 in August 1999 is a valuation that has been undoubtedly affected by the Donnelly factor and as it refers to the "second closing". The falling price from US$67 to US$49.6 is also noteworthy. The PCCW price converted by using the 10.61 multiplier comes to US$37.51696 (10.61 multiply by 3.536). This must necessarily be skewed having regard to the factors that I have already referred to. The worth of the defendant's 30,000 shares as at December 1999 would, in my judgment, be comfortably down on those valuations. For all these reasons, I would value each Teleway share at US$26.525, a considerable advance on the US$10 value placed on them by the parties when they entered into their agreement.

40. Accordingly, there must judgment to the plaintiff in the sum of US$495,750. This is arrived at by multiplying, US$26.525 by 30,000 shares which equals US$795,750 less the US$300,000 which the plaintiff would have had to pay for the shares. Interest must also be added to this from the date of the Writ until judgment at 1% above United States prime rate. Costs will follow the event. The defendant will pay the plaintiff's costs of the action, to be taxed, if not agreed, on a party and party basis. This will be an order nisi.

Representation:

Mr Paul Carolan, instructed by Messrs Robertsons, for the Plaintiff

Mr David Stokes, instructed by Messrs Minter Ellison, for the Defendant

Remarks:

HCA9289/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9289 OF 2000

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J U D G M E N T

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1. The defendant applies under Order 23 rule 1(1)(a) of the Rules of the High Court for an order for security for costs, on the ground that the plaintiff is ordinarily resident out of the jurisdiction. The total costs incurred and to be incurred are calculated at $971,475.00. The defendant has been paid US$60,000.00 by the plaintiff, is prepared to give credit for that sum, and accordingly seeks security for the sum of $504,075.00.

2. There is no dispute that the plaintiff is ordinarily resident out of the jurisdiction; his address given in the Writ is in Mainland China.

3. The case arises out of an agreement between the parties for the transfer of shares in Teleway Communications Ltd ("Teleway") which provided for the defendant to transfer to the plaintiff 30,000 shares at a price of US$10.00 per share. The price was to be paid in five instalments. The shares were to be transferred once all the payments had been made. The plaintiff paid the first three instalments, totalling US$60,000 by 31 October 1998, but not the balance. The date for payment of the 4th instalment was 6 July 1999. The plaintiff's case is that the defendant on 3 June 1999 agreed to transfer all his shares in Teleway to third parties, and did in fact transfer them on 14 July 1999, thereby committing an anticipatory breach of the agreement which the plaintiff accepted on 24 September 2000. Teleway was a shareholder in one Chinabig.com Ltd; an offer was made by Pacific Century Cyberworks Hong Kong Telecom to purchase some of the shares in Chinabig.com Ltd; the plaintiff was deprived of participation in that offer, which, he says, would have brought the value of 300,000 Teleway shares up to about US$1.125 million. The defendant's case is that there was no breach on his part; he could have acquired shares from other shareholders for transfer to the plaintiff in terms of the agreement, if the plaintiff had paid the instalments. This is the case in brief; there are other issues but I do not think it is necessary to go into them here.

4. The Writ was issued on 29 September 2000. On 16 October 2000, the defendant through his solicitors requested security for costs, which the plaintiff did not give. The plaintiff applied for summary judgment under Order 14 and Order 14A. On 9 March 2001 the defendant was given unconditional leave to defend. On 2 April 2001 the defendant's solicitors wrote to the plaintiff's solicitors demanding security for costs by way of bank guarantee or payment into court of $973,595.00. On 4 April 2001 the defendant filed his Checklist indicating that an application for security for costs would be made within 14 days. In the meantime, on 4 April 2001 the defendant through his solicitors offered to repay the sum of US$60,000 held by him, with interest at 1% above the US dollar prime rate from 31 October 1998. The plaintiff disregarded this offer which was open until close of business on 11 April 2001. However no application was made for security for costs at that stage.

5. Then on 7 September 2001 the defendant filed a 2nd Checklist, indicating that an application for security would be made within 42 days, but again it was not made, though on 10 October 2001 the defendant's solicitors indicated in correspondence that an application was being prepared. On 20 October 2001 the case was set down for trial in the fixture list, to be heard on 2 July to 5 July 2002 inclusive.

6. The question of security arose again on 2 April 2002, when the defendant again through solicitors demanded security for the same sum. The plaintiff's solicitors replied that the defendant was more than adequately "secured" by virtue of its retention, since 31 October 1998, of the part payment of US$60,000. The defendant's solicitors replied that the defendant would take the US$60,000 into account and demanded security for HK$506,195.00. This was refused and a summons for security for costs was filed on 6 May 2002, less than two months before the commencement of the trial.

7. The defendant argues that it is the usual, ordinary or general rule of practice to require a foreign plaintiff to give security for costs and that the figures put forward by his solicitors in their skeleton bill of costs are reasonable.

8. The plaintiff argues there is a general discretion in the court as to whether or not to order security for costs, even against a foreign plaintiff. The court may take into account the strength of the plaintiff's case; it is a strong one, and therefore no order for security should be granted. Further, the defendant is extremely late in bringing this application, a mere two months before the trial. There will inevitably be prejudice to the plaintiff if an order is made, even though there is no specific evidence of such prejudice from the plaintiff. The plaintiff also attacks the quantum of the skeleton bill and the final figure sought.

9. The defendant replies that the merits of the case can only be taken into account if there is a very high probability of success or failure. There is no such probability here; the defendant has been granted unconditional leave to defend, and in any event there can be no certainty that he could not have complied with his part of the bargain by acquiring and transferring shares if the plaintiff had paid up. With regard to the delay the defendant says that the application was not necessary before, because he was holding the US$60,000.00 but the actual and potential costs are now double that figure. Counsel has also sought in argument to justify the figures.

10. The order for security for costs is discretionary and may be made if, having regard to all the circumstances of the case the court thinks it is just to do so. The fact that a plaintiff is foreign does not now mean that an order for security for costs is inevitable : Lauria v. Le Salon Orient (Hong Kong) Ltd & Anor [1996] 2 HKLR 37. The merits of the plaintiff's case may be taken into account in exercising the discretion; Wong Kwok Mei Sanrita & Ors v. Eversonic Inc. [1992] 2 HKC 62. However the starting point remains that, other things being equal, a foreign plaintiff will normally have to give security, and the merits should only be weighed where the plaintiff shows a high probability of success. This should not involve a mini-trial. In Porzelack K.G. v. Porzelack (U.K.) Ltd [1987] 1 WLR 420 at 423 Sir Nicholas Browne-Wilkinson VC said :

"Under RSC Order 23, Rule 1(1)(a), it seems to me that I have an entirely general discretion either to award or refuse security having regard to all the circumstances of the case. However, it is clear on the authorities that if other matters are equal, it is normally just to exercise the discretion by ordering security against a non-resident plaintiff. The question is what in all the circumstances of the case is the just answer. The matters urged before me have spread over a fairly wide field. First, there have been attempts to go into the likelihood of the plaintiff winning the case or the defendant winning the case, presumably following the note in the Supreme Court Practice 1985, page 384 under rubric 23/1-3/2 which says : 'A major matter for consideration is the likelihood of the plaintiff succeeding.' This is the second occasion recently on which I have had a major hearing on security for costs and in which the parties have sought to investigate in considerable detail the likelihood or otherwise of success in the action. I do not think that is a right course to adopt on an application for security for costs. The decision is necessarily made at an interlocutory stage on inadequate material and without any hearing of the evidence. A detailed examination of the possibilities of success or failure merely blows the case up into a large interlocutory hearing involving great expenditure of both money and time. Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed in the sense that there is a very high probability of success, then that is a matter that can be weighed but for myself I deplore the attempt to go into the merits of the case unless it can be demonstrated one way or another that there is a high degree of probability of success or failure."

11. Here there has been argument about the merits of the case. The plaintiff says that it would have been practically impossible for the defendant to have reacquired shares for transfer to him. The value of the shares increased considerably after the defendant had disposed of his holding. In any event, he left Teleway under a cloud, so that the other shareholders would not have sold them to him. Counsel for the defendant referred extensively to the arguments put forward on the defendant's behalf in the Order 14 hearing. He argued that the plaintiff's contention that the defendant could not have reacquired shares is a matter of evidence. He relied on Alfred C Toepfer International GmbH v. Itex Italgrani Export S.A. [1993] Lloyd's LR 360 as authority for the proposition that inconsistent agreements do not necessarily make it impossible for a party to comply with one of them. That proposition is no doubt correct but it has to be noted that there is a considerable difference between an agreement to buy and sell shares in a private company, and an agreement to ship a load of maize, as in that case.

12. The plaintiff was unable to obtain a summary judgment. Here the burden is less onerous in that the plaintiff does not have to demonstrate that there is no arguable defence but only that he has a high degree of probability of success; nevertheless it is still an onerous burden. Whether the defendant could have reacquired shares for transfer to the plaintiff is a matter of evidence which can only be decided at trial and I do not think that I can find, on the affidavit evidence, a high probability either way. I cannot therefore refuse security on the ground that the plaintiff is highly likely to succeed.

13. There remains the question of delay. The plaintiff particularly relies on the case of BBNB Finance (Hong Kong) Ltd v. China Underwriters Life and General Insurance Company [1991] 1 HKLR 617. That case concerned an application for security for costs made against a limited company 3 1/2 years after the writ was issued, seven months after the action had been set down for trial and eight weeks before a 10-week trial was due to begin. The plaintiff itself was in liquidation. It was held that the proper test of lateness was whether the defendants were dilatory after they had obtained the information on the company's financial position which enabled them to apply, and that since the defendants knew from the inception of the action that the plaintiff was in liquidation, the application came too late. The prejudice to the plaintiff caused by the oppressive conduct on the part of the defendants was plain enough.

14. Here the defendant knew from the outset that the plaintiff was a foreign plaintiff. The position is analogous to that in BBMB Finance where the defendant knew the plaintiff's financial situation from the outset. The application was only made two months before the trial, though, as I have shown above, the plaintiff has been giving notice of its intention to apply, though not following it through, at least since April 2001, and asked for security long before that. One cannot escape the inference that the making of the application at this stage is a tactical move on the defendant's part, to put pressure on the plaintiff ahead of the trial.

15. There is no real explanation as to why the application was not made earlier. It cannot be said simply that the defendant is holding US$60,000 for which he is prepared to give credit against security for costs, and that the projected bill has now gone well over that figure, because it went over that figure long ago. If one looks at the projected costs of preparation for and attendance at trial, and counsel's fees, the total figure (leaving aside any discussion of whether it could be obtained on taxation) is $305,000.00. That projected figure would have been the same in October 2001 when the case was set down, or even in April 2001 when the defendant was offering to return the US$60,000.00.

16. Having said that, there is no direct evidence of prejudice in that the plaintiff does not say that he cannot put up the money and his case will be stifled if he is required to do so. It is argued for the plaintiff that some prejudice is inevitable. I think this must be right. The plaintiff will probably have had to pay or secure his own solicitors' costs. Some preparation for trial will be going ahead, even if it is only for a four-day trial. Against that is the fact that the plaintiff has known all along that as a foreign plaintiff he could face such an application and that following Porzelack the court would take the view that, other things being equal, it is normally just to order security for costs against a foreign plaintiff. He has had ample time to make arrangements to provide security if ordered to do so. I do not think, in the absence of any direct evidence of prejudice, that it would be just to refuse an order for security.

17. With regard to quantum the plaintiff says that interest on the US$60,000.00 should be taken into account; this comes to about HK$150,000.00. So in effect the defendant should be giving credit for about HK$620,000.00. This is not, I think, strongly disputed though one wonders if the defendant could have obtained such a high interest rate. The plaintiff also attacks the defendant's bill in considerable detail. His solicitor has argued, in his latest affirmation, that it should be reduced to a mere $13,349. I do not think that the defendant's solicitor, Mr Hill's hourly rate charged to the client is excessive; given his seniority he should get at least that on taxation on the party and party basis. I do not think counsel's fees are excessive given that both counsel briefed by the defendant, though not long called, were experienced solicitors before their call to the Bar. I do however take the point that Mr Hill seems to be estimating too many hours both for the Order 14 application and for the preparation by a senior partner for a short trial, and that a considerable amount of his time will inevitably be taxed off on taxation on the party and party basis.

18. Taking all these factors into account I think a reasonable figure for security for costs is $200,000. There will accordingly be an order that the plaintiff do provide security for the defendant's costs up to the final disposal of the action in the sum of $200,000.00 by way of bank guarantee or payment into court within seven days from the order; that all further proceedings be stayed in the meantime; and that the costs of the summons (nisi) be costs in the cause.

Representation:

Mr Barry Paul Hoy of Messrs Robertsons, for the Plaintiff

Mr David Stroke, instructed by Messrs Sinclair Roche & Temperley, for the Defendant