HONG JING CO LTD v. ZHUHAI KWOK YUEN INVESTMENT CO LTD

HCA 156/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 156 OF 2006

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REASONS FOR JUDGMENT NO.2

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1.  (1) On 20 December 2010, I gave judgment on liability for the plaintiff against the defendant.

(2) On 25 January 2011, the order of my judgment on liability and the judgment thereof were sealed. 

(3) Thereafter on 10 March 2011, I handed down my Reasons for Judgment on liability “Judgment No. 1”.

2.  By a summons dated 9 May 2011, the plaintiff applied for various directions and/or orders.  They are mainly concerned with three items of clarification on my findings of liability, namely :

(I) the legal basis on which damages are to be assessed, and in particular, whether the defendant is also accountable to the plaintiff as a constructive trustee for all unauthorized profits /commissions received including the “introduction fee” of $171.99 million;

(II) whether damages should be assessed on the basis of “loss of a chance” and if so, the percentage of chance lost by the plaintiff to acquire the Debts and the Properties in relation to the plaintiff’s contractual claim; and

(III) the date of valuation of the Properties for the purpose of assessing the quantum on the basis of “loss of a chance”. 

(I) The Plaintiff’s Relief for the Defendant’s Breach of Fiduciary Duties

3.  In this respect, in my Judgment No. 1, I have made the following findings :

“16. P alleges that D owes a contractual, as well as a fiduciary duty towards P because P had to rely on D in the negotiation with BOCGI. D denies any fiduciary duty owed, because both parties were dealing at arms’ length.

76. However I accept the plaintiff’s submission that whether the MOU is governed by PRC law or Hong Kong law would not have affected the plaintiff’s substantive causes of action nor would it have any effect on the construction of the MOU. Hong Kong court can hold the defendant liable as a constructive trustee. It was stated in Dicey, Morris & Collins, at para. 34‑049 that :

‘Similarly, if it is argued that a defendant, who in a domestic case would be required to hold property on constructive trust, is nevertheless not liable, on the ground that the law of the place of the enrichment, or other lex causae, does not recognize the principles of constructive trusteeship, the argument is misconceived. The appropriate analysis is to ask whether, under the lex causae, the defendant owes obligation which would impose on him under that law a liability to disgorge a benefit. If so, an English court may hold him liable as constructive trustee when giving remedial effect to the substantive right arising under the lex causae.’

77. Further it was held in Kuwait Oil Tanker SAK v Al Bader [2000] 2 All ER (Comm) 271 (CA) that :

‘190. The judge held that the claimants’ alternative claim was made out. Although his consideration of the question proceeded mainly on the footing that the defendants were liable as constructive trustees, he concluded by holding that they were also liable by reason of breaches of their fiduciary duties to the claimants. On the basis of his previous findings, that conclusion was both justified on the facts and correct in law. However, because the rule of English private international law is that the obligation to restore the benefit of an enrichment such as was obtained by the defendants in this case is governed by the law of the country where the enrichment occurred (see Dicey & Morris : The Conflict of Laws (13th ed.) Rule 200(2)(c)), it was necessary for the judge’s decision to be based, in the first instance, on the law of Kuwait.

191. Although the concept of trust is unknown to Kuwaiti law, both Dr Hoyle and Professor Ballantyne agreed that Articles 264 and 267 of the Civil Code (see above) imposed on each of the defendants an obligation to make restitution to the claimants in respect of the funds misapplied by him. On that footing the judge followed the decision of Chadwick J in Arab Monetary Fund v. Hashim (15th June 1994 ‑ unreported), which has since itself been followed by Mance J in Gruppo Torras S.A. v. Al Sabah (24th June 1999 – unreported), and held that the restitutionary obligation under Kuwaiti law could be characterized as fiduciary in character by English law and thus capable of supporting the equitable remedies in personam which would be available to the claimants in an English court.’

This case was cited in Dicey & Morris with other authorities for the aforesaid proposition.

78. Under Hong Kong law, a fiduciary certainly owes an obligation to disgorge any secret or unauthorised profits.  Therefore, even if the MOU is governed by the PRC law, the obligation owed to the plaintiff by the defendant under PRC law are capable of supporting the court in Hong Kong in holding that the defendant is liable as a constructive trustee.  The defendant fails to refer to para. 34‑049 of Dicey & Morris in his closing submission.”

4.  It is therefore quite explicit that I had found for the plaintiff that the defendant was liable as a constructive trustee.  Therefore, it is accountable for all unauthorize profits /commissions received including any “introduction fee” of whatever amount or alternatively such other sum to be determined at the quantum part of the trial.

(II) The Plaintiff’s Loss of Chance

5.  In this respect, I stated one of those issues to be tried on liability in paragraph 12 (3) of Judgment No. 1 :

“12.(3) What caused the defendant to fail in its negotiation with BOCGI during the exclusivity period?

(i) When did D start its negotiation with Sei Pou and its predecessor See Good?

(ii) Did D intend to further P’s MOU by D’s solicitors’ letter to BOCGI dated 26.11.2005?

(iii) Did BOCGI change its stance by “raising the price” during the exclusivity period?”

6.  From the evidence it was accepted by the court that had the defendant duly performed the plaintiff’s MOU and /or had it not negotiated with SEE GOOD /SEI POU people in breach of the exclusivity provision, the defendant would have been able to secure the deal with BOCGI in furtherance of the plaintiff’s MOU before or by the date of expiry of the exclusivity period.

7.  However, the defendant contended that even if the defendant had been in breach of duty of contract, the deal with BOCGI could not have been finalized within the exclusively period due to BOCGI’s change of stance on 28 November 2005, and thus had not led to the loss of any chance. There was no other alternative case advanced by the defendant in the event the alleged change of stance was not established.

8.  In my Judgment No. 1, at paragraph 33, the parties’ respective cases were stated as follows:

“33. Apparently, D failed to secure the deal between BOCGI and P during the exclusivity period. P alleged that D failed because it wanted to bring in another investor (See Good /Sei Pou) and deliberately delayed the negotiation. D alleged that it was because BOCGI suddenly changed its stance and decreased the debt discharged by payment of HK$700 million. In other words the payment of HK$700 million would not be sufficient to discharge the Debt completely.”

9.  In this respect, I found that the defendant had contacted and negotiated with See Good /Sei Pou within the exclusivity period, and PH’s letter dated 26 November 2008 was used to further SGMOU‑1 and not the MOU of the plaintiff.  I found in paragraph 38‑42 of my Judgment No. 1 as follows :‑

“38. In my judgment, this is very unlikely.  There is no reason why See Good would want to add a clause that says it had been advised when in fact it had not been so advised.  The effect would put itself in a more disadvantaged position for no good reason.  When analysed this clause (which says See Good had been advised) logically, one would immediately ask : who would have advised See Good?  It could not be its own solicitors, as no solicitor would advise his client to add a clause to its detriment on its own initiative.  Thus probably, See Good had been “advised” by PH already, at least in a draft given by PH.  Accordingly there is a strong inference that the defendant (apart from itself but, also through PH), had contacted See Good within the exclusivity period. 

39. The second factor is supported by Mr Quan of the defendant, who described the signing of the final version of the MOU with Sei Pou (See Good’s successor) happened very fast (negotiation started on 1 December 2005 and concluded next day) that even surprised him.  Indeed, relative to the length of discussion between the plaintiff and the defendant before the signing of the plaintiff’s MOU (several weeks), the negotiation between Sei Pou and the defendant was unusually fast (less than 48 hours).  I think it is more likely than not that the defendant negotiated with Sei Pou (through its predecessor See Good) before 1 December 2005. 

Issue 3.2 ‑Did the defendant intend to further the plaintiff’s MOU by the defendant’s solicitors’ letter dated 26.11.2005?

40. Mr Chang also submitted that the letter sent by the defendant to BOCGI on 26 November 2005 was in fact used to further SGMOU‑1.  He pointed out that this letter envisaged that the “buyer”, whoever the defendant intended to be, would buy the Debt and the underlying securities directly from BOCGI.  This is the same mechanism envisaged in SGMOU‑1, but different from the one envisaged in the plaintiff’s MOU (Clause 5) as aforesaid. 

41. I accept this submission.  The proper inference is that immediately after receiving SGMOU‑1 on 25 November 2005, the defendant contacted BOCGI on 26 November 2005 to further SGMOU‑1. 

42. From the findings above, the defendant breached the plaintiff’s MOU by negotiating and aiding a third party (See Good) in purchasing the Debt and underlying securities during the exclusivity period.”

10.  Thus, I concluded at paragraph 80 of Judgment No. 1 that :

“80. BOCGI never took a change of stance and it could not be the cause for the defendant’s failure to secure a deal with BOCGI. The cause was the defendant’s delay in performing the MOU and its negotiation with See Good/Sei Pou during the exclusivity period…”

11.  It is therefore very clear that this court had rejected the defendant’s case as to why it had failed to secure the deal between BOCGI and the plaintiff during the exclusivity period.  Had the defendant duly perform the plaintiff’s POU, the deal would have been secured for the plaintiff’s MOU before or by the date of expiry of the exclusivity period.  Instead, the defendant delayed the matter and negotiated with See Good /Sei Pou, during the exclusivity period which caused the performance of the plaintiff’s MOU failed.  It was not because of any change of stance on the part of BOCGI. 

12.  For the aforesaid reason, the plaintiff’s loss of a chance must be 100 percent.  Thus the plaintiff’s damages on his contractual claim should be assessed on a 100 percent loss of chance basis.

(III) Reference Date for Valuation Evidence

13.  Before the trial on liability, the plaintiff had filed the valuation report by Savills (Macau) Limited dated 2 September 2010.  The valuation of the Macau Property was assessed at the following dates, namely :

(1) 11 November 2005‑date of P’s MOU;

(2) 11 November 2006‑one year after the P’s MOU;

(3) 1 October 2009‑a few days after the completion of the restructuring of the ZK Group on 25 September 2009;

(4) 30 June 2010‑date of the report.

14.  It is the plaintiff’s pleaded case that it intended to resell the Properties for profits at the earliest opportunity.  This could only be possible after the completion of the restructuring of ZK Group on or shortly after 25 September 2009. 

15.  D did not plead any other date to be the earliest opportunity that the plaintiff could sell the Properties.  The defendant did not lead any evidence on any other date at all, nor argue that the relevant date for the valuation of the Properties for the purpose of the assessing the plaintiff’s damages should be a date other than 25 September 2009.

16.  I consider that the date 1 October 2009, being a few days after the competion of the restructuring of the ZK Group is a reasonable one.  The plaintiff could not have sold the Properties before the completion of the restructuring of the ZK Group.

Jurisdiction

17.  After the judgment on liability on 20 December and the order dated 20 December 2010 had been sealed on 25 January 2011, I then handed down the Reasons for Judgment No. 1.  The defendant submitted that I have no jurisdiction in this application for clarification of my Judgment No. 1.

18.  However I accepted the submissions of counsel for the plaintiff that the authorities supported the contention that this court has ample jurisdiction to clarify any points of finding which had already been made in my Judgment No. 1. 

19.  Two authorities were cited in support, namely :

(1) In Roche v Chief Constable of Greater Manchester Police

[2005] EWCA Civ 1454 (see, in particular, §§20‑28, per Buxton LJ) :

“27. Thirdly, if the case had come before us without the benefit of Judge Tetlow’s second judgment, this court would have had jurisdiction under English v Emery Reimbold to send the matter back to the judge for him to make findings upon matters on which it was alleged he had not made findings. That would, prima facie, be a sensible step as against the cost of the potential unfairness to one side or another of starting the whole matter over again. If it was the case that the court considering the original grounds of appeal might have so ordered, why should the court not take advantage of already having the fruits of that inquiry without having to order it? We have heard no detailed argument on this point. But in my view it would be wholly artificial and wrong if the court did not take account of what Judge Tetlow found on 10 June. If we do that, paragraph 9 of the judgment already cited is conclusive that Mr Roche did not commit a reckless assault, and paragraph 12 is conclusive that Sergeant McDermott had no reasonable grounds for suspecting him of that assault. That is effectively the end of this appeal, because the matters allegedly not considered by the judge were considered by him on 10 June and were determined against the appellants in the way that I have described.” (emphasis added)

(2) In Hicks v Russell Jones & Walker [2009] 1 WLR 487,

Lloyd LJ (with whom Toulson LJ agreed) at §10(p 491) and held that (p 492):

“13. The court considered contentions as to whether it was unreliable or undesirable for a judge, having reached a provisional conclusion, to hear further argument on it having already given judgment. Of course the court was well aware that the judge had given judgment and his order had been drawn up, and indeed it was against that that the appeal was launched. Buxton LJ asked himself whether in those circumstances not only the order but also the reasoning of the judge could only be corrected by the decision of the Court of Appeal and not by the judge himself. He said that he considered that the general provisions about finality of judgment did not preclude the court considering the second judgment. He said it did not in any way alter the judge’s order, it simply gave further reasons why that order was valid, rejecting the relevance of contentions that were not before the judge when he made that order. He refers at paragraph 27 at the English v Emery Reimbold case and to the fact that the court would have been able, if it thought it relevant, to send the matter back to the judge for him to make findings but on which findings were necessary. …

So that [Roche] is a case a good deal closer to the present than the English case, which seems to me to justify the course which is proposed and, indeed, gives a degree of approval for the trial judge, no doubt on application from the parties, to make further findings even without the blessing of the Court of Appeal.” (emphasis added)

20.  A fortiori, I have the necessary jurisdiction to clarify any finding of facts as sought by the plaintiff.  If I had not given judgment on liability for the plaintiff on 20 December 2010, but reserved my Judgment, and thereafter handed down a full Judgment in writing at a later date, the plaintiff could have applied for clarification before the judgment was sealed.

21.  I also consider the speedy resolution of these matters at this stage to be fair and beneficial to both parties.

Conclusion

22.  For the aforesaid reasons, I have given the further direction and orders dated 27 October 2011 as follows :

“IT IS HEREBY DECLARED and ORDERED that :

(1) The defendant be liable to the plaintiff as a constructive trustee for all unauthorized profits /commissions received the amount of which 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 Memorandum of Understanding dated 11 November 2005 (“P’s MOU”) 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 1 October 2009.”

23.  The plaintiffs shall have the costs of this application with certificate for three counsel.

Mr. Denis K.L. Chang, SC leading Ms. Gekko S.Y. Lan & Mr. Newman Lam, instructed by Dominic Y.K. Lai & Co., for the plaintiff.

Mr. Paul Shieh, SC leading Mr. Liu Man Kin, instructed by Paul, Hastings, for the defendant.

HCA156/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 156 OF 2006

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REASONS FOR JUDGMENT ON LIABILITY

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Introduction

1.  Zhu Kuan (Hong Kong) Co. Ltd (“ZKHK”) is a company incorporated in Hong Kong.  Zhu Kuan Group Company (“ZKG”) is a company incorporated in Macau.  The two companies were controlled by the Zhuhai Municipal Government of the People’s Republic of China (“Zhuhai Government”). 

2.  ZKHK and ZKG (the “Zhuhai companies”) were used as investment vehicles (also known as window companies) by the Zhuhai Government.  They incurred substantial debt from various creditors.  The amount of total debt was about HK$8 billion.  Since 1998, the Zhuhai Companies were unable to make repayment.  They were unable to reach any agreement with creditors even in August 2003.  One of the creditors was Bank of China Group Investment Ltd (“BOCGI”) and the relevant amount owed to BOCGI was no less than HK$800 million as at 4 October 2004 (“the Debt”).  ZKG was adjudged “bankrupt” in Macau, and both ZKG and ZKHK were wound up in Hong Kong by the end of 2004. 

3.  BOCGI refused to sign a memorandum for restructuring debt and threatened to push for liquidation and obtain the underlying securities.  The Zhuhai Government did not want this to happen, and sought the help of outside investors.  In order to facilitate the rescue, the Defendant herein (“D”) was incorporated in the Mainland.  The purpose of D is to obtain enough funds to pay off the Debt and “unwind” the underlying securities. 

4.  The plaintiff (“P”) was one of the potential investors.  In or around October 2005, Madam Chu Kin Heung (“Madam Chu”) was approached by one Mr Wu Yue Ping and one Mr Xiao Guang Bing.  Both Mr Wu and Mr Xiao were estate agents.  Madam Chu said that at their suggestion she wrote on behalf of P to explore the possibility of helping D with the restructuring of debt by buying the underlying securities of the debt. 

5.  On or about 26 October 2005, Madam Chu and Mr Xiao went to Zhuhai and visited Mr Zhang Song.  Mr Zhang was the director of the Financial Services Department (“FSD”) and the Deputy Secretary-General of the Zhauhai Government.  At the 5^th meeting with the Zhuhai Government, Madam Chu on behalf of P and Mr Quan Li on behalf of D signed a memorandum of understanding (“P’s MOU”) on 11 November 2005. 

6.  P’s MOU provided, interalia, that D would endeavor to negotiate on P’s behalf with BOCGI.  P was to pay HK$810 million and D was to transfer the securities (3 valuable properties) to P.  The understanding at that time was that D would receive HK$110 million and BOCGI would receive HK$700 million (for repayment of the Debt of about HK$800 million).  D explained the HK$110 million to be received from P was not for the benefit of the Zhuhai Government. Instead it was to be used for repayment of other debts owed by the Zhuhai Companies.  It was both parties’ understanding that P would buy the “debt”, but not the securities itself, from BOCGI.  The transfer of the 3 valuable properties would not take place immediately.  They would be transferred to P after D had completed the whole restructuring scheme with all the creditors of ZK Companies. 

7.  P’s MOU also provided for an exclusivity period, in which D was not to negotiate with other parties regarding the Debt and securities.  The exclusivity period would end on 30 November 2005 but could be extended by mutual agreement. 

8.  A series of correspondences took place between the solicitors acting for P and D during the exclusivity period.  The exact content and nature of the correspondences will be fully explored later. 

9.  P and D did not come to any further agreement during the exclusivity period.  Understandably Madam Chu, on behalf of P, tried to contact representatives of D near and after the end of the exclusivity period. 

10.  In the afternoon of 30 December 2005, D through one Mr Liao Ke contacted Madam Chu and invited her to participate in a tender/auction (投標) for the Debt and securities on 31 December 2005 in Zhu Hai.  On the next day, Madam Chu and P’s solicitor, Mr KC Ho arrived at the tender/auction. P submitted a heavily defaced set of auction documents and P’s bid was declared invalid.  The stated price at P’s document was HK$880 million, higher than the price offered by P’s sole competitor, one Sei Pou Estate Development Ltd (at HK$871,990,000). 

11. (i) P brought this action alleging that D was in breach of P’s MOU by :

(1) failing to negotiate with BOCGI in furtherance of P’s MOU;

(2) failing to provide information requested by Messrs K.C. Ho & Fong (“KCHF”) acting for P, to enable P to further P’s MOU;

(3) negotiating with third parties, See Good Investments Limited (“See Good”) and Sei Pou Estate Development Ltd (“Sei Pou”), in breach of clause 7.1 of P’s MOU; and

(4) causing the Debt and the securities therein to be sold to Sei Pou Estate Development Ltd (“Sei Pou”). 

(ii) P also claimed that the said tender/auction in Zhu Hai was invalid under the laws of the Mainland. 

12.  There are numerous issues put forward by Counsel from both sides.  Those issues are :

(1) What is the nature and extent of D’s duty under P’s MOU?

(i) What is the condition for triggering D’s duty?

(ii) Did P provide sufficient asset proof?

(iii) Did D waive the requirement for asset proof?

(2) When did the exclusivity period end?

(3) What caused D to fail in its negotiation with BOCGI during the exclusivity period?

(i) When did D start its negotiation with Sei Pou and its predecessor See Good?

(ii) Did D intend to further P’s MOU by D’s solicitors’ letter to BOCGI dated 26.11.2005?

(iii) Did BOCGI change its stance by “raising the price” during the exclusivity period?

(4) Did P waive its right under P’s MOU by participating in the auction on 31 December 2005?

(5) Is the auction on 31 December 2005 valid?

(6) What is the governing law for P’s MOU?

Issue 1 — Nature and Extent of D’s duty under P’s MOU

13.  The starting point for any alleged duty on the part of D is clause 5 to 7 and 11 of P’s MOU.  Clause 11 specifically provides that all clauses (except clauses 5 to 7), are not to have legal effect.  Both parties conducted their case on this basis. 

14.  Clause 5 provides that the price for selling the Debt and the underlying securities is HK$810 million.  Clause 6 provides that P should pay D’s solicitors (Messrs Paul, Hastings Janofsky &Walker, “PH”) HK$50 million as earnest money before 20 November 2005 and provide asset proof of HK$760 million and Clause 6.1 and 6.2 provide the treatment of the earnest money in different events. 

15.  Clause 7 provides that upon payment of earnest money, D promised to do/forbear to do certain acts in Clause 7.1-7.3, from the date of signing of P’s MOU to 30 November 2005 (or later if extended by mutual agreement).  The period referred in Clause 7 is the exclusivity period mentioned above.  Clause 7.1 provides that D would only discuss/negotiate/contract with P and no one else during the exclusivity period.  Clause 7.2 provides that D would provide all reasonable and necessary help and information.  Clause 7.3 provides that any agreement between D and BOCGI would require P’s confirmation/approval regarding the content and format. 

16.  P alleges that D owes a contractual, as well as a fiduciary duty towards P because P had to rely on D in the negotiation with BOCGI.  D denies any fiduciary duty owed, because both parties were dealing at arms’ length. 

Issue 1.1 — What is the condition for triggering D’s duty?

17.  Mr Paul Shieh SC appearing with Mr Liu Man Kin, for the Defendant, submitted that the trigger for D’s duty under P’s MOU is not just the payment of earnest money (which P had made on 19 November 2005), but also the provision of the asset proof.  He further submitted that D’s duty did not arise unless P had paid the earnest money and provided the asset proof which happened on 23 November 2005. 

18.  Mr Denis Chang SC appearing with Ms Gekko S.Y. Lan and Mr Newman Lam, for the Plaintiff, submitted that Mr Shieh’s interpretation of Clause 7 is contrary to its literal meaning. 

19.  I agree with Mr Chang that D’s duty was conditional only upon the payment of earnest money and had retrospective effect.  The very clear words used in Clause 7 eliminated any room for any alternative interpretations. 

20.  Mr Shieh submitted that the duties in Clause 7.1-7.3 could not be imposed upon D when P had not provided the asset proof according to Clause 6.  To this there are two answers : first, it was the effect both parties intended under the exigent situation; secondly, D had recourse to P if P failed to provide the asset proof. Accordingly, the construction of P’s duty under Clause 6 as a concurrent condition, instead of a condition precedent, to D’s duties under Clause 7 and 7.1-7.3, is not unfair to D.  Upon construction, this is the meaning and effect of the P’s MOU. 

Issue 1.2 — Did P provide sufficient asset proof?

21.  Having found that the provision of asset proof is not a condition precedent but a concurrent condition, coupled with the fact that D is not counter-claiming under Clause 6, the issue of asset proof seems to have no significance.  However, this issue may be relevant to the assessment for damages and it is prudent for me to make a ruling on this issue.

22.  It is undisputed fact that P provided a bank reference letter (“the Reference Letter”) from Bank of China (Hong Kong) Limited (“BOCHK”) stating that Future Leader Management Limited (“FLML”) maintained an account with a high 9-digit fund with BOCHK.  It also stated that Fit Profits Limited (“FPL”) (with FLML as its shareholder) maintained a cheque account with BOCHK. 

23.  D first took issue with the Reference Letter in the allegedly unfriendly meeting on 26 November 2005, where P was represented by Madam Chu and D was represented by Mr Zhang Song, one Mr Ouyang Guoliang and one Mr Huang Hai To. D (through PH) again took issue with the Reference Letter on 28 November 2005 and requested P to provide another asset proof that specified an amount of more than HK$760 million.  PH also requested P to provide documents to show the relationship between P, FLML and FPL.  On the same day, P (through KCHF) replied that P would not provide any document mentioned in the aforementioned letter of PH and urged D to continue with its obligations under P’s MOU.  D had not pursued its request any further. 

24.  Mr Shieh submitted that the Reference Letter was flawed in two ways.  First, it does not link FLML and FPL with P, as it does not mention any relationship between P and FLML and/or FPL.  Secondly, a high 9-digit figure could not be taken to mean that P had over HK$ 760 million in BOCHK’s account. 

25.  P’s case is that the relationship between FLML and FPL on one hand, and P on the other hand had been imputed to D (through Mr He Ning Ke) by P (through Madam Chu) on 11 November 2005.  Allegedly Madam Chu mentioned that the investor behind P was one Mr Cheung Lap Kwan.  Mr Cheung intended to use FLML and FPL to hold the 3 valuable properties.  Therefore, any asset proof regarding FLML and FPL’s financial position must be taken to be sufficient for discharging P’s burden under Clause 6.  Madam Chu explained that as Mr Cheung would like to maintain a low profile in this transaction, thus she wanted to avoid mentioning his name as much as possible.  For the same reason she saw no need to repeat his name when responding to the letter from PH on 28 November, especially since D must have known about Mr Cheung by then. 

26.  D denied that FLML and/or FPL were ever mentioned to Mr He, who denied any English words were ever mentioned to him.  Mr He also could not recall if the name Cheung Lap Kwan was mentioned to him. 

27.  In my judgment, the relationship between P, FLML, FPL and Mr Cheung Lap Kwan had been understood by D before 19 November 2010.  Otherwise, the Reference Letter would be totally meaningless to D and D would have immediately raised an issue with it.  The delay by D in raising the issue regarding the relationship between P, FLML, FPL and Mr Cheung can only be taken to mean that D knew about it before receiving the Reference Letter. 

28.  KCHF said in their letter dated 28 November 2010 (page 461 of Bundle 4), that high 9-digit figure is usually taken by banks to mean somewhere between 700 million to 990 million; 760 million therefore falls within this range. I find that this is sufficient asset proof of their ability to pay the balance of 760 million.  As aforesaid, PH for D had not pursued their request in respect of the high 9-digit figure and identify of FLML and FPL any further. 

Issue 1.3 — Did D waive the requirement for asset proof?

29.  P submitted that even if P was in breach of its obligation under Clause 6, D had waived its right by continuing to perform P’s MOU.  Having held that P is not in breach of Clause 6 and, in any event, P’s obligation under Clause 6 is not a condition precedent, this point becomes purely academic.  Accordingly there is no need to make a ruling on this issue. 

Issue 2 — When did the exclusivity period end?

30.  P submitted that the exclusivity period was orally extended by a telephone call with D’s representative on 28 November 2005.  D denied such an extension. 

31.  I do not believe the exclusivity period was extended by D.  As I have held below, D negotiated with a third party before 25 November 2005 and acted as if such contact had only begun on 1 December 2005 and another MOU was only signed on the next day 2 December 2005.  More likely than not, D would not endanger itself by extending the exclusivity period. 

32.  Accordingly, on the balance of probability, the exclusivity period under P’s MOU ended on 30 November 2005. 

Issue 3 —  What caused D to fail in its negotiation with BOCGI during the exclusivity period?

33.  Apparently, D failed to secure the deal between BOCGI and P during the exclusivity period.  P alleged that D failed because it wanted to bring in another investor (See Good/Sei Pou) and deliberately delayed the negotiation.  D alleged that it was because BOCGI suddenly changed its stance and decreased the debt discharged by payment of HK$700 million.  In other words the payment of HK$700 million would not be sufficient to discharge the Debt completely. 

Issue 3.1 — When did D start its negotiation with Sei Pou and its predecessor See Good?

34.  D admitted that the Zhuhai Government received See Good’s application letter on 25 November 2005.  Mr Zhang and his assistant Madam Chen Yu Rong (“Madam Chen”) of the FSD received the same on 29 November 2005.  D’s case is that Mr Zhang and Madam Chen discussed about the application letter but decided not to pass it onto Mr Quan, in order to avoid conflict until 1 December 2005.  

35.  P’s case is that D had contacted See Good’s representative(s) on/before 25 November 2005, i.e. within the exclusivity period.  P relied on the following factors to support its proposition :

(1) similarity between See Good’s 1^st MOU submitted on 25 November 2005 (“SGMOU-1”) and P’s MOU;

(2) the speed of the negotiation between See Good and D; and

(3) D’s solicitors’ letter dated 26.11.2005 to support this proposition. 

36.  Mr Chang had helpfully prepared a summary of the similarity between SGMOU-1 and P’s MOU.  The more decisive similarities are the exact titles and price ($810 million).  These similarities tend to show that D helped in the drafting of the SGMOU-1.  It should be noted that the title in SGMOU-1 is in Traditional Chinese while the one in P’s MOU is in Simplified Chinese. 

37.  Mr Chang also pointed out that Clause 7.5 of SGMOU-1 stated PH “had advised” (曾建議) See Good to seek independent advice regarding the proposed transaction.  Mr Chang submitted this was for the benefit of PH and the proper inference is that PH, who was still representing D at that time, inserted this clause in SGMOU-1.  This might be the case, but more importantly, this literal meaning of the words suggested that PH had already contacted (and advised) See Good in drafting SGMOU-1.  No one from PH gave evidence to the contrary.  D’s case seems to be that as it was well known that PH represented D in relation to the restructuring of the Debt, it was possible that See Good added this clause on its own initiatives. 

38.  In my judgment, this is very unlikely.  There is no reason why See Good would want to add a clause that says it had been advised when in fact it had not been so advised.  The effect would put itself in a more disadvantaged position for no good reason.  When analysed this clause (which says See Good had been advised) logically, one would immediately ask : who would have advised See Good?  It could not be its own solicitors, as no solicitor would advise his client to add a clause to its detriment on its own initiative.  Thus probably, See Good had been “advised” by PH already, at least in a draft given by PH.  Accordingly there is a strong inference that D (apart from itself but, also through PH), had contacted See Good within the exclusivity period. 

39.  The second factor is supported by Mr Quan of D, who described the signing of the final version of the MOU with Sei Pou (See Good’s successor) happened very fast (negotiation started on 1 December 2005 and concluded next day) that even surprised him.  Indeed, relative to the length of discussion between P and D before the signing of P’s MOU (several weeks), the negotiation between Sei Pou and D was unusually fast (less than 48 hours).  I think it is more likely than not that D negotiated with Sei Pou (through its predecessor See Good) before 1 December 2005. 

Issue 3.2 — Did D intend to further P’s MOU by D’s solicitors’ letter dated 26.11.2005?

40.  Mr Chang also submitted that the letter sent by D to BOCGI on 26 November 2005 was in fact used to further SGMOU-1.  He pointed out that this letter envisaged that the “buyer”, whoever D intended to be, would buy the Debt and the underlying securities directly from BOCGI.  This is the same mechanism envisaged in SGMOU-1, but different from the one envisaged in P’s MOU (Clause 5) as aforesaid. 

41.  I accept this submission.  The proper inference is that immediately after receiving SGMOU-1 on 25 November 2005, D contacted BOCGI on 26 November 2005 to further SGMOU-1.  

42.  From the findings above, D breached P’s MOU by negotiating and aiding a third party (See Good) in purchasing the Debt and underlying securities during the exclusivity period. 

Issue 3.3 —Did BOCGI change its stance by raising the price during the exclusivity period?

43.  This issue was heavily debated during the trial.  It surrounds the purported change of stance by BOCGI during the exclusivity period.  D’s case is that BOCGI suddenly decided that the payment of HK$700 million was only sufficient for purchasing the portion of the Debt worth HK$652 million but not the remaining portion of HK$154 million.  This was completely contrary to the earlier understanding that D would settle the whole Debt (HK$652 million + HK$154 million = HK$806 million) by payment of HK$700 million. 

44.  Counsel from both sides repeatedly described the change of stance as an increase of price by BOCGI.  This is not the most accurate description.  A better description is that BOCGI reduced the amount of Debt discharged by payment of HK$700 million.  An interesting observation is that D’s case made no mention of how BOCGI/Bank of China would treat the remaining portion of the Debt (HK$154 million).  

45.  D relied on a purported letter from the Zhuhai Government to BOCGI dated 30 November 2005.  It was said to be an official document from the Zhuhai Government and bore the words “珠府函[2005]232号”.  I shall refer to this document as Letter 232 which said :

“……然而，11 月28 日我方得知，中银投资单方面改变了10 月27 日双方所达成的意向，认为我方所拟付的7 亿港元只是购买其单独所持的对珠光集团债权6.52 亿港元，而不包含其在中银香港名下的间接债权1.54 亿港元，……升幅达19%。……”

46.  P denied that BOCGI ever changed its stance by reducing the amount of Debt discharged by the HK$700 million.  They relied on a letter sent from BOCGI (through its solicitors Mayer Brown JSM) to P’s then solicitors on 12 October 2010.  I shall refer to this letter as the JSM Reply.  The JSM Reply states, inter alia, that BOCGI could not find document regarding the alleged change of stance.  BOCGI also could not find the various documents alleged to have been sent by BOCGI to convey the change of stance in Mr Zhang’s statement.

47.  Mr Shieh submitted, rather innovatively, that as Letter 232 was discovered by P, P cannot challenge its authenticity.  He relied on an analogy, that is a man cannot challenge his own witnesses unless he turns the witness hostile.  I cannot see how the two can be treated alike.  Mr Shieh’s analogy is qualified by the important exception regarding hostile witness, and I think he implicitly accepted that a document cannot be “turned hostile”.  As the exception is not applicable to documentary evidence, the rule is simply inapplicable.  Otherwise this will cause undue hardship to P, who had no control over the documents discovered. It is not, as Mr Shieh suggested, that the rule is applicable and the exception prevents P from challenging the evidence. 

48.  I do not accept that BOCGI had ever changed its stance.  The first reason is that the “change” would necessarily mean that the buyer would pay HK$700 million for HK$652 million of debt, which is ridiculous.  D explained that BOCGI might have foreseen that the market value for the securities would go up, and so asked for a higher price. However, one must remember that even on D’s case, BOCGI’s stance was thoroughly that of an eager seller.  BOCGI’s initial willingness to discharge the HK$806 million Debt for HK$700 million also shows that it did not consider the Debt (or its underlying securities) to have much investment potential. 

49.  D’s case necessarily meant that BOCGI suddenly saw the potential of the securities and substantially increased the price, but shortly after on 31 December 2005 it reverted the price to HK$700 million.  D’s case is plainly unbelievable. 

50.  The second reason is the lack of any trace of document in BOCGI’s record (except Letter 232) that can support the alleged change of stance.  There is no reason why BOCGI would not record such an important business decision.  There is also no reason why BOCGI would deliberately conceal any such record. 

51.  I do not consider that the letter dated 29 November 2005, allegedly sent by BOCGI to the Zhuhai Government, as a document that supports the alleged change of stance.  It only states that the Zhuhai Government requested BOCGI not to further increase the price for the Debt.  It does not refer to any recent increase of price.  This letter did not tally with the allegation in the Letter 232 part of which was quoted in Chinese in paragraph 45 above.  Thus it cannot prove that BOCGI had changed its stance.  In any event the authenticity of this document is in doubt.  The date and number of pages were apparently corrected as the digits “9” and “1” were hand-written while the other digits were typed. 

52.  D also produced two courier receipts to show that Letter 232 had in fact been sent to BOCGI and BOC Beijing.  The first receipt (p. 820 of Bundle 4) shows that the sender is ZKG and the recipient is Bank of China (in Beijing).  The second receipt (p. 821 of Bundle 4) shows that the sender is the Zhuhai Government and the recipient is BOCGI (in Hong Kong).  Both receipts are dated 1 December 2005. I do not think these receipts are relevant at all.  They only show that something was sent to BOC Beijing and BOCGI.  It does not show what was actually sent.  More importantly, the senders in the two receipts are different, even though the packages were mailed by the same person (Michael Wong).  If both packages contained the same item (Letter 232), one would expect them to be sent from the same sender. 

53.  In the end, as orally submitted by Mr Chang, all documents produced by D (some of which were only produced during the trial) to support this allegation of change of stance, had some problems and queries of their own.  For those reasons above, the proper inference is that BOCGI had never made the alleged change of stance. 

Issue 4 —  Did P intend to waive its right under P’s MOU by participating in the auction on 31 December 2005?

54.  D alleged that P had waived its right under P’s MOU by the following acts :

(1) Alleged oral assurance made by Mr Xiao.

(2) P’s participation in the tender/auction on 31 December 2005.

(3) The Undertaking (承諾書) given by P as part of the tender/auction documents submitted. 

55.  Regarding the alleged oral assurance made by Mr Xiao, I cannot find that Mr Xiao possessed any actual or ostensible authority.  From Madam Chu’s evidence, it was clear that Mr Xiao was known to D as an estate agent only, and he never had actual authority to bind P in matters regarding the sale of the Debt. 

56.  Mr Xiao also had no ostensible authority, since Madam Chu was the only representative of P in all the meetings regarding the sale of the Debt.  It is clear from the witness statements from both sides that any major decisions from P were communicated by Madam Chu. It is inconceivable that D would perceive Mr Xiao as an agent for P with all its authority, in its technical sense. 

57.  It is true that in Madam Chu’s affirmation dated 21 January 2006, Mr Xiao was said to be a representative of P.  Mr Shieh placed great weight to the word “representative”.  He submitted that this word means Mr Xiao had authority to bind P.  However as I have found above, Madam Chu was the only person responsible for making or communicating major decisions from P.  D must have understood the above and it could not have thought otherwise.  D must have known that Mr Xiao’s role was at best that of a helper or an assistant to Madam Chu.  His role was purely advisory, and P did not act through him.  

58.  In any event I cannot accept how Mr Xiao’s alleged oral assurance that P would abide by the rules laid down by the Zhuhai Government could be taken as an unequivocal statement of waiver. There was not the slightest mention of P’s MOU by D and Mr Xiao’s reply could not be taken as a waiver in any event. 

59.  The same principle applies to the Undertaking given as part of the tender/auction documents on 31 December 2005.  Mr Shieh submitted that by agreeing to the following words, P had waived its right under P’s MOU :

「為明確起見，我司確認 貴司、珠海市政府及普衡律師事務所對上述安排將不會承擔任何責任」

60.  The “aforementioned arrangement” (上述安排) only refers to the matter arising from the tender/auction on 31 December 2005.  This is apparent from the paragraph immediately preceding the quoted sentence (omitted by Mr Shieh in his quote).  In that paragraph, there is a detailed arrangement regarding the treatment of earnest money.  It states that once P signs the document, the earnest money would be treated as deposit and P must understand the risk (“我司完全明白該訂金一經支付將不會退回我司，就此，我司願意自行承擔這風險”).

61.  In my judgment, the “aforementioned arrangement” clearly refers to the treatment of the earnest money, quoted above.  The true interpretation of the two quoted sentences in Chinese is simply this : P understands the risk regarding the earnest money, and P understands that D, the Zhuhai Government and PH cannot be held liable for the treatment of earnest money.  The liability regarding P’s MOU was never mentioned in the Undertaking and it cannot be implied into the document. 

62.  The final act that may be said to constitute a waiver is the participation in the tender/auction on 31 December 2005. The submission by D that Madam Chu intended to participate in the tender/auction as a genuine bidder, and decided to protest only after the failed attempt to win the bid, is inconceivable.  Had Madam Chu really intended to submit the tender documents qua bidder, she would have at least queried the organiser as to the proper form of making a counter proposal, or the possibility of deferring the tender/auction for the purpose of further negotiation in relation to the proposed terms.  Instead of being cautious, P had recklessly defaced the tender document and it must have been apparent to her (or to her advising solicitor at least) that any hope of it being accepted would be lost.  The only inference that can be drawn was that P only intended to protest with the document. 

63.  I further accept P’s submission that even assuming that the tender/auction were valid, and that P had genuinely participated in it, such acts, under Hong Kong law, which is the governing law of the MOU, would still not amount to waiving, relinquishing or varying any or any relevant rights under the MOU.  The participation in the tender/auction is perfectly consistent with P’s duty to mitigate the damage and cannot be said to be a waiver. 

64.  Since D’s own case was that it was not in breach of the MOU, because it did not contact Sei Pou (or See Good) during the exclusivity period, and it did not consider the duty under P’s MOU arose retrospectively, following HIH Casualty & General Insurance Ltd v AXA Corporate Solution [2002] 2 All ER (Comm) 1053, D could not be heard to have interpreted P’s participation as waiver.  The principle can be found at §22 (per Tuckey LJ) :

“What I have said illustrates the difficulty in establishing this type of estoppel when neither party is aware of the right which is to be forgone. A representor who is unaware that he has rights is unlikely to make a representation which carries with it some awareness that he has rights. Conversely a representee who is not aware that the representor has a particular right is unlikely to understand the representor to mean that the representor is not going to insist on that right or abandon any rights he might have unless he expressly says so.”

65.  Even assuming the Mainland Chinese law applies, Professor Wang for D, under cross-examination, has accepted that in the case of breach of contract, there would only be waiver if the representor is aware of his rights and expressly says that he would waive the same [T16/2035S]. 

Issue 5 — Is the auction on 31 December 2005 valid?

66.  I agree with P that the whole tender/auction was invalid.  This tender(投標)is a kind of tender within the <招投標法> of the Mainland.  But it was a breach of various provisions of <招投標法> and <廣東省實施辦法>.  It was therefore invalid(無效)by virtue of <民法通則> s. 58(5) [違反法律].  It was further invalid by virtue of <民法通則> s. 58(3).  (“一方以欺詐、脅迫的手段或者乘人之危、使對方在違背真實意思的情況下為的”.)  In this respect, I accept the submissions of P, as set out in much more detail in Chinese in its Appendix I to P’s Submission Part II.  

Issue 6 — What is the governing law for P’s MOU?

67.  Is P’s MOU governed by Hong Kong Law? The legal principles are well settled.  In the absence of an express or an effective choice of law, a contract is governed by the law of a country or system of law with which it is most closely connected. 

68.  All matters have to be taken into consideration that are relevant to the contract : see Dicy, Morris and Collins, Conflict of Laws (14^th Edn) rule 204. 

69.  Those relevant matters include :

(1) the place of contracting,

(2) the place of performance,

(3) the places of residents of business of the parties,

(4) the nature and subject matter of the contract, and

(5) the situation of funds which are available for the discharge or security of the obligation.

70.  Two cases were cited to support the aforesaid submission by P, namely :

(1) Reunited Railways of Advana and Retla Warehouses Limited [1960] CH 52, at 36 (CA), which was affirmed in

(2) Tomkinson and Another v First Pennsylvania Banking & Trust Co. [1961] AC 1007. 

71.  The subject matter of the anticipated acquisition under P’s MOU was in the nature of chose in action held by BOCGI in Hong Kong.  The “Debts and Properties” was a convenient label to refer, first to the Debts owed to BOCGI by the ZKHK, a company also incorporated in Hong Kong and ZKG, a Macau company.  It also refers to the Properties upon which the Debt were secured, the most valuable of which was situated in Macau.  The Debt with the relevant security interests were choses of action created under loan documentation and security instruments all expressed to be governed by Hong Kong law.  It was Hong Kong law which governed the restructuring that was necessitated by the liquidation of the Zhuhai companies.  Neither the creditor nor the debtor was located within the Mainland. 

72.  The place of performance of P’s MOU was Hong Kong.  This is the most weighty consideration in the present case.  The payments of the Earnest Money under the relevant provisions of P’s MOU in the sum of HK$50 million, was made by P’s solicitors to D’s solicitors and both of them are Hong Kong solicitors.  Thus apart from the payments under P’s MOU was in Hong Kong currency, the stakeholder was also located in Hong Kong and subject to the laws of Hong Kong.  The completion of the transaction was envisaged to be in Hong Kong. 

73.  Thus the place of negotiation, the contracts, and other matters relied upon by D, such as the use of simplified Chinese in P’s MOU, lose their significance in this context.  D submitted that, despite the involvement of Hong Kong lawyers, P’s MOU was drafted and prepared using the Mainland simplified characters in order to support its argument that P’s MOU is governed by the Mainland law.  This is insignificant.  Civil memorandum prepared by PH in its first and second draft were prepared in Chinese traditional characters.  The final draft was changed to simplified characters. These two types of characters are interchangeable in any computer with the appropriate software. 

74.  Thus I accept P’s submissions that Hong Kong law is the proper law of the contract in P’s MOU. 

75.  The defendant’s expert suggested that the only difference under PRC law is that there is no concept of constructive trust. 

76.  However I accept P’s submission that whether the MOU is governed by PRC law or Hong Kong law would not have affected P’s substantive causes of action nor would it have any effect on the construction of the MOU.  Hong Kong court can hold D liable as a constructive trustee.  It was stated in Dicey, Morris & Collins, at para. 34‑049 that :

“Similarly, if it is argued that a defendant, who in a domestic case would be required to hold property on constructive trust, is nevertheless not liable, on the ground that the law of the place of the enrichment, or other lex causae, does not recognize the principles of constructive trusteeship, the argument is misconceived. The appropriate analysis is to ask whether, under the lex causae, the defendant owes obligation which would impose on him under that law a liability to disgorge a benefit. If so, an English court may hold him liable as constructive trustee when giving remedial effect to the substantive right arising under the lex causae.”

77.  Further it was held in Kuwait Oil Tanker SAK v Al Bader [2000] 2 All ER (Comm) 271 (CA) that :

“190. The judge held that the claimants’ alternative claim was made out. Although his consideration of the question proceeded mainly on the footing that the defendants were liable as constructive trustees, he concluded by holding that they were also liable by reason of breaches of their fiduciary duties to the claimants. On the basis of his previous findings, that conclusion was both justified on the facts and correct in law. However, because the rule of English private international law is that the obligation to restore the benefit of an enrichment such as was obtained by the defendants in this case is governed by the law of the country where the enrichment occurred (see Dicey & Morris: The Conflict of Laws (13^th ed.) Rule 200(2)(c)), it was necessary for the judge’s decision to be based, in the first instance, on the law of Kuwait.

191. Although the concept of trust is unknown to Kuwaiti law, both Dr Hoyle and Professor Ballantyne agreed that Articles 264 and 267 of the Civil Code (see above) imposed on each of the defendants an obligation to make restitution to the claimants in respect of the funds misapplied by him.  On that footing the judge followed the decision of Chadwick J in Arab Monetary Fund v. Hashim (15^th June 1994 –unreported), which has since itself been followed by Mance J in Gruppo Torras S.A. v. Al Sabah (24^th June 1999 – unreported), and held that the restitutionary obligation under Kuwaiti law could be characterized as fiduciary in character by English law and thus capable of supporting the equitable remedies in personam which would be available to the claimants in an English court.”

This case was cited in Dicey & Morris with other authorities for the aforesaid proposition. 

78.  Under Hong Kong law, a fiduciary certainly owes an obligation to disgorge any secret or unauthorised profits.  Therefore, even if the MOU is governed by the PRC law, the obligation owed to P by D under PRC law are capable of supporting the court in Hong Kong in holding that D is liable as a constructive trustee.  D fails to refer to para. 34‑049 of Dicey & Morris in his closing submission. 

Conclusion

79.  From the plain meaning of Clause 7, the exclusivity period started from the date of signing of the MOU to 30 November 2005.  P had provided a sufficient asset proof.  Even if they had not, that did not affect the length of the exclusivity period.  D negotiated with Sei Pou/See Good during the exclusivity period and this amounted to a breach of Clause 7.1.  The letter dated 26 November 2005 sent by PH corroborated with SGMOU-1 but not P’s MOU and I have held that on a balance of probability, it was sent to further the deal with See Good/Sei Pou.  Even this letter was sent in breach of Clause 7.1.  

80.  BOCGI never took a change of stance and it could not be the cause for D’s failure to secure a deal with BOCGI.  The cause was D’s delay in performing the MOU and its negotiation with See Good/Sei Pou during the exclusivity period.  In any event, the failure by D to inform P of this purported change amounted to a breach of Clause 7.2.  It was not open to D to say that if P were so informed it would jeopardise the negotiation between D and BOCGI.  The promise under Clause 7.2 does not allow D to withhold information on the ground of furthering an ongoing negotiation.  P was entitled, as of right, to all reasonable and important information from D irrespective of D’s assessment of the situation. 

81.  P’s MOU is governed by Hong Kong Law.  P’s participation in the tender/auction on 31 December 2005 in the Mainland could not be taken as a waiver of its rights following from the breaches of P’s MOU.  The tender/auction in the Mainland is invalid (無效) under the laws in the Mainland. 

82.  For the aforesaid reasons, I gave Judgment on Liability for the plaintiff immediately after hearing Counsel’s submissions on 20 December 2010.

HCA 156/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 156 OF 2006

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D E C I S I O N

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1.  This is the plaintiff’s application for specific discovery by affidavit made pursuant to Order 24 rule 7 of Rules of the High Court.  The application is contained in paragraph 3 of the summons dated 4 July 2008.

2.  The plaintiff’s present claim arises out of a Memorandum of Understanding (MOU) dated 11 November 2005 entered into between the plaintiff and the defendant.  The MOU relates to the plaintiff’s intended purchase of the debts (“the Debts”) owed to the Bank of China Group Investment Ltd (“BOCGI”) by two “window” companies of the Zhuhai Municipal Government, one in Hong Kong and the other one in Macau, which were in liquidation.  The Debts were no less than HK$ 800 million and were secured on three properties (“the Properties”), one of which is in Macau and the other two are in Zhuhai.

3.  The defendant is a company incorporated in Mainland China.  It is common ground that it was set up by the Zhuhai Government.  The plaintiff’s case is that the defendant was set up for the purpose of rescuing or facilitating the rescue of the two collapsed window companies from their liquidation. 

4.  The plaintiff was ultimately unsuccessful in the purchase of the Debts and the Properties. The successful purchaser was a company incorporated in Macau called Sea Good Real Estate Development Limited (also known as “Sei Pou”), with which the defendant had entered into a MOU dated 2 December 2005.  

5.  The issues in this action centre around whether the defendant was in breach of its various duties and obligations under the MOU it made with the plaintiff.  It is the plaintiff’s case that the defendant was under a duty, inter alia, to use its best endeavours to carry out negotiations with Bank of China (BOC) for the purchase of the Debts and the Properties by the plaintiff and was further under an exclusivity obligation not to enter into negotiation with another party during the Exclusivity Period (i.e. prior to 30 November 2005) and the extended Exclusivity Period.

The application

6.  The present application relates to two categories of documents, particulars of which are set out in two paragraphs in Schedule B to the plaintiff’s summons.  Paragraph 1 concerns documents relating to the application made by Sei Pou for the purchase of the Debts and Properties.  Paragraph 2 concerns documents relating to the negotiations between the BOC Group and the Zhuhai Government, FSD (which is a department or branch of the Zhuhai Government), the defendant and the defendant’s solicitors (“PH”) on the purchase of the Debts and the Properties. 

7.  The plaintiff says the documents sought are relevant to whether the defendant was in breach of its duties and obligations under the MOU, in particular, the duty and obligation mentioned in paragraph 5 above. 

8.  The defendant does not take issue on the relevance of the documents sought.

9.  The defendant resists the application on the ground that the plaintiff has failed to show a prima facie case that the documents are documents in existence which are in its possession, custody or power and which the defendant has not disclosed.

Do the documents exist?

10.  On the first category of documents sought, the starting point is the application document that Sei Pou submitted to the Zhuhai Government for the purchase. It was dated 25 November 2005 and the bank reference letters enclosed in it were dated 24 and 25 November 2005.  This, the plaintiff says, indicates that before the expiration of the Exclusivity Period, Sei Pou or its promoters were already engaged in activities for the purchase of the Debts and Properties.

11.  The plaintiff further points out that there are differences between the MOU signed with the plaintiff and that signed with Sei Pou in terms of the arrangement for the purchase of the Debts and Properties. The plaintiff says that this suggest that there had been discussions and communications with BOCGI in this regard.  Reliance is also placed on a letter dated 26 November 2005 that PH wrote to the Bank of China, which stated that the defendant had already liaised with a third party.  The plaintiff contends that the third party referred to therein is not the plaintiff but is Sei Pou, having regard to the content of the letter and the fact it was written just one day after Sei Pou submitted the application.  Hence, the plaintiff says that there should have been communications between the defendant and Sei Pou and some internal records on the part of the defendant.  

12.  The defendant, on the other hand, says that it only received Sei Pou’s application letter on 1 December 2005 and that the third party referred to in PH’s letter is the plaintiff and not Sei Pou.  The defendant’s List of Documents has disclosed three documents relating to the negotiations with Sei Pou, namely, the application letter dated 25 November 2005, the draft and signed copy of the MOU signed with Sei Pou).  The defendant says that other than these three documents, there are no other documents in its possession, custody or power.

13.  Whether the defendant was already in communication and negotiation with Sei Pou during the Exclusivity Period is a matter for the trial.  Likewise, whether Sei Pou is the third party referred to in PH’s letter to Bank of China is an issue to be adjudicated upon at the trial.  At this interlocutory stage, I am not persuaded that the plaintiff’s contention that the third party referred to in the letter is not the plaintiff is plainly unsustainable. For the purpose of the present discovery application, I am prepared to accept, on the plaintiff’s analysis and contention, that there is a basis to believe that there are in existence other documents falling within the first category of documents sought by the plaintiff.

14.  As to the second category, they are documents relating to negotiations conducted with the BOC Group.  The defendant’s List of Document had disclosed two documents relevant to the negotiations with the BOC Group. The first is letter from the Zhuhai Government to Bank of China dated 30 November 2005.  The second is an agreement dated 31 December 2005 made between the Zhuhai Government and several members of the BOC Group letter regarding the framework or principles for resolving the Debts.  

15.  The plaintiff contends, and I agree, that a number of events and happenings were mentioned in these two documents.  For instance, the letter mentioned that an understanding was reached between the Zhuhai Government and BOCGI in October 2005, but BOCGI later changed its position.  And in the agreement, it was recorded that another understanding was reached in a meeting on 6 December 2005.  I accept that there is proper basis for believing that, other than these two documents, there are correspondence and communications passing between the BOC Group on the one hand and the Zhuhai Government, FSD, the defendant and PH on the other hand as well as documents of the kind particularized in paragraph 2 of Schedule B to the summons.   

Are the documents in the defendant’s possession custody or power?

16.  As identified by Mr Chang SC, the central plank in the defendant’s objection is that Zhuhai Government (and also the FSD) and the defendant are separate and distinct entities and that the defendant does not have control over the former.   Hence, the defendant argues, even if there are documents falling within the categories of documents sought by the plaintiff that are in the possession of the Zhuhai Government or the FSD, they are not discoverable documents in the possession, custody or power of the defendant.

17.  There is no doubt that the defendant and the Zhuhai Government or FSD are different legal entities.  However, it would appear from the materials before the Court in this application that they are not wholly unrelated parties.  Indeed, in the Defence, it is admitted that the defendant is a company established by the Zhuhai Government. Although the defendant did not accept that it was established for the purpose of the corporate rescue, there can be no serious dispute that the defendant had taken active part and worked closely with the Zhuhai Government in this regard.     

18.  More specifically, in meeting the plaintiff’s allegation that the defendant was in breach of its duty to use best endeavours to negotiate with BOC, it was pleaded in the Amended Defence that the defendant did attempt to purchase the Debts from BOCGI.  And in response to the plaintiff’s request for further and better particulars of the plea, the defendant relied on: (i) the letter written by PH on behalf of the Zhuhai Government to BOCGI, (ii) a visit by two officials of the Zhuhai Government and FSD (Mr Zhang and Miss Chen), and (iii) a letter written by the Zhuhai Government to the Bank of China as particulars of the defendant’s attempts. 

19.  In the witness statement of the defendant’s director (權力), it was also said that after signing the MOU with the plaintiff, the defendant had through the relevant departments of the Zhuhai Government (透過珠海市相關部門) endeavoured to discuss the purchase with BOCGI (para.15), and also that the defendant had through FSD (我們透過金融辦) contacted corporations interested in purchasing the Debts, which included Sei Pou, to find out their intentions (para.22).    

20.  Mr Shieh SC argued that what was stated in the further and better particulars and the witness statements have to be viewed in the context.  Reference was made to paragraphs 29(b) and (d) of the Amended Defence where it was pleaded that the two officials of the Zhuhai Government and FSD (Mr Zhang and Miss Chen) did not act on behalf of the defendant.  This is in response to the plaintiff’s averments in paragraph 20 of the Amended Statement of Claim, namely, Mr Zhang and Miss Chen had made representation on the extension of the Exclusivity Period and Mr. Zhang had said that he would notify the plaintiff of any progress made in the negotiations with BOCGI.  While denying the averments, the defendant pleaded further that even if the representation or statement had been made, Mr Zhang and Miss Chen did not at the time of the representation or communication act on behalf of the defendant.  Plainly the plea in paragraph 29 of the Amended Defence is referring to the specific occasions in question.  It does not detract from the fact that the defendant relies on and regarded the acts done by the Zhuhai Government and FSD as its attempts to discharge its duties under the MOU with the plaintiff.

21.  Reference was also made to other parts of the witness statement of Mr 權力, which show that the defendant is only one of the investment vehicles of the Zhuhai Government and is one among several other vehicles of the Zhuhai Government that had participated in the corporate rescue.  Accordingly, it was said that when the witness statement states that the defendant had made endeavours and contacts through the Zhuhai Government, it does not denote any agency relationship. 

22.  It was further pointed out that the defendant is not a contracting party to the agreement that was reached with Bank of China, for instance, the 31 December 2005 agreement.  It is said that this demonstrates that the defendant and the Zhuhai Government are separate distinct entities because if it were otherwise, the defendant could have concluded the deal.

23.  In Mr Shieh’s submissions, there is no evidence or material before the court to support any agency relationship between the defendant and the Zhuhai Government such that the defendant can be said to have (as principal) a right to compel access to or inspection of documents maintained or kept by the Zhuhai Government (as its agent): see the principle in Yasuda Fire & Marine Insurance Co of Europe Ltd v. Orion Marine Insurance Underwriting Agency Ltd [1995] QB 174, 184G-186B.

24.  In my view, for the purpose of this application, the issue does not turn on whether there is any agency relationship between the defendant and the Zhuhai Government or whether the latter was the agent of the defendant.  Surely, if the Zhuhai Government was the defendant’s agent, then documents in the possession, custody or power of the Zhuhai Government will be discoverable by the defendant.   However, the plaintiff does not have to go so far as showing agency or that the defendant is able to control the Zhuhai Government or to compel it to make available documents or records.  The plaintiff needs only show a prima facie case based on probability arising from the surrounding circumstances of the case: Hong Kong Civil Procedure 2009 vol. 1 at p.477, para.24/7/1.

25.  On the materials present before the Court, it is not difficult to see that the defendant, being a company set up by the Zhuhai Government, had worked closely with the Zhuhai Government and the FSD in the activities associated with the rescue of the two “window” companies.  It is also not difficult to see that the defendant had or was given access to documents relevant to the corporate purchase and the purchase of the Debts and Properties.  For instance, the defendant has disclosed in its List of Documents the letter dated 30 November 2005 from the Zhuhai Government to the Bank of China and also the 31 December 2005 agreement that was made between the Zhuhai Government and members of the BOC Group.  The letter was not copied to the defendant while the defendant was not a contracting party to the agreement. Despite this, the defendant did have access to and copies of the documents.  

26.  The relationship between the defendant on the one hand and the Zhuhai Government and the FSD on the other hand, especially in connection with the purchase of the Debts and the Properties, and the manner in which they had worked together to bring about the corporate rescue, are such that the plaintiff is justified in saying that there are prima facie relevant documents in the possession, custody or power of the defendant.

Conclusion

27.  For the reasons above, I grant the plaintiff’s application.  There is an order that the defendant do within 14 days of the date of this Decision make an affidavit/ affirmation stating whether it has in its possession, custody or power the documents listed in Schedule B to the summons dated 4 July 2008.  Applying the normal rule of costs follow event, the costs of this application shall be paid by the defendant to the plaintiff in any event, to be taxed if not agreed.

HCA 156/2006

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 156 OF 2006

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HCA 156/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 156 OF 2006

____________

____________

HCA 156/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 156 OF 2006

____________

____________

_____________

D E C I S I O N

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Background:

1.  Zhu Kuan (Hong Kong) Co Ltd, a Hong Kong incorporated company, and Zhu Kuan Group Co Ltd, a Macau incorporated company, (the Zhu Kuan companies) were both companies owned, controlled and used by the Zhuhai Government of the People’s Republic of China as investment vehicles.  In that capacity both incurred substantial debts in Hong Kong, particularly with Bank of China Group Investment Ltd, to whom a sum in excess of HK$800 million was owed.  The debts were secured on three properties, one in Macau and two in Zhuhai.

2.  Both companies were wound up by the Court of First Instance in the Hong Kong in the latter half of 2004, and joint and several liquidators, resident in Hong Kong were appointed.

The parties enter into a Memorandum of Understanding:

3.  The defendant, Zhuhai Kwok Yuen is a further company, established by the Zhuhai Government, in the PRC.  It was established, as a “white knight” for the purpose of rescuing the Zhu Kuan companies from that liquidation.

4.  On 11 November 2005, Hong Jing entered into a Memorandum of Understanding, (the MoU), with Zhuhai Kwok Yuen.

5.  The purpose of the MoU was to advance the rescue of the Zhu Kuan companies from the liquidation by the purchase, by Zhuhai Kwok Yuen, from the Bank of China Group, of the debt owing to the Bank of China Group, and the three properties upon which the debt was secured.  The debt and three properties would then be sold on to Hong Jing for an agreed sum of HK$810 million.  The MoU required, and Hong Jing paid, to Hong Kong solicitors for Zhuhai Kwok Yuen, earnest money in the sum of HK$50 million.

6.  The MoU provides, in Clause 11, that:

“Except the provisions in clauses 5, 6 and 7, this Memoranda of Understanding will not be treated as a contract or a legally binding agreement that is for negotiation purposes only. (Sentence omitted) Except the provisions in clauses 5, 6 and 7, any obligations or duties of both parties mentioned in this Memorandum of Understanding will take effect and be legally binding on both parties only after the execution of the formal agreements by both parties.”

Mr Chang SC, for Zhuhai Kwok Yuen, is on strong ground when he contends that, by implication from clause 11, the parties intended that clauses 5, 6 and 7 of the MoU would be legally binding.

7.  Clause 5 of the MoU appears to establish an obligation upon Zhuhai Kwok Yuen to acquire the debts and assets from the Bank of China Group.  Clause 6 of the MoU sets out the provisions in relation to the payment of the earnest money, to be held by the solicitors as a stakeholder, and a final agreement is reached transformed into a deposit, or in the event that no agreement is reached by a specified date to be refunded to the Zhuhai Kwok Yuen.

8.  Clause 7 of the MoU appears to impose an obligation upon Zhuhai Kwok Yuen, (i) not to negotiate matters relating to the sale of the debt or the properties with any third party, (ii) to provide Hong Jing with all reasonable and necessary information and assistance, and (iii) to disclose for approval by Hong June the contents and format of the agreement for the acquisition by Zhuhai Kwok Yuen from the Bank of China Group of the debts and properties.

9.  In respect of both clauses I have used the expression “appears to” s the true meaning of the clauses has not been argued.

The case for Hong Jing:

10.  The case for Hong Jing is that the Zhuhai Kwok Yuen failed in its obligation under clause 5 of the MoU to acquire the debts and assets from the Bank of China Group for on sale to Hong Jing, would duly disclosing the content and format of the agreement with the Bank of China Group.  It is argued that Zhuhai Kwok Yuen instead dealt with the Bank of China Group for its own purposes, and further, that in breach of its obligation under clause 7 of the MoU, Zhuhai Kwok Yuen negotiated with third parties, and in particular a company called Sei Pou Estate Development Ltd, to sell the debts and the properties to that company.

11.  It is alleged that an agreement was entered into by Zhuhai Kwok Yuen to sell the debts and properties to Sei Pou for the sum of HK$871.99 million.  It is alleged that Zhuhai Kwok Yuen agreed to pay the Bank China Group the sum of HK$700 million for the debts and properties.  Consequent upon this it is then alleged that the effect of the agreement with Sei Pou is that from the payment of the purchase price, Zhuhai Kwok Yuen would receive an “introduction fee” in the sum of HK$171.99 million.  That latter sum has apparently been paid to the Zhuhai Kwok Yuen’s solicitors in Hong Kong.

12.  The case for Hong Jing is that Zhuhai Kwok Yuen’s actions, resulting in a profit to Zhuhai Kwok Yuen of HK$171.99 million, constitutes a breach of fiduciary duty arising from the legally binding provisions of the MoU, and that consequently Zhuhai Kwok Yuen is liable to account for the sum of $171.99 million as a constructive trustee.

13.  On 21 January 2006, Hong Jing obtained, ex parte, an interlocutory injunction restraining the Zhuhai Kwok Yuen from disposing or dealing with, or removing from Hong Kong sum of HK$171.99 million then held by their solicitors.  At the same time leave to serve the writ out of the jurisdiction was given.

The procedural background:

14.  Before the writ could be served Zhuhai Kwok Yuen issued a summons, purportedly pursuant O 12 R 8, seeking a declaration that this Court has no jurisdiction over the defendant in respect of the subject matter or alternatively a declaration that Hong Kong is not the proper forum for the adjudication of the claim.  With the writ, endorsed with the claim, but with no statement of claim attached, not served, Mr Chang sought to file the statement of claim at the commencement of the hearing.  Leave was required as the plaintiff was out of time to file a statement of claim.  I made an order in terms permitting the filing of the statement of claim, with no order for costs.

15.  Out of an abundance of caution, Mr Chang filed a further ex parte application pursuant to O 11 R 1, for leave to serve the writ out of the jurisdiction.  In the absence of Mr Chan, for Zhuhai Kwok Yuen, I made that order, with no order for costs.

16.  Mr Chan acknowledged that the order that should have been sought by the O 12 R 8 summons filed by Zhuhai Kwok Yuen was an order pursuant to R 8(1)(c), for the discharge of the order giving leave to serve the writ out of the jurisdiction.  Upon his undertaking to file an amended summons, argument proceeded on the amended summons on the basis that that was the order sought.

17.  When an O 12 R 8(1)(c) order is sought the grant of leave to serve out of the jurisdiction is considered afresh.  It is clear that the burden is then on the plaintiff to show a good arguable case under one or other of the various paragraphs in O 11 R 1: see Hong Kong Civil Procedure § 11/1/1-2.

18.  To discharge that burden Mr Chang relied primarily on O 11 R 1(1)(b), which permits service out of the jurisdiction, if the action begun by the writ seeks an injunction ordering the defendant to do or refrain from doing anything with in the jurisdiction.  Alternatively, and equally primarily, Mr Chang relied on O 11 R 1(1)(p), which permits service out of the jurisdiction, if the claim is brought for an account or other relief against the defendant as a constructive trustee, and the defendant’s alleged liability arises out of acts committed, whether by him or otherwise, within the jurisdiction.

19.  There appears to be no dispute that the solicitors for Zhuhai Kwok Yuen hold the sum of HK$171.99 million, apparently paid by Sei Pou as part of the purchase price for the debts and properties acquired by Zhuhai Kwok Yuen from the Bank of China Group.  As I have said, Mr Chang is on strong ground in contending that clauses 5, 6 and 7 of the MoU establish legally binding obligations on Zhuhai Kwok Yuen.  It appears not to be in dispute that Zhuhai Kwok Yuen has negotiated with third parties, arguably in breach of a legally binding obligation not to do so.  In consequence and argument may strongly be made that the “introduction fee” effectively paid by Sei Pou to Zhuhai Kwok Yuen is a sum held by Zhuhai Kwok Yuen is a constructive trustee for Hong Jing, for which Zhuhai Kwok Yuen must account.  The argument falls squarely within the provisions of R 8(1)(p).  Mr Chan did not contend otherwise.

20.  There appears to be no dispute that the sum of HK$171.99 million is held in Hong Kong, by Hong Kong solicitors.  The writ plainly seeks an injunction restraining Zhuhai Kwok Yuen from further dealing with that sum.  Any dealings with that sum would be dealings taking place within the jurisdiction of Hong Kong.  The relief sought falls squarely within the provisions of R 8(1)(b).  Again, Mr Chan did not contend otherwise.

21.  That being the case, it is clear that Hong Jing has shown a good arguable case will be to serve out the jurisdiction, and that the application to set aside the ex parte order must fail.

22.  Consequently, it is simply not necessary for me to consider further the third basis upon which Mr Chang argued for leave to serve out of the jurisdiction, namely R 8(1(d)(iii), that the claims and brought to enforce the contract or obtain relief in respect of a breach of contract which, by its terms or by implication, is governed by Hong Kong law.  It was on this aspect of the case only that Mr Chan addressed me.  In the circumstances I do not need to consider the argument.

Costs:

23.  There will be an order nisi that the Zhuhai Kwok Yuen must pay Hong Jing’s costs, to be taxed on a party and party basis, on the application to set aside the grant of leave to serve the writ out of the jurisdiction.