PHONEYORK CO LTD v. CHESSON INTERNATIONAL (HOLDINGS) LTD

HCA 2192/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2192 OF 2007

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D E C I S I O N

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1. On 28 May 2012, this Court delivered Judgment (“Judgment”) dismissing the plaintiff’s claim against the defendant and also the third party’s counterclaim against the defendant (see para. 104 of the Judgment). Further, this Court made an order nisi that: (1) the plaintiff do pay to the defendant the costs of and occasioned by the plaintiff’s claim, with certificate for two counsel for the trial, to be taxed if not agreed; and (2) the third party do pay to the defendant the costs of and occasioned by the third party’s defence and counterclaim, to be taxed if not agreed (see para. 105 of the Judgment).

2. By a Summons dated 7 June 2012, the plaintiff applied to vary the cost order nisi. The cost order the plaintiff sought is that the third party do pay: (a) the defendant the costs of and occasioned by the plaintiff’s claim in this action, with certificate for two counsel for the trial, to be taxed if not agreed; and (b) to the plaintiff the costs of and occasioned by the plaintiff’s claim in this action, with certificate for two counsel for the trial, to be taxed if not agreed. In short, it is the plaintiff’s case that the third party should bear the costs of both the plaintiff and the defendant. By way of written submissions and at the hearing on 18 June 2012, the plaintiff also sought that the costs be taxed on an indemnity basis.

3. By its solicitors’ letter dated 12 June 2012, the defendant informed this court that it adopted a neutral stance to the plaintiff’s application. Accordingly, the defendant neither attended the hearing nor made any submissions.

Whether the plaintiff’s costs to be paid by the third party

4. The plaintiff relied on two grounds. First, relying on section 52A(1) of the High Court Ordinance and the authority of Edginton v Clark [1963] 3 WLR 72, the plaintiff contended that this court has jurisdiction to order the third party to pay the costs of the plaintiff, even though the plaintiff’s claim in the original action was only against the defendant and not the third party. Second, the plaintiff contended that the third party has caused this litigation and thus should bear the costs.

5. On the question of jurisdiction, the third party did not challenge the plaintiff’s contention. Nor did the third party suggest that this court has no jurisdiction to order the third party to pay the plaintiff’s costs if the circumstances warranted such an order. Having considered section 52A(1) (and if necessary also section 52A(2)) of the High Court Ordinance and Edginton v Clark [1963] 3 WLR 72 (per Upjohn LJ at pp. 726-727), I agree with the plaintiff that this court has jurisdiction to order the third party to bear the plaintiff’s costs if the circumstances warrant such an order.

6. The key issue in dispute between the plaintiff and the third party is whether this court should exercise its discretion to order the third party to pay not only the defendant’s costs but also the plaintiff’s costs of this action. The applicable test is whether the third party has caused this litigation. See: Edginton v Clark [1963] 3 WLR 72 (per Upjohn LJ at p. 729) (approving or following Hornby v Cardwell (1881) 8 QBD 329).

7. Having considered the submissions made on behalf of the plaintiff and those advanced on behalf of the third party, I agree with the plaintiff that the third party has caused this litigation. My reasons are as follows.

8. As stated in the Judgment, the dispute in this action concerns the sale and purchase of a building in Kwun Tong. The key disputes included: (1) whether the Preliminary Sale and Purchase Agreement pre-signed by the plaintiff and subsequently signed by the defendant on 2 October 2007 (“SPA”) was intended to be a legally binding contract; and (2) whether the cheque in the sum of HK$7.9 million issued by the defendant (“the Cheque”) was simply to show sincerity on the part of the defendant and was not intended to be presented by the plaintiff until the defendant had a chance to meet the plaintiff to discuss the price.

9. According to the defendant, upon Mr. Kai of the defendant expressing a strong desire to meet the plaintiff so as to persuade the plaintiff to reduce the price, the third party as agent of the plaintiff represented to the defendant as follows: (1) the plaintiff would only be prepared to meet Mr Kai of the defendant face-to-face upon Mr. Kai signing the SPA and issuing the Cheque; (2) the SPA and the Cheque would be shown to the plaintiff only for the purpose of demonstrating Mr Kai’s sincerity; (3) the SPA would not be treated as effective, and the Cheque would not be presented (“the Sincerity Representation”) (see para. 18 of the Judgment).

10. In my Judgment, I found that the defendant’s case on the Sincerity Representation is inherently probable (see para. 57 to 70 of the Judgment). I found as a fact that: (1) the third party did make the Sincerity Representation before Mr Kai signed the SPA; (2) the defendant did rely on the Sincerity Representation when Mr Kai signed the SPA and issued the Cheque; (3) the SPA as signed by Mr Kai was not intended to be legally binding, and that the Cheque was not intended to be passed to the plaintiff for presentation until Mr Kai had a chance to meet the plaintiff to discuss the price; and (4) the third party was well aware of the aforesaid matters (see para. 86 of the Judgment). Importantly, I stated in paragraph 94 of the Judgment as follows:

“In the present case, it is regrettable that the third party did not fully or properly perform its role as an agent. As noted above, Mr Kai gave his name card and two books on Chinese calligraphy to the third party on 30 September 2007 with a request that the same be passed to the plaintiff. Yet, the third party did not do so until 2 October 2007 when the SPA and the Cheque were also passed to the plaintiff. The third party also did not reveal the existence of the Explanatory Memorandum to the plaintiff, nor did the third party conveyed Mr Kai’s wishes to meet with the plaintiff before the Cheque should be delivered to the plaintiff. On the evidence available, the only reasonable inference to be drawn is that the third party had not handled the situation properly, which lead to the opposing perceptions of the situation on the part of the plaintiff and the defendant.”

11. It was on this basis that I held that the defendant has established its case on the Sincerity Representation and that the defendant is not liable on the Cheque (see para. 96 of the Judgment).

12. Ms Mok SC submitted that looking at the overall picture, both the defendant and the plaintiff are the victims of the third party’s conduct. In view of the findings I made in my Judgment, I agree with Ms Mok SC. But for the failings on the part of the third party, the plaintiff would have known that the defendant did not intend the SPA to be a legally binding agreement and would also have known that the Cheque was not intended to be presented until Mr Kai of the defendant had a chance to meet the plaintiff.

13. In addition to the matters stated above, Ms Mok SC for the plaintiff also pointed out that the third party filed evidence (both at the stage of the plaintiff’s Order 14 application and for the trial) denying the making of the Sincerity Representation. Such a stance adopted by the third party clearly affected the plaintiff’s assessment of its entitlement against the defendant and had caused the commencement of this action by the plaintiff against the defendant. The plaintiff did not take part in the negotiation with the defendant prior to the signing of the SPA by the defendant on 2 October 2007. The plaintiff naturally relied on the third party (being its agent at the time) as to what happened during the negotiation with the defendant, including whether the Sincerity Representation had or had not been made.

14. The third party denied that it had caused this litigation. Relying on Linfield Ltd. v Toaho Design Architects Ltd. [2006] 2 HKC 604, the third party contended that the decision to sue the defendant was that of the plaintiff and thus it should bear the costs consequence. Mr. Cooney SC argued that if the plaintiff were to succeed on this application, it would have to be shown that the plaintiff is completely blameless in bringing this action against the defendant. Indeed, Mr Cooney SC went as far as to argue that there would have to be a deliberate fraud on the part of the third party before the plaintiff could succeed in its present application.

15. I do not agree with the submissions advanced on behalf of the third party as it is inconsistent with the approach adopted in Edginton v Clark (above). Nor do I think the decision in Linfield Ltd. v Toaho Design Architects Ltd. [2006] 2 HKC 604 assists the third party’s contention. The facts of that case is very different from the facts of the present case. More importantly, it was pointed out by the Court of Appeal in Linfield’s case (at para. 6 to 11 & 46) that the third party in that case had not committed any fault which caused the plaintiff there to sue the 4^th defendant. Although not expressed as such, the substance and rationale of the Court of Appeal’s approach in Linfield’s case is similar to the one adopted in Edginton v Clark (above). For the reasons set out above, I do not think the third party can maintain that it had not caused the plaintiff’s to commence this action against the defendant.

16. The third party also argued that the Sincerity Representation was not determinative of the plaintiff’s claim because it was the plaintiff’s case that the Cheque was as good as cash. Such an argument simply can withstand scrutiny. It is true that the plaintiff’s main argument at the Order 14 stage was that the Cheque was as good as cash. However, once the defendant was granted unconditional leave to defend, it became plain that the defence of misrepresentations (especially the Sincerity Representation) was the crux of the dispute.

17. I accept that the plaintiff would have to make its own independent assessment as to whether to bring an action against the defendant. However, given the conduct of the third party before the commencement of this action and given the stance it adopted throughout the trial (i.e. the Sincerity Representation was not made), it is clear that the third party’s stance was influential in the plaintiff’s decision to start this action against the defendant.

18. In the circumstances, I agree with the plaintiff and rule that (subject to the matter discussed in paragraphs 23 to 25 below) the third party should bear the plaintiff’s costs of and incidental to this action.

19. There are three other points raised by the third party which require consideration.

20. First, the third party disputed the plaintiff’s request for a certificate for two counsel. It was pointed out that when I made the cost order nisi and directed the third party to pay to the defendant the costs of and occasioned by the third party’s defence and counterclaim, I did not grant certificate for two counsel to the defendant (see para. 105(2) of the Judgment).

21. Factually and literally, the third party’s observation about the cost order nisi is correct. However, that part of the cost order nisi has to be read in its overall and proper context; in particular, that cost order nisi directed the plaintiff to pay to the defendant the costs of and occasioned by the plaintiff’s claim with certificate for two counsel for the trial (see para. 105(1) of the Judgment). In other words, I took the view that the defendant should get costs of the trial (insofar as it concerns the plaintiff’s claim against the defendant) with certificate for two counsel, although at that stage I provisionally ordered that such costs should be paid by the plaintiff. As far as the costs concerning the third party’s defence and counterclaim (i.e. para. 105(2) of the Judgment), I say no more since the defendant has not made any application to vary that part of the cost order nisi.

22. In view of the matters set out above and considering the matters in the round, I agree it would be appropriate to vary the cost order nisi to the effect as set out in paragraph 2 of the plaintiff’s Summons (see para. 2 above) and a certificate for two counsel is appropriate.

23. Second, the third party argued that the plaintiff should bear the costs of the Order 14 application. The third party contended that the decision to pursue the Order 14 application had nothing to do with the third party.

24. In this regard, I can see the force of the third party’s argument. The question of whether to take out and proceed with an Order 14 application is a procedural decision that the plaintiff had to make. Irrespective of the stance adopted by the third party and conveyed to the plaintiff, the plaintiff would have to assessed whether the defendant’s case could or could not survive an Order 14 application.

25. After this action was commenced on 18 October 2007, the plaintiff issued its Order 14 Summons on 8 November 2007. The Order 14 application was heard before Master S. Kwang on 17 March 2008 and the defendant was granted unconditional leave to defend. The plaintiff then appealed against Master S. Kwang’s decision. The appeal was heard before A. Cheung J (as he then was) on 28 July 2008, and was dismissed on 21 August 2008. Whilst it might arguably be a matter of judgment as to whether to proceed with the Order 14 application at the initial stage and thus it would not be fair to deprive the plaintiff of the costs of the Order 14 application, the appeal against Master S. Kwang’s decision stands on a different footing. As explained in the Judgment, this case is an unusual one. Given the unusual features of this case, I take the view that the plaintiff should not have appealed against the decision of Master S. Kwang. This position is also reflected in the cost order made by A Cheung J (as he then was) when he dismissed the plaintiff’s appeal. The decision to appeal was the plaintiff’s decision and the third party should not be made responsible for the appeal.

26. Third, the third party sought to stress that the plaintiff spent a lot of time arguing numerous law points regarding dishonoured cheque. As those points failed, the third party contended that it should not be made to pay for those parts of the costs. I do not agree. Viewed in the overall context, those law points did not take up much time. The key focuses of the trial are the factual issues. In any event, bearing in mind the nature of the disputes, one cannot say that no reasonable plaintiff would have run those law points. Whilst this court has the jurisdiction and discretion to apportion costs on an issue by issue basis, I do not think it is appropriate to exercise such power in the present case.

Whether costs on indemnity basis

27. The plaintiff also sought costs on an indemnity basis.

28. The principles governing the circumstances under which the court may award costs on indemnity basis are fairly settled. Put briefly, it has to be shown that the case has some “special or unusual feature” before an award of costs on an indemnity basis is appropriate. See: (a) Town Planning Board v Society for Protection of the Harbour Ltd. (No. 2) (2004) 7 HKCFAR 114 (at para. 15); (b) Hong Kong Civil Procedure 2012, Vol. 1, para. 62/App/12 (p. 1168).

29. The basis of the plaintiff’s argument is that the third party knowingly made the Sincerity Representation, and yet did not inform the plaintiff. At one stage, Ms Mok SC for the plaintiff argued that the third party’s conduct was fraudulent or reckless.

30. The third party, on the other hand, disagreed that such a feature was sufficient to constitute “special or usual feature” which merits an award of costs on indemnity basis. The third party stressed that there is no express finding of fraud against the third party in the Judgment.

31. Although I did initially find the plaintiff’s argument attractive and whilst this case may be close to one which may well attract costs on an indemnity basis, I at the end come to the conclusion that the matters relied on by the plaintiff are not sufficient to constitute “special or usual feature” which warrant an award of costs on an indemnity basis. In short, whilst I have no doubt that the third party was responsible for causing this litigation, I do not think its conduct, when viewed as a whole, was culpable to the extent of warranting an order of costs on an indemnity basis. I give the third party the benefit of doubt that it might not fully appreciate the serious implications or consequences of its failings. In the circumstances, I do not think it is appropriate to order costs against the defendant on an indemnity basis.

Conclusion

32. To conclude, I order that the cost order set out in paragraph 105(1) of the Judgment be varied to read as follows: “the third party do pay: (a) to the defendant the costs of and occasioned by the plaintiff’s claim in this action, with certificate for two counsel for the trial, to be taxed if not agreed; and (b) to the plaintiff the costs of and occasioned by the plaintiff’s claim in this action (save and except the costs of and occasioned by the plaintiff’s appeal against the Order of Master S Kwang dated 17 March 2008 which was heard before A Cheung J (as he then was) on 28 July 2008), with certificate for two counsel for the trial, to be taxed if not agreed”. (For the avoidance of doubt, I shall add that I make no variation to the cost order set out in paragraph 105(2) of the Judgment as no application has been made by the defendant. That part of the cost order shall therefore become absolute.)

33. As discussed and agreed at the end of this hearing, the costs of this application should follow the event. I therefore also order that the third party do pay to the plaintiff the costs of and occasioned by the plaintiff’s Summons dated 7 June 2012, with certificate for two counsel, to be taxed if not agreed.

34. Lastly, I thank counsel on both sides for their able assistance.

HCA 2192/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2192 OF 2007

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J U D G M E N T

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1. This is an unusual case. It is a dispute concerning the sale and purchase of an industrial building in Kwun Tong, Kowloon. The action started off as a claim for dishonoured cheque. The plaintiff had previously applied for summary judgment for the amount represented by the dishonoured cheque, but the defendant was granted unconditional leave to defend due to the unusual features of the dispute. Pursuant to an Order made by Master Ho dated 24 August 2009, the third party also participated in this trial.

A.  THE PROTAGONIST

2. The plaintiff, a property holding company, was at all material times the registered owner of the industrial building situated at No 82 Hung To Road, Kwun Tong, Kowloon (“the Building”).  The directors of the plaintiff at the time were Ms Lau Wai Kuen, Goretti (“Ms Lau”), her father (who had unfortunately passed away before the trial) and her brother.  Ms Lau’s late father was the person who made decision at the time, but Ms Lau was involved in this matter as she (together with a Ms Chung referred to below) assisted her late father in this matter.  Apart from being a director of the plaintiff, Ms Lau was involved in the family textile business and also took up various public duties concerning textile and environmental protection.

3. The defendant was at all material times a company with business and investment in Hong Kong and in various parts of Mainland China.  It ran various factories which manufactured electrical appliances.  The key person behind the defendant was a Mr Kai Yau Ming (“Mr Kai”).

4. Apart from being a businessman, Mr Kai has a keen interest in Chinese culture including Chinese calligraphy and painting.  At the material time, Mr Kai held the chairmanship of numerous Chinese arts and calligraphy bodies.  He was also the Vice-Director of the Culture, History and Learning Sub-Committee of the National Committee of the Chinese People’s Political Consultative Conference (“CPPCC”), and Fellow of the Calligraphy and Painting Faculty of the Chinese Culture and History Research Institute.  In 2007, Mr Kai published a collection of Chinese calligraphy containing selected Chinese calligraphy works of his.  Further, Mr Kai received various recognition of his achievement and contribution to the community of Hong Kong and Mainland China.  Amongst others, he was awarded the Hong Kong SAR BBS Bauhinia Award in 2000 by the Hong Kong Government, and was appointed a member of the National Committee of the CPPCC in 2005.

5. In this action, the plaintiff placed emphasis on the fact that Mr Kai was a seasoned businessman and had experience in purchasing landed properties in Hong Kong.  As I understand, the defendant and Mr Kai did not dispute such a fact highlighted by the plaintiff.  In any event, on the evidence before this court, there is no doubt that Mr Kai was a very successful business with experience in acquiring landed properties in Hong Kong.  In fact, the same can also be said of the plaintiff. According to the evidence of Ms Lau, the plaintiff or her father (as well as she herself) was also very experienced in the acquisition of landed properties in Hong Kong.

6. The third party was and is a well-known estate agency in Hong Kong.  The staff members of the third party involved in this matter included Ms Irene Ngai (“Ms Ngai”), Mr Choi Wing Cheung, Kent (“Mr Choi”) and Mr Chang Chung Hei, Kinson (Mr Chang”).  Mr Choi and Mr Chang were then respectively the Deputy Sales Director and Manager of the Industrial and Commercial Property Department of the third party.  Ms Ngai, on the other hand, was the key person dealing with the plaintiff.

7. As will be dealt with below, one question concerning the third party is whether it was the estate agent of the plaintiff only, or whether it was the estate agent acting for both the plaintiff and the defendant. According to the plaintiff: (1) the third party acted for both the plaintiff and the defendant for the sale and purchase of the Building; (2) Ms Ngai acted as the plaintiff’s agent for the sale of the Building, whereas Mr Choi and Mr Chang acted as the defendant’s agent for the purchase of the Building (see paragraph 4 of the Amended Reply).

B.  THE PLAINTIFF’S CASE

8. As noted at the outset, the plaintiff’s claim is one for dishonoured cheque (“the Cheque”) for the amount of HK$7.9 million which was issued in the context of the sale and purchase of the Building.  Putting aside its answer to the defendant’s defence (which will be dealt with below), the essential facts relied on by the plaintiff in support of its claim are relatively straightforward and can be summarized as follows.

9. Since around late 2006, the plaintiff had put up the Building for sale and various estate agents including the third party were retained. However, the intended sale had not been successful.  By a written sole agency agreement in Chinese dated 5 September 2007, the plaintiff appointed the third party as the sole or exclusive agent for selling the Building for the period from 5 September to 5 October 2007.  According to Ms Lau of the plaintiff, her father found Ms Ngai “very aggressive” and that was why the plaintiff agreed to appoint the third party as the sole agent.  As far as the plaintiff was concerned, Ms Lau and her father only dealt with Ms Ngai of the third party.  On this basis, it is the plaintiff’s case that only Ms Ngai was acting as the plaintiff’s agent, whereas Mr Choi and Mr Chang acted as agent for the defendant.

10. The plaintiff signed an undated Preliminary Sale and Purchase Agreement (“SPA”), which was the standard form agreement of the third party.  The SPA stated, amongst others, that the price for the Building was HK$158 million, and that it was only valid until 5 October 2007 (ie the last date of the sole agency granted to the third party).  Further, not only did clause 4 of the SPA state that the Building was to be sold subject to tenancy, the part in clause 4 concerning vacant possession was deleted and there was a schedule to the SPA setting out certain particulars of the then existing tenancies.

11. On around 2 October 2007, the SPA as signed by the defendant together with the Cheque were delivered to the plaintiff.  The plaintiff took the view that the SPA was a valid and legally binding agreement whereby the plaintiff agreed to sell and the defendant agreed to purchase the Building at the price of HK$158 million.  As regards the Cheque, the plaintiff took the view that it was for payment of the initial deposit for the purchase of the Building.  The plaintiff acknowledged receipt of the Cheque by countersigning on the SPA, and presented the Cheque on the same date.  However, the Cheque was dishonoured with “Refer to Drawer” as the reason for dishonour.  On 4 October 2007, the plaintiff presented the Cheque again.  However, the Cheque was dishonoured again with instructions to “Refer to Drawer, present after 8 October 2007”.  The plaintiff presented the Cheque yet again on 8 October 2007.  Again, the Cheque was dishonoured and the plaintiff was informed that payment was countermanded by the drawer.

12. By a letter dated 10 October 2007 from its solicitors Messrs Y T Chan & Co to the defendant, the plaintiff complained that the Cheque was dishonoured and demanded payment.  After the defendant’s reply by a letter dated 15 October 2007, the plaintiff commenced this action for the sum of HK$7.9 million against the defendant.

C.  THE DEFENCE

13. The defendant did not in any way dispute the signing of the SPA or the issue of the Cheque.  However, the defendant contended that the SPA was not legally binding and that there were misrepresentations by the third party as agent of the plaintiff.  The defendant’s case can be summarized as follows.

14. At the time when the plaintiff was putting up the Building for sale, Mr Kai was looking for a place to set up an exhibition centre for promoting Chinese art and culture including Chinese calligraphy (“the Purpose”).  According to the defendant, once this news went out, various estate agents approached Mr Kai or his staff with a view to introducing premises to Mr Kai.  Amongst others, Mr Choi and Mr Chang of the third party approached Mr Kai’s secretary, a Ms Li Suet Yin (alias Li Yick Lam) (“Ms Li”) on 20 September 2007, representing to her that the Building was available for sale at the price of HK$160 million.

15. According to the defendant, there were site inspections and meetings during the period from 20 September 2007 to 28 September 2007 (save that Mr Kai was in Beijing during the period from 23 to 26 September 2007 and hence no real negotiation took place when he was not in Hong Kong).

16. During these inspections and meetings, Mr Kai expressed the view that the asking price of HK$158 million for the Building was too high and requested to meet the plaintiff face-to-face so that he could negotiate with the plaintiff to reduce the price.

17. As was accepted by Mr Chang in his testimony, Mr Kai gave his name card and two books on Chinese calligraphy to Mr Chang at their meeting after the first visit to the Building on 20 September 2007.  Mr Kai also told Mr Chang that his purpose of buying the Building was to establish an exhibition centre for Chinese art and calligraphy.  As the purpose of buying the building was a charitable or non-profit one, Mr Kai expressed a strong desire to meet the plaintiff so as to persuade the plaintiff to reduce the price.

18. Mr Choi and Mr Chang, asserted the defendant, made the following representations to the defendant in the course of the negotiations leading up to the signing of the SPA and the issue of the Cheque on 29 September 2007:

(1)  The plaintiff, owned by an elderly gentleman in his eighties (ie Ms Lau’s late father), would only be prepared to meet Mr Kai face-to-face upon Mr Kai signing a preliminary sale and purchase agreement (which turned out to be the SPA) and issuing a cheque for the initial deposit (which turned out to be the Cheque).  The SPA and the Cheque would be shown to the Plaintiff only for the purpose of demonstrating Mr Kai’s sincerity.  The SPA so signed would not be treated as effective, and the cheque so issued would not be presented (“the Sincerity Representation”).

(2)  Vacant possession of the Building could be given at the time of completion (“the Vacant Possession Representation”).

(3)  The Building was fit for the Purpose (“Fit for Purpose Representation”).

19. Of these representations (collectively the “Representations”), it is the defendant’s case that the Sincerity and Fit for Purpose Representations were made orally (see paragraphs 2(d)(ii) and 2(f) of the Defence), whereas the Vacant Possession Representation was made by conduct (see paragraph 2(g)(iii) of the Defence).

20. Apart from the signing of the SPA (ie the one already pre-signed by the plaintiff) and the issue of the Cheque at a meeting with Mr Choi and Mr Chang at Mr Kai’s office on 29 September 2007 (a Saturday), the defendant stressed that, at the same meeting on 29 September 2007 and at the request of Mr Kai, Mr Choi and Ms Li signed a document in Chinese (“志成國際(集團)有限公司關於購買鴻圖道82號安達工業大廈的情況說明”) dated 29 September 2007 (“Explanatory Memorandum”).  The relevant parts of this Explanatory Memorandum read as follows:

“1. 本公司開出恒生銀行373725#支票，金額$7,900,000（柒佰玖拾[萬]元正）該支票只作購買關於購買鴻圖道82號安達工業大廈的預付訂金專款專用，不可作其他用途。

2. 據了解，該業主曾委託多間地產商出售該處物業，根據慣例，購買雙方在成交後都須支付1%的佣金給中介人。因該物業的業主售價太高，我們買方已感到困難，因此，該物業如能完成交易，我方只能擔負0.5%的佣金。

3. 本公司要求能儘早與業主見面，具體商討有關購買事宜。

4. 此支票僅用於該大廈出售價港幣1.58億方為有效。

5.  交票日期2007年9月29日，若超過30天不成功，需於10天內退票。”

The English translation is as follows:

“1. Our Company issued a cheque drawn on Hang Seng Bank with number 373725 in the sum of $7,900,000 (Seven million and Nine hundred thousand dollars only). That cheque is only to be used for payment of the deposit in the purchase of On Tat Factory Building at 82 Hung To Road and cannot be used for any other purpose.

2. As understood, the vendor had appointed a number of estate agencies to sell the Building. According to the common practice, the vendor and the purchaser shall each pay 1% as commission to the agent after completion. Since the price of the Building asked by the vendor is far too high, we the purchaser have found it difficult, thus if the transaction of the Building can be concluded, we can only afford 0.5% as commission.

3. Our Company requests to see the vendor as soon as possible, to specifically discuss the matters in relation to the purchase.

4. This cheque is only to be used and valid for the sale of the Building at the asking price of HK$158,000,000.

5.  The cheque was handed over on 29 September 2007, if the transaction is not successful after 30 days, the cheque shall be returned within 10 days.”

21. According to the defendant, Mr Kai signed the SPA and the Cheque on behalf of the defendant in reliance on the Representations and that the Explanatory Memorandum was made so as to ensure that the Cheque would not be passed to the plaintiff until Mr Kai had a chance to meet the plaintiff face-to-face to discuss the price.  On this basis, it is the defendant’s case that the SPA was signed with no intention to be legally bound (see paragraph 2(i)(iv)(2) of the Defence) and that Mr Kai reiterated to Mr Chang and Mr Choi at the meeting on 29 September 2007 that the Cheque “should not be handed over to the plaintiff” (see paragraph 2(i)(v) of the Defence).

22. Further, after having obtained the Explanatory Memorandum, Mr Kai was still concerned about the situation.  Mr Kai through his secretary Ms Li asked the estate agents to return to his office on the morning of 2 October 2007 (which was the first working day after 29 September 2007) and asked Mr Choi to make an endorsement on the back of the Cheque.  Mr Choi acceded to Mr Kai’s request and made the following endorsement (“Endorsement”) on the back of the Cheque:

“1. 該支票只作購買關於購買鴻圖道82號安泰工業大廈。

2. 此支票僅用於該大廈出售價港幣1.58億方為有效。

3.  此支票若超過30天不成功，需於10天內退票。”

The English translation is as follows:

“1. The cheque is only for the purchase of On Tai Factory Building, 82 Hung To Road.

2. This cheque is only to be used and valid for the sale of the Building at the asking price of HK$158,000,000.

3.  This cheque, if not successful after exceeding 30 days, shall be returned within 10 days.”

23. According to the defendant, the purpose of the Endorsement was to ensure that “the Cheque would not be presented” (see paragraph 2(k) of the Defence).

24. As Mr Kai did not at the time have a chance to meet the plaintiff, the Cheque was not honoured on 2 October 2007.  As Mr Kai was told that a meeting with the plaintiff could be arranged on 8 October 2007, Mr Kai informed the bank that the Cheque would be hold up until 8 October 2007.  This was the reason why when the Cheque was presented again by the plaintiff on 4 October, the plaintiff was informed by the bank: “Refer to Drawer, present after 8 October 2007”.  Mr Kai, however, was not happy with the presentation of the Cheque by the plaintiff before he had a chance to meet the plaintiff to discuss the price.  Following a meeting on 5 October 2007 during which he was told that the sale and purchase of the Building was reported in an article published in the Hong Kong Economic Times on that day, Mr Kai was very unhappy about the situation.  Mr Kai took the view that the third party released the information to the Hong Kong Economic Times so as to put pressure on the defendant to purchase the Building.  Mr Kai felt that he was deceived and decided not to buy the Building.  Accordingly, Mr Kai instructed his staff to countermand the Cheque.

25. Instead of buying the Building, the defendant purchased units in another building known as Wah Shing Centre on 8 October 2007 for the purpose of establishing the exhibiting centre.  The exhibition centre was eventually established at the units at Wah Shing Centre.

D.  THE RESPONSE OF THE PLAINTIFF AND THE THIRD PARTY

26. The plaintiff asserted that it was not aware of the making of the Representations as the negotiations with the defendant were conducted through the third party.  According to the plaintiff (as can be seen from the cross-examination of Ms Ngai by the plaintiff’s leading counsel), the third party never told the plaintiff the background of Mr Kai or his intention to buy the Building for the purpose of establishing an exhibition centre for displaying Chinese art and calligraphy.  Further, it is the plaintiff’s case (which is not disputed by the third party) that it only became aware of the Explanatory Memorandum on around 18 October 2007 (ie after the plaintiff’s solicitors received the defendant’s letter dated 15 October 2007 on 18 October 2007).  The plaintiff regarded the Explanatory Memorandum as a matter solely between the defendant and the third party.  As regards the Endorsement on the back of the Cheque, the plaintiff took the stance that the conditions set out in the Endorsement did not add anything to the SPA as the plaintiff was happy to sell the Building at the price of HK$158 million.

27. Further, it is the plaintiff’s case that the third party in any event did not have authority to make any of the Representations.  The plaintiff also relied on clause 18 of the SPA, which provided that the SPA “superseded all prior negotiations, representation, understanding and agreements of the parties”.

28. The third party denied the making of the Representations, and also contended that the SPA was legally binding.  In other words, it was also the stance of the third party that the defendant was in breach of the SPA in that it failed to complete the purchase of the Building.

29. Although it was accepted that Mr Kai did pass to Mr Chang his business card and the two books on Chinese calligraphy on 20 September 2007 and asked the third party to pass them on to the plaintiff, the third party acknowledged that the same were not passed on to the plaintiff until 2 October 2007.  However, according to Ms Ngai, she informed Ms Lau’s father of the background of Mr Kai on 20 September 2007 but was told that the plaintiff was not interested in the background of Mr Kai and that the plaintiff would not reduce the price.  According to Mr Chang, the Explanatory Memorandum was only to confirm the amount of commission payable to the third party.

30. On the above basis, the third party counterclaimed against the defendant the sum of HK$2,370,000 being unpaid commission under clause 12 of the SPA.

31. At the trial, both the plaintiff and the third party placed emphasis on the fact that the defendant purchased units in Wah Shing Centre on 8 October 2007.  In short, the plaintiff and the third party sought to suggest that the defendant changed its name and thus countermanded the Cheque.

E.  THE ISSUES

32. In view of the dispute between the parties, the first and most important key issue that calls for consideration is whether the Sincerity Representation was made by the third party on behalf of the plaintiff which induced the signing of the SPA and the issue of the Cheque by the defendant.  In other words, the most important question in this action is whether or not the SPA was intended to be a legally binding agreement.  If the defendant successfully established its case on the Sincerity Representation and demonstrated that the SPA as signed by Mr Kai on behalf of the defendant was not intended to be a legally binding agreement, the plaintiff’s claim on the Cheque fails and so will the third party’s claim against the defendant.

33. On the other hand, if the defendant failed to establish its case on the Sincerity Representation, that would mean that the SPA was a legally binding agreement and the Cheque was issued for payment of the initial deposit.  In such a scenario, unless the defendant could successfully establish its case on the Vacant Possession Representation or the Fit for Purpose Representation, the plaintiff’s claim as well as the third party’s claim against the defendant should be upheld.

G.  THE WITNESSES

34. A large part of the present dispute is factual in nature.  In particular, the question of whether the Representations were made is a fact-sensitive question.  Accordingly, credibility and reliability of witnesses is one of the issues that calls for consideration.  However, since the third party acted as the agent in the negotiations leading to the execution of the SPA and there was no direct communication or meeting between the plaintiff and the defendant prior to the signing of the SPA on 29 September 2007, the most crucial question is whether the defendant’s version of events is to be accepted or whether the court should accept the third party’s version of events.  Needless to say, this court has to consider the inherent probability of the parties’ cases and also test the witnesses’ testimonies against the contemporaneous documents as well as their contemporaneous conduct.

35. Given the nature of the plaintiff’s claim and the lines of defence relied on by the defendant, the trial started with the defendant’s witnesses after Mr Fung SC’s opening.  The defendant called two witnesses, namely, Mr Kai and his daughter Ms Kai Ngan Ping (“Ms Kai”).

36. At the time of the trial, Mr Kai was 73-year-old.  His oral testimony was largely in line with his witness statements.  There are areas in Mr Kai’s testimony that are less than clear or even not entirely consistent with his previous affirmation or witness statements.  However, having considered his evidence as a whole (including the inherent probability of the defendant’s case, the contemporaneous documents and the parties’ contemporaneous conduct, which will be discussed below), I have no doubt that Mr Kai tried his very best to tell what he believed and understood to have happened at the time.  The unsatisfactory areas of Mr Kai’s testimony was, in my view, due to his old age and his subjective perception of the events that he narrated.  On the whole, notwithstanding there are unsatisfactory areas in Mr Kai’s testimony, I find Mr Kai an honest witness. In particular, for the reasons set out below, I have no hesitation in accepting Mr Kai’s evidence concerning the making of the Sincerity Representation by the third party.

37. Ms Kai’s testimony is very brief and peripheral to the real issues in dispute.  She was not involved in the material events surrounding the execution of the SPA and the issue of the Cheque.  I do not think her evidence affects the determination of this dispute one way or another. In any event and insofar as may be necessary, I also accept Ms Kai’s evidence.

38. Mr Kai’s secretary, Ms Li, had made two witness statements but did not testify at this trial.  However, I do not think any adverse inference should or could be drawn against the defendant.  Ms Li only assisted Mr Kai in the intended purchase of the Building.  The key or material communications with the third party was covered by Mr Kai’s testimony.  While different party or counsel might make a different decision in a similar circumstances, I do not think the defendant’s decision not to call Mr Li can be faulted.

39. The plaintiff called two witnesses, namely, Ms Lau and Ms Chung Yee Kam, Joy (“Ms Chung”) (who was at the time a staff of the plaintiff assisting Ms Lau’s father).

40. As noted above, neither Ms Lau nor Ms Chung dealt with Mr Kai or his secretary directly.  Instead, they essentially only dealt with Ms Ngai directly, although they had met Mr Choi as well.  As a result, neither of them took part in the discussions between Mr Chang and Mr Choi on the one part and Mr Kai or his secretary on the other.  Hence, although reflective of the contemporaneous conduct of the plaintiff and also the plaintiff’s perception of the matter, their testimonies are not particularly material in resolving whether the Representations were made.

41. As will be further discussed below, their testimonies’ key relevance to the resolution of this dispute is only twofold.  First, the third party did not show the Explanatory Memorandum to the plaintiff at the time.  According to Ms Lau (which I accept), the plaintiff only became aware of the existence of the Explanatory Memorandum on around 18 October 2007 (ie after the defendant sent its letter dated 15 October 2007, which was, as the receipt chop shown, received by the plaintiff’s solicitors Messrs Y T Chan & Co on 18 October 2007).  Second, if the Sincerity Representation was made by the third party as the defendant asserted (an issue which will be considered below), the plaintiff was not informed of it by the third party.  Besides, notwithstanding Mr Kai’s express request to the third party, the name card and the two books on calligraphy were only passed to the plaintiff on 2 October 2007 (ie on the same occasion when the SPA and the Cheque were passed to the plaintiff).

42. Although there are areas in Ms Lau’s evidence which were not entirely satisfactory (such as her evidence in respect of her reaction to the Endorsement or the Explanatory Memorandum, and also the repeated assertion that only Ms Ngai acted for the plaintiff despite the third party, as opposed to Ms Ngai, was appointed as the plaintiff’s sole agent), I do not think Ms Lau deliberately sought to tailor her evidence to suit her case.  Instead, I think Ms Lau was affected by her perception of this matter, which in turn was largely caused by what the third party had or had not informed her at the time.

43. I should add that a Mr Wong Hun Fat had also made a witness statement for the plaintiff but was not called to testify at this trial. This Mr Wong was one of the founder of Regent Chain Company Limited, which was at the time one of the plaintiff’s tenants at the Building.  His witness statement dealt with matters which might have an impact on the Vacant Possession Representation.  Like the case of Ms Li, I do not think any adverse inference should or could be drawn notwithstanding the plaintiff’s decision not to call Mr Wong to testify at this trial.

44. Further, I should mention another matter concerning witnesses for the sake of completeness.  The plaintiff’s solicitors had issued Writs of Subpoena Duces Tecum on Ms lau Yuen-ling, Ms Lai Wai-lin and Mr Wong Wai Kwong of Hang Seng Bank Ltd on 17 March 2011 and on Ms Virgie Lee of Standard Chartered Bank (Hong Kong) Ltd on 11 April 2011, requiring them to attend court at this trial to give evidence on behalf of the plaintiff.  By a letter dated 16 May 2011, the plaintiff’s solicitors Messrs Vincent T K Cheung, Yap & Co informed this court that the plaintiff had reconsidered the matter and took the view that it would not be necessary to call any of those witnesses.  By the same letter, the plaintiff applied for directions that those witnesses be excused from attending this trial.  The plaintiff’s application was granted on the same date by this court, as none of those witnesses was necessary in view of the issues in dispute.  Accordingly, none of those witnesses from the two banks attended this trial.

45. The third party called three witnesses, namely, Ms Ngai, Mr Choi and Mr Chang (who left the third party at the end of 2009).  For reasons dealt with below, I have serious reservation about the reliability or credibility of these three witnesses.  In particular, I have grave reservation about the key aspect of the testimonies of Mr Choi and Ms Ngai.  Hence, insofar as their testimonies conflicts with those of Mr Kai or Ms Lau, I prefer those of Mr Kai and Ms Lau instead of those of Ms Ngai, Mr Choi or Mr Chang.

H.  ADMISSIBILITY OF EVIDENCE

46. In its pleadings and also at this trial, Ms Mok SC leading Mr Lee Tung Ming for the plaintiff challenged the admissibility of the evidence relied on by the defendant to show that the Cheque was only issued to show sincerity.  In support of its challenge, the plaintiff relied on a long line of authorities dealing with the application of the parol evidence rule in the context of cheque.  These authorities include: Great Sincere Trading Co Ltd v Swee Hong & Co [1968] HKLR 660; S Y Chan Ltd v Choy Wai Bor [2001] 3 HKLRD 145; Lam Tai Kwan v Lo Wai Kit [2007] 1 HKLRD 367; Prosperity Lamps & Components Ltd v Rotegear Corp Ltd [2000] 2 HKC 638; Man Sun Finance (International) Corporation Ltd v Wong Kwan-man [1982] HKLR146; Hoven International Ltd v Mass Resources Development Ltd [1997] 1 HKC 38; Lin Hsien Tseng v So Sin Mui Bonnie [2002] 4 HKC 532; Suen Ho Sun v Kamenar International Ltd [1989] 1 HKC 135; Hongkong Chinese Bank Ltd v Delon Photo & Hi-Fi Centre Ltd [2000] 3 HKC 71.

47. Having considered the submissions made by the parties, I do not agree with the submissions made by the plaintiff in this regard.  In my view, the defendant was entitled to adduce and rely on evidence (including the Explanatory Memorandum, the Endorsement and the oral testimony of Mr Kai) to show that the SPA was not intended to be legally binding, and that the Cheque was not intended to be delivered to the plaintiff or presented for payment.  My reasons are as follows.

48. Properly analyzed, all the authorities relied on by the plaintiff were decided on the basis of the parol evidence rule.  Shortly put, the parol evidence rule means that if there is a written contract, oral or extrinsic evidence is not admissible to vary the terms of the contract.  This rule has been justified on the ground that it upholds the value of written proof, effectuates the finality intended by the parties in recording their contract in written form and eliminates great inconvenience and troublesome litigation in many instances.  See: Chitty on Contracts, 30^th edn, Vol 1, para 12-096.

49. However, the parol evidence rule only applies when the terms of the parties’ agreement are wholly contained in the written contract but not otherwise See: Chitty on Contracts, 30^th edn, Vol 1, para 12-098.  This is the reason why the parol evidence rule does not apply if the intention to adduce extrinsic evidence (whether oral or in other forms) is to show, amongst others, that: (1) there is no contract between the parties; (2) there was no consideration or failure of consideration; (3) the contract was only a conditional contract; or (4) the true nature of the agreement.  See: Chitty on Contracts, 30^th edn, Vol 1, para 12-106, 12-108, 12-109 and 12-113.

50. In the context of a cheque, section 21 of the Bills of Exchange Ordinance is also relevant.  Section 21 provides as follows:

“(1) Every contract on a bill, whether it is the drawer’s the acceptor’s or an indorser’s, is incomplete and recoverable, until delivery of the instrument in order to give effect thereto:

Provided that where an acceptance is written on a bill, and the drawee gives notice to or according to the directions of the person entitled to the bill that he has accepted it, the acceptance then becomes complete and irrevocable.

(2) As between immediate parties, and as regards a remote party other than a holder in due course, the delivery –

(a) in order to be effectual, must be made either by or under the authority of the party drawing, accepting, or indorsing, as the case may be;

(b) may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill;

but if the bill is in the hands of a holder in due course, a valid delivery of the bill by all parties prior to him, so as to make them liable to him, is conclusively presumed.

(3)  Where a bill is no longer in the possession of a party who has signed it as drawer, acceptor, or indorser, a valid and unconditional delivery by him is presumed until the contrary is proved.”

51. By reason of section 21 of the Bills of Exchange Ordinance, it may be shown that delivery of a cheque was conditional or for a special purpose only, and not for the purpose of transferring the property in the bill.  In other words, it may be shown that the delivery was in escrow (ie that the instrument was to be delivered so as not to take effect as a bill until a certain condition should have been fulfilled).  See: Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes, 17^th edn, para 2-152.

52. As regards admissibility of evidence, the learned authors of Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes, 17^th edn, explained as follows (para 2-153):

“The defect in delivery may be established by oral evidence. The parol evidence rule ... does not apply. This is in conformity with the common law which admits oral evidence to show that what purports to be a written contract is no contract at all or to prove an agreement that a written contract is not to come to operation until a certain condition is fulfilled.”

(See also para 2-154 to 2-159, which explain further the circumstances where the parol evidence rule does not apply in the context of cheque.)

53. In the present case, if the defendant’s case is upheld, the SPA should clearly be read together with the Explanatory Memorandum and the Endorsement.  If follows that the SPA alone did not contain the entire agreement, if any, between the parties.  Besides, due to the Sincerity Representation, if the defendant’s case is upheld, the SPA was not intended to be an unconditional or binding agreement, nor was the Cheque intended to be passed on to the plaintiff for payment.  In the circumstances, the situation is no different from a party seeking to assert that a written document purporting to be a contract is not a contract or is only a conditional contract but the condition has not been fulfilled.  As shown by the authorities discussed above, the parol evidence rule does not apply in such circumstances.  Accordingly, I am of the clear view that that the evidence sought to be relied on by the defendant in this regard is admissible. 

54. Before leaving this issue, I would add this.  The authorities relied on by the plaintiff (see paragraph 46 above) are well established.  The above conclusion, however, does not in any way affect the principles expounded in those authorities.  Nor is the intention of this court to suggest that those authorities were wrongly decided.  The conclusion stated above is only a conclusion on the unusual facts of this case.  In none of the authorities relied on by the plaintiff were there documents or endorsement similar to the Explanatory Memorandum or the Endorsement on the back of the Cheque.

I.  THE SPA AND THE CHEQUE – WHETHER LEGALLY BINDING

55. The question of whether there was an intention to be legally bound by the SPA and the issues concerning the Cheque are clearly inter-related.  If there was an intention to be legally bound, it is difficult to see how the defendant’s case in respect of the delivery of the Cheque can succeed.  On the contrary, if there was no intention to be legally bound, it is difficult to see how there would be an effective delivery of the Cheque. An alternative way of putting it is this: if the defendant or Mr Kai did not intend that the Cheque should be delivered to the plaintiff until he had a chance to meet the plaintiff and discuss the matter, it is unlikely that there was an intention to be legally bound by the SPA.

56. In considering this question, I bear in mind that parties signing contracts or documents of a contractual nature in a commercial context are generally regarded to have signed the same with an intention to be legally bound.  Not only does the defendant in this case bear the burden of showing that there was no intention to be legally bound, a “high degree of probability” is required.  However, where the requisite burden of proof is satisfied, the agreement will have no contractual effect.  See: Orion v Sphere Drake [1992] 1 Lloyd’s Rep 239, per Stuart-Smith LJ at pp 274-275.

I.1  Inherent probability

57. A convenient starting point for analyzing this question is the inherent probability of the parties’ case.  The key question is: in the context of this case, is it inherently probable that the estate agents would have asked Mr Kai to sign the SPA and to issue the Cheque so as to show sincerity to the plaintiff, and is it inherent probable that Mr Kai would have agreed to do so? In my view, the answer is in the affirmative.  My reasons are as follows.

58. First, the signing of the SPA and the issue of the Cheque for the purpose of showing sincerity was consistent with the practice adopted by estate agents.

59. When Mr Choi testified at the trial, he confirmed that, as far as the residential properties market was concerned, it was common for estate agents to say to interested buyer that the market was good and it would be desirable to sign a provisional sale and purchase agreement and also to issue a cheque so as to show sincerity to the vendor.  Mr Choi asserted that such a practice was “relatively few” in the industrial and commercial sector because normally the intended purchasers were companies and they would need to hold meetings before they could issue any cheque.  However, Mr Choi agreed that when the interested buyer were individuals, the said practice as in cases of residential properties could also be adopted.  This means that in cases where the interested buyer was a company controlled by an individual (like the defendant in the present case), the same practice of asking the interested buyer to sign a provisional sale and purchase agreement and to issue a cheque so as to show sincerity could be adopted.

60. Bearing this in mind and taking into account the fact that the property market in Hong Kong at the material time was going up (ie a vendors’ market), it is in my view very probable that the estate agents would have resorted to the same practice and asked Mr Kai to sign the SPA and issue the Cheque so as to show sincerity.  At the time, the property market was going well and it was a rising market.  This was confirmed at the trial and also mentioned in paragraph 30 of the Judgment dated 21 August 2008 (“O 14 Judgment”) delivered by A Cheung J (as he then was).  The price for the Building was a substantial one and understandably estate agents in the position of the third party would be very keen to conclude the deal.  Besides, the sole agency granted by the plaintiff to the third party was due to expire on 5 October 2007 and the third party was understandably eager to complete a deal as much as possible.  Since the defendant was a company controlled by Mr Kai, there was no need for the defendant to hold any board meeting or shareholders’ meeting before the defendant could be persuaded to issue a cheque.

61. Second, it is conceivable that Mr Kai was so confident in his own ability to persuade the plaintiff to reduce the asking price if he could have a chance to meet the plaintiff that he was prepared to sign the SPA and issue the Cheque.

62. Mr Kai was at the time no doubt a successful businessman.  As a successful businessman and his background as outlined above, Mr Kai naturally would have confidence in his negotiation skills.  Further, Mr Kai placed emphasis in the fact that he did not intend to acquire the Building for profit-making purpose, but for the non-profit purpose of establishing an exhibition centre which was for the purpose of promoting Chinese art and calligraphy.  Viewed thus and stepping into the shoes of Mr Kai, I accept that he at the time genuinely believed that he might be able to persuade the plaintiff to reduce the price since his reason for purchasing the Building was to organize an exhibition centre for the promotion of Chinese art.  Obviously, Mr Kai believed that this non‑commercial reason for acquiring the Building, coupled with his status and position, would be helpful in his negotiation with the plaintiff.  Had it been otherwise, Mr Kai would not have given his name card and his calligraphy book to Mr Choi and Mr Chang and asked them to pass them on to the plaintiff.

63. In this regard, it is pertinent to note that the following observations made by A Cheung J (as he then was) in his O 14 Judgment (at paragraph 37):

“it is conceivable that Mr Kai was so confident in his own ability to persuade the owner to reduce the price if only he could have a chance to see him that he was prepared to sign the [SPA] and write the [Cheque] for the initial deposit even though he found the price (namely $158 million) to be far too high. He was prepared to do so because that was the only way, so he had been told by the estate agents, for him to secure a meeting with the owner. And he sought to protect his own position by requiring the estate agents to sign the [Explanatory Memorandum] and even to bring the [Cheque] back to him a few days later to add the [Endorsement] on the back of the [Cheque].”

64. I fully appreciate that observations made in an Order 14 Judgment are primarily made for the purpose of deciding whether leave to defend should be granted and are (save possibly in the context of ruling on points of law and other instances where the doctrine of res judicata may also apply in interlocutory applications) not binding on the trial Judge when the action eventually comes to trial.  However, having considered the evidence adduced at the trial and the parties’ submissions as well as having seen Mr Kai testifying at the trial, I respectfully agreed with the above-quoted observations by A Cheung J (as he then was).

65. Third, the Explanatory Memorandum and the Endorsement on the back of the Cheque (which are contemporaneous documents) also fortify the inherent probability of the defendant’s case.  The proper interpretation of the contents of Explanatory Memorandum and the Endorsement will be dealt with below.  For the purpose of the present discussion, I would confine the analysis to the question of whether the Explanatory Memorandum and the Endorsement negative or fortify the inherent probability of the defendant’s case.

66. In the O 14 Judgment, A Cheung J (as he then was) agreed with Mr Daniel Fung SC and Mr Gary Lam (who appeared for the defendant at the Order 14 hearing and also at this trial) that this case stands out from other dishonoured cheque cases in that the defendant had prepared the Explanatory Memorandum and also made the endorsement on the back of the Cheque (paragraph 23).  Having considered the evidence on the whole, I too respectfully agree to this observation.  In particular, as noted at the outset, I do agree that this case is unusual on the facts.  More importantly, the contemporaneous documents raise a very fundamental questions: why did Mr Kai insist on having the Explanatory Memorandum and the Endorsement on the back of the Cheque?

67. In a normal sale and purchase transaction, one would not expect to see anything like the Explanatory Memorandum or the Endorsement.  Mr Chang, when cross-examined, also accepted that the Explanatory Memorandum was usual.  As stressed by the plaintiff, Mr Kai was a seasoned business and a person with experience in purchasing landed properties in Hong Kong.  Hence, one would start from the premises that Mr Kai must have a reason for making the Explanatory Memorandum.

68. Viewed thus and considering the circumstances as a whole (including the meaning of the Explanatory Memorandum and the Endorsement as discussed below), I am of the view that the only reason for making the Explanatory Memorandum and the Endorsement is that Mr Kai did not regard the SPA as binding, and that he wanted to have something in writing so as to protect the defendant before he had a chance to meet the plaintiff.  In this regard, I note that A Cheung J (as he then was) also took the same view (see the above-quoted paragraph 37 of the O 14 Judgment).  It might be that the drafting of the Explanatory Memorandum and the Endorsement is not satisfactory from a lawyer’s point of view.  However, in the context of inherent probability, it is sufficient to note that both the Explanatory Memorandum and the Endorsement were not drafted by lawyers, and that it is more relevant to consider the rationale behind the Explanatory Memorandum and the Endorsement.

69. Fourth, the circumstances concerning the making of the Endorsement on the back of the Cheque are also relevant.  If the Sincerity Representation had not been made, it was difficult to see why the third party would have agreed to bring the Cheque back to Mr Kai on 2 October 2007 (ie after the SPA was signed by Mr Kai and the Cheque already issued and handed over to the third party).  If the SPA was regarded as binding, the third party could certainly have declined on the ground that there was a done deal.  Yet, the third party did take the Cheque back and did make the Endorsement on the back of the Cheque.  Such contemporaneous conduct also supports the inherent probability of the defendant’s case.

70. Accordingly, I find that the defendant’s case in respect of the signing of the SPA and the issuing of the Cheque is inherent probable.

I.2  Proper interpretation

71. The principles of interpreting a contractual document are well established.  I believe it is only necessary to cite the following two passages to remind ourselves the key principles involved.

72. The first is the following cogent summary of the principles by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (at pp 912-913):

“... ... I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. ... ...The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. ... ...

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax ... ...

(5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.  On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. ... ...” [emphasis added]

73. The second one is the other explanation by Lord Hoffmann in Jumbo King Ltd v Faithful Properties Ltd (1992) 2 HKCFAR 279 (at p 296):

“... ... The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended. In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant. Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words. ... ... But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.” [emphasis added]

74. When deciding to grant unconditional leave to the defendant to defend the Plaintiff, A Cheung J (as he then was) observed that the plaintiff’s case at first blush looks overwhelming.  This is because paragraphs 1 and 4 of the Explanatory Memorandum are wholly consistent with the Cheque being issued for payment of the initial deposit for the purchase of the Building at the price of HK$158 million.  Further, the Explanatory Memorandum did not say that the Cheque was only issued and the SPA signed to show sincerity on the part of the defendant, or that they were never meant to be handed over to the plaintiff.  In addition, A Cheung J (as he then was) added that if the purpose of the meeting with the plaintiff was to negotiate the price, then signing the SPA and issuing the Cheque would not help the defendant bargain down the price requested by the plaintiff; nor would it show any sincerity to the plaintiff by signing the SPA and issuing the Cheque if the true intention of the defendant was to meet with the plaintiff and then ask him to reduce the price.

75. However, A Cheung J (as he then was) observed as follows in his O 14 Judgment:

“26. In my view, if what is preventing the conclusion of a binding agreement between the parties was merely the communication of the acceptance of the offer to the vendor, the period of 30 days given in paragraph 5 would seem to have been far too long. Rather, again arguably speaking, paragraph 5 seems to suggest that at the time of writing the explanatory memorandum, no binding agreement had yet been concluded, and the estate agents were given a period of 30 days to bring about the conclusion of the agreement between the parties. And when read together with paragraph 3, the way forward was to arrange a meeting between the parties as soon as possible.

27. In my view, this possible reading of the memorandum is also supported by paragraph 2. Paragraph 2 simply says that the estate agents are only to get 0.5% commission “if” the transaction can be completed (該物業如能完成交易，我方只能擔負0.5% 的佣金). Of course, here, the relevant point is the completion of the transaction (完成交易) rather than conclusion of a binding agreement. But it must be remembered that the explanatory memorandum is not a legal document drafted by lawyers. Whilst to a conveyancing lawyer, concluding a binding agreement and completing the transaction are two distinct and separate matters, it is arguable that to a layman, this distinction may not be apparent. For the purposes of deciding whether a believable story has been put forward, paragraph 2 is capable of meaning that at the time of the explanatory memorandum, no agreement had yet been concluded and therefore the obligation to pay commission was still an “if”.

28. Paragraph 2 is supportive of Mr Kai’s story in another sense. Given that the preliminary agreement has already set out the amount of commission payable to the estate agents, paragraph 2 of the memorandum is wholly redundant if there has been made a concluded agreement between the parties, or if there is going to be one subject to communication of the defendant’s acceptance to the vendor. Paragraph 2 makes much more sense if the negotiations have not yet been concluded and the purchase price is still a matter of negotiation between the parties. It provides that the estate agents’ commission from the purchaser’s side is to be at 0.5% of whatever may eventually be the purchase price after further negotiation.

29. As for paragraphs 1 and 4, paragraph 1 is, arguably, neutral enough because it simply restricts the cheque to payment of the initial deposit for the purchase of the building in question, but not the purchase of any other properties, even if they are owned by the same owner.

30. As for paragraph 4, there is an ambiguity as to whether the price $158 million is a transaction price or asking price. The Chinese term used is “出售價”, which can mean either. If it means the asking price, then paragraph 4 is not inconsistent with the defendant’s case. The cheque is given to the estate agents to show sincerity to the owner only if the owner is prepared to sell at $158 million (or less – after further negotiations with the defendant), but not if the vendor wants any higher price – after all, according to the evidence, it was a rising market then.

31. Mr Chan [leading counsel for the plaintiff at the O 14 application] contends that does not make sense. What matters is the price agreed upon by the parties after negotiation, rather than the vendor’s asking price. If the term means the asking price, there is no need to include paragraph 4 in the memorandum in the first place.

32. That is a fine point by itself, but I am not here trying the case. Nor do I find it wholly absurd to include paragraph 4 in the memorandum if “出售價” means the asking price. At the lowest, including something redundant or quite meaningless in the memorandum, merely out of abundance of caution, does not by itself turn the whole story of the defendant unbelievable. But more importantly, the asking price could conceivably be of significance to the defendant. If the vendor were to raise the asking price to one that the purchaser should find it wholly impossible to accept, there would simply be no point in meeting with the vendor to negotiate. It would be a waste of time and the purchaser might as well start looking for other properties.”

76. Having considered the contents of the Explanatory Memorandum against the background of this case and the parties’ submissions made at this trial, I come to the view that the Explanatory Memorandum did mean to say that the SPA was not legally binding and that the defendant wanted to discuss with the plaintiff the price before the deal would be regarded as a concluded deal.  My reasons are as follows.

77. First, I agree with the observations made by A Cheung J as set out in paragraphs 26 to 32 of his O 14 Judgment.  Having heard the evidence and the parties’ submissions, I am of the view that the construction contended on behalf of the defendant at the O 14 application is the correct one.

78. Second, clause 2 of the Explanatory Memorandum is important. It referred to, as noted above, “if” the transaction could be completed.  Had the defendant understood that the SPA was a legally binding one, such language would not be used.  Instead, clause 2 in my view shows that the defendant did not regarded the SPA as a legally binding agreement, and the reason for such a view on the part of the defendant was because of the Sincerity Representation.

79. Third, clause 5 of the Explanatory Memorandum is also important.  It referred to the return of the Cheque if the deal was not successful within 30 days.  Plainly clause 5 could not be referring to the completion of the sale and purchase of the Building.  Mr Kai, as the plaintiff stressed, was experienced in acquiring properties in Hong Kong.  He could not possibly have intended or understood that the whole process of the sale and purchase of the Building could be completed within 30 days as there remained the need, amongst others, to sign the formal sale and purchase agreement and the checking of title before completion could take place.  Accordingly, the reference to the 30-day period in clause 5 of the Explanatory Memorandum could only mean that the defendant wanted to have a period of 30 days to meet the plaintiff and to discuss the price.

80. Fourth, I wholly reject the third party’s contention that the Explanatory Memorandum was only intended to deal with the question of commission.  If that be the case, the same could be addressed in clause 11 of the SPA itself.  In fact, as can be seen from clause 11 of the SPA, the plaintiff (as vendor) was to pay HK$1,580,000 to the third party as commission whereas the defendant (as purchaser) was only to pay HK$790,000 to the third party as commission.  In other words, there is no question that the third party did not want the plaintiff to know that the defendant was paying less commission than the plaintiff.

81. It follows from the above that the same interpretation should also be given to the contents of the Endorsement on the back of the Cheque.  In other words, I rule that the contents of the Endorsement also show that the Cheque was not intended to be passed to the plaintiff for presentation, and that the third party (through Mr Chang and Mr Choi) was aware of this meaning.

82. Before leaving this topic, I should perhaps also add this.  At this trial, the plaintiff also sought to place emphasis on the contents of the SPA with a view to showing that the parties must have entered into a legally binding agreement.  In my view, reliance on the SPA does not really assist the plaintiff.  If the SPA was legally binding, its contents of course could be relied on.  However, if the SPA was not intended to be legally binding by reason of the circumstances it was signed (including the Explanatory Memorandum and the Endorsement), there was no point in referring to the contents of the SPA to show that it was a legally binding agreement.

I.3  The witnesses’ testimonies

83. By reason of the above analysis on the inherent probability of the defendant’s case and the meaning of the Endorsement and the Explanatory Memorandum, I accept Mr Kai’s evidence that the third party did make the Sincerity Representation before he signed the SPA.  In reaching this conclusion, I have also taken into account the letter in Chinese dated 15 October 2007 written by the defendant in response to Messrs Y T Chan & Co’s letter before action. Although the contents of that letter from the defendant are not entirely accurate when considered in light of the overall evidence, it did on the whole support the making of the Sincerity Representation by the third party and that it was a contemporaneous document before this action was commenced.

84. I would also add that during his testimony, Mr Kai was quite adamant that he was deceived.  He pointed out that he had purchased a lot of properties but this was the only occasion he was deceived.  Looking at the circumstances as a whole, one can understand the frustration felt by Mr Kai, although this frustration was more caused by the third party rather than the plaintiff.

85. In the circumstances, I reject the testimonies of Mr Chang and Mr Choi insofar as they are in conflict with that of Mr Kai in respect of the making of the Sincerity Representation.  In particular, as noted above, I find Mr Chang’s suggestion that the Explanatory Memorandum was only intended to deal with the question of commission inherently improbable. I think Mr Chang made out such an explanation with a view to explaining away the effect of the Explanatory Memorandum.

86. Accordingly, I find as a fact that: (1) the third party did make the Sincerity Representation before Mr Kai signed the SPA; (2) the defendant did rely on the Sincerity Representation when Mr Kai signed the SPA and issued the Cheque; (3) the SPA as signed by Mr Kai was not intended to be legally binding, and that the Cheque was not to be passed to the plaintiff for presentation until Mr Kai had a chance to meet the plaintiff to discuss the price; and (4) the third party was well aware of the aforesaid matters.

87. In this regard, I would add that the defendant’s purchase of units at Wah Shing Centre does not affect my above analysis.  The question of whether the Sincerity Representation was made and whether the SPA was intended to be legally bound should be considered as at 29 September 2007 (or latest 2 October 2007 when the Endorsement was made at the request of Mr Kai).  The purchase of units at Wah Shing Centre was subsequent to the signing of the SPA.  Since the SPA was not intended to be legally binding and the defendant understood it that way, I cannot see how the subsequent purchase of units at Wah Shing Centre could affect the credibility of Mr Kai or the defendant.

I.4  THE ROLE OF THE THIRD PARTY

88. The question as to whether the third party was at the time acting as the plaintiff’s agent or the defendant’s agent or both is a question of fact to be decided in the circumstances of this case.  See: Green Park Properties Ltd v Dorku Ltd [2000] 2 HKLRD 400, per Cheung J (as he then was) at pp 417J-418E.  Ms Mok SC, leading counsel for the plaintiff, confirmed during her oral closing submissions that the plaintiff did not dispute the principle as expounded in Green Park Properties Ltd v Dorku Ltd (above).

89. Applying the approach in Green Park Properties Ltd v Dorku Ltd (above), I find that the third party was acting as the agent of the plaintiff when the Sincerity Representation was made.  My reasons was as follows.

90. First, it is not disputed that the third party was at the time the sole agent of the plaintiff.  As stressed by Mr Fung SC for the defendant, it was the third party (as opposed to individual such as Ms Ngai) who was appointed as the plaintiff’s agent for the sale of the Building.  Viewed thus, I reject the plaintiff’s pleaded case that Ms Ngai acted for the plaintiff in the sale of the Building whereas Mr Choi and Mr Chang acted for the defendant in the purchase of the building.  I regard such a distinction as highly artificial and not justified on the facts of this case.

91. Second, since the SPA was not legally binding at the time, clause 11 of the SPA (whereby the parties agreed to pay commission to the third party as their agents) was not yet operative.  There was no other document whereby the defendant had appointed the third party as its agent.  Besides, as pointed out by Mr Kai in his testimony, the defendant did not approach the third party.  Rather, it was the third party who approached the defendant.

92. Third, even if the third party was at the time acting as agent for both the plaintiff and the defendant, the making of the Sincerity Representation should be viewed as having been made in the third party’s capacity as the plaintiff’s agent on top of its capacity as the defendant’s agent.  The Sincerity Representation was related to the negotiation of the price, a matter which would affect both the plaintiff and the defendant in their respective capacities as the potential vendor and the potential purchaser.

93. There remains the question of whether the third party had the requisite authority to make the Sincerity Representation.  In this regard, I have no hesitation that the answer must be in the affirmative.  As the sole agent of the plaintiff, the third party must necessarily had the implied or ostensible authority to conduct the negotiations with the defendant, which would include the making of the Sincerity Representation.

94. In the present case, it is regrettable that the third party did not fully or properly perform its role as an agent.  As noted above, Mr Kai gave his name card and two books on Chinese calligraphy to the third party on 20 September 2007 with a request that the same be passed to the plaintiff.  Yet, the third party did not do so until 2 October 2007 when the SPA and the Cheque were also passed to the plaintiff.  The third party also did not reveal the existence of the Explanatory Memorandum to the plaintiff, nor did the third party conveyed Mr Kai’s wishes to meet with the plaintiff before the Cheque should be delivered to the plaintiff.  On the evidence available, the only reasonable inference to be drawn is that the third party had not handled the situation properly, which lead to the opposing perceptions of the situation on the part of the plaintiff and the defendant.

I.5  Clause 18 of the SPA

95. As noted above, the plaintiff also relied on clause 18 of the SPA which stated that the SPA superseded “all prior negotiations, representation, understanding and agreements of the parties thereto”.  This contention on the part of the plaintiff can be disposed of briefly.  Since the SPA was not legally binding, this clause 18 could not have any effect.  The effect of the Sincerity Representation is that the entire SPA (including clause 18 thereof) would not be legally binding.

I.6  Conclusion on the Sincerity Representation

96. By reason of the aforesaid, I find and rule that the defendant has established its case on the Sincerity Representation.  It follows that the SPA was not legally binding and that the defendant is not liable on the Cheque.

J.  THE OTHER REPRESENTATIONS

97. In view of the above conclusion, it is strictly not necessary to deal with the Vacant Possession Representation or the Fit for Purpose Representation.  However, for the sake of completeness, I shall briefly deal with them below.

98. As far as the Fit for Purpose Representation is concerned, I find and rule that the defendant failed to make out its case.

99. First, on the evidence, the defendant made enquiry with the Planning Department on 27 September 2007 before signing the SPA on 29 September 2007.  This was on top of the defendant’s enquiries with other government departments.  This shows that the defendant knew that it would have to make the necessary application even before Mr Kai signed the SPA.

100. Second, more importantly, it must be obvious to the defendant that the plaintiff did not have the final say on the change of user so that the Building (being an industrial building) could be used as an exhibition centre.  Hence, whatever representation was made in this regard, I find it difficult to accept that the defendant had relied on it before Mr Kai signed the SPA.

101. Third, the defendant decided not to buy the Building and no proper application for change of user had been made.  Accordingly, no matter what perceived difficulties there might be, it was premature to say that an application for change of user would necessarily and ultimately rejected by the relevant government departments.

102. As regards the Vacant Possession Representation, I likewise find and rule that the defendant failed to make out its case.  As noted above, the SPA expressly stated that the Building was to be sold subject to tenancies.  Particulars of tenancies were included in a schedule to the SPA. Furthermore, copies of tenancy agreements were provided to the defendant before Mr Kai signed the SPA on 29 September 2007.  In the circumstances, I do not think the defendant could possibly establish that the Vacant Possession Representation had been made by conduct.

103. Furthermore, when Mr Kai testified, he said during cross‑examination to the effect that whether he would insist on vacant possession depended on the price: if the price was reduced to a level he found acceptable, he would be prepared to accept a purchase subject to tenancies; on the other hand, if the price was not reduced to a level he found acceptable, he would want vacant possession.  This goes to show that vacant possession was not that material in the defendant’s decision to purchase.  Rather, what was material to the defendant was the price.

K.  CONCLUSION & POSTSCRIPT

104. For the reasons set out above, the plaintiff’s claim against the defendant fails and I dismiss the plaintiff’s claim against the defendant.  Likewise, the third party’s claim against the defendant also fails and I also dismissed the third party’s claim against the defendant.

105. On the question of costs, I make an order nisi that: (1) the plaintiff do pay to the defendant the costs of and occasioned by the plaintiff’s claim, with certificate for two counsel for the trial, to be taxed if not agreed; and (2) the third party do pay to the defendant the costs of and occasioned by the third party’s defence and counterclaim, to be taxed if not agreed.

106. It remains for me to express my gratitude to all the counsel for their able assistance rendered at this trial.  I do not mean any disrespect to counsel even though I do not find it necessary to address each and every point they made in their closing submissions.

107. Lastly, by way of postscript, may I add this remark.  This case is an example which shows that the estate agents’ practice of suggesting a potential purchaser to sign a preliminary agreement and to issue a cheque to show sincerity may be a recipe for potential misunderstanding unless the matter is handled very well.  It is time for estate agents to reconsider whether such a practice should be continued, and if yes, how such practice should be carried out properly so as to avoid any unnecessary or potential misunderstanding.

HCA 2192/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2192 OF 2007

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J U D G M E N T

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1.  This is the plaintiff’s appeal from the decision of Master S Kwang refusing its application for summary judgment and giving the defendant unconditional leave to defend.

2.  The plaintiff sues on a dishonoured cheque for $7.9 million.  It says the cheque was given by the defendant for payment of the initial deposit for the sale and purchase of an old industrial building in Kwun Tong, which is owned by the plaintiff.  The price was $158 million, and the initial deposit was 5% of that price.

3.  The plaintiff relies on a preliminary sale and purchase agreement dated 29 September 2007 and signed by both sides in support of its case.  The preliminary agreement clearly sets out the parties, the property, the total purchase price, the various deposits to pay, the payment and receipt of the initial deposit (by the subject cheque) as well as some additional terms.  Two estate agents in the employ of Centaline Property Agency Limited were responsible for bringing the parties together to the deal.

4.  The defendant’s case, which is given by its controlling director and shareholder, Mr Kai Yau Ming, is quite different.  Mr Kai is no doubt a successful and seasoned businessman, who is also greatly dedicated to promoting Chinese culture, particularly Chinese calligraphy and painting.  In 2007, he wanted to buy suitable premises in Kwun Tong for holding art and culture exhibitions.  The two estate agents introduced the subject industrial building to him for consideration.  Mr Kai had a site visit of the building and was generally interested.  But he wanted to meet with the vendor (or more correctly, the person owning and controlling the vendor company) for face-to-face negotiations.

5.  The agents told him that the “owner” was an elderly gentleman in his eighties, and he was not prepared to meet with potential buyers for negotiation unless it was really a keen and sincere potential buyer.

6.  At that time, the asking price for the building was $160 million, which Mr Kai found to be way too high; a bank valuation had put the property at around $110 to $120 million.  But the owner appeared to be quite firm on the price.  The asking price was only nominally reduced from $160 million, first to $159.8 million, and then to $158 million, after negotiations through the agents.

7.  This made Mr Kai even more eager to meet with the owner to negotiate with him face-to-face about the price.  The agents told him, however, that he should first sign a preliminary sale and purchase agreement and write a cheque for the initial deposit to show his sincerity to the owner, before the owner would be prepared to meet with him. 

8.  Upon the repeated urging of the agents to Mr Kai to first sign a preliminary agreement and write a cheque so as to secure a meeting with the owner, Mr Kai eventually agreed to do so on 29 September 2007.  The preliminary agreement that the agents asked Mr Kai to sign was a standard Centaline agreement, which was already pre-signed by a director of the plaintiff.  As mentioned, it set out a total purchase price at $158 million, with an initial deposit of $7.9 million payable upon signing of the preliminary agreement.  It contained additional terms and provided for the sale and purchase subject to existing tenancies.

9.  Mr Kai signed the preliminary agreement and issued a company cheque for $7.9 million.  However, he made the two agents sign an “explanatory memorandum”, which he caused his secretary to prepare, to set out the circumstances for giving the cheque to the agents.  The memorandum reads: 

“志成國際（集團）有限公司

關於購買鴻圖道82號安達工業大廈的情況說明

29 Sep 2007

1. 本公司開出恒生銀行373725#支票，金額$7,900,000.-（柒佰玖拾萬元正）該支票只作購買關於購買鴻圖道82號安達工業大廈的預付訂金專款專用，不可作其他用途。

2. 據了解，該業主曾委託多間地產商出售該處物業，根據慣例，購買雙方在成交後都須支付1%的佣金給中介人。因該物業的業主售价太高，我們買方已感到困難，因此，該物業如能完成交易，我方只能擔負0.5%的佣金。

3. 本公司要求能儘早與業主見面，具體商討有關購買事宜。

4. 此支票僅用於該大廈出售價港幣1.58億方為有效。

5. 交票日期2007年9月29日，若超過30天不成功，需於10天內退票。

志成國際（集團）有限公司:  [defendant’s company chop]

中原地產中介人簽名:   [signature]”

10.  That was on 29 September 2007.  Still not satisfied with having got the agents sign the explanatory memorandum, Mr Kai through his secretary had the agents return to his office together with the cheque on 2 October to add endorsement on the back of the cheque.  The endorsement was essentially identical to paragraphs 1, 4 and 5 of the explanatory memorandum.

11.  According to Mr Kai, the estate agents assured him that the signed preliminary sale and purchase agreement as well as the cheque would only be shown to the owner so as to demonstrate the defendant’s sincerity to negotiate and buy the building.  They were not to be handed over to the owner nor were they intended to be effective and binding there and then.

12.  The agents, according to Mr Kai, had promised to arrange a meeting for him with the owner of the building for negotiation.  But that promise did not materialise.  Rather, on 3 October 2007, the cheque was presented for payment and it was not honoured.  “Refer to drawer” was the response given to the plaintiff’s banker for not honouring the cheque.  It was presented for the second time on the same day, and again no payment was obtained.  This time, the plaintiff was told by its banker: “refer to drawer, present after 8 October 2007”.  The plaintiff presented the cheque for payment for a third time on 8 October 2007, and this time payment was countermanded.

13.  According to Mr Kai, he caused enquiries to be made with relevant government departments on 2 October 2007 and found out that the building could not be used for exhibition of Chinese calligraphy and painting.  Moreover, he discovered that there were still tenants operating inside the building and vacant possession could not be delivered.  Furthermore, the building was more than 37 years old and it would take at least 2 or 3 years to repair and rebuild the building to a desirable state and therefore it could not be used immediately.  Mr Kai claims that all these constituted misrepresentations by the estate agents (as agents for the vendor) regarding whether the building was fit for use as an exhibition centre and whether vacant possession would be delivered upon completion.

14.  The defendant therefore runs a number of defences, namely, total failure of consideration, non-delivery of the cheque, conditional delivery, payment of the cheque being conditional as well as misrepresentations.

15.  It seems to me that the appeal turns on whether Mr Kai’s story is believable.  That is the bottom line of the matter.  For Mr Edward Chan SC, appearing for the plaintiff together with Mr Lee Tung Ming, accepts that if Mr Kai’s story is true, and the cheque is never meant to be given to the plaintiff, there is simply no or no effective delivery of the cheque to the plaintiff and the plaintiff cannot sue on it.

16.  Turning to whether the defendant’s story is believable, it is necessary to remind oneself that one is not trying the case.  The question is whether the story is believable at this stage, rather than whether it is to be believed.

17.  At first blush, the plaintiff’s case looks overwhelming enough.  As Mr Chan has lost no time to point out to the Court, we have here a signed preliminary sale and purchase agreement and the cheque is for the payment of the initial deposit specified in the agreement.  Moreover, when one looks at the explanatory memorandum, paragraphs 1 and 4 are wholly consistent with the cheque being issued for payment of the initial deposit for the purchase of the industrial building for $158 million.  Paragraph 2 of the memorandum again confirms the sale of the property – the purchaser there is saying that the price is too high and therefore the estate agents’ commission from the purchaser’s side is only to be 0.5% of the sale price.  Mr Chan says paragraph 3 is neither here nor there because there could be many other matters to be discussed amongst the vendor and purchaser, apart from those terms already agreed in the preliminary sale and purchase agreement and the additional terms attached to it.  As for paragraph 5, Mr Chan contends that it provides for the contingency where despite the defendant’s signing the preliminary sale and purchase agreement and issuing the cheque for the initial deposit, no binding agreement could be concluded because prior to communication of the (purchaser’s) acceptance to the vendor, the vendor could have withdrawn the offer for sale or could have agreed to sell the building to someone else through other estate agents.

18.  Most importantly, as Mr Chan has also pointed out, the memorandum did not say that the cheque was only written and the preliminary agreement signed to show sincerity on the part of the defendant, or that they were never meant to be handed over to the vendor.

19.  Mr Chan also submits that when the cheque was returned on the second occasion after it was re-presented for payment, instead of countermanding payment of the cheque, what the defendant did was to tell the plaintiff, through the banks involved, to re-present the cheque for payment after 8 October 2007.  Again, this is quite inconsistent with Mr Kai’s present story.

20.  I can see the full force of all these points.

21.  I could add one further point against Mr Kai’s story, ie that if the purpose of the meeting with the owner of the building was to negotiate the price with him, then signing a preliminary agreement for the purchase of the building at $158 million and writing a cheque for the initial deposit at 5% of that price would certainly not help the purchaser bargain down the price of $158 million insisted upon by the vendor.  Nor would it show any sincerity to the vendor by signing the preliminary agreement and issuing the cheque if the true intention of the defendant was to meet with the vendor and then ask him to reduce the price.

22.  However, the test, at this stage, remains whether Mr Kai’s story is believable, not whether it is to be believed.

23.  I agree with Mr Daniel Fung SC, Mr Gary Lam with him, for the defendant, that the undeniable fact in the present case, which makes it stand out from other dishonoured cheque cases, is that the defendant has prepared the explanatory memorandum as well as made the endorsement on the back of the cheque.  Paragraph 3 of the explanatory memorandum specifically says that the defendant requested a meeting with the owner as soon as possible so as to discuss or negotiate substantially with the owner matters relating to the purchase of the building (本公司要求能盡早與業主見面，具體商討有關購買事宜).  It does arguably suggest that the negotiations between the parties have not been completed.  Of course, it could mean that the defendant wanted to meet with the plaintiff and negotiate on other terms not already covered by the preliminary agreement – in that sense, paragraph 3 would not be inconsistent with there having been, or there being going to be (subject to communication of the acceptance to the vendor), a binding agreement between the parties.  However, it could, arguably, also mean that the parties had not yet concluded any binding agreement, and the defendant was requesting for a meeting as soon as possible to negotiate with the owner directly.

24.  Paragraph 5 seems also to support Mr Kai’s story to an arguable extent.  It speaks of the estate agent returning the cheque (退票) – as opposed to returning any money – to the defendant if the matter is not successful within 30 days (交票日期2007年9月29日，若超過30天不成功，須於10天內退票).  The parties are ad idem that the 30 days period refers to the conclusion of a binding agreement, rather than the completion of the sale and purchase of the building, within that period of time, for quite obviously, completion would normally require a period longer than 30 days.

25.  If there has already been made, upon the signing of the preliminary agreement by the defendant (the plaintiff having signed it earlier), a binding agreement between the parties, then paragraph 5 is difficult to understand.  Mr Chan has argued in his reply submission that no binding agreement came into existence when the defendant signed the preliminary agreement, even though the plaintiff had signed it first.  It was because the defendant’s acceptance of the plaintiff’s offer would still need to be communicated to the plaintiff.  In the meantime, the plaintiff could have withdrawn the offer, particularly if he had managed to sell the property through another estate agent at a more attractive price.  That is certainly a fair enough suggestion.  However, my task here is to see whether paragraph 5 cannot be read, arguably, in any other way, in order to determine out whether Mr Kai’s story is believable at all.

26.  In my view, if what is preventing the conclusion of a binding agreement between the parties was merely the communication of the acceptance of the offer to the vendor, the period of 30 days given in paragraph 5 would seem to have been far too long.  Rather, again arguably speaking, paragraph 5 seems to suggest that at the time of writing the explanatory memorandum, no binding agreement had yet been concluded, and the estate agents were given a period of 30 days to bring about the conclusion of the agreement between the parties.  And when read together with paragraph 3, the way forward was to arrange a meeting between the parties as soon as possible.

27.  In my view, this possible reading of the memorandum is also supported by paragraph 2.  Paragraph 2 simply says that the estate agents are only to get 0.5% commission “if” the transaction can be completed (該物業如能完成交易，我方只能擔負0.5% 的佣金).  Of course, here, the relevant point is the completion of the transaction (完成交易) rather than conclusion of a binding agreement.  But it must be remembered that the explanatory memorandum is not a legal document drafted by lawyers.  Whilst to a conveyancing lawyer, concluding a binding agreement and completing the transaction are two distinct and separate matters, it is arguable that to a layman, this distinction may not be apparent.  For the purposes of deciding whether a believable story has been put forward, paragraph 2 is capable of meaning that at the time of the explanatory memorandum, no agreement had yet been concluded and therefore the obligation to pay commission was still an “if”.

28.  Paragraph 2 is supportive of Mr Kai’s story in another sense.  Given that the preliminary agreement has already set out the amount of commission payable to the estate agents, paragraph 2 of the memorandum is wholly redundant if there has been made a concluded agreement between the parties, or if there is going to be one subject to communication of the defendant’s acceptance to the vendor.  Paragraph 2 makes much more sense if the negotiations have not yet been concluded and the purchase price is still a matter of negotiation between the parties.  It provides that the estate agents’ commission from the purchaser’s side is to be at 0.5% of whatever may eventually be the purchase price after further negotiation.

29.  As for paragraphs 1 and 4, paragraph 1 is, arguably, neutral enough because it simply restricts the cheque to payment of the initial deposit for the purchase of the building in question, but not the purchase of any other properties, even if they are owned by the same owner.

30.  As for paragraph 4, there is an ambiguity as to whether the price $158 million is a transaction price or asking price.  The Chinese term used is “出售價”, which can mean either.  If it means the asking price, then paragraph 4 is not inconsistent with the defendant’s case.  The cheque is given to the estate agents to show sincerity to the owner only if the owner is prepared to sell at $158 million (or less – after further negotiations with the defendant), but not if the vendor wants any higher price – after all, according to the evidence, it was a rising market then.

31.  Mr Chan contends that does not make sense.  What matters is the price agreed upon by the parties after negotiation, rather than the vendor’s asking price.  If the term means the asking price, there is no need to include paragraph 4 in the memorandum in the first place.

32.  That is a fine point by itself, but I am not here trying the case.  Nor do I find it wholly absurd to include paragraph 4 in the memorandum if “出售價” means the asking price.  At the lowest, including something redundant or quite meaningless in the memorandum, merely out of abundance of caution, does not by itself turn the whole story of the defendant unbelievable.  But more importantly, the asking price could conceivably be of significance to the defendant.  If the vendor were to raise the asking price to one that the purchaser should find it wholly impossible to accept, there would simply be no point in meeting with the vendor to negotiate.  It would be a waste of time and the purchaser might as well start looking for other properties.

33.  All this is a matter of evidence and argument.

34.  Mr Chan argues that even the defendant’s counsel have not pleaded “出售價” to mean the asking price in the defence.  The pleaded translation simply treats $158 million as the purchase price.  However, I note that in Mr Kai’s own affirmation (paragraph 19) where he deals with paragraphs 3 to 5 of the explanatory memorandum, he says “this cheque is only to be used and valid for the sale of the premises at $158 million”.  I do not find his understanding of paragraph 4 to be necessarily inconsistent with reading “出售價” as the asking price.

35.  In any event, I find all these very fine arguments more suitable to be ventilated at trial rather than at this Order 14 stage.  The test, as I have said many times, is whether the defendant’s story is believable.  Whether it should be believed is a matter for the trial judge.

36.  As for the suggestion that the cheque should be re-presented after 8 October,  I have the impression that it was linked to some extent to the estate agents’ promise at one stage to arrange for a meeting between Mr Kai and the owner on 5 or 8 August.  The evidence from Mr Kai on this aspect is far from satisfactory.  I have fully borne this in mind.  But having looked at the matter in the round, I am unable to say that his story is unbelievable and should be rejected summarily.

37.  As for the question I raised earlier, namely, how do the signing of the preliminary agreement for the sale and purchase of the building at $158 million plus the issuing of the cheque for $7.9 million show sincerity to the vendor, and how would it enable the purchaser to bargain down the asking price of the vendor in the face-to-face negotiation that he so much wanted to have, again the bottom line is whether the defendant’s story is so unbelievable that it should be rejected summarily.  I will not repeat the logical difficulty with the defendant’s case.  But is it unbelievable?  On reflection, it is not.  First, logic is not everything and people, including experienced businessmen, do not always behave in the most logical manner.  When something as abstract as sincerity is concerned, application of strict logic could be dangerous and misleading.  Secondly, it is conceivable that Mr Kai was so confident in his own ability to persuade the owner to reduce the price if only he could have a chance to see him that he was prepared to sign the preliminary agreement and write the cheque for the initial deposit even though he found the price (namely $158 million) to be far too high.  He was prepared to do so because that was the only way, so he had been told by the estate agents, for him to secure a meeting with the owner.  And he sought to protect his own position by requiring the estate agents to sign the explanatory memorandum and even to bring the cheque back to him a few days later to add the endorsement on the back of the cheque.

38.  I accept that the defendant could have put everything beyond dispute by stating clearly in the memorandum as well as on the back of the cheque that the cheque was merely to be shown to the vendor to show sincerity.  But that is not the question.  The question is whether the failure to do so renders the whole story unbelievable.  In my view, the answer is “no”.  There could be explanations why a person sometimes fails to do even the most obvious thing.  It is really a matter for trial.

39.  In those circumstances, I cannot reject summarily Mr Kai’s assertions as being wholly unbelievable.  All the arguments and counter arguments must be tested at trial.

40.  That being the case, I am of the further view that the defendant has an arguable defence as a matter of law.  If the defendant’s story is accepted, the cheque was never meant to be handed over to the vendor.  Put in legal terms, there was no delivery or effective delivery.  Or, delivery was conditional.  Moreover, as no binding agreement for the sale and purchase of the building was intended, there was also a total failure of consideration for the cheque.

41.  Given my conclusion, I need not deal with the other defences also raised on behalf of the defendant.

42.  It is relatively rare for the court to give leave to defend in a dishonoured cheque case.  But each case depends on its own facts and the applicable principles are the same.  I have come to the conclusion that the Master’s decision was indeed the right one.  The defendant has shown an arguable defence and it is not shadowy.  There is no question of imposing conditions.

43.  I order that the appeal be dismissed.  I make a costs order nisi that the costs of the appeal be paid by the plaintiff to the defendant, with a certificate for two counsel.