PAUL Y. MANAGEMENT LTD v. ETERNAL UNITY DEVELOPMENT LTD AND OTHERS

HCA 571/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 571 OF 2007

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HCA 1281/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1281 OF 2011

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(Heard Together)

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D E C I S I O N

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1. There are two summonses. The first summons is issued by the defendants of HCA 571/2007 (“the 1st action”) to lift the stay of the 2nd third party proceedings (2nd TP proceedings”) brought by them against the 2nd third party, PYI Corporation Limited (“PYI”). The stay was imposed by A Cheung J (as he then was) on 1 June 2009 with the concurrence of the parties.

2. The plaintiff in the 1st action is Paul Y Management Limited (“PYM”).  The defendants in this action are Eternal Unity Development Limited (“EUD”) the 1st defendant, Chan Yuk Yan (“Dennis Chan”) the 2nd defendant and the Eternal Unity Properties Limited (“EUP”).  EUD and EUP are and were controlled by Dennis Chan at all material times.  They have also brought the 1st third party proceedings (1st TP proceedings”) against Paul Y Engineering Group Limited (“PYE”). 

3. PYI agrees with the lifting of the stay subject to the 2nd TP proceedings be tried together with the main action and the 1st TP proceedings. 

4. The defendants oppose PYI’s suggestion of trying all matters together.  They say such will delay the trial of the main action and the 1st TP proceedings. 

5. The second summons is issued in HCA 1281/2011 (“the 2nd action”) by Lau Ko Yuen Tom (“Tom Lau”), the 4th defendant therein for the 1st and 2nd actions to be tried together. 

6. The plaintiffs in the 2nd action are Dennis Chan and Eternal Real Estate Development Company Limited (“ERE”).  ERE is and was at all material times controlled by Dennis Chan.  The defendants in this action are Galaxy Land Limited (“Galaxy Land”), PYI and Paul Y Construction (China) Limited (“PY China”).

7. Dennis Chan and ERE oppose the 2nd summons.  They also say that to order the two actions to be tried together will delay the trial of the 1st action (which is not to include the trial of the 2nd TP proceedings).

The first action

8. The 1st action was started by PYM against Dennis Chan, EUD and EUP.  PYM’s claim is for repayment of a HK$10 million loan (“the Loan”) it lent to ERD together with interest pursuant to a loan deed made between PYM and ERD on 25 October 2005 (“the Loan Deed”).  Dennis Chan and ERP also executed the Loan Deed as guarantors and are sued by PYM as such.  All three defendants deny liability.  Their defence involves an elaborate scenario of events.  These evens have been summarized by Tom Lau in para 17 of his affirmation filed on 19 January 2012 in support of his application in the 2nd action and the third party statement of claim in the 1st action.

The allegations of Dennis Chan

9. The events alleged by Dennis Chan are as follows:

(1)  Since about March 2005, Tom Lau (allegedly acting on behalf of PYE) and Dennis Chan discussed methods of co-operation.  The discussions included provision of funding and project management services in relation to a property development in Beijing known as Jiayu Yuen (嘉裕苑) (“the Project”).  In the course of the discussions, PYE carried out due diligence on the financial position and other aspects of ERE and the Project.

(2)  On 22 June 2005, Tom Lau (allegedly for PYE) met with Dennis Chan and allegedly reached on oral master agreement on funding arrangements for completion of the Project (“the Master Agreement”).

(3)  Under the Master Agreement, PYE would, inter alia, within 14 months advance or cause its related companies to advance loans up to RMB420 million (“the Facility”) to ERE for the purpose of financing and completing the Project.

(4)  Part of the Facility, i.e. RMB130,000,000.00 would be used by ERE to redeem the existing mortgage of Block C of the Project held by 中國信達資產管理公司 (“信達”), a financial institution incorporated in the mainland.

(5)  The rest of the Facility would be used for paying the construction and other costs for completion of the Project, and would be advanced at such times and in such sums per the actual need to ensure the completion of the Project and units therein for handover to individual purchasers in 14 months.

(6)  The Facility would be secured by various properties of the Project.

(7)  This security would be provided by ERE by entering into presale contracts of various units of Blocks A, B and C and a leasing contract for the carpark and club house of the Project.  The contracts would have cancellation previsions entitling ERE to cancel the presale or leasing arrangement upon repayment of the sums advanced under the Facility.

(8)  Interest for the advance would be at the basic lending rate of the People’s Bank of China plus 8% per annum.

(9)  PYE would be entrusted with the management of the Project.  It would complete the remaining works timeously and receive 5% of the construction costs as project management fee.

(10)  The sums advanced under the Facility would be repaid after completion of the Project, and repaid in stages upon the sale of the completed units.

(11)  In part performance of or implementation of the Master Agreement, PYE caused two related companies and Dennis Chan caused ERE to enter into the following contracts:

(a)  Framework Presale Agreement for Block C of the Project dated 22 June 2005 (關於 “嘉裕苑” C座商品房預售框架協議) entered into by ERE and Galaxy Land, the 1st defendant in the 2nd action (“Block C Frameowrk Presale Agreement”);

(b)  Leasing Agreement for Clubhouse and Carpark dated 22 June 2005 (關於 “嘉裕苑” 會所及停車場租用權協議) entered into by Eternal Real Estate and Galaxy Land (“Clubhouse and Carpark Leasing Agreement”);

(c)  Framework Presale Agreement for Blocks A and B dated 22 June 2005 (關於 “嘉裕苑” A、B座商品房預售框架協議) entered into by Eternal Real Estate and Galaxy Land (“Blocks A&B Framework Presale Agreement”);

(d)  Project Management Contract (建築項目管理合同) dated 22 June 2005 entered into by ERE and PY China; and

(e)  Memorandum of Understanding (諒解備忘錄) dated 20 October 2005 (“MOU”) entered into by ERE and PY China on behalf of PYE.

(12)  Pursuant to the Master Agreement and Block C Framework Presale Agreement, ERE and Galaxy Land entered into formal presale contracts in Beijing (北京市商品房預售合同) (“the Presale Contracts”) in respect of 124 residential units of Block C.

(13)  In mid-October 2005, Dennis Chan requested to draw RMB10 million as part of the Facility pursuant to the Master Agreement.  By reason of the shortage of RMB in Beijing, Dennis Chan alleged that Mr Wong Wing Hoo Billy and Tom Lau (allegedly for PYE) agreed with Dennis Chan that the sum was to be advanced through PYM in HK dollars and such sum would be repaid in HK dollars upon ERE having received a corresponding advance under the Facility in RMB to be available within 2 months (“the Further Agreement”).

(14)  As a result of and pursuant to the Further Agreement, the defendants in the 1st action entered into the Loan Deed at the request of PYE.  PYM was allegedly acting as the agent of PYE in entering into the Loan Deed with these defendants.

(15)  In breach of the Master Agreement and the Further Agreement, PYE subsequently failed to make the corresponding advance in RMB to the defendants in the 1st action.  PYE also failed to make adequate advance of the Facility to Dennis Chan and ERE for the completion of the Project.  On this basis, it is further alleged that the Loan (admittedly advanced and received) has not yet fallen due.

(16)  In November 2005, Dennis Chan allegedly requested a further advanced of RMB30 million from PYE under the Facility.  An alleged oral agreement was then reached between Dennis Chan and Tom Lau (allegedly for PYI) (“the 2nd Further Agreement”) so that a further sum of HK$30 million being part of the Facility and repayable in 13 months would be advanced to Dennis Chan.  A written procurement agreement dated 7 December 2005 was then entered into between Jenvin Limited (“Jenvin”) (a PYI subsidiary) and Dennis Chan and various companies under his control (“the Procurement Agreement”) pursuant to and as a result of the Master Agreement and the 2nd Further Agreement.

(17)  In March 2006, an oral agreement was allegedly reached between Dennis Chan and Tom Lau (allegedly for PYI) concerning the expansion of Beijing Rosedale Hotel (“the Hotel Expansion Agreement”).  Under the Hotel Expansion Agreement, Dennis Chan was supposedly responsible for securing the Beijing Municipal Government’s approval for the development of around 40,000 m² of additional gross floor area for the Beijing Rosedale Hotel.  In return, he would be paid RMB40 million as consultant fee as well as given the right to use 2,000 m² of the commercial podium or portion of the Hotel Expansion Development for 20 years.

(18)  Dennis Chan alleged that he secured an approval in principle from the Beijing Municipal Government.  However, due to the failure of PYI, the formal approval could not be obtained.  On this basis, Dennis Chan alleged that he had suffered the loss of the consultant fee of RMB40 million and the value of the right to use 2,000 m² of the commercial premises.

(19)  There, however, was allegedly a subsequent oral agreement between Dennis Chan and Chan Kwok Keung Charles (“Charles Chan”) (allegedly for both PYE and PYI) in May 2006 whereby it was agreed that the Loan and the HK$30 million (advanced pursuant to the 2nd Further Agreement) be set off against the RMB40 million payable by PYI to Dennis Chan as his consultant fee under the Hotel Expansion Agreement (“the Set-off Agreement”).

The third party proceedings

10. Apart from defending the claim by PYM for repayment of the Loan, Dennis Chan, EUD and EUP also issued third party proceedings (TP proceedings”) against PYE and PYI in the 1st action.  The TP proceedings against PYE are for various declarations that Galaxy Land, PY China, PYM and Jenvin Limited entered into the various above-mentioned agreements and loan arrangements as agents of PYE and pursuant to the Master Agreement.  They also claim damages from PYE for breach of the Master Agreement.

11. Regarding PYI, they claim a declaration that the Loan advanced in the name of PYM and the HK$30 million advanced in the name of Jenvin had been set-off against the alleged consultant fee of RMB40 million due to Dennis Chan.  They also pleaded the set-off in their defence to PYM’s claim for the Loan.  Dennis Chan also claims damages from PYI for loss of use of the 2,000 m² commercial premises in the Hotel Expansion Development for 20 years.

Claims against Tom Lau

12. In the 2nd action, Dennis Chan and ERE repeated Dennis Chan’s allegations in the 1st action.  In addition, they also alleged that Tom Lau entered into the Master Agreement as the authorised representative of PYE, alternatively, in breach of Tom Lau’s warranty of authority.

13. They further alleged that because of Tom Lau’s directions, Galaxy Land, PYE and PY China had failed to act in accordance with their obligations under the various agreements above-mentioned. 

14. They also alleged that Tom Lau had represented to Dennis Chan that the companies involved in the various agreements would honour their commitments to provide funding or services to ensure the completion of the Project in time.  They then alleged that Tom Lau’s representations were false and were made intentionally, recklessly or negligently.

15. In addition, Dennis Chan and ERE alleged that since late 2004, Tom Lau had represented to Dennis Chan that PYE was the counterparty of the Master Agreement and Tom Lau was authorised by PYE to enter into the Master Agreement and the various other arrangements on its behalf. However, if it should be held that Tom Lau was not authorised by PYE to enter into the various agreements, Dennis Chan and ERE will suffer the loss of not being able to enforce the agreements against PYE.  On that basis, they asserted that Tom Lau should then be held liable for their loss for Lau’s breach of his warranty of authority from PYE.  They therefore claim damages and various relief against Galaxy Land, PYE, PY China and Tom Lau.  The claim against Tom Lau is based on misrepresentation and breach of warranty of authority.

The 1st summons to lift the stay of the 2nd third party proceedings

16. The claim against PYI, the 2nd third party in the 1st action was stayed by A Cheung J with the concurrence of the parties. The reason was that this claim, as based on the Hotel Expansion Agreement and the Set-off Agreement, could be dealt with separately.  However, Dennis Chan now thinks that PYE, as the 1st third party, has obtained discovery from him in relation to the Hotel Expansion Agreement.  Since PYE and PYI are managed by Tom Lau, PYI, as the 2nd third party and through Tom Lau, can have a preview of the discovery on the key issue in the 2nd TP proceedings.  Hence, Dennis Chan wishes to have the stay lifted so that he can have discovery from PYI as well.

17. Furthermore, Dennis Chan says that he has, after the stay was imposed, obtained documents showing that Tom Lau has a secret scheme to take over the Project from ERE and him.  He therefore does not want the stay to remain as that would give Tom Lau and the PY group more time to perpetrate his scheme. 

18. Mr Cheuk, counsel for Dennis Chan, EUD and EUP, further submitted that the issue of set-off in the 2nd TP proceedings forms part of the live issues in the main action.  The reason being that a ground of defence of Dennis Chan, EUD and EUP in the 1st action is that the Loan was advanced under the Master Agreement rather than the Loan Deed and it had been set-off under the Set-off Agreement.  Therefore, the Set-off Agreement will have to be canvassed at the trial of the 1st action. If the stay should remain and the main trial proceeds, the issue of the existence of the Set-off Agreement will be decided in the absence of PYI.  This is problematic and unsatisfactory (see paras 13 and 14 of the skeleton submissions). 

19. However, it seems that Dennis Chan and his companies have changed their position and would now ask only for lifting of the stay but not to try the 2nd TP proceedings together with the main action.  The reason they gave for this change is the delay that may be produced by the preparation of the 2nd TP proceedings.

20. Mr Lam, counsel for PYI disagreed.  He submitted that the preparation of the 2nd TP proceedings for trial should not produce any delay as the issues pleaded are simple.  He also suggested a tight timetable of directions for preparation which will avoid any delay. 

21. In fact, the hearing for directions on expert evidence in the 1st action will only take place in June this year.  It is likely that the preparation for the trial of the 2nd TP proceedings will finish ahead of that for the main action.  The normal rule is also to try all issues together. 

22. Furthermore, the main issue in the 1st action is the credibility of Dennis Chan and Tom Lau.  This issue extends throughout the series of events from late 2004 to 2006 culminating in the Hotel Expansion Agreement.  PYI is also desirous of cross-examining Dennis Chan on the whole story.  It does not mind incurring the legal costs to sit through the whole trial.

23. Mr Lam also refers to the Set-off Agreement with PYI which has been pleaded as a complete defence to PYM’s claim.  For these reasons, Mr Lam submitted that all issues in the 1st action including the 2nd TP proceedings should be tried together.

Analyses and decision on the 1st summons

24. I, having considered all arguments advanced by both sides, am of the view that the stay should be lifted and all issues in the 1st action including the 2nd TP proceedings should be tried together. 

25. The main trial of the 1st action will canvass the Master Agreement and the two Further Agreements.  PYM has to take part in this trial as it is the defendants’ defence that the Loan was not really advanced by PYM under the Loan Deed, but was advanced by it as agent of PYE pursuant to the Master Agreement and Further Agreement.  PYE will also be at this trial as the 1st TP proceedings will be tried with the main action.

26. Regardless of the outcome on these issues, the fact remains that there would be the Loan due from Dennis Chan either as guarantor or as borrower.  If the court should find that the Loan was advanced by PYM pursuant to the Loan Deed, he would be liable as a guarantor of it.  If the court should find that there were the Master Agreement and Further Agreement and the HK$10 million was advanced under them, then he would be held as the borrower. 

27. In the former case, he would be held liable as a guarantor to PYM, but his Set-off Agreement was allegedly made with PYE and not PYM.  It is not entirely clear if he could still rely on the Hotel Expansion Agreement and Set-off Agreements which were allegedly made with PYE.  If he could not, then he would have to pay PYM the loan with interest and PYM would not have to take part at the trial of the 2nd TP proceedings.  The trial of the 2nd TP proceedings would also have nothing to do with the HK$10 million loan.  In the event that he could, then PYM would have to take part in the trial of the 2nd TP proceedings as the Set-off Agreement has been pleaded as a complete defence to its claim for the repayment of the Loan (para 49 of the defence in the 1st action).

28. In the latter case, Dennis Chan would be held as the borrower.  It is not clear whether PYE will want to take part in the trial of the 2nd TP proceedings to contest the Hotel Expansion and Set-off Agreements as it has not pleaded any claim for the HK$10 million loan even as an alternative and in the event of the court finding for the existence of the Master Agreement and Further Agreement.

29. These potential problems will not disappear simply by ordering the 2nd TP proceedings to be tried with the main action. But such an order will procure the availability of all parties so that the appropriate solutions can be knocked out amongst them.  Furthermore, if the 2nd TP proceedings should be tried later and if either PYM or PYE will have to take part in the second trial on the alleged set-off, more costs will have to be incurred.

Order and directions on the 1st summons

30. Since delay is the only concern raised by Dennis Chan and his companies and such concern does not appear to have been borne out by the simplicity of the pleadings on the Hotel Expansion and Set-off Agreements, I consider it preferable for the 2nd TP proceedings to be tried with the rest of the 1st action.  Since the issues in the 2nd TP proceedings are simple, I also do not think there will be overloading of issues.  I therefore lift the stay and order that the 2nd TP proceedings be tried with the other claims in the 1st action.

31. For the sake of prudence, I do grant a liberty to apply for separate trials in case it can be shown later that the preparation for the 2nd TP proceedings would delay the trial of the 1st action.

32. I also adopt the directions proposed by Mr Lam for the preparation of the 2nd TP proceedings.  I order and direct as follows:

(1)  The stay of the TP proceedings against the 2nd third party be lifted;

(2)  The 2nd TP proceedings be tried at the same time as the main action and the 1st TP proceedings in the 1st action;

(3)  The parties to the 2nd TP proceedings shall file and serve their list of documents relating to the 2nd TP proceedings within 14 days from the today;

(4)  There will be inspection of documents between the parties to the 2nd TP proceedings within 14 days after the service of the list of documents by these parties;

(5)  The parties to the 2nd TP proceedings do mutually exchange signed witness statements as to facts within 63 days from the date of inspection of documents, and such statements do stand as evidence in chief unless the trial judge otherwise directs;

(6)  There will be a Case Management Conference of the 2nd TP proceedings, which shall be fixed at the same time as the next Case Management Conference of the main action and the 1st TP proceedings in the 1st action.

The 2nd summons for the trial of both actions together

33. The 2nd summons was issued by Tom Lau in the 2nd action for trying the two actions together.  It can be seen from the above allegations by Dennis Chan and his companies that the claims against Tom Lau in the 2nd action are based on misrepresentation and breach of warranty of authority.  They are pleaded in paras 41 to 49 of the Statement of Claim in the 2nd action.  Dennis Chan and ERE repeated in the 2nd action all the allegations of Dennis Chan made in the 1st action.  In addition, they also pleaded against Tom Lau misrepresentation and breach of warranty of authority. However, the allegations against Tom Lau himself constitute a relatively small part of the allegations in that action and are all factual.

34. Tom Lau now says that it is unfair for his credibility to be decided in the 1st action without his being legally represented at its trial.

35. If Tom Lau has not been sued in the 2nd action, I am sure he would have been contented to leave the issue of his credibility to be taken care of by the lawyers of the PY companies.  However, claims have been made against him personally in the 2nd action, all be it as a fallback position of Dennis Chan as asserted by Mr Cheuk, it appears unfair to Tom Lau if he is not allowed to be represented at the trial of the 1st action when his credibility will be determined.  The solution is to have the two actions tried together.

36. Mr Wong, counsel for Tom Lau, also submitted that because of the overlapping in issues and witnesses, it will save time and costs to have the two actions tried together.  Though the issues addressed to Tom Lau are relatively few, he does not mind incurring the legal costs for his lawyers to sit through the whole trial and to canvass and contest all the allegations made by Dennis Chan.

37. In fact the original intention of Dennis Chan and ERE was to have both actions tried together (see para 11(1) of the Statement of Claim in the 2nd action).  But they have a change of heart now. 

38. To have the two actions tried together will also avoid the risk of inconsistent judicial findings as the Master Agreement and Further Agreement are relied on by Dennis Chan in both actions and the defendants are different in the two actions.

39. Dennis Chan and ERE oppose this application.  I suppose EUD and EDP would take the same stance in the 1st action.  The 1st ground of opposition is delay.  The 1st action was started in April 2007.  Its preparation has reached an advanced stage.  The 2nd action has only reached the close of pleadings in February this year.  There are also interlocutory applications by the defendants in the 2nd action for striking out and security for costs.  If the two actions are tried together, the trial of the 1st action will be delayed substantially.

40. Mr Cheuk also submitted that if there would be further delay of the trial of the 1st action, the PY group will have more time to perpetrate their secret scheme to take over the Project.  Mr Cheuk suggested that the way forward of the 2nd action should only be decided after the result of the 1st action is known.  If Dennis Chan should be successful in the 1st action, he will not need to proceed with the 2nd action.

41. Mr Cheuk also submitted that there is no claim against Tom Lau in the 1st action and there is therefore no common issue as against him in both actions.  Mr Cheuk further submitted that there is no need for Tom Lau to be legally represented at the 1st trial as there are already three teams of lawyers acting for the PY companies. Tom Lau will also have his voice heard in the 1st action as a witness.

Analyses and decisions on the 2nd summons

42. I think the potential delay is the key issue.  I have already mentioned that the directions for expert witness in the 1st action will only be dealt with in coming June.  It is therefore unlikely for the 1st action to be tried this year or even within the 1st quarter of next year.  Apart from the claim against Tom Lau, the issues in the 2nd action are mainly repetitions of those in the 1st action.  Since the preparation of the 1st action, save expert evidence and the 2nd TP proceedings, has been more or less completed, not much time will be needed to prepare for the same issues in the 2nd action.

43. Regarding the claims against Tom Lau, they involve a relatively narrow compass and are all factual.  The preparation for them should not be very time consuming.

44. In the premises, I am not convinced that to have the two actions tried together will result in delay of the trial of the first.

45. Regarding the submission that Dennis Chan may not proceed with the 2nd action if he should succeed in the first, I think this submission cannot stop Tom Lau from insisting to proceed with his defence in the 2nd action with a view to clear himself of the claims.

46. Regarding the number of teams of lawyers to represent the PY companies and Tom Lau, this is irrelevant on whether Tom Lau should be allowed to take part in the battle for his own credibility.

Order on the 2nd summons

47. I therefore make an order in both actions that they be tried together.  I again for the sake of prudence grant a liberty to apply to sever the trials of the two actions in case later events show that the preparation for the 2nd action will delay of the trial of the 1st action.

Costs orders nisi

48. I also make the following costs orders nisi. I order that the summons by the defendants in the 1st action to lift the stay of the 2nd TP proceedings be in the cause save that the costs of PYI in seeking to have the 2nd TP proceedings be tried together with the main action be paid by the defendants in the 1st action to PYI to be summarily assessed if not agreed.

49. I also order that the costs of Tom Lau’s summons in the 2nd action be in the cause save that the costs of Tom Lau in arguing for the summons and the costs of the solicitors for the 1st to 3rd defendants in the 2nd action in attending to the argument be paid by the plaintiffs in the 2nd action to be summarily assessed if not agreed.

50. For summary assessments of costs, the bills of costs should be filed outside the next 14 days but within the next 28 days.  Objections should be filed within the next 14 days.  A 9:30 am hearing should be fixed for the summary assessments.

Mr Calvin Cheuk, instructed by Leung & Associates, for the defendants (in HCA 571/2007) and 1st and 2nd plaintiffs (HCA 1281/2011)

Mr Douglas Lam, instructed by DLA Piper Hong Kong, for the 2nd third party (in HCA 571/2007)

Ms Alice To, of Minter Ellison, for the 1st, 2nd and 3rd defendants (in HCA 1281/2011)

Mr Jonathan Wong, instructed by Deacons, for the 4th defendant (in HCA 1281/2011)

HCA 571/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 571 OF 2007

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BETWEEN

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J U D G M E N T

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1.  Today’s appeal against Master de Souza decision on 8 February 2011 only concerned with the discovery of documents relating to the defendants’ application for approval of a hotel expansion. The defendants alleged that they got approval in principle. These documents and the matter arises in this way.

2.  The plaintiff (“PYM”) sues the 1^st defendant as borrower and the 2^nd defendant and 3^rd defendant as guarantors for a $10 million loan advanced to the 1^st defendant together with interest charges and costs.  The defendants in their defence alleged that PYM only acts as the agent for the 1^st third party (“PYE”).  It also alleged that there was a master agreement between the 1^st defendant and PYE.  There was a further allegation that a hotel expansion agreement was concluded between the defendants and the 2^nd third party (“PYI”). Mr Justice A Cheung (as he then was) ordered that the defendants’ third party proceedings against PYI should be stayed until after the determination of the main action and the third party proceedings against PYE. 

3.  In the defendants’ defence and counterclaim against both third parties, PYE and PYI, the defendants themselves alleged that there was a hotel expansion agreement with PYI.  However in paragraph 41 they also alleged that in May 2006 one Mr Charles Chan acting for and on behalf of PYI and PYE agreed that the 2^nd defendant will be paid a consultant fee of RMB40 million in the hotel expansion agreement and this 40 million payable by PYI maybe set‑off against the aforesaid debt of $10 million and an additional sum of $30 million will be paid to the 2^nd defendant.  The first $10 million was paid by PYM to the 1^st defendant, the second $30 million was paid by PYI to the defendants. 

4.  As Mr Justice A Cheung pointed out, the link between the third party proceedings and these proceedings is this set‑off agreement.  It is the defendants’ case that PYE also agreed to the set‑off agreement.  After the proceedings against PYI third party proceedings have been stayed, the issue becomes what will be the issues in the trial of the main action and the third party’s proceedings against PYE.  To my mind it cannot be just the master agreement because it is the 2^nd defendant’s own case that PYE is a party to the set‑off agreement which comes from the hotel expansion agreement between the defendant and PYI.  That being the case the debt set‑off agreement must be a live issue in the 1^st trial.  This is reinforced by the 2^nd defendant’s witness statement filed for the 1^st trial, where he went at length in respect of the background and the agreement reached in the hotel expansion agreement and what he did pursuant thereto.  He said that he had applied for approval and that was given in principle.  The documents thereunder would be discoverable as documents mentioned in his witness statement and also as documents relevant to an issue to be tried during the 1^st part of the trial. 

5.  However Miss Selina Lau, counsel for the defendants pointed out that if the set‑off agreement as alleged by the defendants with PYI and PYE is a live issue in respect of PYE, then the stay of proceedings against PYI may present a problem.  I am faced with an order that the proceedings against PYI be stayed and I do not have jurisdiction to vary it.  I am afraid that will be a problem for the trial judge and he will have to give direction on how the trial should proceed.  The parties must be sneisble in reaching an agreement or make submissions to the trial judge for the 1^st part of the trial.

6.  For the aforesaid reason, I would dismiss the appeal. 

7.  The 1^st Third Party PYE shall have its costs for the appeal.

HCA571/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 571 OF 2007

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HCA 571/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 571 OF 2007

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J U D G M E N T

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[Submissions on adducing further evidence]

1.  I refuse the application.  It is a very late application taken out only several days before this scheduled hearing, whereas the application to strike out was made back in September 2007.

2.  Moreover, given the nature of the application, the factual assertions contained in the proposed evidence will be of little use at the hearing because the Court simply cannot resolve any factual disputes between the parties insofar as they are relevant to the present application, and I am afraid there are many factual disputes.  So the application is refused.

[Submissions on applications to strike out]

3.  I have two applications before me.  The first application is by the 1^st third party to strike out the third party notice against the 1^st third party.

4.  The relevant facts and disputes between all the parties can be gleaned from the judgment of the Court of Appeal handed down on 12 August 2008.  In that judgment, the Court of Appeal dealt with an appeal by the defendants from the summary judgment granted against them in favour of the plaintiff.  The Court, of which I sat as a member, reversed the judgment below and granted the defendants unconditional leave to defend.

5.  At the heart of the dispute between the parties is whether there was made between the defendants and the 1st third party a master agreement for the financing of a project in Beijing to the extent of RMB 420 million.

6.  It is the defendants’ case that pursuant to that master agreement, various written agreements were entered into with different companies belonging to the Paul Y Group, of which the plaintiff, the 1st third party, as well as the 2nd third party, are members.

7.  In reversing the judgment below, the Court of Appeal took the view that the loan deed which the plaintiff sues on as a standalone agreement might arguably be part of the financing arrangement, the subject matter of the master agreement alleged by the defendants.

8.  In paragraph 37 of the judgment, the Court observed that there was ‘almost overwhelming evidence’ that the parties had indeed entered into a master agreement concerning the 1st third party’s promise to advance money in relation to the Beijing project.

9.  Mr Rimsky Yuen SC, appearing for the 1st third party at today’s application, submits that there is no res judicata arising from the Court of Appeal’s judgment because the 1st third party was not involved in the relevant hearing.  Counsel takes me to a number of documents in the hearing bundles, including pages 42, 55, 57, 65, 72, 80, 100, 105, 139, 141, 144 and 145 in bundle B, with a view to demonstrating principally two matters.  First, the master agreement was never referred to in these contemporaneous documents.  Secondly, the 1st third party was not named in these documents.  Counsel very fairly accepts that in one or two of these documents, the name of the 1st third party did feature.  Particularly, there was a public announcement on page 105 that was made by the 1st third party itself.

10.  Counsel’s point is that looking at the contemporaneous documents as a whole, it is plainly unarguable that there was this master agreement concluded, but in any event, even if any such agreement had been concluded, there is not any arguable evidence that the contracting party to the agreement was the 1st third party.

11.  I do not wish to repeat what the Court of Appeal has already observed in relation to the arguability of the alleged master agreement.  As I said at the outset, the Court of Appeal has observed that there was almost overwhelming evidence of the existence of the master agreement between the defendants and the 1st third party.

12.  I appreciate the points made by counsel in relation to the contemporaneous documents that he has carefully referred the Court to.  I take the view that these are arguments that should be made at trial.  They are certainly relevant points that should be brought to the notice of the trial judge, who has to make up his mind as to whether the alleged master agreement did exist as a matter of fact or not.

13.  But given the nature of today’s application, namely a strike-out application, I am unable to conclude that this is a plain and obvious case for striking out the third party notice on the ground that the defendants’ case about the master agreement is wholly unarguable.  Indeed, as the Court of Appeal has observed, there is evidence to support the allegation.  It is not for this Court to engage in a mini-trial of the issues on the documents before the Court.

14.  The importance of contemporaneous documents cannot be underplayed, but one must not forget the oral assertions made by the witnesses of the defendants regarding the making of the master agreement and the identity of the contracting party to this agreement, nor can one ignore the inherent probability of the existence of the agreement; nor, I should add, can one ignore, for instance, the public announcement made by the 1st third party itself about its involvement in the Beijing project.

15.  There is also, for instance, on page 55 of bundle B, a handwritten note which appears, on the face of it, to lend some support to the story put forward by the defendants.

16.  There is no way this Court can conclude that the defendants are bound to fail at trial in relation to the alleged master agreement.

17.  Mr Yuen also takes the point that the master agreement is not good in law for being incomplete.  The relevant legal principles are not in doubt, but it is fair to say that when parties have made an agreement and that agreement has been partly performed, as the defendants allege to be the case here, the courts generally are slow to conclude that the agreement is incomplete and is incapable of performance in law.

18.  Whether the master agreement, if it has ever been made, is so incomplete that it is incapable of performance or enforcement in law is a question of mixed law and fact.  Put another way, it is a fact-sensitive question, and everything turns on the facts.

19.  At this stage, I am afraid I cannot accept counsel’s suggestion that it is a plain and obvious case that the master agreement was an incomplete one and could not be enforced at law.

20.  That leaves counsel’s argument based on agency.  Again, the principles are not in doubt.  The question is whether Mr Tom Lau had the actual or apparent authority to represent the 1st third party in entering into the master agreement alleged by the defendants.  This again turns on the facts, and even in relation to the question of actual authority this cannot be finally determined until after full discovery of all relevant documents, including all relevant internal documents of the 1st third party on this subject matter.  Nor can it be finally resolved without regard to the past practice as to how things were done within the Paul Y Group in general and within the 1st third party in particular, because when one is dealing with actual authority, one is also concerned with implied authority apart from express authority, and this is so even in the case of a limited company.  And of course there is the question of apparent authority and how things were generally dealt with in the past must be a relevant matter to take into account.

21.  So for all those reasons, I am afraid I am not with Mr Yuen, who has obviously got a difficult task to perform today in light of the Court of Appeal’s judgment.  Counsel has said everything that can be said on behalf of the 1st third party, but I am afraid the application to strike out must be dismissed for those reasons.

22.  Turning to the second application before me, the 2nd third party’s application to strike out the third party notice, I accept that there are two matters to consider.  First, whether the third party claim against the 2nd third party falls within the provisions in Order 16 rule 1(1) of the Rules of the High Court, Cap 4.  Secondly, whether as a matter of discretion, the Court should allow the third party claim to be made in the present action.  See Chatsworth Investments Limited v Amoco (UK) Ltd [1968] 1 Ch 665.

23.  The claim against the 2nd third party centres on the defendants’ allegation that under an alleged hotel extension agreement, the 2nd third party has incurred liability to the extent of RMB 40 million towards the defendants.  The defendants further allege that they have made an agreement with the 1st third party to set off that liability against the monies advanced to the defendants in relation to the Beijing project pursuant to the alleged master agreement (including the $10 million advanced under the loan deed that the plaintiff relies on).

24.  I take the view that the third party claim against the 2nd third party falls within rule 1(1)(c) of Order 16, ie there is a question or issue to be tried that is related to the original subject matter that should be determined not only between the plaintiff and the defendants but also between the defendants and the 2nd third party.

25.  However, I still have a discretion to exercise, and here I am concerned by the fact that apart from the set-off which provides a link between the issues concerning the defendants and the 2nd third party and those involved in the main action and the 1st third party proceedings, the 2nd third party is basically unconnected with the latter disputes which are serious and complicated ones which will require many days to try.

26.  The main point advanced on behalf of the 2nd third party in relation to discretion is that it should not be made to expend time and costs unnecessarily in the trial of the third party proceedings as well as the main action which will mostly be concerned with issues not involving the 2nd third party itself.

27.  I see some force in this submission, but in my view, the best way to cater for the concern is to hive off the issues pertinent to the third party proceedings involving the 2nd third party from the disputes in the main action and the issues involved in the third party proceedings insofar as they relate to the 1st third party.

28.  The issues relating to the 2nd third party need only be tried after the outcome of the disputes in the main action and the third party proceedings involving the 1st third party is known.  So for instance, if the defendants should fail at trial in establishing the master agreement, the set-off agreement which premised to some extent on the master agreement and the liability of the 1st third party towards the defendants under the master agreement would be difficult to make out.  Of course there could be many possibilities, and I need not list them all out here.

29.  I am pleased to say that after this possibility has been mentioned by the Bench to the parties, both the defendants as well as the 2nd third party are receptive to it.  In my view, the Court’s discretion should be exercised along those lines.

30.  But returning to the 2nd third party’s application to strike out the third party notice, I take the view that it should be dismissed for the reasons explained, subject to the rider that appropriate directions should be given in relation to how the third party proceedings against the 2nd third party should be proceeded with.

[Submissions re directions]

31.  I note the concern of the plaintiff about delay, but the new rules now allow parties 28 days to file pleadings.  I see no reason why the third parties should be made to file their pleadings within 14 days.

32.  I will deal with the 1st third party’s position first:

(i)  Leave to the 1st third party to file and serve a defence within 28 days from the date hereof.

(ii)  Leave to the defendants to file and serve a reply within 14 days thereafter.

(iii)  The defendants and the 1st third party do file and serve a list of documents within 14 days thereafter.

(iv)  There be inspection within 14 days thereafter.

(v)  The defendants and the 1st third party do file and mutually exchange signed witness statements as to fact within 42 days after inspection.

(vi)  The 1st third party shall attend the case management conference scheduled for 8 July 2009 in respect of the main action; and

(vii)  the defendants and the 1st third party be at liberty to seek further or other directions from the Court if appropriate at the case management conference in respect of the third party proceedings concerning them.

[Discussion]

33.  In relation to the 2nd third party, I will give similar directions in terms of (i) and (ii) of the directions that I have just given for the 1st third party, i.e. defence within 28 days, reply within 14 days.  I give these further directions:

(iii)  Subject to any further or other directions by the court, the third party proceedings against the 2nd third party shall only be proceeded with after the outcome of the main action and the third party proceedings against the 1st third party is known.

(iv)  Liberty to apply for further or other directions. 

[Submissions]

(v)  Liberty to the 2nd third party to attend the case management conference scheduled for 8 July 2009.

[Submissions on costs]

34.  I will deal with the costs of the strike-out application by the 1st third party first.  Costs should follow the event, so I order that costs be to the defendants to be taxed if not agreed.

35.  On the striking-out application by the 2nd third party, I bear in mind the submissions.  I think the fairest order would be the defendants’ costs in the cause.

36.  The third party directions – costs in the cause.

HCA 571/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 571 OF 2007

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Before: Deputy High Court Judge L. Chan in Chambers

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J U D G M E N T

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1.  This is an application by the plaintiff for summary judgment against the defendants.  The cause of action is a loan for HK$10 million advanced by the plaintiff to the 1^st defendant on 25 October 2005 together with interest and expenses.  The loan was advanced pursuant to a loan deed of the same date. 

Relationship of the defendants and ownership of the Project

2.  The 2^nd defendant holds 90% of the shares of the 1^st defendant.  The 1^st defendant holds 99.99% shares of the 3^rd defendant.  Both the 2^nd and 3^rd defendants are named in the loan deed as guarantors of the loan. 

3.  The 1^st and 3^rd defendants in turn own 13% and 62% of a Mainland Company Eternal Real Estate Development Company Limited (“ER Estate”).  ER Estate owns a real property development project in Beijing (“the Project”). 

The loan deed and supplements

4.  The loan deed required repayment within two months.  The repayment date was extended to 25 January 2006 by a supplement to the loan deed made on 24 December 2005.  The repayment date was further postponed to 25 February 2006 by a 2^nd supplement to the loan deed dated 24 January 2006.  There was no repayment by 25 February 2006.  The plaintiff then started this action against the defendants for repayment of the loan with interest and expenses.

The alleged Master Agreement, the Three Agreements and the Management Agreement

5.  The defendants deny that the loan is repayable.  They say that this loan is part of an oral master agreement (“Master Agreement”) made on 22 June 2005between one Paul Y. Engineering Group Limited (“PYE”) as represented by one Tom Lau and the 2^nd defendant.  They further allege the terms of the Master Agreement as follows:

“(1) PYE should within 14 months advance or cause its related companies to advance loans up to RMB420,000,000.00 (‘the Facility’) to ER Estate for the purpose of financing and hence completing the Project.

(2) Part of the Facility, i.e. RMB130, 000,000.00 would be used ER Estate to redeem the existing mortgage of Block C held by 中國信達資產管理公司 (‘信達’), a financial institution incorporated in the Mainland.

(3) The rest of the Facility would be used for paying the construction costs and other costs for completion of the Project, and would be advanced at such times and in such amounts according to the actual need to ensure the Project would be completed and units therein ready for hand over to individual purchasers in 14 months.

(4) The Facility would be secured by various properties of the Project.

(5) This security would be provided by ER Estate entering into presale contracts of various units of Blocks A, B and C and leasing contract for the carpark and club house of the Project, with cancellation provisions entitling ER Estate to cancel the presale or leasing arrangement upon repayment of sums advanced under the Facility.

(6) Interest at the rate of the People’s Bank of China’s basic lending rate  + 8% per annum would be paid to PYE for advances made under the Facility.

(7) PYE would be entrusted with the project management of the Project and complete the remaining works timeously and would receive payment of 5% of the construction costs incurred as project management fee.

(8) The sums advanced under the Facility would be repaid after completion of the Project, and, repaid in stages upon sale of completed units of the Project.”

6.  They further refer to a note dated 22 June 2005 and written by Tom Lau as evidence of their alleged Master Agreement.  The note stated:

At the top of the notes is the date 22nd June 2005.  The notes refer to certain pre-sale and leasing contracts for some properties.  The first pre-sale agreement is for purchasing some units at RMB250 million.  The second is a leasing agreement for RMB50 million.  The last is a pre-sale agreement for some units at RMB50 million.  The total sum under the three agreements is RMB420 million.  The RMB420 million is supposed to be used as follows: RMB150 million in cash, RMB150 million for construction costs and RMB120 million for the rest of the building costs.  There is another presentation on the use of the RMB420 million; namely RMB130 million for Shun Tat, RMB270 million for construction costs and RMB20 million for others.

7.  The defendants further allege that the following four written agreements were entered into in part performance of the Master Agreement.  They are:

“(1) Framework Presale Agreement for Block C of the Project dated 22^nd June 2005 (關於‘嘉裕苑’C座商品房預售框架協議) entered into by ER Estate and Galaxy Land Ltd (‘Galaxy Land’) (‘Block C Agreement’);

(2) Leasing Agreement for Clubhouse and Carpark dated 22^nd June 2005 (關於‘嘉裕苑’會所及停車場租用權協議) entered into by ER Estate and Galaxy Land (‘Clubhouse and Carpark Agreement’);

(3) Framework Presale Agreement for Blocks A & B dated 22^nd June 2005 (關於‘嘉裕苑’A、B座商品房預售框架協議) entered into by ER Estate and Galaxy Land (‘Blocks A & B Agreement’); and

(4) Project Management Contract dated 22^nd June 2005 (建築項目管理合同) entered into by ER Estate and PY China (‘the Management Contract’).”

The Block C Agreement, the Clubhouse and Carpark Agreement and the Blocks A & B Agreement are hereinafter called “the Three Agreements”.  Galaxy Land is a company owned or controlled by PY Construction (China) Limited (“PY China”).

8.  The Block C Agreement provided that ER Estate would pre-sell to Galaxy Land RMB250 million worth of units in Block C.  The parties would enter into formal contracts for the per-sales.  Of this RMB250 million purchase price, RMB130 million would be paid by Galaxy Land to the then mortgagee of the Project信達.  RMB20 million would be paid to ER Estate after signing the actual pre-sale contracts for the units in Block C.  The payment of the remaining RMB100 million under this Agreement would be in line with the need of costs for completing the Project.  However either party could cancel some or all of the pre-sale contracts by written cancellation agreement before Galaxy Land has obtained from the Mainland Government the title certificate (商品房權屬證書).  Upon cancellation, ER Estate would have to return the money paid plus interest at 8% above the basic lending rate of the People’s Bank of China for the period between the date of receipt of the money and the date of repayment.  Hence, the defendants say that RMB250 million would be advanced under the Block C Agreement for use in completing the Project.

9.  Regarding the Blocks A & B Agreement, Galaxy Land has the option to purchase certain units in Blocks A & B at the price of RMB12,000 per m².  Galaxy Land may enter into actual pre-sale contracts in respect of the purchase.  The total purchase price for the units in these two blocks could be up to RMB240 million.  The payment of purchase price would be in line with the need of costs for completing the Project.  The parties would, at the time of ER Estate’s request for payment, negotiate and agree on the units to be pre-sold to Galaxy Land and sign the relevant pre-sale contracts.  Upon signing the pre-sale contracts, Galaxy Land would pay 50% of the purchase price (i.e. Up to RMB120 million) to ER Estate.  The remaining 50% would be paid upon obtaining the title certificate.  There is also a provision for cancellation of the pre-sale contracts and repayment of purchase price with interest.  It is similar to that of the Block C Agreement.  The defendants therefore say that RMB120 million would be advanced under this agreement for use in completing the Project. 

10.  For the Clubhouse and Carpark Agreement, the term of lease was for 30 years at the total rental of RMB50 million.  Payment of the rental was also in line with the need for costs of the Project.  There is also a provision for cancellation and repayment of rental with interest which is similar to that of the Block C Agreement.  The defendants say that RMB50 million would be advanced under this agreement for completing the Project. 

11.  They further say that the total sum to be advanced under the Three Agreements would be RMB420 million which was the Facility provided in the Master Agreement for completing the Project.

12.  Pursuant to the Block C Agreement, the parties also signed some actual pre-sale contracts in respect of 124 units in Block C.

13.  On 20 October 2005, the parties further entered into a memorandum of understanding (“MOU”).  The management fee payable under the Management Contract and the money paid to ER Estate for developing the Project were deemed by the MOU to be debts due from ER Estate to PY China.  These debts had to be repaid with interests.  The MOU also confirmed that some units in Blocks A, B and C had been pre-sold to PY China and its related company for them to hold as security for the payment of the management fee and the repayment of the project costs.  It also provided that if such money should be outstanding, the parties through negotiation and agreement could treat the outstanding money as payment for the outstanding purchase price of the units or the outstanding rental under the Three Agreements.  Finally, it confirmed that the Three Agreements were all for securing prompt payment by ER Estate of the management fees and repayment of the project costs.  Upon full payment of the fees and repayment of the costs and purchase price, ER Estate could cancel the pre-sale contracts and the Clubhouse and Carpark Agreement. 

14.  The MOU thus confirmed that the Three Agreements were for providing security to PY China for the payments to be made by ER Estate.  However, it also allowed PY China to take up some interest in the Development in the event of ER Estate’s default in making full payment/repayment promptly.

15.  On 6 January 2006, PYE also made a public announcement in accordance with the Listing rules of the HKSE on the money that Galaxy Land/PY China had paid ER Estate under the Three Agreements.  The announcement stated among other things:

“The trading balances arose from payment of certain development and construction costs by the Group on behalf of the employer, Eternal Real Estate Development Co., Limited in respect of a residential development in Beijing (the ‘Project’).  The trading balances, which bear interest at 8% over the lending rate as announced by The People’s Bank of China and are repayable on demand, are secured by certain property units of the Project with an independent valuation of approximately HK$183,255.000 as at 15^th October, 2005.”

The alleged Further Agreement

16.  The defendants then say that in mid-October 2005, the 2^nd defendant requested to draw down RMB10 million under the RMB420 million Facility to pay the contractors and creditors.  PYE then represented through Tom Lau that it suffered from shortage of RMB.  It instead proposed to lend the 2^nd defendant HK$10 million on the following terms:

“(1)   A sum of HK$10 Million would be advanced in Hong Kong through the Plaintiff as PYE’s agent, which would be repaid in HKD upon Eternal Real Estate having received a corresponding advance under the Facility in RMB, which PYE represented would be available within 2 months’ time; and

(2)    On Eternal Real Estate receiving a corresponding advance under the Facility in RMB in Beijing, the 2^nd Defendant would convert the same into HKD and repay the same to PYE in Hong Kong.”

These terms were characterized as the Further Agreement.  The defendants say that the loan deed dated 25 October 2005 was made pursuant to the Further Agreement.  They further allege that the plaintiff entered into the loan deed as agent of PYE. 

17.  The defendants then allege that PYE had failed to advance the RMB20 million to the 2^nd defendant within two months.  They also allege that PYE had failed to make adequate advance to the 2^nd defendant and ER Estate for completing the Project within 14 months from June 2005 as provided in the Master Agreement.  They therefore say that the HK$10 million under the loan deed is not due yet.

The plaintiff’s arguments

18.  The plaintiff denies that there was any Master Agreement or Further Agreement.  It says that each of the Three Agreements and the Management Agreement was an independent agreement and there was no Master Agreement.  It further says that if there were any Master Agreement, it would have been made in writing and referred to in the Three Agreements and the Management Agreement.  Furthermore, the notes written by Tom Lau on 22 June 2005 merely showed that there were the Three Agreements, the Management Agreement and the total amount of money to be paid to ER Estate thereunder.  The notes did not refer to any Master Agreement.  These notes were compatible with the fact that there were merely the Three Agreements and the Management Agreement each being a stand-alone agreement.

19.  The plaintiff further says that the Three Agreements and the loan deed were all prepared by lawyers.  The Three Agreements made no mention about the Master Agreement.  The loan deed also made no reference to the Three Agreements or the alleged Master Agreement.  The loan deed provided a definite date for repayment.  Such provision was in conflict with the terms of the Three Agreements and the alleged Master Agreement.  The security provided in the loan deed was also different.  The 2nd and 3rd defendants stood as guarantors in the deed.  However, the security in the Three Agreements for the repayment of the purchase price and rental were the units in Blocks A, B and C and the use of the clubhouse and the carpark.

20.  The plaintiff further refers to six agreements made between PY China and ER Estate under which a total of RMB145,085,568 had been advanced to ER Estate for payment of project costs.  These agreements were listed in schedule 4 of the defence.  Some of the advances were made before the loan deed and some after.  These six agreements all contained provisions that their advances would in due course be set-off against the purchase price to be paid under the Block C Agreement, but the loan deed did not have such provision.  This shows that if PY China should have agreed to advance money to ER Estate pursuant to the Three Agreements with the units in the blocks as security, it would have done so in writing.  The loan deed was without such provision and was therefore an arrangement independent of the Three Agreements.  Even if there were the Master Agreement, which would have encompassed the terms of the Three Agreements, there was no reason why the loan deed should have any connection with it. 

21.  Furthermore, if there were indeed the Further Agreement, there was no reason why its terms would not appear in the loan deed and the loan deed would instead contain a definite repayment date which contradicted the terms of the alleged Further Agreement. 

22.  The plaintiff further submits that parole evidence is not admissible to contradict the terms of a written agreement (see Hennabun Capital Ltd v Wong Chun Hung Vincent, HCA 340/2001 at paragraph 15 and Societe Provencale de Constructions Metalliques Navales et Ferroviaires v Tao-Yih Woo  t/a T. Y. Woo & Co. [1961] HKLR 394 at 401).

The defendant’s arguments

23.  The defendants further refer to some notes written by Tom Lau on 30 June 2007 and some other notes referring to some contracts to be drafted.  The Three Agreements, the loan deed and another loan of HK$30 million advanced by one Jenvin Ltd. (a company related to PYI Corporation Ltd. (“PYI”)) were referred to together in these notes.  They say that these agreements were all under the Master Agreement.  The plaintiff however replies that these notes were created at a time when the parties wanted to sort out and settle all the dealings between them.  All these transactions were mentioned in the notes for this purpose.

24.  Furthermore, ER Estate wrote on 15 November 2006 a demand letter to PYI, PY China and Galaxy Land in relation to the Three Agreements and the payment of project costs.  Paragraph 6 of the letter referred to the HK$10 million advanced under the loan deed.  It stated:

「6.       至於2005年10月25日雙方簽署的《貸款合同》,是因貴公司沒有完全履行《關於‘嘉裕苑’C座商品房預售框架協議》約定的付款2,000萬元的義務，而將其中的1,000萬元付款改在香港支付，並要求我方重複簽署的《貸款合同》。」

(ER Estate in this paragraph alleged that the loan deed was made because PY China had not fully performed the Block C Agreement and did not pay ER Estate the RMB20 million.  It instead paid HK$10 million of this sum in Hong Kong and asked the defendant to enter into the loan deed.)

25.  The plaintiff denies that the RMB20 million under the Block C Agreement had not been paid.  It refers to the seven agreements listed in schedule 4 of the defence which show the advancement of a total of RMB18,285,000 to ER Estate and of which RMB15,085,568 were expressed to be related to the Block C Agreement.  The more important point however is the failure of the demand letter to mention the terms of the alleged Further Agreement at all.  If the HK$10 million were not repayable because of PYE’s breach of the Further Agreement, the demand letter would have said so. 

26.  The plaintiff therefore says that all these show that the loan deed was an independent transaction and the Further Agreement was a fabrication.  Otherwise, the terms of the loan deed would not have been in contradiction with the terms of the alleged Further Agreement. 

Finding on the loan deed

27.  I agree with the plaintiff’s reasoning.  I also agree that the parole evidence rule does not allow the admission of oral evidence on the alleged Further Agreement as such evidence contradicts the express terms of the loan deed.  I therefore find that the HK$10 million loans advanced under the loan deed was a stand-alone transaction and the defendants’ allegations that it was part of the Master Agreement or the Three Agreements or that it was made pursuant to the Further Agreement are unbelievable.

Defence of set-off

28.  Apart from the above argument of the alleged Master Agreement and Further Agreement, the defendants have another ground of defence.  They allege that the HK$10 million together with another HK$30 million advanced by Jenvin Limited under an agreement dated 7 December 2005 had been set-off in May 2006 against RMB40 million consultant’s fees allegedly due from PYI to the 2^nd defendant.  This set-off agreement was said to have been made orally between the 2^nd defendant and one Charles Chan, the person allegedly in control of PYE and PYI.  However, both the HK$10 million under the loan deed and the HK$30 million advanced by Jenvin were still referred to in the demand letter of ER Estate dated 15 November 2006.  The letter, however, made no mention of the alleged set-off.

29.  Furthermore, there were the notes referred to in paragraph 23 above which were made after May 2006 for negotiating a global settlement of all disputes between the parties.  This HK$10 million loan and the HK$30 million loan were still mentioned in these notes.  This shows that they had not been set-off.

30.  If there were indeed a set-off in May 2006, these loans would have ceased to exist and would not have been mentioned in these notes or the demand letter.  If they should still be mentioned despite having been set-off, then the set-off against the alleged consultant’s fee would also have been mentioned.  But no set-off was mentioned.  For these reasons, I do not think the allegation of set-off is believable at all.

Defence of set-off against damages

31.  The next ground of defence is the setting off of this HK$10 million loan against the damages payable by PYE/PY China for breach of the Master Agreement or the Three Agreements.  There is no evidence on why the Three Agreements have not been fully performed or who have breached them.  There is no credible evidence in support of the defendants’ claim for damages.  The defendants cannot rely on this as a defence.

Illegal Money Lending

32.  Finally, the defendants argued that the HK$10 million loan was an illegal loan contrary to the provisions of the Money Lenders Ordinance.  The defendants argue that this loan was not exempted by Schedule 1 of the Ordinance because it was a loan advanced to the 2^nd defendant personally through his agent the 1^st defendant.

33.  This is a re-run of the Master Agreement argument.  Furthermore, if the 2^nd defendant were personally borrowing the HK$10 million, his role would be a primary borrower and not a guarantor.  A guarantor has only secondary liability to repay.  The assumption by the 2^nd defendant of the guarantor’s role is inconsistent with his allegation that he was the primary borrower.

Judgment

34.  For the above reasons, I hold that the defendants have no defence to this claim.  I therefore give summary judgment to the plaintiff for the amount claimed in the Statement of Claim with interest at the daily rate of HK$6,506.85 from 22 March 2007 to today.  I also make an order nisi that the defendants do pay the plaintiff the costs of this action.