BONDS GROUP CO LTD v. KWAN DANIEL AND OTHERS

HCA 1861/2017

[2023] HKCFI 1396

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1861 OF 2017

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DECISION ON COSTS

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1.  On 12 December 2022, I handed down a judgment after the trial of the action ([2022] HKCFI 3674)  and made a costs order nisi that the defendants do have 60% of the costs of the action to be taxed on a party and party basis if not agreed, with certificate for two counsel, save that the costs of the expert evidence (including the costs of engaging the defendants’ expert, the defendants’ expert reports, and the time spent at trial with the experts)  be excluded from the defendants’ costs. The reasons for departure from the starting point that costs should follow the event are set out in §§96-104 of the Judgment.

2.  By summons dated 23 December 2022, the defendants seek to vary the costs order nisi on the grounds that the plaintiff failed to obtain a judgment better than the defendants’ sanctioned payment made on 14 February 2019. Pursuant to RHC Order 22 r.23(3)  and (4), the Court may order that the defendants have their costs on an indemnity basis after the last date on which the plaintiff could have accepted the payment without requiring leave of the Court (in this case, 14 March 2019)  and interest on such costs at a rate not exceeding 10% above the judgment rate.

3.  RHC Order 22 r. 23(5)  provides that the Court shall make the order in rules 23(2)  to (4)  unless it considers it unjust to do so. There is no dispute that the burden is on the party declining the sanctioned payment (in this case, the plaintiff)  to show why it would be unjust (see e.g. Salleh Abu Baker v Anway Ltd[2022] HKCFI 2055 at §8).

4.  Having regard to my findings in the Judgment and the fact that the plaintiff did not accept the sanctioned payment, the defendants propose that the costs order nisi be varied as follows:

(1)  The defendants do have 60% of their costs of the action (excluding the costs of the expert evidence)  to be taxed on a party and party basis up to and including 14 March 2019 if not agreed, with certificate for two counsel; and

(2)  The defendants do have their costs of the action (excluding the costs of the expert evidence)  to be taxed on an indemnity basis from 15 March 2019 up to 12 December 2022 (the date of the Judgment)  if not agreed, with certificate for two counsel, plus interest thereon at 6% from 15 March 2019 up to 12 December 2022.

5.  Mr Jonathan Ng, counsel for the plaintiff (who did not appear at the trial), does not dispute the costs proposed by the defendants in respect of the period up to and including 14 March 2019, which are the same as those in the costs order nisi. However, he submits that for the subsequent period, the defendants should have only 60% of the costs of the action, excluding the costs of the expert evidence, to be taxed on an indemnity basis if not agreed, with certificate for two counsel, plus interest thereon at 5% per annum.

6.  Mr Jiang Zixin, counsel for the defendants (who also did not appear at the trial), submitted that the question before the Court is how the established principles in Re Elgindata (No. 2) [1992] 1 WLR 1207, which were applied by the Court in determining and apportioning costs in the costs order nisi, interact with the principles and objectives of sanctioned offers and payments.

7.  He accepted that whilst the Court’s discretion remains unfettered, the following approach would strike the correct balance between the two principles and objectives:

(1)  The starting point is that if a plaintiff fails to do better than the defendant’s sanctioned payment, the costs consequences under the rule are prima facie applicable, even if the defendant loses the action and substantial damages are awarded to the plaintiff. A fortiori, the same consequences are prima facie applicable where, as in the present case, “the defendants were for practical purposes the successful party in this action” (§98 of the Judgment).

(2)  Whilst the court is entitled to take into account all the circumstances of the case in considering whether it is unjust to make the orders under the rule, for a circumstance to be considered relevant, it ought to: (a)  “relate... to the reasonableness or otherwise of the [plaintiff’s] non-acceptance of the sanctioned [payment]”; or (b)  “suggest ... that, while the continuation of the proceedings is primarily due to the non-acceptance of the sanctioned [payment], costs are incurred or increased thereafter due to any unreasonable conduct of the [defendant]” (Arnold Robert Limited v Glorious Motors Limited[2019] HKCFI 91 at §12 per Recorder S. Wong SC; see also, Qvist Henrik v Clatronic Far East Ltd [2020] 1 HKLRD 703 at §19; Wah Lun International Development Ltd v Lau Chiu Shing[2021] HKCFI 1976 at §10(7)).

(3)  Where a defendant acted unreasonably in contesting a particular issue, causing significant time and effort to be wasted, this would fall within “unreasonable conduct” in (b)  above. Thus, in Tin Foo Investment Company Limited v Previgor Development Limited[2019]HKCFI 1106 at §§16(5)-(6), DHCJ B Man SC held that the defendants acted “unreasonably and improperly” in contesting liability and therefore should be deprived of part of their costs (even though the plaintiff failed to obtain a better result than the defendants’ sanctioned payment).

(4)  Given that the cost consequences under RHC Order 22 r.23 prima facie apply even if the party making the sanctioned offer or payment fails in the action entirely, the fact that that party fails only on some issues, provided the same were not unreasonably and improperly raised, should not normally be a reason to depart from the costs consequences under the rule.

(5)  Whilst it is unnecessary as a general rule to establish that a successful party has acted unreasonably or improperly in raising an issue for it to be deprived of the whole or part of its costs (see e.g. Zhuhai International Container Terminals (Jiuzhou)  Limited v Lo Tong Hoi (unreported)  CACV 181/2011, 31 July 2012, at §33), in the context of a sanctioned offer or payment, success or failure on the merits should be less readily taken into account in departing from the costs consequences under the rule.

8.  I agree in principle with Mr Jiang’s analysis, subject to the following observations.

9.  First, it should be emphasised that the two categories identified in §7(2)  above, whilst providing a useful guide, should not be read as if they form part of the rule or that the categories are closed. In considering whether it would be unjust to make the orders referred to in rule 23(2), (3)  and (4), paragraph (6)  expressly provides that the Court shall take into account all of the circumstances of the case. In any event, what may or may not be considered to be “unreasonable conduct” is necessarily fact sensitive.

10.  Second, since the Civil Justice Reform, the manner in which litigation is conducted is not solely a matter as between litigants themselves, but there is also a broader public interest to ensure that the Court’s limited resources are distributed fairly. The Court’s powers as to costs perform an important function to promote cost-effectiveness, proportionality and procedural economy in litigation. All of these concepts are expressly recognised by the underlying objectives in RHC Order 1A r.1 and apply throughout the litigation process.

11.  In considering what is “unjust” within the meaning of RHC Order 22 r.23(6), the Court is concerned not only with what may be just or unjust as between the parties inter se but also the broader public interest mentioned above. A party who has made a sanctioned offer or payment remains under the duty to assist the Court to achieve these underlying objectives. The Court’s discretion on costs to promote such objectives should not be restricted to situations where conduct is necessarily “unreasonable” or “improper”. It is ultimately a matter of degree, and each case turns on its own facts and circumstances.

12.  In my view, the defendants’ case at the trial that the LOI was not binding on the parties was particularly opportunistic and unmeritorious, especially when both parties had all along believed and proceeded on the basis that they were bound. On the other hand, I accept that the proper construction of Clause 10b raised difficult questions albeit, in the end, I found against the defendants on the issue (§66 of the Judgment).

13.  Having regards to the above, together with the other miscellaneous points raised by the parties in their written submissions and my reasons in the Judgment for the costs order nisi (which have not been otherwise challenged in this application), and adopting a necessarily broad brushed approach, I would exercise my discretion to vary the costs order nisi as follows:

(1)  The defendants do have 60% of their costs of the action to be taxed on a party and party basis up to and including 14 March 2019 if not agreed, with certificate for two counsel, save that the costs of the expert evidence (including the costs of engaging the defendants’ expert, the defendants’ expert reports, and the time spent at trial with the experts)  be excluded from the defendants’ costs;

(2)  The defendants do have 80% of their costs of the action to be taxed on an indemnity basis from 15 March 2019 up to and including 12 December 2022 if not agreed, with certificate for two counsel, save that the costs of the expert evidence (including the costs of engaging the defendants’ expert, the defendants’ expert reports, and the time spent at trial with the experts)  be excluded from the defendants’ costs;

(3)  The defendants do have interest on the costs mentioned at paragraph (2)  above at 6% p.a. from 15 March 2019 up to and including 12 December 2022.

(4)  There be no orders as to costs of this application.

14.  Last but not least, I thank both counsel for their assistance.

Mr Jonathan Ng, instructed by MinterEllison LLP  for the plaintiff

Mr Jiang Zixin, instructed by Huen & Partners for the defendants

HCA 1861/2017

[2022] HKCFI 3674

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1861 OF 2017

__________________________

__________________________

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J U D G M E N T

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I.  INTRODUCTION

1.  In this action, the plaintiff claims against the 1^st to 3^rd defendants for damages for breach of contract in respect of a “公司股權轉讓意向書” [Letter of Intent for Company Share Transfer] entered into between the defendants as sellers (described as “甲方” [Party A]) and “寶聲集團或旗下之成員公司” [Bonds group or its member companies] as purchasers (described as “乙方” [Party B])[1] in April and May 2017 (the “LOI”) of 70% of the ordinary share capital of a company known as Discreet Limited (the “Company”) and the subsequent management of the affairs of the Company. The principal asset and business of the Company were the development of 13 detached houses known as “Grand Riviera” situated at 368 Castle Peak Road, Ting Kau, Tsuen Wan, New Territories, on Lot No. 496 in D.D. 399 (the “Development”).

2.  On the original writ indorsed with statement of claim dated 8 August 2017, the primary relief sought by the plaintiff was specific performance of the LOI. In this connection, the plaintiff issued a summons on 11 August 2017 seeking interim injunctions and orders in aid of its prayer for specific performance (the “Injunction Application”).

3.  The Injunction Application was heard by Lisa Wong J on 8 September 2017, and by a Decision dated 18 September 2017 (the “Decision”), her Ladyship dismissed the application on the grounds that there was no serious issue to be tried that the LOI could still be subsisting, it being clear that the same had been terminated at the latest by 5 June 2017. The plaintiff was therefore left with a claim (if any) against the defendants in damages (see §76 of the Decision).

4.  On the first day of the trial, I made an order in terms of a consent summons dated 20 June 2022 whereby it was agreed that the action against the 3^rd defendant (“Mr Koon”) was to be discontinued with no order as to costs. Unless otherwise stated, references to the defendants below are references solely to the 1^st and 2^nd defendants (or “Mr and Mrs Kwan”) and references to the parties are references solely to the plaintiff and the 1^st and 2^nd defendants.

II.  BACKGROUND

5.  The factual background of the action, insofar as relevant, is not in serious dispute, save for the contents of a telephone conversation which took place on 31 May 2017 between Mr Kwan and Mr Anson Chan (“Mr Chan”), the plaintiff’s chief executive officer and director. At this juncture, I need only summarise briefly the events leading to the present action having regard to the agreed chronology filed by the parties and the respective opening and closing submissions of Mr Jonathan Wong, counsel for the plaintiff, and Mr Law Man-Chung SC[2], counsel for the defendants.

6.  The defendants, who are husband and wife, were at all material times the only registered shareholders of the Company, a Hong Kong incorporated company. The Company’s issued share capital comprised, inter alia, 5,900,000 ordinary shares of HK$10 each, of which Mr Kwan held 5,880,020 and Mrs Kwan held 19,980. Mr Koon, a friend of Mr Kwan, did not hold any registered shares of the Company, but was described in the LOI as having some beneficial interest in the Company.

7.  The dispute between the parties arises out of the LOI, the primary subject matter of which was, as mentioned above, the sale and purchase of the defendants’ 70% shareholding of the Company (the “SubjectShareholding”). Although discussions between the parties commenced in late 2015, the process took on momentum after the valuation of the Development was agreed in principle at HKD 800,000,000.

8.  There is no dispute that the LOI was not professionally drafted. The first draft, which was a simple document with some 9 lines of Chinese text, was emailed by Mr Kwan to the plaintiff’s general manager, one Ho Shek Tim (“Mr Ho”) on 8 April 2017. The plaintiff then reverted with its own version, which was substantially more detailed and drafted in Chinese by one 洪亮 [Hong Liang] (“Mr Hong”), who Mr Ho said was the chief financial officer for one the plaintiff’s projects in Beijing. It was the latter draft upon which amendments were made and which eventually became the LOI. In their initial discussions, the parties contemplated a sale of only 50% of the Company’s shareholding and that management powers would be shared equally. However, the position evolved, and the parties eventually agreed to the sale of 70% of the Company’s shareholding (i.e., the Subject Shareholding) and the plaintiff assuming management control of the Company through the appointment of a majority of directors on the board.

9.  The LOI was signed by Mr Chan on behalf of “寶聲集團” [Bonds group] and Mr Koon on 20 April 2017. Mr and Mrs Kwan signed later on 13 May 2017. The LOI comprised some 13 clauses on two single-spaced typewritten pages. For ease of reference, I reproduce the LOI in full in the Annex 1A to this Judgment, together with an informal English translation for convenience: Annex 1B. Needless to say, I have considered the disputes as to the meaning of its terms on the basis of the original Chinese version.

10.  After the execution of the LOI, the plaintiff commenced the due diligence process pursuant to the 60-day window provided by clause 10 of the LOI. The plaintiff contends that it engaged external professionals for this purpose and had incurred significant costs, although this is disputed by the defendants.

11.  On 31 May 2017, Mr Kwan unexpectedly informed Mr Chan by telephone that he wished to terminate the LOI (the “May 31 Conversation”). The contents and effect of the May 31 Conversation are hotly disputed, this being the primary factual dispute between the parties at the trial. Mr Kwan contends that an agreement was reached between him and Mr Chan during that conversation as to the termination of the LOI and the measure of compensation for such termination. Such an agreement was then “re-confirmed” in subsequent correspondence between the parties. The plaintiff, on the other hand, contends that no agreement was in fact reached in the May 31 Conversation or the subsequent correspondence and therefore the normal measure of damages should apply for the defendants’ repudiation of the LOI.

12.  I should also add that following the refusal of Lisa Wong J to grant injunctive relief, Mr and Mrs Kwan subsequently entered into an agreement on 8 January 2018 with third parties disposing, inter alia, 100% of their shareholding in the Company.

13.  I will come back to various aspects of the background in greater detail when I examine the issues below.

III.  ISSUES TO BE DETERMINED

14.  For convenience, I adopt with minor modification the list of issues set out in Mr Wong’s Closing Submissions (which was not seriously disputed by Mr Law SC).

15.  The first issue is whether the LOI constituted a binding contract between the parties, which the defendants deny on the grounds that the parties did not intend the LOI to be binding, or it was insufficiently certain or complete to have contractual force.

16.  The second issue (assuming that the LOI did constitute a binding contract) is whether, on its proper construction, the agreed formula for measuring damages in clause 10b of the LOI is concerned solely with a breach of clause 10a (a provision prohibiting Party A from negotiating with third parties during the due diligence period), as contended by Mr Wong; or whether it is concerned with breaches of LOI generally, including any anticipatory breach of the same, as contended by Mr Law SC.

17.  The third issue is, irrespective of the proper interpretation of clause 10b, whether there was a mutual consensus reached during the May 31 Conversation for the compensation to be made by the defendants pursuant to the mechanism in Clause 10b.

18.  The fourth issue is whether the plaintiff is entitled to damages and the quantum of such damages, pursuant to the mechanism in clause 10b or in general damages for breach of contract (as the case may be).

IV.  FIRST ISSUE: WAS THE LOI BINDING ON THE PARTIES?

19.  Both parties approached this issue solely as one of construction of the LOI. It is not pleaded by either of the parties that the meaning or enforceability of the LOI was affected by the parties’ communications or conduct either before or after entering into the LOI – for instance, by way of part performance or some form of estoppel.

20.  The requirements for a binding contract are well established, namely, that (1) the parties have reached an agreement; which (2) is intended to be legally binding; (3) is supported by consideration; and (4) is sufficiently certain and complete to be enforceable.

21.  Mr Wong’s case is straightforward - the LOI was intended to be a binding contract and all the essential terms for the sale and purchase of the Subject Shareholding and the subsequent management of the Company had been agreed, including:

(1)  the valuation of the Development and the consideration for the 70% of the shareholding (i.e. HKD 245 million): clauses 1, 2 and 3;

(2)  the general framework for the plaintiff’s payment obligations: clauses 4 and 5;

(3)  the application of the sale proceeds generated from the sale of the Development: clause 6;

(4)  control by the plaintiff of the board of directors and over essential matters regarding the improvements to be made to and the sale of the Development: clause 7; and

(5)  the division of the profits from the Development: clause 9.

  Further, the fact that the LOI envisaged the execution of further formal agreements was, in the circumstances of this case, no bar to the LOI being enforceable, and any matters which had not been agreed can be resolved by the parties acting in good faith and adopting the standard of reasonableness.

22.  On the other hand, Mr Law SC submitted that the LOI lacked terms essential for a binding contract for the sale and purchase of the Subject Shareholding. In particular, there are no provisions for the date of completion and the date of payment for the Subject Shareholding. By “completion”, I understand this to mean that the date on which the Subject Shareholding was to be transferred by Party A to Party B.

23.  For convenience, I summarise here the clauses relevant to completion and payment:

(1)  Clause 3 provides that, inter alia, Party B’s exact payment schedule is subject to confirmation in a contract for sale and purchase of the Subject Shareholding (the “Intended SPA”) to be formally signed by both parties.

(2)  Clause 4 provides that Party B shall firstly pay Party A the sum of HKD 140 million to be applied to the purchase of the Subject Shareholding.

(3)  Clause 5 provides that Party B shall pay the remaining balance of HKD 105 million within 24 months according to the progress of the sale of the Development. Interest (to be calculated at an annual interest rate of 2.5%) shall accrue on the outstanding unpaid balance.

(4)  Clause 10 provides that Party B is required to complete the due diligence within 60 days on the date of signing the “Letter of Intent”.

(5)  Clause 11 provides that if there are no major negative findings within 10 working days after Party B’s due diligence report has been completed, the parties shall as soon as practicable complete the Intended SPA, a shareholders agreement and a letter of undertaking from Party B in respect of the shares, creditors’ rights and liabilities of the Company and the Development.

24.  Mr Wong accepts that the LOI does not provide for a date of completion or of payment of the purchase, but he submitted that these omissions do not render the LOI unenforceable as clauses 4, 5 and 11 of the LOI provide a sufficient framework by which the time for payment (and completion) may reasonably be determined.

PRINCIPLES ON INCOMPLETE CONTRACTS

25.  A useful starting point can be found in Halsbury’s Laws of England (5^th edition 2019) Vol. 22 at §68:

“To constitute a binding contract there must be a concluded bargain; and a concluded contract is one which settles everything that is necessary, or essential, to be settled. This requirement may be expressed by way of a general rule that for the parties to be bound they must have finished reaching an agreement, so that it is possible to infer an intention on the part of both of them to be bound immediately, but even when such intention may be found the agreement may still be incomplete and therefore too uncertain to be enforced… Similarly, if the parties have reached agreement in principle only, it may be that the proper inference is that they have not yet finished agreeing, for instance: where they make their agreement subject to details, or subject to contract; or where the parties reach agreement by telephone, but clearly contemplate that one shall send the other a more elaborate written contract; or where the parties simply agree to negotiate in good faith…

On the other hand, an agreement may be complete although it is not worked out in meticulous detail. Indeed, the parties may make it clear that, whilst they intend subsequently to enter into a detailed formal agreement, it is their intention that the provisional agreement be immediately binding. However, whether or not the parties intend a subsequent formal agreement, an outline agreement may achieve sufficient certainty for that agreement to be complete by reason of the maxim that that which is capable of being made certain is to be treated as certain; for instance, because the details not settled by the parties may be determined by recourse to reasonable implied terms, or usage, or by means of a reference to a third party…”

26.  It can be seen that the significance of incompleteness or missing terms is potentially two-fold: (1) it may signify that the parties have not yet finished reaching an agreement, and therefore, there was no intention (or no such intention can be inferred) between them to be bound without further negotiation and agreement of additional terms; or (2) the parties have reached an agreement between them, but due to the fact that they have failed to agree on terms which are essential to a binding contract, what they have agreed is too uncertain to be legally enforceable. I shall refer to (1) as a want of intention to be bound; and (2) as a want of essential terms – that these concepts are distinct can also be seen from Yu Man Fung Alice v Chiau Shing Chi Stephen (unreported) [2020] HKCFI 2923, where Coleman J explained at §24:

“There is a separate and independent requirement of a contract that there be certainty and completeness of terms. So even in cases where the Court concludes that the parties have made an agreement which is intended to be legally binding, the court may nevertheless also conclude that the agreement is too uncertain or incomplete to be enforceable. A typical example is because the agreement lacks an essential term which the court cannot supply for the parties. But the court will only hold that the contract, or some part of it, is void for uncertainty if it is legally or practically impossible to give the agreement, or that part of it, any sensible content.”

27.  Of course, whether parties entered into a concluded contract is a matter to be looked at objectively (see e.g., World Food Fair Ltd v Hong Kong Island Development Ltd [2006] 9 HKCFAR 735 at §35). That is so whether the situation is one of want of intention to be bound or want of essential terms. In the case where there is a written document, as in the present, the Court will of course look primarily to the contents of that document.

28.  As I understand from Mr Law’s submissions, he relies upon both a want of intention to be bound and a want of essential terms. He began by referring the Court to the line of authorities originating from the decision of the Hong Kong Court of Final Appeal in Kwan Siu Man v Yaacov Ozer (1997-98) 1 HKCFAR 343. In that decision, Litton PJ said at p 355C-F:

“…as is common knowledge in Hong Kong, the property market is highly volatile. Whatever might have been the position in England in the last century – when the concept of an “open contract” was first developed in a climate of a stable pound sterling and no inflation – in the Hong Kong of today, the date of completion is an essential term of any contract for the sale and purchase of land. …

The Judge’s finding that the parties were prepared to leave it to the lawyers to deal with the date of completion as a matter of formality – and the finding that the plaintiff was “prepared to leave it to [them] to do what was usual” – should have led her to conclude that, in all probability, there was no concluded agreement reached.”

(emphasis added)

In a concurring judgment, Bokhary PJ said at p 362J-363H:

“In today’s Hong Kong the fixing of a date by when a contract for the sale of land must be completed is at least generally (if not inevitably) of at least considerable (if not vital) commercial importance. There is no practice in the ordinary course of business here of treating the date for completion as a subsequent matter simply to be left to legal advisers to settle.

So even assuming that an open contract can be made under our law, still our courts should always be slow to find that such a contract has indeed been made in any given case. The making of such a contract is not to be found just because there has been a meeting of minds as to parties, property and price. For the strong probability would be that such meeting of minds was no more than one stage in the course of on-going negotiations. This is because in Hong Kong nowadays the inherent probability is that negotiations for the sale of land would, if successfully concluded, result in a contract which includes express terms as to other important matters in addition to parties, property and price: not least of all the date for completion.”

And at p 364E:

“... But in the circumstances of this case, the matters left to the solicitors were much more than mere details. They included the very important matter of the date for completion. Accordingly, all that the parties achieved was an agreement to agree: and that is not a contract. The law preserves bargains; but it does not create them: that must be done by the parties themselves, if it is to be done at all.”

(emphasis added)

29.  Mr Law SC recognised, of course, that the LOI is not an agreement (or purported agreement) for the sale of land but for the shares of a limited company. However, he referred the Court to the decision of the Court of Appeal in Ch’ng Poh v. China Everbright Ltd (unreported) CACV 3805/2001, 23 October 2002. That case was concerned with a claim for damages for breach of an oral agreement for the sale and purchase of the shareholding of a corporate vehicle or “shell company”, which had no assets other than a house in Jardine’s Lookout. The judge below found that no oral agreement had been concluded. Dismissing the plaintiff’s appeal, Le Pichon JA (with whom Rogers VP and Yuen JA agreed) held at §17:

“17. But the date for completion is an essential term of any contract for the sale and purchase of land in Hong Kong. It was so held by the Court of Final Appeal in Kwan Siu Man Joshua v Yaacov Ozer…Since it is common ground (and it was so pleaded by the plaintiff) that “in truth and/or in substance” the agreement related to the sale and purchase of the house, the absence of agreement as to the completion date was fatal to the plaintiff’s case in any event. A finding that the completion date had not been agreed would have led to the conclusion that there was no concluded agreement reached for the sale of the house.”

(emphasis added)

30.  Mr Law SC further referred the Court to Tsang Wing Man v Chung On Ling (unreported) CACV 129/2015, 4 October 2016. In that case, the parties signed a purported sale and purchase agreement in Chinese in respect of a property in Tai Po. No completion date was specified, but rather, the completion date was stated to be, “…within 3 days according to the sale and after completion of the property owned by the Purchaser at Longgang District, Shenzhen City, Guangdong.” The plaintiff sought specific performance of the agreement. As at the date of trial, the plaintiff’s Shenzhen property remained unsold. After referring to the passages of the Court of Final Appeal in Kwan Siu Man cited above, the Court of Appeal continued at §§65-67:

“65. In the circumstances of the present case the reality is that there was not only no date for completion, there was also no viable means for determining it. As at 28 June 2011, the date of the sale agreement, the completion date for the plaintiff’s Shenzhen property was unascertainable as there did not even exist a draft contract of sale for it.

66. In our view, on the basis of the evidence of the content of the sale agreement and the evidence that there was no basis for the plaintiff to harbour an expectation that the Shenzhen property would be sold within a reasonable period of time, the sale agreement is no more than an agreement to agree. However, even if we were wrong in that view, for the very same reasons, the sale agreement would not comply with section 3(1) of the Conveyancing Ordinance and would therefore be unenforceable.

67. For these reasons we agree with the judge that the lack of certainty in relation to completion resulted in the document not being a legally binding contract for sale of the property.”

WAS THERE A WANT OF INTENTION TO BE BOUND?

31.  Mr Law SC submitted, first, that it was “implausible for the parties to intend the [LOI] to be binding”. In Kwan Siu Man at 355A-B, Litton PJ referred to Clifton v. Palumbo [1944] 2 All ER 497, where Lord Greene MR said this at 499E:

“There is nothing in the world to prevent an owner of an estate of this kind contracting to sell it to a purchaser, who is prepared to spend so large a sum of money, on terms, written out on a half sheet of notepaper, of the most informal description, and even, if he likes, on unfavourable conditions; but I think it is legitimate, in approaching the construction of a document of this kind, containing phrases and expressions of doubtful significance, to bear in mind that the probability of parties entering into so large a transaction, and finally binding themselves to a contract of this description couched in such terms is remote.”

32.  He submitted that the present case is a fortiori and asked rhetorically why the parties (when the identity of Party B was not even identified) would intend to be bound by a 2-page home-made document entitled “意向書” [Letter of Intent] based upon a draft made by Mr Hong in Beijing without the involvement of lawyers, especially when the size of the Development, the amount of capital involved, and the purchase price were all very significant. Further, the transaction was not a simple sale and purchase of shares of a shelf company. It was plainly envisaged in the LOI that the Company was to carry out substantial refurbishment works prior to any sale of units in the Development, and the parties would operate the Company as a joint venture.

33.  It was also highly improbable, he submits, that the parties (who had not been acquainted with each other and never had any prior commercial dealings) would allow essential terms, i.e., date of payment and the date of completion, to be dealt with through “the standard of reasonableness”, especially when it was common knowledge that the property market in Hong Kong is “highly volatile”. The fixing of the completion date was of considerable commercial importance and an essential term. Without any agreement on such important term, the Court should be slow to find that a binding contract has been concluded.

34.  Notwithstanding Mr Law SC’s persuasive submissions, it is clear in my judgment that the parties intended themselves to be legally bound by the terms of the LOI.

35.  First, unlike the initial draft from Mr Kwan, the LOI is a relatively detailed document setting out various rights and obligations of the parties both prior to and after the sale and purchase of the Subject Shareholding. It is a far cry from the situation, for instance, in Clifton v. Palumbo.

36.  More importantly, the parties agreed in terms that the LOI was to be binding. Clause 13 provides that:

“Termination of this “Letter of Intent”

13a.  Termination by negotiation: after this “Letter of Intent” has been signed, the “Letter of Intent” can only be terminated after a consensus has been reached between Party A and Party B upon negotiation.

13b.  Termination due to breach of contract: if either Party commits a breach of contract after this “Letter of Intent” has been signed, the other Party may unilaterally terminate the “Letter of Intent” in accordance with the provisions hereunder, and/or seek redress for the legal liability arising from the breach of contract.” (emphasis added)

37.  Further, as pointed out by Mr Wong, the formality of the LOI and the fact it was only signed after a process of negotiation involving numerous drafts and a period of deliberation by the defendants also point to the parties’ intention to create legal obligations.

38.  In the circumstances, there was no want of intention to be bound.

WAS THERE A WANT OF ESSENTIAL TERMS?

39.  Mr Law SC submitted that as essential terms are missing, the LOI could not be a binding contract. In particular:

(1)  No time for completion or payment of the initial instalment and the balance of the purchase price have been agreed in the LOI, which expressly provides that this would be worked out in the Intended SPA to be formally signed by the parties.

(2)  These dates cannot be determined by applying the standard of reasonableness, as it is expressly provided in clause 3 that these would be subject to confirmation in the Intended SPA. In any event, any determination of such dates is far from straightforward, and the amounts involved are substantial.

(3)  It is not even clear which entity within the Party B, i.e., the Bonds Group, would be responsible for making payment.

40.  I first address (3) above. I should mention here that in a footnote of the Decision, Lisa Wong J noted that, “A reason why the defendants to not regard the [LOI] as binding… is that the identity of the purchaser is left open. However, nothing turns on this for present purpose”.

41.  Although the plaintiff asserted (without any apparent particulars) in the amended statement of claim that “寶聲集團” [Bonds Group] (on behalf of which Mr Chan signed the LOI) was a reference to the plaintiff (the Chinese name of which is 寶聲(集團)有限公司), in my view, this is far from clear on the face of the LOI. Even more ambiguous is the fact that Party B is described not merely as “寶聲集團” but as “寶聲集團或其下之成員公司” [Bonds group or members companies under the group].

42.  Needless to say, certainty as to identity of the parties is fundamental to the existence of a binding contract. However, in their amended defence dated 7 December 2017 (after the date of the Decision), although the defendants did not expressly admit that Party B was to be equated with the plaintiff, they did not specifically deny it either. More importantly, they then proceeded to plead that, inter alia:

“5A. Further or alternatively, the true nature of the LOI is merely an offer to the Plaintiff by the 1^st, 2^nd and 3^rd Defendants to perform due diligence on the Company and if the 1^st, 2^nd and 3^rd Defendants refused to make any deal with the Plaintiff eventually, the 1^st, 2^nd and 3^rd Defendants agreed to pay for the wasted costs and expenditures arising from the due diligence work times a factor of five as full compensation. The 1^st, 2^nd and 3^rd Defendants aver and contend that no contract at all had been made between them and the Plaintiff upon the sale of any of the shares of the Company.”

“7. By means of voluntary election, the Plaintiff had agreed to the formal termination of the LOI, and it is now impossible for it to revive its earlier election.”

“13. …it is admitted that Clause 10 of the LOI provides that the Plaintiff has to carry out the due diligence work on the Company within 60 days upon signing of the LOI…”

(emphasis added)

43.  Unsurprisingly, in its reply dated 18 January 2018, the plaintiff pleaded that,

“if it is so alleged, the Plaintiff avers that there was, at all material times, no confusion as to the identity of the contracting parties to the [LOI].”

44.  In the light of the amended defence, the plaintiff’s assertion in its reply is unassailable. In the circumstances, it is no longer open to Mr Law SC to resurrect the issue (apparently flagged before Lisa Wong J) that the lack of certainty as to Party B’s identity is a factor to be taken into account against the LOI being a binding agreement.

45.  As to completion and payment dates being essential terms lacking from the LOI, I address first the question of whether the Kwan Siu Man line of authorities requires me to find that the absence of agreement of a completion date renders the LOI non-binding for want of essential terms. In my judgment, it does not:

(1)  Kwan Siu Man was concerned with the sale and purchase of land in Hong Kong, and it was held that the date of completion was an essential term in such contracts owing to the particular nature of the property market in Hong Kong.

(2)  Although in Ch’ng Poh v China Everbright Ltd (supra), the Court of Appeal applied the principle in Kwan Siu Man to a contract concerning the sale of the shares of a company, it was clear in that case, as noted by Le Pichon JA, that the company in question was merely a corporate vehicle holding a house in Jardine’s Lookout, and that it was common ground that “...in truth and/or in substance the agreement related to the sale and purchase of the house”.

(3)  On Mr Law’s own case, the Company in the present case was not a pure asset holding vehicle, and it was envisaged that the Company would carry out substantial works on the Development before any sale of its units. Although the purchase price for the shares was calculated by the parties on the basis of an agreed valuation of the Development, it was not merely an asset but rather a business project in which the Company would continue to be engaged (clause 7). For instance, the Company had employees, two of which were to be retained even after the sale of the Subject Shareholding (clause 2a).

(4)  Further, as Mr Wong submitted, under the terms of the LOI, the defendants would not be relieved of all the risks (or benefits) entailed by market volatility. Rather, the LOI contemplated that the parties intended collectively to weather (or benefit from) the volatility together as a joint venture.

46.  The present case is therefore clearly distinguishable from Kwan Siu Man and Ch’ng Po. In the absence of any authority binding on me, I do not think it is right to expand the principle in Kwan Siu Man beyond contracts for the sale of landed property in Hong Kong, or contracts for the sale of a corporate vehicle which are “in truth and in substance” the sale and purchase of the underlying landed property.

47.  As mentioned above, the threshold for the Court in finding that a contract is void for uncertainty is high, namely, that it would be “legally or practically impossible to give the agreement, or that part of it, any sensible content.”

48.  In this regard, Mr Wong referred me to the decision of the Court of Appeal in Chan Wan Chuen Snaky v Express Tourist Bus Company Limited[2020] HKCA 471 where the Court held at §§29.1-29.4:

“29.1 It is true that the parties had not entered into a sophisticated shareholders’ agreement, but they had agreed in the Co-operation Agreement that they would be promoters of SSHSL, a vehicle in which they would have equal shares, by which they would enjoy the benefit of the Property.

29.2. Taken to the highest, the most that the plaintiff could have contended is that the agreement could have contained more details of the type found in legally-drafted shareholders’ agreements. However, an agreement is valid as long as the essential matters are agreed, even if there may be further negotiations or agreements between the parties.

29.3. In Donwin Productions Ltd v EMI Films Ltd…, Lord Loreburn’s judgment in Love and Stewart (Ltd) v S Instone & Co (Ltd)… was quoted as follows:

“It was quite lawful to make a bargain containing certain terms which one was content with, dealing with what one regarded as essentials, and at the same time to say that one would have a formal document drawn up with the full expectation that one would by consent insert in it a number of further terms. If that was the intention of the parties, then a bargain had been made, none the less that both parties felt quite sure that the formal document could comprise more than was contained in the preliminary bargain”.

29.4. Thus, as was held in Donwin, “as a matter of law there is no reason why one cannot have a partial binding agreement pending the completion of the full agreement”.

49.  The following passage from the UK Supreme Court’s decision in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (UK Production) [2010] UKSC 14 at §49(6) is also illuminating:

“It is sometimes said that the parties must agree on the essential terms and it is only matters of detail which can be left over. This may be misleading, since the word ‘essential’ in that context is ambiguous. If by ‘essential’ one means a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract. If by ‘essential’ one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous. If by ‘essential’ one means only a term which the Court regards as important as opposed to a term which the Court regards as less important or a matter of detail, the statement is untrue. It is for the parties to decide whether they wish to be bound and if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the Judge [at page 611] ‘the masters of their contractual fate’. Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called ‘heads of agreement’…” (emphasis added)

(recently cited by Godfrey Lam JA (sitting as an additional judge of the Court of First Instance) in Bespark Technologies Engineering Limited v A-Tech M & E Engineering Limited[2022] HKCFI 3024 (30 September 2022) at §70)

50.  Bearing these principles in mind, is the LOI void for uncertainty due to want of essential terms? In my judgment, it is not.

51.  I agree with Mr Wong that the terms of the LOI provide a sufficient framework to proceed with the sale and purchase of the Subject Shareholding even if the parties were to fail (as in the present case) to enter into the formal agreements envisaged in clauses 3 and 11, namely, the Intended SPA and the shareholders agreement:

(1)  The parties had already agreed that payment was to be made in two tranches: (a) pursuant to clause 4, a first tranche (non-interest-bearing) of HKD 140,000,000 was to be made for the purchase; and (b) the balance of HKD 105,000,000 was to be paid within a longstop period of 24 months, according to the sale progress of the Development. Although not expressly spelt out, it is reasonable to infer that the 24-month period would commence from the payment of the first tranche.

(2)  As to payment of the first tranche, although no precise date has been agreed, in the absence of such agreement, it should be payable on or at least within a reasonable period after the execution of the Intended SPA and the SHA, which are to be signed “as soon as practicable” after the due diligence process is complete (clause 11).

(3)  As to payment of the second tranche within the longstop date of 24 months, there is no reason why this cannot be determined on the basis of reasonableness depending upon the progress of the sale of the project. For instance, percentage of payment to be made can be linked to percentage of the units sold.

(4)  The completion date, meaning the date of transfer of the Subject Shareholding to the plaintiff, again adopting a reasonableness approach, can be either on or shortly after the payment of the first tranche, since it is provided that the plaintiff would assume management control of the Company through the appointment of a majority of directors on the board (clause 7 and 7a).

52.  Given the premature termination of the LOI, it is unnecessary for the Court to determine how the parties should proceed and what the precise obligations of the parties would be. Rather, the above exercise is merely to demonstrate that, whilst not ideal, the absence of completion and payment dates in the LOI are not an insurmountable bar to the performance of the LOI, such that their absence would render it “legally or practically impossible to give the agreement, or that part of it, any sensible content.”

53.  As to Mr Law’s argument that the standard of reasonableness is inapplicable due to clause 3 providing that the precise payment schedule is subject to confirmation in the Intended SPA to be formally signed between the parties, it is clear from authorities such as Donwin Productions and RTS Flexible Systems Ltd that an expectation between the parties to enter into a fuller or formal agreement with additional terms is no bar to the parties being bound to a partial agreement. Indeed, the parties are expected in such circumstances to negotiate in good faith so as to settle outstanding details which were to be incorporated (see e.g., Chan Wan Chuen Snaky at §30).

54.  Hence, for the reasons above, I find that the LOI constituted a binding agreement between the parties.

V.  SECOND ISSUE: SCOPE OF CLAUSE 10B

55.  As mentioned above, the issue here is whether, on its proper construction, the mechanism in Clause 10b is applicable solely to a breach of Clause 10a (as contended by the plaintiff) or whether it is concerned with breaches of LOI generally, including any anticipatory breach (as contended by the defendants).

56.  It is helpful to set out clause 10 here:

“10. 乙方需於此簽署此『意向書』之日起計60天內完成盡職調查。

10a. 甲方承諾在簽署此『意向書』之後,至雙方另行簽訂『前進有限公司股權買賣合約』之日或本『意向書』議解除或終止之日,未經乙方同意,甲方不得與仼何第三方以任何方式就其所持有的『星悅海灣及『前進有限公司』的股權出讓、或增資擴股事宜進行協商或談判。

10b. 如果甲方違反此『意向書』項下的相關規定,則乙方在簽署此『意向書』後所支出的與此『意向書』 項下相關的所有費用的五偣,即港幣200萬元上限(含乙方聘請專業律師、會計師、投資顧問的費用及乙方職員投入本意向協議項下的所有費用等)由甲方承擔。”

(English translation):

“10. Party B shall finish due diligence exercise within 60 days from the date of signing this [LOI].

10a. Party A undertakes that upon signing this Letter of Intent, up to the date when both parties separately sign [the Intended SPA] or the date of discharge or termination of this [LOI], Party A shall not, without the consent of Party B, conduct negotiation or talks in any manner with any third party in relation to matters of the equity transfer or increase of capital and shares held by it regarding [the Development] and [the Company].

10b. If Party A is in breach of the relevant provisions in this Letter of Intent, five times of all the costs and expenses incurred by Party B after signing this [LOI] and relevant to the items under this [LOI], which is capped at HK$2,000,000 (including costs and expenses for Party B to engage professional lawyers, accountants, investment consultants and all fees paid by the staff of Party B regarding the agreed terms under this [LOI] and etc.) shall be borne by Party A.”

57.  There is no dispute between the parties that clause 10b is a form of liquidated damages clause. Although the plaintiff pleaded in its reply that the clause is unenforceable as a penalty clause, Mr Wong confirmed at the trial that he no longer pursued such plea. The only remaining question, therefore, is the clause’s scope of application. Again, the parties have approached the issue solely as one of construction, and neither has pleaded rectification or any estoppel by convention.

58.  The starting point is the opening phrase of the clause, “如果甲方違反此『意向書』項下的相關規定…”. The ambiguity here is whether the word “此” refer to “『意向書』” (i.e., this “LOI”), or “項” (i.e. this “clause”). If it were the latter, then the words, “『意向書』” would be superfluous, and the meaning would be much more naturally expressed by simply stating, “如果甲方違反此 『意向書』 項下的相關規定…” or “如果甲方違反此 『意向書』 項下的相關規定”. The use of the words, “意向書” followed by the words “項下” suggests instead the meaning, “clauses under this LOI”, i.e., all of the clauses of the LOI and not merely clause 10. Hence, focusing just on the words “此『意向書』項下” alone, the clause appears to be intended to apply to a breach of the LOI generally by Party A.

59.  On the other hand, the words, “相關” [relevant] in describing “規定” [provisions] might be said to narrow the “clauses under this LOI” to those that are “relevant”. The provisions that are relevant here are arguably those that are relevant to this clause, i.e., clause 10, including clause 10a. This is at least supported by the positioning of clause 10b as a subclause of clause 10, which whilst not by itself conclusive, nonetheless sheds light on the intention of the clause. Clause 10 is concerned with due diligence and clause 10a is a prohibition solely against Party A from conducting any negotiations with third parties pending (presumably) the execution of formal documentation.

60.  The difficulty with the argument that clause 10b is intended to have general rather specific application to a breach of clause 10a is that the former interpretation does not sit well with the overall context of the LOI. It is well established that:

“…all the terms of an agreement should be read or considered together and construed with the overall context in mind. Construction is a unitary exercise involving an iterative process. The court should have regard to the implications of any competing constructions, at least by way of a cross-check, where business common sense should be engaged in the iterative process.”

      at Yu Man Fung Alice (supra) at §21

61.  First, clause 10b is concerned only with breaches by Party A, i.e., the sellers, and not Party B, the purchaser. If, for instance, the value of the Development suddenly depreciated in value after the LOI, and it was the purchaser that sought to terminate the LOI, then clause 10b would have no application – the normal measure of damages would apply, it being clear from clause 13b that a defaulting party is liable for breach of contract.

62.  As a matter of business common sense, it is difficult to see why the parties would have intended such a disparity in consequences between a similar breach by the purchaser or the seller.

63.  Further, whilst parties are of course free to decide when liquidated damages are to apply, clause 10b would be a remarkably blunt instrument as a pre-estimate of loss of the buyer if it were to apply to any breach by sellers. Although the sellers’ primary obligation in the LOI is to transfer the Subject Shareholding to the purchaser, there are a number of other ancillary obligations, a breach of which might not have entitled the innocent party, i.e., the purchaser, to terminate the LOI. For instance, in the plaintiff’s amended statement of claim, it is alleged that “…the total indebtedness of the Company was in excess of $450 million which was a breach of warranty by the defendants as provided by clause 6 of the [LOI].” In such circumstances, the formula in clause 10b would have no bearing at all to the anticipated resulting loss.

64.  On the other hand, one can see as a matter of business common sense why a clause prohibiting a party from negotiating with third parties pending the drawing up of formal documentation would be coupled with a liquidated damages clause. Such negotiations put the position of the counterparty (usually the buyer in a case such as the present) at risk, including the risk of the seller exploring better prices or terms with other potential buyers whilst having secured “a floor” with the existing buyer. Actual damages in such cases may be difficult to prove, especially if those negotiations with third parties do not come to fruition. Even if the seller does terminate the contract, if the contract price is close to the market price, unless the buyer is able to compel specific performance, the buyer’s provable loss would in most cases only be out of pocket the expenses incurred, which may not be significant. A liquidated damages clause based on a multiple of expenses incurred may thus be a practical way of discouraging such conduct by the seller.

65.  There can be no dispute that the wording of clause 10b is somewhat ambiguous. This is perhaps unsurprising since, as mentioned above, the LOI was based on a draft from someone in Beijing. It is interesting to note, however, that the original draft from Mr Hong already contained clause 10b and was retained in its original form in the signed version of the LOI.

66.  Doing the best I can to ascertain objectively the intention of the parties, for the reasons above, I find that the mechanism for ascertaining damages in clause 10b does not have general application to all breaches of the LOI, but is confined to breaches of clause 10a.

VI.  THIRD ISSUE: MUTUAL CONSENSUS IN MAY 31 CONVERSATION?

67.  As mentioned above, the issue here is whether there was a mutual consensus reached during the May 31 Conversation for compensation by the defendants based on the mechanism in clause 10b, which was based on a multiple of due diligence expenses incurred with a ceiling of HKD 2 million. This issue is independent of the true meaning and scope of clause 10b, as it concerns whether, as a matter of fact, the parties agreed in the May 31 Conversation that the mechanism in clause 10b should apply.

68.  A useful starting point is the parties’ affidavit evidence that was placed before Lisa Wong J at the Injunction Application, which is helpfully summarised in detail in §§11 to 26 of the Decision and which I do not repeat here. The reader is referred to those paragraphs of the Decision.

69.  In Mr Chan’s witness statement made on 26 July 2018, he described the May 31 Conversation as follows:

“On this call, [Mr Kwan] told me that he wanted to unilaterally terminate the [LOI] and would not proceed with the sale of shares of [the Company] to the Plaintiff. I was annoyed by this and told him he should keep his word. I told him that if he unilaterally terminated the [LOI], that would constitute a clear breach of the [LOI]. Daniel Kwan started apologising to me over the telephone, and I informed him that the Plaintiff would accept the Defendants’ wrongful repudiation of the [LOI] on the condition that the Defendants paid compensation for the Plaintiff’s efforts and costs incurred in the due diligence to date. I believe I raised the sum of HK$2 million as compensation. (I knew that the Plaintiff had already incurred advisory fees in excess of HK$400,000 for due diligence, and although I did not have the [LOI] at hand during the telephone call, I remembered that in accordance with Clause 10b of the [LOI], the Plaintiff would be entitled to 5 times the amount of fees incurred with an upper limit of HK$2 million in compensation from the Defendants). Daniel Kwan expressed a willingness to compensate to the Plaintiff but did not commit to do so and no agreement to pay compensation was reached.”

70.  This account of the May 31 Conversation is slightly different from the two versions in his 1^st affirmation dated 10 August 2017 and his 3^rd affirmation dated 5 September 2017 placed before Lisa Wong J in the Injunction Application (and quoted in §§13 and 16 of the Decision). Her Ladyship found the two versions internally inconsistent, especially regarding the question of whether Mr Chan accepted the defendants’ repudiation of the LOI (see §42 of the Decision). On the basis of those affirmations, she was prepared to find that Mr Chan’s evidence of the May 31 Conversation then before her to be “incredible”. The account in Mr Chan’s witness statement seeks to place a gloss so as to reconcile his previous accounts but maintains that no agreement on compensation was reached.

71.  In cross examination, Mr Chan maintained that Mr Kwan expressed a “willingness to compensate” but no commitment on any specific amount or time was given. Mr Kwan was “non-committal” and did not say anything certain, including any specific calculation, amount or time. Mr Chan said that he made an offer of HK$2 million, a figure which he remembered from the LOI (which was not in front of him at the time), and had that been accepted by Mr Kwan, then that would have been the end of the matter. He insisted that clause 10b was never mentioned in the conversation.

72.  Mr Kwan’s account in his witness statement dated 17 May 2018 mirrored the account in his affirmation (which is set out in §15 of the Decision):

“I told Mr Chan that I wished to terminate the [LOI] and not to proceed with the sale of the shares in the Company. Mr Chan said that it was wrong for me not to keep my word and given my decision not to proceed with the sale, I would have to pay HK$2 million as previously agreed. I told him that I am willing to provide monetary compensation according to the calculation method agreed under the Letter of Intent.

After the aforesaid meeting with Mr Ho and the telephone conversation with Mr Chan on 31 May 2017, it was clear to the parties that the [LOI] was at an end and the sale and purchase of the shares would not proceed. The only remaining issue was the amount of compensation (if any) payable to the Plaintiff in accordance with the agreed formula under Clause 10b of the [LOI].”

73.  In cross-examination, Mr Kwan said he missed out mentioning specifically in his witness statement a reference to clause 10b in the May 31 Conversation. Also, when asked why he did not say in his witness statement that Mr Chan expressly agreed to the formula he proposed for compensation, Mr Kwan replied that Mr Chan “did not object”, which to his understanding meant that “he agreed”.

74.  It is well known that human memory is imperfect and can evolve over time, and even honest recollections between what was said in a conversation years ago can differ between participants to the conversation. In assessing the respective credibility of conflicting accounts, I remind myself of the principles helpfully summarised by Poon J (as the Chief Judge then was) in Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd (unreported) HCA 1975/2005 (unreported), 28 July 2011, at §24:

“In assessing credibility, the court takes into account, among other things, the inherent probabilities or improbabilities of one’s testimony, the contemporaneous documents or any evidence, which is undisputed or indisputable, tending to support or contradict one account or the other and the overall impression of the characters and motivations of the witnesses… Where there exists a wealth of contemporaneous documents, credibility is to be tested by reference most particularly to them…”

75.  In my view, the correspondence between the parties immediately or shortly following the May 31 Conversation serves both as a useful starting point and guide. Passages of these correspondence have been set out in §§19 to 25 of the Decision and it is unnecessary to repeat them in full here. However, I highlight the following which I find particularly relevant.

76.  In the plaintiff’s Chinese letter dated 5 June 2017 (the “June 5 Letter”), which was drafted by Mr Ho and Mr Chan and signed by Mr Chan, it referred to Mr Kwan’s proposal to terminate the LOI and his “willingness to compensate” for the plaintiff’s loss. The letter then referred to clause 10b and 13b, quoted the mechanism in clause 10b and followed with a demand for compensation of HKD 2 million.

77.  It is not entirely clear on the face of the June 5 Letter whether Mr Chan’s reference to the mechanism in clause 10b was due to (1) his belief that clause 10b (contrary to my finding above) applied generally to breaches of the LOI, including Mr Kwan’s anticipatory breach in the May 31 Conversation; (2) an agreement or consensus between him and Mr Kwan in the May 31 Conversation that clause 10b shall be the basis of compensation for the termination proposed by Mr Kwan; or (3) both.

78.  About half an hour later, Mr Kwan sent a reply letter in English to the plaintiff as follows (the “June 5 Reply”):

“We refer to the discussion on 31 May 2017 between your [Mr Ho] and our [Mr Kwan] about the termination of the Letter of Intent entered into by us and you on 12 May 2017 and write to put on record that both of us agreed to the termination of the said Letter of Intent subject to honouring Clause 10b thereof. Please advise us the amount of the costs so far incurred by you for our verification. It is however understood that you have not yet engaged any professional adviser (including lawyer or accountant in relation to the transaction contemplated under the said Letter of Intent.” (emphasis added)

79.  In cross-examination, Mr Kwan explained that he had inadvertently omitted referring also to Mr Chan in the letter. In my view, nothing turns on this. Rather, the critical point of this letter is that Mr Kwan was writing “…to put on record that both of us agreed to the termination of the said Letter of Intent subject to honouring Clause 10b thereof”. Mr Kwan then asked the plaintiff to advise the defendants of the costs incurred so far, although he understood that none had been incurred to date.

80.  The plaintiff replied by letter to the defendants two days later (the “June 7 Letter”), with the letter being signed by Mr Chan’s sister, Lily Chan (“Ms Chan”), as director of the plaintiff. Significantly, as observed by Lisa Wong J in §47 of the Decision, the plaintiff took no issue in that letter with what Mr Kwan’s statement on record that an agreement had been reached as to the termination of the LOI subject to honouring Clause 10b.

81.  Ms Chan did not give evidence, but Mr Chan explained in cross examination that she (who, together with Mr Chan and their brother, were the “bosses” of the family company) was not handling the negotiations but stepped in to help in relation to the June 7 Letter as he may not have been around at the time. Mr Chan described her sister as someone who is very careful and would not sign anything without looking at its contents. She would also have discussed with him and Mr Ho before signing, and Mr Chan knew the “general text of [the letter]” even if not a “precise handle on every word”.

82.  Mr Chan accepted that there was no rebuttal in the June 7 Letter to Mr Kwan’s assertion of an agreement, which he described as “ludicrous”, but explained that his sister pursued a “softer tone” and that the June 7 Letter was a “counteroffer” similar to the offer he had made to Mr Kwan in the May 31 Conversation. He further said that the HKD 2 million figure and the deadline for payment of 8 June 2017 were not terms contained in clause 10b, and there was thus no agreement with Mr Kwan – “silence is not acceptance”, he added.

83.  There was then some correspondence regarding the expenses incurred by the plaintiff in due diligence to date. On 11 July 2017, the plaintiff wrote a further letter to the Company for the attention of Mr Kwan (the “July 11 Letter”), which was signed by Mr Chan and sent by registered mail and by hand to the Company. In the letter, it is said that:

“In a meeting held on 31 May 2017, your [Mr Kwan] informed our [Mr Ho] that you intended to unilaterally cease execution of [the Letter of Intent], and you were willing to compensate us in accordance with Clause 10B of the Letter of Intent. For the record and as a matter of clarification, our Mr Ho told your Mr Kwan at the time that we were already deep into our due diligence review, although we had not yet appointed a lawyer to draft our formal Sale & Purchase Agreement…”

84.  The significance of this letter for present purposes is the express reference in the May 31 Conversation that Mr Kwan was willing to compensate the plaintiff in accordance with clause 10b. This is in contrast to §20 of his 3^rd affirmation dated 5 September 2017, where he said on oath that, “…Mr Kwan definitely had not said he was willing to pay monetary compensation according to the calculation method agreed under clause 10b of the [LOI].” Mr Ho, in his evidence, said he also saw the letter before it was issued and that he had no opinion (or disagreement) as to its contents.

85.  On 18 July 2017, the defendants replied by letter to the plaintiff stating that, inter alia, whilst the defendants were still seeking legal advice, they were of the view that LOI was in essence an agreement to agree, and therefore, “not a contract and cannot be enforced.” (the “July 18 Letter”).

86.  Having heard the oral evidence of Mr Chan, Mr Kwan and Mr Ho, and having considered the versions of events in the affirmations and witness statements and the contemporaneous documents, my findings are as follows:

(1)  First of all, it seems to me that, at the time of the May 31 Conversation and in the subsequent correspondence up until the July 18 Letter, both Mr Chan and Mr Kwan regarded the LOI as a binding agreement between the parties and that (contrary to my view above) clause 10b was the operative provision covering any breaches of the LOI, including the defendants’ anticipatory breach on 31 May 2017.

(2)  It is more likely than not that clause 10b, or the substance of the clause, was expressly mentioned by the parties. Not only was this confirmed in the July 11 Letter, but the HKD 2 million figure on Mr Chan’s mind during the conversation was derived directly from the ceiling in clause 10b. Whilst I accept that Mr Chan was unlikely to have had a copy of the LOI in front of him, Mr Chan would have been sufficiently familiar with the terms of the LOI to be aware of the clause. He was closely involved with amending the LOI during negotiations as evidenced by his detailed manuscript notations and corrections on at least one of the drafts.

(3)  It is highly significant that there was no rebuttal or objection by the plaintiff in the June 7 Letter to Mr Kwan’s assertion in the June 5 Reply that an agreement had been reached in the May 31 Conversation.

(4)  Mr Chan accepted in cross-examination that he received and read the June 5 Reply at the latest by the next day, i.e. 6 June 2017. From my observations of Mr Chan in the witness box, I found him to be an outspoken and assertive individual as well as a shrewd and cautious businessman. He was obviously articulate, highly educated and, on his own evidence, more proficient in English than he was in Chinese. He is not someone, it seems to me, who would have remained silent in the face of a statement being expressly “put on record” that he believed to be untrue or prejudicial to his interests.

(5)  Although the June 7 Letter was signed by Ms Chan, it is likely that she would have discussed the matter with Mr Chan and Mr Ho, and Mr Chan would have approved the contents of the letter in principle before it was issued. I have little doubt in my mind that had Mr Chan disagreed (or had any doubt) with what was being put on record in the June 5 Reply, this would have been specifically and forcefully denied in the June 7 Letter or in subsequent letters.

(6)  It follows that I also reject Mr Chan’s evidence that in the May 31 Conversation, he had merely offered Mr Kwan to settle the matter for a fixed sum of HKD2 million and which was not accepted by Mr Kwan.

(7)  I have also carefully considered Mr Wong’s submissions that there can be no agreement on Mr Kwan’s own evidence in cross-examination that Mr Chan “did not object” to his proposal based on the formula in clause 10b, and Mr Kwan merely assumed the existence of an agreement from Mr Chan’s silence. It is important in situations such as the present that what might have been said in the course of a conversation cannot be considered in isolation. Whilst it is correct of course that silence cannot normally be taken as an acceptance of an offer, much will depend on the context of the conversation in which this silence or non-objection occurred. The reality is that neither Mr Kwan nor Mr Chan can remember verbatim or precisely what was said in the May 31 Conversation. In short, viewed against the rest of the evidence, I do not consider what Mr Kwan said in cross-examination in this regard to be of great weight as to whether the parties had reached a consensus in that conversation.

(8)  I also bear in mind that the May 31 Conversation was a short conversation and one that took Mr Chan “by surprise” at the time. However, it is not unlikely that he and Mr Kwan were able to come to an agreement that compensation should be calculated in accordance with clause 10b. Both parties were likely of the view at the time that clause 10b in fact governed the measure of compensation in that situation, and the plaintiff only changed its views as to the effect of clause 10b after the involvement of legal advisers when the plaintiff commenced the present action and sought injunctive relief. The plaintiff has not, however, sought to void the compensation agreement on the grounds of mutual mistake.

(9)  In any event, the compensation agreement worked to the benefit of both parties, in that there would be a degree of certainty in the amount of compensation payable in the circumstances. It is important to bear in mind that the LOI had been signed by Mr and Mrs Kwan only two weeks prior to the May 31 Conversation, and the parties had agreed a valuation for the Development shortly before that.

87.  For the reasons above, therefore, I find that a mutual consensus was in fact reached between the parties that the compensation to be made by the defendants for the termination of the LOI would be pursuant to the mechanism in Clause 10b. Whether (1) the parties agreed to terminate the LOI by “mutual consensus” on terms as to compensation (as pleaded by the defendants); or (2) the plaintiff accepted the defendant’s anticipatory breach with an agreement as to the measure of compensation arising therefrom; (which are of course legally distinct concepts) does not matter much from a practical point of view. It is unlikely that either Mr Kwan or Mr Chan would have appreciated the distinction at the time. However, taking into account the evidence as a whole, I find that it more likely to be the latter (and I so find), especially given that Mr Kwan effectively presented Mr Chan with a unilateral termination on 31 May 2017, rather than the parties negotiating a termination as such.

VII.  FOURTH ISSUE: DAMAGES AND QUANTUM

88.  It follows from my findings above that the measure of compensation payable to the plaintiff is to be calculated in accordance with the formula in clause 10b.

89.  The difficulty for the plaintiff is that the plaintiff has not pleaded any alternative case as to damages to cater for this situation. In §§23-25 of its amended statement of claim, the plaintiff pleaded its loss and damage as follows:

“23. By reason of the foregoing, the plaintiff has lost the benefit of the [LOI] represented by the value of the 70% shareholding in the Company and has thereby suffered loss and damage to be assessed.

Particulars

The Plaintiff avers that the valuation of the 70% shareholding in the Company is to be assessed by reference to the [LOI]. Under Clauses 6 and 9, the net sale proceeds generated from the sale of [the Development], after the deduction of outstanding bank loans, would be distributed to the parties in according [sic] with their respective shareholding.

24. The Plaintiff aver that 70% shareholding in the Company is worth substantially more than $245 million, as according to the Defendants, the market value of [the Development] as at July 2017 was at least $1,103,200,000, well above the contractual value of $800,000,000. The Plaintiff will rely on expert evidence to be adduced for a proper valuation of [the Development].

25. Further, by reason of the matters pleaded at paragraph 18 above, the Plaintiff has suffered further loss and damage represented by the excess indebtedness of the Company in breach of Clause 6 of the Agreement to be assessed.”

90.  There is no mention of damages being assessed in accordance with clause 10b or any averments as to the expenses incurred up to 31 May 2017 in the due diligence process in the event that clause 10b were to apply (whether on construction of the LOI or by agreement). To be fair, in Mr Chan’s witness statement he did set out some details on the due diligence work performed and the professional parties engaged. Some agreements and invoices were also sent by the plaintiff to the defendants in the correspondence following the May 31 Conversation. In particular, there were, inter alia:

(1)  An agreement with a company known as Propertywise Surveyors Limited dated 18 May 2017 for due diligence work to be performed at a contract sum of HK$600,000 and an invoice dated 25 May 2017 for HK$300,000, which was said to represent 50% of the contract sum.

(2)  An agreement with a company known as “Visionary Consultant Management, Inc.” (“Visionary”) for financial due diligence for the contract sum of HK$150,000 and a debit note for that amount dated 31 May 2017.

91.  At the trial, Mr Wong submitted that the Court should, despite the fact that it has not been pleaded, nonetheless take these materials into consideration in assessing damages in the event that damages fell to be measured in accordance with clause 10b.

92.  Mr Law SC, perhaps unsurprisingly, strongly objected to such an approach. He submitted that the evidence was not straightforward, and allowing the plaintiff to introduce a new case on damages at this late stage would cause substantial prejudice and unfairness to the defendants. For instance, as accepted by Mr Chan in cross-examination, Mr Chan was the 100% owner of Visionary, which he said provided consultancy services to the Bonds group. This gives rise to the question of whether Visionary’s charges were genuinely incurred or fell within the scope of clause 10b.

93.  The principles on pleadings are well established. As Ma CJ reminded litigants in Kwok Chin Wing v 21 Holdings Limited (2013) 16 HKCFAR 663 at §21:

“The basic objective is fairly and precisely to inform the other party or parties in the litigation of the stance of the pleading party (in other words, that party’s case) so that proper preparation is made possible, and to ensure that time and effort are not expended unnecessarily on other issues:- Wing Hang Bank Limited v Crystal Jet International Limited. It is the pleadings that will define the issues in a trial and dictate the course of proceedings both before and at trial. Where witnesses are involved, it will be the pleaded issues that define the scope of the evidence, and not the other way round. In other words, it will not be acceptable for unpleaded issues to be raised out of the evidence which is to be or has been adduced. As the Court of Appeal remarked in Wing Hang Bank Limited v Crystal Jet International Limited:-

“(2) In a trial, particularly where evidence is given by witnesses, it becomes extremely important that each side knows exactly what are the live issues. Where issues are sought to be introduced that have not been adequately or properly pleaded, amendments must be sought unless the consent of the other party or parties has been obtained. It will simply not do for unpleaded issues to be ‘slipped in’ when evidence is being given in the hope that the other side is not sufficiently alert to object.”

(emphasis added)

94.  The issue of whether any due diligence costs had in fact been incurred by the plaintiff was in fact raised by the defendants as early as the June 5 Reply, when Mr Kwan said that, “It is however understood that you have not yet engaged any professional adviser (including lawyer or accountant in relation to the transaction contemplated under the [LOI]).” Further, after receiving copies of the agreements and invoices from the plaintiff, in the July 18 Letter, Mr Kwan reiterated his understanding from Mr Ho that professional teams were only about to be appointed on 31 May 2017. In cross-examination, when asked why he did not pay the sums in the invoices provided by the plaintiff, he said that he “suspected the authenticity” of the receipts.

95.  There may well have been strategic reasons for the plaintiff not to have pleaded an alternative case on damages. Be that as it may, in the light of Mr Law’s objections, I do not think that it would be fair to allow Mr Wong to introduce a new case at this late stage. The fact that some of these matters were raised in plaintiff’s witness statement is neither here nor there. The plaintiff pleaded a specific case on damages in its statement of claim and did not raise any alternative plea. Had it done so, the defendants would have had a proper opportunity to challenge the plaintiff’s evidence as to whether any due diligence had in fact commenced and whether, and if so how much, costs have in fact been incurred.

VIII. CONCLUSION AND COSTS

96.  It follows that the Court, having rejected the plaintiff’s pleaded case on damages and in the absence of an alternative case on damages, the plaintiff is confined to nominal damages of HK$1 for the defendant’s anticipatory breach of the LOI.

97.  As to costs, the starting point of course is that costs follow the event. I bear in mind, however, the following matters which are relevant.

98.  Although I have found that the defendants were in anticipatory breach of the LOI, the defendants were for practical purposes the successful party in this action, as they prevailed in resisting the plaintiff’s claim for substantial damages.

99.  The issue as to whether the defendants were in breach of the LOI was not in serious dispute, save as to the defendants’ case that the LOI was not a binding agreement, which I have rejected. Considerable time, however, was spent in submissions and in this Judgment on the issue.

100.  Both parties adduced expert reports and called their experts on the market value of the Subject Shareholding as at 31 May 2017 pursuant to the Order of Master Hui dated 21 November 2018 to address the quantum of damages had the normal measure of damages applied. The plaintiff adduced the evidence of Mr Alnwick Chan, a surveyor at Knight Frank and the defendants called Mr Paul Varty, also a surveyor. Both experts were in agreement throughout as to the methodology to be adopted in ascertaining the value of the Subject Shareholding, although the experts reached somewhat different conclusions as to its value. In short, both Mr Alnwick Chan and Mr Varty based their respective opinions on the value of the Subject Shareholding by taking the market value of the Development, less HKD 450,000,000 (being the agreed cap on the Company’s indebtedness) and making certain deductions and discounts.

101.  Notwithstanding the exchange of expert reports and the production of a joint expert report dated 2 April 2019 (over two years before the trial) no objection was raised by the plaintiff either in correspondence, the pre-trial review or in its written opening submissions as to the expertise of Mr Alnwick Chan or the valuation methodology adopted and agreed by Mr Varty.

102.  In his cross-examination of Mr Alnwick Chan, however, Mr Law SC raised for the first time that the methodology adopted by Mr Alnwick Chan and Mr Varty was wrong in law and should be rejected altogether and that neither he nor Mr Varty, as surveyors, had the requisite expertise to give an opinion on the value of the Subject Shareholding.

103.  With the greatest respect to Mr Law SC, I am not impressed with such an argument being raised out of the blue and kept up the defendants’ sleeves even in opening submissions. Irrespective of the merits of his submissions in this regard (which are disputed by Mr Wong) and the well-established principle that the Court is not bound by the expert evidence before it, I agree with Mr Wong that the defendants’ conduct smacks of an ambush and is in my view inconsistent with the letter and spirit of the underlying objectives of the Civil Justice Reform.

104.  It is unnecessary in the circumstances of this case for me to form a view as to whether the methodology agreed by the experts is correct or not. However, in the light of the stance taken by the defendants (and maintained in their closing submissions), I think it is appropriate to deprive the defendants of the costs of the expert evidence, as the defendants have themselves disavowed the same.

105.  Having regards to the above and adopting a broad-brushed approach, I make an order nisi that the defendants do have 60% of the costs of the action to be taxed on a party and party basis if not agreed, with certificate for two counsel, save that the costs of the expert evidence (including the costs of engaging the defendants’ expert, the defendants’ expert reports, and the time spent at trial with the experts) be excluded from the defendants’ costs.

106.  Last but not least, I thank both teams of counsel for their assistance in this interesting case.

Mr Jonathan Wong, instructed by MinterEllison LLP  for the plaintiff

Ms Law Man-Chung SC and Mr Meyrick Wong, instructed by Huen & Partners for the defendants

Annex 1A

公司股權轉讓意向書

物業地址	: 新界荃灣青山公路汀九段368號
物業名稱	: 星悅海灣
甲方	: 關秀琼與關鉄安(前進有限公司現時之唯一兩位股東)及官有權(前進有限公司權益持有人)
乙方	: 寶聲集圑或旗下之成員公司

甲乙雙方經友好協商合作投資上述物業項目『星悅海灣』,現決議如下:

1.  『星悅海灣』物業定價為港幣八億元正。

2.  乙方將投入資金和甲方合作,達到甲乙雙方各佔『前進有限公司』70%公司權益。甲方須承諾『前進有限公司』完全擁有『星悅海灣』100%產權;且『前進有限公司』並無除『星悅海灣』之外的其他投資; 而『前進有限公司』之總負債不能超過港幣四億五千萬元正。

2a.  甲方承諾於乙方入股『前進有限公司』之前,將解除『前進有限公司』之所有僱員、服務、供應、各種顧問、及銷售代理的合約;但以下之公司文職人員除外: 1·秘書; 2·會計主仼。

3.  乙方投入資金为港幣二億四千五百萬元正(『星悅海灣』物業定價八億元減除銀行貸款四億五千萬元後的餘額的70%)是用於購買甲方於『前進有限公司』之股權70%。乙方的具體付款時間表待雙方正式簽署的『前進有限公司股權買賣合約』確認。

4.  乙方願意首支付港幣一億四千萬元正予甲方,作為購買70%股權之用。

5.  乙方將餘下購買股權尾數一億零五百萬元正在24個月內按照『星悅海灣』樓盤銷售進度,償還餘款給甲方。未償還之欠款計算利息(以年利率2·5 %計算)。

6.  前進有限公司向銀行贷款總額度在股權轉讓完成時應為四億五千萬港元。出售『星悅海灣亅收入的款項優先用於償還此銀行貸款。

7.  甲乙雙方合組『前進有限公司』之新的董事會管理層。董事會由甲方委任兩席董事和乙方委任三席董事組成。

7a.  甲方同意此地產發展項目『星悅海灣』之裝修、改造、重新設計、及銷售策略及執行,由乙方完全主導。乙方亦承諾在重大議題上,將提交公司董事會層面討論及表決。

8.  『星悅海灣』以出售為主，但如對外銷售不如理想,甲乙雙方亦可在雙方同意下,考慮雙方按股權比例分配現樓。

9.  『星悅海灣』售樓收益除淨後甲乙雙方各按股權比例分配利潤。

10.  乙方需於此簽署此『意向書』之日起計60天內完成盡職調查。

10a.  甲方承諾在簽署此『意向書』之後,至雙方另行簽訂『前進有限公司股權買賣合約』之日或本『意向書』議解除或終止之日,未經乙方同意,甲方不得與仼何第三方以任何方式就其所持有的『星悅海灣及『前進有限公司』的股權出讓、或增資擴股事宜進行協商或談判。

10b.  如果甲方違反此『意向書』項下的相關規定,則乙方在簽署此『意向書』後所支出的與此『意向書』 項下相關的所有費用的五偣,即港幣200萬元上限(含乙方聘請專業律師、會計師、投資顧問的費用及乙方職員投入本意向協議項下的所有費用等)由甲方承擔。

11.  乙方或乙方委託的第三方，在盡職調查中如無重大負面的發現,即未發現存在對本次交易有實質性影響的重大事實(或發現該等重大事實但經雙方友好協商得以解決);且乙方的盡職調查(含律師、會計師、銷售顧問)報告完成後的10個工作內,甲乙雙方儘早完成簽署『前進有限公司股權買賣合約』及『股東協議書』：甲方同时向乙方提供有关『星悅海灣』及『前進有限公司』的股權、債權債務等方面的『承诺函』。

12.  甲乙雙方需將此合作投資保密。

13.  此『意向書』之終止

13a  協商終止:此『意向書』簽署後,經甲、乙雙方協商一致,此『意向書』才可以終止,

13b  違約終止，此『意向書』簽署後,一方發生違約情形,另一方可依本意向協議規定單方終止此『意向書』，及或追究相關違約之法律賷任。

Annex 1B

Letter of Intent regarding equity transfer of company [English translation]

It is now resolved as below upon amicable negotiation between Party A and Party B, regarding the joint investment in the above mentioned property project [Grand Riviera]:

1.  The price for the property, [Grand Riviera], is fixed at HK$ 800,000,000.

2.  Party B shall inject funds to cooperate with Party A, so that both Party A and Party B will each have 70% interest in [Discreet Company]. Party A shall undertake that [Discreet Company] wholly owns 100% property right of [Grand Riviera]; in addition, [Discreet Company] does not have other investment except [Grand Riviera]; and that the total indebtedness of [Discreet Company] cannot exceed HK$ 450,000,000.

2a.  Party A undertakes that before Party B acquires shares of [Discreet Company], contracts of [Discreet Company] with all employees, service providers, suppliers, various consultancies, and sales agents will be discharged except for clerical personnel of the company, namely, 1) secretary; 2) accounts supervisor.

3.  Party B shall inject funds of HK$ 245,000,000 (70% of the remaining sum upon the deduction of bank loans in the sum of HK$ 450,000,000 from the property price of [Grand Riviera] in the sum of HK$ 800,000,000) for the purchase of the 70% shareholding of Party A in [Discreet Company]. The specific time table for payment of Party B will be confirmed upon the formal signing of the [Agreement for the sale and purchase of the equity of [Discreet Company]] by both parties.

4.  Party B agrees to first pay to Party A HK$ 140,000,000 for the purchase of 70% shareholding.

5.  Party B shall pay Party A the remaining sum HK$ 105,000,000 for the purchase of the equity within 24 months in accordance with the sale progress of [Grand Riviera]. Interest will be charged on the outstanding debts (at the rate of 2.5% per annum).

6.  The total loan limit of Discreet Company from bank(s) should be HK$450,000,000 at the time of completion of the equity transfer. The sale proceeds from [Grand Riviera] shall be prioritized to repay this bank loan.

7.  A new management of board of directors of [Discreet Company] will be jointly formed by Party A and Party B. The board of directors will be comprised of two directors to be appointed by Party A and three directors to be appointed by Party B.

7a.  Party A agrees that all works of renovation, reform, re-design, sales strategy and the enforcement of the [Grand Riviera] property development project will be wholly directed by Party B. Party B also undertakes that for important issues, they will be submitted to the board of directors for discussion and resolution.

8.  [Grand Riviera] is mainly for sale. If external sale is not satisfactory, Party A and Party B, by mutual consent, can consider to allocate the existing flats in accordance with the ratio of shareholding of both parties.

9.  The net profit from the sale proceeds of [Grand Riviera] shall be shared by Party A and Party B in accordance with the ratio of shareholding.

10.  Party B shall finish due diligence exercise within 60 days from the date of signing this [Letter of Intent].

10a.  Party A undertakes that upon signing this Letter of Intent, up to the date when both parties separately sign [Agreement of the sale and purchase of the equity of Discreet Company] or the date of discharge or termination of this Letter of Intent, Party A shall not, without the consent of Party B, conduct negotiation or talks in any manner with any third party in relation to matters of the equity transfer or increase of capital and shares held by it regarding [Grand Riviera] and [Discreet Company].

10b.  If Party A is in breach of the relevant provisions in this Letter of Intent, five times of all the costs and expenses incurred by Party B after signing this Letter of Intent and relevant to the items under this Letter of Intent, which is capped at HK$2,000,000 (including costs and expenses for Party B to engage professional lawyers, accountants, investment consultants and all fees paid by the staff of Party B regarding the agreed terms under this Letter of Intent and etc.) shall be borne by Party A.

11.  If Party B or a third party appointed by Party B, makes no material negative finding during the due diligence exercise, namely, no material facts which can substantively affects this transaction is found (or in the event that such material fact is found but resolved through amicable negotiation of both parties) ; in addition, within 10 working days upon the completion of the due diligence report (including lawyers, accountants, sales consultants) of Party B, Party A and Party B shall as soon as practicable complete the signing of [Agreement of the sale and purchase of the equity of Discreet Company] and [Agreement of shareholders]; Party A shall at the same time provide Party B with a [Letter of Undertaking] concerning the shareholding, creditor’s rights, debts and etc. of [Grand Riviera] and [Discreet Company].

12.  Party A and Party B shall keep this joint investment confidential.

13.  The termination of this [Letter of Intent]

13a.  Termination of negotiation: this [Letter of Intent] can only be terminated upon the signing of this [Letter of Intent] and by agreement of Party A and Party B upon negotiation.

13b.  Termination in the event of default: upon the signing of this [Letter of Intent], in the event of default of one party, the other party can unilaterally terminate this [Letter of Intent] in accordance with the provisions of this Letter of Intent and/or pursue the legal liability of the relevant default.

HCA 1861/2017

[2019] HKCFI 2757

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1861 OF 2017

________________________

________________________

_________________________________

DECISION

_________________________________

Introduction

1.  By paragraph 1 of the summons filed by the Defendants (“Ds”) on 16 May 2019 (“the Summons”), Ds applied for the specific discovery of various documents, 4 classes of which remain contested by the Plaintiff (“P”). The 4 classes of contested documents are: -

(1)     All correspondence between P and Propertywise in relation to the due diligence work on Discreet Ltd (“the Company”) and the residential development known as Grand Riviera (“Class (e) Documents”); 

(2)     All correspondence between P and Visionary in relation to the due diligence work on the Company and Grand Riviera (“Class (f) Documents”); 

(3)     All subsequent, supplemental, additional, alteration or cancellation agreements between P and Propertywise in relation to the due diligence work on the Company and Grand Riviera (“Class (g) Documents”); and

(4)     All subsequent, supplemental, additional, alteration or cancellation agreements between P and Visionary in relation to the due diligence work on the Company and Grand Riviera (“Class (h) Documents”).

 (Collectively, “the Contested Documents”)

2.  I heard substantive arguments in relation to the discovery of the Contested Documents today.  My decision is to (1) order discovery of the Contested Documents; and (2) order P to pay all costs of and incidental to paragraph 1 of the Summons, including costs previously reserved, to Ds, summarily assessed by me, with Certificate for Counsel, at HKD 239,125, forthwith (“the Decision”). 

3.  My reasons for the Decision are as follows. 

Background Facts

4.  According to the Amended Statement of Claim (“ASoC”), P’s claim against Ds is based on a homemade Chinese document dated 20 April 2017 (“the Homemade Document”) on the purchase of 70% of the shares in the Company at the price of HKD 245 million. 

5.  P’s case is that P accepted Ds’ repudiation of the Homemade Document in June or July 2017, as a result of which P lost, inter alia, the benefit of the Homemade Document, and is entitled to damages. 

6.  Ds’ case is that even if they were in breach of the Homemade Document, clause 10b of the same limited the quantum of damages payable by Ds to P to 5 times the amount of all expenses spent by P in due diligence exercises, subject to a ceiling of HKD 2 million, and the clause is valid. 

7.  On 14 June 2019, Ds filed an affirmation, paragraphs 32 to 37 of which explained, with full particulars, why the amount of damages to be paid by Ds could be zero, and why Ds would need to inspect the Contested Documents in order to verify their position on quantum. 

8.  P never filed any affirmation to answer paragraphs 32 to 37 of Ds’ affirmation substantively.  P did, however, file a short affirmation on 20 August 2019 to update this Court on solicitors’ correspondence. 

Ds’ Submissions

9.  Mr Meyrick Wong, Counsel for Ds, submits, inter alia, that it is plain and obvious that the Contested Documents are directly relevant to the issue of quantum, and clearly necessary for the resolution of the dispute on quantum, and that as such P should state on affidavit whether it has or had in its possession custody or power all of the Contested Documents. 

P’s Submissions

10.  Mr David Morrison, Solicitor for P, submits, inter alia, that (1) P’s expenses on due diligence exercises would only be relevant if P claimed those costs, but P did not; and (2) there was no basis for Ds to assume the Contested Documents existed.  Based on these two purported grounds of objection, P asks that the Summons be dismissed with costs. 

My View

11.  In gist, I agree with Ds’ submissions, and disagree with P’s. 

12.  On the “relevance” point, it is with respect extraordinary for P to have focused entirely on its own pleaded case and ignored Ds’ pleaded case. Relevance in civil litigation is determined by the issues in dispute as revealed by examining the pleadings filed by all parties.  P’s expenses on due diligence work may not be relevant to P’s case, but they are relevant to Ds’ case, and as such they are relevant in this litigation for the purposes of specific discovery applications. 

13.  On the “existence” point, it is also extraordinary for P to say there was no basis for Ds to assume correspondence or related documents existed.  As P had admitted, certain documents in P’s possession, such as service agreements, invoices, cheques and receipts, etc, had been disclosed voluntarily.  If those documents which existed were obviously created for the purpose of being dispatched to others (a corporation does not normally sign an agreement with itself, or issue an invoice to itself, or issue a cheque to itself, or issue a receipt to itself), one would be quite entitled to assume (as Ds do) that some form of cover letter or cover email must have existed.  More importantly, if the documents did not exist, all that P would have to do would be to say so on affidavit, which P never did. 

14.  In my view, the Contested Documents are necessary for Ds to run their pleaded case.  Ordering disclosure would be beneficial to the just and effective resolution of this litigation.  There is no substance in P’s two purported grounds of objection.  I order P to file and serve, within 14 days from today, an affidavit stating whether it has in its possession, custody or power the Contested Documents, and if the same or any of them had been but is not now in P’s possession, custody or power, stating when P parted with the same and what has become of the same. 

Costs

15.  Costs should follow the event.  Ds are the winner.  All costs of the Summons should be paid by P to Ds. 

16.  On the question of Certificate for Counsel, in my judgment it was plainly necessary for Ds to engage a “senior junior” Counsel to assist in the preparation of this matter, and to argue the Summons, given the great importance of the Contested Documents to Ds’ case.  As it turned out, Mr Wong, Counsel for Ds, had in fact been most helpful to this Court. 

17.  On the quantum of costs, Ds claim HKD 240,425.  Pursuant to paragraphs 13 & 14 of Practice Direction 14.3, I examined each item in Ds’ Statement of Costs, and also the final figure.  I take the view that Item C3(e) is excessive, as this hearing lasted just under 1 hour.  There should be a deduction of HKD 1,300.  All other sums claimed, including all sums of Counsel Fees claimed, are reasonable and proper. 

18.  Taking a broad-brush approach in assessing quantum of costs, I consider a total figure of HKD 239,125 to be fair and reasonable. 

Final Remarks

19.  All litigants and their legal representatives are reminded that they all have a general duty to “act sensibly” in litigation.  That had been emphasized in, for example, (1) the Judgment of the Court of Appeal, dated 31 August 2017, in Asgain Co Ltd v Cheng Ka Yan [2017] 4 HKLRD 779; (2) the Judgment of Mr Registrar KW Lung (as DHCJ KW Lung then was), dated 29 August 2017, in Glory Sky Finance v Chen Jianhua (HCMP 2482 / 2014); (3) the Letter from Mr Registrar KW Lung to the Chairman of the Bar dated 4 September 2017; and (4) the Bar Circular No. 168/17 dated 3 October 2017, all of which predated P’s opposition to the Summons.  For applications for specific discovery in particular, if all parties act sensibly, substantial costs on unnecessary arguments can be saved.  P’s decision to oppose paragraph 1 of the Summons appears to me to be far from sensible, especially since complying with that paragraph would most probably have been substantially cheaper than arguing against it.  The obvious litigation risk of losing paragraph 1 of the Summons, and being ordered to pay costs to Ds forthwith, could have been easily avoided had P acted more sensibly.  I hope that in the future, all litigants and their legal representatives would bear their general duty to “act sensibly” in litigation in mind.

20.  I do thank both advocates for their most able assistance. 

HCA 1861/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1861 OF 2017

__________________________

__________________________

____________________

D E C I S I O N

____________________

Application and opposition

1.  The plaintiff’s claim arises out of a homemade Chinese “公司股權轉讓意向書” signed by the defendants as vendors and “寶聲集團或旗下之成員公司”[1] as purchaser in April and May 2017 (“Letter of Intent”) for the sale and purchase, at HK$245 million, of 70%[2] of the issued ordinary shares (“Shares”) in Discreet Limited (“Company”), which company holds Lot 496 in Demarcation District 399 (the street address of which is 368 Castle Peak Road, Ting Kau, Tsuen Wan, New Territories) on which the residential development of 13 detached houses known as Grand Riviera (“Grand Riviera”) stands.

2.  By the specially indorsed writ of summons issued on 8 August 2017, the plaintiff claims primarily for specific performance of the agreement that it says is contained in the Letter of Intent or damages in lieu of or in addition to specific performance.

3.  Before the court is the plaintiff’s summons filed on 11 August 2017 for interlocutory injunctions to restrain the defendants from:

(1)  selling, mortgaging, charging, disposing of, encumbering, or dealing with the Shares;

(2)  causing or procuring the Company to sell, mortgage, charge, dispose of, encumber or deal with Grand Riviera;

(3)  causing or procuring the Company to issue any new shares or grant any option to purchase shares in the Company; and

(4)  causing or procuring the Company to appoint new or additional directors of the Company

until trial or further order (“Application”).

4.  The defendants oppose the Application on a number of grounds, one of which is that there is no serious issue to be tried on the plaintiff’s claim for specific performance.  This ground, if accepted, would dispose of the Application because the said injunctions are sought to prevent the frustration of the plaintiff’s claim for specific performance of the Letter of Intent by the disposal of the Shares or Grand Riviera before trial.

5.  One of the bases upon which the defendants say that there is no serious issue to be tried on the plaintiff’s claim for specific performance is that the plaintiff has already accepted the defendants’ repudiation of the Letter of Intent thereby terminating the same.

6.  For the record, the defendants also resist the Application on these further or other grounds:

(1)  First, they contest the plaintiff’s right to specific performance by further arguing that:

(a) The Letter of Intent does not constitute a binding agreement for the sale and purchase of the Shares that is capable of being specifically enforced, but is rather an agreement in principle only, with fundamental terms yet to be agreed upon.

(b) Damages would in any event be an adequate remedy for the plaintiff so that specific performance should, and would, not be ordered.

(c) The 3^rd defendant (“Mr Koon”) is undisputedly not a shareholder of the Company, and is thus not in a position to transfer any shares in the Company to plaintiff so that there is simply no viable claim for specific performance against him.

(2)  Second, the defendants question whether they would be able to successfully enforce the plaintiff’s undertaking as to damages. 

(3)  Third, the balance of convenience lies against granting the injunctions.

In light of my conclusions on the questions whether the Letter of Intent was terminated by the plaintiff’s acceptance of the defendants’ repudiation and, if so, whether the acceptance was vitiated by the defendants’ misrepresentation, it is not necessary for me, and I do not propose, to deal with these points.

Relevant background

Parties

7.  The plaintiff, a company within the Bonds group of companies, engages in various businesses including real estate investment and development.  Mr Anson Chan (“Mr Chan”) is the Chairman and CEO of the Bonds group of companies.  Mr Ho Shek Tim (“Mr Ho”) is the plaintiff’s General Manager.

8.  The Company is a property holding company and holds Grand Riviera.  The 1^st defendant (“Mr Kwan”) and the 2^nd defendants (“Mrs Kwan”), husband and wife, are the only registered shareholders of the Company (with Mr Kwan holding the majority of the shares).   Mr Kwan, Mrs Kwan and Mr Koon are the Company’s directors.

9.  Despite being described in the Letter of Intent as an “equity holder” (“權益持有人”) of the Company, Mr Koon, a friend of Mr Kwan, is not a shareholder of the Company and has disclaimed having any present legal or beneficial interest in the Company’s shares.  Both Mr Kwan and Mr Koon speak of an informal understanding between them that Mr Koon may in the future be allotted some shares (for his past contributions) but the timing of the allotment and the number of shares to be allotted to him is yet to be fixed.

Letter of Intent and material terms thereof

10.  Insofar as it is material for present purpose, the Letter of Intent contains the following terms:

(1) Clause 7:

“[被告人][原告人]雙方合組「前進有限公司」之新的董事會管理層。董事會由[被告人]委任兩席董事和[原告人]委任三席董事組成。

 7a.  [被告人]同意此地產發展項目「星悅海灣」之裝修、改造、重新設計、及銷售策略及執行，由[原告人]完全主導。[原告人]亦承諾在重大議題上，將提交公司董事會層面討論及表決。”

English translation:

“[The defendants] and [the plaintiff] together will form the board of directors and management of [the Company]. The board of [the Company] shall consist of 2 directors to be nominated by [the defendants] and 3 directors to be nominated by [the plaintiff].

7a. [The defendants] agree that the renovation, modification, redesign and sale strategy in respect of this property development project “Grand Riviera” and the execution thereof shall be led entirely by [the plaintiff]. [The plaintiff] warrants that major issues will be submitted to the board of directors [the Company] for discussion and voting.”

(2) Clause 10:

“[原告人]需於此簽署此「意向書」之日起計60天內完成盡職調查。

10a. [被告人]承諾在簽署此「意向書」之後，至雙方另行簽訂「前進有限公司股權買賣合約」之日或本「意向書」議解除或終止之日，未經[原告人]同意，[被告人]不得與任何第三方以任何方式就其所持有的「星悅海灣」及「前進有限公司」的股權出讓、或增資擴股事宜進行協商或談判。

10b.  如果[被告人]違反此「意向書」項下的相關規定，則[原告人]在簽署此「意向書」後所支出的與此「意向書」項下相關的所有費用的五倍，即港幣200萬元上限（含[原告人]聘請專業律師、會計師、投資顧問的費用及[原告人]職員投入本意向協議項下的所有費用等）由[被告人]承擔。”

English translation:

“[The plaintiff] should complete its due diligence review within 60 days from the execution of this Letter of Intent.

10a. [The defendants] warrant that after signing this Letter of Intent and until the date of execution of the “Agreement for Sale and Purchase of Shares in [the Company]” by the parties or the date of discharge or termination of this Letter of Intent, [the defendants] shall not, without the consent of [the plaintiff], in any way discuss or negotiate with any third party for the sale of “Grand Riviera” or the shares in [the Company] or the injection of capital into or the issuance of new shares in [the Company].

10b. In the event [the defendants] shall be in breach of the relevant provisions in this Letter of Intent, [the defendants] shall be responsible for 5 times the amount of all costs and expenses, with an upper limit of HK$2 million, incurred by [the plaintiff] after the signing of this Letter of Intent in connection with matters relating to this Letter of Intent (including the fees of professional lawyers, accountants and investment consultants engaged by [the plaintiff], and all costs and expenses incurred by the personnel of [the plaintiff] relating to matters under this Letter of Intent].”

(3) Clause 13:

“此「意向書」之終止

13a. 協商終止：此「意向書」簽署後，經[被告人]、[原告人]雙方協商一致，此「意向書」才可以終止。

13b. 違約終止：此「意向書」簽署後，一方發生違約情形，另一方可依本意向協議規定單方終止此「意向書」，及或追究相關違約之法律責任。”

English translation:

“Termination of this Letter of Intent

13a. Termination by mutual agreement: after this Letter of Intent is executed, it can only be terminated by mutual agreement between [the defendants] and [the plaintiff].

13b. Termination by breach: after this Letter of Intent is executed, if one party acts in breach, the other party can, in accordance with the provisions of this document, unilaterally terminate this Letter of Intent, and/or seek legal remedies for such breach.”

Meeting & telephone conversation on 31.5.2017

11.  On 31 May 2017, Mr Ho (the plaintiff’s General Manager) was summonsed to a meeting with Mr Kwan at the latter’s office.  In the course of this meeting, Mr Ho telephoned Mr Chan and Mr Chan and Mr Kwan spoke on the phone.  There is a dispute as to what was actually said at such meeting and telephone conversation.

12.  The plaintiff’s initial account of the events on 31 May 2017 is set out firstly in paragraphs 12 and 13 of the Statement of Claim dated 8 August 2017 by which the plaintiff avers:

“12. …, the 1^st Defendant informed the Plaintiff on 31^st May 2017 that the Defendants would not proceed with the sale of their shares, which was a clear breach of the Agreement and a wrongful repudiation thereof, …

13.  The Plaintiff was then willing to accept the Defendants’ wrongful repudiation of the Agreement on condition that the Defendants paid the sum of $2 million to the Plaintiff; the deadline for such payment was last extended to 15^th July 2017.” (emphasis added)

13.   Such pleading is then elaborated upon by Mr Chan in paragraphs 20 to 22 of his 1^st affirmation made on 10 August 2017 in support of the Application:

“20. On 31^st May 2017, [Mr Ho] received a telephone call from [Mr Kwan] who invited him to go to the registered office of [the Company] on the same day for an urgent meeting.

21. I was informed by [Mr Ho] that he attended the registered office of [the Company] at around noon time on 31^st May 2017; and at the said meeting, [Mr Kwan] informed [Mr Ho] that [he] wanted to terminate the [Letter of Intent] unilaterally. He also asked [Mr Ho] to stop all on-going due diligence work, and not to start on any additional due diligence work. [Mr Ho] informed [Mr Kwan] that due diligence had already begun; and the Plaintiff had also engaged various outside parties to perform the relevant due diligence work. As [Mr Ho] sensed the urgency of the matter, he immediately called me and asked me to speak on the telephone with [Mr Kwan] directly.

22. On this said telephone call, [Mr Kwan] told me that he wanted to unilaterally terminate the [Letter of Intent] and would not proceed with the sale of the shares of [the Company] to the Plaintiff. I told him that this was a clear breach of the Contract and a wrongful repudiation. Since [Mr Kwan] was apologising to me over the telephone, I informed him that the Plaintiff would accept the Defendants’ wrongful repudiation of the [Letter of Intent] on the condition that the Defendants pay a sum of HK$2 million to the Plaintiff as compensation. [Mr Kwan] expressed his willingness to compensate the Plaintiff.” (emphasis added)

14.  On the other hand, according to Mr Kwan, on 23 May 2017, he was informed by a Mr Anthony Man (“Mr Man”) of Kin Shing (Leung’s) General Contractors Limited (“Kin Shing”) which successfully tendered for the renovation work for Grand Riviera that due to their past experience on another renovation project, Kin Shing had serious doubts about the trustworthiness of the plaintiff and they would not agree to undertake the construction work in respect of Grand Riviera if the plaintiff should become the majority shareholder of the Company.  After considering Mr Man’s comment and warning, Mr Kwan decided to pull out of the deal with the plaintiff.

15.  Mr Kwan recalls the meeting with Mr Ho and the telephone conversation with Mr Chan on 31 May 2017 in paragraphs 35 and 36 of his affirmation made on 30 August 2017 in opposition to the Application:

“35. I therefore called for a meeting with Mr. Ho on 31 May 2017, at the registered office of the Company. At the meeting between myself and Mr. Ho:

(1) I told him that I wished to terminate the Letter of Intent and would not proceed with the sale. I frankly explained to Mr. Ho that I was informed by Kin Shing that the Plaintiff previously engaged Kin Shing for a renovation project at No.10 Beijing (sic) Road, but substantial sums were still unpaid and owing to Kin Shing. I told Mr. Ho that Kin Shing would not agree to be the Company’s contractor for the renovation of Grand Riviera if the Plaintiff were to become the majority shareholder.

(2) Upon hearing this, Mr. Ho told me that he was just about to engage solicitors and accountants to conduct due diligence on that day, but he had not yet done so. He also stated that he would have to inform Mr. Chan about my wish to terminate the Letter of Intent.

(3) Mr. Ho therefore called Mr. Chan immediately, and asked me to speak directly with Mr. Chan in the phone, which I did.  I told Mr. Chan that I wished to terminate the Letter of Intent and not to proceed with the sale of the shares in the Company.  Mr. Chan said that it was wrong for me not to keep my word, and given my decision not to proceed with the sale, I would have to pay HK$2 million as compensation as previously agreed.  I told him that I am willing to provide monetary compensation according to the calculation method agreed under the Letter of Intent.

36. After the aforesaid meeting with Mr. Ho and telephone conversation with Mr. Chan on 31 May 2017, it was clear to the parties that the Letter of Intent was at an end and the sale and purchase of the shares would not proceed.  The only remaining issue was the amount of compensation (if any) payable to the Plaintiff in accordance with the agreed formula under Clause 10b of the Letter of Intent.”

16.  Mr Chan replies by giving this changed account of the 31 May 2017 telephone conversation in paragraphs 18 to 25 of his 3^rd affirmation dated 5 September 2017:

“18. …. The telephone conversation between [Mr Kwan] and me was a short one, lasting only a few minutes. It was [Mr Ho] who called me and then handed the phone to [Mr Kwan].

19. [Mr Kwan] only told me that he had a change of heart, and he no longer wanted to sell the shares, he was also apologetic. On hearing that I was annoyed, and I told him that it was wrong for him not to keep his words (言而無信). During the brief phone conversation, I (representing the Plaintiff) merely reminded [Mr Kwan] of certain penalties for which he is liable under the Letter of Intent for his breach of contract. I believe I might have mentioned $2 million because I remembered that was the amount provided for in the Letter of Intent although I did not have a copy of it in hand when I was talking to [Mr Kwan] over the telephone.

20. [Mr Kwan] was however non-committal and I am sure no agreement of any kind was reached. Other than saying that he was sorry and that he would be responsible, [Mr Kwan] definitely had not said he was willing to pay monetary compensation according to the calculation method agreed under clause 10b of the Letter of Intent. That was entirely consistent with what [Mr Kwan] did later when he denied that the Letter of Intent was a legally binding contract.

21. Given the 1^st Defendant’s letter dated 18^th July 2017 (exhibit C1-14), it is but audacious for the 1^st Defendant now to say on oath that he all along agreed to pay monetary compensation.

22. When I mentioned payment of damages/compensation, I had in mind not just clause 10b but also clause 13 of the Letter of Intent which provides that the same can only be terminated by mutual agreement. I also expected the 1^st Defendant to know that as well, because after all clause 13 was added only towards the end of the negotiations immediately prior to the signing of the Letter of Intent.

23. As pointed out by the 1^st Defendant, at that time the parties have not sought legal advice because the Plaintiff was, and I expected that the 1^st Defendants would be, acting in good faith. To me as a layman, it takes two (both parties) to agree.

24. Absent an agreement on the amount of compensation and a promise to pay the agreed amount; there was simply no reason for the Plaintiff to make any choice/election about the 1^st Defendant’s proposed termination of the contract. Afterall, [Mr Kwan] might change his mind again and decide to proceed with the sale.

25. Apart from repeatedly apologizing to me, the 1^st Defendant simply did not say much over the telephone.  As deposed to above, I was annoyed and I therefore asked for [Mr Ho] and instructed [Mr Ho] not say anything more to [Mr Kwan], and I hung up.  I have definitely not told [Mr Kwan] that the Plaintiff agreed to terminate the sale.”

17.  While on the events on 31 May 2017, apart from whether the plaintiff accepted the defendants’ repudiation of the Letter of Intent, there is also an issue as to whether Mr Kwan mentioned to either Mr Ho or Mr Chan what Kin Shing’s Mr Man had told him and that was the reason why he backed out.  According to Mr Chan, Mr Kwan did not do so.  Mr Chan says this in paragraph 15 of his 3^rd affirmation:

“[Mr Kwan] must have deliberately withheld the information from me in an attempt to try to persuade me to agree to his proposed termination. Had I known the truth that [Mr Kwan]’s true reason for his wish to terminate was due not to his having a change of heart of not willing to sell, but a wish to co-operate with Kin Shing without prior consent from the plaintiff; I definitely would not have considered accepting his proposed termination. …”

18.  Mr Benjamin Chain, counsel for the plaintiff, deploys such evidence by Mr Chan to support an argument that Mr Kwan’s alleged failure to give the plaintiff the true reason behind the defendants’ repudiation, if found, amounted to misrepresentation, the effect of which would be to rescind and vitiate the plaintiff’s acceptance, if found.

Correspondence after 31 May 2017

19.  The meeting and telephone conversation on 31 May 2017 was followed by 5 days of silence and inaction between the parties.  The plaintiff made the first move on 5 June 2017 at 5:32 pm by sending to the defendants a letter signed by Mr Chan himself.  The second and third paragraphs of that letter read as follows:

“2017年5月31日下午12時30分關秩安先生約我方代表何錫添先生到貴方前進有限公司辦公室，並一併致電我方陳燿璋董事長，關秩安先生提出終止執行《意向書》的相關條款，並終止出售70%前進公司股權給寶聲集團；關秩安先生表示抱歉及願意賠償寶聲集團之損失。

按照《意向書》10b、13b項的規定，“如果甲方違反此《意向書》項下的相關規定 則乙方在簽署此《意向書》後所支出的與此《意向書》項下相關的所有費用的五倍，即港幤200萬元上限 由甲方承擔”。由於我司已展開盡職調查，所消耗的時間、費用已超過200萬元；所以現我方要求貴方於2017年6月7日前盡快將賠償金200萬元支付給寶聲(集團)有限公司，否則我方保留權利向貴方追究相關違約之法律責任。”

(emphasis added)

English translation:

“On 31 May 2017, at 12:30 pm, [Mr Kwan] asked our representative [Mr Ho] to meet at your office, and telephoned the chairman of our board of directors [Mr Chan]. [Mr Kwan] proposed to terminate the performance of the relevant provisions of the Letter of Intent, and to halt the sale of 70% shares in the [Company] to the Bonds Group; [Mr Kwan] conveyed his apologies and willingness to compensate the Bonds Group’s loss.

   According to clauses 10b and 13b of the Letter of Intent, “[if the defendants] shall be in breach of the relevant provisions in this Letter of Intent, [the defendants] shall be responsible for 5 times the amount of all costs and expenses incurred by [the plaintiff] after the signing of this Letter of Intent in connection with matters relating to this Letter of Intent, with an upper limit of HK$2 million”.  As we have already commenced the due diligence investigation, the time and costs incurred has already exceeded $2 million; hence we demand your side to pay compensation in the sum of $2 million to Bonds Group Company Limited as soon as possiblebefore 7 June 2017,otherwise we reserve the right to claim against you for legal liability for the related breach of contract.” (emphasis added)

20.  Just about half an hour later, the defendants sent to the plaintiff a letter containing this paragraph:

“We refer to the discussion on 31 May 2017 between your [Mr Ho] and our [Mr Kwan] about the termination of the Letter of Intent entered into by us and you on 12 May 2017 and write to put on record that both of us agreed to the termination of the said Letter of Intent subject to honouring Clause 10b thereof. Please advise us the amount of the costs so far incurred by you for our verification. It is however understood that you have not yet engaged any professional adviser (including lawyer or accountant in relation to the transaction contemplated under the said Letter of Intent.” (emphasis added)

21.  The plaintiff responded on 7 June 2017:

“We refer to our letter of 5 June 2017 and your reply letter of the same date ….  We would like to reiterate Clause 10b of the Letter of Intent which states that “If Party A breaches any terms and conditions of this Letter of Intent, Party A shall compensate Party B, five times of the relevant costs incurred by Party B associated with this Letter of Intent, with a maximum cap of HK$2 million”.  Relevant costs incurred should include not only lawyers and accountants fees, but also charges and retainers paid or payable to internal or external consultants or employees.

As we have commenced our due diligence review of [the Company], its books and records and its underlying real estate project, current market conditions, etc., our cumulative costs incurred to-date have well exceed HK$400,000; and therefore the penalty for your breach of the Letter of Intent (at 5 times our costs) will be the maximum HK$2 million as OUR compensation.  Hence, we demand you to pay us,on or before 8 June 2017, the HK$2 million as compensation stated in the Letter of Intent. Otherwise, we reserve all rights to claim against you for breach of contract.” (emphasis added)

22.  On 6 July 2017, the plaintiff provided to Mr Kwan some, and Mr Kwan asked the plaintiff if it had more, documents evidencing the costs and expenses incurred by the plaintiff in relation to the Letter of Intent.

23.  On 11 July 2017, the plaintiff sent to the Company for the attention of Mr Kwan a letter the last 2 paragraphs of which read as follows:

“In a meeting held on 31 May 2017, your [Mr Kwan] informed our [Mr Ho] that you intended to unilaterally cease execution of [the Letter of Intent], and you were willing to compensate us in accordance with Clause 10B of the Letter of Intent. For the record and as a matter of clarification, our Mr Ho told your Mr Kwan at the time that we were already deep into our due diligence review, although we had not yet appointed a lawyer to draft our formal Sale & Purchase Agreement.

Cumulative consultant fees paid or payable by us amount to more than HK$400,000; therefore, we hereby demand [the Company] to pay us, on or before 15 July 2017, HK$2 million (being the lesser of HK$2 million and 5 times our fees incurred) as our compensation in accordance with the terms of [the Letter of Intent].  Failing that, we will have no alternative but to commence legal action against you for breach of contract without further notice.”

24.  This was followed up by Mr Chan by these WhatsApp exchanges with Mr Koon on the following day:

Mr Chan:

“早晨，權哥，昨天我已寄出「最後警告信」給 關則師／前進有限公司… 促請他在7月15日或以前向 寶聲集團支付「交易違約金」，否則我方將正式起訴前進有限公司。

勞煩權哥對此事多加關注，以免「前進有限公司」面對不必要、也必輸的官司。”

Mr Koon:

“收悉﹗今天會與他見面，再提点他”

Mr Chan:

“好的… 勞煩你囉﹗”

English translation:

Mr Chan:

“Morning, elder brother Kuen, I have sent an “ultimatum” to [Mr Kwan]/[the Company] … urging him to pay “compensation for breach of contract” to Bonds Group on or before 15 July, otherwise would formally sue [the Company].

We trouble elder brother Kuen to be more concerned about this matter, so as to save [the Company] from facing litigation which is unnecessary and which it is bound to lose.”

Mr Koon:

“Noted! I will meet him today, will remind him again.”

Mr Chan:

“Good … thank you for the trouble!”

25.  The plaintiff’s ultimatum was met by the response, inter alia, that the Letter of Intent was not a contract and could not be enforced because it did not “constitute a definitive contract but signifies a genuine interest in reaching the final agreement subject to due diligence, or fulfilment of certain conditions”.  See the letter dated 18 July 2017 signed by Mr Kwan on the Company’s letterhead.

26.  On 8 August 2017, the plaintiff issued the writ of summons in this action.

27.  It is the defendants’ case that but for the intervention of the Application, the Company would have launched the sale of the Grand Riviera (which has been estimated to have an open market value of over HK$1,100,000,000) on 12 August 2017.

28.  Having seen the defendants’ evidence, the plaintiff’s latest position is that it does not object to a sale of the Grand Riviera at not less than HK$1,100,000,000 and seeks the interlocutory injunctions applied for subject to any such possible sale.

Meaning of “serious question to be tried”

29.  Generally, the court does not grant an interlocutory injunction unless the plaintiff’s claim raises a serious question to be tried.  See American Cyanamid Co v Ethicon [1975] AC 396 (HL), per Lord Diplock at 407G-H.  What is required is that the plaintiff has “prospects of success, which in substance and reality, exist”.  See Hong Kong Civil Procedure 2017, Volume 1, §29/1/10.

Whether specific performance claim raises a serious issue to be tried

Issues

30.  The question arising on the evidence summarised in paragraphs 11 to 25 above is, first, whether the plaintiff accepted the defendants’ repudiation of the Letter of Intent in the telephone conversation between Mr Kwan and Mr Chan on 31 May 2017 or by the correspondence thereafter (“Acceptance Issue”).

31.  Further, as mentioned in paragraphs 16 and 17 above, Mr Chain advances the proposition that even if the plaintiff is found to have accepted the defendants’ repudiation of the Letter of Intent, Mr Kwan is guilty of misrepresentation by failing to tell Mr Chan and Mr Ho that the defendants repudiated the Letter of Intent due to what Kin Shing said about its past dealings with the plaintiff and such misrepresentation would rescind and vitiate the plaintiff’s acceptance (“Misrepresentation Issue”).

32.  For the sake of completeness, I should also record that in §10 of his skeleton submission dated 6 September 2017, Mr Chain seeks to raise an issue as to whether there was even a “wrongful repudiation” or a “renunciation” of the Letter of Intent by the defendants.  In so contending, counsel seizes upon Mr Kwan’s words (in paragraph 35 of his affirmation as set out in paragraph 14 above) that he told Mr Ho and Mr Chan that he “wished to terminate the Letter of Intent” (Mr Chain’s emphasis), as opposed to, I suppose, telling them that he was terminating the Letter of Intent.

33.  I am afraid I do not see, in this context, any or any meaningful difference between Mr Kwan saying that he wished to terminate, and that he was terminating, the Letter of Intent. 

34.  And Mr Kwan was understood by Mr Ho and Mr Chan to be terminating the Letter of Intent there and then.  This is made clear by the second paragraph of the plaintiff’s letter dated 5 June 2017 signed by Mr Chan (quoted in paragraph 19 above).  Moreover, as pointed out by Ms Tong, the plaintiff’s case, as pleaded in paragraph 12 of the statement of claim, is that on 31 May 2017, the 1^st defendant informed the plaintiff that the defendants “would not proceed with the sale of their shares, which was a clear breach of the [Letter of Intent] and a wrongful repudiation thereof”.  The plaintiff goes on to plead in paragraph 13 that the plaintiff was then “willing to accept the Defendants’ wrongful repudiation of the [Letter of Intent] on condition that the Defendants paid the sum of HK$2 million to the Plaintiff”.  Such pleading is also consistent with paragraphs 21 and 22 of Mr Chan’s 1^st Affirmation (see paragraph 13 above).

35.  I discern no issue concerning whether the defendants repudiated the Letter of Intent.

Acceptance Issue

Applicable legal principles

36.  Whether the plaintiff’s claim for specific performance raises a serious issue to be tried is to be determined by the application of the following well established principles of contract law:

(1)  Where a party to a contract commits a repudiatory breach, the innocent party is given a choice to either affirm the contract so that the contract continues or accept the repudiation thereby bringing the contract to an end and discharging the innocent party from further performance. See Chitty on Contracts (32^nd Edition), Volume 1, §24-002.

(2)  Where the innocent party chooses to accept the repudiation, both parties are discharged from further performance of the contract.  The innocent party cannot thereafter insist upon performance of the contract by repudiating party by claiming specific performance. This follows from the fact that his acceptance of the defaulting party’s repudiation puts an end to the contract.  See Johnson v Agnew [1980] AC 367 (HL), per Lord Wilberforce at 392G-H and 398E-F; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL), per Lord Diplockat 849F-H.  See also Chitty on Contracts,supra, §24-052 and §24-054.

(3)  The same principles apply in the context of an anticipatory breach, where a party expresses an intention not to fulfil his part of the contract before the time for performance arrives.  In such circumstances, the innocent party may accept the renunciation, which has the effect of discharging the parties from further performance of their primary obligations.  See Chitty on Contracts, supra, §24-022. 

(4)  An act of “acceptance of repudiation” requires no particular form.  It does not have to be couched in the language of acceptance.  It is sufficient that the communication or conduct clearly and unequivocally conveys to the repudiating party that the innocent party is treating the contract as at an end.  See Vitol SA v Norelf Ltd [1996] AC 800 (HL), per Lord Steyn at 810H-811B. See also Chitty on Contracts, supra, §24-013 at p 1745.

(5)  The following may constitute acceptance of a repudiation:

(a) an unequivocal overt act which is inconsistent with the subsistence of the contract: see State Trading Corp of India Ltd v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277 (CA), per Kerr LJ at 286;

(b) where applicable, reliance on a contractual term which entitles the innocent party to terminate the contract: see Chitty on Contracts, supra, §24-013 at p 1746. 

(6)  Once the repudiation has been accepted, the acceptance cannot be withdrawn.  See Scarf v Jardine (1882) 7 App Cas 345 (HL), per Lord Blackburn at 360-361.  See also Chitty on Contracts, supra, §24-013 at p 1747.

37.  Mr Chain accepts these principles but stresses that:

(1)  The innocent party is entitled to a period of time to resolve whether he is going to affirm or terminate the contract.  See Cheung Chung Ping Stephen v Allcom Ltd [2010] 2 HKLRD 324, per Rogers VP at [21]-[22] (following Allen v Robles [1969] 1 WLR 1193 and what Rix LJ said in Stoczina Gdanska SA v Latvian Shipping Co [2002] 2 ALL ER (Comm) 768 at [87]).  See also Chitty on Contracts, supra, §24-002. 

(2)  Unless and until he elects to accept the repudiation, the contract continues to exist.

38.  Counsel for the defendants, Ms Sara Tong, does not quarrel with either of these propositions.

Whether acceptance on 31 May 2017?

39.  As noted earlier, the parties disagree as to what was said in the meeting and the telephone conversation on 31 May 2017.

40.  Mr Chain stresses time and again that the telephone conversation on 31 May 2017 was not an arranged discussion; that it was a short exchange lasting just a few minutes; that it was an exchange between 2 laymen and not lawyer to lawyer; that it was sprung upon Mr Chan who had no prior notice or inkling that the defendants wanted to back out of the Letter of Intent; that Mr Chan’s response was spontaneous; that such response would not have conveyed an election to Mr Kwan; that it would have made no commercial sense for Mr Chan to make any election in the absence of at least a promise by Mr Kwan to pay; and that the plaintiff’s subsequent express reservation of rights was entirely consistent with Mr Chan not having made any election.  I note and take into consideration all these points.

41.  However, that there should be no mini-trial on affidavits (of which I am reminded) does not mean that the court should turn a blind eye to the following evidence.

42.  Firstly, there are internal inconsistencies in the plaintiff’s own account of the 31 May 2017 telephone conversation, especially regarding the critical questions of whether Mr Chan accepted the defendants’ repudiation of the Letter of Intent (conditionally or otherwise) and whether Mr Kwan agreed to compensate the plaintiff or not. See paragraphs 13 and 15 above.  The plaintiff now disavows paragraphs 21 and 22 of Mr Chan’s 1^st affirmation and relies on paragraphs 19 to 25 of Mr Chan’s 3^rd affirmation.  The later version contradicts not only Mr Chan’s 1^st affirmation but also the plaintiff’s letters dated 5 June and 11 July 2017 (see paragraphs 19 and 23 above), which clearly relay the message that Mr Kwan indicated that he was willing to pay the plaintiff monetary compensation as stipulated in clause 10b.  The plaintiff has, however, not explained why Mr Chan said what he said in these letters or in paragraphs 21 and 22 of his 1^st affirmation and why he retracts from such earlier evidence.  In assessing whether the plaintiff’s claim for specific performance raises a serious issue to be tried, the court is entitled to have regard to the quality of the plaintiff’s evidence on such claim.  The presence of the said unexplained incongruities in the plaintiff’s evidence on such a crucial aspect of the dispute is, to my mind, relevant to whether the plaintiff could in substance and reality succeed in its claim for specific performance.

43.  Secondly and more importantly, in his letter dated 5 June 2017 for and on behalf of all the defendants to the plaintiff, Mr Kwan expressly asserted and put on the record that the parties agreed in the discussion on 31 May 2017 to the termination of the Letter of Intent subject to the defendants honouring of clause 10b thereof (see paragraph 20 above).  The defendants made the point in the first sentence of this letter and in plain and direct terms.  There was nothing ambiguous about what they were saying.  There was no room for misunderstanding. It was the first point made by the defendants in that letter.  It took up half of that very short one paragraph letter.  The plaintiff could not have missed it.

44.  Mr Chain deals with the defendants’ letter of 5 June 2017 by firstly questioning its timing, that is, it being sent half an hour after, though it was not on its face a response to, the plaintiff’s earlier letter of the same date and it being sent shortly after 6 pm (which was close to or after close of business). He notes that Mr Kwan has chosen not to inform the court whether he had read the plaintiff’s letter of 5 June 2017 when he wrote his letter of the same date.  He asks “why [Mr Kwan], on the face of it, wrote such a letter on that day at that hour out of the blue”.    

45.  Mr Chain further describes this letter as being “self created and self-serving” and the agreement mentioned therein “bogus” and somehow inconsistent with the defendants’ case that Mr Chan elected to accept the defendants’ repudiation in the telephone conversation on 31 May 2017.

46.  Mr Chain also draws my attention to clause 13a, which provides that “the Letter of Intent can only be terminated by mutual agreement”. 

47.  With respect, I think counsel misses the point.  What strikes me as material, but not dealt with by Mr Chain, is that the plaintiff did not in any way take issue with the defendants’ claim of an agreed termination in its letter dated 7 June 2017 (see paragraph 21 above).  And this letter was expressly a response by the plaintiff to the defendants’ letter of 5 June 2017. 

48.  I am unable to see anything suspicious about the defendants’ letter of 5 June 2017.  To the contrary, it would make perfect sense if the Letter of Intent was terminated by Mr Chan’s acceptance of the defendants’ repudiation pursuant to clause 13b when he spoke to Mr Kwan on 31 May 2017, leaving only the amount of compensation payable by the defendants to the plaintiff under clause 10b to be worked out and agreed.  One would not expect a layman to use legalistic phrases such as “repudiation”, “acceptance of repudiation” or “election to terminate”. However, I imagine a layman who is in repudiation of a contract would see the opposite party’s acceptance of the situation as an agreement to terminate the contract.

49.  On this state of evidence, had it been necessary for me to do so, I would have held Mr Chan’s evidence of his telephone conversation with Mr Kwan on 31 May 2017 to be incredible. 

50.  However, it is not necessary for me to so find.  I am prepared to proceed on the assumption that Mr Chan did not accept the defendants’ repudiation of the Letter of Intent in his telephone conversation with Mr Kwan on 31 May 2017 and that the Letter of Intent remained in subsistence as at the end of that exchange.  On this note, I turn to the plaintiff’s letters after 31 May 2017.

Whether acceptance after 31 May 2017?

51.  I refer to paragraphs 19, 21, 23 and 24 above which set out the plaintiff’s letters and WhatsApp message to the defendants after 31 May 2017, by which the plaintiff cited and relied on clauses 10b and 13b of the Letter of Intent and demanded for compensation as per clause 10b.

52.  In support of her submission that the plaintiffs thereby communicated to the defendants its acceptance of the defendants’ repudiation of the Letter of Intent, Ms Tong has taken me to Hansun Investment Ltd v Sincere Union Development Ltd [2008] 4 HKLRD 442, per Deputy High Court Judge Gill at [48]-[55]; So Siu Yung v Chan Tsan Tak, HCMP 1516/2011, unreported, 13 February 2012, per Deputy High Court Judge Burrell at [30]-[35] per DHCJ Burrell); and Zheng Chulin v Wo Kee Hong Kong Industrial Limited [2012] 4 HKC 522 (CA), per Kwan JA at [21]-[23]. These were all cases in which a request for the return of the deposit by a purchaser of land was held to constitute an act of unequivocal acceptance of the vendor’s repudiation, and preclude a subsequent claim for specific performance of the agreement for sale and purchase.[3]

53.  Mr Chain distinguishes these 3 authorities on the basis that the purchasers therein all claimed for the return of the deposits and that in none of them did the purchaser claim just damages. 

54.  I do not agree.  The return of a deposit paid under an agreement for sale and purchase is the “antithesis of keeping the contract to purchase alive” (in DHCJ Gill’s words in Hansun Investment Ltd v Sincere Union Development Ltd, supra, at [49]) because if the contract had been kept alive and eventually enforced against the vendor by a decree of specific performance, the vendor would have been entitled to retain such monies as part of the purchase price.

55.  By parity of reasoning, a demand or claim for the payment of damages to compensate the purchaser for costs and expenses that would have been wasted only in the event of a non-completion of the agreement is likewise inconsistent with the subsistence of the agreement.  This is so because if the contract had been kept alive and eventually enforced against the vendor by a decree of specific performance, the purchaser would have had to bear such sums as his costs of the transaction and could not have looked to the vendor for reimbursement of the same.  In this regard, I note that the Court of Appeal held a claim for damages for the agency fee and legal costs incurred by a purchaser of land to be plainly inconsistent with the subsistence of the contract.  See Kwan JA at [22] in Zheng Chulin v Wo Kee Hong Kong Industrial Limited, supra.

56.  I agree with Ms Tong’s submission on the effect of the plaintiff’s letters to the defendants after 31 May 2017.

57.  The second and third paragraphs of the plaintiff’s letter dated 5 June 2017 to the defendants (see paragraph 19 above), read objectively, clearly and unequivocally conveyed to the defendants that the plaintiff accepted the defendants’ repudiation of the Letter of Intent and was treating the Letter of Intent as at an end.

58.  More particularly, the plaintiff demanded the defendants to pay it HK$2 million. Such demand was made expressly pursuant to clauses 10b and 13b of the Letter of Intent (set out in paragraphs 10(2) and (3) above).  The former permits a party to terminate the Letter of Intent upon breach of the same by the other party. The latter provides for the compensation of the plaintiff in the event of the defendants’ breach.  Although it does not specify the kind of breach that triggers the defendants’ liability to compensate the plaintiff in accordance with the formula therein provided, on proper analysis, it is clear to me that clause 10b could be invoked by the plaintiff only upon the defendants’ refusal to proceed with the sale under the Letter of Intent.  The compensation payable by the defendants is based upon, and fixed with reference, to the costs and expenses incurred by the plaintiff in connection with the Letter of Intent after its execution (subject to a HK$2 million cap).  The plaintiff should be so compensated only if such costs and expenses would be wasted.  And they would be wasted only if the parties would not proceed with the transaction under the Letter of Intent.

59.  Mr Chain disputes the characterisation of the plaintiff’s letter of 5 June 2017 as a communication of the plaintiff’s acceptance of the defendants’ repudiation of the Letter of Intent.  He relies on the plaintiff’s (1) imposition of a deadline upon the defendants for compliance with the demand for compensation and (2) express reservation of rights at the end of the third paragraph of that letter.  He likens the plaintiff’s letter of 5 June 2017 to the letter written by employee in response to his employer’s repudiation of his contract of employment in Norwest Holst Group Administration Ltd v Harrison [1985] ICR 668 (CA).  There is nothing to stop the innocent party, while he was deliberating whether to affirm or terminate the contract, from making to the repudiating party an offer (as in Norwest Holst Group Administration Ltd v Harrison) to let it off the hook upon certain terms which, if accepted, would give rise to a second contract the effect of which is to discharge the first (repudiated) contract.  According to Mr Chain, this is what the plaintiff was doing by its letter of 5 June 2017.

60.  I have difficulty with Mr Chain’s argument.

61.  I cannot read from the letter in question any express or implied offer along the line suggested by counsel.  As I see it, such letter simply conveyed the plaintiff’s demand for compensation under clause 10b that would not have been payable by the defendants had the Letter of Intent not been terminated under clause 13b.

62.  Norwest Holst Group Administration Ltd v Harrison was very much a decision on its facts and is clearly distinguishable. 

63.  Briefly, the employer in that case repudiated the employee’s contract of employment by informing him that he would from 1 July 1982 no longer be employed as a director, to which position the employee was contractually entitled.  In response, the employee sent to the employer a letter headed “without prejudice”, stating that he regarded the employer’s letter as terminating his contract of employment as from 30 June 1982; that he would be pleased to receive 12 months’ salary and benefits in lieu of notice and that the employer should contact him if further discussion would assist an amicable resolution of the matter.  Seven days later the employee was told that the employer was no longer intending to remove his directorship from him.  The question arose as to whether the employer could withdraw the threatened breach.  This, in turn, depended on whether the employee had already terminated his contract of employment by accepting the employer’s breach thereof by his said letter.  In answering this question in the negative, the English Court of Appeal was much influenced by the fact that the employee’s letter was headed “without prejudice” and concluded with an invitation for further discussion that would assist an amicable resolution of the matter: per Cumming-Bruce LJ at 679D-680D; Neill LJ at 682D-F; and -Sir Denys Buckley at 683D-E.

64.  Neither of these features is present in the plaintiff’s letter of 5 June 2017.  In response to my observation that the plaintiff’s 5 June 2017 letter was not marked “without prejudice”, Mr Chain says that the plaintiff should be regarded as making an open offer.  I think counsel misses the point, noted by the court in Norwest Holst Group Administration Ltd v Harrison, that a “without prejudice” communication is by nature qualified whereas an open one is not.  In this connection, Cumming-Bruce LJ said at 679E-F:

“To my mind the effect of heading the letter “without prejudice” was to communicate to the recipient that the letter was to be regarded as a commencement of a process of negotiation or compromise, which at first sight is a communication of a very different kind from what it commonly called an open letter, stating in black and white the final stance taken upon an issue which has arisen between the parties.  You expect such a letter to open the compromise or bargaining field which of its nature means a change of position by the parties in the course of negotiation. That is a quite different stance from taking up an unequivocal position upon which the writer seeks to establish his legal rights.”

The other 2 members of the court made similar observations in the passages quoted above.

65.  Nor can I attach to the deadline for payment the significance attributed to it by Mr Chain.  One would expect any demand of the kind to be coupled by a time for compliance.

66.  As for the “reservation of right”, it does not per se indicate an intention to keep the agreement alive.  What could be, and was being, reserved were rights that were still available at the time of stating the reservation.  Read in context, the right being reserved by the plaintiff is that to claim damages in accordance with clause 10b of the Letter of Intent.  See Hansun Investment Ltd,supra, at [51] and So Siu Yung, supra, at [34].

67.  To conclude, I can find no serious issue to be tried that the plaintiff accepted the defendants’ repudiation of the Letter of Intent at the latest by its letter of 5 June 2017.  Indeed, the whole course of correspondence between the parties since 5 June 2017 clearly and unequivocally demonstrate that the parties regarded the Letter of Intent as having been terminated, and the only issue in dispute is the quantification of the compensation payable by the defendants to the plaintiff under clause 10b.

Misrepresentation Issue

68.  I am unable, and I do not propose, to resolve on affidavits whether Mr Kwan did or did not inform the plaintiff that the defendants wanted to withdraw from the Letter of Intent because of what they learnt from Kin Shing.

69.  The matter that I can and will address is, assuming that Mr Kwan did not do so, whether such omission amounts to a misrepresentation that can be relied upon by the plaintiff to vitiate its acceptance of the defendants’ repudiation of the Letter of Intent.

70.  This question takes up one sentence in Mr Chain’s skeleton submission: “Last but not least, the Plaintiff’s alleged election, if any, was or was arguably induced by the 1^st Defendant’s misrepresentation, see paragraph 15 of [Mr Chan]’s 3^rd affirmation.”  I think it is fair to say that Mr Chain has not taken this statement much further at the hearing.

71.  What Mr Chain is advancing is, as far as I understand the law of contract, a novel proposition.  He admits that he has no authority for it.  

72.  Although this is an application by the plaintiff for interlocutory injunctions in respect of which the court need only be satisfied that there is a serious issue to be tried on the merits, in face of a novel legal proposition unsupported by authority, the least that the court would expect from the party making the point are (1) a reason for the proposition that is sound in principle and/or policy and (2) an analysis of the scope, or elements or requirements for the operation, of the proposition. 

73.  First, on the former, the only point that Mr Chain can make is that the acceptance of a repudiation of contract is an act of election and as a matter of principle an election must be informed.  If Mr Chain were right, there would have to be a legal requirement that the party in repudiation of a contract should disclose to the aggrieved party the reason or true reason why he repudiates before the latter accepts the repudiation.  I am not aware of any such requirement.[4]

74.  Second, in response to Ms Tong and the court’s questions as to what is required to constitute a misrepresentation that vitiates an acceptance of a repudiation of a contract and whether it is the same as a misrepresentation that renders the contract induced thereby liable to rescission, Mr Chain simply says, “let us assume that it is the same”!  I am afraid, despite the low merit burden on the plaintiff, I cannot hold the existence of this new legal principle a serious issue to be tried on the basis of such an assumption, at least not without good reasons, which I have not been given.  In any event, as pointed out by Ms Tong, Mr Chain has not shown how these assumed elements can be found in the plaintiff’s evidence.

75.  I do not find the Misrepresentation Issue a serious issue to be tried.

Conclusion on “serious issue to be tried”

76.  For the abovementioned reasons, the Letter of Intent was terminated at the latest by the plaintiff’s acceptance of the defendants’ repudiation by letter dated 5 June 2017 so that there is no longer any subsisting agreement on which the plaintiff can found a claim for specific performance and the plaintiff is left with a claim in damages.

Orders

87.   I dismiss the Application and release the defendants from the undertakings given by them to the court on 18 August 2017.

88.   I also make an order nisi that the plaintiff should pay the defendants their costs of the Application, to be taxed on a party and party basis if not agreed, with certificate for counsel.