GIANT HARVEST LTD v. NAN HAI CORPORATION LTD AND ANOTHER

HCA 2072/2018, HCA 2560/2018 & HCA 2632/2018

[2026] HKCFI 2034

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2072 OF 2018

ACTION NO. 2560 OF 2018 &

ACTION NO. 2632 OF 2018

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J U D G M E N T

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Introduction

1.  This is the trial of the Actions.

2.  The Plaintiff (“Plaintiff/ Giant Harvest”) is a company incorporated in Hong Kong and an indirect wholly owned subsidiary of the 2^nd Defendant by Counterclaim Orange Sky Golden Harvest Entertainment (Holdings) Limited (“OSGH”). OSGH is a Bermudan company whose shares were at all material times listed on the Stock Exchange of Hong Kong Limited (“HKEx”). It was a substantial player in the mid to high-end market of cinema operations in the PRC, focusing on providing “high-quality theatres experiences”. Giant Harvest and OSGH are known in these proceedings as OSGH Parties.

3.  At the material time, Giant Harvest held all the shares in City Entertainment Corporation Limited (橙天嘉禾影城有限公司) (“Company”), a company incorporated in Hong Kong.

4.  As at 25 January 2017, the Company held 92.59% of the equity in Orange Sky Golden Harvest Cinemas (China) Company Limited (橙天嘉禾影城（中國）有限公司) (“Orange China”), a joint venture vehicle established in the PRC, whose remaining 7.41% equity was held by a PRC limited partnership. Orange China held, directly and indirectly, 69 subsidiaries and associated companies established in the PRC (collectively “Orange China Group”) which operated a total of 76 cinemas in the PRC.

5.  The 1^st Defendant Nan Hai Corporation Limited (“Nan Hai”) is a Bermudan company, whose shares were at all material times also listed on HKEx. Nan Hai was a conglomerate that engaged in a wide range of businesses, including inter alia the operation of cinemas in the PRC. Nan Hai conducted its PRC cinema business through Dadi Cinema (Hong Kong) Limited (“Dadi”), its wholly-owned subsidiary.

6.  The 2^nd Defendant True Vision Limited (“2nd Defendant/True Vision”) is a company incorporated in Hong Kong and is Nan Hai’s indirect, wholly owned subsidiary. Nan Hai and True Vision are known in these proceedings as Nan Hai Parties.

7.  In mid-January 2017, representatives of the OSGH Parties, including Mr Andrew Mao Yi Min (“Mao”), Ms Fiona Chow (“Fiona”) and Ms Zhong Liang Zi (“Zhong”) and the Nan Hai Parties, including Mr Chen Tao and Ms Han Qi, together with their external lawyers, had intensive and lengthy face-to-face meetings for a number of days to negotiate and finalise the terms of the disposal of OSGH’s PRC cinema business in Beijing.

8.  Eventually, by an agreement for the sale and purchase of shares (股份購買協議) dated 25 January 2017 between Giant Harvest, OSGH, True Vision and Nan Hai (“SPA”), Giant Harvest agreed to sell and True Vision agreed to purchase all the shares in the Company (“Shares”). The enterprise value of the Company was stated in the SPA to be RMB3.387 billion.

9.  Completion of the SPA took place on 28 July 2017 (“Closing Date”) whereupon Giant Harvest transferred all the Shares to True Vision and handed over the control and management of Orange China and the Orange China Group to True Vision.

10.  The present disputes arose out of the sale of the Shares under the SPA. Each side complains that the other side was in breach of the terms of the SPA.

11.  To put it simply, since 28 July 2017, True Vision has through its ownership of Orange China and the Orange China Group owned and operated the line of cinemas in the PRC used to be under the “Orange Sky Golden Harvest” brand. However, True Vision has up until now refused to pay the third and last tranche of the consideration under the SPA. According to “The OSGH Parties’ Note on Order Sought” dated 28 February 2025 (“OSGH Note”), the Plaintiff seeks judgment against the Nan Hai Parties jointly and severally US$37,434,469 as the “First Sum”, alternatively US$44,528,223.47[1] as the “Second Sum”, being the Third Guarantee Amount as calculated per clause 6.5(b) of the SPA (“Third Guarantee Amount”). According to that clause, the Third Guarantee Amount is payable on the 1^st business day after 6 months from the Closing Date out of the Escrow Account as defined below, with additional payment or deduction, as the case may be, depending on whether the Third Guarantee Amount is greater, the same or smaller than the Escrow Amount ie RMB300 million in the Escrow Account.

12.  That is the first main aspect of the Plaintiff’s claim.

13.  The second main aspect of the Plaintiff’s claim is in respect of a sum of RMB3,010,000 and arose in this way.

14.  On 11 April 2012, Orange China as tenant entered into a lease with 深圳雅寶房地產開發有限公司 (“Shenzhen Yabao”) as landlord in respect of a cinema complex called “星河雅寶” at COCO Park 購物中心 (“Shenzhen Yabao Cinema”). In 2016, litigation arose between Orange China and Shenzhen Yabao over the lease (“Litigation”).

15.  In about 2018, Orange China[2]settled the Litigation with Shenzhen Yabao and was entitled to a sum (“Settlement Sum”) then held by its lawyers 北京市康達律師事務所Kang Da Law Firm (“Kang Da”). While the Shenzhen Yabao Cinema was not part of the sale under the SPA, the parties agreed that any monetary benefit arising from the Litigation would belong to Giant Harvest.

16.  Despite the agreement, the Plaintiff complains True Vision has wrongfully retained the Settlement Sum as it claimed it was entitled to deduct RMB 875,000 to cover a profit tax liability it would incur as a result of the settlement. On True Vision’s pleaded case, this tax liability should have materialised by 2023. The Plaintiff complains True Vision has not adduced any evidence that this RMB 875,000 was due or had been paid.

17.  The Nan Hai Parties dispute the OSGH Parties’ claims; alternatively, seek to set off the same against the Compensation Amount and the Damages Amount referred to below.

18.  Nevertheless, on Day 1 of the trial, Mr Leong SC for the Nan Hai Parties had in effect conceded liability when he, on instructions, indicated to this court the Nan Hai Parties would immediately take steps to instruct Kang Da to release the Yabao Settlement Sum to the OSGH Parties. After the trial, as per this court’s direction, the Plaintiff’s solicitors Kennedys sent a letter dated 31 March 2025 to the clerk of this court informing that a subsidiary of OSGH had finally received RMB3,010,000 on 26 March 2025 from Kang Da.

19.  On the other hand, True Vision is counterclaiming against the OSGH Parties for:

(a)  The amount of RMB380 million as stipulated in para 2.3 of Schedule 6 of the SPA (“Compensation Amount”) for Giant Harvest’s failure to procure the renewal of the lease (“MIXC Lease”) of a commercially valuable cinema (“MIXC Cinema”) located at an upmarket shopping mall in Shenzhen known as 萬象城, in accordance with the renewal conditions in clause 8.2(b) of the SPA (“Renewal Conditions”), without being able to mitigate the loss of its failure by securing leases for other cinemas in tier-1 Mainland cities (“Substitute Cinemas”) in accordance with the agreed stipulated conditions (“Prescribed Conditions”). 5 such Substitute Cinemas were named and the Prescribed Conditions were set out in Schedule 5 of the SPA. 3 of them are the subject of disputes in these Actions.

(b)  Damages for Giant Harvest’s breach of various warranties, representations and/or undertakings as stipulated in the SPA (“Damages Amount”) comprising unpaid construction expenditures, unpaid taxes, unpaid theatre rentals and various other outstanding amounts in the normal and usual course of business which should have been paid, as particularized in section F and Schedules 1 to 3 of the Re-re-Amended Consolidated Defence and Counterclaim (“Defence and Counterclaim”).

Basic Background events

20.  While this case is principally about the true construction of the SPA and other related documents, it is necessary to set out some uncontroversial background events in order for the issues to be better understood. The following is largely taken from the Agreed Statement of Undisputed Facts and such of the parties’ chronologies which are backed up by contemporaneous documents.

21.  On 25 January 2017, Giant Harvest, OSGH, True Vision and Nan Hai entered into the SPA.

22.  On 27 March 2017, a meeting took place between Orange China and華潤（深圳）有限公司 (“MIXC Landlord”) concerning the extension of the MIXC Lease (“Renewal Meeting”). At the Renewal Meeting, (i) OSGH presented plans for a new design, refurbishment, hardware updates and diversified operational concepts, (ii) but the MIXC Landlord indicated that it was considering operating the MIXC Cinema on its own.

23.  In May, July and October 2017, on behalf of Orange China, Giant Harvest entered into leases in respect of 3 Substitute Cinemas which are in dispute in these Actions viz : the Beijing Great Wall Cinema, Shanghai Xinghui Cinema and Shenzhen Xinghui Cinema.

(a)  A lease with 北京市長城飯店公司 (“Beijing Landlord”) on or about May 2017 in respect of the Beijing Great Wall Cinema (“Beijing Lease”).

(b)  A lease with 上海廣田房地產開發有限公司 (“Shanghai  Landlord”) on 25 July 2017 in respect of the Shanghai Xinghui Cinema (“Shanghai Xinghui Lease”).

(c)  A lease with 祈福房地產開發（深圳） 有限公司 (“Shenzhen Landlord”) on or about October 2017 in respect of the Shenzhen Xinghui Cinema (“Shenzhen Xinghui Lease”).

24.  Pausing here, a word of caution about the Beijing Lease. While the above is stated in the Agreed Statement of Undisputed Facts, the evidence actually shows the lease had not been signed by the Beijing Landlord. This court will deal with this point when addressing the issue of Substitute Cinemas. Suffice it to say that this court takes the view that it is not bound by what the parties had agreed if it is factually incorrect.

25.  On 22 July 2017, and pursuant to clause 6.5(a) of the SPA, Giant Harvest, True Vision, and Wilkinson & Grist (“W&G”) as the Escrow Agent entered into an Escrow Agreement (“Escrow Agreement”) for the deposit of not more than US$50,000,000 into an account (“Escrow Account”) with W&G to be held in escrow. Broadly, the terms are as follows:

(a)  W&G shall accept from True Vision the deposit of not more than US$50,000,000 within 6 months from the date of the Escrow Agreement.

(b)  Giant Harvest and True Vision jointly and severally authorise W&G, after receipt of a written instruction in the form set forth in Appendix I executed by both of them (“Joint Instruction”), to release the Escrow Amount, in whole or in part, to Giant Harvest or True Vision.

(c)  Other than the Joint Instruction as provided, WG shall only be authorised to release all or part of the Escrow Amount upon receipt of a court order of the Hong Kong Courts.

26.  On or around 28 July 2017, the OSGH parties and Nan Hai Parties entered into an SPA Confirmation Letter (“SPA Confirmation Letter”). Broadly, the parties agreed that inter alia (i) all conditions precedent under the SPA had been satisfied or waived, and (ii) the USD equivalent to the Escrow Amount ie RMB300 million should not be deposited into a PRC onshore bank account but to an offshore trust account ie W&G’s account with the Bank of East Asia Limited.

27.  Further, (i) clause (8) of the SPA Confirmation Letter set out the agreed arrangement concerning the Litigation with Shenzhen Yabao, and (ii) Schedule 4 of the SPA Confirmation Letter set out the updated Prescribed Conditions for the Shanghai Xinghui Cinema and Shenzhen Xinghui Cinema, the satisfaction of which could be treated as successful Substitute Cinemas for the purpose of clauses 8.3 and 8.5 of the SPA.

28.  As stated earlier, completion of the SPA took place on 28 July 2017 ie the Closing Date whereupon:

(a)  Giant Harvest transferred all the shares in the Company to True Vision and handed over the control and management of Orange China and the entire Orange China Group to True Vision.

(b)  True Vision deposited the USD equivalent of the Escrow Amount in the sum of US$44,528,223.47 with W&G pursuant to the Escrow Agreement.

29.  On 18 August 2017, Giant Harvest and True Vision agreed to appoint BDO China Shu Lun Pan Certified Public Accountants LLP (立信會計師事務所（特殊普通合夥）北京分所) (“BDO”) as the Independent Auditor pursuant to clause 3.1 of the SPA.

30.  On 11 September 2017, Orange China sent a letter to the MIXC Landlord submitting a formal application to renew the MIXC Lease. In the letter, Orange China referred to a previous application for the renewal of the lease on 15 August 2016 and its numerous communications with the MIXC Landlord on the subject since then. It also referred to the Renewal Meeting on 27 March 2017.

31.  On 27 September 2017, True Vision procured a letter to be issued by Orange China to the MIXC Landlord seeking a renewal of the MIXC Lease to 2028.

32.  On 18 October 2017, the MIXC Landlord indicated to Orange China that it would take back the MIXC Cinema to operate it itself. However, it offered Orange China a short-term lease not exceeding 5 months (“Short-Term Lease”) and requested a written reply before 15 November 2017.

33.  On 30 October 2017, by email exchanges, Zhong of OSGH parties asked Chen Tao of the Nan Hai Parties to approve a draft letter to the MIXC Landlord counter-proposing a Short-Term Lease of 5 to 12 months (“Counter-proposed Short Term Lease”), to which Chen Tao was said to be amenable to but he also emphasised this would not be considered as a successful renewal of the MIXC Lease. Eventually, the Nan Hai Parties did not affix the seal of Orange China to it.

34.  17 November 2017, Liu Chao of the Nan Hai Parties rejected the Counter-proposed Short-Term Lease.

35.  On 12 December 2017, the MIXC Landlord informed Orange China by letter that the MIXC Lease would not be extended beyond its expiry date ie 27 September 2018.

36.  On 26 January 2018, BDO issued to True Vision and Giant Harvest a signed report (“Closing Audit Report”) dated 25 January 2018 of Orange China for the accounting period 1 January -28 July 2017 “橙天嘉禾影城(中國)有限公司 審計報告及合併財務報表 2017年1月1日-2017年7月28日”.

37.  On 27 January 2018, True Vision issued what is known as the 1^st Disagreement Letter, disagreeing with the figures in Note 13 of the Closing Audit Report (“Note 13”). Note 13 provided as follows:

“13. Rental Deposits and Other Deposits

As of 28 July 2017, the total amount of rental deposits for the 76 operating cinemas was RMB39,065,504.85, and the total amount of other deposits was RMB2,838,644.70. The rental deposits for the 7 cinemas with signed leases but not yet operational defined in Appendix 4 of the SPA (excluding Huizhou Taidong, Jiangyin Orange Sky Land and Tangshan Baoshengchang) amounted to RMB13,402,052.94.”

13. 房租押金及其他押金

  截至2017年7月28日，在营业的76家影城的房租押金总额为39,065,504.85元，其他押金总额为2,838,644.70元；购买协议附件4中定义的其中7家已签约未开业影城（不包括惠州太东、江阴橙地、唐山宝升昌）的房租押金为13,402,052.94元。

38.  On 28 January 2018, Giant Harvest sent a letter to True Vision stating that the Third Guarantee Amount should be RMB 252,207,249 i.e. US$37,383,975 and prepared a Joint Instruction to be sent to W&G so that the sum could be transferred to Giant Harvest.

39.  On 29 January 2018, Linklaters, True Vision’s former solicitors, issued what is known as the 2^nd Disagreement Letter, claiming that the Closing Audit Report was not binding on the parties as True Vision did not agree with its results.

40.  On 14 March 2018, Giant Harvest sent what is known as the OSGH Agreement Letter indicating inter alia they did not object to the results of the relevant items in the Closing Audit Report.

41.  On 21 March 2018, True Vision issued what is known as the 3^rd Disagreement Letter, laying out three items in the Closing Audit Report which it considered to be problematic. According to the Plaintiff, only the item in relation to Note 13 is relevant to the calculation of the Third Guarantee Amount.

42.  On 2 April 2018, Giant Harvest sent a revised Settlement Agreement with Shenzhen Yabao to Kang Da, under which Kang Da was designated to receive the Settlement Sum.

43.  On 3 April 2018, the Shenzhen Court issued a judgment based on the revised Settlement Agreement, pursuant to which Shenzhen Yabao was ordered to pay the Settlement Sum to the bank account of Kang Da.

44.  On 12 April 2018, True Vision sent a letter to Giant Harvest querying Giant Harvest’s computation of the Third Guarantee Amount in the sum of US$37,383,975.

45.  On 24 April 2018, True Vision attended a meeting with the MIXC Landlord in which the MIXC Landlord confirmed that no renewal of the MIXC Lease would be granted.

46.  On 27 April 2018, Giant Harvest provided to True Vision its calculation on how it arrived at the Third Guarantee Amount.

47.  From 26 April to 2 May 2018, True Vision demanded RMB875,000 be transferred to it to mitigate Orange China’s alleged tax liability arising from the Settlement Sum under PRC laws.

48.  On 20 June 2018, True Vision notified Giant Harvest in writing of its alleged breaches of warranties, representations and undertakings under the SPA.

49.  On 31 August 2018, the Nan Hai Parties sent an email to Giant Harvest disputing the latter’s computation of the Third Guarantee Amount and stated that W&G had to temporarily keep the Escrow Amount until the resolution of their disputes.

50.  On 27 September 2018, the MIXC Lease expired.

51.  On 4 September 2018, the Writ of Summons in HCA 2072 was issued by Giant Harvest against the Nan Hai Parties.

52.  On 31 October and 8 November 2018, the Writs of Summons in HCA 2560 and HCA 2632 of 2018 were issued by True Vision against the OSGH Parties.

53.  On 14 November 2018, True Vision wrote to Giant Harvest with particulars of the alleged breaches of warranties, representations and undertakings.

The SPA and SPA Confirmation Letter

SPA

54.  The SPA is a very substantial document in Chinese.[3]  The following sets out the effect of and/or verbatim the relevant provisions which are germane to the issues in this case.

55.  Closing Audit and the determination of the sale price for the Shares:

(a)  For the purposes of the SPA, the enterprise value of the Company is RMB 3,387,000,000 (cl.2.3).

(b)  The “Expected Price” shall be the total sum of (a) the enterprise value of the Company as stated in clause 2.3; (b) plus the amount of cash equivalents[4] (less consideration of RMB 240,000,000 paid by True Vision for the Xinye Share Transfer) and the prepayments for the acquisition of theatres which had not been completed; (c) minus the amount of bank loans, amount of finance leases, and the consideration payable for the acquisition of theatres which had been completed (cl.2.4 (a) to (c)).

(c)  The amounts under clauses 2.4(b) and (c) will be determined by reference to the “Most Recent Audited Consolidated Accounts” (cl.2.4) (“2016 Audited Accounts”)[5].

(d)  True Vision and Giant Harvest shall engage an Independent Auditor as soon as possible after the Closing Date[6] and perform an audit (“Closing Audit”) within 6 months from the Closing Date (or by such other date True Vision and Giant Harvest may agree) on inter alia the consolidated balance sheet as of the Closing Date, the consolidated profit and loss statement and the consolidated cash flow statement of the Orange China Group, for the period from the Base Date[7] to the Closing Date. The costs of the Independent Auditor shall be borne by True Vision. Upon agreement by True Vision and Giant Harvest, the result of the Closing Audit shall be final and binding upon all parties (cl.3.1).   

56.  Clause 3.2 sets out the formula for the calculation of the total sale price (“Total Price”) as follows.

57.  The Total Price is the Expected Price subject to adjustment (“Adjustment Amount”) which is to be determined by the following:  

The Adjustment Amount = A – B + C – D

i.  A is the sum of the following items as of the Base Date[8] as stated in the 2016 Audited Accounts: (i) the amount of bank loans of Orange China Group; (ii) the amount of finance leases; (iii) the consideration payable for the acquisition of theatres which had been completed, less (i) the amount of Cash Equivalents (less consideration of RMB240,000,000 paid by True Vision for the Xinye Share Transfer); and (ii) prepayments for the acquisition of theatres which had not been completed.

ii.  B is the sum of the same items in A as of the Closing Date as stated in the Closing Audit.

iii.  C is cash incurred for capital expenditure for renovation works undertaken pursuant to tenancy agreements of new theatre projects for the period from the Base Date to the Closing Date.

iv.  D is the consideration (if any) for the shares which True Vision is required to additionally pay to Xinye pursuant to the Xinye Share Transfer Agreement if the Closing Date is after 15 September 2017 and True Vision has not exercised the Xinye Share Transfer Waiver.

If the Adjustment Amount is positive, the Total Price shall be the Expected Price plus the absolute value of the Adjustment Amount. If the Adjustment Amount is negative, then the Total Price shall be the Expected Price minus the absolute value of the Adjustment Amount.

For the avoidance of doubt, if the Independent Auditor is unable to complete the Closing Audit within six months from the Closing Date due to the reasons not attributable to Giant Harvest, no adjustment will be made to the Expected Price, and the Total Price will be the same as the Expected Price (cl.3.2).

58.  Clause 6 deals with the Payment of the Total Price by True Vision:

(a)  On the Closing Date, True Vision shall procure the transfer of the Escrow Amount into the Escrow Account (cl.6.5(a)).

(b)  On the first Business Day after 6 months from the Closing Date (“Payment Date of the Third Guarantee Amount”), True Vision and Giant Harvest shall procure the Escrow Amount (in part or in full) to be remitted out of the Escrow Account as the Third Guarantee Amount and any amount to be returned to Giant Harvest (cl.6.5(b)).

(c)  The Third Guarantee Amount =  A (Total Price) - B (First Payment Sum) - C (the First Guarantee Amount) - D (the Second Guarantee Amount) - E (the taxes and payments True Vision is liable to deduct and pay on behalf of Giant Harvest according to the relevant laws of the PRC) (cl.6.5(b)).

(d)  Within 1 year after the Closing Date, True Vision shall pay an amount in USD equivalent to the sum of the First Guarantee Amount the Second Guarantee Amount and the Third Guarantee Amount to the Offshore Account designated by Giant Harvest as soon as possible overseas (in one lump sum or in multiple instalments) as the balance of the Total Price (“Balance of Total Price”) (cl.6.6(d)).

(e)  After Giant Harvest receives the First Payment Sum and the Balance of the Total Price in full outside the Mainland, True Vision shall be deemed to have fulfilled its obligation to pay the Total Price under the SPA (cl.6.6).

(f)  If True Vision fails to pay the Balance of Total Price in full to Giant Harvest outside the Mainland within 1 year from the Closing Date in accordance with the above condition, then for each day of overdue payment, True Vision shall pay default interest to Giant Harvest or its designated party at 0.02% per day of the amount payable but unpaid, until it is fully repaid. Giant Harvest may also immediately enforce the pledge in clause 6.6 and the guarantee of Nan Hai as referred to in clause 13 (cl.6.7).

59.  Clause 13 deals with Nan Hai’s guarantee of True Vision’s obligations:

(a)  Nan Hai unconditionally and irrevocably warrants to Giant Harvest that True Vision inter alia will comply with all of its respective obligations under all Transaction Documents[9]  including any payment obligation (cl.13.2(a)).

(b)  If True Vision inter alia fails to perform or does not perform in accordance with the time stipulated in the SPA any obligations, then Nan Hai agrees to perform such obligations at Giant Harvest’s request (cl.13.2(b)).

(c)  Nan Hai warrants that it shall indemnify, and continue to effectively indemnify, Giant Harvest for all liabilities, losses, damages, legal fees, and expenses arising out of or resulting from the breach of inter alia the SPA or any related matters of True Vision (cl.13.2(c)).

(d)  Without prejudice to the terms of the SPA, the liabilities and guarantees of Nan Hai required or established under the SPA shall remain valid and enforceable until the liabilities and obligations of True Vision under (inter alia) the SPA have been fully performed or waived (cl.13.2(d)).

60.  Renewal of the MIXC Lease:

(a)  True Vision and Giant Harvest agree that the commercial value of the MIXC Project i.e. 萬象城項目 will be calculated as follows:

commercial value = agreed annual box office revenue (約定年票房) of RMB 80 million x 4.75, that is, RMB 380 million (cl.8.1).

(b)  From the signing of the SPA to the expiration date of the MIXC Lease (“Renewal Period”), Giant Harvest is responsible for the renewal of the MIXC Lease and shall use the brand “OSGH Cinemas” to perform the task of contract renewal (cl.8.2(a)).

(c)  From the Closing Date to the expiration date of the MIXC Lease, True Vision has the right to use the brand “Dadi Cinema” or the brand “Ifree” to sign contracts (“簽約工作”) for the MIXC Project. True Vision has the obligation to actively sign the contract (“買方有義務積極進行簽約工作”) (cl.8.2(a)).

(d)  From the date of signing of the SPA to the Closing Date, Giant Harvest may renew the MIXC Lease within the scope of the Renewal Conditions (續約條件) without the written consent of True Vision. One of the Renewal Conditions is that the “proposed renewal period” must not be less than either 7 years (preferred) or 5 years (alternative) (cl.8.2(b)).

(e)  During the period from the Closing Date to the expiration of the MIXC Lease, Giant Harvest and True Vision promise to use their respective brands to, in their best endeavours, participate in the renewal, contract bidding, and strive for the renewal of the MIXC Lease in accordance with the law and under the market conditions (cl.8.2(c)).

(f)  True Vision and Giant Harvest should cooperate during the process of renewal and contract bidding (cl.8.2(c).

(g)  The following scenarios will be deemed as instances where Giant Harvest successfully renewed the MIXC Lease (成功續約) (cl.8.2(d)).

i.  Until the Closing Date, Giant Harvest uses the brand “OSGH Cinemas” to renew the MIXC Lease within the scope of the Renewal Conditions, or to do so beyond the scope of the Renewal Conditions with True Vision’s prior written consent.

ii.  After the Closing Date, Giant Harvest renews the MIXC Lease in accordance with clause 8.2(c).

iii.  From the Closing Date to the expiration of the MIXC Lease, True Vision uses the brand “Dadi Cinema” or the brand “Ifree” to directly sign a lease with the lessor of the MIXC Cinema.

(h)  True Vision promises not to maliciously interfere with Giant Harvest’s contract renewal work in any manner during the Renewal Period (cl.8.2(e)(i)).

(i)  If Giant Harvest renews the contract with the “OSGH Cinemas” brand, True Vision shall cooperate in signing the contract renewal document with this brand (cl.8.2(e)(iii)).

61.  Clauses 8.3 to 8.5 and Schedule 5, relate to the Substitute Cinemas:[10]

(a)  The contract-signing period for all Substitute Cinemas starts from the date of the SPA and ends on 31 December 2018 (cl.8.3(b)).

(b)  Giant Harvest will designate personnel to represent True Vision in locating Substitute Cinemas and negotiating contracts (cl.8.3(c)).

(c)  True Vision shall cooperate in completing the signing process, except where both parties confirm that they will not collaborate further (cl.8.3(c)).

(d)  Giant Harvest can sign lease agreements for the assets of the 5 Substitute Cinemas on behalf of Orange China within the scope of the conditions outlined in Schedule 5 ie the Prescribed Conditions, without needing to obtain separate written consent from True Vision (cl.8.3(d)).

(e)  If Giant Harvest signs a lease for the Substitute Cinemas within the scope of conditions specified in clauses 8.3 and 8.4, or beyond such conditions with the prior written consent of True Vision, it shall be considered as a successful signing (cl.8.5).

(f)  The “agreed commercial value” for the Shanghai Xinghui, Shenzhen Xinghui, and Beijing Great Wall Cinemas in the SPA are as follows (Schedule 5):

i.  RMB 85,500,000 (Shanghai Xinghui Cinema).

ii.  RMB 133,000,000 (Shenzhen Xinghui Cinema).

iii.  RMB 150,000,000 (Beijing Great Wall Cinema).

62.  Schedule 6 of the SPA provides for inter alia Giant Harvest’s and True Vision’s respective payment obligations in the event that the MIXC Lease and/or leases for the Substitute Cinemas are entered or not entered into:

(a)  Paragraph 2.3(2) of Schedule 6 states that:

“If it is not that The Purchaser Disagrees To Renew Pursuant To Renewal Conditions, the Seller shall pay the Purchaser 380 million as compensation within 10 Business Days from 27 September 2018.”

(b)  The effect of that paragraph is that if (a) the MIXC Lease is not extended by 27 September 2018 (the expiry date of the MIXC Lease) (b) the reason for the non-renewal of the MIXC Lease is not because True Vision disagreed to renew pursuant to the Renewal Conditions; and (c) no leases for Substitute Cinemas are entered into, then Giant Harvest would have to pay RMB 380 million as compensation within 10 business days from 27 September 2018.

(c)  Paragraph 2.4(2) states that:

“If it is not that the Purchaser Disagrees To Renew Pursuant To Renewal Conditions, the two parties shall conduct clearance within 10 Business Days from 27 September 2018, with the clearance method as: A - B = C

A refers to the commercial value of the MIXC Project, namely, RMB380 million.

B refers to the sum of the commercial value of all Assets of Substitute Cinemas with contracts signed (as of that point of time).

C refers to the difference between the commercial value of the MIXC Project and the sum of the commercial value of all Assets of Substitute Cinemas with contracts signed.”

(d)  The effect of that paragraph is that if (a) the MIXC Lease is not extended, not because True Vision disagreed to renew pursuant to the Renewal Conditions, but (b) leases for Substitute Cinemas were entered into by 27 September 2018, then the parties should calculate the difference between the “agreed commercial value” of the MIXC Cinema ie RMB 380 million and the commercial value of the Substitute Cinemas. If the former is greater than the latter, then Giant Harvest will pay the difference as compensation.

63.  Giant Harvest gave a series of undertakings, representations, and warranties in clause 7, clause 10.1, and Schedule 1: 

(a)  Except as otherwise agreed in the SPA or in writing between True Vision and Giant Harvest, Giant Harvest promised that during the period from the signing of the SPA to the Closing Date that (“Undertakings”):

i.  It would procure the Target Group to operate in accordance with the normal business process and past practices and use commercially reasonable efforts to ensure the sound operation of all important assets (cl.7.1(b)).

ii.  The Target Group would conduct business or make daily payments in the normal and usual course of business, and will not enter into any major agreements, arrangements, guarantees, compensation, or transaction outside the ordinary course of business (cl.7.1(d)).

(b)  Giant Harvest represents and warrants to True Vision that each representation and warranty listed in Schedule 1 is true, accurate, and not misleading in all respects as of the date of this Agreement, and will be true, accurate, and not misleading in all respects as of the Closing Date (cl.10.1).

(c)  The material warranties (“Warranties”) are as follows:

i.  There are no significant violations of laws and regulations associated with the projects of the Target Group under construction. Each Group Member Company has fully paid the construction costs payable at the current stage, and as of the Closing Date, there are no disputes with the project contractors (Schedule 1, para. 5(3)).

ii.  From the establishment of each Group Member Company until the signing date of the SPA and the Closing Date, taxes payable by each Group Member Company have been paid in full and on time by each of the Group Member Companies (Schedule 1, para. 10(2)).

iii.  The rents for all cinemas of each Group Member Company have been paid on time as per the leases, and there are no disputes with the owners and/or sub-lessors (Schedule 1, para. 15(2)).

64.  Clause 11 excludes and/or restricts Giant Harvest’s liability for the breaches of the SPA:

(a)  True Vision may not make any claim for a breach of the SPA (including the warranties) unless True Vision notifies Giant Harvest of such claim within 25 months of the Closing Date (cl.11.1).

(b)  True Vision may not make any claim for a breach of the SPA (including a breach of the warranties), unless: (a) the claim is related to a specific matter or a series of similar or related matters which exceeds RMB 1,000,000 (or its equivalent in USD); and (b) the total claim for all matters exceeds RMB 3,000,000 (or its equivalent in any other currency)(cl.11.2).

However, once the total amount of claims exceeds the amount specified in clause 11.2(b) ie RMB3,000,000, True Vision may claim for all liabilities or losses incurred.

(c)  If True Vision raises any claim pursuant to the SPA, it shall first notify Giant Harvest in writing (containing reasonably detailed information about the breach). Giant Harvest may, within 30 days of receiving the notice, choose to rectify the breach described in the notice at its own expense (cl.11.4).

SPA Confirmation Letter

65.  In relation to Issue 4 concerning the Substitute Cinemas, clause 15 of the SPA Confirmation Letter provides that if the leases in respect of the Shanghai and Shenzhen Xinghui Cinemas met the criteria set out in Schedule 4, they would qualify as Substitute Cinemas for the purposes of the SPA.

66.  Schedule 4 modified the Prescribed Conditions for the Shanghai and Shenzhen Xinghui Cinemas previously set out in Schedule 5 of the SPA.

Schedule 4 - Contract Signing Conditions for Assets of Substitute Cinemas

Cinema	Agreed Annual Box Office Revenue RMB 0’000	Lease Term	Fixed Rent/Year (RMB 0’000)	Property Management and Promotional Fee/Year (RMB)	Turnover Rent/Year	Others	Commercial Value (equivalent to 4.75 times the annual box office specified) RMB 0’000
Shanghai Landmark Centre business square	1,800	13	301 for the first year 4,660 in total for 13 years (including 5% VAT)	RMB860,000/year RMB11.2 million in total for 13 years (including 6% VAT)	For years 1-3, 14% of the annual net box office; For years 4-6, 15% of the annual net box office; For years 7-10, 16% the annual net box office; For years 11-13, 17% of the annual net box office (plus 5% VAT)		8,550
Note: The total fixed rent and property management fee for 13 years: RMB57.8 million (tax inclusive). Adjustments to the fixed rent and property management fees within this total amount are also deemed to meet the signing conditions.
Shenzhen Landmark (Diwang) project	2,800	13	695 for the first year 10,300 in total for 13 years (including 5% VAT)	RMB250,000/year RMB3.25 million in total for 13 years (including 6% VAT)	For years 1-3, 17% of the annual net box office; For years 4-6, 18% of the annual net box office; For years 7-10, 19% of the annual net box office; For years 11-13, 20% of the annual net box office (plus 5% VAT)	-	13,300
Note: The total fixed rent and property management fee for 13 years: RMB106.25 million (tax inclusive). Adjustments to the fixed rent and property management fees within this total amount are also deemed to meet the signing conditions.

Key issues in dispute

67.  The parties are in agreement that there are five key issues in dispute although their formulation of them is slightly different. Combining the parties’ formulation, they are:

68.  Issue 1: were the Nan Hai Parties in breach of their obligations under the SPA to pay the Third Guarantee Amount?  In particular,

(a)  whether or not Giant Harvest was and/or is entitled to be paid the Third Guarantee Amount; and

(b)  whether or not True Vision was and/or is obliged to execute the Joint Instruction to Wilkinson & Grist (“W&G”) as the Escrow Agent to release the Third Guarantee Amount out of the Escrow Account to Giant Harvest.

69.  Issue 2: was True Vision in breach of clause (8) of the SPA Confirmation Letter referred to below by refusing to instruct Kang Da to release RMB 3,010,000 out of the Settlement Sum to Giant Harvest?

70.  Issue 3: as regards True Vision’s claim for the Compensation Amount ie RMB380 million under para 2.3 of Schedule 6 of the SPA:

(a)  whether or not there was a breach of the SPA by Giant Harvest of clause 8.2 of the SPA for the non-renewal of the MIXC Lease?

(b)  whether or not True Vision was and/or is entitled to be paid the Compensation Amount (or any part thereof)?

(c)  was True Vision in breach of clauses 8.2(c), 8.2(e)(i), and/or 8.2(e)(iii) of the SPA over the non-renewal of the MIXC Lease?

71.  Issue 4: whether or not there should be any deduction of the Compensation Amount based on any of the Substitute Cinemas lease(s), and how much? In particular, did the leases for the Beijing Great Wall, Shanghai Xinghui and Shenzhen Xinghui Cinemas referred to below qualify as leases for Substitute Cinemas for the purposes of the SPA and the SPA Confirmation Letter?

72.  Issue 5: as regards True Vision’s claim for the Damages Amount:

(a)  whether or not there was a breach by Giant Harvest of any of the warranties, representations and/or undertakings in the SPA? and

(b)  whether or not True Vision was and/or is entitled to be paid the Damages Amount; and if so, the quantum thereof?

Deliberation

73.  While these Actions are principally about the construction of contractual documents, if and in so far as may be necessary, this court has  also considered the witnesses’ testimony and assessed it against the documentary evidence and their inherent probabilities in order to make the appropriate findings.

74.  As a matter of longstanding practice and out of abundance of caution, this court has in the course of preparing this Judgment reviewed its own notes taken at the trial and the professional transcripts of the trial in order to refresh its memory. They are very helpful. This court is also thankful for the detailed written submissions from the legal teams on both sides.

Issue 1 – Entitlement to the Third Guarantee Amount

75.  The OSGH Parties’ pleaded case at paras 6A, 7, 8 and 8A of the Re-Amended Statement of Claim can be summarised as follows.

76.  On a true and proper construction of clause 3.1 of the SPA, or there are implied terms to like effect:

(a)  The parties agreed that (i) each of them shall use its best or reasonable endeavours to agree to the Closing Audit Report, within 6 months from the Closing Date or within any other deadline mutually agreed by the parties, or within a reasonable time after BDO has issued the Closing Audit Report; (ii) the Closing Audit Report agreed in the aforesaid manner shall be binding on the parties.

(b)  If no agreement is reached in the manner described above, after the expiry of reasonable time after BDO has issued the Closing Audit Report, the Closing Audit shall become final and binding on the party who failed to use best or reasonable endeavours to reach an agreement and on both parties if neither or both parties have applied best or reasonable endeavours to reach an agreement.

77.  Alternatively, the SPA contained implied terms to the effect that:

(a)  The parties shall cooperate with each other, and each shall use best or alternatively reasonable endeavours to do all that is necessary to agree to the Closing Audit Report pursuant to clause 3.1 of the SPA.

(b)  The parties shall raise with BDO any requests, queries or errors about the Closing Audit with full particulars or substantive reasons either within 6 months from the Closing Date or alternatively within a reasonable time after receipt of the Closing Audit Report. Failing that, the parties shall agree to the Closing Audit Report pursuant to clause 3.1 of the SPA.

78.  The Implied Terms are reasonable and equitable. They represent the obvious intention of the parties to the SPA and are necessary for the calculation of the Total Price and the Third Guarantee Amount, and therefore give business efficacy to the SPA.

79.  In the alternative, on a true and proper construction of the last paragraph of clause 3.2 of the SPA, if for any reason, excluding any reason caused by the OSGH Parties, the Closing Audit cannot be completed (in the sense of serving the clear purpose of binding the parties) within 6 months from the Closing Date, there shall be no adjustment to the Expected Price and the Total Price shall be the same as the Expected Price. This is the basis of their claim for RMB300,000,000/US$44,528,223.47 ie the 2^nd Sum.

80.  At para 16 of the Re-Amended Statement of Claim, it is pleaded:

“16. Consequently:

16.1. The Plaintiff and the 2nd Defendant were obliged to agree to the Closing Audit by 27 January 2018, being 6 months from the date of the Closing Date, or alternatively, by 14 March 2018 when the Plaintiff expressed and communicated its consent to the Closing Audit to the 2nd Defendant, or in the further alternative, within a reasonable time after the receipt of the Closing Audit from the Auditor;

16.1A If the parties cannot agree on the Closing Audit as aforesaid, the Closing Audit shall become final and binding on the parties as pleaded in paragraphs 6A to 8A above;

16.2. The 2nd Defendant was required to execute a written instruction for the purpose of instructing the Escrow Agent to release the Third Guarantee Amount (which is in effect the balance of the Total Price) in the amount of US$37,383,975 (alternatively, US$37,434,469 based on the exchange rate on the Closing Date) to the Plaintiff by 29 January 2018, or alternatively, by 14 March 2018, or in the further alternative, within a reasonable time after the receipt of the Closing Audit.”

81.  On the other hand, the Nan Hai Parties’ primary pleaded Defence to the above is one of denial – there is nothing in the SPA which expressly or impliedly imposes on the parties any contractual obligation to agree on the results of the Closing Audit or to use best or reasonable endeavours to do so, or failing agreement by the parties, the Closing Audit would become final and binding on the parties. Further, they deny that the last paragraph of clause 3.2 is, or can as a matter of construction be, engaged in the event that Giant Harvest and True Vision failed to reach an agreement so as to bind themselves to the results of the Closing Audit.

82.  The Nan Hai Parties’ alternative case is that they did use best or reasonable endeavours to agree to the Closing Audit Report: Defence and Counterclaim at para 15.

83.  At paras 125 and 127 of Mr Leong SC’s Closing, he summarises the Nan Hai Parties’ arguments and conclusions as follows:

(a)  The OSGH Parties had wrongly insisted on the OSGH Implied Terms[11].

(b)  The Closing Audit Report was neither final nor binding on the parties.

(c)  The parties have not agreed on the amount of “Component B”[12] or “Component C”[13] in Clause 3.2. Hence, the amounts of the Total Price in Clause 3.2 of the SPA and the Third Guarantee Amount in Clause 6.5 remain undetermined. That being so,

i.  Giant Harvest is not entitled to be paid the Third Guarantee Amount.

ii.  True Vision was or is not obliged to execute the Joint Instruction to release the Third Guarantee Amount to Giant Harvest.

iii.  Giant Harvest’s claim with regard to the Third Guarantee Amount and the issue of the Joint Instruction should be dismissed.

84.  As a preliminary observation, if this court were to accede to the Nan Hai Parties’ arguments, it would mean they are entitled to withhold payment to the Plaintiff of the last instalment of the purchase price for the Shares ie the Third Guarantee Amount as long as they disagreed and continue to disagree with the results of the Closing Audit Report, in which event, the Total Price and the Third Guarantee Amount cannot be ascertained and will never be paid, even though completion had taken place long ago. This is nothing short of a commercial absurdity, as described by Mr Man SC.

85.  In his Closing, Mr Man SC submits that on a proper construction of the terms of the SPA, True Vision was under a duty to use its best or reasonable endeavours to agree to BDO’s Closing Audit Report either (a) within 6 months of the Closing Date ie 27 January 2018 or (b) within a reasonable time ie 1 year from the Closing Date ie 26 July 2018. His reasoning is as follows.

86.  First, clause 6.5(b) of the SPA obliges True Vision to pay the Third Guarantee Amount on the “first Business Day” after 6 months from the Closing Date. As a matter of proper contractual interpretation, the deadline for agreeing to the figures in the Closing Audit Report is 6 months from the Closing Date. In order to discharge its obligation, True Vision must agree to the figures in the Closing Audit Report within 6 months of the Closing Date. Otherwise, the Total Price ie Item A of the formula used in Clause 6.5(b)[14] could not be determined, which in turn means the Third Guarantee Amount could not be ascertained, which also in turn means the Plaintiff will never get paid the Third Guarantee Amount as long as True Vision does not agree with the Closing Audit Report. To ensure that the Plaintiff can get paid for the Shares which had long been transferred to True Vision on the Closing Date, True Vision must use best or reasonable endeavours to agree.

87.  Second, alternatively, True Vision had to use its best or reasonable endeavours to agree within a reasonable time, that time being 1 year from the Closing Date. This is because under the SPA, the parties agreed that True Vision would incur financial penalties eg default interest at 0.02% per day of the amount unpaid if the Third Guarantee Amount was not paid within 1 year from the Closing Date.

88.  Third, if True Vision failed to agree to BDO’s Closing Audit Report, then the Closing Audit Report would govern the relevant calculations.   

True interpretation of the SPA

89.  Since Mr Man SC seems to be focusing his submissions based on the true interpretation of the SPA, this court should first go into some of the authoritative statements on the topic cited by him.

90.  First, in Eminent Investments (Asia Pacific) Ltd v DIO Corporation (2020) 23 HKCFAR 487 at paras 43-44, Ribeiro PJ and Lord Collins NPJ observed:

“43. It is a truism that the starting point is the ordinary and natural meaning of the words of the contract, and of course in the vast majority of cases that is the ending point also. But, as Ma CJ pointed out in Fully Profit (Asia) Ltd v Secretary for Justice,in the more difficult cases it is not particularly helpful to refer to the “ordinary and natural meaning” of words because in such cases there can be much debate over exactly what is the ordinary or natural meaning of words; and in those cases the surer guide to interpretation is context.

44. In Wood v Capita Insurance Services Ltd [2017] AC 1173, Lord Hodge JSC reviewed the many cases on interpretation and emphasised that interpretation was a unitary exercise. That is why, where there are conflicting interpretations, account should be taken of the natural and ordinary meaning of the provision in question, the purpose of the contract and of the provision, other relevant provisions, the facts and circumstances known or assumed by the parties at the time that the contract was executed, the quality of the drafting of the instrument, and commercial common sense.” (emphasis added)

91.  In Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at para 14, Lord Hoffmann explained:

“14. There is no dispute that the principles on which a contract (or any other instrument or utterance) should be interpreted are those summarised by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912—913. They are well known and need not be repeated. It is agreed that the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. The House emphasised that ‘we do not easily accept that people have made linguistic mistakes, particularly in formal documents’ … but said that in some cases the context and background drove a court to the conclusion that ‘something must have gone wrong with the language’. In such a case, the law did not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had.” (emphasis added)

92.  In Arnold v Britton [2015] AC 1619, at paras 15-22, Lord Neuberger PSC explained:

“15 When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’…And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions…

16 For present purposes, I think it is important to emphasise seven factors.

17 First, the reliance placed in some cases on commercial common sense and surrounding circumstances (e g in Chartbrook [2009] AC 1101, paras 16—26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision…

…

19 The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made…

…

22. Sixthly, in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention. An example of such a case is Aberdeen City Council v Stewart Milne Group Ltd 2012 SC (UKSC) 240, where the court concluded that ‘any . . . approach’ other than that which was adopted ‘would defeat the parties' clear objectives’, but the conclusion was based on what the parties ‘had in mind when they entered into’ the` contract: see paras 21 and 22.”

93.  Lastly, in Virgin Atlantic TM Ltd v Alaska Airlines Inc [2024] FSR 27 at  para 32, Phillips LJ explained:

“32 The commercial considerations also strongly favour Virgin's interpretation. There is a strong presumption that commercial parties do not intend to provide something for nothing, but Alaska's contention is that it should be entitled to hold (and effectively "sterilise") valuable intellectual property rights for up to 25 years, and yet pay nothing. If nothing else, it is plainly of value to Alaska that the well-known Virgin Brand should not be used by one of its competitors in the US airline marketplace. It is not appropriate to consider the adequacy or otherwise of that consideration, but it is plain that some payment would be expected and indeed required.” (emphasis added)

94.  This court agrees it is a commercial absurdity that the Nan Hai Parties are entitled to indefinitely withhold payment to the Plaintiff of the Third Guarantee Amount as long as they disagreed and continue to disagree with the results of the Closing Audit Report. But none of the authorities cited above permits the Court to ignore the language actually used by the parties in a contract, even taking into account the context and background, commercial common sense and surrounding circumstances, the strong presumption mentioned in Virgin Atlantic TM Ltd or whatever the court is entitled to take into account. This court does not think there can be much debate over exactly what is the meaning of the words used in the clauses in the SPA relied upon by the OSGH Parties.

95.  Regarding clause 3.1, it only imposes a duty on BDO to perform and complete the Closing Audit within 6 months from the Closing Date. It does not impose any duty on Giant Harvest and True Vision at all, whether to agree on the results of the Closing Audit or to use reasonable or best endeavours to do so. It certainly does not say what is to happen if the results of the Closing Audit are for whatever reason not agreed. All it says is what is to happen if the results are agreed.

96.  As for the last paragraph of clause 3.2, it only applies if BDO was unable to complete the Closing Audit within 6 months from the Closing Date, which was definitely not the case here. As submitted by Mr Leong SC’s Closing at para 34, The fact that the Closing Audit Report had been completed and issued is clearly borne out by the evidence.

97.  “Inability to complete the Closing Audit” means what it says – this court finds it very difficult to construe it to mean “in the sense of serving the clear purpose of binding the parties” as contended for by the OSGH Parties. In his Closing, Mr Man SC submits that purposively, the Closing Audit can only be “completed” if it actually has its intended effect on the calculation of the Total Price such that it enables True Vision to discharge its obligation under clause 6.5(b) of the SPA and pay the Third Guarantee Amount. This court does not agree. The so-called “intended effect” may and would most probably be the subjective intent of the OSGH Parties, but that is not the issue here.

98.  Rather, this court agrees with Mr Leong SC that the OSGH Parties’ contention about the true construction of the last paragraph of Clause 3.2 of the SPA is plainly asking this court to re-write clause 3.2 as “if a party disagrees with the result of the Closing Audit, then there will be no adjustment”. With respect, it is impossible to read this clause to have such effect. Construing the SPA as a whole, including in particular clauses 3.1, 3.2, 6.5 and 6.7 relied upon by the OSGH Parties, this court is not prepared to construe the SPA in such a way as to include in it the term contended for.

Implied Terms

99.  This court now turns to the suggested implied terms.

100.  The process of implication of terms involves a rather different exercise from that of construction. The court’s usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power: per Lord Neuberger PSC in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd  [2016]  AC 742 at [29], quoting with approval Bingham MR’s comment in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472, 481.

101.  The applicable principles on implied terms are well-established.

102.  For a term to be implied, it must satisfy the following conditions: it must be (i) reasonable and equitable, (ii) necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it, (iii) so obvious that “it goes without saying”, (iv) capable of clear expression, and (v) not contradict any express term of the contract: Kensland Realty Ltd v Whale View Investment Ltd & anor (2001) 4 HKCFAR 381 at para 23 per Bokhary PJ.

103.  More recently, in Marks and Spencer plc at [21], Lord Neuberger PSC explained and summarised the various judicial observations on the implication of terms into a contract as follows:      

“21 …I would add six comments on the summary given by Lord Simon in the BP Refinery case 180 CLR 266, 283 as extended by Bingham MR in the Philips case [1995] EMLR 472 and exemplified in The APJ Priti [1987] 2 Lloyd's Rep 37. First, in Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 459, Lord Steyn rightly observed that the implication of a term was “not critically dependent on proof of an actual intention of the parties” when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time at which they were contracting. Secondly, a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term. However, and thirdly, it is questionable whether Lord Simon's first requirement, reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable. Fourthly, as Lord Hoffmann I think suggested in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, para 27, although Lord Simon's requirements are otherwise cumulative, I would accept that business necessity and obviousness, his second and third requirements, can be alternatives in the sense that only one of them needs to be satisfied, although I suspect that in practice it would be a rare case where only one of those two requirements would be satisfied. Fifthly, if one approaches the issue by reference to the officious bystander, it is “vital to formulate the question to be posed by [him] with the utmost care”, to quote from Lewison, The Interpretation of Contracts 5th ed (2011), p 300, para 6.09. Sixthly, necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of “absolute necessity”, not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon's second requirement is, as suggested by Lord Sumption JSC in argument, that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.” (emphasis added)

104.  In Wuhan Ocean Economic and Technical Cooperation Company Ltdv Schiffahrts-Gesellschaft ‘Hansa Murcia’ mbH & Co KG  [2012] EWHC 3104 (Comm) 1277 at para 24, Cooke J said:

“…It is clear to me that there is no express term in the addendum as to the time by which the existing refund guarantee fell to be extended. Nor is there any express incorporation of any terms from the refund guarantee itself. It must be accepted that the obligation to provide the extension has a temporal content, with the result that any time limit must fall to be implied. Where parties impse a unilateral[15]obligation, without specifying the time in which it is to be done, there must be some implication as to the time in which it is to be done, because the parties cannot have intended the obligation to be of perpetual or indefinite duration. There must be a limit to the time in which the obligation is to be fulfilled.” [16] (emphasis added)

105.  Applying the above principles, this court accepts the gist, though not the exact wording, of the pleaded implied terms contended for by the OSGH Parties and shall hold that by implication of the SPA:

(a)  The parties agreed (i) each of them shall use its best or reasonable endeavours[17] to agree the Closing Audit Report, within 6 months from the Closing Date, within a reasonable time after BDO has issued the Closing Audit Report or within any other deadline mutually agreed by the parties; (ii) the Closing Audit Report agreed in the aforesaid manners shall be binding on the parties.

(b)  If no agreement is reached in the manner described above, after the expiry of a reasonable time after BDO has issued the Closing Audit Report, the Closing Audit Report shall become final and binding on the party who failed to use best or reasonable endeavours to reach an agreement and on both parties if neither of them has applied best or reasonable endeavours to reach an agreement.

106.  Further or alternatively:

(a)  The parties shall use their best or reasonable endeavours to do all that is necessary to agree the Closing Audit Report.

(b)  The parties shall raise with BDO any requests, queries or errors about the Closing Audit with full particulars or substantive reasons either within 6 months from the Closing Date or alternatively within a reasonable time after receipt of the Closing Audit Report. Failing that, the parties shall agree to the Closing Audit Report prepared pursuant to clause 3.1 of the SPA.

(“Accepted Implied Terms”)

107.  The reasons are these.

108.  Clause 6.5(b) of the SPA imposes an obligation on True Vision to pay the Third Guarantee Amount on the “first Business Day” after 6 months from the Closing Date. This is premised on the basis that the parties were in agreement on the results of the Closing Audit. Giant Harvest submits correctly that in order to discharge its payment obligation under clause 6.5(b), True Vision had to at least use its best endeavours to agree the Closing Audit Report within 6 months of the Closing Date. Otherwise, the “Total Price” as stated in clause 6.5(b) could not be determined, and True Vision would not know how much it had to pay as the Third Guarantee Amount on the “first Business Day” after 6 months from the Closing Date.

109.  While BDO had to complete the Closing Audit within 6 months from the Closing Date[18], it did not have to wait until the deadline to issue the Closing Audit Report very close to the deadline of 27 January 2018, although that was what it did: BDO only issued the Report to the parties on 26 January 2018.

110.  If True Vision was under an obligation to raise with BDO any requests, queries or errors about the Closing Audit with full particulars or substantive reasons within 6 months from the Closing Date, it is quite conceivable that BDO could have completed the Closing Audit Report well before the deadline so as to leave the parties sufficient time to consider it. Further, if True Vision was under an obligation to use its best endeavours to agree to the Closing Audit Report, it is equally conceivable that the Closing Audit Report could have been agreed and True Vision could have discharged its payment obligation under clause 6.5(b) on time.

111.  Alternatively, even if BDO, for whatever reason, waited until very close to the deadline to issue the Closing Audit Report, True Vision should still be obliged to use its best endeavours to agree it within a reasonable time. Without this implied obligation, True Vision could delay, without any or any reasonable cause, its agreement to the Report which in turn means it could delay, without any or any reasonable cause, its payment of the last tranche of the purchase price indefinitely. This is clearly not what the parties had intended when they entered into the SPA.

112.  What is regarded as “a reasonable time” depends on a whole list of considerations. In Lewison The Interpretation of Contracts 8^th Ed at para 6.161, the learned editors opined:

“6.161 The consideration of whether there has been a breach of an obligation to perform within a reasonable time is not limited to what the parties contemplated or ought to have foreseen at the time of the contract. In Peregrine Systems Ltd v Steria Ltd, Maurice Kay LJ approved the formulation that the question whether a reasonable time has been exceeded is:

‘a broad consideration, with the benefit of hindsight, and viewed from the time at which one party contends that a reasonable time for performance has been exceeded, of what would, in all the circumstances which are by then known to have happened, have been a reasonable time for performance. That broad consideration is likely to include taking into account any estimate given by the performing party of how long it would take him to perform; whether that estimate has been exceeded and, if so, in what circumstances; whether the party for whose benefit the relevant obligation was to be performed needed to participate in the performance, actively, in the sense of collaborating in what was needed to be done, or passively, in the sense of being in a position to receive performance, or not at all; whether it was necessary for third parties to collaborate with the performing party in order to enable it to perform; and what exactly was the cause, or were the causes of the delay to performance. The list is not intended to be exhaustive.’” (emphasis added)

113.  In this regard, the OSGH Parties’ contention is that a reasonable time would lapse at the latest within 1 year after the Closing Date which also happened to be 6 months after the deadline for the completion of Closing Audit Report. This court agrees and shall so hold. In this court’s view, that contention of the OSGH Parties is clearly reasonable, equitable and commercially sensible.

114.  First and foremost, it is a commercial absurdity that the Nan Hai Parties are entitled to indefinitely withhold payment to the Plaintiff of the last tranche of the purchase price ie Third Guarantee Amount as long as they disagreed and continue to disagree with the results of the Closing Audit Report.

115.  Second, it must be the intention of the parties to the SPA that Giant Harvest would get paid the Third Guarantee Amount for the Shares, which had already been transferred to True Vision upon completion, at some definite rather than at an indefinite time in the future. Without the Accepted Implied Terms, Giant Harvest would literally be at the mercy of True Vision as to whether it would get paid.

116.  Third, clause 6.6(d) of the SPA obliges True Vision to pay an amount in USD equivalent to inter alia the Third Guarantee Amount as the balance of the Total Price as soon as possible to the Offshore Account designated by Giant Harvest within 1 year after the Closing Date. It is only after receiving inter alia the Third Guarantee Amount in USD would True Vision be deemed to have fulfilled all its payment obligations. Clause 6.7 of the SPA imposes financial penalties on True Vision if it fails to pay the balance of the Total Price in full within 1 year from the Closing Date ie default interest at 0.02% per day of the amount payable but unpaid, until it is fully repaid. Both clauses contemplate True Vision’s payment of the Third Guarantee Amount should be no later than 1 year after the Closing Date.

117.  Since True Vision was obliged to pay the Third Guarantee Amount no later than 1 year after the Closing Date, failing which it would be obliged to pay default interest under clause 6.7, logically, it must agree to the Closing Audit Report by the same date so that the Third Guarantee Amount could be ascertained. In order to do so, True Vision must  at least use its best or reasonable endeavours to agree the results of the Closing Audit.

118.  Fourth, even assuming that the parties contemplated True Vision would have genuine disagreements with the Closing Audit Report, it seems to this court reasonable to expect any such disagreements would be resolved in consultation with BDO and Giant Harvest within 6 months after the deadline for the issue of the Closing Audit Report. After all, BDO was only given 6 months to prepare and issue the Report. Since BDO was chosen by both parties to be the independent Auditor to perform the Closing Audit, one would not have expected True Vision to disagree with the entirety of the Closing Audit Report, and on the facts it did not. Hence, 1 year after the Closing Date which was 6 months after the deadline for the completion of Closing Audit Report was entirely reasonable, in fact, more than reasonable in this court’s view, with or without the benefit of hindsight.

119.  Not only are the Accepted Implied Terms reasonable and equitable, it seems to this court they are necessary to give business efficacy to the SPA – otherwise, the SPA would not be effective since there would be no mechanism for the Third Guarantee Amount to be calculated and paid. Without the Accepted Implied Terms, the SPA would lack commercial and practical coherence. For the same reason, it seems to this court the Accepted Implied Terms are so obvious that they go without saying.

120.  Further, this court is of the view that the Accepted Implied Terms are capable of clear expression. In this regard, the Accepted Implied Terms are self-explanatory and require no further elaboration.

121.  Lastly, this court does not see how the Accepted Implied Terms would contradict any express term of the SPA.

122.  To conclude, this court is of the view that all the conditions laid down in Kensland Realty Ltd are fulfilled.

123.  Mr Leong SC, in his Closing, opposes vehemently the implication of any terms into the SPA.

124.  His first general objection is that OSGH Parties are on a quest to ask the Court to rewrite the SPA. Citing authorities such as Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2 at [7], Mr Leong SC’s point is that it is not the function of the Court to rewrite the parties’ agreement. This point is of course valid as far as it goes, but in Nazir Ali at [7], Lord Hughes JSC expressly adopted the principles on implication of terms as “authoritatively restated” by the Supreme Court in Marks and Spencer plc. So the question is not so much whether this court is being asked to rewrite the SPA, it is whether the conditions for the implication of terms into the SPA are satisfied.

125.  Mr Leong SC’s second general objection is that the implied terms that Giant Harvest is proposing do not comply with the requirements as laid down in high authorities such as Kensland Realty Ltd and Nazir Ali (which in turn adopted the principles in Marks and Spencer plc).

126.  Mr Leong SC’s third general objection is that allowing the implied terms contended for by the OSGH Parties could destabilize the “traditional, highly restrictive approach to implication of terms”. This is a non-point. As long as the OSGH Parties can satisfy the established conditions for the implication of terms, which represent the “traditional, highly restrictive approach”, it is unclear how that approach could be destabilized.

127.  Dealing with the requirements for the implication of terms, Mr Leong SC’s first specific objection at paras 85 and 86 of Section D.4.3 of his Closing, without any meaningful elaboration, is that the OSGH Implied Terms contradict clauses 3.1, 19.1 and 19.4 of the SPA in that they would render those clauses nugatory or significantly vary or limit their meaning and operation.

128.  This court does not agree.

129.  Clause 3.1 has been set out in the earlier part of this Judgment. It is only concerned with (i) the appointment of an Independent Auditor to perform the Closing Audit and (ii) the effect of the Closing Audit as being final and binding when agreed by the parties. There is nothing contradictory or inconsistent between the Accepted Implied Terms and this clause. The Accepted Implied Terms are there to supplement what the parties would have intended to include in the SPA in order to give it business efficacy but have omitted to do so as ex hypothesi they are so obvious that “it goes without saying”.

130.  Clause 19.1 is part of the “General Provisions” which provides that unless otherwise expressly provided in this Agreement, either party may exercise its rights or remedies, or give or withhold consent, in any manner it deems appropriate (including imposing additional conditions).

“除本協議另有明確規定之外，任何一方均可以以其認為合適的任何方式（包括附加條件）行使權利或補救措施或作出或拒絕作出同意”

131.  Mr Man SC’s response is that according to its ordinary and natural meaning, clause 19.1 only allows either party to choose the manner in which to exercise a right or remedy or to give or withhold consent. It does not empower the parties to withhold consent simpliciter, however unreasonably. Otherwise, clause 19.1 could simply read “除本協議另有明確規定之外，任何一方均可以…拒絕作出同意”, which means the phrase “合適的任何方式” would be otiose. In SA Maritime et Commerciale of Geneva v Anglo-Iranian Oil Co [1954] 1 WLR 492, 495, Somervell LJ expressed the view that “Although one finds surplusage in contracts and deeds and in Acts of Parliament, one leans towards treating words as adding something rather than as mere surplusage.”

132.  There is some force in Mr Man SC’s submission.

133.  However, this court thinks the OSGH Parties’ stronger argument should be that clause 19.1 is only a general provision which is not concerned with the specific provisions dealing with the Closing Audit or the calculation and payment of the Third Guarantee Amount. As such, it should not and cannot be construed as conferring an entitlement on either party to not even try to agree the Closing Audit Report (in their original version or in some revised version if True Vision’s objections were accepted by BDO which it had not) so as to enable the Third Guarantee Amount to be ascertained and paid. Such a construction of clause 19.1 does not accord with “the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’, ‘the overall purpose of the clause and the [SPA]’ or ‘commercial common sense’”: Arnold v Britton supra at [15].

134.  Putting it in another way, clause 19.1 could not be construed as giving True Vision a right to unilaterally withhold payment of the Third Guarantee Amount indefinitely. Otherwise, the extensive machinery in relation to the calculation and payment of the Third Guarantee Amount in clauses 3.1, 3.2, and 6.5 would be rendered meaningless. If so, there is nothing contradictory or inconsistent between the Accepted Implied Terms and clause 19.1.

135.  Lastly, clause 19.4 is an entire agreement clause which simply provides that: “This Agreement (including all its schedules thereto) and all the Transaction Documents constitute the entire agreement between the parties and supersede all previous agreements, understandings or negotiations” .

136.  Quite apart from the fact that what clause 19.4 expressly supersedes has on its face nothing to do with the Accepted Implied Terms, it is said that the purposes of an entire agreement clause are to prevent a party from relying on (i) a collateral contract/warranty or (ii) promises or assurances made during pre-contractual negotiations: Lewison The Interpretation of Contracts  at para 3.134.

137.  Hence, an entire agreement clause would not preclude the implication terms to the SPA because implied terms are “intrinsic to the agreement” and thus in the present case within the expression “This Agreement (including all its schedules thereto)”: AXA Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133 at [41].

138.  Indeed, with or without AXA Sun Life Services Plc, this court would still hold that an entire agreement clause would not preclude the implication of terms to a contract. Otherwise, the entire line of authorities all the way up to the Court of Final Appeal and the Supreme Court and the jurisprudence developed by them would be vitiated by the inclusion of an entire agreement clause. That is too drastic a result to be endorsed by this court and is not supported by any authorities cited by Mr Leong SC.

139.  To conclude, there is nothing contradictory or inconsistent between the Accepted Implied Terms and clauses 3.1, 19.1 and 19.4 of the SPA. Mr Leong SC’s first specific objection is rejected.

140.  Mr Leong SC’s next specific objection at paras 87 to 89 of Section D.4.4 of his Closing is that the OSGH Implied Terms are not capable of clear expression. His main point is expressed in para 89:

“None of the above concepts is capable of being defined with clarity – each could lead to a litigation over its meaning. OSGH Parties have bundled them all into the OSGH Implied Terms – we respectfully submit that (1) the SPA would be rendered nearly impossible to perform effectively and (2) the rights and obligations of the SPA would be completely distorted.”

141.  The concepts criticised by Mr Leong SC include (1) obligations to “cooperate with each other”, (2) “best endeavours to agree”, (3) “reasonable endeavours to agree”, (4) “best endeavours to do all that is necessary”, (5) “reasonable endeavours to do all that is necessary”, (6) “raising request, queries or errors with full particulars or substantive reasons” and “reasonable time”.

142.  This court does not agree. In fact, the point made in para 89 is just a bare assertion.

143.  “Best endeavours”, “reasonable endeavours” and “reasonable time” are often used in contracts and have been the subject of numerous judicial explanations. On “best endeavours” and “all reasonable endeavours”: see Lewison The Interpretation of Contracts from paras 16.46 onwards. On “reasonable time” see Lewison The Interpretation of Contracts from paras 6.156 onwards. Ultimately, the court applies the reasonable man test, a clearly familiar and well-established criterion, in determining the content of such obligations. This has been done by the Court time and again without any difficulty.

144.  Lastly, Mr Leong SC submits that the OSGH Implied Terms are (1) not necessary to give business efficacy to the contract, (2) not reasonable or equitable and (3) not so obvious that ‘it goes without saying’.

145.  This court has earlier in this Judgment already explained why the Accepted Implied Terms are reasonable and equitable, necessary to give business efficacy to the SPA and are so obvious that they go without saying. Mr Leong SC’s submission cannot be rejected.

146.  Mr Leong SC seems to be suggesting at para 99 of his Closing that the implication of any terms in the SPA is unnecessary since in the event of disagreement on the result of the Closing Audit, the parties were free to enter into negotiations, resort to mediation, arbitration, or the appointment of third-party accountants to resolve their differences, reach a compromise or go to court for an adjudication.

147.  These are all theoretically possible alternatives in every case but the existence of such theoretical alternatives does not as a matter of law preclude the implication of terms to a contract if the same is otherwise justified according to the established principles. As the facts of this case show, these alternatives could not have resolved and did not in fact resolve the issues relating to the Closing Audit Report reasonably quickly, as submitted in para 100 of Mr Leong SC’s Closing.

148.  The next question is whether True Vision was in breach of the Accepted Implied Terms and if yes what would be its consequences.

149.  As stated earlier, the Nan Hai Parties’ alternative case is that they did use best or reasonable endeavours to agree the Closing Audit Report in that they had promptly expressed their disagreement with the results of the Closing Audit with particulars, after their receipt of it on 26 January 2018. In their Defence and Counterclaim at para 15, they have pleaded:

(a)  By a letter addressed to the OSGH Parties dated 27 January 2018 ie 1^st Disagreement Letter, True Vision expressed its disagreement, and raised queries, over the contents of the Closing Audit Report.[19]

(b)  By a letter addressed to the Plaintiff, cc its solicitors, Messrs. King & Wood Mallesons, dated 29 January 2018 ie 2^nd Disagreement Letter, True Vision’s solicitors, Messrs Linklaters (a) reiterated True Vision’s position that it disagreed with the contents of the Closing Audit Report, in particular, the calculation of the amount of “Component B” in clause 3.2 of the SPA and (b) stated that the Closing Audit Report was not final or binding on the parties[20]. Accordingly, the Plaintiff and True Vision were not in a position to agree on the Total Price in clause 3.2 or the Third Guarantee Amount in clause 6.5 of the SPA.

(c)  By a letter to the Plaintiff dated 21 March 2018 ie 3^rd Disagreement Letter, True Vision “explained fully the bases of its disagreement with certain contents of the Closing Audit Report” including footnotes 13, 20, 25 and 26 to the consolidated accounts.[21]

(d)  By an email dated 31 August 2018, the OSGH Parties were provided with True Vision’s complete breakdown of its computation of the Third Guarantee Amount, from which they could readily ascertain the bases of True Vision’s disagreement over the contents of the Closing Audit Report including the items relevant to the calculation of the Third Guarantee Amount.[22]

150.  Notwithstanding the above, as far as the provision of adequate particulars of their disagreements are concerned, in their Closing, the Nan Hai Parties are only able to refer to the 3^rd Disagreement Letter, and the 31 August 2018 without prejudice email which was issued after a reasonable time had elapsed.

151.  Mr Man SC submits that 1^st, 2^nd and 3^rd Disagreement Letters as well as the 31 August 2018 without prejudice email come nothing close to reasonable or best endeavours. Additionally, the 31 August 2018 without prejudice email is unduly late and inadmissible.

152.  This court agrees.

153.  Starting with the 31 August 2018 without prejudice email, it is clearly inadmissible. In any event, by 31 August 2018, the reasonable time for True Vision to agree the Closing Audit Report or expressed their disagreements had expired. By comparison, the Plaintiff was able to and did:

(a)  state their calculation of the Third Guarantee Amount on 28 January 2018;

(b)  invite True Vision to articulate its reasons and appropriate audit methodology to support its disagreement with the Plaintiff’s calculation on 30 January 2018;

(c)  indicate to True Vision they had no objection to the results of the relevant items in the Closing Audit Report;

(d)  provide a detailed breakdown of the calculation of the Third Guarantee Amount on 27 April 2018.

154.  On the part of the Nan Hai Parties, they did not give any further response to the Plaintiff’s calculation of the Third Guarantee Amount after 27 April 2018 until the 31 August 2018 without prejudice email.

155.  For completeness, concerning the 2^nd Disagreement Letter, while reiterating True Vision’s disagreement with Component B, Linklaters did not articulate which sub-component(s) True Vision disagreed with or why.

156.  Concerning the 1^st and 3^rd Disagreement Letters, in the course of cross-examination on Day 10, Ms Han Qi of Nan Hai Parties accepted that the 2 letters had stated Nan Hai Parties’ disagreement with Notes 13[23], 20 and 25[24], and 26[25] of the Closing Audit Report but did not explain why [26]. Ms Han Qi also testified that while Nan Hai Parties had communicated with BDO concerning their disagreements with those Notes, BDO had rejected Nan Hai Parties’ views and reiterated the correctness of the Closing Audit Report. On the evidence, there was no follow up action by the Nan Hai Parties with BDO.

157.  It is not in dispute that Component C is not dependent on the Results of the Closing Audit and the challenge to Component C is not pleaded.

158.  To conclude, for the above reasons, this court holds that True Vision was in breach of the Accepted Implied Terms. If so, the consequences are straightforward.

159.  First, the Closing Audit Report is final and binding on the parties. Second, the calculation of the Total Price and thus the Third Guarantee Amount would be as calculated by the Plaintiff and it is entitled to be paid the Third Guarantee Amount as per the First Sum ie US$37,434,469. Second, True Vision must issue the Joint Instruction to W&G to release the appropriate amount out of the Escrow Account as  payment to the Plaintiff for the First Sum.

160.  Having said that, this court must consider True Vision’s defence of set off and counterclaims before arriving at the final disposition of this case.

Issue 2 – The Plaintiff’s claim to RMB3,010,000

161.  As stated earlier, liability for this claim had been conceded on Day 1 and the sum had been received by the OSGH Parties. There is no need to dwell on it.

Issue 3 – True Vision’s claim for the Compensation Amount of RMB380 million

162.  The Nan Hai Parties’ submission on its claim for the Compensation Amount is relatively straightforward.

163.  First, MIXC Cinema is one of the most valuable cinemas operated by Giant Harvest under the “橙天嘉禾影城” brand. It was operated pursuant to the MIXC Lease which was due to expire on 27 September 2018 (“Expiry Date”). Given the commercial importance of the MIXC Cinema and its continued operation, there was a need to renew the MIXC Lease after the Expiry Date, failing which there would be a substantial diminution in value of the Shares.

164.  Second, clause 8.2(a) of the SPA provided that Giant Harvest was responsible for the renewal of the MIXC Lease, using the “橙天嘉禾影城” brand name, during the Renewal Period ie between 25 January 2017 and the Expiry Date as per the Renewal Conditions. For the present purpose, the most important Condition is that it must be not less than 7 years (preferred) or 5 years (alternative).

165.  Third, under the SPA, Giant Harvest would be liable to compensate True Vision for such diminution in value in the event that no renewal of the MIXC Lease could be secured. Clause 8.1 of the SPA provides that the MIXC Cinema’s enterprise value is RMB380 million, precisely equal to the Compensation Amount. Under the SPA at para 2.3(2) of Schedule 6, “if it is not that the Purchaser disagreed to renew pursuant to the Renewal Conditions, the Seller should pay the Purchaser 380 million as compensation within 10 Business Days from 27 September 2018” (如果不是買方不同意按續約條件續約:賣方在 2018 年 9 月 27日起 10 個營業日內，向買方支付 3.8億元作為補償).

166.  Fourth, there is no dispute that the MIXC Lease was not renewed. It is also undisputed that it is not a situation where True Vision disagreed to renew pursuant to the Renewal Conditions. Hence the Compensation Amount is payable to True Vision.

167.  Fifth, in so far as the OSGH Parties submit that Giant Harvest only needed to use “best endeavours” as sufficient discharge of its contractual duty to renew the MIXC Lease, that submission is doomed to fail because it is repugnant to the express wording and the parties’ clear intention expressed in the SPA at Clause 8.2(a) and para 2.3(2) of Schedule 6. Incidentally, this submission also contradicts Mao’s witness statement dated 20 March 2020 (“Mao 1”) at para 71 where he says compensation is payable "if the lease were not extended", and not “compensation is payable if the Plaintiff failed to use best endeavours to seek a renewal”.

168.  The OSGH Parties’ pleaded case in their Re-Re-Amended Consolidated Reply and Defence to Counterclaim (“RDC”) is that the expiry and non-renewal of the MIXC Lease was caused by True Vision’s (i) refusal to use its best endeavours to procure a successful renewal of the MIXC Lease, (ii) its malicious interference with the Plaintiff’s work and (iii) its refusal to cooperate with Giant Harvest’s efforts pursuant to clauses 8.2(c), 8.2(e)(i) and 8.2(e)(iii) of the SPA.[27] In particular, the Nan Hai Parties’ refusal to affix the seal of Orange China on the draft letter to accept the Short-Term Lease of not exceeding 5 months[28] constituted a breach of clauses 8.2(c), 8.2(e)(i), and (iii) of the SPA by True Vision.[29]

169.  Senior Counsel for the OSGH Parties has gone to great length to submit in their Closing that there was more than a substantial chance that the Short-Term Lease proposed by the MIXC Landlord would have led to the renewal of the MIXC Lease on a long-term basis. The submission is too lengthy to repeat here. The following is an excerpt of it.

(a)  First, Mao’s evidence is that, under normal circumstances, it was rarely the case that a handover period of five months being such a long period of time was required. From his perspective, this signified that the MIXC Landlord was not ready to operate the MIXC Cinema itself and had not abandoned the possibility of outsourcing its operation to experienced operators like Orange China.

(b)  Second, a Short-Term Lease would push back the expiry date of the MIXC Lease. It follows that matters concerning the handover of the premises would not be impending and thus would be of less concern to the MIXC Landlord in 2018. There would have been more room to negotiate, and the MIXC Landlord would likely be more open to entertain discussions.

(c)  Third, the market conditions were not favourable to cinema operators at the time. Intensified competition from new cinemas meant that the individual box office revenue per screen was gradually getting lower, even though the overall box office revenue had increased. Competition was so fierce that it severely affected the profitability of renowned and established cinemas such as the MIXC Cinema. In fact, its revenue in late 2017 was only RMB 60 million. This was a far cry from its revenue of roughly RMB 80 million in January 2017.[30] Given the situation, the MIXC Landlord would have been less keen to operate the MIXC Cinema on its own.

(d)  Critically, by 2018, the MIXC Landlord would have seen the dire market conditions.

(e)  Quite clearly, against the backdrop of the market downturn, the later the favourable offer was given to the MIXC Landlord, the greater the chance that it would be accepted.

(f)  Mao’s evidence is compelling: an offer to renew the MIXC Lease at a rent of RMB 38 million in March 2028 coupled with the acceptance of the proposed Short-Term Lease might well have worked.

(g)  In the premises, agreeing to the proposed Short-Term Lease  would entail a significant prospect of renewing the MIXC Lease on a long-term basis. Although the MIXC Landlord wished to operate the MIXC Cinema, given the clear evidence of the market downturn at the time, its mind could be changed. Consequently, its desire to operate the MIXC Cinema was not an insuperable obstacle.

(h)  The Nan Hai Parties’ rejection of the proposed Short-Term Lease was most unreasonable. True Vision plainly breached its duty to use best endeavours to renew the MIXC Lease.

170.  As far as causation is concerned, Senior Counsel for the OSGH Parties submits in the Closing that:

(a)  While it is common ground that Giant Harvest did not make the offer to renew the MIXC Lease at RMB 38 million rent per year, but this is not an intervening cause to break the chain of causation of True Vision’s breach of the SPA.

(b)  Offering RMB 38 million per year to the MIXC Landlord would have been what Mao would have done had the proposed Short-Term Lease been agreed to by the Nan Hai Parties.

(c)  In other words, the Nan Hai Parties’ breach of clause 8.2(c) of the SPA had deprived the OSGH Parties of an “appropriate opportunity”[31] to make such an offer which could have sealed the deal. The effective cause of the failure to renew the MIXC Lease was still the Nan Hai Parties’ breach of the SPA.

171.  That submission on causation must be rejected.

172.  Looking at the available evidence as a whole, this court is of the firm view that the MIXC Landlord was determined to operate the MIXC Cinema itself and would not be willing to extend the MIXC Lease for 5 or 7 years, which was what in fact happened.

173.  In this regard, one only needs to consider the following matters.

174.  First, Mao’s evidence is that the OSGH Parties had proactively made multiple efforts to renew the MIXC Lease. However those efforts came to nothing. In Mao 1 at paras 81 to 83, he said this:

“81 On 27 March 2017, Ms Chow, Mr Zhao and I met with Mr Chen Hua (陈华), Assistant General Manager of the Commercial Properties Department (商业地产事业部副总经理) of China Resources and Gu Xin Li (谷欣立), the Business Development Manager (招商经理) of China Resources.

82 During the meeting, we presented plans for a new design, refurbishment, hardware updates and diversified operational concepts for MIXC Cinema. Whilst this was warmly received by China Resources, China Resources indicated that due to its own strategic planning considerations, its preliminary thought at the time was to start their own cinema brand. As such, it was giving serious consideration to taking over the MIXC Cinema and operating it by itself.

83 Despite China Resources’ indication, I believed that OSGH Group, with its excellent historical box office performances and professional renown in the industry, should not give up any opportunity to convince China Resources to change its mind. Quite apart from OSGH Group’s obligation under clause 8.2(c) of the SPA to use best endeavours to secure an extension of the MIXC Lease envisaged under the SPA, which I was aware of at the time, I thought we should not give up so easily given that China Resources’ preliminary plans were not set in stone and could change over time. Therefore, I told China Resources at the meeting that obviously we would want to extend the lease but even if China Resources were to decide to take back the venue for its own operation, we should discuss whether there could be other forms of new cooperative operation.” (emphasis added)

175.  Second, by letter dated 18 October 2017, the MIXC Landlord informed Orange China that:

“租赁期限将于2018年10月8日到期。今年3月，贵司毛义民先生一行到访我司，我司已明确表示：贵司在深圳万象城内经营的橙天嘉禾影院租赁期限届满后，我司将收回自营，不再对外出租。

为了更顺利地完成交接工作，贵我双方可探讨在上述租赁期限届满后，贵司短期续租(不超过5个月)原影院部分面积继续经营的方案，最终以双方签订的相关协议为准…” (emphasis added)

176.  Third, by letter dated 12 December 2017, the MIXC Landlord informed Orange China that the MIXC Lease would not be extended beyond its expiry date ie 27 September 2018. The relevant parts of that letter read:

“由于我司经营战略调整，贵司在深圳万象城内经营的橙天嘉禾影院租约到期后，我司将收回自营，不再对外招租。

…

故请贵司遵照合同约定，于合同到期之日的15日内按照此前的交付标准交付我司…此外，关于贵司转租的租户亦请自行清理相关合同。” (emphasis added)

177.  Fourth, at a meeting in Shenzhen on 24 April 2018 in which representatives of the MIXC Landlord, the Nan Hai Parties and the OSGH Parties were present, the MIXC Landlord confirmed that no extension would be granted. In  Zhong’s witness statement (“Zhong 1”) at para 69, she said “在该会议上，尽管橙天嘉禾集团再次表达与华润续约的诚意，华润最终确认在万象城影院的租赁期限后将收回商铺自营，不会续约。” (emphasis added)

178.  The relevant parts of the minutes of that meeting made this absolutely clear:

“ 5.1 华润确认将收回自营，并计划2019.2.5开业，影城品牌为 “万象影城”。

  …

储怡：今天我们召集这个会，主要是嘉禾在今年就要到期了，就是这间店铺就要到期了，大方向上，就是我们自己要筹建影院，我们全国的项目未来都会往这个方向去走，所以，之前也和在座的其中几位沟通过，未来这个嘉禾到期后我们想收回来自营…” (emphasis added)

179.  Hence, it is academic to consider the OSGH Parties’ case that the Nan Hai Parties had maliciously interfered with, refused to cooperate with the OSGH Parties or failed to use their best endeavours to achieve the renewal of the MIXC Lease, and whether such conduct was a breach of the SPA. Whether or not True Vision did or did not deny the alleged breach and/or run any positive case in answer to it, as allured to by the OSGH Parties in their Closing in section D1.1, the crux of the matter is still whether the MIXC Lease could have been renewed whatever the OSGH Parties and the Nan Hai Parties had done.

180.  On the available evidence, this court rejects as pure speculation the contention of the OSGH Parties that if only the Nan Hai Parties had agreed to the short term lease of 5 months offered by the MIXC Landlord or the counter-proposed 5 to 10 months suggested by the OSGH Parties, it was likely that there would be a longer extension. Indeed, even taking into account the so-called fair-wind principle relied upon by the OSGH Parties, this court is of the view that the OSGH Parties’ submission is inconsistent with the clear evidence which indicates the MIXC Landlord’s firm intention to develop its own cinema business, not just with regard to the MIXC Cinema in Shenzhen, but to cinemas in other parts of the Mainland.

181.  The next question is whether this court should allow any deduction or set off of the Compensation Amount of RMB380 million based on the commercial value of the Substitute Cinemas pursuant to Schedule 6 para 2.4(2) of the SPA.

Issue 4 - The Substitute Cinemas

182.  Of the 5 Substitute Cinemas, only 3 are relevant to the disputes between the parties: the Beijing Great Wall Cinema as well as the Shenzhen and Shanghai Xinghui Cinemas. Their combined agreed commercial values were RMB368.5 million.

Beijing Great Wall Cinema

183.  In the Agreed Statement of Undisputed Facts, it is stated that:

“46. Schedule 5 to the SPA was modified by Schedule 4 and clause (15) of the SPA Confirmation Letter. They (inter alia):

(a) set out the agreed annual box office revenue (約定年票房) in respect of each of the Five Substitute Cinemas;

(b) state the commercial value ascribed to the leases in respect of the Five Substitute Cinemas; and

(c) make clear that the commercial value was calculated on the basis of its agreed annual box office revenue and by multiplying the agreed annual box office revenue by 4.75 times.

47. Further, if the lease in respect of the Beijing Great Wall Cinema met the criteria as set out in Schedule 5 of the SPA, the Beijing Great Wall Cinema would qualify as a Substitute Cinema for the purposes of the SPA.

影院	約定年票房 人民幣萬元	租貸年限	固定租金/年 人民幣萬元	物業管理費及推廣費/年 人民幣	提成租金/年	其他	商業價值（等於約定年票房4.75倍） 人民幣萬元
北京長城飯店項目一層	票房2,000其他收入1,500	預計6年，租約期至2023年12月		物業費：約60萬元	淨票房銷售額及除淨票房外所有營業額 25%	-	15,000(即票房收入乘以 4.5 倍，其他收入乘以 4 倍)， 影城非票收入比重很大

”

184.  The evidence from the OSGH Parties suggests that on or about 20 September 2017, the Beijing Landlord confirmed with them that the Beijing Lease was ready for execution. But by email sent to Zhong on 27 September 2017, Chen Tao argued that the Beijing Lease did not comply with the Prescribed Conditions because clause 2.63 imposed a minimum requirement on the annual fixed rent payable failing which clause 10.2.5 enabled the Beijing Landlord to terminate the Beijing Lease.

185.  In the Nan Hai Parties’ Closing, they submit this:

“186. The parties’ dispute about this cinema can be summarized into the following THREE sub-questions:

(a) Q1: Was Beijing Great Wall Cinema Contract signed?

(b) Q2: Does the Condition of “固定租金/年” apply to Beijing Great Wall Cinema Contract?

(c) Q3: Does Beijing Great Wall Contract contravene this condition?

G.4.2 Q1: Was Beijing Great Wall Cinema Contract signed?

187. It is Common Ground that the Beijing Great Wall Cinema Contract was UNDATED and NEVER SIGNED by the landlord. THIS FACT is incontrovertible. This is evident from the absence of any date or landlord’s signature in the signing page of the Beijing Great Wall Lease itself….

188. OSGH’s own witness[32] accepted this...”

186.  For reasons unknown to this court, the Nan Hai Parties admitted in para 53(1) of their Defence and Counterclaim that the Beijing Lease had been entered into in about May 2017.

187.  The OSGH Parties’ submission is essentially that the Nan Hai Parties should be bound by their pleadings – meaning that the case should proceed on the basis that the lease had been signed – even if they know the facts therein are untrue, as this was due to their oversight. But then, the OSGH Parties also knew the Beijing Lease had not been signed and hence it was their oversight too to state in the Agreed Statement of Undisputed Facts at para 49 that the Beijing Lease had been entered into.

188.  More importantly, on matters of facts, this court is not bound by what the parties had admitted or agreed, whether in the Nan Hai Parties’ pleadings or the Agreed Statement of Undisputed Facts. This court only decides cases on the basis of the evidence.

189.  Thus, in the House of Lord decision Gramophone Co Ltd v Magazine Holder Co (1911) 28 R.P.C. 221 at 225, Lord Loreburn LC held:

“It is the duty of a Court to decide cases according to the truth and fact, not according to any assumed or artificial state of facts which the parties might find it convenient to present…A Court of Justice can never be bound to accept as true any fact, merely because it is admitted between the parties.” (Emphasis added)

190.  If the OSGH Parties failed to obtain an executed lease in relation to the Beijing Great Wall Cinema, that is the long and short of it: see Schedule 6 of the SPA at paragraph 2.4.2. No deduction from the Compensation amount should be made for the commercial value of the Beijing Great Wall Cinema and this court shall so hold.

Shenzhen and Shanghai Xinghui Cinemas

191.  The Shanghai Lease was entered into on or about 25 July 2017[33] and the Shenzhen Xinghui Lease was entered into on or about 13 October 2017[34]. In between the two dates, on 28 July 2017, the parties signed the SPA Confirmation Letter. Schedule 4 of the SPA Confirmation Letter set out the modified Prescribed Conditions for the 2 cinemas. The OSGH Parties’ submit that both the Shanghai and Shenzhen Xinghui Leases had met with those modified Prescribed Conditions. The Nan Hai Parties dispute that on the ground that the OSGH Parties had failed to satisfy 2 conditions of the SPA.

192.  In the Agreed Statement of Undisputed Facts, it is stated that:

“48. Still further, if the leases in respect of the Shanghai and Shenzhen Xinghui Cinemas met the criteria set out in Schedule 4 of the SPA Confirmation Letter, they would qualify as Substitute Cinemas for the purposes of the SPA.

影院	約定年票房 人民幣萬元	租貸年限	固定租金/年 人民幣萬元	物業管理費及推廣費/年 人民幣	提成租金/年	其他	商業價值 （等於約定年票房4.75倍） 人民幣萬元
上海星薈中心商業廣場	1,800	13	首年：301 13年總租金4660 （以上含5%增值税費）	86萬元/年 13 年總物業費1120 萬元 （以上含6%增值税費）	1-3 年，年淨票房的14%； 4-6 年，年淨票房的15%； 7-10 年，年淨票房的16%； 11-13 年，年淨票房的17%； （需另付5%增值稅費）		8,550
註:13年的固定租金和物業費總額 :5780萬元(含稅)，在不超過該總額前提下，固定租金和物業費部分調整也視為滿足簽約條件。
深圳地王星薈項目	2,800	13	首年：695 13年總租金10300 （以上含5%增值税費）	25萬元/年 13 年總物業費325 萬元 （以上含6%增值税費	1-3 年，年淨票房的17%； 4-6 年，年淨票房的18%； 7-10 年，年淨票房的19%； 11-13 年，年淨票房的20%； （需另付5%增值稅費）	-	13,300
註:13年的固定租金和物業費總額 :10625萬元(含稅)，在不超過該總額前提下，固定租金和物業費部分調整也視為滿足簽約條件。

”

Shenzhen Xinghui Cinema

193.  On the available evidence, including in particular the contemporaneous correspondence:

(a)  By email dated 20 October 2017, the Nan Hai Parties alleged that the Shenzhen Xinghui Cinema could not be operated as a cinema as it did not meet the fire safety requirements in the PRC. A total of 4 deficiencies were raised in the email and they sought the necessary fire safety floor plan [消防报审全套图纸] in order to resolve the problems:

“1. The evacuation walkway in the theater is not wide enough overall. The theater requires an evacuation walkway of 6 meters wide. Currently, that in the theater is only 3.2 meters wide.

2. Some of the evacuation doors in the auditorium are dead-ended walkways that are more than 27.5 meters away from the nearest safety exit and do not comply with the “Code for Fire Protection Design of Buildings”.

3. There is a lack of designated fire evacuation stairs within the theater.

4. The theater covers an area of 1,908 square meters and needs to be set up with 2 fire protection zones. Currently, only one fire protection zone is set up.”

(b)  On or about 6 November 2017, Orange China issued a Termination Notice fortheShenzhen Xinghui Lease to the Shenzhen Landlord on the ground that the latter refused to cooperate to provide the necessary floor plan or to confirm Orange China’s proposal to renovate the premises in order to meet the fire safety requirements. Thus, it was impossible to open the cinema for business.

(c)  By letter dated 6 February 2018, Orange China sent a proposal to theShenzhen Landlord seeking to revise the terms of the Shenzhen Xinghui Lease. In addition, Orange China requested the Shenzhen Landlord to take responsibility for renovating the premises and seeking the necessary fire safety approval from the relevant authorities, after which Orange China would enter the premises for its cinema business [ 本物业系旧楼改造，影院装修消防设计和验收由贵司负责通过，取得消防设计审核同意意见书后我司进场].

(d)  No constructive response was received from the Shenzhen  Landlord and the fire safety problem remained.

(e)  On or about 20 July 2018, the Shenzhen Landlord issued a Termination Notice of the Shenzhen Xinghui Lease to Orange China upon the Nan Hai Parties’ failure to take over the premises.

194.  In theNan Hai Parties’ Defence and Counterclaim at paragraphs 51 and 52, it is pleaded inter alia that on a true and proper construction of Schedule 5 to the SPA, as modified by paragraph (15)  and Schedule 4 of the SPA Confirmation Letter and/or paragraph 2.4(2) of Schedule 6 of the SPA, alternatively, by way of implication, it is a requirement alternatively condition precedent that the SubstituteCinemas must be capable of being operated as a cinema and must meet, or alternatively be objectively capable of meeting, all applicable PRC laws and regulations for that purpose (“First Condition”).

195.  The second requirement alternatively condition precedent pleaded in the Nan Hai Parties’ Defence and Counterclaim is that the Substitute Cinemas must be objectively capable of achieving the agreed annual box office revenue in relation to it as specified in Schedule 5 to the SPA and/or Schedule 4 of the SPA Confirmation Letter (“Second Condition”).

196.  In this court’s view, the use of the term “condition precedent” in the Defence and Counterclaim is superfluous and indeed inappropriate. As the learned editors of Lewison The Interpretation of Contracts 8^th Ed. put it at para 16.75, conditions precedent are normally contingent conditions. In other words, unless and until the condition is satisfied, no contract comes into existence, or liability under a contract is suspended. This court does not understand the term in the Defence and Counterclaim as carrying either of these 2 meanings. Rather, this court is of the view that the term “condition” carries its “common meaning” ie a term, provision or stipulation of a contract: Lewison The Interpretation of Contracts at para 16.01.

197.  Perhaps acknowledging the problem with the use of the term “condition precedent”, the Nan Hai Parties have avoided the use of it in their Closing and described the First and Second Conditions as “Condition”  bearing their “common meaning” of being terms of the SPA and the SPA Confirmation Letter: see, for instance, para 180 of their Closing:

“What are the conditions?

(a)  In Schedule 5 of the SPA: One sees a table entitled “5 家替代影院資產簽約條件”. Aside from the cinema names, there are SEVEN conditions (“Conditions”):

i.  影院

ii.  約定年票房

iii.  租賃年限

iv.  固定租金/年

v.  物業管理費及推廣費/年

vi.  提成租金/年

vii.  其他

viii.  商業價值.

(b)  In Schedule 4 of the SPA Confirmation: One sees a similar table entitled “替代影院資產簽約條件”, containing exactly the same conditions as the Conditions.”

198.  For reasons which will become apparent from the following discussions, this court is of the view that the OSGH Parties’ failure to fulfil the FirstCondition is sufficient to defeat their case that the Shenzhen Xinghui Cinema constituted an eligible “Substitute Cinema”. If so, they are not entitled to deduct its agreed commercial value from the amount of compensation payable by it for the non-renewal of the MIXC Lease. There is thus no need for this court to dwell on the OSGH Parties’ lengthy arguments at this stage against the Second Condition.

199.  However, the existence and fulfilment of the Second Condition is the crux of the dispute concerning the Shanghai Xinghui Cinema and will be canvassed later.

200.  The Nan Hai Parties submit that the above interpretation concerning the First Condition is readily apparent from the use of the term “Substitute Cinema” in the SPA and the SPA Confirmation Letter: to be a “Cinema”, it must comply with all applicable PRC laws and regulations for a cinema to be legally operated on the premises.

201.  This court agrees, whether as a matter of proper construction of the SPA or as a matter of implied terms, the existence of the First Condition is undeniable and this court shall so hold.

202.  With regard to the former, it is sufficient to refer back to some of the authorities cited in relation to Issue 1 viz:

(a)  Chartbrook Ltd v Persimmon Homes Ltd at para 14, where Lord Hoffmann explained that “the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”.

(b)  Arnold v Britton at para 15, where Lord Neuberger PSC explained that “when interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’”.

203.  Taking into account the context and background of the SPA, commercial common sense and all surrounding circumstances, it is plain and obvious to this court that a reasonable person would have understood the term “Cinema” to mean it must be capable of being operated as a cinema and must meet, or alternatively be objectively capable of meeting, all applicable PRC laws and regulations for that purpose. Otherwise, the Cinema would simply not be fit for purpose.

204.  With regard to the latter, it seems to this court that the First Condition is (i) reasonable and equitable, (ii) necessary to give business efficacy to the SPA, (iii) so obvious that “it goes without saying”, (iv) capable of clear expression, and (v) does not contradict any express term of the SPA.

205.  The OSGH Parties’ principal submission in their Closing in Section E1 is that neither Condition exists as a matter of construction or implication. Most of their arguments concern the Second Condition. In respect of those against the First (as well as the Second) Condition, their first argument is that there are no express terms to the effect that the “agreed commercial value” of the Substitute Cinemas can only be set-off against that of the MIXC Cinema only if the 2 Conditions are met. In particular, Schedule 6 para 2.4(2) of the SPA, makes clear that it solely depends on whether a lease was signed for the Assets of Substitute Cinemas” (替代影院資產是否簽約), and not the 2 Conditions.

206.  In this court’s view, of course a lease for a Substitute Cinema must have been signed in the first place. But that is not the end of the matter. This submission fails to address the Nan Hai Parties’ point that “Substitute Cinema” must be capable of being operated as a “Cinema”; otherwise, the set off mechanism in Schedule 6 para 2.4(2) of the SPA cannot be triggered. In this regard, it must be remembered that the Agreed Commercial Value of the Shenzhen Xinghui Cinema amounted to RMB133 million. It is unrealistic to suggest the parties’ intention, objectively ascertained, was that OSGH Parties were entitled to set off this amount from the Compensation Amount of RMB380 million even if the  Shenzhen Xinghui Cinema could not be legally operated as a “Cinema”, in which case the so-called “Cinema” would have no commercial value at all.

207.  For this reason, this court rejects the OSGH Parties’ principal submission. As for the rhetorical question by the OSGH Parties in their Closing ie who is to judge whether a cinema is objectively capable of being operated? The answer must be the Court based on all the objective evidence.

208.  The next question is: has the First Condition been satisfied?

209.  On this question, the burden is on the OSGH Parties to prove that the Shenzhen Xinghui Cinema premises were capable of being operated as a cinema, including meeting, or alternatively, be capable of meeting, all applicable PRC laws and regulations for that purpose. This should be self-evident since it is the OSGH Parties who proffered the Shenzhen Xinghui premises as a “Substitute Cinema”.

210.  On the evidence, it is indisputable that at the time the Shenzhen Xinghui Lease was executed, be it 29 September or 13 October 2017, there was an unsolved problem with the subject premises owing to non-compliance with the relevant fire safety requirements. The 4 more important defects were already set out in the 20 October 2017 email and recited in Chan Tao’s witness statement at paragraph 70 and shall not be repeated here.

211.  Some fire protection problems were recorded in a minutes of meeting held on 10 August 2018 in which Zhong and the Shenzhen Xinghui Landlord’s representative Mr Yau (邱) were present. The minutes established that even the Shenzhen Xinghui Landlord acknowledged that the designated fire evacuation staircase did not exist and had to be built. This was frankly admitted by Zhong during her cross-examination on Day 6.

212.  Further, Schedule 2 Part 1 section4 (Fire Protection) of the Shenzhen Xinghui Lease contained a number of outstanding renovation or installation works supposed to be undertaken by the Shenzhen Xinghui Landlord (e.g. designing a dedicated staircase) or Orange China (e.g. building an independent emergency exit and evacuation staircase based on the landlord’s drawings). Schedule 2 Part 2 section 4 (Fire Protection) of the Shenzhen Xinghui Lease contained a list of 12 renovation items which were the sole responsibility of Orange China.

213.  The OSGH Parties’ Closing is extremely brief, consisting only of 2 paragraphs:

“104. …the Shenzhen Xinghui Cinema satisfies [the First Condition]. Crucially, Yu Xin[35] admits someone is operating a cinema at the relevant site.

105. This is consistent with how the Nan Hai Parties were willing to operate the cinema on their revised commercial terms and executed the Fire Safety Terms[36] on 29.9.2017 after a site inspection on 5.9.2017 in the knowledge that they needed to modify the site to become a cinema, a fact that was clearly known to the Nan Hai Parties when they signed the SPA: see Annex A, §§58-59. Whether the modifications turned out to be substantial is irrelevant”.

214.  A number of flaws can readily be found in the 2 paragraphs quoted above.

215.  First, para 104 of the OSGH Parties’ Closing. What Yu Xin was asked during cross-examination on Day 9 and her answer to the question were these:

“Q:…Do you know whether a cinema is operating in the Shenzhen Xinghui premises today?

A. I know.

Court: What do you know?

A: There is a cinema being operated in that location.”

(emphasis added)

216.  It should be obvious that whether a cinema is operating on the Shenzhen Xinghui premises on Day 9 of the trial is totally irrelevant. This court agrees with the submission of the Nan Hai Parties that the relevant date should be the date of the execution of the lease itself. While Chen Tao’s testimony during cross-examination was that the Shenzhen Xinghui premises were ultimately occupied and used by a new operator as a cinema, he also testified it had taken the new operator 19 months to get fire safety approval.

217.  Second, the allegation that the Nan Hai Parties clearly knew the need to modify the premises to become a cinema when they signed the SPA ie on 25 January 2017 is not borne out by Annex A at §§58-59. If the OSGH Parties cannot in their Closing point to any evidence to support that allegation, that allegation will have no probative value.

218.  Third, as noted earlier, it is correct that Schedule 2 of the Shenzhen Xinghui Lease contained a number of outstanding renovation or installation works to be undertaken by the Shenzhen  Landlord or Orange China simply reinforced the Nan Hai Parties’ contention that the premises were not fit for purpose when the lease was entered into. It does not mean that the First Condition was satisfied.

219.  Fourth, if and in so far as the OSGH Parties seek to rely on the fact that the Nan Hai Parties had affixed Orange China’s company chop on the Shenzhen Xinghui Lease, this does not automatically mean the Nan Hai Parties had waived the requirement of the First Condition of the SPA. Satisfaction of the First Condition is a question of mixed fact and law. So is the waiver of it which must be specifically pleaded in order not to take the Nan Hai Parties by surprise: RHC O 18 r 8; Hong Kong Civil Procedure 2026 Vol 1 para 18/8/15. But waiver of the First Condition had not been pleaded by the OSGH Parties. Furthermore, the OSGH Parties were not a party to the Shenzhen Xinghui Lease. Whatever the Nan Hai Parties or Orange China had or had not agreed with the Shenzhen Landlord was of no concern to the OSGH Parties.

220.  Fifth, in this court’s view, what the SPA obliged or at least permitted the OSGH Parties to do for the purpose of the set off against the Compensation Amount was to locate premises which could be operated as cinemas in substitution for the MIXC Cinema. Thus, the OSGH Parties were supposed to find premises which were capable of being operated as cinemas before offering them to the Nan Hai Parties. It is unreasonable to expect Orange China to incur significant expenses and time to render the premises so offered legally capable of being operated as a cinema. As the Nan Hai Parties put it in their Closing, any structure can theoretically be converted and modified into a cinema. The question is how much costs and time are needed for the necessary conversion and modification. The OSGH Parties’ submission that whether the modification turned out to be substantial is irrelevant cannot be accepted.

221.  To conclude, this court is of the view that the Shenzhen Xinghui Cinema did not qualify as a Substitute Cinema and its agreed commercial value cannot be used to set off the Compensation Amount.

Shanghai Xinghui Cinema

222.  This court has earlier explained the Nan Hai Parties’ pleaded case on the Second Condition.

223.  In their Closing, the Nan Hai Parties submit that the parties’ dispute about this cinema can be summarized into 2 questions:

(a)  Q1: is there a condition of “約定年票房” ?

(b)  Q2: if answer to Q1 is “yes”, has the “約定年票房” condition been fulfilled?

224.  In relation to Q1, the starting point is (i) Clause 8.3 (a) and (d), Clause 8.5 and Schedule 5 of the SPA and (ii) Clause 15 and Schedule 4 of the SPA Confirmation Letter.

225.  Clause 8.3(a) and (d) and Clause 8.5 of the SPA provide:

“8.3 替代影院資產

(a) 替代影院資產包括附件 5 所述 5 家替代影院資產 ( "5 家替代影院資產" ) …。

…

(d) 賣方可以在附件 5 條件範圍內，賣方代表橙天中國簽署 5 家替代影院資產的租賃協議，而不必另行取得買方書面同意。

…

8.5 替代影院資產成功續約界定

賣方在第 8.3 條…規定的條件範圍內簽約，或者經買方事先書面同意後超過該等條件範圍簽約，均視為成功簽約。萬象城項目續約以及替代影院資產簽署租約的雙方安排及支付時間見附件 6 。” (emphasis added)

“8.3 Assets of Substitute Cinemas

(a) Assets of Substitute Cinemas include the assets of five substitute cinemas described in Schedule 5 (the “Assets of Five Substitute Cinemas”)...

…

(d) The Seller can sign lease agreements for the Assets of Five Substitute Cinemas on behalf of Orange China within the scope of the conditions outlined in Schedule 5, without needing to obtain separate written consent from the Purchaser.

…

8.5 Definition of Successful Renewal for Assets of Substitute Cinemas

The signing of the contract by the Seller within the scope of the conditions specified in clause 8.3 or beyond such conditions with the prior written consent of the Purchaser, shall be considered as a successful signing. The arrangements and payment schedules for the renewal of the MIXC project and the signing of lease agreements for Assets of Substitute Cinemas are outlined in Schedule 6.”

226.  Schedule 5 is entitled “5 家替代影院資產簽約條件” and set out the names of the 5 “Substitute Cinemas” including inter alia the Shanghai Xinghui Cinema and the Prescribed Conditions including inter alia “約定年票房” (Agreed annual box office revenue) , “租賃年限” (Lease Term) and “商業價值”  (Commercial Value).

227.  Clause 15 and Schedule 4 of the SPA Confirmation Letter contained the agreed modifications to some of the Prescribed Conditions for the Shenzhen and Shanghai Xinghui Cinemas as “Substitute Cinemas”. Clause 15 provides as follows:

“(15) 买方同意，卖方按照列于本函附件4的条件签约，即视为根据购买协议第8.3条、8.5条就上海星荟中心商业广场、深圳地王星荟项目作为替代影院资产成功签约。”

“(15) The Purchaser agrees that the Seller’s execution of the agreement under the conditions set out in Schedule 4 to this Letter shall be deemed as the successful signing of the Shanghai Landmark Centre business square and the Shenzhen Diwang projects as Assets of Substitute Cinemas under clauses 8.3 and 8.5 of the SPA.”

228.  The Prescribed Conditions in Schedule 4 were those set out in para 48 of the Agreed Statement of Undisputed Facts. They have already been set out in the section “Shenzhen and Shanghai Xinghui Cinemas” above.

229.  As far as the Shanghai Xinghui Cinema is concerned, its “約定年票房” was RMB18 million, its “租賃年限” was 13 years and its “商業價值” was RMB85,500,000.

230.  In their Closing, the Nan Hai Parties submit that“約定年票房”  is one of the conditions to be complied with before any cinema can qualify as a “Substitute Cinema”. This court takes that submission to mean the Shanghai Xinghui Cinema’s “約定年票房” must achieve RMB18 million a year in order to qualify as a “Substitute Cinema”. But there is no clue in the SPA or the SPA Confirmation Letter as to which year the Nan Hai Parties are talking about.

231.  In the OSGH Parties’ Closing, they have raised a number of counter arguments against the existence of the Second Condition in section E1.1 to E1.3. This court has considered them and, for the sake of clarity of this Judgment, will only set out what this court considers as their best argument.

232.  At para 92, the OSGH Parties submit that “most significantly, [the Second Condition] is arbitrary and absurd”. Their submission runs like this.

“(1) Why would the OSGH Parties have agreed to guarantee that cinemas operated by the Nan Hai Parties could objectively achieve a particular box office, for any period (let alone 15 (sic)[37] years), when this would critically depend on matters out of the OSGH Parties’ hands such as how competent the Nan Hai Parties were in running their cinemas ?”

“(2) [Chen] Tao attempts to restrict the ‘annual box office revenue’ that the Shanghai… Xinghui Cinema must achieve to the 1st year of their operation. This is arbitrary and unsupported by the terms of the SPA...”

233.  As Mao put it in Mao 1 at paragraph 107, the annual box office revenue would depend on a host of factors, which OSGH Parties would have no control whatsoever, such as the general economic environment, how the cinema’s operations were run, whether Nan Hai Group’s personnel had the relevant expertise etc. Given that the Lease Term in question was 13 years, it is even more improbable that the OSGH Parties would have agreed to guarantee the annual box office revenue of the Shanghai Xinghui Cinema for all those 13 years.

234.  Even Chen Tao realised the absurdity of this construction of the SPA or the SPA Confirmation Letter; hence his attempt during cross-examination on Day 8 to limit the guaranteed annual box office revenue to the 1^st year of operation as being “our usual understanding”. But the problem with Chen Tao’s personal interpretation is: that was not what the SPA or the SPA Confirmation Letter provides.

235.  It is true that Schedule 5 of the SPA or Schedule 4 of theSPA Confirmation Letter did contain the column “約定年票房” and the column of “商業價值”. But it is also true that the SPA or the SPA Confirmation Letter did not contain a condition to the effect that the Shanghai Xinghui Cinema’s “約定年票房” must achieve RMB18 million a year in order to qualify as a “Substitute Cinema”as such.

236.  The Nan Hai Parties also contend that the court should not completely ignore the entire column of “約定年票房” and the entire column of “商業價值” in Schedule 5 of the SPA or Schedule 4 of the SPA Confirmation Letter. This is correct as far as it goes but this court cannot give the column “約定年票房”as giving rise to the Second Condition as put forward by the Nan Hai Parties without adding words to Schedule 5 of the SPA or Schedule 4 of the SPA Confirmation Letter which are simply not there.

237.  In order to make sense of the existence of the column “約定年票房” and the column of “商業價值”in the 2 Schedules, this court agrees with the submission of the OSGH Parties[38] that the figure set out in the column “約定年票房” was used to calculate the figure in the column of “商業價值”. In the case of Shanghai Xinghui Cinema, this would be RMB18 million x 4.75 = RMB 85,500,000, as shown in Schedule 4 of the SPA Confirmation Letter. Once the figure in the column of “商業價值”was arrived at by agreement of the parties, the calculation of the net amount of compensation payable to the Nan Hai Parties in the event of the non-renewal of the MIXC Lease would be simple: the parties need only follow the formula set out in paragraph 2.4(2) Schedule 6 of the SPA ie A – B = C, where A referred to the commercial value of the MIXC Project viz RMB380 million, B referred to the sum of the commercial value of all Assets of Substitute Cinemas with contracts signed, and C referred to the difference between the two.

238.  Another counter argument against the existence of the Second Condition is that it is wholly unclear from the Nan Hai Parties’ case as to the methodology for ascertaining whether this condition has or has not been satisfied when the lease in question was signed. Further, the SPA is also silent on this.

239.  As the OSGH Parties put it in their Closing,

“True Vision alleges that if a cinema did not have the same number of houses or seats as originally projected, it would be certain that [the Second Condition] could not be satisfied. But Andrew Mao’s unchallenged evidence shows this is wrong. A cinema’s box office revenue depends on other variables, such as “average ticket price” and the “number of shows”, such that a loss in houses or seats could be counterbalanced by “increasing the number of shows each day to increase the box office revenue” or increasing ticket price.”

240.  There is force in that argument.

241.  Again applying the test in Arnold v Britton at para 15 that “when interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’”, this court is of the view that such a reasonable person would not have understood Schedule 5 of the SPA or Schedule 4 of the SPA Confirmation Letter to mean that the Shanghai Xinghui Cinema’s “約定年票房” must achieve RMB18 million a year in order to qualify as a “Substitute Cinema”.

242.  For these reasons, the answer to Q1: is there a condition of “約定年票房”must be no. There is thus no point in going into Q2.

Conclusion on Substitute Cinemas

243.  To conclude, only the Shanghai Xinghui Cinema qualified as a “Substitute Cinema”. If so, only the agreed commercial value of RMB85,500,000 can be used by the OSGH Parties to deduct from or set off against the Compensation Amount of RMB380 million.

Issue 5 - Breach by Giant Harvest of warranties, representations and/or undertakings

244.  In the Defence and Counterclaim’s prayer for relief, True Vision claims damages for the Plaintiff’s breaches pursuant to clauses 7.1(b) and (d) as well as clause 10.1 of the SPA. The breaches in relation to clause 10.1 are some of the warranties set out in Schedule 1 of the SPA.

245.  The relevant terms of the said clauses and Schedule 1 have been summarised earlier in this Judgment under the section “SPA and SPA Confirmation Letter” and shall not be repeated here.

246.  A total of 4 categories of breaches have been pleaded in the Defence and Counterclaim at (i) section F1 (unpaid construction expenditures) claiming the sum of RMB3,227,966.42, (ii) section F2 (unpaid taxes) claiming the sum of RMB1,005,160.14, particularised in Schedule 1 of the Defence and Counterclaim, (iii) section F3 (unpaid theatre rentals) claiming the sum of RMB18,567,800.44, particularised in Schedule 2 of the Defence and Counterclaim, and (iv) section F4 (unpaid routine payments in the normal and usual course of business) claiming the sum of RMB22,214,287.18, particularised in Schedule 3 of the Defence and Counterclaim.

247.  The above pleaded claims add up to RMB45,015,214.18 ie the Damages Amount. This sum represents a substantial reduction from the original pleaded claim of RMB82,145,795.38 which first appeared in the 14 November Letter referred to below and which had been deleted by purple amendment.

248.  This is an extraordinary claim in that True Vision has adduced no or next to no evidence in support of it, even on liability.

249.  In the Nan Hai Parties’ Opening, other than reciting the relevant clauses in the SPA and the references to the Defence and Counterclaim, they only set out 2 letters at paras 101 and 102:

“101. By a written notice dated 20 June 2018 (the “20 June Notice”)[39], True Vision notified Giant Harvest of the breaches of warranties, representations and undertakings pursuant to Clause 11.4 of the SPA [CB1/1/SPA/28], and requested the same to be remedied within 30 days. Further particulars of the breaches were provided in an email dated 26 August 2018 [D18/5055-5068] [A3/4/Rejoinder/352/§24].

102. By a letter dated 14 November 2018 addressed to Giant Harvest (the “14 November Letter”) [CB3/717-753], True Vision supplied full particulars of the breaches. However, Giant Harvest failed and/or refused to remedy the breaches within 30 days of the 20 June Notice or the 14 November Letter, or at all. In the circumstances, Giant Harvest is liable to pay to True Vision the Damages Amount or, alternatively, damages in an amount to be assessed. [A2/2/DCC/139/§§80 to 81]”

250.  In the Nan Hai Parties’ Closing, they gave only 1 example of unpaid construction expenditure:

“283. By way of example, there wasunpaid construction expenditures for Hangzhou Raffles Contract in the amount of RMB 2,522,500 (DCC para 70 [A2/136]):

(a) according to the 50% phase of construction that had been completed as at the Closing Date (a document showing 50% progress reached on 12.7.2017 [D27/7054]), the construction expenditure due from and payable by Orange China (construction contract Cl 21.2.2 [D27/7142]) as at the Closing Date was RMB2,522,500.

(b) However, no such payment was made by Orange China on or before the Closing Date [B2/714]. Instead, payment was made by Orange China in respect of this project for RMB 2,522,500.00 (see a payment proof dated 2017.08.24 [D27/7071]).

251.  The plea in relation to Hangzhou Raffles Contract can be found in paragraph 70 of the Defence and Counterclaim:

“70. Pursuant to the Hangzhou Raffles Contract, the total consideration payable by Orange China was RMB10,090,000. According to the phase of construction that had been completed as at the Closing Date, the construction expenditure due from and payable by Orange China as at the Closing Date was RMB2,522,500, but no such payment was made by Orange China on or before the Closing Date.”

252.  Further, apart from reiterating their submission that sufficient notice had been given to Giant Harvest under Clause 11.4 of the SPA, Nan Hai Parties only made 2 additional points.

253.  First, when Nan Hai Parties’ witness Han Qi was being cross-examined, she testified that the relevant documents showing that payments were due and unpaid by Giant Harvest on the Closing Date had been passed to Nan Hai Parties’ former solicitors, Linklaters.

254.  Second, it would be just and convenient, efficient and proportionate for the Court to exercise its case management power to direct damages under this head of claim be assessed by a Master.

255.  In opposition to the claim, the OSGH Parties made a number of submissions in opposition. This court needs only recite 2 of them.

256.  First, the20 June Notice and the 14 November Letter failed to give Giant Harvest “reasonably detailed information” as to the breaches as required by clause 11.4 of the SPA. In particular, no underlying facts as to how the breaches allegedly arose were given and more pertinently, Nan Hai Parties failed to articulate how certain sums were said to become due in the first place. Since a central purpose of giving “reasonably detailed information” as to the breaches under clause 11.4 is to allow Giant Harvest to rectify the breaches, it is impossible for Giant Harvest to do so without such information.

257.  This court has considered the 20 June Notice and the 14 November Letter and agree with the OSGH Parties.

258.  Regarding the 20 June Notice, it only contained (i) bare allegations of 4 categories of breaches of undertakings, representations and warranties by Giant Harvest, (ii) the amount of the claim for each category and (iii) the aggregate amount of the 4 claims in the sum of RMB90,434,350,32.

259.  Regarding the 14 November Letter, while it did contain additional particulars of the alleged breaches consisting of 728 items adding up to RMB82,145,795.38 as the aggregate amount of the claims, in this court’s view, it still falls short of the requirement of “reasonably detailed information”.

260.  Take item 1 and item 728 as examples.

(a)  Item 1

SPA7.1 (category)

Special funds for films (particulars)

Chongqing Broadcasting Group (payee)

Special funds for films payable (description of outstanding amount)

15,990.25   (amount)

(b)  Item 728

Property rental (category)

Rent (particulars)

Guangdong Power Grid Co., Ltd., Heyuan Power Supply Bureau (payee)

Heyuan Orange Sky Golden Harvest Kaixuan Cinema Co., Ltd. water and electricity bills (description of outstanding amount)

55,741.82   (amount)

261.  Given the current version of True Vision’s claims as pleaded in the Defence and Counterclaim which add up only to RMB45,015,214.18, it should be quite obvious that the particulars set out in the 14 November Letter were not only not “reasonably detailed”, they were inaccurate.

262.  Second, True Vision has failed to adduce any relevant documentary evidence at the trial in support of its claims.

263.  This court agrees.

264.  To start with, even for the one example relating to the unpaid construction expenditure for the Hangzhou Raffles Contract mentioned in para 283 of Nan Hai’s Closing, the 3 documents referred to in that para ie D27/7054, 7071 and 7124 do not support the claim at all.

265.  D27/7054 purports to show the overall progress of the construction works by a Chongqing contractor was 65% as of 12 July 2017, as claimed by that contractor.

266.  D27/7071 shows a payment of RMB2,522,500 by Orange China to the Chongqing contractor on 24 August 2017.

267.  D27/7142 is a document entitled “Construction Enterprise Qualification Certificate” dated 13 January 2024 of a different contractor in Beijing.

268.  The long and short of it is that the documents referred to by Nan Hai Parties in their Closing simply cannot substantiate their claim that “there was unpaid construction expenditures for Hangzhou Raffles Contract” and that constituted a breach by Giant Harvest.

269.  Further, Han Qi’s testimony in cross-examination that all relevant documents had been passed to Nan Hai Parties’ former solicitors, coupled with the non-disclosure of them without any legitimate explanation, means more probable than not True Vision has no relevant evidence at all. Otherwise, one would expect Nan Hai Parties to provide some explanation as to why such relevant evidence was not adduced in support of its claims.

270.  Lastly, in any event, even if such evidence were available, given that it was not made available at trial, True Vision cannot rely on it and thus fails to prove its case, as correctly submitted by the OSGH Parties.

271.  Regarding Nan Hai Parties’ submission that the Court should exercise its case management power to direct damages to be assessed by a Master, the OSGH Parties oppose it on the ground that as a matter of law, the Nan Hai Parties cannot now ask for damages to be assessed on a separate occasion, as they had not applied for a split trial earlier.

272.  This submission is clearly established by the authorities cited by the OSGH Parties: Born Chief Co v George Tsai [1996] 2 HKLR 188, 195B-E (Nazareth VP); Allan v Ng & Co (a firm) [2012] 2 HKLRD 160, [63]-[64] (Kwan JA, as she then was).

273.  To conclude, this court agrees with the OSGH Parties that this claim should be dismissed on the basis that True Vision has failed to make out a case on liability and shall so hold.

Summary of Conclusions on the 5 Issues

274.  On Issue 1, the Plaintiff is entitledagainst the 1^st and 2^nd Defendants jointly and severallyto the sum of US$37,434,469 as calculated under clause 6.5(b) of the SPA together with contractual interest at 0.02% per day from 26 July 2018 until judgment.

275.  On Issue 2, the Plaintiff is entitled against the 1st and 2nd Defendants jointly and severally to the sum of RMB3,010,000 being the Yabao Settlement Sum together with interest at the prevailing HSBC prime rate plus 1% from 20 April 2018 until payment on 26 March 2025.

276.  On Issues 3 and 4, True Vision is entitled against the OSGH Parties jointly and severally to the sum of RMB294,500,000, being the Compensation Amount minus RMB85,500,000 ie the agreed commercial value of the Shanghai Xinghui Cinema together with interest at the prevailing HSBC prime rate plus 1% from 11 October 2018 until judgment.

277.  True Vision is entitled to set off the sum of RMB294,500,000 together with interest as claimed against the sum of US$37,434,469 together with interest as claimed.

278.  On Issue 5, True Vision is not entitled to the Damages Amount or any part thereof for failing to prove the Plaintiff was in breach of any of the warranties, representations and/or undertakings pursuant to clauses 7.1(b) and (d) as well as clause 10.1 of the SPA.

Disposition and costs order nisi

279.  The parties shall within 14 days from the date hereof use their best endeavours to work out arithmetically the sum due from the OSGH Parties to True Vision after the aforesaid set off and draw up an agreed minutes of Order to reflect this court’s conclusion above.

280.  There shall be Judgment in favour of True Vision against the OSGH Parties in the sum after the aforesaid set off, together with interest on that sum after judgment at judgment rate until payment.

281.  There shall be an Order that the Plaintiff and True Vision do execute the Joint Instruction in the form set forth in Appendix I of the Escrow Agreement dated 22 July 2017 to release the appropriate amount to True Vision after the aforesaid set off from the Escrow Account.

282.  True Vision’s counterclaim in the Damages Amount for the Plaintiff’s breaches of warranties, representations and/or undertakings pursuant to clauses 7.1(b) and (d) as well as clause 10.1 of the SPA be dismissed.

283.  In the absence of agreement within 14 days from the date hereof, the parties shall exchange and lodge with the court their written submissions on costs of the Actions (not exceeding 3 pages) for the court’s consideration. Unless otherwise directed, costs will be disposed of on paper.

284.  Liberty to apply.

Mr Bernard Man SC, Mr Anthony Chan SC and Mr Alvin Cheung, instructed by M/s Kennedys, for the Plaintiff (by original action) and the 1^st and 2^nd Defendants (by counterclaim)

Mr Alan Leong SC and Mr Chan Hei Ching Jacky, instructed by M/s Ho, Tse, Wai & Partners, for the 1^st and 2^nd Defendants (by original action) and the Plaintiff (by counterclaim)

HCA 2072/2018, HCA 2560/2018, HCA 2632/2018

[2024] HKCFI 2829

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 2072 OF 2018, 2560 OF 2018 AND

2632 OF 2018

____________

(by original action)

(by counterclaim)

(consolidated by the Order of Master Ho dated 5 December 2018)

____________

_______________

D E C I S I O N

_______________

INTRODUCTION

1.  It has often been said that one of the foundations of the rule of law is that “all are equal before the law”. The present case is a good illustration of this.

2.  No matter how famous or rich a person is (in this case the person behind the appellant is one Mr Yu Pun Hoi (于品海) (“Yu”) who certainly was or is such a person); or how many distinguished counsel the parties can afford to engage (in this case there are 3 eminent senior counsel involved on both sides); and how much money is at stake (in this case the sum in dispute broadly speaking is at around US$38 million), the court will endeavour to apply the same legal principles and rules to the facts and evidence presented by the parties in the case and will try to “safeguard the law and administer justice without fear or favour, self-interest or deceit” as stated in our judicial oath.

The Appeal

3.  This is the hearing of the appeal of the 1^st defendant Nan Hai Corporation Limited (南海控股有限公司) (“D1”) and the 2^nd defendant True Vision Limited (美視角有限公司) (“D2”) (by original action) and the plaintiff (by counterclaim) (collectively “Nanhai Parties”)[1] by way of notice of appeal filed on 8 July 2024 from the Order of Master Kay Seto (“the Master”) made on 24 June 2024 (“the Order”). The Master dismissed the summons taken out by Nanhai Parties dated 30 January 2024 (“the Summons”).

4.  By the Summons, Nanhai Parties are seeking leave (collectively, “the Applications”) to:

(a)  Amend the Re-Re-Amended Consolidated Defence and Counterclaim as per the draft annexed to the Summons (“the Proposed D&CC Amendment”)[2];

(b)  File a supplemental witness statement of Yu (“Yu’s WS”) as revised in Annex C of Nanhai Parties’ skeleton submissions lodged with the court on 20 September 2024 (“Nanhai Parties’ Submissions”); and

(c)  File the supplemental list of documents containing documents (13 items, which are exhibits YPH-1(3), (4), (5), (6), (7), (9), (10), (11), (12), (13), (14), (15) and (17)) annexed to Yu’s WS (“the Proposed List of Documents”)[3].

5.  The plaintiff (by original action) and the 1^st and 2^nd defendant (by counterclaim) are Giant Harvest Limited (鉅滿有限公司) and Orange Sky Golden Harvest Entertainment (Holdings) Limited (橙天嘉禾娛樂(集團)有限公司) (collectively “OSGH Parties”). OSGH Parties resisted the Applications on the grounds of delay, new evidence, inadmissibility and irrelevance.

BACKGROUND

Parties’ Respective Pleaded Case

6.  According to the written submissions prepared by Mr Bernard Man SC and Mr Anthony Chan SC, counsel for the OSGH Parties (“OSGH Parties’ Submissions”), the parties’ respective pleaded case can be briefly summarized as follows:

(a)  By a Share Purchase Agreement (股份購買協議) dated 25 January 2017 (“SPA”), Giant Harvest agreed to sell the entire shareholding in City Entertainment Corporation Limited (橙天嘉禾影城有限公司) (“the Company”) to Nan Hai. The Company further held 92.59% of the equity in Orange Sky Golden Harvest Cinemas (China) Company Limited (橙天嘉禾影城 (中國)有限公司) (“Orange China”), which controlled and operated 76 cinemas in the Mainland: See re-amended statement of claim (“RASOC”) §§2.1-2.2;

(b)  Under the SPA, the consideration for the sale of the shares was payable in broadly 3 instalments: RASOC §§6.5-6.10, 13.3;

(c)  It is common ground that on 28 July 2017, completion took place and the shares were transferred to (and are still held by) True Vision: RASOC §13.1; RRADCC §11(1);

(d)  However, despite having taken the assignment of the shares, Nanhai Parties failed and/or refused to pay the third and last instalment of the purchase price in the sum of US$37 million odd, which remains unpaid: RASOC §§6.4-14, 17-34, 37; and

(e)  OSGH Parties also claim for the return of RMB¥3.01 million (“Settlement Sum”) wrongfully withheld by Nanhai Parties. The Settlement Sum arose out of the settlement with the landlord of a cinema known as “Shenzhen Yabao”. The tenant for this cinema was Orange China but this project was excluded from the sale under the SPA (“Shenzhen Yabao Damages Issue”): RASOC, §§12, 40-45.

7.  Nanhai Parties counterclaim for compensation arising from OSGH Parties’ alleged breaches of (a) the SPA concerning obligations to sign certain cinema leases; and (b) other representations, warranties and undertakings.

8.  As submitted by OSGH Parties’ counsel, for present purposes, this court needs only be concerned with the first counterclaim, which may be briefly summarized as follows:

(a)  Clause 8 of and Schedule 6 to the SPA provide that if the lease (“MIXC Lease”) with 華潤 (深圳) 有限公司 (“HR”) for a cinema known as “MIXC Cinema” were not signed, True Vision would be entitled to claim compensation in the sum of RMB¥380 million. But subject to any deduction representing the agreed commercial value of the “Substitute Cinemas”, calculated in the manner identified in Schedule 5 to the SPA, whose lease the OSGH Parties are able to sign: See re-re-amended consolidated defence and counterclaim (“RRADCC”) §34A;

(b)  Nanhai Parties contend that Giant Harvest had failed to extend the MIXC Lease because (“MIXC Lease Extension Issue”): (a) it failed to exercise its option to renew under cl.2.5 of the MIXC Lease; and (b) it failed to tell 華潤（深圳）有限公司 (“HR”), the landlord, that Nan Hai was willing to pay rent which exceeded market value: See rejoinder §§7(1)(2);

(c)  Nanhai Parties further contend that the OSGH Parties are not entitled to deduct the agreed commercial value of “Shenzhen Xinghui” and “Shanghai Xinghui” cinemas even though the leases had been signed because the cinemas failed a condition precedent – said to be included in Schedules 5 and 6 to the SPA either on a proper construction or by implication – that required the cinemas must (a) meet, or alternatively be capable of meeting, all applicable Mainland laws and regulations for the purpose of being operated as a cinema and/or (b) be objectively capable of achieving the agreed annual box office revenue (約定年票房) stated in Schedule 5 to the SPA. See RRADCC §§51-52, 55-57;

(d)  Nanhai Parties also allege that OSGH Parties are not entitled to deduct the agreed commercial value of the “Beijing Great Wall Cinema” even though Giant Harvest had entered into a lease (“Beijing Great Wall Cinema Lease”) because it contained a clause which, according to Nanhai Parties, required payment of a fixed minimum annual rental amount in contravention of Schedule 5 to the SPA: RRADCC §54;

(e)  Consequently, Giant Harvest would be required to pay a compensation amount of RMB¥380 million: RRADCC §47; and

(f)  In terms of the Settlement Sum, Nanhai Parties deny they are obliged to repay the same notwithstanding they had signed the “SPA Confirmation” where clause 8 provides that any income and compensation from the settlement in respect of Shenzhen Yabao, which obviously includes the Settlement Sum, would be enjoyed by Giant Harvest. Alternatively, Nanhai Parties say they are entitled to deduct RMB¥875,000 as corporate tax liability: RRADCC §30G.

Relevant Procedural History

9.  The history of the present actions, which were commenced 6 years ago in September 2018, has been canvassed in the 3^rd affirmation of Chung Sing Fook Rudy (“Chung 3^rd”) §14, the accuracy of which is not disputed by Nanhai Parties. OSGH Parties’ counsel has highlighted the following events in OSGH Parties’ Submissions which I would respectfully adopt (with appropriate modifications made by me where appropriate):

(a)  On 9 June 2020, Nanhai Parties filed 5 witness statements, including the witness statements of Yu Xin (于欣) (“YX”) and Chen Tao (陳濤) (“Chen”) (“YX’s WS” and “Chen’s WS” respectively), pursuant to Master Kot’s order on 26 May 2020;

(b)  On 28 August 2020, Master Winnie Tsui (as she then was) dismissed Nanhai Parties’ Summons for leave to adduce expert evidence on, inter alia, Mainland fire and safety regulations in the context of the dispute between the parties (“Nan Hai Expert Summons”). On 29 March 2021, Deputy High Court Judge MK Liu dismissed Nanhai Parties’ appeal;

(c)  On 3 January 2022, Master Hui extended the deadline for any further interlocutory application(s) to 21 February 2022. On the same day, ie 3 January 2022, Master Hui adjourned the case management conference (“CMC”) scheduled for 23 February 2022 to 13 July 2022;

(d)  On 13 June 2022, Nanhai Parties appointed Messrs Ho Tse Wai & Partners (“HTW”) to act in place of Messrs Linklaters as their solicitors;

(e)  On 7 July 2022, Nanhai Parties applied for a time extension to take out interlocutory applications (if so advised). The main reason given in the supporting affirmation was that HTW only came on board recently and needed to get up to speed;

(f)  On 8 July 2022, Nanhai Parties filed a timetabling questionnaire (“the Questionnaire”). Section F3 stated that “subject to counsel advice”, Nanhai Parties “may” tender Yu as witness and file his witness statement;

(g)  In Yu 1^st §11, Nanhai Parties further explained the reason for the answer in Section F3 of the Questionnaire, viz: that in July 2022, HTW advised and Nanhai Parties agreed preliminarily that if their witnesses cannot attend the trial – and Nanhai Parties could not confirm their attendance at that stage – Yu should put in a witness statement to “make up for the deficiency” in Nanhai Parties’ evidence;

(h)  On 13 July 2022, Master Hui, having considered the materials mentioned in subparagraphs (a)-(g) above, dismissed Nanhai Parties’ summons for an extension of time to take out interlocutory applications (if so advised), and gave leave to set down this case for a 14-day trial; and

(i)  On 28 September 2022, the registrar of the High Court fixed the present actions for trial from 7-10, 13-17, 20-24 January 2025 before The Hon Ng J. On 7 November 2022, a notice confirming the same, as well as an additional date fixed on 24 February 2025 for oral closing submissions, was issued to the parties.

DISCUSSION

10.  Mr Alan Leong SC, leading Mr Chan Hei Ching, for Nanhai Parties at this appeal (who had also represented the same parties at the hearing of the Summons before the Master below), at the outset of their submissions, informed the court that they do not dispute that there was delay on the part of his lay clients. They also do not shy away from the fact that their lay clients are now seeking for an indulgence from the court to allow them to introduce new evidence 3 months prior to the commencement of a 14-day trial that was fixed by Master Hui at the CMC back in July 2022, some 27 months ago.

11.  Without doing injustice to Mr Leong SC’s eloquent submissions on these 2 important issues, I shall briefly sum up his main points on these matters as stated Nanhai Parties’ Submissions hereinbelow.

Delay

12.  According to Mr Leong SC, Nanhai Parties do not dispute there has been delay in making the Applications but they claim to have sufficiently explained the delay. In his submission, there is no allegation that Nanhai Parties were acting mala fides or there was deliberate fouling of the Rules of the High Court (“RHC”) and the principles set out under the Civil Justice Reform (“CJR”).

13.  Mr Leong SC further submits that delay alone is not determinative. Notwithstanding CJR and active case management, according to him, the court’s primary duty is still to admit all relevant, admissible, and probative evidence to secure the just resolution of disputes in accordance with the substantive rights of the parties.

14.  In his submission, it is for OSGH Parties to particularize and substantiate that they would, because of the court granting the Applications, suffer real prejudice that is not capable of compensation by costs (as opposed to cliché generic allegations of unspecific, unparticularized general assertions of prejudice) that would render a fair trial not possible. He submits that they have not done so.

15.  Had OSGH Parties done so, Mr Leong SC says that Nanhai Parties are ready to modify their application to remove such prejudice.

16.  Further, Mr Leong SC submits that dismissing the Applications in their entirety will end up with Nanhai Parties suffering from a serious inequality of arms, which almost pertains to declaring a premature defeat of Nanhai Parties at the trial. While OSGH Parties have Mao Yimin (“Mao”), Fiona Chow (“Chow”) and Zhong Liangzi (“Zhong”), all frontline participants in negotiations and implementation of the SPA, to give evidence, Nanhai Parties have none to call in rebuttal. Thus, Nanhai Parties at trial will practically be left to put OSGH Parties to strict proof of their case.

17.  Mr Leong SC reminds me that our court system is adversarial in nature. It should not be a light matter for the court to exclude clearly admissible, relevant and probative evidence. He says Yu should have his day in court. He says no doubt Yu will be cross-examined harshly by OSGH Parties challenging his delay in coming forth as a witness. However, it is quite different for him to be barred completely from attending court just because he had chosen to leave it to his frontline personnel YX and Chen, according to Mr Leong SC.

18.  Further, according to Mr Leong SC, OSGH Parties witnesses Mao, Chow and Zhong have always been prepared to meet the case of Nanhai Parties. Whether such evidence is coming from YX and Chen or from Yu, they will just stand their grounds and state their case as it always has been.

19.  Last but not the least, according to him, the Summons was taken out in January 2024. He says the court has so far heard nothing from these witnesses themselves saying how they would be prejudiced in giving evidence in January if Yu’s WS is admitted.

New Evidence

20.  According to Mr Leong SC, the parties, as well as the court, are clear about issues at the crux of this case that really matter at trial being, viz. (a) the meaning of “約定年票房” in Schedule 5, SPA; (b) who was responsible for failure to renew the MIXC Lease; and (c) could OSGH Parties set off the worth of any Substituted Cinemas against the agreed Compensation Damage of RMB¥380 million and, if so, how much.

21.  For the contention of new evidence, OSGH Parties asked the Master to compare what had been covered by the “lost witnesses” in their original statements to Yu’s WS, and to disallow as new evidence matters not already said by YX and Chen. Mr Leong SC submits that it was a wrong approach.

22.  Rather, according to Mr Leong SC, the proposed contents of Yu’s WS should be tested for admissibility, relevance, and probative value against those 3 crucial live issues identified by the parties as stated above. He submits that Yu’s WS clearly passes such a test. Further, as demonstrated by Annex A to his Skeleton (which compared and highlighted the contents of Yu’s WS against the witness statements of OSGH Parties’ witnesses), OSGH Parties witnesses already had their own stories to tell in refutation of what Yu has to say.

Legal Principles Involved

23.  The legal principles are not in serious dispute between the parties in this case. Leading counsel on both sides however have cited different cases to the court in support of their respective clients’ case and their propositions.

24.  Out of respect to counsel and the hardwork they have put in their submissions, I shall briefly sum up their respective position on law below before I make my findings on the matters which the court has to determine in this appeal.

Applicable legal principles regarding appeal from a master’s decision

25.  It is trite that an appeal from a master’s decision is a hearing de novo, in that it is dealt with by way of an actual rehearing of the application which led to the order under appeal and the judge treats the matter as though it came before him for the first time. The judge would give the weight it deserves to the previous decision of the master, but he is in no way bound by it. The judge in chambers is in no way fettered by the previous exercise of the master’s discretion. Fresh points may be raised before the judge which were not raised or taken before the master. See Hong Kong Civil Procedure 2024, Vol 1 (§§58/1/2 and 58/1/5).

Applicable legal principles regarding pleadings amendments

26.  Nanhai Parties submit that the Court of Appeal in Honey Bee Electronic International Ltd v Golden Lucky Co Ltd [2007] 3 HKLRD 524 (HKCA) (per Cheung JA and Andrew Chung J) states the guiding principles on amendment to pleadings in §11 as follows:

"Principles on amendment

11. It is sufficient for the purpose of this appeal to identify the following principles on amendment:

First, it is a guiding principle of cardinal importance on amendment that generally speaking, all such amendments ought to be made "for the purpose of determining a real question in controversy between the parties to any proceedings…" per Jenkins LJ in GL Baker Ltd v Medway Building and Supplies Ltd [1958] 1 WLR 1216 at p.1231.

Second, leave is readily granted, in respect of application to amend made before the trial or hearing, on payment of the costs occasioned, unless the opponent would be placed in a worse position than he would have been if amendment had been served in the first instance, see Hong Kong Civil Procedure 2008, Vol.1, p.368 para.20/8/10/." (emphasis added)

27.  In Honey Bee, the Court of Appeal (at §§10 & 17) took the view that the discretion was wrongly exercised and that although there was “no doubt delay” but that would not itself be sufficient to dismiss the amendment. Prejudice to the defendant was not shown.

28.  In Topwell Corp Ltd v Kwan Kam Kee [2014] 5 HKLRD 1, the Court of Appeal (per Kwan and Lam JJA) found that the judge below, in refusing the amendment, “had exercised his discretion on a misunderstanding of the law and a misapprehension of the facts and was in disregard of principle. His exercise of discretion was plainly wrong and must be set aside.” (§38).

29.  The Court of Appeal in Topwell Corp (in addition to applying Honey Bee) further elaborated as follows:

“31. The Judge however placed great weight on the absence of explanation from the 2^nd defendant why he had only applied for leave to amend in December 2012.

32. Even in the absence of explanation from the 2^nd defendant, and looking at the relevant circumstances with common sense, we think the Judge was plainly in error to draw the inference that there was "deliberate delay" on the part of the 2^nd defendant in seeking an amendment. The conclusion he reached that the 2^nd defendant had acted with "deliberate delay" carries with it an implicit finding of bad faith. A finding of this kind is not to be lightly made (Honey Bee Electronic International Ltd v Golden Lucky Co Ltd [2007] 3 HKLRD 524 at [18]; HKSAR v Lee Ming Tee (2003) 6 HKCFAR 336 at 362FG).

…

39. The principles in Ketteman v Hansel Properties Ltd [1987] AC 189 at 212F-H on the exercise of discretion to allow or refuse an amendment of pleadings remain good law after the CJR, see Li Shiu To v Li Shiu Tsang (unrep., HCA 416/2003, [2012] HKEC 1153) (14 August 2012), Deputy Judge Lok, [14]-[16]. Having said that, in the exercise of discretion, the Court must of course have regard to the underlying objectives in O.1A of the RHC or of the RDC, so it cannot be assumed that once the principles in Ketteman are satisfied, the amendment would be allowed. The Court would need to balance all relevant factors to decide how its discretion should be exercised, if the application is made in circumstances offending one or more of the underlying objectives. In this particular case, a pertinent consideration in giving effect to the underlying objectives is that the Court "shall always recognise that the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties" (O.1A r.2(2) of the RDC).”

30.  In Ketteman v Hansel Properties Ltd [1987] 1 AC189, the House of Lord (per Lord Brandon at p 212F-H) laid down the principles under which the court exercises its discretion to allow or refuse amendments to pleadings (which was approved by the Court of Appeal in Topwell Corp as remain good law after the CJR). The principles can be summarized into 4 prepositions:

(i)  first, all such amendments should be made as are necessary to enable the real questions between the parties to be decided;

(ii)  second, amendments should not be refused solely because they have been made by the honest fault or mistake of the party applying for leave to make them: it is not the function of the court to punish parties for mistakes which they have made in the conduct of their cases by deciding otherwise than in accordance with their rights;

(iii)  third, however blameworthy (short of bad faith) may have been a party's failure to plead the subject-matter of a proposed amendment earlier, and however late the application for leave to make such amendment may have been, the application should, in general, be allowed, provided that allowing it will not prejudice the other party; and

(iv)  fourth, there is no injustice to the other party if he can be compensated by appropriate orders as to costs.”

31.  On the other hand, on the issue of delay, Mr Man SC submits that the overarching principle governing late applications to amend pleadings and file and serve new evidence is summarized in Converge Design and Construction Co Ltd v Mount Kelly International Ltd[2020] HKCFI 2433 §2 (Mimmie Chan J) where the learned judge stated the following:-

“The courts have emphasized on repeated occasions that CJR is about early preparation for trial, in order to achieve the objectives of the Rules. It needs no further reminder that delay itself is a ground to refuse a late application, either for discovery, or for the introduction of new pleadings and evidence, when trial is imminent. The onus is on the applicant to justify its delay and to show good reason for leave to be granted. Whilst delay is to be weighed against the probative value and relevance of the pleadings and the evidence sought to be introduced, it need not be emphasized further that the primary aim in the Court’s exercise of powers is to secure the just resolution of disputes in accordance with the substantive rights of the parties. Such just resolution of disputes requires due consideration of the time occasioned by last minute applications to introduce amendments to the pleadings and/or evidence on the eve of trial. Prejudice is inevitably caused, in the disruptions in the preparation for trial, by the need to consider the new evidence and the need to respond thereto, coupled with the need to locate witnesses at the last minute to consider and if necessary, respond to the new evidence, and the last-minute distraction from the proper focus and of the due preparation for trial. This is actual prejudice” (emphasis supplied).

32.  For late applications to serve additional witness statements in particular, OSGH Parties submit as follows:

(a)  The burden is on the applicant to give good explanation for the delay. Change in the legal team and/or counsel is not a valid reason. It is incumbent on those advising a party at each and every stage on pleadings, discovery and the filing of witness statements to have due regard to the party’s pleaded case, the evidence required for ultimate trial, the party’s readiness for trial and to pay due heed to the duty to comply with the directions made by the court. It is no excuse that new or the same counsel instructed late in the day of trial (on a party’s own choice) saw the need to improve the evidence at the last minute. See Converge Design, §5;

(b)  The contents of any statement evidence must be admissible and must be confined to matters of fact rather than opinion: Order 38, rule 2A(8) of the RHC; Ho Wai Tung v Ho Fung [2020] 4 HKLRD 508, §§36-38 (Marlene Ng J);

(c)  Similarly, a lay witness as to fact cannot give opinion on an expert subject upon which competency to form an opinion can only be acquired by special study and skilled experience: Ho Wai Tung, §38;

(d)  Nor is a witness permitted to advance arguments or make submissions, which might be expected of an advocate rather than a witness of fact, or to give commentary of facts which he has no direct knowledge and of which he cannot give direct evidence: JD Wetherspoon plc v Harris [2013] 1 WLR 3296 at §§39 & 41 (Sir Terence Etherton C) ; Converge Design, §6;

(e)  It is not the function of witness statements to argue with opposing witnesses, or to offer commentaries on the evidence, and it is not the proper conduct of litigation to have rounds of statements for “point-by-point” rebuttal of the opposing witness statements: Converge Design, §7; Ho Wai Tung, §42; and

(f)  It is incumbent on the applicant to ensure the contents of the witness statement is not a mixed bag of admissible and inadmissible evidence. This is a pertinent factor in deciding whether or not to grant leave to serve a late witness statement: Ho Wai Tung, §41.

33.  A late application for lists of documents and discovery may be refused on the ground of delay alone, without a “good and credible explanation” on affidavit as to why the documents were not disclosed earlier: Converge Design, §9.

34.  It is submitted by Mr Man SC that the making of late disclosure is an obligation and does not require leave. It is the use of the late disclosure as evidence that requires leave; whether the court should grant such leave is governed by the aforesaid principles. See Hollander, Documentary Evidence in Hong Kong (2^nd ed.), §§8-011-8-013.

35.  At this juncture, I would like to briefly deal with the several authorities replied on by Mr Leong SC on this issue and why I do not consider that they are applicable to our present case:

(a)  Honey Bee, supra involved as amendment to the statement of claim that the agreement for delivery of machines from the PRC were void for illegality and/or infringement of public policy, Cheung JA (and the CA) granted leave to amend because “no trial has been fixed yet”, and the judge at first instance failed to consider “this important fact” (§12);

(b)  Topwell Corp Ltd, supra at the time the defendant sought to amend its defence to include a plea of adverse possession, there was question of “milestone dates being affected since the action was not even set down for trial” (§5(2);

(c)  Excel Courage, supra in that case the amendment to the defendant’s pleadings and admitted a supplemental witness statement took place more than 10 months prior to the trial, Godfrey Lam J (as he then was) and not 3 months like our case. The learned judge emphasised the trite principle that the court’s indulgence and magnanimity in allowing late amendments is strictly qualified by two conditions: (1) that the other party is not prejudiced; and (2) no milestone date should be disturbed (§§28-29);

(d)  Keiron Peter Arch Rochester v Glory Sky Precious Metal Ltd[2023] HKCFI 2536, a critical consideration for Wilson J in allowing the application to adduce further witness statements in that case was that (1) it was made before the trial was set down, and was made more than 2 years before trial; (2) any criticisms on the further witness statements could be dealt with by cross-examination; and (c) there was little risk of disruption of the trial dates (§§23-25). All factors which are not applicable in the present case.

(e)  Although in both Hong Lok School Ltd v Chow Sai Yiu [2003] 2 HKLRD 782 (DHCJ Lam) and Chan Cheung Ming Jacky v Siu Sin Man (formerly known as Siu Kit Ling) [2014] 5 HKLRD 89 (Court of Appeal) the court allowed the plaintiffs to adduce evidence right before or during the trial, both counsel for the defendant in those cases conceded that there was “no prejudice” caused to their clients: See §8 per DHCJ Lam; and §42 per Lam V-P as he then was) respectively.

36.  Thus, with respect, I do not consider the cases cited by Mr Leong SC are that helpful nor have they in my view assisted Nanhai Parties’ case in the Applications. I think it is worth reminding ourselves that for applications like the present one where there has been serious delay and where a party is seeking the court’s indulgence to allow it to admit new evidence and/or new supplemental or substituted witness statements close to the trial dates, they are all fact-sensitive. The circumstances of each case are different and therefore the considerations fall upon the court to consider and determine are different. What happened in other cases therefore in my view are of limited value only in the exercise of the court’s discretion in deciding whether to grant the indulgence or not in another case.

FINDINGS OF THE COURT

37.  In my judgment, the Master was absolutely correct in dismissing the Summons.

38.  There are several strong and compelling reasons why in my view the Summons should be dismissed. They included: (i) inordinate and unexplained or unexplainable delay; (ii) inclusion on new and inadmissible evidence; and (iii) other related reasons.

(i) DELAY

39.  First, let me start by saying that I do not accept most, if not all, the purported reasons / explanations put forward by Nanhai Parties through their counsel regarding the delay. No matter how well and how eloquent they have been dressed up and put forward by their lawyers, in my judgment, delay is delay. This is particular pertinent when looking through the prism of the underlying objectives of the CJR. In the context of conducting civil litigation in Hong Kong these days, a party who has repeatedly delayed in pursing his/her claim or in defending the matter (as in the case of Nanhai Parties in this case) should not expect any mercy or indulgence from the court. This is in particular so when some milestone dates events like a trial or pre-trial review (“PTR”) have been fixed and the party asking for the indulgence from the court wants to or force the court or his opponent to either adjourn or vacate such dates. The rule of thumb is that the closer to such milestone dates events the less likely that the court is willing to exercise its indulgence or discretion in favour of the party who has been causing the delay.

40.  With greatest respect to Nanhai Parties’ counsel, their purported explanations of the delay in my view came “too little, too late and too poor”.

41.  In this regard, I entirely agree with Mr Man SC for OSGH Parties that the present appeal is the latest attempt by Nanhai Parties to “re-make” their case a little more than 3 months before trial. This is after many years of inertia and inaction. The PTR in this case will take place on 15 October 2024, ie the day after this decision is going to be handed down. At the time when the parties appeared before me to argue this appeal, it was merely 3 weeks away from the date of the PTR. However, the Nanhai Parties had more than 27 months to consider their position and made the Applications. Yet they had failed to do so.

42.  I agree with Mr Man SC that the court and OSGH Parties have been placed in this invidious position solely because of Nanhai Parties’ unexplained or unconvincing reasons for the delay. Although I am fully aware that this court is not bound by the Master’s decision (nor her reasoning), it is trite that this court will give the weight it deserves to that decision. In my judgment, the Master was plainly correct to have reached the view (6 months before trial) that the Summons was hopeless and prejudicial to the OSGH Parties, it follows that there is all the more reason for this court to reach the same view, given the 14-day trial is only 3 months away now.

43.  I further agree with Mr Man SC that Nanhai Parties’ submission in this regard[4] is erroneous in law:

(a)  Though there is no rigid rule, delay of itself is a ground to refuse late applications for amendment of pleadings and to file evidence. The burden is on the applicant to (a) provide cogent justification for the delay (b) show good reason for allowing the application (c) ensure the proposed amendments and new evidence are properly permissible according to the relevant law;

(b)  It is not the law (as Nanhai Parties appear to suggest) that any late application would be allowed unless the respondent can demonstrate prejudice. It is also not the law that the applicant should be permitted to “modify their application to remove such prejudice” after hearing from the respondent. To me, this is like putting the cart before the horse. At any rate, I agree with Mr Man SC that the irreparable prejudice to OSGH Parties if this appeal were allowed is obvious. They do not have to particularize them. The burden is not on them to prove that. They are on Nanhai Parties to explain the delay;

(c)  The obligation is fairly on the applicant to get their application in order. If their application is inexplicably late and faulty (for example, the proposed amendments lack necessary particulars or the new evidence is inadmissible or irrelevant), they only have themselves to blame. It must be for them to then formulate a proper application, rather than for the court or the other party to blue-pencil the drafts for them;

(d)  Indeed, Nanhai Parties’ latest attempt to “edit” Yu’s WS (a) is no answer to the criticisms made by the OSGH Parties; and (b) causes further prejudice to the OSGH Parties as they have to respond to yet another “new case”; and

(e)  In respect of Nanhai Parties’ suggestion that they will be prejudiced if the appeal were dismissed, the law is clear. Change of legal teams, or alleged errors by the legal teams, is not a good reason for late applications. More egregiously, in this case, Nanhai Parties’ present solicitors have indicated more than 2 years ago they may want to take out interlocutory applications (including to file and serve a witness statement from Yu). Insofar as any prejudice is caused to Nanhai Parties by not being allowed to run a new pleaded case and rely on new evidence, I agree with Mr Man SC that they will have to bear those consequences.

44.  In addition to the above, I think to say that there were inordinate delay on the part of Nanhai Parties in this case perhaps is an understatement. As the following procedural history of the actions set out by Mr Man SC and Mr Chan SC in their submissions has shown, not only there was delay, I think there were conscious and deliberate efforts on the part of Nanhai Parties in “dragging their feet” throughout the present proceedings.

45.  As Mr Man SC has rightly pointed out in OSGH’s Submissions, the Summons was issued on 31 January 2024, which was:

(a)  Around 16 months after the trial dates had been set down on 28 September 2022;

(b)  Around 18 months after Nan Hai had indicated in the Questionnaire that they may file and serve Yu’s WS on 8 July 2022 to “make up for the deficiency” in Nanhai Parties’ evidence caused by nonattendance of witnesses and for Master Hui to have dismissed Nanhai Parties’ application for extension of time to take out interlocutory applications on 13 July 2022; 

(c)  Around 19 months after Nanhai Parties had changed solicitors on 13 June 2022; and

(d)  Close to 4 years after Master Kot had ordered the exchange of witness statements on 26 May 2020, which parties did on 9 June 2020.

46.  I entirely agree with ratio of Mimmie Chan J stated in §2 of Converge Design that substantial delay in itself is “actual prejudice”. In my view, this alone is a strong enough reason for this court to dismiss the appeal.

47.  Further, given that Master Hui had already dismissed the application to extend time for issuing further interlocutory applications on 13 July 2022 after Nanhai Parties had indicated that they might adduce evidence from Yu, there is no reason in my view why this order should be reversed by §1 of the Summons. There was no appeal against that order, and there is no material change of circumstances in favour of Nanhai Parties. I agree with Mr Man SC that without §1, the entire Summons must fail.

48.  In addition, I consider that OSGH Parties would suffer substantial prejudice if the appeal were allowed at this late stage as we are little more than 3 months away from trial. As Mr Man SC has stated in his submissions, if the appeal were to be allowed, OSGH Parties would be placed in an impossible position (which in my view cannot be compensated by costs) because within those 3 months, on top and instead of the usual pre-trial preparations, they would be distracted, hampered, and forced to (a) consider and respond to the voluminous new evidence by applying to file further witness statements; (b) jog their 3 witnesses’ memory as to events going back to 2016 and 2017 on matters hitherto unraised; (c) possibly find new witnesses; (d) consider whether and if so what further discovery need be given or sought; (e) consider Nanhai Parties’ amended pleaded case and implications; and (f) amend their pleadings.

49.  In my judgment, all the above listed matters amount to real, substantial and actual prejudice. I so find that OSGH Parties will suffer such prejudice if the appeal were to be allowed.

Failure to provide any good and convincing explanation for the delay

50.  Given Nanhai Parties are seeking the indulgence of the court at a very very stage of the present actions, I agree with OSGH Parties that it behoves them to come up with a detailed and good explanation as to the inordinate delay in the Summons.

51.  Sadly, in my judgment, Nanhai Parties have failed miserably to explain why the Applications to amend pleadings and disclose further documents should not and could not have been made earlier, much earlier.

52.  Regarding the application to amend the pleadings, it is in my view beyond any shadow of doubt that Nanhai Parties should and could have applied for them months if not years ago. In my judgment, the Master was clearly correct in dismissing this very belated attempt to do something that they could have done months or years ago.

53.  As for the belated application to file and serve Yu’s WS, I agree with OSGH Parties’ submission that the reason given for the delay is that Nanhai Parties only confirmed YX and Chen were unable to attend trial or give evidence via video-link by the second half of 2023: See Yu 1^st, §§13-19; Yu 2^nd, §7.

54.  I agree with Mr Man SC that their explanation is plainly unsupported by their own account of the facts and therefore the late application to file and serve Yu’s WS should be refused by this court as well.

55.  Hence, purely based on the delay alone, I would dismiss the Summons.

(ii) NEW AND INADMISSIBLE EVIDENCE

New Evidence

56.  First and foremost, I do not agree at all with Nanhai Parties’ counsel’s very bold submission that “Yu’s WS can be likened to a statement supplemental to those of Yu Xin and Chen Tao that serves to give NH Parties the chance to fill in gaps in the earlier statements or to answer the statements of OSGH Parties.”: See §16 of Nanhai Parties’ Submissions.

57.  With greatest respect to their counsel, nothing could be further from the truth.

58.  As graphically demonstrated by Mr Man SC and Mr Chan SC at the appeal hearing, by using a yellow colour to highlight on the new matters/evidence raised by Yu in his 26-page/159-paragraph draft witness statement, one can immediately see that about 90% of the contents of that document would fall within this category.

59.  They are not, in my view, matters just to “fill in the gaps” of the evidence of the two witnesses originally intended to be called by Nanhai Parties to testify at the trial as submitted by Mr Leong SC. They appear to me to be entirely new evidence which are substantially different from those contained in the other two witnesses’ witness statements.

60.  I agree with Mr Man SC that the application to adduce Yu’s WS should be dismissed given the unusual large amount of new evidence (ie evidence not found in Nanhai Parties’ 5 existing witness statements) that it seeks to introduce. Out of 159 paragraphs, 142 paragraphs contain new evidence. It is thus clear to me and I so find that Yu’s WS was not designed to “fill in the gaps” of YX’s and Chen’s witness statements. In truth and in substance, I find it is designed to replace the other 2 other witnesses’ statements. In my judgment, this must not be allowed so close to the trial, otherwise it will only (i) make a mockery of the pre-trial case management process introduced under the CJR; and (ii) derail the trial which of course is one of the most important milestone dates in the whole proceedings.

Inadmissible Evidence

61.  I would further dismiss the Applications on the ground that Yu’s WS in my view has contained inadmissible evidence.

62.  As rightly pointed out by OSGH Parties’ counsel in their submission, Yu’s WC contained: (a) inadmissible non-expert opinion evidence or speculation; (b) inadmissible opinion evidence on expert subjects; or (c) irrelevant evidence: See Ho Wai Tung §§36-38.

63.  I agree with Mr Man SC that the difficulty in severing the “admissible” and “inadmissible/ irrelevant” is a strong factor which tilts towards dismissing Summons §2 entirely: See Ho Wai Tung §41.

(iii) OTHER REASONS

64.  I further agree with OSGH Parties’ counsel that there are two further reasons why the Summons should be dismissed.

65.  First, since Nanhai Parties are seeking the court’s great indulgence, they should have been forthcoming to both the Master and this Court and explain all relevant matters with sufficient detail.

66.  In this regard, on 6 June 2024, OSGH Parties’ solicitors wrote to HTW stating that on 26 March 2024, Yu was bankrupted and ceased to be a director of Nan Hai, which is the ultimate owner of True Vision (“June 6 Letter”). HTW were asked to confirm, inter alia, whether (a) Yu had authority to make Yu 2^nd at the point of filing Yu 2^nd,[5] which postdated 26 March 2024; and (b) Yu has given or is still giving instructions on the present actions and the Summons after 26 March 2024.

67.  However, only on 17 June 2024 did HTW respond to OSGH Parties’ solicitors, stating that the board of directors of Nanhai Parties have authorized Yu to make Yu 2^nd on their behalf. I agree that this does not answer, or satisfactorily answer, the first or any of the questions posed to HTW. Nor have Nanhai Parties sought to give satisfactory answers after the Order and for the purpose of the present appeal. Nor have they given any in their latest skeleton submissions.

68.  In my view, full answers to the questions posted in the June 6 Letter are plainly relevant to the present applications as they concern, inter alia, whether Yu is still giving instructions after he was made bankrupt and ceased to be a director of Nan Hai and, if so, whether he has any justification in continuing to give instructions. These matters go fundamentally to the question of whether the Summons was and the appeal is properly pursued, and whether Yu will likely attend court after all if he has ceased giving instructions.

69.  Second, the present situation is especially unsatisfactory as Nanhai Parties have not been able to confirm to this court that they will not make further applications to adduce additional witness statements.[6] Given (a) Nanhai Parties’ modus operandi as manifested in the application below and the appeal; and (b) there is no certainty that their remaining witnesses will give evidence, the likelihood of further applications cannot be ruled out entirely. I agree with Mr Man SC that allowing this appeal would embolden Nanhai Parties, and make it more difficult for the court to refuse further applications being made on similar basis as the present. In the age of CJR, such practice should not be encouraged or condoned by the court.

CONCLUSION

70.  For the above reasons, I will uphold the Order made by the Master and would dismiss Nanhai Parties’ appeal with costs in favour of OSGH Parties.

71.  As I have mentioned to the parties at the end of the appeal hearing on 25 September 2024, I will deal with the costs of this appeal by way of summary assessment and on paper.

72.  Having studied the statement of costs submitted by OSGH Parties, I hereby summarily assess the costs of the OSGH Parties at HK$850,000. I order that such costs to be paid forthwith by Nanhai Parties.

73.  It remains for me to thank counsel on both sides for their very helpful submissions in this appeal and to their solicitors in preparing the appeal bundle in such meticulous and orderly manner.

Mr Alan Leong SC leading Mr Chan Hei Ching, instructed by Messrs Ho Tse Wai & Partners for the 1^st and 2^nd Defendant (by original action) and the Plaintiff (by counterclaim)

Mr Bernard Man SC leading Mr Anthony Chan SC, instructed by Messrs Kennedys, for the Plaintiff (by original action) and the 1^st and 2^nd Defendants (by counterclaim)

HCA 2072/2018, HCA 2560/2018 and HCA 2632/2018

[2021] HKCFI 870

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2072 OF 2018, 2560 OF 2018 AND 2632 OF 2018

________________________

(by original action)

________________________

(by counterclaim)

________________________

(consolidated by the Order of Master Ho dated 5 December 2018)

________________________

REASONS FOR DECISION

________________________

1.  The dispute in these proceedings is between two group of companies concerning the sale and purchase of some cinema business in Mainland China. For ease of reference, I would call Giant Harvest Limited (“Giant Harvest”) and Orange Sky Golden Harvest Entertainment (Holdings) Limited as the OSGH Parties, and True Vision Limited (“True Vision”) and Nan Hai Corporation Limited as the NH Parties.

2.  By an Amended Summons filed on 4 September 2020 (“the Amended Summons”), the NH Parties sought leave to adduce expert evidence on:

(1)  Mainland Chinese tax law;

(2)  valuation of cinema box office revenue; and

(3)  Mainland Chinese fire and safety regulations,

in the context of the dispute between the parties.

3.  The Amended Summons was heard and dismissed by Master Winnie Tsui on 28 August 2020.  On 11 September 2020, the NH Parties lodged an appeal against the master’s decision.  Subsequently, the NH Parties issued 2 summonses on 22 February 2021 and 8 March 2021 respectively for leave to adduce new evidence in the appeal (“the 2 New Evidence Summonses”).

4.  On 29 March 2021, after hearing submissions from the parties, I dismissed the appeal and the 2 New Evidence Summonses.  I also awarded costs to the OSGH Parties, with a certificate for 2 counsel.  These are my reasons for the decision.

The principles

5.  An appeal hearing under Order 58 is a denovo hearing.  Subject to the restriction in Order 58 rule 1(5), the hearing before me is an actual rehearing as if the application came before me for the first time[1].

6.  As prescribed in Order 58 rule 1(5), no new evidence may be received in the hearing of an appeal except on special grounds.  It is not in dispute that for new evidence to be received in the hearing of an appeal under Order 58, the conditions laid down in Ladd v Marshall[2] have to be satisfied, namely whether the evidence:

(1)  could not have been obtained at the hearing below with reasonable diligence;

(2)  would have a very important effect on the mind of the court; and

(3)  is of a sort which inherently is not improbable.

7.  As to the admission of expert evidence, the principles have been set out by the Court of Appeal in Shenzhen Futaihong Precision Industry Co Ltd v BYD Company Limited & Others[3]:

(1)  The subject matter of the opinion must fall within an area in which expert evidence may properly be given.  This calls for consideration of (a) whether the subject matter is such that a person without experience in that area of knowledge would not be able to form a sound judgment on the matter without the assistance of expert evidence; and (b) whether the subject matter of the opinion forms part of a body of knowledge or experience which is sufficiently organized or recognized.

(2)  The witness must be qualified as an expert to give the evidence of the type in question.

(3)  The witness’ evidence must be relevant and necessary to the issues being litigated, in the sense that the evidence must be helpful to the court in resolving any issue in the case justly.  Evidence will not be helpful where the issue to be decided is one on which the court is able to come to a fully informed decision without hearing such evidence.

(4)  The expert evidence must be both relevant and necessary. 

8.  In assessing whether leave should be given for introducing expert evidence on a particular issue, it has to be borne in mind that the admission of expert evidence should be really necessary for the resolution of the dispute between the parties.  Adducing irrelevant and unnecessary expert evidence would lead to wastage on time and costs.  As said by Lam J (as he then was) in Chok Yick Interior Design & Engineering Co Ltd v Lau Chi Lun[4]:

“7. I wish to stress that application for expert directions is not a mere formality. It is an integral part of the case management process. As a trial judge, I have seen far too many cases where the lack of proper preparation of expert evidence resulted in unnecessary costs and time spent on evidence which is of no help to the resolution of the dispute. And such wasteful exercise cost the parties a great deal of money, not only in terms of the fees paid to the experts, but also legal costs spent on paying for the lawyers’ reading, understanding of the reports, discussing the matter with the experts and then the time (and costs) of the lawyers explaining and exploring the expert evidence with the judge by way of submissions and the examination and cross-examination of the experts during trial. Very often, it is not only the party responsible for the mismanagement of expert evidence who has to pay such costs, similar costs have to be incurred (at least on an upfront basis) by his opponent.

8.  Such wastage is not consistent with the underlying objectives set out in Order 1A Rule 1.  ……”

Mainland Chinese tax law

9.  Pursuant to a sale and purchase agreement dated 25 January 2017 (“the SPA”), Giant Harvest agreed to sell to True Vision all the issued shares in City Entertainment Corporation Ltd, which held substantially all the shares in Orange Sky Golden Harvest Cinemas (China) Company Ltd (“Orange China”), which in turn operated 76 cinemas in Mainland China through its subsidiaries.

10.  One of the claims made by Giant Harvest against True Vision is for RMB3.01 million (“the Settlement Sum”) pursuant to Clause (8) of a confirmation letter dated 28 July 2017 signed by the OSGH Parties and the NH Parties (“the Confirmation Letter”).  In essence:

(1)  Orange China through its subsidiary operated the Shenzhen Yabao Cinema (“Shenzhen Yabao”), and was in a pre-existing litigation before the Mainland court with the landlord (“Yabao Litigation”).

(2)  Clause 8 of the Confirmation Letter provides that Giant Harvest would bear all costs (“成本”) and be entitled to all benefits, compensation and damages arising out of the Yabao Litigation.

(3)  The Settlement Sum is comprised of (a) damages payable by the landlord to Orange China of RMB3.5 million (“Yabao Damages”) and (b) a refund of the deposit previously paid by Orange China of RMB0.5 million, less (c) legal fees payable to Orange China’s Mainland lawyers.

(4)  Giant Harvest claims it is entitled to the whole of the Settlement Sum, since “成本” in the form of legal fees has already been accounted for.

(5)  True Vision contends that “成本” would include any additional cost that Orange China would have to shoulder arising from the Settlement Sum, which includes Mainland Chinese corporate tax liability of RMB875,000 in relation to Orange China’s receipt of the Yabao Damages (“Yabao Tax”), and which liability, even if not immediately payable, would remain with Orange China for 5 years after the year of receipt (ie after the financial year ending 2018) under applicable Mainland Chinese corporate tax law. Accordingly, True Vision says that the time for release of the Settlement Sum has not yet arrived and Giant Harvest’s claim is premature.

11.  Against the aforesaid background, the NH parties contend that it would be necessary to have expert evidence on the Mainland Chinese tax law in these proceedings.

12.  There is no dispute that Mainland Chinese tax law is a subject matter which forms a sufficiently organised body of knowledge for an expert opinion to be given.

13.  The NH Parties proposed to call Mr Ron Ma (“Mr Ma”), a Mainland Chinese lawyer specialises in Mainland Chinese taxation law, to be their expert. 

14.  Ms Eva Sit SC (leading Ms Esther Mak) for the NH Parties submits that in Clause 8 of the Confirmation Letter, the meaning of “成本” covers all liabilities that Orange China would have to shoulder relating to the Settlement Sum.  Accordingly, the factual question of whether Orange China was still liable for the Yabao Tax at the time of the writ is an issue to be resolved in these proceedings, and the answer to this question turns on Mainland Chinese tax law.

15.  In my view, even if the true meaning of “成本” in Clause 8 of the Confirmation Letter is the one contended by the NH Parties, there is no reason to introduce expert evidence on the Mainland Chinese tax law in these proceedings.

(1)  As submitted by Mr Bernard Man SC (leading Mr Anthony Chan) for the OSGH Parties, it is clear that Shenzhen Yabao is not part of the sale and purchase under the SPA.

(a)  Preamble C(b) of the SPA expressly excludes the dispute concerning Shenzhen Yabao from the sale and purchase, meaning Giant Harvest has not sold its interest or liability in the dispute.

(b)  Clause 8 of the Confirmation Letter reconfirms that Shenzhen Yabao is not part of the sale and purchase under the SPA.  It also expressly stipulates that any income and compensation from the Shenzhen Yabao dispute would be enjoyed by Giant Harvest, who would also bear the liability arising from the dispute.

(2)  Pursuant to Clause 8 of the Confirmation Letter, Giant Harvest should be entitled to have the Settlement Sum.  The NH Parties argue that Orange China (which they now own and control after the SPA) may have to pay tax on the Settlement Sum, and hence they are entitled to withhold the Settlement Sum.  I agree with Mr Man that this is an unarguable defence.  The suggestion that the NH Parties are entitled to keep the Settlement Sum pending the outcome of whether Orange China needs to pay any tax is absurd as the NH Parties would effectively get a 5-year interest free loan at the expense of the OSGH Parties when both sides have expressly agreed (as per clause 8 of the Confirmation Letter) that it is Giant Harvest who would get the benefit of the Settlement Sum.  Further, there is also no reason why the NH Parties are entitled to keep the entire Settlement Sum (ie RMB3.01 million) when the potential tax liability is, according to the NH Parties’ case, only RMB875,000.

16.  As a matter of fact, about half of the 5-year period as pleaded in the NH Parties’ case has elapsed.  Orange China has not paid any tax as a result of the receipt of the Settlement Sum in 2018.  The Mainland tax authority has also not required Orange China to pay any tax in relation to the Settlement Sum.  In my view, it would not be desirable to complicate these proceedings by introducing expert evidence to cover a contingency (ie Orange China is required to pay a tax in relation to the Settlement Sum) which may not occur.

17.  In the event that Orange China is required to pay any tax as a result of the receipt of the Settlement Sum at a point of time in future, the NH Parties may request Giant Harvest to reimburse them pursuant to Clause 8 of the Confirmation Letter when Orange China’s liability to pay the tax arises.  If Giant Harvest refuses to accede to that request, the parties may resolve the difference between them through another set of proceedings.  However, in that litigation, it would not be necessary to have any expert evidence on the Mainland Chinese tax law, for Orange China’s liability to pay the Mainland tax would be an actuality in that scenario.  At that time, the crux of the matter would only be the true meaning of Clause 8 of the Confirmation Letter.

18.  For all these reasons, I am of the view that there should not be introduction of expert evidence on the Mainland tax law as suggested by the NH Parties here and now.

Valuation of cinema box office revenue and Mainland Chinese fire and safety regulations

19.  True Vision has two counterclaims against the OSGH Parties.  For the present purposes, only the following counterclaim is relevant.

20.  True Vision counterclaims for contractual compensation of RMB380 million pursuant to Schedule 6 to the SPA. True Vision’s case is as follows:

(1)  One of the most valuable cinemas operated by the Orange China group was万象城影城 in Shenzhen (“MIXC Cinema”), with a commercial value of no less than RMB380 million and made up approximately 10% of the total annual box office of OSGH’s Mainland China cinema businesses.

(2)  The lease of MIXC Cinema (“the MIXC Lease”) was due to expire on 27 September 2018 (“the Expiry Date”), after the anticipated execution and completion of the SPA.

(3)  True Vision says that given the commercial importance of the MIXC Cinema, the parties negotiated and agreed on a mechanism, whereby:

(a)  Giant Harvest had an obligation to procure an extension of the MIXC Lease; failing which

(b)  Giant Harvest would be liable to compensate True Vision for the resultant diminution in value of Orange China, which liability could be

(i)  discharged in kind, by Giant Harvest procuring new leases for substitute cinemas (primarily from a list of 5 listed in Schedule 5 to the SPA, “Schedule 5 Cinemas”) which value would be commensurate with the value of the MIXC Cinema; or

(ii)  discharged in cash.

(4)  Scenario (3)(a) above is provided for in Clause 8.2 of the SPA.

(5)  Scenario (3)(b)(i) above is provided for in Clause 8.3 to 8.5 of the SPA and Schedule 5 thereto, namely: 

(a)  Giant Harvest could choose to procure leases for some or all of the Schedule 5 Cinemas (which Orange China hitherto did not have leases) to be entered into, as long as the combined annual box office and/or commercial value of the same exceed that of the MIXC Cinema.

(b)  Further, for any of such new lease to be entered into (“Substitute Cinema Contract”), they must be either on prescribed terms, or the terms had to be agreed to by True Vision.

(c)  Still further, if the combined commercial value of the Schedule 5 Cinemas secured by Giant Harvest in the aforesaid manner is less than that of the MIXC Cinema, Giant Harvest would have to pay compensation to True Vision, in the amount of the difference between the two.

(6)  Scenario (3)(b)(ii) above is provided for in §§2.3-2.4 in Schedule 6 to the SPA, which stipulate:

(a)  payment by Giant Harvest to True Vision of the Compensation Amount (RMB380 million, where no Substitute Cinema Contract is entered into);

(b)  payment by Giant Harvest to True Vision of compensation in the sum of the difference (where the commercial value of the Schedule 5 Cinemas secured is less than that of the MIXC Cinema); or

(c)  payment by True Vision to Giant Harvest of incentive payment (where the commercial value of the Schedule 5 Cinemas secured exceed that of the MIXC Cinema), based on a percentage to such difference in value.

21.  True Vision contends that that having regard to the aforesaid context, the SPA, properly construed, contained the terms that the Schedule 5 Cinemas secured could only be treated as compensation in kind such that their stipulated commercial value could be brought into account and deducted from the Compensation Amount if the Schedule 5 Cinemas in question are:

(1)  objectively capable of achieving the stipulated annual box office revenue for the same specified in Schedule 5; and

(2)  objectively capable of meeting all applicable Mainland Chinese laws and regulations for the purpose of operating as a cinema.

22.  Giant Harvest has procured Substitute Cinema Contracts to be entered into with respect to 3 of the 5 Schedule 5 Cinemas, ie Beijing Great Wall Cinema, Shanghai Xinhui Cinema and Shenzhen Xinhui Cinema.

23.  True Vision says that none of these contracts satisfied the contractual requirements to qualify as Substitute Cinema Contracts.  However, for the present purposes, only the matters concerning Shanghai Xinhui Cinema and Shenzhen Xinhui Cinema would be relevant.

24.  True Vision argues that:

(1)  For the Shanghai Xinghui Cinema, its substandard structural specifications and location rendered it objectively incapable of attaining the stipulated box office revenue.

(2)  For the Shenzhen Xinghui Cinema:

(a)  its (substandard) structural specifications and location rendered it objectively incapable of attaining the stipulated box office revenue; and

(b)  it did not and was not objectively capable of meeting all applicable Mainland Chinese laws and regulations for the purpose of operating as a cinema, including Mainland Chinese fire and safety regulations, since its structural configuration rendered it incapable of complying with the Mainland Chinese Code for Fire Protection of Buildings. 

25.  True Vision’s case is that it was not aware of the aforesaid problems when it entered into the SPA.

26.  With respect, notwithstanding the eloquent submissions of Ms Sit, I am not persuaded that the NH Parties have made out a case justifying the introduction of the expert evidence as proposed by them.

27.  As submitted by Mr Man, on 28 July 2017, more than 6 months after the execution of the SPA, the OSGH Parties and the Nanhai Parties signed the Confirmation Letter.  Clause 15 of the Confirmation Letter provides that the parties agreed that if the signed leases of Shanghai Xinghui Cinema and Shenzhen Xinghui Cinema complied with the terms set out in Schedule 4 thereto, the cinemas would be treated as successful Substitute Cinemas for the purpose of clauses 8.3 and 8.5 of the SPA.  The question would therefore simply be whether the signed leases of the 2 cinemas complied with the terms stated in Schedule 4 to the Confirmation Letter.  The court therefore has no need to decide whether Shanghai Xinghui Cinema and Shenzhen Xinghui Cinema should be regarded as a successful Substitute Cinema on a proper construction of the SPA or by implication, for the OSGH Parties and the Nanhai Parties have already separately agreed that they would deem or treat the 2 cinemas as successful Substitute Cinemas if their leases complied with the terms in Schedule 4 to the Confirmation Letter.

28.  As per Schedule 5 to the SPA and Schedule 4 to the Confirmation Letter, the commercial value (商業價值) of each Substitute Cinema should be the agreed annual box office revenue (約定年票房) x 4.75.  The term “約定年票房” is not defined in the SPA and in the Confirmation Letter.  As to the true meaning of the term “約定年票房” in the context of the SPA and the Confirmation Letter, counsel have different views.

(1)  Mr Man submits that in respect of each Substitute Cinema in Schedule 5 to the SPA and in Schedule 4 to the Confirmation Letter, “約定年票房”is the figure of the annual box office revenue of that cinema as agreed by the parties.  Thus, it would not be necessary to have any mechanism to verify the “約定年票房” of any cinema in the said schedules, for the “約定年票房” of a particular cinema is a figure assigned to that cinema by the agreement of the parties.

(2)  Ms Sit submits that “約定年票房” of a particular cinema is the annual box office revenue which the cinema would be objectively capable to achieve in a particular year.  The OSGH Parties have to show that a particular substitute cinema can objectively achieve the relevant “約定年票房”, and only then the substitute cinema can be treated as an acceptable substitute.

29.  Since I am dealing with interlocutory matters, I refrain from expressing a final view on the true meaning of the term “約定年票房” in the context of the SPA and the Confirmation Letter.  I would only say that there is force in Mr Man’s submissions.  A problem in Ms Sit’s submissions is that if Ms Sit’s construction is correct, “約定年票房” must be referring to a specific year.  However, which year should be the specific year is unknown or unclear.

30.  For the sake of discussion, even if Giant Harvest has to show that the Shanghai Xinghui Cinema and the Shenzhen Xinghui Cinema meet the “約定年票房”, I am of the view that the issue should not be resolved by the expert evidence proposed by the NH Parties. 

31.  It is not in dispute that the Shanghai Xinghui Cinema has been in operation at all times.  As to whether Shanghai Xinghui Cinema has achieved the agreed annual box office revenue (約定年票房) in a particular year, this is a question of fact which can be answered by reference to simple arithmetic and evidence readily available.  A person without expert assistance could tell that based on the agreed annual box office revenue (約定年票房), what should be the required daily box office revenue.  By counting the number of the tickets sold and with prices of the tickets in hands, it would be easy to calculate the daily box office revenue and the annual box office revenue.  The task is a simple one.

32.  I have been told that the Shenzhen Xinghui Cinema has not been in operation for some time.  In order to estimate the annual box office revenue of the Shenzhen Xinghui Cinema, I am of the view that one would need to have the annual box office revenues of some other similar cinemas as comparables.  Based upon these comparables, some adjustments would be made in order to arrive at an estimated annual box office revenue of the Shenzhen Xinghui Cinema.  I appreciate that expert evidence would be necessary in this exercise.  However, the expert evidence now proposed by the NH Parties is not of this kind.

33.  The NH parties proposed to have Mr Lau Chun Kong (“Mr Lau”) as their expert to give expert evidence on cinema box office revenue.  Mr Lau is a professional surveyor and a managing director at Colliers International, with more than 30 years of property experience in valuation, real estate consultancy and investment sales market in Hong Kong, Mainland China and Asia.  With respect, I really do not see why it would be necessary to conduct any property valuation in this case.

34.  Ms Sit submits that the market rental values of the Shanghai Xinghui Cinema and the Shenzhen Xinghui Cinema can be found out through the investigations to be conducted by Mr Lau, and the market rental values would reflect the annual box office revenues.  With respect, I am unable to agree.  In my view, the rentals being paid by a cinema and the box office revenue of that cinema are two different matters.  A cinema paying expensive rentals may not be able to have a satisfactory box office revenue, if its management is unsatisfactory.  On the contrary, a cinema not in a prime location and paying modest rentals may have very good business due to its successful management.  The rentals being paid by a cinema does not necessarily reflect its box office revenue.

35.  If there is any necessity to find out the “約定年票房” of the Shanghai Xinghui Cinema and Shenzhen Xinghui Cinema, the matters should be approached in the way as set out in [31] and [32] above.  Further, both the Shanghai Xinghui Cinema and Shenzhen Xinghui Cinema are listed as agreed substitute cinemas in Schedule 5 to the SPA and Schedule 4 to the Confirmation Letter.  In my judgment, it would not be necessary to investigate whether the Shenzhen Xinghui Cinema has complied with the Mainland Chinese fire and safety regulations for the purpose of these proceedings in any event. 

The 2 New Evidence Summonses

36.  By the 2 New Evidence Summonses, the NH Parties proposed to introduce the 2^nd and the 3^rd affirmations of Tang Ying Kit (“Mr Tang”) in the hearing of the appeal.

(1)  The 2^nd affirmation of Mr Tang gives further details of Mr Lau’s credentials and exhibits his supporting statement.

(2)  The 3^rd affirmation of Mr Tang proposes to have a new expert to give evidence on Mainland Chinese fire and safety regulations, since the original expert became unavailable due to some development after the hearing before the master on 28 August 2020.

37.  For the reasons set out in the above, none of the matters deposed in these affirmations would have a material impact on the outcome of the NH Parties’ application as per the Amended Summons.  Further, in relation to the 2^nd affirmation of Mr Tang, I am not satisfied that the contents thereof are something which would not have been obtained before the hearing on 28 August 2020 with reasonable diligence.  In my judgment, the Ladd v Marshall threshold is not met.  I therefore dismissed the 2 New Evidence Summonses.

Costs

38.  Costs should follow the event.  Mr Man sought a certificate for 2 counsel.  Ms Sit did not dispute these.  I therefore awarded costs to the OSGH Parties, with a certificate for 2 counsel.

Disposition

39.  For the reasons above, I made the order as set out in [4] above is made.

40.  Lastly, it remains for me to thank all counsel for the helpful assistance rendered to the court.

Mr Bernard Man SC leading Mr Anthony Chan, instructed by Kennedys, for the plaintiff (by original action) and the 1^st and 2^nd defendants (by counterclaim)

Ms Eva Sit SC leading Ms Esther Mak, instructed by Linklaters, for the 1^st and 2^nd defendants (by original action) and the plaintiff (by counterclaim)