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CACV 16/2008 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 16 OF 2008 (ON APPEAL FROM HCA 571 OF 2007)

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BETWEEN PAUL Y. MANAGEMENT LIMITED and ETERNAL UNITY DEVELOPMENT LIMITED CHAN YUK YAN ETERNAL UNITY PROPERTIES LIMITED and PAUL Y. ENGINEERING GROUP LIMITED PYI CORPORATION LIMITED 1 Third Party 2nd Third Party
st

Plaintiff

1st Defendant 2nd Defendant 3rd Defendant

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Before : Hon Cheung JA, Lam and A. Cheung JJ in Court

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Date of Hearing : 24 July 2008 Date of Judgment : 12 August 2008

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JUDGMENT Hon Cheung JA :

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The plaintiff obtained from Deputy High Court Judge

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Louis Chan summary judgment against the defendants for the sum

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- 2 of HK$13,070,539.26 together with interests and costs. The

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defendants now appeal. The plaintiff s claim

2
F G H I J K

The

plaintiffs

claim

was

based

on

loan

of
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HK$10 million lent by the plaintiff to the 1 s t defendant on 25 October 2005 pursuant to a Loan Deed (the Loan Deed) dated 25 October 2005 together with interest and related charges. The loan was required by the Loan Deed to be repaid within two months i.e. 24 December 2005. Repayment, however, was, at the 1 s t defendants request, extended first to 25 January 2006 and subsequently to 25 February 2006 respectively. 3 Despite the extension the 1
st

defendant failed to repay

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the loan. The 2 n d and 3 r d defendants who were also parties to the Loan Deed acted as guarantors of the loan. The 2 n d defendant is a director of the 1 defendants. The defence
st

and 3

rd

defendants and controls the 1

st

and 3

rd

4
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The defendants denied that they were liable to repay They alleged that the loan was part of the agreement
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the loan.

reached between the 2 n d defendant and Mr. Thomas Lau, the Deputy Chairman and Director of the PYI Corporation Limited (PYI) and Paul Y Engineering Group Limited (PYE) both of which are public listed companies in Hong Kong. Mr. Lau agreed that his companies in the Paul Y Group of companies would grant facilities of up to RMB 420,000,000.00 to the 2 n d defendant.

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- 3 5 The 2
nd

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defendant through the 1

st

and 3

rd

defendants
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controls ER Estate Development Company Limited (ER Estate). ER Estate is the owner and developer of a partially completed residential building project known as Jiayu Yuan in Beijing (the project). had to stop work. 6 Through the introduction of a mutual acquaintance,
nd

The project experienced financial problems and

(the structural engineer of the project and a director of a company of the Paul Y Group), the 2 complete the project. 7 The parties eventually reached an agreement (the defendant met Mr. Lau in November 2004 who expressed his interest in helping the 2 n d defendant to

Master Agreement) on 22 June 2005 on the following terms, (1) PYE should within 14 months advance or cause its related companies to advance loans up to RMB 420,000,000.00 (the facility) to ER Estate for the purpose of financing and completing the project. (2) Part of the facility, i.e. RMB 130,000,000.00 would be used by ER Estate to redeem the existing mortgage of Block C of the project held by , a financial institution incorporated in the PRC . (3) The rest of the facility would be used for paying the construction costs and other costs for completin g the project, and would be advanced at such times and in such amounts according to actual need to ensure that

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- 4 the project would be completed and the units ready for

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hand over to purchasers in 14 months. (4) The facility would be secured by various properties of the project. (5) Security would be provided by ER Estate entering into with PYE presale contracts of various units of Blocks A, B and C and leasing contract for the carpark and club house of the project, with cancellation provisions entitling ER Estate to cancel the presale or leasing arrangement upon repayment of sums advanced under the facility. (6) Interest at the rate of the People s Bank of Chinas basic lending rate plus 8% per annum would be paid to PYE for advances made under the facility. (7) PYE would be entrusted with the management of the project and complete the remaining work timeously and would receive payment of 5% of the construction costs incurred as project management fee. (8) The sums advanced under the facility would be repaid after completion of the project, and, repaid in stages upon sale of the completed units of the project.

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In part performance of or implementation of the Master

nd

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Agreement PYE caused its related companies and the 2

defendant caused ER Estate to enter into the following contracts :

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- 5 (1) Framework Presale Agreement for Block C of the project dated 22nd June 2005 C entered into by ER Estate and Galaxy Land Limited (Galaxy) (Block C Agreement). Under this Agreement RMB 250 million was to be advanced to ER Estate, of which RMB 13 million was to be paid directly by Galaxy to to redeem the mortgage; RMB 20 million was to be paid for the purpose of paying the consultant fees and construction costs and RMB 100 million was to be paid for the construction costs. (2) Leasing Agreement for Clubhouse and Carpark dated 22
nd

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June 2005 entered into by and Galaxy (Clubhouse and Carpark

ER Estate

Leasing Agreement). Under this agreement the rental was RMB 50 million for 30 years. Payment of rental was to be linked with the costs of completing the development. (3) Framework Presale Agreement for Blocks A and B dated 22 n d June 2005 A B entered into by ER Estate and Galaxy (Blocks A&B Agreement). Under this agreement, Galaxy has the option to purchase certain units in Block A and B. The total price would be about RMB 240 million. 50% of the sum i.e. RMB 120 million was to be paid upon the signing of the pre-sale contracts. The balance shall be paid upon issuing the title documents.

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- 6 (4) Project Management Contract dated 22

nd

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June 2005
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entered into by ER Estate and PY China (the Project Management Contract). 9 On 20 October 2005 ER Estate and PYE (through

another of its related companies) entered into a Memorandum of Understanding (MOU) which after reciting the fact that the related company was a Hong Kong listed company and was thus obliged to make public disclosure of matters in relation to sale and purchase and renting of property in a large amount, confirmed, among other things, that 1) This company and its related companies were the manager of the project. 2) This company and its related companies were to make advances to ER Estate as part of the construction costs of the development and ER Estate shall repay the amount advances. 3) To guarantee repayment of the advances ER Estate was to pre-sell some of the units in the three blocks of building and lease the Club House and Carpark to this company and its related companies.

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4)
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The purpose of entering into the Pre-sale Agreements and Leasing for Agreements construction was to guarantee and the
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repayment by ER Estate of the management fees, advances expenses expenses related to the project.

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- 7 10 The defendants contended that these agreements and

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MOU were agreements entered into by PYE by its agents. 11 Pursuant to the Master Agreement, ER Estate and

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Galaxy in November and December 2005 entered into formal presale-contracts of 124 units of Block C. The contracts provided that before the purchaser obtained the title documents of the property, the vendor and purchaser might agree to cancel the contracts. The contracts further provided that the units had to be completed and handed over to the purchaser by 31 August 2006. The 2 n d defendant claimed that this reflected the agreement to complete the project within 14 months under the Master Agreement.

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12

The 2 n d defendant claimed that in breach of these

agreements, PYE only provided loans to the plaintiff in the total sum of RMB 148,285,568.00 and HK$38,710,000.00.

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The loan deed 13 follows : 1) In mid-October 2005, the 2 n d defendant requested for a The circumstances leading to the Loan Deed were as

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drawing of RMB 10 million under the facility to pay some existing creditors and contractors and facilitate the take-over of the site by PYE. PYE agreed but represented that due to its shortage of RMB in Beijing, it would have to advance the same in HK$ under the facility in Hong Kong instead. As a result, it was agreed by Mr. Billy Wong and Mr. Tom Lau on behalf of PYE and the 2 n d defendant that: (1) A sum of HK$l0 Million would be advanced in Hong Kong through the Plaintiff as PYE s agent, which would be repaid in HK$ upon ER Estate having received a corresponding advance under the facility in RMB, which PYE represented would be available within 2 months; and (2) On ER Estate receiving a corresponding advance under the facility in RMB in Beijing, the 2 n d defendant would convert the same into HK $ and repay the same to PYE in Hong Kong (the Further Agreement).

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2) plaintiff.

At the request of PYE and pursuant to the Further

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Agreement, the defendants entered into the Loan Deed with the

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- 9 14 The defendants alleged that in breach of the Master

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Agreement and the Further Agreement, PYE has wrongfully failed to make the corresponding advance in RMB to the 2nd defendant and ER Estate and also failed to make advance of the facility to the 2nd defendant and ER Estate to meet the need of completing the project within 14 months. 15 The defendants contended that the said sum of HK$ 10

million has not yet fallen due. 16 The defendants contended that because of the failure

by the PYE to advance the facility fully ER Estate was unable to complete the project and the defendants suffered loss of not less than RMB 402.35 million. 17 They further contended that there was an agreement

reached between the parties in May 2006, in which PYI and PYE would set off the HK$10 million and another HK$30 million advanced by PYE as part of the facility (in the form of earnest money paid in December 2005 under a sale procurement arrangement entered into between the defendants and Jenvin Limited, another PYEs related companies) from the consulting fee of RMB 40 million which was due by PYE to the 2 n d defendant in respect of the Rosedal Hotel project that the parties had agreed upon. The plaintiff s response

18
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The

plaintiff

denied

that

there

was

Master
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Agreement.

It contended that the Loan Deed was a stand alone

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- 10 agreement and not related to the other three agreements set out in

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paragraphs 8(1), (2) and (3). arose under the Loan Deed.

The liabilities of the defendants The terms of the Loan Deed were

different from the terms of these agreements. Further the alleged Further Agreement was not revealed in the contemporaneous documents written by the defendants. Test for summary judgment 19 In deciding whether a plaintiff is entitled to summary

judgment the relevant test is whether the defendant has raised credible triable issues. If there are, the matter should go to trial. If not, judgment should be entered against the defendant. In considering whether there are triable issues the Court will, of course, not take the alleged defence on its face value but test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents, whether the alleged defence is inconsistent with the defence previously put forward or whether the defence is only recently raised despite opportunity being given to the defendant to respond earlier. The Court will also consider the inherent probability of the defence. But what the Court should not do is to conduct a mini-trial on complicated factual issues. Overview

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20

In my view it is necessary to take an overview of the

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matter. It is apparent from the defendants case that the parties had indeed entered into agreements whereby PYE agreed to advance money to the defendants to enable them to complete the

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- 11 project which was previously stopped due to financial problems

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encountered by ER Estate. The amount identified under the first three agreements set out in Paragraph 8 above matched the sum of RMB 420 million. 21 Before the parties entered into these three agreements

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and also the Project Management Contract it is not unlikely that they had agreed on an overall plan upon which their respective obligations and rights were identified. A Master Agreement as suggested by the defendants is not a fanciful idea at all. 22 The Loan Deed was made in October 2005, shortly
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after the making of these four agreements. It is just impossible to say at this stage that the loan of HK$10 million was somehow not related to the Master Agreement which was implemented by the four agreements. Other supporting matters

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23

This view is further reinforced by the following

matters, namely, 1)
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The contents of the Letter of Intent and the Loan Deed

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24

One of the companies of the Paul Y Group had The letter that was

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submitted a Letter of Intent to ER Estate.

disclosed was not signed but it recited the fact that the parties reached agreement to restart the project. This document referred to, among other things, this company arranging to advance loans to restart the project.

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- 12 25 Under the Loan Deed, Clause 2 recites that the plaintiff

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agreed to lend HK$10 million for the Purpose which is defined as taking appropriately prioritized steps necessary to restart the Project. 26 This supports the defendants case that the Loan Deed

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was made pursuant to the Master Agreement and the four agreements. 2) 27
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Other advances The loan of HK$10 million was made at around the

same time of other advances made by PYE to the project. Specifically it was made afte r the first advance of RMB 496,000 on 16 September 2005. Estate : (1) (2) (3) dated 16 t h September 2005, RMB 496,000. dated 10 t h November 2005, RMB 4,378,188. dated 14 RMB 3,200,000. (4) dated 20 t h December 2005, RMB 1,000,000. (5) dated 23 r d December 2005, RMB 4,000,000.
th

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The advances were referred to in the

following agreements between Paul Y Construction Ltd and ER

November 2005,
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- 13 (6) dated 20 January 2006, RMB 5,000,000. (7) dated 13 April 2006, RMB 211,380. 28 Item (6) was in respect of Blocks A and B but the other
th th

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items were in respect of Block C of the project. 29 Following the advance of HK$10 million, there was

another advance of HK$30 million on 7 December 2005. 30 It is arguable that it is unlikely the parties would have

entered into piece meal agreements on advances without having agreed on the Master Agreement first. 3) Due diligence search

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31

PYE had conducted thorough due diligence search of

the defendants which is consistent with PYE having agreed to make a substantial commitment to the project.

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4. Contemporaneous documents 32 The loans of RMB 10 million and RMB 30 million

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were referred to in a chart prepared by the Paul Y Group in August 2005 which set out the proposed agreements that the parties should enter into. 33 There were other handwritten notes said to be written

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by Mr. Lau which confirmed the existence of the agreement by PYE to lend RMB 420 million to the defendants. 34 PYEs own public announcement dated 6 January 2006

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(the announcement) in which it disclosed that the Paul Y Group had made payment of development and construction costs on behalf of ER Estate. This is again a reflection of the existence of the Master Agreement. Separate loan agreement? 35 Mr. Jat, SC who together with Mr. Dawes appeared as

counsel for the plaintiff, submitted that the defendants case on the HK$10 million loan was based on the RMB 20 million facility agreed upon by PYE in the Block C Agreement but the total money admittedly advanced by PYE would exceed RMB 20 million if the HK$10 million was to be taken into account. Hence this shows that the HK$10 million loan was not part of the RMB 420 million agreed upon by PYE. 36 I disagree with this submission. Under the Block C

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- 15 Agreement, PYE, apart from agreeing to advance RMB 20 million,

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also agreed to advance another RMB 100 million. Only two of the agreements set out in paragraph 23 (i.e. Items 1 and 2) referred to the provision on the advancement of RMB 20 million. Further when HK$10 million was advanced, only RMB 496,000 had been advanced, hence one cannot rule out that the HK$10 million was part of the RMB 20 million and also part of the RMB 420 million facility promised by PYE. Mr. Jat further argued that the sum of $147,571,000 referred to in the announcement did not include the HK$10 million. In my view this matter cannot be resolved on affidavit evidence alone. 37 The Court is unable to say at this stage that the Loan

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Deed is an independent agreement in view of the almost overwhelming evidence that the parties had indeed entered into a Master Agreement concerning PYEs promise to advance money to the ER Estate. The fact that PYE chose to use different

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companies under the Paul Y Group to enter into the various agreements does not point conclusively that the Loan Deed was an independent agreement. To the contrary this only highlights the fact that the use of these different companies was merely for the purpose of implementing the Master Agreement. Different terms 38 It is true that under the Loan Deed and the extension The

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documents the time for repayment was specified, whereas the Further Agreement did not specify the repayment date. interest rate and the security in the form of guarantees by the 2 n d

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- 16 and 3
rd

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defendants were also different from the other agreements.

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In my view these are not fatal to the defendants case. 39 The defendants had always maintained that the loan of

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$10 million was part of the facility agreed to be advanced by PYE. In its demand letter of 15 November 2006 (issued well before the plaintiff s demand letter for repayment of the loan dated 16 February 2007 and the plaintiff s action which was commenced on 13 April 2007), the defendants complained about PYEs breach to honour the promised facility. This letter specifically stated that PYE had not complied with the Block C Agreement by advancing RMB 20 million but had insisted to pay part of the RMB 10 million in Hong Kong and requested ER Estate to sign again the Loan Deed. 40 Further although this letter did not specifically referred

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to the Further Agreement, it is not appropriate to draw any adverse inference against the defendants at this stage because implicit in the allegations against PYE is the entering of the Further Agreement on PYEs request. In any event the purpose of the letter was a demand on PYE and not a considered response to the plaintiff s claim when one would expect some detailed defence from the defendants. Inadmissibility of oral terms 41 I do not consider that the defendants defence is

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vitiated by the parol evidence rule which restricts admissibility of oral evidence which varies or contradicts the terms of the written

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- 17 contract. Quite apart from the fact that the Loan Deed does not

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have an entire contract clause, the defendants case is that the Loan Agreement was part of the Master Agreement reached between the parties. The subsequent four agreements were implemented pursuant to the terms of the Master Agreement and the loan was made pursuant to the agreement to advance RMB 20 million contained in the Block C Agreement. As pointed out by Chitty on Contracts 29 t h Ed, Vol 1, para 12098 :
It follows that the scope of the parol evidence rule is much narrower than at first sight appears. It has no application until it is first determined that the terms of the parties agreement are wholly contained in the written document. The rule only applies where the parties to an agreement reduce it to writing, and agree or intend that the writing shall be their agreement. Whether the parties did so agree or intend is a matter to be decided by the court upon consideration of all the evidence relevant to this issue. It is therefore always open to a party to adduce extrinsic evidence to prove that the document is not a complete record of the contract. If, on that evidence, the court finds that terms additional to those in the document were agreed and intended by the parties to form part of the contract, then the court will have found that the contract consists partly of the terms contained in the document and partly of the terms agreed outside of it. The parol evidence rule will not apply.

42
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In this case the defendants case is that the Loan Deed

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was not the only agreement reached between the parties. 43 In any event I would not hold at this stage that the plea

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of collateral contract is unavailable to the defendants based on the existing state of evidence. Leave to defend

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- 18 44 In my view the defendants have raised credible triable Ms Cheng, SC for the

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issues which entitled them to defend the action. who appeared together with Mr. Cheuk,

counsel

defendants, had referred to many other issues which she said support the defendants case. I have not addressed each of them because, in my view, what I have already said shows that triable issues exist in this case. 45 Mr. Jat argued that there should only be conditional

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leave to defend. In my view this is not appropriate having been satisfied that there is a credible defence. As a matter of fact the value of the Block C properties held by PYE pursuant to the Block C Agreement exceeds RMB 233 million. Conclusion 46 I will accordingly set aside the judgment and grant the

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defendants unconditional leave to defend. 47 The defendants are entitled to the costs of the appeal

while the costs below will be costs in the cause of the action. Hon Lam J :
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48

I agree.

As demonstrated by my Lord, the dispute

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between the parties must go to trial unless the parties are able to resolve it by some other means. This means that the resolution of the matter through litigation will take time and costs. for the litigation on top of the fees payable to lawyers. That includes management time and costs in doing all the preparation

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- 19 49 I can see that the costs of the trial will be substantial,

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probably in the region of millions if not more. It also seem to me, based on what we have been told, that it would probably be in the common interest of all the parties to come to a solution that facilitate the continuation of the project as soon as possible. To achieve such a solution, it certainly requires some degree of cooperation amongst them. trust and confidence The litigation (and perhaps events the parties. However, the leading up to the litigation) might have done some damage to the between transaction is a business venture. There is no reason why the

parties cannot approach the dispute with good commercial sense. 50 By now, it should be recognized by those conducted

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litigation in Hong Kong and their professional advisers that very often commercial disputes can be resolved more satisfactorily through means other than litigation. Parties are represented by very experienced lawyers and I am sure that counsel involved are more than capable of advising their respective clients on other possible options to resolve their disputes including mediation.

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51

As I see it, the case cries out for mediation. Before the

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parties spend more resource and efforts in this piece of litigation, they would be well-advised to sit down to explore the option of mediation with their lawyers. 52 From a business point of view, it is much better to

spend management time and costs on restoring the project than on a piece of litigation which may ultimately result in a no win situation for both parties.

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- 20 Hon A Cheung J :

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53

I agree with the judgment of Cheung JA and the order

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he proposes. I also share the sentiments of Lam J on mediation as the most sensible way forw ard in this case.

(Peter Cheung) Justice of Appeal

(M. H. Lam) Judge of the Court of First Instance

(Andrew Cheung) Judge of the Court of First Instance

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Mr. Jat Sew Tong, SC, and Mr. Victor Dawes, instructed by Messrs Pinsent Masons , for the Plaintiff Ms Teresa Cheng, SC, and Mr. Calvin Cheuk, instructed by Messrs Siao, Wen and Leung, for the 1 s t to 3 r d Defendants

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