China Construction Realty Ltd v Sino Business Services Pty Ltd [2004] VSC 91

5. This litigation concerns a piece of land of 401,108m² which was to be developed as a tourist resort. I shall refer to this land as "the Dalian land". More particularly, it concerns a contract dated 26 June 1997 whereby the plaintiff, China Construction Realty Pty Ltd ("CCR"), a company incorporated in Bermuda on 22 March 1995, agreed to sell to the firstnamed defendant, Sino Business Services Pty Ltd ("SBS"), a company incorporated in Australia on 19 February 1988, 41,817,420 shares each of $1 in a company, Wonderful Investment Worldwide Ltd ("WIW"), a company incorporated in the British Virgin Islands on 18 January 1996. These shares represented 90 percent of the issued capital of WIW[1]. The consideration for the sale was $A 46,500,760 payable by a deposit of $A 500,760 and the balance by three instalments of $A 10 million, $A 10 million and $A 26 million payable by 31 December 1998, 31 December 1999 and 31 December 2000, respectively. The principal asset of WIW at the time of the sale was its interest in the Dalian land. In fact the shares were transferred on 27 June 1997 by CCR, at the direction of SBS, to the secondnamed defendant, Leisureline Holdings Ltd ("LLH"), a company incorporated in the British Virgin Islands on 22 May 1997, a wholly owned subsidiary of SBS.

9. The issues in this case, as they emerged in the course of the trial, may be shortly stated. CCR sues for the three unpaid instalments under the share sale agreement, totalling $A 46 million. SBS defends by asserting that the agreement was terminated by it on 13 November 1998 by reason of certain breaches by CCR of the share sale agreement and of certain warranties made in the agreement by CCR. It seeks damages. It was common ground that SBS made no payment under the share sale agreement other than the deposit and that, notwithstanding its termination, it has not re-transferred or caused to be re-transferred to CCR the WIW shares. It follows from this that SBS is obliged in its claim for damages to give credit for the unpaid price of the shares. So much was accepted by counsel on its behalf. The consequence of this is that the real issues between the parties were those raised by SBS in its defence and counterclaim[2]. These concerned the alleged breaches by CCR and the damages flowing from them.

12. The question as to the right of SBS to determine the contract, whether it has done so and whether it has affirmed the contract or waived its right to determine occupied a good part of the pleadings and some part of the evidence. It appears, however, that this issue is of no great practical significance in terms of the relief sought by SBS and I shall say little about it. I should add, too, that CCR also alleged that the share sale agreement had been terminated by it and it sought restitutionary relief. This claim, and a claim based on misleading and deceptive conduct[3] also disappeared by the time of final addresses.

15. The breaches of the share sale agreement alleged by SBS are the following:

(i) At the date of the share sale agreement WIW did not have title to the Dalian land and thereby breached cl. 6.1 of its warranties under the share sale agreement[4].

(ii) The value of the Dalian land was $US 3 million and not $US 46,279,000 as shown in the accounts of WIW. This meant that CCR was in breach of cl. 4.1(d) of its warranties that the accounts were accurate[5].

(iii) The accounts of WIW were also inaccurate inasmuch as they did not show a liability of RMB 50 million for the unpaid balance of the land use right premium[6].

(iv) CCR was in breach of cl. 6.1 of its warranties in that it did not own 80 percent of the issued share capital in a company, Dalian Jinshitan Baotong Real Estate Development Co Ltd[7]. This company was a joint venture vehicle for the development of the Dalian land and is referred to in this judgment as the "Dalian Joint Venture Company".

(v) CCR was in breach of its warranty that the Dalian Joint Venture Company was the registered proprietor of the Dalian land and held it free of encumbrances[8].

(vi) CCR was in breach of cl. 2.3(a)(iii) of the share sale agreement inasmuch as it failed to use its best endeavours to provide funding of up to $US 21 million to cover construction costs[9].

(vii) CCR breached cl. 7.1 of its warranties inasmuch as the copy of the joint venture agreement annexed to the share sale agreement was not a complete accurate and up to date copy. In fact the joint venture agreement had been amended by a supplementary agreement dated 18 June 1997[10].

21. A further issue which loomed large in the pleadings and, indeed, caused LLH to be a party to the proceeding arose out of the rather inadequate provision in the share sale agreement for the purchaser, SBS, to provide security for the very substantial unpaid balance of the price. Under cl. 3.3, CCR was in certain circumstances entitled to call upon SBS to deliver up all of its shares in LLH as security. This was not done. CCR's claim in the statement of claim[11] for these shares did not appear to assume importance at the trial.

24. Finally, by an escrow agreement dated 20 January 1998, a time when SBS was not yet in breach of a share sale agreement, SBS and CCR agreed that SBS would provide security for the balance of the price under the share sale agreement by depositing with Equity Trustees Ltd 18,530,000 shares in Sino Consolidated Enterprises Ltd[12]. These shares were to be held by Equity Trustees during the escrow period, that is, so long as any part of the price was unpaid. Under the terms of the escrow agreement SBS was prevented from dealing with the shares during the escrow period. In fact, in the period 19 July 2001 to 11 January 2002 SBS transferred the shares to third parties. It was said by CCR that this was in breach of the escrow agreement. For my present purposes, the interest of this transaction is that SBS contended in various ways that CCR should bring to account against the balance of the share price agreement unpaid, the value of this security, which was given as $A 3,891,300[13].

27. Before I turn to these matters in detail it is convenient that I make two general observations. First it will already be apparent that the transactions with which I am concerned are couched in different currencies: Hong Kong dollars, US dollars and Australian dollars. In addition, much use was made, not surprisingly, of the Chinese currency which is described as Yuan or Renminbi, depending on which Chinese language is used. I will adopt the term, Renminbi. I shall refer to money sums in the different currencies which were adopted in the transactions. The rates of exchange at the relevant time were agreed by the parties to be $A1 = $US 0.75; RMB 6.2; $HK 5.7.

30. The second general observation concerns the evidence which was offered by each party. Documents in the Chinese language were submitted with agreed English translations. A great deal of documentary hearsay was admitted without complaint and I will act upon it albeit with some caution. As will be seen, there were some very surprising absences in the evidence. For example, payments by a party which were challenged were not proved in the usual way by the production of the party's books of account. Witnesses who might have been expected to be called were absent without explanation. As a consequence, I was invited by each party to draw Jones v Dunkel inferences. It had the further consequence that I was asked to act in some cases upon uncontradicted evidence of unimpressive generality. Finally, this has caused me to be acutely aware of where the risk of non-persuasion lies on particular issues.

33. As to the Jones v Dunkel inferences, I was pressed on behalf of both parties as to the absence of expected witnesses from the other side. On behalf of SBS it was pointed out that Nelson Hon Sang Chiu, who was a director of both WIW and CCR at the time of the share sale and who is still a director of the parent company of CCR and one of the men who negotiated the share sale agreement on behalf of CCR and who signed certain documents at the time, might have been able to give useful evidence. Counsel for CCR responded that the defendants called no witness at all with direct knowledge of the transactions in issue. This was sought to be explained away by the fact that on 13 February 2003, after the commencement of this proceeding, Sino Securities International Ltd, the parent of the SBS group, sold all of the shares in SBS to a third party, Central Business Asia Ltd. This had the consequence, I was told, that the present owners of the defendants were strangers to the transactions, the subject of this litigation. I observe that in this 2003 share sale agreement the vendor warranted that the records of SBS had been maintained and were accurate and, by cl. 4.2(e) they were to be delivered to the purchaser. I infer from this that SBS, and those presently controlling it, still have the financial records of its subsidiaries including WIW and the various joint venture companies, if these records existed.

36. Particular mention in the present context was made by counsel about the absence from the witness box of Li Zhao Long (Richard Li) and his brother, Li Zhao Liang (Alex Li). Mr Richard Li signed the share sale agreement as a director of SBS and also the 2003 share sale agreement as a director of Sino Securities International Ltd. He is mentioned in Schedule 1 to this latter agreement as a director of SBS at the time of that sale. According to Chan Ka Wai, who became a director of SBS after it was sold in August 2003, Mr Richard Li then controlled SBS. Mr Alex Li's involvement was more limited. He was authorised by the board of WIW to execute a supplementary joint venture agreement on 18 June 1997, but he did not do so. Chang Shan, a director of CCR and WIW in June 1997, said that Mr Alex Li handled "all other matters" after this agreement, presumably on behalf of WIW. Each of these brothers continued with the project after control of WIW passed to SBS and its companies in 1997 until its sale in May 2003 to a third party, Lucky Dragon Ltd. Counsel for CCR contended that they were in the camp of SBS and might have been expected to be called to support its case. Mr Richard Li, it would seem, also had an interest in CCR, for his company, Sino Resources Pty Ltd holds about 6 percent of the shares in that company. This emboldened counsel for SBS to complain that Mr Richard Li was in the camp of CCR so that his unexplained absence should give rise to an inference adverse to CCR.

39. At the end of the day I am unable to conclude that the absence of either Mr Richard Li or Mr Alex Li should give rise to an adverse inference. With respect to Mr Chiu, I will treat him as a potential witness in the camp of CCR and available to be called.

43. Evidence of Chinese land law was led from two Chinese lawyers: Qin Shiping (Shirley Chin), a real estate lawyer practising in Beijing since 1999 and Si Ping Ping, associate professor in East China University of Politics and Law and a lawyer practising in Shanghai since 1998.

46. It appears from their evidence that land in China is not held in fee simple and that there is no system like the Torrens System of registered proprietorship of land. Land is owned by the State or by peasants collectively. The Dalian land was at all relevant times owned by the State. The State may assign to an individual or a corporation the right to use State-owned land for a specific purpose for a specified period of years. In this sense, the right is analogous to the common law leasehold. A person obtains such an assignment by entering into an agreement of assignment with the appropriate Land Authority and for this right, the person must pay an assignment fee. The assignee may mortgage or sub-divide or transfer to another this land use right provided that the transaction is approved by the Land Authority. Again, a fee may be payable to the Land Authority for its approval.

49. In addition to these fees there is also an annual land use fee payable to the Land Authority.

52. Where a person enters into a contract of assignment of the right to use State-owned land the person has an immediate contractual right to use the land in terms of the assignment. This is a right based only on the contract. When the assignment fee has been paid the assignee may obtain the entry of its land use right in a register and the issue of a State-owned Land Use Rights Certificate.[14] When this certificate has issued, the right of the assignee becomes a property right. In this sense the issue of such a certificate is analogous to the registration of a land use right. The right of a certificate holder is protected by the law.[15]

55. Where an assignee fails to pay the assignment fee the Land Authority may rescind the assignment agreement and seek compensation for the contractual breach[16].

58. The right to use land may be revoked where the terms of the grant, such as a term to carry out certain development works, is not complied with or where the land is permitted to remain idle.

61. Against this legal background, the evidence showed that on 1 May 1993 the appropriate Land Authority granted to Dalian Gold Star Real Estate Development Co Ltd ("Dalian Gold Star") Land Use Rights Permit No. 35 of 1993 in respect of the Dalian land. The experts were agreed that this is not a State-owned Land Use Rights Certificate; it is simply a permit to commence preliminary work on the land.

64. On 2 February 1996, the Land Authority entered into a contract of assignment of the Dalian land to Dalian Gold Star. By Article 7, the assignment fee was fixed at RMB 64,177,280 payable as to RMB 12,835,456 on the signing and the balance of RMB 51,341,824 within 60 days. By Article 10, the annual fee is fixed at RMB 200,554. By Article 11, these fees are payable in RMB or $US or $HK. Article 9 provides that, upon payment of the assignment fee, the assignee may apply for a land use right. I take this to mean that the assignee may then apply for a State-owned Land Use Rights Certificate. Article 8 provides that the Land Authority may rescind the agreement and request compensation if the assignment fee is not paid within the specified time. There is also in evidence a document setting out the conditions for the use of land. This document, which is undated and does not on its face relate to the Dalian land, was accepted by the Chinese law experts and the valuers as being applicable to the February 1996 contract of assignment. It provides in cl. 2-1 and cl. 4 that Dalian Gold Star must comply with the following requirements when carrying out building work:

(1) The main structure should be individual houses. This was interpreted by the valuers as indicating that the permitted use was for the construction of villa units only.

(2) The rate of building volume should not be greater than 0.15. This was interpreted as meaning that the aggregate floor area of the buildings should be not more than 15% of the site area. This produces a maximum floor area of 60,150 m2.

(3) Building height should not exceed 8 metres.

(4) The assignee must complete 60% of the total building area above ground by 31 December 1996 and the whole work, subject to certain exceptions, by 31 October 1997.

70. On 2 February 1996[17], the same date as the contract of assignment, Dalian Gold Star entered into a joint venture agreement with WIW. Pursuant to this agreement the parties agreed to establish the Dalian Joint Venture Company to carry on the business of construction and sale of real estate in China and overseas. The parties agreed in Articles 8 and 9 that Dalian Gold Star would contribute 20 percent, namely $US 1.2 million "in land and cash" and WIW, 80 percent, namely $US 4.8 million "in the measure of cash, transport, vehicles and telecommunications". This agreement was approved by the government authority on 30 June 1996.

73. It seems that, at this time, the issued share capital of WIW was 24,500 $US 1 shares held by Dragon Investment Group Ltd, a Hong Kong Company. One week later, on 9 February 1996, WIW and other parties, including Dragon Investment Group, entered into an agreement whereby WIW agreed to allot a further 25,500 shares for cash to CCR. This agreement asserts in recital A, incorrectly it would seem, that an 80 percent interest in the joint venture company is held, not by WIW, but by Wonderful International Investment Co Ltd, a Hong Kong company. By cl. 5.1, Wonderful International Investment assigned its interest in the joint venture to WIW.

76. On 21 June 1996 the Land Authority issued Land Use Rights Permit No.1 of 1996 to the Dalian Joint Venture Company authorising it to invite tenders for the joint venture development. The evidence of the experts, which I accept, is that this is not a State-owned Land Use Rights Certificate.

79. On 10 March 1997 in Hong Kong, the Dalian Joint Venture Company entered into two Sino Joint Venture Business agreements in very similar terms. In the first, it agreed with China Entertainment Ltd, a company incorporated in the British Virgin Islands and wholly owned by WIW (China Entertainment"), to establish a sub-joint venture, Dalian International Entertainment Co Ltd ("Dalian Entertainment Joint Venture") to develop and operate 40,000 m2 of the Dalian land for "games room, cinema, games machine, food and beverage, recreation and entertainment centre, deluxe yacht facilities" with a total investment of $HK 150 million. The shares in the Dalian Entertainment Joint Venture were held as to 60 percent by China Entertainment and 40 percent by the Dalian Joint Venture Company. This sub-joint venture was approved by the relevant authority on 20 June 1997. Pursuant to the other agreement, the Dalian Joint Venture Company agreed with China Entertainment Club Ltd, a company incorporated in Western Samoa, to establish a sub-joint venture, Dalian International Foreigners' Entertainment Club Co Ltd, ("Dalian Club Joint Venture") to develop and operate 120,000 m2 of the beach area of the Dalian land for "indoor and outdoor water park, game centre, playground, squash court, table tennis court, mini cinema, food and beverage, gym, golf practice court, service apartment, sauna, entertainment and recreation centre facilities" totalling 50,000 m2. Total investment in this sub-joint venture was said to be about $HK 200 million. The shares in the Dalian Club Joint Venture were held as to 60-percent by China Club and 40 percent by the Dalian Joint Venture Company. This sub-joint venture, too, was approved by the relevant authority on 20 June 1997. This means that, of the 401,108 m2 comprising the Dalian land, 160,000 m2 was subject to the sub-joint ventures and the balance of 241,108 m2 remained to be dealt with by the Dalian Joint Venture Company.

82. On 31 May 1997 Dragon Investment Group agreed with CCR to sell to CCR 19,500 shares of its holding in WIW. This had the consequence that, of the 50,000 issued shares in WIW, 45,000 (90 percent) were held by CCR and the remaining 5,000 (10 percent) by Dragon Investment Group. Under this agreement CCR agreed to pay to the seller $HK 150,540 for the shares and the further sum of $HK 56,924,600.40 for the transfer of a debt due by WIW to Dragon Investment Group. The principal asset of WIW at this time, according to a balance sheet annexed to the agreement was an investment in the Dalian land valued at cost at RMB 168 million. Since WIW held only 80 percent of the joint venture this gives the land a total value of RMB 210 million.

85. The next relevant transaction, and the last which predates the share sale agreement, is a supplementary agreement to the joint venture agreement of 2 February 1996. This supplementary Joint Venture Agreement is dated 18 June 1997. The parties are Dalian Gold Star and WIW. Under this agreement Dalian Gold Star agreed in article 1 to contribute the Dalian land to the Dalian Joint Venture Company as its share of contribution to the joint venture. By article 2, WIW agreed to pay RMB 50 million to the Land Authority being the balance of the land rights use assignment fee. It will be recalled that the balance of this fee, after payment of the deposit, was RMB 51,341,824 payable 60 days after 2 February 1966. The amount which WIW undertook to pay was, in this agreement, expressed to be "the balance of the total amount of the fee for transferring the land" and "the balance of fee for land use includes but is not limited to transfer of right to use the land of 401,108 m2 from [Dalian Gold Star] to [Dalian Joint Venture Company] and it, in accordance with the relevant contract with regard to the joint venture includes future transfer of the right to use part of the land as a contribution to the two joint venture companies, that is, [Dalian Entertainment Joint Venture] and [Dalian Club Joint Venture]". The discrepancy between this amount of RMB 50 million and the balance of the assignment fee under the 2 February 1996 agreement of assignment with the Land Authority was never explained. It was assumed, however, in argument before me that RMB 50 million of the 1996 assignment fee remained outstanding and I proceed on that basis. It should be noted that this 18 June 1997 agreement is, by Article 6, not to come into effect until it is signed by the parties and approved by the relevant authority. This approval was not given until 26 November 1997 in circumstances to which I shall come in due course.[18]

90. There were in evidence also two resolutions of the same date, 18 June 1997. The first, by the Board of Directors of WIW, resolved to pay the balance of the fee for land use "up to the amount of RMB 50 million" and that this amount should be treated as a share of contribution by WIW to the Dalian Joint Venture Company over the contribution of $US 4.8 million which it was to make under the joint venture agreement. It was to be treated as a loan from WIW to the Dalian Joint Venture Company. The other resolution of this date was a resolution of the Board of Directors of the Dalian Joint Venture Company itself. This resolution treats the payment of RMB 50 million as having already been "paid by [WIW] [on behalf] of [the Dalian Joint Venture Company]". The Board then agreed that the sum be paid to the Land Authority in the name of the Dalian Joint Venture Company. Each of the resolutions authorised Mr Alex Li to attend to its implementation.

93. It may be convenient that I now set out in summary how things stood with respect to the Dalian land on the eve of the share sale agreement.

(1) WIW was owned as to 90 percent by CCR and 10 percent by Dragon Investment Group.

(2) WIW held 80 percent of the shares of the Dalian Joint Venture Company. The balance was held by Dalian Gold Star.

(3) The Dalian Joint Venture Company held land use rights with respect to the whole of the Dalian land.

(4) WIW held the major interest in each of the sub-joint venturers, Dalian Entertainment Joint Venture and Dalian Club Joint Venture. In each case its interest was 92 percent, being the whole of the 60 percent held by China Entertainment and China Club respectively, and 80 percent of the 40 percent held by the Dalian Joint Venture Company. No point was taken before me of the fact that 8 percent of these sub-joint ventures was held by Dalian Gold Star, and I shall pass over this.

CCR Breaches of the Share Sale Agreement

The Title to the Dalian Land

99. The share sale agreement is, of course, concerned directly with the shares in WIW, not with its underlying assets. In recital B it is said that WIW owns 80 percent of the Dalian Joint Venture Company which, in turn, has a 100 percent interest in "the development right of the [Dalian land]". By cl. 7, CCR represents and warrants that each of the Realty Warranties as described in Schedule 3A are true and accurate as at the date of the agreement (26 June 1997) and will be true and accurate on the completion date by reference to the facts and circumstances then existing. The completion date was 27 June 1997.

102. Schedule 6 to the share sale agreement comprises the accounts of WIW as at 16 June 1997. In fact, the only accounts contained in the schedule are a balance sheet supported by a number of notes. The accounts are expressed to have been prepared in accordance with applicable accounting standards issued by the International Accounting Standards Committee.

105. The balance sheet is expressed in US dollars. It shows current assets of $US 45,180,836 comprising cash and one $US 1 share in each of two subsidiary companies, China Club and China Entertainment. The non-current assets which total $US 46,282,964 represent, for the most part, "Leasehold Properties" which are valued at $US 46,279,000. It is this asset with which this litigation is concerned.

108. Note 3 to the balance sheet says this about the Leasehold Properties:

"On the balance sheet date, leasehold properties represent the land use right at Dalian Jinshitan Estate, the People's Republic of China. This land use right was granted to [the Dalian Joint Venture Company], which is 80% owned by WIW. On 16 June 1997, RHL International Francis Lau & Co., (Surveyors) Ltd. independently valued the land use right on an open market basis in its existing state. The valuation places a value of RMB 480,000,000 (USD 57,848,750) on the land, of which RMB 384,000,000 (USD 46,279,000) is attributable to WIW."

112. In paragraph 5B(a) of the defence it is alleged that CCR was in breach of its warranty in that:

"WIW did not have title to all of the assets included in the WIW accounts as at the date of execution of the Share Sale Agreement and presented as part of the Share Sale Agreement (Schedules 3A, cl. 2.1(d))."

Clause 2.1(d) of Schedule 3A contains a warranty by CCR that WIW -

"(d) has title to all of the assets included in the WIW Accounts (except for current assets subsequently sold or realised in the ordinary course of business) as of the date of this agreement and presented as part of this agreement."

118. The particulars of breach assert that WIW did not have title to the "Dalian land use right" disclosed in the WIW accounts. This was because the fee payable for this right had not been paid and therefore the title was defective.

121. In its terms, this allegation has not been made out. CCR did not in the share sale agreement nor in the WIW accounts assert a title to the Dalian land. It asserted WIW's ownership of 80 percent of the shares in the Dalian Joint Venture Company, an assertion which was never challenged.

124. This allegation is, however, associated with that in paragraph 5B(d) of the defence which puts in issue the title of the Dalian Joint Venture Company to the Dalian land. In this plea SBS alleges, as a further breach of the CCR warranties, that:

"(d) [The Dalian Joint Venture Company] was not the registered proprietor of the Dalian [land] and did not have good title to the Dalian [land] free from all liens, encumbrances, mortgages, charges, leases, licenses and interests of third parties of any nature whatever. The documents of title of the Dalian [land] did not issue in the name of [The Dalian Joint Venture]. (Schedule 3A, clause 6.2)."

Clause 6.2 of Schedule 3A contains a warranty by CCR that:

"6.2 The Dalian [Joint Venture] Company is the registered proprietor of the Dalian [land] and has good title to the Dalian [land] free from all liens, encumbrances, mortgages, charges, leases, licenses and interests of third parties of any nature whatever. The documents of title of the Dalian [land] will when issued be in the name of the Dalian [Joint Venture] Company."

130. It was put on behalf of SBS that the warranty required that the Dalian Joint Venture Company hold the Chinese equivalent of registered proprietorship in the Dalian land at the relevant time. It was contended, first, that it did not do so since it did not hold a State-owned Land Use Rights Certificate. This is factually correct. No such certificate had been issued. Nevertheless the warranty goes on to provide for the issue in the future of the "documents of title". This, in the present context, must refer to the issue of the certificate. It cannot, therefore, be correct to interpret the warranty as requiring that such a certificate shall have been issued at the relevant date.

133. Second, counsel for SBS argued that such title as the Dalian Joint Venture held was a precarious one for, the Land Authority might at any time rescind the February 1996 assignment agreement. Again, this is factually correct. I do not however, conclude that the warranty has thereby been breached. An examination of the Land Administration Law and the other Chinese statutes which were in evidence before me, as interpreted by Ms Chin and Professor Si, satisfies me that there are a number of contingencies which might give rise to the revocation of a land use right. There is nothing before me which satisfies me that the title of the Dalian Joint Venture Company to use the land was at risk in any real sense. While it is true that there was a substantial sum outstanding, this does not appear to have been a matter of concern to the Land Authority or, indeed, to anyone.

136. Associated with this allegation was that appearing in para 5B(c) of the Defence that:

"WIW did not own 100% of the property and assets which it purported to own, including 80% of the issued shares in the Dalian [Joint Venture] Company (Schedule 3A, cl 6.1)."

The particulars relied on were those given in support of para 5B(a). I have dealt with this matter.

142. In cl 4 of the CCR warranties, CCR warranted that:

(a) disclose a true and fair view of the affairs, financial position, assets and liabilities of WIW as at the Accounts Date;

(b) are not affected by any unusual, extraordinary, exceptional or non-recurring items;

(c) contain proper and adequate provision for and full disclosure of all liabilities (including but not limited to, any Taxes), whether actual, contingent, prospective or otherwise, and the other commitments and obligations of WIW as at the Accounts Date.

...

4.3 Since the Accounts Date, there has been no material change to the affairs, financial position, assets and liabilities of WIW."

The accounts date is 16 June 1997.

149. As I have mentioned, the principal asset in the WIW balance sheet is the non-current asset of Leasehold Properties, for which the given value is $US 46,279,000. This is the 80 percent interest of WIW in the Dalian land. The current value of the Land Use Rights of the Dalian land is given in Note 3 to the WIW Accounts as RMB 480 million ($US 57,848,750)[19 ]

154. In para 5B(b) of the defence the defendants allege:

"(b) The WIW accounts did not disclose a true and fair view of the affairs, financial position, assets and liabilities of WIW as at the Accounts Date (Schedule 3A, Clause 4).

Particulars

The true and fair view of the affairs, financial position, assets and liabilities of WIW as at the Accounts Date is set forth in the Report of Mark Lipson dated 30 October, 2003 at page 406 of the Court Book (AUD $3,101,760) and is materially different to the view of the affairs, financial position, assets and liabilities of WIW as at the Accounts Date warranted by the Plaintiff (USD $46,279,000) and is a material breach or inaccuracy in a [CCR] warranty."

158. There was a dramatic conflict between the valuations relied upon by each of the parties. Wong Chi Wai, who was called on behalf of the defendants, valued the property at $US 3 million so that the interest of WIW was $US 2.4 million. On behalf of CCR, Tse Wai Leung expressed the view that the value was RMB 480 million or $US 57,830,000. Mr Tse was an author of the valuation dated 18 June 1997 made by the Hong Kong firm of valuers, RHL International Francis Lau & Co (Surveyors) Ltd, which is referred to in note 3 to the WIW balance sheet of 16 June 1997.[20]

This valuation of RMB 480 million is that which is warranted in the share sale agreement. I shall refer to this valuation as "the RML valuation".

163. Each of the valuers laboured under a difficulty which they said existed in China: the sale prices of property are not publicly available. This makes a direct comparison with comparable sales very difficult. A valuer must therefore make enquiries of parties to a contract of sale in the hope that they will disclose the sale price and do so accurately. There is an alternative strategy which is adopted, namely, to obtain a copy of the sales material showing what price a vendor of a potentially comparable property is asking. This price is then taken as being an achievable price and, after sale, the price actually achieved.

166. It was put that evidence of these offers or invitations to treat was not relevant as to the prices which may have been ultimately agreed to. Reliance was placed on the observations of Isaacs J in McDonald v Deputy Federal Commissioner of Land Tax (NSW)[21], where the evidence of an offer made by a vendor of land to a prospective purchaser was not admitted as evidence of the value of the land. His Honour pointed out the difficulties in inferring from this evidence what price the suppositious purchaser might pay for the land, this being the legal test of value.

169. Evidence of an offer to sell land has been admitted in some subsequent cases to show matters such as, whether a sale was a forced sale[22], that there was a purchaser who was prepared to pay more than the market price[23], as a reasonable basis for a person holding an opinion as to value[24], as to the market performance of a property[25] or as a check on the methodology of the valuer[26]. Nevertheless, it has not been doubted that the evidence of an unaccepted offer to sell comparable land at a particular price is not admissible as direct evidence of the value of the subject land, and I accept that this is the law.

172. Counsel on behalf of CCR, however, argued that the evidence of Mr Tse as to the prices sought by vendors of comparable land was not evidence of comparable sales, but should be accepted as showing how he arrived at his likely sales figure for the subject land. To my mind, this argument is not correct. My task is to find whether the value attributed of the Dalian land in the WIW balance sheet was at variance from its true value so that the accounts did not disclose a true and fair view of the affairs, financial position, assets and liabilities of the company at the relevant dates. If, as a matter of law, the amount of an unaccepted offer is not probative of the value of comparable land, it is not rendered probative because a valuer has had regard to it as such.

175. In the present case, the evidence of offers is even more problematic. What was said was that developers, in their published brochures inviting purchasers to treat with them, put specified prices on the comparable land. To my mind, this shows nothing more than the figure which the developer supposes is sufficiently low to attract the interest of the buyer but not lower than a price for which it might be prepared to sell the land. The evidence that such brochures were distributed and that the properties were later sold, tells me nothing of the sale price nor of the surrounding circumstances which valuers traditionally bring to bear in relating the sale price of the comparable land to the suppositious sale price of the subject land.

178. As I mentioned to counsel in argument, if it were permissible for the valuers to have regard to figures in the sales brochures, why should they not in this case have regard to the figures which the CCR included as its sales expectations in its own published material?

181. I should add that the fact that admissible evidence of comparable sales is unavailable in China or that the practice of valuers in China is to use evidence of offers as evidence of comparable sales, do not affect my decision not to rely upon this evidence.

184. Returning to my task, it is important to note, as counsel for SBS observed, that for the purposes of the breach of warranty claim and, perhaps, even for the purposes of the right of SBS to determine the contract for breach of warranty, it is not necessary for me to determine the true value of the Dalian land. It is sufficient that I find that the balance sheet value of the land was erroneous. But, having said that, counsel accepted that the true value of the Dalian land is an element in the SBS counterclaim for damages, a significant component of which is the difference between the value as warranted and the value in fact. In each case, it is SBS which bears the risk of non-persuasion.

187. Before I return to the evidence of the valuers, it is of interest to record the available contemporaneous evidence of the value attributed in China to the Dalian land.

(1) Mr Tse produced a chart published by the Land Authority in Dalian showing that the standard land price for Grade 1 Land for Tourism in 1993 was in the range of RMB 936 to RMB 990 per m2. This would produce a price for the Dalian land of between RMB 375,437,088 ($US 45,233,384) and RMB 397,096,920 ($US 47,843,002).

(2) In the Contract of Assignment of the Dalian land to Dalian Gold Star dated 2 February 1996, the assignment fee was RMB 160 per m2, a total of RMB 64,177,280 ($US 7,732,202).

(3) In the Joint Venture Agreement of the same date, Dalian Gold Star agreed to contribute to the Dalian Joint Venture Company "in the measure of land and some cash", $US 1.2 million.

(4) On 9 February 1996 the 80 percent interest in the Dalian Joint Venture Company, said to have been held by Wonderful International Investment Co Ltd, was transferred to CCR. Neither party sought to extract from this complicated agreement what light the consideration for this interest shed on the value of the joint venture asset at that time.

(5) In the share sale from Dragon Investment Group to CCR dated 31 May 1997, the vendor warranted the accuracy of the WIW balance sheet as at 16 May 1997[27] which included the value of the Dalian land as RMB 210 million. In this agreement the major asset of WIW is described in the first schedule in these terms:

"[WIW] has an 80% equity interest in the Dalian [Joint Venture] Company, incorporated in the People's Republic of China (Incorporation number: 0121954) which holds 100% title to a land of approximately 400,000 square metres with an acquisition value of RMB 210,000,000 (valuation per Land Bureau of December 1996 is RMB 400,000,000.00).

(6) On 18 June 1997, in the RML valuation which was obtained on the instructions of CCR, the Dalian land is valued at RMB 480,000,000.

197. The principal evidence as to value offered on behalf of SBS was that of Mr Wong who adopted, for his valuation, the Direct Comparison Method and, as an alternative, the Residual Valuation Method. He observed that, on his inspection in March 2003, there were erected on the Dalian land, three detached houses with a total floor area of 1,554 m2. In his report of 25 May 2003, he says he was asked to value the company WIW as at 16 June 1997. This is the date of the WIW balance sheet annexed to the share sale agreement of 26 June 1997. His criticisms of the balance sheet are directed only to the value of the Dalian land. Mr Wong expressed his conclusion that the value of the company WIW, was $US 2,585,000 of which the value he attributed to the Dalian land was $US 2,400,000. Since the interest of WIW was only 80 percent, this result is achieved by attributing to the Dalian land a total value of $US 3,000,000. Notwithstanding the 19 pages of his report, Mr Wong gives no explanation as to how this value was arrived at. It was, to adopt the expression of counsel for CCR, a non-speaking valuation.

200. For his reasoning, it is necessary to read his supplementary report dated 5 November 2003. In this, Mr Wong first undertakes a direct comparison of the subject land with the sale of the adjoining Golden Pebble Golf Course. The price of this very substantial property of 1.33 million m2, he said, was $US 17,024,000. That is, an average of $US 12.8 (RMB 106) per m2. After making adjustments to this figure, Mr Wong expressed the opinion that the Dalian land was worth $US 7.55 per m2 giving it a total value of $US 3,029,167.62, which he rounded off at $US 3,000,000.

203. It appears that the $US 12.80 price attributed to the golf course property was in fact the fee charged by the Land Authority when it assigned the land to the developer in 1993. In this sense, it is comparable with the assignment fee of RMB 160 ($US 19.28) per m2 charged to Dalian Gold Star for the Dalian land in February 1996. Accepting for this purpose, as some witnesses maintained, that there was no significant variation in land values between the dates[28], this means that the value per square metre of the Dalian land was about 1.5 times that of the adjoining golf course land, each in an undeveloped state at the time of assignment. Mr Wong's analysis ignores this: in his view the value of the Dalian land is about 60 percent of that of the golf course land.

206. The principal adjustments which Mr Wong made to the assumed equivalent value of $US 12.80 per m2 was a reduction of 25 percent for landscape and environment and 20 percent for user restriction. With respect to the landscape adjustment, it was pointed out by counsel for CCR that this represented the landscaping improvements carried out on the golf course after the assignment. Mr Wong then explained that he was thinking, not only of these improvements, but also of the natural advantages enjoyed by the golf course site. I found his explanation unconvincing.

209. The other substantial adjustment was for user restriction. He referred to the conditions attaching to the assignment of the Dalian land to which I have referred. The difficulty with this is that restrictions of a different kind were imposed upon the assignment of the golf course land. The permitted use, as it appears in the assignment of that land, was made for the construction of a golf course and recreational complex area. Nothing more is known. To my mind, counsel for CCR was justified in criticising this adjustment.

212. In short, I am not prepared to act on Mr Wong's valuation supported by the Direct Comparison Method.

215. Mr Wong then undertook a residual value analysis which also produced an undeveloped land value of $US 3,000,000. This was arrived at as follows:

This land price was then rounded off at RM 24.8 million which converted into approximately $US 3,000,000 or $A 4,000,000.

220. A similar, but more sophisticated, analysis was undertaken by Mr Tse. He produced a spreadsheet in which the items were valued on a quarterly basis over six years from July 1999 to the end of 2002. Unfortunately, his table does not show the totals for these items, but he said that the total sales income was RMB 1,272.5 million, about seven times the figure estimated by Mr Wong. His total figure for development costs was RM 964.4 million, over eight times Mr Wong's comparable figure. He adopted 10 percent for finance costs and 3 percent for marketing costs. This produced a present day capital value of RMB 551,508,873 which, after deduction of the developer's profit, produced a sum of nearly RMB 480,000,000 which, he said, was the sum a developer might reasonably pay to purchase the Dalian land.

223. Both valuers acknowledged that the end result of these calculations very much depends upon the figures which are used for the variables. Much attention in this regard was directed to the major items of difference, the sales figures and the development cost figures.

226. In undertaking an evaluation of this evidence it must be acknowledged that, at the relevant date, little work had been carried out on the project. A permit had been issued but with a rather limited scope of development. The developer on the other hand, had produced a brochure with a grandiose depiction of the project which appears to be far beyond the development contemplated in the assignment agreement of the preceding year. For example, the conditions of the assignment included a plot ratio which would permit a total of 60,166 m2 gross floor area over 10 percent of the site, 40,110.7 m2. The land use permitted was the construction of residential villas. The instruction to RML in June 1997 included a project brief with rather different expectations. The gross floor area was there said to be 88,000 m2, of which the details show over 200 luxurious villas (50,000 m2), hotel (38,000 m2), international club and other supporting facilities, such as shopping and convention centres. Elsewhere, it is said that 38,000 m2 is to be the total area of the hotel, entertainment and commercial complex. All is to be of the highest standard with luxurious appointments.

229. The Project Summary dated June 1997 published by CCR is even more enthusiastic. The design of the international club shows a 16 floor structure catering for a high standard of entertainment. I pause to recall that the conditions of the assignment include a height limit of eight metres.

232. In the Project Summary, but not in the project brief, some assumptions as to the project financial forecast are set out. These are that the land cost is RMB 480 million, and the construction costs are RMB 3,500 per m2 for villas and RMB 4,500 per m2 for the international club. The selling price is estimated at RMB 10,000 per m2 for the villas and RMB 16,000 per m2 for the club.

235. I return to Mr Wong's residual value analysis. It proceeds upon the selling price of RMB 3,000 for villas and a cost of about RMB 1,500 per m2 for construction. Mr Tse rejects with reasons these rates as unrealistic for the type of development contemplated and I agree.

238. I have mentioned that Mr Wong's methodology was not sophisticated. He failed to adjust the costs and the sales figures for inflation and to adjust them back to present day values at the point where the present value of the land was to be calculated.

241. Mr Wong resisted criticisms of his analysis, saying that he relied upon the conditions under which the developer held the land. These included the physical aspects of the development to which I have referred[29]

and also that it should be completed by the end of October 1997. The exercise which he undertook was the financial analysis which a suppositious buyer of the land for development purposes is assumed to have undertaken in order to fix an appropriate purchase price. Such a buyer in the present case, Mr Tse said, would have known the plans of the developer to enlarge the project beyond that permitted under the February 1996 assignment. Such a buyer would, of course, realise that the construction was not really under way and could not be completed within four months as required in the assignment agreement.

246. Mr Tse said that such a buyer would know these things and would have a view about the prospects of obtaining an extension of the scope of permitted work and the time for its completion. I agree. It will be recalled that the warranty as to the accuracy of the accounts relevantly, concerns the value of the principal asset of the company, 90 percent of whose shares were the subject of the sale. In a commercial sense, it was a share in this asset and its profitability which SBS was purchasing for $A 46,500,760.[30]

249. I conclude that I am not prepared to act on either basis of Mr Wong's valuation of the Dalian land.

252. Evidence was also given on this matter by Mark Russell Lipson of SLA Partners Pty Ltd, Certified Practising Accountants. Mr Lipson did not offer himself as a valuer, but he did prepare, at the behest of SBS, a residual valuation model to test the development value of the property. He used this to conduct a sensitivity analysis to test a range of discounts on the profit to achieve the value of the property as determined by RML. His table where this task was undertaken shows a project profit of RMB 1,526,436 which, expressed as a percentage of sales, is 68.51 percent. I regret that this table is of little value for my purposes. The figures for sales, RMB 2,228,200,000 and construction costs, RMB 441,000,000, were taken, he said, from the spreadsheet cash flow included in CCR's Project Summary of June 1997. He then brings to account the $US 3 million (RMB 24,900,000) value of the land and produces the project profit of 68.51 percent. If the RML valuation were substituted, this profit would be 46.9 percent. Mr Lipson said that if this were done, it would be necessary also to modify the figure for construction costs. I am not sure that I understand his reason for this. In any event, there is no evidence that a project profit of some 50 percent would be so inappropriate for a Chinese entrepreneur that the RML figure, or any such figure, should be doubted. Mr Lipson did not claim knowledge of this market.

255. I conclude from all of this that I am not persuaded by the defendants' valuation witnesses, that the interest of WIW in the Dalian land should have been shown in its accounts as 80 percent of $US 3 million.

258. This is, however, not the end of the matter. The defendants will succeed on this point if they show that the figures in the WIW accounts do not disclose a true and fair view. This might be demonstrated if the figure for the principal asset is erroneous to a lesser extent than suggested by the defendants' witnesses. I turn now to consider whether the defendants have discharged this onus by mounting a successful attack on the RML valuation.

261. The RML valuation of June 1997 was also a non-speaking valuation. No details are given in it as to how the valuation of RMB 480,000 million is arrived at. Mr Tse provided two further reports setting out a basis for the RML valuation and responding to Mr Wong's report. These are each dated 11 February 2004.

264. Mr Tse's says in his reports that he had no material upon which to undertake a direct comparison method valuation, for there was no comparable sales data.

267. He then undertook a discounted cash flow analysis to which I have briefly referred[31]

. As I have mentioned, his sales figures assumed a development of the kind described in the Project Summary and that the construction program would start in mid 1997 and be completed at the end of 2002. His total construction costs were based at a rate per square metre of RMB 3,000 for the villas and RMB 4,500 for the commercial areas, with an 8 percent per annum inflation allowance. These are the rates for construction of the project forecast contained in the Project Summary of June 1997. They are to be contrasted with Mr Wong's rates for villas of RMB 1,500 per m2. Mr Tse maintained, despite attack, that these rates were appropriate in China and I accept this to be the case. The basis for the construction figures in his spreadsheet were not otherwise disclosed.

272. His sales figures were based on rates per m2 of RMB 9,000 for the villas and RMB 14,000 for commercial areas with a 10 percent growth rate. These rates are less than the equivalent RMB 10,000 and RMB 16,000 in the Project Summary. They are very much greater than the RMB 3,000 adopted by Mr Wong.

275. In support of his sales rates Mr Tse referred to 13 projects which he described as being similar. For the most part the comparable sales rates were taken from sellers' brochures. For example, the villas on the adjoining Dalian Golf Club course were on offer for an average of RMB 12,793 per m2 but, as Mr Wong pointed out, none had been sold.

278. Mr Tse said that he had information as to actual sales on one of the projects in his list, the Hillsborough Golf Resort at Mission Hills near Hong Kong. In this development 13 to 20 villas had been sold at prices ranging from RMB 16,000 to RMB 17,000 per m2. This is a very unsatisfactory basis for accepting Mr Tse's sales rates. It was, however, supported by his opinion, derived from his experience of developments of a similar kind in China, that his selected sales rates were realistic.

281. I remain profoundly uneasy about accepting Mr Tse's discounted cash flow analysis. I say this despite the fact that I found him an impressive and reliable witness with considerable relevant expertise. As I have mentioned, such an analysis is sensitive to the accuracy of the figures which are fed into it, and the figures in the present case are not well supported by hard detailed evidence.

284. Nevertheless, my task is to decide the issues on the balance of probabilities. I am certainly not satisfied that the defendants have discharged the onus which they bear of satisfying me that the RML valuation gives other than a true and fair value of the Dalian land. With considerable misgiving I would, if it were necessary, make an affirmative finding that the RML valuation does give a true and fair valuation of that asset. I decline, on the material before me, to embark upon my own analysis of the figures provided so as to produce a third valuation.

288. In paragraph 5B(ba) of the defence, it is alleged that CCR was in breach of its warranty as to the continuing accuracy of the WIW accounts as follows:

"(ba) As at the date of the Share Sale Agreement (26 June 1997), the WIW accounts did not disclose a true and fair view of the affairs, financial position, assets and liabilities of WIW unaffected by any unusual, extraordinary, exceptional or non-recurring item or material change since the Accounts Date (Schedule 3A, Clause 4);

Particulars

As at the date of the Share Sale Agreement, the Plaintiff and/or WIW had not paid approximately RMB 50 million, being the balance of the land use right premium in respect of the land use right presented in the WIW Accounts as part of the Share Sale Agreement. By an agreement made on 18 June 1997 (CB 1046), WIW assumed the liability of [Dalian Golden Star] to pay RMB 50 million to the State Owned Land Authority which has the right to issue a State Owned Land Use Rights Certificate. The WIW accounts, as at the date of the Share Sale Agreement (26 June, 1997) therefore did not present a true and fair view, by reason of being affected by an unusual, extraordinary, exceptional or non-recurring item, alternatively a material change since the accounts dated (16 June, 1997) to the affairs, financial position, assets and liabilities of WIW."

292. The balance sheet in the WIW account is prepared as at 16 June 1997. It does not show any liability to Dalian Gold Star of RMB 50 million. Nor is there anything in the share sale agreement which discloses this liability. By cl 4.3, CCR warranted that there had been no material change to the accounts since 16 June 1997.

295. On behalf of CCR it was put that no material change occurred because the liability which WIW assumed under the supplementary Joint Venture Agreement to pay RMB 50 million to the Land Authority did not arise until the agreement had been approved by the Land Authority. This approval was not given until 26 November 1997.

298. There are some very surprising features in the supplementary Joint Venture Agreement apart from the apparent disconformity between the sum mentioned and the balance apparently owing to the Land Authority for the assignment fee of the Dalian land[32]

. First, the agreement is dated 18 June 1997, shortly prior to the share sale agreement. Assuming it was entered into on that date, it is remarkable that it was not mentioned in the share sale agreement, especially since it was by this agreement that the rights to the Dalian land passed to the Dalian Joint Venture Company. Mr Shan said, rather baldly, that the supplementary agreement was known to SBS. This evidence was not contradicted and I accept it.

303. Second, the rights of the Dalian Joint Venture Company to the Dalian land had long been treated as held by that company. This appears to have been assumed in the agreement of 9 February 1996 whereby WIW allotted further shares to CCR; the land use rights permit was issued to the Dalian Joint Venture Company on 21 June 1996; it is implicit in the sub-joint venture agreements of 10 March 1997; in the agreement of 31 May 1997 Schedule 1 it is said that the Dalian Joint Venture Company holds 100 percent title to the Dalian land. It may be, therefore, that the supplementary Joint Venture Agreement had the function of confirming this fact rather than that of disposing of a land interest.

306. Finally, the liability upon which the defendants place reliance is not free from difficulty. By article 2 of the supplementary Joint Venture Agreement WIW agreed at the request of Dalian Gold Star to pay to the Land Authority RMB 50 million, being the balance of the assignment fee. This amount was to be put to the credit of WIW in the accounts of Joint Venture. The agreement was executed by the parties pursuant to resolutions of the Board of Directors of each of them on the same date, 18 June 1997. The resolution of the Dalian Joint Venture Company Board includes a statement that the money had been paid by WIW to the Dalian Joint Venture Company and that it was to be treated as the contribution payable to the Dalian Joint Venture Company under the joint venture and that any surplus should be treated as a loan by WIW to the Dalian Joint Venture Company. This loan is to be repayable as profit.[33] This is mirrored in the resolution of the WIW Board.

309. Under the Dalian Joint Venture Agreement of 2 February 1996 WIW was to contribute to the joint venture $US 4.8 million (RMB 39.84 million) and Dalian Gold Star $US 1.2 million (RMB 9.96 million) which, by article 10, was payable within three months of the issue of the business licence. This licence was issued on 18 April 1994. Whether these payments were made is not known to me. No such liability appeared in any of the WIW balance sheets which were in evidence.

312. Returning to the sum of RMB 50 million mentioned in the supplementary Joint Venture Agreement, the sum might appear in the books of WIW as a liability to Dalian Gold Star until it was paid. No witness was called or any account produced to prove the payment by WIW to the Land Authority or, indeed, to anyone. The nearest to any evidence is the statement in the board minutes of the Dalian Joint Venture Company to which I have referred[34]

: the money had been paid by WIW to the Land Authority on behalf of that company. If this were correct it should be treated as an asset of WIW rather than a liability. Counsel for the defendants preferred to characterise the liability as a current liability, namely a debt of RMB 50 million due and payable to the Land Authority. I doubt that this is, strictly speaking, correct, for the Land Authority was not a party to the agreement by which the liability arose.

317. This is a very unsatisfactory and obscure state of affairs. I remind myself that contract of WIW and its accounts passed to SBS on 27 June 1997. It is SBS which bears the burden of proof of this issue. I am not satisfied that it has discharged this burden.

321. The Dalian Joint Venture Agreement is annexed to the share sale agreement as Schedule 7. By cl 7.1 of the CCR warranties, CCR warranted that:

"The Dalian Joint Venture Agreement is valid and enforceable and has not been amended. The copy of the Dalian [Joint Venture] Agreement contained in Schedule 7 is a complete, accurate and up to date copy of that agreement and incorporates all amendments."

325. It was not disputed that the terms of the supplementary Joint Venture Agreement of 18 June 1997 would operate to vary or supplement the Dalian Joint Venture Agreement. The allegation of the defendants in paragraph 5B(f) of the defence is that, in breach of the CCR warranty:

"(f) The Dalian [Joint Venture] Agreement contained in Schedule 7 was amended prior to the Share Sale Agreement by an agreement between [Dalian Golden Star] and WIW dated 18 June, 1997.

Particulars

The agreement is a document entitled 'Sino-Foreign Joint Venture A Contract Concerning Dalian Jinshitan Baotong Real Estate Development Company Limited Supplementary Agreement' which is pleaded by the Plaintiff in paragraph 9B(b) of its Second Further Amended Reply and Defence to the Defendants' Amended Defence and the First Defendant's Amended Counterclaim dated 3 November 2003. A copy of the original supplementary agreement is at CB 1044 with a translation at CB 1047."

329. The only point of substance raised in defence to this allegation is that the supplementary Joint Venture Agreement was not in force on 27 June 1997, for it had not been approved. Until this approval was given, no amendment was effected. I am persuaded that this is a good answer to the allegation. Accordingly the suggested breach of warranty has not been made out.

The Failure to Contribute to Construction Costs

333. Unlike the other alleged breaches, the allegation here is that of a breach by CCR of a term of the share sale agreement, not a breach of a CCR warranty. Clause 2.3 of the share sale agreement provides:

"2.3 By entering into this agreement, the parties agree to use their best endeavours at all times to perform the duties as described below respectively: a) [CCR]: i) to get all necessary approvals for the development of the [Dalian land]; ii) to provide project management and construction services at commercial terms and arrange for completion of the development where appropriate; iii) to provide funding of up to US$ 21 million to cover construction costs on the development of the [Dalian land] and should conditions arise where [SBS] is unable to contribute funding under which circumstances, [CCR] will be given the option to increase its shareholding, and [SBS] agrees to reduce its shareholding accordingly, in proportion to the amount of funds injected by [CCR]."

337. The allegation in paragraph 5B(e) of the defence is simply that CCR "failed to provide funding of up to $US 21 million to cover construction costs on the development of the Dalian [land]".

340. The allegation, as pleaded, is not a breach of cl. 2.3(a)(iii), which is a best endeavours clause. Furthermore, the obligation of CCR is to provide an indeterminate sum up to $US 21 million for construction. In order to establish such a breach, it would be necessary for SBS to show that the sum in question had been requested and, perhaps, that it was required for construction. No evidence of these matters was offered. It is clear that little construction work was undertaken. Some 1,500 m2 of buildings had been constructed when Mr Wong visited the site recently and an unknown amount of infrastructure.

343. SBS, upon whom the burden of proof lies, called no evidence of non-payment of any sum for construction costs. Such evidence as was before me suggested CCR made a substantial contribution to these costs. On 24 November 1997 CCR wrote a letter to China Hotel Holdings Ltd ("CHH"), a wholly owned subsidiary of LLH. CHH at this time was the transferee of the WIW shares, the subject of the share sale agreement. In its letter CCR records its acknowledgment "(relying on the representations made by the directors of [CCR])", that a total sum of $HK 2.1 million had already been advanced. This letter is primarily concerned to record an agreement between CCR and CHH whereby CCR is to provide a loan facility in the sum of not more than $US 21 million. Such a facility to be drawn upon by notice given by a director of CHH. Such an agreement appears to be in implementation of the obligation of CCR under cl. 2.3(a)(iii).

346. There was little evidence of performance of this facility. There was produced, however, a fourth draw down notice signed by the directors of CHH and dated 30 September 1998. This notice calls for payment of $US 2,008,000 and notes that the accumulated draw downs including that sum to date were $US 7,300,000.

349. In these circumstances the breach of cl 2.3 has not been made out.

353. Each of SBS and CCR contended that it had lawfully terminated the share sale agreement. The contention of SBS was pursued with considerable vigour right to the end of the trial. That of CCR was rather more faint.

356. The SBS termination was pleaded to have been effected by a letter dated 13 November 1998 and that the right to terminate arose by reason of the breaches previously alleged[35]. The defence then goes on to allege, perhaps gratuitously, that CCR accepted this termination by entering into a new agreement for the sale to SBS of the WIW shares by heads of agreement dated 27 November 1998 and conversations between the lawyers for the parties[36]. It is then alleged that, having accepted the termination by SBS on 13 November 1998 and by entering into negotiations for the new agreement, CCR is estopped from denying the SBS termination[37].

359. It is necessary, first, to undertake the task of disentangling these pleas. The share sale agreement contained, in cl. 7.6, provision for termination by SBS for breach of a CCR warranty. For other breaches, such as a breach of cl. 2.3 with respect to the provision of funds for construction, the right to terminate depends upon common law principles. The two pleas which are concerned with the events after 13 November 1998 are said to depend, one upon the other. But this is not so. The first alleges a new share sale agreement which presumably replaced that of June 1997. In fact it was not seriously contended at trial that such an agreement was entered into: there were negotiations and an executed heads of agreement, but they led to nothing. The second plea alleges that entering into negotiations for a new agreement gave rise to the estoppel.

362. I have already mentioned that, for practical purposes, there is no benefit to SBS in maintaining this termination argument. While it is true that the obligation of SBS to pay the first instalment of the balance of the price payable for the WIW shares was not to accrue until 31 December 1998, SBS accepted that it must give credit for the whole price in its damages calculation.

365. I have not found that any of the breaches relied upon as supporting the termination has been made out.

368. The termination was very late. Under the share sale agreement the vendor, CCR, was to transfer the shares and to pass control of the board of directors of WIW to SBS. This was done in June 1997. Thereafter, it had continuing obligations under cl. 2.3[38]

and under cl. 7.2 with respect to its warranties. But otherwise the contract was, from its point of view, executed. There was no evidence when the events, relied upon as providing the foundation for the termination, came to the attention of SBS. In the meantime, SBS or its subsidiaries had dealt with the shares as its own and continued to do so, even up to the trial. For example, it accepted from CCR a transfer of the WIW shares into the name of its nominee and wholly owned subsidiary, LLH. On 6 November 1997, LLH further transferred the shares to its wholly owned subsidiary CHH. These companies, with more or less enthusiasm and success, pursued the project until 28 May 2003 when the project, that is WIW's shares in the Dalian Joint Venture Company and its shares in the two sub-joint venture companies, the Dalian Entertainment Joint Venture and the Dalian Club Joint Venture, were sold to Lucky Dragon Ltd.

373. I should mention also in this regard that on 18 December 1997 the Land Authority issued to the Dalian Joint Venture Company a State-owned Land Use Rights Certificate for 399,590.7 m2 of the Dalian land. This appears to have been issued following a number of decisions of the Land Authority made on 26 November 1997. It was accepted before me that these decisions would have been made by the Authority following a request by the Dalian Joint Venture Company and I infer that, at least by this date, the matters referred to were known to SBS. First, the supplementary joint venture agreement of 18 June 1997 was accepted and approved. Second, the Land Authority agreed to issue a State-owned Land Use Rights Certificate to the Dalian Joint Venture Company within seven days of payment by it of RMB 28 million and, within seven days of the payment of a further RMB 10 million, to issue like certificates to Dalian Entertainment Joint Venture and to Dalian Club Joint Venture. The balance of the assignment fee unpaid appears to have been waived. On 2 March 1998 two State-owned Land Use Rights Certificates were issued to these sub-joint venture companies for the same area totalling 399,590.7 m2. Leaving aside the discrepancy between this area and the total area of the Dalian land, 401,108 m2, a fact which did not appear to cause concern, any deficiency in the title of the joint venture to the Dalian land was then resolved. The required fee $HK 27 million (RMB 28,890,000) was paid on 5 December 1997 and RMB 9,100,000 on 28 March 1998.

376. I return to the SBS termination contention. It is to my mind evident from the documents in evidence that SBS, by 26 November 1997, was aware of the facts that a State-owned Land Use Rights Certificate had not been issued on 27 June 1997, that some RMB 50 million remained to be paid for the assignment fee on that date and that the supplementary Joint Venture Agreement had been entered into shortly prior to that date and that it knew its terms. On 24 November 1997, through its subsidiary CHH, SBS was aware of the loan facility which CCR provided for up to $US 21 million for construction costs. No evidence on these matters was led by any party other than from Mr Shan.

379. Nearly 12 months passed with the project moving forward, albeit slowly, until 13 November 1998, shortly before the first instalment of $A 10 million was to be paid by SBS. It was then that SBS delivered its termination letter.

382. By cl. 7.6 of the share sale agreement it is provided as follows:

"If there is a material breach of or inaccuracy: ... (b) in any of the [CCR] Warranties on or before Completion, [SBS] may, without prejudice to any other remedy available to it, immediately terminate this agreement by notice in writing to [CCR]."

It was put that the letter of 13 December 1998 was given pursuant to this clause. Assuming, contrary to my conclusion, that all or some of the breaches of warranty were made out, termination under this provision was nevertheless not available. Accepting that the suggested breaches were material breaches or inaccuracies, a point which was not debated before me, there is a requirement that SBS act promptly. I am inclined to the view that the word "immediately" in cl. 7.6 means that SBS must move promptly after it discovers the existence of the breach, rather than "summarily" as counsel for the defendants contended. But, even so, it would be an affront to common sense and legal principle that a party, who was aware of a breach of warranty entitling the summary determination of a contract, could stand by and continue to pursue this contract as it pleased and then terminate it some considerable time afterwards. I leave to one side the further fact in this case that SBS, having claimed to terminate the contract under which it obtained the WIW shares, has, since termination, has, through its subsidiaries, continued to enjoy the shares and has recently sold off the underlying asset. To my mind SBS has affirmed the contract and waived its right to terminate.

387. I mention, finally, in this context, the allegation that the SBS termination might be justified for a breach of cl. 2.3 of the share sale agreement, assuming it to have been made out. The sum involved is substantial and it was important for the venture that the construction proceed. Had the breach been established I would have concluded that it warranted rescission of the agreement provided that the other requirements for this had been made out and no affirmation had occurred.

390. I conclude, therefore, that the purported determination of the share sale agreement by SBS on 13 November 1998 was ineffective.

393. CCR in its turn, also alleges that, by its conduct in purporting to terminate the share sale agreement, SBS itself repudiated the agreement[39] and that CCR has accepted the repudiation by its issue of the writ in this proceeding on 9 November 2001. In principle, I accept this to be correct. Nevertheless, no relief is sought other than the payment of the balance of the price. This entitlement does not depend upon termination. Accordingly, I express no final view on this matter.

397. In the event that my findings as to the SBS termination should not stand, I shall also briefly set out my views on its claim for damages.

400. An immediate difficulty here arises. Clause 7.7 of the share sale agreement contemplates that SBS might seek damages or costs and expenses incurred as a result of a breach of the agreement. By Schedule 4 Part A, CCR granted an indemnity to SBS in the following terms:

"[CCR] must indemnify [SBS] from any and all liabilities, damages, losses, costs, claims, demands, proceedings or expenses which [SBS] suffers or incurs by reason of:

(a) any of the Warranties or any other covenant or representation made in this agreement being untrue or inaccurate in any respect; or

(b) any breach of any Warranty or any covenant made under this agreement."

If damages or indemnity are sought for a breach it must be causally related to that breach. This is not the SBS claim; although it alleges that it has suffered loss and damage by reason of the pleaded breaches, it seeks damages for termination. The quantum is expressed to be the contract price for the WIW shares, $A 46,500,760, less the paid deposit of $A 500,760, less the true value of the shares transferred, namely, $A 3,101,760 less the unpaid balance of $A 46 million. This leaves a sum owing by SBS to CCR of $A 3,101,760. Further consequential damages totalling $A 497,245 are then added to the claim. A final component to be added is $A 3,891,300, being the value of escrow agreement. This produces a total damages claim payable by CCR to SBS of $A 1,286,785. There was before me no debate about the principle of this claim. It was the components which were in issue.

407. The first issue relates to the true value of the WIW shares at the date of the purchase. The figure adopted in the claim is that of Mr Lipson which is, in turn, based upon a valuation of the Dalian land of $A 4 million. I have rejected this valuation. The second issue was the amount of $497,245.00. This represented the costs of continuing the development. The component items were not proved. The claim is bad in principle for the expenses were incurred in 2003 after the suggested termination and, presumably, at a time when SBS or its subsidiaries sought to continue with the project in the hope of making a profit. Moreover, these expenses are part of the costs incurred, not by SBS, but by the joint venture vehicles in pursuing the project. I reject them entirely.

410. The third issue concerned the value of the escrow agreement. Of all the claims made by SBS this is the most astonishing. I have already briefly summarised this matter[40]. What is said by SBS is that CCR took no steps prior to or in 2001 and 2002 to prevent it, SBS, from committing breaches of the escrow agreement which it had provided to CCR by way of security for its payment of the balance of the price. As an explanation for its conduct, it was said on behalf of SBS, that the share sale agreement had been terminated so that this escrow agreement had then no basis for existence. In any event, on the question of damages, SBS contended that CCR should give credit for the value of the security as if it had called upon it following the failure of SBS to make payment of the instalment of $A 10 million due on 31 December 1998. Accepting for a moment that SBS is correct in asserting that the share sale agreement was terminated on 13 November 1998 and that this meant it did not have to pay the $A 10 million instalment, in some way it now contends that CCR should have enforced its non-existing entitlement to payment by calling upon the security and receiving the Sino Consolidated Enterprises Shares. This it did not do, with the consequences that it received no benefit from the security and that SBS received the value of the shares upon their sale. Nevertheless, it was put that CCR must give to SBS credit for this non-existent benefit. It is not an attractive argument; I reject it.

414. It follows from all of this that, whether the share sale agreement be terminated by CCR or not, CCR is entitled to the balance of the price of the WIW shares, namely $A 46 million. The counterclaim of SBS will be dismissed. The claim of CCR against LLH was not pursued. I will hear counsel further as to the terms of the orders to be made as to interest and costs.

[1] This company later changed its name to Golden Pebble Beach Development Ltd, but I shall call it by its original name.

[2] Third defence and counterclaim filed 16 February 2004.

[3] Further amended statement of claim filed 26 June 2003, paras 15-18.

[11] Statement of claim, paras 13, 14 and prayer para B.

[12] This company changed its name to Sun Consolidated Enterprises Ltd on 3 December 1999, and to Suntech Environmental Group Ltd on 28 June 2002.

[14] Land Administration Law of the People's Republic of China, Art. 11.

[15] Land Administration Law of the People's Republic of China, Art. 13.

[16] Urban Real Estate Administration 1995 Art. 15.

[17] It may be that this agreement merely formalised a pre-existing joint venture, for the certificate of its approval issued on 6 June 1996 gives the approval date as 12 April 1994.

21] [1915] HCA 54; (1915) 20 CLR 231 at 237.

[22] Hustlers Pty Ltd v The Valuer-General (1967) 14 LGRA 269 at 277, per Else-Mitchell J.

[23] Phillipou and Others v Housing Commission of Victoria (1969) 18 LGRA 258, per Barber J.

[24] Henderson v Amadio Pty Ltd (No. 1) (1995) 62 FCR1 at 122, per Heerey J.

[25] Henderson v Amadio Pty Ltd (No.1) (1995) 62 FCR1 at 123, per Heerey J.

[26] Adelaide Brighton Cement Ltd v South Australia [2001] SASC 381 at [7], per Debelle J.

30] On a balance sheet basis the company was said to be worth $US 46,463,800 ($A 61,951,733).

35] Defence, paras 9, 10, counterclaim para 30.

[38] This clause is set out at [[] above.