The proper law of contract in the context of determining the existence of an equitable proprietary interest in shares gives rise to complicated questions as to the characteristics necessary for concluding that a contract gives rise to a proprietary interest in equity. The characteristics identified therein are relevant for deciding the appropriate remedy to be granted in the case of a breach of that contract. In 廈門新景地集團有限公司 v Eton Properties and others, the Hong Kong Court of Final Appeal (the ‘Court’) considered both issues.

Under an agreement governed by PRC law (the ‘Agreement’), the 1st and 2nd Defendants (respectively, Eton Properties and Eton Properties (Holdings)) are contractually obliged to transfer the shares in the 5th Defendant’s (PRC Legend Properties) parent company, Hong Kong Legend (4th Defendant), to a company nominated by the Plaintiff. The Plaintiff argued that by virtue of the Agreement, it has an immediate beneficial interest in the shares of Hong Kong Legend Properties, and this interest is something which a Hong Kong Court should recognise. This follows from Akers v Samba Financial Group, which held that a fiduciary relationship may arise from an executory contract for the sale of shares. The issues arising from the Plaintiff’s constructive trust claim is twofold: (i) whether Hong Kong law is the relevant law for the purpose of deciding whether such a beneficial interest existed (First Laser Ltd v Fujian Enterprises (Holdings) Ltd), and (ii), if the first question is answered in the affirmative, whether the contractual obligation to transfer the shares borne by Eton Properties Limited and Eton Properties (Holdings) Limited was specifically enforceable as a matter of Hong Kong law.

Rejecting the Plaintiff’s arguments, Lord Sumption NPJ differed from the lower courts’ approach. His Lordship held that a finding that PRC law does not recognise the concept of trusts is not an adequate answer to the enforceability of the Agreement. Instead, it is necessary to ask ‘whether the characteristics of the [Agreement] in PRC law were such as to make it specifically enforceable in Hong Kong law’. Agreeing with the lower courts’ decision to dismiss the Plaintiff’s claim, his Lordship held, for two related reasons, that Hong Kong law would not enforce the Agreement.

First, it is generally a bar to the specific performance of a contract that the obligation to be enforced has not arisen because it is subject to a condition precedent which has not been satisfied (subject to limited exceptions). In the present case, a piece of land was to be delivered to the Plaintiff well before the shares were to be transferred. Developments on that piece of land, including demolition, design and construction, were also required before the transfer could take place. As the satisfaction of these conditions was not within the Plaintiff’s sole control under PRC law, nor was it in a position to waive them, none of the exceptions to the general bar against specific performance mentioned above exist. Second, the conditions to be satisfied are inherently disputable and called for a high level of cooperative performance between the parties. As such, it would not be practical for a court to supervise the performance of the Agreement.

Lord Sumption NPJ’s reasoning reinforces the importance of analysing, from the perspective of the lex situs of shares, whether an equitable interest in those shares is capable of subsisting. Such analysis has to be supported by the law governing the agreement that gives rise to the aforesaid equitable proprietary interest. If the governing law of an agreement does not recognise the concept of trusts, this does not mean the agreement cannot possess characteristics which may nevertheless give rise to an equitable proprietary interest under the lex situs. Therefore, future practitioners need to be mindful of two issues. First, how a court that does not recognise the concept of trusts would articulate the characteristics of an agreement which, if interpreted in a jurisdiction that recognises the concept of trusts, would give rise to a trust. Second, and on a related note, practitioners need to consider how their argument before a court that recognises the concept of trusts (eg in a common law jurisdiction) would be affected by the characteristics of the agreement as identified by the governing law of that agreement.

Thomas Yeon is a Judicial Assistant at the Hong Kong Court of Final Appeal.