Interpreting A Commercial Contract—How Far Can The Hong Kong Courts Go?

In a recent decision of the Hong Kong Court of Final Appeal ("CFA") in Sinoearn International Limited v Hyundai-CCECC Joint Venture (a firm) (FACV No.22 of 2012, September 30, 2013) (the "Decision"), the CFA was asked to revisit a widely discussed point of contract law: the extent to which the courts can consider the commercial purpose of the parties when interpreting a commercial contract. It is an area of law which has stirred a flurry of commentary from academics and commercial law practitioners from many common law jurisdictions and one which has now finally been addressed before Hong Kong's highest court.

Summary of Facts

The Decision concerned a dispute over the interpretation of an agreement made between the parties in July 2000 (the "Agreement"). Under the Agreement, Sinoearn International Limited (the "Respondent") agreed to act as the agent of Hyundai-CCECC Joint Venture (a firm) (the "Appellant") to obtain dumping permits from the Mainland Chinese authorities to enable contaminated mud dredged in Hong Kong waters, as part of the Container Terminal 9 ("CT9") development project, to be dumped in Mainland Chinese waters at a dumping ground in South Erzhou, China ("SEZ (China)").

In accordance with the Agreement, the Appellant had the obligation to pay the Respondent for obtaining the dumping permits, and it was common ground that the payment was stipulated in the Agreement as HK$17 per m3. However, due to unforeseen circumstances, the Appellant was unable to dump at SEZ (China), and a dispute ensued as to whether or not the Appellant was under an obligation to dump a minimum quantity of contaminated mud at SEZ (China) and/or make payment to the Respondent for such minimum quantity.

Accordingly, the key issues in this case concerned the interpretation of the Appellant's dumping and payment obligations under the Agreement.

The Muddle Below

When the issue was brought before the courts, the Court of First Instance1 ("CFI") held that the Appellant was not under an obligation to dump (or pay for) a minimum quantity of contaminated mud at SEZ (China). Thus, the Respondent's entitlement to payment under the Agreement was HK$17 per m3 of contaminated mud actually disposed of by the Appellant at SEZ (China).

The Court of Appeal2 ("CA"), however, viewed the contract in a completely different light and set aside the CFI judgment. The CA ruled that the Appellant had agreed to pay the Respondent to secure the right to dump the entire amount of...