MARINER INTERNATIONAL HOTELS LTD AND ANOTHER v. ATLAS LTD AND ANOTHER

FACV No. 3 of 2006

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

 FINAL APPEAL NO. 3 OF 2006 (CIVIL)

(ON APPEAL FROM CACV NO. 291 OF 2004)

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J U D G M E N T

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Chief Justice Li :

1.  I agree with the judgment of Mr Justice Bokhary PJ.

Mr Justice Bokhary PJ :

Introduction

2.  The first thing to note about the contract in the present case is the difference between its structure and its commercial reality.  It was structured as a contract essentially for the sale and purchase of shares.  The price was $1.07 billion.  And the shares constituted the entire issued share capital in a British Virgin Islands company named Crest Inc. (“Crest”) which owned all the shares in a Hong Kong company named Ocean Time Investments Ltd (“Ocean”) on whose land in Tsuen Wan a hotel was being constructed.  As a matter of substance, however, this amounted to a contract for the delivery of that hotel for $1.07 billion.  This is because getting Crest meant getting Ocean; getting Ocean meant getting the hotel; and there is no evidence that either Crest or Ocean was worth anything substantial apart from the hotel.  Such is the commercial reality of this contract.  And as we shall see in due course, the written agreement which the parties signed contains conditions reflecting this reality.  The hotel concerned was eventually named the Bay Bridge Hotel, but I will refer to it throughout simply as “the Hotel”.

3.  Before moving on, I should briefly explain why I said that this contract was structured essentially as one for the sale and purchase of shares.  This is simply because it also involved the sale and purchase of certain shareholders loans.  But nothing turns on that in this appeal.

4.  Negotiations between the parties had been commenced by a letter dated 29 July 1996 from the surveyors C Y Leung & Co. Ltd to the Sino group’s Chairman, Mr Robert Ng.  By this letter the Hotel was put forward as a “438-room hotel development” for sale on a “turnkey basis”.  The letter enclosed what it called an “offering summary”.  Under the heading “Basis of Sale”, the offering summary said that “[t]he hotel property is offered for sale on turnkey basis with full scale fixture and fitting as a three/four-star hotel”.  By this time construction of the Hotel was already in progress. 

5.  A written agreement (“the Sale Agreement”) was eventually signed on 19 December 1996.  It was entered into by the 1st appellant as purchaser and the 1st respondent as vendor.  I will refer to them as “the Purchaser” and “the Vendor” respectively.  Performance by the Purchaser was guaranteed by the 2nd appellant while performance by the Vendor was guaranteed by the 2nd respondent.  Both appellants are companies in the Sino group while both respondents are companies in the Hang Lung group.  So neither side lacked experience or expertise in property development or hotel operation.

6.  Under the terms of the Sale Agreement, completion of the purchase was “conditional upon” the Vendor (i) procuring the practical completion of the Hotel by 30 June 1998 and (ii) proving good title to the property.  On that date the Purchaser declined to complete the purchase.  It so declined on the basis of its contention, disputed by the Vendor, that the Vendor had not done either of those two things.  Each side accused the other of having repudiated the Sale Agreement.  The Purchaser sued the Vendor and the Vendor’s guarantor.  And the Vendor cross-claimed against the Purchaser and the Purchaser’s guarantor.

7.  About half way through a 64-day trial in the first half of 2004, Burrell J acceded – “readily” he said – to a joint application by the parties that that trial be confined to liability only.  By the judgment which he handed down on 2 August 2004, Burrell J :

(i) held that it was the Purchaser who repudiated the Sale Agreement;

(ii) dismissed the Purchaser’s claim;

(iii) gave the parties liberty to seek directions on the further conduct of the proceedings and/or the assessment of the damages suffered by the Vendor; and

(iv) made an order nisi awarding the Vendor and its guarantor the costs of the trial.

8.  On 30 December 2005 the Purchaser and its guarantor’s appeal to the Court of Appeal (Rogers VP, Le Pichon JA and Tang JA, as Tang VP then was) was dismissed with costs nisi.  And now by leave of the Court of Appeal they appeal to us.  So the Purchaser and its guarantor are now before us as the appellants while the Vendor and its guarantor are now before us as the respondents.  From now on it will be enough to speak of the Purchaser and the Vendor without burdening this judgment with further references to either guarantor.

9.  I acknowledge with gratitude the assistance which I have derived from the arguments which counsel on both sides have so carefully and ably prepared and presented.  Before us the Purchaser’s team of counsel is headed by Mr Jonathan Sumption QC as it had been before the Court of Appeal.  (I should mention that the Purchaser’s first leader at trial left the case thereafter.)  Mr Neville Thomas QC heads the Vendor’s team of counsel before us, and had done so before both courts below.

10.  In so far as is material, “completion” is defined by clause 1.02(a) of the Sale Agreement as “subject to the fulfilment of the conditions … 30th June 1998”.  And clause 1.02(a) defines “conditions” as “the conditions set out in clause 2.01”.  The term of the Sale Agreement which speaks of completion of the purchase being conditional upon the Vendor having procured the practical completion of the Hotel is clause 2.01(b).  The whole of clause 2 is headed “Conditions”, and clause 2.01(b) reads :

“Completion of this Agreement is conditional upon ... the Vendor having procured the practical completion of the Hotel with furniture, fixtures, fittings and decoration (the hotel rooms shall be equivalent to the standard and quality of finishes of the Grand Plaza Hotel rooms as renovated in December 1996 and the main lobby of the Hotel shall be equivalent to the standard and quality of finishes of the existing Grand Plaza Hotel main lobby) and having obtained (i) the occupation permit in respect of the Hotel issued by the Building Authority and the Certificate of Compliance and (ii) the licence in respect of the Hotel granted by the Office of the Licensing Authority of Home Affairs or the Hotel and Guesthouse Accommodation Authority Department under Section 8(2)(a) of the Hotel and Guest House Accommodation Ordinance (or any other equivalent licence permitting the commencement of operation of the Hotel) (‘the Hotel Licence’) in order for the Hotel to commence business on or immediately after Completion.”

The whole of clause 5 is headed “Completion”, and clause 5.01 speaks of completion taking place “subject to the Conditions being duly fulfilled”.  Clause 13 made time of the essence.

11.  I should explain the reference in clause 2.01(b) to the Grand Plaza Hotel.  As we have seen, the offering summary spoke of a “three/four-star hotel”.  But during the negotiations which resulted in the Sale Agreement, the Vendor suggested that the standard and quality of the Hotel be specified by reference to an actual hotel.  This suggestion was taken up.  The actual hotel eventually selected by the parties for this purpose was the Hang Lung group’s Grand Plaza Hotel in Kornhill (which happens to be a four-star hotel).

Rival arguments as to the meaning and effect of clause 2.01(b)

12.  As to the meaning and effect of clause 2.01(b), the rival arguments are as follows.  The Purchaser argues (i) that practical completion of the Hotel by 30 June 1998 is a condition precedent to completion of the purchase and (ii) that by “practical completion” clause 2.01(b) means a state of affairs in which the Hotel has been completed free from any patent defects other than ones to be ignored as trifling.  Disputing that, the Vendor submits that the Purchaser is barred from arguing for that meaning.  And the Vendor argues (i) that practical completion is not a condition precedent to completion of the purchase and (ii) that by “practical completion” clause 2.01(b) means no more than a state of affairs in which the Hotel is capable of being opened for business even though works are still being continued.  As to the facts, the Vendor accepts that as at 30 June 1998 the Hotel was not free from non-trifling patent defects.  So the Purchaser must succeed if its construction is right.  But if it is the Vendor’s construction which is right, then there will be the factual question of whether the Hotel was capable of being opened for business on 30 June 1998, which the Vendor contends that it was while the Purchaser contends to the contrary.  And there will also be the question of whether the Vendor had proved good title, which it contends that it had while the Purchaser contends to the contrary.

Practical completion in the building contract sense

13.  The rival constructions go to the meaning of the expression “practical completion” as used in the Sale Agreement.  But choosing between them on an informed basis involves considering them against the backdrop of what the expression is understood to mean in building contracts.  As to this, Mr Sumption submits that as used in building contracts “practical completion” is a legal term of art well understood to mean a state of affairs in which the works have been completed free from patent defects other than ones to be ignored as trifling.  As far as the position in England is concerned, the correctness of that submission is convincingly attested by weighty judicial and academic statements.  The judicial statements which I have particularly in mind are those : by Viscount Dilhorne in Westminster Corporation v. J Jarvis & Sons Ltd [1970] 1 WLR 637 at p.646; by Lord Diplock in P & M Kaye Ltd v. Hosier & Dickinson Ltd [1972] 1 WLR 146 at p.165; and by a highly experienced Official Referee (HH Judge Newey QC) in H W Nevill (Sunblest) Ltd v. William Press & Son Ltd (1981) 20 BLR 78 at p.87 and in Emson Eastern Ltd v. EME Developments Ltd (1991) 55 BLR 114 at pp 119 – 122.

14.  Turning to the academic statements, the ones which I have particularly in mind are to be found : in Hudson’s Building and Engineering Contracts, 11th ed. (1995), Vol.2 at p.1130, para. 9-043; in Keating on Construction Contracts, 8th ed. (2006) at pp 774 – 775, para. 19–113; and in Emden’s Construction Law at I [141] and II [606] – [610].

15.  Now as far as the position in England is concerned, Mr Thomas does not challenge the building contract meaning of practical completion put forward by Mr Sumption.  But Mr Thomas queries whether that meaning holds good for the position in Hong Kong.  In Big Island Contracting (HK) Ltd v. Skink Ltd [1990] 1 HKC 69; (1990) 52 BLR 110 Kempster JA for the Court of Appeal felt unable to distinguish between practical completion and substantial performance.  No authorities were cited apart from Hoeing v. Isaacs [1952] 2 All ER 176 and Bolton v. Mahadeva [1972] 1 WLR 1009, neither of which concerned practical completion.  Not surprisingly, the correctness of the Big Island case was queried in a commentary forming part of the report of the case in the Building Law Reports.  And the case was referred to in Emden at II [606] – [610] for the purpose of demolishing it.  This was done quite simply by pointing out that practical completion and substantial performance are distinct, the doctrine of substantial performance having been developed in order to ascertain the right to payment under an entire contract.

16.  I do not think that experienced lawyers in Hong Kong ever looked with confidence to the Big Island case for the meaning of practical completion.  They looked instead to the English cases and books.  The references to the Big Island case in the Building and Construction volume of Halsbury’s Laws of Hong Kong (to be found at paras 65.041 and 65.044 of vol.3 of the 2003 Reissue) are accompanied by references to the English cases.  And in Yuen Chong Fire Engineering Co. Ltd v. Ngo Kee Construction Co. Ltd, DCCJ 3761/04, 19 January 2005, for example, HH Judge Chow cited the then latest edition of Keating for the meaning of practical completion, making no mention of the Big Island case.  It is time to give the Big Island case decent burial, and I would formally overrule it.

Certificates issued

17.  On 27 June 1998 the architect, Mr Nelson Chow of Chows Architects Ltd, issued two certificates of practical completion.  One was issued under the building contract entered into by Ocean, and the other was issued under the fitting-out contract entered into by Ocean.  The body of each certificate reads:

“In accordance with Clause 15(1) of the Conditions of Contract, we hereby certify that subject to the making good of any defects which appear during the Defects Liability Period

The works were practically completed on:  June 27, 1998

and the Defects Liability Period will expire on: June 27, 1999

We declare that one moiety of the retention moneys deducted under previous certificates in respect of the said works is to be released.”

18.  Before us, Mr Thomas has not re-newed his argument that practical completion under the Sale Agreement is a purely documentary requirement satisfied by certificates of practical completion under the building and fitting-out contracts.  That was the argument on which Burrell J decided the case in the Vendor’s favour.  But it was rejected by the Court of Appeal which decided the case in the Vendor’s favour on Mr Thomas’s “capable of being opened for business” argument instead.  I can readily understand why Mr Thomas declined to re-new his “documentary requirement” argument, for as Mr Sumption took the precaution of pointing out :-

(a) Detailed documentary requirements for completion are to be found in the Sale Agreement. Clause 2.01(b) itself provides for the Vendor to procure an occupation permit and statutory hotel licences before completion. And clause 5.01(a) provides for the delivery of eleven categories of further documentation upon completion.  Some of this documentation relates to the works. Yet there is no provision in the Sale Agreement for a certificate of practical completion.  In a contract which identifies with so much precision the documentary requirements for completion, it is inconceivable that the certificates of practical completion would be omitted if they were really intended to be the measure of contractual performance.

(b) The certificates of practical completion were issued for the purposes of the building and fitting-out contracts, and in accordance with their terms. But the Purchaser was not party to the building and fitting-out contracts. It was not even aware of their terms, which were certainly no part of the factual matrix to the Sale Agreement. Moreover, the terms of the building and fitting-out contracts are different from those of the Sale Agreement in significant respects. For example, they contained no equivalent to the obligation in the Sale Agreement to procure finishes equivalent to those of the Grand Plaza. Nor did they provide for completion of the works by 30 June 1998 or contain any provisions as to time being  of the essence.

(c) It must be borne in mind that the architect has a recognised status as an adjudicator of performance as between the parties to the building and fitting-out contracts, although it should be noted that even in that context his decisions may be challenged. He has no status at all under the Sale Agreement, save for the limited purpose of granting extensions of time for the completion of the works. These will affect the Sale Agreement by virtue of the express provisions of clause 5.05.  That stipulation in itself suggests that these parties did not intend the architect's decisions to affect their relations in any wider respects.

(d) In Global Time Investments Ltd. v. Super Keen Investments Ltd. (2000) 3 HKCFAR 440, which concerned a clause in some ways similar to clause 5.05, this Court drew attention to the unsatisfactory consequences of incorporating architects' procedures from a building contract into an agreement for sale and purchase. In that case the consequences had to be accepted because the parties there had expressly provided for it.  Those remarks, however, provide a strong reason against the incorporation by mere implication of architects’ procedures into an agreement for sale and purchase_.

Purchaser’s argument as to condition precedent

19.  For his argument that practical completion of the Hotel by 30 June 1998 is a condition precedent to completion of the purchase, Mr Sumption relies essentially on the plain language of the Sale Agreement, particularly the words “is conditional upon” in clause 2.01(b). 

Purchaser : freedom from non-trifling patent defects is practical completion

20.  And for his argument that by “practical completion” clause 2.01(b) means a state of affairs in which the Hotel has been completed free from any patent defects other than ones to be ignored as trifling, Mr Sumption deploys submissions running broadly along the following lines :–

(a) In using the expression “practical completion”, the parties have chosen to employ a well-known legal term of art with an established meaning in building contracts wherein it is routinely used to mean a state of affairs in which the works have been completed free from any patent defects other than ones to be ignored as trifling under the maxim de minimis non curat lex (the law does not concern itself with trifles).  The parties, being property developers, may be taken to have been aware of that meaning.  Although the Sale Agreement is not a building contract, its subject-matter is, as a matter of substance and commercial reality, a building under construction.  And clause 2.01(b) in particular is concerned with the Vendor’s obligation to procure the completion of building works.  There must therefore be a strong presumption that the ordinary building contract meaning of “practical completion” was intended.

(b) The contention to the contrary advanced by the Vendor necessarily involves the suggestion that its concluding words “in order for the Hotel to commence business on or immediately after Completion” qualify the other requirements of clause 2.01(b) so as to require the Purchaser to accept something less than practical completion as normally understood in building contracts provided that the uncompleted premises could be operated as a hotel.

(c) But that suggestion is wrong.  Clause 2.01(b) provides for a number of things to have been done before completion of the share purchase.  There is no reason to regard any of them as qualifying any of the others.  The concluding words of clause 2.01(b) simply create an additional condition for completion, which was intended to give effect to the parties’ intention that this should be a turnkey contract.  They reflect the fact that the Sale Agreement required the premises to be completely equipped and furnished for operation as a hotel, subject only to limited and expressly agreed exceptions (such as the provision of bed-linen).  So the concluding words of clause 2.01(b) are not to be read as part of any of the preceding obligations.  Alternatively, the only preceding obligation of which they are a part is the immediately preceding obligation to procure the statutory hotel licences.  They cannot be read as qualifying the obligation to procure practical completion.  If anything, they emphasise and strengthen that obligation.

(d) The consequence of reading the concluding words to qualify what goes before would be that the whole of the obligation imposed by clause 2.01(b) is contained in those words.  That would render what goes before largely redundant.  It would, for example, mean that it would be open to the Vendor to hand over the Hotel with one wing unbuilt or with workmen still in possession of the upper stories, provided that guests could be accommodated in the rest of the building.

(e) There is no reason why practical completion in the building contract sense should be treated as a standard so exacting that it is unreasonable to expect the Vendor to achieve it.  This is because there is nothing unreasonable in expecting a vendor to deliver a building free of non-trifling patent defects that by definition he was or should have been aware of.  In the discharge of their obligations, building contractors have been performing to this standard for many years.  And an obligation to procure building works is no different in principle.

(f) The background to this contract and the express requirement for finishes in the public spaces and guest rooms equivalent to those of the Grand Plaza show that the parties envisaged a hotel of some standing.  That such a hotel can be regarded as ready to be opened for business while being less than practically complete is an artificial and commercially unattractive notion.

Vendor’s Flywin objection

21.  In the Court, Mr Thomas’s first line of attack against Mr Sumption’s arguments as to condition precedent and the meaning of practical completion is that they depart from the way in which the case had been fought at trial.  At trial, Mr Thomas says, the issue of which party wrongfully repudiated was investigated in the context of Hong Kong Fir Shipping Co. Ltd v. Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26.  Mr Thomas says that the Purchaser’s stance at trial had been that there were breaches which went to the root of the contract and were therefore repudiatory.  And the Vendor’s stance at trial, Mr Thomas says, had been that any breaches of the contract were non-repudiatory so that the Purchaser’s proper course was to complete the purchase on 30 June 1998 and then, so far as appropriate, sue for damages after such completion.

22.  As is well known, we said in Flywin Co. Ltd v. Strong & Associates Ltd (2002) 5 HKCFAR 356 at p.369B – C that “where a party has omitted to take a point at the trial and then seeks to raise the point on appeal, [he] will be barred from doing so unless there is no reasonable possibility that the state of the evidence relevant to the point would have been materially more favourable to the other side if the point had been taken at the trial.”  A Flywin objection is one taken by way of a fairly and squarely made complaint of that nature about the state of the evidence.  No such complaint was made on the Vendor’s behalf in the Court of Appeal.  Nor is any such complaint to be found in the Vendor’s printed case.  Even at the hearing before us, Mr Thomas made no such complaint in relation to Mr Sumption’s argument that practical completion of the Hotel was a condition precedent to completion of the purchase.  But Mr Thomas did at the hearing before us make such a complaint in relation to Mr Sumption’s argument on the meaning of practical completion, thus taking a Flywin objection to it.  It is unprecedented for a party to take a Flywin objection here without having taken it in the Court of Appeal.  I do not think that such an objection should be entertained save in exceptional circumstances, especially when the party taking it has not included it in his printed case so as to give the other side full and fair warning of it.  The circumstances here are not exceptional, and I would not entertain the Vendor’s Flywin objection.

Purely a question of construction

23.  No harm whatsoever was done by Mr Thomas having fallen into the understandable temptation of taking a Flywin objection at the hearing before us.  Nor was any harm done by his not having taken it earlier.  Mr Sumption contends that the building contract meaning of practical completion had been put forward on the Purchaser’s behalf even at the trial although the focus then may have been different.  And even leaving that aside, I do not think that the points available to Mr Thomas can support the requisite complaint about the state of the evidence.  Like the question whether practical completion was a condition precedent, the question of what clause 2.01(b) means by “practical completion” is purely one of construction.  So it would not matter even if the Purchaser’s case is a new one, the situation being of the type to which Lord Diplock referred in Bahamas International Trust Co. Ltd v. Threadgold [1974] 1 WLR 1514 when he said this at p.1525 F-H :

“In a case which turns, as this one does, upon the construction to be given to a written document, a court called upon to construe the document in the absence of any claim for rectification cannot be bound by any concession made by any of the parties as to what its language means.  This is so even in the court before which the concession is made; a fortiori in the court to which an appeal from the judgment of that court is brought. The reason is that the construction of a written document is a question of law. It is for the judge to decide for himself what the law is, not to accept it from any or even all of the parties to the suit; having so decided it is his duty to apply it to the facts of the cases.  He would be acting contrary to his judicial oath if he were to determine the case by applying what the parties conceived to be the law, if in his own opinion it was erroneous.”

Vendor’s argument for Hong Kong Fir Shipping approach

24.  Of course Mr Thomas’s first line of attack is by no means his main one.  His submissions in support of a Hong Kong Fir Shipping approach rather than a condition precedent approach run along the following lines :-

(a) The fundamental character of a contractual term (ie whether it was intended to take effect as a condition or as a lesser, intermediate promise) can only be decided by the consequences flowing from its breach.  The real question, ignoring the language choices of the contract, is: what in each instance is the substance of the transaction?  One looks at the circumstances surrounding the contract to decide whether the intention of the parties will best be carried out by treating any given promise as one the breach of which entitles the promisee to terminate the contract or only as one which entitles him to claim damages against the promisor.

(b) That is all the more so where, as in the present case, the express quality terms of the contract are confined to achieving equivalence between identified parts (guest rooms and lobby) of one building ie the Hotel and the same parts of a comparator building ie the Grand Plaza, whereas the quality to be attained in all other parts is left to be covered by implied terms.

(c) In a hotel of 400 plus bedrooms, which the Hotel is, some thousands of components will need to be assessed when determining compliance or otherwise with the contractual demands as to quality.  The importance of those components to the functioning or to the decorative appearance of the Hotel will vary over a very wide range, and the consequences of a shortfall from prescribed standard will be equally variable.  One could hardly devise a set of terms more unsuitable than those in clause 2.01(b) for treatment as a series of promissory conditions, each one resulting in discharge of the Sale Agreement in the event of a breach.  Everything will depend on considerations of degree.  Unless the breaches of the quality terms were so numerous and so grave as to go to the root of the contract, they would sound in damages only.

(d) The only requirement in default of which the Purchaser would be entitled to terminate the contract was the requirement that the Hotel be ready to open for business on 30 June 1998 (which the courts below held that it was). 

Vendor : readiness to be opened for business is practical completion

25.  As to why he says that the parties cannot have intended to use the expression “practical completion” in the building contract sense, Mr Thomas puts forward the following matters :-

(a) In a building contract, which would contain building specifications, an architect’s certificate of practical completion is a conventional part of the machinery which enables the contractor to claim payment of any retention monies (usually 5% or 10%) withheld up to that stage.  And it triggers the start of the defects liability period.  An architect who mistakenly issues such a certificate may well be challenged on that account.  But nothing done by him, whether right or wrong, will release the principal parties from their bargain.  By way of contrast, the incorporation of such a building contract provision into a sale and purchase agreement like the present one may have cataclysmic consequences.  On the Purchaser's case, any failure of performance by the Vendor, however minor it may be provided that it cannot be ignored as trifling, will afford the Purchaser a complete release.  That release can – and in the present case would have – come at the very moment when the plans of both parties have come to fruition.  By June 1998 the Vendor's commitment to the building works over the past two or three years will have been matched by the Purchaser's commitment in staff, publicity and equipment purchases directed at the imminent opening of the Hotel.  It is inconceivable that the parties would have wished such an enterprise to be liable to be aborted at such a juncture by any minor albeit non-trifling breach.

(b) The nature and purpose of a building contract practical completion clause are very well-known to solicitors and property developers.  It would be obvious to them that such a provision is wholly unsuitable for incorporation into a sale and purchase agreement.

(c) There are two possibilities.  One is that the parties, through carelessness in their choice of language, unwittingly foisted a building contract procedure on to a sale and purchase agreement.  That is how and why the expression “practical completion” came to be used in the Sale Agreement.  And the inapposite and unmanageable situation which has resulted should be dealt with by reading the expression “practical completion” in the Sale Agreement differently from the sense in which that expression is used in building contracts. 

(d) As for the other possibility, it arises out of the fact that the Vendor has undertaken various obligations.  Some of these obligations – relating to permits and licences – are clear-cut.  But the performance of others – involving works to an unspecified standard or to a standard equivalent to that of the Grand Plaza – is to be judged according to whether it permits the Hotel to be opened for business by the completion date.  And this would be the ordinary meaning to be accorded to a requirement of practical completion in a context such as this.

Condition precedent rather than Hong Kong Fir Shipping

26.  For reasons which can be stated very briefly, I am of the view that practical completion of the Hotel by 30 June 1998 is a condition precedent to completion of the purchase.  The language of the Sale Agreement is clearly to that effect.  And there is nothing in the context calling for some other construction.  This is plainly and simply not a Hong Kong Fir Shipping sort of situation.

Freedom from non-trifling patent defects is practical completion

27.  As to what clause 2.01(b) means by “practical completion”, I have already outlined the rival submissions made by Mr Sumption and Mr Thomas.  Each has put forward his submissions most attractively.  Ultimately, I find myself persuaded by the submissions put forward by Mr Sumption rather than those put forward by Mr Thomas.  In my view, what clause 2.01(b) means by “practical completion” is a state of affairs in which the Hotel has been completed free from any patent defects other than ones to be ignored as trifling. 

28.  I should of course indicate that I recognise the force in Mr Thomas’s point as to what he called the “cataclysmic consequences” of not performing to that exacting standard.  But Mr Sumption’s riposte is, I think, a sufficient one.  As defined by Mr Thomas’s argument, the standard of readiness to be opened for business as a hotel means – as it had to for the Vendor’s purposes given the facts of the present case – such readiness even though works are still being continued.  That is, to put it mildly, difficult to reconcile with the delivery of a hotel on a turnkey basis which is, as a matter of commercial reality, what was obviously contemplated by the parties.  In saying that, I have not forgotten Mr Thomas’s description of C Y Leung & Co. Ltd’s reference to “sale on a turnkey basis” as an estate agent’s blurb.  But I think that it was more than that, and forms an important component of the factual matrix.

29.  True it is that the standard of freedom from non-trifling patent defects is an exacting one.  But it does not, after all, demand more than the avoidance of what is apparently defective and, moreover, apparently so to a degree exceeding what can be ignored as trifling.  A person who has to perform to that standard can protect himself.  He can do so by leaving himself sufficient time to achieve that standard.  The Vendor should have negotiated sufficient time for it to do that.

It was the Vendor who repudiated the Sale Agreement

30.  The position reached is therefore as follows.  Practical completion of the Hotel by 30 June 1998 to the standard of freedom from non-trifling patent defects was a condition precedent to completion of the purchase.  The Vendor accepts that the Hotel was not free from such defects as at that date.  Therefore, contrary to the judgments of the courts below holding that the Purchaser had repudiated the Sale Agreement, it was the Vendor who had done so.  This was repudiation in the sense which Mr Sumption described as “repudiation in the Chitty sense”.  That description was a reference to the passage in Chitty on Contracts, 29th ed. (2004), vol.1 at p.1243, para.21-015 which speaks of failure to perform by a stipulated time which is of the essence entitling the innocent party to terminate the contract and claim relief.  For the foregoing reasons, I am of the view that the Purchaser’s appeal must succeed.

31.  Nevertheless I consider it appropriate, for reasons which will become apparent, to deal with certain things said below on the factual question of whether the Hotel was ready to be opened for business by 30 June 1998 and on the question of proof of good title. 

Fire protection

32.  There is one aspect of the issue of readiness to be opened for business which I propose to deal with even though I would allow the appeal no matter how that issue is to be resolved.  It is the aspect of fire protection.

33.  Under the Building Department’s Code of Practice for Fire Resisting Construction (“the Code”) every building must be divided into fire compartments to inhibit the spread of fire.  And the Code lays down the minimum fire resistance period (“FRP”) for the vertical and horizontal partitions of each type of compartment, depending on its location and purpose.  The compartments concerned in the aspect of fire protection with which I am now dealing are the riser shafts running through the full height of the Hotel.

34.  Under cross-examination, Mr Jeffrey Gosnell, an expert called by the Vendor, made what Burrell J obviously regarded as an admission that the FRP for the riser shafts was two hours.  This is obvious because Burrell J considered whether the walls of the riser shafts, which were thick enough to afford one hour’s FRP, had been rendered with at least the 13mm of gypsum plaster each side which rendering would have increased the riser shafts’ FRP to two hours.

35.  Having set for himself the question of whether the riser shafts’ walls had at least 13mm of gypsum plaster each side, Burrell J said :

“There was no certainty about the evidence on this point.  There was rendering on both sides.  The outside was the plaster of the guest room walls, the inside was what appeared on the photographs.  Where there is a lack of evidence on a particular point such as this, some comfort may be drawn from the fact that a certificate of fire safety had been issued by the Fire Services Department and has been renewed since.  It is not evidence of compliance and on its own is insufficient to be relied on by [the Vendor] as an answer to everything.  If a scintilla of detail is missing however, the existence of the certificate helps to put the bigger picture into focus.”

And having said that, Burrell J observed that “final factor for finding against [the Purchaser] is that it only really flowered into an issue during the cross-examination of [Mr Gosnell].”

36.  Once that issue relating to fire safety arose, I cannot accept that its lateness justified not treating it as seriously as its nature demanded.  As for the evidential uncertainty to which Burrell J referred, Mr Sumption points out that all the experts were agreed that the rendering mentioned by Burrell J was not made of gypsum plaster but of cement or concrete.  As for the certificate of fire safety issued by the Fire Services Department from which certificate Burrell J drew some comfort, Mr Sumption points out that such certificates are not concerned with the integrity of fire compartments or the observance of the Code, which are matters for the Buildings Department and not the Fire Services Department.  Such certificates are, Mr Sumption points out, concerned only with fire installations : in other words, matters such as sprinklers, alarms and telephone links to the Fire Brigade.

37.  Rogers VP, speaking for the Court of Appeal on the fire safety aspect of the case, referred to the Technical Specifications in the tender documents.  Those Technical Specifications, he observed, required that all wall plaster should be of “Alltek”.  On the basis of his own research into Alltek on the internet, Rogers VP concluded (i) that Alltek satisfied British Standard 476 (a specification for fire propagation testing); (ii) that a product which satisfied British Standard 476 was likely to have been approved as an alternative fire-resistant material by an authority recognised in Hong Kong under para.6.5 of the Code; and (iii) that if the walls of the riser shafts were not rendered with gypsum plaster they would have been rendered with Alltek or some other product meeting British Standard 476 and approved in Hong Kong.

38.  In addition to pointing out that the Technical Specifications which Rogers VP referred to were for the fitting out contract and not the building contract, Mr Sumption makes the following (among other points) against Rogers VP’s research and his conclusions based thereon :-

(a) None of it was dealt with in the evidence given at the trial or in submissions addressed to Burrell J or to the Court of Appeal.

(b) No notice of the point was given to the parties before the Court of Appeal handed down judgment.

(c) Rogers VP’s analysis ignores the unchallenged evidence given by both side’s experts at the trial, which evidence was cited to the Court of Appeal, to the effect that the rendering was in fact cement or concrete.

39.  Citing this Court’s decision in Sky Heart Ltd v. Lee Hysan Co. Ltd (1997-98) 1 HKCFAR 318 at pp 333 – 338, Mr Sumption submits that the process by which the Court of Appeal affirmed Burrell J’s findings on rendering so violated basic principles of forensic procedure as to involve a serious miscarriage of justice to be remedied by the rare and exceptional course of disturbing concurrent findings of fact.

40.  There are two reasons why one need not go further into that submission.  First, as to the disposal of future cases, I am sure that Rogers VP will be no less keen than any judge to avoid depriving any party of a proper opportunity to be heard or himself of that party’s assistance.  Secondly, Mr Thomas declines to support the process by which the Court of Appeal affirmed Burrell J’s findings on rendering.  Instead Mr Thomas submits that his client’s expert Mr Gosnell was wrong in thinking that the requisite FRP for the riser shafts was two hours.  All that the Code required for the compartments like the riser shafts was, Mr Thomas submits, an FRP of one hour (which the riser shafts had even without any rendering).  Mr Sumption says that that submission is an example of what rightly attracts a Flywin objection.

41.  In taking his Flywin objection, Mr Sumption points out that the Code’s requirements, being a matter of practice, are susceptible of expert evidence.  He also points out that the re-examination of Mr Gosnell did not involve any suggestion that he might have been wrong in thinking that the requisite FRP for the riser shafts was two hours and went instead to rendering.  If any such suggestion had been made, Mr Sumption says, the Purchaser might have been able to meet it by adducing or extracting further evidence.

42.  That is a Flywin objection to which I can see no adequate answer.  And this brings me to the reason why I have dealt with this aspect of readiness to be opened for business even though I would allow the appeal whatever my view on the question of readiness.  The reason is simply this.  It is necessary to make it clear, lest anyone reading them in future might believe otherwise, that the judgments of the courts below should not be regarded as guidance on what the Code does or does not require.  This is of course not to criticise the learned judges concerned.  It is based on a real doubt as to the completeness of the data produced in the case relevant to what the Code really requires.

Proof of good title

43.  What remains is the question of showing good title.  Even though I would allow the appeal whatever my conclusion on this question, there are some aspects of the relevant law which it is appropriate to address having regard to the Court of Appeal’s approach and the arguments addressed to us.

44.  Clause 2.01(a) the Sale Agreement made completion of the purchase conditional upon the Vendor proving that Ocean had good title to the property.  In this case, proof of good title means of course proof that Ocean had good title.  That understood, it is unnecessary to keep referring to Ocean.  The Purchaser’s case on proof of title is that, even if the Vendor could convey good title, it had failed to prove that at the crucial time.  This failure, the Purchaser contends, arises from the Vendor’s failure to provide satisfactory answers to its requisitions on title.  These requisitions are contained in a letter dated 23 June 1998 from the Purchaser’s solicitors.  The answers are contained in a letter dated 27 June 1998 written in reply by the Vendor’s solicitors.

45.  On 29 June 1998 the Purchaser’s solicitors wrote another letter relating to the matters first referred to in their letter of 23 June 1998.  Mr Edward Chan SC dealt with requisitions on the Vendor’s behalf.  As to the letter of the 29th, the contents of which are characterised in the Vendor’s printed case as “follow-up requisitions”, Mr Chan makes two submissions.  The first is that the letter of the 29th was a waiver of any right to treat those answers as the Vendor’s final position.  And the second submission runs thus.  The letter of 29th was also a representation by the Purchaser that it would give the Vendor a reasonable opportunity to make further answers to the requisitions first raised on the 23rd in so far as they were repeated or further pursued on the 29th.  But the termination on the 30th deprived the Vendor of any such opportunity.

46.  In my view, the letter of 29th did not waive anything.  Nor do I think that it made any representation that further time would be given, for all that it did was irrelevantly to repeat in more aggressive terms what had been said on the 23rd.

47.  Save for one relating to the ground floor, all the requisitions relate to works on the roof of the Hotel which works had not been included in the building plans for the Hotel approved by the Building Authority.  The Purchaser stresses that its representatives had been excluded from the roof.  It was granted access thereto under an order made by Yuen J (as Yuen JA then was) on 10 June 1998 following a contested hearing.  And it was not until 20 June 1998, three days before the requisition letter of 23 June 1998, that its representatives were able to view the roof.

48.  The requisitions with which we are now concerned relate to :

(i) the installation of concrete plinths laid on the roof to support and distribute the weight of the air-conditioning chiller plants;

(ii) the installation of steel gondola posts, fixed into the roof slab, to support the steel davits from which was suspended the gondola for carrying workers while they are engaged in window cleaning and maintaining the external surfaces of the building; and

(iii) openings in the roof slab for the passage of chilled water return pipes.

It is the Purchaser’s contention, which the Vendor disputes, that these works gave rise to a reasonable doubt as to whether there would be enforcement action by the Building Authority or re-entry by the Government.

Exemption from Building Authority approval

49.  Section 2(1) of the Buildings Ordinance, Cap.123, defines “building works” and s.41(3) of that Ordinance makes provision for exemption from the requirement of approval from the Building Authority for the carrying out of any building works.  Building works is defined to include “any kind of building construction, site formation works, ground investigation in the scheduled areas, foundation works, repairs, demolition, alteration, addition and every kind of building operation, and includes drainage works”.  The exemption provided by s.41(3) is in these terms :

“Building works other than drainage works, ground investigation in the scheduled areas or site formation works not involving the structure of any building may be carried out in any building without application to or approval from the Building Authority : Provided that nothing in this subsection shall permit any building works to be carried out in contravention of any regulation.”

So the first requirement for building works to come within this exemption is that they must not involve the structure of a building and the second such requirement is that they must be in a building.

50.  As to the first requirement, Burrell J construed “involving the structure” to mean adversely affecting the structure.  It appears to be the view of Le Pichon JA, who spoke for the Court of Appeal on the question of showing good title, that “involving the structure” of a building is to be equated with holding the building up.  As to the second requirement, Burrell J thought that the works on the roof of the Hotel were “in” the Hotel because they could be reached by entering the Hotel.  Le Pichon JA referred to a Bill by which it was proposed to amend the exemption by substituting “inside” for “in”.  In her view, this meant that, under the exemption as it stands, works on the roof a building are “in” that building.

51.  Citing Medical Council of Hong Kong v. Chow (2000) 3 HKCFAR 144 in which this Court said that legislation is to be construed purposively, Mr Sumption submits that the exemption has to be construed narrowly in a manner consistent with the statutory scheme of which it forms a part.  I accept that submission.  A purpose, if not the purpose, of the approval scheme of our building legislation is to protect the public by subjecting the matter of structural acceptability to the scrutiny of the Building Authority.  To widen the exemption would be to reduce such scrutiny.  In my view, Mr Sumption is right in his submission, on the first requirement, that building works added to a building involves its structure if they serve a structural function or are capable for some reason of affecting the integrity of the structure.  That is to be derived from purpose.  And it is also to be derived from linguistic consideration, for I think that Mr Sumption is right in characterising the word “involving” as one of the broadest words of association known to the English language.  Perhaps only phrases like “in relation to”, “relating to” and “with respect to” are wider.

52.  As to the second requirement, I accept that, in terms of the exemption, building works on the roof of a building are not “in” the building.  There is a purposive difference relevant to safety between buildings works protected from the elements by being “in” a building and building works exposed to the elements.  I would not cut down the meaning of the word “in” by recourse to the proposed amendment by which “inside” would be substituted for “in”.  One view of the proposed amendment – and I am inclined to think it is the best view – is that it is meant to avoid doubt.

53.  The openings in the roof slabs, it has been established, were made at the time of casting and were therefore covered by Building Authority approval given generally for certain categories of standard detail.  But as far as the installation of the concrete plinths and the installation of the gondola posts are concerned, they would have had to satisfy both requirements in order to come within the exemption and I am not persuaded that they satisfied either requirement.  They involved the structure of the building, for the concept of involving the structure of the building is not limited to holding the building up.  And being on the roof and therefore exposed to the elements despite the roof parapet, they were on the building not in it.

Any real risk of enforcement action or re-entry?

54.  There arises therefore the question of whether there was any real risk of enforcement action or re-entry.  It is settled law that any contravention of the Buildings Ordinance or the regulations made thereunder is an incumbrance on title if there is a real risk that it will lead to enforcement action by the Building Authority or re-entry by the Government.  Under s.24 of the Buildings Ordinance, the enforcement action open to the Building Authority for any such contravention includes demolition of the contravening works.  And as to re-entry, it is common for Government leases to contain – as the present lease does – provisions under which the Government may re-enter for any such contravention.  As attested by many decisions including that of this Court in Jumbo Gold Investment Ltd v. Yuen (2000) 3 HKCFAR 52, a real risk means a risk that is not merely fanciful.  This is a particular feature of the general test for proof of good title which, with the concurrence of the other members of the Court, Sir Anthony Mason NPJ and I articulated thus in Chi Kit Co Ltd v. Lucky Health International Enterprise Ltd (2000) 3 HKCFAR 268 at pp 282I – 283A :

“The burden is on the vendor to prove a good title to the very high standard of proof beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of an incumbrance (MEPC Ltd v. Christian-Edwards [1981] AC 205 at p.220).  The vendor discharges his obligation if he shows to that standard that he is in a position to convey the estate or interest contracted to be sold ‘without any blot, or possibility of litigation to the purchaser’ (Re Stirrup’s Contract [1961] 1 WLR 449 at p.454).”

55.  Before examining the requisitions and answers in detail, there are several observations to make for the purpose of clearing the air, so to speak.  Mr Thomas points to the well-known statement by Fuad JA (later Fuad VP and now Fuad NPJ) in Woomera Co. Ltd v. Provident Centre Development Ltd [1985] 1 HKC 257 at p.275 A-B.  This is that while purchasers are “fully entitled to insist upon their legal rights whatever their motives for seeking to withdraw from their agreements, … they should not be surprised if … their list of condemnations is very carefully scrutinised where, in the absence of any inclination by the vendors to vary their bargain, [the purchasers] were so obviously looking for excuses not to complete”.  I respectfully agree.  But of course very careful scrutiny does not mean scrutiny with a jaundiced eye.

56.  Mr Sumption submits that a fair reading of their judgment makes it plain that the lower courts had formed – and were influenced by – the view that the Purchaser was trying to escape from a purchase which a fall in property prices had made unprofitable.  After pointing out that the Purchaser had been raising concerns even before the property market crashed, Mr Sumption says that it would not matter even if the Purchaser had been motivated by a desire to escape from an unprofitable purchase.  I think that it comes back to very careful but not jaundiced scrutiny.  After all, a party would normally only exercise a right of termination if it suits him to do so.  The legal question is whether there was a right to terminate.

57.  The standpoint from which the question of title is to be approached was identified by Mr Justice Litton PJ in Mexon Holdings Ltd v. Silver Bay International Ltd (2000) 3 HKCFAR 109 at p.117D.  It is that of “a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain”.  The bargain being one for good title, it comes back to the general test of proof beyond reasonable doubt.  And in a case where a purchaser says that he fears enforcement action by the Building Authority or re-entry by the Government, applying that test involves deciding whether the risk of such enforcement action or re-entry is a real risk or merely a fanciful one.

These requisitions and the answers

58.  These requisitions asked whether the installation of the concrete plinths and gondola posts had received Building Authority approval, and whether the holes in the roof slab had been pierced with such approval.  The answers were to the effect that the installation of the concrete plinths and the gondola posts did not require Building Authority approval, and that the holes in the roof slab did not have to be shown on the architectural plans.  Fairly read, the answer in respect of the holes in the roof slab was, in my view, sufficient.

59.  As far as the answers in respect of the installation of the concrete plinths and the gondola posts are concerned, I am of the view that they raised, and ought properly to have an understood to raise, the spectre of unauthorised building works and the Building Ordinance contravention that such works entail.  Mr Sumption realistically recognises that there is available to the Vendor a respectable argument that there was no real risk of enforcement action or re-entry.  I regard that argument available to the Vendor as not only respectable but also right.  So I would not decide the appeal against the Vendor on the ground that it had failed to show good title.  That does not affect the result since I would decide the appeal against the Vendor on the ground that, for the reasons which I have given, it was the Vendor who repudiated the Sale Agreement.

Result

60.  Accordingly, I would allow the appeal so as to : (i) set aside the judgments of the courts below; (ii) declare that the Vendor repudiated the Sale Agreement; (iii) order repayment to the Purchaser of its deposit with interest to be assessed by the High Court if not agreed; (iv) award the Purchaser damages to be assessed by the High Court; and (v) leave the costs here and below to be dealt with by us on written submissions by the parties pursuant to procedural directions to be given by the Registrar of this Court.

Mr Justice Chan PJ :

61.  I entirely agree with the judgment of Mr Justice Bokhary PJ.  I would just like to add a few words on a couple of matters which have arisen during the hearing.

62.  First, I do not think the principles in Hong Kong Fir Shipping Co. Ltd v. Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (which dealt with a seaworthiness clause in a time charter) are applicable in the present case.  Those principles apply to the situation where (as in that case) there is no provision in a contract, whether expressly or by necessary implication, to the effect that a certain term in that contract is a condition the breach of which entitles the innocent party to terminate the contract.  But as Upjohn LJ said at p.63:

“It is open to the parties to a contract to make it clear either expressly or by necessary implication that a particular stipulation is to be regarded as a condition which goes to the root of the contract, so that it is clear that the parties contemplate that any breach of it entitles the other party at once to treat the contract as at an end.”

See also Diplock LJ at p.65.

63.  This, in my view, is what happened in the present case.  As Mr Justice Bokhary PJ said, the language of the Sale Agreement is clear. Upon a proper construction of the whole Agreement, it is clear that the parties have agreed to the effect that practical completion is a condition precedent to completion of the Sale Agreement.  See the definitions of “Completion” and “Conditions”, clauses 2.01, 5.01 and 5.04 (iii) which all refer to the fulfillment of or compliance with the requirements of clause 2.01 on or before 30 June 1998. There is no room for the application of the Hong Kong Fir Shipping principles.

64.  The second matter is the risk of enforcement action or re-entry as a result of the installation of concrete plinths and gondola posts on the roof of the Hotel.  Following a letter of complaint dated 23 June 1998 hand delivered by the Chairman of the 2nd appellant to the Director of Building about these installations, a team of surveyors was dispatched to investigate into the matter.  In a letter dated 17 July 1998 to the Vendor’s solicitors, the Building Authority indicated that there was no contravention of the Building Ordinance as found in the Hotel upon two inspections in July 1998.  It also appears from internal minutes within the Building Department that the possibility of enforcement action was indeed not very high : one of the minutes said : “It is advisable to treat those obvious minor building works outside a building as exempted works. The concrete plinths on the roof may come under this category.” and another said: “A/C plants, gondola installation and the like are plants or equipment which are not ‘building works’ as defined in the BO.”

65.  The presence of structures on the roof of a building often gives rise to disputes between vendors and purchasers as to whether these structures are unauthorized building works and whether there is any real risk of enforcement action or re-entry.  I note from the internal departmental minutes that the Building Department has indicated that it adopts “a flexible approach in dealing with certain common unauthorized amenity features” and that “IE (immediate enforcement) action normally will not be taken against such amenity features, new or existing, subject to certain criteria being fulfilled”.  This obviously makes sense.  On the other hand, the Department also considers it prudent and expects that in appropriate cases, authorized persons in the discharge of their duty and having exercised their professional judgment would indicate amendments on the building plans for the Building Authority’s approval prior to the application for an occupation permit in order to avoid subsequent contentions.

Mr Justice Ribeiro PJ :

66.  I agree with the judgment of Mr Justice Bokhary PJ.

Mr Justice McHugh NPJ :

67.  I agree with the judgment of Mr Justice Bokhary PJ.

Chief Justice Li :

68.  The Court unanimously allows the appeal and makes the orders set out in the concluding paragraph of the judgment of Mr Justice Bokhary PJ.