XCHRX TSANG MAN CHUNG v. KAR HO DEVELOPMENT CO. LTD.

HCA 8534/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8534 OF 1999

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D E C I S I O N

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Introduction

1. The defendant is in short the developer of a housing development known as "Laguna Verde" (海逸豪園) in Hung Hom. The plaintiff herein was the purchaser of one of the housing units there.

2. The plaintiff commenced this action in May 1999 alleging in essence that the defendant has breached the sale and purchase agreement dated 26 March 1997 ("the agreement") and that the same has been rescinded by the plaintiff. A Defence and Counterclaim was filed on 30 July 1999 denying the claim and alleging that the plaintiff breached the agreement by failing or refusing to complete the sale and purchase.

The Nature of the Plaintiff's Appeal

3. On 16 January 2001, the defendant took out a summons pursuant to RHC Ord. 18 r. 19 and the court's inherent jurisdiction to strike out para. 10 to 16 of the Statement of Claim. The Master made an order in terms of the summons on 19 February 2001. This is the plaintiff's appeal against the said order.

4. Para. 10 to 16 of the Statement of Claim read:-

"10. In breach of clause 4(1)(c) of the Agreement, the Defendant failed to complete the Buildings in all respects in compliance with conditions of the Government Grant in so far as they relate to the Buildings and the building plans on or before 30th November 1997.

11. The Defendant purportedly obtained an extension of time by a letter dated 7th November 1997 issued by the Authorized Person purportedly pursuant to clause 4(5) of the Agreement (hereinafter called "the certificate of extension"). The certificate of extension purportedly granted an extension of 131 days from 30th November 1997 for completion of the buildings to be erected on Phase 1 of the Development and stated that the extension of time so granted appeared to be reasonable having regard to delays caused by the fire and inclement weather occurring during the construction period of the Development. The said extension of 131 days would expire on 10th April 1998.

12. The Plaintiff contends the Defendant was not entitled to such extension of time as the same was unreasonable and without proper or reasonable basis:

(1) There was only one reported incident of number four fire alarm on 13th September 1996 and two reported incidents of number one fire alarm on 12th May 1997 and 28th June 1997 respectively at the Development. The said three fires were put out immediately on the same day.

(2) During the construction period up to 7th November 1997, according to the Observatory, the total number of days of inclement weather as defined in clause 4(5) of the Agreement which could affect construction site work was much less than 131 days.

13. Further or alternatively, if, which is denied, the Defendant was entitled to the said extension of 131 days, wrongfully and in breach of the Agreement, the Defendant failed to complete the Buildings in all respects in compliance with the conditions of the Government Grant in so far as they relate to the Buildings and the building plans on or before 10th April 1998, i.e. 131 days from 30th November 1997.

PARTICULARS

The Plaintiff will rely on the fact that the Defendant did not obtain pre-sale consent from the Director [of Lands] for the residential units, car parking spaces and kindergarten in Towers 1 to 5 of Phase I until 2nd June 1998 and that the PTT [Public Transport Terminus] was not completed until 30th June 1998.

14. Further, the Defendant failed to complete the Buildings in all respects in compliance with the conditions of the Government Grant ... The Plaintiff will rely on the same particulars as stated in paragraph 13 above.

15. By reason of the matters aforesaid, the Plaintiff was entitled to and did rescind the Agreement by a letter dated 28th June 1998, issued by the Plaintiff to the Defendant.

16. Further and/or alternatively.

(a) By the certificate of extension, the Defendant represented that there was a valid extension of 131 days for the completion of the Buildings in accordance with clause 4(1)(c) of the Agreement. In reliance upon the certificate of extension, the Plaintiff failed to exercise his right of rescission under clause 4(4)(a) of the Agreement after 30th November 1997.

(b) The Plaintiff contends that:

(i) the 28 days time limit under clause 4(4)(b) does not begin to run until a reasonable time after the Plaintiff knows of the said misrepresentation; or

(ii) the Defendant is not entitled to rely on the 28 days time limit in clause 4(4)(b) by reason of the said misrepresentation.

(c) If the Plaintiff had known of the misrepresentation on 28th June 1998, the day he sent his said notice of rescission, he would have rescinded the Agreement not only under clause 4(4)(c) but also under clause 4(4)(a) of the Agreement.

(d) By the service of the said notice of rescission, or alternatively by the issue of the Writ herein, the Plaintiff has rescinded the Agreement."

Summary of the Plaintiff's Arguments

5. The plaintiff's arguments in support of this appeal can be summarized as follows.

6. Clause 4(1)(c) of the agreement provided that the defendant should complete "the Buildings" in all respects in compliance with the conditions of the Government Grant in so far as they relate to the Buildings and the building plans on or before 30 November 1997 subject to any extension of time which may be granted by the authorized person in accordance with clause 4(5)(a) thereof.

7. The words "the Buildings" are defined in the agreement as (at least arguably) including the PTT: relying on (among other clauses) clauses 1(1)(b) and 1(1)(g) of the agreement and Kar Ho Development Ltd. v. Axis Investment Ltd. [2001] 1 HKC 86, 92A-C and 99C-D.

8. Because the PTT (being part of the Buildings referred to in the agreement) was not completed by 30 November 1997, the defendant breached its obligations under the agreement. The purported extension of time given by the authorized person in the defendant's favour cannot provide a defence because:-

(a) the purported extension was invalid. It was not given by the authorized person in accordance with clause 4(5)(a)(iv) [fire] or (vi) [inclement weather] of the agreement because the time period purportedly extended could not have been properly given by a reasonable authorized person;

(b) in any event, even if the purported extension were valid, time was only extended by the authorized person to 10 April 1998 but the PTT was only completed by 30 June 1998.

9. Insofar as the defendant relies on clause 4(4)(c) of the agreement, which provides for a period of 6 months from 30 November 1997 to complete the Buildings (and which expired on 31 May 1998), the defendant would still be in breach of the agreement because the PTT was not completed even by then.

10. Clause 4(4)(a) of the agreement provided that the plaintiff would be entitled to rescind the agreement by written notice if the defendant failed to complete the Buildings by 30 November 1997 or any extensions of time granted by the authorized person within 7 days thereafter. The plaintiff further contends that, although no such notice was in fact given within the prescribed time, the time prescribed by clause 4(4)(a) should not start to run until after the plaintiff has discovered the purported extension of time was actually invalid. This is because the true facts have been concealed from him by virtue of the invalid extension of time given by the defendant's authorized person.

11. Clause 4(7) of the agreement provided that the issue of a certificate of compliance or consent to assign by the Director of Lands shall be conclusive evidence that the Buildings have been completed or are deemed to be completed. The plaintiff argues that such a clause cannot be relied upon when there was a misrepresentation (by way of the invalid extension of time) on the defendant's part and/or a resultant mistake on the plaintiff's part.

12. Further, for the above reasons, the notice to complete dated 25 June 1998, served by the defendant on the plaintiff purportedly under clause 5(1) of the agreement, was of no effect because the PTT was not completed even by then.

13. The above matters involve questions of fact, and/or mixed law and fact, which cannot be properly resolved except at trial. Hence, this is not a plain and obvious case which warrants para. 10 to 16 of the Statement of Claim to be struck out.

Summary of the Defendant's Arguments

14. It is the plaintiff's primary case that, because the authorized person's extension of time was invalid, the deadline for the defendant to complete the Buildings (including the PTT) remained to be 30 November 1997 (clause 4(1)(c) of the agreement). This is because (according to the plaintiff) the time extension was unreasonably given and/or given without proper or reasonable basis.

15. The plaintiff is seeking rescission of the agreement and the return of the deposit paid. He seeks to do so by relying on the provisions of the agreement, especially those in clause 4 which provided for a right to rescind the agreement under certain circumstances. It is important to note that the plaintiff has not alleged a repudiatory breach of the agreement by the defendant or that such repudiation has been accepted by the plaintiff.

16. There are 2 ways in which the plaintiff can (and has) put his case regarding the entitlement to rescind the agreement pursuant to clause 4: the first is under clause 4(4)(a) and the other is under clause 4(4)(c). These clauses stipulated that:-

"Subject to sub-clause (4)(b), if the [defendant] fails to complete the Buildings by [30 November 1997] as extended by any extensions of time ... , the [plaintiff] shall be at liberty by notice in writing to the [defendant] to rescind [the agreement] and upon service of such notice, [the agreement] shall be rescinded within 7 days thereafter ... " (clause 4(4)(a))(emphasis supplied);

"If the Buildings are not completed in accordance with the building plans and the other provisions of [the agreement] within a period of 6 months from [30 November 1997] or any extended date ... , the [plaintiff] shall be at liberty to rescind [the agreement] ... " (clause 4(4)(c))(emphasis supplied).

17. Clause 4(4)(b) is also relevant:-

"If the [plaintiff] does not rescind [the agreement] under sub-clause (4)(a) within 28 days from [30 November 1997] or any extended date, he shall be deemed, without prejudice to his rights under sub-clause (4)(c) hereof, to have elected to wait for completion of the Buildings. In such event, the [defendant] shall pay to the [plaintiff] interest at the rate of ... " (emphasis supplied).

18. The defendant argues that the plaintiff has lost the right to rescind the agreement, irrespective of whether the extension of time given by the authorized person was valid or not. As stated above, para. 11 of the Statement of Claim avers that the said extension was given on 7 November 1997 for 131 days (commencing from 30 November 1997 and expiring on 10 April, 1998).

19. If the extension of time was valid,

(a) the deadline under clauses 4(4)(a) and (b) [28 days from the extended time] for serving a notice to rescind would have been 28 days from 10 April 1998, namely, 8 May 1998;

(b) the deadline under clause 4(4)(c) would have either been:-

(1) 10 October 1998, being 6 months from the extended date, 10 April 1998 (it does not appear that either party is relying on this date for the purpose of this appeal); or

(2) 31 May 1998, being 6 months from the original completion date of 30 November 1997.

As set out in the paragraphs below (and irrespective of whether the deadline under (b) above was 10 October 1998 or 31 May 1998), the notice to rescind given by the plaintiff on 28 June 1998 (received by the defendant on 29 June) is ineffective.

20. On the other hand, if the extension of time was invalid,

(a) the deadline under clauses 4(4)(a) and (b) would (according to para. 16(b)(i) of the Statement of Claim) have been a reasonable time after the plaintiff discovered the facts;

(b) the deadline under clause 4(4)(c) would have been 31 May 1998, being 6 months from 30 November 1997.

The defendant argues that the plaintiff's notice to rescind of 28 June 1998 would still be invalid for the following reasons.

21. Clause 4(7) of the agreement stipulated that:-

"For the purpose of this clause the issue of a Certificate of Completion or consent to assign by the Director of Lands shall be conclusive evidence that the Buildings have been completed or are deemed to be completed as the case may be and nothing in this sub-clause shall preclude the [defendant] from proving that it has complied with sub-clause (1)(c) above by other means" (emphasis supplied).

22. The occupation permit was issued on 6 March 1998. Further, and more important to the defendant's argument, the defendant applied on 14 March 1998 to the Director of Lands for a consent to assign and this was given on 2 June 1998. There is no suggestion (or evidence) that any of these documents were invalid or improperly issued or given.

23. Thus, irrespective of whether the Buildings (including the PTT) were in fact completed by 2 June 1998, this was deemed to be the case for the purpose of clause 4 (including clauses 4(4)(a) to (c)) of the agreement.

24. By reason of the aforesaid matters, the defendant was entitled to, and (in compliance with clause 5(1) of the agreement) on 25 June 1998 did, notify

"the [plaintiff] in writing that [the defendant] is in a position validly to assign the Property within one month of the issue of ... the consent of the Director of Lands to assign ... ".

According to clause 27 of the agreement:-

"Any notice required to be given hereunder shall be deemed to have been ... served on the second business day after the date of posting".

The defendant submits that this means 27 June 1998.

25. On the other hand, the plaintiff's purported notice to rescind the agreement of 28 June 1998 was, according to clause 27 of the agreement, only served by 30 June 1998 although it was in fact received on 29 June 1998. By then, the defendant had already notified the plaintiff that it was in a position to convey to the plaintiff. Hence, whether the said notice took effect from 29 or 30 June 1998, it was ineffective for having been served too late.

26. In further support of the above arguments, the defendant relies on the following passages of the Court of Appeal's judgment in Kar Ho Development Co. Ltd. v. Axis Investment Ltd. [2001] 1 HKC 86:-

"[The defendant] argued that as issue was being taken on the validity of the certificate [of time extension] it was still possible at trial that a substantial part of the delay claimed [by the plaintiff] would be disallowed and that while this possibility continued to obtain the defendant should not be required to exercise the option to rescind the contract. [The plaintiff's] answer to this was that this contention amounted to a red herring. If the extension of time was disallowed the time for the defendant to exercise this option would already have expired. I do not see any answer to this" (at p. 92D-F, per Mayo, VP);

"[The plaintiff] argued that when the defendant was served with the notice to complete he was formally put on notice that the building had been completed. At that point of time the option contained in clause 4(4)(c) came to an end. It was then incumbent upon the defendant to decide whether to rescind the contract or to complete the purchase. I am satisfied that this is unarguably a correct analysis of the position. This then leads to the third issue [regarding the nature of communication (if any) which the defendant need to give the plaintiff if it wished to rescind the contract] ... " (at p. 92G-I, per Mayo, VP) (emphasis supplied).

Summary of the Defendant's Other Arguments

27. Further to the above, the defendant argues that if the extension of time given by its authorized person is invalid, the plaintiff must still serve the notice to rescind within 28 days from 30 November 1997 (in accordance with clause 4(4)(b)) or he would be deemed to have elected to wait for completion. This is the combined effect of clauses 4(4)(b) and (c). The plaintiff was accordingly not entitled to serve the said notice on 28 June 1998.

28. Even if the extension of time was invalid, this cannot advance the plaintiff's case that the 28-day limit for giving a notice to rescind should be extended to a reasonable time after the plaintiff discovered the facts. This is because the consequence of an invalid extension of time can at most be to estop the defendant from asserting that time for completion should be extended. The plaintiff would still have to give a notice to rescind within the 28 days provided for in clause 4(4)(b). Whether the plaintiff is aware of the existence of his right is irrelevant.

29. There is no substance in the plaintiff's argument that the extension of time is invalid. The only proper bases for challenging such an extension of time are:-

(a) the extension was not given by the person authorized to do so under the agreement;

(b) the person authorized to extend the time under the agreement did not do so in good faith;

(c) such person did not purport to exercise the power conferred on him by the agreement (to extend time).

None of the above have been asserted by the plaintiff in the Statement of Claim.

Conclusion

30. It is trite law that pleadings should only be struck out in plain and obvious cases. To sum up, I agree with the arguments set out under the heading "Summary of the Defendant's Arguments". However, I consider those set out under "Summary of the Defendant's Other Arguments" not to be plainly and obviously fatal to the plaintiff's case. On the other hand, I disagree with the arguments under "Summary of the Plaintiff's Arguments". I shall elaborate on the above conclusions in the paragraphs below.

31. The cornerstone to the plaintiff's arguments has to be this: by reason of the defendant's misrepresentation (by way of the invalid extension of time), the defendant cannot rely on clause 4(7) of the agreement and claim that the consent to assign from the Director of Lands was conclusive evidence that the Buildings (including the PTT) had been completed or deemed to have been completed.

32. It is not the plaintiff's case that the consent to assign was vitiated by the defendant's said misrepresentation as such. This is understandable because the alleged misrepresentation was directed to the plaintiff whereas the consent to assign was given by the Director of Lands. The plaintiff's arguments as to why clause 4(7) cannot be relied upon are in essence that it would not be right to allow the defendant to do so. The defendant's misrepresentation was the only reason put forth by the plaintiff for preventing him (from 8 May 1998 to 28 June 1998) from exercising in time his right to rescind under clauses 4(4)(a) and (b).

33. Para. 13-011 and 13-012 of Chitty on Contracts (1999) 28th Ed. state that:-

"Co-operation. The court may be willing to imply a term that the parties shall co-operate to ensure the performance of their bargain. ... However, the conditions for the implication of a term mentioned above must be satisfied. Also the duty to co-operate and the degree of co-operation required is to be determined, not by what is reasonable, by the obligations imposed?whether expressly or impliedly?upon each party by the agreement itself, and the surrounding circumstances ...

Prevention of performance. By the same token, 'if a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances under which alone the arrangement can become operative ... " (emphasis supplied).

34. The extensions of time referred to in clauses 4(4)(a) and (b) and available to the defendant are the maximum period afforded to the defendant to complete the Buildings. Irrespective of whether the extension of time of 7 November 1997 was based on valid reason(s) (and/or for the proper period of time), it should have been known to the plaintiff as a fact that the completion date had been postponed from 30 November 1997 to 10 April 1998.

35. However, if the extension of time was valid, it is arguable (and hence not plain and obvious) that the plaintiff could not by clauses 4(4)(a) and (b) rescind the agreement by a written notice prior to the expiration of the extended time. It is arguable whether (1) the court should imply the term(s) referred to in Chitty (see above) into clause 4(4)(b) of the agreement, and (2) if so, whether the defendant has breached the implied term(s).

36. Having said that, the plaintiff's pleaded case is not based on a repudiation of the agreement, but on the provisions of the agreement themselves. It is settled law that a breach of contract which is not (or, as in this action, has not been asserted to be) repudiatory can at most give rise to a claim for damages, but not the recission of the contract. Even if the extension of time was invalid, and accordingly the plaintiff has been deprived from exercising his right under clauses 4(4)(a) and (b) in time, I do not see how that could result in the defendant not being able to rely on the "conclusive evidence" clause regarding the completion of the Buildings under clause 4(7) of the agreement. I also do not see why the defendant could not on 25 June 1998 serve a notice to assign upon the plaintiff in accordance with clause 5(1) of the agreement.

37. In the light of the plaintiff's case as it now stands, the crucial matters are these. After the plaintiff received the extension of time dated 7 November 1997, the plaintiff knew (as a fact) that completion would be postponed from 30 November 1997 to some other date. The plaintiff decided to wait and only gave his notice to rescind on 28 June 1998. By then, the defendant has already informed him it was in a position to assign to him.

38. Plaintiff's counsel also argues that the consent to assign did not cover the PTT. Again this is to be expected because the plaintiff did not need to assign the PTT. I therefore agree with the defendant's argument that (at least for the purpose of this action) this is irrelevant provided the consent to assign enabled the defendant to convey the requisite title to the plaintiff (which it clearly did).

39. For the above reasons, I agree with the learned Master that para. 10 to 16 of the Statement of Claim should be struck out. The appeal is therefore dismissed.

Leave to Amend the Statement of Claim

40. As stated above, the Statement of Claim has not pleaded a case of repudiatory breach by the defendant, or an acceptance of such repudiation by the plaintiff. Plaintiff's counsel has, however, referred to an alleged repudiation of the agreement in her oral submissions during the appeal hearing.

41. As a result, the question of whether leave to amend the Statement of Claim was raised at some stage of the appeal hearing. This appeal is of course to be decided on the plaintiff's case as pleaded. The defendant argues that it only seeks to strike out para. 10 to 16 of the Statement of Claim without seeking to dismiss the action. The question of whether the Statement of Claim should be amended does not arise at this stage. The defendant further argues that it is for the plaintiff to formulate the proposed amendment(s) and in the absence of such formulation, the defendant cannot proper address the court on this issue.

42. In short, I agree with the defendant's arguments regarding this aspect as well.

Costs

43. There is no apparent reason why costs should not follow the event. The costs order nisi (pursuant to RHC Ord. 42 r. 5B(6)) is that the costs of this appeal are to be paid by the plaintiff to the defendant to be taxed if not agreed in any event with certificate for two counsel. The plaintiff's own costs are to be taxed in accordance with the Legal Aid Regulations.