HO CHI KEUNG AND ANOTHER v. YIP LAI PING ELIZABETH

DCCJ 7062/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. DCCJ 7062 OF 2003

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J U D G M E N T

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The facts

1.  This is an action by the purchasers, Mr Ho and Ms Tsui, against the vendor for breach of a provisional agreement for the sale and purchase of a flat in Galaxia in Diamond Hill. 

2.  Through the introduction of Midland Realty, the parties entered into a provisional sale and purchase agreement on 26 October 2003 (the “Agreement”).  The purchase price was $2,580,000.  Clause 2(b) of the Agreement provides that the purchaser shall pay to the vendor an initial deposit of $129,000 upon signing of the Agreement.  The formal sale and purchase agreement shall be signed on or before 7 November 2003 when a further deposit of $129,000 shall be paid.  Completion shall be on or before 28 November 2003.

3.  Upon signing the Agreement on 26 October 2003, which was a Sunday, Mr Ho issued a cheque drawn on the Standard Chartered Bank in the amount of $129,000 to Mr Liu, an estate agent of Midland Realty.  Mr Liu passed the cheque to the vendor, who accepted the cheque and signed the Agreement. 

4.  On the morning of 27 October 2003, Mr Ho purchased a cashier order from Bank of China, presumably where his funds were kept, in the amount of $129,000 at 9:19 am.  He deposited the cashier order into his Standard Chartered Bank account at 9:52 am for the purpose of meeting his cheque for payment of the initial deposit.  As he did not ask for special clearance of the cashier order, the funds were not available when the vendor deposited the cheque with Hang Seng Bank later on the same day. 

5.  On 28 October 2003, Hang Seng Bank issued a returned cheque advice to the vendor stating the reason for the return of the cheque as “drawn against uncollected funds, please present again.”  On the same day, Mr Ho’s bank sent Mr Ho a letter informing him of the returned cheque and stating the reason for the return as “drawn against uncollected funds” and informing him that the cheque may be re-presented.

6.  On the same day the vendor was informed that the cheque was returned, presumably from a separate source as Hang Seng Bank’s written advice would not have reached her through the ordinary course of mail by then.  She informed Mr Liu that Mr Ho’s cheque bounced.  Mr Liu contacted Mr Ho who promised to make inquiries with his bank the following day because the bank had already closed for business by that time.  At that stage, neither party was aware of the reason why Standard Chartered Bank refused to honour the cheque.

7.  Also on the same day, the purchasers entered into a provisional sale and purchase agreement to sell the flat they were then residing for completion on 31 December 2003 in anticipation of the move to the Galaxia. 

8.  At about 9:30 am on 29 October 2003, Mr Ho made inquiries with his bank and was informed that his cashier order had been cleared and in fact it must have been by then.  He informed Mr Liu accordingly.  At 7 pm that day, the vendor informed Mr Liu that his bank had issued a returned cheque advice.  Mr Liu related that to Mr Ho.  Mr Ho reiterated that there were sufficient funds in his bank account.

9.  At 9:15 am on 30 October 2003, Mr Ho informed Mr Liu that the cheque had not been cashed by the vendor.  Presumably, he had been informed that he had not allowed sufficient time for the cashier order to be cleared for the purpose of meeting his cheque in payment of the initial deposit.  At 11 am, Mr Ho requested to replace his cheque with a cashier’s order and offered two days’ interest as compensation.  Mr Liu related the request to the vendor, but the vendor refused and proposed to treat the provisional sale and purchase agreement as repudiated and to forfeit the deposit.  The vendor also suggested that if the purchasers wished to purchase the property again she would consider a reduction in price.  When this was related to Mr Ho, Mr Ho offered to replace the bounced cheque with a cashier’s order and an additional sum of $5,000 as compensation.  This was also rejected by the vendor who said that she would seek legal advice.  At 6 pm that evening, the vendor requested to cancel the Agreement.

10.  On 31 October 2003, Mr Liu contacted the vendor and repeated Mr Ho’s offer.  The vendor refused and said she would terminate the Agreement in accordance with law.  There were further attempts to rescue the Agreement, but these were rejected by the vendor.

11.  On the same day, the vendor’s solicitors, Messrs Chong & Partners, issued a letter to Mr Ho alleging that the cheque was dishonoured and demanded payment of $129,000 within seven days and another letter to Mr Ho and Ms Tsui jointly accepting their repudiation of the Agreement and demanding payment of $129,000 as the initial deposit.

12.  At the same time, the purchasers’ then solicitors, Messrs Chan Evans Chung & Co (“Chung & Co”), wrote to the vendor explaining why the cheque bounced and reiterating that the purchasers were ready to purchase the property in accordance with the Agreement and offered a cashier order in payment of the initial deposit.  They also enclosed a copy of the cashier order dated 31 October 2003.

13.  On 3 November 2003, Chong & Partners wrote to Chung & Co.  They asserted that the dishonoured cheque was a repudiatory breach which had been accepted by the vendor, that the deposit shall be forfeited and demanded payment of $129,000 as forfeited deposit.

14.  The parties’ solicitors exchanged further correspondences but could not reach any agreement.  On 6 November 2003, the purchasers’ present solicitors, Messrs M K Lam & Co (“Lam & Co”) wrote to Chong & Partners repeating the vendors’ willingness to compensate any loss and damages suffered as a result of the delay caused by the non-payment of the initial deposit.  They also intimated that they were holding another cashier order for another sum of $129,000 in favour of the vendor as payment of further deposit and part payment of the purchase price under the Agreement and requested Chong & Partners for their draft formal agreement for sale and purchase of the property.  Chong & Partners rejected the offer on the same day.

15.  On 10 November 2003, Chong & Partners wrote to Lam & Co and returned the bounced cheque and intimated that the vendor will not be claiming for the unpaid initial deposit but reserved her rights to claim for all loss and damages as a result of the alleged repudiation of the Agreement.  Lam & Co replied on 26 November 2003 enquiring if the vendor would complete the sale and purchase and threatened that if not the purchasers will institute legal proceedings.  Chong & Partners did not respond.

16.  On 15 December 2003, the purchasers issued a writ of summons against the vendor.  As they had to deliver vacant possession of their flat on 31 December 2003, they took up a short lease in Galaxia.  Eventually, on 11 January 2004, they purchased a similar unit in Galaxia at the same price for completion on 23 February 2004.  The purchasers claim the sum of $129,000 as liquidated damages for breach of the Agreement and the sum of $38,700 as reimbursement of stamp duty paid on the Agreement or alternatively damages to be assessed.  The vendor denies liability on the basis that she has accepted the purchasers’ repudiation and counterclaims for a declaration that the Agreement has been terminated, damages to be assessed and an indemnify in respect of stamp duty and agency commission.

17.  The issues are (1) whether there was an effective repudiation of the Agreement by the purchasers which has been accepted by the vendor or whether it was the vendor who repudiated the Agreement and (2) in either event, what damages or remedies are the innocent party entitled to recover.

Who was in breach

18.  The vendor pleaded that it was an implied condition of the Agreement that any cheque delivered by the purchasers in purported payment of the initial deposit payable under Clause 2(b) of the Agreement shall be honoured upon first presentment.  Though not so pleaded, it is common ground that time was of the essence in relation to payment of the initial deposit.  That must be right in the circumstances of the typical transaction of this kind and as the obligation to pay arose immediately upon signing the Agreement.  The purchasers and vendor did not liaise face to face but through an estate agent as a go between.  Clause 2(b) of the Agreement provides that the initial deposit shall be paid upon signing of the Agreement.  If the purchasers said “I am not going to pay upon signing the Agreement, but will pay tomorrow”, certainly the estate agent would not process the transaction further until the following day when payment would be ready.  Even if he would, the vendor would not sign the Agreement until she has actually receive cash or a cheque for the initial deposit the following day so that she would only agree to be bound when she has the earnest money in the form of the initial deposit.  The vendor agreed to payment by cheque instead of by legal tender. Where a cheque is offered in payment, it amounts to a conditional payment of the amount of the cheque which, if accepted operates as a conditional payment from the time when the cheque was delivered: Homes v Smith [2000] Lloyds Rep Banking 139 at 143.  The cheque was issued on Sunday, 26 October 2003, as payment of the initial deposit upon signing the Agreement, pursuant to Clause 2(b) of the Agreement.  The obligation to pay arose at the time of signing the Agreement. In the circumstances, it must be implied that the cheque shall be met upon first presentment on the first business day after its delivery, i.e. 27 October 2003, and that this is a fundamental term of the Agreement.  The cheque was not met upon presentment on Monday 27 October 2003.  Was that a breach?  If it was, was the breach repudiatory?

19.  Mr Lau submitted that it was not and even if it was the breach was not repudiatory.  Through his diligent research, he was able to refer me to the case of Millichamp and others v Jones [1983] 1 All ER 267.  In that case, the defendant granted the plaintiffs an option to purchase a plot of land.  The agreement provided for the serving of a notice of intention to purchase within a prescribed time.  Clause 5 of the agreement provided that a deposit shall be paid to the defendant’s solicitors as stake money “upon the exercise of the said option”.  The plaintiffs served the notice within the prescribed time but failed to pay the deposit.  The defendant informed the plaintiffs that he did not intend to proceed with the agreement and the plaintiffs sought specific performance.  Warner J held that a requirement in a contract for the sale of land that a deposit be paid was not a condition precedent but was a fundamental term of the contract, breach of which entitled the vendor, if he so elected, to treat the contract as at an end and to sue for damages including the unpaid deposit.  These dicta were cited with approval by the Court of Appeal in Damon Compania Naviera S.A. v Hapag-Lloyd International S.A. [1985] 1 WLR 435.  But that is not the point relied on by Mr Lau.  Warner J went on to hold that where failure to pay the deposit was a mere oversight, it was incumbent on the vendor, before he could treat the failure to pay the deposit as a repudiation of the contract, to tell the purchaser that he intended doing so and to give him the opportunity of complying with his obligation.  Warner J said at 274:

“What happened in 1980 suggests, however, another question, which is: what conduct on the part of the plaintiffs would constitute a breach of that fundamental term?  In Dewar v Mintoft there was an actual refusal to pay the deposit, as there was also in Pollway Ltd v Abdullah.  In Myton Ltd v Schwab-Morris the cheque for the deposit was dishonoured three times.  Precisely what had happened in Lowe v Hope is not clear from the report.  Here, there was mere oversight and the question is whether that, by itself, constituted a sufficient breach of the term to entitle the defendant to treat the contract as discharged.  I do not think it did.  There are no doubt cases of contracts where the mere failure to pay on time a sum due under the contract is sufficient to entitle the party to whom the payment should have been made to treat the contract as repudiated.  But I think that it would be unnecessarily harsh to hold that that was so in a case of the present kind.  The only authority cited to me suggesting that I should so hold was Hare v Nicoll[1966] 1 All ER 285, [1966] 2 QB 130, but that was a case of an option to buy back shares, not land, under a contract so framed that if payment were not made by the specified date, the option would lapse.  That was quite a different situation in my view from the situation in the present case.  In my judgment, in the present case it was incumbent on the defendant, before he could treat the plaintiffs’ failure to pay the deposit as a repudiation of the contract, to tell them that he was minded so to do and to give them an opportunity of complying with their obligation.  Only if they then showed in some way that they were unwilling or unable to comply with it, would he become entitled to consider their conduct a sufficiently clear breach of the contract to entitle him to treat it as discharged.”

20.  Mr Lau relied heavily on the above dicta in support of his argument that the conduct of Mr Ho was insufficient to constitute a breach of the Agreement.  He argued that there was no intention on the part of Mr Ho not to be bound by the Agreement.  Mr Ho did arrange for funds to be available in his Standard Chartered Bank account.  He inquired with his bank when informed that the cheque was not cleared.  He offered another cashier order in lieu and even offered a compensation of $5,000.  Mr Lau argued that the cheque was not dishonoured, it was not cleared because it was drawn against uncollected funds and the vendor was asked to re-present the cheque.  Hence, Mr Lau submitted that Mr Ho’s oversight did not constitute a sufficient breach of the Agreement as Mr Ho never evinced any intention not to be bound by the Agreement and in the circumstances it was unreasonable for the vendor not to re-present the cheque and to treat the non-clearance of the cheque by the purchasers’ bank as a repudiation of the contract.

21.  I think Warner J’s dicta represent a conclusion reached on the basis of the application of general legal principles to the particular facts of that case and are not intended to be a statement of the of legal principle of universal application.  It is clear from the above dicta that Warner J was referring to the factual situation of that case and a case of the kind.  He also recognised that there are cases where failure to pay on time is sufficient to entitle the innocent party to treat the contract as repudiated.  In that case, the obligation was to pay “upon the exercise of the said option”. There was nothing to suggest that time was of the essence of the agreement.  As a general principle, a breach is not repudiatory unless it goes to the root of the contract or unless it evinces an intention on the part of the party in breach no longer to be bound by the contract.  In deciding whether the evidence is such as to evince such an intention, the court must look at all the circumstances of the case, including the term which was breached.  If time is expressed to be of the essence of the agreement, the conduct of the party in breach has little or no bearing.  Mr Lee referred me to Union Eagle Ltd v Golden Achievement Ltd [1977] 1 HKC 173, which was about completion of a contract for sale and purchase of land in which time was stated to be of the essence of the agreement. The appellant was ten minutes late.  The Privy Council held that in the case of a contract in which time was expressed to be of the essence of the agreement, performance by the purchaser was no longer possible once the time for completion had passed.  I think Warner J only decided that on the peculiar facts of that case that the plaintiffs’ inadvertence to pay was not sufficient to evince any intention on the part of the plaintiffs that they no longer considered themselves bound by the contract and not that a vendor is under an obligation in all situations to warn the purchaser that he would treat the non-payment as a repudiation of the contract.  I am not aware of any such legal principle. 

22.  On the facts of the present case, the purchasers’ obligation was to pay upon signing of the Agreement.  I am satisfied that it was an implied term that the cheque in payment of the initial deposit shall be met on first presentment on the first business day after its delivery, i.e. 27 October 2003.  Due payment of the cheque on that day must be of the essence of the Agreement.  The cheque was not met upon its first presentment on that day.  Whatever might have been the bank’s reason for the not clearing the cheque and however sympathetic one may be with the purchasers, they were in breach of this fundamental term in respect of which time was of the essence.  The vendor was entitled to treat the breach as repudiatory and decide for herself what to do with the property.  There was no obligation on the part of the vendor to accept the purchasers’ assurance that there were funds in his account and to re-present the cheque and to wait and see for a second time whether the cheque will be honoured while holding herself bound by the Agreement.  Millichamp is clearly distinguishable on its facts from the present case.  I consider I am bound by the Privy Council decision in Union Eagle. I therefore find that the non-payment was a sufficient breach of a fundamental term of the Agreement.

Whether the breach has been accepted by the vendor

23.  The next issue is whether the breach has been accepted by the vendor.  Mr Lau submitted that even if the non-clearance of the cheque amounted to a breach, it was open to the vendor to affirm the Agreement or to accept the repudiation but until acceptance of the repudiation was communicated to the purchasers the Agreement was still alive and capable of performance.  He argued that up until 30 October 2003, the vendor has not accepted the repudiation; she only suggested that if the purchasers wished to purchase the property again she would consider a reduction in price.  Hence Mr Lau argued that it was open to the purchasers to perform by offering a cashier order in the amount of the initial deposit and an additional sum of $5,000 as compensation.  He further argued that even as at 31 October 2003, the vendor had not accepted the purchasers’ breach because on that day the vendor’s solicitors were still demanding Mr Ho and Ms Tsui for payment of the deposit.

24.  With respect, I disagree.  The vendor holding onto the cheque without more does not amount to affirmation.  By refusing to re-present the cheque and by suggesting to the purchasers that they may re-negotiate for the purchase of the property on the understanding that she would take into account the initial deposit forfeited and would reduce the price, the vendor clearly treated the Agreement as at an end.

25.  As a matter of law, in a contract in which time for performance is expressed to be of the essence, once time for performance has passed, the contract is no longer on foot and performance by the party in breach is no longer possible.  In Union Eagle, Lord Hoffmann said at 177:

“…It is true that until there has been acceptance of a repudiatory breach, the contract remains in existence and the party in breach may tender performance.  Thus a party whose conduct has amounted to an anticipatory breach may, before it has been accepted as such, repent and perform the contract according to its terms.  But he is not entitled unilaterally to tender performance according to some other terms.  Once 5:00 pm had passed, performance of the contract by the purchaser was no longer possible.  The vendor could be required to accept late performance only on the grounds of some form of waiver or estoppel.”

It is therefore not open to the purchasers to tender performance after the first presentment of their cheque on 27 October 2003, no matter how earnest they were and despite their offer of compensation.

26.  As for the letters from Messrs Chong & Partners, the solicitors issued two letters of the same date.  One was addressed solely to Mr Ho, captioned “Dishonoured Cheque” and demanded payment of $129,000 within 7 days.  Another letter was addressed jointly to the two purchasers.  It was captioned “Sale and Purchase Agreement entered into between Yip Lai Ping Elizabeth and Ho Chi Keung & Tsui Shui Ping in respect of Suite 2501, 25/F, Tower B, Galaxia, No. 3 Lung Poon Street, Kowloon, Hong Kong.”  It referred to the Agreement and its terms and the cheque which has been dishonoured.  Then it went on to say:

“In the circumstances, we are instructed by our client to give you notice that due to your failure to comply with the terms and conditions contained in the Agreement, our client will treat your conduct as a repudiatory breach of the Agreement on your part and you have evinced an intention no longer to be bound by the Agreement and you have repudiated the same.

We are instructed to notify you that our client, as it was entitled to do, accepted the said repudiation.  By reason of the aforesaid breach and the aforesaid acceptance, the Agreement was terminated.  Copy of the Dishonoured Notice is enclosed for your reference.

….

We are instructed to give you notice that unless a sum of HK$129,000 being the initial deposit thereto is paid to us on behalf of our client within 7 days from the date hereof, legal proceedings will be instituted against you for the recovery thereof together with and the default damages and all costs and expenses incidental to such proceedings without further notice.”

27.  The two letters were dated 31^st October 2003 and were received by Mr Ho at the same time.  It is obvious that one was addressed to Mr Ho as the drawer of the cheque and the other was addressed to Mr Ho and Ms Tsui jointly as purchasers under the Agreement.  In both letters, Messrs Chong & Partners demanded payment of $129,000.  In respect of the letter to Mr Ho and Ms Tse jointly, even if the vendor accepted the breach as repudiatory, she was entitled to demand payment of the initial deposit which she was entitled to forfeit as a result of the breach which she accepted.  In respect of the letter to Mr Ho, she was also entitled to demand payment from Mr Ho as the drawer of the cheque.  I am unable to agree that by making the demands, the vendor is deemed to have affirmed the Agreement.  On the contrary, it is clear from the letter to Mr Ho and Ms Tse jointly that the vendor has accepted the breach and she was demanding payment of the initial deposit which she was entitled to forfeit.  By making this demand instead of re-presenting the cheque for the purpose of forfeiting the deposit, the vendor has stayed clear of any possible misunderstanding that she affirmed the Agreement.

28.  Accordingly, I find that the breach was repudiatory and has been accepted by the vendor.  Though the vendor only communicated her acceptance of the breach to the purchasers on 30 October 2003, as time of payment of the cheque was of the essence of the Agreement, it was not open to the purchasers to tender performance after 27 October 2003.  In the circumstances, the Agreement has been lawfully terminated.

Damages and remedies

29.  The vendor returned the cheque to the purchasers on 10 November 2003 and confirmed that she would not be claiming for the unpaid initial deposit.  In her defence and counterclaim, the vendor seeks a declaration that the Agreement has been terminated, damages to be assessed an indemnity against the purchasers in respect of stamp duty and estate agent’s commission but made no claim for forfeiture of the deposit.

30.  At the trial, Mr Lee did not ask for damages to be assessed.  There is nothing to suggest that the vendor has suffered any loss.  In the circumstances, I do not consider it necessary to order an assessment.  I consider a declaration would be a sufficient recognition of the vendor’s rights.  It is not necessary to make a nominal award.

31.  The vendor also seeks an indemnity in respect of stamp duty and agency commission.  The stamp duty has been duly paid by the purchasers who will be able to obtain a refund from the Collector of Stamp Duty.  It is unlikely that the vendor will be subject to any liability for stamp duty.  An indemnity is not necessary.

32.  The vendor is under an obligation to pay estate agent commission to Midland Realty under Clause 9 the Agreement.  However, Clause 10a provides that if the Agreement could not be completed, the defaulting party shall compensate the estate agent in the amount of $45,800 as agreed damages.  Clause 9 and 10a of the Agreement provide:

“9.     In consideration of the services rendered by the Agent, the Agent shall be entitled to receive HK$25,800.00 from the Vendor and $20,000.00 from the Purchaser as commission.  Such commission shall be paid not later than 28 November 2003.

10a.   If in any case either the Vendor or the Purchaser fails to complete the sale or purchase in the manner herein contained, the defaulting party shall compensate at once the Agent HK$45,800.00 as agreed damages.”        

33.  The amount of agreed damages is the total of the commission payable by the vendor and the purchaser to the estate agent.  The due date for payment of the commission was also the completion date of the Agreement.  The use of the words “agreed damages” suggests that the estate agent will not receive any commission if the Agreement does not proceed to completion.  If the commission is payable irrespective of completion, the estate agent will suffer no loss if the Agreement does not proceed to completion.  That the agreed damages are the sum total of the commission payable by both the vendor and the purchasers under Clause 9 suggests that in the event of default, the innocent party will not be required to pay commission under Clause 9, otherwise the estate agent will receive double commission under Clause 10a.  Thus the intention of the vendor, the purchasers and the estate agent as could be ascertained from reading the two clauses together, must be that firstly, no commission is payable unless the Agreement proceeds to completion; secondly, if the Agreement does not progress to completion, the party whose default prevented the Agreement from being completed shall compensate the estate agent with damages which is agreed to be the commission which it would otherwise have earned had the Agreement proceeded to completion and thirdly, the innocent will be relieved of any obligation to pay commission under Clause 9 to the estate agent.  As I have found the purchasers are the defaulting party, the vendor is not under any liability to pay commission to the estate agent.  An indemnity is not necessary.  

34.  Accordingly, I grant the vendor the declaration sought only.

Costs

35.  Mr Lee has indicated that he would ask for costs on an indemnity basis should the vendor succeed.  The purchasers’ breach was innocent and inadvertent. They made genuine and reasonable offers to save the Agreement. The Agreement could have been saved but for the vendor’s change of mind.  The purchasers might have suffered inconvenience and loss.  They also aggravated their damage by incurring legal costs in the amount of $51,492 for the legal advice and a few letters issued between 5^th and 26^th November 2003, which Mr Lee commented as incredible.  They were the authors of their misfortune.  Mr Ho should have realised that the bank would take at least a day to have the cashier order cleared and that his cheque would not be met unless he requested for special clearance of his cashier order.  He was ill-advised to litigate on his own breach.  However, having regard to the conduct of the parties, particularly the vendor’s change of mind, I do not consider this is an appropriate case for indemnity costs.  But I am open to persuasion.  I therefore make a cost order nisi that the Plaintiffs shall pay the Defendant’s costs to be taxed on a party and party basis.

Conclusion

36.  Accordingly, the Plaintiffs’ claims are dismissed.  I enter judgment in favour of the Defendant on her counterclaim and grant the Defendant the declaration sought.  I make a costs order nisi that the Plaintiffs shall pay the Defendant’s costs, to be taxed on a party and party basis.