CHEER KING INVESTMENTS LTD v. RICH GLORY INVESTMENT LTD

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HEADNOTE

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Property Law - Purchaser's lien - Sale and Purchase Agreement provided for payment of 10% of purchase price by purchaser - Purchaser failed to complete the sale - Vendor rescinded the agreement and forfeited the money - Purchaser asked for the return of the money and a declaration that it was entitled to a lien on the property in respect of that sum.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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Nature of the application

1. In its Statement of Claim, the Plaintiff seeks the return of the sum of $4,860,000 it had paid under a Sale and Purchase Agreement ("the Agreement") entered into between the parties for the purchase of the Defendant's property ("the property") and a declaration that it is entitled to a lien on the property in respect of the said sum. The Writ of Summons was registered as a lis pendens against the property.

2. Under the Agreement the Defendant agreed to sell the property to the Plaintiff for the sum of $48,600,000. The Plaintiff through its solicitor informed the Defendant that it was not prepared to complete the sale. The Defendant rescinded the Agreement and forfeited the sum of $4,860,000.

3. The Defendant succeeded in an application before Mr Registrar Betts in striking out paragraph 14 of the Plaintiff's Statement of Claim in which the Plaintiff pleaded that it was entitled to a lien on the property as security for the return of the said sum of $4,860,000. The registration of the lis pendens was also vacated.

4. The Plaintiff now appeals against that decision.

Forfeiture of 10% purchase price

5. Part IV of the Schedule to the Agreement set out the terms for the payment of the purchase price:

Clause 13 of the Agreement provided that:

"13. If the Purchaser shall fail to complete the purchase in accordance with the terms of this Agreement all moneys paid by the Purchaser to the Vendor shall be absolutely forfeited as liquidated damages (and not as penalty) to the Vendor (emphasis added) who shall be at liberty if the Vendor sees fit without being obliged to tender to the Purchaser an assignment to rescind this Agreement and to retain the Premises or any part or parts thereof or to resell the same either as a whole or in lots and either by public auction or private contract or partly by the one and partly the other and subject to such conditions and stipulations as to title or otherwise as the Vendor may think fit. Any deficiency in price arising from such resale and all expenses attending the same or any attempted resale shall be made good and paid by the Purchaser as liquidated damages and any increase in price realised by any such resale shall belong to the Vendor. This Clause shall not preclude or be deemed to preclude the Vendor from taking other steps or remedies to enforce the Vendor's rights hereunder or otherwise. On the exercise of the Vendor's right of rescission hereunder the Vendor shall have the right, if this Agreement shall have been registered in the Land Registry to register at the Land Registry a Memorandum signed by the Vendor alone to rescind the sale of the Premises."

Creation of a lien

6. The Defendant contended that it was entitled to forfeit the sum of $4,860,000 and that the Plaintiff has no right to claim any lien in respect of that sum against the property. The Defendant relied on paragraph 560 of Halsbury's Laws of England Vol. 28, in which at Footnote No.2 it was stated that a purchaser through whose own fault the purchase is defeated has no lien. The case of Dinn v. Grant [1852] 5 De G & Sm 451 was relied upon in support of this proposition.

7. Mr Leong, Counsel for the Plaintiff, however, argued that the correct position regarding the purchaser's lien was in the judgments of Farwell J. and the Court of Appeal in Whitbread & Co Limited v. Watt. [1901] 1 Ch.911 and in [1902] 1 Ch.835 respectively.

8. The following principles can be extracted from the judgment of Farwell J. (page 915):

9. In the Court of Appeal, the judgment of Farwell J. was expressly approved of. The following principles can be extracted from the judgment of the Court of Appeal:

Two Australian cases were referred to in argument. In McGifford v. O'Brien [1932] V.L.R. 71, Mann J. at page 79 held that:

"The other point reserved was the claim by the plaintiffs for a declaration or order of charge or lien upon the land in the hands of the defendants for the amount of the purchase money, which the plaintiff's have already paid and which they are entitled to recover back. Mr Hassett could refer me to no authority in support of this claim. I think that in general the Court in a suit for rescission would not direct a purchaser to give up possession except upon payment of the amount, if any, found to be payable to him by the vendor, but it by no means follows that where, as in this case, the purchaser is in default and has already given up possession the Court has power to give the remedy asked for, which would amount to the creation, as it seems to me, of a new right of property in the land. This claim must also be disallowed."

10. Neither party in this application was able to assist me as to the relevance of the question of possession referred to in that case. As no authority was cited in the judgment and bearing in mind that the case may involve a interpretation of the Australian Transfer of Land Act 1915. I could not derive too much assistance from that case.

11. The other case was Frankcombe v. Foster Investments Pty Ltd [1978]2 N.S.W.L.R. 41 in which at page 57, Holland J. held that:

Is the Plaintiff entitled to the lien?

12. In the present application, the Plaintiff assumed, but without conceding, that the transaction went off through the Plaintiff's breach of the Agreement. Mr Leong argued that nonetheless the Plaintiff has a lien on the property because, relying on the judgment of Farwell J., the default did not disentitle it to claim back the monies it had paid under the Agreement. Further, relying on the judgment of Barnett J. in Dawson Enterprises Limited v. Talisteam Limited (H.C.M.P. No.790 of 1994), Mr Leong submitted that Cl.13 of the Agreement did not provide for forfeiture of a deposit and in the absence of evidence of a genuine pre-estimate of the damage and loss sustained by the Defendant, the liquidated damages provision in Clause 13 was unenforceable. In such a case it was highly arguable that the Plaintiff has a lien on the property. He also relied on the dictum of Holland J. In Frankcombe in support of his argument.

13. This being an Order 18 Rule 19 application, I am prepared to accept that it is at least arguable that the Plaintiff may have a lien on the property if its default did not disentitle it to claim back the monies it had paid under the Agreement. It is necessary to examine Dawson to see if it assists the Plaintiff.

Dawson

14. In Dawson, the parties incorporated into their agreement Condition 10 of Part A of the Second Schedule to the Conveyancing and Property Ordinance. Condition 10 provided that:

          "10 FAILURE OF THE PURCHASER

          If the purchaser shall fail to comply with any of the terms and conditions of the agreement the deposit money shall be absolutely forfeited as and for liquidated damages (and not as a penalty) to the vendor (emphasis added) who may (without being obliged to tender an assignment to the purchaser) rescind the agreement and either retain the property the subject of the agreement or any part or parts thereof or resell the same, either as a whole or in lots, and either by public auction or by private contract. or partly by the one and partly by the other, and subject to such conditions and stipulations as to title or otherwise as the vendor may think fit. Any deficiency arising from such resale and all expenses attending the same or any attempted resale shall be made good and paid by the purchaser as and for liquidated damages, and any increase in price realized by any such resale shall belong to the vendor. This clause shall not preclude or be deemed to preclude the vendor from taking other steps or remedies to enforce the vendor's rights under the agreement or otherwise. On the exercise of the vendor's right of rescission under the agreement the vendor shall have the right, if the agreement shall have been registered in the Land Registry, to register at the Land Registry an instrument to rescind the sale of the property. This clause shall not prevent the vendor recovering, in addition to liquidated damages, damages representing interest paid or lost by him by reason of the purchaser's failure."

15. Barnett J. at page 22 held that:

16. Mr Leong argued that Clause 13 was, subject to certain differences which are not material, similar to Condition 10. Based on the judgment of Barnett J., Clause 13 was in the nature of a liquidated damage clause. There was no provision for the forfeiture of a deposit in case of breach. Unless the Defendant can establish by evidence a genuine pre-estimate of loss, Clause 13 was ineffective and unenforceable. It was in the form of a penalty and the sum of $4,860,000 paid would have to be returned to the Plaintiff subject only to any actual loss which the Defendant might be able to prove. Given that the Agreement was made during a rising market, there could hardly be any genuine pre-estimate of loss in the sum of $4,860,000 in the event of a breach by the Plaintiff. The parties had never met at any time prior to the making of the agreement, rendering such genuine pre-estimate impossible. At the very least, whether there was such a genuine pre-estimate of loss would be a matter for trial.

Workers Trust

17. Clause 13 of the Agreement provided, inter alia, for the forfeiture of the money paid by the purchaser to the vendor in the event that the Plaintiff failed to complete the purchase. The payment of $4,860,000 was made before breach of the Agreement. Although in the Agreement, $1,000,000 was described as initial deposit and $3,860,000 was described as balance of deposit and part of purchase price; in the Provisional Sales and Purchase Agreement ("the Provisional Agreement"), the parties simply referred to a deposit of 10%. The relevant clauses are set out below:

          "Purchase Price : HK$48,600,000.-

18. Whatever label one may put on the sum of $4,860,000, it is abundantly clear that it represented 10% of the purchase price paid before breach of the Agreement. In my view, even if there is no evidence to show that the $4,860,000 is a genuine pre-estimate of loss, it still does not mean that the Defendant is not entitled to forfeit this sum. The situation is covered by the decision of the Privy Council in Workers Trust Bank Limited v. Dojap Limited [1993] AC573, where at page 578, Lord Brown-Wilkinson held that :

"In general, a contractual provision which requires one party in the event of its breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established that the forfeiture of such a deposit (customarily 10% of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract."

19. The basis of the forfeiture of the 10% of the purchase money is provided by Clause 13. The description in Clause 13 that the sum of $4,860,000 is in the nature of liquidated damages would only become relevant where the Defendant seeks to recover from the Plaintiff damages in addition to the sum of $4,860,000. However, for the purpose of forfeiting this sum, it makes no difference that it is described as liquidated damage in the Agreement. This sum was made before the breach of the Agreement and was described by the parties as a deposit in the Provisional Agreement. This payment could only mean that it was a guarantee that the purchaser meant business and that the contract would be performed.

20. The Court of Appeal recently has the opportunity of considering the question of deposit in Silverpole Limited v. China Pride Investment Ltd (Civil Appeal No.62 of 1994). The deposit in question was 20% of the purchase price. It should be borne in mind that the decision itself was that the vendor by its own conduct, was not entitled to forfeit the deposit. At page 19 of the judgment Godfrey J.A. held that:

Pennington J.A. at page 23 referred to Dawson although he did not express any concluded view on the matter.

21. It should be observed that the forfeiture clause in Silverpole (see page 4 of the judgment) is similar to the present Clause 13 in that the sum to be forfeited was also described as liquidated damages. The wording of the clause there did not cause Godfrey J.A. to put a qualification on the views he had expressed regarding the forfeiture of the deposit.

22. The Plaintiff's only basis for claiming a lien is based on the argument that the 10% of the purchase price is not liable to be forfeited. In my view, this argument is not sustainable and as such the basis for claiming the lien must necessarily fail.

Other Arguments

23. I shall briefly deal with some of the other arguments advanced by the parties. Mr Shum, Counsel for the Defendant argued that the Plaintiff's claim on the lien could also be struck out on the basis that it was vexatious and an abuse of the process of the court. He argued that the Defendant had already sustained a loss that exceeded 10% of the purchase price by reason of its failure to sell the property at recent auction. If one is to go into the question of the actual loss and damage sustained by the Defendant, then it is a matter in which evidence must be called. Furthermore, as the Plaintiff submitted, the issue of mitigation of damage may also arise. This is not a point that will assist the Defendant in the present application.

24. The Defendant also argued that a lien is an equitable relief, and as the Plaintiff was in breach of the Agreement, it was not entitled to the equitable relief because it did not come with clean hands. This is too general a statement. As Spry in The Principles of Equitable Remedies (4th Ed.) page 243 showed, it is not correct to regard either a lack of honesty on the part of the Plaintiff or breaches of contract by him as a necessary bar to relief. This is again a point that does not assist the Defendant. Mr Shum also relied on Howe v. Smith (1884)27 Ch.D89 and argued that even in the absence of express contractual provision, in the event of the purchaser's failure to complete in accordance with the terms of the contract, the deposit is forfeit, equity having no power to relieve against such forfeiture. In view of my judgment that the Defendant is entitled to forfeit the sum under Clause 13, it is not necessary for me to deal with this point as well.

Conclusion

25. I am satisfied that the Plaintiff has no basis for claiming the lien. The decision of the learned Registrar is correct and I shall dismiss the Plaintiff's appeal with costs nisi to the Defendant. The Defendant is also entitled to cost nisi in respect of the Plaintiff's application for stay of execution of the Registrar's decision pending appeal.