SEE TO KEUNG AND ANOTHER v. SUNNY WAY LTD

HCMP 3292/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3292 OF 2004

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J U D G M E N T

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1.  This dispute concerns a conveyancing transaction involving the Plaintiffs as vendors and the Defendant as purchaser.  The property in question consists of three shop spaces in Tsim Sha Tsui, namely Shops 1, 2 and 3 of Windsor Mansion, 17 Austin Avenue, Kowloon (“the Property”).

Procedural history

2.  The Plaintiffs commenced these proceedings on 23 December 2004 by way of Originating Summons by which they seek: (a) a declaration that the Defendant was in breach of a Provisional Agreement for Sale and Purchase in respect of the Property dated 9 October 2004 (“the Provisional Agreement”) and that the Plaintiff is entitled to forfeit the initial deposit of $500,000 paid pursuant thereto; and (b) an order that the registration of the Provisional Agreement by Memorial No. 9368111 be vacated forthwith.

3.  The Plaintiffs filed an affirmation of Ms Elizabeth Wong Mai Lun, an associate of the Plaintiffs’ solicitors, on 11 January 2005 in support of the Originating Summons.

4.  On 11 January 2005, the Plaintiffs made an appointment to hear the Originating Summons on 22 February 2005.

5.  On 8 February 2005, Ms Lee Kam Ling (“Lee”), a director of the Defendant, made an affirmation in opposition to the Plaintiffs’ Originating Summons and indicating that the Defendant had been advised that it had a meritorious claim for specific performance of the Provisional Agreement and/or for damages for misrepresentation.  In that affirmation, Lee asserted that there was a substantial dispute of facts so that the action should be referred to a full trial so that each party’s witnesses could give evidence and be cross-examined.

6.  By a consent summons dated 19 February 2005, the parties agreed that the Originating Summons should proceed and by a consent order made by Deputy Judge Carlson on 21 February 2005 directions were given for the filing of evidence and for leave to set down the matter for a substantive hearing with one day reserved.

7.  Pursuant to the consent order of 21 February 2005, affirmation evidence of the 1st Plaintiff was filed on 17 March 2005 and the Originating Summons was set down for substantive hearing today.

8.  On 11 November 2005, the Defendant filed a Notice (“the Notice”) setting out certain relief sought by it by way of counterclaim and proposing certain directions for the further conduct of the proceedings in the event that the Court thinks it appropriate to order that the proceedings continue as if begun by writ.  At the hearing, Ms Tong, counsel for the Defendant, clarified that the Defendant’s counterclaim was for: (a) a declaration that the Plaintiffs were in repudiatory breach of the Provisional Agreement and that the Defendant is entitled to and has terminated the same by the service of the Notice; (b) a declaration that the Defendant is entitled to a return of the initial deposit of $500,000 paid to the Plaintiffs pursuant to the Provisional Agreement together with interest; and (c) damages to be assessed.  Although the Notice included a claim for damages for misrepresentation, Ms Tong indicated in her oral submissions that the Defendant was no longer pursuing this claim.

The relevant provisions of the Provisional Agreement

9.  The Provisional Agreement was a standard form agreement to which the Plaintiffs and the Defendant were parties as vendor and purchaser respectively.  Uni-Pac Property Consultants (Retail) Limited was also a party to the Provisional Agreement as agent.

10.  Clause 2 of the Provisional Agreement, the marginal note to which is “Consideration and payment”, provides as follows:-

“The Purchase price of the said premises shall be HK$29,800,000.00 which shall be paid by the Purchaser to the Vendor in the manner as follows:

(a)     Initial deposit shall be paid upon signing of this Agreement in the sum of HK$500,000.00.

(b)     Upon signing of the Formal Agreement for Sale and Purchase on or before 8 November 2004 further deposit shall be paid in the sum of HK$2,480,000.00.

(c)     [Deleted]

(d)     Balance of purchase price shall be paid upon completion on or before 28 April 2005, at Vendor’s solicitors in the sum of HK$26,820,000.00.”

11.  Clauses 7 and 8 of the form of the Provisional Agreement were provisions dealing with the consequences of the parties failing to perform.  However, both provisions were deleted and the parties initialled the deletions.

12.  Clause 12 of the Provisional Agreement provided that:

“This agreement supersedes all prior negotiations, representation, understanding and agreements of the parties hereto.”

13.  The Annexure to the Provisional Agreement contained a table setting out details of the tenants of Shops 1, 2, 3A and 3B including the tenants’ names, the amounts of rent payable and the period of the tenancies.

Background facts

14.  The Plaintiffs are the registered owners of the Property, which consists of 4 separate shop spaces (Shop 3 having been divided into Shop 3A and Shop 3B). 

15.  The Plaintiffs’ case is that in early October 2004, a Mr Ronald Yim (“Yim”) of Uni-Pac Real Estate Consultants (Retail) Ltd. contacted the 1st Plaintiff to seek to persuade the Plaintiffs to sell the Property.  On 7 October 2004, Yim went to the 1st Plaintiff’s home at which time the 1st Plaintiff gave him copies of the tenancy agreements in respect of the 4 shop spaces.  The 1st Plaintiff told Yim that although the expiry date of the tenancy for Shop 3A was stated to be 31 March 2005 under the tenancy agreement, the Plaintiffs had agreed to a request by the tenant of Shop 3A for early termination of the lease on 31 October 2004.

16.  The Defendant’s case is that on or about 8 October 2004, a Mr Mandy Chui Chi Sing (“Chui”) approached Lee and recommended the Property to her, after which Lee inspected the Property.

17.  The Plaintiffs’ case, however, is that on 8 October 2004, Yim and Chui both went to the 1st Plaintiff’s home.  Yim brought a draft Provisional Agreement for Sale and Purchase in respect of the Property and a cheque for $500,000 drawn in favour of the Plaintiffs for the payment of the initial deposit.  The purchase price under the draft Provisional Agreement was $29.8 million.  The draft Provisional Agreement had an Annexure, Clause 4 of which set out a table of the existing tenancies of the 4 shops, subject to which tenancies the Property was to be sold.  The 1st Plaintiff noticed that the expiration of the tenancy of Shop 3A was mistakenly typed as 31 October 2005 and pointed out this mistake to Yim.  Yim amended the table by crossing out the incorrect date and writing in the correct date of 31 October 2004 in the margin next to the table.  The 1st Plaintiff’s recollection was that the draft Provisional Agreement and its Annexure were already signed by Lee on behalf of the Defendant.

18.  On 9 October 2004, the Plaintiffs both went to their solicitors’ offices to sign the Provisional Agreement.  Yim brought the cheque for the initial deposit drawn in the Plaintiff’s favour.  According to the 1st Plaintiff’s recollection, Lee had already initialled beside the amendment to the table in the Annexure at that time.

19.  It is the Defendant’s case that, prior to its signing the Provisional Agreement, Chui, as the Plaintiffs’ agent, orally represented to Lee that (a) the tenant of Shop 3A had a new business partner who would join him as from 1 November 2004 and had requested the Plaintiffs to grant to the partnership a new tenancy on the same terms as the existing one with effect from 1 November 2004, and (b) the documents for the tenancy replacement were still being prepared and clause 15 of the Provisional Agreement would give the Defendant the final say on the terms of the new tenancy.  At the same time as making this alleged oral representation, Chui asked Lee to initial beside the amendment in the Annexure to the Provisional Agreement.  The Defendant contends that in reliance on the alleged representation made by Chui, Lee intialled beside the amendment and tendered the cheque for the initial deposit.

20.  The Plaintiffs’ case is that the Defendant, through Lee, was aware that the tenancy of Shop 3A would expire on 31 October 2004, as evidenced by Lee’s having initialled beside the amendment to the table in the Annexure to the Provisional Agreement.  The Plaintiffs deny that either Chui or Yim was ever acting as the Plaintiffs’ agent.  The Plaintiffs further deny that they ever authorized or requested Chui to act or negotiate on their behalf.

21.  The Defendant registered the Provisional Agreement in the Land Registry on 2 November 2004.

22.  On 6 November 2004, the Defendant’s solicitors, Messrs Kok & Ha (“Kok & Ha”) wrote to the Plaintiffs’ solicitors, Messrs Philip K.H. Wong, Kennedy Y.H. Wong & Co. (“PW & Co.) proposing to amend the draft Formal Agreement for Sale and Purchase by adding a warranty by the Plaintiffs that all the tenancies were good, valid and subsisting and that none of the tenants had quit the premises.  This was said to have been done after Lee had expressed her concern to Kok & Ha having heard from another estate agent that the tenant of Shop 3A had ceased business and quit the premises.

23.  The conveyancing clerk of PW & Co. agreed to the warranty on the understanding that the Defendant was aware that the tenancy of Shop 3A had already expired on 31 October 2004 as set out in the table in clause 14 of the Annexure to the Provisional Agreement.

24.  On 8 November 2004, the parties did not execute the Formal Agreement for Sale and Purchase (“the Formal Agreement”) contemplated by the Provisional Agreement and the Defendant did not pay the further deposit (“the Further Deposit”).  On the same date, Kok & Ha wrote to PW & Co. alleging that the Plaintiffs were in anticipatory breach of contract.  Kok & Ha’s letter stated that they only learned about the tenant of Shop 3A having quit the premises after PW & Co. had accepted the warranty to be included in the Formal Agreement.

25.  PW & Co. refuted Kok & Ha’s allegation of anticipatory breach on the part of the Plaintiffs.  For their part, the Plaintiffs asserted that the Defendant was obliged to sign the Formal Agreement and pay the Further Deposit and extended the deadline for doing so to 10 November 2004, then 11 November 2004 and finally 17 November 2004.  Each of the extended deadlines passed without the Defendant signing the Formal Agreement or paying the Further Deposit.

26.  On 22 November 2004, PW & Co. wrote on behalf of the Plaintiffs to Kok & Ha, without prejudice to the Plaintiffs’ rights due to the Defendant having defaulted in complying with the Provisional Agreement, to inform the Defendant that there was a proposed tenant who wished to rent Shop 3A.  Kok & Ha replied to state they were taking instructions and then later sought details of the proposed tenancy.

27.  On 26 November 2004, PW & Co. wrote to Kok & Ha to convey the Plaintiffs’ decision to determine the Provisional Agreement and to forfeit the initial deposit on the grounds that (a) the Defendant had failed to sign the Formal Agreement and pay the further deposit in breach of the Provisional Agreement, and (b) the Defendant had insisted on the inclusion in the Formal Agreement of terms other than those agreed in the Provisional Agreement.

28.  On 27 November 2004, Kok & Ha replied to PW & Co. and alleged that the Defendant was “willing able ready and prepared” to proceed with the purchase of the Property in accordance with the Provisional Agreement and to pay the further deposit conditional upon signing the Formal Agreement.  However, since the Formal Agreement had not been signed, the further deposit was not payable.  Kok & Ha offered to arrange for the Defendant to pay the Further Deposit to demonstrate the Defendant’s ability and sincerity.

29.  On 29 November 2004, PW & Co. wrote to Kok & Ha to state that, without affecting the Plaintiffs’ decision to terminate the Provisional Agreement, the Plaintiffs might consider continuing with the Provisional Agreement upon receipt of the Further Deposit by 5 pm on that date.  However, Kok & Ha’s response was that the Defendant was out of town and that they would contact the Defendant and revert.

30.  On 8 December 2004, PW & Co. wrote to Kok & Ha to request the Defendant to cancel the registration of the Provisional Agreement within 7 days.  Kok & Ha replied, insisting that the Defendant had not repudiated the Provisional Agreement and that it was still binding on the parties.

31.  On 20 December 2004, Kok & Ha sent the further deposit together with a Formal Agreement signed by the Defendant to PW & Co.  In Part VII of the Formal Agreement provided by the Defendant, Shop 3A is stated to be vacant.  PW & Co. returned the Further Deposit and the Formal Agreement provided by the Defendant to Kok & Ha.

32.  On 22 December 2004, Kok & Ha wrote to PW & Co. indicating that the Defendant was ready to cancel the registration of the Provisional Agreement provided that the Plaintiffs agreed to sign the Defendant’s Formal Agreement and to accept the Further Deposit that it had tendered.

33.  As noted above, on the next day, 23 December 2004, the Plaintiffs issued the Originating Summons by which this action was commenced.

The Plaintiffs’ case

34.  The Plaintiffs’ case is relatively straightforward.  They maintain that the Defendant repudiated the Provisional Agreement by not paying the Further Deposit despite repeated extensions of time and therefore the Plaintiffs were entitled to and did accept the Defendant’s repudiatory breach of the Provisional Agreement by their solicitors’ letter dated 26 November 2004.

35.  Mr Li, counsel for the Plaintiffs, accepts that the further deposit was only payable on the signing of the Formal Agreement.  His acceptance of this point is consistent with a number of authorities that have made it plain that the payment of a further deposit upon the signing of a formal sale agreement is linked to the signing of the formal agreement rather than to the date by which that document is to be signed: see Fujian Finance Co. Ltd. v. Link Brain Ltd. [1990] 2 HKLR 353 per Clough JA at 364E-F; Yiu Yau-ping v. Fong Yee-lan [1992] 2 HKLR 167 at 175 (lines 12-28); and Health Link Investment Ltd. v. Pacific Hawk Investment Ltd. [1995] 1 HKC 249 at 254A-B (per Litton JA) and 256D-G (per Nazareth VP).

36.  However, he submits that the Defendant was obliged to execute the Formal Agreement on or before 8 November 2004 and that, by failing to do so and thus to trigger the obligation to pay the Further Deposit, the Defendant was in repudiatory breach of the Provisional Agreement.

37.  Furthermore, Mr Li submitted that the Defendant’s insistence that the Formal Agreement should contain a term to the effect that Shop 3A was tenanted rather than vacant was tantamount to a requirement that the Formal Agreement contain a term which went beyond and was inconsistent with the Provisional Agreement so that the Defendant was in repudiatory breach of the Provisional Agreement by showing a clear intention not to be bound by it.

38.  In support of the above contentions, Mr Li relied on Chu Wing Ning v. Ngan Hing Cheung, HCA No. A9409 of 1991, unrep., 6.11.92, §§34 to 39, and Keung Shiu Tang v. D.H. Shuttlecocks Ltd. [1994] 1 HKC 286 at 291B-292B, discussed in J. Sihombing & M. Wilkinson, Hong KongConveyancing Law & Practice Vol. IV, at §§19 & 19.1.

Was the Defendant obliged to sign the Formal Agreement?

39.  The law is clear that where parties have entered into a binding provisional agreement for the sale and purchase of a property and are subsequently unable to agree on the terms of a formal agreement, the rights and obligations of the parties under the provisional agreement nevertheless continue and the parties are respectively entitled to enforce the terms of the provisional agreement as an open contract: see Fujian Finance Co. Ltd. v. Link Brain Ltd. (supra.).

40.  Likewise, it is clear that the fact that a provisional agreement calls for a formal agreement that will supercede it is not inconsistent with the former being a binding agreement: see Yiu Yau-ping v. Fong Yee-lan [1992] 2 HKLR 167 at 174 (lines 40-45).  This is so much so that in Man Sun Finance (International) Corporation v. Lee Ming Ching, Stephen [1993] 1 HKC 113 at 124C-E, Godfrey J (sitting in the Court of Appeal) held that the parties having signed the usual form of provisional agreement will bring into existence an immediately binding agreement on the terms on which it expressly contains and, otherwise, on the terms of an open contract and that “all references to the formal sale and purchase agreement are illusory; there is already in existence an immediately binding agreement and neither side is entitled to demand that the other side enter into a further one.  The existing agreement, so long as it contains all the essential terms of a contract for the sale of land … stands on its own and is from that moment on specifically enforceable at the suit of either party”.

41.  Ms Tong submitted that in the present case, on a proper construction of clause 2(b), the parties could not have intended the signing of the Formal Agreement to be a condition of the contract.  She submitted that, although the parties may have contemplated the signing of the Formal Agreement by 8 November 2004 as the target date, there was no binding obligation for the parties to sign such an agreement.  Thus, she submitted, clause 2(b) is no more than a payment clause which merely stipulates that in the event that the parties do sign a formal agreement, the Further Deposit would become payable.  It did not mean that the parties were under a contractual obligation to sign on or before the stipulated date and that failure to do so would amount to a repudiatory breach of the Provisional Agreement.

42.  For his part, Mr Li took issue with the Defendant’s submissions in this regard.  He submitted that the authorities did not support the Defendant’s case that it was not obliged to sign the Formal Agreement on or before 8 November 2004.

43.  Was the Defendant obliged to do so or not?  In my judgment, the Defendant was not so obliged for the following reasons.

44.  The answer to the question posed is a matter of construction of the Provisional Agreement.  In China Landmark Hi-Tech Development Ltd. v. San Fung Ltd., HCA No. 3243 of 1996, unrep., 11.7.97, Keith J considered a payment clause in a provisional agreement similar to clause 2(b) in this case.  He said (at p. 8):-

“It is arguable that, although the agreement contemplated the signing of a formal sale and purchase agreement by 19th December 1995, there was no obligation on the parties to sign such an agreement then.  That is because it is arguable that the only provision in the agreement about the signing of a formal sale and purchase agreement by 19th December 1995 did not require a formal sale and purchase agreement to be signed at all.  It merely required the purchaser, in the event of the formal sale and purchase agreement being signed by that date, to pay the further deposit on such an agreement being signed.  There are echoes of reasoning along those lines in the decision of the Court of Appeal in Yiu Yau Ping v. Fong Yee Lan [1992] 2 HKLR 167 at p.175.”

45.  In Luxebond Investment Ltd. v. Super Asian Investment Ltd. [1998] 2 HKC 308, Hartmann J referred to the above passage when considering a similar clause and said (at pp. 314I to 315C):-

“Admittedly, in this judgment Keith J did not base the ratio on the passage quoted.  That passage is expressed in terms of it being only ‘arguable’.  In respect of the provisional agreement before me, however, I am satisfied that it is worded in a way that accords with the vendor’s submission; namely, that it is a ‘payment’ clause.  Accordingly, cl.2(b) could only mean that the purchaser was under no obligation to pay the second deposit of $750,000 until and unless the formal agreement had been signed.  The fact that the purchaser did in fact forward the deposit before signature cannot alter the construction and intent of the provision.

Accordingly, cl.2(b) cannot be read to mean that the vendor was under a binding contractual obligation to sign on or before the stipulated date and that its failure to do so amounted to a fundamental breach of the provisional agreement.”

46.  In Man Wing Fun, Stephen and Chan Man Kuen v. Ho Ching Yee, Susanna, HCA No. 3724 of 1997, unrep., 25.2.99, Mr Recorder Chan SC held, in relation to a clause similar to that under consideration in the present case, that (at p. 19):-

“It is now well settled that a clause in the form of clause 2 of the present case did not have any effect of imposing any legal or contractual obligation on the part of either the vendor or the purchaser to enter into a formal sale and purchase agreement (see Man Sun Finance (International) Corporation v. Lee Ming Ching, Stephen [1993] 1 HKC 113 at 124, Luxebond Investment Ltd. v. Super Asian Investment Ltd. [1998] 2 HKC 308A).  Unless and until the parties had entered into a binding formal sale and purchase agreement replacing or superseding the provisional agreement, the provisional agreement continued to be binding on the parties.”

47.  At pp. 22-23 he continued:-

“While it may well be true that at the time of the provisional agreement, both parties envisaged that a formal sale and purchase agreement would be signed in due course, if as a matter of construction of the provisional agreement and as a matter of law, there was no contractual obligation to enter into a formal sale and purchase agreement, I do not see how it could be said that the vendor (or the purchaser) could be said to have failed to enter into the formal sale and purchase agreement.”

48.  Mr Li takes issue with the proposition that the Defendant in this case was not obliged to sign the Formal Agreement.  He submits that reliance on Man Sun Finance (International) Corp. v. Lee Ming Ching, Stephen (supra.) is misplaced to support that proposition.  He points to the passages in the judgments of Litton JA (at p. 120B-D) and Godfrey J (at p. 125D-E) to support his submission that in that case, under a provisional agreement containing a similar clause to clause 2(b) in this case, the Court held that time was of the essence for the signing of the formal agreement and the exercise of the right to back out by the purchaser.

49.  I do not think these passages assist Mr Li.  In the Man Sun Finance case, the Court of Appeal was concerned with the purported exercise by the purchaser of the right under clause 8 of the provisional agreement in that case to a double refund of the deposit already paid upon the vendor being unable or unwilling to enter into the formal agreement.  There was in that case an express provision in the provisional agreement, clause 1, which provided: “The vendor and the purchaser shall complete the formal agreement for sale and purchase in respect of the above premises at the offices of M/s.…. on or before 3 April 1992.”  No such positive obligation to enter into a formal agreement exists in the Provisional Agreement in this case.

50.  Mr Li argued that the dictum of Keith J in the China Landmark case did not support the proposition that the signing of a formal agreement can be dispensed with.  In that case, he submitted, what happened was simply that the parties had chosen not to sign the formal agreement and there was no suggestion that such failure was due to the fault of any party.  That may be so, but in my view, the obiter dictum of Keith J as to the proper construction of clause 2(b) does provide support for the Defendant’s contention that the apparently similarly worded clause 2(b) in this case should be construed as not containing an obligation of the parties to sign a formal agreement by a particular date.

51.  Mr Li attempted to distinguish the Luxebond case on the basis that the question addressed there by Hartmann J was whether the vendor was obliged to sign the formal agreement on or before the stipulated date.  He said that the case showed that the vendor might choose not to, but could not be read to mean that the purchaser had no obligation to sign the formal agreement and to pay the further deposit.  Similarly, Mr Li sought to distinguish Man Wing Fun, Stephen on the basis that the case concerned the proper interpretation of an escape provision invoked by the vendor in that case.

52.  I do not agree with Mr Li that the cases of Luxebond or Man Wing Fun, Stephen are distinguishable as he submitted.  The Court in both cases came to the view that a clause in the same terms as clause 2(b) in this Provisional Agreement did not impose an obligation on the parties to enter into a formal agreement.  The fact that Hartmann J’s decision was that the clause could not be read to mean that the vendor was under a binding contractual obligation to sign (at p.315B) does not mean, in my opinion, that he would have decided otherwise in relation to the purchaser:  if there were an obligation to enter into a formal agreement, it would clearly be a mutual obligation.  The fact that Mr Recorder Chan SC’s decision was based on his ruling as to the proper meaning of the escape clause does not detract from the fact that he plainly decided that clause 2(b) in that case did not impose a contractual obligation on either party to enter into a formal agreement: see the passages cited above.

53.  Finally, I should mention the cases of Chu Wing Ning v. Ngan Hing Cheung, HCA No. 9409 of 1991, unrep., 6.11.92, and Keung Shiu Tang v. DH Shuttlecocks Ltd. [1994] 1 HKC 286 which were relied on by Mr Li to support his submission that the Defendant was in repudiatory breach by insisting on a term in the Formal Agreement reflecting that Shop 3A was to be sold subject to a tenancy rather than with vacant possession.  As I understood him, he also relied on these cases to support his submission that in this case the Defendant was under a contractual obligation to enter into the Formal Agreement on or before 8 November 2004.

54.  In my judgment, neither case supports Mr Li’s submission in this respect.  In Chu Wing Ning, there was an express provision in the following terms:

“3.(b)A: The Purchaser shall on or before 6th November 1991 go to the parties’ solicitors offices to sign sub-sale agreement and shall at that time pay the Vendor (a cashier order made in favour of the abovementioned solicitors firm) a further deposit in the sum of …..” (see p.2).

The Court of Appeal in Keung Shiu Tong was not concerned with the issue of whether the provisional agreement in that case contained a positive obligation on the parties to enter into a formal agreement but rather was concerned with the issue of whether the purchaser in that case had, by insisting on the inclusion of a particular term in the formal agreement, evinced an intention to be bound by the contract.  In any event, in Keung Shiu Tong, the provisional agreement contained a similar clause 2 to that in the present case, but also contained an express provision in the following terms (which is absent in the present case):

“If the purchaser shall fail to sign the sale and purchase agreement on or before the date specified as mentioned in para.2 above for reasons other than defective title, the initial deposit mentioned herein and all other payments (if any) made by the purchaser shall be absolutely forfeited to the vendor as liquidated damages and thereupon, this agreement shall be terminated …” (see p.289).

Provisions like these which existed in Chu Wing Ning and in Keung Shiu Tong are simply absent in the Provisional Agreement in this case.

Was the Defendant in repudiatory breach by refusing to sign the Formal Agreement or to pay the Further Deposit?

55.  In the light of my conclusion that the Provisional Agreement, properly construed, did not impose an obligation on either party to execute the Formal Agreement either by 8 November 2004 or at all, it follows that there can be no question of the Defendant having been in repudiatory breach of the Provisional Agreement by failing (a) to sign the Formal Agreement, or (b) to pay the Further Deposit.

The consequence of time being of the essence of the Provisional Agreement

56.  It was accepted by the Defendant that time is impliedly of the essence of the typical provisional sale and purchase agreement in use in Hong Kong.  On this footing, Mr Li argued that the date stipulated in clause 2(b) of the Provisional Agreement could not simply be a target date and that therefore there must be an obligation to enter into the Formal Agreement by the stipulated date and thereupon to pay the Further Deposit.

57.  However, I do not think that this follows.  In the first place, the mere fact that time will usually be of the essence in a provisional sale and purchase agreement of this type does not mean that the Provisional Agreement in this case must be construed as containing an obligation to sign a formal agreement.  Furthermore, if the Provisional Agreement in this case, properly construed, does not contain an obligation to sign the Formal Agreement (as I hold to be the case) and thus to trigger the obligation to pay the Further Deposit, the mere fact that time will usually be of the essence in a provisional sale and purchase agreement of this type cannot create an obligation out of clause 2(b) which is not otherwise there.  There are numerous obligations in the Provisional Agreement which are to be performed on or by certain dates: time, in respect of those obligations, is of the essence: for example, the completion date is stipulated to be 28 April 2004 and time is obviously of the essence in respect of the parties’ respective obligations due to be performed at completion.   However, there is no obligation in clause 2(b) to sign the Formal Agreement and so the date stipulated in that clause, namely 8 November 2004, is merely a target date.

58.  In the circumstances, it is unnecessary for me to deal with Ms Tong’s submission in this context that it was apparent from the parties’ conduct that they did not treat time to be of the essence, or that alternatively time ceased to be of the essence by reason of the Plaintiffs’ conduct.

Was the Defendant otherwise in repudiatory breach of, or evince an intention not to be bound by, the Provisional Agreement?

59.  Mr Li submitted that the Defendant’s insistence on a term in the Formal Agreement reflecting that Shop 3A was to be sold subject to a tenancy rather than with vacant possession was an insistence on a term which was inconsistent with the Provisional Agreement and amounted to a repudiatory breach or the evincing of an intention not to be bound by the Provisional Agreement.  As noted above, Mr Li relied in support of this submission on the cases of Chu Wing Ning and Keung Shiu Tang.

60.  On its face, the amendment to the Annexure to the Provisional Agreement suggests that the tenancy in respect of Shop 3A would expire on 31 November 2004, namely before the date for completion of the sale of the Property.  Prima facie, there would be no expectation that the formal agreement would reflect otherwise than that vacant possession of Shop 3A would be given upon completion.

61.  The Defendant contends, however, that, based on the representations that were made to Lee by Chui on behalf of the Plaintiff, Lee reasonably understood that Shop 3A was to be sold subject to a tenancy.  It is said by Lee that it was for this reason that, on 6 November 2004, Kok & Ha wrote to PW & Co. to seek to amend clause 6(b) of the draft Formal Agreement.

62.  Based on this understanding on the part of the Defendant, Kok & Ha wrote to PW & Co. on 8 November 2004 asserting that the Plaintiffs were in anticipatory breach of contract, or would be in repudiatory breach upon the signing of the Formal Agreement reflecting that Shop 3A was to be sold subject to a tenancy.

63.  Mr Li submitted that the Defendant’s case of misrepresentation should be rejected as a matter of analysis for various reasons: first, the Defendant’s case of misrepresentation was evidentially unbelievable; second, there was no evidence that Chui was acting for the Plaintiff in making the alleged representation; third, the content of the alleged oral representation (see paragraph 19 above) does not appear to be a representation of existing fact but rather is in the nature of a statement of a future state of affairs; fourth, it is excluded by the entire agreement clause in the Provisional Agreement (clause 12).

64.  In my opinion, it is not necessary for me to resolve the questions raised by these submissions, nor to resolve the issue of whether it is possible or appropriate for me to resolve them on a summary procedure.  This is because the correspondence between the parties in the period after 8 November 2004 and up to 26 November 2004 does not, in my judgment, support the Plaintiffs’ contention that the Defendant was in repudiatory breach of contract by reason of the disagreement over the question of whether Shop 3A was to be sold subject to a tenancy or with vacant possession or had evinced an intention no longer to be bound.  PW & Co.’s letter dated 9 November 2004 enclosed amendments to the draft Formal Agreement to reflect that Shop 3A would be sold with vacant possession and then called on the Defendant to pay the Further Deposit by 5pm on the following day, 10 November 2004.  Kok & Ha replied on 9 November 2004 to say they would take instructions from their client on the question of the status of Shop 3A.  On 11 November 2004, PW & Co. further extended the deadline for payment of the Further Deposit to 6pm that day.  Kok & Ha replied on 11 November 2004 to say that it was unreasonable to impose a time for payment of the Further Deposit as the terms of the Formal Agreement had not yet been finalized.  They did not say that the Formal Agreement would not be finalized or that there was no intention on the part of the Defendant to enter into such an agreement.  On 15 November 2004, PW & Co. pressed the Defendant to sign the Formal Agreement and pay the Further Deposit by 5pm on 17 October 2004 (subsequently clarified to be a typographical error for 17 November 2004).  Kok & Ha replied on 16 November 2004 to say that as the terms of the Formal Agreement were still to be worked out, the obligation to pay the Further Deposit had not yet arisen.  Again, there is no indication that the Formal Agreement would not be finalized or that there was no intention on the part of the Defendant to enter into such an agreement.

65.  On 22 November 2004, PW & Co. wrote to inform Kok & Ha that there was an intended tenant for Shop 3A and providing information as to the proposed term, monthly rent, further term and rental deposit.  Kok & Ha wrote on 22 November 2004 indicating they were taking the Defendant’s instructions and wrote again on 24 November 2004 asking for details of the identity of the intended tenant, its proposed business and financial background for the Defendant’s consideration.  All of these matters would be material details to be inserted in the Formal Agreement in the event the parties agreed to a sale on the basis of Shop 3A being subject to this intended tenancy.

66.  In the letter dated 26 November 2004, PW & Co. on behalf of the Plaintiffs purported to terminate the Provisional Agreement on the basis (i) that the Defendant had failed to pay the Further Deposit and sign the Formal Agreement and also (ii) that the Defendant had “insisted on including terms in the formal agreement other than what has been agreed by our respective clients under the Provisional Agreement”.  However, as the summary of the correspondence in the preceding two paragraphs shows, there was no continued insistence by the Defendant on the inclusion of a term to reflect that Shop 3A would be sold subject to a tenancy.  Kok & Ha had indicated that they would take the Defendant’s instructions on the subject of a sale subject to vacant possession.  I do not discern in the correspondence a clear intention on the part of the Defendant not to be bound by the Provisional Agreement to purchase the Property.

67.  In the circumstances, I do not regard the Defendant to have been insisting on the inclusion of a term inconsistent with the Provisional Agreement in the same way as the plaintiff purchaser in Chu Wing Ning or in the same way as the vendor in Keung Shiu Tang.  Moreover, as Godfrey JA held in the latter case (at p. 291C) “a repudiation in not to be lightly inferred”.  Kok & Ha responded to the termination letter by a letter dated 27 November 2004 expressing surprise, stressing that the Defendant was “willing able ready and prepared to proceed with the purchase” and indicating that they would consider arranging for the Defendant to pay the Further Deposit to demonstrate the Defendant’s ability and sincerity.  In my opinion, Kok & Ha were justified in expressing surprise.  In light of the sequence of correspondence, the purported termination of the Provisional Agreement had come out of the blue.

68.  In my judgment, the Defendant was not in repudiatory breach of the Provisional Agreement, nor had it evinced an intention not to be bound by that agreement.

Disposition of the Plaintiffs’ Originating Summons

69.  In the light of my conclusions above, I decline to make the declaration or order sought by the Plaintiffs in their Originating Summons dated 23 December 2004.

The Defendants’ Counterclaim

70.  In the light of my conclusions stated above, it follows that the Provisional Agreement remained a binding contract between the parties in respect of the sale of the Property.  By the purported termination of the contract on 26 November 2004 and by failing to complete the transaction, the Plaintiffs were in repudiatory breach of the Provisional Agreement.  By its Notice dated 11 November 2005, the Defendant has accepted the Plaintiffs’ repudiatory breach of contract and brought the Provisional Agreement to an end.

71.  The relief sought by the Defendant in the Notice is a declaration that the Plaintiffs were in repudiatory breach of the Provisional Agreement and that the Defendant is entitled to and has terminated the same by the service of the Notice dated 11 November 2004, a declaration that the Defendant is entitled to return of the initial deposit paid to the Plaintiffs and for damages to be assessed.  As noted above, Ms Tong clarified in the course of the hearing that the Defendant was no longer seeking to claim damages for misrepresentation, as originally indicated in the Notice.

72.  It will be apparent that the counterclaim in the Notice differs from the counterclaim intimated in Lee’s affirmation (see paragraph 5 above).  Mr Li raised a procedural objection to the proposed directions contained in the Notice in the event that I thought it appropriate to order that the proceedings continue as if begun by writ.  As I understood him, the Plaintiffs did not take objection to the new counterclaim in the Notice (paragraph 2.10(b) of the Plaintiff’s skeleton) but took issue instead with the proposed directions (paragraph 2.10(c) of the Plaintiff’s skeleton).  In the event, as I do not regard it as necessary to direct the proceedings to continue as if begun by writ, this procedural objection is academic. 

73.  In case I am wrong in my understanding of Mr Li’s position regarding the new formulation of the counterclaim, I do not consider that there is a valid basis for objecting to my hearing and determining that counterclaim rather than the original counterclaim intimated in Lee’s affirmation (i.e. a claim for specific performance).  The Defendant’s new counterclaim does not require any further directions to be made and the Notice makes the nature of the counterclaim clear.  In my view, it would be pointless to require the counterclaim in the Notice to be the subject of directions for a subsequent hearing when it has not been suggested that such subsequent hearing would involve any further evidence to that already filed or any further arguments to those already addressed to me in this hearing.  In the circumstances of this case, I consider that it is appropriate for me to hear and determine the counterclaim as formulated in the Notice.

The Orders and Relief

74.  As indicated above, I decline to make the declaration or order sought by the Plaintiffs on the Originating Summons.

75.  On the Defendant’s counterclaim, I make the declarations sought, namely:-

(1)     the Plaintiffs were in repudiatory breach of the Provisional Agreement for Sale and Purchase dated 9 October 2004 and registered in the Land Registry by Memorial No. 9368111 and that the Defendant is entitled to and has terminated the same by the service of its Notice dated 11 November 2004; and

(2)     the Defendant is entitled to a return of the initial deposit of $500,000 paid to the Plaintiffs pursuant to the Provisional Agreement together with interest.

76.  The parties made written submissions as to the rate and period for which such interest should be awarded.  It was common ground between the parties that the rate of interest should be the commercial rate of 1 per cent above the prevailing prime lending rate.  The parties differed as to the period for which such interest should be paid.  Miss Tong submitted that interest should run from 9 October 2004, being the date on which the initial deposit was paid.  Mr Li submitted that it should run from 11 November 2005, being the date of the Notice by which the Defendant accepted the Plaintiff’s termination of the Provisional Agreement, and not earlier, because prior to that date the Defendant had instead intimated a counterclaim for specific performance.  Although the Defendant only came to pursue the repayment of the deposit by the Notice on 11 November 2005, I consider that the appropriate date from which interest should be awarded is from 9 October 2004 because that is the date on which the Plaintiffs received the initial deposit and they have had the use of those monies since that date.  Interest will therefore run at the commercial rate I have indicated from 9 October 2004 until the date of this judgment and thereafter at the judgment rate.

77.  I also direct that there be an assessment of the damages (if any) suffered by the Defendant by reason of the Plaintiffs’ repudiation of the Provisional Agreement.

Costs

78.  I see no reason why the costs of the proceedings should not be paid by the Plaintiffs to the Defendant and I make an order nisi to that effect.