YAU FOOK HONG CO LTD v. ATTORNEY GENERAL

1986, No. 51
(Civil)

IN THE COURT OF APPEAL

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JUDGMENT

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Sir Alan Huggins, V.-P.:

1. The issue in this case is whether, on the true construction of the correspondence between the parties, the judge was wrong to conclude that the Plaintiff was under an obligation to convey to the Crown specified Land Exchange Entitlements.

2. The Crown was entitled to receive $10,744,667.68 from some developers on 19th May 1984.  In April of that year the Government adopted a policy under which the holders of Land Exchange Entitlements could surrender those entitlements in discharge of debts due to the Government in respect of various land related transactions.  Details of that policy were published in the Hong Kong Government Gazette and a circular letter dated 3rd April 1984 was sent to those developers who might desire to take advantage of it.  That letter set out the procedure which should be followed and one of the appendices was a draft letter which it was intended to send with demand notes for moneys which might be covered by the new policy.  A letter in terms of that draft was sent on 5th May 1984 to the developers who owed the debt in question here ("the Developers") together with a demand note calling for payment within fourteen days.  It was in the following terms:

"Dear Sir,

I enclose herewith a demand note for settlement.   Payment of the attached demand note will be accepted in part or in full by way of the surrender of land exchange entitlements (Letters A and B) in lieu of each.  The monetised value of such entitlements should be calculated in accordance with the attached list of currency values extracted from G.N. 7210

If you therefore intend to settle the demand note wholly in cash, payment of the attached demand note should be made to Treasury on or before the due date stated thereon.  If you intend to settle the amount due wholly by way of surrender of land exchange entitlements, you should return the demand rote to this office for cancellation before the due date for payment stated thereon together with the Application Form attached hereto, duly completed with details of the entitlements you propose to surrender.  If you intend to settle the amount due partly in cash and partly by way of surrender of land exchange entitlements, the attached demand note should be returned to this office for cancellation before the due date for payment stated thereon together with a cheque for the amount which you wish to pay in cash. You should also at the same time return the attached application Form, duly completed with details of the entitlements you propose to surrender.

Should any discrepancy or deficiency be discovered in your title to or the monetised value of the entitlements specified on such application Form, you will be required to make good on demand the amount of the deficiency in cash and no further entitlements may be submitted for settlement of the demand note in such circumstances.  In addition, interest equivalent to 2 per centum per annum above the Best Lending Rate of the Hongkong and Shanghai Banking Corporation for the time being will be payable on the amount of such deficiency for the period from the due date for payment shown on the attached demand rote up to and including the- date of payment of the deficiency.

Yours faithfully"

It would seem that the Plaintiff was associated with the Developers, and it sought to surrender various Land Exchange Entitlements in discharge of the greater part of the Developers' debt.  In pursuance of that object on 18th Hay 1984 it submitted to the Government an application form listing Land Exchange Entitlements to a monetised value of  $10,744,632,00 together with a cheque for $35.68 to cover the balance of the debt. The substance of the application was :

“I/WE YAU FOOK HONG CO. LTD. of 19^th floor, Far East Finance Centre, 16 Harcourt Road, Admiralty, Hong Kong hereby offer to surrender the following land exchange entitlements in full/partial settlement of Demand Note No._________ in respect of S.T.T.L. 11 for $10,744,667.68 and further agree to abide by the terms contained in the final paragraph to the letter attached to the Demand Note referred to above.

I/We hereby certify that the land exchange entitlements listed below are registered in my/our own name(s) and are free from encumbrances.  I/We further undertake to surrender my/our entitlements and, if so required, to deliver up to the Government the original letters in respect of the lots specified in such land exchange entitlements and to execute a Memorandum of Release in such form as may be required by the Government releasing the Government from all costs, claims and demands whatever arising out of or in connection with the surrender of the said lots.”

3. The Government replied to the Plaintiff by a letter dated 26th May 1984, which is a vital document in the case.  It read:

“Dear Sirs,

  Sha Tin Town Lot No. 11

I refer to your application made to the District Lands officer, Sha Tin offering to surrender Lots Nos. 2693 SB RP, 2956, 2952, 2623 B RP, 2542, 2512, 2722, 2724B, 2619, 2641, 2924 SB RP and 2703(p) in D.D.No.91 being land exchange entitlements with a total area of 85,005 sq. ft. in partial settlements of the Demand Notes Nos. 74-080-000939-1 and 74-080-001320-8 for the 7th and 8th instalments of the land premium of the above lot.

2. I have been requested by District Lands officer, Sha Tin to prepare the relevant Memorandum of Release for your execution. However, prior to execution of the same, your title to the abovementioned land exchange entitlements has to be verified.  In this respect, I shall be grateful if you would at your earliest convenience forward all relevant title deeds to District Lands office, North situated at old District office Building, Tai Po Market, New Territories for the purpose of title checking. You may be required to make Statutory Declaration in case you fail to submit any or all of the title deeds.

3.  Upon receipt of confirmation as to your title from District Lands officer, North, I will arrange for execution of the Memorandum of Release by you."

4. Although the Plaintiff claimed to be the holder of the Land Exchange Entitlements which it had listed, most of the "Letters B” by which the entitlements had beer created and which constituted evidence of the title could not be found.  As result there followed correspondence in the course of which there were negotiations for the provision by the Plaintiff of a statutory declaration and an indemnity. There came a sta8e when the Plaintiff declined to provide the indemnity asked for and sought to withdraw its application to surrender the land Exchange Entitlements.  Instead it desired to pay their monetised value in cash.  This appears in a letter dated 3rd April 1985, which was in these terms:

 "Dear Sir,

RE: Monetisation of Letter B settlement of premium of Sha Tin Tower Lot No.11

We refer to the previous correspondence in connection with those letter B Land Exchange Entitlements (LEEs.) as set out in the list hereto attached intended to be surrendered by our clients in part payment of premium in respect of the captioned property.

We are instruct ed by our client s to inform you that our clients now withdraw their application to surrender the aforesaid LEEs. and to pay cash for the monetised value of the said LEEs. calculated at the date of our clients' application.

In the premises, we should be obliged if you would kindly send us your demand note for our clients' settlement as soon as possible.”

5. The Government contended that the Plaintiff was not entitled to withdraw and demanded the surrender of the Land Exchange Entitlements.  At first it demanded an indemnity against any loss which might result from the Plaintiff's failure to fulfil its undertaking to deliver up the original Letters B but later withdrew its insistence on such an indemnity.

6. The judge held that, whatever might have been the position had the Developers themselves applied to surrender their exchange entitlements in payment of their debt "the circular letter of 3rd April 1984 and the letter of 5th May 1984 had no contractual effect vis-a-vis the Plaintiff, because they It/ere not addressed to the Plaintiff.  It is true that at one point in his judgment he said:

“…I am satisfied that the plaintiff company did become contractually bound to surrender its' entitlements when it submitted the application form under cover of its letter of the 18th May 1984, and its purported withdrawal in April 1985 was of no effect.”

7. However, when the judgment is read as a whole I think it is clear that he regarded the application by the Plaintiff as an offer which was accepted by the letter of 26th Hay 1984 and that he held that no obligation arose from the mere submission of the application.  Although Mr. Feenstra somewhat tentatively submitted before us that the passage just cited was correct when read alone, he agreed in answer to a question which I put to him that at the time of the application there was no obligation on the Plaintiff towards the Government and none on the Government towards the Plaintiff.  The Plaintiff's admission in the correspondence and before the courts that it could not avoid making the payment of cash and interest if there was a deficiency in title is significant.  The Attorney General contends that such a liability could arise only from the bilateral contract contained in the application form and the letter of 26th Hay 1984 - as an alternative to a primary liability to surrender Land Exchange Entitlements which arose under the same contract.  The liability to pay cash could arise only from some contract made between those parties, and, as I understand it, what is implicitedly suggested by the Plaintiff is that the submission of the application form somehow converted a previously unilateral contract, by which the Government committed itself to accepting Land Exchange Entitlements in discharge of land related debts, into a bilateral contract: it was suggested that in submitting the application the Plaintiff did not accept the offer to provide an alternative mode of discharging the Developers' debt but accepted an offer which had never been made to the Plaintiff at all and which had never been made to anyone in these terms) to postpone payment of that debt and to discharge it only in the event that the Plaintiff performed the obligation then undertaken.  That obligation was to pay the amount of the debt with interest or such part of the debt - with interest as was not covered by an actual surrender of Land Exchange Entitlements. Whether or not that would have been a contract which would have been more beneficial, to the Crown (in that the right of re-entry would have been preserved), I am quite unable to infer such a contract from the events which happened.  If there was any obligation imposed on the Plaintiff at any time it was imposed by the contract contended for by the Attorney General.

8. Mr. Pollock then contends on behalf of the Plaintiff that the letter of 26th May 1984 cannot properly be construed as an unqualified acceptance of the Plaintiff's application and that it was in substance no more than an acknowledgement of the application with an indication that the Government would consider whether to accept it or not.  The Respondent invites us to construe the letter as an acceptance of the offer and, in effect, to say that verification of the title was not a condition precedent to acceptance of the promise to discharge the Developers' debt but a necessary step in deciding whether the Plaintiff would, in discharge of its obligations undertaken as consideration for the release of the Developers' debt, be required to surrender the Land Exchange Entitlements or to pay a sum equal to the amount of the debt with interest.

9. Clearly the first matter which the Government had to do on receipt of the Plaintiff's application was to decide whether to deal with the Plaintiff at all: the Plaintiff was not the debtor.  Mr. Pollock submits that the letter of 26th May does not even indicate that a decision had been taken on that initial question.  I cannot agree.  The letter states that the District Land officer has requested the preparation of the relevant Memorandum of Release for the Plaintiff's execution. That would hardly have been done if the Plaintiff had not been accepted pot only as a paymaster but also as a paymaster of substance, since, although the Land Exchange Entitlements may have had known values in the hands of the owners (whoever they were), there was no certainty that the Plaintiff was the owner, and, if it proved not to be the owner, the promise to pay the cash and interest would be valueless should the promisor be unable to raise the money.  It is altogether unlikely that the letter was sent, as it was suggested might have been the case, without the Registrar General's Department having noticed that the Plaintiff and the Developers were different person.  It was open to the Government to reject the application out of hand on the ground that it was not obliged to deal with the Plaintiff.  In that event it could in theory have ignored the application completely and proceeded against the Developers, although, had the application been submitted by the Developers themselves, the Government would almost certainly have been obliged to proceed in accordance with its published policy. As it was, it neither ignored the application form nor returned it to the Plaintiff.  Instead it wrote in terms which would plainly lead the Plaintiff (and the Developers if they knew of them) to believe that it had contracted with the Plaintiff.  The position might arguably have been different if the new scheme had not provided for payment in cash in the event of discovery of a discrepancy or defect in the Applicant's title: one might have been able to construe the statement that the Plaintiff's title had to be verified as qualifying the acceptance of the Plaintiff as a contracting party, although even then it would be unusual to prepare a conveyance to a party before deciding whether to deal with him or not.  Here the argument that the letter of 26th May was “prima facie administrative in nature” cannot succeed, because the verification of the title was in the circumstances a necessary step in the carrying out of the contract once it had been made and not a step in deciding whether to contract or not. 

10. The matter is not capable of further elaboration and in my view the judge was right in his construction of the letter of 26th May 1984. The parties therefore became bound to observe the terms which had been reflected in the application form: the Plaintiff promised to surrender those Land Exchange Entitlements listed provided that the Government was satisfied as to its title and to pay cash and interest in respect of any deficiency, whilst the Government promised to release the debt of the Developers.  I accept that the application did not constitute an immediate surrender of the entitlements in so far as they were owned by the Plaintiffs. On the other hand, 1 do not regard the parties as ever having contemplated the postponement of the Developers' liability to pay the debt: the scheme devised by the Government clearly provided for its discharge.  Whether the originator of the scheme appreciated that such a discharge might in some cases deprive the Government of a right of re-entry for non-payment of an original debt is beside the point: it would be discharged and could not be revived even if there were a breach of the substituted contract.

11. It follows that, the Plaintiff's offer to discharge the Developers' debt in t he manner contemplated by the letter of 5th May 1984 having been accepted, it was not open to it subsequently to insist on a variation of the consideration for that discharge.  That was what the Plaintiff sought in its solicitors' letter of 3rd April 1985.

12. Next it was argued that under the terms of any contract created by the application form and the letter of 26th May 1984 the Plaintiff was not obliged to surrender the Land Exchange Entitlements in respect of which the Letters B had been lost, because the failure to produce the letters B constituted a “deficiency in [the Plaintiff’s] title". It was common ground that although the letter of 5th May was addressed to the Developers it formed part of the matrix of facts in relation to which the contract between the Government and the Plaintiff had to be construed.  The third paragraph of that letter laid down what was to happen in the event of the discovery of any discrepancy or deficiency in the Applicant's title.  Therefore, the argument ran, as there was a deficiency in the Plaintiff' s title the Government was obliged to accept cash to the amount of the balance of the debt plus interest.  I did not understand it ever to have been suggested by the Respondent that the Government had an option other than an option whether to insist on enforcing the undertaking to produce the letters B.  If the Government was prima facie satisfied as to the Plaintiff's title, the Plaintiff had a right to surrender the Land Exchange Entitlements in lieu of cash.  I say '”prima facie satisfied” because, although a person conveying property may warrant that he has a good title, the necessity for such a warranty arises from the possibility of the existence of a hidden defect. Obviously no one would be compelled to convey property to which it was known he had no title at all, but absence of t it le deeds cannot be equated to absence of title. The Plaintiff does not deny that it has good title to all the Land Exchange Entitlements listed in the application form (subject to correction of a typographical error, and that has, by implication, been correct ed) and the Government has been satisfied as to that title to the extent that it was willing to waive performance of the undertaking to produce the Letters B.  It has not "agreed to accept a defective title”.  No discrepancy or deficiency of title has been discovered and therefore the Plaintiff is obliged to surrender the entitlements and there is nothing to be compensated for in cash.

13. Great reliance was placed upon the subsequent correspondence. In that correspondence the Government sought an indemnity when the Plaintiff revealed its inability to fulfil its undertaking to produce the letters B.  That was not inconsistent with the Respondents' case that there was a concluded contract for the discharge of the Developer's debt.  I attach no weight to the fact that in a letter dated 25th January 1985 the Registrar General's Department described the Plaintiff' s title as “defective”: it is clear from the context that this was intended to refer to unsatisfactory evidence rather than an actual deficiency of title.  Equally the statement in the last paragraph of the Registrar General's letter of 14th October 1985 that "I accept the surrender of those LEEs”: in no way alters the fact that the offer to discharge the Developers' debt had been accepted over 16 months earlier.

14. I would dismiss the appeal.

Silke, J.A.:

15. I agree and there is nothing I can usefully add.

Power, J:

16. I also agree.

20th February 1987

Representation: