SMART MAX ENTERPRISE LTD v. SPEEDY WAY LTD

HCA 665/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 665 OF 2007

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BETWEEN

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J U D G M E N T

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Facts

1.  This is a conveyancing dispute.  By a provisional agreement for sale and purchase dated 13 September 2006, the plaintiff agreed to buy and the defendant agreed to sell a property known as Units A & B, 9^th Floor of Kin Tak Fung Industrial Building, No 174 Wai Yip Street and No 39 Tsun Yip Street, Kowloon, for $9.48 million.  The plaintiff paid an initial deposit of $474,000 upon signing the provisional agreement. Completion was to take place on 27 February 2007.

2.  On 12 October 2006, the vendor’s solicitors (Ellen Au & Co) delivered the title deeds and documents of the property to the plaintiff’s solicitors (Ong & Chung) for perusal. 

3.  On 19 October 2006, Ong & Chung, on behalf of the plaintiff, raised 4 requisitions.  The 4^th requisition read:

“In Assignment Memorial No. UB7351170, the Vendor executed its part by one director, please prove for due execution.”

4.  On 24 October 2006, pursuant to the provisions in the provisional agreement, the parties signed a formal agreement for sale and purchase. 

5.  The formal agreement, which superseded the provisional agreement, provided, among other things, that:

“5. (a) The Vendor shall show give and prove a good title to the Property in accordance with Section 13 of the Conveyancing and Property Ordinance (Cap. 219) and shall at his expenses and at the like expense make and furnish to the Purchaser such attested or certified copies of any deeds or documents of title in accordance with Section 13 of the Conveyancing and Property Ordinance (Cap. 219) as may be necessary to complete such title.

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6. Any requisition or objection on title shall be delivered to the Vendor’s Solicitors within seven business days after receipt of the relevant title deeds and documents by the Purchaser’s solicitors who shall within 7 working days reply to the answers delivered by the Vendor solicitors otherwise the same shall be considered as waived (in which respect time shall be of the essence) and if the Purchaser shall make and insist on any objection or requisition either as to title conveyance or any matter appearing on the title deeds or particulars or conditions or otherwise which the Vendor shall be unable or (on the ground of difficulty delay or expense or on any other reasonable ground) unwilling to remove or comply with or if the title of the Vendor shall be defective, the Vendor shall notwithstanding any previous negotiation or litigation be at liberty on giving to the Purchaser or his Solicitors not less than 7(seven) days’ notice in writing to annul the sale, in which case unless the objection or requisition shall have been in the meantime withdrawn the sale shall at the expiration of the notice be annulled in which case the Purchaser shall be entitled to the return of all the deposits forthwith but without costs or compensation and, if that return is made within 7 days, without interest.

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11. If the Vendor shall for any cause (other than the default of the Purchaser) fail to complete the said sale in accordance with the terms hereof then all the said deposit shall be forthwith returned to the Purchaser who shall also be entitled to recover from the Vendor such further damages (if any) over and above the said deposit as the Purchaser may sustain by reason of such failure on the part of the Vendor and it shall not be necessary for the Purchaser to tender an assignment to the Vendor.

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13. Time shall in every respect be of the essence of this Agreement.”

6.  Upon signing the formal agreement, the plaintiff paid a further deposit of $474,000 to the defendant’s solicitors as stakeholders.

7.  The formal agreement provided, as was already agreed in the provisional agreement, that completion was to take place on 27 February 2007.  However, for reasons not disclosed in the evidence, the defendant’s solicitors simply did not reply to the plaintiff’s requisitions raised on 12 October 2006.  By a letter dated 7 February 2007, the plaintiff’s solicitors sent a draft assignment of the property to the defendant’s solicitors for their approval.  The letter read:

“ With reference to our previous correspondence herein, we send you the draft Assignment of the Property for your approval on behalf of your client, the Vendor, subject to the satisfaction or compliance of the requisitions or objections on title raised by us in our previous correspondence on or before the date of completion. To enable you to approve the same, we also send you a copy of the latest Assignment for your reference.” (emphasis added)

8.  Still, there was no reply from the defendant’s solicitors regarding the plaintiff’s requisitions. 

9.  One day before the scheduled completion date, the plaintiff’s solicitors wrote to the defendant’s solicitors, putting on record that up to that date, the defendant’s solicitors had not yet given any reply to the requisitions.  The letter reserved the plaintiff’s rights.  The letter also drew the defendant’s attention to the well-known Court of Appeal decision of Active Keen Industries Ltd v Fok Chi-keong [1994] 1 HKLR 396, about the obligation on the part of a vendor to answer requisitions and objections.  On 27 February, the very day fixed for completion, the defendant’s solicitors provided their answers to the 4 requisitions.  In relation to the 4^th requisition, the letter of the defendant’s solicitors (sent by fax and by hand) read:

“We enclose herewith a copy of the sealing provisions of Alan Textiles Limited for your perusal in order to prove due execution of the Assignment Memorial No. UB7351170.”

10.  The copy sealing provisions, extracted from the memorandum and articles of association of the company concerned, were only faxed over to the plaintiff’s solicitors at 3:03 pm on 27 February 2007, when according to the provisions in the formal agreement, completion was to take place at or before 5 pm on that day.

11.  Not surprisingly, the plaintiff’s solicitors protested at the late reply.  In their letter dated 27 February 2007, they complained that no reasonable time was allowed for them to consider the defendant’s solicitors’ answers, and on behalf of their client, all rights were reserved.  In those circumstances, completion did not take place as scheduled.

12.  On the following day, the plaintiff’s solicitors wrote on behalf of their client to rescind the transaction.  They maintained that the defendant’s solicitors were late in answering the requisitions and therefore their client had “failed to show a good title”.  They also pointed out that the answers to the 1^st and 2^nd requisitions were not satisfactory.  They asked for the return of the deposits paid.

13.  The defendant’s solicitors did not agree to any of this.  By a letter also dated 28 February 2007, the defendant’s solicitors forfeited the deposits paid on account of the plaintiff’s failure to complete. After further correspondence, they notified the plaintiff’s solicitors by letter dated 13 March 2007 that they had determined the formal agreement by reason of the plaintiff’s (alleged) wrongful repudiation of the same.  In the letter, the defendant’s solicitors said the initial and further deposits in the total sum of $948,000 had been forfeited to the defendant.

14.  On 2 April 2007, the plaintiff commenced the present action to seek recovery of the initial and further deposits, damages and other relief.  On its part, the defendant counterclaimed for damages, being abortive conveyancing expenses in the sum of $16,450, together with interest and costs. 

Failing to answer the 4^th requisition satisfactorily

15.  As mentioned, there were 4 requisitions involved.  However, at trial, Mr MK Liu, appearing for the plaintiff, dropped any reliance on the first 3 requisitions and put the plaintiff’s case entirely on the 4^th requisition. Relying on the Court of Appeal’s decision in Grand Trade Development Ltd v Bonance International Ltd [2001] 2 HKLRD 759, Mr Liu contended that the answer given by the defendant’s solicitors to the 4^th requisition was unsatisfactory.  This was because the relevant sealing provisions in the articles of the relevant company provided that the seal of the company shall not be affixed to any deed or instrument except by the authority of a resolution of the board and in the presence of one of the directors of the company and such director shall sign every deed or instrument to which the seal of the company is affixed in his presence.  Relying on the Court of Appeal’s decision, counsel argued that what was required to prove due execution was a copy of the board resolution authorising the affixing of the seal of the company on the relevant assignment in the manner prescribed by the articles. Like what happened in Grand Trade, the assignment here did not describe the single director who signed the instrument as a director directed and authorised by the board to affix the seal and to sign the instrument.  This crucial difference therefore distinguished the present case (as well as Grand Trade) from the earlier Court of Appeal decision of Hillier Development Ltd v Tread East Ltd [1993] 1 HKC 285 (see also the first instance decision of Godfrey J, which was reversed on appeal on a separate point: HCA 907/1991, 23 November 1992; digested in [1992] HKLY 601). 

Defence of waiver etc

16.  Ms Queenie Ng, appearing for the defendant, conceded all this.  She accepted on behalf of the defendant that the 4^th requisition had not been satisfactorily answered on behalf of the defendant.  In those circumstances, at trial, counsel focused her efforts on the defences of acceptance of title, affirmation of contract, waiver and estoppel, which were dealt with together without much differentiation.

17.  In essence, Ms Ng argued that the plaintiff had waived the 4^th requisition. In particular, counsel relied on the following facts:

(1) The plaintiff had elected not to press for any answers to the requisitions but had chosen to remain silent for more than 4 months until 26 February 2007, one day before completion, before writing to the defendant’s solicitors saying that the latter had not answered the requisitions. By conduct, counsel argued, the plaintiff had waived the requisitions.

(2) The plaintiff could have, but did not, serve on the defendant a 7 days’ notice to annul the sale as provided in clause 6 of the agreement. Coupled with the matter set out in sub-paragraph (1) above, the plaintiff had accepted the defendant’s title, or affirmed the agreement, or had otherwise waived the requisitions, or was estopped from insisting on the same (counsel argued).

(3) The plaintiff had sent a draft assignment to the defendant’s solicitors for approval. This constituted a waiver of the requisitions.

Time for answering requisitions

18.  The decision of Active Keen draws attention to the important distinction between showing a good title before completion and making a good title on completion.  The vendor’s obligation to show a good title includes the obligation to answer requisitions and objections.  In the absence of any relevant contractual provisions governing time, the obligation to answer requisitions and objections must be discharged within a reasonable time to enable the purchaser to satisfy himself on the matter, get his money ready and complete on the date fixed.  The obligation of showing good title would not have been discharged by disclosure of relevant facts known to the vendor on the date fixed for completion.  See pages 405 to 406.

19.  To the extent that the contract makes provisions for time, the rules stated above must be modified accordingly.  In a case where the formal agreement stipulates the time for raising requisitions but is silent on the time for answering them, the requisitions must be answered within a reasonable time, as the Court of Appeal so held in Summit Link Ltd v Sunlink Group (HK) Co Ltd [2000] 2 HKLRD 724, 732.  The Court went on to set out some relevant factors for determining what the reasonable time was.  They included, amongst other things, the completion date.

20.  In the present case, clause 13 provides that time shall in every respect be of the essence of the agreement.  More specifically, clause 5(a) provides for how the vendor shall show, give and prove a good title to the property; and clause 6 governs the raising of requisition or objection. 

21.  It should be noted that under clause 6, within 7 business days after receipt of the title deeds and documents, the purchaser’s solicitors shall deliver to the vendor’s solicitors any requisition or objection on title.  Clause 6 is then silent on the time within which the vendor’s solicitors shall answer any such requisition or objection on title.  What it provides, however, is that within 7 working days after the delivery of such answers by the vendor’s solicitors to the purchaser’s requisition or objection on title, the purchaser’s solicitors shall reply to the vendor’s solicitors in relation to the answers; failing which the purchaser shall be taken to have waived his requisition or objection on title.

22.  Clause 6 goes on to provide that if the purchaser shall make and insist on any objection or requisition which the vendor shall be unable or unwilling to remove or comply with or if the title of the vendor shall be defective, the vendor shall be at liberty to give the purchaser or his solicitors not less than 7 days’ notice in writing to annul the sale, in which case the sale shall be annulled upon the expiry of the notice and the deposits shall be refunded to the purchaser.

23.  In other words, despite the various provisions relating to time, no provision is contained in the formal agreement to govern the time within which the defendant shall answer a requisition.  According to the case law described above, the defendant has to do so within a reasonable time, which can only be ascertained by looking at the entire circumstances.

Significance of the letter of 7 February 2007

24.  However, in the present case, it is unnecessary to ascertain what the reasonable time is.  What becomes crucial in the present case is the letter of 7 February 2007 written by the plaintiff’s solicitors to the defendant’s solicitors.  As mentioned, the letter enclosed a draft assignment for the approval of the defendant’s solicitors.  It was delivered subject to “the satisfaction or compliance of the requisitions or objections on title raised by [Ong & Chung] in [their] previous correspondence on or before the date of completion”.

25.  Assume, first, that the reasonable time had not expired by the time of this letter.  In that event, there is no question of the plaintiff waiving its requisitions.  Ex hypothesi, the time for the defendant’s solicitors to answer the requisitions had not expired.  No question of the plaintiff’s waiving its requisitions could therefore arise.

26.  Assume, on the other hand, that the reasonable time for answering the plaintiff’s requisitions had already expired by the time of the letter of 7 February 2007.  In that scenario, given that time was of the essence of the agreement in general (clause 13), the defendant had committed an anticipatory (repudiatory) breach of the agreement, and the plaintiff was therefore entitled to terminate the agreement upon the expiry of the reasonable time.  That, the plaintiff did not do.  Instead, the plaintiff wrote the letter of 7 February 2007, giving, expressly, the defendant until the very date of completion to answer the outstanding requisitions.

27.  In those circumstances, the plaintiff had waived, but only waived, the right to terminate the agreement on the ground that the defendant had failed to answer the requisitions within a reasonable time.  What the plaintiff did not waive were its requisitions.  Rather, by its letter of 7 February 2007, the plaintiff made it absolutely clear that it was still pursuing its requisitions, and was giving the defendant further time (until completion date) to answer the same.

28.  The letter of 7 February 2007 specifically subjected the delivery of the draft assignment for the approval of the defendant’s solicitors to the satisfactory answering of the outstanding requisitions on or before completion date.  This fact distinguishes the present case from Hillier Development Ltd, supra, where the delivery of the draft assignment for the vendor’s solicitors’ approval was done without any reservation of the right to raise further requisitions, something which the purchaser’s solicitors in that case later sought to do.  In those circumstances, no acceptance of title or waiver of the outstanding requisitions can have arisen from the letter of 7 February 2007. 

29.  In other words, assuming that the reasonable time for answering requisitions had already expired before 7 February 2007, the letter of 7 February 2007 simply did not waive the plaintiff’s requisitions. 

Mere silence is no waiver

30.  As for the period of time between the expiry of the reasonable time (before 7 February 2007) and the letter of 7 February 2007, the plaintiff’s mere silence cannot amount to any waiver in the circumstances of the present case.  In my view, mere silence or inaction does not amount to waiver in the present type of situation, where, whether as a matter of contract or as a matter of normal conveyancing practice, there is nothing that the purchaser has to do, before the time for sending over the draft assignment for the vendor’s solicitors’ approval.  Of course, if nothing is said in the letter sending over the draft assignment about the outstanding requisitions, the purchaser may well be regarded as having waived the requisitions: Hillier, supra.  But if the formal agreement or normal conveyancing practice requires the purchaser to do nothing before that time and the purchaser has done nothing, his mere silence or inaction simply cannot be taken as his acceptance of the vendor’s title, or as waiver of the outstanding requisitions.  Indeed this accords well with the apparent understanding of the vendor’s own solicitors at the time.  They did not protest at the letter of 7 February or even the later letter of 26 February from the plaintiff’s solicitors, which maintained the outstanding requisitions, on the ground that title had been accepted or the requisitions had been waived.  Indeed they raised no objection at all.  Instead, they tried to answer the requisitions on 27 February. 

Annulment notice

31.  As for serving a notice of annulment, with respect, counsel has misread clause 6.  The clause provides for the defendant as vendor giving a 7 days’ notice to annul the transaction in the circumstances described therein.  It does not give the plaintiff as purchaser any right to give a notice to annul the sale in case the defendant does not or is unable to answer the requisition or objection on title.  Therefore there is no question of the plaintiff giving any such notice, or of any waiver arising from the supposed non-giving of the annulment notice.

Further time to answer requisitions and termination

32.  The letter of 7 February 2007 gave the defendant until completion date to answer the outstanding requisitions.  It was written 20 days before the scheduled completion date, when there was still ample time to answer the requisitions.  There is, therefore, no question of the plaintiff not giving the defendant another reasonable period of time to answer the outstanding requisitions, after the lapse of the original reasonable time to do so, and after the plaintiff’s election not to terminate the agreement for that reason.

33.  Furthermore, given clause 13 which made time of the essence in every respect, the new time for answering the outstanding requisitions (which expired on completion date) given by the plaintiff in its letter dated 7 February 2007 was also one of the essence of the agreement.  Indeed there can be no question of the new time given for the defendant’s answering the outstanding requisitions not being of the essence of the agreement, since it was pegged specifically to the completion date, which was of course of the essence of the agreement.

34.  In any event, as a matter of logic, a good title must be shown before completion.  Since completion was agreed to take place at or before 5 pm on 27 February 2007, and the time for completion was of the essence, the inability of the defendant to show a good title before then must have entitled the plaintiff to refuse completion and to terminate the agreement.

Reasons for termination

35.  The fact that the plaintiff’s reasons given in the letter of termination written on the following day did not accord entirely with the above analysis is neither here nor there.  It is trite law that if a party refuses to perform a contract, giving therefor a wrong or inadequate reason or no reason at all, he may yet justify his refusal if there were at the time facts in existence which would have provided a good reason, even if he did not know of them at the time of his refusal: Chitty on Contracts (30^th ed), Vol 1, para 24-014.  The rule is subject to several exceptions, as has been explained in Chitty.  In other words, a party cannot rely on a ground which he did not specify at the time of his refusal to perform if the point which was not taken could have been put right.  Secondly, a party may be precluded by waiver or estoppel from relying on the ground which he did not specify at the time of his refusal to perform.  Thirdly, a party may be held to have accepted the goods (in a sale of goods situation) so that he is no longer able to justify his refusal to perform.

36.  But none of these exceptions apply here.  Given that time remained of the essence of the agreement, the defendant’s inability to answer the 4^th requisition before completion satisfactorily was simply fatal, even if it were told at the time the true reason why the plaintiff was entitled not to complete.  Indeed, counsel has conceded that the answer supplied to the 4^th requisition has not been satisfactory, and even up to the time of trial, there has not been any evidence to show due execution of the assignment in question.  Secondly, as explained, no waiver or estoppel operates in the present case to prevent the plaintiff from relying on the reasons analysed above to refuse completion.  Thirdly, there is no question of any acceptance of title or property here. 

Outcome

37.  For all these reasons, I reject the defendant’s arguments.  There is simply no defence to the plaintiff’s claim for the return of the deposits in the total sum of $948,000 and for damages in the agreed sum of $4,505. 

38.  I would further grant a declaration that the plaintiff is relieved from all liability for the further performance of its obligations under the formal agreement.  

39.  As for interest, I award interest on the deposits and damages at the rate of the HSBC prime rate plus 1 percent as from 28 February 2007 until the date of judgment and thereafter at the judgment rate until payment.

40.  Pursuant to the provisions in the formal agreement, the deposits have been released by the defendant’s solicitors to the defendant for its use.  I would therefore make a declaration that the plaintiff do have a lien on the property for repayment of the deposits, damages, interest and costs – Ms Ng has conceded that a purchaser’s lien may cover damages and costs: Super Keen Investments Ltd v Global Time Investments Ltd [1996] 4 HKC 355; Karex (Hong Kong) Ltd v Fortune Talent Development Ltd [1999] 3 HKLRD 397; Lee Fu Wing v Yan Po Ting Paul [2009] 5 HKLRD 513.

41.  Judgment for the plaintiff shall be entered accordingly.

42.  I further order that the counterclaim be dismissed.

43.  As for costs, I note that the total amount recovered is just marginally under the $1 million mark.  Having heard counsel’s arguments on costs (in advance), even assuming that the plaintiff’s action is within the jurisdiction of the District Court notwithstanding the rateable value involved, I believe it is fair and reasonable in all circumstances to order that the costs of the action (and counterclaim), including all costs previously reserved, be paid by the defendant to the plaintiff, to be taxed on the High Court scale, if not agreed.  I so order.

44.  I thank counsel for their assistance.