LEE TAT KWONG v. CHOI PUI KEI STEPHEN AND ANOTHER

1991, No. A2338

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HEADNOTE

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                If a contract for the sale of land contains a provision for payment by the vendor to the purchaser of a sum of money in the event of non-performance by the vendor, a question of construction arises as to whether the parties intended by that provision either (a) to secure the vendor's performance of the contract of sale; or (b) to give the vendor an option whether to perform the contract of sale or to make the payment. In the latter case, if the vendor exercises his option to make the payment, the purchaser will not be entitled to refuse the payment and claim specific performance of the contract.

1991, No. A2338

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. This action is a purchaser's action for specific performance. I have before me an application in that action for summary judgment under Order 86 of the Rules of the Supreme Court. There being a question as to whether the vendors may have an arguable defence, the parties have, at my suggestion, sensibly agreed to treat this application as the trial of the action, the evidence that being contained in the affirmations already filed. They have also agreed to the defendants' translation of the Chinese Agreement dated 19th March 1991, upon which the action depends, being treated for the purposes of the action asan agreed translation, although in fact there are two competing translations of the Agreement - each of them certified by a court translator.

2. The property the subject of the Agreement is a flat in an uncompleted development: Flat G, 20th Floor, Block 4, Bayview Garden, Tsuen Wan, New Territories. The purchase price mentioned in the Agreement was $1,400,000. The Agreement was a provisional agreement for sale and purchase in a form prepared or generally used by agents or brokers and with the usual deficiencies to be found in such forms. The Agreement provided for the payment by the purchaser of a provisional deposit of $20,000 and for the payment of a further deposit of $120,000 exclusive of the provisional deposit on or before 27th March 1991 when a formal sale and purchase agreement was to be executed at the offices of solicitors. The balance of the purchase price of $1,260,000 was to be paid on or before 17th April 1991 on completion of the transaction.

3. The provisional deposit of $20,000 was duly paid.

4. By Clause (11) of the Agreement, it was provided as follows :-

"If the Purchaser does not within the stipulated time go to the solicitors office to deal with the procedures, the vendor is entitled to forfeit  the provisional deposit, and further has the right to resell the property or retain it for his own use. If the vendor in breach of contract failed, within the stipulated time, to go to the solicitors' office to deal with the procedures, the vendor shall compensate the purchaser by twice the amount of the provisional deposit in the total sum of HK$40,000.00 and the purchaser is not entitled to dispute that. If the vendor in breach of contract failed immediatley to compensate (the purchaser) by the amount of the deposit, the purchaser shall be entitled to take legal action to enforce the purchase by specific performance, and also to claim for any loss consequential thereupon."

5. It is upon the true construction of Clause (11) of the Agreement that the dispute between the parties turns. What happened was that the vendors decided not to go on with the contract. They, informed the purchaser accordingly. They tendered $40,000 to him by way of compensation, claiming that that was what they were entitled to do under the provision of Clause (11) and claiming that, that being so, the plaintiff would not be entitled to a degree of specific performance (to which, of course, but for the provisions of Clause (11), he clearly would be entitled).

6. The mere fact that a contract contains a liquidated damages clause, or a clause of a similar nature, is not generally an admission that the parties have agreed that damages are an adequate remedy, or that one party has an option to pay or perform. Specific performance will, despite such a clause, be granted, if it is the appropriate remedy. The relevant principles have long ago been settled and are restated with conspicuous clarity in Sir Edward Fry's classic work on The Specific Performance of Contracts, 6th Edition, (1921), Chapter 3. As Sir Edward Fry there points out (at p.65) :

"S.S.140 ... where a contract is substantially performed by the payment of a sum of money, the Common Law remedy being adequate, Equity will not interfere. Hence, in cases where there is added to the contract a clause for the payment of a sum of money in the event of non-performance, the question arises whether the contract will be satisfied by the payment or whether it will not. In the former case, Equity will not interfere; in the latter, it may.

 

S.S.141 The question always is, What is the contract? Is it that one certain act shall be done, with a sum annexed, whether by way of penalty or damages, to secure the performance of this very act? or is it that one of two things shall be done at the election of the party who has to perform the contract, namely, the performance of the act or the payment of the sum of money? If the former, the fact of the penal or other like sum being annexed will not prevent the Court's enforcing performance of the very act, and thus carrying into execution the intention of the parties : if the latter, the contract is satisfied by the payment of a sum of money, and there is no ground for proceeding against the party having the election to compel the performance of the other alternative."

7. With these considerations in mind, I return to the provisions of Clause (11) of the Agreement. It will be recalled that, by the first sentence, it is provided as follows : "If the purchaser does not within the stipulated time go to the solicitors' office to deal with the procedures, the vendor is entitled to forfeit the provisional deposits and further has the right to resell the property or retain it for his own use". So far as the purchaser is concerned, if he fails "to deal with the procedures", the vendor is entitled either to bring an action against him for specific performance, or to forfeit the provisional deposit and to resell the property or retain it for his own use. There is nothing in the first sentence which excludes the vendor's right to claim specific performance as against the purchaser in the event of the purchaser's breach of contract.

8. That leads inevitably to the conclusion that there is a lack of mutuality if the obligation of the vendor under Clause (11) is to be construed in a different way. Nevertheless, what the court is required to do is to construe the clause as a whole and the distinction in the parties' respective rights to specific performance is not fatal to a construction upholding that difference if the parties can be shown to have intended to draw that distinction by the words they have used.

9. The second sentence commences with the words "If the vendor in breach of contract fails within the stipulated time to go to the solicitors' office to deal with the procedures". This militates against the argument that the vendor is being offered an alternative mode of performance, that is to say, the alternative of paying money instead of completing the contract according to its tenor. The reason is of course the presence in the second sentence of the words I have emphasized "in breach of contract." But this does not altogether preclude a construction, if otherwise justified by the language, which gives the vendor - even if he is in breach of contract - the right to pay money to the purchaser and, if he does so, to debar the purchaser from the right he would otherwise have had to take legal action to enforce the contract by way of specific performance.

10. The remainder of the second sentence of Clause (11) reads "the vendor shall compensate the purchaser by twice the amount of the provisional deposit in the total sum of $40,000 and the purchaser is not entitled to dispute that". The right of the vendor to pay compensation of "twice the amount of the provisional deposit for the total sum of $40,000" is expressed in terms not entirely free from ambiguity. But, as it seems to me, it does mean that a total payment of $40,000 is all that it is required. The $40,000 represents the original provisional deposit of $20,000 and a further amount of $20,000 by way of compensation.

11. The words "and the purchaser is not entitled to dispute that" are also not free from ambiguity. Do they relate only to the total sum to be paid; or do they also relate to the possibility that the purchaser is to be debarred from any alternative remedy if $40,000 is tendered to him by way of compensation? Light is shed upon this by the third sentence of Clause (11) which, it will be remembered, reads as follows "If the vendor in breach of contract failed immediately to compensate (the purchaser) by the amount of the deposits, the purchaser shall be entitled to take legal action to enforce the purchase by specific performance and also to claim for any loss consequential thereupon." The necessary implication, to my mind, of the introductory words of this final sentence of Clause (11) is that the purchaser's right to take legal action to enforce the purchase by specific performance is to be available to him if the vendor, in breach of contract, fails immediately to compensate the purchaser by the amount of the deposit, but it is taken away from him if the vendor does make the compensation for which the contract provides.

12. All in all, reading the provisions of Clause (11) as a whole, as I think I am bound to do, I am of the opinion that it is intended to operate as follows.

13. First and primarily, the vendor is bound to complete the contract in accordance with its tenor and to convey the property to the purchaser. But, if the vendor in breach of that obligation, is prepared to and does compensate the purchaser by twice the amount of the provisional deposit, that is to say, by payment of a total sum of $40,000, that is to be the end of the matter. The purchaser receives his $40,000 and he is not entitled to dispute the question further. Of course, if the vendor, having failed not only to complete the contract in accordance with its tenor by conveying the property to the purchaser, also fails to compensate the purchaser, then the purchaser is to be entitled to take legal action to enforce the purchase by specific performance. But otherwise, as I read Clause (11), the purchaser is not entitled to do so.

14. In the present case, the vendor did make or offer to make the appropriate compensation to the purchaser and did so in timely fashion. If I am right on the construction which I have placed on Clause (11), that is the end of the matter and this action for specific performance must necesarily fail.

15. I have had the benefit of citation to me of two passages from Halsbury's Laws of England which, in deference to the helpful argument addressed to me, I shall now cite. The first passage is to be found in Halsbury's Laws of England, 4th edition, Vol.44, title "Specific Performance", para. 415 (at p.290) which reads as follows :-

"415. Contract stipulating for payment of money on non-performance. Where the contract contains a stipulation that in the event of non-performance a certain sum of money is to be paid, that fact is not in itself decisive in considering whether or not specific performance should be granted. The answer is to be found by considering the intention of the parties, that is, whether the party bound to performance has an alternative choice given to him by the contract to perform or to pay the agreed sum, or whether he is bound to do a certain thing, with a penal sum or sum by way of liquidated damages attached as security. In the second instance, notwithstanding the penal clause, the court enforces performance if the contract is such that without the penal clause it would have been proper for specific performance."

I have no doubt that that passage accurately states the law, but so far as the contract which I have to construe is concerned, I have equally no doubt that the sum of $40,000 referred to in Clause (11) is not a penalty annexed to secure the specific performance of the contract, but is rather a sum the option of paying which is offered to the vendor in place of specific performance of the contract. I construe the contract as conferring on the vendor "the alternative choice" to which the passage refers.

16. I also had cited to me paragraph 417, which reads as follows :-

"417. Payment as an alternative to performance. There are cases where the court holds, on the construction of the contract, that the intention of the parties is that the act may be done by the contracting party or that payment may be made by him of the stipulated amount, so that the contracting party has in effect the option either of doing the act which he has contracted to do or paying the specified sum, the contract being alternative, either to do or abstain from doing on payment of the sum in money...."

I have no doubt that this passage too accurately states the law; and that, on the true construction of the contract, it is as I have already indicated entirely applicable to the provisions of Clause (11). In my judgment, this is one of those cases in which, on the true construction of the contract, the intention of the parties was that the act might be done by the contracting party or that payment might be made by him on the stipulated amount; so that the contracting party (the vendor) had an effective option either to do the act which he contracted to do or to pay the specified sum.

17. Two further authorities were cited to me. The first of these was Chan Yock Kwong v. Wong Hee Mao [1962] HKLR 480. This contained a provision in terms similar in effect but different in language from the one which I have to consider and I do not think anything in the judgment in that case further assists me in coming to a conclusion upon the construction of the documents with which I am concerned. The second was Szymonowski and Company v. Beck and Company [1923] 1 KB 457. That, again, was far away from the present case. It was a case about sale of goods, but two passages from the judgment in that case are worth recording for present purposes. Bankes L.J. said (at p.464) :-

"A buyer has, in the event of his seller breaking his contract, a prima facie right to avail himself of one or other of several alternative remedies, and if the seller desires by a clause in the contract to restrict the buyer's right to those remedies he must say plainly whether he intends to deprive the buyer in certain events of all those remedies or only of one or more of them, and if so of which."

Scrutton L.J. said at (p.466) :-

"Now I approach the consideration of that clause applying the principle repeatedly acted upon by the House of Lords and by this Court - that if a party wishes to exclude the ordinary consequences that would flow in law from the contract that he is making he must do so in clear terms."

18. Giving the best consideration I can to the provisions of Clause (11), I think it is in sufficiently clear terms to warrant and indeed dictate the conclusion to which I have come, that is to say, that it was the intention of the parties to confer on the vendors an option, if they chose not to go ahead with the contract by specifically performing it, to pay $40,000 to the purchaser instead. That is what the vendors have elected to do.

19. In those circumstances, I must dismiss this action. Since the form of contract used here appears to be in common use, I will release this judgment for publication, in the hope that it will afford guidance for practitioners faced with similar problems.