XCHRX RICHIE BASE LTD. v. LANEX INVESTMENT LTD.

HCA 12066/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12066 OF 1999

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J U D G M E N T

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This is an application under Order 14A of the Rules of the High Court, Cap. 4 by the Defendant for determination of:-

(i) whether on the true and proper construction of the Procurement Agreement dated 15 October 1997 ("the Procurement Agreement") referred to in para. 3 of the Statement of Claim, the Defendant was the agent and/or trustee of the Plaintiff as regard the sum of $20.16 million referred to in para. 6 of the Statement of Claim; and

(ii) whether in the light of all the correspondence, in particular those subsequent thereto, the Plaintiff was justified in treating the Defendant's solicitors' letter dated 22 August 1998 as amounting to a wrongful repudiation of the Procurement Agreement;

and that in the event either question be answered in the negative, the Plaintiff's claim herein be struck out and judgment be entered for the Defendant with costs of these proceedings including that of and occasioned by the application.

2. The facts of the case are really not in dispute and in essence they are as follows:-

(a) the Defendant has been variously described as a developer, financier or consultant dealing with New Territories land;

(b) some time in 1997 the Defendant got involved in a development project whereby a total of 31 three-storey village type houses were to be built on D.D. 7 Lot Nos 43 and 44 of Tai Hing, Tai Po, New Territories ("the land");

(c) actually, the land was granted by the government under the concession scheme for indigenous villagers to build houses which are not transferable unless additional premium is paid;

(d) by the Procurement Agreement, the Defendant agreed to procure the assignment by the villagers of 12 houses ("the houses") among the 31 houses to be built on the land to the Plaintiff free from encumbrances;

(e) under the Procurement Agreement, the Plaintiff was to pay $87.36 million by six instalments; in fact the Plaintiff paid the first two instalments totalling $21.160 million but failed to pay the remainder instalments;

(f) on the ground of default by the Plaintiff to pay outstanding instalments, the Defendant by a letter dated 26 February 1999 purported to terminate the Procurement Agreement;

(g) as at the time of the Defendant's termination of the Procurement Agreement, the Plaintiff was due to pay a further $23.847 million under the Procurement Agreement;

(h) on the ground that the Defendant failed or refused in a letter dated 22 August 1998 to account for the said $21.160 million, the Plaintiff by a letter dated 7th June 1999 purported to accept the Defendant's wrong repudiation of the Procurement Agreement.

Order 14A

3. The first question raised by Mr Chong, counsel for the Plaintiff, is whether this is a case suitable for determination under Order 14A of the Rules of the High Court, Cap. 4. Counsel contends that the facts in this case are interwoven with the legal issues such that final determination cannot be made without trial. This case turns on construction of a contract and the court has to look at all the circumstances leading to the execution of the Procurement Agreement. Attention was drawn to para. 14A/2/5 of the 1999 White Book:-

"The question of law or construction to be determined by the Court under the Order should be stated or formulated in clear, careful and precise terms, so that there should be no difficulty or obscurity, still less any ambiguity, about what is the question that has to be determined (see Allen v. Gulf Oil Refining Ltd [1980] Q.B. 156; [1979] 3 All E.R. 1008, CA, reversed on another point [1981] A.C. 101; [1981] 1 All E.R. 353), and this is all the more important since the determination will be final (see para. 1(i)(b)).

Moreover it should be remembered that among the facts which are to be treated as proved or admitted, there must be no hypothetical or future facts (see Sumner v. William Henderson & Sons [1963] 1 W.L.R. 823; [1963] 2 All E.R. 712, CA) and still less any fictitious facts, even though they may be admitted in the pleadings (see Royster v. Cavey [1947] K.B. 204; [1946] 2 All E.R. 632, CA). Where the issues of fact are interwoven with the legal issues raised, it will be undesirable for the Court to split the legal and factual determination, for to do so would in effect be to give legal rulings in vacuo or on a hypothetical ruling, which the Court will not do (see per Taylor LJ in State Bank of India v. Murjani Marketing, 1 March 1991, CA Transcript 91/0304)."

4. As to the facts that are said to be in dispute, Mr Chong refers to an affirmation by one Mr Ho Ngai Keung ("Mr Ho") affirmed on 29 February 2000 on behalf of Plaintiff. There, Mr Ho states (1) a number of events that are not controverted and (2) a number of matters allegedly brought to the knowledge of the Plaintiff by other parties ("the said Wong" and "the said Szeto") none of whom were regarded by the Plaintiff as agents for the Defendant. Then Mr Ho says in para. 14 of his affirmation:-

"14. Before or at the time when I signed the said Provisional Procurement Agreement, the said Wong informed me and I verily believe that neither had the Defendant any interest in land. What the Defendant would do was to procure the owner of the land who were invariably indigenous villagers living in the New Territories to sell and convey the village type houses to my company upon completion of the development project. In the premises, it was common ground between us that the Defendant only acted as the agent for the said United Key Limited, inter alia, to procure various indigenous villagers to sell their village type houses upon completion to the said United Key Limited and, in the meantime, to ensure that steps necessary to ensure completion of the village type houses would be taken."

5. Mr Chain, counsel for the Defendant, contends that, on the facts before the court, the true construction of the Procurement Agreement can be arrived at. None of the extra facts asserted by Mr Ho are relevant because they were not the factual basis on which the parties concluded the Procurement Agreement which regulates the legal relationship between the parties. In any event, Order 14A envisages construction cases which may be determined on affidavit evidence. In support, counsel refers to the following extract from para. 14A/2/5 of the 1999 White Book:-

"Sir Thomas Bingham M.R., considering the inter-relation of striking out and O.14A, expressed unease at "... deciding questions of legal principle without knowing the full facts". However he continued "But applications of this kind are fought on ground of a plaintiff's choosing, since he may be generally assumed to plead his best case ... [If] the legal viability of a cause of action is unclear (perhaps because the law is in a transition), or in any way sensitive to the facts, an order to strike out should not be made. But if, after argument, the court can be properly persuaded that no matter what (within the reasonable bounds of the pleading) the actual facts [are] the claim is bound to fail for want of a cause of action, I can see no reason why the parties should be required to prolong the proceedings before that decision is reached" (E (A Minor) v. Dorset C.C. [1995] 2 A.C. 633; [1994] 4 All E.R. 640). These words were approved on appeal to the House of Lords by Lord Browne-Wilkinson (the other members of the Appellate Committee concurring) reported sub nom. X (Minors) v. Bedfordshire County Council (another appeal heard at the same time) at [1995] 2 A.C. 633; [1995] 3 All E.R. 353, HL(E)."

6. Order 14A provides that:-

"Determination of questions of law or construction (O. 14A, r. 1)

1.-(1) The Court may upon the application of a party or of its own motion determine any question of law or construction of any document arising in any cause or matter at any stage of the proceedings where it appears to the Court that-

(a) such question is suitable for determination without a full trial of the action, and

(b) such determination will finally determine (subject only to any possible appeal) the entire cause or matter or any claim or issue therein.

(2) Upon such determination the Court may dismiss the cause or matter or make such order or judgment as it thinks just.

(3) The Court shall not determine any question under this Order unless the parties have either -

(a) had an opportunity of being heard on the question, or

(b) consented to an order or judgment on such determination.

(4) The jurisdiction of the Court under this Order may be exercised by a master.

(5) Nothing in this Order shall limit the powers of the Court under Order 18, rule 19 or any other provision of these rules.

Manner in which application under rule 1 may be made (O. 14A, r. 2)

2. An application under rule 1 may be made by summons or motion or (notwithstanding Order 32, rule 1) may be made orally in the course of any interlocutory application to the Court."

7. The matter that strikes me at once upon reading the precise wording of this Order is that it covers two types of cases: (1) cases involving questions of law and (2) cases involving construction of private legal documents or statutes. So cases that may come under Order 14A are not restricted to those involving pure questions of law. Cases turning on issues involving mixed law and fact may be determined under Order 14A provided that the factual basis required for determination is either agreed or incontrovertible. The crucial test is not whether there are issues of fact, but whether the issues of fact are relevant for the final determination of the case.

8. In the instant case, although it is said that the court should look at all the circumstances leading to the conclusion of the Procurement Agreement, no effort has been made to demonstrate triable issues of fact. In the Statement of Claim, the Plaintiff does not aver any fact that adds to the context of the Procurement Agreement to be read as whole. In his affirmation, Mr Ho does not state any extraneous circumstance that may properly be taken into account for construction of the Procurement Agreement. Para. 14 and other parts in his affirmation relating to matters allegedly brought to the knowledge of the Plaintiff by the said Wong and the said Szeto are simply irrelevant because they show at best subjective intent and have no bearing on the common intention of the parties. In I.C.S. Ltd v. West Bromwich B.S. [1998] 1 W.L.R. 896 at 912-913, Lord Hoffman summarized the applicable principles as follows:-

"I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of "legal" interpretation has been discarded. The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact", but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd v. Eagle Star Life Assurance Co. Ltd [1997] A.C. 749.

(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had."

9. I did ask Mr Chong whether he could point to any relevant issue of fact for trial. Counsel, however, could only say that neither the pleadings nor the affirmation in answer to the Order 14A summons can or need to allude to all the facts in issue. I do not think this is satisfactory. The whole purpose of pleadings is to place facts to be relied upon by the parties on record so that each side knows the case of the other side that it has to meet. And, it is no good for a party confronted with an Order 14A summons to say there are issues of fact without particularizing them. Thus, I hold that there are no issues of fact raised by the Plaintiff.

10. It will be seen that the primary issue in the instant case is whether the Defendant contracted as principal with the Plaintiff whereas the Plaintiff contends that the Procurement Agreement was an agency agreement with the Defendant undertaking to act as agent or trustee for the Plaintiff. What the said Wong and the said Szeto, both unrelated to the Defendant, told the Plaintiff cannot possibly affect the legal status or capacity of the Defendant. Thus it is highly misleading for Mr Ho to say in para. 14 of his affirmation that it was common ground between the parties herein that the Defendant only acted as the agent. In any event, Mr Chain for the Defendant argues that even if the court finds as a fact that the Defendant contracted to act as agent under the Procurement Agreement, it is not fatal for the Order 14A summons. In other words, the Plaintiff's claim is bound to fail and hence judgment ought to be given for the Defendant under the Order 14A summons. I shall deal with this point in due course.

11. It is necessary to set out in extenso the relevant parts of the Procurement Agreement as follows:-

"WHEREAS:-

(1) The Purchaser [the Plaintiff] is desirous of purchasing the premises ("the said premises") more particularly described in the First Schedule hereto which forms part of the Development referred to in the said First Schedule.

(2) Twelve (12) three-storeyed village-type houses (such houses together with their corresponding lot(s) on which they will be erected are called "the houses" and individually each one is accordingly referred to as "house") are planned to be erected on the said premises and the relevant certificates of exemption authorizing commencement of building works are expected to be issued before 31 December 1997. The houses are expected to be completed with certificates of compliance issued in respect of the New Grants/Building Licences thereof before 31 December 1998.

(3) The Purchaser [the Plaintiff] is desirous of engaging the Consultant [the Defendant] to procure the owners of the said premises to sell the said premises to the Purchaser [the Plaintiff] upon the terms and conditions hereinafter appearing.

NOW IT IS HEREBY AGREED AS FOLLOWS:-

1. The Purchaser [the Plaintiff] hereby agrees to engage the Consultant [the Defendant] as its sole and exclusive Consultant [the Defendant] for the purpose of procuring the owners of the said premises ("the Owners") to sell the said premises to the Purchaser [the Plaintiff] upon the terms and conditions set out in the Second Schedule hereto.

4. The Consultant [the Defendant] shall be responsible for:-

(a) procuring the said premises to be sold to the Purchaser [the Plaintiff];

(b) advising and assisting the Purchaser [the Plaintiff] in all matters relating to purchasing the said premises;

(c) advising and assisting the Purchaser [the Plaintiff] in all matters relating to tenancy/licence of the said premises;

(d) procuring and advising the Owners to promptly and without unreasonable delay after the signing hereof, do all acts and make all applications for the written consents or certificates of the District Lands Office, Tai Po to enable the Owners to build and erect the said premises and for the sale of the said premises to the Purchaser [the Plaintiff] and the determination of the premium payable.

5. The Purchaser [the Plaintiff] shall pay the price for the purchase of the said premises to the Consultant [the Defendant] in accordance with the Payment Terms set out in the said Second Schedule and any other provisions therein as applicable. For this purpose, time shall be of the essence of this Agreement. Should the Purchaser [the Plaintiff] fail to make payments in strict compliance with the said Payment Terms, the Consultant [the Defendant] shall be entitled, in respect of each of the houses, to terminate this Agreement forthwith and the provisions in clause 10 shall apply accordingly Provided that such termination shall not prejudice the rights and obligations of the parties hereto in respect of the remaining houses. Subject to adjustments to be made, if any, under paras 2 and 3 of the said Second Schedule, the total price of HK$87,360,000.00 shall be applied by the Consultant [the Defendant] for payments of premium due to the Government of the Hong Kong Special Administrative Region for consent to the sale of the said premises to the Purchaser [the Plaintiff] pursuant to the relevant condition(s) of the relevant New Grants/Building Licences, or deposits and/or part payments of the purchase price of the said premises or the balance thereof payable to the Owners, or construction cost and other expenses in due course and in due compliance with the Payment Terms under the said Second Schedule. For the avoidance of doubt, before such payments are made, the Consultant [the Defendant] shall be entitled to keep and utilize any money received pursuant to this Agreement for any purpose as it thinks fit and the Consultant [the Defendant] shall have the absolute discretion to decide when the payments as deposits or part payments of purchase price or balance thereof are to be made to the Owners or the contractors provided that the Consultant [the Defendant] hereby undertakes to pay off the Owners and the contractors and any other relevant parties prior to completion of the sale and purchase such that the said premises shall be assigned to the Purchaser [the Plaintiff] or its nominee free from encumbrances and to indemnify the Purchaser [the Plaintiff] and keep it harmless from any loss or damage as a result of any such use or application of the price or any part thereof.

6. The Consultant [the Defendant] shall procure the Owners to deliver vacant possession of the said premises to the Purchaser [the Plaintiff] on completion.

8. The provisions herein shall be effective and be binding and continue to be binding on the Consultant [the Defendant] and the Purchaser [the Plaintiff] until the Purchaser [the Plaintiff] shall have purchased the said premises or this Agreement shall have been terminated and for removal of doubt it is hereby expressly agreed by the parties hereto that subject to Clause 11 hereof the Purchaser [the Plaintiff] shall not be entitled to ask the Consultant [the Defendant] for the refund of any money paid during the subsistence of this Agreement.

9. When the Consultant [the Defendant] has successfully procured the Owners to agree to sell the said premises to the Purchaser [the Plaintiff] in accordance with the provisions of this Agreement (and the Consultant [the Defendant] undertakes not to procure any such agreement in breach of any conditions in the relevant New Grants/Building Licences prohibiting alienation), the Consultant [the Defendant] shall forthwith procure the Owners to enter into an Agreement for Sale and Purchase with the Purchaser [the Plaintiff] or its nominee(s) in respect of the said premises on the terms set out in the said Second Schedule and to acknowledge receipt of all moneys paid to or on behalf of the Owners pursuant to Clause 5 hereof and the Consultant [the Defendant] undertakes to ensure that the Owners or their solicitors shall have received payments of any monies paid in manner provided in the said Second Schedule before the execution of the assignment of the said premises by the relevant Owners and the Purchaser [the Plaintiff] shall complete the sale and purchase with the relevant Owners and take up the assignment of the relevant lot(s) in the said premises within 21 days after the Purchaser [the Plaintiff] shall have been notified by the Consultant [the Defendant] or the Owners or their respective solicitors that the relevant written consent of the District Lands Office, Tai Po ("the said written consent") to permit the sale of the relevant lot(s) in the said premises has been issued and a certified copy of the said written consent and a certified copy receipted Demand Note for premium has been given to the Purchaser [the Plaintiff] or his Solicitors.

10. (a) The parties agree that the total deposit of HK$8,736,000.00 paid on or before signing hereof represents 10% deposit of the price at HK$728,000.00 per house.

(b) In respect of each of the houses, if the Purchaser [the Plaintiff] shall fail to observe or comply with any of the terms and conditions contained herein or if the Purchaser [the Plaintiff] shall fail to make payment of any part of the price on or before the date stipulated for payment of the same herein, then (i) the deposit of HK$728,000.00 per house paid shall be absolutely forfeited to the Consultant [the Defendant] without prejudice to any right of the Consultant [the Defendant] to any further damages suffered by the Consultant [the Defendant] and (ii) the Consultant [the Defendant] shall hold the part payment and any further payment of the price (other than the forfeited deposit) made by the Purchaser [the Plaintiff] hereunder until such damages have been quantified and upon such quantification, the Consultant [the Defendant] shall retain out of such part and/or further payment such amount as will indemnify the Consultant [the Defendant] against such damages and the balance, if any, will be repaid to the Purchaser [the Plaintiff] forthwith without interest. Upon determination of this Agreement the Consultant [the Defendant] may deal with the house(s) in whatsoever manner as the Consultant [the Defendant] may think fit and any increase in price on such dealings shall belong to the Consultant [the Defendant]. Without prejudice to the Consultant's [the Defendant's] right to recover the actual loss which may flow from the Purchaser's [the Plaintiff's] breach of this Agreement, on such dealing(s), any deficiency and all expenses attending the same or any attempted thereof shall be made good and paid by the Purchaser [the Plaintiff] as and for liquidated damages. This clause shall not preclude or be deemed to preclude the Consultant [the Defendant] from taking other steps or remedies to enforce the Consultant's [the Defendant's] right under this Agreement otherwise.

(c) Any dealings between any person(s) and the Consultant [the Defendant] upon exercise of the Consultant's [the Defendant's] right pursuant to sub-clause (b) above shall be valid and effectual in all cases; the only remedy open to the Purchaser [the Plaintiff] where the determination by the Consultant [the Defendant] shall have been subsequently ascertained to be wrongful shall be a claim against the Consultant [the Defendant] for damages only.

11. Notwithstanding anything to the contrary hereinbefore contained, it is hereby expressly agreed that:-

(i) if, in respect of each of the houses, the Consultant [the Defendant] shall be unable to procure the said written consent of the District Lands Office, Tai Po to be issued on or before 31 March 1999 (in circumstances not attributable to the fault of the Purchaser [the Plaintiff]) the Purchaser [the Plaintiff] shall have an option to terminate this Agreement with regard to that house by giving written notice to the Consultant [the Defendant] provided that such option shall lapse if the same is not exercised by the Purchaser [the Plaintiff] on or before 30 April 1999. If such option is so exercised by the Purchaser [the Plaintiff], the Consultant [the Defendant] shall forthwith return any monies paid in respect of that house to the Consultant [the Defendant] in full to the Purchaser [the Plaintiff] but without interest or compensation and either party shall in such event waive any claim against the other of them provided that if the inability to obtain the said written consent of the District Lands Office, Tai Po is caused by the fault of the Purchaser [the Plaintiff] then the provisions in this Clause 11(i) shall not be applicable and the Purchaser [the Plaintiff] shall have no right to terminate this Agreement and for avoidance of doubt, occupying the said premises by the Purchaser [the Plaintiff] or any other person(s) authorized by him (whether for consideration or not) shall not be treated as a fault of the Purchaser [the Plaintiff] for the purpose of this Sub-clause if such occupation has been agreed to in writing by the Consultant [the Defendant]; and

(iii) if the Owners shall have sold or sell any of the houses to other person or fail or refuse to enter into the formal Agreement for Sale and Purchase or to complete the sale and purchase of any of the houses in accordance with the provisions of this Agreement (in circumstances not attributable to the fault or default of the Purchaser [the Plaintiff] in purchasing the said premises), then the Consultant [the Defendant] shall forthwith return to or compensate the Purchaser [the Plaintiff] in full any monies received hereunder in respect of that/those house(s) together with interest thereon at the best lending rate of The Hongkong & Shanghai Banking Corporation Limited form time to time from the date of receipt of the said sum from the Purchaser [the Plaintiff] to the date of its eventual repayment both days inclusive and further pay to the Purchaser [the Plaintiff] liquidated damages equivalent to the difference between the price as determined by a Chartered Surveyor jointly appointed by the Purchaser [the Plaintiff] and the Consultant [the Defendant] to be the market price of similar premises in the Development as at the date when that/those house(s) is/are sold by the Owners to such other person(s) and the said price of HK$7,280,000.00 per house but without prejudice to other rights of the Purchaser [the Plaintiff] to claim for specific performance of the formal Agreement for Sale and Purchase (if already signed) and to claim against the Consultant [the Defendant] and/or the Owners for all losses and damages caused to the Purchaser [the Plaintiff] by reason of the breach by the Owners.

(iii) For the avoidance of doubt, the exercise of the option in para. (i) above or the event envisaged in para. (ii) above happens will not invalidate, terminate or affect this Agreement in respect of the other houses or its application thereto.

13. It is hereby expressly agreed and declared that the Consultant [the Defendant] in entering into this Agreement with the Purchaser [the Plaintiff] is not acting in the capacity as an agent of the Owners and no privity of contract is created or intended to be created between the Owners and the Purchaser [the Plaintiff].

15. This Agreement sets forth the entire agreement and understanding between the Purchaser [the Plaintiff] and the Consultant [the Defendant] and annuls and supersedes all previous agreements between the parties whether implied or expressed, verbal or written, and all representations by or made on behalf of the parties to each other are hereby expressly withdrawn.

THE SECOND SCHEDULE ABOVE REFERRED TO

Basic Terms and Conditions of Sale

1. Price

HK$7,280,000.00 per house i.e. HK$87,360,000.00 in total. Such price shall be inclusive of land cost, cost of villager's right, design fees, construction cost (not exceeding HK$1,200,000.00 per house), and premium payment to Government for removal of the non-alienation clause (not exceeding HK$1,400,000.00 per house). The construction cost above referred to shall include the cost of external works relating to the Development and apportioned to individual houses. However, the cost of advance work such as site investigation and site formation cost shall be solely borne by the Owners/Consultant [the Defendant].

2. Payment Terms

(a) HK$2,000,000.00 initial deposit has already been paid before the signing of this Agreement to the Consultant [the Defendant].

(b) HK$18,160,000.00 as to HK$6,736,000.00 thereof being further deposit and as to HK$11,424,000.00 thereof being part payment of the price to be paid upon signing of this Agreement to the Consultant [the Defendant].

(c) Further payment in the aggregate of HK$1,200,000.00 per house to meet the Owners'/Consultant's [the Defendant's] construction cost for building works in respect of each individual house, payable to the Consultant [the Defendant] within 7 days of the Purchaser [the Plaintiff] being notified by the Consultant [the Defendant] of the issue of the relevant architect's certificate and the amount shall be that as certified by the architect. Provided if the aggregate amount certified by the architect shall exceed HK$1,200,000.00 per house, the Owners/Consultant [the Defendant] shall pay the exceeded amount first, but the same shall be borne by the Purchaser [the Plaintiff] in any event and eventually be reimbursed by the Purchaser [the Plaintiff] upon completion as provided in sub-para. (f) below.

(d) HK$1,000,00.00 per house payable to the Consultant [the Defendant] upon substantial completion of building works payable within 7 days of the Purchaser [the Plaintiff] being notified by the Consultant [the Defendant] of the architect's certificate of substantial completion.

(e) HK$1,400,000.00 per house payable to the Consultant [the Defendant] within 7 days of the Purchaser [the Plaintiff] being notified of the receipt by the Owners/Consultant [the Defendant] of the demand note(s) issued by the Government for payment of premium for lease modification to remove the non-alienation clause.

(f) HK$2,000,000.00 per house together with any adjustment as necessitated by sub-paragraph (c) above payable upon completion to the Consultant [the Defendant].

3. Premium Payment

(a) The price shall include the payment of premium to the Government for removal of the non-alienation clause up to a maximum of HK$1,400,000.00 per house which shall be borne by the Owners/Consultant [the Defendant].

(b) If the premium is higher than HK$1,400,000.00 for any house(s), the Purchaser [the Plaintiff] shall reimburse the Owners/Consultant [the Defendant] for the difference above HK$1,400,000.00 within 7 days of payment of the premium by them.

(c) If the premium is less than or equal to HK$1,400,000.00, no adjustment shall be made to the price."

The Duty to Account

12. Mr Chong relies on the terms and conditions in the Procurement Agreement to argue that the Defendant had a duty as an agent or trustee of the Plaintiff to account to the Plaintiff for the $20.16 million paid by the Plaintiff to the Defendant. In particular, counsel points out that under Clause 5 of the Procurement Agreement the Defendant agreed to apply monies received from the Plaintiff to pay:-

(i) premium due to the Government for consent to the sale of the said village type houses to the Plaintiff;

(ii) deposit and/or part payment of the purchase price of the said village type houses or balance to the said indigenous villagers;

(iii) construction costs and other expenses for the houses; and

(iv) the indigenous villagers and the contractors and any other relevant parties prior to the completion of the sale and purchase so as would enable the houses to be assigned to the Plaintiff and its nominees free from encumbrances.

Furthermore, under Clause 9 of the Procurement Agreement the Defendant undertook to ensure that the said indigenous villagers or their solicitors would have received payments of any monies paid in manner provided in the Second Schedule to the Procurement Agreement before the execution of the assignment of the said village type houses by the said indigenous villagers.

13. It is indisputable fact that after the Plaintiff had paid monies under paras 2(a) and (b) of the Second Schedule to the Procurement Agreement, the Defendant refused to render an account to the Plaintiff. On that basis, counsel says that there was wrongful repudiation of the Procurement Agreement on the part of the Defendant.

14. Mr Chain contends that there are two types of duty to account. In Bowstead and Reynolds on Agency, 16th Edition, at pp. 202-203, it is said that:-

"Earlier editions of this book suggested that the situations where a trust has been held to exist largely fall into two broad categories: (i) where money or property has been specifically entrusted to the agent by the principal to hold for his benefit or to use for a specific purpose, and (ii) where money or property has been handed to the agent by a third party to hold or convert into a specific property for the benefit of the principal. These are useful indications, though the cases are not all easily reduced to such form. But the present trend seems to be to approach the matter more functionally and to ask whether the trust relationship is appropriate to the commercial relationship in which the parties find themselves, whether it was appropriate that money or property should be, and whether it was, held separately, or whether it was contemplated that the agent should use the money, property or proceeds of the property as part of his normal cash flow in such a way that the relationship of debtor and creditor is more appropriate. The latter would not, for example, be appropriate for an agent of a type who is not normally expected to handle money for his principal at all. A relevant consideration also is whether money or property was received in pursuance of a single transaction for which the agent was appointed, or as part of a group of transactions in respect of which a general account was to be rendered later or periodically. Although the issue does not arise in many of the cases, a central question, really one of policy, perhaps too often overlooked (because not directly in issue), is whether the rights of the principal are sufficiently strong, and differentiable from other claims, for him to be given priority in respect of them on the agent's bankruptcy; though this can also be achieved by an equitable lien. Sometimes with this in mind the position is secured by statute or regulation providing that particular types of functionary (e.g. estate agents and solicitors) hold clients' money on trust, pay into client accounts and keep trust accounts."

In an article entitled Bribes and Secret Commissions [1993] Restitution Law Review 7, at pp. 23-25, Lord Millet commented that:-

"The position is not necessarily the same where money payments are concerned. An agent who receives money from or for his principal is not necessarily a trustee, even though he is a fiduciary. At law, the relationship between the agent and his principal is that of debtor and creditor. In equity, however, the relationship of trustee and beneficiary may be superimposed. In Palette Shoes v. Krohn, Sir Owen Dixon explained:

"In equity the relation of agent would carry with it a duty to account and, as a rule, a duty, if monies are received in the course of the agency, to hold them specifically for the principal. At law the relation would be that of debtor and creditor."

Solicitors, estate agents and persons authorised under the Financial Services Act 1986 are subject to a statutory obligation to keep "clients' money" separate from their own. They are trustees of the money for their clients.

In other cases the question whether an agent is a trustee depends on all the circumstances and in particular the intention of the parties, express or inferred. There is no single test; the usual approach is to consider whether it is appropriate to superimpose a trust relationship onto the commercial relationship which exists between the parties; or whether it was contemplated that the agent should be free to treat the money as his own, in which case no trust relationship is created. It is fundamental to the existence of a trust that the trustee is bound to keep the trust property separate from his own and apply it exclusively for the benefit of his beneficiary. A right of the agent to mix his principal's money with his own and use it as part of his cash-flow is inconsistent with the existence of a trust.

Stockbrokers, auctioneers, rent-collectors and others who receive payment on behalf of their principal are usually trustees of the money; but, as Sir Owen Dixon recognised, this is not always the case. The duty to keep such money separate from their own and hold it specifically for their principal may be excluded by the terms of their employment or by the circumstances of the particular case. Where it is excluded, there is no trust property and no trust."

15. In fact, in Paragon Finance v. DB Thakerer & Co. [1999] 1 All E.R. 400, Millet LJ (as he then was) held at p. 416:-

"It is fundamental to the existence of a trust that the trustee is bound to keep the trust property separate from his own and apply it exclusively for the benefit of his beneficiary. Any right on the part of the defendant to mix the money which he received with his own and use it for his own cash flow would be inconsistent with the existence of a trust. So would a liability to account annually, for a trustee is obliged to account to his beneficiary and pay over the trust property on demand. The fact that the defendant was a fiduciary was irrelevant if he had no fiduciary or trust obligations in regard to the money. If this was the position, then the defendant was a fiduciary and subject to an equitable duty to account, but he was not a constructive trustee. His liability arose from his failure to account, not from his retention and use of the money for his own benefit, for this was something which he was entitled to do.

Unless the defendant was a trustee of the money which he received, however, the claim for an account was barred after six years. The fact that the defendant was a fiduciary did not make his failure to account a breach of fiduciary duty or make him liable to pay equitable compensation. His liability to account arose from his receipt of money in circumstances which made him an accounting party. It did not arise from any breach of duty, fiduciary or otherwise. The defendant was merely an accounting party who had failed to render an account."

Mr Chain further prays in aid Napier v. Hunter [1993] A.C. 713, Re Fleet Street Disposal Services [1995] 1 B.C.L.C. 345 and Triffit Nurseries v. Salads Etcertera Ltd [1999] 1 Lloyd's Rep. 697 as supporting the modern approach indicated by Bowstead and Reynolds on Agency and Lord Millet.

16. In the premises, Mr Chain contends that there is no room for trust or duty to account in the sense canvassed by Mr Chong. This is because Clause 5 of the Procurement Agreement expressly provides that "...... For the avoidance of doubt, before such payments are made, the Consultant [the Defendant] shall be entitled to keep and utilize any money received pursuant to this Agreement for any purpose as it thinks fit and the Consultant shall have the absolute discretion to decide when the payments as deposits or part payments of purchase price or balance thereof are to be made to the Owners or the contractors ..." (Emphasis added)

17. In my view, Mr Chain must be right. Clause 5 makes it crystal clear that the Defendant may treat monies received under the Procurement Agreement as in effect its own money. Under the Procurement Agreement, there is no obligation on the Defendant to account to the Plaintiff on demand. Although in the Procurement Agreement the word "apply" or its derivatives are used, the true meaning of all the provisions in the Procurement Agreement relating to use of money is that the Defendant has a duty to pay certain parties for certain purposes but not a duty to really pay out of monies received from the Plaintiff. I think the duty to pay, per se, is quite different from the duty to account. Under the Procurement Agreement, so long as the Defendant pays off all the other parties, its financial duties are discharged. The right of the Plaintiff, assuming all goes well, is to have the houses conveyed to it or its nominees with vacant possession and free from encumbrances. There are of course situations provided for in the Procurement Agreement under which the Defendant must refund but those situations have not arisen in this case.

18. In the light of the clear wording in Clause 5 of the Procurement Agreement, there is no room at all for implied condition to give a true and proper account as pleaded in para. 5 of the Statement of Claim.

19. Once it is accepted that the Defendant has no duty to account in the sense canvassed by Mr. Chong, it was of course wrong for the Plaintiff to demand by the letter dated 22 August 1998 for an account from the Defendant and even more wrong to treat refusal to account as repudiation by the Defendant.

20. To take a step back, even if the Defendant was under a duty to account, refusal or failure to do so only gives the Plaintiff a cause of action to demand accounts to be shown. There is nothing in the Procurement Agreement or in the circumstances of the case to support the claim that refusal or failure to render accounts is a breach of condition giving the Plaintiff the right to discharge the contract. After all, the Plaintiff did not bargain for some books or accounts. The Plaintiff's bargain was for the houses to be conveyed to it or its nominees with vacant possession and free from encumbrances.

Termination or Repudiation

21. Moreover, according to Clause 5 of the Procurement Agreement, the Plaintiff must pay in accordance with the time table set out in the Second Schedule to the Procurement Agreement and time is expressed to be of the essence. There is no doubt that the Plaintiff defaulted in payments under para. 2(c) of the Second Schedule when they fell due. The same Clause 5 gives the Defendant an express and unequivocal right to terminate the Procurement Agreement upon the Plaintiff's failure to make payments in strict compliance. And the Defendant did so by its letter dated 26 February 1999. This was four months before the Plaintiff purported to accept repudiation. It is axiomatic that there cannot be acceptance by one party of repudiation by another party of a contract if the contract has already been rightfully and validly terminated by that other party.

Deposit and Further Payments

22. The Plaintiff's claim in this action is for refund of the $20.16 million paid under the Procurement Agreement by the Plaintiff to the Defendant. I have held that the money is not trust money. I have also held that the Defendant had no duty under the Procurement Agreement or as an agent to account to the Plaintiff in the sense canvassed by counsel for the Plaintiff. The Plaintiff having failed to make good its pleaded case, this action should be dismissed. Consequently, question arises as to rights over the $20.16 million paid under the Procurement Agreement which has been rightly and validly terminated by the Defendant for the Plaintiff's breach.

23. Mr Chong has not advanced any argument or authority to show that a party to a contract terminated due to its own fault is entitled to return of money or property passed under the contract. Since the Plaintiff's action ought to be dismissed, I cannot see how it can be appropriate for me to order the Defendant to return the $20.16 million or any part thereof to the Plaintiff. On the other hand, the Defendant has not lodged any counterclaim.

24. Mr Chain for the Defendant relies on Clause 10(b) of the Procurement Agreement which provides that upon the Plaintiff failing "to observe or comply with any of the terms and conditions" the Defendant is entitled to forfeit $7.28 million and hold any balance (other than the forfeited amount) until damages have been quantified. But, as I have observed, technically there is no counterclaim by the Defendant against the Plaintiff for damages for breach by the Plaintiff even though in fact there was a breach. So, again, it appears that there is no basis for me to make an order for enquiries as to damages much less to determine damages. Presumably, the Defendant believes that it can hold on to the entire $20.16 million without any order or judgment.

25. However, Mr Chong does argue that the forfeiture provision in Clause 10(b) is a penalty clause and as such the Defendant is not entitled to rely upon it. If this issue has to be decided, I believe it depends on whether the Procurement Agreement is in effect a contract for sale and purchase of landed property. If so, there is clear authority to the effect that the Defendant as vendor may forfeit 10% of the purchase price and recover more if actual damages for breach exceed the forfeited amount. I am inclined to think that the Procurement Agreement is in effect a contract for sale and purchase of landed property. But there is no need for me to go to that length because, even if the forfeiture clause is a penalty clause, no attempt has been made to convince me that in the circumstances of this case the Plaintiff is entitled to return of the money that cannot be forfeited.

Order

In the premises, I answer the two questions posed by the Order 14A summons in the negative. For the reasons given, the Plaintiff's action is dismissed with costs to be taxed if not agreed.