XCHRX RAINBOW COLLECTION LTD. v. LEE ON FUK WILLIAM

1994, No. A9815

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

____________

_______________

J U D G M E N T

_______________

1. This is an appeal against the order of Master Woolley whereby, on an application by the Plaintiff for judgment against the Defendant, the Defendant was ordered to pay the sums of $2 million and $357,500.00 with interest and costs to the Plaintiff.

2. The action arises out of an Agreement for Sale dated the 2nd March 1994 in which the Vendor (Defendant) agreed to sell to the Purchaser (Plaintiff) the 32nd floor of an apartment block and two car parking spaces for the sum of $13 million. The deposit paid upon the signing of the Agreement was $2 million. Completion was to take place on or before the 8th April, i.e. almost exactly five weeks from the signing of the Agreement.

3. There are three clauses in the Agreement most relevant to the issues in this appeal. Clause 4 provides for forfeiture of the deposit in the event of the Purchaser repudiating the contract; clause 5 provides for liquidated damages in the same amount as the deposit and refund of the deposit in the event of the Vendor's repudiation; and finally clause 6 contains an abandonment of any other claim which the non-defaulting party may have over and above the relief provided for in clauses 4 and 5. Clause 7 straightforwardly provides for payment of the stamp duty by the defaulting party.

4. The Agreement was signed on behalf of the Vendor by his solicitor, Mr. Paul Tse, who had been given a general power of attorney.

5. The following day, the Purchaser's solicitors wrote to the Vendor's solicitors asking for the title deeds, etc. There was no reply. A reminder was sent on the 17th March. On the 18th March, the Vendor's solicitors replied to the effect that the Vendor was still in China, they had been unable to contact him, that he was expected to return next week, and the power of attorney had been revoked on the 7th March.

6. On the 23rd March, a further request was made for the title deeds, etc. in view of the proximity of the completion date. On the 25th March, a further letter was sent indicating that it might be necessary to postpone the completion date in view of the continuing delay in receiving the title deeds.

7. On the 30th March, matters had come to a head. An ultimatum was sent. Completion could not take place on the 8th April. Unless the documents were received by 10 a.m. on the 31st March, the Vendor's indicated repudiation of the Agreement would be accepted and the Purchaser would rely on clause 5 for its compensation.

8. Documents for the stamp duty payable on the Agreement were prepared on the 30th March and the duty was paid on the 31st March. On that day, letter of acceptance of the Vendor's repudiation was sent to his solicitors together with a demand for the return of the deposit, the liquidated damages in a like sum and the stamp duty. Reference was made to a conversation between the Vendor and the representative of the Plaintiff company on the day before - the 30th March - in which the former stated that he would not proceed with the sale.

9. The deposit was returned. This action commenced for the damages and stamp duty paid, and the Vendor eventually joined his solicitor as a third party.

10. In seeking leave to defend the action, Mr. Chu, on behalf of the Defendant, sought to argue that there was an issue to be tried and that the Defendant had a credible defence. This argument essentially revolved around contentions that

(1) the Vendor did not own the property in question; and

(2) that his solicitor with the general power of attorney had acted fraudulently or in breach of his fiduciary duty and therefore somehow the Agreement was not a valid one.

It is clear that neither contention even if well-based factually, affected the merits of the Plaintiff's action. The Vendor was in any event controlling shareholder of the company which owned the property, could contract as its agent, could procure the company's concurrence with completion, and was, on his own affirmation negotiating for the sale of the property at a higher price.

11. The Plaintiff's claim against the Defendant is, in essence, unanswerable - he was clearly repudiating the Agreement, if not by his actions (or inaction) making investigation of title, etc. impossible, then certainly by his conversation with the Plaintiff's servant or agent. It is argued that since he did not own the property at the time of the Agreement, there can be no valid agreement. This is irrelevant. In any event, he was capable of procuring the company's Agreement.

12. The next point concerned the amount of liquidated damages provided for in clause 5, the Defendant arguing, inter alia, that it was not a genuine pre-estimate of loss, and, since it represented 15.38% of the contractual price it was a penalty, or an act in terrorem. I was referred to a number of authorities, in particular Workers Trust Ltd. v. Dojap Ltd. [1993] A.C. 573; China Pride Investment Ltd. v. Silverpole Ltd. (Civil Appeal No. 62 of 1994); Dawson Enterprises v. Tailsteam Ltd. [1994] 2 HKC 327; Union Eagle Ltd. v. Golden Achievement Ltd. [1995] 2 HKC 225; and Ng Chek Kok v. Kin Wai Ming [1992] 1 HKLR 5.

13. These cases were essentially concerned with forfeiture of a deposit paid by the prospective purchaser upon his default and the considerations to be applied to determine whether such deposits were to be regarded as a penalty, liquidated damages, or an earnest of performance. In some cases there was argument as to whether deposits in excess of 10% of the purchase price were to be regarded as other than genuine deposits - in other words, penalties intended to act in terrorem.

14. This case is not a deposit case. True it is that the deposit itself, which was returned, was a little over 15%, but I note that though 10% is usual, it is often 15%. This is a case of liquidated damages payable on the Vendor's default. As to whether there is any evidence of a genuine pre-estimate of loss, this is clear from the Agreement itself and specifically the three clauses I referred to at the outset. Both parties quantified their entitlement in the event of the other's default. The Purchaser would have to forgo the deposit but would not be liable for any other sum of money. The Vendor was to pay in addition to return of the deposit, an equivalent sum for liquidated damages, but would not be liable for any other sum or relief. It is quite clear in my view that these clauses accurately and unequivocally declare the agreement and understanding on the part of the Purchaser and Vendor concerning their respective loss in the event of a breach. That sufficiently disposes of that point, but if any practical check were required, it is easy to see in a volatile market how the prices could vary short term or long term, and it is to be noted that this property was to be sold with two carpark spaces whereas those itemised in the valuations of C.Y. Leung & Co. Ltd. had only one carpark space for sale. It is not difficult to envisage the Purchaser, if deprived of the chance of purchasing this property, having to pay an extra $2 million for an equivalent or comparable property at some other stage. If indeed the market dropped, it would hardly result in a rush to sell by the owners of such properties who saw a down turn in their investment. The Purchaser would, therefore, have to look elsewhere and, perhaps, search for an uncertain period of time.

15. The third argument related to the stamp duty payable and paid on this Agreement. I can deal with this shortly. The Purchaser had to pay the duty by the 1st April at the latest. It was paid on the 31st March. The Defendant argues that firstly, a search should have been made which would have revealed that a company, Sure Right, owned the property and that this would have alerted them to problems and the need for further enquiries. I disagree. Even if they had done so, they would have ascertained from the Vendor's solicitors that the Vendor was the controlling shareholder of the company and regularly acted on the company's behalf. Secondly, it is suggested that with the background of uncertainty and taking into account the position disclosed by the letter of the 30th March to the Vendor's solicitors, no stamp duty should have been paid. There is no substance in that contention. The Purchaser still wanted to buy and a deadline was fixed for the title deeds, etc. to be delivered.

16. Finally, it is argued that by virtue of clause 53 of the Commissioner of Inland Revenue's practice note, the Plaintiff's solicitors should have applied for a refund of the duty paid. The ground upon which such an application may be made is that the "Vendor was unable to prove his title in accordance with the agreement". This ground is not available. The Vendor was able to prove title. He had simply decided he wanted to sell to another potential purchaser - or at least not to sell to this Purchaser - and he would have had no difficulty in procuring the company's agreement to the passing of title. I cannot see any circumstance in which the Plaintiff's solicitor could have obtained such a refund.

17. This appeal is dismissed with costs.