TWINKLE STEP INVESTMENT LTD. v. SMART INTERNATIONAL INDUSTRIAL LTD.

FACV No. 4 of 1999

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 4 OF 1999 (CIVIL)

(ON APPEAL FROM CACV No. 201 OF 1998)

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J U D G M E N T

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Chief Justice Li :

1. I agree with the judgment of Mr Justice Ching PJ.

Mr Justice Litton PJ :

2. I agree with Mr Justice Ching PJ's judgment and would simply add this: When Lord Wilberforce spoke of varieties of implications which courts make when construing a seemingly complete contract - see Liverpool City Council v. Irwin [1977] AC 239 at 253F - he was not seeking to identify them as four rigid categories. As he said at 254A the case itself merely represented a "fourth shade on a continuous spectrum".

3. The relationship of vendor and purchaser of real estate is one well-known to the law. The court, in construing the parties' contract, can say with some confidence what the legal incidents of that contract must be, in order that it should take effect as the parties intended. As Mr Justice Ching said in his judgment, it must be assumed that parties who enter into a contract for the sale and purchase of a house intend that the transaction should go through to completion. If, on the day the agreement was signed, the vendor were asked by the purchaser: "Would you please let me into the house later on so that I can see for myself it is vacant, before I hand over the balance of the purchase money?", is it likely that the vendor would have said no?

4. Mr Chang SC, counsel for the vendor, said that in refusing inspection the vendor was standing on his strict legal rights: that is to say, according to the strict letter of the written agreement. That was indeed the vendor's stance when relations between the parties had soured. It is no sure guide to the parties' true intentions at the time the contract was made.

5. Upon disputes arising between the parties, it is the court's task to ascertain what their rights and obligations are, in order that the contract should work as they intended it to work: no more and no less. This would involve mutuality of obligations to some extent: In the example given by Mr Benjamin Chain in the course of argument, as referred to in Mr Justice Ching's judgment, the contract would not work unless there was some give and take on both sides: On the part of the purchaser: that he would give to the vendor a reasonable opportunity to count the money, making sure that the balance of the purchase money was indeed the consideration provided for in the contract: This right of the vendor's flows from the very nature of the contract itself. It need not be expressed. What more natural then, when the vendor had contracted to give vacant possession to the purchaser, that he should afford the purchaser an opportunity to see that he was indeed getting what he had bargained for, prior to handing over his money? These are, as I see them, rights and obligations necessarily flowing from the contract the parties had made. Approaching the matter in this way, the court is not exercising a discretion by imposing terms which appear to the court to be fair and reasonable; the court is simply giving true effect to the contract which the parties themselves have made.

Mr Justice Ching PJ :

6. This is an appeal by the defendant to an action relating to the sale by it of a house in Hong Lok Yuen to the plaintiff. The only contractual document between the parties is a pro forma one headed 'Provisional Agreement for Sale and Purchase' dated 12 June 1997. It identified the property, gave the total consideration for the purchase, set the amounts of and the dates for paying the initial deposit and what was described as a further deposit and provided that the balance of the purchase price should be paid upon completion on 12 September, 1997, at the offices of the solicitors of the defendant. Clause 4 provided that upon completion the defendant was to deliver vacant possession. By clause 13 it was provided that,

"It is hereby declared that the sale and purchase hereof shall include the chattels, furniture and fittings as set out in the Schedule attached hereto."

No Schedule was in fact attached but there was written upon the document words in the Chinese language which have been translated as,

"All fixtures, decoration and air-conditioner in the property with photographs attached to prove."

The photographs were not attached to the document but were sent to the plaintiff subsequently. Upon the backs of them had been written words which identified those items which were or were not included. A dispute arose in relation to what has been described as an overhead projector and an electric water closet which the plaintiff claimed and the defendant denied were included. After an exchange of letters dated 24 June, 1997, this was taken no further.

7. The plaintiff paid the initial and the further deposits in the total sum of $2,814,000. Late in August 1997, the plaintiff raised questions in relation to the legality of the swimming pool and some structures around it and on 4 September, 1997, asked for an inspection by an authorised person and asserting that it was 'also entitled to have a full inspection of the captioned premises.' Access was provided on 5 September, 1997, when the swimming pool and the structures around it were inspected but access to the house itself was refused. The plaintiff had never visited the premises before. Correspondence followed in which the plaintiff demanded inspection of the premises prior to completion to no avail. The correspondence also contained a demand by the plaintiff for formal completion rather than one by exchange of undertakings. The outcome was that there would be formal completion at the offices of the defendant's solicitors on 12 September 1997. The defendant attempted to impose on the plaintiff the time of 3:30 p.m. for that completion, which the plaintiff refused to accept. In turn, the plaintiff took the stance that there could be no completion without its having an opportunity to inspect and on this the defendant remained intransigent. On the day in question the plaintiff's solicitors attended at the offices of the defendant's solicitors armed with the necessary cashier orders but, no inspection having been allowed, left a few hours later having left a contact telephone number at which they could be reached at any time before midnight. No completion occurred.

8. The plaintiff issued these proceedings claiming the return of the deposits, stamp duty paid in the sum of $773,850, agency fees in the sum of $280,000, its costs of investigating title, interest and costs. The defendant counterclaimed for a declaration that the deposits had been rightfully forfeited, damages to be assessed, costs and interest. The defendant then issued a summons under Order 14A rule 1 and Order 18 rule 19 of the Rules of the High Court asking that the plaintiff's claim be dismissed and for an order that monies in the hands of the defendant's solicitors as stakeholders be released to it. The Master dismissed the summons but this was reversed on appeal to a Judge of the High Court and in turn this was reversed by a majority in the Court of Appeal. The defendant now appeals to us.

9. The plaintiff's assertion as put before us in its case is,

"... that the purchaser is entitled to look at the whole of the property before being required to hand over the (balance of the) purchase price."

This assertion is at once too wide and is lacking in precision. Like Godfrey JA in the Court of Appeal with whom Rogers JA agreed and like Megarry J (as he then was) in Schindler v. Pigault [1975] 30 P&CR 328 we do not intend to decide more than we must. In the report of that decision at 333 he said,

"No authority bearing at all directly on the point was put before me, and I do not want to decide more than I have to. Under a contract for the sale of land the vendor may or may not be under an enforceable obligation to allow access to the property to the purchaser and his prospective mortgagees, sub-purchasers or others with whom he has actual or proposed dealings : that remains for decision."

The question that is before us and which we have to decide may properly be put as follows,

"where a contract for the sale and purchase of land in Hong Kong requires the vendor to deliver vacant possession upon completion does the purchaser have a right of access to the land before completion in the absence of an express provision to that effect."

We do not take into account the question of whether or not the overhead projector and the electric water closet were included in the sale. That is a dispute of fact not for this Court to decide and which we therefore cannot consider as the basis of any right of access.

10. There is neither English nor Hong Kong decision directly in point. The nearest English decision appears to be Schindler (supra). That was a case where the purchaser needed finance to fund his purchase. Having failed to obtain a mortgage he arranged to sell on to a sub-purchaser with whose purchase monies he would discharge his obligations to the vendor. This was known to the vendor who agreed to allow the sub-purchaser to inspect the premises. The inspection did not take place due to difficulties in locating the keys. Megarry J was able to dispose of the case in favour of the purchaser by holding that the vendor had effectively prevented the purchaser from obtaining the necessary finance. In these circumstances he was in no position to complain that the purchaser did not complete in time. While the decision has no direct bearing on the present case, it is noteworthy that Megarry J did not reject out of hand the possibility of an implied or imposed term that a purchaser may have the right to inspect before completion. As has been seen from the passage already cited, he reserved that question for another occasion. Having regard to the ratio decidendi Megarry J was not dealing with any general question of the right of sub-purchasers to inspect, a question that does not arise and which is not covered by the present judgment.

11. A decision directly in point is Re Harkness and Cooney [1979] 131 DLR 765 decided in the County Court in the Judicial District of Waterloo in Ontario in Canada. There the purchaser sought an opportunity to inspect on the day of closing of a contract in which the property remained at the vendor's risk, the vendor agreeing to hold any insurance policies in trust for the purchaser and the purchaser being entitled to terminate in the event of substantial damage. An argument put forward by the vendor's counsel was that the purchaser must wait for notice from the vendor or the vendor's insurers of the occurrence of potential substantial damage, as to which the Judge, Judge Costello, said, at 766,

"I fail to see why the purchaser should have to wait to be notified by a vendor of defects in the property."

That is clearly a common sense approach as is the important paragraph of the judgment at 767,

"I raised the matter of executory and executed contracts. It seems ridiculous that the purchaser should have to move from his rights under the executory contract to the fewer rights he would have under the executed contract without having the right to inspect the premises while he was still in possession of such rights as the law gives him in an executory contract. It also seems ridiculous that he should have to complete the transaction and pay over his money before ascertaining whether or not he had been entitled to terminate the contract prior to completing it."

The judgment was extempore and, unless the passage cited above can be considered as such, contains no mention of a juridical basis upon which such a term as that in question can be implied or imposed.

12. The absence of authority on the point does not necessarily militate against the existence of the term. It may be, as remarked by Rogers JA that

"Perhaps, the absence of authority for the proposition that the purchaser is entitled to inspect is explained by the rarity of the occasions upon which a vendor has ever declined a request for inspection."

It must be assumed that parties who enter into any contract for sale and purchase intend that the transaction should go through to completion. That being so, it is difficult to see any grounds upon which a vendor may wish to object to reasonable access being given to a purchaser. In argument Mr Denis Chang SC who appeared for the defendant before us was only able to point to the inconvenience which may be caused by the presence of a number of sub-purchasers. So it was said that a purchaser may wish to show the property to a number of sub-purchasers. It is necessary in this respect only to refer to the judgment of Megarry J in Schindler (supra) at 334 where he said,

"Of course, if a purchaser required the vendor to afford access to a horde of possible sub-purchasers, hawking the property round to the highest bidder, very different questions might arise ..."

Then it was pointed out that in the case of a number of sub-purchasers, each acting as confirmor to his own purchaser, difficulties would arise if each insisted upon inspection on or just before completion. It is enough to say that neither of these points arises for decision in the present case.

13. It must be remarked that sometimes parties or their lawyers proceed to claim or to defend claims on what is generally understood to be the practice of the law without question but subsequently that understanding of the practice or the law has been shown to be wrong. A striking case in relation to practice is to be found in Edward Wong Finance Co. Ltd v. Johnson Stokes & Master (A Firm) [1984] AC 296. There the respondent solicitors were acting for a proposed mortgagee. In accordance with Hong Kong conveyancing practice they adopted the process of completion by mutual undertakings and therefore sent the mortgage monies to the proposed mortgagor's solicitor before receiving the completed documentation. The solicitor for the proposed mortgagor absconded with the money. Notwithstanding that the usual practice had been followed the respondents were found liable to the proposed mortgagee. Perhaps a better example, in relation to the law, is Lister v. Romford Ice and Cold Storage Co. Ltd [1957] AC 555. There a lorry driver employed by a company injured his father, another such employee, for which the company was held liable. It had been established law for many years that it is to be implied into a contract of employment that an employee will carry out his duties with reasonable skill and care. The company claimed an indemnity against the driver. No such claim appears to have been put before the Courts in any previous case. Nevertheless the company was successful in its claim. In the present case, if the existence of the term contended for by the plaintiff can be justified the absence of previous authority is of little relevance.

14. In Liverpool City Council v. Irwin [1977] AC 239 Lord Wilberforce set out at 253, 254 four bases upon which terms may be held to exist notwithstanding that they are not expressed. They may be summarised, with comments where necessary, as follows :-

(1) Established usage. This was not argued in the present case.

(2) On the principles of The Moorcock [1889] 14 PD 64. In the words of Chitty on Contract (27th Edn.) at paragraph 13-005, 'A term will be implied if it is necessary, in the business sense, to give efficacy to the contract.'

(3) Reasonableness. This was, rightly, rejected by Lord Wilberforce.

(4) By establishing what the contract is, some terms not having been stated.

Strong arguments may be made that the present case falls within (2) but it will be unnecessary to decide that if it falls within (4).

15. The basis upon which Rogers JA decided in favour of the Plaintiff in the Court of Appeal is that formal completion involves the simultaneous discharge of duties by both purchaser and vendor. As put as an example by Mr Benjamin Chain, who appeared for the plaintiff in the courts below and before us, if the purchaser had tendered the balance of the purchase price in cash there can be no doubt that the vendor would have insisted upon counting the money before handing over the assignment and title deeds. Assuming that the contract called for payment by split cashier orders and these orders were handed over in an envelope the vendor would surely wish to examine them before passing over the documents. Whether the orders were in an envelope or not, the vendor would at least want to check whether, for instance, the figures corresponded with the written sum. It is unnecessary to consider fanciful questions such as whether the bank notes or the cashier orders may have been forged. Ascertaining whether the cash is sufficient and whether the cashier orders are in the proper amounts are obvious and reasonable steps which the vendor must take to discover whether the purchaser is in fact discharging his duties. In the absence of an acceptance by the purchaser that the premises are in fact vacant it is impossible to understand how it can be thought that he should not be allowed to take obvious and reasonable steps to ascertain that the vendor can discharge and is in fact discharging his obligation to give vacant possession.

16. Bearing in mind that simple reasonableness cannot be the criterion for implying or imposing a term, it remains that the attitude of the vendor and his solicitors in the present case was wholly unreasonable. There appears to be nothing militating against the implication or imposition of the term. Indeed there is much militating against its exclusion. Difficulties may arise if a purchaser has not investigated whether or not there are other interests disclosed by persons being on the premises and in any event it appears to be absurd that the purchaser should be forced to complete only to find that he must take legal action immediately thereafter. Mr Chang SC could only say that the vendor was standing on his rights. Some of the judgments in the Courts below have mentioned that any finding that there is to be the right of access claimed would cause great inconvenience and would mean an upheaval in local conveyancing practice. With respect, there was no evidence as to whether or not a right of access was or was not given as a matter of practice. So far as convenience or inconvenience is concerned, the parties must abide by their contract and can, if they agree, insert an express clause excluding any such right. In any event any convenience is more imaginary than real having regard, as Rogers JA pointed out, to the ubiquitous mobile telephone.

17. In the result this appeal fails on the basis that in cases where vacant possession is to be given upon completion a purchaser has a right of access to the premises at or before the time of completion for the purpose of ascertaining whether the vendor is delivering vacant possession on completion. We do not say that it is a right of inspection as that may imply a right of access for purposes wider than those just stated. That question does not arise in the present case. The appeal is dismissed with costs. We will hear the parties on the terms of the order we should make.

Mr Justice Bokhary PJ :

18. Like Mr Justice Litton PJ, I agree with Mr Justice Ching PJ's judgment, and would add only a little thereto.

19. This case concerns an agreement for the sale and purchase of premises with vacant possession. And the focus is on the moment immediately before the purchaser pays the balance of the purchase price, thus completing the purchase. In the present case, there is no express term as to whether the purchaser is entitled to view the premises at that moment. The issue, therefore, is whether there is an implied term that he has that entitlement.

20. In circumstances such as the present, the test is the one articulated by Lord Wilberforce in Liverpool City Council v. Irwin [1977] AC 239 at p.254 A-B when he famously spoke of "a fourth shade on a continuous spectrum" of the contractual terms implied by the courts. Under this test, the question is whether the term contended for is one which the court must imply in order to establish what the contract is, the parties themselves not having fully stated the terms of their contract.

21. In my judgment, the term contended for is indeed one which must be so implied. No one would question a vendor's entitlement to peruse any cheque or cashier's order (or, taking the extreme example given in the course of the argument, to count any cash) before accepting the same as the balance of the purchase price. That is one side of the coin. The other side of the same coin is the purchaser's entitlement to view the premises immediately before proffering the balance of the purchase price. All that the respondent purchaser wanted to do before parting with his money was to take a look at what he was being given in order to see if it was what he had agreed to buy. His entitlement to do that simple thing must be implied in order to maintain the transaction at a commercial level and prevent it from sagging to the level of something approaching a lottery.

22. I, too, would dismiss this appeal.

Sir Anthony Mason NPJ :

23. I agree with the judgment of Mr Justice Ching PJ.

Chief Justice Li :

24. The Court unanimously dismisses the appeal with costs. Any party, wishing to apply for any further order, should within 10 days send in written submissions to the Court copied to the other party.

Representation: