XCHRX KING LAI'S HOLDINGS LTD. v. HARBOUR PEARL LTD.

1998, No. A1854

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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1. On 15 October 1997, the defendant sold a landed property to the plaintiff under a provisional agreement for sale and purchase. On 10 November 1997, the defendant purported to accept what it said was a repudiation of the agreement by the plaintiff, and forfeited a deposit of $300,000.

2. I now have before me a summons issued by the plaintiff under Orders 14 and 14A by which the plaintiff seeks judgment in that sum of $300,000, interest and costs upon determination of certain questions of law. These questions are -

"(a) whether under the provisional agreement . . . the defendant as vendor could insist that the plaintiff as purchaser should sign what is in effect an identical agreement again in order to trigger off the plaintiff's obligation to pay the further deposit of HK$1,066,800.00 to the Defendant;

(b) whether certain terms and conditions contained in the Provisional Agreement (in particular clauses 7 and 8) could survive the contemplated "formal agreement for sale and purchase";

(c) assuming the answer to (c) above is in the affirmative, whether the requirement to enter into an identical "formal Agreement" and hence to pay the further deposit is a condition as distinct from a mere warranty of the Provisional Agreement, the breach of which entitled the defendant to rescind the Provisional Agreement and to forfeit the initial deposit of HK$300,000.00;

(d) assuming that the answer to (c) above is that it is a condition, whether time is of the essence and if so what the legal consequences was if both parties failed to perform by the stipulated time and thereafter whether the plaintiff had repudiated the Provisional Agreement by failing to execute the "formal agreement" by 7th November 1997 (as required by the defendant), or alternatively by 10th November 1997 (when the defendant sought to rescind)."

3. Following the provisional agreement, the solicitors for the parties entered into correspondence. There were negotiations towards concluding a formal agreement of sale, both sides reminding each other that the provisional agreement would remain binding if these negotiations failed. They did fail. No formal agreement was signed.

4. One of the reasons for the plaintiff's reluctance to conclude a formal agreement was that it was unhappy that the building on the land might not be in accordance with the building licence.

5. The plaintiff was not obliged to sign any formal agreement, at least so long as it was acting in good faith or not so unreasonably as to be able to infer an intention to repudiate the binding provisional agreement. There is no suggestion of bad faith or unreasonableness here.

6. It is true that the plaintiff, I believe, had no right to insist on requisitions as to title at this stage, but, whilst raising this worry, the plaintiff's solicitors made it clear that the plaintiff's intention was to go through with the deal. Certainly, there was not even a hint that the plaintiff did not regard itself as bound by the provisional agreement. The most that could be said is that the plaintiff manifested some intention of refusing to complete under the provisional agreement if the defendant was unable to show good title. That, of course, the plaintiff would have been entitled to do if the defendant's title was defective.

7. The defendant's solicitors pointed out that the defendant was not obliged to deal with requisitions at this stage, and suggested, mistakenly I believe, that the plaintiff had a contractual obligation to sign a formal agreement. The defendant's solicitor threatened legal proceedings under the provisional agreement.

8. The plaintiff's solicitors replied saying that the terms of the formal agreement had not been agreed.

9. The defendant's solicitor then sent to the plaintiff's solicitors another draft of a formal agreement of sale "incorporating all terms of the Provisional Agreement", saying that, if they did not receive the executed agreement and the further deposit, which was payable on the execution of the formal agreement, within 3 days, "our client shall accept your client's breach and forfeit the initial deposit paid.". Just as there was no obligation for the plaintiff to sign an agreement incorporating new terms, there was equally no obligation on the plaintiff to sign a formal agreement incorporating the same terms as those contained in the provisional agreement. Mr Leung concedes this. The only purpose, of course, of such a duplicate agreement would be to require the plaintiff to pay the further deposit.

10. The plaintiff's solicitors replied repeating the plaintiff's worry about the building licence, but saying that they had received the further deposit "showing our client's intention in this matter". They also said that "our clients will execute the formal agreement . . . only upon conclusion" of a surveyor's report commissioned by the plaintiff.

11. The defendant's solicitors then wrote saying that they "note that your client has, in breach of a condition of the provisional agreement . . . failed to execute the formal agreement . . . and pay the further deposit to our client. . . . We are accordingly instructed by our client to and do hereby inform your client through your goodselves that our client has elected to accept your client's breach and treat the said agreement as having been repudiated by your client and discharged and hereby exercises its right to forfeit the deposit payment of $300,000 previously paid by your client to our client.".

12. So we have here a situation in which the defendant purported to treat as breaches the plaintiff's failure to execute the formal agreement and to pay the further deposit, which were not, in the circumstances of this case, in fact or in law, breaches at all. Accordingly, on that basis, the defendant had no right to forfeit the deposit. Mr Leung recognised this. He put his argument on an entirely different basis. He submitted that the plaintiff had insisted on a condition precedent being fulfilled before the formal agreement was signed, and that this was a repudiatory breach of the provisional agreement. But this is not so at all. A repudiatory breach must demonstrate an intention not to be bound by the provisional agreement, whereas here the plaintiff's solicitors had made it quite clear that they accepted that, if a formal agreement was not entered into, the provisional agreement was binding. The worry about the building licence was a reason for not signing a formal agreement, but it was never suggested by the plaintiff that this concern was a reason for not being bound by the provisional agreement. That is not to say that the plaintiff would not have been entitled to refuse to complete under the provisional agreement if the defendant was unable to show good title, but nothing that the plaintiff's solicitors said could reasonably have lead to the belief that the plaintiff did not consider itself bound by the provisional agreement, which was the only agreement in existence between the parties.

13. In the result, I am unable in this case to find any manifest intention by the plaintiff to refuse to be bound by the provisional agreement. Accordingly, there was no breach of that agreement by the plaintiff that the defendant was entitled to accept as repudiation of the provisional agreement. It follows that the defendant was not entitled to forfeit the deposit. There will be judgment for the plaintiff in the sum of $300,000, together with interest from 10 November 1997 until today at 2% over the commercial bank rate, and thereafter at the judgment rate.

14. There is also before me an appeal by the defendant against a refusal by the Master to vacate the registration of the writ against the property. In the light of my decision in the plaintiff's application, the plaintiff is entitled to a lien over the property. It follows, I think, that the appeal must be dismissed, and I so order.

15. There is no obvious reason why costs should not follow the event. I make an order nisi that the defendant pay the plaintiff's costs of action and in respect of both applications.