ROBERT JOHN FRANCIS BROTHERS AND ANOTHER v. NEW RUI INTERNATIONAL CO, LTD

CACV 433/2023, [2026] HKCA 999

On Appeal From [2023] HKCFI 3062

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 433 OF 2023

(ON APPEAL FROM HCA NO 654 OF 2023)

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R E A S O N S   F O R   J U D G M E N T

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Hon Chu VP:

1.  This is the defendant’s appeal against the decision of Deputy High Court Judge Le Pichon (“the Judge”) dated 27 November 2023^[1] entering summary judgment for the 1^st and 2^nd plaintiffs for an order of specific performance of clause 3.4.1 of the Escrow Agreement dated 23 June 2021 together with costs.  Pursuant to the Judge’s judgment and order, a sum of HK$10 million, being the Tax and Warranty Claim Retention Money[2] held under the Escrow Agreement, was released to the plaintiffs.

2.  On 20 January 2025, this court by majority allowed the defendant’s appeal, set aside the Judge’s order, granted leave to the defendant to defend the plaintiffs’ claim for specific performance of clause 3.4.1.1 of the Escrow Agreement, and ordered that the plaintiffs pay the defendant the costs of the appeal with a certificate for two counsel and the costs of the summary judgment application below be in the cause of the action with a certificate for two counsel.  On 9 April 2025, we further order, by way of supplementary orders^[3], that the plaintiffs shall, within 14 days (a) pay into court to the credit of the action below the Tax and Warranty Claim Retention Money released to them together with interest pending the final determination of the action, and (b) repay to the defendant the sum of HK$1.2 million being costs paid to them pursuant to the Judge’s costs order.  This is our reasons for the judgment on the appeal.

3.  The relevant facts were set out in the Judge’s decision and summarized in Au JA’s Reasons for Judgment.  The core issue before the Judge and in this appeal is whether the defence of rescission of the Sale and Purchase Agreement dated 23 June 2021 (“SPA”) on account of the plaintiffs’ misrepresentation raises triable issues.  At the heart of the dispute is whether the defendant had waived its right to rescind the SPA in that the letter dated 16 January 2023 from Mayer Brown (“MB”) to Wong Poon Chan Law (“WPCL”) amounted to unequivocal conduct of affirmation.

4.  In considering the issue, it is pertinent that the Judge did not accept the plaintiffs’ argument that MB’s letter to WPCL dated 8 November 2022 amounted to unequivocal affirmation.  The Judge held that as the legal owner of the property, the defendant had every right to find out the facts giving rise to the complaints of breaches of the government lease made by the District Lands Office, Sai Kung (“DLO/SK”) and to establish what would be involved to remedy them.  Implicit in the Judge’s finding is that by November 2022 the defendant had yet to master all the relevant information and knowledge to enable it to form an informed view on its rights and entitlements arising from the SPA.  This is notwithstanding that it was some time after the completion of the sale and purchase and the receipt of DLO/SK’s enforcement letter, and the defendant had been given some information and some of the related correspondence through the 24 June 2022 meeting and thereafter by Mr Shun of SLN & Associates Limited, the Authorized Person appointed by the plaintiffs.  As the Judge also observed, MB’s subsequent letter dated 16 December 2022 made clear that the defendant was still considering different options in consultation with its professional advisors, and the letter made no reference to remedial work possibly involving demolition and rebuilding.  This suggests that in December 2022 and until mid-January 2023, the defendant was still in the process of establishing the relevant facts regarding the DLO/SK’s complaints and/or the extent of the remedy involved.

5.  The 16 January 2023 letter was part of a series of correspondence exchanged between MB and WPCL over the plaintiffs’ request for the release of the Tax and Warranty Claim Retention Money which was rejected by the defendant.  The letter shows that by then the defendant had received advice from its own consultant to the effect that the breaches complained by DLO/SK were substantiated, and to remedy the breaches, the existing building would most likely have to be demolished with any new building to be constructed having a smaller lot coverage.  The defendant’s case is that the findings of its consultant show that the Authorized Person’s Certificate (issued by Mr Shun in 2017) provided by the plaintiffs during the due diligence process was untrue, inaccurate and misleading.  Accordingly, in the letter, the defendant raised, for the first time, a complaint of misrepresentation, and refused to release the retention money as the costs of remedying the breaches would far exceed the entire retention money.  The letter stated that MB had instruction to claim against the plaintiffs for its loss and damages arising from breaches of the SPA and/or misrepresentation, and concluded by reserving the defendant’s rights and remedies.

6.  The Judge held that the 16 January 2023 letter was an unequivocal affirmation and the defendant had waived its right to rescind the SPA, notably because the letter made no reference to rescission and the claim for loss and damages indicated that the defendant was not contemplating rescission.  The Judge also considered that the defendant’s stance was repeated in MB’s letters to WPCL dated 1 and 16 February 2023.

7.  I agree with Au JA, for the reasons given in his Reasons for Judgment, that in so concluding, the Judge had not considered, and it is arguable, that the defendant was entitled to have a reasonable time after having all the relevant information to consider its options before committing to whether to rescind or affirm the SPA.  The relevant information included not only that of a potential case of misrepresentation against the plaintiffs and the likely extent of the defendant’s liability to remedy the breaches of the government lease, but would also include the plaintiffs’ response to the defendant’s complaint of misrepresentation, as appeared by WPCL’s letters dated 27 January, 10 February and 21 February 2023.  It is further arguable that, having regard to the circumstances of the case, the indication in MB’s letter dated 7 March 2023 that the defendant would seek a rescission was made within a reasonable time.  There are thus triable issues as to whether by the time of this letter the defendant had already affirmed the SPA and lost its right to claim rescission.  Accordingly, I have agreed that the appeal should be allowed and the defendant should have leave to defend the plaintiffs’ claim on specific performance of the Escrow Agreement, together with the orders set out in [2] above.

Hon Cheung JA:

8.  The background of the case is fully set out in the judgment of Au JA.  I am of the view that Deputy High Court Judge Le Pichon’s decision to grant summary judgment is correct and I would dismiss the appeal.

9.  Two questions that are determinative of whether there are triable issues in this appeal are, first, when did the defendant acquire sufficient knowledge for it to make an informed choice as to its right either to affirm or rescind the contract; and second, when did the defendant by its conduct show that it had made the informed choice?  The evidence addressing these two questions is found in the correspondence between the parties.

10.  As to the first question, my view is that by 16 January 2023, the defendant already had the relevant materials for it to make an informed choice on whether to rescind or not.  This was 17 months after the completion of the Sales and Purchase Agreement (‘SPA’) and seven months after the District Lands Office, Sai Kung (‘DLO/SK’) issued the Enforcement Letter dated 26 April 2022 to Fung Sau Property Co Ltd (‘the Company’) of which the defendant had acquired the shares from the plaintiffs. The Enforcement Letter stated that 1) ‘no approval under Special Condition No. 7 of the [New Grant] (i.e. the lease conditions of the Lot) has been given to the Company for erecting the [Property]’; 2) ‘All the general building plan submissions for the Lot were disapproved by [DLO/SK] owing to the reason that the erection of the [Property] within the Lot would render the total built over area of the Lot No. 285 in D.D. 252 as a whole in excess of the maximum built over area (i.e. 15% of the lot) specified under Special Condition No. 9 of the New Grant ...’; 3) ‘[the Company is] required to purge the existing breach by demolishing all the existing building(s) standing on the Lot to the satisfaction of the [DLO/SK] within four weeks of the date of this letter so as to comply with the terms and conditions of the lease of the subject lot is held.’; and 4) ‘Failure to comply with this requirement may result in lease enforcement action being taken and the lot being re‑entered by Government’.

11.  The knowledge of the defendant on 16 January 2023 was, first, it had the 2017 AP Certificate issued by Mr Shun of SLN & Associates Limited (‘SLN’), the Authorized Person appointed by the plaintiffs for the construction of the buildings erected on the Lot, stating, amongst other things, that 1) the built over area of the Lot [meaning the whole Lot No. 285 in D.D. 252] did not exceed 15 percent of the area of the Lot and was in compliance with Special Condition No. 9 of New Grant No. 6035; and 2) the built over area of the House B Lot did not exceed 15 percent of the area of the House B Lot and was in compliance with Special Condition No. 9 of New Grant No. 6035.

12.  Second, it had confirmation from the meeting on 24 June 2022 with Mr Brothers of the plaintiffs and Mr Shun who had earlier that day met with DLO/SK, about the disapproval of the submitted building plans and also the breach of certain Special Conditions of the New Grant.  This can be seen from the letter dated 16 January 2023 from the defendant’s solicitors Mayer Brown (‘MB’) to the plaintiff’s solicitors Wong Poon Chan Law & Co (‘WPCL’).

‘[4] .....In the afternoon on the same date on 24 June 2022, Mr Brothers, Mr Shun and the Agent attended our office providing us with a debrief of the meeting with DLO/SK in the morning. In the meeting, Mr Shun brought with him a file containing records relating to the construction of the Property and correspondence between, inter alia, SLN & Associates Limited and the Building Plan Unit of the Lands Department both before and after issuance of the Occupation Permit of the Property on 23 March 2010 clearly setting out the Lands Department’s view that there is a clear breach of both Special Conditions 9 and 12 of the New Grant. In fact, at the meeting, Mr Shun pointed us towards this issue by showing us the relevant letters from the Lands Department stating its disapproval of the submitted building plans and also the breach of certain Special Conditions of the New Grant as mentioned earlier.’

13.  Third, the correspondence provided by Mr Shun showed that between 2008 and 2011 the Lands Department repeatedly disapproved the proposed building plans for the Property on the basis of the breach of, amongst other things, Special Condition No. 9 of the New Grant.  It stated that no building work should be effected on Lot 285RP unless prior approval of the building plans had been obtained and non‑compliance might result in lease enforcement action being taken and Lot 285RP being re‑entered by the Government.

14.  Fourth, it had confirmation from its own consultant appointed to carry out an investigation into the alleged breaches of the New Grant that the complaints made by DLO/SK were substantiated and there might not be other solution other than demolishing the existing building and re‑build a new one with a smaller coverage so as to comply with Special Condition No. 9 of the New Grant, viz the maximum area of the Lot that may be built over shall not exceed 15 percent of the area of the Lot.

15.  It was expressly stated in the 16 January 2023 letter that the plaintiffs were in breach of the ‘SPA and/or misrepresentation’ by saying that the 2017 AP Certificate in respect of the two matters identified in [10] above was ‘untrue, inaccurate and misleading’; the sellers had failed to disclose of the breach of the New Grant which would render the warranties in the SPA to be ‘untrue, inaccurate or misleading’; the sellers had withheld important information material to the defendant, the property and the translation under the SPA.  The letter further expressly stated that the title to the Property is not good and defective and there is clear breach of the New Grant with the issuance of the Enforcement Notice.  On the issue of misrepresentation, the letter stated that:

‘Further or in the alternative, the Sellers had misrepresented to our client by producing a copy of the 2017 AP Certificate to our client/our firm during the due diligence process which confirmed, inter alia, that the built over area of the Property did not exceed 15% of the Lot and was in compliance with Special Condition 9 of the New Grant which our client relied on and entered into the SPA with the Sellers and they knew or ought to have known that this is in fact not the case.’

16.  In my view by mid January 2023, the crucial facts of the breaches of the SPA and misrepresentation by the plaintiffs were known to the defendant (and not simply suspicion) from which a reasonable person would deduce the truth and the defendant was taken to have the necessary knowledge that would give it the right to make an informed choice either to affirm the SPA or to rescind: S K Shipping Europe PLC v Capital VLCC 3 Corporation and Another (The C Challenger) [2021] Lloyds LR 109 Foxton J at [202(ii)].  As the defendant was represented by solicitors, one proceeds on the presumption that it had received the appropriate advice: The C Challenger [202(v)] and there is no contrary evidence in the present case saying otherwise.  The 16 January 2023 letter concluded by making a claim for damages for ‘breaches of the SPA and/or misrepresentation’ a remedy that is available to the defendant by an affirmation of the SPA.

‘5. In view of the above, we are instructed to make a claim against your clients, the Sellers and we hereby do, for the losses and damages suffered by the Purchaser and/or the Company arising from the Sellers’ breaches of the SPA and/or misrepresentation as stated in (C) above.’

17.  It is of note that the 16 January 2023 letter was issued after MB’s letter dated 16 December 2022 that stated the defendant was considering different options for the breaches:

‘3. For the subsequent development and liaison with DLO and the plan of our client to find ways to address the alleged breaches of land grant by DLO, it suffices to say that our client is still considering the different options in consultation with professional advisors and no concrete plan has been determined yet.’

18.  As the Judge observed, the defendant repeated in the letters dated 1 February 2023 and 16 February 2023 its stance to pursue the remedy for breach of the SPA which would involve ‘colossal damages’ contrary to a claim for rescission.  In my view the content of the 16 January 2023 letter clearly indicated that the defendant had made an informed choice and decided to affirm the SPA and had communicated it to the plaintiffs.  This addressed the second question posed earlier in [4] above.

19.  Two other matters arising from the 16 January 2023 letter that need to be addressed.

‘5. ..... We are further instructed by both the Purchaser and the Company that unless a satisfactory proposal for settlement of their loss and damage can be provided by your clients, the Sellers, within the next 7 days from the date of your receipt of this letter, we have standing instructions to take out legal proceedings against your clients without further notice.

6.  All our client’s rights and remedies against your clients are hereby expressly reserved.’

20.  First, the proposal for settlement must be read in the context of the defendant’s claim for damages, particularly the letter’s warning about the defendant’s standing instruction to take out legal proceedings.  It does not support a reading that the defendant was still considering its options.  Second, as to the reservation of rights stated in [6] of the letter, determining whether a particular conduct gives rise to an election is ultimately a matter of legal characterisation rather than a question of what label a party has attached to its own conduct. If, with knowledge of the facts giving rise to the repudiation, the other party to the contract acts in a manner consistent only with treating that contract as still alive, he is taken in law to have exercised his election to affirm the contract: The C Challenger [211].  Foxton J’s decision with his summary of principles on affirmation was affirmed by the Court of Appeal [2022] 1 CLC 552.  His view at [211] was expressly adopted by the Court of Appeal at [73] of its judgment.  In this case the defendant’s claim for damages showed that it had affirmed the SPA and the reservation of rights did not deprive the defendant’s election to rescind the necessary quality of unequivocality.

21.  Mr Chang S.C. for the plaintiffs now argued that the knowledge to enable the defendant to formulate a claim for rescission based on fraudulent misrepresentation only came to the defendant when WPCL in the letter dated 21 February 2023 admitted that it was the plaintiffs who told the defendant’s property agent Knight Frank who carried out inspections of the building, that ‘such areas of the house that had been constructed in variance to the requirements of the Special Conditions of the Lease.’

22.  I do not regard this as a triable issue.  The defendant had not stated in its affirmation filed in opposition to the summary judgment application that it was still in the process of gathering information on 21 February 2023.  The closing submission of the defendant below also did not state that that was the defendant’s position.  As a matter of fact, the issue relating to Knight Frank had already surfaced in WPCL’s letter of 27 January 2023 when it denied there was any representation by the plaintiffs or their representative.  The letter stated:

‘Clause 7.2(b) of the SPA provides that, “The Purchaser confirms that it is fully aware that it is purchasing the Sale Shares with the Property in its present state and condition and on an “as‑is” and “where‑is” basis and condition in the full knowledge that the presence of any unauthorised or illegal structures or alterations or partitions or encroachments existing or within or appertaining to or otherwise affecting the Property (if any) may potentially render the title of the Property defective. Without prejudice to Clause 4.1(e), the Purchaser specifically agrees that it shall not make any objection or requisition thereto or in connection therewith.”

The existence of the electrical rooms on the Lower Ground Floor of the Property and the fact that they were not in compliance with the terms and conditions of the New Grant can hardly have come “as a great surprise to our client and us” as you now claim. Indeed Knight Frank, your client’s property agent (“the Agent”), carried out full inspection of the Property prior to the entering into the SPA.  During several inspections, it was specifically pointed out to the Agent that the electrical rooms on the Lower Ground Floor did not comply with the conditions of the New Grant.  Your client was throughout advised by yourselves supported by the Agent which is one of Hong Kong’s leading real property agents.  The Agent was provided with a copy of the Lease Conditions and a copy of the authorised building plans.’

23.  Reading the correspondence in a reasonable and purposive manner, the defendant must have known that the context of the statement that Knight Frank was informed of the non‑compliance must be by the plaintiffs themselves.  It sounds hollow for the defendant to insist that this knowledge only came about on 21 February 2023.  In any event, as pointed out earlier, the fact relating to misrepresentation was known to the defendant by mid January 2023 and its affirmation of the SPA is clearly shown by the contents of the letters dated 16 January 2023, 1 February 2023 and 16 February 2023.  Further, the knowledge of a fact is not to be equated with having sufficient material to plead a fact: The C Challenger [202(iii)].  The latter was what the defendant seeks to do in this appeal by eliding material relating to pleadings with knowledge that it already possessed which enable it to rescind the SPA.  There are no triable issues on the two questions identified in [2] above.

Hon Au JA:

A.     BACKGROUND

24.  The relevant factual background and procedural history of this matter has been set out by Deputy High Court Judge Le Pichon (“the Judge”)succinctly at [2] ‑ [22] of her written decision of the same date ([2023] HKCFI 3062) (“the Decision”) which I would gratefully adopt.  For the present purpose, I will further highlight the following.

25.  Prior to 23 June 2021, the plaintiffs (“Ps”) were the only shareholders of Fung Sau Property Co Ltd (“the Company”) whose sole asset was the property (“the Property”) known as House B, 8 Fung Sau Road, Sai Kung, New Territories (“House B”) together with a short-term tenancy (“STT”) of another 12,000 sq ft of the adjacent land granted for gardening purposes.

26.  The 1^st plaintiff (“P1”) had purchased the whole of Lot 285 in 1973 and erected House A on it.  By a Deed Poll dated 10 March 2006, Lot 285 was subdivided into Section A and the Remaining Portion (respectively “Lot 285 SA” and “Lot 285 RP”). In 2011, P1 erected House B on Lot 285 RP and sold House A and its surrounding land.  The subject matter of the STT was situated in front of House B, which by then was owned by the Company.

27.  In 2018, P1 decided it would be logical for the ownership of the subject matter of the STT to be also transferred to the Company and an application was made to the District Lands Office (“the DLO”) for that purpose.  While the proposal was acceptable to the DLO, the procedure required was first to cancel the original STT and for a new STT (“the Revised STT”) in the Company’s name to be processed.

28.  After this process was initiated, the officer in charge was transferred and his replacement took some time to take the matter up.

29.  In the meantime, while the negotiation for the Revised STT to be granted to the Company was going on, Ps and the defendant (“D”) entered into a sale and purchase agreement on 23 June 2021 (“the SPA”) for D to acquire Ps’ entire shareholding in the Company at the consideration of HKD300 million.  Completion was to take place on 23 July 2021 (“Completion Date”).

30.  As P1 had been handling the STT negotiations for many years, the parties also agreed to incorporate a clause[4] into the SPA to the effect that P1 would continue to handle the negotiations until their conclusion.

31.  Pursuant to the SPA, Ps, D and Ps’ then solicitors, Wong Poon Chan Law & Co (“WPCL”) further entered into an escrow agreement dated 23 June 2021 (“the Escrow Agreement”) which provided for 10% of the consideration, ie, HKD30 million (“the Retention Money”) to be held in escrow, out of which a sum of HKD10 million[5] (“the Tax Retention Sum”) would be released to Ps upon joint instructions if D did not serve/issue proceedings regarding the warranties/undertakings/ indemnity on tax within 18 months from the Completion Date (ie, by 23 January 2023)[6].

32.  Completion duly took place on 23 July 2021.  But after that, on 26 April 2022, the DLO notified the Company by letter (“the Enforcement Letter”) that House B exceeded the permitted built-over coverage percentage as stipulated in Special Condition 9 (“SC9”) of the relevant Government Lease (“the New Grant”) and requested that the breach be purged by demolishing the building.  On the other hand, on 28 June 2022, the DLO further clarified to the Company that the application for the Revised STT would not be held up amid the forthcoming lease enforcement action.

33.  Thereafter, discussions and correspondences were exchanged between the parties (involving P1, D’s representatives and the DLO) as to the alleged breaches and potential ways to address the same.

34.  Relevantly, as summarized by the Judge at [30] ‑ [32] of the Decision, by their letters respectively dated 8 November, 16 and 23 December 2022 to WPCL (respectively “MB’s 8 Nov Letter”, “MB’s 16 Dec Letter”, and “MB’s 23 Dec Letter”), Mayer Brown (“MB”) acting for D reiterated that (a) MB should be involved in dealing with the DLO in respect of the Revised STT application as the STT over the garden was ancillary to the use and enjoyment of House B; (b) D had to incur substantial time, costs and to investigate into the breaches as alleged by the DLO; and (c) D reserved its rights and remedies to claim against Ps under the SPA.  MB had also emphasized in these letters D’s plan to find ways to address the alleged breaches of the land grant, and it was considering different options in consultation with professional advisers but that no concrete plan had been determined yet.

35.  Then, on 10 January 2023, WPCL wrote to MB, seeking their comments on the draft joint instruction for the release of the Tax Retention Sum under the Escrow Agreement.

36.  Through the following correspondences exchanged between the parties between 16 January 2023 and 7 March 2023, MB on behalf of D repeatedly rejected Ps’ requests for the release of the Tax Retention Sum:

(1)     By their 7-page long letter dated 16 January 2023 (“MB’s 16 Jan Letter”) to WPCL, MB indicated, among others, that D’s consultant had now confirmed with D that DLO’s complaints about breaches of the government lease were substantiated and that there might not be other solution other than demolishing House B and rebuilding a new one to rectify the breaches.  It also complained for the first time (at Section C) that (a) Ps had misrepresented to D by way of their provision to D during the due diligence exercise of an authorized person certificate (“AP Certificate”) which purportedly confirmed, inter alia, that the built over area of House B did not exceed 15% of the lot and was in compliance with SC9[7], and (b) Ps knew about the breach beforehand and that D had relied on the misrepresentation in entering into the SPA.  MB then indicated at the last section of the letter (Section D) that D rejected Ps’ request for the payment of the Tax Retention Sum as the cost of remedying the breaches of the government lease would far exceed the entire Retention Money (ie, HKD30 million).  MB also stated that it had instructions to claim against Ps for the loss and damage suffered by D or the Company arising from Ps’ breaches of the SPA and/or misrepresentation.  It had also reserved D’s rights and remedies.

(2)     By WPCL’s letter dated 27 January 2023 in reply, Ps denied any allegations of misrepresentation and asserted that D’s then property agent had carried out full inspection of the Property prior to entering into the SPA, and insisted that there was no basis for D not to consent to release the Tax Retention Sum.

(3)     MB and WPCL thereafter exchanged further correspondences, each stating their own bases on, among others, whether Ps had with prior knowledge misrepresented to D about the compliance of the relevant Special Conditions of the government lease before they entered into the SPA.  In these correspondences, MB had also expressly reserved all of D’s rights and remedies against Ps.  See MB’s letters dated 1 and 16 February 2023 (collectively “MB’s Feb Letters”) and WPCL’s letters dated 10 and 21 February 2023.

(4)     Eventually by their 5-page letter dated 7 March 2023 (“MB’s 7 Mar Letter”), MB set out in details as to why WPCL had still not been able to satisfy them that Ps did not know about the breaches of the Special Conditions before (mis) representing to D (in particular by way of the AP Certificate) that all the special conditions had been complied with in inducing D to enter into the SPA.  At the end of the letter, it stated that in light of the colossal damages to be involved, D “would have no alternative but to consider taking out legal proceedings against [Ps] and possibly [the firm and authorized person issuing the AP Certificate] with a view of obtaining damages and/or recission of contract” (emphasis added).  This is the first time D mentioned about a claim for recission of the SPA.

37.  After some further correspondences exchanged between MB and Gall (who subsequently acted for Ps as their litigation advisers) thereafter, on 28 April 2023, Ps issued their Statement of Claim against D claiming for, inter alia, an order for specific performance of clause 3.4.1.1 of the Escrow Agreement by D to issue a joint instruction to WPCL for the release of the Tax Retention Sum with interest[8].

38.  On 19 May 2023, Ps took out the summons seeking summary judgment against D for the Tax Retention Sum, on the basis that D had not issued any proceedings for breach of any of the indemnity/warranty/ undertakings as to tax, and thus it had no defence under the SPA not to agree to the release of the Tax Retention Sum.

39.  On 6 July 2023, D filed its Defence and Counterclaim (“D & CC”).  In essence, it was D’s case that Ps had fraudulently, negligently and/or innocently misrepresented to D that both the lot and House B were not in breach of government lease and/or any of the special conditions, and/or that any non-compliance have been readily discoverable by D in the due diligence process.  D is therefore entitled to and has rescinded the SPA and the Escrow Agreement.  It therefore counterclaims for a declaration that the SPA and Escrow Agreement be rescinded, the return of the consideration paid under the SPA and damages to be assessed, or alternatively for damages in lieu of rescission to be assessed.

B.     THE DECISION

40.  Before the Judge, P’s leading counsel agreed that, for the purpose of the summary judgment summons, D’s plea of misrepresentation might give rise to a triable issue.  However, counsel contended that, even if there had been such misrepresentation as pleaded, D had already by way of its words and conduct unequivocally affirmed the SPA and thus lost its right to recission.  In the premises, rescission is not a triable issue and the Tax Retention Sum must be payable subject to any question of set off against damages.  See [20] ‑ [22] of the Decision.

41.  In particular, Ps contended that D’s unequivocal affirmation of the SPA was reflected and evidenced in MB’s 8 Nov Letter and MB’s 16 Jan Letter which, when read in the proper context against all the other correspondences, plainly showed that, despite knowing about the Enforcement Letter, D:

(1)     had continued to seek control of the negotiations for the Revised STT (which could only be consistent with a view of enjoying House B, and hence affirming the SPA); and

(2)     still only sought to claim against Ps for “colossal damages” to be suffered by D under the SPA in carrying out the expected remedial works to rectify the breach (which is inconsistent with the remedy of rescission).

See [22] and [44] of the Decision.

42.  After examining the relevant correspondences, the Judge agreed with Ps and concluded that there was no triable issue on rescission.  She found that D had affirmed the SPA through MB’s 8 Nov and 16 Jan Letters (and reinforced by MB’s Feb Letters).  In particular, the Judge was of the view that by the time of MB’s 16 Jan Letter, although D was already fully aware of (a) Ps’ misrepresentation, (b) the need to demolish House B if it was to rectify the breach, and (c) the options of remedies open to her (ie, rescission for misrepresentation or damages for breach and/or misrepresentation), it only mentioned in this letter a claim for damages against Ps, without mentioning rescission (which was inconsistent with the remedy of damages).  D had therefore unequivocally affirmed the SPA.  See [30] ‑ [71] of the Decision.

43.  After finding that there was no triable issue on rescission, the Judge went on to further hold that it was unnecessary to consider D’s counterclaim for a purported defence of set off, as this was neither properly pleaded nor quantified.  See [72] ‑ [81] of the Decision.

44.  By way of the order dated 27 November 2023 (“the Order”), the Judge granted summary judgment in favour of Ps, ordering specific performance by D to jointly instruct WPCL for the release of the Tax Retention Sum to Ps, with costs of the action.  See [83] ‑ [86] of the Decision.

C.     THIS APPEAL

C1.    Grounds of Appeal

45.  By the Notice of Appeal dated 27 December 2023, D advanced two grounds of appeal:

(1)     the Judge erred in concluding that D had affirmed the SPA by conduct and by MB’s 8 Nov and 16 Jan Letters, reinforced by MB’s Feb Letters, such that it could no longer invoke rescission as a remedy (“Ground 1”); and

(2)     the Judge erred in concluding that the defence of set-off (specifically equitable set-off) was not available to D in the absence of a specific plea (“Ground 2”).

46.  Ps filed a Respondent’s Notice on 12 January 2024 seeking to affirm the Decision on the additional ground that in any event D failed to raise an arguable defence based on set-off.

47.  As D has decided not to pursue Ground 2 and Ps also no longer pursue the Respondent’s Notice,[9] the present appeal is only concerned with Ground 1.

C2.    Relevant legal principles

48.  Ground 1 relates to the issue of whether by way of the relevant correspondences D had affirmed the SPA and thus waived its right of rescission.

49.  The relevant principles on affirmation barring rescission as adopted by the Judge[10] are not in dispute and can be summarized as follows:

(1)     The words or conduct ordinarily required to constitute an election to affirm must be unequivocal in the sense that it is consistent only with the outright exercise of one right which is inconsistent with the exercise of the other.

(2)     Whether there was an election is a fact-sensitive issue depending on the proper and objective construction of the relevant correspondence and conduct of the contracting parties.

(3)     The innocent party is not bound to accept a repudiation once a breach is committed by the other side.  He is entitled to consider his position and keep his options open.  Hence, the fact that the innocent party complains about the breach of the defaulting party and urges the rectification of such breach, without more, generally would not be regarded as conduct amounting to an election to affirm.

(4)     The significance of an express reservation of right or without prejudice statement varies depending on the facts of the case.  If the objective conduct of the innocent party amounts to an outright exercise of a right which is inconsistent with another right, such conduct constitutes an election not to exercise the other, whatever reservation might have been made by that party when exercising that right.  On the other hand, where there is less clear conduct to show an outright exercise of that right, reservations by a party of its right may assist in depriving its conduct of the necessary unequivocal character.  All must be dependent on the particular facts and circumstances of the case.

See Castle Global Limited v Ip Tai Hoi Paul [2021] HKCA 1540 at [19].

50.  In this respect, it is also pertinent to note the following undisputed legal principles relevant to the question of affirmation as set out by Foxton J in SK Shipping v Capital VLCC 3 Corporation (The “C Challengers”)[2021] 2 LLR 109 at 202 and 203 (pp 132-133):

“202. So far as the question of knowledge is concerned:

(i) It is clear that for a party to elect, it must be aware both of the facts giving rise to the inconsistent rights, and of the legal rights to which those facts give rise: Peyman v Lanjani [1985] Ch 457.

...

(iii) As Mance J noted in Insurance Corporation of the Channel Islands v the Royal Hotel Limited and others (No 2) [1998] Lloyd’s Rep IR 151, 162, the issue of knowledge is ‘essentially a jury question’. He rejected the argument that knowledge of a fact was to be equated with having sufficient material to plead a fact, but observed:

‘At the other extreme, knowledge is not to be equated with absolute certainty, itself an ultimately elusive concept. The impossibility of doubt which Descartes found only in the maxim ‘I think, therefore I exist’ is not the criterion of legal knowledge. For practical purposes, knowledge pre-supposes the truth of the matters known, and a firm belief in their truth, as well as sufficient justification for that belief in terms of experience, information and/or reasoning. The element of regression or circularity involved in this description indicates why knowledge is a jury question’.

(iv) The fact that the misrepresentor is denying any misrepresentation is a relevant, but not a decisive, consideration when considering the state of the misrepresentee’s knowledge: Insurance Corporation of the Channel Islands v the Royal Hotel Limited and others (No 2), 171-172.

...

203. So far as the question of communication is concerned:

...

(v) Because an election once made is final and irrevocable, the party making the election is entitled to a reasonable time to make a decision, the length of which will depend on the particular circumstances: McCormick v National Motor & Accident Ins Union Ltd (1934) 49 Ll L Rep 361, 365 (Scrutton LJ). This is so even if, during that period, the party with the right of election is exercising rights under the contract (in that case the liability insurer’s right to conduct the insured’s defence).

(vi) Nor does mere lapse of time of itself amount to an election unless it is of such a length of time as to demonstrate an unequivocal decision to elect: Scandinavian Tanker Trading Co AB v Flota Petrolera Ecuatoriana (The Scaptrade) [1981] 2 Lloyd’s Rep 425, 430.

...” (emphasis added)

51.  Bearing these principles in mind, I now proceed to consider the merits of Ground 1.

C3.    Discussion

52.  As mentioned above, after examining the relevant correspondences in some details, the Judge held that D had affirmed the SPA by its conduct and words under MB’s 8 Nov Letter and MB’s 16 Jan Letter, which is reinforced by MB’s Feb Letters.  The Judge came to this conclusion for the following reasons.

53.  The Judge in fact first concluded that MB’s 8 Nov Letter did not show unequivocally that D had affirmed the SPA.  This is so as the Judge noted that MB had in their 16 December 2022 letter “made clear that [D] was still considering the different options in consultation with its professional advisors.  Relevantly, it made no reference to remedial work possibly involving demolition and rebuilding”.  In this respect, although the Judge was conscious that (as submitted by Ps) the Company’s conduct in taking over the control in the negotiation for the issue of the Revised STT was only consistent with an intention to affirm the SPA, this was a self-contained issue and had nothing to do with options available to D.  The Judge reminded herself that D as the legal owner of the Property had every right to find out the facts giving rise to the alleged breaches and to ascertain what was involved in remedying the breaches.  See [45] ‑ [51] of the Decision.

54.  However, the Judge then went on to hold that MB’s 16 Jan Letter showed that D had by that time unequivocally affirmed the SPA.  The Judge explained as follows:

(1)     As stated in this letter, by that time, D was already advised by its consultant that the likely remedy to rectify the breach was to demolish House B and rebuild a new one: [52] of the Decision.  In this respect, the Judge specifically noted at [56] that, by then, D was “well aware not only of the breaches concerned but also of misrepresentations. It must have been well aware that it had the right to rescind yet it chose to pursue its remedies for SPA, which would involve ‘colossal damages’ and that was the course that was being taken”.

(2)     Further, not only had D continued to indicate in this letter that it was considering seeking damages against Ps, it had not mentioned at all the relief for rescission.  This position was repeated in MB’s Feb Letters.  See [53] ‑ [54], [57] ‑ [61] and [69] of the Decision.

(3)     In particular, the Judge further noted at [62] that rescission as a relief was only mentioned for the first time by D later in MB’s 7 Mar Letter.

(4)     The Judge also rejected D’s submissions that the reservation of rights in MB’s 16 Jan Letter had the effect of keeping all options open when read in light of D’s knowledge of the matters as summarized above.  The Judge in particular observed that a claim for damages for breach and a claim for recission for fraudulent misrepresentation are logically inconsistent remedies. See [63] ‑ [69] of the Decision.

(5)     In the premises, the Judge held that by 16 January 2023, D had unequivocally affirmed the SPA, subject to its claim for damages for breach of the SPA or misrepresentation.  See [69] ‑ [71] of the Decision.

55.  Mr Chang SC (leading Mr Louis Cheng) for D contends that the Judge had erred in her reading of the relevant letters in finding that D had affirmed the SPA by 16 January 2023.  In particular, counsel emphasizes the Judge’s reading had failed to apply the principles that D as the innocent party should be afforded reasonable time to consider its options, especially in light of the reservation of rights and remedies stated in those letters.

56.  On the other hand, Mr Westbrook SC (leading Mr Michael Lok) for Ps supports the Judge’s reasons.  In particular, counsel has taken this court at some length to the letters and the authorities, in particular The “C Challengers”, and emphasized that the Judge had properly applied the relevant principles to the facts, and it was plainly right for the Judge to find that by the time of 16 January 2023, D was already fully apprised of its rights and the remedies available to it and thus its only claim for damages for breach against Ps amounted to an unequivocal affirmation of the SPA.

57.  The merit of this ground of appeal boils down to an objective reading of the relevant correspondences (in particular, the 8 November 2022 and 16 January 2023 letters) as to whether they amount to unequivocal acts or conduct on the part of D to affirm the SPA such that it can no longer invoke rescission as a remedy.

58.  With respect to the Judge, in my view, for the following reasons, when the relevant letters are read in their proper context, they do raise a triable issue as to whether D had waived its right to rescission and affirmed the SPA by 16 January 2023.

59.  As mentioned, the Judge in fact first held that by the time of MB’s 8 Nov Letter, D was not yet in a position to elect whether to rescind or affirm the SPA or not as it was entitled to have time to carry out reasonable investigations since D had “every right to find out the facts giving rise to the alleged breaches and to ascertain what was involved in remedying them”.  See [49] ‑ [51] of the Decision.  This is not challenged on appeal by Ps, and thus it must be taken that by the time of November 2022, it was correct that D was not in a position to be able to make an informed choice as to remedies.

60.  Thereafter, in MB’s 16 Dec Letter and MB’s 23 Dec 2022 Letter, MB effectively continued to state that D was “still considering the different options in consultation with professional advisers” (emphasis added) to ascertain its position[11]. The Judge was of the similar view that MB’s 16 Dec Letter showed that D was still ascertaining its position in consulting its professional advisers.  See [51] of the Decision.

61.  Then, in MB’s 16 Jan Letter (where D for the first time raised the issue of Ps’ “misrepresentation” at paragraph 5 of Section D), at the 2^nd full paragraph of paragraph 5 of Section B, it was stated that after commissioning a land consultancy firm to carry out “an investigation into the alleged breaches of the New Grant by [the DLO] and without going into details”, the consultant “confirms that the complaints made by DLO/SK are substantiated and there might not be other solution other than demolishing the existing building and rebuild a new on with a smaller coverage so as to comply with [SC9]” (emphasis added).

62.  Hence, as shown by this letter, it was only by around mid‑January 2023 that D had the necessary information to know (a) that there might be a case of misrepresentation whereby P had induced D to rely on the AP Certificate as proof of compliance of the New Grant as the land consultant had by then confirmed that the DLO’s complaint about the breach was “substantiated”, and (b) the extent of D’s liability in seeking to remedy the breach if it was to affirm the contract.  See also the Judge’s similar observation at [52] of the Decision[12].

63.  In these circumstances, D as the innocent party should be given a reasonable time after mid-January 2023 to consider its options before making a choice as to whether to rescind or affirm the contract after having possessed all the relevant information, including considering Ps responses to D’s claim of misrepresentation.

64.  This is particularly so when the matter is considered in the context that, after MB’s 16 Jan Letter, (a) Ps had immediately denied the alleged misrepresentation in WPCL’s letters respectively dated 27 January 2023, 10 and 21 February 2023[13], and (b) D had continued to reserve its rights and remedies.

65.  In this respect, it is pertinent to be reminded of the following principles referred to at [50] above:

(1)     The fact that the misrepresentor is denying any misrepresentation is a relevant, though not a decisive, consideration when considering the state of the misrepresentee’s knowledge;

(2)     The issue of knowledge is “essentially a jury question”;

(3)     Because an election once made is final and irrevocable, the party making the election is entitled to a reasonable time to make a decision.  This is so even if, during that period, the party with the right of election is exercising rights under the contract.

66.  When the above are considered together, with the greatest respect, the Judge had therefore erred in concluding that by the time of MB’s 16 Jan Letter (whether read together with the subsequent Feb Letters or not) D had already unequivocally affirmed the contact, as she had not taken into account the factor that it might be regarded as reasonable for D to wait for and consider Ps’ responses to the misrepresentation allegation.  In failing to do so, the Judge had further erred in not having considered whether it was triable in all the circumstances that it was still reasonable in time for D to only make an election by 7 March 2023 when it sought to rescind the SPA.

67.  For the above reasons, in my view, it is at least triable that, when D indicated about six weeks after mid-January by way of MB’s 7 Mar Letter that it would seek rescission, this was still made within a reasonable time and thus had not made an election as to remedies and affirmed the SPA by MB’s 16 Jan Letter.

C3.    Conclusion

68.  I would therefore allow the appeal, set aside the Order and grant leave to D to defend the action, with costs of the appeal be to D with certificate for two counsel, and costs below be in the cause of the action also with certificate for two counsel.