IP KAM WAH AND ANOTHER v. FAIR CITY GROUP LTD

HCMP 2491/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2491 OF 2004

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D E C I S I O N

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Introduction

1.  This is a vendor and purchaser summons taken out by the vendor (the “Plaintiff”) in respect of a provisional sale and purchase agreement dated 4March 2004 (the “Provisional Agreement”).  The property which is the subject matter of the sale and purchase of a house known as House No 70, 18^th Street, Hong Lok Yuen, New Territories (the “Property”).  The sale and purchase was to complete on 10 December 2004.  By this summons, the Plaintiffs seek a declaration that the purchaser (the “Defendant”) has repudiated the Provisional Agreement entitling them to rescind the Agreement and to forfeit the initial deposit paid.

2.  Chan Wai Shing (“Chan”), an undischarged bankrupt entered into five provisional sale and purchase agreements through New Fortune Property Agency Co (“New Fortune”) on behalf of various other purchasers for purchase of four houses and a flat in Hong Lok Yuen.  Except in the case of the purchase of the flat, the sale and purchase agreements were accompanied by a collateral agreement in similar terms relating to unauthorised or illegal structures or additions or alternations to or appertaining to the respective subject matter of the purchase (the “Collateral Agreement”).  The dispute arose out of the provisional sale and purchase agreements in respect of the Property.  The purchase price of the Property was $8,600,000.  An initial deposit of $100,000 was paid upon signing the Provisional Agreement.  A further deposit of $760,000 was paid to the vendor in the form of a cheque by a third party, namely Miss Jiang, which was stake held by the vendor’s solicitors in accordance with Clause 17 and which shall be released to the vendor in accordance with Clause 18 of the Provisional Agreement. This is the usual clause for protecting the purchaser in the event that the property is subject to an outstanding mortgage which exceeds the purchase price.  Clause 18 provides as follows:

“The cheque representing the further deposit shall not be released to the vendor unless and until the vendor shall have supplied bank’s confirmation to the effect that the balance of purchase price is sufficient for repaying the outstanding mortgage loan and the purchaser shall have been satisfied with and accepted title of the Property.”

3.  The Collateral Agreement was written in both English and Chinese languages and signed by Chan and the Plaintiffs.  It provides as follows:

“The Property shall be sold at its “as is condition”.  The Vendor gives no warranty that there is no unauthorised or illegal structure, or addition or alteration to or appertaining to the Property.  The Purchaser confirms that he has inspected or have been afforded with the opportunity to inspect the Property prior to the entering into this agreement and shall make no objection to title and refuse to complete the purchase, or otherwise make any claim for compensation in the event there is any unauthorised or illegal addition or alteration to, or structure or appertaining to the Property.”

Pausing here, it would not be difficult to note that this transaction is typical of a speculative transaction with a very long completion period of nine months and with a very small initial deposit of about 1% of the purchase price paid while the balance of usual 10% was paid by a third party.  This transaction is the first of a series of five transactions of very valuable property entered through the same estate agent on similar terms.  It is obvious that this transaction is not an ordinary consumer sale but one made by a dealer in real property for speculative purposes.

4.  The Defendant’s solicitors raised certain requisitions which were duly answered by the Plaintiffs’ solicitors save and except one raised in June 2004 in respect of an illegal structure covering the terrace on the first floor facing the main entrance.  The Plaintiffs’ solicitors relied on the Collateral Agreement and replied that they were not obliged to answer the requisition but nevertheless informed the Defendant’s solicitors that no building approval has been obtained in respect of the illegal structure.  The solicitors engaged in further correspondence but were unable to resolve their differences.  Eventually, on 23 July 2004, the Plaintiffs’ solicitors informed the Defendant’s solicitors that they were going to release the cheque for further deposit to the Plaintiffs as they considered the requirements under Clause 18 had been met.  Subsequently, the cheque was released to the Plaintiffs but it was dishonoured on presentation on 24 August 2004.  On 31 August 2004, the Defendant’s solicitors offered to complete the sale and purchase at a reduced price in view of the unanswered requisition.  Then the Plaintiffs took out the summons on 30 September 2004.

5.  The Plaintiffs filed two affirmations from the first named Plaintiff, Ip Kam Wah, and one from the estate agent, Candy Lai (“Lai”), who showed the Property to Chan.  The Defendant filed two affirmations from its director and one from Chan.  At the hearing, counsel for the Defendant, Mr Chum, sought leave to produce a second affirmation of Chan which was served after 4 pm in the afternoon before the hearing.  He submitted that this affirmation has nothing to add to the Defendant’s case.  Mrs Chan opposed to the late production of the affirmation.  The affirmation has indeed nothing to add to the defence case.  It dealt with two issues.  In the first issue, Chan admitted being an undischarged bankrupt but said he entered the Provisional Agreement on behalf of his employer.  Nothing significant turned on that issue.  In the second issue, he gave further evidence about his lack of knowledge of the unauthorised structure.  That issue has been covered in his first affirmation.  In fact, his second affirmation would have exposed his credibility to further criticism.  As Mrs Chan objected to the production of the affirmation and the affirmation is of marginal utility, I refused leave to produce this late affirmation.

6.  The Defendant’s objections are firstly, that the originating summons procedure is not appropriate for disposing of this action as there are substantial disputes on facts which could not be resolved on affidavit evidence.  The Defendant’s contention is that the correct approach for the Court to adopt is to order the case be continued as if begun by writ under Order 28 rule 8 or to order the deponents of the affirmations to attend Court for cross examination under Order 28 rule 4(3). Secondly, Mr Chum submits that the Collateral Agreement is not binding as a matter of law and the Defendant is not disentitled from raising requisitions in respect of the unauthorised structure.  As the requisition in respect of the unauthorised structure has not been adequately answered, the cheque in respect of the further deposit should not have been released to the Plaintiffs and there was no repudiation by the Defendant.

Whether the originating summons procedure appropriate - Substantial disputes on facts

7.  The central factual issues in dispute are the circumstances under which the Collateral Agreement was signed and the Defendant’s knowledge of the unauthorised structure.  According to Chan’s affirmation, prior to signing the Collateral Agreement, Lai represented to him that signing of the Collateral Agreement was just a routine procedure and it would not be used as a waiver in raising requisitions as to the unauthorised structure and he had never inspected the Property and had no knowledge of the unauthorised structure.  Mr Chum submits that these are key factual issues in dispute which cannot be resolved on affidavit evidence.  He referred to Shum Wah Ming and The Estate of Chen King Ngo (deceased) & Lau Loi Tai, Civ App No 21 of 1996, 10 July 1996 and submits that the original summons procedure is not and is never intended to be a short-cut to resolve disputes which can only be properly dealt with in a writ action and the resolution on such factual dispute should be a trial.  His fall back position is that the effect of Order 28 rule 4(3) is to permit resolution of disputed issues of facts in proceedings begun by originating summons by receiving oral evidence and thus the hearing should be adjourned for both Lai and Chan to attend Court for cross-examination so that the Court can decide which version is more credible in order to dispose of the originating summons.

8.  I accept that, unlike the plaintiff in an order 14 application, the plaintiff in an originating summons procedure bears the burden of proof.  When faced with conflicting affidavits from both parties, the court will be failing in its duty if it should take the assertions in the affidavits on their face value in isolation and jump to the conclusion that there is a triable issue without first considering whether the assertions in the affidavits are believable.  I bear in mind the test laid down by Bokhary JA (as he then was) in Re Safe Rich Industries Ltd, Civil Appeal No 81 of 1994 that whether the assertions are believable is a question to be answered not by taking the assertions in isolation but by taking them in the context of so much of the background as was either undisputed or beyond reasonable dispute.  In an originating summons procedure, it is only when the court is satisfied after having undertaken that exercise that factual disputes could not be resolved on affidavit evidence that oral evidence or trial should be considered.

9.  On the factual issues in dispute, Chan said the following in his affirmation:

“	7.	I was asked to sign [the Collateral Agreement]. I had asked the said Miss Lai that the reason for signing the same in which I was replied by the said Miss Lai by making a representation to me that the signing of the [Collateral] Agreement was only a routine supplement in purchase a property in Hong Lok Yuen and the said [Collateral] Agreement would not be used in the transaction between the Plaintiffs and the Defendant in purchasing the Property. Thus, acting on the faith of the said representation, I signed the said [Collateral] Agreement.
	8.	I also recall that no mention of any particulars of any illegal and unauthorised structures in the Property by the said Miss Candy Lai to me and I even recall that I had no chance to inspect the Property before the Plaintiffs and I entered into the [Provisional Agreement and Collateral Agreement] as there was a tenant in the Property and it was not convenient to let me visit the Property. But as the strong inducing of the said Miss Lai on high return in investment, I still decided to buy the Property on behalf of the [Defendant].
	9.	Thus, I had not been noticed any illegal and unauthorised structure in the Property until I was informed by Messrs. B. Mak & Co. …	”

10.  In reply, Lai said in her affirmation that she showed Chan more than ten houses in Hong Lok Yuen, including the Property.  She accompanied Chan to view the exterior of the Property on at least two occasions.  On each viewing, she told Chan that it was common for houses in Hong Lok Yuen to have unauthorised or additional structures and the Property would be no exception.  Chan replied that he was well aware of that.  While explaining to Chan the contents of the Collateral Agreement, Chan said that there would be no problem at all in signing the agreement and he knew every house in Hong Lok Yuen has additional structures.  Lai also said that Chan had told her that he wanted to “sweep up everything on offer” and that he had bought more than twelve houses in Hong Lok Yuen through another estate agent.  Chan did not seek to respond to Lai’s affirmation.

11.  I have noted earlier that this transaction is not a consumer purchase.  On undisputed evidence, Chan purchased five units in Hong Lok Yuen through New Fortune on behalf of five different purchasers within five days involving a total consideration of over $60 million, not to mention the other twelve properties which he told Lai that he had purchased through another estate agent. Collateral agreements were signed in respect of all the purchases of houses but not in respect of the purchase of a flat.  Thus, there is not much truth in Chan’s allegation that these agreements were signed as a matter of routine.  This suggests that similar collateral agreements are signed when purchasing houses for which the difficulties relating to unauthorised structures often arise.  The Collateral Agreement is prepared in both the English and Chinese languages.  The language is clear and unequivocal.  Under the Collateral Agreement, the Plaintiffs gave no warranty that there was no unauthorised structures appertaining to the Property and the Defendant agreed not to make objection to title or refuse to complete or otherwise make any claim in the event there is any unauthorised structures.  Chan’s allegation that it had been represented to him that the Collateral Agreement was a routine procedure and would not be used as a waiver in raising requisitions as to the unauthorised structure is devoid of credibility in the light of the contents of the Collateral Agreement. 

12.  Chan said that he had no chance to inspect the Property as it was tenanted, but he did not deny he had inspected the exterior of the Property with Lai on at least two occasions.  Chan did not seek to respond to Lai’s affirmation.  From the photographs taken from outside the Property, the unauthorised structure is readily visible even from an external inspection of the Property.  It is hardly credible that Chan did not notice the unauthorised structure while he was viewing the Property from the outside with Lai.  Not only that, Chan confirmed in the Collateral Agreement that the Defendant had inspected the Property or had been afforded the opportunity to inspect the Property prior to entering into the Provisional Agreement.  In the Collateral Agreement, the Plaintiffs refrained from warranting there were no unauthorised structures while the Defendants undertook not to raise objection to title by reason of any unauthorised structures.  It is amply clear from the Collateral Agreement that the parties knew there were unauthorised structures appertaining to the Property.  Chan was obviously carrying on the business of trading in real property on the Defendant’s behalf, if not on his own.  He is experienced in the business of trading in real property in Hong Lok Yuen and is very familiar about unauthorised structures in the houses in the development.   This makes his allegation all the more incredible.  In the light of the incontrovertible evidence, Chan’s allegation that he had not inspected the Property or afforded the opportunity to inspect and had no knowledge of the unauthorised structure is incapable of belief.

13.  Taking into account what Chan said in his affirmation in the context of so much of the background which is undisputed or beyond reasonable dispute, such as the photographs, that he was a dealer in real property and the contents of the Collateral Agreement he signed, I consider Chan’s assertions in his affirmation are practically moonshine and incapable of belief, while Lai’s affirmation is believable.  I do not think this is a case which involves any genuine and substantial disputes on facts.  I am satisfied with the evidence filed on behalf of the Plaintiffs and reject the evidence filed on behalf of the Defendant.  I am satisfied that Chan had inspected the Property from outside and had knowledge of the unauthorised structure before he signed the Collateral Agreement.  I also reject his evidence that he signed the Collateral Agreement as a result of the misrepresentation.

The Collateral Agreement

14.  It is common ground that the structure above the first floor terrace is an unauthorised structure which had been erected without building approval and that the Plaintiffs failed to answer the requisition in respect of that unauthorised structure.  It is also assumed by the parties that the matter did go to title.  The Plaintiffs’ case is that the Defendant has waived its right to raise requisition in respect of the unauthorised structure under the Collateral Agreement.  Mr Chum argues otherwise.  He argues, firstly that there was no concluded Collateral Agreement; secondly that the Collateral Agreement was not binding due to misrepresentation; thirdly that the Collateral Agreement is invalid as being inconsistent with the vendor’s obligation to pass a good title and fourthly that it was not binding for want of full disclosure such that the Defendant had no knowledge of what he was consenting in the Collateral Agreement.

15.  Having rejected Chan’s affirmation as moonshine, there is nothing in support of Mr Chum’s first and second arguments.  I now turn to his third argument.  Mr Chum submits that the Collateral Agreement is not binding on the Defendant as it is inconsistent with the Provisional Agreement under which the Plaintiffs were obliged to show and prove a good title to the Property.  He referred to paragraphs 39 to 41 of Deputy High Court Judge Woolley’s judgment in Empire Trend Enterprises Limited HCMP 2425 of 1998 (unreported) 1 February 2001, in support of his argument.  Deputy High Court Judge Woolley said in paragraph 39 of his judgment:

39.	Although I have found that there was no concluded collateral agreement between the parties as to the unauthorised building works, I would go further and say that, even if there had been, the defendant cannot now rely on it.
40.	Mr Griffiths for the plaintiff submits, correctly in my view, that a collateral agreement, though it may add a term to a written contract, must not vary any of the terms of that contract. In support of this, he points to the decision of Lord Wright in Lysnar v National Bank of New Zealand [1935] NZLR 129, where he says, at p. 140:
	‘	But though the rule is established, it is subject at least to one definite limitation; though the collateral contract must inevitably, it seems, add to the written contract, it must not vary it in the sense of being inconsistent with, or contradictory of, the written contract to which it is collateral.
41.	Such a collateral contract as is suggested by the defendant here would be inconsistent with the provision that good title must be shown and proved, as it would apparently provide for a matter, which would prevent good title being shown, to be ignored. Further, it would be contradictory to clause 24, which reads as follows:
	‘	This agreement supersedes all representations and previous agreements between the parties, whether implied or expressed verbal or written.
	the so-called “entire agreement clause”. It is clear from this that the contract expressly states that the written terms are the only terms of that contract, and it is difficult, if not impossible, to envisage the circumstances where it could be held that there are other terms not recorded therein.

16.  I think Deputy High Court Judge Woolley’s dicta should be considered in their proper context.  In Empire Trend Enterprises Limited, the parties had entered into a formal sale and purchase agreement in familiar terms with the usual requirements for the vendor to show and prove good title.  In that case, the point was raised whether the plaintiff purchaser had knowledge of any unauthorised building works which he orally agreed to be responsible for their demolition and agreed to waive any right to raise requisition on them while negotiating for a price reduction.  It was in this context that the above dicta were made.  In the light of the express requirements to show and prove good title, the collateral agreement in that case was clearly inconsistent with the vendor’s express obligation and could not be binding on the vendor.  However, in the present case, no formal sale and purchase agreement has been entered into.  There was no express requirement to show and prove good title under the Provisional Agreement.  Mr Chum’s argument could only succeed if a term requiring the Plaintiffs to prove and show a good title free from risk of government enforcement action on the unauthorised structure may be implied into the Provisional Agreement.  The parties entered into the Provisional Agreement and the Collateral Agreement at the same time.  As I have indicated above, in view of the terms of the Collateral Agreement, it is only too clear that the parties contemplated that there were unauthorised structures in the Property and the Defendant bore the risk of government enforcement action.  In the circumstances, such term could not be implied into the Provisional Agreement.  Accordingly, the Collateral Agreement is not inconsistent with the Provisional Agreement and does not cease to be binding on the Defendant for that reason.

17.  I now turn to Mr Chum’s fourth argument that the Collateral Agreement is not binding for want of full disclosure.  In essence, Mr Chum’s objection to the Collateral Agreement is its lack of particularity as to the unauthorised structure.  He argues that in order that the waiver is binding on the Defendant, the Defendant must know in respect of which unauthorised structure it was agreeing to waive its right to raise requisition.  Mr Chum submits that a general description is not sufficient.  He referred to paragraphs 28 of the judgment in Empire Trend Enterprises Limited in which Deputy High Court Judge Woolley said:

“

28.

There can be no doubt that the presence of unauthorised structures, and the risk of action by the Building Authority, will prevent a vendor from being able to show a good title, unless either the purchaser can safely disregard that risk, or there is full disclosure of the existence and nature of the illegal structures and an agreement by the purchaser not to take any objection to title on that basis.

”

In fact that dictum owes its origin to what Godfrey JA said in Spark Rich (China) Ltd v Valrose Ltd CACV 249 of 1998 at p 11:

“But it is perhaps worth adding that in the light of this judgment a prudent vendor should always consider, before attempting to sell his property, whether his title to the property may be affected by some unauthorised building work.  If so, he should refrain from entering into any contract for the sale of the property which does not contain (1) a full disclosure of the problem; and (2) an agreement on the part of the purchaser not to raise any requisition or take any objection to the title based upon the unauthorised work.”

18.  I think what Godfrey JA said in Spark Rich (China) Ltd was an advice to vendors or their solicitors as to what steps would be prudent to take if a vendor intends to sell property which may be affected by some unauthorised building works.  It is not even an obiter dictum.  In any event, I do not think that by “full disclosure of the problem” Godfrey JA meant a full identification of each and every unauthorised structure, fixture, fitting or erection which did not comply with Building Ordinance or its subsidiary regulation or any related legislation.  If a vendor can make a full list of all possibly offending structures or fixtures, it would of course be most ideal, but that is not essential.  As a matter of conveyancing law and practice, there is nothing to prevent the parties from agreeing to the sale and purchase of a property with a defective or imperfect title or to agree to waive any right to raise requisition in respect of any unauthorised works whether they constitute any blot in title.  Indeed, not every unauthorised structure constitutes a blot on title or goes to title.  In another equally important judgment of Godfrey JA published at the same time, Jumbo King Ltd and Faithful Properties Ltd & Others [1999] 3 HKLRD 231, it is clear that the words “full disclosure of the problem” do not carry the meaning which Mr Chum gave to them.

19.  In Jumbo King Ltd, the vendors sold a number of tenanted units in the commercial portion of a multi-storey building to the purchasers.  There were unauthorised cocklofts in some of the units.  The question was whether the vendors might rely on a contractual clause in the sale and purchase agreement to exclude the purchaser from raising an objection to title in respect of these unauthorised structures.  Clause 18(e) of the sale and purchase agreement provides:

“The vendor does not warrant or represent that each and every fixture, fitting, erection and structure (if any) on the property or any part thereof is erected in all respects in compliance with the Building Ordinance (Cap 123) and/or its subsidiary legislation and/or any other legislation or regulation.  The vendor shall be under no liability whatsoever if it is discovered at any time (whether before or after completion) that at the date hereof or before completion, there is any fixture, fitting, erection or structure in or to any part of the property which is in contravention of the Building Ordinance (Cap 123) and/or its subsidiary legislation and/or other legislation or regulation, the vendor shall not be held responsible for the demolition, alteration, removal, reinstatement, reinforcement and/or any other works relating to such illegal fixture, fitting, erection or structure or for any costs or expenses of or incidental thereto whether or not such works are required by the Building Authority or other authority or body or otherwise.  The purchaser shall not be entitled to raise any requisition or objection or to rescind this agreement or to annul the sale or to claim any compensation or damages from the vendor by reason of or in connection with any such contravention.”

20.  It can be readily appreciated that this clause is essentially similar to the Collateral Agreement in the present case.  It is equally unspecific and lacking in particularity as to the unauthorised structures.  It covers virtually any structure or fixture which is in contravention of the law.  Godfrey JA dealt with the clause as follows at 244:

“	‘Unauthorised structures’ are all too common in Hong Kong and present a real problem for conveyancers. A vendor whose title is, or may be, open to objection because there is, or may have been, erected on the property of which he is granting exclusive use to his purchaser some unauthorised structure is well advised to protect himself by precluding his purchaser, by contract, from raising any requisition or objection to the title based on an “unauthorised structure” point. Of course, if the vendor’s contract is tricky or unfair; if by concealment or non-disclosure, he misleads the purchaser about the matter, it will be held that he has disqualified himself by his conduct from relying on any such provision.
	In the present case, however, the vendors are in my opinion perfectly entitled to rely on Clause 18(e) of their contract with the purchaser (set out above). If the purchaser had raised, in time, an objection to the title based on the (alleged) unauthorised nature of the cocklofts, the vendors would have been entitled to reply that, by virtue of Clause 18(e), the purchaser was not entitled to take that objection to the title. There is nothing in the case, as it seems to me, which would justify a complaint by the purchaser that the vendors’ conduct had been such as to disqualify them from relying on Clause 18(e). It follows that this point, too, does not avail the purchaser.	”

21.  It appears that Godfrey JA did not approach the duty of disclosure on the basis of any specific principle applicable to property transactions.  He approached that issue on the basis of general principle in contract and in construction of contract.  He must be of the view that the sale and purchase of property is a matter of agreement between the parties and that it is open to the parties to agree to the sale and purchase of a property with defective or imperfect title or for the purchaser to agree to waive his right to raise requisition in respect of unauthorised building works.  He considered the duty of disclosure in the context of the effect of non-disclosure, i.e. whether the contract was tricky or unfair and has the effect of misleading the purchaser.  I do not think his Lordship has laid down any principle in Spark Rich (China) Ltd that in order that a waiver may be valid the unauthorised structures must be particularised in the contract in which a purchaser agrees to waive his right to raise requisition.

22.  Godfrey JA’s view was approved by the Court of Final Appeal [1999] 3 HKLRD757.  Litton PJ said at 771:

“Assuming the matter did go to title, nevertheless, in my judgment, Godfrey JA and Mortimer VP are plainly correct when they found for the vendors on the basis of clause 18(e).  As Godfrey JA remarked, if the purchaser had raised, in time, an objection to the title based on the (alleged) unauthorised nature of the cocklofts, the vendors would have been entitled to reply that, by virtue of clause 18(e), the purchaser was not entitled to take that objection to the title.”

23.  It was reported in the headnote of the decision of the Court of Final Appeal that the above dictum was subject to the qualification that there was no evidence that the vendor actually knew there were unauthorised structures.  The learned editor of the report must have either imported that additional requirement from the “non-disclosure” point in Godfrey JA’s judgment in the Court of Appeal or adopted it as an imprecise summary of what Lord Hoffmann NPJ said at 776:

“On the question of the cocklofts I agree with Litton P.J. that clauses 18(e) and 19 preclude the purchaser from basing any objection to title on this ground.  Miss Eu submitted that there was a rule of equity which prevented a vendor, as a matter of law, from relying on such clauses in a case in which he knows or ought to know of a defect in title.  I think that is putting the matter far too broadly.  Contracts for the sale of land are not exceptions to the principle that parties have freedom of contract and may agree to whatever terms they like.  What the cases show is that the courts will be very reluctant to construe such a term as enabling the vendor to mislead the purchaser.  As is stated in Farrand, Contract and Conveyance (4^th ed.) at p. 93, such conditions are “subject to the overpowering principle that the vendor must not mislead the purchaser in any way; this means that a sufficient indication of the risk must be given before the contract is made.”   This may be said to leave it unclear whether the “overpowering principle” is an aid to construction of the contract or something which operates outside the contract.  It probably does not matter, although for my part I think it is better regarded as a matter of construction.  Thus it is inconceivable that a term will be construed as enabling a vendor to impose upon a purchaser a serious defect in title of which he actually knew.  No purchaser would sign a contract which was bare-faced enough to stipulate expressly that the vendor need not disclose serious defects in title of which he had actual knowledge and, even if there was no objection on grounds of public policy, nothing less than the most express language would do.  On the other hand, the position is different if the vendor did not actually know of the defect but had the means of knowledge, or if the matter was technically a defect in title but something which a purchaser might reasonably be prepared to accept.  Prima facie it is the duty of the vendor to deduce and then convey a good title and if he relies upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so.  As Farrand says, the question is whether the purchaser would have been aware of the risk he was being asked to take.  So, for example, general words which did not identify any specific defect in title have been held inadequate to protect the vendor against liability for a serious defect which he could easily have discovered: Becker v. Partridge [1966] 2 Q.B. 155.  In the present case, however, the language of clause 18 (e) was entirely apt to cover the cocklofts.  No one who had read that clause and saw the cocklofts could have failed to appreciate that he was being asked to bear the risk that they were unauthorised structures. The language seems to me perfectly clear.  And therefore, in the absence of any evidence that the vendor actually knew that they were unauthorised, the purchaser was in my opinion bound by the clause.”

24.  I think Lord Hoffmann NPJ precisely explained what I said was in the mind of Godfrey JA when he said what was quoted by counsel in Spark Rich (China) Ltd v Valrose Ltd.  His lordship adopted the principle of freedom of contract as his starting point.  The parties to a contract for the sale and purchase of land is free to agree to any term they like.  The parties are free to agree to the sale and purchase of a property with defective or imperfect title and the purchaser may agree to waive his right to raise requisition in respect of unauthorised building works.  This then raises the question of construction of the contract.  If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.  However, if the vendor seeks to rely on a term providing for a waiver which has the effect of shifting the risk of any defect in title to the purchaser, he has the burden of showing that on a proper construction of the contract the language of the waiver must clearly have that effect.  But there is a great reluctance on the part of the court to construe a contract in such way as would enable the vendor to mislead the purchaser.  There is probably no “overpowering principle” in a contract for sale and purchase of real property that the vendor must not mislead the purchaser in any way or must give full disclosure.  It is only a rule of construction that the court will avoid construing a contract in such a manner as would enable a vendor to mislead the purchaser.  The duty of disclosure is to be understood in this light. Thus, ultimately, as regards any term of the contract providing for a waiver of the right to raise requisition, the question is what has the parties agreed in the light of all the surrounding circumstances and the factual matrix.  This affirms my opinion that what Godfrey JA said in Spark Rich (China) Ltd v Valrose Ltd was a counsel of wisdom and there is no “overpowering principle” applicable to contracts for the sale and purchase of real property requiring full disclosure of unauthorised structure for which a waiver is sought.  Of course had there been full disclosure, the validity of the waiver is beyond doubt.

25.  Turning back to the case now before me, the Collateral Agreement is in all respects similar to Clause 18(e) in the agreement in Jumbo King Ltd.  I can find no reason to differ from the wisdom of their Lordships in the Court of Final Appeal in that case.  Accordingly, I find the Collateral Agreement in the present case is capable of constituting a waiver of the Defendant’s right to raise requisition on the unauthorised structure.  The question is what the parties meant by “unauthorised or illegal structures” in the Collateral Agreement and whether the Defendant was in any way misled if the court should give effect to that construction.  The words “unauthorised or illegal structures” are ordinary words and must be given their ordinary and plain meaning.  It must include the unauthorised structure which covered the terrace on the first floor of the Property converting the open terrace into roofed accommodation.  Giving these words their ordinary plain meaning, the Defendant must have agreed to waive its right to raise objection to title in respect of the said unauthorised or illegal structure in question. 

26.  The next question is whether the Defendant was misled if the Collateral Contract should be given that construction.  Before turning to the factual matrix, it must be remembered that this is not a consumer transaction.  According Chan’s own evidence, he bought on behalf of different purchasers five properties in Hong Lok Yuen through New Fortune within five days.  He signed similar collateral agreements in respect of the other three houses he purchased through New Fortune.  Lai said that Chan claimed to have bought another twelve properties from another agent.  Thus Chan is a very experienced dealer in property in Hong Lok Yuen.  When Lai explained to him that unauthorised structures were very common in Hong Lok Yuen and the Property was no exception, Chan said he was well aware of that.  The unauthorised structure, as the photographs show, is conspicuous at the front of the Property.  It could not have escaped the attention of any purchaser making an investment of $8.6 million on the Property.  Chan signed the Collateral Agreement on behalf of the Defendant.  The agreement was in both English and Chinese and in simple language.  Chan confirmed in the agreement that he had inspected or had been afforded the opportunity to inspect the Property prior to entering into the agreement.  There is nothing to suggest Chan was misled.  The Defendant has clearly waived its right to raise requisition in respect of the unauthorised structure in clear and unequivocal language.  The unauthorised structure must be a risk which Chan has agreed to assume or was in the circumstances reasonably expected to assume.  It is impossible to say that this very experienced property dealer was misled in any way about the effect of the Collateral Agreement.  Indeed such collateral agreements are often used by estate agents to “hide” the unauthorised structures from the banks so as to facilitate mortgage application.  Accordingly, the Plaintiff is entitled to reply to the Defendant that by virtue of the Collateral Agreement the Defendant is not entitled to take objection to the title.

Conclusion

27.  In view of the above, I come to the conclusion that condition under Clause 18 have been satisfied and the Plaintiffs’ solicitors were obliged to release the cheque in respect of the further deposit to the Plaintiffs.  The cheque was dishonoured.  As revealed by the letter dated 26 July 2004 from the Defendant’s solicitor, the Defendant was insisting on its right to raise the requisition, contrary to the Collateral Agreement.  By this letter and the fact that the cheque was dishonoured due to insufficient funds, the Defendant evinced an intention no longer to be bound by the Collateral Agreement and the Provisional Agreement.  The Plaintiffs were entitled to accept that as repudiation of the Collateral Agreement and the Provisional Agreement. 

28.  Mrs Chan confirmed that the Plaintiffs are not seeking damages or forfeiture of the further deposit.  Accordingly, I grant the Plaintiffs a declaration that the Provisional Agreement for the sale and purchase of the Property has been duly rescinded by the Plaintiffs and the Plaintiffs are entitled to forfeit the initial deposit in the sum of $100,000.  I also award the Plaintiffs the costs of this action.