GIGABILLION ASIA PACIFIC LTD v. SINO DYNAMIC INTERNATIONAL LTD

CACV 98/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 98 OF 2014

(ON APPEAL FROM HCA 1053/2011)

____________

____________

_______________

J U D G M E N T

_______________

Hon Cheung CJHC:

1.  This conveyancing dispute concerns the sale and purchase of an industrial unit, known as Unit C, 25^th Floor, Gold King Industrial Building, Kwai Chung, which fell through over a requisition on title. The plaintiff purchaser successfully sued for the return of the forfeited deposits and part payments of over $1 million from the defendant vendor, after trial of the action before Deputy High Court Judge Linda Chan SC (now a recorder), who held in her judgment dated 3 April 2014 that the requisition had not been satisfactorily answered and therefore a good title to the property not proven. This is the defendant’s appeal.

The facts

2.  Gold King Industrial Building is a multi‑storey industrial building comprising many units co‑owned by different owners.  At all material times, the vendor was a 1% co‑owner of the land and building with the exclusive right to possession of Unit C on the 25^th Floor.  The co‑owners have incorporated themselves in the name of Incorporated Owners of Gold King Industrial Building pursuant to the provisions in the Building Management Ordinance (Cap 344) (“the Ordinance”).  The building is managed by Synergis Management Services Limited.

3.  The provisional sale and purchase agreement was dated 16 February 2011.  Pursuant to the provisional agreement, a formal sale and purchase agreement was signed on 11 March 2011.  It provided for completion on or before 15 June 2011.  It provided for the payment of an initial deposit, a further deposit and a further part‑payment, totalling $1,008,239.40 on or before 1 April 2011 with the balance of the purchase price to be paid on or before completion.  Clause 16(a) of the agreement required the vendor to give his title pursuant to section 13A of the Conveyancing and Property Ordinance (Cap 219) and to prove its title to the property in accordance with section 13 of that Ordinance.  Clause 20 of the agreement provided that should the vendor fail to complete the sale of the property in accordance with the terms of the agreement, all moneys and deposits paid by the purchaser pursuant to the agreement should be returned to the purchaser.

4.  The requisition on title which gave rise to the dispute between the parties centred on one matter.  Put simply, the incorporated owners were involved in three pieces of litigation at the material time:

(1) HCA 1603/2007 and the subsequent appeal in CACV 252/2010 between Chatham Industries Limited, the incorporated owners and the management company concerning whether a certain right of way carried with it a right to park vehicles along a private road;

(2) HCA 104/2006 and the subsequent appeal in CACV 297/2006 between the owner of some common area and external wall and the incorporated owners concerning the ownership and rental incomes of some carparking spaces; and

(3) DCCJ 347/2009 between the owner of some common area and external wall, the incorporated owners and the management company concerning the costs of the removal of a watchman’s hut.

At the material time, these were ongoing litigations.  Moreover, in CACV 252/2010, this court (differently constituted) handed down judgment on 4 May 2011 in which it awarded the costs of the appeal and the proceedings below against the incorporated owners.  No damages were claimed against the incorporated owners in any of these proceedings, and it is not disputed that the incorporated owners’ actual and potential liabilities under them were restricted to costs.

5.  Understandably, the plaintiff was concerned about its potential liability as a co-owner after completion regarding the actual or potential liabilities of the incorporated owners under the litigations.  Relying on the well known Court of Final Appeal case of Chi Kit Co Ltd v Lucky Health International Enterprise Ltd (2000) 3 HKCFAR 268, which held that the liability of a unit owner in a multi‑storey building to meet a contribution to the funds of the incorporated owners may constitute a defect in title if the liability is “so extraordinary having regard to matters such as its nature or magnitude as to be wholly outside the contemplation of a reasonable purchaser” (p 282A/B), the plaintiff raised a requisition in relation to the magnitude of the actual and potential exposure of the incorporated owners to costs in the three sets of proceedings.

6.  The solicitors’ correspondence has been summarised in paragraphs 11 to 21 of the judgment below, and it is not necessary to repeat the exercise here.  Suffice it to say, the plaintiff’s position, as at 13 June 2011, two days before completion, was quite clearly set out in the letter of its solicitors as follows[1]:

“We don’t see how unreasonable we are in requiring the estimation of costs by the solicitors of other parties to the litigations for ascertaining how much more should be contributed for settlement of such costs. If your clients could not obtain such estimation, how can you expect us to advise our clients or the mortgagee/bank to accept that the amount which your clients propose (HK$25,000 now for each unit) is sufficient for settlement of the costs payable for such litigations (by taking into account the sum of HK$1,000,000 set aside by The Incorporated Owners for payment of such costs). If the management company would not give you further reply, but only HK$1,000,000 but not more can be set aside for payment of the costs of such litigations, it is very and more likely than not that further contribution will be required from the owners of the units of Gold King Industrial Building (including the Properties) for payment of the shortfall because HK$1,000,000 is very likely insufficient for payment of costs for all the two High Court civil actions, two civil appeals and one District Court civil action. Without fair estimation from solicitors of the receiving parties, we or our clients are not able to make any counter‑offer. Our clients maintain that your clients had the duty to disclose the litigations and potential liabilities arising from the same which constitute encumbrances which cannot be cleared or removed up to now (less than 2 days before the time for completion). We did not unilaterally impose any time limit but are just telling you that it is a matter of conveyancing practice reality for drawing down the mortgage loan for financing payment of balance of purchase price by 2 or 3 working days’ prior notice in writing to the mortgagee bank, which we cannot give for draw down purpose because we cannot satisfy the mortgagee bank or our clients up to now that the Properties may be conveyed to our clients or mortgaged to the bank free from encumbrances on 15^th June 2011.”

7.  As for the defendant’s ultimate position before completion, it may be found in the defendant’s solicitors (Chow, Griffiths & Chan)’s second letter dated 14 June 2011:

“(i) the existence of the litigations even amounting to an encumbrance does not necessarily mean that our clients as the Vendor need to discharge it as our clients being two of the co‑owners could not have control over the proceedings. Further, analogy could be drawn to a repair notice for common parts which had been held by the Court that the setting aside of a reasonable sum as security money to cater for the apportioned cost for the subject property is sufficient for proof of good title without the need to discharge it on or before completion as the only title issue would be the potential liability to pay for the apportioned cost in case contribution is called for at the end of the day;

(ii) the litigations here are as revealed in the minutes of the AGM only concern certain use of rights of way but not on any damages nor where the quantum of damages could not be assessed nor where enormous damages are involved. What was in real issue here was thus the costs of litigations and disbursements of the three litigations but not further or otherwise;

(iii) In the minutes of the AGM, it was mentioned that there is over HK$7 Million management surplus and out of which up to HK$1 Million could be utilized without further sanction. It is misconceived for you to say that only HK$1 Million is set aside by the co‑owners to meet such expense;

(iv) Further, we were informed by the Management Company that the surplus is sufficient for the costs and disbursements and hence calling for contribution from co‑owners is not likely;

(v) Taking the aforesaid factors in mind, the real issue, i.e. the potential liability as mentioned in item (i) above seems to be already catered for; if not much to be left;

(vi) But our client wants to further cater for the flimsy risks by offering to set aside a sum of HK$10,000 for each unit on completion as security money to be held by us as stakeholder; thus making another HK$1 Million for the whole development;

(vii) In view of absence of response from your clients, our clients, through us, requested twice for your clients’ counter‑offer to the proposed sum to be set aside;

(viii) As no response is forthcoming, our clients to show more sincerity, had on their own, raised the offer to HK$25,000 (instead of HK$10,000) for each unit as security money which is more than sufficient and reasonable as it would mean another HK$2.5 Million for the whole development.

However, on the other hand,

(i) while you had also verified with the Management Company last month and got the same information as what we were told, i.e. sufficient management funds to cater for the costs of the litigations and contributions from co‑owners is not likely, we did not gather from you any intention or sincerity in discussing the amount of security money to be set aside in defiance of what we put forward since early June;

(ii) you just kept on requesting for the written estimate of the exact amount of costs and litigation from the other party’s Solicitors;

(iii) such request, needless to say, is unrealistic and impossible as how could our client as one of the co‑owners could have the locus standi to ask for such an estimate. Even the Incorporated Owners who is a party to the litigations could not be in a position to obtain such estimate nor to disclose the same to our clients;

(iv) despite such unrealistic request, we, on a without prejudice basis, had tried to obtain the estimate from the Management Company but was in vain. Such had been relayed to you;

(v) up to the moment of writing, we still have not heard any concrete comments of your clients on our clients’ offer and re‑offer;

(vi) you just kept on saying without the estimate, you could not advise the mortgage on the issue. Despite how you are to advise the mortgagee is not of our clients’ concern nor of relevance to the issue or our clients’ title, we, wonder given what we had replied, a reasonable mortgagee bank and a reasonable purchaser would have no difficulty to consider and accept.

…

We therefore repeat that our clients have duly given and shown their title and fully answered your requisitions in accordance with the terms of the relevant sale and purchase agreements.

But again out of abundant good will, though not obliged to, we are instructed that in addition to our clients’ offer to set aside the sum of HK$25,000 for each Unit on completion [from] the balance of purchase price, each of our clients would create an Indemnity in favor of your respective clients undertaking to settle the apportioned sum called for at the end of the day and keep your respective clients indemnified against such contribution.”

8.  The AGM minutes referred to in the vendor’s solicitors’ reply contained the following information (court translation):

“(I) …

(II) …

A. Mr Lau of Sky Honour and Co., CPAs reported on the 2009 Audit Report:

…

(1) As of December 2009

(a) The Building’s operating profit was about $270,000;

(b) The Building’s accumulated reserve was about $2.42 million;

(c) The Building’s accumulated profit was about $3.36 million.

(2) …

B. Ms Pang Hon Ling (transliteration), Treasurer, reported on the 2010 Annual Financial Report of the Building on behalf of the (building) manager:

As of December 2010

(a) The Building’s accumulated arrears of management fees were about $180,000;

(b) The Building’s accumulated reserve was about $2.66 million;

(c) The Building’s accumulated profit was about $2.55 million.

Information relating to the balance as of 31 December 2010 is recorded as follows:

…

Total: HK$7,264,446.72

…

C. Ms Tsui of Synergies management office reported on the 2011 building management fees budget:

The 2011 draft budget together with its relevant information and data was posted on the notice board between 12 November and 28 November 2010. During that time, no tenants or owners raised any objection and it was passed by the meeting(s) of the Incorporated Owners. Taking the actual expenditure from July 2009 to December 2010 as reference and on the basis of the principle of “spending no more than one’s income”, an estimate on the revenue and expenditure of the Building was worked out, which projected that there would be an annual profit of 4‑5%. The maintenance, repair and improvement works on the Building were to be carried out in an economical and effective manner. For example, in order to save money on recruiting subcontractors, the daily repair works, which included the repainting of the walls in the rear staircases of the Building and the carpark, would be handled by the on-site workman II. Further, a discussion on the renovation works of the Building’s lobby was underway and a report would be made to the owners and tenants under agenda VIII.

…

(III) …

(IV) Legal consultant reported on the legal actions concerning the Building

Mr Chan Chi Wah, a solicitor, reported to the owners and owners’ representatives in attendance that the Building was involved in three legal actions, none of which was initiated on purpose by the Incorporated Owners or the Building.

The first one: regarding the action concerning the rent for parking spaces, the appeal by the Building in relation to 13 parking spaces was successful. From now on the Building may use those 13 parking spaces, although further legal proceedings were expected to determine whether the parking spaces in question were privately owned or otherwise. Currently the matter has entered into mediation, and the members present unanimously agreed upon discussion that the mediation would be dealt with by the Building’s solicitor on behalf of the Building.

The second one: in relation to the allegation put forward by Chatham Industries Ltd, one of the owners of South China Cold Storage Building, that it had a right to park vehicles on the road situated at Gold King Industrial Building leading to the 3^rd floor, the final hearing of the proceedings was held on 15 April 2011 and judgment was given by the Court of Appeal on 4 May 2011. As discussions would have to be held with the barrister about the details of the case, the matter would be followed up later.

The third one: civil claim – the owner of the common area made a claim for the legal expenses (including solicitors’ fees and administrative fees) associated with the dismantling and refurbishing of the guard kiosk (situated at the entrance to the driveway); the Incorporated Owners already arranged and paid for the works relating to the said dismantling. The legal consultant of our Building submitted a written defence to the District Court in response to the claim, giving (his) legal opinion that the [plaintiff’s] demands were groundless and unreasonable. On 20 January 2011, the mediation process came to an end, but no agreement could be reached following initial mediation efforts. The matter would be followed up by the Building’s legal representative.

…

(V) Report on the lift replacement works

Engineer(s) from Fujitec reported that regarding the above works, they already entered the site to start work on 1 December 2010 and the progress was satisfactory. The lift doors and motors together with the main cable for L4 and L8 on various floors had already been replaced. Use (of such lifts) had been resumed upon the examination and issuance of the compliance certificate by the Electrical and Mechanical Services Department. Currently phase two of the replacement of parts in the shaft of lifts L3 and L7 is underway, which is estimated to complete by the end of June.

…

(VI) …

(VII) Resolution was passed in respect of the Building’s legal actions, for which the ceiling on the Building’s funds that could be spent was set at HK$1 million

Currently the three legal actions involving the Building are being followed up by the management company and the management committee. In order to allow for more efficient handling of the actions, it was proposed that (a resolution) be passed that in respect of such actions, the ceiling on the Building’s funds that could be spent should be set at HK$1 million to cater for contingency.

…

The final result was that the owners and the owners’ representatives in attendance, who accounted for 97% of the valid shares owned, took a vote and a resolution was passed by majority that in respect of the Building’s legal actions, the ceiling on the Building’s funds that could be spent was set at HK$1 million. All the (voting) paper was sealed in the presence of the owners and the owners’ representatives.

(VIII) Resolution was passed in respect of the renovation works on the Building’s lobby, for which the ceiling on the Building’s funds that could be spent was set at HK$1 million

…

The final result was that the owners and the owners’ representatives in attendance, who accounted for 100% of the valid shares owned, took a vote and a resolution was passed by majority that in respect of the renovation works on the Building’s lobby, the ceiling on the Building’s funds that could be spent was set at HK$1 million.  All the (voting) paper was sealed in the presence of the owners and the owners’ representatives.”

9.  The vendor’s solicitors’ lengthy reply failed to satisfy the plaintiff’s solicitors.  In their letter dated  15 June 2011 written on the very day scheduled for completion, they maintained :

“The Incorporated Owners and management company themselves do not have the professional knowledge or expertise to assess or estimate the amount of legal fees for the works done in litigations, so that their own estimations are not objective nor reliable. We appreciate your difficulties in getting the estimations direct from the receiving parties’ solicitors but likewise we or our clients as non‑party to the litigations also have the same difficulties. Our clients cannot make a reasonable or proper counter‑offer without such estimations of exact amount of legal costs and disbursements payable for such litigations. It is hard to say whether HK$3,500,000 (HK$1,000,000 + HK$2,500,000 as you calculated) is sufficient for payment of all 5 litigations (two High Court civil actions, two civil appeals and one District Court civil action). Further, there could also be practical difficulties in getting contribution from owners of all individual units their own shares before making payment of the legal costs and disbursements to the receiving parties’ solicitors so that interest can [accrue]. Such encumbrances arising from the litigations will continue to bother our clients if our clients just take your clients’ offer to complete the purchase of the Properties. These are also the real practical difficulties for us to convince our clients as well as the mortgagee bank from which our clients require the mortgage loans facilities to finance payment of the balance of purchase price payable for completing the purchase of the Properties.”

10.  In another letter written on the same day, the plaintiff’s solicitors added, in respect of the indemnity offered:

“Our clients also have no knowledge of your clients’ financial capabilities in meeting such likely requirement of making contribution for payment of the balance of such legal costs and disbursements …”

11.  As mentioned, the transaction fell through and completion did not take place on 15 June 2011.  The defendant therefore forfeited the moneys paid under the agreement, and this resulted in the commencement of the action below for the recovery of the moneys paid on the ground that the defendant had failed to answer satisfactorily the plaintiff’s requisition on title and therefore failed to prove a good title to the property.

The judgment below

12.  In holding for the plaintiff, the deputy judge rejected the defendant’s argument that the potential liability of the plaintiff (after completion) would only be limited to 1% of the liability of the incorporated owners, as it failed to take into account the possibility that the order for costs made against the incorporated owners could, with leave of the Lands Tribunal, be enforced against individual owners including the plaintiff after completion.  The deputy judge considered that the actual and potential liabilities of the incorporated owners in the litigations and the potential liability of the co‑owners to contribute to the funds of the incorporated owners towards such liabilities were by their nature extraordinary, as it was not an ordinary affair of an owners’ corporation to be involved in any litigation, let alone three sets of legal proceedings against different parties.  Moreover, even if one were to focus on the magnitude of such liability or potential liability alone, the deputy judge considered, the defendant had still not proven beyond reasonable doubt that the plaintiff would not be at risk of a successful assertion against it of an encumbrance in light of the following matters (para 38):

“(1) The liability of the IO [Incorporated Owners] in the Litigations has never been ascertained and remains unknown at trial. I am unable to see how CGC [Chow, Griffiths and Chan] could in their answers assert that the liability of the IO was not substantial or that it would be limited to $1 million, $2 million or even $3.5 million.

(2) It is clear from the minutes of the AGM that prior to 15 June 2011 (the date for completion), the Litigations were still on-going and $1 million was set aside for the purpose of dealing such on-going Litigations. CGC were wrong when they asserted in correspondence that the $1 million had been set aside to pay the costs awarded against the IO in the Litigations.

(3) As the Litigations were at the material times still on-going, it was not certain whether the $1 million would be sufficient to discharge the IO’s own costs, let alone the costs ordered against the IO.

(4) The fact that the IO had cash fund in excess of $7 million as at 31 December 2010 was wholly irrelevant, as it was one of the assets of the IO and could not be taken as fund available to discharge the liability of the IO. Unless all the liabilities of the IO were taken into account, it was impossible to say that the cash fund of $7 million could be used to discharge the liability in the Litigations, as CGC asserted.

(5) As for the reserve of $2.55 million as at 31 December 2010, after setting aside $1 million to meet the costs of the on-going Litigations, only about $1.55 million was left. It can be seen from the minutes of the AGM that the IO had at the same meeting set aside another $1 million to meet the cost of the renovation of the lift lobby. Thus, the reserve was reduced to about $0.55 million, assuming the IO did not need to use the reserve for any other purposes.

(6) The above matters, taken together, show that it was likely that the management committee would call on the owners to contribute towards the liability of the IO for costs in the Litigations.”

13.  The deputy judge further rejected the defendant’s argument that the offer of $25,000 plus an indemnity was a sufficient answer to the plaintiff’s requisition.  She pointed out that the offer for indemnity did not cover the full amount of the liabilities of the incorporated owners in the litigations.  Moreover, it was not backed up by any security other than a sum of $25,000 to be set aside and stakeheld by the defendant’s solicitors.  Furthermore, the evidence showed that the plaintiff’s side was in difficulty in getting a mortgage loan, and the marketability of the property had been affected.

14.  For those reasons, the deputy judge took the view that the defendant had failed to answer the requisition satisfactorily and therefore failed to prove a good title to the property.  The deputy judge also decided on other points which are no longer pursued on appeal.

The arguments on appeal

15.  In this appeal, Mr Robert Pang SC, leading Ms Pauline Leung, took three main points on behalf of the defendant.  He submitted that by reason of the duties and rights of an owners’ corporation under sections 16 and 18 of the Building Management Ordinance, liability of an owners’ corporation to a third party to meet litigation to protect the rights of the owners of a building by nature must be within the contemplation of a reasonable purchaser.  Such liability by nature is not extraordinary.  Counsel argued that even though at the time of the agreement there were three sets of proceedings, the incorporated owners were only liable in costs in CACV 252/2010 and HCA 1603/2007; and no order as to costs both in relation to the appeal and to the hearings below was made by this court (differently constituted) in CACV 297/2006 (arising from HCA 104/2006) in their judgment dated 17 September 2007; and the claim in DCCJ 3471/2009 was only in respect of costs (legal and administrative) said to be incurred in dealing with the demolition of a watchman’s hut.  None of the litigations involved any substantial damages.  Counsel therefore submitted that the magnitude of the incorporated owners’ exposure to costs was by no means extraordinary and was a far cry from the situation in Chi Kit (where the judgment sum involved was $25 million together with interests and costs).

16.  Secondly, Mr Pang argued that the incorporated owners had over $7 million in their bank accounts, and the judge was in error as regards how much money was available to the incorporated owners for use to meet the potential liability.  Counsel submitted that in fact the incorporated owners had the means to meet the contingent liability on costs, and there was nothing in the evidence to indicate otherwise.  Counsel submitted that even though the exact quantum could not be ascertained from the management company before completion, the judgments in the litigations were public documents and the plaintiff properly advised could come to a conclusion on the likely quantum of the costs of the proceedings.  Those costs were something which the incorporated owners, given their strong financial position, could meet without calling on the owners to contribute to the funds of the incorporated owners.

17.  Thirdly, counsel relied on the offer of $25,000 plus the offer for an indemnity as a good answer to the requisition on title.  Counsel argued that the chances of those plaintiffs involved in the litigations applying successfully to the Lands Tribunal for leave to enforce their judgments against the individual owners were remote.  It would be even more remote and unlikely, according to counsel, that the Tribunal would exercise its discretion to order the plaintiff as a 1% co-owner to bear an amount more than its proportionate share of such costs.  In those circumstances, even though the indemnity would not cover the full amount of the costs payable by the incorporated owners in the litigations, it would operate to cover, counsel contended, a very remote and fanciful risk of enforcement against the plaintiff alone.

The law

18.  It is basic conveyancing law that a vendor has the twin obligations to show/prove a good title before completion and to make/give a good title upon completion.  For the purposes of proving a good title, that is, proving it to the very high standard of proof beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of an encumbrance (MEPC Ltd v Christian‑Edwards [1981] AC 205), the vendor has to answer satisfactorily requisitions on title that have been properly raised: Active Keen Industries Limited v Fok Chi Keong [1994] 1 HKLR 396.  As illustrated by the actual decision in Active Keen, a failure to give a satisfactory answer to a properly raised requisition on title can be fatal to a vendor even though he may, in fact and in law, have a good title to the property.

19.  As was decided by the Court of Final Appeal in Chi Kit, a liability to contribute to the funds of the incorporated owners of a multi‑storey building in which the subject property for sale and purchase is situated may constitute a blot on title if “the liability to contribute is extraordinary in view of its magnitude so that it exceeds what any reasonable purchaser might be expected to have in contemplation” (Chi Kit at p 284J).  As mentioned, earlier on, the Court of Final Appeal had also said that whether the liability to contribute is extraordinary may be gauged from matters “such as its nature or magnitude” (p 282A/B).  What the purchaser will end up buying, in that sort of situation, is not a title free from liability, but one “which carries with it a substantial liability even if limited to its proportionate share or, if not so limited, an even greater liability” (Chi Kit at p 285A/B).

20.  Pausing here, it would be natural to think that such a substantial liability to contribute could lead to a title problem in the following ways.  First, depending on the provisions of the deed of mutual covenant, it may lead to the incorporated owners’ registering a charge against the purchaser’s unit if the call for contributions is not met, thus affecting title: section 19(1) of the Ordinance. Alternatively, even if it is met, yet if because of other reasons (such as the call not being met by other co‑owners) the incorporated owners are unable to or otherwise do not discharge the liability towards the third party, the third party may take out execution proceedings against the purchaser as owner of the unit, subject to obtaining leave from the Lands Tribunal (section 17(1)(b)) – such leave may be limited to the proportionate share of the purchaser for the liability corresponding to his share in the land or, depending on the circumstances, not so limited.  If leave is granted, the execution process may involve the registration of a charging order against the purchaser’s unit, thereby affecting title.  Furthermore, if the incorporated owners should be wound up, the co‑owners are liable, both jointly and severally, to contribute, according to their respective shares, to the assets of the corporation of an amount sufficient to discharge its debts and liabilities (section 34).  This could, eventually, lead to the levying of execution against the purchaser’s unit by way of a charging order, thus affecting title.

21.  But as the Court of Final Appeal explained in Chi Kit (pp 281C/D‑282C/D), an “encumbrance” that affects title is not limited to some claim to the property or a charge which may be imposed upon the property.  A liability which attaches to the owner for the time being is one which binds successive owners and thus goes with and binds the property.  It is not a liability which is merely personal to the owner at a given time.  In other words, a mere liability, or a mere (but real) risk of a liability to make a substantial contribution may, by itself, constitute an encumbrance, regardless of whether there is a real risk that eventually matters should so develop that a charge or charging order is imposed on the unit of the purchaser.

22.  In this regard, one is only concerned with what may happen to the purchaser after completion, that is, the evaluation of a risk of a call for substantial contribution which, as explained, binds the owner for the time being, and thus the property.  Unless the risk can be said to be fanciful or unreal, the presence of the risk is sufficient to constitute a blot on the title of the vendor, thus entitling an unwilling purchaser not to complete.

23.  Understood in this light, the facts that in Chi Kit, an actual judgment of over $25 million had been entered against the incorporated owners by the third party, that the incorporated owners had no money to meet the liability without making a call for contributions, that it was therefore a certainty that a contribution call would be made, and that some co‑owners had expressly stated to the media that they had no money to meet the expected call for contributions, were all circumstances relevant in that case to the assessment of whether there was a real, as opposed to a fanciful, risk of the owner for the time being, and thus the unit, being saddled with a substantial liability outside of the purchaser’s contemplation, and therefore a defect in title.  It is not necessary to have all those facts present in a particular case before the court may conclude that the title is defective because the risk is a real rather than a fanciful one.  Facts are bound to vary from case to case.  What really matters is a real risk of the coming into being of an encumbrance in this type of situation.

The present case

24.  In my view, the litigations involved in the present case cannot, when viewed as a whole, be regarded as an ordinary incident of building management that a reasonable purchaser may be expected to have in contemplation.  Here one is concerned with three different sets of litigations, which cannot be termed as a common occurrence in building management.  The subject matters of the litigations were no doubt building management matters, but they could not be described as ordinary matters encountered in day to day building management.   Certainly, one is not concerned with potential contributions to meet ordinary running expenses of the incorporated owners or the manager, nor is one concerned with the expenses of upkeep and repair of the building, nor the costs to meet a building order issued by the Building Authority.  Moreover, the magnitude of the costs exposure in the litigations is potentially great.  At the time, the litigations were ongoing.  In HCA 1603/2007, there had been a five‑day trial before the Court of First Instance which was followed by a one‑day appeal before the Court of Appeal, and they resulted in orders against the incorporated owners regarding the costs of the trial and the costs of the appeal.  In HCA 104/2006 and CACV 297/2006, there were hearings before a master, a judge and the Court of Appeal in relation to an application for summary judgment, in which both sides were only partially successful, and eventually the Court of Appeal made no order as to costs regarding the hearings, and the incorporated owners had to shoulder their own costs.  In other words, both the actual and potential liabilities of the incorporated owners for costs – their own costs as well as those payable to the other side – were substantial.

25.  In short, I take the view that the actual and potential liabilities for costs in the present case were not something that the plaintiff as purchaser should be taken to be within its reasonable contemplation when it entered into the agreement for the purchase of the property, so much so that it could not be heard to complain by way of a requisition on title.

26.  This being the case, the requisition on title in relation to the actual and potential exposure to costs was properly raised and demanded a satisfactory answer from the defendant by way of proof of title.  And in this regard, the focal point was on the magnitude of the actual and potential exposure to costs of the incorporated owners.

27.  Further, I take the view that this properly raised requisition has not been satisfactorily answered.  Despite the heavy reliance on the contents of the AGM minutes, there can be no doubt that the defendant singularly failed to give any indication, not even a rough one, as to the magnitude of the actual and potential exposure to costs that was involved.  What one cannot find from the correspondence was any such indication.  Instead, the defendant’s solicitors repeatedly maintained that they had tried their best to obtain an answer; that the manager was not more forthcoming than it could or should; that the incorporated owners had millions of surplus available to meet the actual and potential liabilities; that the manager had told the solicitors that a call for contribution was “unlikely”; that a sum of $1 million had been set aside for the purposes of the litigations; that no claim of damages was made in any of the litigations and only costs were involved; that a sum of $25,000 would be stakeheld to meet any call for contribution (which would translate into a fund of $2.5 million assuming that everybody would pay up); and that on top, there was an offer of indemnity (albeit unsecured) to “settle the apportioned sum called for at the end of the day and keep [the plaintiff indemnified] against any such contribution”.

28.  In my view, none of these, whether alone or collectively, provide a satisfactory answer to the properly raised requisition of the plaintiff.  They all failed to address a central issue, that is, what was the likely magnitude of the total costs exposure of the incorporated owners in the litigations.  There was no such estimate, not even a rough one.  Without such a figure, it was simply impossible to evaluate whether the various matters relied on by the defendant’s solicitors were sufficient to render the risk of an encumbrance a fanciful, rather than a real one.

29.  And the fact that the defendant’s solicitors had (apparently) done their best to obtain an answer, or the fact that the manager was not more forthcoming than it could, is neither here nor there.  For they were not the questions that had to be answered.  The issue was not whether the vendor’s solicitors had done their best to provide an answer.  The issue was whether the vendor had, through its solicitors, provided a satisfactory answer to the requisition, thereby proving a good title to the property beyond reasonable doubt.

30.  Without even a rough estimate of the likely exposure, it was simply impossible to assess whether the mere assurance by the manager that a call for contributions was not “likely” was to be accepted at its face value, not to mention that “likely”, in the context of proof of title, might well not be sufficient given the high standard of proof involved.

31.  Likewise, the fact that the incorporated owners had some cash in the bank accounts did not really advance the vendor’s case when the total potential liability for costs was quite unknown.  In any event, as the deputy judge pointed out, the amount of cash in hand was rather unhelpful because one must take into account the actual and potential liabilities of the incorporated owners.  Quite plainly, even from the minutes, the incorporated owners had other liabilities to meet, including the huge cost of the lift replacement exercise – stage 2 would only be completed in mid 2011. The fact that $1 million was set aside for litigation purpose could mean many things.  At that time, the litigations were still ongoing, and the $1 million could well be for future costs.  Moreover, the fact that $1 million was set aside might mean that if the costs, actual or potential, were to go beyond $1 million, the incorporated owners would consider making a call for contributions.

32.  I do not agree, in any event, that nothing more could be, or could have been, done.  As co‑owner, the vendor was entitled to attend the AGM held on 7 May 2011 and asked for details about the litigations (which were discussed at the AGM), including, in particular, the basis for setting aside $1 million for legal costs.  And in fact, even after the AGM, as co‑owner, the defendant could ask the incorporated owners for more details about the litigations, for instance, whether, as regards the judgment of the Court of Appeal handed down on 4 May 2011 in CACV 252/2010, which reversed Au J’s judgment in favour of the incorporated owners and made adverse costs orders against the incorporated owners, there would be an application for leave to appeal to the Court of Final Appeal, thereby increasing the exposure to costs.  As a matter of fact, there was indeed an application to this court for leave to appeal to the Court of Final Appeal, which was successfully resisted by the plaintiff on 15 September 2011, in which the plaintiff, originally represented by Mr KM Chong and Mr Lester Lee, brought in Mr Benjamin Yu SC as leader. The matter did not end there – the incorporated owners sought leave to appeal from the Court of Final Appeal itself (FAMV 35/2011), this time bringing in Mr Edward Chan SC as leader, leading Mr Andrew Mak. That application also failed, with costs again awarded against the incorporated owners and manager.  All this, of course, happened after the falling through of the transaction.  But, they illustrated my point that at the material time, the magnitude of the actual and potential exposure to costs of the incorporated owners arising from the ongoing litigations was an unknown, and the fear that it could be so great that it could lead to a substantial liability or a call for substantial contributions was a real rather than a fanciful one, which could not be satisfactorily answered by the various matters relied on by the vendor’s solicitors.

33.  I do not think the offer of $25,000 plus an indemnity really took the matter any further in the present case.  Without any reliable idea on the likely quantum of the costs exposure, there was no way the purchaser could judge whether the offer of $25,000 was sufficient or not.  And in this regard, the burden was squarely on the vendor to come up with a satisfactory figure, and it was not for the purchaser to name a figure.  The offer of an indemnity was insufficient either.  First, it was only limited to the difference between the amount of the call and the sum of $25,000.  It did not cover the further liability of the purchaser as unit owner after completion in case any other co‑owners should fail to meet the call for contributions.  Moreover, it was an unsecured offer, not buttressed up by anything.  As the plaintiff’s solicitors replied in one of their last letters, the financial situation of the defendant was unknown.  In any event, there was evidence that the litigations had affected or were likely to affect the marketability of the property and the obtaining of mortgage.  In Chi Kit, the Court of Final Appeal considered that an offer to set aside over $33 million as indemnity for the liability involved was insufficient to resolve all the problems which flowed from the existence of the potential liability (Chi Kit at p 286C‑I).  For similar reasons, I fail to see how the offer of $25,000 plus an indemnity could solve all the potential problems arising from the litigations in the present case.

Disposition

34.  For all these reasons, I have come to the conclusion that the defendant has failed to answer satisfactorily the requisition on title properly raised by the plaintiff relating to the litigations, and has therefore failed to prove a good title to the property.  In other words, the deputy judge was right in entering judgment against the defendant for the return of the deposits and part‑payments.  I would, therefore, dismiss the appeal and make an order nisi that the plaintiff shall have the costs of this appeal, to be taxed if not agreed.

Hon Cheung JA:

35.  I agree with the judgment of the Chief Judge.

Hon Chu JA:

36.  I agree with the judgment of the Chief Judge.

Hon Cheung CJHC:

37.  Accordingly, we dispose of this appeal as indicated in paragraph 34 above.