GOLDSPEED INVESTMENT LTD. v. EASY SUCCESS ENTERPRISES LTD.

HCA 8187/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8187 OF 1998

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J U D G M E N T

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1. This case concerns the construction of a clause commonly used in the sale and purchase of units of building under construction. It is Clause 16 of the agreement entered into between the parties here.

2. The parties had placed before me a bundle of agreed documents. No witness was called and I was told that the witness statements filed in Court can be disregarded in this trial.

3. The relevant facts are as follows.

4. An agreement for sale and purchase dated 21 April 1994 ("the Agreement") was entered into by the Defendant as the vendor, Chuang's Properties Limited as the financier and the Plaintiff as the purchaser for the sale and purchase of the 7/F ("the Property") of a commercial building at Nos. 376-382 Lockhart Road, Hong Kong, which was then under construction. The purchase price was HK$25,200,000.00, of which 30% being HK$7,560,000.00 had been paid by the Plaintiff to the Defendant when the Agreement was terminated by the Defendant in the circumstances described below.

5. The sale and purchase was to be completed within 14 days of the Plaintiff being notified in writing that an Occupation Permit had been issued and that the Defendant was in a position validly to assign the Property to the Plaintiff. Such notice was given by the Defendant's former solicitors in a letter dated 8 May 1995 to the Plaintiff's solicitors, stating that completion was to take place not later than 4 pm on 22 May 1995. On 22 May 1995, the Defendant accepted the Plaintiff's request for an extension of time and agreed to extend the time for completion to 4 pm on 6 June 1995. On 5 June 1995, the Plaintiff's solicitors notified the Defendant's former solicitors that the Plaintiff was not prepared to proceed with the purchase of the Property and returned all relevant title deeds and documents.

6. On 14 June 1995, the Defendant's former solicitors wrote to the Plaintiff's solicitors demanding the Plaintiff to complete the sale and purchase and to make good the default including payment of the balance of the purchase price in the sum of HK$17,640,000.00 and HK$62,319.00 being the costs of completion, stamping and registration. In that letter, it was stated that unless the aforesaid sums with interest were paid and the sale and purchase completed within 21 days from the date thereof, the Defendant would forthwith enforce its right under Clause 16 to terminate the Agreement and forfeit all monies already paid by the Plaintiff.

7. The Plaintiff did not complete the sale and purchase.

8. On 6 July 1995, the Defendant's former solicitors wrote to the Plaintiff's solicitors and gave notice that "in accordance with Clause 16 of the Agreement, the Agreement is hereby determined and the deposit and all monies paid under the Agreement is hereby forfeited to [the Defendant]." It was also stated that the Defendant "reserves all its right and remedies against [the Plaintiff] under the Agreement and by law as a result of [the Plaintiff's] breach of the Agreement."

9. In September 1996, 14 months after the Defendant's termination of the Agreement, the Defendant re-sold the Property together with the 11/F of the building to another purchaser subject to existing tenancies for the total consideration of HK$35,280,000.00.

10. By a letter dated 26 April 1997 from the Plaintiff's solicitors to the Defendant, the Plaintiff demanded repayment of HK$5,040,000.00 being two part payments made by the Plaintiff to the Defendant. It was accepted in that letter that the Defendant was entitled to forfeit the deposit in the sum of HK$2,520,000.00.

11. The Defendant's solicitors replied by a letter dated 8 May 1997 denying liability to refund to the Plaintiff the sum of HK$5,040,000.00. They asserted that Clause 16 of the Agreement did not preclude the Defendant from maintaining its claim against the Plaintiff under common law for damages for breach of contract and for a set-off by reason of the same. It stated that at the material time of the Plaintiff's failure to complete, the open market price of the Property had dropped to about HK$15,000,000.00. The measure of the Defendant's damages would be the difference between the contract price and the market price at the time of breach, and that would be well in excess of HK$5,040,000.00.

12. On 21 May 1998, the Plaintiff issued the writ in this action.

13. I set out the material terms of the Agreement:

Clause 2

"The purchase price shall be the price specified in Schedule 5 hereto which shall be paid by the Purchaser to the Vendor's Solicitors as stakeholders in the manner set out in Schedule 5 hereto ..."

Schedule 5

"The purchase price of the Premises shall be HONG KONG DOLLARS TWENTY FIVE MILLION AND TWO HUNDRED THOUSAND ONLY (HK$25,200,000.00) which shall be paid by the Purchaser to the Vendor's Solicitors in manner as follows:

(1) A sum of HK$2,520,000.00 ... being the deposit is to be paid on the signing of this Agreement.

(2) A sum of HK$2,520,000.00 being the further part payment of the purchase price is to be paid on or before the 14th day of May 1994.

(3) A sum of HK$2,520,000.00 being the further part payment of the purchase price is to be paid on or before the 14th day of July of 1994.

(4) A sum of HK$17,640,000.00 being the balance of the purchase price is to be paid on or before the date on which the purchase of the Premises shall be completed in accordance with Clause 4 hereof. ..."

Clause 15

"Time shall in every respect be of the essence of this Agreement."

Clause 16

"Should the Purchaser shall [sic] fail to observe or comply with any of the terms and conditions herein contained or if the Purchaser shall fail to make the payments in accordance with Schedule 5 hereto whether of the deposit or the balance of the purchase price or of any instalment thereof or of any interest within seven (7) days of the date stipulated for payment of the same in Schedule 5 hereto, the Vendor may ... give to the Purchaser notice in writing calling upon the Purchaser to make good his default and in the event of the Purchaser failing within twenty-one (21) days from the date of such notice fully to make good his default, the Vendor may by a further notice in writing forthwith determine this Agreement and the Vendor shall thereupon become entitled to re-enter upon the Premises and repossess the same free from any right or interest of the Purchaser therein and the Vendor shall be entitled to forfeiture of the deposit and to receive from the Purchaser as occupation rent a sum equal to interest at the rate of fifteen percent (15%) per annum on the whole of the purchase price for the period during which the Purchaser was in occupation. Upon determination of this Agreement, the Vendor may resell the Premises either by public auction or by private contract subject to such stipulations as the Vendor may think fit and any increase in price on resale shall belong to the Vendor. On a resale any deficiency in price shall be made good and all expenses attending such resale shall be borne by the Purchaser and such deficiency and expenses shall be recoverable by the Vendor as and for liquidated damages Provided always that the Purchaser shall not be called upon to bear such deficiency or expenses unless the Premises are resold within six (6) months of the determination of this Agreement. The balance (if any) of the monies paid by the Purchaser under this Agreement after deduction of all sums due to the Vendor under this Clause shall be repaid to the Purchaser without interest costs or compensation within one month after such balance has been ascertained. ..."

14. In the Statement of Claim, the Plaintiff claims payment of HK$7,560,000.00, being all the monies paid by the Plaintiff under the Agreement. Sir John Swaine, SC, who appears for the Plaintiff, informed me that the Plaintiff seeks to recover only HK$5,040,000.00 being the two part payments, which was the position taken by the Plaintiff's solicitors in their letter dated 26 April 1997. Two points were taken by him in his submissions:

(1) The Defendant's right of retention of the amount received as part payment is governed exclusively by Clause 16. Unlike the deposit, the part payments are not forfeitable. If the Defendant should fail to comply with the pre-condition in Clause 16 and resell the property within 6 months of 6 July 1995 (the date of determination of the Agreement), the Defendant is obliged to return the part payments to the Plaintiff.

(2) Clause 16 governs the rights and obligations of the parties exclusively and exhaustively in the event of a breach by the Purchaser. The Defendant is thereby precluded from pursuing any right to claim damages for repudiatory breach at common law.

15. Mr Warren Chan, SC, who appears for the Defendant, does not dispute that the Defendant would have no right to retain the monies received as part payment outside of Clause 16 in the event of a termination of the Agreement. This is well established by the authorities and I was referred by Sir John Swaine, SC to Harrison v. Holland [1921] 3 KB 297 and [1922] 1 KB 211 and Mayson v. Clouet [1924] AC 980 (a decision of the Privy Council on appeal from Singapore). I agree with the Plaintiff's submissions that any right of the Defendant to retain the part payments in the event of determination of the Agreement could only have arisen from the terms of the Agreement. In the absence of any such term, the Defendant would not be entitled, on the termination of the Agreement, to retain the part payments as security for any loss it might sustain on a resale. The suggestion to imply a term in the contract to the effect that the Vendor be at liberty to retain instalments for a reasonable time as security against loss in the event of default was rejected by the English Court of Appeal in Harrison v. Holland, supra.

16. In the present case, the Defendant had not complied with the pre-condition in Clause 16 in that the resale did not take place within 6 months of the termination of the Agreement by the Defendant. The Defendant cannot therefore rely on the right given to it under Clause 16 to retain the amounts received as part payment. This, however, is not the end of the matter as the Defendant has brought a counterclaim in this action claiming damages at common law in the sum of HK$10,200,000.00, being the difference between the contract price of HK$25,200,000.00 and the market price of HK$15,000,000.00 in July 1995, which brings me to the second point taken by Sir John Swaine.

17. It is the Plaintiff's contention that Clause 16 is a comprehensive and exhaustive provision of the Vendor's rights and remedies in the event of the Purchaser's breach. If the Defendant should fail to comply with the pre-condition in that provision, the Defendant is not entitled to claim damages at common law.

18. Clause 16 is, for all intents and purposes, identical to the provision cosidered by the Court of Appeal in Woomera Co. Ltd v. Provident Centre Development Ltd [1985] HKLR 263. The critical question considered in that case was whether the Vendors would be entitled to claim common law damages in the alternative for the purchasers' failure to complete in view of Clause 16. The Court of Appeal ruled unanimously that Clause 16 was not an exhaustive statement of the Vendors' rights and did not preclude a claim for common law damages. I set out the relevant parts in the judgment as follows:

"As I construe the clause with its references to what 'may' be done and to 'entitlement' it is permissive rather than restrictive or comprehensive and not susceptible of a construction which, after the exercise of the second option [i.e. the option to determine the agreement], would preclude a claim to damages based on the purchasers' repudiation at common law. Whether claiming such damages or under the provisions of clause 16 the vendors must rely upon the determination of the contract. In the circumstances pleaded in the counterclaim and after irrevocable election at trial the vendors would be entitled to the difference between the contract price and the market price of the several units at the contractual date for completion. ... I am satisfied that, as a matter of law, the vendors were entitled to claim damages at common law for the purchasers' failure to complete once and howsoever the contracts had been determined ..." (per Kempster, JA, at 266J-267C)

"The plaintiff Purchasers contended that cl.16 was intended as a complete code which sets out all the rights of the vendor in the event of a determination of the particular agreement and, by implication, excludes any rights which the vendor would have had at common law. It is common ground that the clause neither expressly excludes nor expressly includes those common law rights. However, the court will always lean against the exclusion of common law rights save where an intention to exclude is clear. ...

I am not persuaded that there is anything which prevents us from holding that the common law remedy has not been excluded. I see that clause as providing the vendor with an alternative remedy at common law - a remedy which on the one hand is limited by the conditions contained in the clause and on the other hand is more readily available and also enables the vendor to obtain a liquidated sum more speedily than he would obtain unliquidated damages at common law. It might even be that the speedy remedy under cl.16 could be worked out by solicitors acting for both parties, without the necessity of their being separately represented. ... The 'protection' it [i.e. clause 16] affords to the purchaser is protection available only where the vendor seeks the remedy granted by the clause." (per Sir Alan Huggins, V-P, at 269C-G)

19. Faced with Woomera, Sir John Swaine submitted that this decision is not binding on me because it was an interlocutory appeal concerned with whether amendments to a pleading were useless and immaterial and should not have been allowed by the trial judge, who did not make any final ruling on the construction point. This is of course correct. However, if one reads the judgment of Sir Alan Huggins, it would appear that the Court of Appeal had made a decision on the question of construction of Clause 16. Sir Alan Huggins has this to say in his judgment:

"The judge declined to decide the true construction of this clause, because he thought it was too difficult a matter to be decided upon an application for leave to amend: he was not prepared to hold that the clause did make the amendment useless, but equally was not prepared to hold that it did not. He thought that, unless he was convinced that the amendment would be useless, the plaintiff had failed to make good this ground of opposition to the amendment but that he should not give a final ruling on the construction point. Before us it has been argued that he ought to have gone on to make a final ruling and we were asked to do so. It goes without saying that the judge should not, as a general rule, in interlocutory proceedings, make a final decision upon a disputed issue of fact. Upon an application under O.14 he should not, however, be reluctant to make a final decision even upon a difficult question of law if the matter has been fully argued: Cow v. Casey [1949] 1 KB 474, 481. The same principle applies to other interlocutory proceedings where the point has been fully argued. It is not the difficulty of the point but the risk of reaching a decision per incuriam which should be the governing factor. The judge was not sure that he had 'seen all round' the point, and he declined to say more than seemed to him necessary. I think he was right, but we cannot excuse ourselves on the basis that the matter has not been fully argued, and I think we are bound to decide it." (at 268A-269B; emphasis supplied)

20. The decision of the Court of Appeal in Woomera on a construction of a provision which is identical to Clause 16 for all intents and purposes is binding on me. In any event, I agree entirely with the reasoning and the construction of the Court of Appeal. I was also referred by Mr Warren Chan to a decision of Waung J in Ford Joint Ltd v. Keen Lloyd Market (Holdings) Ltd HCA No. 21393 of 1998, 27 August 1999, in which Waung J drew on the "powerful support" of the Court of Appeal in Woomera and came to the conclusion that there is no arguable case of legal displacement of common law damages as the clause he was concerned with (which was similar to Clause 16 but worded differently) is not exclusive or exhaustive of the remedy available to the Vendor.

21. Having reached the conclusion that the Defendant has no right to retain the part payments by virtue of Clause 16 and that Clause 16 does not preclude the remedy of common law damages, where does that leave the parties?

22. There is undisputed evidence before me in the form of a valuation report that the open market value of the property as at 6 July 1995 was HK$15,000,000.00. Hence, the difference between the contract price and the market price at the day of termination is HK$10,200,000.00. The Defendant is entitled to recover the difference in price being damages based on the Plaintiff's repudiation at common law. Mr Chan informed me that the Defendant has abandoned the claim for legal and other costs and expenses relating to the aborted sale and purchase pleaded in the Counterclaim.

23. The net result of this is that although the Defendant cannot deduct the unliquidated damages from the part payments, the Defendant has a good cross claim for such damages in the Plaintiff's action. In this regard, I set out the dicta of Dixon J and Millett J in the following cases:

"But, where there is no express agreement excluding the implication made at law, by which the instalments become repayable upon the discharge of the obligation to convey and the purchaser has a legal right to the return of the purchase money already paid which makes it needless to resort to equity and submit to equity as a condition of obtaining relief, the vendor appears to be unable to deduct from the amount of the instalments the amount of his loss occasioned by the purchaser's abandonment of the contract. A vendor may, of course, counterclaim for damages in the action in which the purchaser seeks to recover the instalments." (McDonald v. Dennys Lascelles Ltd (1933) 48 CLR 457 at 478-9)

"It is settled law that if a vendor accepts the purchaser's repudiation of a contract of the sale of land and bringing the contract to an end, he is bound to repay to the purchaser all pre-payments of purchase price other than those which were paid by way of deposit. That was established by the decision of the House of Lords in Mayson v. Clouet. Moreover, it is clear law, and certainly established by decision of the High Court of Australia in McDonald v. Lascelles, that the vendor cannot deduct from the purchase price, which is repayable to the purchaser, any sum by way of damages for breach of contract, though he may have a perfectly good cross claim for such damages. Accordingly, on acceptance of the purchaser's repudiatory breach, the vendor is under a personal liability to repay the purchase money and the purchaser has a claim against the vendor for the return of the money. It would appear that he does not have a lien on the property for the return of the money since any purchaser's lien is discharged if the contract goes off by his default. He is an unsecured creditor of the vendor for the return of the money, in the same way that the vendor is an unsecured creditor of the purchaser for any damages for breach of contract." (Hillel v. Christoforides (1991) 63 PCR 301)

24. The counterclaim raised by the Defendant is sufficient to extinguish the Plaintiff's claim for return of the part payments in the sum of HK$5,040,000.00. The Defendant would also have to give credit for the deposit forfeited in the sum of HK$2,520,000.00. The net sum the Defendant is entitled to recover from the Plaintiff is HK$2,640,000.00. As against a claim arising out of a transaction between the parties, there could be set-off in equity a cross claim arising under the same transaction whether sounding in debt or unliquidated damages, which is the case here (Hanak v. Green [1959] 2 QB 9). There being an equitable set-off so that the Plaintiff's claim is extinguished, the proper order I should make is to enter judgment for the Defendant with costs on the claim and for the balance of the amount of the counterclaim in the sum of HK$2,640,000.00 with costs. I would add that if there were no equitable set-off of the counterclaim, I would still have given judgment for the Defendant for the balance of HK$2,640,000.00, under O. 15 r. 2(4) of the Rules of the High Court.

25. I would award interest on HK$2,640,000.00 at the rate of 1% above the prime rate of the Hong Kong and Shanghai Banking Corporation from 6 July 1995 to the date hereof. The order nisi I make as to costs shall become absolute 14 days after this judgment if no application is made in the meantime to vary that order.