CHOW NAP MAN v. CHUNG WAI KWONG

CACV 137/2017

[2018] HKCA 245

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 137 OF 2017

(ON APPEAL FROM HCMP NO 3307 OF 2016)

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REASONS FOR JUDGMENT

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Hon Kwan JA (giving the reasons for judgment of the court):

1.  This appeal is brought by the plaintiff, Chow Nap Man (“Chow”), against the judgment of Deputy High Court Judge Kwok, SC on 24 May 2017, the reasons for which were given on 9 June 2017. By the judgment, the originating summons of Chow in HCMP 3307/2016 was dismissed on the basis that it should never have been issued as his case was “obviously unsustainable” as a matter of law. The judge ordered Chow to pay costs to the defendant, Chung Wai Kwong (“Chung”), on an indemnity basis.

2.  At the conclusion of the hearing, we allowed the appeal, set aside the judge’s order and ordered that the originating summons be remitted to the Court of First Instance, to be heard with HCA 1787/2015 before the same judge at the same time.  We ordered Chung to pay Chow’s costs of this appeal, but declined to grant a certificate for two counsel to Chow.  As for the costs of the hearing before the judge, we set aside the judge’s order and substituted it with an order that those costs be the plaintiff’s (Chow’s) costs in the cause of the originating summons.  That means Chow shall be entitled to his costs of the hearing before the judge if judgment is given in his favour in the cause of the originating summons but he shall not be liable to pay the costs of Chung for that hearing if judgment is given against him.

3.  These are the reasons for our judgment.

Background

4.  The relevant background matters may first be stated as follows.

5.  In January 2010, Chow and Chung acquired a flat in Jordan Road (“the Property”) as tenants-in-common in equal shares for the price of $2.72 million.  The Property was used for the operation of a guest house.  In August 2015, Chung issued a writ against Chow in HCA 1787/2015, alleging there was a verbal agreement to operate the guest house jointly and Chow was in breach of it in excluding him from the management.  Chung claimed an account of profits, an order for sale of the Property, and half of the mesne profits of the Property.

6.  Chow filed a defence and counterclaim in October 2015 denying that there was an agreement to operate the guest house jointly.  He pleaded that he does not object to an order for sale of the Property, subject to credit being given by Chung to the counterclaim of $334,019.28, which was made up of the amounts Chung should have contributed towards the Property, being mortgage repayments, legal costs and estate agency fees, and expenditure incurred for renovation.

7.  In April 2016, Chung issued a summons in HCA 1787/2015 under Order 31 rules 1 to 3 (“the Order 31 Summons”), seeking an order for the sale of the Property before the trial of that action, with directions that the balance of the proceeds of sale, after deduction of outgoings, the discharge of incumbrances, and expenses of sale, be released to Chung and Chow in equal shares, save and except that the amount of Chow’s counterclaim of $334,019.28 be paid into court from Chung’s share, pending the final determination of the counterclaim.

8.  In Chung’s affirmation in support of the Order 31 Summons, he deposed that it is apparent from the pleadings there is nothing to prevent the sale of the Property and he is willing to pay into court the amount of the counterclaim from his half share of the balance of the proceeds of sale and for the said sum to be released according to the final determination of the counterclaim.  He proposed to sell the Property by private sale and stated that according to a professional valuation obtained in March 2016, the market value of the Property with vacant possession was $4.15 million.

9.  An order was made by Master J Wong in respect of the Order 31 Summons on 17 May 2016.  He ordered the parties within 28 days thereof, to “try to agree and appoint” (a) a single joint expert to prepare a valuation report to determine the reserved price of the Property “for the purpose of auction (if any)”; (b) an agent to conduct the said auction; and (c) a firm of solicitors to handle the sale.  He adjourned the Order 31 Summons to 28 June 2016 for “further call-over”.

10.  On 14 June 2016, Chow’s wife, Thai Thi Thanh Hong (“Madam Thai”) obtained summary judgment against Chung in DCCJ 4437/2015 in the sum of $380,000 in respect of a promissory note, with interest at 1% over the prime rate from February 2012 to judgment, and costs to be summarily assessed.

11.  On 21 June 2016, there was a meeting between Chung, Madam Thai, her daughter Angel Chow and one Madam Tam So.  At that meeting, a Chinese memorandum was written by Chung and signed by him.  It read as follows:

“本人鐘偉光同意和周立民先生就佐敦道15号華豐大厦5樓D室業杈一事 [庭][1]外和解及同意將上址一半業杈以二佰萬元賣給另一半業主周立民先生或其家人，本人願意給予周立民先生或其家人時間 [籌][2] 備資金。以此為據。

見証人:	21-6-2016
譚蘇	簽名 鍾偉光
周芷茵
	副本”

12.  On 23 June 2016, Chow’s solicitors wrote to Chung’s solicitors stating that they were instructed their respective clients “have reached an agreement” and Chung “is prepared to sell his interests” in the Property.  By the letter, Chow’s solicitors proposed a “global settlement” of HCA 1787/2015 and DCCJ 4437/2015, and set out the terms proposed, which included the purchase by Chow of Chung’s half share of the Property at $2 million and that certain sums for which Chung should give credit be deducted from the purchase price.

13.  At the call-over hearing of the Order 31 Summons on 28 June 2016, Chung denied that a valid binding agreement was reached.  The summons was adjourned for argument, with directions for the parties to file further evidence.  Chow deposed that the price of Chung’s interest in the Property had been agreed as evidenced by the Chinese memorandum and he undertakes to purchase the same.  He asked the court not to exercise the discretion under Order 31 to make an order for sale by way of auction without taking into account section 6(3)(a) of the Partition Ordinance, Cap 352.

14.  Chung stated in his further affirmation that neither Chow (through his wife and daughter) nor he intended the memorandum to be legally binding, that it was merely a memorandum of understanding to document the progress of settlement negotiations between Madam Thai and himself, that he was assured by Chow’s wife and daughter that no terms would be legally binding until an agreement was drafted by their solicitors and executed by him and Chow, and that he had copied out the memorandum from a draft provided by Chow’s daughter.  He placed reliance on the letter of Chow’s solicitors which stated that nothing contained therein “is binding on [Chow] unless and until consent summons with all the agreed terms incorporated have been signed by the parties.”  He asked the court not to attach weight to the memorandum when considering the price and manner of sale of the Property.  He has no objection to selling his share of the Property to Chow at the market value estimated by his surveyors, at $2,075,000.

15.  On 22 September 2016, Chow’s solicitors made another offer to settle HCA 1787/2015 in an open letter, also on the basis that Chow was to purchase Chung’s half share of the Property at $2 million, which was not accepted.

16.  Chow then brought fresh proceedings to seek to enforce the memorandum.  The originating summons in the present proceedings (HCMP 3307/2016) was issued against Chung on 25 November 2016.  Chow sought declarations there was a valid, binding and enforceable settlement agreement between the parties on or about 21 June 2016, and the terms of the agreement were that Chung agreed to sell his half share of the Property to Chow at $2 million.  Chung disputed there is any valid, binding and enforceable agreement between him and Chow.  Chow, Madam Thai and Angel Chow filed affirmations in reply disputing Chung’s version of what was said at the meeting on 21 June 2016 and how the memorandum came to be written and signed.  Chow also issued a summons in HCA 1787/2015 for an order that the Order 31 Summons be dismissed, alternatively all further proceedings in that summons be stayed pending the determination of the originating summons.

17.  On 9 December 2016, Master Kwang made an order adjourning the Order 31 Summons pending the final determination of the originating summons in HCMP 3307/2016.

18.  By an order by consent made on 21 February 2017, it was provided that no further affirmation was to be filed by any party without leave of the court and the originating summons was fixed for substantive hearing.

The reasons for the judgment below

19.  The originating summons came before the judge for substantive hearing on 24 May 2017.  There were factual disputes on the evidence filed but the judge did not find it necessary to resolve them.  He dismissed Chow’s case as obviously unsustainable as a matter of law on a single ground.  The agreement for sale to Chow of Chung’s half share of the Property was a contract for the sale and purchase of land.  The memorandum was silent on the date for completion of the sale.  It recorded that Chung was willing to allow Chow or his family member(s) time to raise capital, but was silent on how much time Chow was allowed, or what was to happen if Chow was unable to raise capital.  As the date of completion is an essential term of any contract for the sale and purchase of land and there was no agreement on such an essential term, the alleged settlement agreement in the memorandum was not enforceable or binding, applying Kwan Siu Man v Yaacov Ozer (1997-98) 1 HKCFAR 343.

The issues on appeal

20.  Mr Wallace Cheung, who appeared with Mr Leonard Chow, took three broad points on appeal on behalf of Chow.  They are essentially matters of law.

21.  Firstly, the judge wrongly presumed that the settlement agreement in the memorandum was a contract for the sale and purchase of land.

22.  Secondly, in light of the relevant circumstances, the settlement agreement reached by Chung and Chow is different from a contract for the sale and purchase of land, such that Kwan Siu Man has no bearing in determining whether a valid or binding settlement agreement has been reached.

23.  Thirdly, even if the settlement agreement is a contract for the sale and purchase of land, it was not held by the Court of Final Appeal in Kwan Siu Man that the date of completion must be an essential term in every contract without any exception.

24.  Mr Roland Lau, who appeared for Chung on appeal, submitted that by the consent order of 21 February 2017, the parties had agreed that the originating summons was to be disposed of on affirmation evidence and Chow could not complain on appeal that the judge had failed to deal with the factual disputes raised.  We do not think that was the submission of Mr Cheung. Mr Cheung’s submission that the case should be remitted to the court below for rehearing must be on the premise that he is to succeed on one or more of the matters of law as mentioned.  The hands of the appeal court would not be tied from remitting the case for rehearing on account of the consent order.  And upon a remittance, directions could be given by the court below on the appropriate means for the disputes of fact to be resolved, by hearing oral evidence if necessary.

25.  Mr Lau then raised a number of factual contentions.  He criticized the evidence filed on behalf of Chow as unclear in a number of respects: whether the alleged offer was accepted in an earlier telephone communication between Madam Thai and Madam Tam So or at the meeting on 21 June 2016; how and under what circumstances the acceptance of the offer by Madam Thai or Chow was conveyed to Chung, as Madam Thai, who came from Vietnam, is “not conversant with Chinese”.  It is unnecessary to resolve whether these are fair criticisms on a proper reading of the affirmations made by Madam Thai and Angel Chow.  If Chow should satisfy the appeal court that his case is not obviously unsustainable as a matter of law, it would be remitted to the court below for the factual disputes to be resolved.

26.  Mr Lau also took the point that the agreement in the Chinese memorandum was subject to the preparation of a formal contract.  He referred to the letter of Chow’s solicitors to Chung’s solicitors dated 23 June 2016 by which the proposal for a global settlement of HCA 1787/2015 and DCCJ 4437/2015 was made, saying that no mention was made in that letter of any settlement agreement having been reached two days ago.  That does not seem to be a proper reading of the letter.  Nor do we agree with him it must be apparent from that letter that no settlement agreement was made at the meeting on 21 June.  There are also factual disputes on the relevant evidence and they would need to be resolved before the court could determine, on the true construction of the evidence, whether it was the intention of the parties that they would not be contractually bound until a formal contract was signed or whether they intended to bind themselves forthwith.

27.  Mr Lau pursued some other points in the respondent’s notice to seek to support the judge’s decision on additional grounds.  He contended that the Chinese memorandum, properly construed, could only constitute a letter of intent as it was not signed by Chow and did not identify who would be the purchaser.  We do not think these are of consequence for the purpose of this appeal, as it could not be said Mr Lau’s contentions must be clearly right so as to render Chow’s case untenable.

28.  We turn to the matters of law raised by Mr Cheung.  All that is required to be established at this stage is that one or more of the points of law are reasonably arguable such that Chow’s case is not obviously unsustainable as a matter of law.

The first issue

29.  It was submitted on behalf of Chow that the judge gave no reasoning why the settlement agreement should be regarded as a contract for the sale and purchase of land and merely presumed that was so, without any legal or factual basis.  We do not think that is a fair criticism.  The judge must have regarded it self-evident that the agreement to purchase Chung’s half share in the Property was a contract for the sale and purchase of land.  There is nothing in this point.

The second issue

30.  Next, it was contended by Mr Cheung that the agreement in the memorandum is different from a contract for the sale and purchase of land.  The judge had failed to ascertain the intention of the parties by looking at all the relevant circumstances.  Had he done so, he should have come to the view that the present case was concerned with the validity of a settlement agreement relating to the disputed elements of the Order 31 Summons, rather than an agreement for sale and purchase of land.  Hence, Kwan Siu Man would not apply to the present situation.

31.  Mr Cheung pointed out that the judge did not mention the Order 31 Summons at all and this was a crucial omission.  He failed to take into account the material issues in dispute in the Order 31 Summons, which were: (a) the purchase price for Chung’s half share in the Property; and (b) the mode of sale, whether by private sale of Chung’s half share or public auction of the Property.  He did not have regard to the fact that the settlement agreement was in relation to those two disputed issues.

32.  It was further submitted that the Order 31 Summons was governed by section 6(3) of the Partition Ordinance and under that provision, there are only two material elements to be considered: (a) whether there is any undertaking given by the other persons interested to purchase the interest of the party applying for an order for sale (section 6(3)(a)); and (b) if so, the fair value of the interest of the party applying for an order for sale so as to determine the appropriate purchase price for his share (section 6(3)(b)).  Chow had given an undertaking to purchase Chung’s half share of the Property and there should be no dispute about this.  The time for completion is not a matter of concern under section 6(3), as pursuant to section 6(4), on the making of an order for sale, the court may direct a distribution of the proceeds of sale and give “all other necessary or proper consequential direction”.

33.  Mr Cheung placed reliance on Bushwall Properties v Vortex Ltd [1976] 1 WLR 591 to support his contention that a contract for the sale and purchase of land is different from a settlement agreement, but we do not consider it helpful to refer to this case as it turned on the construction of documents in the particular factual circumstances.

34.  Mr Lau submitted that the mere fact that the memorandum was intended to be a settlement agreement could not conceal or cloak the substance of the agreement in that it involved the transfer or disposition of an interest in land.  He cited Foskett on Compromise (8^th ed) §3‑72 which stated that any compromise involving a “sale or other disposition of an interest in land” must be made in writing (as falling within section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989; the equivalent provision in Hong Kong is section 3(1) of the Conveyancing and Property Ordinance, Cap 219) and there will be no contract if this formality has not been observed.  He also made the point that if the agreement as evidenced by the memorandum was intended as an out of court settlement of the Order 31 Summons, no concluded agreement has been achieved as a material element in the negotiations being the issue of costs remains unresolved, citing Foskett on Compromise §3‑50.

35.  Regardless of whether the agreement in the memorandum is characterised as a contract for the sale and purchase of land or a settlement agreement, there would be no valid or binding agreement if there is no consensus on an essential term.  We do not think it would assist Chow’s case in characterising the agreement as a settlement agreement of the Order 31 Summons rather than an agreement for the sale and purchase of land, as a material term being the question of costs in that application has remained unresolved.

36.  We do not think the second point raised by Mr Cheung is of substance.

The third issue

37.  The third issue is based on the premise that the agreement was a contract for the sale and purchase of land.  The contention here is that the judge was in error in holding that the date of completion is an essential term in every land contract without any exception.  Reliance was placed on the decision of To J in Fong Yin Hing v Fong Kwan Pui [2016] 2 HKLRD 825, which was an example of when, exceptionally, there could be an enforceable agreement for the sale and purchase of land in which the time for completion was not set by a named date.  It was held that a term could be implied for completion to take place within a reasonable time of an event supplied by an express term.  At §79, To J expressed the view that neither Litton PJ nor Bokhary PJ in Kwan Siu Man was of the view that it is “not possible” to make an open contract for sale and purchase of property under the volatile market situation in Hong Kong, they had only warned against coming to a conclusion that an open contract was made too readily.  At §80, he pointed out that while the Court of Final Appeal was of the view that completion date is an essential term and there is no practice in the ordinary course of business in Hong Kong of treating it as a subsequent matter simply to be left to legal advisers to settle, “it never held that absent agreement on the completion date, there could be no concluded contract”.

38.  The facts of Fong Yin Hing are distinguishable.  So also is another case relied on by Mr Cheung, Lau Suk Ching Peggy v Ma Hing Lam (2010) 12 HKCFAR 226, which is concerned with the valid exercise of an option to purchase land.

39.  The Chinese memorandum stipulated that Chung was willing to give time to Chow or his family to raise capital for the purchase of Chung’s half share in the Property.  It is reasonably arguable that a term could be implied that completion of the sale was to take place when the capital was raised.  However, the memorandum was silent as to how much time was allowed to Chow to raise capital.  The question is whether a term ought to be implied that reasonable time was to be allowed to Chow, and whether such an implied term would be void for uncertainty.  Also, it has to be borne in mind that the court has no power to improve upon a contract it is called upon to construe and cannot introduce terms to make it fairer or more reasonable but is concerned to discover the meaning which the contract would convey to a reasonable person having all the background knowledge (Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988 at §16).

40.  Mr Lau submitted that the lack of a specified period of time for Chow to raise capital for the purchase is simply too indefinite for the court to give it a practical meaning and is void for uncertainty.  The deficiency could not be cured by an implied term that this was to be done within a reasonable time.  He submitted this was similar to Walford v Miles [1992] 2 AC 128 which concerned a “lock-out” agreement, providing the plaintiffs with an exclusive opportunity to try to come to terms with the defendants, but contained no term as to the duration of the obligation to negotiate and made no provision for the defendants to determine the negotiations with the plaintiffs.  It was held that the deficiency could not be cured by implying a duty to negotiate in good faith as this was unworkable in practice and inherently inconsistent with the position of a negotiating party.

41.  The factual situation in Walford v Miles which militates against an implied term and the nature of the term sought to be implied are different from the present circumstances.  We are not persuaded it is obviously unsustainable to imply into the agreement a term that Chow was to raise capital for the purchase within a reasonable time or that such term would be unworkable or simply too indefinite as to be void for uncertainty.  The judge was in error in dismissing the originating summons summarily on the basis it was obviously unsustainable.

42.  For the above reasons, we have allowed the appeal, set aside the judge’s order of dismissal, and ordered the originating summons be remitted to the Court of First Instance for hearing.  In view of the substantial factual disputes, we think it appropriate that the entire dispute of Chow and Chung arising out of the Property – being the subject of HCA 1787/2015 and the originating summons in HCMP 3307/2016 – should be dealt with by the same judge at the same time.  The Order 31 Summons, which was adjourned by Master Kwang in December 2016 pending the final determination of the originating summons, would not be an effective means to reduce the scope of the dispute.

43.  To give effect to our order of remittance, we would direct the respective plaintiffs in HCA 1787/2015 and HCMP 3307/2016 to issue a summons within seven days of the handing down of our reasons for judgment to seek directions from a judge on the further conduct of proceedings in each case.