CHU WING NING v. NGAN HING CHEUNG AND ANOTHER

1991, No. A9409

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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The Agreement

1. The facts in the present case are not in dispute. The Defendants are the registered owners of a property known as Flat D, 10th Floor, Block 4, Bayview Garden, Castle Peak Road, in the New Territories ("the property"). On 30th October 1991, they signed an agreement with the Plaintiff, which was headed "Agreement for Sale and Purchase of Property".

2. It was however an example of what have become well known to the Hong Kong Courts as "provisional agreements" for the sale of land. It was referred to in the pleadings and at the trial as "the Provisional Agreement".

3. Upon signing, the Plaintiff duly paid a deposit of $50,000 to the Defendants. The Provisional Agreement then provided for further payments, for entering into a formal sale and purchase agreement and for effecting the legal assignment of the property as follows:

"3.(b)A: The Purchaser shall on or before 6th November 1991 go to the parties' solicitors offices to sign sub-sale agreement and shall at that time pay the Vendor (a cashier order made in favour of the abovementioned solicitors firm) a further deposit in the sum of ..... $197,000.00.

3.(b)C: Balance of purchase money. ... $2,223,000.00 shall be paid within 14 days after the Occupation Permit has been issued ..... and at the time of executing the Assignment by the Purchaser to the Vendor or to the developer or its solicitors."

4. Having signed the Provisional Agreement, the Plaintiff referred the matter to her solicitors who were Messrs. Joseph Chu & Co. ("Joseph Chu"). Messrs. Vivien Chan & Co. ("Vivien Chan") were acting for the Defendants.

5. Joseph Chu sought (on 4th November 1991) and received (on the following day) from Vivien Chan a draft agreement for sale and purchase ("the Draft Agreement"). Vivien Chan asked that if the Draft Agreement were approved, it should be returned executed together with a cheque drawn in the Defendants favour for $197,000, constituting the further deposit payable on signing the sale and purchase agreement.

6th November 1991

6. Trouble was then encountered. On 6th November 1991, which was the day by which the Draft Agreement was to be signed and the further deposit paid, Joseph Chu discovered from a land search that there was registered against the property, an agreement dated 2nd October 1991 ("the Earlier Agreement") for the sale of the property by the Defendants to one Ng Mei Yuk ("Madam Ng") for the sum of $2,290,000. There ensued a series of telephone calls and faxes or letters which I summarise in the paragraphs which follow.

7. Joseph Chu called for an explanation and Vivien Chan responded, sending a copy of the Earlier Agreement for Joseph Chu's perusal. Vivien Chan pointed out that the Earlier Agreement was conditional on the Defendants' obtaining their own mortgagee's consent for the sub-sale within one month from 2nd October 1991, that such consent had not been forthcoming and accordingly that the Earlier Agreement had become null, void and of no effect. Vivien Chan stated that they therefore intended to hold the Plaintiff to signing the Draft Agreement and making further payment on that day.

8. Joseph Chu however stated that their client needed more time to study the Earlier Agreement and would meanwhile decline to sign the Draft Agreement. They enclosed their client's cheque made out in favour of Vivien Chan, asking them "to hold the same as stakeholders" pending further consideration of the position. Having read the Earlier Agreement, Joseph Chu saw that the Defendants were entitled, as against Madam Ng, to have her execute a cancellation agreement. They wanted this to be done and the cancellation agreement registered in the Land Registry before the Plaintiff should proceed with the purchase.

9. This approach was not acceptable to the Defendants and Vivien Chan replied in the following terms:-

"..... there is nothing in the Provisional Agreement ..... which entitles your client to postpone the date for signing the formal agreement for Sub-sale and Purchase until the execution of the said Cancellation Agreement. We take the view that your client's right to obtain good title to the Property is adequately protected under the formal Agreement to be entered into by our respective clients and your client's request to postpone execution of the same is therefore unacceptable to our clients."

10. Vivien Chan warned that failure to proceed would result in forfeiture of the initial deposit of $50,000.

11. Vivien Chan's reference to protection in the Draft Agreement was apparently a reference to Clause 7 which required the Defendants to procure an assignment of the property free from encumbrances, from the Head Vendor in favour of the Plaintiff or her sub-purchasers (CI. 7). The Draft Agreement also contained (in Clauses 12 and 15) machinery for proving title.

7th November 1991

12. Vivien Chan's last letter of 6th November crossed with Joseph Chu's letter enclosing the cheque. Accordingly, on 7th November, 1991, the correspondence resumed with Vivien Chan returning the cheque and asserting that the Plaintiff was in breach of the Provisional Agreement for having failed to sign the Draft Agreement and to pay the further deposit to the Defendants on the previous day. However, they reported that while such breach entitled their clients to forfeit the initial deposit of $50,000, the Defendants were prepared to extend time for signing the Draft Agreement to the close of business on that day, 7th November, failing which the initial deposit would be forfeited.

13. The Plaintiff's position remained that she would insist on the cancellation agreement being signed and registered before proceeding. Joseph Chu wrote in the following terms:-

"Upon perusal [of the Earlier Agreement], we note from Clause 27(a) thereof that the said Agreement was conditional upon your clients' obtaining the Mortgagee's consent within one month from the date of the said Agreement failing which the said Agreement shall become null and void and the parties thereto shall execute a Cancellation Agreement. Therefore, our client will not enter into an Agreement for Sub-sale and Purchase with your client unless and until the said Cancellation Agreement has been duly signed by all necessary parties and [registered] in the Tsuen Wan District Land Office."

14. Joseph Chu returned the Draft Agreement with a proposed amendment regarding the further deposit to be paid. Instead of requiring payment of such deposit to be paid to the Vendor on signing the Draft Agreement, the proposed amendment was that such sum should be paid:-

"..... to Messrs. Vivian Chan & Co. as stakeholder upon the signing of [the Draft Agreement], who shall pay the same over to the Vendor upon [a] Cancellation Agreement of the above property made between the Vendor of the one part and Ng Mei Yuk of the other part has been duly signed and registered in the Tsuen Wan District Land Office."

This was obviously based on the Plaintiff's stated attitude that she would not proceed with her purchase without registration in the Land Registry of an agreement cancelling the Earlier Agreement.

8th November 1991

15. The proposed amendments were unacceptable to the Defendants who considered them to be contrary to the terms of the Provisional Agreement. However, while reserving their rights, the Defendants made a further attempt to satisfy the Plaintiff that the Earlier Agreement would in due course be cancelled.

16. They enclosed copies of correspondence involving themselves and Madam Ng's solicitors (namely, Messrs. Raymond T.L. Tse & Co.), pointing out that such solicitors accepted that the Earlier Agreement was null and void and moreover that Madam Ng had not paid the further $200,000 deposit required under the Earlier Agreement, showing that she was not proposing to take it any further.

Subsequent developments

17. These representations did not satisfy the Plaintiff. On 11th November 1991, Joseph Chu joined issue with the Defendants' approach and stated:-

"We ..... insist our amendments to your draft formal agreement that the sum of $197,000 has to be held by you as stakeholders pending the Cancellation Agreement being signed by your client and Ng Mei Yuk pursuant to the [Earlier Agreement]."

18. On 13th November 1991, the Defendants decided to bring the matter to a head. Vivien Chan wrote to Joseph Chu asserting that the Plaintiff was in breach by failing or refusing to execute the formal sale and purchase agreement on or before 7th November 1991, that the Defendants were therefore entitled to treat the Provisional Agreement as discharged and that they accordingly forfeited the $50,000 initial deposit.

19. On the next day, 14th November 1991, Joseph Chu registered the Provisional Agreement with the Tsuen Wan District Land Registry and three weeks later, on 6th December 1991, the Plaintiff issued a Writ claiming specific performance of the Provisional Agreement. That Writ was also registered as a lis pendens.

20. In fact, on 8th January 1992, about a month after the Writ was issued, the Defendants and Madam Ng executed a cancellation agreement which was registered on 9th January.

21. One might also note that the Occupation Permit along with the Letter of Consent to Assign were both registered on 16th January 1992, having been issued by the Government on 30th September 1991 and 9th January 1992 respectively. As I understand the position, the Letter of Consent to Assign was necessary to enable the head Vendor, i.e., the original developer, to effect legal assignments of shares in the property to the various purchasers.

Unencumbered title

22. In my view, the issue which underlies all other questions in this case concerns the question whether the Defendants were under any duty to show unencumbered title to the property before requiring the Plaintiff to sign the sale and purchase agreement. Putting the same question from the Plaintiff's point of view: Was the Plaintiff entitled to refuse to proceed until the Defendants were able to show unencumbered title (or to insist on an interim stakeholding arrangement reflecting such an entitlement)?

Express terms

23. The starting point must be Clause 3.(b)A itself. On its face, this clause requires the Plaintiff on or before 6th November 1991 to sign the envisaged sale and purchase agreement and to pay to the Defendants the further deposit by cashier order made in favour of their solicitors.

24. Mr. Li for the Plaintiff argued that Clause 7 of the Provisional Agreement expressly qualified this obligation to sign and to pay by making it a prior requirement that the Defendants should be able to show that the property was unencumbered.

25. I am unable to accept that submission. Clause 7 provides as follows:-

"It is agreed between the Purchaser and the Vendor that the above Property shall be sold free from encumbrances to the Purchaser or its nominee or its sub-purchaser."

26. In my view, this merely stipulates that the sale is conducted on the basis that the property is to be assigned unencumbered. It does not require this unencumbered condition to be demonstrated at the time of signing the sale and purchase agreement: "A statement that the vendor is selling as absolute beneficial owner does not mean that he is entitled at the date of the contract free from encumbrances, but that any encumbrances there are will be cleared off before completion." (Williams on Title, 4th Ed., p. 519)

27. Miss Pinto for the Defendants submitted on the other hand that I should have regard to the parties' deletion of Clause 3.(b)B of the Provisiorial Agreement and hold that the Plaintiff's insistence that the further deposit be paid to the solicitors as stakeholders was a course which the parties had expressly (and literally) ruled out.

28. It is true that the deleted paragraph (which remains legible) sets out alternative approaches to the further deposit whereby the parties might have agreed, for instance, that it should not be released until approval of the title deeds or only released to solicitors as stakeholders, and so forth. If I am entitled to have regard to this deletion in the manner suggested, it might well be thought to provide a basis for rejecting the Plaintiff's approach in favour of the Defendants.

29. However, in my judgment, on the authorities as they stand, it would be impermissible for me to have regard to the deleted provisions. The basic rule is that deletions must be ignored and treated as if they had never been present in the document: Inglis v Buttery (1878) 3 App Cas 552 (HL); Sassoon (M.A.) & Sons Ltd v International Banking Corp [1927] AC 711 (PC). While some authority exists for treating differently deletions in standard forms (or in standard forms commonly in use), the exception is, in my view, not well established and of questionable limits: Chitty on Contracts (26th Ed), para. 825; Lewison, Interpretation of Contracts, pp. 21-25. Accordingly, I decline to rely upon the deletions as an indication of the parties' intentions.

30. I therefore hold that there are no express terms in the Provisional Agreement dealing specifically with the time for showing unencumbered title.

Implied terms

Mr. Li sought to argue that such a term ought to be implied in the present case. I am unable to accept his submission.

It has long been established that the vendor generally only needs to establish a good title by the date of contractual completion and that it is no defence to an action for specific performance or damages that he had no title at the date of the sale and purchase agreement: Smith v Butler [1900] 1 QB 694 (CA); Brickles v Snell [1916] 2 AC 599 (PC); Elliott v Pierson [1948] Ch 452 and the other cases cited in Farrand, Contract and Conveyance, 4th Ed., p. 111; Bamsely's Conveyancing Law and Practice, 3rd Ed., p. 248; Bramwell, Conveyancing in Hong Kong, p. 187-189.

31. No necessity whatsoever has been made out for implying a different term in the present case. As the Defendants pointed out in correspondence, the Draft Agreement contained express provision requiring the Defendants to assign the property unencumbered, thus protecting the Plaintiff's position. If the Plaintiff signed the sale and purchase agreement, she would be no worse off and would be able to seek specific performance of that agreement at least as easily as she could in respect of the Provisional Agreement.

The proposed amendment to the Draft Agreement

32. Mr. Li addressed an argument to me in reliance on the recent Court of Appeal decision in Link Brain Ltd v Fujian Finance Co Ltd [1990] 2 HKLR 353. His submission was that all that had happened in the present case was that the parties had failed to reach agreement on the terms to be inserted in the sale and purchase agreement and accordingly that he was entitled simply to enforce the Provisional Agreement as an open contract. With respect, I consider this argument untenable on the facts.

33. If the parties so intend, it is generally open to them to enter into an initial agreement which has immediate contractual effect while at the same time agreeing that they will formalise that agreement in a written contract subsequently to be drawn up: Rossiter v Miller (1878) 3 App Cas 1124; Branca v Cobarro [1947] KB 854 (CA); Chitty on Contracts, 26th Ed., para. 114. Provisional agreements of the type under consideration are likely, if worded appropriately, to fall within this category, as recognised by the Court of Appeal in Fono Yee-lan v Yiu Yau Ping (Unreported) Civ App No 128 of 1991 (9.1.92).

34. What are the terms to be inserted in the formal sale and purchase agreement envisaged by the provisional agreement? Obviously, no difficulties arise where the parties agree on the terms of the sale and purchase agreement prepared by their solicitors, whether or not the final product is consistent with the provisional agreement. But what if certain terms proposed for the sale and purchase agreement cannot be agreed?

35. Assuming that the underlying provisional agreement is a binding legal agreement in its own right, the governing principle must be that each party is entitled to have inserted in the formal agreement all the terms which the Provisional Agreement expressly or by necessary implication contains - but no others (unless by mutual consent). Thus, in Rossiter v Miller (1878) 3 App Cas 1124, dealing with a case where an outline agreement was to be formalized in an agreement to be prepared by solicitors, Lord Hatherley stated:-

"Both parties may desire that it shall be put into a formal shape by a solicitor who, in that case, will not be able to vary the agreement either on one side or the other, but only to put into a more formal and professional shape the agreement which had been completely formed with unity of purpose with reference to the sale and purchase by the two parties to the contract." (at p. 1143-1144)

Lord Blackburn was of a similar view (see p. 1153), as was Lord Gordon who stated (at p., 1154):-

"I think that the correspondence founded on, constituted a completed contract for the purchase and sale of the lots in question. No doubt these conditions provided for a subsequent and formal deed being executed by the parties; but that deed was only for the purpose of more formally setting forth the conditions upon which the parties had agreed. If there was anything introduced into the proposed deed, which the purchaser considered beyond the terms and conditions on which he purchased the property, he would have been entitled to object, and, if necessary, the proper terms of the deed could have been adjusted at the sight of a Court of Law. But in my view the contract between the parties was concluded by the correspondence and the conditions which were referred to and embodied in it."

36. Similarly, in Branca v Cobarro [1947] KB 854 (CA), Lord Greene MR, described a "provisional agreement" as "an agreement which is only to last until it is replaced by a formal document containing the same terms and drawn up by a solicitor ....." (at p. 858)

37. Where a party presses for a term which does properly reproduce or reflect a provision agreed as part of the provisional agreement but where the other party rejects inclusion of that term, then it is clear that the original party is able to fall back upon the Provisional Agreement and enforce it as an open contract: Link Brain v Fuiian Finance Co Ltd [1990] HKLR 353 (CA). The intended subsequent agreement was to make formal and express what had been informal and perhaps only implied. Failure to achieve the desired formality does mot affect the contractual rights and obligations already in place by virtue of the underlying provisional agreement.

38. Thus, in Link Brain, it was held inter alia that, by virtue of an express term in the provisional agreement (Clause 7) and s. 13 of the Conveyancing and Property Ordinance, there was an express or implied obligation on the vendor to require proof of title with its root in a 1962 assignment. The draft sale and purchase agreement however would effectively have limited proof of title to an assignment in 1982. This was rejected by the purchaser and the terms of the sale and purchase agreement were never agreed. The Court of Appeal held that since the purchaser was entitled to require a 1962 root of title, failure to agree on the formal sale and purchase agreement in this regard did not affect the parties' continuing rights and obligations under the existing provisional agreement. The purchaser was able to enforce that provisional agreement as an open contract.

39. The position is obviously different where the parties fail to agree the contents of the formal sale and purchase agreement because one of them is insisting on terms being inserted which go entirely beyond what had been expressly or impliedly agreed in the Provisional Agreement. In such a case, continued insistence on such extraneous terms may constitute a repudiation of the Provisional Agreement which the other party may accept, bringing the contract to an end. The party insisting on the new term cannot, on such a failure to reach agreement, merely fall back onto the Provisional Agreement and seeks its specific performance. The repudiation having been accepted, nothing remains to be enforced.

40. That is what happened in the present case. There was no express or implied term in the Provisional Agreement obliging the Defendants to show unencumbered title before requiring the Plaintiff to execute the sale and purchase agreement. The Plaintiff was therefore not entitled to insist on a term being introduced into the sale and purchase agreement which represented or was aimed at giving effect to such a non-existent term.

41. The Plaintiff however did insist on such a term. By her solicitors' letters of 7th and 11th November 1991, she made it clear that she was unwilling to sign the sale and purchase agreement or pay the further deposit until such time as a cancellation agreement was executed and registered in the Land Office (thereby enabling the Defendants to show unencumbered title). Alternatively, she suggested that in the interim, the proposed sale and purchase agreement be amended to make release to the Defendants of the funds representing the further deposit conditional upon execution and registration of such a cancellation agreement. This proposal was obviously founded on the assumption that she was entitled to require unencumbered title to be demonstrated before proceeding further with the purchase.

42. In my judgment, the Plaintiff's conduct constituted a repudiation of the Provisional Agreement and entitled the Defendants to treat it as at an end. This the Defendants did by their letter of 13th November 1991. Thereafter, it was no longer open to the Plaintiff to seek to enforce the Provisional Agreement. Her position is entirely different from that of the plaintiff in the Link Brain case. There, the failure to agree on the terms of the sale and purchase agreement was not the result of that plaintiff's repudiatory insistence on introducing extraneous terms into the sale and purchase agreement. There was no repudiation of the contract and, having throughout affirmed the same, that plaintiff was entitled to enforce it.

43. The $50,000 paid in the present case was paid by way of deposit and, in accordance with the general rule, was intended by the parties to be available as security for the Plaintiff's performance of her obligations as purchaser under the Provisional Agreement: Howe v Smith (1884) 27 Ch D 89 at 97-98; Chitty, para. 2064. Her repudiation therefore entitled the Defendants to forfeit the same.

Time of the essence

44. Counsel on both sides also debated whether time was of the essence in respect of the signing of the sale and purchase agreement pursuant to the Provisional Agreement's terms.

45. With respect, I do not consider that this discussion is relevant in the light of the view I have taken as to how the Provisional Agreement was discharged. The contract was brought to an end by the Plaintiff's refusal to proceed save on terms other than those which had been agreed and by the Defendants' acceptance of such repudiation. We are not concerned with the question whether a missed date in itself justified terminating the contract.

Conclusion

46. I therefore dismiss this Action and make a costs order nisi in favour of the Defendants.

47. Turning to the Counterclaim, Miss Pinto, on behalf of her client, abandoned the claim for damages which is in paragraph 3 of the Prayer. Having dismissed the Action, the declarations sought in paragraphs 1 and 2 of the same are academic. In so far as necessary, I would have been prepared to declare the Provisional Agreement duly rescinded as from 13th November 1991 and that the Defendants were thereupon entitled to forfeit the abovementioned deposit of $50,000.

48. It was accepted by Mr. Li that if the Action was dismissed, the Defendants would be entitled to consequential orders for vacating from the Tsuen Wan District Land Registry, the registration of the Provisional Agreement and the lis pendens constituted by this Action against the property. I propose to make the necessary orders for the relevant entries to be so vacated.

49. At the parties' request, I will hand down this Judgment and will thereafter adjourn into Chambers to hear the parties' solicitors on the terms of the orders which I propose to make.