ASGAIN CO LTD v. CHENG KA YAN

CACV 197/2017

[2018] HKCA 200

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 197 OF 2017

(ON APPEAL FROM DCCJ NO 181 OF 2014)

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REASONS FOR JUDGMENT

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Hon Lam VP (giving the Reasons for Judgment of the Court):

Introduction

1.  After a 5-day trial, on 19 December 2016, Deputy District Judge Tracy Chan (“the Judge”) handed down a judgment in favour of the Plaintiff.  She ordered the Defendant to pay the Plaintiff the sum of $683,000 with interest in respect of the unpaid purchase price of an industrial unit at Kwun Tong [“the Workshop”] pursuant to an agreement of 30 August 2010. 

2.  With leave granted by Lam VP, the Defendant appealed against that judgment.

3.  We heard the appeal on 7 March 2018.  At the end of the hearing, we granted leave to the Plaintiff to amend the Reply and dismissed the appeal, maintained the order as to costs below but made no order for costs of the appeal.  Here are our reasons for the dismissal of the appeal.

Background

4.  For the purpose of this judgment, it is sufficient to take the factual background from [2] to [6] of the judgment below:

“ 2.   The non-controversial facts on the background are these.  In 1992 when Cheng Koon Ming (“Ming”) was holding the Plaintiff’s shares with two other persons whose identities are unimportant in these proceedings, 4 industrial units including the Workshop and its neighbouring workshops number 5, 6, 7 of 8^th Floor were acquired in the name of the Plaintiff.  After some transfer of shares in the years that followed Ming became the sole shareholder of Plaintiff.  The Workshop is the only property relevant in these proceedings.  It is to be noted that since its acquisition back in 1992, the Workshop had been leased to the company of Mr Cheng Koon Hoi (“Hoi”), elder brother of Ming, to conduct his school uniform trading business.

3.   People involved in the present proceedings are relatives.  Hoi is not only brother of Ming but also father of Cheng Yuk Nam (“Nam”) and the Defendant.  In other word, the Defendant is the niece of Ming.  Nam at the time of the Transaction was the other director of the Plaintiff.

4.   In about 2007 it was decided that the Plaintiff’s assets including all the workshops were to be sold.  After selling 3 workshops in March 2007 and in July 2009, the Workshop was the only one remaining.

5.   On or about 30 August2010, the Memorandum was executed between the Plaintiff, as the vendor, and the Defendant and Ming, as the purchasers.  Under the Memorandum, the total purchase price of the Workshop was $1,500,000.  Subsequently, on or about 31 January 2011, the relevant parties executed the Assignment.  As a result, the Defendant has thereby become one of the registered owners of the Workshop and is holding 50% share as tenant-in-common with Ming.

6.   On the same day the Assignment was executed, the Defendant got a mortgage loan secured by the Workshop from China Construction Bank (Asia) Corporation Limited (“CCB”) for $750,000 (“the Mortgage Loan”).  The mortgage deed was executed by CCBCL as the lender; the Defendant as the borrower, and Ming and the Defendant as mortgagors.  The Mortgage provided that:-

(1) The Defendant’s share of the interest of the Workshop was subject to the mortgage;

(2) Ming’s share of the interest of the Workshop was also subject to the mortgage; and

(3) Ming and the Defendant jointly and severally covenanted with CCB to repay the facility arranged by CCB.

The said $750,000 was drawn down and transferred to the Defendant’s personal account directly on 31 January 2011.”

5.  At the trial, the primary case of the Defendant was that she had paid $750,000 for the acquisition of her interest in the Workshop.  That case was rejected by the Judge who found that the alleged payment of $750,000 as particularized by the Defendant had not been made. Instead, the Judge found that part payments in the total sum of $67,000 for the payment of the purchase of such interest (as set out at [19] of the judgment) were made by the Defendant on diverse dates between 1 February and 14 September 2011.  The Judge rejected the Defendant’s case that these payments were not related to the purchase and were loans made to Ming. 

6.  There was no appeal against the findings of fact by the Judge.  In this appeal, Mr Ho for the Defendant focused on the effect of the Receipt Clauses in the Memorandum of Agreement of 30 August 2010 and the Assignment of 31 January 2011.  The Receipt Clauses were as follows:

(a)   Clause 1 of the Memorandum of Agreement:

“ 1.   The Vendor shall sell as beneficial owner and the Purchaser shall purchase all that property described in the First Schedule hereto (“the Property”) on the following terms and conditions:-
(a)	Purchase Price:	HK$1,500,000.00
(b)	Manner of Payment:	HK$1,500,000.00 being the purchase price has been paid by the Purchaser to the Vendor DIRECT (receipt whereof is acknowledged) PRIOR TO the signing of this Memorandum of Agreement for Sale and Purchase.
(c)	Completion:	31st January 2011
(d)	The Property shall be sold on an “as is” basis.
(e)	Costs:	All costs and expenses of and incidental to preparation of this Agreement and the Assignment shall be borne by the Purchaser absolutely.
(f)	Stamp Duty:	To be borne by the Purchaser absolutely ”

(b)   Endorsed at the end of the Memorandum of Agreement:

“ RECEIVED on or before the day and year first above written of and from the Purchaser the above mentioned HK$1,500,000.00 being the full payment of the purchase money payable to me as abovementioned).

[Signatures of Plaintiff and Defendant]”

(c)   Clause 1 of the Assignment:

“ 1. IN CONSIDERATION OF the sum of HONG KONG DOLLARS ONE MILLION AND FIVE HUNDRED THOUSAND ONLY (HK$1,500,000.00) paid by the Purchaser to the Vendor (receipt whereof is hereby acknowledged) the Vendor as Beneficial Owner ASSIGNS to the Purchaser the land described in the Schedule hereto (“the Property”) TO HOLD the same unto the Purchaser as Tenants in Common in Equal Shares for the residue of the term of years created by the Government Lease referred to in the Schedule Subject to the payment of the due proportion of yearly Government rent payable in respect of the Property and the covenants conditions and provisos contained in the Government Lease AND SUBJECT to and with the benefit of a Deed of Mutual Covenant registered in the Land Registry by Memorial No. UB3627048 (“the said Deed of Mutual Covenant”) And Subject to and with the benefit of a Management Agreement registered in the Land Registry by Memorial No. UB3627049 (“the said Management Agreement”) so far as the same relates to or affects the Property.”

7.  Mr Ho advanced two submissions on the effect of these Receipt Clauses, either of which can, he contended, bar the claim by the Plaintiff.  First, he submitted that these Receipt Clauses gave rise to a contractual estoppel in favour of the Defendant.  Second, he submitted that the Defendant can defeat the claim by virtue of section 18(1) of the Conveyancing and Property Ordinance Cap 219 [“CPO”].

Contractual estoppel

8.  The Judge considered the argument based on contractual estoppel at [64] to [76].  After referring to the authorities cited by counsel, the Judge rejected that argument on two bases:

(a)   There was no agreement between the parties as to the effect of the Receipt Clauses because Ming was not aware of the same and the Defendant’s own case was that she did not make full payment when she signed the Memorandum, as such the clauses in the Memorandum were not there to acknowledge payment;

(b)   There was no reliance on the Receipt Clauses as, according to the finding of the Judge, the Defendant made part payments after execution of the Assignment on 31 January 2011.  

9.  Mr Ho submitted that the Judge erred in holding that the Receipt Clauses did not have effect despite the signing of the Memorandum and the execution of the Assignment when there was no attempt by the Plaintiff to vitiate the binding nature of the clauses by raising any case of mistake, misrepresentation, illegality or fraud.  He relied on the following authorities to support his submission in this respect: Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334 at [84]; DBS Bank v Sit Pan Jit, HCA 382 of 2009, 2 April 2015, [193], [321], [382] and [384]; Wong Lai Ling v Lam Kin Chung, HCA 828 of 2011, 10 Aug 2012 at [28].

10.  There is considerable force in this submission. For present purposes, we can take the applicable legal propositions from the judgment of Ribeiro PJ at [84] of Ming Shiu Chung v Ming Shiu Sum, supra:

“ … Reliance is universally placed on signatures appended to documents by persons of full age and understanding as signifying the signatory’s assent or adherence to what that document states. Where such a person has signed a document which purports to have legal effect, the law has never regarded it as enough to show that he signed without knowing its contents for the document to be disavowed. It is an everyday occurrence that people sign documents without reading the small (or even the large) print and therefore sign without actually knowing the terms (or all the terms) of the document signed. But they are held to the documents which they have chosen to sign unless there is shown to be a recognized legal basis for concluding that their apparent consent has been in some way vitiated or that reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity.”

11.  In the context of estoppel based on a receipt clause, the Privy Council held in Prime Sight Ltd v Lavarello [2014] AC 436 that such a clause could operate as an estoppel even though both parties knew that the statement was not true.  At [41], Lord Toulson said:

“ … if as a matter of construction the recital amounts to a mutual agreement to treat it as true, and if there are no vitiating factors such as illegality or misrepresentation, the fact that the parties have willingly so bound themselves is itself sufficient reason for the contract to be enforced.”

12.  Hence, the fact that the parties knew that payment had not been made was not sufficient to defeat the effect of the Receipt Clauses. 

13.  We are therefore unable to support the first basis relied on by the Judge to reject the contractual estoppel defence.

14.  However, the second basis of the Judge’s reasoning is more substantial.  The underlying rationale for this kind of estoppel was explained by Dixon J in Grundt v Great Boulder Proprietary Gold Mines Ltd (1937) 59 CLR 641 at 675-676:

“ The justice of an estoppel is not established by the fact in itself that a state of affairs has been assumed as the basis of action nor inaction and that a departure from the assumption would turn the action or inaction into a detrimental change of position. It depends also on the manner in which the assumption has been occasioned or induced. Before anyone can be estopped, he must have played such a part in the adoption of the assumption that it would be unfair or unjust if he were left free to ignore it. But the law does not leave such a question of fairness or justice at large. It defines with more or less completeness the kinds of participation in the making or acceptance of the assumption that will suffice to preclude the party if the other requirements for an estoppel are satisfied.”

15.  That dictum was cited by Lord Toulson in Prime Sight Ltd v Lavarello, supra, at [40] as a well-known statement of principle, see also [44].  Another authority cited at [45] by Lord Toulson is Spencer Bower, Estoppel by Representation, 4^th Edn p.197: 

“ an estoppel by convention need not involve any misleading of a representee by a representor, nor is it essential that the representee shall be shown to have believed in the assumed state of facts or law. The full facts may be known to both parties; but if, even knowing those facts to the full, they are shown to have assumed a different state of facts or law as between themselves for the purposes of a particular transaction, then a convention will be established. The claim of the party raising the estoppel is, not that he believed the assumed version of facts or law was true, but that he believed (and agreed) that it should be treated as true.”

16.  Applying these propositions to the facts of the present appeal, the estoppel arisen from the Receipt Clauses is the assumption that the payment obligations under the Memorandum of Agreement on the part of the Defendant had been discharged even though payment had not been made. Hence, Ming executed the Assignment on behalf of the Plaintiff without obtaining any payment from the Defendant.  

17.  However, as found by the Judge (and there is no appeal against the finding), the Defendant started to make part payments starting from 1 February 2011.  Those payments were accepted by the Plaintiff as part payments of the purchase price payable by the Defendant.

18.  The necessary inference from such conduct of the parties in the making and accepting of part payments is that the assumption of discharge of the payment obligation as set out in the Receipt Clauses was abrogated by them.  If the Receipt Clauses gave rise to an estoppel, the effect of such estoppel was subsequently extinguished by a counter estoppel arising from the part payments by the Defendant.  We cannot see any basis for making such part payments other than an acceptance by the Defendant that her payment obligation under the Memorandum of Agreement had not been discharged by the Receipt Clauses.  Notwithstanding time being given to Mr Ho to take instructions after such analysis was put to counsel, he could not advance any other suggestion. 

19.  At the hearing of the appeal, we were concerned that the Plaintiff did not plead to the defence of contractual estoppel in the Reply or Amended Reply.  Though the fact of part payments had been pleaded in the Statement of Claim, to satisfy the requirement of Order 18 Rule 8(1)(a) and (b), it was necessary for the Plaintiff to set up a plea of counter estoppel or waiver by reference to such payments in response to the defence of contractual estoppel. 

20.  Mr Wong applied for leave to re-amend the Reply to add the plea that by reason of the part payments as pleaded in the Statement of Claim notwithstanding the Receipt Clauses, the Defendant is estopped from and/or has waived the right to assert that the payment obligation on her part under the Memorandum of Agreement had been discharged.  

21.  Mr Ho objected to the application for leave to amend owing to the prejudice suffered by the Defendant and the late stage at which the application was made.  As the allegations of part payments had already been advanced in the Statement of Claim and the evidence and factual issues in that respect had been fully canvassed and considered by the Judge, the Defendant cannot be said to have been taken by surprise on such allegations.  We explored with Mr Ho on the prejudice suffered by the Defendant and in the end the only real prejudice Mr Ho could pinpoint was the possibility of the Defendant accepting liability had the plea of counter-estoppel or waiver was advanced earlier. 

22.  In our judgment, as the Defendant had already had a full and fair opportunity to contest the allegations of part payments and the finding by the Judge after a trial on such issue, this is an exceptional case where this Court should grant leave to the Plaintiff to re-amend the Reply to plead properly the legal implications of the part payments in response to the defence of contractual estoppel.  The prejudice to the Defendant occasioned by the late amendment can be adequately addressed by an appropriate order as to costs.

23.  We therefore granted leave to re-amend the Reply accordingly.  For the sake of proper record, we direct the Plaintiff to file and serve the re-amended Reply within 7 days from the handing down of these reasons for judgment.  Mr Ho sought to have the case remitted to the District Court for a retrial on the issue of counter estoppel or waiver.  However, given the finding by the Judge on the part payments (which is binding on the parties), counsel could not explain what further evidence the Defendant could adduce on the issue or what further good a retrial would do to his client.  We therefore refused to adopt such a course.

24.  The Judge analysed the implication of the part payments in terms of lack of reliance on the part of the Defendant on the Receipt Clauses.  Unlike promissory estoppel, the contractual estoppel alleged by the Defendant is akin to an estoppel by convention for which reliance is not a discrete element.  We prefer to analyse the effect of the part payments by way of counter-estoppel or waiver as set out above.

25.  In light of this analysis, even assuming that the Receipt Clauses gave rise to a contractual estoppel, such estoppel ceased to have any effect after the Defendant made the first part payment to the Plaintiff, unequivocally acknowledging that she continued to have the obligation to pay notwithstanding such Receipt Clauses.

26.  Hence, the plea of contractual estoppel cannot succeed.

Section 18(1) of the CPO

27.  The section reads:

“ A receipt for consideration in the body of an instrument shall be a sufficient discharge to the person paying the consideration and, in favour of any other person acting on the faith of the receipt, shall be sufficient evidence of payment.”

28.  The true effect of this statutory provision is set out in The Annotated Ordinance of Hong Kong on the CPO, 2014 Reissue, at [18.09] and [18.11], cited by the Judge at [81] of the judgment below:

“ [18.09] Sufficient discharge

‘Discharge’ refers to the deprivation of an obligation of its binding force (R v Hill [1982] Tas R 1at 3 per Green CJ). At common law, a receipt in the body of the deed operates as a complete estoppel between the parties (Rowntree v Jacob (1809) 2 Taunt 141), but in equity the receipt is merely a presumption of payment which can be rebutted (Wilson v Keating (1859) 4 De G & J 588, in which it was held that upon the receipt being disproved, the vendor's lien would revive; and Capell v Winter [1907] 2 Ch 376; 76 LJ Ch 496). Under s 18(1), a receipt is a sufficient but not a conclusive discharge; accordingly, an unpaid vendor is able to continue to rely upon his lien, the enforceability of which is governed by the appropriate priority rules (Kwok Wai Fan v Tse Kin Chung [1998] 2 HKC 105).

[18.11] Sufficient evidence of payment

A receipt is sufficient but not conclusive evidence of payment.  An unpaid vendor may continue to rely upon his unpaid vendor's lien, the enforceability of which, as an unwritten equity, continues to be governed by the appropriate priority rules.  A volunteer or a purchaser of a subsequent equitable interest will be bound by an unpaid vendor's lien but a subsequent purchaser or mortgagee of the legal estate who has no notice, actual or constructive, will take free of an unpaid vendor's lien (Rice v Rice (1853) 2 Drew 73).”

29.  We reject Mr Ho’s submission that the first part of section 18(1) has the effect of conclusive discharge upon the proof of a receipt clause and a person being “the person paying the consideration”.  With respect, Mr Ho has not addressed the approach in equity outlined at [18.09]. 

30.  The background for the enactment of the statutory provision is explained in Butterworth’s Hong Kong Conveyancing and Property Law Handbook at [18.03] as follows:

“ At common law, a subsequent purchaser is put on inquiry as to payment of the purchase price if an instrument does not have a receipt endorsed upon it. This section dispenses with a duplication of receipts, by providing that a receipt in the body of the instrument is a sufficient discharge to a purchaser or other person responsible for payment of the consideration and is sufficient evidence of payment (Bateman v Hunt [1904] 2 KB 530). A separately endorsed receipt is thus no longer necessary.”

31.  These sections can be traced back to the English Conveyancing and Law of Property Act 1881, sections 54 and 55.  Section 54 (1) was the precursor of the first part of our section 18(1) and it reads:

“ A receipt for consideration money or securities in the body of a deed shall be a sufficient discharge for the same to the person paying or delivering the same, without any further receipt for the same being indorsed on the deed.”

32.  The sections in the 1881 Act were considered in Capell v Winter [1907] 2 Ch 376.  In that case, Parker J held at p.381:

“ I agree that if a vendor executes a conveyance containing a proper receipt for the purchase-money, and hands such conveyance to the purchaser, who subsequently deposits it with an equitable mortgagee without notice of any vendor’s lien, the equity of such mortgagee may, by reason of his possession of the conveyance, be superior to the vendor’s lien for unpaid purchase-money. This is the effect (having regard to ss.54 and 55 of the Conveyancing Act 1881) of the well-known decision of Rice v Rice …”

33.  Rice v Rice (1853) 2 Drew 73 was decided before the 1881 Act and it was a decision on priority of equities, see the further explanation of Parker J at p.382 in Capell v Winter, supra.  For our purposes, it is significant to note that Parker J did not regard that a vendor’s lien for unpaid purchase-money could not arise after the 1881 Act in view of section 54(1).  Instead, His Lordship considered it as absolving a subsequent mortgagee from making enquiries behind the receipt clause in the deed. 

34.  The same approach was adopted by the Court of Appeal in Bateman v Hunt [1904] 2 KB 530 at p.540.

35.  In Kwok Wai Fan v Tse Kin Chung [1998] 2 HKC 105, Cheung J (as Cheung JA then was) also accepted the same view on the effect of section 18(1).  His Lordship said at p.109E to G:

“ This section is a combination of s67 and s68 of the Law of Property Acts 1925. The authors of Barnsley Conveyancing Law & Practice (4^th Edn) at 440 commenting on s68 of the Law of Property Act stated that the enforceability of a vendor’s lien ultimately rests on the doctrine of notice rather than on a purchaser’s reliance upon a receipt clause. The prima facie sufficiency of the receipt is displaced if the vendor, having parted with the deeds on completion, registers the lien as a Class C (iii) land charge, for this will give the purchaser actual notice. Similarly, if he retains the deeds their non-availability will constitute constructive notice of the vendor’s rights.”

36.  Sections 54 and 55 of the 1881 Act were replaced by similar provisions in sections 67 and 68 of the Law of Property Act 1925. In Greer v Kettle [1938] AC 156, Lord Maugham at p.171 referred to the well known rule of the Chancery Courts in regard to a receipt clause in a deed not effecting an estoppel if the money has not in fact been paid without finding it necessary to allude to sections 67 and 68 of the 1925 Act.

37.  In Close Asset Finance Ltd v Taylor [2006] EWCA Civ 788, the Court of Appeal also held that a receipt clause is not conclusive between the parties. 

38.  Mr Ho submitted that there should be a distinction between the position of a party paying the consideration and a subsequent party relying on the deed.  In the case of the former, because of the first part of section 18(1), counsel submitted that the effect of the discharge is conclusive.  In the case of the latter, counsel accepted the sufficiency of the receipt clause as evidence does not mean that it is conclusive.

39.  With respect, we cannot accept this submission. Mr Ho was unable to cite any authority to support this distinction.  Further, as a matter of principle, the concern of a subsequent purchaser would only arise if the original vendor could assert an equity in the property on account of unpaid vendor’s lien.  If Mr Ho were correct on the effect of the first part of the section, it should have extinguished whatever claim the vendor would have arising from the lack of payment.  The second part of the section would not matter.

40.  In our judgment, on the correct construction of section 18(1), the “sufficient discharge” in the first part of that section should be interpreted in the same way as “sufficient evidence of payment”, viz that the discharge is sufficient but not conclusive.  Bearing in mind the background leading to the enactment of the provision, the purpose of the section is to avoid the need to have another receipt endorsed on the instrument.  It has never been the intention of the legislature and never been the law that by reason of the first part of section 18(1) the vendor cannot sue the purchaser for unpaid purchase price if the prima facie discharge is rebutted by evidence of non-payment.  As between the third party subsequent purchaser or mortgagee and the vendor, the effect of section 18(1) is to give protection to the former in priority (absolving them from further inquiries so long as a receipt clause is included in the instrument) as long as they had no notice of the claim of the vendor when they entered into the transaction. 

41.  In this connection, insofar as the Judge in Best Joint Investments Ltd v Kagani Ltd, HCA 2608 of 2006, 13 July 2015, decided otherwise, we respectfully disagree.  It is not clear from that judgment if the Judge was actually deciding the question by reference to the concept of estoppel under common law or by reference to section 18(1).

42.  Hence, we reject Mr Ho’s ground of appeal based on section 18(1).

Costs

43.  We did not disturb the costs order below because the substantive dispute at the trial was on the primary case of the Defendant that payment had actually been made and the part payments relied on by the Plaintiff were actually unrelated to this transaction.  The Judge rejected the evidence of the Defendant on that primary case and there was no appeal in that respect.

44.  In respect of the costs of the appeal, we took the view that had the Plaintiff properly pleaded its case in the Reply or Amended Reply in response to the defence of contractual estoppel, the court would have been better assisted on the implications of the part payments. Leave to appeal would have probably been refused.  In light of the late amendment and the inadequate focus by counsel for the Plaintiff on some unmeritorious arguments, we decided to make no order for costs in respect of the appeal.

45.  We have not dealt with the costs of the leave applications.  Having regard to the actual outcome of the appeal, we would order the Defendant to pay the Plaintiff’s costs of the leave applications, both here and below.  Such costs are to be taxed if not agreed.

Postscript

46.  In the appeal, we do not receive any submissions on the correctness of Prime Sight Ltd v Lavarello, supra, in the application of the concept of estoppel to a receipt clause.  We can see that there is a tension between Prime Sight Ltd v Lavarello and the inconclusive nature of a receipt clause as discussed in the cases we cited in the discussion on section 18(1). 

47.  Prime Sight Ltd v Lavarello, supra, has been subject to some criticisms: see Handley, Reinventing Estoppel in the Privy Council (2014) 130 LQR 370; Handley, Estoppel by Conduct and Representation (2^nd Ed) para 5-021; Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5^th Ed) para 17-015.  It was recently considered by the Privy Council in an appeal from the British Virgin Island in Chen v Ng [2017] UKPC 27 where further academic commentaries on Prime Sight were cited by Lord Neuberger.

48.  As we have not heard any submissions in this regard, we would only confine ourselves to pointing out that as far as Hong Kong law is concerned, Prime Sight may still be subject to further debate in our courts notwithstanding our judgment in this appeal.