TONY INVESTMENTS LTD v. FUNG SUN KWAN BERNARD

HCMP 180/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 180 OF 2005

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D E C I S I O N

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Introduction

1.  This is a vendor and purchaser summons taken out by the Plaintiff (the “Purchaser”) against the Defendant (the “Vendor”) seeking specific performance of a sale and purchase agreement dated 19 November 2004 (the “Memorandum of Agreement”) and damages.  The Purchaser and the Vendor entered into the Memorandum of Agreement whereby the Purchaser agreed to purchase and the Vendor agreed to sell a property (the “Property”) known as New Kowloon Marine Lot No. 21 (“NKML No. 21”) at the price of $110 million.  The Property is described as “New Kowloon Marine Lot No. 21”.  Completion was to take place within one month, but was later extended by agreement to 24 January 2005.  The Purchaser paid $5.5 million as deposit upon signing the Memorandum of Agreement.  The Memorandum of Agreement was registered in the Land Registry against the Property.  There is no registration of any encumbrance or other agreements.

The background of NKML No. 21

2.  The Vendor acquired the original NKML No. 21 from the Hong Kong Government under a memorandum dated 6 September 1965 and Conditions of Sale No. 9002 (the “Conditions of Sale”).  Annexed to the Conditions of Sale was a Sale Plan (the “Sale Plan”) showing the original NKML No. 21 which had an approximate area of 39,790 square feet and made up of four portions.  One portion of the property was subsequently surrendered to the Government for construction of Lai Chi Kok Road and is not relevant to the current dispute.  This dispute is related to a second portion of the property, part of which was at one stage used by the Vendor as a slipway for launching boats into the then existing harbour (the “Former Slipway”).  The third portion was a land portion.  The fourth portion was in the then sea-bed.  The Property which now formed the subject matter of the sale and purchase under the Memorandum of Agreement is made up of the second and third portions.

3.  In 1990, the Government initiated a scheme of land reclamation under the Foreshore and Sea-Bed (Reclamations) Ordinance, Cap 127 (the “FSRO”) for the purpose of constructing the necessary infrastructure for the new airport at Chek Lap Kok in Lantau Island (the “1990 Reclamation”).  By a gazette notice dated 6 April 1990, namely GN 1220, the Government proposed dredging the foreshore and sea-bed and the construction of the relevant infrastructure pursuant to section 5 of the FSRO.  By another gazette notice dated 16 November 1990, namely GN 4119, the Governor in Council authorized the proposed reclamation pursuant to section 9 of the FSRO.  This reclamation project directly affected the Former Slipway, which had an area of about 679.5 square metres i.e. about 7,314 square feet and the fourth portion. 

4.  Pursuant to section 12 of the FSRO, the Vendor filed a claim for compensation as a result of the damage to the interest to his Property caused by the reclamation.  By an Agreement as to Provisional Payment of Compensation and Indemnity (the “Provisional Compensation Agreement”) dated 23 October 1996, the Vendor obtained a sum of $31.5 million as provisional sum of compensation from the Government.  Subsequently, by an Agreement as to Final Payment of Compensation and Indemnity (the “Final Compensation Agreement”), the Vendor obtained a further payment of $7.7 million as full and final compensation under the FSRO and a contractual right to a re-grant at nominal premium of the Former Slipway which had been reclaimed by the Government, the Vendor’s rights in respect of the Former Slipway having been extinguished under section 10(1)(a) of the Ordinance.

5.  After the Government had reclaimed the Former Slipway, the Vendor built a three-storey building on the reclaimed Former Slipway and continued to use and occupy it.  However, as of today, the Vendor has not obtained the re-grant.

6.  With a view to redevelop the Property for residential purpose, the Vendor applied to the District Lands Officer for an in situ land exchange to convert the user of the Property to non-industrial purposes for re-development.  On 30 November 2000, the District Lands Officer offered an exchange which included an increase in area of about 867.4 square metres, presumably including the Former Slipway of 679.5 square metres, at a premium of $321.85 million (“the Offer Letter”).  The Vendor did not accept the offer.

Events leading to the issue of this Summons

7.  On 19 November 2004, the Purchaser and Vendor entered into the Memorandum of Agreement for completion within a month.  On 21 November 2004, the Purchaser’s solicitors, Messrs Kao, Lee & Yip (“KLY”) wrote to the Vendor’s then solicitors, Messrs Philip K Y Lee & Co (“PL”) requesting for a draft formal sale and purchase agreement (the “Formal Agreement”) together with all relevant title deeds for KLY’s approval.  Then the parties’ solicitors entered into negotiation on the terms of the Formal Agreement and on proposal to postpone the signing of the Formal Agreement and the completion date. 

8.  On 3 December 2004, KLY faxed to PL their latest proposed amendments to the draft Formal Agreement which, according to KLY, was agreed by the parties’ solicitors over the telephone.  Mr Daniel Fung SC, counsel for the Vendor, argued that as at that stage no agreement had been reached on the terms of the Formal Agreement.  However, there was no affirmation from PL disputing the telephone agreement or averring to what was outstanding.  I have no difficulties in finding that as at that telephone conversation, the parties had reached agreement on the terms of the Formal Agreement.

9.  Soon after that telephone agreement and on the same day, PL sent a letter to KLY suggesting further amendments to the description of the Property to be sold as follows:

“ALL THAT piece or parcel of ground located at Cheung Sha Wan under the Land Registry Number NEW KOWLOON MARINE LOT NO. 21 bounded North by Lai Chi Kok Road South by Sham Shing Road with a width of 24.405 meters, East by New Kowloon Inland Lot No. 6320 and West by New Kowloon Marine Lot No. 20 with length of border 112.091 meters and 106.415 meters respectively, making a land area of approximately 2656 square meters plus 154 square meters granted by the Government, that forming a combined total of land area 2810 square meters subject to the land exchange for residential development of New Kowloon Marine Lot No. 21 (No.873 Lai Chi Kok Road) to be later known as New Kowloon Inland Lot No. 6354 on acceptance and payment of premium offered by Hong Kong Special Administrative Region Plan No.NA1253-D, KL4885-POa annexed hereto for above reference.”

On the same day, KLY refused to accept the proposed amendments.  Up till then PL had not supplied the title deeds to KLY for approval.  KLY’s caution was understandable.  After having instructed their surveying experts upon the institution of these proceedings, the parties now agree that the above description of the Property accords with their understanding under the Memorandum of Agreement.

10.  On 6 December 2004, PL wrote to KLY stating that the date of signing of the Formal Agreement would be postponed indefinitely.  To that letter, KLY replied on 9 December 2004 saying that the Vendor had no right to unilaterally postpone the signing of the Formal Agreement and to insist on the amendments to the description of the Property.  KLY also urged PL to send them the engrossment of the Formal Agreement incorporating all the mutually agreed amendments for the Purchaser’s execution and to deliver the title deeds and documents for proof of title.  Despite repeated reminders, PL did not respond.

11.  In the meantime, KLY obtained copies of title documents from the Land Registry and raised requisitions thereon on 15 December 2004.  On 22 December 2004, KLY and PL agreed to postpone completion to 24 January 2005.  PL purported to answer the requisitions on 18 December 2004 and again on 31 December 2004.  On 4 January 2005, KLY insisted further requisitions, but PL did not respond.  On 22 January 2005 and again on 24 January 2005, KLY reminded PL of the requisitions and threatened to commence legal action if the Vendor failed to show and give good title to the Property and assign the Property to the Purchaser on 24 January 2005.  PL did not respond.  The Purchaser issued the Originating Summons on 25 January 2005.  At that stage the dispute about the description of the Property had not yet been resolved.

The duty to give and show good title

12.  Clause 7 of the Memorandum of Agreement imposes on the Vendor an express obligation to show and give a good title to the Property.  Even in the absence of this express obligation, it is trite law that a vendor is under an implied obligation to give and show good title:per Litton JA in Active Keen Industries Ltd v Fok Chi Keong [1994] 2 HKC 67 at 76.  The two obligations are separate and distinct.  Thus, though a vendor has a good title, if he fails to show it by properly answering any reasonable requisition, he has failed to discharge the obligation of proving title: see Kok Chong Ho v Double Value Developments Ltd CA 90/1991 (unreported). 

13.  The vendor must also establish beyond reasonable doubt that his title, both legal and equitable, is not defeasible.  But, he needs not prove a perfect title and that a good title is shown so long as he can satisfy the court beyond reasonable doubt that the purchaser would not be a risk of a successful assertion against it of an encumbrance in the futures: per Lord Russell of Killowen in M.E.P.C. Limited And Christian-Edwards and Others [1981] AC 205 at 220C-D.  Whenever questions whether a good title is shown arises, it must be approached from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust common sense, both intending to see the transaction through to completion in terms of their own bargain: per Litton PJ in Mexon Holdings Ltd v Silver Bay International Ltd [2000] 2 HKC 1 at 8G-H.  An alternative test is whether a prudent and experienced solicitor can properly advise his client that he can accept the vendor’s title: per Ching PJ in Chi Kit Company Limited & Another and Lucky Health International Enterprise Limited, FACV 18/1999.

Whether the Vendor has good title

14.  There is no dispute that the parties intended the subject matter of the sale and purchase to be the whole of the Property including the Former Slipway.  The Vendor’s defence is that there was no contract because at the time of entering into the Memorandum of Agreement both parties were labouring under a common misapprehension as to the Vendor’s right to sell the Former Slipway.  I shall consider the merit of this defence at a later stage.  On the question of the Vendor’s title to the Property, it is worthy to note that by this defence the Vendor is in fact conceding or admitting that he had no title to the Former Slipway.

15.  Ms Yu SC, counsel for the Purchaser, argued that the Vendor’s title to the Former Slipway was extinguished by section 10(1)(a) of the FSRO and in addition the Vendor has by contract surrendered his title to the Former Slipway to the Government under the terms of the Final Compensation Agreement.  On the other hand, it was argued by PL in the course of answering KLY’s requisition in respect of the re-grant and again by Mr Fung SC during these proceedings that what were extinguished were the Vendor’s rights in relation to the foreshore and sea-bed affected under Gazette GN 4119 only and the Vendor retains title to the Former Slipway. 

16.  There is no dispute that the Former Slipway and the fourth portion formed part of the land to be reclaimed by the Government under the 1990 Reclamation in respect of which notice was duly published in the Gazette on 6 April 1990, namely GN1220.  By another Gazette notice dated 16 November 1990, namely GN4119, the Governor in Council authorized the proposed reclamation pursuant to section 9 of the FSRO.  Hence, the Vendor’s title in respect of the Former Slipway and the fourth portion has been extinguished under section 10(1)(a) of the FSRO.  This section provides:

“(1)	Subject to section 17, upon the publication of a notice of authorization in the Gazette under section 9(1)(b) –
	(a)	all public and private rights in relation to the foreshore and sea-bed affected thereby shall be extinguished and cease to exist; and
	(b)	no person shall have any right against the Government or any other person to compel or restrain anything authorized under section 7, 8(1)(b) or 8(1)(c).
(2)	No action shall be brought or continued in respect of the extinguishment under subsection (1), in whole or in part, of any public or private right.”

Section 10(1)(a) is in absolute terms.  In view of the two Gazette notices and section 10(1)(a), the totality of all the rights of the Vendor in respect of the Former Slipway and the fourth portion, whether in relation to the foreshore and sea-bed or otherwise, were extinguished.  This must include the Vendor’s title to the Former Slipway and the fourth portion.  If Mr Fung SC were right, as of today the Vendor would still be retaining the title to the Former Slipway and the fourth portion.  There could be no scope for Mr Fung SC’s argument that what were extinguished were the Vendor’s rights in relation to the foreshore affected by the Gazette notice GN4119.  What was left as a result of the two notices was the Vendor’s right to statutory compensation. 

17.  In that connection, as part of the statutory compensation package under section 12 of the FSRO, the Vendor received a monetary compensation in the total sum of $39.2 million under the Final Compensation Agreement and a contractual right from the Director of Lands for a re-grant of the Former Slipway at nominal premium.  Paragraphs (d) and (h) of the Recital and Clauses 1(i) and 2 of the Final Compensation Agreement are relevant.  Paragraphs (d) and (h) of the Recital read:

“(d)

The Claimant is the legal and beneficial owner of the land known and registered in the Land Registry as New Kowloon Marine Lot No. 21 (hereinafter referred to as “the said land”) which was injuriously affected by the Undertaking;

(h)

The parties hereto have reached final agreement as to the amount of statutory compensation payable to the Claimant in the aggregate of HK$39,200,000.00 in respect of the extinguishment of the Claimant’s rights in the said land (subject to the deduction of the said sum of HK$31,500,000.00 already paid to the Claimant under the said Agreement) in full and final settlement of the Claimant’s claim (save and except the Professional Fee as hereinafter defined) under the Ordinance.”  (emphasis added)

Clause 1(i) and 2 of the Final Compensation Agreement provide:

“(1)	(i)	The Director hereby pays and the Claimant hereby accepts the sum of HONG KONG DOLLARS SEVEN MILLION SEVEN HUNDRED THOUSAND ONLY (HK$7,700,000.00) (the receipt whereof the Claimant hereby acknowledges) (being the net statutory compensation after deduction of the said sum of HK$31,500,000.00 from the said sum of HK$39,200,000.00) in full and final satisfaction of all and any claims which the Claimant may have against the Crown or the Government of Hong Kong before 1st July 1997 and the Government of the Hong Kong Special Administrative Region after 30th June 1997 or the Director or other Government Officers under the Ordinance or otherwise in respect of the extinguishment of the Claimant’s rights in the said land, save for costs or remuneration mentioned in Section 12(3) of the Ordinance (hereinafter referred to as “Professional Fees”);
…
(2)	The Director hereby agrees to regrant to the Claimant at nominal premium [the Former Slipway].  The Claimant’s rights on the [Former Slipway] have been extinguished under Section 10(1)(a) of the Ordinance.” (emphasis added) ”

The word “Director” in the above clauses means the Director of Lands.  The word “Claimant” refers to the Vendor.  “The said land” refers to the Property and the fourth portion.  I have also conveniently substituted the complicated technical description of the land in question used in the original text by the phrase “the Former Slipway” to which that description referred.

18.  From paragraph (d) of the Recital, it is clear that the compensation referred to in Clause 1(i) was compensation in respect of the extinguishment of the Vendor’s rights in the then existing NKML No. 21 (i.e. the second, third and fourth portions).  Only the Former Slipway and the fourth portion were caught within the two Gazette notices.  The rest of the Property was not.  Thus, the rights that were extinguished must mean so far as the Former Slipway and the fourth portion were concerned, the entirety of the Vendor’s rights including title to the Former Slipway and the fourth portion and so far as the rest of the Property was concerned, such of the Vendor’s rights as may be affected by the reclamation, i.e. the lost of marine access via the Former Slipway and consequential loss of business prospect etc.  Hence, Mr Fung SC’s argument could only stand as regards the Vendor’s right over the rest of the Property, but could not be right as regards the Former Slipway and the fourth portion.  If indeed Mr Fung SC were right, it would not have been necessary for the Director of Lands to promise in the Final Compensation Agreement a re-grant of the Former Slipway to the Vendor at nominal premium.  Mr Fung SC’s contention would also lead to the absurd result that section 10(1)(a) of the FSRO has no effect of extinguishing the rights of the Vendor in respect of the Former Slipway and the fourth portion.  On the above analysis, it is clear that the compensation under Final Compensation Agreement provided as part of the statutory compensation scheme was in respect of the loss of two parcels of rights, one parcel in respect of the rights in relation to the Former Slipway and the fourth portion and another parcel in respect of those relating to the rest of the Property. 

19.  On the other hand, there was nothing in the Final Compensation Agreement to suggest that the compensation was paid as consideration for the Vendor surrendering his rights over the Former Slipway.  Quite on the contrary, the last sentence of Clause 2 expressly states that the Vendor’s rights on the Former Slipway was extinguished by section 10(1)(a) of the FSRO.  I therefore dismiss Ms Yu SC’s argument that the Vendor had in addition by contract surrendered his title to the Former Slipway to the Government under the terms of the Final Compensation Agreement.  But that has no bearing on the Purchaser’s case.

20.  As part of that statutory compensation package the Vendor had a contractual right against the Government for a re-grant of the Former Slipway at nominal premium as evinced by Clause 2 of the Final Compensation Agreement, but that agreement is not a re-grant by itself.  There is no dispute that since the surrender in 1990, the Vendor has never obtained a re-grant of the Former Slipway.  In the circumstances, the Vendor has no title to convey part of the Property to the Purchaser, namely the Former Slipway, unless it seeks a re-grant from the Government. 

Failure to show good title

21.  As the Vendor had no title to the Former Slipway, it must follow that he could not show good title unless he could show that the Purchaser would not be at risk of a successful assertion against it of an encumbrance in respect of the Former Slipway in the future.  The relevant requisitions and answers complained of by the Purchaser arose as follows.

22.  On 15 December 2004, upon obtaining copies of title documents from the Land Registry, KLY discovered a discrepancy over the name of the grantee under the Conditions of Sale and the name of the Vendor as appearing on his Hong Kong Identity Card.  KLY requisitioned for a statutory declaration to cover the discrepancy.  This innocuous requisition provoked a series of answers and requisitions which led to these proceedings. 

23.  PL replied on 18 December 2004 with a statutory declaration and produced for the first time a copy of the Final Compensation Agreement as secondary evidence of Vendor’s name.  On 20 December 2004, in response to the above answer, KLY raised a further requisition requiring PL to clarify if any re-grant had been executed between the Vendor and the Government and the terms of the re-grant and to provide relevant documents for their perusal.  KLY wrote:

“In the meantime, we note from the Agreement as to Final Payment of Compensation and Indemnity dated 24^th September 1998 that your client’s rights in the Property have been extinguished under Section 10(1)(a) of the Foreshore and Sea-Bed (Reclamations) Ordinance and the Director of Lands has agreed to regrant to your client [the Former slipway] at nominal premium.  Please clarify and let us know if any regrant has been executed between your client and the Government and let us have the regrant terms and documents for perusal.”

24.  On 22 December 2004, PL replied that they needed time to clarify with the District Lands Office before they could answer the requisition.  In the meantime, other negotiations about the change of the description of the Property, the terms of the Formal Agreement, completion and postponement of the date of completion continued.  Eventually, on 29 December 2004, KLY proposed to add a special condition to the Formal Agreement that the Vendor shall obtain a re-grant from the Government within a reasonable time before completion.

25.  On 31 December 2004, PL replied confirming that there was no re-grant and purported to answer the requisition as follows:

“We are of the view that such regrant is not necessary because Section 10(1)(a) of the Foreshore and Sea-Bed (Reclamations) Ordinance could only extinguish our client’s rights in relation to the foreshore and sea-bed affected under Gazette G.N.4119.  Apparently, your client is not purchasing our client’s right in the foreshore and sea-bed of the New Kowloon Marine Lot No. 21”

Thus PL took the view that the re-grant was not necessary as section 10(1)(a) only extinguished the Vendor’s right in relation to the foreshore and sea-bed but not the Former Slipway.

26.  KLY took a contrary view and replied on 4 January 2005 referring to Recital (h), Clauses 1(i) and 2 of the Final Compensation Agreement and an extract of counsel’s opinion from Mr Michael Bunting SC and Miss Lisa Wong.  The reply was as follows:

“Recital (h) and clause 1(i) of the [Final Compensation Agreement] dated 24^th September 1998 (“Agreement”) mentioned that the statutory compensation as having been paid was in full and final settlement of all and any claims which your client may have against the Government under the Ordinance or otherwise in respect of the extinguishment of your client’s rights in the [Property].  The [Property], having been defined in recital (d) to mean New Kowloon Marine Lot No. 21, covers the whole of Property comprising 3 portions coloured Red and [the Former Slipway] and the blue portion.  Clause 2 of the Agreement further explicitly mentioned that the Director of Lands had agreed to regrant to your client at nominal premium the [Former Slipway] and that your client’s right on the [Former Slipway] had been extinguished under Section 10(1)(a) of the Ordinance.

Hence, by virtue of the Agreement, the Director of Lands and your client have mutually and explicitly assumed the Government could resume the [Former Slipway] and have also effectively done so.  It is clear from the Agreement that your client’s right to the [Former Slipway] have been extinguished.  Without a regrant of the [Former Slipway], your client is not in a position to assign the legal title to the same to our client.

…

We reiterate our view that a regrant of the [Former Slipway] is necessary before completion and the relevant provision as proposed by us under our letter dated 29^th December 2004 should be incorporated into the formal Agreement ….”

PL did not respond despite repeated reminders.  Then the Purchaser took out this Originating Summons on 25 January 2005.

27.  I have rejected PL’s argument and found that the Vendor had no title in respect of the Former Slipway.  However, Mr Fung SC argued that a good title had been shown because there is no real risk of some punitive or remedial action being taken by the Government some time in the future and hence PL had answered the requisitions satisfactorily.

28.  A good title does not mean a perfect title, free from every possible blemish.  The test is whether the purchaser would not be a risk of a successful assertion against it of an encumbrance in the future.  It is not disputed that the Vendor had built on the Former Slipway, had been openly using and occupying it and had been paying rates and Government rent in respect of it.  However, the legal position is that the Vendor has no title to the Former Slipway for reasons as explained in paragraphs 14 to 20 above.  The background was that the Vendor had been the owner of the Former Slipway which was reclaimed by the Government and he was given a personal right to a re-grant at nominal premium.  These are important points of distinction which distinguishes the position of the Vendor from that of the Purchaser, if it should have acquired the Property.  Rates are payable by an owner of land as well as by its occupier.  It is trite law that collection of rates and Government rent by the Government is not an acknowledgement of title.  Against this background, it is understandable that the Government took no enforcement action in the past fifteen years against the Vendor.  It would have served no purpose as the Vendor was entitled to a re-grant at nominal premium. 

29.  However, that the Government had not taken any action against the Vendor does not mean it will not take enforcement action against any other trespassers, who have no personal right to a re-grant and who had never been the lawful owner of the Former Slipway.  The area of the Former Slipway was just over one-third of the total area of the Property.  On the basis of the Offer Letter of 30 November 2000 (a premium of $321.85 million for an in situ exchange of 2,844 square metres), the premium payable to the Government for this strip of land would be worth $77 million for an in situ exchange in 2000.  In addition, on a pro-rata basis of the consideration under the Memorandum of Agreement, the Former Slipway was worth at least $37 million to the parties.  Thus, on a rough mathematical calculation and without taking into account the escalating land value between 2000 and 2005, the Government could extract a revenue of well over $110 million in respect of the Former Slipway from a third party by a new grant of the Former Slipway for non-industrial purpose.  Furthermore, the reality is, without any title to the Former Slipway, not only that the Purchaser cannot use or build on it, it would adversely affect the total floor area which the Purchaser contemplated could be built on the Property.  Building approval would not even be granted for the building project which the Purchaser had in mind, not to mention approval for any part of the building project on the Former Slipway.  I would be extremely surprised that the Government would not take enforcement action should the Purchaser use or build on the Former Slipway.  Whether I am to apply Ching PJ’s prudent and experienced solicitor’s approach or Litton PJ’s robust and willing parties approach, I would come up with the conclusion that enforcement action is almost a certainty, should the Purchaser acquire the Property and attempt to use or build on the Former Slipway without a re-grant. 

30.  I am satisfied that the Vendor has no title to the Former Slipway.  I am satisfied that the requisitions were reasonable and the Vendor had failed to show good title.  The Vendor did not even have a defective title with which he can show beyond reasonable doubt that there would be no risk of successful enforcement in the future.  The Purchaser’s solicitors had reasonably proposed an additional condition that the Vendor shall apply for a re-grant of the Former Slipway prior to completion.  It was unreasonable for the Vendor not to have accepted the suggestion.

Defence of common mistake

31.  Though common mistake was raised as a ground for resisting the Purchaser’s claim for specific performance, in his submission, Mr Fung SC has elevated its importance to that of a defence, such that not only was the Purchaser not entitled to specific performance but that there was no contract at all.  However, this defence is inconsistent with the stance of the Vendor’s solicitors in answering the Purchaser’s requisition that the re-grant is unnecessary.  Nevertheless, I shall now consider common mistake as a complete defence.

32.  According to the Vendor’s affirmation, it was all along his belief and understanding that the 1990 Reclamation only affected the third portion of the Property and he acted on such belief and understanding by occupying the Property and paid rates and Government rent in respect of the Property including the Former Slipway.  For the purpose of these proceedings, I assume this to be his genuine belief.

33.  Mr Fung SC submitted that the Vendor can in no way be blamed for the mistake as his belief and understanding was evidently shared by the Government who never objected or complained to the Vendor for his continued occupation of the Former Slipway and collected rates and Government rent in respect of the Property including the Former Slipway.  I have already expressed my contrary view that collection of rates and Government rent does not constitute an acknowledgement of title.  There is no evidence at all that the Vendor’s belief was shared by the Government.  I am not prepared to assume the Vendor was blameless as he must have known that he only had a personal right to re-grant of the Former Slipway at a nominal premium at the time he entered into the Final Compensation Agreement, but he either deliberately chose not to or negligently failed to seek the re-grant.  But whether he was blameless or otherwise has no bearing on the conclusion which I am going to reach.

34.  The thrust of Mr Fung SC’s submission in that where the parties to a contract were under a common misapprehension either as to the facts or their respective rights and where the misapprehension was fundamental, there was no contract and there could be no damages and no specific performance.  He quoted the following passage from paragraph 15-32 of Snell’s Equity, 31^st Edition at 361:

“Mistake in the formation of a contract has historically been regarded (in appropriate cases) as being good reason for refusing specific performance, so that the claimant is only entitled to damages at common law.  Thus, specific performance has been refused where the parties to a contract were under a common misapprehension (either as to the facts or their relative rights) provided that the misapprehension is fundamental and the party seeking to resist enforcement is not blameworthy.”

35.  That passage was written in the context of refusal to a claim for specific performance and does not deal with how the court should approach a common mistake relied on in avoiding a contract.  Ms Yu SC helpfully referred me to the following passage in paragraph 5-052 in Chitty on Contracts, 29^th Edition, which summarised the law of common mistake and the latest approach of the Courts as follows:

“In cases in which there is some other common mistake as the surrounding facts, or perhaps the law, the contract may be void but only if the mistake means that performance of the contract would be impossible, or would be essentially or fundamentally different to what was contemplated by the parties.  There are rival formulations of the principle.  One is Lord Atkin’s, that a common mistake as to the quality of the subject matter may render a contract void if it makes the thing without the quality essentially different from the thing as it was believed to be.  The other is the Court of Appeal’s in The Great Peace,that a common mistake may render a contract void if it makes the contractual adventure impossible.  The newer formulation is, with respect, easier to apply if only because it enables us to draw directly on analogous cases of frustration, of which there are considerable numbers.  It is submitted, however, that these two formulations reflect differences in opinion over the origin or underlying nature of the doctrine – Lord Atkin’s seemingly reflecting Roman or continental notions of mistake, the Court of Appeal’s based on parallels to frustration and ultimately, the construction of the contract – than differences over when the doctrine will apply.  Both make it clear that it will only be in exceptional circumstances, when the mistake makes the contract completely different to what the parties both thought they were about, that the contract will be void for common mistake.”

36.  It would be convenient to turn now to the Court of Appeal decision in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679.  In that case, the defendant negotiated with the claimant to salvage a damaged vessel which the defendant thought was about 35 miles from the claimant’s vessel.  A contract of hire for a minimum of five days to escort and stand by the damaged vessel for the purpose of saving life was made.  When it was later discovered that the claimant’s vessel and the damaged vessel was 410 miles apart and not 35 miles, the defendant did not immediately cancel the contract but sought a nearer vessel to assist while hanging onto the contract with the claimant.  After securing the assistance from the other vessel, the defendant cancelled the contract with the claimant.  The claimant claimed for damages.  The defendant disputed liability by reason of a fundamental mistake of fact in that both parties had proceeded on the fundamental assumption that the two vessels were in close proximity but they were not.  The court found in favour of the claimant.  The defendant appealed to the Court of Appeal.  It would be sufficient to refer to the headnote which contained a succinct statement of the law and the test for common mistake.  In dismissing the appeal, the Court of Appeal held:

“(1)   that common (or mutual) mistake was a common mistaken assumption of fact which rendered the service that would be provided if the contract were performed in accordance with its terms essentially different from the performance that the parties contemplated, with the result that the contract was not merely liable to be set aside but was void at common law; that the avoidance of a contract on the ground of common mistake resulted not from an implied term but from a rule of law under which, if it transpired that one or both of the parties had agreed to do something which it was impossible to perform, no obligation arose out of that agreement; that the test for common mistake was narrow, and if a contract were to be avoided for common mistake there had to be a common assumption as to the existence of a state of affairs, no warranty by either party that that state of affairs existed and the non-existence of the state of affairs had not to be attributable to the fault of either party; and that, where it was possible to perform the letter of the contract but it was alleged that there was a common mistake in relation to a fundamental assumption which rendered performance of the essence of the obligation impossible, it was necessary to construe the contract in the light of all the material circumstances in order to determine whether the contract could be avoided for common mistake.”

In the eventual analysis, the Court of Appeal held the fact that the defendant did not cancel the contract when they discovered the mistake until they secured the services of a nearer vessel showed that the mistake did not have the effect of rendering the contract essentially different from what the parties had agreed.

37.  As with the author of Chitty on Contracts, I prefer the Court of Appeal’s approach.  It is easier to apply.  But I think in most cases, either approach would lead to the same conclusion because under either approach, it will only be in exceptional circumstances that the mistake could have the effect of making the contract completely different to what the parties both thought they were such that the contract will be avoided.  The test for a common mistake is a very narrow one.  On the formulation of the Court of Appeal, a common mistake may render a contract void if it makes the performance of the contract to the letter impossible: it makes its performance essentially different from what the parties contemplated; there was a common assumption as to the existence of a state of affairs; there was no warranty by either party that the state of affairs existed and the non-existence of the state of affairs had not to be attributable to the fault of either party.  All the material circumstances must be taken into account in order to determine whether the contract should be avoided.

38.  On the facts of the present case, there was no mistake about the subject matter of the sale and purchase.  The mistake alleged is the common misapprehension as to the Vendor’s rights over the Former Slipway.  I think such argument is disingenuous and purely semantic.  When someone offers his land for sale, he must be offering to sell some beneficial interests or rights which he has over the land.  This inference is so strong that the law of conveyancing has developed to the extent that it has become an implied term in any sale and purchase agreement involving land that the vendor shall prove and show good title.  Likewise, the inference is so strong that there must be implied into any sale and purchase agreement that the vendor warrants he has title to sell, unless such warranty or intention is expressly or impliedly excluded.  Thus, when there was no mistake about the subject matter of the sale, it is only semantic to argue that there was a mistaken apprehension about one’s rights over the land to be sold.  In a sale and purchase agreement, in the absence of express exclusion, there must be an implied warranty that the vendor has good title and shall show and pass a good title.  This alone would defeat the Vendor’s defence of common mistake.

39.  Furthermore, the parties had contracted to sell and purchase the Property including the Former Slipway.  The sale and purchase of the Property including the Former Slipway was not anything which had not been contemplated by the parties.  The performance by the Vendor is not impossible.  He has a contractual right against the Government to seek a re-grant of the Former Slipway at nominal premium.  There is nothing to suggest that the Government is not good for its promises.  There is no evidence to suggest that the Government had revoked its promise of re-grant.  The re-grant is just a matter as of right and as of course.  What the Vendor has to do is to apply for a re-grant to perfect his title.  That could not be an onerous or impossible obligation.  Even if the Vendor does not have a right to the re-grant, that could not render the contract void.  This is not a case where the subject matter of the sale and purchase did not exist at all.  The contract is valid if the sale and purchase including the Former Slipway was what the parties have bargained for.  Specific performance may not be available in that case but the Vendor may not walk out of the contract as if there was no contract at all and without having to pay damages for failing to honour his obligation under the contract.  This defence must fail. 

No agreement reached

40.  Mr Fung SC also submitted that the parties had not reached any agreement as there was no meeting of the minds and no Formal Agreement has been signed.  He was referring to two incidents.  Firstly, on 3 December 2004, when just after PL agreed to the amendments to the terms of the Formal Agreement proposed by the KLY, PL suggested amendments to the description of the Property to which KLY objected.  Secondly, on 23 December 2004 and other occasions, KLY wrote to PL referring to the proposed amendments to the description of the Property and stressed that the terms of the Formal Agreement had never been mutually agreed.  However, the fact is that apart from the description of the Property, everything else including the subject matter of the sale and purchase has been agreed.  Thus, what the parties had not agreed was only the description to be put to the Property and not the subject matter of the sale and purchase.  Indeed KLY and PL continued in their negotiation on completion date and signing of the Formal Agreement.  This must have been done on the premise that there was no disagreement on any essential terms of the Formal Agreement or misunderstanding on any terms in the Memorandum of Agreement.  Most importantly, it has been Mr Fung SC’s position when he argued on the defence of common mistake that there was no mistake about the subject matter of the sale and purchase.  In that position, it is impossible for him to launch his argument that there was no meeting of the minds.  There was.  What was in disagreement is as to how to describe the Property.  In the end, as the surveyors’ reports show, even on the description as insisted by the Vendor, there was no mistake as to the Property which was the subject matter of the sale and purchase under the Memorandum of Agreement.

41.  As for the failure to enter into the Formal Agreement, it is trite law that in the circumstances the rights and obligations of the parties are to be determined on the basis of the Memorandum of Agreement, if the Memorandum of Agreement evinces a validly binding contract.  The Memorandum of Agreement is in writing and contains all the essential terms of a valid sale and purchase agreement: description of the parties, the property and the price.  Clause 9 expressly provides that the Memorandum of Agreement shall constitute a legally binding agreement between the parties.  The parties’ intention to contract is beyond dispute.  Mr Fung SC has not advanced any argument why the Memorandum of Agreement is not a valid agreement.  The failure to agree to the description of the Property in the Formal Agreement does not affect the validity of the Memorandum of Agreement based on which the remedy is sought.

42.  Accordingly, I dismiss the argument that there was no binding agreement on the sale and purchase of the Property.  The Vendor is in clear breach of the Memorandum of Agreement for failing to convey the Property including the Former Slipway to the Purchaser on or before the extended completion date.

Specific performance

43.  By this summons, the Purchaser seeks specific performance and damages.  It is trite law that specific performance is an equitable and discretionary remedy.  Land is a unique commodity in itself.  There can never be two pieces of land which are identical.  In the case of breach of a sale and purchase agreement, specific performance is usually a more appropriate remedy than damages, provided it is capable of performance by the vendor and no third party has acquired any interest over the land.  The Court will exercise its discretion to compel the vendor to make good the title which he has agreed to transfer.  Lord Redesdale LC said in Costigan v Hastler And Another (1804) 2 Sch & Lef 160 at 166:

“When a person undertakes to do a thing which he can himself do or has the means of making others do the court compels him to do it or procure it to be done unless the circumstances of the case make it highly unreasonable to do so.”

44.  However, since equity does not act in vain, specific performance will not be ordered unless and until the Court is satisfied that the defendant is in a position to comply with or to perform the obligation: see Hanbury & Martin, Modern Equity 17^th Edition at paragraph 24-005 and Wroth And Another v Tyler [1974] 1 Ch 30.  Thus, specific performance will be refused if the defendant is able to show a sufficiently great likelihood that performance will not be possible.  The learned author of Spry, The Principles of Equitable Remedies, 6^th Edition wrote at pp 128-9 as follows:

“… if a sufficiently great likelihood is shown that performance will not be possible, and especially if no strong considerations of hardship appear on the part of the plaintiff, it may be most just to grant no order for specific performance at all, whether absolute or conditional, and so to confine the plaintiff to remedies in damages.

These principles may be illustrated by cases where performance will be possible only if the consent of a third person is obtained.  Here an absolute order of specific performance might involve requiring the defendant to do something that in truth he cannot do.”

45.  In this case, the Purchaser has contracted to purchase the Property including the Former Slipway, which constituted just over one-third of the total area to be purchased.  Though no particular hardship has been shown by the Purchaser, it is more than obvious that it would make the bargain very much different if the area to be purchased is to be reduced to just below two-third, even with an appropriate reduction in price.  There has been no change in circumstances.  No third party has acquired any interest in the Former Slipway or any other part of the Property.  Prima facie, an order for specific performance is appropriate.  However, a peculiar feature in this case is that the Vendor has no title to the Former Slipway in respect of which specific performance is sought.  Therefore, before he can specifically perform the Memorandum of Agreement, the Vendor has to obtain a re-grant from the Government.  Mr Fung SC sought to resist an order for specific performance by arguing on the basis of the Vendor’s expert evidence from Mr Chan of Chesterton Petty Ltd that it is uncertain that the Vendor will obtain a re-grant from the Government and that the re-grant is dependent upon matters entirely beyond the control of the Vendor.

46.  Mr Fung SC relied on the case of Wroth and Another v Tyler [1974] 1 Ch 30.  In that case, the defendant agreed to sell his bungalow to the plaintiff with vacant possession for 6,000 pounds.  Subsequently to that the defendant’s wife entered on the Land Register a notice of her rights of occupation under the Matrimonial Homes Act 1967.  Megarry J held that it would be highly unreasonable to make a decree of specific performance against the defendant because that would require him to litigate against his wife under the Matrimonial Homes Act. 

47.  On the other hand, Ms Yu SC referred me to the case of Walters and Others v Roberts (1980) 41 P & CR 210.  In that case, the defendant vendor entered into a contract with the two plaintiff purchasers for the sale with vacant possession of some farming land in 1974.  The plaintiffs did not complete because the area of the land was found to be just half of its area as described.  In 1977, the defendant entered into a second contract for the sale of the same property to a third party.  That contract contained a special condition which provided that the contract was conditional upon the prior contract being rescinded unless the court otherwise directs.  In 1979, the two plaintiffs entered into a contract to sub-sell the land to the other three plaintiffs.  Nourse J referred to Wroth and Another v Tyler and said:

“In this connection Mr Simpson referred me to a passage in the judgment of Megarry J in Wroth v Tyler, n5 where he said:

‘A vendor must do his best to obtain any necessary consent to the sale; if he has sold with vacant possession he must, if necessary, take proceedings to obtain possession from any person in (218) possession who has no right to be there or whose right is determinable by the vendor, at all events if the vendor’s right to possession is reasonably clear; but I do not think that the vendor will usually be required to embark upon difficult or uncertain litigation in order to secure any requisite consent or obtain vacant possession.  Where the outcome of any litigation depends upon disputed facts, difficult questions of law, or the exercise of a discretionary jurisdiction, then I think the court would be slow to make a decree of specific performance against the vendor which would require him to undertake such litigation.’

A little later on Megarry J turned to consider the facts of that particular case, from which it appeared to him to be clear that the person concerned – in that case the vendor’s wife – had demonstrated that she was not prepared to get out of possession short of the vendor taking proceedings to that end.

Accordingly, the position in the present case is that if the defendant’s right to possession is reasonably clear he must take proceedings to get Mr Evans out, should that course become necessary.  But if it does become necessary and the defendant’s right to possession depends on a difficult question of law then I ought to be slow to order specific performance of the plaintiffs’ contract.  So I must ask myself: Is the defendant’s right to possession reasonably clear or does it depend on a difficult question of law?  On the one hand, it can be said that the absence of authority on the point is an indication that the right to possession is not reasonably clear; on the other, that if the right does depend on a difficult question of law then it is most surprising that it does not appear to have been contested in any reported case in the 32 years or so since the Agricultural Holdings Act 1948 was enacted.”

In the end Nourse J held that the defendant’s right to possession against Mr Evans was reasonably clear and did not depend on a difficult question of law because Mr Evan’s occupation resulted from the second contract for sale and the Agricultural Holdings Act 1948 did not extend to the rights of a person who had contracted to purchase the land and was let into occupation pursuant only to that contract and whose occupation was never intended to survive its extinction.  He granted the decree of specific performance.

48.  According to the Vendor’s expert, Mr Chan, no similar application for a re-grant had been processed by the Lands Department.  Mr Fung SC submitted that this evidence was unchallenged.  However, no evidence has been produced from the Lands Department that this was the case.  Taken at its highest, Mr Chan’s evidence is that he had not processed any application for re-grant during his employment in the Lands Department or he was not aware of any such application.  Even if the Lands Department has never processed any re-grant, that is far from saying that it will not honour its promise in the Final Compensation Agreement.

49.  Mr Chan’s evidence was that the process of making a re-grant involved circulating the draft re-grant conditions to no less than between eight to twelve Government departments for comments, obtaining approval from the District Lands Conference and, if the application was made in the form of a private treaty grant, approval of the Chief Executive in Council would also be necessary.  He estimated that the process would take about 21 weeks.  What Mr Chan described accords with my understanding of the process involved in making a new grant, which I acquired from other cases before me.  The process he described may not be applicable to an application for re-grant at nominal premium.  On the contrary, the fact that the Government offered a re-grant at nominal premium in 1990 must mean at that time it had already obtained all necessary clearance, including the condition as to nominal premium, for making the re-grant, whether as a private treaty grant or as an ordinary grant.  I would have thought the re-grant is only a matter of formality.  Mr Chan admitted his lack of knowledge about processing a re-grant and admitted that the re-grant should be a simple and straightforward process.  His evidence about the time taken for processing a re-grant was given on the basis that the procedures were the same as for a new grant.  I give no weight to his evidence.  The Vendor has produced no credible evidence from any authoritative source about the process involved in a re-grant.  Despite all the effort and expenses he incurred in instructing an expert to give opinion on something which the expert had no knowledge of, the Vendor did not even attempt to do the most obvious of writing to the Director of Lands referring to the Final Compensation Agreement and enquire if an application for re-grant will be approved and the time necessary for processing such application.  It should be recalled that in answering KLY’s requisition, PL wrote on 22 December 2004 that they were seeking clarification from the District Lands Office about the re-grant.  Almost a year has lapsed, PL never reverted to KLY about the result of their enquiry.  If PL had made enquiries with the District Lands Office as they had intimated, it is unbelievable that the District Lands Office would not have replied one way or the other.  If the reply was positive, there is no reason why the Vendor did not proceed with an application for re-grant, but instead chose to embark on an expensive litigation on defences which have been shown to be spurious.  If the reply was negative, there is no reason why such reply was not exhibited in support of Mr Fung SC’s argument on impossibility of compliance.  The sincerity of PL in answering KLY’s requisition is doubtful.  The motive of the Vendor is dubious.

50.  Next, Mr Chan said that unless an application for a land exchange with change of user is made at the same time, which would require payment of a very substantial premium, any re-grant would be made subject to the user restriction contained in the Conditions of Sale, i.e. to be used as a shipyard or for ship building or repairs.  This, Mr Chan said, would give rise to substantial problems and difficulties.  In my view, the problem about re-grant with change of user and substantial premium is a problem created for the sake of argument and for resisting the Purchaser’s claim for specific performance.  The Purchaser has never required that the Former Slipway be conveyed with the right to use the land as a shipyard not to mention for use for non-industrial purpose.  The sale and purchase was negotiated on the basis that the user of the entire Property was subject to the user restriction contained in the Conditions of Sale, i.e. for industrial purpose.  The Purchaser never complained about the user restriction in respect of the rest of the Property.  It goes without saying that the costs and premium involved in removing or altering the restriction in the Conditions of Sale are to be borne by the Purchaser.  What the Vendor is obliged to do is to obtain the re-grant in respect of the Former Slipway on same or similar condition as to user restriction for no other purpose than to perfect the Vendor’s title over the Former Slipway which he has contracted to pass to the Purchaser.  Whether the Former Slipway could be used as a shipyard is of no concern or relevance to the Purchaser.

51.  The other difficulty referred to by Mr Chan is that as all marine access to the Property had been extinguished with the Government’s reclamation of the surrounding land in early 1990s and that since March 2004 the site has been rezoned under the Town Planning Ordinance as a Residential Group A3 area under Outline Zoning Plan No S/K20/15, which explicitly prohibits user as a shipyard.  Hence, a re-grant subject to the previous user restriction as a shipyard may well amount to a derogation of grant and that such a re-grant would contravene the Town Planning Ordinance.  In my view, this difficulty is unreal.  The Vendor received compensation for the reclamation.  Thus, any re-grant must be with the same user restriction as in the Conditions of Sale but without marine access.  Whether it can be used as a shipyard is a matter of no concern to the Government or the Vendor.  As for the difficulty created by the Outline Zoning Plan S/K20/15 and the problem about derogation of grant, the Vendor only had himself to blame for not making timeous application for the re-grant.  Had he done so, he might have received further compensation as a result of the zoning or might have received a bonus change of user restriction from industrial to non-industrial in respect of the Former Slipway.  In any event, Ms Yu SC rightly submitted that these are irrelevant to the question as to title.  The user restriction is a matter to be agreed on a nominal premium basis between the Vendor and the Government which is contractually bound to make the re-grant.  The Vendor and the Government could agree on the type of user restriction which would conform with the zoning requirement.  There is no need for me to speculate on how that could be achieved.  In my opinion, the problems and difficulties suggested by Mr Chan are unreal.

52.  For the reasons as I have explained in paragraphs 14 to 20, the Vendor has no title in respect of the Former Slipway to convey to the Purchaser in accordance with the Memorandum of Agreement.  It must be within the contemplation of the parties that the Purchaser intended to re-develop the Property as a residential development.  The Purchaser will be unable to build on the Former Slipway or to make use of the area of the Former Slipway in calculating the floor area which may be built on the remaining part of the Property.  Building approval would not even be granted for the building project which the Purchaser had in mind when it entered into the Memorandum of Agreement.  The conveyance of the Property without the Former Slipway even with a reduction in price would be a very much different transaction from that which the Purchaser had in contemplation when it entered into the Memorandum of Agreement and will result in substantial loss of profit from the re-development as the area of the Former Slipway is over one-third of the total area of the Property.  This is sufficient hardship to justify an order for specific performance, especially when contrasted with the relatively simple process of applying for a re-grant required of the Vendor.

53.  I think the present case is distinguishable from Wroth and Another v Tyler and is very similar to Walters and Others v Roberts.  In this case, the Vendor has a contractual right against the Government for a re-grant.  There is nothing to suggest that the Government will not honour its undertaking.  I am satisfied that the Vendor’s right of a re-grant against the Government is reasonably clear and does not depend on any difficult question of law.  The Vendor has a simple contractual right against the Government for the re-grant.  Even if that right has to be enforced by litigation, such litigation will be very straightforward.  I am not satisfied that the Vendor has proved a sufficiently great likelihood that performance will not be possible.  When balancing the hardship to the Purchaser against the costs and inconvenience to the Vendor, I can see no reason why the Vendor should not take out such proceedings if he had to.  Accordingly, I am satisfied that it is equitable that an order of specific performance should be made against the Vendor.

54.  In respect of the Purchaser’s claim for damages in addition to and in lieu of specific performance, Mr Fung SC argued that the claim for damages must be dismissed as the Purchaser has not filed any evidence on quantum.  With respect, I do not agree.  In an action for specific performance and damages in addition to and in lieu, it is difficult to assess the damages which are dependent on how long it would take for the performance to be completed and if at all the contract will be performed.  It is always appropriate to defer that to a later stage when the damages have been crystallised and in the meantime to make an order for inquiry as to damages.   

55.  It is uncertain how long the application will take from today and it is unrealistic to set a time table for specific performance.  I accept the form of order should take the form as suggested by Ms Yu SC, that is, by making a declaration that the Former Slipway formed part of the Property to be sold and purchased under the Memorandum of Agreement and that the Vendor be ordered to perform the Memorandum of Agreement and to take all necessary steps to obtain a re-grant at nominal premium of the Former Slipway from the Government.  There should also be an inquiry as to damages and liberty to apply.

56.  The Vendor has no dispute about the subject matter of the sale and purchase.  He does not dispute that he had no title to the Former Slipway.  He has an undisputed right against the Government for a re-grant of the Former Slipway at nominal premium.  He must foresee at the time of entering into the Memorandum of Agreement that the Purchaser would suffer substantial loss of profits if the Purchaser is unable to acquire the title to the Former Slipway.  Such loss of profits might well be near to the balance of the price payable to the Vendor for the Property without the Former Slipway.  It is inexplicable why he should refuse KLY’s offer to include a condition in the Former Agreement that he shall apply for the re-grant before completion and why he should resist specific performance when he would otherwise be liable to very substantial damages.  A re-grant by the Government would give to the Purchaser what it has bargained for and would provide the solution to the Vendor’s predicament.  On his expert’s evidence, it would only take 21 weeks to process such a re-grant even assuming the process involved would be same as that for a new grant.  It puzzles me why the Vendor should choose to take almost a year to launch himself into this expensive litigation with such disastrous result.

Conclusion

57.  Accordingly, I grant the declaration and specific performance sought by the Plaintiff in the above terms.  I also make a costs order nisi that the Defendant shall pay the Plaintiff’s costs with certificate for two counsel.  The costs are to be taxed if not agreed.