HOI FAT HOLDINGS LTD. v. LEUNG PUI NAM

HCA 13169/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13169 OF 1997

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J U D G M E N T

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1. These proceedings arise out of an agreement for sale and purchase of a shop premises in Kwong Wa Street, Kowloon. A provisional agreement having been signed on 30 September 1997 between the plaintiff as purchaser and the defendant as vendor, the formal sale and purchase agreement was signed on 23 October 1997, for sale of the property at a price of $12,300,000.00, the sale to be completed on or before 22 January 1998, and a total deposit was paid of $1,230,000.00. It was on the face of it an unremarkable agreement in the usual terms save for one important variation. Clause 31 of the agreement reads:

Notwithstanding anything herein contained to the contrary, it is hereby mutually agreed and declared by the parties hereto that the sale and purchase of the Property is also subject to the terms and provisions set out in the Annexure hereto.

2. The agreed translation of the annexure referred to reads as follows:

The vendor warrants that the purchaser will be able to obtain bank loan in the sum of HK$7,800,000.00 or above for the purpose of purchasing the said Property, otherwise the purchaser shall have the right upon its choice to cancel the Agreement and obtain full refund of the deposit or to arrange mortgage itself. (The purchaser shall satisfy the bank's requirement.) This term is valid until the 15th day of November 1997.

3. The annexure had originally been signed by the parties at the same time as the provisional sale and purchase agreement, but it is common ground that the last two sentences were added after that agreement but before the formal agreement.

4. In order to assist the plaintiff in obtaining a mortgage, the defendant caused the plaintiff to be introduced to a Mr K Chan of the Sai Kung branch of the Nanyang Commercial Bank, but, for reasons which I will come to shortly, the bank did not approve the plaintiff's application for a loan, and, no other loan being forthcoming, the plaintiff first demanded that the defendant procure a mortgage loan for them, and, having been informed that the defendant considered he had discharged his duty to them in assisting them to do so, then requested the return of their deposit of $1,230,000.00 pursuant to the agreement contained in the annexure. The defendant declined, saying that the failure to obtain the mortgage was caused by the plaintiff's delay and failure to supply to the bank adequate documentary information in support of their application for the loan. These proceedings were commenced on 4 December 1997 claiming, inter alia, return of the deposit and a declaration that the agreement has been rescinded.

5. The plaintiff is part of a two company group, and is merely a holding company for properties owned by the group which are used as security for banking facilities for Hoi Fat Construction Mechanic Co. Ltd (Construction), the other member of the group, which imports and hires machinery from Japan and Germany. The companies have the same shareholders and directors. Apart from the banking facilities, the other properties are not subject to any mortgages.

6. The defendant first put the property on the market in early September 1997 with an asking price of $12,800,000.00 through the Perpetual Estate Agency. The plaintiff's directors were interested in the property, already owning a shop premises in that street and others nearby, which were all kept as investments and to use as security. However, they considered the price too high, and they had, or could obtain, only some $4,500,000.00 in realisable funds so would need to raise the balance on mortgage, being otherwise unable to purchase the property. This situation was communicated to one Doris Lau of the estate agency, who told the defendant that he would need to offer a warranty as to the mortgage. He contacted two banks, the China State Bank and the Nanyang Commercial Bank, to ask them to assess the value of the property for mortgage purposes, and they did so at $12,500,000.00 and $12,300,000.00 respectively. Apparently being satisfied that a mortgage would be available to the plaintiff at that price, and eager to sell, the sale was agreed and the provisional agreement signed together with the annexure.

7. At some stage the defendant says he was advised that the warranty should not be open ended nor without some condition on the plaintiff, so a date of 15 November was inserted for the period of validity of the warranty, and the provision added that the buyer satisfy the bank's "requirement", the precise meaning of which I shall have to consider. Indeed, the initial question in this case, in which there are also a number of factual disputes, is the meaning of the annexure and the intention of the parties in adding it to their agreement.

The Annexure

8. From the evidence before me it is clear that the defendant, having found a buyer at the price he wanted, and knowing the need for the plaintiff to secure a mortgage in order to be able to complete the sale, was prepared to allow the sale to be aborted should they not be able to obtain one. This provision was originally open-ended, which the defendant was obviously, and rightly, advised was a bit too generous, as he may have been left until the date of completion to know whether the purchaser was successful. The date of 15 November 1997 was accordingly inserted as the period for which the term was valid. Also added was the provision that the purchaser shall "satisfy the bank's requirement", and it is this which gives rise to the present dispute.

9. The defendant clearly also considered himself obliged under the agreement to assist the plaintiff obtain the loan they required. I am not satisfied that the annexure, as worded, committed him to do that. Taking the natural meaning of the wording, it does no more than provide that, if a loan is not forthcoming by the relevant date, the plaintiff has the right to cancel the agreement or, if they choose, continue with it and arrange another mortgage. He does not warrant that he will procure a mortgage; merely that the purchaser will be able to obtain one. However, the defendant did introduce the plaintiff to a bank, which was prepared to lend the sum required on that property to a qualified borrower. If the intention was that the defendant should have any duty himself under the annexure, it can only have been to assist the plaintiff; this he has done. In this he discharged any duty there may have been under the agreement. I do not consider that the words "or to arrange the mortgage itself" imply any further duty upon the defendant. He was not in a position to arrange a mortgage. The most that a reasonable person could expect in such a situation would be introduction to a bank which could arrange the loan, which is what he did.

10. I accordingly return to the provision that the purchaser shall "satisfy the bank's requirement". It is the plaintiff's case that this means that they shall cooperate with the bank in provision of information and documentary evidence demanded by the bank in order to enable the bank to decide whether to grant the loan. This must be right. Such an agreement would be meaningless if the plaintiff could do nothing and thereby ensure that no loan would be granted, and still be able to rescind the agreement for sale without penalty. It is not in dispute that there must be a duty on both parties to such an agreement not to prevent the occurrence of the event which it envisages. The event here, in respect of the part of the agreement under consideration, is the granting of a mortgage in the sum of at least $7.8 million. The defendant, having done his part in ascertaining that the Nanyang Commercial Bank would be prepared to offer a loan of that size on his property, need do no more, provided he takes no step to prevent that loan being granted. The plaintiff, likewise, should not behave in such a way that either prevents the bank granting the loan, or makes it unlikely that it will do so. To give any sort of business efficacy to this agreement, it must be implied by the wording that the plaintiff will do what they can to ensure that their application for the loan will be at least favourably considered.

The mortgage application

11. It is not in dispute that, upon the introduction of the defendant, Mr Chan of the Nanyang Commercial Bank's Sai Kung branch visited the plaintiff's premises on 9 October 1997 and discussed the proposed loan with a Mr Lau, who was joined a little later by Mr Gary Leung. Mr Lau is the plaintiff's and Construction's managing director, and Mr Leung their general manager, and Mr Chan was told that Mr Leung would handle the application for the loan.

12. At that stage the only agreement was the provisional sale and purchase agreement with the original annexure, without the words later added in brackets and the time limit of 15 November. However, Mr Chan gave evidence that he already had a copy of the amended annexure which had been faxed to him by the defendant, had been told by the defendant that a decision was needed by the agreed date, and he said that the representatives of the plaintiff he met were aware of it. Indeed, Mr Lau said in evidence that he was himself concerned to have approval before that date, so he clearly knew that the provision was going to be added to the formal agreement and that time was important. Mr Chan said that he impressed on them the need to process the documentation quickly in view of that time limit.

13. At that meeting, it does not appear that the plaintiff was informed in any detail as to what information and documentary evidence of the plaintiff's financial situation was to be supplied. If they were, it was certainly not a written list and nobody appears to have made a note or minutes of the meeting, which was obviously just a general discussion about the plaintiff's requirements. Indeed, it was not spelt out precisely which company was to be the mortgagor and which the borrower, although Mr Chan was told about the two companies and their functions, and was given the business cards of Mr Lau and Mr Leung, showing the main company, Construction. From this he deduced that the plaintiff as purchaser would be the mortgagor, and Construction the borrower. He said that a Miss Wong, the supervisor of the bank's loan unit would contact Mr Leung. Mr Leung took this to mean, correctly in my view, that she would specify the precise documents that he was to provide.

14. Following that meeting, Mr Chan said that he instructed Miss Wong to contact Mr Leung, and believed that she had done so on 13 October. Mr Leung agrees that a female member of the bank's staff, whose name he did not know and was not given, telephoned him between 9 and 16 October. It is not in dispute that he was asked in the course of that call to supply documents in support of the plaintiff's application, although there is some question as to what those documents were. Mr Leung says that she only asked for three months bank statements and tax returns, and when asked whether other documents such as annual returns, certificate of incorporation, business registration certificate and a document called "Form X" were required, gave no definite reply. Unfortunately, Miss Wong was not available to give evidence, so that I only have that of Mr Leung as to what transpired, and I have to accept that, although I find it unusual, to say the least, that an experienced loan officer of a bank, as she clearly was, should be so indecisive and unclear in her requirements. I am therefore left with Mr Leung's account that he was asked to provide bank statements and tax returns.

15. Mr Leung, however, did nothing for over two weeks, until he says he was telephoned on 30 October by Mr Chan. Although there is evidence that he and Mr Lau were also having discussions with the Nathan Road branch of Nanyang Commercial Bank, with whom they had done business in the past, and that some documents were supplied to them, there is none as to what precisely they gave them, nor that the Sai Kung branch, and in particular Mr Chan and Miss Wong were informed. It was not until 30 October that any documents at all were given to the bank. There is some disagreement in the sequence of events on 30 October. Mr Leung says that he was telephoned by Mr Chan and asked if he was ready to submit his documents, when he told Mr Chan that the female staff had not been clear and asked again what he wanted. He says Mr Chan asked for bank statements and income proof, and, when asked if he also wanted audited accounts, business registration certificate, certificate of incorporation and Form X, replied in the affirmative. He says he accordingly sent these by DHL with a covering letter making it clear that the application was by Construction. As I shall refer to below, this is not an accurate account, as the only documents received by the bank were the accounts and some bank statements.

16. Mr Chan said that he first received the documents, and, after discussing them with Miss Wong, then telephoned Mr Leung to say that these were inadequate, and told him what else he wanted, and that they must be supplied soon as time was short. It was then only 15 days to the deadline under the agreement, and Mr Chan said that he had previously told them that a loan of this size needed to be approved by his head office, which took about 14 days. In particular he said that he required the company registration and business documents, the company's tax return, tenancy agreements relating to their other properties, and details of the identity and financial standing of the directors who would act as guarantors. The plaintiff accepts that it was known that guarantors would be required.

17. I have to say that I accept the evidence of Mr Chan where it differs from that of the plaintiff's witnesses. Apart from the fact that he has no interest in this matter and no reason not to recount events to the best of his ability, he came to court under a subpoena duces tecum, bringing with him the documents in possession of the bank, which support his account of what was supplied to him. It is regrettable that so little of the dealings between the bank and the plaintiff were recorded in writing, being almost entirely conducted by telephone, and I accept that, after such a length of time, memories may not be accurate. But he seemed to me a truthful witness doing his best to recall these events, and, as a experienced banker, knows well what he would have done in these circumstances.

18. The next thing to happen after 30 October was that Mr Chan received from the plaintiff's solicitors a number of documents by fax on 7 November. These did not include any of the documents requested, but were the company registration documents of the plaintiff, the formal sale and purchase agreement, and others relating to the suit premises. None of these were of use to the bank in relation to the application by Construction. Mr Chan says that he spoke to a Miss Poon of the solicitors and told her that it was no good sending the documents now as the application could not be processed in any event by 15 November and it was too late. He went on to say that he had already, by 3 November when no further documents were forthcoming, decided that the plaintiff was not sincere in pursuing the application, although he did not communicate this to them, but told the defendant that there was now no time so the application was unsuccessful. He denies that he told this to Mr Leung on 12 November as the latter claims.

19. It is the defendant's case that the conduct of the plaintiff made it inevitable that the application would not be granted by the time limited and that they cannot now rely on the annexure to the agreement to rescind it. I have some sympathy with that. While maintaining that the plaintiff was throughout keen to complete the transaction, for which they needed the loan, they did nothing to apply for it between about 13 October and 30 October, and only then, on their own account, when they were contacted by the bank and asked if the documents were ready. Even if Miss Wong had only asked for some documents on 13 October, there was apparently no attempt to supply those. Further, finding as I do that Mr Chan did ask for other documents on 30 October, Mr Leung then did nothing at all after that, except perhaps to tell their solicitor to send more documents, which in the event were inadequate and not those requested. This is not the conduct of a keen purchaser eager to cooperate with the bank providing the loan necessary to make the purchase. It is more that of a party who has lost interest in the sale, dragging their feet and delaying the process, knowing that time is of the essence in relation to the mortgage application, and that they can rely on the annexure to rescind the agreement. The letter from their solicitors on 13 November demanding that the defendant procure a mortgage was almost cynical. Apart from the fact that the agreement did not require the defendant to do so, they must have known by then that in the two days left it would be impossible.

20. The plaintiff has sought to place the blame for the failure of their application on the bank, by claiming that the economic climate at that time, which had caused a fall in property prices also led the bank to change their policy towards loans such as this. Although a dramatic decline might change a bank's view of the amount they would advance, I am not convinced that they would refuse applications completely on this basis, and there is no evidence that they were inclined to do so here. It is in my view far more likely that a fall in property prices would cause a loss of interest on the part of the plaintiff, who would then seek a way to lawfully avoid the transaction, in which, from my findings above, it will be apparent that I consider that they have failed. Were this not the case, it seems unusual that, instead of asking for more time under the agreement, or continuing with the transaction and applying to their own bankers for a loan, they sought to rescind the agreement with almost indecent haste. On the facts of this case it is clear that they pursued a course intentionally to ensure that the bank would not be in a position to even consider their application for a loan in time for such to be granted by the time limited in the agreement. They were therefore not entitled to rescind the agreement under the terms of the annexure.

21. The plaintiff's claim is accordingly dismissed, and the defendant is entitled to judgment on his counterclaim.

22. There are a number of reliefs claimed in the alternative in the defendant's counterclaim, but his counsel Mr Lam says that they seek damages. I agree that this is an appropriate remedy in a case such as this. At the commencement of this hearing the parties informed me that they had agreed a valuation of the property as at 3 November 2000 at $4,400,000.00. The difference between that and the agreed purchase price is $7,900,000.00. The plaintiff has already paid a deposit in the sum of $1,230,000.00, leaving a balance of $6,670,000.00, and I find that that is the amount of damages the defendant is entitled to. There will accordingly be judgment for the defendant in this sum. As he has been kept out of this money from the proposed date of completion of 22 January 1998, I also order that the plaintiff pay interest on that sum at 1% over HSBC prime from that date to the date hereof. There will also be an order nisi that the plaintiff pay the defendant's costs to be taxed.

23. I understand that the writ in these proceedings has been registered as a lis pendens. I further order that this be vacated.