CHAN CHUN MING COLMAN AND ANOTHER v. CHUNG LIK KEUNG AND ANOTHER

1991 No. A4025

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. By a provisional agreement dated 12th April 1991, the plaintiffs agreed to buy and the defendants to sell a flat and car park. By this action, the plaintiffs seek specific performance of the agreement and damages. By summons issued on 4th October 1991, the plaintiffs applied, pursuant to Order 86, for an order in terms of the minute attached thereto which essentially was for specific performance and damages.

2. On 2nd april 1992, the Master granted the defendants unconditional leave to defend, leave to amend their defence and counterclaim, and gave directions. Against that order the plaintiffs now appeal, and seek the a relief contained in the minute to which I have referred.

3. The pleadings raised a number of issues. The Statement of Claim ran to 18 paragraphs, the Amended Defence to 26. For the purpose of this appeal, however, it was agreed between counsel that the outcome depends upon the construction of the provisional agreement and, in particular, the following clauses:

"2.     The sale and purchase price herein shall be HK$2,630,000.00 which shall be paid by the Purchaser to the Vendor in the following manner:-

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(b)    HK$233,000.00 shall be paid upon signing of the Formal Agreement on or before 23rd April 1991 as further deposit.

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5.     Should the Purchaser fail or refuse to sign the Formal Agreement in the manner herein contained, the initial deposit paid herein shall be forfeited by the Vendor in full and final settlement of the Vendor's Claims.

6.     Should the Vendor fail or refuse to sign the Formal Agreement in the manner herein Contained the Vendor shall refund to the Purchaser the initial deposit paid and at the same time immediately compensate the Purchaser with a sum equivalent to the amount of the initial deposit as liquidated damages in full and final settlement of the claims of the Purchaser.

7.     In consideration of the services of the Agent in assisting or procuring the Vendor and Purchaser in signing this Agreement aforesaid, the Agent shall be entitled to receive HK$ Nil from the Vendor and HK$26,300.00 from the Purchaser as commission and such commission hall be paid by the vendor and Purchaser upon signing of the Formal Agreement.

8.     If in any case either the Vendor or the Purchaser or both of them be in breach of or settle to cancel this Agreement, the defaulting party or both of them shall compensate at once the Agent HK$26,300.00 as liquidated damages."

4. On 25th April 1991, after a series of events which are no longer material, the defendants' solicitors wrote to the plaintiffs' solicitors saying that the plaintiffs were in breach of clause 2(b) of the Provisional Agreement because they had failed to pay the further deposit on 23rd April and that accordingly the defendants were entitled to and did rescind the agreement and forfeited the deposit. The defendants reserved their rights to claim further damages as a result of the plaintiffs' breach.

5. On 17th September, some 41/2 months later, the defendants applied to amend their defence to include, inter alia, the following paragraph:

"20A. If, which is denied, the Defendants were not entitled to rescind the Agreement by reason of the matters aforesaid, the Defendants would have been entitled to refuse to complete the Agreement in accordance with Clause 6 of the Agreement and the Defendants will so elect should their rescission thereof be held invalid."

6. On 2nd April 1992, the date of the plaintiffs' summons under order 86, the defendants' present solicitors wrote to the plaintiffs' solicitors saying that, on behalf of their clients, they made the election pursuant to clause 6 of the provisional agreement to refund the initial deposit and pay a further sum of HK$30,000 as liquidated damages in full and final settlement of the plaintiffs' claim. On the following day, they tendered a cashier's order for HK$60,000.

7. For the plaintiffs, Mr. Edward Chan, Q.C. accepted that clause 6 of the provisional agreement provides for the defendants a means of alternative performance or settlement. He argued that the word "immediately", if it is to have any meaning or force, must govern payment not only of the compensation but also of the refund of the initial deposit. He said that the defendants had failed to make immediate payment as required by clause 6 and therefore could not rely on it. Even if refund of the initial deposit is not required immediately, he said it is well settled that such refund or payment must be made within a reasonable time. Even if the amendment of the defence sought in September constituted an effective adoption of clause 6, it came far too late after the defendants' failure or refusal to sign the formal agreement in April, and certainly not within a reasonable time. He argued, however, that the amendment was ineffective because the adoption of clause 6 was conditional upon the failure of the defendants' primary defence which was that the plaintiffs themselves were in breach of contract. As for the tender of HK$60,000 in April 1992, nearly a year after the event, that, Mr. Chan said, was manifestly too late.

8. Mr. Andrew Liao, Q.C. who appeared for the defendants and who, it must be said, had nothing to do with the earlier events or the pleadings, did not seek to argue to the contrary. I am perfectly satisfied that a clause such as clause 6 requires prompt payment by the vendor of the sums therein referred to and I accept that the word "immediately" governs payment both of the deposit and the additional compensation. Were the word to govern only the compensation then it would be otiose because it would add nothing to the words "at the same time". I also accept that a vendor cannot rely upon an alternative performance clause as a fallback position should some other defence fail. Either a vendor takes advantage of such a clause because it is valid and effective or he does not. I do not find the addition of paragraph 20A to the defence to constitute an effective reliance upon the clause or to reserve the defendants' position. The attempt to pay HK$60,000 nearly one year later was plainly far too late.

9. Mr. Liao's argument, however, was that clauses 5 and 6 of the provisional agreement provided for complete mutuality of terms between the parties and for the extinction of their various rights and remedies at common law or in equity upon the failure of either of them to sign the Formal Agreement. He emphasized the words "in full and final settlement of the claims". He also pointed to clauses 7 and 8 as emphasizing the complete mutuality between the parties. He said that the Formal Agreement not having been signed, each party had recourse to their respective clause and no other remedy left to them. Accordingly, all that is open to the plaintiffs is to take action for the HK$60,000 and no more.

10. I am in complete agreement with all that Mr. Liao said, save for his conclusion which in my judgment is based upon a fundamental error. That error is to divide clause 6 into 2 separate parts, namely, the failure to sign the formal agreement, and the refund of the deposit and payment of compensation. Mr. Liao’s argument, as I understand it, is that clause 6 is triggered by the failure or refusal to sign the Formal Agreement, and that immediately all other rights are extinguished. If the vendor then fails to make the necessary payments, the purchaser's only remedy is to sue for HK$60,000. With the greatest respect that cannot be right. I have no doubt whatsoever that clause 6 cannot be so divided. In my judgment, the parties' rights are extinguished only upon the vendor both failing to sign the Formal Agreement and upon payment of the required sums by him. Until he has done both, clause 6 has not effectively been invoked and consequently is not effective to extinguish the other remedies open to the parties. It would make nonsense of the mutual arrangements between the parties if either of them could, for whatever reason, fail to sign the formal agreement but then fail to make the payment required of them and simply invite the other to sue for that payment. Once payment is made, then and only then, is there full and final settlement between the parties which has the effect of extinguishing their other rights and remedies.

11. During the course of argument, I was referred to various authorities. The leading case is Abdul Cader Abdeen v. Abdul Careem Mohamed Thaheer and Others (1958) A.C. 116. That case is of course authority for the proposition that it is open to the parties to a contract to stipulate for alternative or substituted performance of that contract provided, of course, that the particular wording used in the contract admits of such construction. The leading Hong Kong case is Wong Lai Fan v. Lee Ha (1992) 1 HKLR 125, a decision of the Court of Appeal. It was a decision to like effect.. Various decisions of the High Court were also cited in which differently worded contracts were accorded an appropriate interpretation. With one exception, however, none of these cases dealt with the practical application of an alternative performance clause. The exception is Kentex Investment Ltd. v. Hui Lap Ping Sam (1991) No. MP 3447, an unreported decision of Godfrey J. given on 7th February 1992. In that case, the purchaser attempted to argue that the decision in Wong Lai Fan was distinguishable because of the obligation of the vendor in that case was to pay compensation immediately. Of that argument, the judge said:

"I accept that that is a distinction but it is, in my judgment, a distinction without a difference. Even if the word "immediately" is not used, the obligation, as counsel for the vendor pointed out in argument, must be an obligation to pay the compensation within a reasonable time. If the vendor fails to pay the compensation within a reasonable time, then, given that he had otherwise had an option to perform the contract by payment of compensation rather than by specifically performing it, he would lose that option; and he would again become bound to submit to a decree for specific performance."

12. I am, with respect, in complete agreement with Godfrey J. save that where a clause does not qualify payment as to time, I would suggest that the obligation to pay is to pay promptly. I would further suggest that in the circumstances of Hong Kong, prompt payment means payment within 24 hours of the failure to sign a formal agreement or such other event as the parties may have agreed.

13. I make this suggestion because it seems to me that a party who is to have his rights extinguished by the other party's failure to proceed, is entitled to know at the earliest opportunity whether or not the primary contract is still subsisting. If the party relying upon the alternative performance clause simply pays the necessary sum of money then, with or without an accompanying formal declaration, the position is clear. Where, however, that party notifies the other that he is relying upon the clause, he must fortify his reliance by prompt payment.

14. Although the underlying jurisprudence is undoubtedly correct, for my part I think the use of phrases such as "alternative" or "substituted performance clause" in relation to contracts such as this are misleading. What the parties to such contracts really intend, it seems to me, is to enter a contract from which they can escape if so minded, rather than "perform" it some other manner. Viewed thus, it becomes clear that, to escape from the contract, it is not sufficient for one party to say in effect "I am escaping" but then fail to comply with the obligation to pay. Until payment has been made, he cannot be said to have escaped and consequently is still subject to the obligations of what is a subsisting contract.

15. From the number of cases arising from "escape" clauses with which I alone have had to deal, it is clear that neither the real estate agents nor their customers understand what the variously worded clauses mean. The financial consequences can be considerable if it becomes necessary for a judge to determine the inevitable dispute. I suggest that it is high time to call a spade a spade and for the agents to adopt some common form of wording for these clauses in their forms of agreement, headed "Escape" or "Cancellation" clause. An unwary purchaser, or vendor in a falling market, can then immediately understand that the primary purpose of the agreement may not necessarily be fulfilled.

16. In the circumstances, I allow the appeal. I make an order nisi in terms of the minute attached to the plaintiffs' original summons. The matter is fit for 2 counsel.