SO SIU YUNG v. CHAN TSAN TAK

HCA 1516/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1516 OF 2011

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BETWEEN

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J U D G M E N T

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1.  By November 2010, the plaintiff and the defendant were on course for the defendant to buy and the plaintiff to sell three small properties at 81 Anchor Street, Kowloon for a price of $1.8 million. Completion was arranged to take place on 30 November 2010.

2.  Unfortunately, completion did not take place for one simple reason.  The plaintiff’s solicitors had failed to send to the defendant’s solicitors the title deeds to the properties to satisfy the purchaser of good title.  Strangely, the purchaser’s solicitors had never asked for them either. They were never sent, so the purchaser had never had the opportunity to check the good title or raise requisitions.  The vendor plaintiff accepts that its failure to show good title was a repudiatory breach and that it is liable for that breach.

3.  The issue in this case is whether or not the purchaser accepted the repudiatory breach and thereby rescinded the agreement.  If it did, the contract was terminated and it cannot ask for specific performance.  It can only recover modest damages for the breach and the return of the deposit.  If it did not, the contract remains performable and the purchaser is entitled to specific performance or damages in lieu of specific performance.

4.  In order to answer this question, it is necessary to refer to the correspondence exchanged between the solicitors after the failed completion.  It will become apparent that about 4‑5 weeks after the completion date it seems that both sides changed their minds about how they wanted the matter to proceed.  If only one side had changed its mind the problem would have been resolved.  However, on the face of it, the vendor initially wanted to revive the agreement but the purchaser wanted his deposit back.  In early January 2011 however the vendor wanted to cancel the agreement and retain the deposit but the purchaser then said it wanted to complete the sale.

THE CORRESPONDENCE POST “COMPLETION”

5.  On 2 December 2010, the purchaser’s solicitors wrote :

“As your client has failed to give and prove title and fail to deliver the title deeds and documents for our perusal on or before the date of completion i.e. 30.11.2010, in accordance with the Formal Agreement for Sale and Purchase dated 25.10.2010 made between our respective clients.

In the circumstances, we are now instructed by our client to demand your client to return forthwith but in any event, within 3 days from the date hereof of all deposits paid in the total sum of HK$180,000.00 to our client, failing which our client shall take such action as he deems fit including legal action together with costs.

In the meantime, all our client’s rights and interests under the Agreement for Sale and Purchase herein are hereby reserved.”

6.  On 4 December the vendor’s solicitors replied :

“Your contention therein is entirely misconceived. May we draw your kind attention to Clause 39(2) of the Agreement for Sale and Purchase dated 22^nd October 2010 signed by our respective clients, the contents of which is self-explanatory.

We shall let your have the title deeds and documents soonest possible. Meanwhile, all our client’s rights and interests under the aforesaid Agreement for Sale and Purchase are hereby expressly reserved.”

7.  Clause 39(2) stated that :

“(2) Both the Purchaser and the Vendor undertake and warrant that the Vendor must sell and the Purchaser must purchase the same Premises.”

8.  On 7 December 2010 a full set of title deeds was sent.  On 8 December the purchaser’s solicitors replied :

“As your client has failed to prove title and fail to deliver the title deeds and documents on or before the date of completion i.e. 30.11.2010 and to prove title before completion, our client is entitled to cancel the purchase and not to proceed with the purchase. Hence, we reiterate the contents of our letter dated 02.12.2010.

In fact, your client has breached the Agreement for Sale and Purchase.

We must stress that your reference to clause 39(2) of the Agreement for Sale and Purchase is entirely misconceived which is obviously not relevant to the present circumstances and does not assist your client at all.

In the circumstances, we are now instructed by our client to demand your client to return forthwith and in any event, within 2 days from the date hereof of all deposits paid in the total sum of HK$180,000.00 to our client, failing which our client shall take such action as he deems fit including legal action to recover the said sum together with other damages and costs.

In the meantime, all our client’s rights and interests under the Agreement for Sale and Purchase herein are hereby reserved.”

9.  The vendor’s solicitor’s response, dated 11 December 2010, repeated its position.  They said “we do not share your view” and argued that they could show good title “within a reasonable time”.

10.  On 14 December the purchaser’s solicitor returned all the title deeds which had been sent on 7 December.

11.  The purchasers repeated their disagreement in their letter of 17 December 2010.  The letter concludes :

“In the circumstances, our client is entitled to rescind the Agreement for Sale and Purchase for the reason stated in our letter dated 02.12.2010. We reiterate that your reference to Clause 39(2) of the Agreement for Sale and Purchase does not apply and does not assist you, in particular when your client is in blatant breach of his obligation to give and prove title and the Agreement for Sale and Purchase which provides for completion on 30.11.2010 and makes time in every respect of the essence of the contract.

We repeat our demand for return of all the sums mentioned in our letter dated 02.12.2010.

In the meantime, all our client’s rights and interests under the Agreement for Sale and Purchase herein are hereby reserved.”

12.  The next letter, from the vendor’s solicitors dated 28 December 2011 marks the beginning in the shift of positions.  Whilst still disagreeing with the purchasers, it concludes :

“However, on a wholly without prejudice basis and without admitting any liability on our client’s part but only as a matter of courtesy, please let us have your draft Cancellation Agreement in respect of cancellation of the said Agreement for our approval at your earliest convenience.”

13.  Thus, in other words, they were saying for the first time that they would agree to the contract being terminated.

14.  Up to this point one might have reasonably hoped and expected that the purchaser’s response to this proposal would have been to accept it i.e. to sign the cancellation agreement and get its deposit back.

15.  However, the purchaser’s reply, dated 6 January 2011 was the very opposite.  It said :

“However entirely on without prejudice basis and without prejudice to our client’s position and our firm’s position, we are now instructed that our client is prepared to complete the sale and purchase of the above Property and our client is ready and willing to complete the sale and purchase of the above Property with your client in accordance with the terms and conditions of the Agreement for Sale and Purchase dated 25.10.2010, subject to approval of title by us. Please let us have all the title deeds and documents for the above Property for our approval soonest possible.

In the meantime, all our client’s rights and interests herein are hereby reserved.

16.  Even though this appears to be a volte face the purchaser’s new stance is what the vendors had been asking for in its earlier letters of 4 and 11 December 2010.  It is again conceivable therefore that the parties were on the brink of a settlement.

17.  Sadly not, because the vendor’s solicitors replied on 13 January 2011 :

“We are instructed to send you herewith a cheque in the sum of HK$180,000.00 drawn in favour of your client being the return of all deposits paid by your client under the Formal Agreement for Sale and Purchase dated 25^th October 2010 together with the Cancellation Agreement (in duplicate) duly signed by our client for the cancel of the aforesaid Agreement for Sale and Purchase for client’s execution.”

18.  On 18 January 2011 the purchasers returned the deposit cheque and the cancellation agreement (unsigned) and re-iterated their intention to proceed with the purchase.

19.  Thereafter the parties made some attempts (not in writing) to negotiate a settlement without success.  The final exchange came 4 months later as follows (from the vendor’s solicitors) :

“We do not share your view that your client is entitled to insist on the purchase of the Property. We are instructed that, as a matter of fact, by your good firm’s letter dated 14^th December 2010 addressed to us together with the enclosures mentioned therein, your client had by conduct shown his genuine intention not to proceed with the purchase of the Property by returning all the title deeds and documents in respect of the Property to us.

20.  For the sake of completeness before embarking on a consideration of these unusual circumstances I set out two clauses from the Sale and Purchase Agreement which are of same significance.

“26. If the Vendor shall (for any cause save as herein provided) fail to complete the said sale in accordance with the terms hereof then all monies paid hereunder shall be returned to the Purchaser forthwith who shall also be entitled to recover from the Vendor such damages as the Purchaser may sustain by reason of such failure on the part of the Vendor and it shall not be necessary for the Purchaser to tender an Assignment to the Vendor.

27. Nothing in this Agreement contained shall be so construed as to prevent the Purchaser or the Vendor from bringing an action and obtaining a decree for specific performance either in lieu of damages or in addition thereto in respect of such losses as the Purchaser or the Vendor may have sustained by reason of the neglect of the Purchaser or the Vendor (as the case may be) or the refusal of either party to complete the said sale and purchase at the time and in the manner aforesaid.”

THE PARTIES’ SUBMISSIONS

21.  The vendor, who instituted these proceedings, was represented by Ms Dora Chan of counsel.  Mr Alex Lai, also of counsel, appeared for the defendant purchaser.

(a) The purchaser

22.  Mr Lai argued that the vendor’s repudiatory breach had not been accepted by the purchaser and thus the contract remained alive and the purchaser was entitled to specific performance (or damages in lieu).

23.  He further argued that the reason that the return of deposit was immediately demanded was because of clause 26 (supra), in particular “… then all monies paid hereunder shall be returned to the Purchaser forthwith …”.  He further pointed out that the deposit was in the hands of the vendor himself, not the vendor’s solicitors, and was therefore concerned about its return.

24.  Moreover, the purchaser’s solicitor’s letter had consistently concluded with “… our client’s rights and interests under the Agreement are hereby reserved.”  This, it was submitted, entitled them to change their position in early January 2011 and complete the purchase.

25.  Mr Lai also relies on the fact that none of the purchaser’s solicitor’s letters specifically says that the repudiatory breach has been accepted.  The fact that two letters state “our client is entitled to cancel the purchase and not proceed …” (8 December) (and similarly on 17 December) is merely stating one of the purchaser’s options but falls short of stating that it did cancel the purchase.

26.  Mr Lai further submits that the vendor’s reasons for wanting to complete (during December), namely its reliance on clause 39(2) was misconceived bearing in mind clause 28 (both supra).

(b) The vendor

27.  The vendor’s task was to establish that by the purchaser’s conduct it had demonstrated an intention to accept the vendor’s (admitted) repudiatory breach.

28.  Bearing in mind its present position (as adopted from 28 December 2010 when, without prejudice, it sent a cancellation agreement to be signed by the purchaser) the vendor, firstly, needs to explain why it maintained its earlier stance (during December 2010) by which it urged the purchaser to complete.  The vendor’s answer was that it misunderstood clause 39(2). It believed that the purchaser should accept late delivery of the title deeds and therefore it did not return the deposit as requested.  

29.  The vendor’s arguments in favour of the agreement having been rescinded by the purchaser may be summarized as follows :

(i) The purchaser’s request for its deposit back on a number of occasions can only be consistent with an acceptance that the contract had been terminated. It is logical to assume that the request represented a bona fide desire to have the money back in its hands. It is logical also to assume that had the deposit been sent it would have been kept. That would have terminated the contract.

(ii) On 7 December 2010 the vendor sent the title deeds to the purchaser. 7 days later they were returned with no comment as to whether they had been perused or checked or whether they gave good title. This also is consistent with an intention not to proceed with the purchase.

(iii) The purchaser’s repeated reference to their “entitlement” to rescind, coupled with the demand for the deposit and the return of the title deeds adds further weight to the vendor’s submission.

(iv) The purchaser’s reliance on their letters concluding with “… our client reserves its rights …” etc can only refer to the rights it had in law at that time. It no longer had a right to completion; it only had a right to sue for the return of the deposit.

(v) The purchaser is not entitled to change its mind, which it clearly did. When the deposit was returned to the purchaser (which it had been demanding for 5 weeks) it promptly returned it. That, it is submitted, is a clear change of mind which is not open to it. The contract had been unequivocally terminated and cannot be resurrected.

(vi) Prior to 6 January 2011 there is no evidence from the purchaser that it was seeking specific performance. No letters contain any such reference, express or implied.

DECISION

30.  Ms Chan for the vendor referred me to Hansun Investment Ltd v Sincere Union Development Ltd [2008] 4 HKLRD 442.  The case, decided by DHCJ Gill, had some similarities with the present case. Given the usual facts of the present case however it could not be said to be on “all fours”.  Nonetheless, a key feature of that case was whether or not one party’s conduct should be construed as amounting to an acceptance of a repudiatory breach in a sale and purchase agreement.

31.  The court’s decision in the Hansun case was, inter alia, that :

“In TP’s correspondence, TP persistently called for the return of its deposits which was the antithesis of keeping the contract to purchase alive. This was coupled in one letter with the clearly stated expression that ‘the transaction had fallen though’ and the cancellation of the cashiers’ orders for payment of the balance, signaling an intention to return the purchase moneys to its pockets and the termination of contractual relations. Although TP expressly reserved its rights, this did not keep the door open. In the context of the letters, that amounted to the reservation by TP of its right to sue for damages.

Nowhere in the correspondence did TP refer to specific performance. Generally silence or inactivity would not be regarded as the communication of acceptance of a repudiation, but here there had been both silence and inactivity, and Ds’ correspondence which further endorsed and confirmed TP’s communicated election to accept the repudiation.”

32.  In the present case, it is true, that the purchaser did not write that “the transaction had fallen through”.  It did however complain that good title had not been shown, it threatened legal action and clearly stated its right to rescind.

33.  DHCJ Gill also dealt with the issue of the acceptance of the repudiatory breach not being in precise words saying :

“ Certainly Sincere Union did not in words spelt out as such acceptance of Champion Asia’s repudiation and terminate the agreement, as did Champion Asia.

But the acceptance does not have to be as succinctly communicated. As Lord Steyn said in Vitol SA v Norelf Ltd [1996] AC 800 at p.810 :

My Lords, the question of law before the House does not call for yet another general re-examination of the principles governing an anticipatory breach of a contract and the acceptance of the breach by an aggrieved party. For present purposes I would accept as established law the following propositions. (1) Where a party has repudiated a contract the aggrieved party has an election to accept the repudiation or to affirm the contract: Fercometal SARL v Mediterranean Shipping Co SA [1989] AC 788. (2) An act of acceptance of a repudiation requires no particular form: a communication does not have to be couched in the language of acceptance. It is sufficient that the communication or conduct clearly and unequivocally conveys to the repudiating party that that aggrieved party is treating the contract as at an end …”

34.  He also went on to decide, on the facts of that case, that the express reservation of rights did not always keep the door open.  So here, I also conclude that the reservation of rights are limited only to those which, on the particular facts, are available at the time of stating the reservation.  In the present case, on the facts, the right to specific performance had already been lost because in my judgment, the purchaser’s conduct should only be construed as an acceptance of the vendor’s repudiation for the reasons outlined above.

35.  He concluded, as do I in this case, by stating that once the repudiation has been accepted, the acceptance cannot be withdrawn.

DAMAGES

36.  The purchaser is clearly entitled to some damages for the vendor’s breach.  These are confined to damages arising from the failure to show good title and the consequent collapse of the agreement.  They are not damages in lieu of specific performance.

37.  I grant the following damages :

(i) $180,000.00 being the return of the deposit.

(ii) $8,100.00 legal costs and disbursements.

(iii) $18,000.00 estate agency fee.

Interest at the judgment rate should be paid on these items (to be calculated and agreed by the parties).

In addition the purchaser should be compensated for some loss of rental income. The purchaser had raised capital in order to make the purchase by taking out a mortgage on another property. It had been his intention to buy the subject properties as an investment with existing tenants. The gross rental income would have been $10,600 a month. I assess this head of damages by estimating that it would have taken 4 months (from 1 December 2010) to buy a different property and thereby utilize the capital he had raised by mortgage.

(iv) The loss of 4 months’ rent is $42,400.00.

(v) The cost of 3 months’ interest on the mortgage, according to the purchaser’s calculation, is $1,853.00 x 4 = $7,412.00. There will be no interest awarded on items (iv) and (v).

38.  Damages under (iv) and (v) above would also have been damages in lieu of specific performance.  I have regarded them also, for the limited period of 4 months, to be damages which flow from the vendor’s breach.

ORDER

(1) Order in terms of paragraphs 1, 2 and 3 of the plaintiff’s summons dated 9 August 2011.

(2) The plaintiff do pay to the defendant damages in the sums of $206,100.00 plus interest to be agreed in accordance with this judgment plus the sum of $49,812.00.

COSTS

39.  On the question of costs there are a number of matters which may affect the court’s discretion :

(i) it was the plaintiff who breached the contract;

(ii) the defendant has been awarded some damages;

(iii) the defendant has failed to obtain an order for specific performance or damages in lieu thereof; and

(iv) on the day of the hearing the plaintiff made an open offer to the defendant which was declined.

40.  Accordingly, I invite written submissions from both parties of no more than two pages on the question of costs.