SUN WEALTHY LTD v. GALANT MOTORS LTD

HCA2475/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2475 OF 2004

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J U D G M E N T

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1. This case arises out of a sale and purchase agreement (the “Agreement”) between the defendant as vendor and the plaintiff as purchaser.  The defendant purported to annul the Agreement in accordance with its Clause 11, on the ground of difficulty to remove or comply with a requisition on the defendant’s title.  The plaintiff claims a declaration that the defendant was not entitled to annul, and has not validly annulled the Agreement, and for specific performance thereof.  The plaintiff now applies by summons for specific performance under Order 86 and the defendant applies for determination of points of law under Order 14A of the Rules of the Supreme Court. 

2. The defendant is the registered owner of the property known as Shop A3 on Ground Floor, No.7 Playing Field Road, Kowloon (“the Property”).  By the Agreement dated 23 August 2004 the plaintiff agreed to buy and the defendant agreed to sell the Property for HK$3,880,000.

3. The Agreement contained a common form Clause 11 providing for annulment of the sale of the Property by the vendor (defendant) on grounds of inability or unwillingness because of difficulty to remove or comply with requisitions on title, as follows :

“

11.

….. If the Purchaser shall make and insist on any objection or requisition in respect of the title conveyancing or any matter appearing on the title deeds or particulars or conditions or otherwise of the Property which the Vendor shall be unable or (on the grounds of difficulty, delay or expense or on any other reasonable ground) unwillingto remove or comply with or if the title of the Vendor shall be defective, the Vendor shall notwithstanding any previous negotiation or litigation be at liberty on giving to the Purchaser or his solicitors not less than five (5) working days’ notice in writing to annul the sale in which case, unless the objection or requisition shall have been in the meantime withdrawn by the Purchaser or the same shall have been removed or complied with by the Vendor, the sale shall at the expiration of the notice be annulled the Purchaser being in that event entitled to a return of all the said deposit or deposits forthwith but without interest, costs or compensation”.

See also the Conveyancing and Property Ordinance, Cap.219, Second Schedule, Part A, Condition 7(2).

4. The Occupation Permit for the Property is dated 14 October 1982.  At that time there were three shop premises on the ground floor, respectively Shops A, B and C.  Shop A was on 14 November 1982 partitioned into Shops A1, A2 and A3.  On 16 November 1989, Messrs Ie & Chung Associates, a firm of architects, certified that the partition of Shop A did not involve structural alteration or addition of extra space and hence to approval from the Building Authority would be required (the “Architect’s Certificate”).  

5. The Agreement provided for completion on 5 September 2004.  Completion was to take place within business hours, i.e. before 5 p.m. at the office of the vendor’s solicitors.  On 30 August 2004 the plaintiff’s solicitors, Messrs Michael Cheuk, Wong & Kee (“MCWK”), having obtained the title deeds from the mortgagee’s solicitors, sent them to the defendant’s solicitors, Messrs Ng & Co. (“NC”).  The latter on 3 September 2003 raised some requisitions in title, and the one which is concerned here (the others having been answered or withdrawn) is Requisition No.3, which reads as follows :

“The Architect’s Certificate…is a plain copy only and no reference was made to any plan to show the partition of the shops referred therein.  How could we ascertain the partitions mentioned in the certificate are the existing partition of Shops A1, A2 and A3.”

6. On 6 September, NC replied to the effect that the floor plan referred to in the Architect’s Certificate should be that referred to in one of the Assignment Memorials relating to the property, the two documents having been signed by the same person.  MCWK however did not accept this and on 7 September wrote to NC requesting a certified copy of the Architect’s Certificate. 

7. In the meantime MCWK, dealing with Requisition No.5 which related to a provision in the DMC against the exercise of a right to partition the premises, wrote on 6 September to Messrs Tong and Tsoi, (“TT”), who had acted for the defendant when it bought the Property regarding this requisition.  TT asked for sight of the DMC and this was sent on 8 September.  In the same letter NC asked for a certified copy of the Architect’s Certificate.  TT replied, dealing with the DMC point but stating, wrongly, that “the Architect’s Certificate does not form part of the title to the property, there is no authority for production of a certified copy thereof.”

8. On 8 September MCWK sent a reminder following its letter of the previous day, requesting, inter alia, answers to Requisition Nos.3 and 5.  At about 3.10 p.m. that day, NC replied by fax that they had written to TT regarding these requisitions, and would revert as soon as possible.  But then, it appears, they found that TT were unable and unwilling to prove a certified copy.  I will deal with the evidence below.  At 4.05 p.m. NC wrote by fax to MCWK in the following terms :

“We are now instructed by our client, to give you notice in pursuance of Clause 11 of the … Agreement ….  that on grounds of difficulty to remove or comply with your objection to our client’s title, our client hereby give you 5 working day’s notice to annul the sale.”

The effect of this was of course that unless the requisition was withdrawn by midnight on 14 September 2004, the Agreement would automatically be annulled.

9. On 13 September MCWK sent a draft Assignment and Undertaking to NC for approval, but without prejudice to the requisitions raised in previous correspondence.  The Undertaking provided for NC to send to MCWK within seven days of receipt from the relevant authority, and in any event not later than 60 days from the completion date, the certified copy Architect’s Certificate.  On 14 September MCWK withdrew their Requisition No.5 and asked for the draft Assignment.  NC asked MCWK to clarify whether they would also withdraw Requisition No.3.  They confirmed that they did not have a copy of the Architect’s Certificate. 

10. To this last letter MCWK replied by a letter also dated 14 September 2004 in the following terms :

“Our client is only prepared to withdraw requisition in item 5.  Item 3 of the requisition is request for production of certified copy of the Architect Certificate to which Clause 11 of the Agreement for Sale and Purchase dated 23 August 2004 has no application.

Under the said agreement, your client is obliged to show a good title to the above property at its expenses.  Clause 11 of the said Agreement does not give your client and absolute right to annul the sale.  The wording ‘the Vendor shall be unable or (on the grounds of difficulty, delay or expense on any other reasonable ground) unwilling to remove or comply with’ not only requires reasonable ground to the Vendor’s willingness to answer a requisition but also to the Vendor’s inability to answer a requisition.  The Vendor will not have acted reasonably if he has ignored a known defect or failing to take prudent steps to ensure that he would perform and discharge his contractual obligations, or the Vendor could remove the defect or perform his contractual obligations without disproportionate expenses.

The title deeds were delivered to us on 30 August 2004.  By our letter dated 3 September 2004, we raised requisitions which include a request for production of the certified copy of the Architect Certificate.

By your letter dated 8 September 2004, you notified us you had written to Messrs Tong & Tsoi and are still awaiting their reply.  However on the same day, by your letter dated 8 September 2004 you purported to annul the sale pursuant to Clause 11 of the said Agreement.  Apparently, your client has determined to annul the sale before you receive any reply from Messrs Tong & Tsoi.

Our request is simply for production of the certified copy of the Architect Certificate which existence is known to your client.  You have not made inquiry with the Architect concerned and you have not waited for Tong & Tsoi’s reply before purporting to annul the sale.

We see no difficulty for your client to make those inquiries or to obtain fresh certificate, if necessary.  We also fail to see any disproportionate costs will have to be incurred in doing so.  Your client is not entitled to annul the sale pursuant to Clause 11 of the said Agreement because of our request for a certified copy of the Architect Certificate.”

11. There is a dispute as to whether the plaintiff’s solicitors tried to send this letter by fax to the defendant’s solicitors between 5.30 p.m. and 6 p.m. on 14 September or whether they only delivered it the next day.  In any event, on 15 September the defendant’s solicitors confirmed that the sale had been annulled and that they would send a draft cancellation agreement and return the deposit.  The plaintiff however called on the defendant to proceed with the Assignment and threatened legal action.  It subsequently refused to enter into any cancellation agreement or accept the return of the deposit and its position is that it is ready, willing and able to complete the purchase.

12. There are some factual disputes.  The plaintiff’s solicitor says that on 15 September 2004, in a telephone conversation, she told the plaintiff’s solicitor’s clerk that if the defendant would complete the sale, the plaintiff would not require delivery of the certified copy of the Architect’s Certificate.  This the clerk denies.  The plaintiff’s solicitor also says that she attempted to send her letter to the defendant’s solicitors by fax on 14 September between 5.30 p.m. and 6 p.m., but without success and that attempts were made at that time to telephone the defendant’s solicitors, again without success.  She was told the next day that there had been no paper in the defendant’s solicitor’s fax machine.  The defendant’s solicitor’s clerk says that there was nothing wrong with fax machine or the telephone, that the office was manned at the relevant time, and that the letter did not in any event reach the defendant’s solicitor, whether by fax or by hand, until the morning of 15 September.

13. As I have indicated, the plaintiff is now seeking summary judgment under Order 86.  The defendant seeks determination of points of law under Order 14A.  In brief these are :

1.	whether the requisition falls within Clause 11, or alternatively whether that Clause covered the requisition;
2.	whether the defendant was entitled to exercise its contractual right under Clause 11 by giving notice to annul the Agreement in five working days’ time; and
3.	whether, having regard to the fact that the requisition was not withdrawn by the close of business on the 5th day, the Agreement has been annulled.

14. It was held by Lord Cairns in Duddell v. Simpson (1866) LR 2 Ch. App.102 at 109 that, for the vendor or to be entitled to rescind relying upon the provision such as that contained in Clause 11, that must be :

(1)	an objection by the purchaser;
(2)	inability or unwillingness on a reasonable ground on the part of the vendor to remove the objection;
(3)	communication to the purchaser of the existence of this unwillingness or inability: and
(4)	insistence by the purchaser upon his objection, notwithstanding this communication.

15. These tests were approved by the Court of Appeal in Dr Ma Chung Ho Kei v. Queen’s Electronic Manufacturing Co. Ltd[1991] 2 HKC 218 (CA).

16. There seems to be no serious dispute that Requisition No.3 falls within, or is covered by Clause 11, although in correspondence the plaintiff’s solicitors claimed that it did not.  The document goes to the legality of the partition of the Property and is a requisition on the title.  If it were not a requisition on the title, Clause 11 is wide enough to cover any request or demand on matters outside title.  Under section 13 of the Conveyancing and Property Ordinance the defendant was obliged to deliver either the original or a certified copy of the Architect’s Certificate as a document dealing with its interest in the land within the meaning of the section.  A certified copy would, under the provisions of the same section, have to be certified by a public officer or a solicitor.  So there was a valid objection by the purchaser.

17. Nor, I think, is it in dispute that the defendant was unable or unwilling to remove the objection, and that this was communicated to the plaintiff.  The plaintiff never withdrew the requisition.  That is clear from the letter dated the 14 September 2004, whether it was communicated to the defendant’s solicitor on that day or on the following day.  So the requisition was not withdrawn by the close of business on 14 September.  In fact since there is no other provision as to time, the five working days’ notice would expire at midnight on the fifth working day.  But it matters not.  The requisition was never withdrawn, or at any rate not within the time limit.  If it were proved that the plaintiff’s solicitor had said, on 15 September that the plaintiff would not insist on the requisition, that in any event would be too late.

18. The real dispute is as to whether the defendant was entitled to exercise its contractual right under Clause 11 by giving notice to annul the Agreement because of inability or unwillingness on a reasonable ground to answer the requisition.  If it was not, the plaintiff is entitled to summary judgment and if it was, the agreement has been annulled.  That is limited issue contended for by the plaintiff’s counsel in argument.

19. I do not see that it makes any difference that the defendant through solicitors simply stated that it was giving notice to annul the sale or on the grounds of difficulty to remove or comply with the objection to the title, and did not specify whether it was unable to do so, or unwilling to do so and on what grounds.  If factual inability, or unwillingness on reasonable grounds to answer the requisition can be shown, the annulment will be valid.  The burden will be on the defendant to establish such inability or such reasonable grounds for unwillingness.  See Lee Siu Wai Florence v. Priway Investments Ltd[1998] 1 HKC 228. 

20. The evidence of the defendant’s solicitor, Mr Ng is that on its September, one of his staff was told by a staff member of TT that the latter would not provide a certified true copy of the Architect’s Certificate of the ground that it did not form part of the title documents.  He therefore believed that TT did not have a certified true copy.  He then received the letter from TT to the same effect.  He went on :

“As a result of the answers provided by Messrs Tong & Tsoi, NC believed that it would not be possible for it to deal with and answer requisitions 3 and 5 as neither NC nor the defendant could produce a certified true copy of the Architect’s Certificate.  Again, nowhere could they obtain the original or a certified true copy.  It is especially so when the contractual completion date was at or before 5 p.m. on 8/9/04.  There had never been any formal extension of time for completion given by MCWK.

Therefore, on the same day, i.e. 8/9/04 NCL gave notice under clause 11…..”

21. This appears to be evidence of a belief of that the defendant was or would be unable to answer Requisition No.3 by 5 p.m. on 8 September, rather than of unwillingness to answer it.  Of course if a vendor in these circumstances relies on unwillingness, he must show “some reasonable ground for unwillingness.”  (per Turner LJ in Duddell v. Simpson at page 107) and in any event as Viscount Radcliffe put it in Selkirk v. Romar Investments Ltd[1963] 1 WLR 1415 at 1422, the equitable principle requires that he :

“… must not act arbitrarily, or capriciously, or unreasonably.  Much less can he act in bad faith.  He may not use the power of rescission to get out of a sale ‘brevi manu’, since by doing so he makes a nullity of the whole elaborate and protracted transaction.”

22. If, therefore, a vendor seeks to rely on belief of inability rather than actual inability to remove or comply with the objection or requisition it seems to me that the equitable principle requires that his belief be held on reasonable grounds.  Another way of looking at his position is of course that he is unwilling to attempt to do so on the ground that the attempt will be so difficult as to be impossible; and again the test of reasonable grounds applies. 

23. Mr Mak for the plaintiff argues that the defendant could and should have written to the architect and asked for a copy of the Architect’s Certificate and been refused, and followed up with TT and failed to get a proper answer, and, before issuing the notice of the moment, should have reported on these matters to the plaintiff’s solicitors.  He argues that the question is “whether there was anything more that could be usefully done by the defendant to find the missing evidence” and in this connection he relies on dicta of Viscount Radcliffe in Selkirk v. Romar at page 1001.

24. In fact at that point His Lordship referred with approval to evidence of the vendor’s solicitor that he “felt that there was nothing further he could usefully do”.  This does not, I think, translate into the statement of a principle that the vendor must do all that he usefully can, before he is entitled to rescind; particularly in the light of what was said a few sentences before, that “a vendor has to be reasonable; he does not have to be beyond criticism before he can exercise his right of rescission”.

25. Mr Chong for the defendant argues in the first place that the plaintiff has not pleaded that the defendant exercised its power of annulment unreasonably, but rather that the defendant was not entitled to exercise that power.  In the alternative he argues that it was reasonable for the defendant’s solicitors to expect TT, as the solicitors who completed the previous sale and purchase for the defendant as purchaser to have a certified copy of the Architect’s Certificate available.  This they did, when they received the letter of 7 September asking for a certified copy.  It would not have been reasonable to expect them to seek a certified copy of the Architect’s Certificate from the architect.  This assumes that the architect firm could be successfully contacted within a reasonable time before 5 p.m. on 8 September, and that they could have traced their relevant files, forwarded the original and a copy of the certificate and had it certified by a solicitor or public officer so as to reach the plaintiff’s solicitors within a reasonable time before 5 p.m. on that day.  Mr Ng would have had no reasonable grounds to believe that such a course of action could be successful.  In any event time was of the essence as provided by the Agreement; the requisition would have to be answered by 5 p.m.  So the defendant’s solicitors took the only reasonable step they could, in approaching TT. 

26. I am not particularly concerned with the pleading point given that the defendant would only be entitled to exercise its power under Clause 11 if it did so on reasonable grounds.  However I am inclined to agree that NC acted reasonably in approaching TT, who were the solicitors who had completed the earlier purchase by the defendant when they received MCWK’s letter of 7 September containing the first specific request for a certified copy.  NC might have followed up more assiduously or pressed harder for TT to make the certified copy available; the parties agree that TT were wrong to refuse.  In any event, it was already the afternoon of the 8 September when TT’s refusal became known.  Time was of the essence; the defendant was not in a position to answer the requisition before 5 p.m. that day.  Mr Ng does not say whether or not he thought of approaching the architect directly.  Perhaps an approach at that point would have produced a certified copy or even a new duplicate original signed by the architect, Mr Herbert S.M. Ie whose name appears on the copy produced; perhaps not.  I cannot however say that it would not be reasonable for a solicitor to think it impossible to get a certified copy of a certificate issued 15 years before, from the issuing architect in the course of an hour or so. 

27. I could, I think, only grant summary judgment if there were no evidence of inability, or no evidence of unwillingness on reasonable grounds to answer Requisition No.3 before the time limit for completion.  There is evidence, to my mind, that the defendant or its solicitors thought, on reasonable grounds that they were or would be unable to do so.  It follows that summary judgment must be refused.  In the result the plaintiff’s Order 86 summons is dismissed with costs to the defendant. 

28. As to the Order 14A summons, its seems to me that the defendant could only be found not to have been entitled to exercise its right under Clause 11 if there were evidence that it acted arbitrarily, or capriciously, or unreasonably.  There is no evidence that it did.

29. I have already found that Requisition No.3 falls within Clause 11, or that Clause 11 applies to it.  On the second and third issues set out in the defendant’s summons, I determine that the defendant was entitled to exercise its right under Clause 11 to give five days’ notice of annulment; and that since the requisition was not withdrawn by midnight on the 5^th day the Agreement has been rescinded. 

30. The costs of the plaintiff’s summons and that part of the defendant’s summons which deals with the Order 14A determinations will (nisi) be to the defendant, to be taxed if not agreed.