LIU SIU SHUM v. LIU TONG, LIU WAI KEUNG and LIU CHOK YIU EDMUND as the managers of LIU SHIU FONG TSO

HCA 2520/2015

[2018] HKCFI 2570

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2520 OF 2015

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J U D G M E N T

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Introduction

1.  The dispute between the parties to this litigation relates to a parcel of land (Section B of Lot No 1085 in DD No 52) (“Section B”).  The plaintiff is the registered owner of that land.  The defendant Tso was a party to an agreement (“the Agreement”) made with the plaintiff in regard to the said parcel of land in November 2004.

2.  The plaintiff seeks a declaration that the Agreement has been terminated, and is now of no legal effect, following an alleged repudiation by the defendant.  Damages are also sought.  The defendant contends that the Agreement remains in force, and brings a counterclaim by which it seeks specific performance of the Agreement, or damages in lieu.  The defendant pleads an oral agreement said to have been made in or about June 1981, and relies on a further oral agreement said to have been made on 26 November 2004, contemporaneously with the (written) Agreement.

Factual background

3.  The plaintiff’s father, the late Mr Liu Shiu Yung (“LSY”), wasthe sole manager of the Tso from about August 1976 until about June 1981.  During his tenure as sole manager of the Tso he arranged to subdivide a piece of land owned by the Tso into three parts; Sections A and B, and a Remaining Portion.  Section A he caused to be transferred to himself, and Section B he transferred to the plaintiff.  The defendant contends that these transfers were improper and unauthorised, although no relevant relief is sought in the counterclaim.

4.  The transfers of Sections A and B took place in September 1977 and in 1978 LSY and the plaintiff applied for building licences, to be allowed to build a “village house” using ‘ding’ rights, on each of Section A and Section B.  The licences were granted and two such houses were built.

5.  Neither village house was granted a Certificate of Compliance (“CC”) by the District Lands Office because of certain contraventions of the terms of the building licences, in particular because of boundary contraventions by the constructed properties.  The houses overhung the boundaries of Sections A and B.

6.  LSY sought to overcome this problem by seeking to transfer the Remaining Portion of the original land to himself and the plaintiff.  This process involved the publication of notices in the village informing residents of the transfer application.  This process drew the attention of the Tso to the situation, and objections to the transfer were raised.  No transfer of the Remaining Portion took place.

7.  In June 1981 three additional managers were appointed to manage the affairs of the Tso.  At about the same time, the defendant alleges, LSY and the plaintiff sought, and it appears received, the forgiveness of the Tso for having made the previous transfer of land, and promised to return the transferred sections to the Tso. This is the first oral agreement referred to by the defendant.

8.  It is common ground that rectification of the boundary problems which were preventing the issue of CCs for the village houses could not be achieved without either the transfer of the Remaining Portion or the demolition of the village houses and reconstruction in a compliant manner.  Attempts were made to obtain approval to the houses as constructed and issue of the CCs, but the District Lands Office would not agree. 

9.  The village houses have never been demolished, and no CCs have ever been issued.  It appears however that the village houses have nevertheless been rented out from time to time since they were built.  Since 1996 rent has been paid to the defendant, at such times as the village houses have been tenanted.

10.  The Agreement was made on 26 November 2004, in terms which are set out below.  Contemporaneously with the execution of the Agreement various other documents including Powers of Attorney, Deeds of Consent and Rectification, and a will of the plaintiff were also executed.  The defendant contends that there was a contemporaneous oral agreement made with the plaintiff by which rectification of the boundary problem, and the obtaining of CCs would be undertaken by the defendant, but only when sufficient funds had been accumulated from rental income from the village houses. This is the 2^nd oral agreement.

The Agreement

11.  The Agreement provided as follows (in translation):

“ WHEREAS:-

(A) Party A is the owner of Demarcation District No. 52 Lot No. 1085B (Section B of Lot No. 1085 in Demarcation District No. 52) (hereinafter called ‘the said Lot’). According to the Building Licence No. 2/78 granted by North District Lands Office on 17^thJanuary 1978, a block of three-storeyed house with the area of 700 square feet for each floor had been built on the said Lot.

(B) The said Lot was originally the property of Party B, and was given to Party A without consideration on 22^nd September 1977.

(C) Due to the boundary problem of the said house, no Certificate of Compliance has yet been obtained.

NOW PARTY A AND PARTY B reach agreement as follows:-

1. Party B agree to pay to Party A Hong Kong Dollars One Hundred Forty Thousand as compensation within three days from the date of this Agreement.

2. Party A shall upon the signing of this Agreement simultaneously sign the ‘Deed of Rectification’ with Party B to deal with the rectification of boundary problem. Party A also promises to sign other documents for dealing with the rectification of boundary problem at the request of Party B.

3. Party A shall upon the signing of this Agreement simultaneously sign the ‘Deed of Consent’ to consent to the encroachment of the house’s balcony upon the land of Party B.

4. Party A agrees to, after issue of Certificate of Compliance (but in any event not later than 6 years after the date of issue of Certificate of Compliance) transfer the said property unto Party B without consideration, and Party Bmust cope with and arrange with Party A for dealing with the procedure of transfer, and Party B shall pay all the expenses incidental to the transfer.

5. From the date of completion of building the said house (which was about 1978), all the costs related to all governmental, common facilities and any other expenses (including rates, government rent, property tax) shall be borne by Party B, and Party B promise to reimburse Party A all such costs and losses arising from Party B’s default (if any).”

12.  The Agreement, and the other associated documents were prepared by, and were signed at the offices of, a firm of solicitors.

The issues in the case

13.  The plaintiff’s Statement of Claim is, at best, cursory in the way in which the plaintiff’s case is set out.  The breach of the Agreement alleged by the plaintiff is that the defendant “still has not duly rectified the boundary problem…and no Certificate of Compliance is issued…so far.”

14.  The plaintiff pleads, without a trace of particularisation, that the “Defendant’s wrongful repudiation of the Agreement” was accepted bythe plaintiff by the issue of the writ.  Damages, to be assessed, are sought.

15.  Recognising that the Agreement does not state, in terms, that the defendant was to carry out any work in relation to the obtaining of the Certificate of Compliance, Mr Lawrence Law, appearing for the plaintiff, submits in his (60 page) closing submission that it is not in dispute that it was the defendant’s obligation to perform the reconstruction work to obtain the CC.  This, he submits, was a condition of the Agreement because a failure to obtain the CC would deprive the plaintiff of substantially the whole benefit that he was to obtain from the Agreement.

16.  The defendant, represented by Mr Edward Lun, accepts that itwas inherent in the Agreement that the defendant would take responsibility for obtaining the CC.

17.  There is, therefore, common ground that the parties agreed that the defendant would be responsible for obtaining CCs in respect of the village houses, and that this would involve their demolition and reconstruction.  The issue between the parties is as to whether there was an express agreement as to the time within which this was to be achieved (contained in the alleged 2^ndOral Agreement) or an implied obligation forming part of the Agreement.

18.  If there was such an express or implied obligation as to the time for performance by the defendant, then consideration is to be given as to whether the relevant obligation has been breached by the defendant; if so, does that breach or constitute a repudiation of the Agreement; and if it does, has that repudiation been accepted by the plaintiff?

19.  Conversely, if there has been no such breach of the Agreement by the defendant, is the defendant entitled to an order for specific performance?

Witness evidence

20.  The plaintiff gave evidence.  He related that he was non-‌resident in Hong Kong since 1971, and had had little to do with the transfer of Sections A and B by his father although he did make the application for a building licence for the village house.  He described the making of the Agreement by which, he said the defendant acknowledged that the house had been built, and also that no CC had been issued.  It was further agreedthat the defendant would pay certain compensation to the plaintiff, and thatthe plaintiff and the defendant would sign a Deed of Rectification to resolve the boundary problem.

21.  The plaintiff also signed an undated Deed of Assignment for the house at the same time, transferring the house to the Defendant by way of gift. 

22.  The plaintiff did not accept that he made any oral agreement such as the defendant alleges.  In his oral evidence in chief he was insistent that, on visits to Hong Kong including in 2004, he had informed representatives of the defendant that the Agreement must be performed within 10 years, or he would consider it to be “null and void”. 

23.  In cross examination he acknowledged that Section B should belong to the defendant.  He was cross examined about a deed of trust by which he confirmed that following the death of his father in 2013 he held Section A on trust for the defendant.  That deed of trust was prepared by the same solicitors as had drawn up the Agreement in 2004.

24.  In cross examination he asserted for the first time that he had not wanted to sign this document, and had argued with the solicitors about it, but had been persuaded by his mother to sign so as to smooth the administration of his father’s estate.  His father’s Schedule of Assets as at the date of his death described the Section A land as “property held by the deceased as trustee or as manager of Tso”.  He accepted the proposition that the 2004 Agreement had been initiated by him to rectify wrongs done to the defendant.

25.  For the defendant evidence was given by Edmund Liu Chok Yiu and Liu Wai Keung.  Mr Edmund Liu’s evidence was straightforward, and he recounted the circumstances in which the land had been subdivided by LSY, how this was discovered, and how the defendant decided not to take legal proceedings in return for LSY and the plaintiff agreeing to “return” the transferred sections to the Tso.

26.  Mr Liu Wai Keung gave the evidence in support of the alleged 2^ndoral agreement, ie, that said to have been made in 2004 at the same time as the Agreement was signed.  He said in his witness statement that it was agreed that demolition of the village houses could only take place after funds had been “saved” out of the rental income.

27.  In cross examination however he accepted that he only discovered after the Agreement had been signed that demolition of the village houses would be necessary to resolve the CC problem. 

28.  Liu Wai Keung’s oral evidence also failed to support the defendant’s contention that funds to demolish the village houses were unavailable except from rental income.  He acknowledged that the Tso maintained accounts records, but these had not been produced on discovery, and nor had the bank records.  Mr Liu said that the balance in the bank accounts was very small, but I am unwilling to place significant weight on this unsupported assertion.

The CC obligation

29.  As noted, this is not set out expressly in the Agreement, but it is common ground that the defendant was to take appropriate steps to obtain the CC.  The issue, in effect, is not whether there was some time obligation, but what that time obligation may have been.  The defendant’s case is that the obligation was contained in an oral agreement, simply to deal with the CC issue when funds had been saved out of rental income.  The plaintiff’s case is that no such express agreement was made but, as a matter of law the defendant was to perform its obligation under the Agreement within a reasonable time.

30.  The defendant’s evidence on the alleged express oral agreement came from Mr Liu Wai Keung, but was unpersuasive.  His witness statement touched on the oral agreement only lightly and was lacking in most particulars as to the “who, when and where” of the allegedagreement.  No explanation was given as to why this part of the matter was not put in writing although, of course, nor was the important obligation on the defendant at least to arrange the demolition of the village houses.  As an aside, it was left unexplained why the houses should be rebuilt at all.  The underlying purpose was to return the land to the Tso.  There is no need to rebuild any property to achieve that purpose.

31.  As referred to above, Mr Liu Wai Keung accepted that he did not know demolition would be necessary until after the Agreement was signed, casting significant doubt on the alleged 2^ndoral agreement.  I am not persuaded that the alleged 2^nd oral agreement was made, and I reject this element of the defendant’s defence.

32.  The defendant sought leave subsequently to disclose, and rely on, the bank records and the accounts of the Tso.  Since the evidence had, by that stage been concluded, I refused the defendant’s application to be allowed to rely on those documents.  In doing so I took into consideration the fact that the central assertion relied on by the defendant was that there was a collateral oral agreement, and that the other evidence showed this assertion to be improbable.

33.  What then was the time obligation applicable to the performance by the defendant when none was expressly stated?  The plaintiff relies on, but has not pleaded, an implied obligation which, it contends, amounted to a condition.  Mr Law’s submission in fact approaches the matter in the opposite sequence.

34.  His submission is that a failure to obtain the CC would deprive the plaintiff of substantially the whole benefit to be obtained under the Agreement.  Therefore the obligation to obtain the CC was a condition of the Agreement, and as a condition, the obligation must have been to obtain the CC within a reasonable time.

35.  I do not accept that approach to the reasoning, but I do accept that the Agreement requires a term to be implied that each party will not unreasonably delay in performing its obligations.  This would be an ordinary incident of a contract especially one requiring future performancetowards the obtaining of government approvals, and involving the intendedtransfer of land.I am prepared to accept, notwithstanding the absence of apleaded implied term, that this Agreement, on its true construction, entailed an obligation on the part of the defendant to act within a reasonable time.

36.  As I return to below, I accept also that the defendant has failed to act within a reasonable period, and as such, is in breach.  I cannothowever accept that this goes to the core of the Agreement in the sense that the plaintiff has been deprived of substantially the whole benefit he was entitled to.  In terms, the Agreement only benefitted the plaintiff by the payment of the sum of money compensation for the loss of ‘ding’ rights, and by relieving him from financial liabilities in respect of the village house on Section B, and the plaintiff has received those benefits.

37.  Mr Law identified two matters as defining the “loss” to the plaintiff from the non-performance of the defendant.  The first was that heremained the apparent owner of the village house on Section B.  The second was that he remained liable for utilities bills and for rates on the property.

38.  I do not accept that the purpose, or even a significant element of the Agreement from the plaintiff’s perspective was to free him from being the apparent owner of the village house.  The purpose, it seems to me, as the plaintiff acknowledged, was clearly to put matters straight in relation to the Tso.  The plaintiff sought the payment of compensation for the “loss” of his “Ding rights”, and this has been paid, but his primary purpose, it seems to me, as he acknowledged, was to transfer the Section B land back to the Tso without incurring any other taxes or costs.

39.  Indeed, in his oral evidence Mr Liu Siu Shum reiterated the importance to him of making that transfer.  He stated that he had pressed the representatives of the Tso on more than one occasion to take steps to give effect to the Agreement on his visits to Hong Kong.

40.  Moreover, the Agreement provided for the defendant to be liable for rates and similar costs on the village house on Section B. 

41.  In these circumstances I do not accept that the plaintiff has made out his claim for a declaration that the Agreement has been repudiated by the defendant.  It follows that his claim for damages consequential on that repudiation also falls away.  No alternative claim for damages due to a breach on the part of the defendant in not taking steps towards obtaining the CC within a reasonable time is made, and therefore no further consideration may be given to that.

Counterclaim

42.  The defendant seeks an order for specific performance of the Agreement.  This is resisted by the plaintiff despite his stated intention of transferring Section B back to the defendant. The plaintiff submits that no order for specific performance should be made because the performance of the Agreement, “on D’s case”, requires demolition of the house on Section A, and the owner of Section A is not a party.

43.  I do not accept that.  According to the dead of trust signed by the plaintiff, the beneficial owner of Section A is the defendant.  The defendant undertook to pay certain costs and, it is common ground, undertook to take the necessary steps to obtain the CC.  It is an oddity of this case that the defendant seeks an order for specific performance in circumstances in which it is the defendant itself that appears to be the party of whom action is required, at least in the first instance.  This would strongly militate against an order for specific performance being made. 

44.  Time for performance by the plaintiff of the obligation to transfer Section B is stated in the Agreement, but it is common ground that the plaintiff’s obligation is not triggered until the defendant itself resolves the CC “problem”.  It is for the defendant to act first, not the plaintiff.

45.  In those circumstances it seems to me to be inappropriate for the Court to exercise its discretion to make an order directed to the plaintiff requiring “performance” on his part.  Accordingly the defendant’s application for such an order is refused.

Costs

46.  The plaintiff has not succeeded in its claim, nor has the defendant has succeeded in its counterclaim.  It seems to me, as stated above, that the defendant has “sat on its hands” for an unduly long period of time.  That has undoubtedly been a factor underpinning the instigation of the litigation.

47.  In the circumstances therefore it seems to me that the appropriate order to make is that there be no order as to costs.  This is the order I make, on an “order nisi” basis.