CHAN YIN MAN AND OTHERS v. LEE SHU MAN

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HEADNOTE

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Contract for sale of land - defendant (purchaser) let into possession in March 1994 prior to completion scheduled for 18 April 1994 for an agreed licence fee - action by plaintiffs (vendors) alleging wrongful repudiation by purchaser - counterclaim by defendant for specific performance and in the alternative for rescission and damages - application by plaintiffs for interim payment under O.29, r.12(b)

Underlying purpose of O.29, r.12(b) - whether requirement in r.12(b) must be satisfied in relation to each relief claimed by defendant - whether costs a relevant factor

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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REASONS FOR DECISION

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1. This is an application under O.29, r.12(b) of the Rules of the Supreme Court for interim payment by the Defendant to the 2nd and 3rd Plaintiffs ("the Plaintiffs"). At the hearing, I ordered that interim payment be made. The reasons appear below.

The Action

2. In this action, the Plaintiffs who are the vendors claim that the Defendant wrongfully repudiated a contract for sale and purchase by failing to complete on time. The Plaintiffs therefore seek to forfeit the deposits. The defence of the purchaser is that it was the vendors who failed to answer requisitions, so that the failure to complete was the vendors' fault. The Defendant therefore counterclaims for specific performance and in the alternative for rescission and damages.

3. Completion under the contract was scheduled to take place on or before 18 April 1994, time being of the essence. Pending completion, the Defendant was let into possession, the agreed licence fee being the sum of $23,000 for the period from 18 March to 17 April 1994. The property in question is a ground floor shop including a cock-loft in Tai Po, the New Territories.

4. The Defendant has been in occupation of the property for almost two years. Other than the licence fee for the period from 18 March to 17 April 1994, the Defendant has not made any payment in respect of his occupation of the property nor has any part of the purchase monies of $3.3 million other than the initial deposit of $100,000 paid to the Plaintiffs and a further deposit of $230,000 paid to the Plaintiffs' solicitors as stakeholder. Accordingly, the outstanding purchase monies amount to $2.97 million.

Order 29, Rule 12(b)

5. This rule provides that -

"If, on the hearing of an application under Rule 10, the court is satisfied that the Plaintiff's action includes a claim for possession of land and, if the action proceeded to trial, the Defendant would be held liable to pay to the Plaintiff a sum of money in respect of the Defendant's use and occupation of the land during the pendency of the action, even if a final judgment or order were given or made in favour of the Defendant, the court may .... order the Defendant to make an interim payment ..."

6. Counsel for the Plaintiffs submitted that if the Plaintiffs were to succeed at trial, they would unquestionably be entitled to mesne profits in respect of the Defendant's occupation and use of the property since 18 April 1994. Having regard to the agreed licence fee when the Defendant was let into possession, it is reasonable to infer that that sum reflects or represents the fair market rent of the property.

7. Counsel for the Plaintiffs further submitted that even if the Defence and Counterclaim were to succeed, the Defendant would still be liable to pay to the Plaintiffs a sum of money in respect of the Defendant's use and occupation of the property. Should he succeed in his counterclaim for specific performance, he would nevertheless, in addition to paying the purchase price, have to pay interest on the balance of the outstanding purchase monies as from the date of his possession, namely 18 March 1994, subject to any adjustment required for the licence fee paid.

8. The outstanding purchase price is $2.97 million. It was submitted that an interest rate at 10%, being prime plus 2%, would be appropriate. Interest at the rate of 10% would produce an amount in excess of $23,000 a month, which it was submitted represented a fair value for the occupation of the premises. Thus, even if a final judgment were to be given in favour of the Defendant, he would remain liable for a sum relating to his occupation of the premises since March 1994, in addition to having to pay the balance of the purchase price.

9. Counsel for the Defendant submitted that in the event of the Court ordering specific performance, the appropriate rate of interest should be 4% and not as the Plaintiffs submitted, 10%. She cited the case of Palmer v. Lark [1945]1 Ch.182, an English authority decided half a century ago. I am not prepared to accept that the rate of 4% is necessarily appropriate in Hong Kong where economic conditions are wholly different. English decisions concerning the appropriate rate of interest on outstanding purchase monies, where the purchaser has taken possession pending completion, can be of little assistance. Moreover, even more recent English authorities such as Barlett v. Barclays Bank Trust Co. Ltd. (No.2) [1980] Ch.515 recognised that the former 4% rule had become unrealistic. Having regard to interest rates and economic conditions prevailing in Hong Kong during the period in question, the suggested rate of 10% does not appear to be out of line or demonstrably wrong.

10. It is quite clear that if the Defendant were to succeed and obtain specific performance, in addition to having to pay the balance of the purchase monies, he would have to pay interest on that amount which would produce a sum that corresponds to, if not exceeds, the amount at the rate payable under licence fee agreed between the parties for the period prior to completion. Even if the submission that the Defendant's costs ought also to be taken into account is correct (a point dealt with below), I cannot see the amount of the costs could possibly exceed the outstanding purchase price that the Defendant would have to pay.

11. It was further submitted by the Defendant that there is an alternative claim for rescission and damages for loss of bargain which would be the difference between the purchase price of the property and its market value as at the date of the trial. So, in the event of his deciding to elect for rescission, even if (as the Defendant is prepared to concede for present purposes) he would have to pay mesne profits, the amount of damages must first be deducted from the mesne profits. In addition, it was argued that an allowance ought also have to be made for his costs. Because the Defendant is not obliged to make his election until trial and because the amount of damages cannot be ascertained until the date of trial, it was submitted that it would be impossible for the Court to ascertain the amount to be deducted from the mesne profits so that there was no amount in respect of which an order under O.29, r.12(b) could be made.

12. But what is the reality? If the property were to go down in value, there would be no loss, ergo, no damages. In that event, the Plaintiffs would be entitled to mesne profits. If property values were to rise, the Defendant would most naturally opt for specific performance rather than damages although the latter remains a theoretical possibility. In the circumstances, where there are alternative pleas, for the purposes of O.29, r.12(b), must the test be satisfied with regard to each of the alternative reliefs pleaded?

13. O.29, r.12(b) does not in terms address alternative pleas. The rule requires the postulation that a final judgment or order is made in favour of the Defendant. In the present case, that is satisfied by postulating that the Defendant will succeed in his claim for specific performance. Once that is done, the rule is satisfied. On its proper construction, it does not go further to require that the final judgment must be postulated with respect to each of the Defendant's alternative pleas.

14. The underlying purpose of O.29, r.12 is to mitigate hardship or prejudice to a plaintiff which may exist during the period from the commencement of an action to the trial. Here the Plaintiffs are deprived of both their land as well as the balance of the purchase price. In other words, the Defendant is simultaneously claiming to have the use of the outstanding purchase price as well as the use of the land. That, with respect, is contrary to general principles of equity, see Halsbury's Laws of England, Vol.44(I), para.941. It cannot be right in principle that the Plaintiffs are made to fund the Defendant's litigation concerning title to land which is the subject matter of the contract between the parties which would be the effect of my acceding to the submissions of the Defendant. It would be tantamount to requiring the Plaintiffs to provide for security for costs through the back door: it is difficult to conceive they would be required to do so if an application under O.23 were to be made by the Defendant.

15. So far as costs is concerned, nothing in O.29, r.12(b) requires that allowance be made for costs before any interim payment order can be made. In my view, it is not a pertinent or relevant consideration in considering whether or not the Court should order an interim payment under O.29, r.12(b). If it were, no interim orders can ever be made because by its nature, the amount of costs will not be known until after trial.

16. Although it was not part of the submissions that the Plaintiffs have failed to adduce evidence of need or prejudice, I would add that such a submission would not have succeeded, there being no restriction implicit in the rules which prevents an interim payment order being made in the absence of evidence of need or prejudice. See Schott kem Ltd. v. Bentley [1991]1 Q.B.61 at 74 B-C.

17. I am satisfied that this is an appropriate case for the Court to make an interim payment order under r.12(b). Accordingly, I order that a lump sum for the period from 18 April 1994 to 17 February 1996 at the rate of $23,000 a month be paid within 21 days of the Order and that a sum of $23,000 per month be paid as from 18 March 1996 until further order. The Plaintiffs are entitled to the costs of this application and I so order.