XCHRX LEIGH HUNG HAU ENTERPRISE LTD. AND ANOTHER v. EVER JOINT PROPERTIES LTD. and STIKEMAN, ELLIOTT (a firm) (Third Party)

HCMP 981/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 981 OF 1998

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DECISION

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1. This is an application by the Third Party for discovery against the Plaintiffs.

2. The Third Party were solicitors acting for the vendor in an agreement for sale and purchase of property dated 19 September 1997 ("the Head Agreement"). The vendor is now the Defendant in these proceedings. The purchaser of the property is now the 2nd Plaintiff.

3. The 1st Plaintiff was the sub-purchaser under a Sub-sale Agreement dated 9 October 1997, under which the 2nd Plaintiff agreed to sell the property to the 1st Plaintiff at a profit of about $3m.

4. Completion of the Head Agreement was due by 5 p.m. on 3 February 1998. Completion of the Sub-sale Agreement was due by 4:30 p.m. (having been put back from 3 p.m. as originally agreed).

5. However, just before 3 p.m. that day, the Defendant through its solicitors the Third Party sent a letter by fax to the solicitors for the 2nd Plaintiff alleging that due to the failure of the 2nd Plaintiff to reply to certain requests or to supply documents, the 2nd Plaintiff was "deemed to have committed an anticipatory breach" of the Head Agreement which the Defendant elected to accept, and forfeited the deposit.

6. The 2nd Plaintiff's response, which I am told was before 5 p.m., was to accept the Defendant's termination as a repudiatory breach. So on either case, the Head Agreement had been terminated before the scheduled completion time.

7. The Plaintiffs have apparently reached a compromise between themselves under which the 1st Plaintiff has become assignee of the 2nd Plaintiff. The Amended Originating Summons seeks, amongst other things, an order that the Defendant repay the 1st Plaintiff the deposit, further or alternatively, damages for the Defendant's wrongful repudiation of the Head Agreement and an order that the Defendant pay the 1st Plaintiff damages which the 2nd Plaintiff may be found liable to pay the 1st Plaintiff for the 2nd Plaintiff's consequential breach of the Sub-sale Agreement.

8. The Defendant has issued third party proceedings against the Third Party for an indemnity and for damages for breach of contract and negligence.

9. The Third Party's application is for discovery from the Plaintiffs under O.24 r.7, or perhaps more appropriately under O.24 r.3, of certain documents relevant to the 1st Plaintiff's financing of the purchase. The Third Party's interest lies in obtaining evidence to see if the 1st Plaintiff was financially able to complete the purchase. As far as the 2nd Plaintiff is concerned, it seems to be common ground that it was relying upon the 1st Plaintiff to fund the purchase.

10. If all that the Plaintiffs were seeking in these proceedings was the return of the deposit, then I would have agreed with Mr Andrew Cheung, counsel for the Plaintiffs, that the Third Party is not entitled to this discovery on the ground that it is irrelevant.

11. The issue between the Plaintiffs and the Defendant is whether the Defendant was entitled to terminate the Head Agreement shortly before 3 p.m., ahead of the time for performance. The Defendant's case is that it was entitled to call off the contract then because of the 2nd Plaintiff's anticipatory breach.

12. An anticipatory breach can only occur when the other party (the 2nd Plaintiff) actually expresses his intention to breach the contract (not this case), or when the other party acts in such a way as to lead a reasonable person to conclude that he does not intend to perform the contract. Acting in this way is regarded as "renunciation" of the contract.

13. It is established law that the juridical analysis of a cause of action in anticipatory breach is not that it is a future breach of contract, but that the contract has been so renounced. The renunciation is not a breach of contract, but is an act which enables the other party to act upon it to terminate the contract (Chitty on Contracts 28th ed paragraphs 25-020 - 25-022).

14. So understood, where A has terminated a contract on the ground of B's anticipatory breach, and the propriety of that termination is challenged, it is not open to A (the Defendant) to try to show that B (the 2nd Plaintiff) would have been in breach at completion time because it did not have the funds. The only thing that could have justified A terminating the contract for anticipatory breach was renunciation by B, so the focus can only be on whether B has acted in such a way as to lead A reasonably to conclude that B did not intend to complete.

15. The Defendant's case is that the following acts or omissions were the 2nd Plaintiff's acts of renunciation:- failure to provide a draft assignment and undertaking; failure to deliver a memorandum under the Head Agreement; failure to respond to a draft letter of indemnity and failure to provide information on stamping, the subsistence of the sub-sale agreement for the purposes of the assignment and a power of attorney.

16. So the focus of the proceedings will be to see if these acts or omissions justified the Defendant treating them as acts of renunciation by the 2nd Plaintiff. The ability or inability on the part of the Plaintiffs to provide funds for completion if the Defendant had not prematurely terminated the transaction is irrelevant, because what matters is the renunciation, not the possibility of a future breach.

17. Accordingly, I take the view that if all that is in dispute is whether the Defendant was justified in terminating the Head Agreement at 3:00 p.m. on the ground of anticipatory breach, the Third Party should not be entitled to the discovery sought.

18. However, Mr Peter Ng, counsel for the Third Party, has drawn the court's attention to the claim for damages for the Defendant's wrongful repudiation of the Head Agreement and an order that the Defendant pay the 1st Plaintiff damages which the 2nd Plaintiff may be found liable to pay the 1st Plaintiff for the 2nd Plaintiff's consequential breach of the Sub-sale Agreement.

19. In examining the claim for damages, the court must consider the scenario as if the Defendant had not terminated the Head Agreement and had proceeded to completion. The Plaintiffs would have had to provide the purchase price before the 2nd Plaintiff would have been in a position to make its profit of $3m. It is therefore pertinent to the issue of damages that the Third Party should be able to examine the Plaintiffs' means of funding the purchase price.

20. In this regard, I take the view that the documents sought are not only relevant but also necessary. It is true that the documents so far exhibited show that there was no drawdown, but it would be relevant to examine from other documents whether there was no drawdown because the Defendant had terminated the Head Agreement, or otherwise. If it were otherwise, such that the Plaintiffs would not have been in a position to complete anyway, the Plaintiffs would not be able to claim any damages from the loss of the Head Agreement. That issue would require an examination of the documents passing between the financiers and the Plaintiffs, or their solicitors or agents.

21. Since no list of documents has been filed in these proceedings, I would therefore order under O.24 r.3 that the Plaintiffs do within 14 days make and serve on the Third Party a list of the documents which may have been in their possession, custody or power relating to the financing of the balance of the purchase price, and make and file an affidavit or affirmation verifying such a list and serve the same on the Third Party.

22. I would also make an order nisi that the costs of the Summons be to the Third Party in any event.