XCHRX ALLIED ASSET LTD. v. KENLEY INVESTMENT LTD.

HCA4614/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4614 OF 1998

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J U D G M E N T

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The Appeal

1. This is an appeal by the Defendant against the Order of Master Bharwaney granting summary judgment to the Plaintiff with damages to be assessed.

The Facts

2. The Plaintiff was the purchaser and the Defendant, the vendor of the property known as Flat 1, 1st Floor, Splendour Villa, No.10 South Bay Road, Hong Kong ("the Property"). They entered into a Provisional Agreement for Sale and Purchase ("the Agreement") of the Property on 23rd February 1998 for the price of $13,800,000. $500,000 of the price was paid by way of initial deposit on signing of the Agreement. A further deposit of $880,000 was to be paid on or before 9th March 1998 and the balance of the purchase price was to be paid on the completion of the sale on or before 24th April 1998.

3. Clause 3 of the Agreement provided that a Formal Agreement for Sale and Purchase ("the Formal Agreement") was to be signed on or before 9th March 1998.

4. Clause 6 of the Agreement provided that :

"Should the Vendor after receiving the initial deposit paid hereunder fail to sign the Formal Agreement for Sale and Purchase or to complete the sale in the manner herein contained, the Vendor shall immediately refund to the Purchaser the initial deposit and pay to the Purchaser a sum equivalent to the amount of the initial deposit as liquidated damages and reimburse or pay to the Purchaser the stamp duty paid or payable in respect of the premises but the Purchaser shall not take any further action to claim for damages or to enforce specific performance of this Agreement."

Clause 12 provided that time was of the essence of the Agreement.

5. Problem arose on 9th March 1998 which was the date set for the signing of the Formal Agreement. According to Winston Chu & Company ("Winston Chu"), Solicitors for the Plaintiff, in their discussion that morning with the Defendant's Solicitors, namely Vincent T.K. Cheung, Yap & Co. ("Vincent Cheung"), the latter informed them that the Defendant would not sign the Formal Agreement and would not accept any payment of the further deposit. They also asked Winston Chu not to send the further deposit to them. On the same date after this discussion, Winston Chu wrote to Vincent Cheung referring to the discussion and stating that :

" ... In view of such, unless a satisfactory explanation of the matter is given to us before 1:00 p.m. today, our client shall have no alternative but to treat your client as in breach of the Provisional Agreement dated 23rd February 1998 and to have wrongfully repudiated the such Provisional Agreement.

Lastly, we reserve all rights whatsoever and the position of our client."

6. No reply was given by Vincent Cheung. Winston Chu was also unable to reach the handling solicitor in Vincent Cheung on the telephone. On the same day Winston Chu sent the further deposit of $880,000 to Vincent Cheung. The accompanying letter stated that this was paid without prejudice to the rights of the Plaintiff. No Formal Agreement was signed on that day.

7. On 11th March 1998, Winston Chu wrote to Vincent Cheung stating that :

" It is a term of the Provisional Agreement for Sale and Purchase dated the 23rd February 1998 that the formal Agreement for Sale and Purchase should be signed on or before 9th March 1998. Please therefore send us the engrossment of the formal Agreement for Sale and Purchase for execution by our client without further delay.

Lastly, we reserve all rights whatsoever of our client under the said Provisional Agreement for the Sale and Purchase."

8. On the same day, Vincent Cheung wrote to Winston Chu stating that the Defendant had decided not to proceed with the sale of the Property. The further deposit of $880,000 was returned and the letter further stated that :

" We will let you have the amount payable by our client pursuant to clause 6 of the Agreement as soon as we receive the same from our client."

9. On the next day, 12th March 1998, Winston Chu wrote to Vincent Cheung stating that :

" We wish to point out, however, that your client is no longer entitled to avail itself of the option under Clause 6 of the Provisional Agreement for Sale and Purchase, especially when your client has still not tendered the moneys as required by the said Clause. Your client's refusal to proceed with the sale therefore constitutes wrongful repudiation of the Provisional Agreement in respect of which our client reserves all its rights."

10. The title deeds were returned to Vincent Cheung. On the same day, Vincent Cheung sent to Winston Chu the sum of $1,379,500 which was the amount payable under Clause 6 of the Agreement. This represented twice the initial deposit of $500,000 plus stamp duty.

Was the Defendant liable for further damages

11. The Defendant had, according to the record of Land Registry, sold the Property to a third party on 20th April 1998 for $15,200,000. Apparently it had entered into an agreement with the third party on 6th March 1998, followed by an agreement for sale and purchase on 20th March 1998.

12. I am not here to pass judgment on the commercial morality or rather lack of it by the Defendant who chose to sell the Property to the third party despite the earlier binding agreement with the Plaintiff. I am here to decide whether the Defendant was entitled to withdraw from the Agreement with the Plaintiff in the manner it had carried out or whether it was liable to pay damages to the Plaintiff for breach of the Agreement. The learned Master decided that it was liable to pay damages.

The issue

13. The Plaintiff contends that, although Clause 6 of the Agreement provided an alternative option to the Defendant to decide whether to go ahead with the sale, it was not entitled to avail itself of the clause because payment was not effected in according with its terms.

14. That Clause 6 provides an alternative mode of performance to a vendor and precludes the purchaser from seeking specific performance or damages in the event of breach by the vendor is clear from authorities such as Wong Lai-fan v. Lee Ha [1992] 1 HKLR 125. The issue is when should the Defendant pay the amount under Clause 6. The Plaintiff contends that it should be on 9th March 1998. The Defendant, on the other hand, contends that its obligation to pay the money under Clause 6 did not arise on 9th March 1998.

Binding Agreement

15. In dealing with the issue, it must be borne in mind that the Agreement was a binding agreement: Link Brain Ltd v. Fujian Finance Co. Ltd. [1992] HKLR 353. If, for example, the Formal Agreement was not signed on 9th March 1998 because the parties could not agree on its terms, there would still be a valid binding agreement between the parties.

The Plaintiff's Case

16. What the Plaintiff contends is this: on 9th March 1998, the Defendant refused to sign the Formal Agreement and also indicated that it would not complete the sale; the Defendant was in breach of the Agreement which would entitle the Plaintiff to seek specific performance or damages. In order to invoke Clause 6, which precludes the Plaintiff from exercising such right, the payment must be made on 9th March, or the first available moment of the next day. The argument being that under the "mid-night rule", the Defendant had until mid-night of 9th March to sign the Formal Agreement.

The Defendant's Case

17. Mr Yeung, Counsel for the Defendant, argued that 9th March 1998 should not be implied as the date on which the Defendant was required to pay the money. The clause stated "should the Vendor ... fail to sign the Formal Agreement ...", this means a present failure on the Defendant to sign the Formal Agreement and then followed by a payment of the money under Clause 6. He argued that the intended operation of Clause 6 necessarily involves the payment of the money after the date due for the signing of the Formal Agreement.

My View

18. I do not consider the Defendant's argument to be valid. In Wong Lai-fan v. Lee Ha [1992] 1 HKLR 125, the relevant clause of an agreement provided that :

"Should the Vendor after receiving the initial deposit paid hereunder fail to complete the sale in the manner herein contained the Vendor shall immediately compensate the Purchaser with a sum equivalent to the amount of the initial deposit as liquidated damages together with the refund of the initial deposit and the Purchaser shall not take any further action to claim for damages or to enforce specific performance."

Nazareth JA stated that on its plain and ordinary meaning, "failure includes all failure howsoever caused, i.e. including refusal. ... It was refusal even more than involuntary failure that was intended as an option by the parties, i.e. to provide that at that provisional stage the vendor (and indeed the Purchaser under Clause 6) could refuse to complete and have her total liability limited to the amount of the initial deposit."

19. I respectfully adopt his view. 9th March 1998 was not just any other date. It was the date specified in the Agreement when the Formal Agreement was to be signed. Clause 6 is clear enough: if the vendor failed to sign the Formal Agreement then it should immediately repay the money as specified in Clause 6. Time was the essence of the Agreement. On 9th March 1998, there was no agreement to extend time for performing the Agreement and the Plaintiff had not waived time. On that date, the Defendant refused to sign the Formal Agreement and indicated that it would not complete the sale. It was in breach of the Agreement which would entitle the Plaintiff to seek specific performance or damages. If the Defendant wished to avail itself of Clause 6, then payment must be made on that date.

20. In Man Sun Finance (International) Corp v. Lee Ming Ching Stephen [1993] HKC 113, the Sale and Purchase Agreement provided that the Formal Agreement was to be signed on or before 3rd April and if the vendor failed to enter into the formal agreement 'all deposits ... shall be double refunded to the purchaser ... otherwise the purchaser reserves the right to buy the premises'.

21. The Court of Appeal held that if the vendor was to avail of this clause then the payment must be paid on or before 3rd April. This conclusion was reached even though the clause was without the word "immediately" and the agreement did not have a time of the essence clause. Godfrey J. (as he then was) at page 125 stated that :

" ... If the relevant provision takes away the innocent party's right to specific performance but only on terms that the defaulting party performs some alternative obligation instead, then the defaulting party, given this option, must perform that alternative obligation strictly in accordance with its terms in order to take the benefit of the provision."

22. Clause 6 in this case is, of course, differently worded but clearly, the rights and obligation of the parties were crystallised on 9th March 1998 when Vincent Cheung stated that the Defendant would not sign the Formal Agreement or accept the further deposit. The refusal by the Defendant to accept the further deposit must be the clearest indication that it would not complete the sale.

23. Mr Yeung said that there is a factual dispute here, because, according to the affidavit of Ms Fung of Vincent Cheung, in the morning of 9th March 1998 when the representatives of the two firms were discussing the Plaintiff's proposed amendment to the draft Formal Agreement, the parties could not agree on the terms and Vincent Cheung mentioned in passing that the Defendant might not be signing any Formal Agreement.

24. Winston Chu had on the same day of this telephone conversation written to Vincent Cheung stating what had transpired in the morning. There was no denial from Vincent Cheung in the contemporary correspondence to what had transpired. In my view it is simply not credible that the failure by the Defendant to sign the Formal Agreement on 9th March 1998 was because of a disagreement on the terms of the Formal Agreement. Furthermore, on 6th March 1998, the Defendant had entered into another agreement to sell the same property to the third party at a higher price. Obviously, the Defendant, on 9th March 1998, was not interested to complete the sale with the Plaintiff.

25. The money was of course not paid on the first moment of 10th March 1998. Mr Mok, Counsel for the Plaintiff, submitted that in any event the money was not paid on either 10th or 11th March 1998 and the Defendant was precluded from exercising the alternative mode of performance by tendering the money on 12th March 1998. I agree.

Waiver

26. Mr Yeung further argued that the Plaintiff had in fact waived the deadline of 9th March 1998. He referred to the Statement of Claim in which the Plaintiff, after pleading the events on 9th March 1998, and the letter of 11th March 1998, pleaded in paragraph 8 that "By reason of the matters aforesaid, the Defendant had wrongfully repudiated the Agreement, which repudiation was accepted by the Plaintiff by letter (dated 14th March 1998 from Winston Chu to Vincent Cheung)". Mr Yeung submitted that this shows the Plaintiff was not relying on 9th March 1998 as the date of repudiation by the Defendant. He referred to the operation of waiver as discussed by Clough J.A. in Link Brain Ltd where he stated that :

" The effect of the innocent party opting to treat the repudiation as inoperative and the contract as being alive thus keeps it alive for the benefit of both parties and obliges the innocent party to perform all his obligations under the contract and does not excuse him from performance or preclude due performance by the repudiating party. The position was recently summarised thus by Lord Achner in Fercometal at p.805D.

'When A wrongfully repudiates his contractual obligations in anticipation of the time for their performance, he presents the innocent party B with two choices. He may either affirm the contract by treating it as still in force or he may treat it as finally and conclusively discharged. There is no third choice, as a sort of via media, to affirm the contract and yet to be absolved from tendering further performance unless and until A gives reasonable notice that he is once again able and willing to perform. Such a choice would negate the contract being kept alive for the benefit of both parties and would deny the party who unsuccessfully sought to rescind, the right to take advantage of any supervening circumstance which would justify him in declining to complete."

27. I do not accept the Statement of Claim indicated that the Plaintiff had waived the deadline of 9th March 1998. In my view, the letter of 11th March 1998 does not constitute a waiver of time or the Defendant's contractual obligation to comply with the alternative performance of payment. The Plaintiff had in the correspondence reserved its right arising from the Agreement. I agree with Mr Mok that, at the highest, the Plaintiff was indicating that it was willing to proceed conditional upon the Defendant sending the engrossment of the Formal Agreement "without further delay". The Defendant never did.

Clause 6 also provides for failure to complete

28. Mr Yeung further argued that Clause 6 also caters for the situation when the Defendant failed to complete the transaction and this is a further indication that 9th March 1998 should not be considered to be the date on which the Defendant was required to pay the money under Clause 6. I had already dealt with this matter earlier : on 9th March 1998, the Defendant was in fact refusing to complete the sale.

Repudiation on 11th March 1998

29. In any event, Mr Yeung accepted that on 11th March 1998 the Defendant had repudiated the Agreement. This entitled the Plaintiff to sue for specific performance or damages subject to the Defendant paying the amount specified under Clause 6. He, however, referred to Halsbury's Laws of England (Vol 45 Para 1148) in which it was said that the word "immediately" means "forthwith" and according to London Borough of Hillingdon v. Cutler [1967] All E R, "forthwith" is not a precise time and provided no harm is done, "forthwith" means any reasonable time thereafter.

30. I do not think that the case is of any assistance. Time was the essence of the Agreement and the Privy Council decision of Union Eagle Ltd v. Golden Achievement Ltd [1997] HKLR 366 clearly demonstrated that this clause means exactly what it says. In my view, if the repudiation was to be treated to have taken place on 11th March 1998 only, then in order to avail itself of Clause 6, the Defendant must pay the money on the same day. The letter of 11th March 1998 from Vincent Cheung merely stated that the money would be given to Winston Chu "as soon as they receive it from their client". In a commercial transaction of this type, is a purchaser required to wait and ponder when the money will be paid by the vendor before he can decide what his legal position is? Are the remedies of specific performance or damages for breach of contract taken away from the purchaser notwithstanding the clear breach by the vendor just because the vendor says that it will rely on Clause 6 but provides no payment at the same time? In my view, the answers to these questions must be "no". What I have said earlier on time being of the essence and the strict performance of Clause 6 apply equally to this aspect of this case.

Obligation under Clause 6

31. Mr Yeung further argued that Clause 6 merely created an obligation on the part of the Defendant to pay the money; if the Defendant failed to pay the money, all that the Plaintiff could do was to sue for the money; the failure by the Defendant to pay the money does not mean that the Plaintiff is entitled to claim for specific performance or damages.

32. I disagree with this construction of the clause. I would respectfully adopt the reasoning of Godfrey J in Man Sun Finance. In my view, Clause 6 must be construed as imposing an obligation on the Defendant, if he wished to exercise the option conferred on it to withdraw from the sale, to pay the money either on or before the specified date. It cannot be right to attribute to the parties an intention that the Defendant, having failed to enter into the Formal Agreement or having indicated that it would not complete the sale, was entitled to keep the Plaintiff waiting indefinitely for the amount or requiring the Plaintiff to sue for the amount. Any other construction will lead to an absurd result.

33. Mr Yeung further referred to Kentex Investment Ltd v. Hui Lap Ping, Sam (1991, No MP3447) in which Godfrey J. seemed to suggest that the obligation was to pay the compensation within a reasonable time. In my view, what Godfrey J. said must be viewed in the context in which it was said. He was merely referring to the argument of counsel for the vendor in a case where the word "immediately" was not used in the relevant clause. Particularly in the light of his own decision in Man Sun Finance, there really is no room for argument that he was of the view that the money was only required to be paid within a reasonable time.

Conclusion

34. Master Bharwaney was clearly right in his decision. The appeal is accordingly dismissed with cost nisi to the Plaintiff.