LIU CHUNG FAI AND ANOTHER v. TIN SHUI WAI DEVELOPMENT LTD AND ANOTHER

cacv 252/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 252 of 2006

(on appeal from HCA NO. 4610 of 2003)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.  There will therefore be an order in terms of paragraph 31 of the judgment.

Hon Le Pichon JA:

2.  This is an appeal by the plaintiffs from the order of Deputy High Court Judge Muttrie dated 4 July 2006 striking out the plaintiffs’ amended statement of claim, the reply and defence to counterclaim of the first defendant and the plaintiffs’ voluntary particulars of misrepresentations and entering judgment for the first defendant on its counterclaim against the plaintiffs with damages to be assessed.  At the conclusion of the appeal hearing judgment was reserved which we now give.

Background

3.  The first defendant is the developer of a housing development comprising eight housing blocks known as Maywood Court, Kingswood Villa, Tin Shui Wai (“the Development”).  The plaintiffs entered into an agreement on 8 October 1997 for the pre-sale of one of the residential units in the Development.  The agreement was an approved standard form agreement under the Consent Scheme for use in projects under development.  The Development has given rise to a number of actions by purchasers of units in the Development against the first defendant under the relevant agreements for sale and purchase that never proceeded to completion.  A relevant factor was the onset of the Asian financial crisis which caused the property market to start falling from late October 1997.  The judge considered that it was probable that by December 1997 the property had already fallen well below the contract price. 

4.  In the agreement, the “Development” was defined to mean:

“the residential units and car parking spaces now being constructed or to be constructed on the land in accordance with the building plans and to be known as “BLOCKS 1, 2, 3, 4, 5, 6, 7 and 8 of MAYWOOD COURT ( 美湖居 )” of “KINGSWOOD VILLAS ( 嘉湖山莊 )”.”

Clause 4(1)(c) of the agreement required the vendor to complete the Development in accordance with the conditions of the Government Grant and the building plans by 31 December 1997 subject to any extensions that may be granted by the Authorised Person.  Clause 4(5)(b) required the vendor to notify the purchaser within 14 days of obtaining an extension and to furnish the purchaser with a copy of the relevant certificate.

5.  If the first defendant failed to complete the Development by 31 December 1997 or any extended date, the plaintiffs had a right under clause 4(4)(a) and (b) to rescind the agreement within 28 days from the due date and if the plaintiffs did not do so, they were deemed, without prejudice to their rights under subclause (4)(c) (which subclause gave the purchaser another window to rescind should the Development not be completed by 30 June 1998) to have elected to wait for completion of the Development.  Clause 4(4)(b) also gave the purchaser a right to interest at 2% above prime on monies paid under the agreement in respect of the period of delay in completion of the Development.

6.  Clause 4 went on to provide as follows:

“   (6)    The Vendor shall apply in writing for a Certificate of Compliance or the consent of the Director of Lands to assign in respect of the Development within 14 days of its having completed the Development as stipulated in sub-clause (1)(c) above.

    (7)    For the purpose of this clause the issue of a Certificate of Compliance or consent to assign by the Director of Lands shall be conclusive evidence that the Development has been completed or is deemed to be completed as the case may be and nothing in this sub-clause shall preclude the Vendor from proving that it has complied with sub-clause (1)(c) above by any other means.”

Clause 5 provided for completion within one month of the issue of the certificate of compliance or the consent to assign, whichever should happen first.

7.  The Building Authority issued the occupation permit on 22 December 1997.  On the same day, the Authorised Person for the Development issued a letter certifying that the Development had been completed in all respects in compliance with the Government Grant and the building plans.  On the following day, the first defendant’s solicitors applied for the consent to assign.  That was not granted until 17 June 1998, after the first defendant had given an undertaking to Government to complete “[m]inor external finishing works, minor landscaping works and minor internal finishing works at the common areas of the lot” by 30 September 1998 and by providing a bank bond in the sum of $55 million as security.

8.  After obtaining the consent to assign, the first defendant by its solicitors’ letter of 3 July 1998 required the plaintiffs to complete the purchase within 14 days of the date of the letter.  When the plaintiffs failed to complete, the first defendant served a notice dated 1 August 1998 pursuant to clause 16 of the agreement requiring the plaintiffs to make good their default within 21 days.  When completion still failed to take place, on 30 September 1998, a notice of determination was sent to the plaintiffs.

9.  In May 2005, the plaintiffs commenced this action against, inter alia, the first defendant for (1) declarations that the first defendant had been in repudiatory breach of the agreement by failing to complete the Development by 31 December 1997 and that the plaintiffs had validly terminated the agreement or that they had accepted the first defendant’s repudiation and (2) the return of the deposits paid of over $1.3 million.  The first defendant denied liability and having resold the property at a considerable shortfall some six months after the termination of the agreement counterclaimed for a little under $1.14 million by way of liquidated damages plus contractual interest and, in the alternative, damages amounting to a little over $1.14 million.

10.  The seven heads of claim are set out in paragraph 21 of the judgment.  Apart from the plaintiffs’ amended statement of claim, the judge had before him the 2^nd draft re-amended statement of claim containing proposed amendments (in green and purple) to the amended statement of claim (“the proposed amendments”).  The judge found the plaintiffs’ pleadings to be unarguably bad, to disclose no reasonable cause of action and that they could not be cured by the proposed amendments.  As the plaintiffs failed to complete when called upon to do so after the consent to assign had been issued, the judge held that they had no claim and no defence to the counterclaim.

This appeal

11.  Both prior to and at the hearing, the plaintiffs abandoned several of their grounds of appeal.  The main issues arising on the appeal relate to the “Implied Term” and misrepresentation.

The “Implied Term”

12.  This was defined in the pleading as referable to any one or more of the terms pleaded in paragraphs 21, 21A and 21B.  Paragraph 21 as formulated was neither straightforward nor easy to understand.  The substantive plea was that:

“ … the first defendant should not make any representation (whether innocently, carelessly, recklessly or knowingly) to the Plaintiffs on matters concerning the time of completion of construction of the Development, or the progress of construction, or extension of the time of completion of construction beyond 31^st December 1997 by the authorised person …”

This was followed by certain pleaded consequences which were predicated on the hypothesis of the first defendant having misrepresented such matters to the plaintiffs and the further hypothesis that the misrepresentations having been “reasonably relied on by the plaintiffs due to the inequality of access to the relevant information”.  To add to its complexity, two alternative formulations of that implied term were proffered.

13.  The judge rejected this implied term on the basis that it was neither clear nor necessary.  But it is the implied terms set out in paragraphs 21A and 21B that formed the crux of this appeal.  These further or alternative pleas read as follows:

“21A.    It is an implied term that when enquired by the Plaintiffs as to matters involving or relevant to the progress of construction of the Development, the 1st Defendant should answer within a reasonable time according to the best of its knowledge, and with reasonable care, and that if the Plaintiffs were prejudiced (by any breach by the 1^st Defendant of such obligation) in exercising their rights to rescind under clause 4(4)(a) of the Agreement then the time limit of 28 days counting from 31^st December 1997 under clause 4(4)(b) should be extended to 28 days from the time when the Plaintiffs found out, or could reasonably be expected to find out, the true position and disabused themselves of the prejudice from such breach.

21B.      It is an implied term that when enquired by the Plaintiffs as to matters involving or relevant to the progress of construction of the Development, the 1st Defendant should answer in accordance to the best of its knowledge, and with reasonable care, and that if the Plaintiffs were prejudiced (by any breach by the 1st Defendant of such obligation) in exercising their rights to rescind under clause 4(4)(a) of the Agreement then the 1st Defendant should only be allowed to rely on clause 4(4)(b) with such extension of time for rescission under clause 4(4)(a) as is equitable in all the circumstances, having regard to, and to redress, the prejudice and the breach.”

The plaintiffs submitted that there was a duty on the first defendant “to properly give a proper answer” to any enquiry made by the plaintiffs “as to matters involving or relevant to the progress of construction of the Development”.  It was said that this court so held in Yau Chin Kwan v Tin Shui Wai Development Ltd [2003] 2 HKLRD 1 which, it was submitted, was seemingly accepted by the judge.

14.  It is necessary first of all to consider what Yau Chin Kwan decided.  The plaintiffs in that case relied on three implied terms.  The first two were to the effect that the vendor was obliged to: (1) inform the plaintiffs of the state of completion within 28 days after 31 December 1997; (2) provide timely information on the development’s progress to enable them to exercise their right of rescission.  This court upheld the judge in that case who had concluded that the agreement was perfectly workable without the first two implied terms “particularly in the light of the [third implied] term that the defendant was obliged to answer questions posed by the plaintiffs.”  The third of the implied terms was formulated as follows:

“to answer the plaintiffs’ questions or requisitions concerning whether the Development had in fact been completed in accordance with cl.4 (1)(c) on before 31 December 1997.”

15.  Although it is recorded in paragraph 15 of the judgment of Rogers VP in Yau Chin Kwan that “[t]he defendant did not seek to dispute the fact that it would be required to answer questions which might be posed by or on behalf of the plaintiffs”, that has to be read and understood in the context of the actual wording of the third implied term and the fact that in Yau Chin Kwan no “questions or requisitions” were ever put to the defendant by the plaintiffs. 

16.  On any sale and purchase of land, the vendor must give adequate and satisfactory answers to requisitions properly raised.  But requisitions within this obligation are confined to requisitions on title.  For this reason, the word “questions” would not have enlarged the scope of “requisitions” that fell within that obligation.  Rather, those words were used synonymously.  Moreover, there is another hurdle in the way of such an implied term.  It is clear from paragraph 18 of the judgment in Yau Chin Kwan that the question as to when the Development had been completed could, in some circumstances, be a matter of judgment and thus open to query and challenge.  This court considered that it would be stretching reality to consider that the defendant would have agreed that it went without saying that it was committed to informing the plaintiffs of its view of the state of readiness of the Development.  So, properly understood, Yau Chin Kwan is not authority for the proposition that the first defendant was under an obligation to answer any “questions” that the plaintiffs might pose in relation to the completion of the Development.

17.  The judge below was well alive to that problem.  That is apparent from paragraphs 30, 32 and 33 of his judgment.  Contrary to what Mr Chan Chi Hung, SC counsel for the plaintiffs appeared to suggest, I do not find any unequivocal ruling by the judge that the vendor is obliged to answer questions at large relating to the completion of the Development.  In this regard, requisitions relating to the completion of the Development may or may not be requisitions on title.  That would depend on the particular requisition.  For example, requisitions as to whether a certificate of compliance has been issued or if consent to assign has been granted and to furnish copies of the same would be requisitions on title.  But a requisition as to whether the Development has been completed may be another matter.  It involves a question of opinion on a state of affairs or a question of fact about which the parties must take a stance.  In any event, whether a requisition as to whether the Development had been completed would trigger the vendor’s obligation to answer requisitions on title does not arise on the facts if the judge was correct in his view about the nature and effect of the enquiries made by the plaintiffs.

18.  In paragraph 12 of the affirmation of Lam Man Yee filed on behalf of the plaintiffs, it is stated that:

“12.      In about December … [w]e were anxious to know when we could complete the purchase and take delivery of the Flat.  Therefore from in about December 1997 to 28 days after 31^st December 1997 I telephoned Mr. Frankie Mak about once a week to ask when the Flat would be delivered for our use.  His replies were that for purchase of uncompleted building there was no definite date for completion of the sale and purchase and delivery of possession to the purchaser, that completion deadline could have been postponed because of typhoon or raining, and that possession of the Property would soon be ready for delivery to us and asked us to wait for further notice.”

The focus of the enquiries was “when the Flat would be delivered for [the plaintiffs’] use”.  In other words, the enquiries were directed at the date the plaintiffs could get possession rather than the actual state of the Development.

19.  Apart from paragraph 12 of Lam’s affirmation, there is also Madam Lam’s witness statement where she set out her own observations as to the physical state of the Development in late December 1997 and early 1998:

“(13)    … Inside the site, there was lots of mud and dust.  The ground was not yet paved.  The buildings (including Block 2) were still under construction and surrounded by scaffolding and green nets.  There were workers in safety helmets moving outside the buildings.  There were no trees, shrubs or landscaped area …, I had the impression that the interior works were not yet completed.”

It was her belief was that the Development had not been completed by 31 December 1997.  As the judge remarked in paragraph 34 of his judgment, the sales brochure given to the plaintiffs had estimated 15 May 1998 to be the date for occupation.  She would have known from the estimated dates given in the sales brochure that the date of occupation would not occur until several months after the issuance of the occupation permit.  The evidence was that the plaintiffs were then living in temporary rented accommodation and understandably anxious about the completion date for the sale and purchase.  I agree with the judge that, in the circumstances the inquiries made were plainly directed at the date when the plaintiffs could move into the property.  The plaintiffs’ own pleading which stated that the enquiry was “about when the property would be delivered to them for their use” does not state anything different and reinforces this view.  In my view, such a question would not be a requisition on title. 

20.  In paragraph 35 of his judgment, the judge went on to consider the submission that a delay in completion of the Development must mean a delay in the completion of the purchase.  The judge concluded that it might well do so but that time could be made up.  He reasoned that it was:

“impossible to infer that, if the plaintiff asked about the date of completion of the sale and purchase, the vendor must be under a contractual duty to tell him about something else entirely, which may or may not produce a delay beyond the estimated (but not binding) date given.”

I respectfully agree.

21.  For these reasons, the pleas based on the existence of the implied term do not disclose any reasonable cause of action and are bound to fail.

Misrepresentation

22.  The replies to the plaintiffs’ enquiries recorded in paragraph 12 of the affirmation of Lam Man Yee reproduced in paragraph 18 above are said to contain two misrepresentations: (1) that there might have been an extension of time due to typhoon or raining, and (2) that the property would soon be ready for delivery to the plaintiffs.  See paragraph 27 of the proposed amendments which went on to allege that the representations were “false, recklessly given, negligently given, and/or given without any belief in it”.  Whether or not any of the answers given to the plaintiffs’ enquiries constituted an actionable representation has to be viewed in the context of what was being asked. 

23.  As explained above, Madam Lam’s enquiries were directed at the date when the plaintiffs could complete the purchase and move into the property rather than the actual state of the Development.  What Mr Mak was saying in response was that he really didn’t know and couldn’t say when the plaintiffs could move in.  That “the property would be ready soon” is, in the context, nothing but meaningless patter that might be given by a sales agent who had no ready answer to the question.  The reference to “completion deadline” takes matters no further as it could equally well have been a reference to the projected completion date stated in the sales brochure.  The statement that there could have been a postponement because of typhoon or raining reinforces the view that Mr Mak had no actual knowledge of whether or not there had been a postponement.  That is evident from the use of the phrase “could have been”: in other words, there might or might not have been a postponement.  In my view, none of the statements made amounted to any actionable representation of fact.

24.  Assuming (for the sake of argument) that misrepresentations were made as alleged, this cause of action would still be inarguably bad.  First, the plaintiffs did not enter into the agreement because of the “misrepresentations”.  That much is indisputable given that the “misrepresentations” did not come into existence until several months after the date of the agreement.  If the agreement did not come about because of the misrepresentations, it is difficult to see how the misrepresentations can form the basis for a claim for rescission.  Second, the plaintiffs’ failure to exercise the right of rescission under clause 4(4)(a) had nothing to do with the alleged misrepresentations.  That is abundantly clear from Madam Lam’s affirmation: the plaintiffs did not exercise that right because they did not know that they had such a right until June 1998.  Had they known in early January 1998, they would certainly have exercised that right.  Accordingly, the plea in paragraph 24 of the amended statement of claim, that the plaintiffs did not exercise the right to rescind because they were “acting on the faith and truth of the said representation”, is plainly unsustainable.  In so far as the cause of action is based on fraud, it is hopeless given the absence of particularity.

Clause 10(e)

25.  The provision reads:

“10.      The Vendor hereby warrants:-

…

(e)        that on completion of the Development the Vendor shall provide the communal and recreational facilities set out in Schedule 6.”

It is the plaintiffs’ contention that the first defendant was in repudiatory breach of this clause in failing to complete the outstanding works by 31 December 1997.

26.  Pang Moon Kwan & another v Concord Property Development Ltd, CACV 55/2006, unreported, 30 November 2006, concerned a similar provision in a sale and purchase agreement where the vendor had warranted that certain specified fittings and finishes be incorporated into the property on before completion of the construction of the building.  This court (differently constituted) held that the provision was in the nature of a warranty and not a condition.  Whilst a breach of the provision which does not go to the root of the contract may sound in damages, it would not amount to a repudiatory breach because it would not have deprived the plaintiffs of substantially the whole benefit to be derived from the agreement.  The reality of the situation is that the plaintiffs’ refusal to complete was due to the market downturn and not because any part of the Development had not been completed.

27.  In any event, even on the assumption that breach was repudiatory, the plaintiffs never accepted the repudiation nor terminated the agreement on that basis so as to be absolved from having to perform their obligations under the agreement.  By failing to complete when called upon to do so by the first defendant, the plaintiffs were themselves in repudiatory breach entitling the first defendant to terminate the agreement.

Conclusion

28.  For the reasons set out above, the appeal falls to be dismissed subject to the point mentioned below.

29.  Under paragraph 4(4)(b) of the agreement, the plaintiffs are entitled to interest at the rate of 2% per annum above the prime rate on the amounts paid under the agreement for the period of delay i.e. from 1 January 1998 to 17 June 1998 and such interest should be paid or allowed as a credit in respect of the purchase price.  Although paragraph 32(b) of the amended statement of claim did allude to this point, it was in the context of the notice to complete given by the first defendant being bad or invalid and no relief as such was claimed in respect of the plaintiffs’ entitlement to interest.  In their reply to defence and counterclaim of the first defendant, the plaintiffs did not seek a set-off.

30.  Mr Edward Chan SC who appeared for the first defendant submitted that on the state of the pleadings, the judge was correct in striking out all of the plaintiffs’ claims.  Nevertheless, he recognized that the failure to plead the interest point was likely to have been an accidental omission.  Without prejudice to his client’s position as to costs, he indicated that he would not oppose an application by the plaintiffs for leave to amend their reply to the defence and counterclaim of the first defendant so as to plead their interest entitlement as a set-off to the counterclaim against them.  But to date, the plaintiffs have not given any intimation of their intention to make any such application.

31.  In these circumstances, I would propose that there be an order nisi that the appeal be dismissed, the action struck out and the costs of this appeal be to the first defendant.