MARBLE HOLDING LTD v. YATIN DEVELOPMENT LTD

Mr Justice Bokhary PJ :

1. I agree with Mr Justice Mortimer NPJ’s judgment.  In a lecture published as My Kingdom for a Horse : The Meaning of Words (2005) 121 LQR 577, Lord Nicholls of Birkenhead proposed some developments by which to improve the law on the interpretation of contracts.  I would not advise anybody to bet against any horse tipped by Lord Nicholls.  That does not, however, avail the respondent since none of those developments would advance its case.

Mr Justice Chan PJ :

2. I agree with the judgment of Mr Justice Mortimer NPJ.

Mr Justice Ribeiro PJ :

3. I agree with the judgment of Mr Justice Mortimer NPJ.

Mr Justice Mortimer NPJ :

The proceedings

4. This appeal concerns a Provisional Sale and Purchase Agreement dated 21 February 2004 (“the agreement”).  The plaintiff / appellant agreed to buy and the defendant / respondent agreed to sell 16, Rua de Sao Domingos, a 3-storey building in the commercial centre of Macau (“the premises”).  The price was HK$19M and the plaintiff paid a total deposit of HK$1.9M.

5. On 30 April 2004 the plaintiff refused to complete alleging that the defendant was in breach.  The defendant disputed the breach and the plaintiff took proceedings for the return of the deposit and other relief.

6. The action came before Burrell J.  He agreed with the plaintiff and on 2 February 2007 gave judgment in its favour for HK$1.9M.  However, in a decision handed down on 6 June 2007, the Court of Appeal (Rogers V-P, Le Pichon JA and Suffiad J) reversed the judge and gave judgment for the defendant on the claim and counterclaim.

7. The plaintiff now appeals to this court seeking to restore Burrell J’s decision.

The agreement and the salient facts

8. In March 2001 the defendant let the premises to Fantastic Natural Cosmetics (Macau) Ltd (“Fantastic”) for 3 years from 1 April 2001 to 31 March 2004 at a monthly rent of HK$100,000.  There was no option to renew and in September 2003 the defendant took the precaution of serving Notices to Quit which required Fantastic to vacate by 31 March 2004.

9. As Fantastic’s tenancy was ending on 31 March, on 7 January 2004 the defendant agreed to let the premises to Angel Cosmetics International Ltd (“Angel”) for 3 years beginning on 1 April 2004 at an increased monthly rent of HK$120,000 with an option to renew after the 3 years at HK$144,000 per month.  Angel was already in occupation of a shop adjacent to the premises.

10. In the latter part of 2003 the defendant put the premises on the market for HK$15M.  Nevertheless, on 21 February 2004 the parties agreed the price of HK$19M.  The agreement was in common form, partly printed and partly handwritten.  By clause 1 it was made “subject to the terms and conditions herein contained…”.  Clause 2 concerned the price and the deposit.  An initial deposit of HK$500,000 was to be paid on signing and a further HK$1.4M was to be paid either on the signing of the “Formal Agreement for Sales and Purchase” or on or before 15 March 2004.  The balance of the purchase price was to be paid upon completion on or before 30 April 2004.

11. Clause 4 reads “upon completion…the purchaser agrees to purchase the said premises subject to the existing tenancy.”

12. The actual date of completion was unknown at the time of signing.  To accommodate the flexible date clause 17 specifies two tenancies as ‘the existing tenancy’:

“17. Main contents of the tenancy:

Tenant – Fantastic Natural Cosmetics (Macau) Ltd.,

Terms: 1/4/2001 – 31/3/2004, monthly rental HK$100,000

Tenant – Angel Cosmetics International Ltd.,

Terms: 1/4/2004 – 31/3/2007, monthly rental HK$120,000, the tenant has a further option to renew the tenancy for 3 years, monthly rental fixed at HK$144,000”

13. The written tenancy agreements referred to in clauses 4 and 17 were not provided to the plaintiff until 10 March 2004 and although the same agent represented both parties he did not have sight of them either.

14. Fantastic’s tenancy expired on 31 March 2004 but it refused to vacate the premises and held over.  It offered to pay an increased rent of HK$120,000 in order to stay but the defendant declined the offer.  In consequence of Fantastic remaining in the premises, the defendant was unable to give Angel vacant possession and its tenancy due to begin on 1 April 2004, was never put in place.

15. Unknown to the plaintiff, the possibility that Fantastic would hold over was envisaged by the defendant and Angel and given effect in clause 24 of their tenancy agreement.  This clause appears in full in paragraph 7 in the judgment of the Court of Appeal.  In summary, it provides that if Fantastic failed to vacate the premises at the end of its tenancy the defendant had the right to postpone the beginning of Angel’s tenancy without giving compensation until 30 June 2004.  After that either the defendant or Angel could give notice to terminate without consequences save for the refund of any money paid.

16. On 30 April 2004 the plaintiff refused to complete and pay the balance of the purchase price on the grounds that the defendant was in breach of the agreement because Angel’s tenancy was not in place.  On the same day the solicitors for the plaintiff wrote two letters of explanation to the defendant’s solicitors.  The first letter includes the following:

“We stress that our client is able and willing to complete the purchase of the Property on the terms of the Provisional Agreement.  However, in view that Fantastic Natural Cosmetics (Macau) Limited is still occupying the Property, it becomes highly unlikely that your client will be entitled to call for completion of the sale and purchase of the Property on 30 April 2004.  Undoubtedly, the failure of your client to fulfil its obligations under the Provisional Agreement, the deliberate nondisclosure and/or the delay in the disclosure of material information render your client to be the party at fault.”

17. The second letter which seeks to accept the repudiation reads in part:

“We put on record that the property has not been handed over to Angel Cosmetics International Ltd pursuant to the new Lease on or before 5pm today.  In the circumstances, your client has failed to fulfil its obligation under the Provisional Agreement and undoubtedly this failure amounts to a wrongful repudiation of the Provisional Agreement on the part of your client which is hereby duly accepted by our client.”

In each letter there follows a claim for the return of the deposit and for damages.

The issue

18. The question for our decision is whether by clauses 4 and 17 the parties agreed that the plaintiff would buy and the defendant would sell subject to the condition that, at the time of completion, the tenancy agreement with Angel would be in place at a rent of HK$120,000 per month with an option to renew, so that the defendant was in breach of the agreement as found by the judge.  Or, whether on the true meaning of the agreement the property was to pass subject to the tenancy agreements whatever they may have contained.  In particular subject to clause 24 of Angel’s tenancy agreement, as found by the Court of Appeal.

The approach

19. There is much authority and little dispute in this appeal as to how the court must approach the interpretation of the meaning and effect of this commercial agreement.  Having considered the complete document the whole matrix of circumstances within which the contract was made is relevant.  These principles are set out by Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896(HL) at 912F - 913F and in BCCI v. Ali [2002] 1 AC 251 where at para 8 Lord Bingham succinctly summarised them:

“To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as known to the parties.  To ascertain the parties’ intentions the court does not of course inquire into the parties’ subjective states of mind but makes an objective judgment based on the materials already identified.”

20. If the words used are free of ambiguity and devoid of commercial absurdity their natural and ordinary meaning will apply unless the relevant surrounding circumstances demonstrate otherwise.  Of course, parties often fail to express themselves well or clearly in which case the surrounding circumstances are of particular value.  See Lord Hoffmann NPJ giving the judgment of this Court in Jumbo King Ltd v. Faithful Properties Ltd and Others (1999) 2 HKCFAR 279 at 296:

“The construction of a document is not a game with words.  It is an attempt to discover what a reasonable person would have understood the parties to mean.  And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.  Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well.  Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended.”

21. It is trite to add that generally evidence of the negotiations leading to the agreement and subjective statements of intent is inadmissible for this purpose although there are limited qualifications, not relevant to this appeal.  See Partenreederei MS Karen Oltmann v. Scarsdale Shipping Co Ltd (The Karen Oltmann) [1976] 2 Lloyd’s Rep. 708 (Kerr J) and Codelfa Construction Pty Ltd v. State Rail Authority of New South Wales (1982) 149 CLR 337 at 352 (Mason J). 

22. Also, post agreement conduct and statements of the parties are not generally relevant.  This is the position in England and Australia.  See Whitworth Street Estates (Manchester) Ltd v. James Miller & Partners Ltd [1970] AC 583 at 603 per Lord Reid and Ku v. Song [2007] FCA 1189 at Para 53.  Recently, however in Wholesale Distributors Ltd v. Gibbons Holdings Ltd [2007] NZSC 37, there are dicta in the judgments of the New Zealand Supreme Court favouring the admission of evidence of post contract conduct.  If such a stance is confirmed in the future it will be controversial in other common law jurisdictions: see (2008) 124 LQR 6.

The Court of Appeal

23. The Court of Appeal found that the meaning of the words in clause 4 – “subject to the existing tenancy” coupled with the disclosure in clause 17 of the names of the tenants, the dates of their tenancy agreements and the rents paid or to be paid was sufficient for it to determine that the plaintiff took subject to all the provisions in the existing tenancies “for whatever they may be worth”.

24. Relying on Bahr and Another v. Nicolay and Others (No 2) (1988) 164 CLR 604at 650-651 in which Munro v. Stuart (1924) 41 SR (NSW) 203 was cited, Rogers VP, with whom the other members of the court agreed, said:

“In my view, the approach to the construction of the contract in the present case must be on similar lines. Clause 4 did, indeed, provide that the assignment of the premises would be subject to an existing tenancy.  It was therefore implicit that vacant possession would not be given.  Clause 17 did not purport to set out all of the terms of the tenancy agreements.  It is quite clear from the terms of clause 24 of the tenancy agreement made with Angel Cosmetics that, as of 30 April 2004, that agreement remained in force.  It was indeed envisaged in that agreement that Angel Cosmetics might not obtain possession until the end of June.  It was only then that the tenancy agreement would cease to exist if vacant possession could not be given.”

25. In consequence the court relied much upon the effect of clause 24 of Angel’s tenancy agreement although the plaintiff was unaware of it at the time of the agreement.

Counsel summarised

26. Mr Campbell, who appears for the defendant, recognises that at the time of the signing of the agreement the plaintiff was unaware of the full terms of the tenancy agreements.  It only became aware on 10 March 2004, some 18 days after the signing.  He contends however that knowledge of the tenancy agreement with Angel (and therefore clause 24) is imputed to the plaintiff by the disclosure of the existence of the tenancy agreement in clause 17.  He submits that the decision of the Court of Appeal was correct and is supported by the authority cited.

27. Mr McCoy SC, who appears with Mr Steven Kwan for the plaintiff, concedes that some language used in the agreement is not felicitous.  But he invites the court to consider the whole document, including the two central clauses 4 and 17, in the matrix of relevant commercial circumstances.  He submits that the sale was conditional upon the tenancy with Angel, as set out in clause 17, being in place and that the defendant was in breach.  He submits that the Court of Appeal fell into error in relying upon clause 24 of Angel’s tenancy.  It was not known to the plaintiff at the time of the execution of the agreement and was, therefore, irrelevant.

Was the defendant in breach?

28. I turn to the Court of Appeal’s decision and to the reliance it put upon Bahr’s case in which Munro’s case was extensively cited.  It is pertinent to note that in Munro’s case the clause under consideration was:

“The Property is sold subject to existing tenancies or occupancies and to the conditions and reservations contained in every relative Crown Grant under which it is held.”

29. This clause was open. It was not qualified in any other part of the contract and before it was executed the defendant had been supplied with copies of the current leases.  In these circumstances it is unsurprising that the judge held:

“The clause is not expressed in the ordinary way in which such an agreement would be expressed, it is simply a condition that the property is sold subject to the existing tenancies and occupancies and the conditions in the Crown Grant; in other words, that the purchaser is to take the property over subject to any existing tenancies for what they may be worth and cannot repudiate the contract because of their existence.”

30. Insofar as the Court of Appeal found this authority helpful in the interpretation of the instant agreement I respectfully beg to differ.  In the instant agreement the clause ‘subject to the existing tenancy’ is not open.  It is qualified by clause 17.  Further, save for clause 17, the terms of the tenancies were not disclosed to the plaintiff at the time of execution as they were in Munro’s case.  Mr Campbell’s suggestion that the plaintiff ought to have asked to see the full tenancy agreements is nothing to the point.

31. It is necessary to have regard to the relevant commercial background within which the agreement was made.  Primarily the premises were commercial, situated in the commercial centre of Macau.  They were offered as an investment, not property with vacant possession for occupation by the purchaser.  They were therefore offered subject to a tenancy.  A necessarily important factor in the price was the tenancy to which it was subject.  An investor would be concerned with the amount of rent, the term of the tenancy, whether there was an option to renew and if so the terms and possibly the identity of the tenant.  Here for example Angel may have been thought to be a good tenant because it was already in occupation of the adjoining building.

32. Against this background clause 4 provides that the sale is ‘upon completion…subject to the existing tenancy’ and clause 17 specifies two tenancies to accommodate the actual date of completion.  As completion had not taken place before the 1 April Angel’s tenancy is the relevant one.  For what it is worth, the details of the tenancies appear in handwriting and were not part of the standard form.  The indication is that the parties considered clause 17 with care.  It specifies the rent, the term, the option and the identity of the tenant.  The concerns of any purchaser for investment.

33. It seems to me unrealistic to suggest in these circumstances that clause 17 was other than a term and condition by which the defendant was bound. The purchase was ‘subject to the existing tenancy’.  The obvious question is, “What tenancy?”  The answer appears in clause 17.  Having so agreed it is irrelevant to suggest, as Mr Campbell did, that the plaintiff could and should have enquired further into the tenancy agreements.  Nor is there any basis upon which knowledge of the tenancy agreements could be imputed to the plaintiff.

34. In these circumstances I would hold without hesitation that the defendant agreed to sell on condition that at the time of completion on 30 April 2004 the premises would be tenanted by Angel on the terms set out in clause 17.  The tenancy was not in place.  The plaintiff was justified in refusing to complete and in treating the defendant as having repudiated the agreement.

Conclusion

35. For these reasons I would allow this appeal and restore the judgment of Burrell J.  I would give judgment for the plaintiff for HK$1.9M with costs here and below. It follows that I would also dismiss the Counterclaim with costs here and below.

The plaintiff’s claim for damages

36. There remains one isolated matter.

37. The Statement of Claim contains a claim for damages as well as for an account.  The claim for an account was advanced but rejected by the judge.  The claim for damages was not pursued by counsel then appearing for the plaintiff.  Mr McCoy, SC recognising his difficulty, asks to revive the claim and seek loss on the basis that a month after the plaintiff failed to complete the premises were sold to a stranger for HK$20M.  He suggested that the appropriate measure of damage is the market price of the premises and that the best evidence is the difference of HK$1M between this sum and the contract price.  He asked that the matter be remitted to a Master.

38. Apart from the price the plaintiff had agreed to pay there is no evidence of the market value of the premises at the date of the breach.  For my part, the claim not having been pursued before the judge, I would not entertain it at this stage of the proceedings.

Mr Justice Gault NPJ :

39. I agree with the judgment of Mr Justice Mortimer NPJ.

Mr Justice Bokhary PJ :

40. The Court unanimously allows the appeal to (i) award the appellant $1.9 million on the claim with costs here and below and (ii) dismiss the counterclaim, also with costs to the appellant here and below.