DIAMOND JUBILEE INVESTMENT LTD v. CHAN YIU CHUNG SIDNEY

CACV 228/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 228 OF 2009

(ON APPEAL FROM DCCJ NO. 5370 OF 2008)

----------------------

----------------------

----------------------------------------

REASONS FOR JUDGMENT

--------------------------------------

Hon Ma CJHC :

1.  The Defendant appealed against an order of HH Judge Yung made on 8 July 2009 whereby summary judgment was ordered against him in the amount of $203,582.69 together with interest (on the sum of $156,408 at the rate of 8.25% per annum from 27 November 2008 - the date of the Writ - to 8 July 2009, thereafter at judgment rate) and costs.  Leave to appeal was granted on 23 September 2009.

2.  After hearing submissions from counsel, we allowed the appeal in part and made the following orders : -

(1)Judgment be entered for the Plaintiff in the sum of $156,408.

(2)Interest on this sum from 27 November 2008 to 8 July 2009 at 1% per annum above prime rate, thereafter at judgment rate.

(3)Costs of the appeal be to the Plaintiff.

3.  We also indicated that the reasons for our judgment would be handed down; this we now do.

Facts

4.  The present case involves the sale and purchase of a flat.  By a Sale and Purchase Agreement dated 28 November 2006 (“the Agreement”), the Plaintiff (as Vendor) sold to the Defendant (as Purchaser) the property known as Flat A, 10th Floor, Tower 6 in the development named “Sausalito”, Yuk Tai Street in Shatin (“the Property”).  At the time of sale, the development had still to be completed (the Occupation Permit was not issued until 18 November 2007).

5.  Under the Agreement, the purchase price was $4,840,000 payable as follows : -

(1)$242,000 was payable as a deposit on the signing of the Agreement.

(2)$242,000 was payable on or before 26 February 2007.

(3)$242,000 was payable on or before 26 May 2007.

(4)The balance of $4,114,000 was payable within 14 days from the date of a written notification to the Defendant that the Plaintiff was in the position validly to assign the Property.

6.  Relevant for present purposes are also the following clauses in the Agreement : -

(1)Clause 3(5) stated : -

“Subject to sub-clause (3) but without prejudice to any other remedy hereunder, the Vendor shall be entitled to demand and receive payment of interest on the amount of any part of the purchase price not paid on its due date at the rate of 2% per annum above the prime rate specified by the Hongkong and Shanghai Banking Corporation Limited from time to time calculated from the date on which the same ought to have been paid by the Purchaser to the date of actual payment.”

(2)Clause 16 stated : -

“16. (1)    Should the Purchaser fail to observe or comply with any of the terms and conditions herein contained or to make the payments in accordance with Schedule 4 or any interest payable hereunder within 7 days of the due date, the Vendor may (subject to Clause 3(3)) give to the Purchaser notice in writing calling upon the Purchaser to make good his default.  In the event of the Purchaser failing within 21 days from the date of service of such notice fully to make good his default, the Vendor may by a further notice in writing forthwith determine this Agreement.

(2) Upon the determination of this Agreement pursuant to sub-clause (1) : -

(a)   the sum paid by the Purchaser under item (i) of Schedule 4 by way only of deposit shall be forfeited to the Vendor; and

(b)   where the Purchaser has entered into possession of the Property, the Vendor shall become entitled to re-enter upon the Property and repossess the same free from any right or interest of the Purchaser therein and to receive from the Purchaser as occupation fee a sum equal to interest at the rate of 2% per annum above the prime rate specified by The Hongkong and Shanghai Banking Corporation Limited from time to time on the unpaid balance of the purchase price for the period during which the Purchaser was in occupation.

(3) Upon determination of this Agreement under sub-clause (1) the Vendor may resell the Property either by public auction or private contract subject to such stipulations as the Vendor may think fit and any increase in price on a resale shall belong to the Vendor.  On a resale, any deficiency in price shall be made good and all expenses attending such resale shall be borne by the Purchaser and such deficiency and expenses shall be recoverable by the Vendor as and for liquidated damages Provided That the Purchaser shall not be called upon to bear such deficiency or expenses unless the Property is resold within 6 months of the determination of this Agreement.”

7.  The initial deposit was paid by the Defendant upon the signing of the Agreement, but he failed to pay the second installment due on 26 February 2007 (or indeed any other installments).

8.  By a letter dated 13 March 2007 from the Plaintiff’s solicitors, notice was given to the Defendant pursuant to Clause 16(1) of the Agreement to pay the said sum of $242,000 which had become due, within 21 days together with interest thereon (as stipulated by Clause 3(5)).  All rights and remedies were reserved in the event the default persisted.

9.  In breach of the Agreement, the said sum was not paid on due date or at all.  Clearly then, the Defendant was in repudiatory breach of the Agreement.

10.  However, it was not until some 8 months later, by a letter dated 7 November 2007, again from the Plaintiff’s solicitors to the Defendant, that the repudiation was accepted and the Agreement was determined under Clause 16(1).

11.  On 23 November 2007, a provisional Sale and Purchase Agreement was entered into between the Plaintiff and a third party buyer whereby the Property was re-sold for the price of $4,454,000.  This price was arrived at after the application of various discounts to the published price of $4,940,000 for the Property.  The evidence before us indicated that a brochure was produced by the Plaintiff advertising for sale a number of flats in the Sausalito development, including the Property.  The said advertised price of $4,940,000 in fact represented an increase of $100,000 on the purchase price payable under the Agreement.  The discounts that were also advertised in the brochure comprised a 2% promotional discount as well as a 8% discount for early payment.  The price of $4,454,000 under the resale reflected these discounts.  The buyer in the resale was introduced by estate agents, who were paid a commission of $89,080.  The resale price being less than the purchase price under the Agreement, the Plaintiff claimed the shortfall under Clause 16(3) of the Agreement ($386,000), together with the expenses of the resale ($3,500 legal costs and $8,908 being the Conveyancing costs).  Credit was given for the $242,000 that had been paid as deposit under the Agreement.  The total claim under Clause 16(3) was accordingly $156,408.  Other claims were also made, to which I shall now turn.

The claim and the proceedings below

12.  The Plaintiff issued the Writ in the present action on 27 November 2008.  The Statement of Claim endorsed on the Writ claimed the said sum of $156,408 being the sum due under Clause 16(3) of the Agreement.  Two other monetary claims were made : -

(1)Interest on the amounts that ought to have been paid under the Agreement was claimed under Clause 3(5).  This amounted to $47,174.69, being the interest due from the relevant dates (starting from 26 February 2007) to 31 March 2008 (when the Plaintiff was paid the balance of the purchase price under the resale referred to in paragraph 11 above).

(2)As an alternative to the liquidated amount claimed under Clause 16(3), the Plaintiff also claimed as damages the sum of $246,488.

13.  Following the service of the Defence, the Plaintiff applied to the District Court for summary judgment.  On 8 July 2009, HH Judge Yung granted summary judgment on the terms set out in paragraph 1 above.  This did not include the alternative claim referred to in paragraph 12(2) above.

14.  Following leave granted by this Court, the Notice of Appeal was served on 29 September 2009.  The Grounds of Appeal (and the Skeleton Arguments of counsel) related solely to the award of $156,408; the award of $47,174.69 was not specifically challenged (this latter aspect is relevant to the question of costs as will shortly become clear).

The issues in the appeal

15.  Condensing the arguments of Ms Vickie Ling (for the Defendant) and Mr Jat Sew Tong, SC, with him Mr Wilson Leung (for the Plaintiff), I have found it useful to identify six issues which have to be resolved in this appeal (with the exception of Issue 5, all the others are questions of law) : -

(1)The existence of a duty to bring a contract to an end within a reasonable time (Issue 1).

(2)Is Clause 16(3) of the Agreement a liquidated damages clause? (Issue 2).

(3)Is there a duty to mitigate where there is a liquidated damages clause? (Issue 3).

(4)Is it implicit in Clause 16(3) of the Agreement that any resale must be effected in good faith and at arm’s length? (Issue 4).

(5)If it is so implicit, was the resale in the present case effected in good faith and at arm’s length? (Issue 5).

(6)Is the Plaintiff entitled to interest under Clause 3(5) of the Agreement? (Issue 6).

16.  Essentially, two points were advanced by Ms Ling in support of the Defendant’s contention that leave to defend ought to be given : -

(1)The Plaintiff had acted unreasonably in delaying termination of the Agreement following the Defendant’s breach, with the result that the best price on resale was not be obtained; alternatively, if the Property had been resold earlier, the Plaintiff would have been paid sooner, thereby arresting the amount of interest that was payable.

(2)In any event, the price obtained by the Plaintiff on the resale was unreasonably low, well below the prevailing market price.  Here, the Defendant produced a valuation report which valued the Property at $5,294,000 as at 23 November 2007 (the date the provisional Sale and Purchase Agreement was made in the resale).

17.  It is within these two broad submissions that the first five issues arise; the sixth issue is an independent one.

18.  Before dealing with each issue, I ought first make the following observations : -

(1)Although much criticism was levelled at the Plaintiff for the alleged delay in bringing the Agreement to an end (and therefore for not reselling the Property earlier), the Defendant’s own evidence (in the valuation report referred to above) showed that the property market was rising during the second half of 2007.  Accordingly and in any event, there is nothing in the criticism that the Plaintiff ought to have sold the Property earlier than it did.

(2)The difference between the market price for the Property as at 23 November 2007 as stated in the Defendant’s valuation report ($5,294,000 : see paragraph 16(2)) and the price advertised in the Plaintiff’s brochure ($4,940,000) was only $300,000.  This is not such a significant difference as by itself to arouse any suspicion.

(3)The discounts from the published price referred to in paragraph 11 above applied across the board to all the flats on sale; they were not peculiar to the purchaser under the resale.  Moreover, there was also nothing untoward or unusual about these discounts.

Issue 1

19.  Nothing in the Agreement provides for any particular time or period for the termination of the contract following a breach.  I would add that it would be highly unusual for a contract for the sale of land to contain such provisions.

20.  In the absence of contractual provisions to the contrary, the general rule is that there is no duty on an innocent party to accept a repudiatory breach, either within a reasonable time or at all.  No question of reasonableness or mitigation arises.  Quite simply, when a repudiatory breach occurs, the innocent party either can affirm the contract or accept the repudiation thereby bringing it to an end.  I would add here that the principle in Johnson v Agnew [1980] AC 367 whereby in a sale of land an innocent party even can wait until trial before making an election whether to claim damages for breach or claim specific performance (thereby affirming the contract), is a classic illustration of the existing common law position.

Issue 2

21.  Clause 16(3) is clearly a liquidated damages clause.  There was a faint hint in Ms Ling’s submissions that perhaps it might be a penalty clause but there was nothing in this point.

Issue 3

22.  Where a valid liquidated damages clause exists, no question of mitigation of damages arises : see McGregor on Damages (18th edition) at paragraph 13-021 (referring to Abrahams v Performing Rights Society [1995] ICR 1028).

Issue 4

23.  Although no duty to mitigate arises as far as a liquidated damages clause is concerned, in the present context involving a resale, it must, I think, necessarily be implicit that any resale must be effected in good faith and at arm’s length.  For all practical purposes, this was the nub of the present appeal.  I am prepared even to go so far as to say (for the purposes of the present appeal) that the duty is also not to act unreasonably in the circumstances (although it has to be said that this facet was not extensively canvassed in the course of counsel’s submissions).  Whether for present purposes the above points constitute implied terms or whether they arise from a true construction of Clause 16(3) of the Agreement, is immaterial; the short point is that the evidence before us failed to demonstrate that this resale was not a good faith/arm’s length transaction.

Issue 5

24.  Ultimately, this point became the Defendant’s principal argument in the appeal.  Ms Ling pointed to the fact that the resale was for a price that was some $850,000 less than what was (according to the said valuation report) the market price of the Property as at 23 November 2007.  She also pointed to some queries as to various dates when payments took place under the resale.

25.  In my view, these submissions come nowhere near raising sufficient grounds to enable this court to give leave to defend : -

(1)The said sum of $4,454,000 (the resale price) was arrived at using the advertised figure of $4,940,000, and then applying the various discounts to it : see paragraph 11 above.  There is nothing whatever to indicate that the price was therefore in any way suspicious or seriously below market price; it is to be remembered that the discounts were applicable across the board.  I would also repeat the points made in paragraph 18 above.

(2)Although some queries arise as to dates, they are of such small significance as to be quite irrelevant for present purposes.

26.  Ms Ling was finally driven to submit that it would be unfair to grant summary judgment when even discovery (much less the trial) had not taken place.  This amounts to no more than a ‘Micawberian hope’ that something may turn up eventually in the Defendant’s favour, a point never by itself enough to avoid summary judgment : see Hong Kong Civil Procedure 2010 Vol.1 at paragraph 14/4/3.

Issue 6

27.  The computation of interest under Clause 3(5) of the Agreement was based on the installment amounts that were due thereunder : see paragraph 12(1) above.  However, that clause bites only when late payment of the installments due are eventually actually made (the words “the date of actual payment” confirm this).  The clause therefore can have no application where, as in the present case, the installment payments simply were not made and instead, a claim is made for a liquidated sum under Clause 16(3).

28.  The appeal was therefore allowed to this very limited extent.  Interest was only appropriate for the said sum of $156,408 (at 1% per annum above prime rate from the date of the Writ to the date of judgment).  As this point was not one that was actually raised by the Defendant at all until the court alluded to it, this did not affect the incidence of costs; the Plaintiff still had had to come to Court to resist the appeal.

Hon Le Pichon JA :

29.  I agree with the reasons given by Ma CJHC.

Hon Stone J :

30.  I agree with the judgment of the Chief Judge.