XCHRX WONG JONG KING WEI AND ANOTHER v. YAM LEUNG KWONG AND ANOTHER

HCA 21099/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 21099 OF 1998

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J U D G M E N T

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1. I have before me an appeal from the judgment of Master Muttrie in favour of the Plaintiffs upon determination of a Summons taken out by them under Order 14A. The matter arises as follows.

The original sale and purchase agreement

2. On 18 October 1997, the Plaintiffs entered into an agreement ("the Agreement") whereby they agreed to sell and the Defendants agreed to buy a property in the New Territories for the price of HK$13.8 million. The property included a house on the Lot in question. Prior to the signing of the Agreement, the Defendants paid HK$690,000 to the Plaintiffs by way of deposit and part payment. A further similar sum of HK$690,000 was paid on signing.

3. On 27 October 1997, the documents of title were delivered to the Defendants' solicitors and a third sum of HK$690,000 was paid by way of deposit and part payment.

The Supplemental Agreements

4. Completion of the purchase was initially to take place on or before 28 February 1998. However, by a Supplemental Agreement dated 10 December 1997, completion was postponed to 1 May 1998. On the signing of this Supplemental Agreement, the Defendants paid a fourth sum of HK$690,000 by way of further deposit and on 10 January 1998, a fifth sum of HK$690,000 was paid, again by way of further deposit.

5. On 8 April 1998, the parties signed a 2nd Supplemental Agreement, agreeing to postpone further the completion to 30 June 1998, the Defendants paying HK$160,000 as agreed compensation or interest on the balance of the purchase price in the sum of HK$10.35 million then outstanding.

6. On 9 May 1998, the parties signed a 3rd Supplemental Agreement, further postponing completion to 31 August 1998, with the Defendants paying a further sum of HK$160,000 as agreed interest.

7. Then on 25 May 1998, they entered into a 4th Supplemental Agreement for yet another postponement, this time to 30 November 1998. This required payment of two further deposits of HK$600,000 each payable by 1 September 1998 and 15 October 1998 respectively.

8. The deposit payable on 1 September was paid. Then, on 22 September 1998, the Defendants' solicitors wrote saying that their clients were in great difficulties raising the money to complete and asking for the purchase price to be reduced by HK$2 million. That request was refused on 24 September.

Non-payment of the HK$600,000 deposit

9. On 15 October, the day when the next deposit of HK$600,000 was due under the 4th Supplemental Agreement, the Defendants' solicitors wrote a long letter to the Plaintiffs' solicitors stating that they had discovered facts "which render it impossible for your client to give our client good title ......." Various alleged unauthorized structures on the Property are referred to, the Defendants' solicitors contending that these structures give rise to defects going to the root of the Plaintiffs' title.

10. However, and this is at the heart of the Defendants' case, the letter goes on to state that because the defects were recently discovered, the Plaintiffs would be given the opportunity to "perfect (their) title on or before completion". It ended with the warning that failure to perfect title by such time would lead to the Defendants accepting the Plaintiff's repudiation. Notwithstanding this willingness to wait to see if the Plaintiff would be able give good title at completion, the letter stated that "payment for the sum of HK$600,000 today shall be withheld pending your client to perfect his title on or before completion."

Forfeiture

11. The Plaintiffs took this refusal to pay the further sum of HK$600,000 to be a repudiation of the Agreement and, by their solicitors' letter dated 31 October 1998, they accepted the alleged breach and forfeited all the deposits paid, totalling HK$4,050,000.

Alleged blot on title

12. In the Defence and Counterclaim, the Defendants complain that the rear portion of the garage which had originally been designed for two cars had been converted so as to accommodate a living area and space for one car, the living area being separated from the car park by a partition wall. The effect of this, according to the Defendants, was to convert the house from a two-storey residential house into a three-storey residential house and to increase the plot ratio of the property. Additionally, they complain that a canopy made of a steel framework with perspex roofing had been set up on the first floor.

13. Such changes, the Defendants say, constitute breaches of the Government Grant and/or the Deed of Mutual Covenant in various respects. In consequence, the Defendants contend that the Plaintiffs' title was defective because the property was at risk of re-entry by the Government for breaches of the Grant and/or the Buildings Ordinance and also because the Plaintiffs were subject to enforcement action by all co-owners of the Lot in respect of breaches of the deed of mutual covenant.

14. The Defendants contend that these matters were known to the Plaintiffs and not reasonably discoverable by inspection of the property, so that it was the Plaintiffs' duty to disclose such defects in title to the Defendants. No such disclosure was made. Moreover, it is alleged that these matters constituted breach of an express covenant in the Agreement that all the terms of the Grant and of the deed of mutual covenant had been complied with. The claim is also put in terms of an alleged fraudulent misrepresentation or breach of warranty based on representations made by the Plaintiffs in provisions of the sale and purchase agreement to the effect that the Plaintiffs were not in breach of any terms of the Grant, the deed of mutual covenant or any provisions of the Buildings Ordinance.

15. The Defendants say that they discovered these problems on 5 October 1998 during a pre-completion inspection of the property by the Defendants and their architects. In consequence, they wrote to the Plaintiffs on 15 October 1998 in the terms which I have already described. They contend that the action of forfeiting the deposit constituted a repudiation of the Agreement and they now counterclaim for the return of the HK$4.05 million paid, together with damages for various wasted expenses (including Stamp Duty, estate agent's commission and the costs of title investigation).

Relief claimed under Order 14A

16. In their Writ, the Plaintiffs claim a Declaration that they have effectively rescinded the Agreement and that the total deposit was properly forfeited. They also ask for damages, giving credit for the deposits, to be assessed. On 12 February 1999, after the Statement of Claim and a Defence and Counterclaim had been served, the Plaintiffs took out a summons pursuant to Order 14A for determination by the Court of the following questions of law, namely:-

"(1) Whether the Defendants, by their solicitors' letter dated 15 October 1998 were in breach of the Agreement dated the 18 October 1997 ('the Agreement') as varied by 4 supplemental agreements dated respectively 10 December 1997, 8 April 1998, 9 May 1998 and 25 August 1998 by refusing to pay to the Plaintiffs the further deposit of HK$600,000 whilst insisting the Plaintiffs to perform their obligations under the Agreement as varied as aforesaid and [whether] the Plaintiffs had accepted the Defendants wrongful repudiation of the Agreement by their solicitors' letter dated 31 October 1998;

(2) If the answer to (1) is in the affirmative, Judgment to be delivered against the Defendants for a declaration that the Defendants have rescinded the Agreement dated 18 October 1997 as varied by the four supplemental agreements are identified and that the total deposit of HK$4,050,000 is forfeited and for damages (giving credit for the deposits) and interest thereon to be assessed and costs to be taxed."

17. The word "whether" between square brackets in paragraph (1) above, is agreed by the parties to have been what was intended, the word "that" which actually appears, being a clerical error.

18. On 14 May 1999, Master Muttrie gave judgment in favour of the Plaintiffs holding that the Plaintiffs had rescinded the Agreement as varied by the four supplemental agreements mentioned above and declared the total deposit of HK$4,050,000 forfeited, ordering also that the Defendants pay damages to the Plaintiffs (giving credit for the deposits) to be assessed, with costs.

The material terms of the agreements

19. Clause 20 of the Agreement provides: "Time shall in every respect be of the essence of this Agreement."

20. So far as material, Clause 21 provides:

"If the Purchaser fails to complete the sale and purchase agreement in accordance with the terms and conditions of this Agreement any payment already paid by the Purchaser to the Vendor shall be absolutely forfeited to the Vendor who may ....... rescind the sale by giving notice of termination in writing to the Purchaser or his solicitor. ....... The Vendor may but is not obliged to resell, let or otherwise deal with the Property ....... Furthermore, in the event that the Vendor elects to and does sell the Property, any deficiency in price and all expenses attending such resale shall be borne by the Purchaser and shall be recoverable [by] the Vendor as and for liquidated damages. Any increase in price shall belong to the Vendor. ....... This Clause shall not preclude or be deemed to preclude the Vendor from taking other steps or remedies to enforce the Vendor's rights under this Agreement or otherwise to recover any further damages suffered by the Vendor as a result of a breach by the Purchaser of any of the provisions of this Agreement."

21. The 4th Supplemental Agreement contained the following terms, set out, so far as material, as follows:-

Clause 1:

"The completion date contained in the said Agreement as varied [by the supplemental agreements] is hereby extended to the 30th November 1998."

Clause 2:

(a) "The Purchaser shall pay to the Vendor the following sums as further deposits and part payment of the purchase price namely: (i) the sum of HK$600,000 on or before the 1st September 1998 and (ii) the sum of HK$600,000 on or before the 15th October 1998."

(b) "The Purchaser shall inform the Vendor on or before the 31st October 1998 if the Purchaser is able to complete the purchase of the Property on or before the 30th November 1998. If the Purchaser fails to inform the Vendor of his inability to complete on or before the 31st October 1998, the Purchaser shall bear all the legal costs incurred or to be incurred by the Vendor from the 18th October 1997 (which is estimated in a sum of HK$10,000), plus the agency fees in the sum of HK$93,500."

Clause 3:

"In the event of the Purchaser failing to complete the purchase of the Property on or before the 30th November 1998, all deposits paid under the purchase agreements mentioned in the recital aforesaid and the deposits paid hereunder shall be absolutely forfeited to the Vendor and the Vendor shall waive his right of claiming any damages from the Purchaser under the said Agreement and neither party shall have any claim against the other herein and the parties hereto shall at the costs of the Purchaser enter into and cause to be registered at the appropriate Land Registry an Agreement for Cancellation."

Clause 4:

"This Agreement shall supersede the previous Supplemental Agreement, Further Supplemental Agreement and Further Further Supplemental Agreement."

Clause 5:

"Save as above varied, all the terms and conditions contained in the said Agreement shall remain in full force and effect."

The Defendants' case on this appeal

22. Mr Chong, who appears for the Defendants, raises two issues on appeal. First, he argues that the learned Master erred in the construction of the Agreement as varied by the 4th Supplemental Agreement. Secondly, he contends that because various questions of fact relating to the existence and extent of the defects complained of have not been investigated and can only be investigated at the trial, the case is not susceptible to determination under Order 14A. I deal first with the construction point.

The construction of Clause 3 of the 4th Supplemental Agreement

23. Mr Chong argues that the purported forfeiture can only, if at all, be justified if the conditions of Clause 3 of the 4th Supplemental Agreement apply. He argues that on its true construction, it does not apply.

24. Mr Chong points to the fact that in Clause 21 of the Agreement, the right to forfeit the deposits is conditional on the Purchaser failing "to complete the sale and purchase agreement in accordance with the terms and conditions of this Agreement". In contrast, he says, Clause 3 makes the right to forfeit conditional on the Purchaser "failing to complete the purchase of the Property on or before the 30th November 1998". This change, he submits, is fundamental. It shows (so the argument runs) that a failure to pay the deposit as agreed on 15 October is not an event triggering the right to forfeit. It is only where there is a failure on the part of the Defendants to carry out the final acts required to complete purchase of the property at the completion date that such right would be triggered. In other words, the right of forfeiture does not arise unless and until the Purchaser defaults in performing the final acts of completion envisaged to take place on or about 30 November 1998. No right of forfeiture arises before that date, even in the face of the Purchaser's breach of the contract by refusing to pay the agreed second tranche of deposit.

25. I am unable to accept so narrow a construction of that clause. In my judgment, the change in wording did not bring about any material change to the obligations on the Defendants in relation to their performance of the contract.

26. When, in Clause 3, the 4th Supplemental Agreement gives the Vendor the right to forfeit deposits paid if the Defendants fail "to complete the purchase of the Property on or before the 30th November 1998", it must of necessity mean "fail to complete the purchase in accordance with the terms of the agreement". There seems to me to be no way that such a purchase contract can duly be completed save in accordance with its terms. The removal, in Clause 3, of the express reference to completion "in accordance with its terms" does not change this basic premise.

27. Accordingly, the Purchaser must punctually pay the purchase price, time being of the essence, in accordance with the agreed terms. In the present case, this meant paying the deposits and part payments of the purchase price at the times agreed and then, when the time came for final completion, paying the outstanding balance, the amount of which would be calculated taking into account all the deposits and part payments already paid. In my view, a failure to perform any one of the essential payment obligations at a stipulated time prior to final completion, leading to termination of the contract, would constitute a failure to complete within the meaning of Clause 3.

28. It is therefore my judgment that the Defendants' refusal to pay the HK$600,000 deposit and part payment on 15 October constituted a repudiatory breach of the Agreement (as varied) and entitled the Plaintiffs to accept such repudiation, bringing the contract to an end. The Defendants in consequence "failed to complete the purchase of the Property on or before the 30th November 1998" by having repudiated it on 15 October, such repudiation having been accepted on 31 October. This gave rise to the right of forfeiture under Clause 3.

The right to treat the contract as repudiated for non-payment of the HK$600,000 deposit

29. I should mention that Mr Chong also sought to argue that failure to pay the HK$600,000 amount, while admittedly a breach, was of minor significance and merely a breach of warranty. It was, he argued, therefore not repudiatory and incapable of bringing the contract to an end upon acceptance by the Plaintiffs. With respect, I do not agree.

30. The refusal of a purchaser to pay the full purchase price goes to the root of the contract of sale. This is particularly so in the context of the 4th Supplemental Agreement. The consideration for yet further postponement of completion was payment of two further sums of HK$600,000 by way of deposit and part payment. Accordingly, when the Defendants refused to pay the HK$600,000 due on 15 October, they were refusing performance of what constituted half of the consideration under the 4th Supplemental Agreement. I am therefore quite unable to accept that such refusal should be treated as minor. Refusal to pay was a breach of an essential term, giving rise to a right to treat the contract as at an end.

The objection to the Order 14A in the present case

31. Mr Chong's second argument is, as I have stated, that the Order 14A procedure was inappropriate in the present case. In the Defence and Counterclaim, the Defendants have raised many factual issues in the course of alleging that unauthorized and unlawful structures on the Property gave rise to a blot on the Plaintiffs' title. Mr Chong argues that such factual issues had to be determined first, so as to decide whether the Plaintiffs were in fact able to give good title. If they were unable to do so, the argument runs, the Defendants would have been entitled to refuse to complete and accordingly would have been entitled not to pay the HK$600,000 deposit in question.

32. In my view, this argument is fallacious. Payment of the deposit was due on 15 October. It was not open to the Defendants to withhold payment until they were satisfied that the Plaintiffs would be able to give good title at the end of November.

33. The decision of Godfrey J. (as he then was) in Yeung Kwok Leung v Lam Cheuk Lai [1991] 2 HKLR 557 gives helpful guidance in this respect. In that case, a proposed mortgagee who was financing purchase of a property raised queries as to the title leaving the purchaser, who was short of funds without the benefit of the mortgage, unable to pay the balance of the purchase price when due. The Vendor forfeited the deposit. It was submitted on behalf of the purchaser that it is a condition precedent to the obligation of the purchaser to pay the purchase money that the vendor should first have shown a good title. That argument was rejected. Godfrey J. stated:-

" ....... I am driven to conclude that there is no warrant for implying any such condition precedent into this contract. The contract provides for the balance of the purchase price to be paid on or before 22nd September 1988. It provides that time is to be of the essence of this contract in every respect. And it provides for a later date than 22nd September 1988 (or what might well turn out to be a later date) for the completion of the agreement, in the sense of 'the final settlement of the business'.

What went wrong here was that, because the proposed mortgagee could not be satisfied in time about the powers of attorney, the plaintiff was unable to come up with the money on 22nd September 1988. Accordingly, the defendant treated the plaintiff as in breach of a fundamental term of the contract and called the contract off. It seems to me that the defendant was perfectly entitled so to do. He had a contract which provided for the payment of the balance of the purchase price on or before 22nd September 1988; and he had a purchaser who, for whatever reason, good, bad, or indifferent, understandable or not, was unable to come up with the purchase money in accordance with the contract on the relevant date."

34. In the present case, the fundamental ground relied on by the Plaintiffs for seeking summary relief is the failure of the Defendants to pay the deposit on 15 October 1998. Whatever doubts the Defendants may have formed as to the ultimate ability of the Plaintiffs to give good title at the end of November, they were not in law entitled in the meantime to refuse payment of the deposit when due.

35. Whether or not there were in fact unauthorized structures on the Property, whether these were of such a nature and scale to constitute a blot on the Plaintiffs' title and whether the Plaintiffs might be able to remove them in time for completion, are all questions which never arose. The ability of the Plaintiffs to give good title only arises at the time of completion and, contrary to Mr Chong's submission, not prior to determining whether the Defendants were obliged to pay the last deposit. When the Defendants refused payment, there was a clear repudiation which the Plaintiffs were entitled to, and did, accept by their letter of 31 October 1998. The Master was not in any way hampered by unresolved factual issues in coming to that conclusion.

36. Accordingly, it is my view that the appeal fails in all principal respects.

The Judgment for damages to be assessed

37. There is, however, one aspect of the Judgment that cannot be maintained. When formulating the question for determination, the Plaintiffs inserted as part of the proposed relief, an Order for damages to be assessed, additional to the deposits forfeited. No doubt guided by the terms of that document, the Judgment pronounced by the learned Master included such relief.

38. Mr Alfred Fung, who appears for the Plaintiffs concedes that, in the light of the express terms of Clause 3 of the 4th Supplemental Agreement waiving the right to any such damages, the appeal must be allowed to the extent of deleting from the last two lines of the said Judgment, the following words, namely: "and that the Defendants do pay damages (giving credit for the deposits) to the Plaintiffs and interest thereon to be assessed and".

39. Subject as aforesaid, the Appeal is dismissed.

40. I will hear the parties as to costs.