GLADFLOW LIMITED v. GRANDLAND DEVELOPMENT LIMITED

1992, No. A4503

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H E A D N O T E

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The court will not make an order for specific performance of a contract for the sale of land in favour of a purchaser whose interest under the contract has been terminated by the vendor in consequence of a failure by the purchaser to make on time a payment due under the contract when time was of the essence of the purchaser's obligation, unless (perhaps) the court finds that the vendor's insistence on his right to terminate the contract was unconscionable : Legione v. Hateley (1983) 152 CLR 406 and Stern v. McArthur (1988) 153 CLR 438 considered.

Nor will the court order the return of the purchaser's deposit in such circumstances, if it does not exceed the conventional 10 per cent of the purchase price.

Per curiam : Consideration should be given to the enactment in Hong Kong of a provision comparable to that contained in s.49(2) of the Law of Property Act, 1925, conferring jurisdiction on the court in an action for specific performance or for return of the purchaser's deposit, to order the return of the deposit.

1992, No.A4503

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is a purchaser's action for specific performance of an Agreement (by way of subsale) for the sale and purchase of Flat 31, 16/F, Tower 4, Hong Kong Parkview, 88 Tai Tam Reservoir Road, Hong Kong (with an associated car parking space).

2. The Agreement was dated 28th May 1992. It was made between the defendant as vendor and the plaintiff as purchaser. The purchase price was $9,400,000. The Agreement contained in Part II of the First Schedule the following provision (identical in effect with that made in the same connection in an earlier provisional sale and purchase agreement made between the same parties on 8th May 1992) :

"The purchase price shall be Hong Kong Dollars Nine Million and Forty Thousand Only (HK$9,400,000.00) which shall be paid to the vendor as follows :-

(1) HK$300,000.00 being initial deposit and in part payment of the purchase price have been paid prior to the signing of this Agreement.

(2) HK$640,000.00 being further deposit and in part payment of the purchase price shall be paid on or before the signing of this Agreement.

(3) HK$940,000.00 being further deposit and in part payment of the purchase price shall be paid on 18th June 1992.

(4) HK$7,520,000.00 being balance of the purchase price shall be paid before 5:00 p.m. (if on a weekday) or 12:00 noon (if on a Saturday) on the date of completion."

3. Clause 3 of the Agreement contained the following further provisions as to payment of the purchase price, and as to completion :

"3. (a) The purchase shall be completed at the offices of Messrs. F. Zimmern & Co. before 5:00 p.m. (if on a weekday) or 12:00 noon (if on a Saturday) on or before the 8th July 1992.

(b) Completion of the sale and purchase shall be carried out by Solicitors' undertaking whereby the Purchaser shall accept an undertaking of the Vendor's solicitors to deliver the executed Assignment and the necessary documents (if any) to the Purchaser's solicitors within 21 days from the date of completion subject to usual Law Society qualifications and the Purchaser shall not call for or require formal completion.

(c) In respect of each payment of the purchase price or any part thereof required to be made hereunder, the Purchaser shall deliver to the Vendor's solicitors on the date on which and before the time at which such payment is required to be made hereunder a cashier order issued by a licensed bank in Hong Kong or a cheque issued by a firm of Solicitors in Hong Kong in favour of the Vendor for the relevant amount Provided Always that the Vendor or the Vendor's solicitors shall be entitled to require the Purchaser to split such payment and deliver to the Vendor's solicitors one or more cashier order(s) or Solicitors' cheque(s) issued in favour of such person(s) or company(ies) and in such manner as the Vendor shall in its absolute discretion direct and a separate cashier order or Solicitors' cheque(s) in favour of the Vendor for the balance.

(d) Notwithstanding any provisions to the contrary, the Purchaser shall not be deemed to have discharged the obligation to make payment hereunder unless in making such payment, the Purchaser also complies with the provisions of this Clause.

(e) Without prejudice to and in addition to the Vendor's right of rescission or determination and all other rights remedies and action which the Vendor may have under this Agreement or otherwise at law, 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 their respective due dates at the rate of 1.5% per calendar month such interest to be calculated from day to day from the date(s) on which the same should have been paid to the date(s) of actual payment."

4. Clause 17 of the Agreement provided that time should in every respect be of the essence of the Agreement.

5. Clause 18 of the Agreement contained the following provision to take effect in the event of any default by the purchaser :

"18. Should the Purchaser fail to observe or comply with any of the terms and conditions herein contained (including without limitation any failure to pay the purchase price or any part thereof in the manner and on the date and before the time stipulated for payment of the same herein) the Vendor may (without being obliged to tender an Assignment to the Purchaser) forthwith determine this Agreement by giving notice of termination in writing to the purchaser or his solicitors to such effect and the Vendor shall thereupon be entitled to re enter upon the said premises and repossess the same if possession shall have been given to the purchaser free from any right or interest of the Purchaser therein and the Vendor shall be entitled to forfeit all the deposit or deposits or instalments of the purchase price paid or due to be paid to the Vendor absolutely as liquidated damages (and not as penalty). Upon determination of this Agreement, the Vendor may resell the said premises either as a whole or in lots and either by public auction or by tender or by private contract or partly by one and partly by the other(s) of such methods subject to such stipulations as to title or otherwise as the Vendor may think fit and any increase in price on resale shall belong to the Vendor. Without prejudice to the Vendor's right to recover the actual loss which may flow from the Purchaser's breach of this Agreement, on such resale any deficiency in price shall be made good and all expenses attending such resale or any attempted resale shall be borne by the Purchaser and such deficiency and expenses shall be recoverable by the Vendor as and for liquidated damages. This Clause shall not preclude or be deemed to preclude the Vendor from taking other steps or remedies to enforce the Vendor's rights hereunder or otherwise or prevent the Vendor from recovering, in addition to liquidated damages, damages representing interest paid or lost by him by reason of the Purchaser's failure. On the exercise of the Vendor's right to determine this Agreement as aforesaid the Vendor shall have the right, if this Agreement shall have been registered at the Land Office an instrument signed by the Vendor alone evidencing determination as aforesaid of the sale of the said premises and to vacate the registration of this Agreement and on the signing of the said instrument by the Vendor, the Purchaser shall be and deemed to be divested of any interest in the said premises under this Agreement."

6. At 3:22 p.m. in the afternoon of 17th June 1992 (the day before the purchaser was due to make a further payment of $940,000 to the vendor) one Fong Tam Yuen-yee on behalf of the purchaser sent a facsimile message in Chinese to the purchaser's solicitors, Poon & Cheung. The following is the court translation of that message :

"In respect of the premises on 16th Floor of Tower 4 of Parksview Court, as I am going to Canada for an urgent matter, the major deposit of HK$940,000.00 can only be paid up on 8th July, hoping the developer would postpone the completion date to 8th July. Kindly quickly send a letter to the vendor's solicitors, Messrs. Poon & Cheung for the attention of Mr. Lo."

(The vendor's solicitors were in fact F. Zimmern & Co. Poon & Cheung referred to in the message as the vendor's solicitors were as I have said the purchaser's solicitors.)

7. On the same day, Poon & Cheung sent a facsimile message to F. Zimmern & Co. in the following terms :

" In accordance with the Agreement for sale and purchase between our respective clients, our client has to pay your a further deposit of $940,000.00 on or before the 18th June 1992.

However, we are just informed by our client that as a matter of urgency, our client has left Hong Kong for Canada at the date of this letter. We enclose herewith a copy letter of our client for your reference.

Therefore, our client would like your client to give ours indulgence by allowing our client to pay the said deposit instead of the 18th June 1992, on the 8th July 1992 together with the balance of purchase price.

We shall be grateful if your client will give ours a favourable consideration and let us have a reply as soon as possible."

8. On 18th June 1992, F. Zimmern & Co. replied as follows :

" We refer to your fax dated 17th June, 1992 upon which we have taken our client's instructions.

We are instructed to inform you that our client insists that the second further deposit in the sum of HK$940,000.00 should be paid to our client on 18th June, 1992 in accordance with the Agreement for Sub-sale and Purchase dated 28th May, 1992, failing which all the deposits paid to the Vendor shall be forfeited forthwith under Clause 18 of the said Agreement.

Lastly, we reiterate that our client reserves all its rights under the said Agreement."

9. On 19th June 1992, F. Zimmern & Co. followed up their message of 18th June 1992 with a further message in the following terms :

" We refer to our letter dated 18th June, 1992.

As a result of your client's failure to pay the further deposit in the sum of HK$940,000.00 on 18th June, 1992 in accordance with the Agreement for Sub-sale and Purchase dated 28th May, 1992 ('the said Agreement'), we are instructed to inform you that our client hereby exercises its right to determine the said Agreement and all the deposit in the total sum of HK$940,000.00 paid to our client is herby forfeited absolutely to our client pursuant to Clause 18 of the said Agreement.

Meanwhile, our client reserves all its rights under the said Agreement or otherwise to claim against your client for any loss or damages resulted from your client's breach of the said Agreement."

10. On 1st July 1992, Poon & Cheung replied to these two messages as follows :

" We refer to your letters of 18th and 19th June 1992.

We have now taken instruction from Mrs Fong of our client and wish to put on record that a Mr Mao of your client has already given consent on 17th June 1992 to the extension of the time for payment of the further deposit of $940,000.00 to 8th July 1992.

We are instructed to inform your client through your goodself that your client has no right whatsoever to forfeit the deposit as alleged.

Further, our client is always ready and willing to complete the purchase of the above property. We shall tender to you our draft Assignment for your approval in due course."

11. On 2nd July 1992, F. Zimmern & Co. replied as follows:

" We refer to your letter dated 1st July 1992 upon which we have taken our client's instructions.

We hereby write to put on record that our client has never given any consent either through a Mr Mao as alleged or anyone else, to the extension of time for payment of further deposit in the sum of HK$940,000.00 from 18th June 1992 to 8th July 1992.

We reiterate that the Agreement for Sub-Sale and Purchase dated 28th May, 1992 was determined on 19th June 1992 upon which the deposit in the sum of HK$940,000.00 was absolutely forfeited to our client."

12. There the battle lines were drawn. Subsequent negotiations (about which I received evidence without objection) came to nothing.

13. If, as the purchaser now asserts, the vendor had agreed to extend to 8th July 1992 the purchaser's time for payment of the further $940,000, the court will certainly not allow the vendor to go back on that, and it will order specific performance despite the purported forfeiture. If however, as the vendor asserts, it never in fact agreed to any such extension, then the court can make such an order in the purchaser's favour only if it is prepared to overlook the fact that in those circumstances the purchaser was in breach of a stipulation, as to which time was of the essence, that the $940,000 should be paid by 18th June 1992. This raises two questions. The first is whether in the exercise of its equitable e jurisdiction the court can relieve the defaulting purchaser from the forfeiture of its interest under the Agreement. The second question, which arises only if the first question is answered in the affirmative, is whether the court ought so to do and go on to order specific performance.

14. Before I turn to these questions, I must examine more closely the rival contentions of vendor and purchaser as to whether the vendor did or did not agree to an extension of the purchaser's time for payment of the $940,000. (In doing so, I bear in mind that Mrs Fong's message of 17th June 1992 to the purchaser's solicitors made no mention of the alleged agreement and that it was not until 1st July 1992 that the purchaser's solicitors for the first time informed the vendor's solicitors that it was the purchaser's case that it had already obtained the vendor's consent to an extension of time for the payment of the $940,000.)

15. It is clear that, on 17th June 1992, the purchaser did not have the money ready to pay $940,000 to the vendor on the next day, 18th June 1992 as it was obliged to do. It is also clear that the purchaser wanted to obtain an extension of time for payment of that sum until the day when the balance of the purchase price was to be paid, namely 8th July 1992. Mrs Fong, for the purchaser, gave evidence that she telephoned the vendor and spoke to a Mr Mo (whom she appears to have thought was named Mao). She says she told Mr Mo that she wanted this extension because there was some urgent matter in Canada that required her attention. In the course of her evidence, it emerged that her complaint against Mr Mo was that he did not tell her that she could not have an extension of time and that, if he had told her so, she could have got the money ready before it was too late. She did not suggest, at any stage, that Mr Mo had positively told her that she could have an extension of time; although, at one point in her evidence, she did refer to what had taken place between herself and Mr Mo as "an oral agreement". She said that Mr Mo had told her that she had to get the money ready "as quickly as possible". But nevertheless, she believed, or at least says that she believed, that Mr Mo had indicated that she could have the extension of time for which she had asked.

16. Mr Mo was employed by the vendor to deal with sub-purchasers. He accepted that Mrs Fong had telephoned him to make a request for postponement of payment of the $940,000. He says that he told her, not to pay the sum "as quickly as possible" but simply "just stick to the Agreement". By that he meant, he says, that, on 18th June 1992, "she had to tender payment on time". He added "At that time I told her that if she could not pay on time, then our solicitors would act in strict accordance with the terms of the Agreement". He says he did not advise her (as she had said he had) to get her solicitors to write a letter to the vendor's solicitors. He did take instructions, on Mrs Fong's request; but those instructions were to reject Mrs Fong's request, and he conveyed that message to Mrs Fong. He told her that her excuse for non-payment (that, as he put it, she would be "flying out of town") was not a reasonable one.

17. My findings of fact about all this are as follows. Mr Mo went no further, in his conversations with Mrs Fong, than, at the most, to indicate that if she wanted an extension of time for payment of the $940,000, she, or her solicitors, would have to write for that purpose to the vendor's solicitors (although Mr Mo denied saying even that). I am not prepared to find that Mr Mo said anything whatever that could have led a reasonable person to believe that he was, on behalf of the vendor, agreeing to the proposal which Mrs Fong had made to him.

18. In these circumstances, the purchaser's original case (based, in legal terms, on a promissory estoppel) fails.

19. That brings me to the more difficult question in the case, raised by amendment at the trial. Is it necessarily fatal to the purchaser's claim for specific performance that it committed a breach of the Agreement by failing to pay the $940,000 on the due date, 18th June 1992 (its obligation to pay that sum on that date being an obligation of which time was of the essence)? The answer depends on whether, as a preliminary to making an order for specific performance in the purchaser's favour, the court will relieve the purchaser from the forfeiture of its interest effected by the determination by the vendor of the Agreement in consequence of the breach.

20. The court certainly can, in the exercise of its equitable jurisdiction relieve a purchaser against the operation of a penal stipulation in the contract under which the purchaser is to forfeit his interest under the contract: see e.g., Kilmer v. British Columbia Orchard Lands Limited [1913] AC 319. As stipulation such as that contained in clause 18 of the Agreement here for forfeiture of the purchaser's interest under the contract, and further for forfeiture of all instalments of purchase money already paid by the purchaser, is, in my judgment, a penal stipulation, notwithstanding the attempt to attach the label of liquidated damages to the penalty.

21. It is, therefore, open to this court to grant relief to the purchaser if it thinks it proper to do so. But should it do so in the instant case? Although it is open to the court to grant specific performance if the justice of the case requires it, even though the literal terms of a stipulation as to time have not been observed, it has been said that the court will "never exercise this jurisdiction where the parties have expressly indicated in their agreement that it is not to apply by providing that time is to be of the essence of the bargain" : see Steedman v. Drinkle [1916] AC 275, at p.279, per Viscount Haldane, giving the judgment of the Privy Council.

22. Clause 17 of the Agreement here did make time of the essence of, inter alia, the purchaser's obligation to pay the $940,000 on 18th June 1992. This court cannot, therefore, without departing from Privy Council authority, order specific performance at the instance of the purchaser in the present case. The most this court can do is to relieve the purchaser against the forfeiture of its deposit of $940,000 paid at the inception of the Agreement. But that is only the conventional 10% of the total price; and following the decision of the Privy Council in Linggi Plantations Ltd. v. Jhgatheesan [1972]1 MLJ 89 I am not prepared to treat the vendor's insistence on retaining this deposit as the exaction of a penalty. In England and Wales, that might not have mattered; for the purchaser might have been able to recover its deposit by an alternative route. By s.49(2) of the Law of Property Act 1925, jurisdiction is conferred on the court in England and Wales to order if it thinks fit the return of the purchaser's deposit in any action brought, unsuccessfully, by the purchaser for specific performance. But there is no legislative provision in Hong Kong (although there ought to be) comparable with s.49(2) of the English Act.

23. In the result, I can neither order specific performance of the Agreement at the instance of the purchaser, nor order the vendor to return the purchaser's deposit of $940,000.

24. During the course of the argument I drew the attention of counsel to the controversial decisions of the High Court of Australia in Legione v. Hateley (1983) 152 CLR 406 and Stern v. McArthur (1988) 165 CLR 489, from which it appears that the Australian courts might be prepared in an exceptional case to relieve against forfeiture, and go on to order specific performance in favour of the purchaser, notwithstanding a breach by the purchaser of a stipulation of which time was of the essence, if the vendor's insistence on its right to terminate the contract was in all the circumstances of the case unconscionable. But since I am not prepared to hold in the present case that the vendor's conduct can be so characterised, these Australian authorities are in the end of no help to the purchaser.

25. For these reasons, I must dismiss the purchaser's action; though not without some regret, since, if the Hong Kong legislation had contained a provision similar to that contained in s.49(2) of the English Law of Property Act 1925, the purchaser would have had a chance, at any rate, of persuading me that this was a proper case in which to order the return of its deposit. I propose to order that the costs of the vendor of this action be taxed if not agreed and paid by the purchaser to the vendor. If the purchaser wishes to invite me to make any other order as to costs, the case will have to be restored to the list for further argument.