LAM YAM YAN v. CHEUNG LAI YUNG

HCMP 2316/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2316 OF 2013

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J U D G M E N T

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1.  This is a dispute over the title of a property known as Shop E, Ground Floor, Cheoy Lee Building, Nos 1‑7, Yee On Street and Nos 4‑10, Hang On Street, Kowloon.

2.  There are three parties in this action.  The Third Party (Ying Fung) owns the property having purchased it in April 2011.  On the 2 June 2011 it created a tenancy in respect of part of Shop E, which became known as E2.  In February of 2012 it created another tenancy in respect of the remainder of the Shop, calling it E1.

3.  On the 3 August 2012 Ying Fung agreed to sell the whole of the property to the defendant (Cheung Lai Yung) for $9.1 million HKD. The two parties then entered into a Provisional Sale and Purchase Agreement and the defendant paid a deposit of $300,000:

4.  The next stage in this saga was an agreement by the defendant to sell the property on to the plaintiff (Lam Yam Yan) on the 28 August 2012 for the sum of $9.9 million HKD.  A Provisional Sale and Purchase Agreement was entered into by them and the plaintiff paid a deposit of $300,000 to the defendant.

5.  In the case of both transactions the completion date was fixed for 31 March 2013.  That date was in fact a Sunday and the following day a Bank Holiday so the completion day would effectively have been either 28 March or 2 April 2013.  Nothing turns on this aspect.

6.  The next stage took place on the 7 September 2013.  The Third Party and the defendant entered into a formal Sale and Purchase Agreement and the defendant paid a further deposit of $610,000 HKD (making a total of $910,000).  The defendant in turn sent a formal Sale and Purchase Agreement to the plaintiff but the terms were not agreed and this was never signed by the plaintiff.

7.  At the same time the defendant received from the Third Party the title deeds, which it sent on, three days later, to the plaintiff.  On 14 September 2013 the plaintiff paid a further deposit to the defendant of $690,000 HKD (making a total of $990,000) even though it had not signed the formal agreement. 

8.  On the 17 September 2013 the plaintiff’s solicitors raised requisitions as to title to the defendant’s solicitors which in turn it sent on to the Third Party’s solicitors.  It is readily apparent that the defendant’s solicitors had not themselves raised any requisitions as to title on behalf of their client to the Third Party’s solicitors.

9.  The defendant’s solicitors’ replies to the requisitions merely take the form of forwarding the reply that the Third Party’s solicitors made to the defendant’s solicitors.  These then continued a three‑way correspondence concerning these requisitions and subsequent requests, with the defendant content merely to adopt the Third Party’s replies, without amendment, clarification or addition, as their own, and forwarding the Third Party’s solicitor’s replies to the plaintiff as if they were their own.

10.  In the course of this activity there is a gap of 5½ months between the defendant forwarding to the Third Party’s solicitors the plaintiff’s letter of requisitions dated 17 September 2012 (the initial requisitions on that date) and the Third Party’s solicitors’ letter of reply dated 4 March 2013 forwarded by the defendant’s solicitors on the same day.

11.  There followed a flurry of exchanges between the plaintiff’s and defendant’s solicitors in which the latter’s replies were simply an adoption of the Third Party’s responses to the defendant’s solicitors.  This lasted up to and including the 2 April 2013 which would have been the completion date for the head transaction.

12.  On that date the Third Party forfeited the defendant’s deposits and, apparently on a tit‑for‑tat basis, the defendant in turn forfeited the plaintiff deposits. 

13.  It may be logical to consider the position vis‑à‑vis the defendant and the Third Party situation first even though the Third Party is in this action by virtue of the defendant claiming indemnity against it in respect of the plaintiff’s claim.  The Third Party’s proposed sale to the defendant is the initiating event. 

The third party and the defendant

14.  The defendant signed the Provisional Sale and Purchase Agreement and the formal agreement and paid two deposits.  It raised no requisitions as to sale of its own volition, did not adopt the plaintiff’s requisitions as its own save arguably at the very outset when it adopted the plaintiff’s letter of requisitions of 17 September 2012, and merely acted as a post‑box, adopting the Third Party’s replies and passing them on to the plaintiff.  In its contractual relationship with the plaintiff, the defendant was asserting, as its own answers to the requisitions, simply what the Third Party had contended was the position.

15.  Having raised no dispute with the Third Party and having failed to complete in accordance with the formal agreement, it was liable to forfeit the deposits paid.

16.  It cannot rely upon whatever justification the plaintiff can establish for declining to sign the formal agreement with itself.  There is no privity of contract between the plaintiff and the Third Party.  The defendant seems to have regarded itself as the mere agent of the Third Party, a type of middleman who sees itself as a conduit for the “pros” and “cons” of a dispute in relation to title.  When the defendant failed to complete the transaction with the Third Party it was in default of its obligations under the agreement.

17.  Although the correspondence between the parties is somewhat repetitive, as is to be expected in view of the defendant’s self‑defined role, the letter of the 4 March 2013 from the defendant to the plaintiff enclosing the Third Party’s letter to itself of the same date is significant. 

“We hereby share the view as mentioned in the said reply letter dated the 4 March 2013” (That is the Third Party’s reply to the requisitions).

“The trust we have satisfactorily answered all your requisitions.”

18.  As the Third Party’s Counsel (Mr Damian Wong) made clear in his written submissions, the defendant accepted and adopted the Third Party’s replies and asserted to the plaintiff (though the Third Party is not concerned with that aspect) “we have satisfactorily answered all your requisitions.”

19.  The defendant’s stance was repeated in its letter of the 11 March to the plaintiff.  Once again it was stating categorically that it accepted the Third Party’s answers to the requisitions, not raised by the defendant itself.  As far as its relationship with the Third Party was concerned, it could not have been less contentious.  In no way did it associate itself with the requisitions raised.  Far from it, it associated itself unequivocally with the Third Party’s stance.

20.  The defendant’s pleaded case against the Third Party proceeds from a fundamental misconception.  It seeks a declaration that the Third Party failed to answer requisitions raised by the plaintiff (and the defendant) in the letter from the plaintiff (to the defendant) of the 17 September 2012.  There was no privity of contract between the plaintiff and the Third Party and so no obligation existed on the Third Party to answer to the plaintiff.  The defendant did in fact adopt the requisitions raised by the plaintiff in their letter of 17 September 2012 as its own, though simply by repeating them in full in its letter to the Third Party’s solicitors.  Once they had been answered by the Third Party in its letter to the defendant (4 March 2013) that was an end to any concern on the part of the defendant as its correspondence makes clear.

The plaintiff and the defendant

21.  At the outset of the hearing, Mr Jeremy Cheung for the defendant, identified what he saw as the issues between himself and the plaintiff on the one hand and the Third Party on the other.

22.  In his refreshingly realistic appraisal of the merits of the case he was fighting on two fronts, he described his position as being between “a rock and a hard place.”

23.  Essentially he was concerned with the requisition raised by the plaintiff in respect of the cockloft and disputed the relevance of that in relation to the metal grilles.

24.  The issue of premature termination by the plaintiff of the Provisional Sale and Purchase Agreement (for it was no more than that) and any argument over what was the actual completion date, were abandoned by him in the course of his later submissions.

25.  Another matter which removed a plank of the defendant’s case against the plaintiff was his concession that the “Kong report” (a highly questionable document) was never sent to the plaintiff’s solicitors.  This was “evidence” which the Third Party appeared to rely upon as being the conclusive answer to the requisition raised by the plaintiff’s solicitors initially on the 17 September 2012 with the defendant’s solicitors.  I do not need to consider it in any detail although I have been dismissive of it as having any significance in relation to the position involving the plaintiff and the defendant.

26.  He did not pursue any strong argument concerning the metal grilles but still relied on the relevance of these which, it is virtually now agreed, concerned the occupiers/owners of the higher floor.  Of course, in considering the letter from the Buildings and Lands Department on June 1993 it remained a matter of concern for the plaintiff and the defendant failed to deal with it sensibly.

27.  That letter stated, in relation to the building of which the property which is the subject of this action is part, that it had decided “not to proceed with any further enforcement action.”  But it went on to state that the “metal grille enclosure” was still considered illegal and “may be subject to enforcement action……should circumstances change.”  It added: “You are strongly advised to ensure that no further unauthorised building works are carried out less prosecution action be initiated against you.”  It was addressed to the co‑owners of the Cheong Lee Building as identified by an attached list.  This included the ground floor units which included the property which the defendant was seeking to sell.

28.  This feature was the subject of item 4 in the plaintiff’s solicitors letter of requisition of the 17 September 2012.  The relevant part of that was:

“…please let us have evidence showing that such illegal structure has been removed to the satisfaction of BD.”

29.  That letter, was sent to the defendant’s solicitors who in turn passed it on to the Third Party’s solicitors.  The reply came over five months later in the form of the Third Party’s solicitors’ reply to the defendants solicitors who thereafter acted as the middleman or post box between the other two parties – the plaintiff as sub‑purchaser and the Third Party as Head Vendor.  Those two parties were never in contact with each other directly.  The defendant simply adopted the Third Party’s replies as his own.

30.  The answer was simply a reliance upon the fact that nearly 20 years had elapsed since the notification from the Building and Lands Department:

“Since there is no further Building Order issued in the last 20 years and the Letter of Withdrawal confirmed the existing Building Order had been withdrawn, no evidence shall be required for proving the non‑existence of the illegal structure.”

31.  This, as I find unequivocally, was not a proper answer to the entirely reasonable requisition.  The defendant’s solicitors’ reply attached to a copy of the Third Party’s solicitors reply was:

“…the contents of which is self‑explanatory……we share the view (of the Third Party)…we trust we have satisfactorily answered all your requisitions.”

32.  The plaintiff’s solicitors quite properly pointed out the duty of the vendor to prove title and maintained its requisition.  The defendant’s solicitors then once more, as they were to continue to do, put the ball back in the Third Party’s court without suggesting that they associated themselves with the plaintiff’s requisitions.  Their stance, vis‑à‑vis the Third Party, was in effect “we are entirely depending on you in this and need you to tell us what to do.  We will act accordingly.”

33.  The potential purchaser is entitled to require (hence the term ‘requisition’) the vendor to prove the title it purports to convey.  There is no duty upon the purchaser to prove the title for the vendor.

34.  By letter of 11 March 2013 the vendor (head‑and sub‑  ) contended that the “withdrawal” of the Building Order was “absolute”.  It was not.  The letter clearly indicated a continuing risk.  The vendor did nothing to show that the risk was now non‑existent or that the offending structures had been removed.

35.  The question of the metal grilles remained a live issue in the requisitions and the vendor(s) provided no further information.  The contention of the Third Party in paragraph 40 of Mr Damian Wong’s written submissions, concerning the actual site of the grilles which should have come from the defendant (if indeed the defendant was aware of it) never featured in any of the unproductive replies to the plaintiff’s requisitions.

36.  Before dealing briefly with the authorities referred to in the hearing (and in the skeleton submissions) it is more convenient and logically sequential to consider the requisition raised concerning the cockloft – item 2/3 in the letter of 17 September 2012.

37.  Once again the defendant’s (and Third Party’s) solicitors sought to deflect this.  The reply was to refer to the property being sold on as “as is” basis as set out in clause 11 of the Provisional Sale and Purchase Agreement.  Wisely Mr Cheung for the defendant conceded that this did not preclude the plaintiff from raising requisitions and so this fell away as part of the defence case.

38.  In fact the defendant (and the Third Party) failed to enhance their reply on this aspect.  They did not commit themselves to a positive statement as to whether there was or was not a cockloft, and simply fell back on an unreasonable and inappropriate assertion that no evidence had been adduced by the plaintiff that the cockloft was an illegal structure.  It was tantamount to that weak feature of a formal pleading:

“If, which is not admitted, a cockloft exists, the plaintiff must prove that it is an illegal structure.”

39.  An attempt to bind the plaintiff to clause 19 of the Head Agreement (between the Third Party and the defendant) fell on dismissive ears.  There was no privity of contract tying the plaintiff into the Head Agreement.  Authority clearly supports that.  The reliance upon the case of Ji Shan International Investment Ltd v Resources Main Enterprises Ltd & Anor [1999] 1 HKC(CFA) is somewhat misplaced because the distinguishing feature from the norm was that in order to save the main contract, the sub‑purchaser offered to pay the head vendor the balance of the purchase price in return for an assignment to himself.  The judgment of Lord Holfman sets out the position clearly and does not seek to override the general proposition as to privity of contract.

Conclusions

40.  There was no contractual link between the plaintiff and the Third Party which could override the priority of contract between the plaintiff and the defendant.  The mere actions of the defendant in acting as a conduit in relation to the requisitions raised by the plaintiff and the answers to them upon which the defendant relied, could not displace its contract with the plaintiff and the obligations under it, or establish a contractual link between the plaintiff and the Third Party.

41.  The requisitions raised by the plaintiff were relevant and entirely justified. They went directly to the matter of title and, in effect, the defendant ignored them.  It took no steps to inquire of the Building Authority whether it knew of the cockloft and what its attitude would be.  In fact it buried its ‘head in the sand’.  It allowed over five months to elapse, with the completion date moving inexorably closer before it attempted to respond.  It is immaterial if such delay was caused by the Third Party.

42.  The defendant failed to show that the Building Authority would not at some date seek to exercise enforcement proceedings.  He contended that the risk was too remote.

43.  But the lapse of over 19 years since the withdrawal of the notice in June 1993 could not be relied upon to suggest that the Authority would not act upon further illegal structures once it knew of them and the defendant shrank from any effort to ascertain what the real position, and therefore the real risk, was.

44.  The words of Litton, P J in Mexon Holdings Ltd v Silver Bay International FACV No 16 of 1999 [unreported] do not avail the defendant:

“A good title does not mean a perfect title, free from every possible blemish. Whenever a question like this arises, it must be approached from the stand‑point of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion.”

45.  Robust commonsense required the defendant to deal with the reasonable requisitions robustly but constructively.  It did not.  In effect it “ducked” them, to use the vernacular, and it simply parried the proper persistence of the plaintiff’s solicitors.  The quality of the title and therefore the quality of what the defendant sought to convey was, in my view, unarguably dependent upon the factual position of the structures and how the Building Authority might view them.  Similarly the defendant cannot gain any support from the decision in Jumbo Gold Investment Ltd v Yuen Cheong Leung & Anor.  The judgments, at both levels postulated an extreme set of circumstances in which it would have been wholly unreasonable to consider that there was a risk of government intervention.

46.  I have also considered Mr Cheung’s arguments in the light of the decision of the Court of Final Appeal in Mexon Holdings Limited v Silver Bay International FACV No 16 of 1999.  There is nothing in that case which assists the defendant.  Whereas in that case Rogers J A had succinctly stated (in the Court of Appeal) that the documents produced by the vendor in support of the title claimed, showed “a clear chain leading back to the base of the title”, the defendant in this case had failed to make “first base”.  It had studiously avoided providing any support for its reply.

47.  Although the formal Sale and Purchase Agreement had not been signed by the plaintiff, it nonetheless paid the second deposit (as long ago as 12 September 2012).  Completion was due on or before the 31 March 2013. That date was a Sunday.  The effective date was therefore the 28 March (Thursday) as the plaintiff’s solicitors correctly pointed out to the defendant’s solicitors.  It is clear that the plaintiff was still receptive to a satisfactory reply to its requisitions right up to the last minute although it carefully protected its position in relation to the completion date.  The letter of the 27 March 2013, offered agreed cancellation of the sub‑sale and purchase agreement on the basis that the defendant accepted that the title was detective and/or it was unable to comply with the requisitions on title, provided that the deposits were returned and all the plaintiff’s legal and estate agency fees were paid.

48.  This prompted the defendant to request repayment of the deposits it had itself paid to the Third Party.  It also wrote to the plaintiff’s solicitors on the 28 March repeating that the relevant requisitions on title had been proved and answered by the Head Vendor “and/or by us”.  It also threatened forfeiture of the deposits and damages for breach of contract.

49.  By their letter of 2 April 2013, the time for completion having passed, the plaintiff’s solicitors wrote to the effect that the 2 April was not the completion date, the defendant’s breach was accepted and the return of the deposits demanded failing which proceedings would be taken to recover them together with damages for the breach.

50.  The plaintiff’s decision was well founded.  As Mr Cheung has conceded, its repudiation of the contract was not premature.  In view of the fact, as I have found, that the defendant, whose contractual obligation was directly to the plaintiff, had failed to make good title by initially ignoring the requisitions (it had had over 5 months to deal effectively with them), the plaintiff was entitled to repudiate and to seek to recover its losses.  It therefore succeeds against the defendant.

The defendant and the Third Party

51.  This can be stated quite shortly without reviewing fully the correspondence which I have already considered in detail. 

52.  Apart from the defendant’s solicitors’ letter to the Third Party’s of the 17 September 2012 which repeated initially verbatim the plaintiff’s requisitions but framed it as its own requisitions, the form of all other requests and replies indicated acceptance of the Third Party’s replies and thereby constituted acceptance of the Third Party’s title.

53.  This was an unimaginative and high‑risk strategy which left the defendant entirely an ineffective party in the agreement for sale of the property concerned.  A straightforward reading of that correspondence discloses the following statements by the defendant’s solicitors:

“We hereby share the view as mentioned in the said reply letter [of the Third Party]”

– 4 March 2013.

“We hereby share the view as mentioned in the said reply letter [of the Third Party]”

– 11 March 2013.

“We put on records that all the relevant requisition on title have been answered”

– 27 March 2013.

“We repeat that all the relevant requisitions or title have been proved and answered by [the Solicitors for] the Head Vendor and/or by us…

Your allegations on the mis‑representation on the part of our client are totally denied…In the meantime all our clients’ rights are reserved including forfeiting all the deposit paid and all loss and damages arising out from your clients’ breach of contract.” – 28 March 2013.

54.  Through its parroting of the Third Party’s Solicitors replies to the requisitions raised, the defendant associated itself entirely with the Third Party’s responses, accepted that they were proper responses, and approved the title.  That was a gross error which it soon came to regret when the Third Party forfeited the defendant’s deposits.

55.  But it failed to complete the head sale agreement even though the completion date was extended by the Third Party to the 2 April 2013, which extension was valid in view of the fact that the 31 March and 1 April 2013 were public holidays and clause 30 of the Head Agreement provided for this.  

56.  As far as the Third Party was concerned as Head Vendor, the defendant had accepted title (it had unequivocally indorsed it to the plaintiff) and the only hint that the defendant was indicating that the Third Party was not in a position to convey title came in the letter of 29 March 2013 to the Third Party Solicitors.  By then it was too late and that change of stance was precipitated simply by the ultimate of the plaintiff.

57.  Mr Damian Wong, for the Third Party rightly identified the defendant’s stance that as mere confirmor, it considered that “it had no role to play in the process.” In his written submissions he considered in some detail the contents of the correspondence on the requisitions which passed between all the parties.  The Third Party had no privity of contract with the plaintiff.  Its answers to the requisitions were for the benefit of the defendant.  After the first letter of requisition (17 September 2012) the defendant’s solicitors accepted the answers provided by the Third Party.  I have already covered this fully in the context of the dispute between the plaintiff and the defendant.

58.  In view of the fact that the defendant considered that the Third Party had satisfactorily answered the requisitions raised it is not necessary for me to consider in relation to the defendant whether those were in fact satisfactorily answered – it is enough that the defendant treated them as such.  The reaction of the plaintiff is immaterial.  The Third Party may have a good title, or there may be questions outstanding in relation to it.  The point is that the defendant accepted that it had a good title and had made it out.  That is why the defendant forfeited the plaintiff’s deposits, the plaintiff having refused to complete because of the failure to answer the requisitions and its rejection of the title.  The defendant decided that failure constituted a breach and was unjustified.

59.  The Third Party may well be able now to show good title to the world at large.  The relevant position is that the defendant for some reason best known to itself, accepted the title.  Hence the unfortunate chain of events.  It is not without significance that the defendant failed to put in hand any relevant inquiries, for over five months following the original letter of requisition.  It is fixed with the position.

Summary

60.  The plaintiff succeeds against the defendant.  It is entitled to the Declarations sought and to return of the deposits and the consequential losses in the form of the solicitors costs arising from the aborted transaction with interest.  Judgment will be entered accordingly with costs to the plaintiff.

61.  The Third Party succeeds on the proceedings brought against it.  It is entitled to retain the deposit forfeited since the defendant failed to complete on the specified date.  The defendant’s claims are dismissed with costs to the Third Party.