AU YEUNG MING HIM v. NG YUK KEUNG

DCCJ 13395/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 13395 OF 2001

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JUDGMENT

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Background

1. The Defendant purchased from a developer Flat C, 35th Floor, Block 1, Villa Esplanada, in Tsing Yi Island, New Territories (the property), under construction at the price of $4,843,100. A sale and purchase agreement dated 10 June 1997 was signed (the head agreement). Thereafter the Defendant sub-sold the property to the Plaintiff under a provisional agreement dated 19 August 1998 at the price of $3,000,000. Subsequently on 10 September 1998 the parties entered into a formal sub-sale agreement (the sub-sale agreement).

2. Under the sub-sale agreement completion was to take place on or before 19 September 1998. It was further provided that upon completion the Defendant was to procure a direct assignment of the property from the developer to the Plaintiff and to join in to confirm the sale (three party assignment). However, instead of procuring a three party assignment the Defendant completed the transaction with the developer under the head agreement two days prior to 19 September 1998 without joining the Plaintiff in the assignment.

3. On completion the Plaintiff insisted on his right under the sub-sale agreement to receive a three party assignment. As the Defendant was no longer able to procure a three party assignment, the Plaintiff regarded the Defendant acted in breach of the sub-sale agreement and treated it as at an end.

4. Subsequently in August 2001 the Defendant re-sold the property for $3,280,000.

5. In this action, the Plaintiff claimed for a declaration that he was entitled to rescind the sub-sale agreement, the return of the deposit of $300,000, legal costs of $9,000, interest of $7,031.84 paid to the mortgagee bank and an indemnity against the claim for agency fee by the estate agent.

The parties' case

6. The Plaintiff's case is that under clause 7 of the sub-sale agreement, the Defendant was obliged to procure the developer to execute an assignment directly to him on the extended completion date of 21 September 1998 and that a failure by the Defendant to do so constitutes a breach of a condition entitling him to rescind the contract.

7. The Defendant alleges that after he had completed the transaction with the developer and before completion, the parties had entered into a supplemental agreement enabling him to complete the transaction by way of a two party assignment between himself as vendor and the Plaintiff as purchaser, that alternatively the breach of clause 7 was not a repudiation but a breach sounding in damages only, and that alternatively by his conduct the Plaintiff had waived his right to rescind.

The oral evidence

8. The Plaintiff gave evidence. He said that he paid $300,000 as deposit for the property. On 16 September 1998 he attended the office of his conveyancing solicitors, Messrs. Katherine Y. W. Or & Co., and executed a 3 party assignment in escrow for completion. On 18 September 1998, his solicitor Mr. Ho told him over the phone that the Defendant had executed a two party assignment with the property developer and that the Defendant had sent a supplemental agreement to Mr. Ho for approval. He was surprised by what he heard over the phone. He was advised that the supplemental agreement would attract stamp duty and that additional legal costs to be incurred should be paid by the Defendant. As he did not know the legal consequences of a two party assignment he told Mr. Ho that he did not want the sub-sale agreement to be prejudiced. He did not want his right to be affected due to the fault of the Defendant. The next day on 19 September 1998 he and his brother attended the office of his solicitors and instructed that he would only agree to complete on the basis of a three party assignment and that he would accept completion date to be extended to 21 September 1998. On the Defendant's proposed supplemental agreement, which was to enable the Defendant to complete the transaction by way of a two party assignment, his solicitor advised him that he would have to pay extra stamp duty and that the right of the first hand buyer over building defects might be lost. It was on that basis he decided to press for a three party assignment. He had incurred interest of $7,031.84 on the loan of $2,037,000 he took from the bank for the period between it was made available and repayment. He has not paid the agency fee of $30,000. In cross examination he said that he did not know his solicitors had been communicating with the Defendant's solicitors over the possibility of a supplemental agreement prior to the telephone conservation on 18 September 1998. He denied that he instructed his solicitors to negotiate a supplemental agreement, that such an agreement had been reached and that he was nevertheless prepared to accept a two party assignment on 19 September 1998. He was a first time home buyer.

9. The Plaintiff called his solicitor, Mr. Ho, to give evidence. He said that on 10 September 1998 his firm sent a draft three party assignment to the Defendant's solicitors. On 16 September 1998 his firm sent a letter to the mortgagee bank to draw down the mortgage loan. In the morning of 17 September 1998 the Defendant's solicitors returned the draft three party assignment duly approved by the developer's solicitors who had no objection to the execution of a three party assignment. In the afternoon of 17 September 1998 a Mr. Law of the Defendant's solicitors firm called to inform that the Defendant had already executed a two party assignment with the developer at their solicitors' office for the purpose of saving legal cost. He protested, contending that the Defendant's act would prejudice the Plaintiff's rights as the benefits under the head agreement might not pass and that Defendant breached the sub-sale agreement. He asked Mr. Law to advise the Defendant to make arrangement with the developer's solicitors to cancel the two party assignment. In the morning of 18 September 1998 he received a letter from the Defendant's solicitors enclosing a draft supplemental agreement to enable the transaction to be completed by a two party assignment. His firm wrote back stating that the supplemental agreement was not acceptable. At about noon his firm sent, among other things, the balance of the purchase price to the Defendant's solicitors. In the afternoon, Mr. Law informed him over the phone that the Defendant was unable to complete the transaction by way of three party assignment because the Defendant had already completed with the developer and had executed a mortgage and the developer's solicitors refused to cancel the two party assignment. At around 5:30 p.m. Mr. Law called again requesting him to ask the Plaintiff to sign the supplemental agreement before 10:00 a.m. the next day. He agreed to take the Plaintiff's instructions on a without prejudice basis that it was "not binding unless and until the supplemental agreement has been signed by the parties". In the morning of 19 September 1998 Mr. Law told him over the phone that some further amendments to the supplemental agreement had to be made because the Defendant did not agree to deposit $45,000 as security for stamp duty. After taking instructions from the Plaintiff he informed Mr. Law at about 11:00 a.m. on the same day that the Plaintiff would not accept the supplemental agreement and insisted to proceed on signing a three party assignment. The Defendant attended his firm to deliver keys to the property but his firm refused to accept it. The completion date was extended to 21 September 1998 to allow the Defendant a further attempt to rectify the situation. Instead of offering to complete by a two party assignment the Defendant forfeited the deposit of $300,000. The mortgagee bank later informed that interest of $7,031.84 had been incurred. In cross- examination, he maintained his view that the rights under the head agreement may not pass to the Plaintiff in the absence of a three party assignment. He advised the Plaintiff that his rights under the head agreement might be prejudiced by a two party assignment and that there would be extra cost and stamp duty on the supplemental agreement. He, however, said that there was a waiver letter removing the exclusion of a category of persons as "Purchaser" under schedule 1 of the head agreement. He explained the reason for the fax correspondence about the supplemental agreement not marked "without prejudice" was because his secretary sent the fax sheets out without him checking. In order to facilitate progress he exchanged correspondence with the Defendant's solicitors on 18 September 1998 on the supplemental agreement prior to the Plaintiff's arrival the next day at his office to give instructions.

10. The Defendant and his solicitors did not give evidence.

The parties' correspondence

11. On 10 September 1998 the Plaintiff's solicitors sent a letter enclosing their draft three party assignment and a draft undertaking letter.

12. On 17 September 1998 these letters were exchanged: a letter from the Defendant's solicitors returning the draft three party assignment and draft undertaking letter "duly approved as amended in red", two letters from the Plaintiff's solicitors stating that they had been informed that the Defendant had executed an assignment with the developer and insisting to proceed on a three party assignment, a fax from the Defendant's solicitors enclosing a copy of the executed two party assignment between the developer and the Defendant, a letter from the Defendant's solicitors enclosing the draft supplemental agreement, a letter from the Plaintiff's solicitors to the developer's solicitors holding them liable for loss and damage by reason of the execution of the two party assignment between the Defendant and the developer.

13. On 18 September 1998 these letters were exchanged: a letter from the Plaintiff's solicitors enclosing their revised draft undertaking letter for approval, a letter from the Plaintiff's solicitors to the developer's solicitors asking for an explanation for the execution of the two party assignment between the developer and the Defendant, a letter from the developer's solicitors to the Plaintiff's solicitor stating that they were not obliged to execute an assignment direct to the Plaintiff unless required by the Defendant, a letter from the Plaintiff's solicitors insisting to complete by way of a three party assignment, a letter from the Plaintiff's solicitors enclosing cheques and a three party assignment executed by the Plaintiff for completion, a fax enclosing the draft supplemental agreement with amendments in red.

14. On 19 September 1998 these letters were exchanged: a letter from the Plaintiff's solicitors insisting to complete by a way of three party assignment and offering an extension of the completion date to 21 September 1998, a letter from the Plaintiff's solicitors returning the completion documents including the supplemental agreement upon being informed that the Defendant would not complete by a three party assignment, a letter from the Defendant's solicitors calling for completion.

15. On 21 September 1998 these letters were exchanged: two letters from the Defendant's solicitors asking for the execution of the supplemental agreement and asserting that Mr. Ho had agreed on behalf of the Plaintiff to execute a two party assignment, a letter from the Plaintiff's solicitors denying the existence of any agreement between Mr. Law and Mr. Ho.

16. On 22 September 1998 the Plaintiff's solicitors wrote to demand the return of the cheques previously sent for the purpose of completion.

17. Thereafter, the parties exchanged further correspondence setting out their positions each alleging the other acted in breach of the sub-sale agreement.

18. In a letter dated 24 September 1998 the Defendant's solicitors wrote:

"We hereby put on record that we had on 18th September 1998, sent you the draft Supplemental Agreement for your approval. On the same day you then faxed to us the draft Supplemental Agreement with your amendments in red for our consideration. The terms of the said Supplemental Agreement were finalized following the telephone conversation between your Mr. Ho and our Mr. Law. On 19th September 1998, the concluded Supplemental Agreement together with a cheque of HK$3,000.00 drawn in your favour were sent to you under cover of our letter of 19th September 1998.

We also put on record that you have faxed to us your draft 2-parties Assignment and draft undertaking for our approval. Under paragraph 1 of your proposed undertaking, it is clear that you would accept an Assignment of the Property by the Head Vendor to our client and an Assignment of the Property by our client to you on completion. In the circumstances, it is no doubt that your client had all along agreed to complete the purchase of the Property by way of 2-parties Assignment".

19. In a letter dated 28 September 1998 the Plaintiff's solicitors wrote:

"On a without prejudice basis, we agreed to take our client's instructions whether he would accept a 2-parties Assignment since our client had already drawn down the mortgage loan in the sum of HK$2,037,000.00. As time is pressing, we amended the Supplemental Agreement under a mutual understanding that the Supplemental Agreement would not be concluded unless and until the same would have been accepted by our client and signed by the parties. No agreement would be deemed to have been reached until and unless the same was signed and exchanged."

20. The Defendant's solicitors wrote on 29 September 1998:

"We refer to your letter of 28th September 1998 and deny the allegations set out in your said letter....".

The issues

21. It was conceded that the Defendant was in breach of clause 7 of the sub-sale agreement in failing to procure a three party assignment by which the developer would assign the property directly to the Plaintiff. However, Counsel for the Defendant submitted that the breach here was not a breach of condition giving the right to rescind. He further submitted that even if the Defendant had committed a breach of a condition the Plaintiff had "waived his right to terminate the contract by entering into negotiation on the supplemental agreement". He accepted that the defence of waiver would be defeated if Mr Ho's assertion that the negotiation was being proceeded on a without prejudice basis is found proved.

22. Counsel for the Plaintiff submitted that clause 7 of the sub-sale agreement was a condition and it was apparently so when read with clause 19, and that the breach entitled the Plaintiff to rescind. On the question of waiver, he submitted that there was nothing to cast doubt on Mr. Ho's evidence about the without prejudice negotiation on the supplemental agreement and that since the Defendant did not call any witnesses to give evidence there was no real issue of fact.

The defence of waiver

23. Counsel for the Defendant submitted that Mr. Ho's evidence contained inherent weakness. He pointed out firstly that Mr. Ho's witness statement did not mention that the telephone conversation with Mr. Law was without prejudice, and secondly that the term "without prejudice" did not appear on the four faxes sent to the Defendant's solicitors relating to the negotiation of the supplemental agreement. In cross-examination, Mr. Ho said that his secretary sent the fax cover sheets without him looking at it, that he had already told Mr. Law that the negotiation of the supplemental agreement was on a without prejudice basis anyway and that he did not think it was necessary to explain this in his witness statement as there was no agreement at the end of the day. Mr. Ho's witness statement did not specifically mention that he told Mr. Law that the telephone conversation was without prejudice. However, he did mention that he was going to take instructions from the Plaintiff on the supplemental agreement after the telephone conversation with Mr. Law at about 5:30 p.m. on 18 September 1998. Having heard the evidence, I do not find Mr. Ho's evidence relating to the without prejudice negotiation on the supplemental agreement unreliable and I accept his evidence in this regard. Further, I accept his evidence generally on factual matters, except his opinion or belief that the interests in the head agreement would not pass under a two party assignment. There was no controversy over the Plaintiff's evidence and Counsel for the Defendant took no issue on credibility. I accept the Plaintiff's evidence.

24. Perhaps I should mention that even if the telephone conversation between Mr. Ho and Mr. Law was not on a without prejudice basis, I do not see how the Plaintiff could have waived his right to terminate the agreement. Firstly, the supplemental agreement was never finalized. It was drafted, amended and exchanged, but never signed, and there were terms still pending agreement. Certainly the act of the negotiation itself was inconsistent with the Plaintiff's right to terminate the sub-sale agreement but on the evidence the Plaintiff had never abandoned such right. On the contrary, he insisted to proceed with the sub-sale agreement on the basis of a three party assignment on or before the extended completion date of 21 September 1998. What he had done was an affirmation of the agreement on the basis of a three party assignment. It was only upon the Defendant's continuing failure to complete the sale in that manner the Plaintiff's solicitors wrote on 22 September 1998, and further on 24 September 1998, to accept the repudiation and to ask for the return of the deposit. Even if the telephone conversation between Mr. Ho and Mr. Law was not proceeded on a without prejudice basis I would hold that nothing in the evidence amounted to anything so fundamental that would, as a matter of law, take away the Plaintiff's right to terminate the sub-sale agreement.

25. Accordingly, the defence of waiver fails on both the fact and law.

Construction

26. Clause 7 of the sub-sale agreement states:

"On completion, the Vendor shall procure that the Head Vendor will execute a proper Assignment or other assurance of the said premises direct to the Purchaser or the Purchaser's nominee or sub-purchaser subject as hereinafter appears but otherwise free from incumbrances and the Vendor will also join in to execute such Assignment as confirmor to assign and confirm the said premises to the Purchaser or the Purchaser's nominee or sub-purchaser and the Purchaser shall be entitled to vacant possession of the said premises from the date of completion."

27. Mr. Ho believed that a three party assignment was a necessary title document because under a two party assignment the rights of the Defendant in the head agreement would not pass to the Plaintiff, particularly the remedy for building defects. Under clause 6 of the head agreement, the developer was obliged to "...execute a proper assurance of the Property to the Purchaser free from incumbrances....". The word "Purchaser" was defined in SCHEDULE 1 of the head agreement as follows:

"Ng Yuk Keung "吳育強" (Holder of Hong Kong Identity Card No. XXXXXXX(X) of 22nd Floor, Prince's Building, Central, Hong Kong and which for the purpose of this Agreement shall include their executors and administrators but shall exclude their assignees, attorneys, nominees, trustees or any other person acting in place of the Purchaser in any capacity whatsoever."

28. Mr. Ho in evidence referred to a "waiver letter" which was signed by the Defendant and the developer to remove the exclusion of assignees and others as set out in SCHEDULE 1 of the head agreement. The "waiver letter" was not produced, but it appears the effect had to be that the Plaintiff was included as "Purchaser" under the head agreement. By clause 29 of the head agreement, the remedy for building defects provided under clause 28(1) shall survive completion. Furthermore, the letter from the developer's solicitors dated 18 September 1998 made it clear that the developer may execute an assignment directly to the Defendant's sub-purchaser should he so direct. In the circumstances, it seems clear enough that the rights of the Defendant in the head agreement including the remedy for building defects would have passed to the Plaintiff under a two party assignment, contrary to Mr. Ho's belief. In any case, the intention of the parties has to be ascertained objectively (see paragraph 12-043 of Chitty on Contracts 28th Edition Volume I).

29. Counsel for the Defendant said that in ascertaining the true intention of the parties the sub-sale agreement had to be looked at as a whole. He pointed out that the Plaintiff was a first time property buyer purchasing a matrimonial home with good title and vacant possession, and that he was not interested in buying a document. He invited me to take a literal approach in construing clause 7. I do not accept the first part of this submission. In Hong Kong, it is not uncommon that even first time property buyers often sub-sell their properties pending completion especially when they cannot resist the temptation of securing a profit. In the present case, as in the majority of cases, the Plaintiff retained the power to sub-sell the property as expressly reflected in clause 7. I do not think the Plaintiff's status as a first time home buyer would be of assistance for the purpose of ascertaining the intention of the parties at the time the sub-sale agreement was signed. However, the second part of this submission still falls to be considered.

30. Counsel for the Defendant referred to the case of City Famous Limited v Profile Property Limited HCA No. 7926 of 1998 which involved the construction of a clause in a sub-sale agreement stipulating that the vendor shall not without prior written consent of the purchaser modify or amend the principal agreement. Cheung J. regarded the clause could be breached in a trivial way or in a fundamental manner and held that the breach in that case did not constitute a repudiation. City Famous Limited concerned a different clause of different wordings and was decided on its own facts.

31. Counsel for the Plaintiff argued that clause 7 was a condition, as was reflected in clause 19 which states:

"In the event of the Vendor failing to complete the sale in accordance with the terms hereof, all the initial deposit, further deposit and all other moneys paid by the Purchaser to the Vendor pursuant to the provisions of this Agreement shall be returned to the Purchaser who shall also be entitled to recover from the Vendor damages (if any) which the Purchaser may sustain by reason of such failure on the part of the Vendor and it shall not be necessary for the Purchaser to tender an Assignment to the Vendor for execution."

32. He submitted that the phrase "in accordance with the terms hereof" indicated that completion by way of a three party assignment was the only method of completion intended by the parties, and that the consequences for the breach was the refund of the deposits and recovery of damages. He referred to paragraph 12-040 of Chitty on Contracts which states:

"The conclusion to be drawn from these cases is that a term of a contract will be held to be a condition: .....................(iii) if it is so designated in the contract or if the consequences of its breach, that is, the right of the innocent party to treat himself as discharged, are provided for expressly in the contract, or................"

33. He submitted that the phrase "in accordance with the terms hereof" in the sub-sale agreement has the same meaning of the phrase "in the manner herein contained" and relied on the case of Newtech Rich Limited v Chan Shuk Yin Ada and Chow Chee Wai Christopher HCA 8726 of 1997 date of judgment 2nd July 1999 where Suffiad J. held that, among other considerations, the words "in the manner herein contained" employed in the provisional agreement meant that the parties intended novation was the only method to carry out the agreement. Newtech was confined to its own facts as Suffiad J. considered the phrase "in the manner herein contained" only one of the indicia leading to the conclusion that novation was the only method of completion.

34. I shall first deal with the situation that favours a construction that the breach in this case was not a breach of a condition. The subject matter of sale under clause 1 is the Defendant's property, all the estate right title interest property claim and demand. Under clause 7 the Defendant was to procure a three party assignment to assign the property free from incumbrances with vacant possession. The principal object is the transfer of the property free from incumbrances with vacant possession. A failure of this principal object would have been undoubtedly a breach of condition. In this case, however, the fundamental purpose can be equally served by a two party assignment. The phrase "failing to complete the sale in accordance with the terms hereof" in clause 19, when read with clause 7, should be construed as "in accordance with the principal object". It is not specific enough to make the mode of completion the only method of completion.

35. The construction that favours the breach in this case being a breach of condition hinges upon the reading of clause 19. The phrase "failing to complete the sale in accordance with the terms hereof" clearly and specifically refers to all things to be complied with as set out in clause 7. The conveyance by a three party assignment was the specific mode agreed by the parties and must be followed. The relief expressly provided in clause 19 is both clear and specific giving the Plaintiff the right to the return of all deposits (rescission) and also to recover damages, if any. When contrasted with clause 31, by which the parties expressly pronounced that the remedy for failure by the Defendant to deliver the furniture provided by the developer is a claim for damages only, the present breach is a fortiori a breach of condition.

36. On the issue of construction I have come to the conclusion that the parties' intention was that the mode of completion by way of a confirmor assignment, the conveyance of the property free from incumbrances and delivery of vacant possession were to be of parallel importance. That intention is reflected in the clear and specific relief expressly provided in clause 19. If the parties intended otherwise, one would have thought that there ought to have been a provision of a relief similar to that set out in clause 31. Accordingly, I find that the Defendant's breach, upon a proper construction of clauses 7 and 19, was a breach of a condition entitling the Plaintiff to rescind the sub-sale agreement.

37. There was no dispute that in the event of the Plaintiff succeeding he is entitled to recover legal fees of $9,000 paid to his conveyancing solicitors and an indemnity against the claim for agency fee by the estate agent.

38. Counsel for the Defendant submitted that interest of $7,031.84 charged by the mortgagee bank is not recoverable because the loan was received, pending completion, by the conveyancing solicitors who were also acting on behalf of the bank, and therefore the bank was not entitled to charge the interest. I do not accept this submission as on the evidence the bank had departed with the money, which was repaid upon the failure of the transaction. I find this sum recoverable.

Order

39. I shall make the following orders:

(a) Judgment for the Plaintiff in the sum of $316,031.84 together with interest thereon at the present judgment rate of 8% from 21 September 1998 to judgment date and thereafter at judgment rate;

(b) A declaration that the Defendant shall indemnify the Plaintiff against the claim for agency fee by the estate agent under the agreement No KTS 0910 dated 19 August 1998;

(c) The counterclaim is dismissed;

(d) An order that the Defendant pay the Plaintiff costs of the action including the costs of the counterclaim to be taxed if not agreed with a certificate for counsel.