ALL PORTS HOLDINGS LTD v. GRANDFIX LTD

HCA 15000/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 15000 OF 1999

____________

______________

J U D G M E N T

______________

1. On 18 September of this year, pursuant to an application by the Plaintiff ('All Ports Holdings') in terms of O.86 of the Rules of the High Court, Master B Kwan granted summary judgment against the Defendant ('Grandfix'). Grandfix now appeals against that decision.

2. The matters in dispute arise out of an agreement for the sale of a shop premises in Cameron Road, Tsimshatsui. On 15 July 1999, in terms of a provisional agreement for sale and purchase, Grandfix agreed to sell the property to All Ports Holdings for a sum of $31,700,000.00. The property was situated on the ground floor of a multi-storey, multi-purpose building. The provisional agreement provided for the drawing up of a final agreement but this was never done. No point has been made of that. The provisional agreement, therefore, governs the contractual rights and obligations of the parties.

3. Clause 20 of that agreement, which was handwritten in Chinese characters, made time of the essence and specified that completion, which was to be on 15 September 1999, was to take place on or before 5:30 p.m.

4. Pursuant to the agreement, All Ports Holdings paid deposits totalling $3,170,000.00, the balance to be paid upon completion.

Unauthorised Building Works

5. On 13 September 1999 - 2 days before completion - the solicitors representing All Ports Holdings wrote to the solicitors representing Grandfix to say that their client had appointed an architect to inspect the property and that the architect had discovered certain 'illegal structures and unauthorised building works'. These works were described in the letter in the following terms:

"The rear portion of the property (open yard portion) has been covered up with concrete slabs and beams forming part of the ground floor. The covered structure or portion is an extension of the ground floor, which should require approval of the Buildings Department."

6. It is apparent that the works in question were substantial and were physically well integrated into the main structure. The letter from the purchaser's solicitors sought confirmation that the Building Department had given its approval to these works. The reasons were plain enough -

"If the extended rear portion of the property was built without approval of the Buildings Department, it is an unauthorised structure rendering the title of the property defective and is also liable to enforcement action by the Buildings Department."

7. In its reply of the following day (14 September 1999), the solicitors for Grandfix wrote as follows:

"Regarding the alleged illegal structures (extensions) and unauthorised building works (which are not admitted), we are instructed that your client had inspected the Property prior to signing the Provisional Agreement of 15th July 1999 and pursuant to clause 19 thereof, your client had accepted all existing conditions of the Property and agreed not to refuse to complete the purchase of the Property in reliance thereof nor to raise any requisition thereto. In the circumstances, we are instructed not to entertain your requisition." [My emphasis]

8. Initially, therefore, Grandfix did not accept that there were any unauthorised building works of the type alleged. However, it now appears to be conceded that the report of the purchaser's architect was factually accurate. As a result, what has been relied upon by Grandfix in this appeal is the second matter referred to in the letter of 14 September 1999; namely, the terms of clause 19 of the provisional agreement for sale and purchase.

9. Clause 19, however, was handwritten in Chinese characters and its true meaning in English translation has not been agreed. This does not make the matter any easier, especially as the provisional agreement provides (in terms of clause 17) that in the case of ambiguities the agreement should be interpreted into English. No certified translation of clause 19 has been obtained. Both parties have, however, suggested their own translations. Grandfix has suggested the following:

"[All Ports Holdings] agrees and accepts all existing conditions/state of the Property and shall not use such conditions/state as pretexts to refuse to complete the transaction or to raise any objections."

10. Against this, All Ports Holdings has suggested:

"[All Ports Holdings] agrees and accepts all the existing conditions of the Property and shall not rely upon any pretext to refuse to complete or raise any different opinion."

11. Clause 19 must be read in the context of the agreement as a whole. More particularly, in my view, it is to be read in the context of clause 3 which provides that the property is to be sold free of encumbrances and clause 11 which provides that it is sold on an 'as is' basis. In the light of these 2 clauses, I confess that I do not find the meaning of clause 19 to be self-evident.

12. In my view, a reasonable person denied evidence of the negotiations - which are inadmissable - would hold that clause 19 is no more than an extension of clause 11 which provides that the property is sold on an 'as is' basis. The purpose of clause 19, superfluous or not, would appear to be to prevent All Ports Holdings from employing the physical condition or state of the property as a device to avoid completion.

13. But Mr Yuen, appearing for the Appellant, Grandfix, argues that such an interpretation of clause 19 would render it completely superfluous as clause 11 already 'covers that ground'. I do not argue with that proposition. I would only say that parties to contracts do sometimes put in repetitive clauses. Mr Yuen argues that clause 19 was specifically intended to cover all existing conditions of the building and by using that inclusive language was intended to cover unauthorised building works as well as other physical defects. The argument is, at one level, a persuasive one. But the law, I believe, is clear and it is to this effect: if a term of the contract is intended to prevent the purchaser from raising requisitions in respect of unauthorised building works, that must be stated in plain, unambiguous language. Is it so stated? In my judgment, it is not. Indeed it falls far short of that test which has recently been restated by Lord Hoffmann NPJ in Jumbo King Ltd v. Faithful Properties Ltd & Others (1999)2 HKCFAR 279 at page 299:

"Prima facie, it is the duty of the vendor to deduce and then convey a good title and if he relies upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so. As Farrand [Contract and Conveyance (4th ed.) p.93] says, the questions is whether the purchaser would have been aware of the risk he was being asked to take. So, for example, general words which did not identify any specific defect in title have been held inadequate to protect the vendor against liability for a serious defect which he could easily have discovered: Becker v Partridge [1966] 2 QB 155."

14. In an attempt to deflect the clear consequence of adopting that test, Mr Yuen has referred to earlier passages in the same judgment, passages of a far more general nature. At page 296, Lord Hoffmann said:

"The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well."

15. Lord Hoffmann concluded:

"But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail."

16. On the basis of these passages, Mr Yuen has contended that, seen in the light of its 'factual matrix', it is evident that clause 19 did intend to shift the risk of defect in title arising out of unauthorised building works from the vendor to the purchaser. At trial, he argued, after all relevant and admissable evidence had been led, there would be an arguable case to say that a reasonable person would understand the parties to intend such a shift despite the fact that they had not expressed themselves well.

17. But that, with respect, I consider to be a circular argument. Clause 12 of the agreement states that the agreement itself 'supersedes all prior negotiations, representation, understanding and agreements of the parties'. In light of that, unless the wording is plain and clear then the law will not countenance a shift so potentially onerous as the one suggested by Mr Yuen. It is therefore incumbent upon the parties to ensure that they do express themselves well (in the sense of being plain and clear) if they both agree to such a shift and understand the consequences of it.

18. In addition, if I adopted the meaning urged upon me by Mr Yuen it would mean that clause 3 - the clause providing that the property is to be sold free of encumbrances - would be undermined, if not mortally so at least to a material degree.

19. Nevertheless, is it at least arguable that, although the parties did not express themselves well, there can be no reasonable doubt that they intended to shift the risk of defective title? As I have said earlier, in my judgment an ordinary reading of clause 19 comes nowhere near that assertion, not even when read in relation to the rest of the provisional agreement and the admissable evidence by way of factual background which appears from the various papers and affirmations.

20. Mr Lau, for All Ports Holdings, has referred to a judgment of our Court of Appeal in Spark Rich (China) Ltd v. Valrose Ltd (unreported) CACV 249/1998 in which Godfrey J A said:

"But it is perhaps worth adding that in the light of this judgment a prudent vendor should always consider, before attempting to sell his property, whether his title to the property may be affected by some unauthorised building work. If so, he should refrain from entering into any contract for the sale of the property which does not contain (1) a full disclosure of the problem; and (2) an agreement on the part of the purchaser not to raise any requisition or take any objection to the title based upon the unauthorised work."

21. According to Mr Lau, those words of guidance - for they are no more than that - nevertheless reflect the reluctance of our courts to read into an agreement for the sale and purchase of land any agreement on the part of the purchaser not to take objection to title based on unauthorised building works unless the contract leaves no room for doubt. Indeed, said Mr Lau, the Court suggested, as good practice, a full disclosure of the problem. There has, however, been no such disclosure in the contract which is the subject of this appeal. Further than that, when first approached on the matter, the vendor's solicitors denied that there were even any unauthorised building works.

22. It is, of course, fundamental that the burden of showing good title lies on the vendor. In this instance, the agreement specified that the property was to be sold free of encumbrances which would include such defects on title as unauthorised building works. Stripped of the ability to rely on the provisions of clause 19, I am satisfied that the Appellant, Grandfix, has been unable to set up a bona fide defence or an issue meriting trial in respect of the unauthorised building works. On that ground alone, I am satisfied that the Master was correct to grant summary judgment against the Appellant.

The Question of Recission

23. It is Mr Yuen's contention that, even if the Appellant, Grandfix, was unable to show good title, when instituting action for the return of the deposits paid and other relief, All Ports Holdings chose to rest its 'primary case' against Grandfix on recission. That being the case, until recission took place, both parties were obliged to honour their respective obligations under the contract - including the obligation to complete. Time was of the essence and time for completion was agreed to be 5:30 p.m. on 15 September 1999. When that time was reached, the contract (that is, the provisional agreement for sale and purchase) remained valid as there had not yet been an act of recission. Accordingly, All Ports Holdings remained subject to its contractual obligations; namely to effect completion. It failed to do this and accordingly All Ports Holdings, the purchaser, was in breach of the agreement rather than Grandfix, the vendor, even though Grandfix may not have been able to show good title.

24. Despite the eloquence of Mr Yuen's argument, I find no substance in it. All Ports Holdings may have based its 'primary case' on recission but the fact remains that its claim has been pleaded in the alternative. The statement of claim seeks the following relief:

"1. A declaration that the sale and purchase agreement has been rescinded or alternatively rescission of the same;

2. Further or alternative to 1 above, a declaration that:-

(a) the Defendant has failed to show a good title to the Property;

(b) the Defendant has failed to satisfactorily answer requisitions on title raised by the Plaintiff;

3. A declaration that the Plaintiff was unable to give a good title to the property free from incumbrances upon completion of the sale and purchase agreement;

4. Return of deposit in the said sum of $3,170,000.00...."

[My emphasis]

25. O.86, r.1, under which judgment was obtained, allows for summary judgment in any action begun by writ indorsed with a claim -

"(a) for specific performance of an agreement (whether in writing or not) for the sale, purchase, exchange, mortgage or charge of any property, or for the grant or assignment of a lease of any property, with or without an alternative claim for damages, or

(b) for rescission of such an agreement, or

(c) for the forfeiture or return of any deposit made under such an agreement."

26. What essentially is being sought by All Ports Holdings is the return of its deposits together with consequential relief such as interest and costs. In any event, the word 'recission' used in paragraph (1)(b) includes the acceptance by a Plaintiff of a repudiation of contract by a defendant. In this regard see the Supreme Court Practice 1999, 86/1/2:

"It is plain that "recission" in para.(1)(b) is used in the wide sense, including the acceptance by the plaintiff of a repudiation by the defendant of the contract by breach, and is not confined to the narrower sense to which the House of Lords in Johnson v. Agnew [1980] AC 367 said "recission" should be restricted. Therefore any claim by a vendor or purchaser, whether seeking to enforce the contract specifically or to have it set aside, or for a declaration that it is at an end, in each case with or without a claim for damages, is within the order."

27. It is, in my view, plain that All Ports Holdings has at all material times proceeded on the basis that, in failing to show good title, Grandfix repudiated the agreement and it did no more than accept that repudication.

28. Admittedly, the letter from the solicitors representing All Ports Holdings was transmitted by fax some 6 minutes after the 5:30 p.m. deadline but the terms of the letter are clear:

"Up to the date hereof, you have failed and/or refused to answer our requisitions raised in our letter dated 13th September 1999 satisfactorily. Your client has failed to show and prove a good title to the property, such act amounts to a breach of contract. We are accordingly instructed by our client to inform your client through your goodselves that our client has elected to accept your client's breach and treat the Provisional Agreement for Sale and Purchase as having been repudiated by your client. We hereby demand your goodselves to return to our client HK$3,170,000.00 being the initial deposit and further deposit paid under the Provisional Agreement for Sale and Purchase."

29. In summary, I can find nothing in the actions of All Ports Holdings prior to the institution of action or in the manner in which it has pleaded its action to suggest that it has restricted itself to the narrow confines of recisson suggested by Mr Yuen.

Collateral Litigation: the Risk of Inconsistent Findings

30. The provisional agreement for sale and purchase made provision for the payment of commission to the estate agents, Royal Property Consultants Ltd. In this regard clause 10 stated:

"If in any case either the Vendor or the Purchaser fails to complete the sale or purchase in the manner herein contained; the defaulting party shall compensate at once the Agent HK$536,000 as liquidated damages."

31. The estate agents have now instituted action against both All Ports Holdings and Grandfix seeking payment of their commission.

32. In its defence, All Ports Holdings pleaded that the estate agents did not advise it of the existence of the unauthorised building works as a result of which it suffered damages. In reply, the estate agents have averred that, before the signing of the provisional agreement and during the course of negotiations, they did make their existence known. As a result, at this time, there exists a dispute of fact as to what was or was not revealed to All Ports Holdings by the estate agents.

33. Mr Yuen has submitted that, in the circumstances, unless this present action is tried together with the action instituted by the estate agents, there is a real risk of two courts of equal jurisdiction making inconsistent findings. This, of course, cannot be a decisive factor but, as I understand it, Mr Yuen suggests it is one more factor to be placed in the balance.

34. The present appeal, however, has not been resolved by resolving an issue of fact; namely, what was (or was not) revealed by the estate agents to the potential purchaser. If there was the need for such a resolution, this matter would have been referred to trial.

35. What may or may not have been said and done during negotiations is of very limited assistance in the present matter. The reasons for that have already been detailed. As I see it, therefore, despite some potential overlapping of 'factual' matters, there is not such a risk of inconsistent findings as to make it imperative that this present matter be reserved for trial and summary judgment denied.

Requisitions Concerning the 'Section 26' Building Order

36. Although I have dismissed this appeal on the grounds that the Appellant has failed to show a bona fide defence or present issues which should properly be tried in respect of the unauthorised building works found in the property, the dispute over these works did not form the only basis upon which the solicitors representing All Ports Holdings made requisitions.

37. In April 1999, some two months before the signing of the provisional agreement, the Buildings Department wrote to the incorporated owners of the building in which the property was situated to advise that an inspection of the 'external and common areas' had revealed the need for repair work to be done. The letter indicated that an order directing the work to be done would be served once the relevant 'ownership information' had been obtained. A requirement for repair works to be carried out was, therefore, certain. There was nothing provisional about the letter.

38. Indeed, on 20 August 1999 - some 26 days before completion was required - the Buildings Department issued an order in terms of section 26 of the Buildings Ordinance, Chapter 123, directing that the work be done.

39. On 13 September, the solicitors representing All Ports Holdings wrote to the solicitors representing the vendor, Grandfix, to say that they were aware of the issue of a 'section 26' order and sought confirmation that the necessary work had been completed in order to comply with that order. In reply, the solicitors for Grandfix wrote:

"Our client had no notice of the [order] until receipt of your letters under reply. However, as a gesture of goodwill and not otherwise, our client is prepared to deposit a sum of HK$50,000.00 with us as security for payment of its share of the cost of complying with the said Orders which has yet to be ascertained. The said sum shall, in our view, be sufficient for such purpose."

40. The offer of an indemnity deposit was rejected. This elicited a further reply to the following effect:

"As long as our client is willing to pay for its share of cost of complying with the [order] and is able to provide security by way of cash deposit, there is no ground for your client not to complete (Lam Mee Hing and Leung Hing Wah v. Chiang Shu Yin [HCMP No.1866 of 1995]). If your client is of the view that HK$50,000.00 is not a sufficient deposit, our client is prepared to place as a deposit such amount as may be certified by an architect as his fair share of the estimate cost."

41. This offer too was rejected, the purchaser asserting that Grandfix had an obligation to 'show and pass a good title in respect of all the existing structures of the property.'

42. Two matters of contention arose from the issue of the 'section 26' order and the ensuing correspondence between the solicitors. First, did the 'section 26' order constitute an encumbrance on the property and, second, if it did, was the giving of an indemnity sufficient to discharge the vendor's obligations?

43. It does not at this time appear to be settled that a 'section 26' order will necessarily amount to an encumbrance on title, not unless, in my judgment, it is demonstrated that the order calls for wholly exceptional measures well outside of the ordinary 'wear-and-tear' remedies that common owners in Hong Kong buildings must meet from time to time. In this regard, see, for example, the dicta of Mortimer VP in Lucky Health International Enterprise Ltd v. Chi Kit Co Ltd [1999] 4 HKC:

"I respectfully agree with Litton JA (as he then was) in Active Keen Industries Ltd v Fok Chi Keong [1994] 2 HKC 67 at 82-83, [1994] HKLR 396 at 409 when he explained that the ordinary liability arising because of common ownership to contribute to expenses in the building does not give rise to an encumbrance. However, I would reserve the question whether it would be the duty of a vendor to disclose a wholly unusual or extraordinary expense for which a purchaser may become liable under s 24 of the Buildings Ordinance consequent upon his ownership."

44. As I understand it, a 'section 24' order concerns the removal of unauthorised building works while a 'section 26' order concerns work needed to remedy general defects and delapidation. In principle, I see no difference between them, not for the purposes of this judgment.

45. It is true that the Court of Final Appeal took a different view from the Court of Appeal in Lucky Health International but it appears to be on the basis that the encumbrance at issue in that litigation was wholly exceptional. See, for example, the dicta of Bokhary PJ and Sir Anthony Mason NPJ at page 518 of the judgment of the Court of Final Appeal [2000] 2 HKLRD:

"As against the respondent it can be urged that a general liability to meet future contributions levied by the management committee is not only foreseeable but expected. That is certainly true in relation to contributions to meet ordinary running expenses. And contributions in relation to the cost of renewal of particular parts of the property, though not necessarily expected, are within the contemplation of a reasonable purchaser. The same may be said about contributions to meet a liability to a third party in contract or tort. There is no occasion why, in the ordinary course, a purchaser should need protection against a liability to contribute to expenses of this kind. Where, however, the liability to contribute is extraordinary in view of its magnitude so that it exceeds what any reasonable purchaser might be expected to have in contemplation, there is a powerful case for saying that there is a defect in title - not because it simply affects the value of the unit (which it may do in a very substantial way) but because it will affect at some time in the future the title. It will affect the title and the purchaser will end up not with a title free from liability (which he contracted to get) but with a title which carries with it a substantial liability even if limited to its proportionate share or, if not so limited, an even greater liability." [My emphasis]

46. In the matter of the present appeal, that raises the question: 'what was the nature and extent of the work required to be done under the 'section 26' order: was it wholly exceptional or was it the sort of work that the incorporated owners of an ageing building must expect to meet from time to time, work essentially of a foreseeable nature?' If the work to be done was of an exceptional nature then, on my reading of the law as it presently stands, that may well amount to a defect against title. If, however, it was not work of such a nature it would not present an impediment to completion. The answer lies, therefore, in deciding the factual question: what is the true nature and extent of the work required? And that, in my judgment, in the absence of clear evidence, is an issue that can only be resolved at trial.

47. In the present appeal, the papers themselves give no real indication of the extent of the works required. In fact, if anything, taken at face value, the 'section 26' order appears to focus essentially on the sort of repair and renovation work that can be completed in a reasonably short period of time and is not wholly out of the ordinary.

48. That being the case, I believe that, if the 'section 26' issue was the only one in contention, it would present an issue to be resolved at trial; namely, whether, in the circumstances, it amounted to an encumbrance on title. The issue of the indemnity would only fall to be resolved if it was found to be so.

Conclusion

49. Although I have come to the finding that summary judgment could not be granted on the 'section 26' issue, that, as I have said, was not the only issue in contention between the parties. The remaining issue related to the existence of unauthorised building works and, in respect of that issue, for the reasons given in the body of this judgment, I am satisfied that the Master was correct to grant summary judgment. The appeal must therefore be dismissed. Costs will follow the event and are awarded to the Respondent, to be taxed if not agreed.