WEALTH CHASE LTD. v. POON HANG YEE

HCA 2401/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 2401 OF 1998

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J U D G M E N T

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1. This is a conveyancing dispute. By a provisional sale and purchase agreement dated 21st October 1997 between a Fung Ying Seen Koon (formerly known as Fung Ying Sin Koon Limited) ("Head Vendor") and the Plaintiff, the Head Vendor agreed to sell and the Plaintiff agreed to buy a piece of land together with a six-storeyed building erected thereon registered in the Land Registry as Kowloon Inland Lot No. 6780 and Lot No. 6624 and known as Nos. 139 and 141 Temple Street, Kowloon, Hong Kong at the price of $25,800,000. This was subsequently replaced by a formal sale and purchase agreement dated 4th November 1997. Completion was to take place on 21st December 1997.

2. By another provisional sale and purchase agreement dated 23rd October 1997 ("Provisional Agreement"), the Plaintiff agreed to sub-sell and the Defendant "or [his] nominees" agreed to purchase the ground floor premises known as Shop A and Shop B, Nos. 139 and 141 Temple Street, of the building mentioned above, at the price of $13,000,000. The agreement was subject to the terms and conditions of the principal agreement made between the Plaintiff and the Head Vendor, and completion was to take place also on 21st December 1997 but at an earlier hour. An initial deposit of $500,000 was paid upon the signing of the Provisional Agreement. A further deposit of $800,000 was payable upon the signing of the formal agreement for sale and purchase on or before 5th November 1997. Vacant possession was to be delivered upon completion.

3. Through no fault of either side, the parties' solicitors could not agree on the terms of the formal sale and purchase agreement, and thus no such agreement was signed. A sum of $800,000 was nonetheless paid by the Defendant to the Plaintiff's solicitors for stakeholding purpose.

4. Title deeds were supplied by the Plaintiff's solicitors to the (former) solicitors acting for the Defendant on 5th November 1997. On 10th November 1997, the Defendant's solicitors wrote to raise a number of requisitions, and for the purpose of this litigation, only one of them is relevant. In their letter, the Defendant's solicitors asked for the supply of a missing agreement for sale and purchase. This was subsequently supplied and prompted the Defendant's solicitors to write on 8th December 1997 as follows:

"We note from the certified copy of Agreement for Sale and Purchase Memorial No. 4920641 that the Ground Floors of Nos. 139 and 141 Temple Street included the cocklofts thereof. There is however no cockloft as stated in the occupation permit. Please clarify."

5. The factual matters alleged by the solicitors were correct. The solicitors acting for the Plaintiff replied on 9th December 1997 as follows:

"Please note that Agreement Memorial No. 4940641 superseded by Assignment Memorial No. 5048696. The address mentioned therein was superseded, amended and confirmed. Furthermore, itself cannot pass title. It is no need to clarify."(sic)

6. The Defendant's solicitors were not satisfied with this answer. They wrote on 15th December 1997 as follows:

"With respect, you have not dealt with this requisition at all. The provisions in the Agreement for Sale and Purchase Memorial No. 4940641 referred the Ground Floors of Nos. 139 and 141 Temple Street as to include cocklofts thereof. Such were at variance with the Occupation Permit and raised the question of the likely existence of unauthorized structures in the premises. Your clarification is therefore requested. The said Agreement being superseded by the subsequent Assignment Memorial No. 5048696 is irrelevant to the requisition raised. We fail to understand what you meant by stating that "the address mentioned therein was superseded, amended and confirmed". Please elaborate and clarify. We are now instructed to ask for a site inspection of the premises."

7. No site inspection by the Defendant took place. But those acting for the Plaintiff wrote on 17th December 1997 thus:

"We would point out that we have answered your above requisitions. In fact, Agreement would be merged with the subsequent Assignment. Any clerical error appearing on it should not affect title."

8. On 19th December 1997, those acting for the Defendant replied as follows:

"With respect, you have not answered this requisition at all. Are you now suggesting that the references to "cocklofts" were clerical errors? In fact, apart from the references to the cocklofts in the Agreement for Sale and Purchase Memorial No. 4940641, the Tenancy Agreement Memorial No. 476218 also mentioned "Cockloft" of No. 139 Temple Street erected on Kowloon Inland Lots Nos. 6780 and 6624. The occupation permit only refers to "Ground Floor: 2 Shops for non-domestic use" without any reference to the Cockloft. We are instructed that on an "as is" basis that there are two cocklofts erected at the rear position of the premises over and above the kitchens and toilets. Please provide evidence before completion that there is Building Authority's authorization to occupy these cocklofts and/or to regularize such erections."

9. Pausing here, it is necessary to give a brief description of the premises in question in order to understand the disagreement between the parties' solicitors. The building in question was an old building erected in 1964. Prior to the two provisional agreements in question, it had been renovated externally and internally by the Head Vendor. The old building was sold with vacant possession. On the ground floor, there were two adjoining shop premises, i.e. Shop A and Shop B of essentially identical design, each comprising a shop proper facing Temple Street and a rear portion. At the back outside the shop proper there was a rear portion comprising a kitchen, a toilet and an open yard. According to the building plans, the covered kitchen and toilet formed a single-storeyed attachment to the shop proper. The shop proper had a very tall ceiling of 13.5 feet. At the end of the yard, there was a rear fence/boundary wall of about 9 feet in height marking the rear boundary of the two Lots with a rear scavenging lane. According to the building plans, several windows at a height from the floor of the shop proper opened from inside the premises into the rear open yard and the roof of the toilet and kitchen through the rear external wall of the building.

10. But at the material times, a row of structures comprising three adjourning structures had already been erected across the rear external wall of the building blocking completely the rear windows of both shops. The structures occupied the airspace above the two adjacent rear yards as well as the covered toilets and kitchens, but it is not clear whether they actually protruded beyond the rear fence/boundary wall. Their roofs were made of corrugated metal sheets or light-weight plywood. They located, vertically speaking, wholly or substantially within the ground floor premises level, although it is again unclear whether they extended partly into the first floor level. The row of structures ran across the whole width of the rear of the two shop premises or the building in question, attaching structurally or otherwise to the rear external wall of the building. Approximately, they measured 27 feet in length, 9 feet in width and 7 to 8 feet in height. They actually rested on the reinforced concrete roof slabs of the original toilets and kitchens and the party wall between the two shops at the rear, but not the rear fence/boundary wall. (The bottom of the structures was about 1 foot higher than the rear fence wall and was connected to it by thin metal bars and welded mesh for security reason rather than for support.)

11. Whilst the position before the renovation was unclear, at the material times, no access could be gained to the structures from within the ground floor shops proper, and there did not seem to be any access to them from outside either, i.e. the rear yards or the scavenging lane. The underside of the structures actually became the roofs of the rear yards, which thus became covered yards of a headroom of over 9 feet. A person visiting the inside of the two shop premises would not be able to see the whole structures whether from the shops proper or the rear yards, but inside the rear yards he could see part of the underside of these structures forming the ceilings of the covered rear yards. But he would not be able to tell what if anything was erected above the "ceilings". And inside each of the shops proper, the row of high windows had been blocked and become part of the wall, and no trace of the windows could be seen.

12. His knowledge would not improve if he opened the back door at the rear fence/boundary wall and walked into the scavenging lane. This was because at the material times, the lane was apparently occupied by street-sleepers. Pieces of canvas or plastic sheets had been erected across the whole width of the lane in some length at a level not much above the average human height, apparently to protect those living underneath from unwanted elements falling from above. The practical result of that, for the purpose of this litigation, was that unless one intentionally lifted some of these pieces of canvas or plastic sheets, a visitor to the rear lane would not be able to see the structures in question clearly or at all given the height of the structures above ground. For the sake of completeness, however, I should add that if one were to look carefully, one could see the structures from the rear windows of the residential units at the upper floors of the building, and of course they might also be seen from the upper floors of the buildings on the opposite side of the rear lane where some of the photographs put in evidence at trial were actually taken.

13. Returning to the requisition and replies, whilst the earlier references to the "cocklofts" would seem to be based only on the references in the title documents, the "cocklofts erected at the rear position of the premises over and above the kitchens and toilets" that the solicitors acting for the sub-purchaser referred to in their letter of 19th December 1997 was a reference to this row of structures abutting the rear external wall of the building, over and above the kitchens and toilets of the two shop premises.

14. In the same letter, the solicitors enclosed a copy letter of nomination dated 23rd October 1997 ("Nomination") which purported to confirm that a Pannon International Limited ("Pannon") was the nominee of the Provisional Agreement in which the Defendant acted as its agent, noting that the Formal agreement as well as the Assignment were to be signed by the nominee directly. The Nomination was signed by the Defendant. In fact, the fact that Pannon was the nominee was mentioned by the Defendant's solicitors to the Plaintiff's solicitors in an earlier letter dated 15th December 1997 (received by the latter on the 17th). In reply, the Plaintiff's solicitors wrote to ask for a certified copy of the Nomination in order to enable their client to execute the Assignment directly in favour of the nominee. A copy Nomination was thus supplied on 19th December 1997.

15. On 19th December 1997, the Plaintiff's solicitors wrote back:

"We are instructed that there is no cocklofts erected as alleged by you. Please give professional evidence to support your allegation otherwise we would treat your requisitions which does not stand. Furthermore, we would ... put on the record that you have as late as three working days before the completion to say there is Cockloft erected."(sic)

16. Pausing here, evidence was given by Mr. Cheung Wai Keung, a director of and the person behind the Plaintiff, that after learning of the other side's requisition, he went to the premises himself to take a look again at the alleged cocklofts, although according to his recollection from his earlier visit before this question of cocklofts arose, he had not noticed the presence of any cocklofts. But on this second visit, he still could not see any "cocklofts" from the inside of the premises and he concluded that there was no cockloft whatsoever within the shop premises and instructed the Plaintiff's solicitors accordingly. As the structures in question were concealed by the canvas or plastic sheets, he never noticed the presence of the structures at the material times. In any event, he would not consider the structures in question as "cocklofts" since no access could be gained to the structures from within the premises, contrary to his understanding of what a "cockloft" was.

17. Returning to the solicitors' correspondence, the solicitors acting for the sub-purchaser replied on 20th December 1997:

"We are instructed that it is a fact that there are cocklofts at the rear of the above premises which is beyond dispute. As early as 8th December 1997, we asked for your clarification that no cockloft was stated in the occupation permit. It is therefore not correct that we raised this issue as late as 3 working days before completion. We insist that evidence must be provided before completion that there is Building Authority's authorization to occupy these cocklofts and/or to regularize such erections."

18. The Plaintiff's solicitors replied on the same day, repeating their instructions that there were "no cocklofts as alleged". Further, they argued that there was no real or was only a fanciful risk of enforcement proceedings by the Building Authority because there had been previous building orders issued. (The reference to previous building orders as an answer was clearly and admittedly bad and irrelevant because they related to other parts of the building unconnected with the structures in question.)

19. The Defendant was not satisfied with the Plaintiff's solicitors' replies; and in those circumstances, completion of the sub-sale and purchase of the two shop premises did not take place as scheduled on 21st December 1997. On the following day, the Defendant's solicitors wrote to accept, purportedly, the Plaintiff's wrongful repudiation of the Provisional Agreement, and ask for the return of the initial deposit as well as the sum of $800,000 stakeheld by the Plaintiff's solicitors.

20. This was not accepted by the Plaintiff's solicitors who continued to maintain that there were no cocklofts within the premises. They offered to extend the completion date to 31st December 1997.

21. The offer was rejected by the solicitors acting for the Defendant. In their letter dated 24th December 1997 which only reached their counterparts on 27th December 1997, they enclosed for the first time a photograph depicting the structures. The same was apparently taken by lifting or removing some pieces of canvas at the rear lane.

22. Neither side changed its position, and no completion took place on 31st December 1997 either. The stakeheld money but not the initial deposit was subsequently returned to the Defendant. The battle lines were drawn and the present action was commenced in early 1998.

23. Notwithstanding the falling through of the sub-sale, the Plaintiff kept its bargain with the Head Vendor and completed the sale and purchase of the land and building. One of the shops (No. 141 Temple Street) was rented out in April 1998, and eventually the two shops were sold (on a subject to tenancy basis for one shop and with vacant possession for the other) in December 1998 and January 1999 for $3.38 million and $3.25 million respectively. The huge drop in prices was said to be due to the onset of the Asian economic crisis in late 1997 and the resulting collapse of property market prices.

24. In this action, the Plaintiff claims a declaration for the forfeiture of the initial deposit, damages for breach of contract based on the difference between the original contract price and the resale prices and the additional transaction costs and rates totalling $6,483,927, as well as interest and costs.

25. On the other hand, the Defendant counterclaims for repayment of the initial deposit, damages representing the cost of investigating title, a declaration for an indemnity against liability towards the estate agent's commission, as well as interest and costs.

26. Apart from challenging the Plaintiff's title to the shop premises and the adequacy of the answers supplied by the Plaintiff's solicitors to his former solicitors' requisition, and apart from challenging quantum, the Defendant also takes the point that after the nomination, he was no longer liable under the Provisional Agreement for its performance and instead the Plaintiff ought to have looked to his nominee for such performance, as the Provisional Agreement named him "or [his] nominees" as the purchaser.

27. In pleading, the Defendant also argued that he only acted as the nominee's agent in entering into the Provisional Agreement and had no personal liability under it. At one stage, the Defendant applied to join Pannon as a co-defendant in this action, but the application was unsuccessful. In those circumstances, the counterclaim was maintained by the Defendant "as agent for [Pannon], or alternatively in his personal capacity". But in final submission, the Defendant no longer ran any argument based on agency.

Nomination

28. As I said, the Defendant argues that as from 19th December 1997 when the copy Nomination was supplied to the Plaintiff's solicitors by the Defendant's solicitors, the Defendant was no longer liable for the performance of the Provisional Agreement, it having been replaced as the contracting party by the nominee upon the making of the Nomination and sending of the copy Nomination to the Plaintiff's solicitors. According to Mr. Lin, counsel for the Defendant, a novation of contract took place whereby Pannon replaced the Defendant as the contracting party under the Provisional Agreement. In other words, the Plaintiffs sues the wrong party in the present action.

29. Mr. Wong, counsel for the Plaintiff, countered that until the Assignment was executed by Pannon, the Defendant remained liable under the Provisional Agreement.

30. The Provisional Agreement in question did specifically refer to the purchaser as being the Defendant or his nominees. A written Nomination was indeed made by the purchaser, naming Pannon as nominee to take up the Assignment. In order to determine the correctness of the competing submissions of counsel, one needs to examine the "nomination" more closely.

31. In my judgment, "nomination" may mean several things and covers several different situations: See generally Sihombing & Wilkinson, Hong Kong Conveyancing Law and Practice, Vol. 1A, para. X[64] et seq. In particular, nomination may cover the situation where a purchaser, for various possible reasons, nominates another person (including a company) to take up the assignment (or for that matter, the formal agreement for sale and purchase). These reasons may include an agency situation (i.e. that the purchaser actually acted as agent for the nominee in entering into the contract in the first place), a sub-sale or assignment situation (i.e. that the nominee is actually the sub-purchaser of the property from the purchaser or the assignee of the purchaser of his interest under the contract with the vendor), and a trust situation (i.e. that the nominee is the trustee of the purchaser in holding the property).

32. However, nomination may also cover the situation of a novation of contract, whereby the original purchaser is substituted by the nominee as the new purchaser under the contract with the vendor. The nominee assumes the obligations and rights of the original purchaser under the contract and has privity of contract with the vendor. Again this may be done for various reasons, like agency, sub-sale, or trust. The distinction with the preceding type of nomination is that under the former situation, the nomination focuses on the nominee's taking up the assignment (or formal agreement), but does not change the contractual relationship between the vendor and the purchaser under the contract. The nominee does not become a party to this contract and has no privity of contract with the vendor. The nominee's relationship with the vendor is governed by the assignment (or formal agreement) which he takes up. The nominee's relationship with the purchaser is of course governed by their agreement or dealings inter se. The relationship between the vendor and purchaser will continue to be governed by the contract between them until (and insofar as) it merges with the assignment (or, as the case may be, is superseded by the formal agreement between the vendor and nominee).

33. In the latter case of a nomination amounting to a novation of contract, the situation is quite different. The original purchaser is replaced by the nominee as the contracting party with the vendor to the contract. Privity of contract exists between the vendor and the nominee after the novation/nomination. The original purchaser is out of the picture. Whereas the former type of nomination focuses on the execution of the assignment (or formal agreement) by the nominee, the present type of nomination need not take place by reference to any contractual stage or execution of document. Just as a contract may be made at any time, the novation of contract can take place at any point in time during the currency of the contract between the vendor and the original purchaser. In other words, for so long as the contract remains executory in whole or in part, the nomination/novation may take place at any time between the three parties involved, i.e. the vendor, the original purchaser, and the nominee as the new purchaser.

34. Thus understood, it is not at all difficult to classify the authority relied on by Mr. Lin, namely, Damon Cia Naviera SA v Hapag-Lloyd International SA [1983] 3 All ER 510 (Leggatt J), [1985] 1 WLR 435 (CA), a shipping case involving the purchase of three ships by brokers for and on behalf of two brothers "and/or for company or companies to be nominated by them in due course", as a case of nomination involving a novation of contract (see p. 446H of the Court of Appeal judgment). In that case, the brothers nominated a company as their nominee in purchasing the ships. Soon afterwards, the contract was terminated and the vendor wanted to hold the nominee company liable for breach of contract. As "a contract cannot be forced on [the nominee] without its agreement" (ibid.), the court focused on whether the nominee company had accepted the brothers' nomination prior to the termination of the contract.

35. Likewise, the local unreported case of Shum Siu Yuk v Liu Tsin Wai HCA No. A8202 of 1991 (1/12/92), may be understood in the same way. In that case, the provisional contract specifically provided that the purchaser could "purchase the ... property by an attorney or nominee. The vendor shall not be entitled to object", and the provisional contract specifically provided for the case of "a change of party" as a result of the nomination. A nomination was duly made, in which the purchaser nominated a nominee "to accept the [provisional contract] and to take up the formal agreement for sale and purchase", and declared that "henceforth all the estate right title benefit and interest of and in the said property including the deposit paid under the [provisional contract] shall be vested in the [nominee]." In my judgment, this was a novation of contract situation. The Court (Deputy Judge Sharwood) held that as a matter of construction of the provisional contract, the vendor was not entitled to object to the nomination and the "unilateral assignment" of the original purchaser's rights under the provisional contract in favour of the nominee. Although towards the end of the judgment, the court did not specify which "plaintiff" (i.e. whether the original purchaser as the 1st plaintiff or the nominee as the 2nd plaintiff) in whose favour a decree of specific performance was being granted, judging from the whole of the judgment, I have no doubt that the decree was granted in favour of the nominee to whom the original purchaser had assigned "all her rights under the [provisional contract]".

36. On the other hand, the authority relied on by Mr. Wong, i.e. Curtis Moffat, Limited v Wheeler [1929] 2 Ch 224 (based on an earlier case Dowell v Dew (1842) 1 Y & C.C.C. 345), may be regarded as a case dealing only with the taking up of an assignment by a nominee. In that case, the purchaser of the leasehold interest under sale successfully sued the vendor for specific performance of the contract of sale, compelling the vendor to complete in favour of the nominee of the purchaser.

37. In relation to these two types of nomination, I would further say this. In the case where the contract on its proper construction expressly provides for the right of a purchaser to substitute himself by someone else as the purchaser (by means of a novation), like the case of Damon and that of Shum Siu Yuk, the vendor has no right to object to the nomination/substitution of parties, or in other words, the novation of contract. The only question is whether the nominee accepts the nomination to replace the original purchaser as the contracting party to the contract with the vendor.

38. In the case where the contract does not entitle the purchaser to substitute someone for himself as the purchaser, no nomination of the preceding type, i.e. a novation of contract, can be forced upon an unwilling vendor. Conversely, if the vendor agrees to the nomination/novation proposed, a novation of contract can always take place even though the contract has not made any such provision (assuming that the intended nominee's consent is also forthcoming). This is simply freedom of contract.

39. However, in the absence of contractual entitlement, and in the absence of the vendor's consent, the purchaser may nonetheless under common law effect a different type of "nomination", i.e. nominating somebody to take up the assignment (or formal agreement). This does not require the consent of the vendor, provided that there is nothing in the contract specifically prohibiting the nomination and that the identity of the purchaser is not shown to be vital to the vendor contracting with him. The original purchaser may where necessary be required to offer to join in the assignment between the vendor and the nominee for the purpose of guaranteeing to the vendor the performance by the nominee of the covenants under the assignment: Curtis, supra. See generally Sihombing & Wilkinson, para. X[65].

40. Returning to the novation type of nomination situation, whilst ex hypothesi, the purchaser may at any time nominate a third person to replace himself as the contracting party to the contract with the vendor, it does not necessarily follow that he must make such a nomination, or put another way, a "nomination" made by him must have such an effect. For the greater includes the less, and there is nothing in principle to prevent him from making a more limited type of nomination, i.e. nominating a person to take up the assignment (or formal agreement), without effecting a novation of contract (whereby he is substituted by his nominee as the contracting party under his contract with the vendor). It all depends on the nominator's intention as to be gathered from the wording of the nomination used.

41. Applying all this to the present case, I am of the view that in the Provisional Agreement, the words "or nominees" only entitled the Defendant to nominate, if he so wished, a third person to take up the formal assignment (or formal agreement), but did not give him a right to nominate a third person to substitute himself as the contracting party to the Provisional Agreement. In other words, the Provisional Agreement only provided for a limited type of nomination, but not the novation type of nomination discussed above.

42. Of course, as explained above, even in the absence of those words ("or nominees"), under common law, a purchaser has the right to direct his vendor to assign the property to his nominee. But that is subject to the proviso that the identity of the purchaser under the contract is not material as well as the right of the vendor to require the purchaser to join in the assignment so as to guarantee the performance of the covenants in the assignment by the nominee. In my judgment, the addition of the words "or nominees" into the Provisional Agreement had the effect of modifying the common law by making clear that the identity of the purchaser was not important or material to the vendor under the Provisional Agreement and by removing the right of the vendor to require the original purchaser to join in the assignment to guarantee the performance of the same by the nominee. The words did not have the effect of enabling the purchaser to substitute a nominee named by him for himself as the contracting party to the Provisional Agreement.

43. In my judgment, the words used in the Provisional Agreement fell short of the wording required to give the purchaser such a right. When compared with the respective wordings used in Damon and Shum Siu Yuk, the point I am making here cannot be clearer. In Damon, the elaborate formula of "and/or for company or companies to be nominated by them in due course" was used. Moreover, according to the evidence in that case, that formula was adopted in accordance with the common practice in relation to the sale of second-hand ships that second-hand ships were not intended to be purchased personally by individuals but rather by companies to be named and nominated as the real purchasers by the individuals named in the contract of sale (p. 512h of the first instance judgment). In Shum Siu Yuk, apart from the detailed provisions involved, i.e. that the purchaser could "purchase the aforesaid property by an attorney or nominee. The vendor shall not be entitled to object", the contract also provided specifically for the eventuality of a "change of party", no doubt a reference to a change of party brought about by the nomination. Therefore in these cases, as a matter of construction, the courts had no difficulty in coming to the conclusion that what was involved was a novation type of nomination situation.

44. In the present case, I hold as a matter of construction that the words "or nominees", or for that matter, the entire Provisional Agreement, did not have such effect. After all, a right to unilaterally force upon an unwilling vendor without its agreement and consent a novation of contract at any time during the currency of the Provisional Agreement is a drastic or important right, and in the absence of clear and specific provisions to that effect in the Provisional Agreement, I do not agree that I should place such a construction on the two words "or nominees" used by the parties. Something much more explicit would be required in order to achieve that construction.

45. For the sake of completeness, I should mention this. During the trial, the parties adduced evidence as to why the words "or nominees" were inserted into the Provisional Agreement, as well as evidence of the parties' or the estate agent's subjective understanding of the meaning and effect of the words so inserted. In my judgment, all this is irrelevant to the proper construction of the meaning of the words or the Provisional Agreement, and are inadmissible by reason of the parol evidence rule. I take account no account of them in my construction of the words used in the Provisional Agreement.

46. If I were wrong with my construction of the words "or nominees", and that under the Provisional Agreement the Defendant did have a right to nominate somebody to replace himself as the contracting party at any time, I would still hold that the nomination argument fails in the present case. This is because when one looks at the Nomination relied on in this case, it is quite plain that it was a nomination of a limited type only. The Nomination reads:

"To: Wealth Chase Limited

Re: Ground Floor, Shops A and B, Nos. 139-141 Temple Street, Kowloon, Hong Kong

Reference is made to the Provisional Agreement for sale and purchase dated 23rd October 1997 in respect of the above premises. This is to confirm that PANNON INTERNATIONAL LIMITED ... was the Nominee of the Provisional Agreement for Sale and Purchase in which I was acting as its agent.

Please take note that the Agreement for Sale and Purchase and the Assignment in respect of the said premises are to be signed by the Nominee, PANNON INTERNATIONAL LIMITED ... directly.

Dated the 23rd day of Oct 1997.

[signed]

Poon Hang Yee"

47. Under the Nomination actually made, the Defendant only nominated Pannon to take up the Formal Agreement and the Formal Assignment. It did not nominate Pannon to substitute the Defendant as the contracting party to the Provisional Agreement. Therefore, even though ex hypothesi, the Defendant could under the Provisional Agreement nominate somebody to substitute himself as the contracting party to the Provisional Agreement, he did not exercise such a right under the Nomination actually made by him; instead he made a limited type of nomination to nominate Pannon to take up the Formal Agreement and Formal Assignment directly from the vendor. In such circumstances, no novation took place, and the Defendant remained the contracting party to the Provisional Agreement.

48. This sufficiently disposes of the nomination argument run by the Defendant to escape liability in the present case. In the light of this conclusion of mine, I will only mention very briefly a contention also raised by the Plaintiff during submission in response to the nomination argument run by the Defendant. It was argued that even assuming that the Defendant had the right to make a novation type of nomination and had by the Nomination actually exercised that right, there was no novation of contract as there was no communication of acceptance of the nomination/novation by the nominee. As a matter of principle, I agree, because by nature, a novation involves the replacement of the original contracting party by a new contracting party to the contract, and this cannot be done without the agreement of the new contracting party, i.e. the nominee. And his agreement to become the new party has to be communicated to the remaining original contracting party, just like the acceptance of an offer by an offeree has to be communicated to the offeror before a contract can be concluded.

49. However, on the facts of this case, given that the Defendant and his elder brother were the only two directors and shareholders of Pannon, and that both of them were personally involved in the acquisition of the property, it is highly arguable that the Nomination, although signed only by the Defendant but not by Pannon, also served as a communication by Pannon, through the Defendant, to the Plaintiff, of Pannon's acceptance as the replacing contracting party under the novation.

50. But given my conclusion above, I need not express any final view on the matter. Nor need I reach any final decision on whether the Nomination signed by the Defendant could constitute a valid memorandum in writing evidencing the contract of novation made between the Plaintiff, the Defendant and Pannon in satisfaction of the formality requirement under section 3 of the Conveyancing and Property Ordinance (Cap. 219), although I note that the memorandum may be signed by an agent, and therefore it is arguable that the Nomination could constitute the requisite memorandum signed by the Defendant not only on behalf of himself but also as agent on behalf of Pannon.

51. Given my conclusion, I do not need to deal with Mr. Wong's further argument of lifting the corporate veil in order to meet the Defendant's argument of nomination. In short, Mr. Wong said that in the circumstances of this case, particularly given the suspicion that Pannon was nominated to enable the Defendant to escape personal liability under the Provisional Agreement, the corporate veil of Pannon should be lifted, and the company should be equated with the Defendant.

52. All I should say is that I do not find on the evidence before me that the nomination of Pannon to take up the Formal Agreement and Formal Assignment was anything other than a normal commercial act done by the Defendant to acquire a property in the name of a company. I find nothing sinister in the nomination. On the evidence, I reject the Plaintiff's suggestion of an ulterior motive in making the nomination. In fact, the nomination was expected by the Plaintiff's solicitors throughout, and the draft Formal Agreement, Formal Assignment and Deed of Mutual Covenant all had the name of the purchaser left blank, awaiting the making of a nomination by the Defendant or his confirmation that he would take up the Assignment in his personal name. Stripped of the suspicion that I reject, I find that there is nothing in the present case which would warrant the Court's lifting the corporate veil of Pannon in favour of the Plaintiff, for the purpose of pinning liability on the Defendant. The purchase of a property in the name of a company, albeit a two-dollar shelf company, or for that matter, the nomination of such a company to take up the formal assignment of a property, is a common enough occurrence in Hong Kong; I see nothing wrong with it, and I certainly find no basis for lifting the corporate veil in such circumstances.

53. Anyhow, as I said, I reject the Defendant's nomination argument.

Showing good title and answering requisition

54. Turning to the title problem raised in the present case, it is important to bear in mind the following basic principles. First, although no formal agreement was signed through no fault of either party, and therefore this was an open contract situation, the Plaintiff as vendor was nonetheless under a dual obligation implied by law to show a good title prior to completion and to make a good title upon completion. In relation to the first obligation to show a good title, the obligation included the duty to answer satisfactorily all relevant and properly raised requisitions on title. If the Plaintiff failed in this duty, the purchaser would be entitled to rescind the Provisional Agreement notwithstanding that it had a good title to the property. For all this, see Active Keen Industries Limited v Fok Chi-keong [1994] 1 HKLR 396.

55. Furthermore, the Plaintiff as vendor had to prove its title beyond reasonable doubt: M.E.P.C. Limited v Christian-Edwards [1981] AC 205. This means that in relation to any factual matters concerning title, the Plaintiff as vendor had to clarify the factual matters beyond any reasonable doubt in favour of a good title. On the other hand, in relation to any legal doubt, the law would seem to be that each side must make up his or her own mind in relation to where the law stands, based on the facts known: Active Keen at p.407, and see the cases cited in M.E.P.C. at p. 219C-H (i.e. Johnson v Clarke [1928] Ch 847 and Smith v Colbourne [1914] 2 Ch 533); but c.f. Emmet on Title paras. 5.001B to 5.001C.

56. However, before a requisition need be entertained and answered, it has to have been properly raised and formulated. It has to be formulated with reasonable precision if it is to be effective. If it is materially confusing and obscure, or is otherwise insufficiently precise, it will not be effective and need not be answered: Chan Chik Sum v Great Pearl Industries Limited [1997] 1 HKC 27. Furthermore, it would appear that if a requisition is frivolous and vexatious, and is not raised bona fide, the vendor may ignore it: Queen Energy Limited v Chau Shu Keung [2000] 3 HKLRD 152.

57. In the present case, the requisition was raised first on 8th December 1997. There was and is no complaint of lateness in raising the requisition, probably because the relevant title documents had been sent to the solicitors of the Defendant late. The requisition asked for clarification of the discrepancy between the occupation permit and a previous agreement for sale and purchase, in that according to the former there was no cockloft in the ground floor premises, whereas the latter suggested cocklofts existed. In my judgment, this was a relevant requisition on title, and it had been reasonably formulated and properly raised. The potential title difficulty caused by the discrepancy between the occupation permit and the building as actually constructed has been well highlighted in two Court of Appeal cases, namely, Active Keen and Kok Chong-ho v Double Value Development Limited [1993] 2 HKLR 423. More importantly, unlike these two cases, the cocklofts in question apparently existed within the ground floor premises. To any reasonably experienced and competent conveyancing lawyer, the potential title problem that this would give rise to must have been plain.

58. It is equally plain to me that the answer that the Defendant's solicitors got from their counterparts on 9th and 17th, namely, that the previous agreement for sale and purchase that mentioned the existence of the cocklofts had merged with the subsequent assignment, was totally beside the point and bad. Doing the best I can, I believe the Plaintiff's solicitors were there trying to say that since the agreement for sale and purchase had merged with the assignment which made no mention of the cocklofts, what was said in the agreement for sale and purchase about the cocklofts no longer mattered. If that was really meant to be the answer, then apart from the objection that it was formulated in the most obscure manner, it would not constitute a satisfactory answer because once the existence of cocklofts was mentioned in the agreement for sale and purchase, concrete evidence would be required to prove beyond reasonable doubt either that the cocklofts were lawfully constructed or otherwise there was no real risk of enforcement action by the Building Authority, or that they had been demolished and no longer existed. The fact that they were not mentioned in the subsequent assignment was quite insufficient to remove the doubt of their existence in contravention of the Buildings Ordinance.

59. Had this remained the position up to the scheduled completion time on 21st December, the Plaintiff as vendor would have failed to satisfactorily answer the requisition raised by the other side. Did what happened after the reply given by the Plaintiff's solicitors on 17th December change the picture? As mentioned above, on 19th December, the solicitors acting for the Defendant wrote back, not only to refute the answer so far given by the Plaintiff's solicitors, but also to point out the location of the two cocklofts then found to be existing, namely, "at the rear position of the premises over and above the kitchens and toilets". The Plaintiff's solicitors were asked to provide evidence before completion that there was "Building Authority's authorization to occupy these cocklofts and/or to regularize such erections".

60. Pausing here, several things should be noted. First, the Defendant's solicitors plainly regarded their identification of the cocklofts at the rear of the shop premises as forming part of their former requisition about the cocklofts based on the title documents or a follow-up requisition to the one previously raised. This is quite clearly correct. And there is no suggestion in the pleading that this was raised late, although at the time of solicitors' correspondence this was vaguely mentioned.

61. Second, there is no doubt that the Defendant's solicitors were referring to the rear structures I have described in some detail above in this judgment in their letter of 19th when they mentioned the existence of "two cocklofts" at the rear, understandably treating each shop as having one "cockloft". At trial, it was debated whether the use of the word "cockloft" was wrong in that the rear structures could not be properly called "cocklofts"; and if so, whether the requisition relating to the rear structures had been formulated with reasonable precision to require answering at all, or alternatively whether a short answer that no "cocklofts" existed at the rear would suffice.

62. In this regard, the Plaintiff led evidence at trial that in order to constitute a "cockloft", the structure in question must be wholly contained within the main or external walls of the building, and there must be access to it from within the building. I do not accept this definition, which is not supported by any literature or material. In fact, neither the (now repealed) statutory definition of "cockloft" in the Buildings Ordinance (Revised edition 1950) nor the definition of "cockloft" or "loft" in The New Shorter Oxford English Dictionary, supports the definition contended for by the Plaintiff.

63. I do not intend to attempt any general definition of a "cockloft" here. It appears to me that whether a structure may be properly called a "cockloft", in the context of formulating a requisition, must depend to a very large extent on the facts pertaining to a particular case. And the matter has to be judged by the application of the viewpoint of a reasonably competent and experienced conveyancing lawyer, not for instance, that of an authorized person (which is something the Plaintiff seeks to persuade me to do by adducing expert evidence from such a person at trial). In my judgment, in the context of the present case, given the very tall headroom in the shop proper and the existence of the tall rear windows at the rear of the shop proper, there was at the very least a reasonable possibility that there was once erected within the shop proper a cockloft which extended through the rear windows into the rear portion of the premises over and above the kitchen, toilet and open yard. I have no doubt that such a structure may be termed a cockloft even though part of it extended beyond the rear external wall of the building within which the shop proper was situated. It was at the very least a reasonable possibility that this was the cockloft referred to in the previous agreement for sale and purchase, there having been one such cockloft in each shop unit.

64. In my judgment, it was again a reasonable possibility on the facts of the present case that subsequently when the property was renovated or otherwise for whatever other reason, that part of the cockloft within the shop proper was demolished and the rear windows sealed, leaving intact the remaining part of the former cockloft attached to the external wall of the building at the rear of the premises over and above the kitchen and toilet in each shop unit. As the rear windows had been sealed, there was no longer any access to the remainder of the former cockloft.

65. In those circumstances, in my judgment, it is not a misnomer to refer to what remains of the former cockloft a cockloft, even though it is located outside the external wall of the building and there is no access to it from anywhere. A remaining part of a cockloft may still be termed a cockloft. Perhaps it would have been more precise to call it the remaining part of a cockloft. But nonetheless it was not that wrong to simply refer to it as a cockloft in the context of the present case so much so that the specific requisition relating to the rear structures termed cocklofts should be regarded as having been formulated without reasonable precision. The Court of Appeal decision in Chan Chik Sum, supra, relating to the need to formulate requisitions with reasonable precision, whilst no doubt correct as a matter of general principle, has to be applied with commonsense; and one must bear in mind the context in which the general principle was enunciated by the Court, namely, an extremely vague, sweeping, obscure and confusing requisition, before seeking to apply it to another case based on different facts.

66. In my above analysis, I have described the suggested "genesis" and "evolution" of the "cocklofts" in terms of reasonable possibilities on the facts of the present case. This is because the burden was on the Plaintiff as vendor to prove any factual matter concerning title beyond reasonable doubt. In other words, from the angle of the purchaser, if a certain factual hypothesis (relating to the genesis and evolution of the "cocklofts") could not be excluded beyond doubt, it would be entitled to raise a requisition or objection to title based on such a factual hypothesis. And I have sought to demonstrate above that based on the suggested factual hypothesis, the use of the word "cocklofts" to describe the rear structures is not inapt or wrong.

67. In my judgment, in the context of the present case, the specific requisition relating to the rear structures termed cocklofts raised on 19th December was a proper and reasonably formulated requisition demanding a satisfactory answer.

68. Lastly, the point to note about the letter of 19th December written by the Defendant's solicitors is this. Whereas previously, the solicitors had been focusing on a general requisition about cocklofts based on the title documents, the specific reference in the letter of 19th to the cocklofts at the rear had a focusing effect, i.e. that of condescending the previous requisition on the cocklofts at the rear. In other words, as from 19th December, in my judgment, the Plaintiff's solicitors need only deal with the cocklofts at the rear, but not any other possible cocklofts within the premises. Their previous bad answer based on merger would not matter anymore if they could provide a satisfactory answer to the specific requisition relating to the cocklofts at the rear. The question is: Have they successfully done so?

69. Before I turn to answer this question, I should deal with a side point raised by Mr. Wong against the specific requisition relating to the cocklofts at the rear as a proper requisition demanding a satisfactory reply. Mr. Wong argued that this was not a proper requisition because the cocklofts at the rear were not located within the property contracted to be sold, they therefore did not affect title, and in the premises the requisition did not relate to title and need not be answered.

70. I reject this argument. Even assuming for the sake of argument that the cocklofts at the rear were not located within the property contracted to be sold, it was still a proper requisition to be raised. A requisition may be raised about anything reasonably concerning title to the property contracted to be sold. Some requisitions may be so fundamental in nature that they go to the root of title, yet some may simply concern title, and (in practice) some may merely concern matters of conveyance (e.g. payment off of a mortgage). In relation to the last type of requisitions, strictly speaking they do not concern title and a vendor is not obliged to answer them, although in practice requisitions as to matters of conveyance are routinely raised and answered. See Emmet, paras. 5.076 to 5.078. But at least in relation to a requisition concerning title, once it is properly formulated and raised (within time), it requires a satisfactory answer. Sometimes, if the requisition has no substance (but was nonetheless raised in good faith), all that a vendor need do is to say so in so many words: Active Keen at pp. 406 to 407. But it does not follow that the requisition need not be answered at all, or was improperly raised.

71. Returning to Mr. Wong's argument, assuming that his basic premise was correct, what the vendor's solicitors ought to do was to reply to the requisition by telling their counterparts that the cocklofts at the rear were without the property contracted to be sold and that therefore title to the property was not affected by their presence. Indeed this was what the vendor's solicitors did in Nation Group Development Limited v New Pacific Properties Limited [2001] 1 HKLRD 375, 379, a case concerning illegal structures attached to the underside of a canopy contracted to be sold. There was no suggestion at all that given the answer the vendor was maintaining, it need not bother to supply any answer at all since the requisition did not affect title. The vendor in that case failed because the Court of Final Appeal held as a matter of construction that the "canopy" contracted to be sold included the underside of the canopy.

72. In my judgment, even if the alleged illegal structure lied outside the boundary of the unit in the building contracted to be sold, so that on final analysis it did not affect title to the unit, a requisition in relation to it would still be proper and need to be answered, although the answer need simply be that it lied without the unit and therefore did not affect title to the unit. Indeed in Active Keen, a case concerning suspected illegally constructed units on another floor of the building within which the suit unit flat was situated, the Court of Appeal held that title to the suit unit was unaffected but the requisition in respect of the suspected illegal units had not been satisfactorily answered. There was no question of the requisition not having been properly raised and thus need not be entertained. Of course, after the clarification of the law in this regard by Active Keen, the answer of a vendor's solicitors to a similar requisition from then on could be very short and simple, as I suggested above.

73. Furthermore, I reject Mr. Wong's argument because I do not agree with his basic premise. In the absence of any specific provisions in the Provisional Agreement to exclude the external walls of the building within the ground floor level and the rooftops of the kitchens and toilets at the rear from the premises contracted to be sold, as a matter of general construction, they were included as part of the ground floor shop premises contracted to be so: Nation Group; Wealthy China Trading Limited v Huie Man Kit [1999] 3 HKC 832. It is not disputed that the cocklofts or rear structures in question were attached (structurally or otherwise) to the rear external wall of the building and rested on the rooftops of the kitchens and toilets as well as the party wall between the two shops. In those circumstances, their presence could potentially give rise to a title problem as well as a problem relating to delivery of vacant possession upon completion: Ibid.

74. In short, I hold that the specific requisition relating to the cocklofts at the rear raised in the letter of 19th December had to be answered.

75. As mentioned above, by a letter dated 19th December but received by the solicitors acting for the Defendant on the 20th, the Plaintiff's solicitors replied that there were no cocklofts "erected as alleged" by the other side. The letter also alleged that the requisition relating to the cocklofts at the rear was raised late, a point not taken up in pleading or by Mr. Wong in submission. In their subsequent letter dated 20th December 1997 but only received by the other side on 22nd December, i.e. after the contractual completion date, the Plaintiff's solicitors repeated the same allegation that there were no cocklofts "as alleged". In the same letter, the solicitors referred to two previous building orders and argued that in any event there was no risk of enforcement action by the Building Authority because the building orders evidenced the Building Authority's awareness and toleration of the existence of the alleged cocklofts against which no action was taken.

76. In relation to the building orders, quite plainly they related to other parts of the building and therefore were totally irrelevant. Mr. Wong accepted that this was so.

77. From the evidence given by the controlling director of the Plaintiff, one can understand why the Plaintiff's solicitors repeatedly alleged in the letters that there were no cocklofts at the rear. For the director could not see any cockloft nor could he find any access to any cockloft from within the shop premises and therefore he concluded that there was no cockloft whatsoever within the shop premises; the Plaintiff's solicitors were instructed accordingly. I do not think this is good enough. First, at the very least, the director could have seen that the supposedly open yard at the rear had been enclosed and there was a ceiling at the yard. He could not have been certain as to what, if any, was there above the ceiling. In those circumstances, he was not quite entitled to simply jump to the conclusion that there were no cocklofts "at the rear position over and above the kitchens and toilets".

78. Second, the location of the alleged "cocklofts" had been identified by the other side. As the vendor bearing the burden to show a good title beyond reasonable doubt, it was incumbent upon the Plaintiff to have a close look at the rear portion of the premises above the kitchens and toilets, particularly bearing in mind the discrepancy already disclosed by an examination of the title documents suggesting the possible existence of cocklofts. And had this been done, the Plaintiff would have discovered no doubt the existence of the rear structures. In those circumstances, given the Plaintiff's duty to answer a requisition "with total candour, so that the purchaser can be reasonably certain that there are no facts and material relevant to the requisition known to the vendor which have not been disclosed" (Active Keen at p. 407), the Plaintiff ought to have replied through solicitors to the effect that one, there were no cocklofts at the rear as alleged (given the Plaintiff's director's subjective understanding of what a cockloft was); but two, there were rear structures there, and the Plaintiff ought then to explain why the rear structures did not affect title or at the very least ask the purchaser's solicitors whether they actually meant to ask about the rear structures by way of requisition. To simply say that there were no "cocklofts as alleged" would be misleading and wrong. Conveyancing is not a game of words, and both sides must act with total candour, commonsense, good faith and a spirit of cooperation, with a view to bringing the contract of sale and purchase into fruition.

79. Third, I have already concluded above that in the context of the present case, the rear structures could be reasonably called "cocklofts", and therefore the answer that the Plaintiff's solicitors gave, namely, that the cocklofts did not exist as alleged was bad as a matter of fact.

80. In those circumstances, I conclude that the specific requisition relating to the cocklofts at the rear was not satisfactorily answered by the time of completion. Both sides accept that although the Provisional Agreement was silent on it, time was of the essence of the agreement. I agree, particularly when this was a sub-sale and the sale and purchase between the Head Vendor and the Plaintiff was one in which time was of the essence. In those circumstances, the vendor was in breach of its duty to show good title and answer requisition satisfactorily; the purchaser was entitled not to complete but to rescind the Provisional Agreement, which he did on 22nd December 1997.

81. I would like to add this. Even if I were wrong with my views above, and the rear structures in the present case could not be reasonably termed "cocklofts", I would still hold that the requisition raised was one requiring an answer, and the answer given was unsatisfactory. If a purchaser raises a requisition based on reasonable facts but mistakenly terms or refers to some of those facts in formulating or developing his requisition, like wrongly calling a structure a cockloft, then if the mistake is one which the vendor knows about or should have reasonably discovered in the process of investigating the alleged facts based on which the requisition is being raised by the other side, the vendor is not entitled to ignore the requisition without answering it, or takes unfair advantage of or hide behind the mistake in answering the requisition (e.g. by saying that there is no "cockloft as alleged" without disclosing at the same time that that is only half of the story and that in fact there is in existence a structure). At the risk of repetition, I would emphasize once again that conveyancing is not a game of words, and both sides must act with total candour, commonsense, good faith and a spirit of cooperation, with a view to bringing the contract of sale and purchase into fruition.

82. In the present case, for the reasons set out above, I would be prepared to hold, if necessary, that the (mistaken) use of the word "cocklofts" to describe the rear structures in the requisition of the 19th did not prevent the requisition from being one requiring a proper answer, that the mistake ought reasonably to have been discovered by the vendor in the course of investigating whether there really were any "cocklofts" erected "at the rear position of the premises over and above the kitchens and toilets", and that therefore the requisition was one requiring answering, and the answer that there were "no cocklofts as alleged" was not a complete and satisfactory answer.

Frivolous and vexatious requisition and bad faith

83. Mr. Wong argued on instructions that the requisition relating to the cocklofts was not raised in good faith, and therefore although his side did not provide a satisfactory answer, that was not fatal. He based his argument on Queen Energy, supra. In that case, Deputy High Court Judge To held (at pp. 161I to 162D) that in general, requisitions reasonably raised should be answered; however, where the requisition has no substance it is enough for the vendor to say there is no substance in the purchaser's objections; and further, where the requisition is a frivolous and vexatious one and is not raised bona fide, there is no need to answer it. However, he cautioned that the decision not to answer frivolous and vexatious requisitions should be made with extreme caution.

84. Accepting these principles, I have no difficulty in rejecting Mr. Wong's argument on the facts. Mr. Wong based his argument on the fact that in November 1997, the father and elder brother of the Defendant together with the estate agent involved in the selling of the shop premises together went to view the first floor premises of the same building. During the course of inspection, somebody looked out from the rear window and discovered the existence of the rear structures below. The estate agent asked the father whether he required the rear structures to be demolished, suspecting that they could be illegal structures; but the father and son replied "no" as they said they could make use of the rear structures for storage purpose if they wanted to in which case they could save themselves the trouble and expense of erecting a new one. The estate agent therefore did not mention the existence of the rear structures or the reply given by the father and son to the Plaintiff. It is not seriously disputed that the premises in question were purchased by the Defendant's family comprising his father and elder brother through the use of Pannon, and the father and elder brother could be equated with the Defendant for present purpose.

85. Mr. Wong therefore argued that the requisition relating to the rear structures or cocklofts at the rear was not raised bona fide, but was only raised in order to enable the Defendant to escape from the concluded deal which had become unattractive due to the intervening onset of the Asian economic crisis. As mentioned above, Mr. Wong also relied on the nomination of Pannon as part of his case of an attempt by the Defendant to rid himself of the Provisional Agreement.

86. At the factual level, no doubt the Plaintiff bears the evidential if not legal burden of proof. On the facts and evidence before me, there is simply insufficient evidence for me to draw any conclusion, albeit based on the civil standard of proof, that the requisition on cocklofts was not raised bona fide. The Defendant gave evidence at trial, and despite Mr. Wong's cross-examination, I do not find that there was a lack of good faith in the raising of the requisition.

87. More importantly, what happened during the November visit is in my judgment quite insufficient for Mr. Wong's purpose. Taken at the highest, the discovery of the rear structures by the Defendant's father and elder brother raised in their mind a suspicion that the rear structures were illegal structures. Their lack of action or immediate action (by way of raising requisition), and their wish to keep the structures for their future use, were perfectly consistent with their, or the Defendant's, contractual right to require the Plaintiff to show and make a good title to the property (including the rear structures). After all, all relevant title documents had first to be supplied and perused before any meaningful requisition, if required, could be raised. And as I said, there was and is no complaint of lateness in relation to the raising of the requisition relating to cocklofts on 8th December. No waiver of any type could be inferred.

88. In fact, as the Court of Final Appeal said in Jumbo King Limited v Faithful Properties Limited [1999] 3 HKLRD 757, 769G-I, the mere noticing of the presence of possibly illegal structures by itself must be viewed as a "neutral" factor, and cannot per se be used by either side to mount any argument against the other in relation to their relationship as vendor and purchaser relating to potential title problem brought about by the presence of the suspected illegal structures, which must be decided ultimately by reference to the contractual terms. (See also pp. 776D to 777B of the judgment relating to the construction of specific contractual terms dealing with suspected illegal structures based on the same rationale.) In this regard, the earlier case of Giant River Limited v Asie Marketing Limited [1990] 1 HKLR 297 must still be regarded as representing good law, notwithstanding the subsequent case law development since it was first decided back in 1990. Further, in my judgment, there can be no difference between a pre-contract inspection and a post-contract inspection. If the facts could not give rise to a case of waiver or acquiescence, I doubt very much any case of lack of good faith could be made out from the same set of facts.

89. Anyway, on the material before me, I do not find sufficient evidence to conclude that the purchaser knew that the rear structures discovered in November were illegal structures, yet out of bad faith he delayed in raising any requisition in relation to them until the last moment, with a view to torpedoing the Provisional Agreement.

90. As regards the nomination of Pannon to take up the Formal Assignment, I have already said that I find nothing wrong with this, whether viewed independently or together with the other circumstances relied on by Mr. Wong in support of his argument of bad faith.

91. As regards whether the requisition was frivolous and vexatious, I have no doubt that it was not, very much unlike the requisition that the Court had to deal with in Queen Energy, namely, a requisition concerning a missing coat of paint on the lower portion of a kitchen partition costing about $1,000! In the present case, I have no doubt that the requisition relating to the cocklofts was a substantive one; and amongst other things, the demolition cost of the rear structures, according to the expert evidence adduced at trial, was substantial and the work could take months to complete if the legal and proper procedure of making an application to the Building Authority was to be gone through with.

92. In the circumstances, I am unable to find that the requisition relating to the cocklofts was frivolous and vexatious, or that it was not raised bona fide.

93. As far as the law in this regard is concerned, I doubt very much whether a substantive requisition that was raised without good faith, i.e. one which was not frivolous and vexatious (apart from its not being raised in good faith) could be ignored by a vendor, and I note that in Queen Energy, the learned judge used the conjunction "and" in referring to these two elements of frivolous and vexatious/"no substance" and lack of good faith, and quite plainly treated the two as being equivalent to each other or interchangeable in his judgment: pp. 161J to 162D. For my part, I would think that to hold that lack of good faith alone would suffice would take the law dangerously close to judging a title dispute according to a purchaser's motive, rather than his contractual/legal entitlement and obligation, something that would be quite contrary to general principles. But I need not decide the point, as I have come to conclusion that the requisition in question was neither frivolous and vexatious, nor was raised without good faith.

94. To be fair to Mr. Wong, he put forward this argument of bad faith, a very serious allegation against a party, which ought not to be lightly raised without proper foundation, with apparent reluctance and unease at trial; and he emphasized that he only did so upon specific instructions. I can understand his position and difficulty, and I do not wish to say anything further than what I have already said for the purpose of disposing of his argument.

Conclusion on liability

95. In conclusion, I hold that the Plaintiff as vendor was in breach of the Provisional Agreement, the Defendant was entitled not to complete but to rescind the agreement, which he through his solicitors did on 22nd December. The Defendant is therefore entitled to the return of the deposit paid in the sum of $500,000.

Quantum of the Plaintiff's claim

96. For the sake of completeness, I should mention that if I had been with the Plaintiff and had come to the conclusion that good title had been shown and the requisition had been satisfactorily answered, so that the Defendant was in the wrong in not completing, I would have found, on the evidence on quantum adduced before me, that the Plaintiff was entitled to no more than the forfeiture of the deposit of $500,000. This is because the Plaintiff has failed to prove to my satisfaction on a balance of probabilities any further loss following the (assumed) breach of contract by the Defendant. In the light of my conclusion on liability, I would only briefly explain why.

97. Both sides agree as a matter of legal principle that the normal measure of damages in a case like the present one is the difference between the contract price and the market price of the property at the contractual date of completion (on 21st December 1997 in the present case), less the deposit forfeited: McGregor on Damages (16th ed.) paras. 992 to 997. However, the Plaintiff's director claimed in evidence that after the falling through of the transaction, he tried to dispose of the shop premises in the market but failed. He said he had sent information of the shop premises to over 100 estate agents by fax but to no avail. Eventually he let out one of the shop premises in April 1998, and disposed of the shops (one subject to tenancy and the other one with vacant possession) in December 1998 and January 1999 at much lower prices.

98. I accept that as a matter of principle, the normal measure of damages may be displaced if there is no market. However on the facts, I am far from satisfied that this was the case. Apart from the oral evidence of the Plaintiff's director about his difficulty in re-selling, no further evidence whatsoever was called. Although the estate agents involved in the present transaction were called to give evidence, no evidence was adduced from them relating to any attempt by them on behalf of the Plaintiff to resell the property or any general difficulties in selling shop premises in Temple Street at the material time (as opposed to a general drop in property prices). No other estate agents were called to corroborate the evidence of the Plaintiff's director or tell the Court what difficulties, if any, they faced in marketing the suit premises. A surveyor was called by the Plaintiff to give valuation evidence relating to the resale prices, but again no evidence was adduced from her regarding any general difficulty in selling shop premises in Temple Street in late 1997 or early 1998. No such evidence was elicited or successfully elicited from the Defendant's valuation expert during cross-examination by the Plaintiff through counsel. Not a single document was adduced by way of evidence to prove or support the alleged attempts by the Plaintiff to resell the property. The premises were never put on auction in the market.

99. According to both valuation experts, during 1998 there were only several transactions involving four shops in Temple Street. Mr. Wong argued that that illustrated the difficulty of reselling, but no evidence was adduced as to the number of transactions involving similar premises in Temple Street in 1997 (when the market was booming until the last two months), and all that I know is that the Defendant's valuation expert could only find two comparables involving Temple Street shop premises in 1997. Maybe there were many more transactions in 1997 that simply could not be used as comparables, maybe there were just a few, all this I have no evidence on to assist me.

100. Whilst there is general evidence of a drop, and indeed a rather drastic drop as we all know only too painfully, in property prices starting from late 1997 and continuing throughout 1998 and beyond, that per se cannot be taken as sufficient evidence to say that there was no market for the shop premises or that there were serious difficulties in reselling the shop premises justifying the postponement of the date for measuring damages for present purpose.

101. I therefore reject any claim for damages based on a market value of the shop premises on a date or dates other than the contractual completion date.

102. For some reason unknown to me, the Plaintiff did not adduce any valuation evidence regarding the market value of the property as of the contractual date of completion. The only valuation evidence adduced was in relation to the market values of the shop premises as of their respective dates of disposal one year after the contractual date of completion. So I am left with no valuation evidence to assist me to find out the loss, if any, suffered by the Plaintiff based on the normal measure of damages. On the other hand, the Defendant has adduced expert valuation evidence to the effect that the market value of the property as of the date of the Provisional Agreement was much higher than the contract price under the Provisional Agreement, and therefore at the contractual date of completion, even though there was a drop in market price, the value of the property was still above the contract price. As I said, the Plaintiff had no expert valuation evidence to contradict the figures put forward by the Defendant's expert, and in fact the Plaintiff's valuation expert was not asked to comment on these figures put forward by the other side.

103. At trial, no evidence was adduced from the Plaintiff's director on what his asking price(s) was/were in his attempts to resell the property, or from the estate agents who gave evidence before me on their estimated market price(s) of the property at around the time of scheduled completion. In short, even if I were to disregard the Defendant's expert valuation figures, all I have are some general indexes of market prices in 1997 and 1998, and a comparable used by the experts concerning a transaction in Temple Street concluded in April 1998. I do not think that I can in those circumstances meaningfully work out by myself, unassisted by expert valuers, the market value of the suit premises in late December 1997, even on a balance of probabilities.

104. Whilst I do have my own educated guess based on the scanty material before me and my own general knowledge of the property market as a member of the public as to the likely magnitude of drop in the market price of the property by late December 1997 (on the basis that I disregard the Defendant's valuation figures), that is neither here nor there. Cases are not decided by guesses, educated or otherwise, but by direct or inferential evidence, according to the applicable burden and standard of proof. Moreover, one must caution oneself against applying wisdom based on hindsight, i.e. the common knowledge by now of the substantial and sustained drop in market prices beginning from late 1997 up to the present. Back in late December 1997, the market perceptions may well have been quite different for different people; and of course it is the market price of the property in late December 1997 as dictated by the then market perceptions as a whole that one has to find out.

105. There are no doubt cases in the books, and some have been cited to me, where the courts were prepared to make do with whatever evidence and material available and come up with assessments of the plaintiffs' losses, and made awards of damages accordingly. But each case turns on its own facts. Apart from those already mentioned, one further difficulty in the present case is that given the Defendant's valuation figures, even if one treats them as being generally on the high side, there is simply insufficient material to prove that the extent of the drop in market price of the suit property in 2 months after the Provisional Agreement was signed (i.e. within an even shorter period of time after the onset of the Asian economic crisis and the resulting general drop in property prices) was such that the difference between the contract price and the market price, plus any additional expenses in resale, must have exceeded, on a balance of probabilities, the amount of deposit liable to be forfeited ($500,000).

106. The Plaintiff bears the burden of proof. I have come to the conclusion that so far as quantum is concerned, the Plaintiff has failed to discharge its burden of proof relating to its alleged loss arising from the falling through of the transaction. In those circumstances, had the Plaintiff succeeded on liability, all that it would be entitled to claim from the Defendant would be a declaration that it be entitled to forfeit the deposit of $500,000. Given the forfeiture, the Plaintiff would not even be entitled to an award of nominal damages.

107. In the circumstances of the present case, like what happened in Born Chief Co. v Tsai George [1996] 2 HKC 282, it would not be right for the Court to order that damages be assessed by a master, as to do so would unfairly provide a further opportunity for proving damages to the Plaintiff at the expense and to the prejudice of the Defendant. It is incumbent upon the Plaintiff to establish its claim at the trial and it must bear the consequence of its failure to do so.

Outcome

108. I dismiss the Plaintiff's claim.

109. The Defendant in his own personal capacity is successful with his counterclaim, and I give judgment to the Defendant on his counterclaim as follows:

(a) A declaration that the Defendant in his personal capacity was entitled to and did lawfully on 22nd December 1997 rescind the Provisional Agreement.

(b) An order that the deposit of $500,000 be returned by the Plaintiff to the Defendant.

(c) Damages in the total sum of $36,260 as his cost of investigating title.

(d) A declaration that the Defendant is entitled to be indemnified by the Plaintiff in respect of the estate agent's commission payable under the Provisional Agreement.

(e) Interest on the above sums of $500,000 and $36,260 at the rate of 8% per annum from 22nd December 1997 to the date this judgment is handed down and thereafter at the judgment rate until full payment.

110. Further, I make an order nisi that the Plaintiff pay to the Defendant the Defendant's costs of the action and counterclaim, to be taxed if not agreed. Unless either party applies to vary the order nisi within 14 days after this judgment is handed down, it will become an absolute order upon the expiry of the 14-day period.

111. Finally, I would like to thank counsel for their patient assistance.