POZDNYAEV, DENIS AND ANOTHER v. KINVAST LTD

DCCJ 3347/2020

[2021] HKDC 1066

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3347 OF 2020

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JUDGMENT

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1.  This is a claimed breach of a Provisional Sales and Purchase Agreement (“PSPA”) dated 30 April 2014 concerning a property known as 7^th Floor, Kingdom Power Commercial Building, 32-36 Des Voeux Road West, Hong Kong (the “Property”) at an agreed price of HK$15.8 million.

Background

2.  Under the PSPA, the Orthodox Brotherhood of Apostles Saints Peter and Paul (the “Church”) was named as and/or stated to be the purchaser of the Property.  The first plaintiff (“Father Denis”), signed the PSPA purportedly on behalf of the Church, and who also paid a deposit of HK$1 million (the “Initial Deposit”) to the defendant, the registered owner and seller of the Property.

3.  The estate agent involved was Mr. Tang Chi Keung (“Mr. Tang”).

4.  Clause 2(b) of the PSPA reads in English:-

“HK$580,000 as balance of the deposit shall be paid by the purchaser to the vendor upon signing of formal agreement for sale and purchase on or before 14 May 2014”

5.  The same clause in Chinese reads:-

“港幣580,000作為加付訂金須在買賣正式買賣合約之時付清，正式買賣合約須於14 May 2014或之前簽妥。”

6.  However, Clause 13 of the PSPA states:-

“This agreement should be interpreted in its English version in case of ambiguities”

7.  The plaintiff’s case is that on 8 May 2014, that is, a mere 6 days before the signing date of the formal agreement as stipulated in Clause 2(b) of the PSPA (the “Formal Agreement”), Father Denis was advised by his lawyer, Ms. Agnes Fung of Messrs. Raymond Lau & Co, that the Church, being an unincorporated association, had no separate legal entity and accordingly could not hold any title in land.

8.  Father Denis immediately informed Mr. Tang and also flew back to Hong Kong (from Beijing) to attend a meeting with his lawyer on 12 May 2014.

9.  With a view to solve this legal entity problem, Father Denis, through Mr. Tang, made various proposals via WhatsApp to Mr. Hugo Kwan (“Mr. Kwan”), the director of the defendant who had been dealing with this transaction (paragraph 5 of the Second Affirmation of Kwan Shuk Kuen, Trial Bundle B, p 18). The various proposals made included cancelling the PSPA and entering a new agreement by substituting Father Denis as the purchaser, or entering into a formal agreement with a company to be incorporated by the Church as the purchaser (which required an extension of time for completion).

10.  Mr. Tang also claimed to have called Mr. Kwan and make a proposal that the PSPA could be kept but to execute the Formal Agreement with Father Denis as the purchaser.  This was disputed by the defendant.

11.  On balance, I would hold that Mr. Tang must have informed Mr. Kwan of this proposal at some point, given that this was the specific instructions from Father Denis, as shown in his email to Mr. Tang on 7.06 pm on 8 May 2014 informing him that “…The Brotherhood authorised me to buy the property on my own name…Can you please help me on Monday do necessary amendments in agreement?” (Trail Bundle D p. 63)

12.  In any case, Mr. Kwan did not accept any proposals and in fact did not reply to Mr. Tang’s WhatsApp messages except one reply at 2.03 pm on 14 May 2014 indicating that he would not accept the proposals stated by Mr. Tang in the WhatsApp (Trial Bundle D p. 24).

13.  Mr. Tang’s evidence was that he even attended the office of the defendant’s solicitors, Messrs. K B Chau & Co, at 4.15 pm on 14 May 2014 requesting their Mr. Cheng that the name of the purchaser be changed to Father Denis or a company to be formed by the Church, but all to no avail.  If there was a dispute that Mr. Tang did not make that telephone call, I have no doubt that the proposal of “Father Denis as the purchaser” must have been given by this time.

14.  In any case, the Formal Agreement was not signed on 14 May 2014.  Mr. Kwan wrote an email on 15 May 2014 at 10.20 am to Mr. Tang purporting to call off the sale and purchase under the PSPA on the ground that the “balance of deposit” had not been paid (see paragraph 13 of the Amended Statement of Claim, Trial Bundle A p 37).

15.  Further, on 18 May 2014, the defendant gave notice to Mr. Tang of the defendant’s decision to forfeit the Initial Deposit.

The parties’ cases

16.  The plaintiffs claim that the defendant’s conduct amounted to a repudiatory breach of the PSPA, but the defendant claims that it was the Church which repudiated the PSPA in its conduct leading up to 14 May 2014.

17.  It is of note that at the time that the defendant forfeited the Initial Deposit, the defendant clearly took the view that the purchaser’s mere non-payment of the balance of deposit by 14 May 2014 amounted to a breach of the PSPA (as stated in Mr. Kwan’s email at 10.20 am on 15 May 2014).

18.  This was also the defendant’s initial defence as pleaded in November 2014 (paragraphs 2(3), 2(4) and 14(1) of the Defence (Trial Bundle A pages 11 and 15).

19.  This position was abandoned when the Defence was amended in 2018 upon advice from senior counsel, presumably on clear authorities (e.g. the Court of Appeal case of Link Brain Ltd v Fujian Finance Co Ltd [1990] 2 HKLR 353) that the interpretation of the English (and prevailing) wordings of Clause 2(b) was that the obligation to pay the balance of deposit was tied up with the signing of the Formal Agreement, thus no payment of the balance of the deposit could be required unless and until the Formal Agreement has been signed.

20.  Instead, the defendant is now pursuing the case that “by seeking to compel (the defendant) to cancel” the PSPA and “enter into a new agreement with a different entity, the Church (alternatively the first and / or the second plaintiffs) was in repudiatory breach of” the PSPA. (Paragraph 14(1) of the Amended Defence and Counterclaim, Trial Bundle A page 108).

21.  I find this defence problematic.

22.  First of all, it is not supported by evidence given by Mr. Kwan under cross-examination: he admitted that he never had any objection to the Church nominating anyone else to carry on with the purchase (“阿貓阿狗都買得”) albeit that such nomination should be done properly through solicitors.

23.  I am of the view that this admission is immediately fatal to the defendant’s case, which was that the defendant would not, and would be compelled to, sell to any different entity.

24.  Further, such “failure to nominate alternative purchaser by solicitors” allegation was not raised in any pleadings as the conduct that the defendant deemed as the plaintiffs’ repudiation of the PSPA.

25.  In fact, the defendant’s pleaded case concerning any failure to appoint solicitors was that “the Church failed to appoint a firm of solicitors to approach the defendant’s conveyancing solicitors…for the execution of the formal agreement…on or before 14 May 2014…”, and that this was in breach of clause 5 of the PSPA (Paragraph 14(2) of the Amended Defence and Counterclaim, Trial Bundle A p 108).

26.  This alleged breach was not actively pursued by the defendant, presumably because clause 5 only provided for the names of the respective law firm representing each party and the parties’ responsibilities for legal costs and stamp duty, and did not require the purchaser to “appoint a firm of solicitors to approach the defendant’s conveyancing solicitors for the execution of the formal agreement”.

27.  Such obvious conflict would raise a serious question as to the credibility of Mr. Kwan, not to mention a strong suspicion that this was, all along, Mr. Kwan’s exploitation of the relative lack of experience of Mr. Tang, Father Denis and the Church to his advantage.

28.  The issue of “who was in breach” is the crux of this case, and it is a question of fact.

29.  I agree with Mr. Lee, counsel of the plaintiffs, that this question can be “approached from the stand-point of a willing vendor and a willing purchaser both possessed of reasonably robust common sense, both intending to see the transaction through to completion in terms of their own bargain” (Litton PJ in Mexon Holdings Ltd v Silver Bay International Limited (2000) 3 HKCFAR).

30.  I am also persuaded by the Court of Appeal decision in China Pride Investment Ltd v Silverpole Ltd [1995] 1 HKLR 48 that the due completion of a conveyancing transaction requires co-operation between the vendor and purchaser, so that if the failure of the purchaser to complete is attributable, or partly attributable, to the conduct of the vendor, the vendor will not be allowed to rely on the purchaser’s default as justification for calling off the contract and forfeiting the deposit.

31.  Mr. Kwan admitted that he was aware of the legal entity problem of the Church, and he claimed that he was willing to sell to anyone “properly” nominated, and yet he did not tell Mr. Tang about that.  Of course, it could not be disputed that he did not reply to Mr. Tang’s many WhatsApp messages except that that one “I do not accept” message on 14 May 2014.  One can also reasonably infer that he did not instruct his solicitors to accept (or to inform Mr. Tang that the defendant would accept) “any purchaser properly nominated” to sign the Formal Agreement when Mr. Tang attended the defendant’s solicitor on that same day.

32.  On the other hand, it was clear that the Church had always been very eager to complete the purchase: various proposals were tabled (including, as pointed out by Mr. Lee, the “unwise and risky” proposal of allowing the defendant to first pocket the Initial Deposit and then signing a new agreement with a price reduction of HK$1M).  Self-evidentially, such proposals were made to preserve the bargain under the PSPA.

33.  Of course, as mentioned above, Mr. Tang even personally attended the defendant’s solicitor in the afternoon of 14 May 2014 with a view to resolve the legal issues.

34.  Despite what Mr. Kwan stated in his email on 15 May 2014, the Church, through Mr. Tang, still was asking Mr. Kwan via WhatsApp whether the defendant was ready to sign the Formal Agreement on 18 May 2014.

35.  And when Mr. Kwan confirmed once and for all that he had forfeited the Initial Deposit on 18 May 2014, the Church, through Mr. Tang, still asked Mr. Kwan on 21 May 2014 whether the defendant would consider selling the Property at HK$17 million or HK$1.2 million above what was agreed in the PSPA (Trial Bundle D p 25).

36.  The Church had clearly not given up on proceeding with the purchase.

37.  In fact, it was by the letter from Tim Chan & Co (acting for the Church and Father Denis) dated 4 August 2014 that they stated that they accepted the repudiation of the defendant.

38.  As such, it is beyond dispute which party was willing and which was not.

39.  The defendant’s pleaded case was that the Church has repudiated the PSPA by “seeking to compel” cancelling of the PSPA, entering a new agreement with Father Denis or a company to be incorporated etc. which were inconsistent with the terms of the PSPA.

40.  As stated before, the case was not supported by Mr. Kwan’s evidence but even taking this case as pleaded, it is also very clear that the Church and Father Denis, through Mr. Tang, was only making proposals and never indicated that they would not be buying the Property.

41.  Instead, it was Mr. Kwan who was being uncooperative and unwilling, and indicating “not to sell” in his WhatsApp on 21 May 2014 (Trial Bundle D, p 25).

42.  So even on the defendant’s original pleaded case, it is absurd to suggest that a willing vendor possessing reasonably robust common sense and intending to see the transaction through to completion would behave as Mr. Kwan (allegedly as pleaded) did, that is, by maintaining that the defendant had only agreed to sell the Property to the Church, and thus was only willing to enter the Formal Agreement with the Church, and that any proposal to substitute the purchaser by anyone else was deemed a repudiation.

43.  The defendant also argued that the Church and Father Denis were wrong about their concerns about the legal status of the Church in the PSPA: the Church could have been the purchaser but need not be the legal owner because it has a common law right of nomination in that it could compel the defendant to assign the Property to a nominee of the Church whilst remaining a party to the PSPA (see paragraph 5 of the defendant’s Opening Submissions).

44.  The question one might ask would be: were the conduct of the Church and Father Denis, under this alleged mistake in the circumstances, so unreasonable that the defendant would justify seeing that as a repudiation of the PSPA?

45.  The leading authority is dictim of Godfrey JA in DH Shuttlecocks Ltd v Keung Shiu Tang [1994] 1 HKC 286:-

“If during the course of the negotiations in these cases over the content of the formal sale and purchase agreement, one party or the other makes demands as to what is to go into the formal sale and purchase agreement which are so unreasonable that he must be taken to be demonstrating an intention no longer to be bound by the contract into which he has already entered, then he may well be held to have repudiated it.

But a repudiation is not to be lightly inferred. There is now a trilogy of cases in which the court has made it clear that the mere fact that you insist on what you think are your rights, even if you later turn out to have been wrong about that, is not to be treated as evincing an intention on your part to repudiate the contract.

Applying these well-settled principles of law to the facts of this case…  If the parties differ, their difference should be resolved by application to the court, not by the high-handed unilateral action such as…forfeiture of the purchaser’s deposit…”

46.  As such, even if the Church and Father Denis were wrong about their concerns, it could not be treated as evincing an intention to repudiate the contract given the indisputable evidence of their clear wish to proceed with the purchase of the Property.

47.  I also note that Mr. Kwan gave evidence that he was aware of this mistake but chose not to tell the other side deliberately. In my view, this was the clearest indication of how unwilling he was to see the transaction through to completion.

48.  Mr. Kwan in fact held the Church and Father Denis in breach of the PSPA: he wrote an email dated (14 May 2014) to Mr. Tang:-

“[the] breach of the terms of the existing agreement made me to instruct my [solicitors] to cease the proceedings. I will not accept any proposal or replacement.”

49.  Under cross-examination, Mr. Kwan admitted that when he wrote “breach of the terms of the existing contract”, he had in mind the failure of the Church to pay the balance of deposit and signing of the Formal Agreement by the end of 14 May 2014.

50.  Of course, failure to pay the balance of deposit could not be taken as a breach as stated above.

51.  Further, failure to sign the Formal Agreement could not, by itself, be taken as a breach. Yuen JA in See To Keung v Sunny Way Ltd [2005] 5 HKLRD 300:-

“A provisional agreement is immediately binding on the parties. Although it provides for a formal sale and purchase agreement to be signed, such formal agreement would only be to incorporate that express terms of the provisional agreement, to express any implied terms, and to add any new terms that may subsequently be agreed…

Accordingly, it is perfectly possible for the parties to proceed to completion without a formal agreement being signed.  However, if no agreement is signed because one party has insisted on the inclusion of a clause that is unreasonable, that insistence may be regarded, depending on the individual circumstances, as conduct evincing an intention no longer to be bound by the terms of the provisional agreement (DH Shuttlecocks Ltd v Keung Shiu Tang [1994] 1 HKC 286).”

52.  As such, the parties could have proceeded to completion without the formal agreement being signed unless the “DH Shuttlecocks unreasonableness test” was satisfied.  In the current case, as stated above, the test was not satisfied.

53.  After considering all the circumstances and applying the well-settled legal principles to the facts of this case, I come to the conclusion that it was the defendant who repudiated the PSPA, and its “unilateral and high-handed action” for forfeiting of the deposit was entirely inappropriate.

The defendant’s “alternative” case

54.  The defendant tried to raise an alternative case in its Opening Submission in that even if the court finds that it was the defendant which was in repudiation of the PSPA (as the court now finds), such repudiation was only accepted by 4 August 2014 by which time the scheduled completion date had expired and the purchaser had failed to complete. As such, the defendant could “turn the tables” and accept the purchaser’s repudiation of the PSPA in failing to complete.

55.  I agree with Mr. Lee that this argument is a non-starter because it was not pleaded: non-acceptance of repudiation must be specifically pleaded (see White Book 2021 paragraph 18/8/27).

56.  I also accept that, in any case, under cross-examination, Mr. Kwan admitted the defendant had no intention, in any case, to sell to the Church by midnight on the date of completion, thus this “turn the tables” argument has no merit even on the defendant’s own evidence.

57.  Further, no allegation of failing to complete was ever raised by the defendant’s then solicitors in their letter dated 26 August 2014 to the plaintiffs’ solicitors (Trail Bundle D p 52-53).

58.  As such, the court finds that this argument is just a desperate attempt to salvage the case by constructing an argument retrospectively, and so it must fail.

Locus

59.  In paragraphs 4A and 8(3) of the Amended Defence and Counterclaim, it was pleaded that Father Denis was not a party to the PSPA and has no locus to sue save as a representative of the Church.

60.  There are disputes as to the validity of this allegation but as Father Denis is now suing in that capacity as the second plaintiff, the defendant is no longer pursuing this allegation.

The “escape clause” and the claim in liquidated damages

61.  The plaintiff also claims liquidated damages at HK$1 million over and above the refund of the Initial Deposit.

62.  Clause 7 of the PSPA provides:-

“Should the Vendor after receiving the initial deposit paid hereunder fail to complete the sale in the manner herein contained, the Vendor shall immediately compensate the Purchaser with a refund of the initial deposit together with a sum equivalent to the amount of the initial deposit as liquidated damages and be responsible for the reimbursement or payment (as the case may be) of stamp duty of the said premises and the Purchaser shall not take any further action to claim for damages or to enforce specific performance.”

63.  The defendant denied that it is liable because:-

“Clause 7 … could only be invoked at the option of the Purchaser should the defendant “fail to complete the sale in the manner herein contained.” It operated as an escape clause to allow the Vendor to “buy his way out” after signing the provisional agreement … The Plaintiffs were not entitled to invoke Clause 7 … the defendant had never had a change of mind after signing the (provisional) agreement but was at all material times willing and able to complete the same.” (paragraphs 16(3) and (4) of the Amended Defence and Counterclaim, Trial Bundle A p 109 and 110)

64.  In Man Wing Fun Stephen and Anor v Ho Ching Yee Susanna, Mr Recorder Edward Chan S C stated in page 22 of the judgment:-

“I am prepared to agree that when clause 8 of the agreement spoke of “failed to complete the sale in the manner herein”, the word “complete” would not just include the act of the execution of the assignment and payment of the balance of the purchase money, but may include any other act which the parties had agreed to do before to complete the sale. In other words, I agree … that in the context “complete the sale in the manner herein” would mean “to do what else is required of him under the agreement leading to the final act.””

65.  This decision was also followed in Castle Global Limited v Ip Tai Hoi Paul (unrep, HCMP 645/2019) and Dragon Access Holdings Limited v Lo Chu Hung (unrep, HCMP 1355/2019).

66.  The defendant’s originally pleaded case was that it was only willing to proceed with the sale with the Church but nobody else, but then Mr. Kwan claimed that in fact the defendant was willing to proceed with the same with anyone else provided that the nomination was done properly by solicitors, but yet he would not tell Mr. Tang or father Denis about that “condition”.

67.  Either way, the defendant was clearly not “at all times willing and able to complete the sale”, instead its director, Mr. Kwan, was uncooperative and was, as one might speculate, exploiting the circumstances of Father Denis and the Church to his advantage in order to profit from forfeiting the Initial Deposit.

68.  However, Clause 7 is “an escape clause, i.e. a clause allowing a party who wishes to resile from the transaction within a short period of time after the provisional agreement to buy his way out” (per Yuen JA in See To Keung v Sunny Way Ltd CACV 25 of 2006). 

69.  My reading of Clause 7 in its plain and ordinary meaning is that it provides a limit on the liability of the vendor if invoked by the vendor by immediately refunding the initial deposit and paying the liquidated damages etc. as specified.  If so, the purchaser cannot take further action to claim damages or enforce specific performance.

70.  On the other hand, if the vendor fails to refund and make such payments (within a short period or at all), he cannot take advantage of this clause and the “limit on liability” benefit that it offers.  As such, the purchaser is entitled to all damages caused by the breach or to enforce specific performance if such remedies are pursued.

71.  In this case, however, neither remedy was pursued.  There were no such pleadings in the Statement of Claim.

72.  In fact, evidence showed that the plaintiffs were able to purchase an alternative and acceptable unit in the same building shortly after.  Under the circumstances, I would imagine there might be little or no damages caused by this breach (besides the loss of the Initial Deposit), and seeking specific performance would not be an appropriate remedy either.

73.  Instead of making the usual claim for damages or specific performance for breach of contract, the plaintiffs attempted to claim under Clause 7.  But if my reading of Clause 7 is correct, as stated above, it can only act as a “shield” for the vendor to invoke, and if not so invoked, it cannot act as a “sword” for the purchaser.  It is not worded as a “penalty clause” and cannot be used as such.

74.  As the plaintiffs did not specifically plead for damages caused by the breach of the PSPA (nor plead for specific performance), the court is not in the position to assess or award damages under the circumstances.

Lien

75.  There is also a dispute on the justification of the plaintiffs putting a lien on the Property until the HK$1M (as the sum of the Initial Deposit) is repaid.

76.  I note from the headnote in the judgment of Shih Ching Yang v Tsoi On Pong & Ors [2011] 3 HKC, on page 433:-

“… as soon as the purchaser paid any part of the purchase price pursuant to a binding sale and purchase agreement for property, the purchaser had a lien on the property to the extent of the purchase-money he paid, even in the absence of a conveyance to him of the property. The lien did not arise on completion but on payment of the purchase-money. It was created by the contract under which the money was paid. It was a security on the property which was enforced when the vendor failed to complete the assignment…

… The lien … arose by operation of law from the relationship of the parties independently of the sale and purchase agreement …  An equitable lien was a form of equitable charge over the property which conferred on the holder a proprietary right so he was regarded as a secured creditor in respect of purchase-money paid.  It was no created by the default of the parties of their obligations under the sale and purchase agreement.  It was the default which gave rise to re necessity for enforcing the lien.”

77.  Under the circumstances of this case, I am of the view that the plaintiffs are entitled to the lien on the Property.

Order

78.  I would order the defendant to pay the plaintiffs a sum of HK$1 million (being the return of the Initial Deposit) plus interests at half judgment rate from the date of the Writ (that is, 15 September 2014) to the date of judgment, and thereafter at judgment rate until payment, and that the plaintiffs be entitled to an equitable lien over the defendant’s interest in the Property until the said sum of HK$1 million is repaid.

79.  There be a cost order nisi that the costs of the action be to the plaintiffs with one certificate for counsel to be taxed if not agreed.