HEALTH LING INVESTMENT LTD. v. PACIFIC HAWK INVESTMENT LTD.

- Headnote-

Property law - Preliminary agreement - proper construction - paying further deposit and signing of formal sale and purchase agreement simultaneous events - whether by necessary implication extending the time for signing meant extending the date for payment.

Held (by majority): appeal allowed. Vendor in repudiatory breach when it purported to forfeit the initial deposit.

IN THE COURT OF APPEAL

1994, No. 147
(Civil)

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J U D G M E N T

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Litton, J.A.:

1. This appeal concerns a contract entered into between the appellant (purchaser) and the respondent (vendor) relating to the purchase of a building No. 55 Connaught Road Central, valued at $442 million. The contract was in fact for the purchase of the shares of the private company which owned the building. Pursuant to the contract the purchaser paid the sum of $5,000,000 as initial deposit but, before the date for completion of the transaction had arrived, the vendor purported to forfeit that sum; the purchaser sued the vendor to recover that amount but its claim was dismissed by the trial judge Rogers J. Hence this appeal.

The contract

2. The contract is expressed in two documents, described by the trial judge in this way:

"There are two documents, both dated the 23rd June 1993, which have to be read together. They are both on the headed paper of MRT Property Agency Ltd. The first is a simple document which is expressed as an offer, subject to contract, on behalf of an unnamed principal to buy the building for $442,000,000.00. It contains the following clause:

'Deposit:20% including the earnest money to be payable uponsigning of the formal Sale and Purchase Agreement. Within 14 days after signing of this offer.

The earnest money was the sum of $5,000,000.00 payable on acceptance of the offer. Completion was to be 30 days from signing of the formal sale and purchase agreement. This document was signed by both MRT Property Agency Ltd. and the Defendant (Vendor).

The terms of that letter have to be read in the light of a letter of the same date again written by MRT Property Agency Ltd. That latter document contains amending terms. The price remained the same but the agreement was altered to be a purchase of the share capital of the company owning the building. The earnest money of $5,000,000.00 was to be treated as initial deposit and part payment of the offer price."

3. There are two clauses in the letter of 23 June 1993 of particular significance. Clause 2 reads:

"2. Offer price of HK$442,000,000.00 means the agreed value of the Property based on which the purchaser shall purchase all the issued shares of the Owning Company on the strict condition that there will not be any liability (both actual and contingent) in the Owning Company; in the event that there is or will be any liability including taxes whether profits tax or contingent tax liability which may have arisen because of the amount of the acquisition cost of the Property or the book cost (less depreciation) of the Property as shown in the books of the Owning Company is less than HK$442,000,000.00 the Offer Price of HK$442,000,000.00 shall be reduced by such liabilities; and in the event that there is any bona fide book debt in the Owning Company to finance the acquisition of the Property by the Owning Company, such book debt would be taken up by the purchaser of the entire issued shares of the Owning Company (or the debt purchaser of such book debt) and the said Offer Price shall also be reduced by the same amount accordingly, if such book debt is not discharged by the vendor of the Owning Company at that time of completion of the sale and purchase contemplated herein."

4. Clause 4 reads:

"4. A further deposit and part payment of HK$88,400,000.00 (equivalent to 20% of the Offer Price including the initial deposit) shall be paid upon signing of the formal Sale and Purchase Agreement which shall contain the basic terms contained in our earlier letter of the even date and as amended herein with other usual terms and warranties for the sale and purchase of the shares of a certain company for this kind of transaction, and the formal Sale and Purchase Agreement shall be signed between the parties within 14 days after the signing of this offer."

The events leading to litigation

5. 23 June 1993 was a Wednesday. On the following Monday 28 June the purchaser's solicitors wrote for the first time, asking for the title deeds and other documents to enable them to prepare a draft sale and purchase agreement for the vendor's solicitors' approval. The title documents were sent on the following day but as regards the up-to-date accounts and the books and records of the company, the vendor's solicitors said that they would be sent as soon as possible.

6. On Friday 2 July the vendor's solicitors wrote, reminding the purchaser's solicitors that the formal sale and purchase agreement was due to be signed on 7 July and enclosed at the same time the draft profit and loss account and balance sheet of the company as at 30 June 1993.

7. It is common ground that the financial statements sent that day, barely one week before the deadline, were necessary for the preparation of the formal sale and purchase agreement, particularly having regard to the provisions of clause 2. Without the accounts, the amount to be paid on completion could not be computed. As can be seen from the Balance Sheet, the company had very substantial liabilities: current liabilities of $180.81 million plus long-term secured loans of $216 million. Accordingly, the purchase price which the purchaser was liable to pay for the shares would not have been the full $442 million but a sum considerably smaller. This would, of course, have to be provided for in the formal sale and purchase agreement, as would the normal undertakings and warranties regarding the affairs of the company to be given by the vendor, as adumbrated in clause 4. These were not mere matters of form but went to the heart of the contract.

8. Not surprisingly, the purchaser's solicitors found themselves in difficulty regarding the time available to draft the formal sale and purchase agreement and to have it approved by the vendor's solicitors before the deadline of 7 July 1993.

9. Accordingly, they wrote on 5 July as follows:

"Dear Sirs,

Sale and Purchase of shares of and in Investar Limited - Connaught Building, Nos. 54, 55 and 56 Connaught Road Central, Hong Kong

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We refer to the above matter of which we received the title deeds and documents of the property on 29th June 1993, the Statutory Book and records of the Company on 30th June 1993 and the unaudited balance sheets of the Company on 2nd July 1993.

Although it is intended that the formal Agreement for Sale and Purchase shall be signed on 7th July 1993, it appears that there will be insufficient time for you to approve the draft Agreement for Sale and Purchase to be prepared by us. Under the circumstances, we would be pleased to know if your client is prepared to extend the time for signing of the formal Agreement for Sale and Purchase to 14th July 1993.

Please take instructions from your client and let us know accordingly."

10. The reply of the vendor's solicitors, dated 6 July, is as follows:

" We refer to your fax message of 5th July 1993 upon which we have taken our client's instructions.

As you are no doubt aware, the letters of 23rd June 1993 signed between our respective clients constitute a binding agreement, the time for the performance of which is, in our client's view, of the essence. Our clients will therefore hold your client liable for the performance of the said binding agreement including, in particular, the payment of the further deposit and part payment of purchase price in the amount of $88,400,000.00 (equivalent to 20% of the price including initial deposit) and the signing of the formal Sale and Purchase Agreement within 14 days after 23rd June 1993.

However, our client will have no objection, by way of indulgence to your client, to considering any draft formal Sale and Purchase Agreement sent to us by 12:00 noon on Saturday, 10th July 1993. We trust you will advise your client thereof accordingly."

11. In their reply of 7 July the purchaser's solicitors said:

" We refer to your letter dated 6th July 1993, the contents of which are noted.

On behalf of our client, Health Link Investment Limited, we will let you have the draft Agreement for Sale and Purchase by 12:00 noon on Saturday, 10th July 1993. We will also inform you of the name of the company who will be the debt purchaser in this matter."

Legal effect of the letters

12. It is common ground that by this exchange of letters the terms of the original contract were varied. The question is: to what extent?

13. A crucial finding made by the judge is this: the payment of the 20% deposit amounting to $88.4 million and the signing of the formal sale and purchase agreement were intended to be simultaneous events. There is no appeal against this finding. This is hardly surprising, having regard to the language of clause 4. There are many cases in the books where, after a preliminary agreement relating to the purchase of real property has been entered into, the obligations to pay the full deposit and the obligation to sign the formal agreement were held to be linked: see for instance Link Brain Limited v. Fujian Finance (1990)2 HKLR 353 at 364E.

14. The $88.4m here is a considerable sum and the purchaser could hardly have been expected to pay without having the protection of a formal sale and purchase agreement; the formula used in para 4 of the letter of 23 June - "the formal sale and purchase agreement shall contain ... other usual terms and warranties for the sale and purchase of the shares of a certain company for this kind of transaction" - could hardly have been regarded as sufficient to protect the purchaser, after paying over to the vendor the full 20%, without those "terms and warranties" - that is to say, undertakings by the vendor - having been spelt out in a formal agreement. And, as Mr Edward Chan QC submits in argument: the matter can be examined in reverse. Assume that, ahead of the deadline, the purchaser had required the formal sale and purchase agreement to be signed, say on 30 June, surely the vendor in turn would have said: "All right, but if we sign today, please pay the $88.4m today"; the vendor would not have been content to wait until 7 July to receive their money, having executed the formal sale and purchase agreement on 30 June. And assume that difficulties should have arisen concerning the precise terms of the formal agreement, was the purchaser to pay nevertheless?

15. What, then, was the effect of the letters of 6 and 7 July 1993? The court must assume that it is dealing with reasonable contracting parties, each willing to see the transaction through to a successful conclusion in accordance with their contract. One starts with the proposition here that for cogent reasons the obligations of payment and signing were to be simultaneous. That is what the parties had agreed. The parties can, of course, by their subsequent conduct severe the link between the two events; the requirement to pay the further deposit can if they so wish be. divorced from the signing of the formal agreement, making these events independent of each other. And if, by their subsequent consensual acts, that is in fact what they did, the court must of course give effect to it, odd though that might be in the result. But is that what they did?

16. Mr Ribeiro QC, counsel for the vendor, places much emphasis on the second paragraph of the letter of 6 July. But, as I view it, the solicitors were there merely stating the obvious: that is, that the payment of the 20% deposit and the signing of the formal sale and purchase agreement were to be within 14 days of 23 June. But when the solicitors went on to say:

"However, our client will have no objection, by way of indulgence to your client, to considering any draft formal Sale and Purchase Agreement sent to us by 12:00 on Saturday, 10 July 1993. We trust you will advise your client thereof accordingly"

could they have possibly meant, or be taken to have meant, that they were divorcing the two requirements? That is, holding the purchaser to the obligation to pay the full $88.4m by the next day, 7 July, but at the same time extending the time for signing the formal agreement to some time after 10 July?

The Judge's conclusion

17. Rogers J, in page 6 of his judgment, said:

"... What that letter said was that the defendant (vendor) was prepared to extend time for the drafting of the formal agreement (that would have the effect the plaintiff would not be in breach of the agreement). The contrast however between that extension and the previous paragraph makes it clear that the defendant was not extending time for the payment of the further deposit".

18. I have to say, that is not clear to me. What appears to me obvious is this: accepting, as is the common case, that the obligations to pay and to sign the formal agreement were to be simultaneously discharged, it must follow that once the signing was to be postponed, the payment would also be postponed, unless the parties had clearly agreed otherwise.

The proper approach

19. One must assume that the vendor, having willingly entered into the agreement to sell the shares on 23 June, continued to be willing to do so on 6 July; the vendor cannot be assumed to have changed its mind in that short time, whatever the "volatilities" of the market as Mr Ribeiro contends. And if difficulties in implementing the parties' agreement should arise, as they did, there was no reason to assume that the vendor was not willing to accommodate the purchaser's solicitors temporarily, so that the technical problems over drafting could be ironed out and the agreement implemented.

20. Mr Ribeiro argues thus: the two obligations had to be performed by 7 July 1993; this was the 14 days deadline imposed by the original contract; time for the payment of $88.4m was intended "to be of the essence"; that is, failure to pay by 7 July would be a repudiatory breach. When, Mr Ribeiro argues, lawyers say "time is of the essence" they mean no more than that the performance of particular obligations has to be strictly punctual: see British Holdings v. Quaderax (1989)1 QB 842 at 856. The deadline as far as payment was concerned had not, Mr Ribeiro argues, been relaxed; accordingly, when the purchaser failed to pay on 7 July, the vendor rightly treated that as a repudiatory breach.

21. Mr Ribeiro's argument begs the fundamental question: Were the two obligations intended to be simultaneously performed? If they were, they were mutually dependent on each other. Extending the time for the signing of the formal agreement necessarily meant extending the time for payment of the deposit. As reasonable contracting parties, the vendor cannot be taken as having, in effect, deliberately set a trap for the purchaser, by their solicitor's letter of 6 July, to enable them to forfeit the sum of $5m the next day with impunity. The parties were engaged in a commercial transaction, and not in a word-game for lawyers. No court should construe the acts of the parties as having the result contended for by Mr Ribeiro unless they are open to no other interpretation. In my judgment, the letter of 6 July is not open to this interpretation.

Conclusion

22. In my judgment, the vendors were in repudiatory breach of contract when they wrote on 8 July purporting to treat the contract as at an end and to forfeit the deposit of $5m. I would allow this appeal, discharge the judge's order and order that the sum of $5m be repaid to the purchaser with interest as from 9 July 1993. I would also make an order nisi that the vendor pays the purchaser the costs in this court and in the court below.

Nazareth, V.-P.:

23. I agree with the judgment of Litton J.A. The meaning of clause 4 of the preliminary agreement (which is set out in the purchaser's solicitors' letter of 23rd June 1993), in my view also, is quite plainly, as Rogers J put it "that the formal sale and purchase agreement had to be executed within 14 days and the further deposit had to be paid on signing". While I have reached that conclusion on the plain wording of clause 4, it is not without significance that this Court, differently constituted, reached a similar conclusion inLink Brain Ltd v Fujian Finance Co. Ltd [1990]2 HKLR 353, 364E-F, where it held that provision in the preliminary agreement for payment by the purchaser "upon signing the sale and purchase agreement" was clear and unambiguous and could only mean that no payment could be required unless and until the sale and purchase agreement had been signed; and likewise in Yiu Yau Ping v Fong Yee Lan [1992]2 HKLR 167 10-16. Moreover, as Litton J.A. has pointed out, besides there being good reasons for execution of the formal sale and purchase agreement and the payment of $88.4m to be contemporaneous, the judge made a finding to the latter effect which has not been appealed.

24. That situation, then, is so clear that there is no question of it having to be resolved by reference to the burden of proof. It is accordingly not necessary to address the latter, nor the matter of whether time was of the essence of the two obligations of the contract in clause 4, upon which Mr Ribeiro made submissions. The central point in this appeal is whether or not the two material requirements in clause 4 can be separated in the way contended for on behalf of the vendor, the two requirements being, first, the payment of the further deposit of HK$88,400,000.00, and second, the signing of the formal sale and purchase agreement. The plain meaning of clause 4 that I have already mentioned, presents an immediate difficulty to the vendor's contention. How can it be right to go beyond clause 4, and even beyond the letter of 23rd June, to modify the plain meaning of the material words in clause 4?

25. Mr Ribeiro, in his able submission, submits that it is not just the preliminary agreement and its wording that have to be addressed but the breach that has occurred. I do not find myself assisted by this submission, if I have understood it correctly. Since the true and proper construction of clause 4 requires the further deposit to be paid on the signing of the formal sale and purchase agreement, breach of the requirement that such agreement be signed by 7th July, cannot, as I can see it, warrant a modification of such construction. However that may be, the proper approach must, in my view, be to determine the questions of breach or compliance with the requirement to pay a further deposit by reference to the signing of the formal agreement for sale and purchase.

26. Mr Ribeiro points also to indications of intention on the part of the vendor to have the further deposit paid within 14 days of the preliminary agreement, i.e. the 7th July. In my view, these cannot prevail in the face of the clear wording and meaning of clause 4. If the vendor had intended the further deposit to be paid within 14 days of the execution of the preliminary agreement come what may, that is what should have been provided. This was not done in either the preliminary agreement or in the letter of 6th July 1993.

27. As to the "indications" in the vendor's letter of 6th July and in the evidence of Mr Sung, of some desire or intention to retain the 14-day deadline for payment of the further deposit (and it would seem in the second paragraph of that letter, equally, for signing the formal agreement although in the third paragraph effectively extending that deadline), they too cannot prevail over the clear contractual extension of the 14-day deadline for signing, which was the clearly agreed trigger for payment of the further deposit. The vendor could, of course, have made his extension of time for signing conditional upon the payment of the further deposit by 7th July, or otherwise varied the preliminary agreement to achieve that effect. But he would have had to do so in suitably clear and unequivocal terms to match those in clause 4. He did not do so. The plain wording of clause 4 and the consequences of the letter of 6th July must be give n effect, particularly as these were not intended to reflect some earlier agreement possibly to a different effect, but constitute the actual agreements between the parties, which were drafted by their legal advisers.

Liu, J.A.:

28. I propose to state briefly the views I hold. Much in this appeal hinges upon the proper construction of paragraph 4 of the letter dated 23 June 1993 from the purchaser's agent to the vendor in conjunction with that of the subsequent correspondence. Paragraph 4 reads :

"4. A further deposit and part payment of HK$88,400,000.00 (equivalent to 20% of the Offer Price including the initial deposit) shall be paid upon signing of the formal Sale and Purchase Agreement which shall contain the basic terms contained in our earlier letter of the even date and as amended herein with other usual terms and warranties for the sale and purchase of the shares of a certain company for this kind of transaction, and the formal Sale and Purchase Agreement shall be signed between the parties within 14 days after the signing of this Offer."

29. Paragraph 4 as accepted by the vendor gave rise to two distinct obligations, namely -

(1) a further deposit and part payment shall be paid upon the signing of the formal Sale and Purchase Agreement by 7 July; and

(2) a formal Sale and Purchase Agreement shall be signed by 7 July.

30. It was highly desirable to arrange for payment of the further deposit to be made simultaneously with the signing of the formal Sale and Purchase Agreement, but the introduction of the words "upon the signing of the Formal Sale and Purchase Agreement" to obligation (1) would not have the effect of making these two otherwise separate obligations mutually dependent obligations. Evidently, the agreement was for the further deposit to be paid at the same time as the signing of the formal Sale and Purchase Agreement. The short point is : should these obligations be separately dealt with for the question of extension or waiver?

31. The volatility of the Hong Kong property market, commercial considerations and the magnitude of this transaction clearly made time of the essence of the contract for these two obligations (1) and (2), particularly when the further deposit was enormous, signing of the formal document was imminent despite the intricate terms and the identity of the purchaser was undisclosed. Mr Ribeiro must be right that the onus to establish any extension of time or waiver for either of these two obligations falls therefore on the shoulders of the purchaser, the appellant.

32. The purchaser requested a 7-day extension for the signing of the formal Sale and Purchase Agreement. The request was entertained and 3-day grace was given subject to an express reservation to the effect that the further deposit would nevertheless have to be paid as scheduled i.e. on 7 July.

33. With regard to obligation (1), since time for signing of the formal Sale and Purchase Agreement had been extended, signing of a formal Sale and Purchase Agreement by 7 July was no longer possible. The time for payment of the further deposit in obligation (1) was made referable to the signing of the formal Sale and Purchase Agreement, but the purchaser's duty under obligation (1) was not predicated upon his performance of obligation (2). After all, they were each couched in peremptory terms, that is to say, "shall be paid", "shall be signed". The appellant/purchaser had to honour each of these two obligations. In essence, the further deposit was agreed to be paid upon the signing of the formal Sale and Purchase Agreement within 14 days after the signing of the Offer, i.e. by 7 July. If the formal Sale and Purchase Agreement was signed before 7 July, its signing would still fall within the 14-day time frame and both-obligations would have to be respectively performed viz. the purchaser paying the further deposit whilst the parties signing the formal Sale and Purchase Agreement. But if the formal Sale and Purchase Agreement was signed after the stipulated 14 days or was not signed at all, could the purchaser justly claim to be relieved, either temporarily or permanently, from paying the further deposit under obligation (1)? Each case must be judged on its own agreed terms. It could not have been envisaged by the parties in this case that obligation (1) could be rendered meaningless or unenforceable against the purchaser by his own default under obligation (2). If the purchaser had wrongfully failed to honour obligation (2) or if an extension had been granted exclusively to obligation (2) as in this case, could it have been argued that the vendor's entitlement to HK$88.4m further deposit under the free-standing obligation (1) had also been abrogated or suspended? Time for performing obligation (1) must then be computed as if the purchaser had not defaulted or as if no extension had been granted for signing the formal Sale and Purchase Agreement. In other words, the further deposit had nevertheless to be paid by 7 July. The vendor's right under obligation (1) was left uninterfered with. These obligations were not inter-dependent or collective. Granted that the date of payment, the 7 July, in obligation (1) was to be culled from obligation (2), but for the reasons I have given, the several stipulation as to time in each obligation would have to be considered detachedly for the purpose of extension or waiver.

34. In my view, obligation (1) was unaffected by the extension given for obligation (2) whether or not the vendor had expressed its wish to retain obligation (1). In order to succeed in this appeal, the appellant/purchaser must demonstrate that the vendor also extended time for payment or waived it. The appellant/purchaser on whom the burden lies has not or has not sufficiently established such an extension or waiver. In this case, the vendor was clearly desirous of preserving the timeous payment of the $88.4m further deposit and had duly conveyed its desire to the purchaser's agent. I would dismiss the appeal.