TECHTRONIC COMMUNICATION CO. LTD. v. KAMOS LTD.

HCMP 5660/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5660 OF 2000

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J U D G M E N T

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1. This is a vendor and purchaser summons arising from a transaction between them which did not proceed. The plaintiff is the purchaser. It seeks declarations that it was entitled to rescind the contract, validly did so and is entitled to a refund of the deposit paid and to be indemnified for costs incurred. The defendant is the vendor. It opposes the applications and seeks a dismissal of the action.

The Agreements

2. The parties entered into a document called 'provisional contract' dated 4 August 2000 for the sale and purchase of Flat C, 56th floor, Manhattan Heights, being a new development in Kennedy Town. The purchase price was $4.864 million. Of this $486,400.00 was due, and paid, on the signing of the provisional contract. A further $243,200.00 was due on 18 August 2000 and the balance on the date of completion being 18 September 2000.

3. The provisional contract stated: "the purchaser shall sign the formal agreement for sale and purchase on or before 10 August 2000"; and elsewhere: "the purchaser agrees that the formal agreement for sale and purchase shall strictly follow the form of agreement for sale and purchase annexed hereto and acknowledges that he has perused the same and understands the contents and legal effect thereof before signing this provisional contract."

4. Clause 5 stated: "Should the purchaser fail to sign the agreement and/or make further payment in accordance with the abovementioned payment terms schedule the vendor shall be entitled to exercise its right:

"(1) ... ...

(2) to sell the abovementioned property to other party and to forfeit all the deposits paid by the purchaser without prejudice to the vendor's right to claim against the purchaser damages over and above the deposits so forfeited and in that event this provisional contract shall be terminated."

5. Pertinent clauses in the form of formal agreement for sale and purchase (the formal agreement) include the following:

"5(b) ... ...

(c) The Vendor shall not be required to produce or deliver or procure to be delivered to the Purchaser any document other than those set out in the Schedule 6 hereto not (sic) shall be liable for any expenses incurred in obtaining the delivery to the Purchaser of any document not set out in the Schedule 6 hereto and no objection shall be made on the ground of such non-production or non-delivery."

(Schedule 6 specifies a total of 51 title deeds and documents)

"9(1) Any requisitions or objections in respect of title or otherwise shall be delivered in writing to the Vendor's Solicitors within seven (7) working days after the delivery of the title deeds to the Purchaser's Solicitors and in respect of any requisitions or objections so delivered as aforesaid and replied to by the Vendor's Solicitors, any further requisitions or objections shall be delivered in writing to the Vendor's Solicitors within three (3) working days from the Purchaser's Solicitors' receipt of the Vendor's Solicitors' reply as aforesaid, otherwise the same shall be considered as waived and the Purchaser shall be deemed to have accepted the Vendor's title (in which respect time shall be of the essence of this Agreement).

13. Subject to Clause 5(b) and 5(c) hereof, the Vendor shall at his own expense show a good title to the Property and produce to the Purchaser for his perusal such certified or other copies of any deeds or documents of title, wills and matters of public record as may be necessary to complete such title. The costs of verifying the title, including search fees, shall be borne by the Purchaser who shall also, if he requires certified copies of any documents in the Vendor's possession relating to other property retained by the Vendor as well as to the Property, pay the cost of such certified copies."

6. After signing the provisional contract the plaintiff instructed Messrs Vincent T K Cheung, Yap & Co. (Cheung Yap) to act for it in the conveyancing. But on advice it did not, on or by due date and thereafter, either sign a formal agreement for sale and purchase or pay any further money towards settlement of the purchase price.

7. Instead, Cheung Yap wrote to the defendant's solicitors, Messrs S H Leung & Co. (Leung & Co.) by letter of 9 August 2000 which included the following:

"We write to inform you that, upon our perusal of the title deeds and documents relating to the Property, we note that your client's title to the Property is defective.

We shall provide you with particulars of the aforesaid title defect in due course.

As it is an implied term of the Provisional Contract that your client must show, prove and give a good title to the Property, your client has failed to comply with, and is therefore in breach of, such obligation under the Contract.

In the meantime, we have been instructed that, due to your client's title to the Property is defective and your client's breach of the Contract as aforesaid, our client shall not proceed with the purchase of the Property under the Contract.

Please could you refund to us the amount of HK$486,400.00, being the preliminary deposit paid by our client to your client under the Contract, as soon as possible."

8. They followed this up with a letter of 12 August in which they raised a number of defects in the title documents which they stated gave their client entitlement to call off the provisional contract forthwith and be refunded the deposit paid. This was a proposition which found no favour with Leung & Co. There followed correspondence between solicitors, but no resolution and the contract went off. The defendant claimed breach of the provisional contract and forfeited the deposit paid.

9. Of the various matters with which the plaintiff took issue in its letter of 12 August only one now concerns these proceedings; that is the legal description of the land upon which Manhattan Heights is built as described in the provisional contract and intended formal agreement.

10. In the formal agreement this was set out in paragraph 1(1)(e) as follows:

"(e) "land" means all those pieces or parcels of ground registered in the Land Registry as Section E of Marine Lot No. 245, the Remaining Portion of Marine Lot No. 245, the Remaining Portion of Section B of Marine Lot No. 245, the Remaining Portion of Sub-section 1 of Section B of Marine Lot No. 245, Sub-section 2 of Section B of Marine Lot No. 245 and Section A of Sub-section 1 of Section B of Marine Lot No. 245."

11. There is a similar, shorthand version in the provisional contract.

The issues

12. It is the plaintiff's case that when the provisional contract was entered into there was a fundamental defect in the defendant's title in that it could not show and would ultimately not be able to prove good title to Section E Marine Lot No. 245. This is because its predecessor in title, called Green Island Cement Company Limited (Green Island Cement), whilst purporting by registered assignment to pass title in Section E to the defendant had itself no title to it to pass. The defendant had no legal right or other power to make good the defect, which gave the plaintiff the right to rescind forthwith the provisional contract as soon as the defect came to light and to recover the deposit already paid and reimbursement of fees expended.

13. It is the defendant's case that whilst it would have been incumbent on the defendant under clause 13 of the formal agreement to show and, on completion, prove good title it was given no opportunity to do so, under the usual channels afforded, in this case by clause 9(1). The rescission was premature and unjustified, and warranted a dismissal of the action irrespective of whether or not good title could have been shown.

14. Its further defence is that good title could have been shown.

How did Section E of Marine Lot 245 come into being?

15. The answer to this question is found in the assignment between Green Island Cement and the defendant, dated 13 November 1995 and finally (after 3 attempts) registered under no. 7982988, which comprises one of the documents of title referred to in schedule 6. It is a transfer of part of the land upon which Manhattan Heights now rests.

16. The property assigned is described in its schedule as follows:

"all those pieces or parcels of ground registered in the Land Registry respectively as Section E of Marine Lot 245 and the remaining portion of Marine Lot 245 together with the messuages erections and buildings thereon formerly known as nos. 6E and 6F New Praya Kennedy Town ... ..."

17. The preamble disclosed the following history:

1. At all material times prior to 21 September 1964 Chan King Pong, Chan King Luen and Chan King Hing (the Messrs Chan) were the registered proprietors of land described as the remaining portion of Marine Lot 245 together with the buildings thereon known as nos. 6E and 6F New Praya Kennedy Town. These were adjoining buildings, separated by a lane which was also included in the land;

2. in 1960 one Chow Bung Piu filed a writ in the Supreme Court of Hong Kong claiming he was the purchaser in an informal agreement written in Chinese characters with the Messrs Chan in which they had agreed to sell to him "a piece of land which included the building then known as 6E New Praya Kennedy Town the whole being part of the Remaining Portion of Marine Lot 245" ... ...;

3. a sealed copy of the writ was registered in the Land Registry Office as a lis pendens dated 21 October 1960 by memorial 326029 against the title, the portion actually the subject of the alleged agreement being described in the memorial as Section E of Marine Lot 245;

4. the action was eventually settled. The transaction did not proceed. The lis pendens was vacated;

5. by assignment dated 21 September 1964 registered under no. 457283 the Messrs Chan assigned both buildings (and the lane between) to Green Island Cement . The property was therein described as "The remaining portion of Marine Lot No. 245 together with the messuages erections and buildings thereon known at the date thereof as nos. 6E and 6F New Praya Kennedy Town" ... ...;

6. when Green Island Cement and the defendant agreed to sell and buy the self same property 30 years later it was agreed "for better identification of the land conveyed and intended to be conveyed that hereafter for conveyancing purposes the said remaining portion of Marine Lot 245 shall be described or otherwise referred to as Section E of Marine Lot 245 and the Remaining Portion of Marine Lot No. 245 ..." ...;

7. at no stage did the Crown as lessor of the land in question recognize a subdivision or partition of Section E from the remaining portion of Marine Lot 245 and there was never an apportionment of Crown rent payable for the remaining portion of Lot 245.

18. In deference to how the parties chose to describe the property bought and sold in the assignment the Land Registry Office created a new record for 'Section E of Marine Lot No. 245' the first 'owner' being recorded as the defendant.

19. The assignment between Green Island Cement and the defendant is not the only document of title which explains how Section E came into being. A director of Green Island Cement, called Mr Albert Chow, made a declaration dated 1 April 1997 registered under no. 7087501 which set out the same circumstances as were recorded in the preamble to the assignment to the defendant. He declared further that for the 30 years of its ownership Green Island Cement had "full uninterrupted and undisturbed possession or receipt of rents of the subject property for its own use and benefit and to the exclusion of others ... ..."

20. It is apparent from these two documents of title that Section E has never been the subject of a formal subdivision or partition either by the Crown as lessor or by any party in ownership, beyond that it was anticipated that the land upon which stood the building at 6E New Praya would be so designated if the sale to Mr Chow had proceeded. Why it was called Section E is not stated. But it is a matter of simple deduction. Previous parcels subdivided from Marine Lot 245 had been designated, in turn, Sections A to D of Marine Lot 245. Had the sale to Mr Chow been completed it would have been the next subdivision in sequence.

The plaintiff's position

21. Cheung Yap having taken instructions to act for the plaintiff searched the documents of title to which I have referred. Their letter of 12 August on the subject clearly sets out their attitude and on advice their client's position:

"... ... We note, in particular, the following apparent and fundamental title defects in respect of your client's title to the Property:

1. As at and with effect from the issue and registration of Lis Pendens Memorial No. 326209, The Remaining Portion of Marine Lot No. 245 had been carved out into Section E of Marine Lot No. 245 and The Remaining Portion of Marine Lot No. 245, as shown on the plan annexed to Lis Pendens Memorial No. 326209.

Such carving out was, in fact, admitted by both your client and Green Island Cement Company Limited under Assignment Memorial No. 7982988, as the property assigned thereunder, and as described in the Schedule thereto, was Section E of Marine Lot No. 245 and The Remaining Portion of Marine Lot No. 245.

Nevertheless, what Green Island Cement Company Limited acquired from Chan King Pong, Chan King Luen and Chan King Hing, its predecessors-in-title under Assignment Memorial No. 457283, was just The Remaining Portion of Marine Lot No. 245 (the assignment clause appearing on page 3 of Assignment Memorial No. 457283 refers).

The recitals to Assignment Memorial No. 7982988 could not possibly remedy your client's title defect to the Property arising out of the omission of an assignment of Section E of Marine Lot No. 245 to Green Island Cement Company Limited, your client's predecessor-in-title, by Chan King Pong, Chan King Luen and Chan King Hing under Assignment Memorial No. 457283.

Given the fact that Assignment Memorial No. 457283 was executed in 21 September 1964, such long lapse of time shall no doubt render the execution of a confirmatory assignment by Chan King Pong, Chan King Luen and Chan King Hing in favour of your client in respect of Section E of Marine Lot No. 245 an extremely difficult, if not impossible, exercise which, regrettably, is the only possible course of action to resolve such title defect.

2. ... ...

Having noted the above, we draw your specific attention to the following comments of Godfrey J in the case A-Mayson Development Company Limited v. Betterfit Limited [1992] 2 HKC 533:

"..... There are circumstances in which the purchaser may call off the contract at once, without waiting to see whether the vendor can succeed in proving title on or before completion: see Price v. Strange [1978] Ch 337, per Goff LJ at 355. For example, in my judgment the purchaser does have a right to call off the contract as soon as he discovers a fundamental defect in the title, or some other fundamental breach of contract by the vendor. ....."

By reason of the above legal principles and authorities in support thereof, our client is perfectly entitled to call off the Provisional Contract entered into between our respective clients dated 4 August 2000 (the "Contract") upon its discovery of the fundamental title defects mentioned above.

As a result, we have been instructed to repeat reiterate and maintain the contents of our letter to you dated 9 August 2000, in particular, the following:

(a) our client shall not proceed with the purchase of the Property under the Contract; and

(b) your client shall refund to our client through us the amount of HK$486,400.00, being the preliminary deposit paid by our client to your client under the Contract, as soon as possible."

The Law

22. Was the plaintiff entitled to rescind and peremptorily, as it did?

23. It is long established that generally speaking a vendor in an agreement for sale and purchase of property only needs to establish a good title as at the date of completion; it is no defence to an action for specific performance or damages that he had no title at the date the parties committed themselves contractually; see Chu Wing Ning v. Ngan Hing Cheung and Anor (unreported) 1991 no. A9409, and in particular DJ Ribeiro QC (as he then was) at p. 6.

24. But if a vendor has no title and no right or power to make good that disability a purchaser has the right to terminate the contract as soon as it comes to his attention; that holds good even if in fact, the vendor does have title by the date of completion; see Price v. Strange [1978] Ch 337; in particular Goff LJ at p. 355.

25. In Hong Kong Godfrey J (as he then was) said in A-Mayson Development Co. Limited v. Betterfit Limited [1992] 2 HKC that this right may be exercised where the purchaser becomes aware of a fundamental defect in the title. At p. 535 he said:

"The obligation of a vendor to prove title is an obligation which he has to perform at completion. But it is an obligation which in practice 'ought properly to be performed by the vendor well before the date fixed for completion': see Re Priestley's Contract [1947] Ch 469, per Romer J at p 476. There are circumstances in which the purchaser may call off the contract at once, without waiting to see whether the vendor can succeed in proving title on or before completion: see Price v. Strange [1978] Ch 337 per Goff LJ at p 335. For example, in my judgment the purchaser does have a right to call off the contract as soon as he discovers a fundamental defect in the title, or some other fundamental breach of contract by the vendor. However, although, upon discovering before completion a fundamental defect in the vendor's title, the purchaser may thereupon treat the contract as at an end, in my opinion he may not do so merely for minor deficiencies, removable defects, matters of conveyance and so on: compare Pips (Leisure Productions) Ltd v. Walton (1981) 260 EG 601, per Megarry VC, at pp 603, 604. Where proof of title is insufficient, but the title is not necessarily defective, the purchaser is, in my judgment, bound in the ordinary way to give the vendor a proper opportunity of establishing the title: see Re Balen and Shepherd's Contract [1924] 2 Ch 365, per Tomlin J at p 378.

So I would hold, in relation to the first of the two issues which I have outlined above, that a purchaser is not always bound to give the vendor until the date fixed for completion to come up with satisfactory answers to the purchaser's objections to the title. There are circumstances under which the purchaser can properly call off the contract without waiting for the completion date."

26. As can be seen in its solicitors' letter of 12 August last, the plaintiff relied on that case in holding that rescission exercised forthwith was within its right.

27. One needs to go back to the origins of Section E to see if these are circumstances envisaged by Godfrey J to fall outside the general rule.

28. In my view it is immediately apparent that they do not.

29. The plaintiff has through its solicitors seized on the assumption that Section E came into being as a separate parcel following the registration of the lis pendens lodged by Mr Chow. Of course that was not so; it was merely a means of identifying that part of the remaining part of Marine Lot 245 which was the subject of the Supreme Court action, as adopted by those acting for Mr Chow. It would have been perfectly proper for that description, as to part, to have been abandoned once the lis pendens was withdrawn and the agreement with Mr Chow settled. In fact that is what happened in the subsequent assignment from the Messrs Chan to Green Island Cement. Why it was reintroduced in the subsequent sale to the defendant is unclear; it matters not. The fact is that there was no title defect, fundamental or otherwise; there was a change of description of an otherwise satisfactory title which was explained in the preamble to the assignment from Green Island Cement to the defendant and in Mr Chow's declaration.

The outcome

30. If follows that the plaintiff had no legal right to call off the transaction. Regardless of its preliminary concern about the defendant's title it was duty bound to sign the formal agreement, pay the further deposit and only then exercise its right of requisition under clause 9(1).

31. How things would have then proceeded is a matter of speculation and no longer relevant. Suffice to say that by refusing, without cause, to sign the formal agreement it was in breach of the provisional contract and liable to lose its deposit.

32. The plaintiff's applications are dismissed.

33. Costs, nisi at first instance, are to the defendant, taxed if not agreed.