GAIN SKY LTD v. CHAU TAK HING AND ANOTHER

HCA 917/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 917 OF 2004

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J U D G M E N T

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Background facts

1.  By a provisional agreement dated 5 March 2004 (“Provisional Agreement”), the Plaintiff agreed to purchase and the Defendants agreed to sell a property at Shop B, Ground Floor, Man Hoi Mansion, 80-82 Cheung Sha Wan Road, Kowloon (“the Property”) for a consideration of $7,500,000.

2.  The Provisional Agreement provided:-

(1)	By clause 2(a), that an initial deposit of $300,000 would be paid by the Plaintiff to the Defendants upon the signing of the Provisional Agreement;
(2)	By clause 2(b), that upon signing the formal sale and purchase agreement on or before 26 March 2004 a further deposit in the sum of $450,000 should be paid by the Plaintiff to the Defendants;
(3)	By clause 2(d), that completion should take place on or before 30 June 2004[1] whereupon the balance of the purchase price in the sum of $6,750,000 should be paid by the Plaintiff to the Defendants;
(4)	By clause 3, that the Property should be sold by the Defendants to the Plaintiff free from encumbrances;
(5)	By clause 11, that the Property be sold to the Plaintiff on an “as is” basis; and
(6)	By clause 16, that the Property would be subject to a tenancy agreement in favour of Ng Tsz Yu from 1 May 2004 to 30 April 2006.

3.  The printed form of the Provisional Agreement included two clauses dealing with the consequences of either party failing to perform but these clauses were deleted and the parties agreed these deletions by initialling next to the deletions.  Clause 7 was concerned with the situation where the purchaser failed to perform.  Clause 8 was concerned with the situation where the vendor failed to perform and was worded thus:-

“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 the reimbursement/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.”

4.  On the date the Provisional Agreement was signed, the Plaintiff duly paid the initial deposit of $300,000 to the Defendants.

5.  On 10 March 2004, the Defendants’ solicitors, Messrs Chan & Tsu (“Chan & Tsu”) sent to the Plaintiff’s solicitors, Messrs Kok & Ha (“Kok & Ha”) a draft formal sale and purchase agreement.  On 25 March 2004, Kok & Ha sent certain suggested amendments to that draft formal agreement to Chan & Tsu.

6.  On 23 March 2004, Chan & Tsu provided the title deeds in respect of the Property to Kok & Ha for their approval on behalf of the Plaintiff.

7.  On 25 March 2004, Kok & Ha wrote to Chan & Tsu in the following terms:-

“We refer to your letter dated 23rd March, 2004.

We are instructed that there is a cockloft in the property and that the floor level of the rear portion (starting from about the middle of the shop) is substantially lower than the level of the front portion of the shop.  However, when we look at the floor plan of the shop in the Deed of Partition with Plans Memorial No.574761 and the Occupation Permit, we do not find any cockloft or any indication of a split floor level.  Please see copy Floor Plan and Occupation Permit enclosed.

As such, we believe these are unauthorised building works and alterations and would render the title of the property defective by reason of the risk of enforcement action by the Building Authority and the apparent contravention of the Deed of Mutual Covenant which prohibits structural alteration.

Please advise us urgently as to how your client will carry out the reinstatement works without in contravention [sic] of the Buildings Ordinance and the Deed of Mutual Covenant and without reducing the size of the property agreed to be sold and purchased.  In the meantime, all our client’s rights and remedies are expressly reserved.”

8.  On 26 March 2004, Kok & Ha wrote to Chan & Tsu to state that the fact that the cockloft and split-level design were unauthorised building works or alterations was never disclosed to the Plaintiff prior to its signing the Provisional Agreement and to state that as the terms of the formal agreement were still being negotiated the further deposit was not yet payable.  Kok & Ha confirmed that the Plaintiff had already deposited with them the payment of the further deposit.

9.  By letter dated 29 March 2004, Chan & Tsu replied to Kok & Ha and asserted that the Defendant had informed the estate agent of various matters before the Provisional Agreement was signed including the fact that the Property had been partitioned to create a cockloft within it.

10.  By a further letter dated 29 March 2004, Chan & Tsu informed Kok & Ha that “without prejudice to our stances as set out in our first letter of even date, our client is unable or unwilling to comply with your queries/requisitions as raised in your said letter of 26th instant” and that “notice of annulment is therefore hereby given to your client, through your firm, that unless we shall at or before 5:00p.m. of 2 April, 2004 … receive from you/your client the written withdrawal of the said queries/requisitions as raised in the said letter of 26th instant” the Provisional Agreement would be annulled and the Defendant would forthwith refund the initial deposit of $300,000.

11.  On 1 April 2004, Kok & Ha wrote to Chan & Tsu to contend that the Defendants had no right to annul the sale and that the Plaintiff insisted on proceeding with the purchase of the Property.  Kok & Ha further stated that the Plaintiff should be compensated for the loss of useable area of the Property because of the need to remove the cockloft by an appropriate abatement of the price.

12.  On 7 April 2004, Chan & Tsu replied to Kok & Ha contending that the Plaintiff should have had notice of the existing partitioning of the Property during the negotiations before the Provisional Agreement was signed and also stating that a formal tenancy agreement had been signed in respect of the Property as a result of which reinstatement would not be possible.  The letter also gave notice that the sale would be annulled at 5 pm that day.

13.  On 8 April 2004, Kok & Ha wrote to Chan & Tsu indicating that the Plaintiff did not accept the proposed annulment and stating that the Plaintiff was “ready able willing and prepared to proceed with the purchase and requires your client to demolish the unauthorized structures and reinstate the property with a reasonable abatement in the price by reason of the reduction of the usable area of the property”.

14.  On 14 April 2004, Chan & Tsu wrote to Kok & Ha to “re-iterate that our client is entitled on the ground of inability and/or unwillingness to annul the captioned transaction”.  By a further letter of the same date, Chan & Tsu purported to annul the sale with immediate effect and stated that the initial deposit was ready for collection by the Plaintiff.

15.  The Defendants signed a Memorandum of Annulment dated 15 April 2004 and a copy of this was sent to Kok & Ha on behalf of the Plaintiff on 16 April 2004.  By a letter to Chan & Tsu dated 16 April 2004, Kok & Ha contended that the Defendants had no right to annul the sale and that by electing to do so the Defendants had wrongfully repudiated the Provisional Agreement, and reserved all of the Plaintiff’s rights and remedies.

The Plaintiff’s claim

16.  The Plaintiff’s claim is that the Defendants were in repudiatory breach of the Provisional Agreement in (i) failing to show and give good title to the Property, (ii) failing to answer satisfactorily the requisitions in respect of the title of the Property including the cockloft and split-level design raised by the Plaintiff in the letters from Kok & Ha to Chan & Tsu dated 25 March 2004 and 26 March 2004, and (iii) wrongfully annulling the sale without proper grounds.

17.  The Plaintiff asserts that it was at all material times and remains ready, willing and able to perform its obligations under the Provisional Agreement and seeks specific performance subject to reinstatement or compensation.  It also claims damages to reflect the loss of use of the Property from the date of completion up to the time when possession is transferred to the Plaintiff pursuant to the sale.

18.  The relief sought by the Plaintiff is as follows:-

(1)	A declaration that the cockloft and the split-level design constitute an illegal structure and/or unauthorised building works or alterations giving rise to a real risk of enforcement action by the Building Authority and therefore a defect in title of the Property;
(2)	Specific performance of the Provisional Agreement subject to the reinstatement of the Property by the removal of the cockloft and the split-level design together with compensation (in the form of an abatement of the purchase price to reflect the loss of usable area due to reinstatement) and/or damages (for loss of use of the Property since the date of completion);
(3)	Alternatively to (2), specific performance of the Provisional Agreement without reinstatement together with compensation (in the form of an abatement of the purchase price to reflect the reduction in the value of the Property by reason of the cockloft and split-level design being illegal structures) and/or damages (for loss of use of the Property since the date of completion);
(4)	Alternatively to (2) or (3), damages in lieu of specific performance.

The defence

19.  The Defendants pleads in their Defence that the Provisional Agreement was subject to an implied term that “if the Plaintiff shall make and insist on any objection and requisition in respect of the title of the Property or otherwise which the Defendants shall be unable or, on the ground of difficulty, delay or expense or any other reasonable ground, unwilling to remove or comply with or if the Defendants’ title to the Property shall be defective, the Defendants shall be at liberty to annul the sale upon giving reasonable notice to the Plaintiff for the objection or requisition to be withdrawn”.

20.  The Defendants also contend (i) that the Defendants had no duty to disclose to the Plaintiff the existence of the cockloft and the split-level design and the fact that such structures might constitute unauthorised building works, (ii) that the Plaintiff should have been well aware of the existence of the cockloft and split-level design of the Property and the fact that such structures might constitute unauthorised building works, and (iii) that the Defendants rightfully annulled the Provisional Agreement.

21.  I shall address the submission by Mr Hui, counsel for the Defendant, as to the Plaintiff’s knowledge below.  It was said to derive in part from the 1st Defendant having told the estate agent dealing with the transaction about the structures and also from the corporate structure of the Plaintiff.  It appears that the Plaintiff’s two directors and shareholders are respectively Guide Light Secretarial Limited (“Guide Light”) and Success Town Limited and that Mr Christopher Kok Lap Seng (“Mr Kok”), a partner in Kok & Ha, is a shareholder of Guide Light and a director of one of its two corporate directors, Brave Light Industries Limited.

22.  The Defendants also contend that the Plaintiff was in breach of the Provisional Agreement in failing to withdraw its requisitions regarding the cockloft and the split-level design being illegal structures by the deadline imposed by the Defendants, as a result of which they suffered loss and damage which they counterclaim.

23.  It is convenient to deal with the Defendants’ counterclaim before considering the defence based on the implied term entitling the Defendants to annul the Provisional Agreement.

The obligation to show a good title and the right to raise requisitions

24.  Although the Provisional Agreement does not contain an express term requiring the Defendants to show and give good title to the Property free from encumbrances or requiring them to answer requisitions reasonably raised by the Plaintiff, the Plaintiff pleads that these obligations were to be implied by law in the agreement.  I agree.  The implication of such terms is clearly supported by the Court of Appeal decision in Active Keen Industries Ltd. v. Fok Chi-keong [1994] 1 HKLR 396 at 405 where Litton JA said:-

“All the leading textbooks on the subject show that, in an ‘open’ contract – that is to say, a contract formed by agreement which stipulates for nothing more than the parties, the property and the price – a number of conditions are implied, one of which is that the vendor will show a good title.  For instance, see Emmet on Title, paragraph 2.072, Barnsley’s Conveyancing Law and Practice (3rd ed.) p.245-6, Williams on Title (4th ed.) p.565.  See also Link Brain v. Fujian Finance [1990] 2 HKLR 353 at 368B.

Whilst I expressed hesitation in the course of the hearing of this appeal on this point, I am satisfied that even though the Chinese agreement is wholly silent on the question of objections and requisitions as to title, there is an obligation on the vendor to show a good title.  This obligation arises by necessary implication from the contract itself.  This accords with common-sense.  Were the law otherwise, the purchaser might be left in the position of having to make a snap decision on the day fixed for completion, on scanty information, as to whether to complete or not.  It follows that this obligation falling on the vendor to properly answer requisitions and inquiries, if reasonably raised by the purchaser, must be discharged within a reasonable time, to enable the purchaser to satisfy himself on the matter, get his money ready and complete on the day fixed.”

25.  The Defendants contend in their Re-Amended Counterclaim that the non-completion of the Provisional Agreement was brought about by the Plaintiff’s failure to withdraw its requisitions relating to the cockloft and split-level design before the deadline imposed by the Defendants.  This argument is discrete from the defence based on the alleged implied term, which is addressed below, and, in my view, is without merit.

26.  By reason of the terms to be implied into the Provisional Agreement by law, as explained in Active Keen Industries Ltd. (supra.), the Plaintiff was entitled to raise queries and requisitions regarding the cockloft and split-level design in the Property as it did through its solicitors as from 25 March 2004.  If the cockloft and split-level design were not unauthorised structures, the requisitions could and should have been duly answered; if they were unauthorised structures, the Plaintiff was entitled to raise the question of an abatement of price on the footing that a conveyance of the Property with the cockloft and split-level design removed would result in the conveyance of a much smaller Property than it had bargained to purchase.  Its refusal to withdraw the queries and requisitions by the deadline imposed by the Defendants was neither wrongful nor in repudiation of the Provisional Agreement.  If the Provisional Agreement was subject to the implied term contended for by the Defendants, then the Plaintiff’s queries and requisitions might lead to the Defendants being able to exercise their right to annul the sale but it would not, in my opinion, support the contention that the Plaintiff was in repudiatory breach of the Provisional Agreement.

27.  Accordingly, regardless of the disposition of the issue based on the alleged implied term entitling the Defendants to annul the Provisional Agreement, I do not consider that the Plaintiff was in repudiatory breach of the Provisional Agreement by raising its requisitions relating to the cockloft and split-level design and the Defendants’ counterclaim therefore stands to be dismissed in any event.

Could the Defendants show and give a good title to the Property?

28.  In Giant River Ltd. v. Asie Marketing Ltd. [1990] 1 HKLR 297 at 307F-308E, Deputy Judge Cruden said: -

“The question of what constitutes a good title has recently been considered by the Court of Appeal in Kan Wing-yau v. Hong Kong Housing Society [1988] 2 HKLR 187.  Clough, J.A. described a good title in these terms:

‘A good title is one which can at all times and in all circumstances be forced upon an unwilling purchaser in an action for specific performance, but the court will not force a doubtful title on a purchaser.  A doubtful title includes not only a title on which the court entertains doubts, but also one in respect of which the court entertains a favourable opinion but may yet be reasonably and fairly questioned by other competent persons.’

The Court of Appeal referred to the House of Lords judgment in M.E.P.C. Ltd. v. Christian-Edwards [1981] AC 205 where Lord Russell of Killowen confirmed that the burden on the vendor is to prove good title to the very high standard of beyond reasonable doubt.  The Court of Appeal accepted that facts which may give rise to a reasonable doubt adverse to good title extend not merely to facts appearing on the title but to facts extrinsic to the title.  Reference was also made with approval to In re Stirrup’s Contract [1961] 1 WLR 449, 454 where Wilberforce, J., as he then was, held that a purchaser is entitled to be satisfied that the vendor is possessed of the estate he is purporting to sell.  That obligation is discharged if the vendor shows beyond reasonable doubt that he:

‘… is in possession of the estate and that he is in a position to convey it without any blot or possibility of litigation to the purchaser.’

In considering the possibility of litigation, the Court of Appeal referred, as did Godfrey, J., in the court below to In re Heaysman’s and Tweedy’s Contract (1893) 69 LT 80 where Lindley, L.J., at p.91 declared:

‘It is a general principle that a purchaser ought not to be forced to accept a doubtful title or to buy a lawsuit.  In applying that principle, however, we must exercise our common sense and see if the supported lawsuit has any basis whatever.  We must see if there is the slightest reasonable chance of any such lawsuit being instituted.  If we come to the conclusion that the supposed lawsuit exists only in the imagination of the purchaser, we ought to disregard it, giving him the advantage of every reasonable doubt …  Such a claim would now be ridiculous: he would be laughed out of court.  The purchaser says that he may.  But is it a reasonable blot to give effect to?  I think not.  I think the facts are such that this supposed blot is a purely theoretical and not practical blot.  Nothing could be made of it at law or in equity.’”

29.  Having considered the facts in that case, Deputy Judge Cruden continued (at 310B-E):-

“The risk of the Crown in such circumstances taking enforcement action, culminating in exercising its right of re-entry, was considered in Woomera Co. Ltd. v. Provident Centre Development Ltd. HCA No.12647 of 1982.  In that case Liu, J., adapting the language of M.E.P.C. Ltd. v. Christian-Edwards (supra) to Hong Kong conditions, enunciated this test:

‘The ultimate question to be asked is: ‘Is the court satisfied beyond reasonable doubt that Woomera and Eskensen as purchasers would not be at risk of a respective successful assertion against them of the Crown’s right of re-entry.’’

That test was not subsequently queried by the Court of Appeal in Woomera Co. Ltd. v. Provident Centre Development Ltd. [1985] HKLR 263.  In the Australian case of Vukelic v. Sadil-Quinlan and Associates Pty. Ltd. [1976] FLR 457 the risk that enforcement action might be taken in respect of an unauthorised structure was held to constitute a defect in title.

In the present case the risk that the Crown would take enforcement action in relation to the basement and roofed-over inner court, is sufficient to satisfy me that the defendant failed to show good title to the plaintiff.  The risk of enforcement action was not merely theoretical or fanciful, but a practical and real blot on the defendant’s title.”

30.  In the present case, it is common ground between the parties that the cockloft and the split-level design were part and parcel of the Property which forms the subject-matter of the sale and purchase under the Provisional Agreement.

31.  The Plaintiff issued a Notice to Admit Facts dated 7 October 2004 in which it required the Defendants to admit “[t]hat the split level design and cockloft referred to in the Statement of Claim filed herein are unauthorised building works”.  On 25 January 2005, Chan & Tsu wrote to Kok & Ha stating that “we take the facts that in the pleadings the parties are not in dispute of that issue, there is no necessity to call for the expert to prove for the same in that particular issue”.  The position is therefore that the Defendant does not dispute that the split-level design and the cockloft in question are unauthorised works.

32.  No evidence having been called by either party regarding the risk of enforcement action in relation to these admittedly unauthorised structures, I am unable to say that the Defendants have shown or could show beyond a reasonable doubt that the Plaintiff would not be at risk of enforcement action in respect of the unauthorised structures in the Property.  Therefore, they could not show a good title to the Property and, provided the Provisional Agreement was not annulled by reason of the Defendants’ Memorandum of Annulment dated 15 April 2004, the Plaintiff is entitled to the declaration sought in paragraph (1) of the prayer in the Amended Statement of Claim.

The implied term contended for

33.  Whether the Defendants’ Memorandum of Annulment dated 15 April 2004 was or was not effective depends on whether the Provisional Agreement was subject to the implied term contended for by the Defendants as set out in paragraph 19 above.  Mr Hui submitted that the term was to be implied into the Provisional Agreement on one of three bases: (i) in order to give business efficacy to the contract; (ii) on the basis of the “officious bystander” test; and (iii) on the basis that this was an “incomplete contract” and the court should establish what the contract is, the parties not having themselves fully stated the terms.

34.  I shall deal below with each of the bases for implication of the term in question contended for by the Defendants.  It is first necessary to deal with certain aspects of the factual evidence concerning the transaction because Mr Hui invites me to find that the Plaintiff knew of the existence and potentially illegal nature of the cockloft and split-level design in the Property prior to entering into the Provisional Agreement.  He submitted that such knowledge on the part of the Plaintiff was material to the question of whether the Provisional Agreement was subject to the implied term contended for.  He referred to a passage in Chitty on Contracts, 29th Ed., Vol. 1 at para. 13-007 in support of the relevance of knowledge in the context of implying a term on the basis of the “officious bystander” test.  That passage reads:-

“Obvious inference from agreement.  A term which has not been expressed may also be implied if it was so obviously a stipulation in the agreement that the parties must have intended it for form part of their contract.  ‘Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if while the parties were making their bargain, an officious bystander were to suggest some provision for it in the agreement, they would testily suppress him with a common, ‘oh, of course.’’  A term will not, however, thus be implied unless the court is satisfied that both parties would, as reasonable men, have agreed to it had it been suggested to them.  The knowledge or ignorance of each party of the matter to be implied, or of the facts on which the implication is based, is therefore a relevant factor.  …” (Emphasis added.)

The Plaintiff’s knowledge of the existence of the cockloft and the split-level design

35.  The only witness of fact for the Plaintiff was Mr Andrew Chan, the Plaintiff’s manager.  It was his evidence that he was telephoned by an estate agent, Mr Ricky Yau (“Ricky Yau”), on 5 March 2004 and invited to invest in the Property.  He said that Ricky Yau told him that there was a lot of interest in the Property, which was a good investment as it was tenanted, and urged him to act quickly.  As a result, Mr Chan went to look at the Property that day but did not go inside it.  In his oral evidence he said he noticed a cockloft inside the Property.

36.  In his witness statement, he stated that, when he went to see the Property on 5 March 2004, he noticed the rear portion of the Property was slightly lower than the front portion, but he did not expressly mention the cockloft in that statement.  In his statement, Mr Chan stated that on or about 23 March 2004 when the title deeds for the Property had been provided by Chan & Tsu to Kok & Ha, he noticed from the floor plan that there was no reference to the split-level design in the Property and so he went back to look at the Property and noticed that apart from the split-level design there was a cockloft at the rear portion of the Property.

37.  Mr Hui submitted that this was an important discrepancy between Mr Chan’s oral evidence and his witness statement.  He submitted that the truth was that he had knowledge of the cockloft prior to signing the Provisional Agreement, as he had acknowledged in his oral evidence, and that the discrepancy was evidence that his witness statement was untruthful.

38.  Mr Hui also submitted that Mr Chan’s evidence concerning what Ricky Yau had told him about the Property in his telephone conversation on 5 March 2004 was also inconsistent.  In his witness statement, Mr Chan did not mention whether Ricky Yau had informed him about the cockloft and split-level design.  In his evidence in chief, he confirmed that Ricky Yau had not said anything about the cockloft.  However, during his cross-examination, when it was suggested to him that Ricky Yau had told him about both the cockloft and the split-level design, Mr Chan said that Ricky Yau had informed him there was a cockloft but did not mention that the rear portion of the Property was lower than the front portion.  This answer was corrected by Mr Chan almost immediately by his clarifying that Ricky Yau did not in fact mention either the cockloft or the split-level design, leading Mr Hui to suggest that Mr Chan was retracting his evidence.

39.  Mr Hui’s submission in regard to Mr Chan was that he lied regarding his knowledge of the cockloft and the split-level design.  In the Defendants’ written closing submissions this was said to be “because he wished to conceal the fact that both [Mr Kok and Mr Chan], before the signing of the [Provisional Agreement], already knew about the existence of the Cockloft and split-level design and their possible legal consequences”.

40.  Before stating my findings in relation to the evidence of Mr Chan, it is necessary to refer to the evidence concerning Mr Kok, who was not called to give evidence for the Plaintiff, and Mr Hui’s submissions regarding Mr Kok.

41.  Mr Chan gave evidence that, after Ricky Yau telephoned him and he had been to see the Property, he decided that the Property was a good investment and so, having obtained verbal authority from his boss, a Mr Paulo Ho, he proceeded to sign the Provisional Agreement on behalf of the Plaintiff.  It was Mr Chan’s evidence that Mr Ho was the ultimate beneficial owner of the Plaintiff and that Mr Kok took no part in the Plaintiff’s decision to purchase the Property and had no interest in the transaction.

42.  Having signed the Provisional Agreement, Mr Chan telephoned Mr Kok in order to obtain a cheque for the payment of the initial deposit in the sum of $300,000.  He did not seek legal advice at this time but instead merely asked Mr Kok to issue a cheque on behalf of the Plaintiff.  Mr Chan said he did not tell Mr Kok about the cockloft and split-level design in the Property as there was no need for him to tell him about these features.  Mr Chan’s evidence was that it was his usual practice to contact Mr Kok when he needed money for the Plaintiff’s property investments but he had no idea as to whether Mr Kok had any personal interest in the transactions he had previously entered into.

43.  As noted above, the Plaintiff’s two directors and shareholders are respectively Guide Light and Success Town Limited and Mr Kok is a shareholder of Guide Light and a director of one of its two corporate directors, Brave Light Industries Limited.  Mr Chan’s evidence was that Mr Kok and Guide Light provided the Plaintiff with secretarial services and nominee director services but it did not participate in the Plaintiff’s investments.

44.  Mr Hui submitted that Mr Kok must have had some personal gain in the present transaction.  He submitted that solicitors do not simply issue cheques for transactions in which they do not have any benefit.  Mr Hui invited the Court to draw the inference that there was no reasonable explanation for Mr Kok’s involvement other than that he was actually involved in the business of the Plaintiff.  There was no evidence, he said, that Mr Kok was only a nominee shareholder and no evidence, apart from Mr Chan’s bare assertion that Mr Ho was involved in the Plaintiff or that he even existed.

45.  Mr Hui submitted that, given Mr Chan’s awareness of the potential problems caused by cocklofts, it was difficult to accept that he would not have mentioned the existence of the cockloft and split-level design of the Property to Mr Kok when he spoke to him to ask for the cheque for the initial deposit.  At the same time, it would have been natural for him to seek legal advice from Mr Kok about the cockloft and split-level design.  In this regard, the Defendants referred to two cases involving property disputes in which Mr Kok had acted as an advocate and in which he had submitted that there was a duty on the part of a vendor to make full disclosure of the existence of unauthorized structures or unpermitted user.

46.  I have carefully considered the submissions in support of the Defendants’ contention that Mr Chan and Mr Kok were both aware of the existence of the cockloft and split-level design of the Property before the Provisional Agreement was signed and that they were also aware of “their possible legal consequences” as Mr Hui put it.  By that phrase, I understood the Defendants’ submission to be that both Mr Chan and Mr Kok were aware of the fact that the cockloft and split-level design were in fact unauthorised structures by reason of which the Defendants would not be able to show and give a good title to the Property (see above).  I have particularly considered the question of whether I should draw any adverse inferences from the failure of the Plaintiff to adduce evidence from Mr Paulo Ho to corroborate his beneficial ownership of the Plaintiff to the exclusion of Mr Kok or from Mr Kok to corroborate the nominee basis on which he was said to have acted.

47.  I have concluded, however, that there is no sufficient basis for accepting the submission that Mr Chan was lying in his evidence or that he was doing so to camouflage the fact that he and Mr Kok were both aware of the fact that the cockloft and split-level design of the Property were unauthorised structures.  I do not consider that there was any material discrepancy between Mr Chan’s oral evidence and his witness statement concerning what he saw when he first went to see the Property.  I find that Mr Chan did go to view the Property on 5 March 2004 after he was contacted by Ricky Yau with a view to buying the Property for the Plaintiff.  I further find that he did notice both the cockloft and the split-level design in the Property, the two features being in effect two parts of the same feature in the sense that it was because the floor level at the rear of the Property was lowered that there was sufficient room for the cockloft to be constructed.  However, I find that he was not aware that the cockloft and split-level design were unauthorised structures.  The mere existence of a cockloft and a split-level design in a property do not necessarily mean that those features are illegal structures.  I do not consider that Mr Chan was lying when he retracted his answer concerning what Ricky Yau told him about the Property: I accept that he was genuinely mistaken as to the question that led him to answer initially that Ricky Yau had mentioned the cockloft.

48.  I find that Mr Kok was not personally involved in the transaction and that his involvement in Guide Light and Brave Light Industries Limited is on a nominee basis for Mr Ho.  I accept Mr Chan’s evidence that he did not mention the cockloft and split-level design of the Property to Mr Kok when he spoke to him by telephone on 5 March 2004 to ask for a cheque for the initial deposit, nor did he ask Mr Kok for legal advice at that stage.  Even if he had, there is no reason to suppose that Mr Kok would have made any assumption as to the legality or otherwise of those features: it would simply have been premature for him to express any view on them before seeing the title deeds and plans.  The mere fact that Mr Kok is a solicitor who has acted in relation to property disputes involving unauthorised structures could not, in my view, have fixed him with knowledge that the particular cockloft and split-level design in this Property were unauthorised structures.

49.  In reaching these findings as to the Plaintiff’s state of knowledge, I have not overlooked the evidence of the 1st Defendant, Mr Chau Tak Hing (“Mr Chau”).  Mr Chau’s evidence was that he was aware that the cockloft and split-level design were unauthorised structures and had been so aware since the time he purchased the Property in 2002.  At the time of that transaction, he learned of that the cockloft and split-level design were unauthorised structures, as had Chan & Tsu who had acted for him when the Defendants purchased the Property.  He gave evidence, which I accept, that he informed Ricky Yau about the cockloft and split-level design by which I understood him to have told Ricky Yau that these were unauthorised structures.  I also accept that he requested Ricky Yau to tell the Plaintiff about this.

50.  However, I do not find that Ricky Yau ever told the Plaintiff that the cockloft and split-level design were unauthorised structures.  In addition to Mr Chan’s evidence that Ricky Yau did not do so, there are a number of other factors that lead me to this conclusion.  First, Mr Chau accepted in cross-examination that he told Ricky Yau that the cockloft and split-level design were unauthorised structures at a time when the Plaintiff had already signed the Provisional Agreement so that there would have been little incentive for Ricky Yau to have informed the Plaintiff.  Secondly, Mr Chau accepted he could not be sure that Ricky Yau had informed the Plaintiff of this fact and Mr Chau did not clarify with him whether he ever did so.  Thirdly, Ricky Yau was not called to give evidence to confirm that he had done what Mr Chau had asked him to do.  Finally, Mr Chau candidly accepted that he had never dealt with the Plaintiff, had never met him (by which I took him to mean Mr Chan), so that he did not know if the Plaintiff was aware that the cockloft and split-level design were unauthorised structures before the Provisional Agreement was signed.

51.  I should add that I do not accept Mr Chau’s evidence that because the staircase leading to the cockloft was a wooden structure it would have been obvious to someone inspecting the Property with a view to buying it that this was a structure for which permission had not been applied and that, because the shops adjacent to the Property did not have a split-level design, it should have been obvious that the split-level design was unauthorised.  When it was put to him in cross-examination that it was not possible to tell just by looking at the outward appearance of the cockloft and split-level design that no permission had been granted in respect of them, he responded that he had “no comment”.  He accepted that not all cocklofts were illegal structures; nor did he suggest that all split-level designs were illegal.

Is the implied term contended for to be implied in the Provisional Agreement to give it business efficacy?

52.  The Defendants’ case is that the implied term contended for should be implied into the Provisional Agreement in order to give it business efficacy.  As I understood the Defendants’ case, it was said to be necessary to imply the term in question into the contract because of the different stages of a conveyancing transaction in Hong Kong: the first stage being the signing of a provisional agreement and payment of initial deposit, which then leads on to the stage of the raising of requisitions in relation to title by the purchaser and the answering of the requisitions by the vendor, both of which stages might be before or after the signing of a formal sale and purchase agreement and then the final stage of completion.  Mr Hui submitted that the implication of the term of annulment contended for was necessary and reasonable in the present circumstances because there was no ‘escape’ clause in the Provisional Agreement enabling the Defendants to back out of the transaction by returning the initial deposit and an equivalent sum as liquidated damages at the requisitions stage.  He submitted that it would “flout common business sense” not to imply a right to annul the sale in circumstances in which the Plaintiff was entitled to raise requisitions regarding defects in title of which it was or should have been aware.

53.  It is well established that a term will not be implied into a contract unless it satisfies the test of necessity.  As to that, in Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. [1986] 1 AC 80, the Privy Council held (at 104H-105B):-

“Their Lordships agree with Cons J.A. that the test of implication is necessity.  As Lord Wilberforce put it in Liverpool City Council v. Irwin [1977] A.C. 239, 254:

‘such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less: a test, in other words, of necessity.’

Cons J.A. went on to quote an observation by Lord Salmon in the Liverpool case to the effect that the term sought to be implied must be one without which the whole transaction would become “inefficacious, futile and absurd” (p.262).

Their Lordships accept as correct the approach adopted by Cons J.A.  Their Lordships prefer it to that suggested by Hunter J. which was to ask the question: does the law impose the term?  Implication is the way in which necessary incidents come to be recognised in the absence of express agreement in a contractual relationship.  Imposition is apt to describe a duty arising in tort, but inept to describe the necessary incident arising from a contractual relationship.”

54.  I do not regard the implied term contended for as necessary in order for the Provisional Agreement to be workable.  The Defendants’ obligation under the Provisional Agreement is to show a good title to the Property and, upon completion, to give a good title to the Property by conveying it to the Plaintiff free from encumbrances.  There is no need, in order for this to occur, for the Defendants to have an option to cancel the contract in the event that they consider it inconvenient to do so.  In the circumstances of this case, which include my finding that the Plaintiff did not have knowledge of any defect in title by reason of the cockloft and split-level design in the Property, it is simply not the case that the Provisional Agreement is “inefficacious, futile or absurd” without the implied term contended for.

55.  I therefore do not consider that the implied term contended for must be implied to give business efficacy to the Provisional Agreement.

Is the implied term contended for to be implied in the Provisional Agreement on the basis of the “officious bystander” test?

56.  In cross-examination, Mr Chan acknowledged that he was experienced in property investment and that he had seen problems caused by unauthorised cocklofts.  He was aware that they could cause financial loss.  He said that, had he known that the cockloft and split-level design in the present case were unauthorised, he would not have purchased the Property.

57.  It was submitted by Mr Hui that, in the light of Mr Chan’s evidence and the fact that the Defendants were aware that the cockloft and split-level design were in fact unauthorised, both parties would have agreed that the implied term contended for was so obvious that it went without saying.  He submitted that the fact that Mr Chau informed Ricky Yau that the cockloft and split-level design were unauthorised structures showed that he wanted to sell the Property “without troubles”.  Hence, it was argued that the implied term contended for satisfied the “officious bystander” test propounded by MacKinnon LJ in Shirlaw v. Southern Foundries Ltd. [1939] 2 KB 206 at 227.

58.  Mr Hui referred also to the fact that in the draft formal sale and purchase agreement, the parties had incorporated a vendor rescission clause in the same terms as the implied term contended for.  Although he acknowledged that this was not direct evidence of the parties’ intentions at the time when they entered into the Provisional Agreement, it did reflect their presumed intentions at that time.

59.  I do not agree that the “officious bystander” test is satisfied in the present case.  The implied term contended for is not, in my view, a straightforward and simply expressed term that the parties would, if asked at the time they signed the Provisional Agreement, have obviously assented to.  Even if it were more simply expressed, I do not consider that it is obvious in the circumstances that the Plaintiff would have agreed to its inclusion.  When Mr Chan said in cross-examination that, had he known the cockloft and split-level design in the Property were unauthorised structures, he would not have purchased the Property, I understood his answer to mean that he would not have accepted the conveyance of the Property with the unauthorised structures as the conveyance of a good title to the Property.  I do not consider that I can or should read into his answer in cross-examination an intention on his part that, should the Defendants find it onerous or inconvenient to give good title to the Property, they should be entitled to a right of annulment.

60.  In order to discern the parties’ presumed intentions, I must look to the express words in the Provisional Agreement.  There, the Defendants agreed to sell the Property free from encumbrances; the normal ‘escape’ clause, which would have enabled the Defendants to back out of the transaction, was expressly deleted.  In my judgment, this evidence of the parties’ presumed intentions outweighs any inference that might be drawn from the subsequent fact that the parties might have executed a formal agreement that included a vendor rescission clause.

61.  I therefore do not consider that the implied term contended for must be implied in the Provisional Agreement on the basis of the “officious bystander” test.

Is the implied term contended for to be implied on the basis that this was an “incomplete contract”?

62.  In Twinkle Step Investment Ltd. v. Smart International Industrial Ltd. (1999) 2 HKCFAR 255, the Court of Final Appeal held that there was an implied term in a contract of sale of land that the purchaser is entitled, for the purpose of ascertaining whether the vendor is delivering vacant possession, to view the premises immediately before he pays the balance of the purchase price at completion.  As to the basis of the implication, Bokhary PJ held:-

“In circumstances such as the present, the test is the one articulated by Lord Wilberforce in Liverpool City Council v. Irwin [1977] AC 239 at p.254A-B when he famously spoke of ‘a fourth shade on a continuous spectrum’ of the contractual terms implied by the courts.  Under this test, the question is whether the term contended for is one which the Court must imply in order to establish what the contract is, the parties themselves not having fully stated the terms of their contract.”

63.  Mr Hui submitted that the implied term contended for should similarly be implied on the above basis into the Provisional Agreement because it was an incomplete contract.  This submission was again based on the evidence, referred to above, that Mr Chau wanted to sell the Property without the purchaser having a right to complain about the cockloft or split-level design and that Mr Chan would not have wanted to purchase the Property if he had known there were unauthorised structures in it.  This evidence was said to reflect the parties’ intentions and therefore, it was submitted, the Provisional Agreement required the implied term contended for in order to make it complete.

64.  I do not consider that the Provisional Agreement was an incomplete contract.  The terms of that agreement are clear enough and, even if the parties were not to go on to execute a formal sale and purchase agreement, the terms of the Provisional Agreement would be sufficient for its purpose of achieving the sale of the Property by the Defendants to the Plaintiff.  I do not regard the evidence as supporting the contention that the parties’ intentions were that the Defendants should have a right to annul the sale in the circumstances.  It does not appear that the point was considered by either Mr Chau or Mr Chan.  I am by no means satisfied that, had Mr Chan been asked to consider it, he would have agreed that when he entered into the Provisional Agreement he intended that, should the cockloft and split-level design be unauthorised structures, the Defendants should have a right to annul the sale.  In short, the evidence does not support the contention that the parties intended that the Provisional Agreement should include the implied term in question.

65.  I therefore do not consider that the implied term contended for should be implied in the Provisional Agreement on the basis that it is an “incomplete contract”.

The implied term contended for is contrary to an express term of the Provsional Agreement

66.  It is trite that an implied term must not contradict any express term of the contract: see Lewison: The Interpretation of Contracts (3rd Ed., 2004) §6.08 (pp.170-171).  To imply the term contended for in the present case would, in my view, be to imply a term that was inconsistent with the express provision in clause 3 of the Provisional Agreement, namely that “[t]he said premises is to be sold to the Purchaser or its nominee(s), sub-purchaser(s) free from encumbrances”.  I do not agree with the Defendants’ submission that this is concerned with a different matter at a different stage of the conveyancing transaction.  A contract must be complete at the time it is made.  When the Provisional Agreement was signed, the Defendants undertook to convey the Property free from encumbrances.  The fact that the conveyance of the Property would take place at the end of the process, in terms of time, does not mean, in my opinion, that it is necessary to imply a right to back out of the transaction at an earlier stage in time just because the obligation to convey the Property free from encumbrances might have become onerous or inconvenient.

67.  I would add, moreover, that even if (contrary to my finding above) the Plaintiff knew that the cockloft and split-level design constituted unauthorised structures, the Defendants were, by clause 3, expressly obliged to convey the Property “free from encumbrances”.  In the circumstances, notice of the defect in title on the part of the Plaintiff would not relieve the Defendants of the obligation to give good title: see Giant River Ltd. v. Asie Marketing Ltd. (supra) at 312H-313B where Deputy Judge Cruden said:-

“A 19th century high water mark of the protection given by Courts to purchasers, which has remained good law ever since, was reached in the case of In re Gloag and Miller’s Contract (1883) 23 Ch D 320 where it was held that if the contract, as here, expressly provides that a good title shall be shown, the purchaser is entitled to insist on a good title, notwithstanding that before execution of the agreement, he had notice of defects in the vendor’s title.  As to whether after the agreement is executed acts of the purchaser can amount to waiver Fry, J., made a distinction between objections removable by the vendor and those which are irremovable.

Cato v. Thompson (1882) 9 QBD 616 is another case where the Court of Appeal applied the same principle.  The purchaser bought freehold property and in terms of the contract the vendor had to make a good marketable title.  The title on the date for completion was subject to restrictive covenants which precluded the vendor from showing a good marketable title.  There was evidence that when the contract was signed the purchaser knew of the restrictive covenants.  The Court of Appeal held that whether the purchaser had such knowledge was irrelevant because the vendor had contracted to make a good marketable title and the obligation was contractually on him to take such steps as were necessary so as to provide, on the date for completion, a good marketable title.”

68.  The implied term contended for would therefore be contradictory to the express requirement on the part of the Defendants pursuant to clause 3 of the Provisional Agreement to convey the Property free from encumbrances and, for this additional reason, I hold that the implied term contended for is not to be implied into the Provisional Agreement.

Conclusion as to liability

69.  For the reasons set out above, I hold that there was no implied term in the Provisional Agreement entitling the Defendants to annul that agreement.  Accordingly, the Defendants’ Memorandum of Annulment dated 15 April 2004 was ineffective to annul the Provisional Agreement.  Instead, the service of that Memorandum amounted to a repudiatory breach of the Provisional Agreement.

70.  The Plaintiff is accordingly entitled to a declaration that the cockloft and the split-level design constitute an illegal structure and/or unauthorised building works or alterations giving rise to a real risk of enforcement action by the Building Authority and therefore a defect in the title of the Property.

71.  In the circumstances, the Plaintiff was entitled either to accept the repudiation and bring the Provisional Agreement to an end or to keep the contract alive and sue for specific performance as it has by the present action.  It is now necessary to consider whether specific performance should be ordered (and if so, on what basis) or whether the Plaintiff should instead be awarded damages in lieu.

Appropriate remedy

72.  It was common ground between the parties that, in the event the Court were to find in favour of the Plaintiff on the issue of liability, the Court would have a discretion to grant an order for specific performance of the Provisional Agreement.  The Provisional Agreement being a contract for the sale of land, it is right that, unless the Defendants establish one of the discretionary bars to it, specific performance is the appropriate remedy.

73.  As to whether or not the Court should grant specific performance, the only basis on which the Defendants contended that specific performance should not be granted was on the ground that the Plaintiff did not come to Court with “clean hands”.  The basis for this contention was the Defendants’ submission that the Plaintiff was aware of the existence of the cockloft and the split-level design and was also aware that these were unauthorised structures before signing the Provisional Agreement.  As I have found that the Plaintiff did not know that the cockloft and split-level design of the Property constituted unauthorised structures before signing the Provisional Agreement (see above), there is no basis for concluding that the Plaintiff has come to Court with “unclean” hands and so I reject this argument as a basis for refusing specific performance and restricting the Plaintiff to damages in lieu.

74.  As noted above, the Plaintiff’s two alternative claims for specific performance were:-

(1)	Specific performance of the Provisional Agreement subject to the reinstatement of the Property by the removal of the cockloft and the split-level design together with compensation (in the form of an abatement of the purchase price to reflect the loss of usable area due to reinstatement) and/or damages (for loss of use of the Property since the date of completion); or
(2)	Alternatively, specific performance of the Provisional Agreement without reinstatement together with compensation (in the form of an abatement of the purchase price to reflect the reduction in the value of the Property by reason of the cockloft and split-level design being illegal structures) and/or damages (for loss of use of the Property since the date of completion).

75.  The Property is presently tenanted by a Ms Ng pursuant to a lease which will not expire until 30 April 2006.  Mr Chau’s evidence, which I accept, is that it will be disruptive to Ms Ng for the Property to be reinstated by the removal of the cockloft and split-level design.  His evidence was that she has stock in the Property and is operating her business there.  Ms Tong submitted that there was no evidence of any hardship to Ms Ng if reinstatement were to be ordered.  I do not agree.  Although Ms Ng might have been called to give evidence to confirm this fact, I think it is a reasonable inference from the available evidence that the removal of the cockloft and split-level design would be disruptive to her and her business.  As such, I decline to order specific performance of the Provisional Agreement with reinstatement by the removal of the cockloft and split-level design.  Instead, I propose to order specific performance on the alternative basis sought by the Plaintiff, namely specific performance without reinstatement.

Compensation in addition to specific performance by reason of the defective title

76.  It was also common ground between the parties that the Court could award compensation in addition to specific performance in the event the Plaintiff was not adequately compensated by an order for specific performance by reason of the defective title to the Property constituted by the presence of the unauthorised structures.  The availability of such compensation in an action by a purchaser for specific performance, by way of an abatement of the purchase price, is well supported: see Jones & Goodhart: Specific Performance (2^nd Ed.) pp. 275-276 & 293-295, Spry: The Principles of Equitable Remedies (6^th Ed.) pp. 302 & 307-308, and Topfell Ltd. v. Galley Properties Ltd. [1979] 2 All ER 388.  As noted above, the Plaintiff sought compensation on two alternative bases depending on which basis an order for specific performance were to be made.  As I have determined that an order for specific performance should be made on the basis of no reinstatement of the Property by the removal of the cockloft and split-level design, the appropriate amount of compensation should be such as to represent the reduction in the value of the Property by reason of the cockloft and split-level design being illegal structures.

77.  I should add, in this context, that it was also common ground between the parties that the date of assessment of any compensation to be awarded in addition to specific performance should be the date of judgment.

78.  Both parties adduced expert valuation evidence in respect of the Property.  The Plaintiff’s expert was Mr Memfus Wong of Memfus Wong Surveyors Limited, who adopted the report dated 11 March 2005 of his colleague, Ms Sat Wei-ling.  The latter was unable to give evidence for the Plaintiff due to reasons of ill-health.  Mr Wong also prepared a supplemental valuation report dated 15 November 2004.  The Defendant’s expert was Mr Alfred Ngo of CS Surveyors Limited, who prepared three valuation reports dated 26 May 2005, 21 November 2005 and 25 November 2005.

79.  Before commenting on the evidence of the parties’ respective experts, it is convenient to indicate the amounts claimed by the Plaintiff based on the valuations of the Property proffered by its expert, Mr Wong.

(1)	In the event that specific performance with reinstatement was to be ordered (which I decline to order), the Plaintiff claimed compensation in the amount of the difference between the open market value of the Property as at November 2005 (with the unauthorised structures but assuming them to be authorised) less the open market value of the Property as at November 2005 (without the unauthorised structures, i.e. after reinstatement).  According to Mr Wong, the former value is $9,160,000 whilst the latter value is $8,625,000 producing a difference of $535,000.
(2)	In the event that specific performance without reinstatement was to be ordered (which is the order I propose to grant), the Plaintiff claimed compensation in the amount of the difference between the open market value of the Property as at November 2005 (with the unauthorised structures but assuming them to be authorised) less the open market value of the Property as at November 2005 (with the unauthorised structures, i.e. no reinstatement).  As noted above, Mr Wong opined that the former value is $9,160,000 and his opinion was that the latter value is $8,590,000 producing a difference of $570,000.

80.  In contrast, the Defendant contended that the valuations of Mr Ngo, which were lower than those of Mr Wong, should be used in the calculation of compensation.  Mr Wong opined that the current market value of the Property on the assumption that the cockloft and split-level design were authorised is $8,300,000.  He opined that the current market value of the Property without the cockloft and split-level design is $7,570,000.  As I understood Mr Hui, the Defendant’s contention was that, if specific performance was ordered without reinstatement, no compensation should be awarded in addition to specific performance since the value of the Property had increased since the date of the Provisional Agreement (§18 of the Defendants’ written closing submission in respect of quantum).  When questioned on whether this contention was really tenable (and I do not think it is), I understood Mr Hui’s fallback argument to be that the amount of any compensation in addition to specific performance should be the difference between the two valuation figures of Mr Ngo reflecting the value of the cockloft and split-level design, namely the sum of $730,000.

81.  It will be immediately apparent that, ironically, if compensation is to be awarded by reference to the difference in the estimated values of the Property with and without the unauthorised structures, there is in fact no advantage to the Defendant in the Court preferring Mr Ngo’s valuations to those of Mr Wong: on Mr Wong’s calculations, the compensation would be $570,000, whereas on Mr Ngo’s calculations, the compensation would be $730,000.

82.  The Plaintiff did not invite me to disregard Mr Wong’s valuations and instead to prefer Mr Ngo’s valuations.  Accordingly, there is strictly no need for me to express a view as to which expert’s opinions as to value I prefer.  However, for the sake of completeness, I propose to indicate briefly why, had it been necessary for me to decide between them, I would have preferred the evidence of Mr Wong to that of Mr Ngo.

83.  I was impressed with the clarity and cogency of the evidence of Mr Wong, who has 28 years experience in the valuation of properties in Hong Kong.  Although Mr Ngo also has considerable valuation experience, of over 12 years, there were a number of respects in which I considered his evidence to be less reliable than that of Mr Wong: (i) he accepted that he made a number of mistakes in calculating time adjustments to various of his comparables in his 1st report due to having not used the appropriate versions of the retail price indices published by the Rating and Valuation Department; (ii) it appeared that he ignored the elements of headroom and visibility in making adjustments to the comparables he used in his reports; (iii) I consider that he gave too much weight to comparable 2 in Appendix D2 to his 1st report; (iv) there seemed to be an inconsistency between his 1st report and his 3rd report in respect of his taking into account the time factor in determining the weightings of his comparables; (v) I do not think his location adjustments for comparables 3 and 4 in Appendix II to his 3rd report were sufficient; (vi) I prefer Mr Wong’s view that an adjustment for layout ought to be made using the “halving-back” principle and this was not done by Mr Ngo in relation to his comparables; (vii) I was doubtful that he made due adjustment for layout in respect of the comparables used in his three reports (correspondingly, I do not think that Mr Wong’s adjustments suffered from the vice of double-counting as suggested by Mr Ngo).

84.  In the circumstances, I consider that the appropriate amount of compensation to be awarded to the Plaintiff in addition to specific performance is the sum of $570,000 to reflect the diminution in the value of the Property by reason of the presence of the unauthorised structures which it will most likely be liable to remove in the future so that it will be left with a much smaller property than it had originally contracted to purchase.

Compensation in addition to specific performance: loss of use of the Property

85.  The Plaintiff also claims damages for loss of use of the Property from the date on which the sale transaction should have been completed until the actual date when the Property is conveyed pursuant to an order for specific performance.  The Plaintiff’s claim for damages for loss of use was quantified on the basis of Mr Ngo’s assessment of the current market rental of the Property without the cockloft and split-level design, which he assessed to be $39,130 per month (being the current market rental of $43,000 per month less 9% to reflect the cockloft and split-level design).  Thus, the Plaintiff claims $39,130 per month for loss of use as from 30 June 2004 and continuing until the actual date when the Property is conveyed pursuant to an order for specific performance.

86.  Although it was not disputed by the Defendants that the Plaintiff could maintain a claim for damages for loss of enjoyment of the Property, it remains for the Court to be satisfied that such an award is appropriate both as a matter of principle and on the evidence adduced.  As a matter of principle, a claim for loss of use of the Property is certainly maintainable by the Plaintiff: see McGregor on Damages (17^th Ed.) para. 22-041.  However, the proof of such a claim is not, in my judgment, simply a matter of calculating the rent which would have been payable to the Plaintiff as from the original date of completion until the date when the Property is actually conveyed pursuant to an order for specific performance.  It remains necessary, in my view, for the Plaintiff to establish by evidence the actual loss suffered by it as a result of the delay in the conveyance of the Property to it.

87.  Other than the payment of the initial deposit in the sum of $300,000, the Plaintiff has not yet expended the purchase price for the Property.  The Plaintiff was purchasing the Property for investment purposes and not for its own use.  No evidence was led as to whether the Plaintiff was proposing to fund the purchase from available cash or by way of borrowed funds and, if the latter, on what terms such funds would be borrowed.  If it was going to borrow the funds, there was no evidence as to the interest liability it would incur on such borrowed funds.  If the purchase was going to be financed by borrowed funds, the Plaintiff would receive a windfall if damages were to be awarded on the basis claimed by the Plaintiff without taking into account its costs of borrowing.  If, on the other hand, the purchase was going to be financed out of available cash, it would similarly give the Plaintiff a windfall if damages were to be awarded on the basis claimed by the Plaintiff without taking into account the sums earned by the Plaintiff on the alternative use or uses to which such cash has or could have been put in the meantime.

88.  In my opinion, absent evidence to show what net loss has actually been caused by reason of the delay from the original date of completion to the date when the Property is actually conveyed pursuant to an order for specific performance, it would be inappropriate to make an award of damages under this head simply on the basis of the rental value of the Property, as claimed by the Plaintiff.  However, that does not mean that the Plaintiff’s claim under this head should be dismissed: to do that would be to assume, without any proper evidential basis, that the Plaintiff’s net loss would be nil.  The Plaintiff’s Amended Statement of Claim seeks damages “to be assessed” and includes a claim for “[a]ll necessary and consequential assessments” and so I therefore propose to direct that the Plaintiff’s claim for loss of use be directed to be assessed by a master in order to determine what sum should be set off against the rent that would have been earned if the Property were conveyed to the Plaintiff on the original completion date.  That sum will likely be either the interest cost that would have been incurred by the Plaintiff, if it was going to fund the purchase by way of borrowed funds, or the interest it would have earned on its capital, if it was going to fund the purchase by way of available cash.  I would note that this course, of directing an assessment of damages by a master, was adopted by Keith J in Wellfit Investments Limited v. Poly Commence Limited, HCA No.A8737 of 1990, unrep., 8.1.96.

89.  Although the assessment of the Plaintiff’s loss of use will therefore be a matter for the master to assess, it is appropriate that I indicate my view on the rental value proposed by the Plaintiff as the basis for its claim for loss of use.  In my opinion, the appropriate basis for an award of damages for loss of use in the present case should be the likely achievable rent during the relevant period of delay from 30 June 2004 on the footing that what was conveyed to the Plaintiff was the Property without the unauthorised structures: after all, had the Property been conveyed with a good title, the cockloft and split-level design would have needed to be removed.  The Property was to have been sold subject to the tenancy in favour of Ms Ng for the period 1 May 2004 to 30 April 2006 under which the monthly rental payable is $40,000 (and not $43,000, which is the current rental value).  The evidence of Mr Ngo is that a reduction of 9% in the monthly rental is appropriate to reflect the removal of the cockloft and split-level design from the Property.  If a 9% reduction were applied to the figure of $40,000, the result would be $36,400.  If I had been able to assess the Plaintiff’s loss of use, I would have adopted this monthly rental value of $36,400, rather than $39,130 as claimed by the Plaintiff, as the appropriate figure to be used as a starting point in calculating the net figure to be awarded to the Plaintiff by way of damages for loss of use during the relevant period of delay.  However, as I have stated, this is a matter for the master conducting the assessment.

Conclusion

90.  On the Plaintiff’s claim, I therefore grant the declaration sought, namely a declaration that the cockloft and the split-level design constitute an illegal structure and/or unauthorised building works or alterations giving rise to a real risk of enforcement action by the Building Authority and therefore a defect in the title of the Property.

91.  I grant an order for specific performance of the Provisional Agreement without reinstatement of the cockloft and split-level design but I award compensation in addition to specific performance in the sum of $570,000.  As to the form of the order, I direct the parties to liaise with a view to agreeing an order incorporating all necessary and proper steps to achieve the completion of the sale and purchase pursuant to the Provisional Agreement.  In the event that agreement on the form of the order cannot be reached, the parties will, of course, have liberty to apply.

92.  I direct that the Plaintiff’s damages for loss of use of the Property for the period from 30 June 2004 until the date when the Property is actually conveyed to it pursuant to the order for specific performance be assessed by a master.  As the Plaintiff has also claimed interest, such assessment should also determine the period and rate for which any interest should be payable upon such damages for loss of use.

93.  I dismiss the Defendants’ counterclaim.

Costs

94.  I see no reason why the Defendants should not pay the Plaintiff its costs of this action to be taxed, if not agreed, and I make an order nisi to that effect.

[1]   Although it was common ground in the parties’ pleadings that the date for completion in the Provisional Agreement was 25 June 2004, it would appear that the date actually agreed for completion was 30 June 2004: the original completion date in the Provisional Agreement was 25 June 2004 but this date was amended to 30 June 2004 and the parties appear to have agreed to this change of date by initialling next to the amendment.