STRONG & ASSOCIATES LTD. v. FLYWIN COMPANY LTD.

CACV 40/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 40 OF 2001

(ON APPEAL FROM HCA NO. A5309 OF 1998)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1. This is an appeal from the order dated 14 December 2000 declaring that the plaintiff/purchaser had wrongfully repudiated the formal agreement dated 29 October 1997 for the sale and purchase of the ground floor and cockloft of No. 53 Granville Road, Kowloon ("the property") and that the defendant/vendor was entitled to forfeit the deposit of $9.555 million. The appeal was allowed at the conclusion of the hearing. My reasons appear below.

The provisional agreement

2. On 20 August 1997, the plaintiff entered into a provisional agreement for the purchase of the property from the defendant who was selling as confirmor for $63.7 million. Prior thereto, it had been provided with a copy of the approved plans and Mr Wong a director of the plaintiff company had, on his own, twice briefly visited the ground floor of the property but not the cockloft. The initial deposit of $1.5 million was paid upon the signing of the provisional agreement. A further deposit of $8.055 million was payable on 11 September 1997 upon the signing of the formal agreement. Completion was scheduled for 3 April 1998, almost 8 months later. The property was to be sold "free from encumbrances" (clause 3) and the sale was subject to an existing tenancy at a monthly rent of $225,000, the lease terminating on 9 July 1998 (clauses 4 and 14). The rider to the provisional agreement referred to the fact that under the approved building plan, the ground floor was designated as "shop" whilst under the Occupation Permit, the property was for domestic use. It contained an acknowledgement by the purchaser that the property was now being used by the tenant as a shop and that no warranty was given by the vendor on the existing use of the property.

Events after the date of the provisional agreement

3. On 29 October 1997, the parties executed a formal agreement. However, that did no more than incorporate the terms of the provisional agreement. The reason was simply that despite lengthy negotiations, the parties were unable to reach agreement. A brief chronology of events is set out below.

4. On 26 August, the defendant's solicitors sent the title deeds for approval. On 29 August, the plaintiff's solicitors raised seven requisitions on title.

5. On 1 September, the defendant's solicitors sent a draft of the formal agreement to the plaintiff's solicitors. Clauses 7, 9 and 10 were designed to exclude the defendant from any liability arising out of unauthorised structures. Clause 7 was an acknowledgement that the purchaser was entering into the agreement on the basis of his own inspection and not in reliance on any representation or warranty. Clause 9 excluded any warranty on the part of the vendor that the property complied with the Buildings Ordinance. Clause 10 was an acknowledgement by the purchaser of advice from its own solicitors to employ an authorised person to advise on the existence of unauthorised structures and, in any event, a waiver by the purchaser of any claims arising from the existence of such structures.

6. 11 September, which was the date envisaged by the provisional agreement for the signing of the formal agreement, came and went without any formal agreement being signed because the parties were still negotiating its terms although the additional deposit stipulated for was paid. On the same day, the plaintiff's solicitors returned the draft to the defendant's solicitors with proposed amendments, suggesting the postponement of the signing of the formal agreement to 15 September. The defendant's solicitors made counter amendments on 13 September, asserting that as the plaintiff had already inspected the property and fully understood its state and condition, no warranty would be given by the defendant relating to the state, condition and structure of the property.

7. On 18 September, in relation to Clauses 7, 9 and 10, the defendant's solicitors reiterated their client's position spelt out on 13 September. The letter then went on to say this:

"Our client is given to understand that certain alteration works have been done to the property. However, she does not have the exact details of the alteration. We hereby give your formal notice that your client is allowed to rescind the Provisional Agreement within 7 days from the date hereof for the reason of the existence of the alteration works which may or may not be authorized by the relevant authorities. Your client may within such period employ an authorised person to check the approved plan and to rescind the Provisional Agreement should it be discovered that there is any unauthorised structure or alteration. In the event of our or our client not having received your notice for rescission within 7 days from the date hereof, your client shall be deemed to have agreed to purchase the above premises notwithstanding the existence of the alteration works and our Clauses 7, 9 and 10 should be retained in the Agreement for Sale and Purchase."

As will become apparent, this letter ("the 18 September letter") features prominently in the defendant's submissions.

8. On the following day, the plaintiff's solicitors wrote to the effect that those clauses would leave the plaintiff in a less favourable position than under the provisional agreement. They rejected the defendant's proposal and, specifically, denied that any failure to respond to the defendant's 'formal notice' would amount to an agreement to purchase the property 'notwithstanding the existence of alteration works'.

9. As the parties could not agree the terms of the formal agreement, on 22 September, the defendant's solicitors forwarded a formal agreement merely incorporating the terms of the provisional agreement "in order to comply with the terms of the provisional agreement". Further correspondence ensued and the formal agreement was eventually signed on 29 October. It contained no provisions relating to requisitions or the time for making them and clauses 7, 9 and 10 of the draft agreement, referred to in paragraph 5 above, never formed part of it.

10. The plaintiff's architect carried out an inspection of the property on 20 February 1998. Its report dated 27 February was forwarded to the defendant's solicitors on 2 March and requisitions were raised by the plaintiff on the unauthorised structures identified in the report. The defendant claimed that the plaintiff had agreed to purchase the property notwithstanding the unauthorised structures, referring to the 18 September letter but offered "to remove the extension portion at [the defendant's] own costs in order to avoid any further argument upon the expiration of the existing tenancy." As the completion date preceded the expiration of the lease by some three months, this was not acceptable to the plaintiff who in turn offered to extend completion to 3 June. This the defendant rejected.

11. Completion did not take place on 3 April 1998. On that day, the plaintiff issued its writ. By its amended statement of claim, the plaintiff sought a declaration that the defect in title relieved it of all liability under the agreement and sought repayment of the deposits paid totalling $9.555 million.

12. The judge held that given the state of Mr Wong's knowledge at that time, the signing of the formal agreement amounted to a waiver of the right to raise requisitions to the alterations. He also held that the plaintiff was estopped from objecting to the unauthorised structures.

The vendor's duty to give good title

13. In the course of this appeal, counsel for the defendant conceded that under that the provisional agreement, there was an implied duty on the defendant as vendor to give good title and abandoned any argument to the effect that the duty had been modified in any way at the time the parties entered into the provisional agreement. So, for the purpose of this appeal, the starting point is that under the provisional agreement which was binding on the parties, the burden was on the defendant to make and show a good title.

14. As is apparent from the chronology of events set out above, the parties could not agree on provisions proposed by the defendant that would have varied the implied duty of the vendor to give good title. There was, thus, no consensual variation to the vendor's obligation subsisting under the provisional agreement which was simply carried through to the formal agreement.

15. It is common ground that there were unauthorised structures on the property which would be subject to enforcement action such as would prevent the defendant from giving good title to the property. Counsel for the defendant nevertheless submitted that the plaintiff had waived its entitlement to good title and that it was estopped from raising objections to the unauthorised structures. He relied upon the following matters in support:

(i) the plaintiff's knowledge of the unauthorised structures gained from inspection of the property;

(ii) the 18 September letter;

(iii) the failure of the plaintiff to raise any requisitions on the unauthorised structures within a reasonable time.

The issues arising in this appeal are thus waiver and estoppel. However, I will deal first with a preliminary matter pertaining to the plaintiff's knowledge.

16. Counsel for the defendant referred to Timmins v Moreland Street Property Co. Ltd. [1958] 1 Ch 110, 121 where Jenkins LJ cited with approval observations made by Fry J In Re Gloag and Miller's Contract (1883) 23 Ch D 320, 327:

"When the contract is silent as to the title which is to be shown by the vendor, and the purchaser's right to a good title is merely implied by law, that legal implication may be rebutted by showing that the purchaser had notice before the contract that the vendor could not give a good title." (emphasis added)

17. I do not see how those observations can assist the defendant given the concession made that the defendant's obligation under the provisional agreement was to give good title. As at 18 September, the defendant's own knowledge was no more than that there were alterations, some of which may not have been authorised. The fact that this knowledge was conveyed to the plaintiff on 18 September does not take matters further. Knowledge acquired after the date of the provisional agreement could not alter the obligation to give good title which had already crystallised. Likewise, the fact that by the time of the receipt of the 18 September letter it was obvious to Mr Wong of the plaintiff that the overwhelming likelihood was that there must have been some sort of alterations and extensions is of no consequence.

Waiver

18. It was submitted that there was unequivocal conduct on the part of the plaintiff from which an inference could be drawn that it had waived its right to object to the title. The defendant referred to correspondence passing between the parties' solicitors after the date of provisional agreement and drew attention to the fact that the plaintiff had been actively looking into the question of alterations to the ground floor and had raised requisitions including one about certain partitioning as early as 29 August 1997 and that these requisitions had all been answered by late September 1997. No requisition as to unauthorised structures was raised until 2 March 1998, more than six months after the date of the provisional agreement and five months after the initial requisitions raised had been answered. In the circumstances, it was submitted that the omission to raise a requisition as to unauthorised alterations within a reasonable time amounted to conduct from which an inference of waiver could be drawn. The defendant's case was also put on the basis that the requisition was made too late inasmuch as there was a duty upon the plaintiff to raise requisitions within a reasonable time of its having been informed that there were alterations to the property some of which might not have been authorised.

19. For my part, I have considerable difficulty with the submission. First, I do not agree that there was an obligation upon the plaintiff to raise requisitions simply because it was informed by the vendor that some of the alterations might be unauthorised. Insofar as it may be suggested that the purchaser has a positive duty to ascertain whether or not unauthorised structures exist, it is wrong. The legal burden is on the defendant to give a good title. To hold that the purchaser is under such an obligation would effectively reverse the legal burden for giving good title in contracts for the sale and purchase of land. It was open to the defendant to have made express provisions to exclude liability for unauthorised structures in the provisional agreement as it had done in relation to the user of the property, but it failed to do so. It cannot seek to rectify that omission by casting the burden on the purchaser. Second, even assuming, for present purposes, that there was such a duty and a requisition as to unauthorised structures should have been raised earlier, I ask rhetorically, what difference would that answer have made? The defendant's knowledge appears from the letter of 18 September. All it knew was that there were alterations some of which might have been unauthorised. I do not see how its answer would have altered matters. Third, whilst I agree that the requisitions have to be raised within a reasonable time, I do not agree that what is a reasonable time is to be computed by reference to its being given notice of the fact of some alterations which may be unauthorised rather than by reference to the completion date. See Chan Chik Sum v Great Pearl Industries Ltd [1997] 1 HKC 27 at 31I. What is a reasonable time would depend on the facts of the particular case. In the present case, it was raised four weeks before completion and, furthermore, the plaintiff's offer to extend the completion date to 3 June to enable the defendant the make good its title to the property was rejected. On the facts, there is no basis for concluding that the requisition was raised too late. So, despite the very lengthy submissions made during the hearing on the subject of requisitions, its relevance escapes me.

20. As a further indication that the execution of the formal agreement could not be unequivocal conduct showing that the requirement to give good title had been waived, it should be noted that the contract here remained capable of complete performance by the defendant as at that date. The defendant could, in the interim period between the formal agreement and the scheduled completion date, have demolished the unauthorised building works so as to render the title unobjectionable. There was no indication from it that it would not do so. Therefore, where the agreement remained capable of complete performance by the defendant as at the date of the formal agreement, it could not be that the plaintiff's act of signing the formal agreement amounted to unequivocal conduct that it would accept a bad title at completion.

21. I have no hesitation in concluding that the requisition as to unauthorised structures was not raised out of time and the matters relied on by the defendant do not remotely make out a case of waiver.

Estoppel

22. The estoppel argument must stand or fall with the waiver argument.

23. I would also add this. An essential ingredient of estoppel is that the person claiming it has incurred expenditure or otherwise prejudiced himself or acted to his detriment. The defendant's contention was that it had relied on the plaintiff's intention not to raise any requisition as to unauthorised structures and suffered detriment by not breaking its contract earlier and selling to another buyer in a rising market. It is, to say the least, a remarkable submission that in order to establish detriment, the person setting up estoppel has to do so on the basis that he suffered detriment by refraining to commit a wrongful act (i.e. a breach of contract). In any event, it is misconceived inasmuch as it was premised on there being a difference between the higher market price at the date of the breach and the amount of damages recoverable by the purchaser, the assumption being that the rule in Bain v Fothergill (1874-75) LR 7 HL 158 applies. This court has recently held that the rule in Bain v Fothergill is not applicable in Hong Kong. See Grand Trade Development Ltd v Bonance International Ltd [2001] 2 HKLRD 759. So, apart from anything else, the defendant's inability to show detriment would be fatal to any defence based on estoppel.

Conclusion

24. For the reasons stated, the appeal must be allowed with costs here and below and the judgment below set aside. The parties are to submit agreed minutes of order for approval within 14 days of these Reasons with liberty to restore.

Hon Yuen J:

25. I agree.

Hon Rogers VP:

26. I agree with the reasons given by Le Pichon JA and the directions that she proposes.