DARTON LTD. v. HONG KONG ISLAND DEVELOPMENT LTD.

CACV146/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 146 OF 2001

(ON APPEAL FROM DCCJ 15672 OF 2001)

______________________________________

______________________________________

_______________

J U D G M E N T

_______________

Hon Le Pichon JA:

1. This is an appeal by the plaintiff from an order dated 28 December 2000 made by Judge Li. The action was transferred from the Court of First Instance to the District Court by order dated 16 October 2000.

2. The Order 14A application sought the determination of the question whether the defendant had provided any consideration in return for a deposit of $302,118 paid by the plaintiff to the defendant pursuant to an agreement contained in a letter dated 6 April 2000 from the defendant to the plaintiff and signed by the plaintiff on 11 April 2000, and in the event of the question being answered that the defendant had not provided consideration, that judgment be entered for the plaintiff against the defendant for the amount claimed in the statement of claim with interest and costs, and in the event of the question being answered that the defendant had provided consideration for the deposit, that the action be dismissed with costs to the defendant, or alternatively, under Order 14 for trial judgment in the action against the defendant for the amount claimed with interest and costs.

3. The judge left the question for determination unanswered but dismissed the plaintiff's summons with costs. It would appear that this might have been an error and what he meant to dismiss was the action itself, having regard to the reasons contained in his judgment. But as matters stand, the action is still extant.

4. In the action, the plaintiff sought repayment of the deposit on the basis of money had and received. Its claim arose in this way. The defendant is and was at all material times the landlord of an office building known as AIA Tower. In March 2000, there were negotiations between the plaintiff and the defendant for a lease of Rooms 1508-1509 ("the premises") of the building. At that time, the plaintiff was already the tenant of other rooms on the same floor, namely, Rooms 1510-1512 and 1507. On 6 April 2000, the defendant wrote to the plaintiff concerning the new letting. The letter which was headed "Subject to Contract & Availability" read:

"Further to the letter (Ref. KLR/L016/NWOB/SA) dated 21st March 2000 from your agent 'Kiu Lok International Realty Ltd', we are prepared to offer you on a subject to contract basis a tenancy of the above premises on the following terms and conditions:-

..." (emphasis added)

The terms and conditions were fairly detailed and related to matters that one would expect to find in a typical lease agreement such as the payment of a deposit. For present purposes, the relevant provisions are the following:

"Deposit

Upon acceptance of this offer, a cash deposit of HK$302,118.00 (HONG KONG DOLLARS THREE HUNDRED TWO THOUSAND ONE HUNDRED AND EIGHTEEN ONLY) being the equivalent of three months' rent, operating charges and rates will be required. For avoidance of doubt, this deposit shall be non-interest bearing and will unconditionally become non-refundable if for any reason whatsoever you do not proceed to execute the tenancy agreement and that this item only is expressly not subject to contract.

...

Tenancy Agreement

The Tenant shall on or before 20th April 2000 sign and execute a formal Tenancy Agreement in our standard form.

...

General

This offer shall otherwise be subject to the terms and conditions as contained in our standard tenancy agreement mentioned above.

Please confirm your acceptance of the above terms by signing and returning to us the enclosed duplicate copy of this letter on or before 13th April 2000.

Upon returning the duplicate copy of this letter, please also forward to us a cheque drawn in favour of "HONG KONG ISLAND DEVELOPMENT LIMITED" in the sum of HK$405,624.00 made up as follows:-

1) Non-Interest Bearing Deposit	HK$	302,118.00
2) Rental from 16/8/2000-15/9/2000	HK$	82,304.00
3) Operating charges from 16/5/2000-15/6/2000	HK$	17,639.00
4) Rates from 16/5/2000-30/6/2000	HK$	3,563.00
	HK$	405,624.00
		========

Unless we are in receipt of your acceptance confirmation and deposit cheque on or before the 13th April 2000, our offer shall lapse automatically."

There was also a manuscript addition to the end of the letter and to the plan but nothing turns on this.

5. The plaintiff signed the 6 April letter on 11 April and paid the sum of $405,624 as required. However, the plaintiff never signed a formal tenancy agreement as envisaged in the letter of 6 April. On 4 May 2000, the plaintiff's solicitors wrote to the defendant stating that their client "no longer intends to rent the said premises from you" and sought the return of $405,624 comprising the deposit of $302,118 and $103,506 as the future rental, operating charges and rates as stipulated for in the 6 April letter. Further letters to similar effect did not elicit any reply and on 14 August 2000 a writ was issued seeking the repayment of the deposit.

6. In the court below, the plaintiff relied on Chillingworth v Esche [1924] 1 Ch. 97 and Yu Tai Hing Land Agency Ltd v Leung Wing Yin [1986] HKC 574. In both those cases, the deposits paid under a subject to contract agreement were held to be repayable upon failure to enter into the formal contract. The judge found the present case distinguishable from the Chillingworth and Yu Tai Hing cases and found an implied request for forbearance as a matter of necessity to give business efficacy to the arrangement between the parties. He held that a party who had parted with his money did not per se have the right to recover it on the ground of money had and received but had to demonstrate that he had retained at least an equitable interest in the money before he was entitled to demand a repayment. The judge further found that the defendant had discharged that onus of showing a right to retain the deposit in that the defendant relied on a forfeiture provision which was not subject to contract and the lack of consideration was irrelevant because here the defendant was not seeking to enforce the agreement.

7. The issue which arises in this appeal is whether the deposit is recoverable.

8. As a preliminary matter, the effect of the letter of 6 April needs to be considered. The opening paragraph of the letter referred to an offer being made on a "subject to contract" basis. This was a clear indication that the parties meant the letter to be "subject to contract". As Jessel MR said in Winn v Bull (1877) 7 Ch D 29, 32:

"It comes therefore, to this, that where you have a proposal or agreement made in writing expressed to be subject to a formal contract being prepared, it means what it says; it is subject to and is dependent on a formal contract being prepared.

It is common ground that no binding agreement was created by the letter.

9. The provision relating to the deposit was unusual inasmuch as it contained a superadded clause at the end viz. "and that this item only is expressly not subject to contract". But for the superadded clause the present case would be indistinguishable from the Chillingworth and Yu Tai Hing cases. In each of those cases, it was held that the deposit was recoverable. Counsel for the plaintiff submitted that the superadded clause made no difference because it did not have the effect of creating any enforceable contractual obligation, the absence of consideration moving from the defendant being fatal. It was further submitted that the letter could not be construed as the grant of an option to take up a lease upon those terms on or before 20 August since the provision relating to the tenancy agreement was, indisputably, a clause that was "subject to contract" and therefore not binding on the parties.

10. Leading counsel for the defendant did not seek to contend that the letter created any enforceable option to grant a lease on or before 20 April. As I understand it, his argument was that the defendant was legally bound to offer a lease on the terms set out in the April letter but was not legally bound to grant it, and if it chose not to grant the lease, it would be liable to the plaintiff in damages for loss of opportunity.

11. On analysis, the defendant's submissions give rise to considerable difficulty. If there was no enforceable option to grant a lease, specific performance could not be ordered nor, (as it must follow,) would damages in lieu be recoverable. If, as appeared to be the defendant's case, it would be liable in damages for 'loss of opportunity', what would the cause of action be? Mr Sarony SC acknowledged that it had to lie in contract. When pressed as to the damages recoverable, it was submitted that it would extend to the difference, if any, in the letting value of the property. In essence, there was no discernible difference from damages awarded in lieu of specific performance. In my judgment, labelling it as 'damages for loss of opportunity' is unhelpful and simply confuses the issue.

12. Mr Sarony submitted, in the alternative, that forbearance from leasing the premises to other prospective tenants or offering to others was necessarily implied when the defendant executed the April letter. Coupled with actual forbearance, that constituted sufficient consideration: see the Yu Tai Hing case at 582 C-G. But it is clear from the passage relied on that to make good that submission, there had to be evidence of an implied request on the part of the defendant. In the present case, (as in the Yu Tai Hing case,) there was no evidence of any implied request. Moreover, there is the difficulty that a lock-out agreement would require the incorporation of other terms that were expressly "subject to contract" and therefore not binding. To imply a term based on non-binding provisions would run contrary to the well settled principle that 'a term will not be implied if it would be inconsistent with the express wording of the agreement': see Chitty on Contracts, 28th Ed., Vol. I, at 13-009, cited with approval by Otton L.J. in Yorkshire Water Services Ltd v Sun Alliance & London Insurance PLC [1997] 2 Lloyds Rep 21 at 33.

13. Finally, I should mention that the defendant also placed reliance on the following passage in the Chillingworth case where Pollock MR said:

"... we have to consider what in fact was the effect of the document of July 10, 1922, not forgetting the contemporaneous documents, and to ask ourselves whether this deposit was by those documents intended to pass irrevocably to the vendor if the purchasers did not carry out the transaction. In all the circumstances of this case, I think the deposit is recoverable by the purchasers. There was no provision made in the documents which would justify the vendor in declining to return it; though if he had, by appropriate words, made provision for that in the document, such a provision could have been upheld."

Although consideration was not expressly mentioned, a provision as to the disposition of the deposit, if contractual, has to be supported by consideration. I do not read the passage as implicitly dispensing with the requirement of consideration. I therefore do not see how the observations in Chillingworth can assist the defendant.

14. In my judgment, the forfeiture provision was unenforceable, not being supported by consideration. I would therefore allow the appeal, set aside the order below and enter judgment for the plaintiff against the defendant in the sum of $302,118 with interest at 2% per annum above prime from the date of the writ to the date of the order and thereafter at judgment rate until payment. I would also make an order nisi that costs be to the plaintiff here and below.

Hon Stone J:

15. For the reasons given by Le Pichon JA, I too would allow this appeal and enter judgment for the plaintiff.

16. The learned judge below clearly overlooked the procedural requirements of the application before him, although his dismissal of the plaintiff's O.14A summons amounted, in effect, to answering the question of law as posed in the defendant's favour, which in turn would have triggered the agreed consequence of dismissal of the plaintiff's action for the return of the deposit.

17. For my part, I had considerable difficulty with the argument that for the purpose of retention of the deposit the defendant had provided consideration in terms of implied forbearance, notwithstanding the absence of any necessity so to forbear given the unenforceability of the balance of this agreement as being "subject to contract".

18. Mr Sarony's circumvention of this difficulty was via the erection of a collateral contractual cause of action distinct from the agreement, which, he said, would be available to the plaintiff for damages for loss of opportunity. This represented an ambitious attempt to square the circle and, in my view, is simply wrong. Why damages should thus be available when damages in lieu of specific performance are not is unclear, and in any event such an approach would be to remove by the back door the necessary certainty inherent in rendering an agreement "subject to contract".

Hon Rogers VP:

19. I agree with the judgment of Le Pichon JA. There will be an order as proposed in the judgment of Le Pichon JA.