TOP FAITH PROPERTY LTD v. WONG BEN AND OTHERS

CACV 438/2021

[2022] HKCA 783

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 438 OF 2021

(ON APPEAL FROM HCMP NO 1060 OF 2012)

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REASONS FOR JUDGMENT

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Hon G Lam JA (giving the Reasons for Judgment of the Court):

1.  This appeal has arisen from an aborted sale and purchase of the shares of a company that held the property known as Units 3802-03 and 3805-11 (“Units”)  on 38^th Floor, Tower Two, Lippo Centre, 89 Queensway, Hong Kong (“Property”). The crux of this appeal is whether the vendors’ representation as to the saleable area of the Property was false. These are our reasons for dismissing the appeal at the conclusion of the hearing.

Facts

2.  The Defendants in the Issue, whom we shall refer to simply as the “defendants”, were the three shareholders of Hero Wealth Corporation Ltd (“Company”), holding between them its entire issued share capital.  The Company purchased the Property in June 2011.  In April 2012, the defendants engaged the Third Party in the Issue, Centaline Property Agency Ltd (“Centaline”), to market the Company for sale together with the Property.

3.  The Plaintiff in the Issue, whom we shall refer to as the “plaintiff”, was a tenant on a different floor of Lippo Centre.  It decided in March 2012 to buy a larger office in the same building for its own use.  Ms Amanda Lau (“Ms Lau”), an estate agent of Centaline, came to know of the plaintiff’s intention and approached Mr Au Chat Kwan (“Mr Au”), the plaintiff’s CEO, in early April 2012, recommending the Property to him. She also gave him printed sales particulars of the Property (among other properties)  on Centaline’s form, which was in Chinese and described the Property as having “建築面積” (gross floor area)  of 11,655 sq ft and an asking price of $25,000 per sq ft.  Mr Au inquired with Ms Lau about the Property’s “實用面積” (referred to below as “saleable area”)  and asked for documentary proof of it.

4.  Ms Lau relayed the inquiry to Ms May Wong (“May Wong”), a representative of the defendants, saying that a purchaser had asked for the saleable area of the Property with proof.  On 16 April 2012, May Wong responded by sending two floor plans of the 38^th Floor of Lippo Centre (“Plans”)  to Lau by email, stating: “Floor plan has been attached as requested.  Please contact me as soon as possible.” 

5.  One of the Plans, referred to at trial as “Plan A”, set out on each of the Units from 3802 to 3811 its “saleable area”.  The sum of such specified “saleable area” of the Units was 758.46 sq m. Three areas on that floor, outside the various units and marked respectively “X”, “Y” and “Z”, were shown on the plan, together with the legend:

“ Note:

- Areas for common areas as marked ‘Y’ shall be for the exclusive use of Units: 3801, 3802, 3803, 3805, 3806, 3807, 3808, 3809, 3810, 3811, 3812, 3813, 3815, 3816, 3817, 3818 & 3819;

- Shaded area as marked ‘X’ shall be for the exclusive use of the Units: 3802, 3803, 3805, 3806, 3807, 3808, 3809, 3810 & 3811;

- Shaded area as marked ‘Z’ shall be for the exclusive use of the Units: 3801, 3812, 3813, 3815, 3816, 3817 & 3818;

-  The plan is for reference and identification purposes only”

6.  The second plan, referred to at trial as “Plan B”, identified each unit on that floor by colour without specifying any saleable area.  This plan contained the signature of Ms Cordelia Chan (“Ms Chan”), Chartered Architect-Authorised Person, with the date of 22 June 2011.

7.  There is no dispute that both Plans were prepared by Ms Chan in June 2011, apparently for the purpose of subdividing the 38^th Floor, and were supplied by the previous owner to the Company at that time.  In fact, Plan A was annexed to the provisional sale and purchase agreement by which the Company purchased the Property, and Plan B was annexed to the assignment by which the Property was assigned to the Company.  The shaded area ‘X’ as marked on Plan A is an area the exclusive right to possession of which has been granted to the Company as the owner of the Units by virtue of a Sub-Deed of Mutual Covenant dated 30 June 2011.

8.  Ms Lau passed the Plans to the plaintiff on 17 April 2012.  The plaintiff alleged that Ms Lau also repeatedly assured Mr Au that the saleable area of the Property was as shown in Plan A, but this was not established at trial.  There was no direct contact between the plaintiff and the defendants.

9.  The plaintiff, believing that the saleable area of the Property was as shown in Plan A, decided to offer to purchase the Company at the price of $250 million.  A draft provisional sale and purchase agreement, written in both Chinese and English, was prepared by Ms Lau.  Clause 1 provided that the vendors agreed to sell and the purchaser agreed to purchase “the entire issued share capital of the Company (including all rights and interests of the Property owed [sic] by the Company as set out in Schedule 1 here to)”.  Schedule 1 referred to “All those office units numbers 02, 03, 05, 06, 07, 08, 09, 10, 11 on 38^th floor, Tower Two Lippo Centre, No. 89 Queensway, Hong Kong”.  Upon the advice of its internal legal adviser, the plaintiff requested Ms Lau to insert the words “as per the two (2)  floor plans hereto” and “依照本合約內兩份FLOOR PLAN” at the end of the English and Chinese words in Schedule 1 respectively.  The agreement, dated 10 May 2012 and as amended and with the Plans annexed, was signed on behalf of the plaintiff and defendants by their respective representatives (“Provisional Agreement”).  The Plans and the amendments to Schedule 1 were initialled by both parties.  At the same time, the plaintiff paid a preliminary deposit of $12.5 million to Joseph C T Lee & Co, the vendors’ solicitors, as stakeholder.

10.  Clause 5 of the Provisional Agreement provided:

“ 5. The Purchaser shall be entitled to conduct a due diligence review on the financial, books, accounts and records of the Company and the title of the Property and the Vendor shall render all assistance to the Purchaser for the information and documents requested. If there is any misrepresentation and/or any material adverse matters discovered in the due diligence process, the Purchaser shall be entitled to cancel this transaction and the Vendor shall refund all the deposit to the Purchaser forthwith. …”

11.  Soon afterwards the plaintiff commissioned a survey of the Property.  The surveyors found the saleable area to be between 480 and 490 m².  Because this was substantially less than the total saleable area according to Plan A, on 24 May 2012 the plaintiff gave notice to the defendants to rescind the Provisional Agreement by reason of their misrepresentation as to the saleable area or to cancel the transaction pursuant to clause 5 of the Provisional Agreement, and demanded for the return of the initial deposit of $12.5 million.

12.  On 28 May 2012, Joseph C T Lee & Co issued the interpleader proceedings below.  The issue of whether the purchaser or the vendors was entitled to the deposit was directed to be tried, with the purchaser as the plaintiff in the issue and the vendors as the defendants in the issue.  In those proceedings the plaintiff in essence sought to recover the initial deposit of $12.5 million, whereas the defendants claimed a declaration that they were entitled to forfeit it.

13.  In addition, in September 2012, the defendants issued third party proceedings against Centaline, claiming an indemnity in respect of the plaintiff’s claim.  In response, Centaline counterclaimed against the defendants for its service charge in the sum of $1.75 million.

The judgment below

14.  The issue between the plaintiff and the defendants was tried before Ng J (“Judge”)  together with the third party proceedings.  By his judgment dated 17 August 2021 (“Judgment”),[1] the Judge held:

(1)  When Ms Lau passed the Plans to the plaintiff, she was acting with the knowledge and assent of May Wong and with the authority and on behalf of the defendants.

(2)  Ms Lau did not give oral assurances to the plaintiff that the saleable area of the Property was as shown in Plan A.  By passing the Plans to the plaintiff, however, a representation was implicitly made on behalf of the defendants to the plaintiff that the saleable area of the Property was as shown on Plan A, i.e. totalling 758.46 m² (“Representation”).

(3)  The Representation was false because the saleable area was substantially less than 758.46 m².

(4)  The plaintiff was induced by the Representation in entering into the Provisional Agreement.

(5)  Accordingly, the plaintiff was entitled to rescind and had rescinded the Provisional Agreement on 24 May 2012 and is entitled to recover the initial deposit.  As there was no breach of duty by Centaline, the defendants are not entitled to an indemnity from Centaline and are instead liable to pay its service charge in the sum of $1.75 million.

15.  There was no finding of any fault on the defendants’ part, but in this context even an innocent misrepresentation was sufficient for the plaintiff to be entitled to rescind the transaction.

The appeal

16.  The defendants’ appeal falls within a narrow compass.  Their sole contention is that the Judge was wrong to find that the Representation was false.  They argue that there was no statutory regulation of the calculation of saleable area for commercial properties at all material times and no uniform definition of “saleable area” imposed by law.  There was no definition or explanation of the term in the plaintiff’s inquiry or in the Plans or in the Provisional Agreement.  Although there was a specified meaning of “saleable area” in the Code of Measuring Practice issued by the Hong Kong Institute of Surveyors in 1999 (“Code”), which comprises the floor area exclusively allocated to the unit in question, the Code was merely a guide for surveyors with no general legal effect.  The plaintiff did not plead that the saleable area of the Property should be calculated in accordance with the Code.  Both Plans were in fact prepared by Ms Chan, an architect, who was not professionally bound by the Code.  She calculated the area of each of the Units using the definition of “usable floor space” (實用樓面空間)  as found in the Building (Planning)  Regulations (Cap 123F). 

17.  Both the plaintiff and Centaline oppose the appeal.  By its amended respondent’s notice, the plaintiff further contends that the Judge’s decision should be upheld on the additional or alternative ground that the plaintiff was entitled to cancel the transaction under clause 5 of the Provisional Agreement.

Discussion

18.  There are four items of floor area relevant in this dispute:

A.  the actual areas of the Units themselves;

B.  the area of shaded area ‘X’ as marked on Plan A which is part of the corridor of the 38^th Floor but, according to the note on that plan, is for the exclusive use of the Units;

C.  the common areas on the 38^th Floor apportionable[2] to the Units (“Floor Common Area”);[3] and

D.  the common areas of Lippo Centre as a whole (i.e. common areas in the podium including B1/F, G/F, 1/F and M1/F)  apportionable[4] to the Property (“Building Common Area”).

19.  There is no significant difference between the plaintiff’s expert and the defendants’ expert on the actual measurements of these four Items, as may be seen from the table below.

Item	Plaintiff’s expert (m2)	Defendants’ expert (m2)
A	501.5	508.04
B	39.17	38.73
C	90.50	91.84
D	235.091	223.796

20.  The Code provided:

“ The Saleable Area of a unit comprises the floor area exclusively allocated to that unit including balconies and other similar features but excluding common areas such as staircases, lift shafts, lobbies and communal toilets. It shall be the area contained within the enclosing walls of the unit measured up to the exterior face of an external wall or the centre line of a separating wall between adjoining units, as the case may be. Enclosing walls separating a unit from a lightwell, a lift shaft or any similar vertical shaft, or a common area, shall be deemed an external wall and its full thickness shall be included. All internal partitions and columns within the unit shall be included.”

21.  The evidence is that as far as professional surveyors are concerned, they are “strongly advised” to follow the definition.  If they depart from it, they have to specify clearly how their measurement of saleable area is arrived at.  Applying that definition to the Property, the plaintiff’s expert took the view that Items A and B, but not Items C and D, should be included, whereas the defendant’s expert took the view that only Item A should be included.  Based on their respective measurements, they therefore opined that the saleable area of the Property was 540.67 m² and 508.04 m² respectively. 

22.  In contrast, according to a report by Ms Chan dated 10 October 2013 (which was not adduced below as expert evidence but may be referred to as evidence in fact of what her calculations comprised), on Plan A, the saleable area of the Property was not calculated in the way described in the Code, but as the sum of 3 components, namely:

(1)  503.902 m², being the “usable floor space” of the Units; “usable floor space” (實用樓面空間)  is a term defined in section 2 of the Building (Planning)  Regulations (Cap 123F)  as follows:

“ any floor space other than staircases, staircase halls, lift landings, the space used in providing water-closet fitments, urinals and lavatory basins and the space occupied by machinery for any lift, air-conditioning system or similar service”

(2)  85.270 m², being a prorated portion (56%)  of the common areas on the 38^th Floor (including shaded areas ‘X’, ‘Y’ and ‘Z’)  in the proportion that the usable floor space of the Units bears to the usable floor space of all the units on that floor; and

(3)  169.2916 m², being a prorated portion of the common areas of Lippo Centre by reference to undivided shares in the land. 

23.  The critical feature of the “saleable area” figures presented on Plan A is, therefore, that they include apportioned shares of the Floor Common Area and the Building Common Area, resulting in the much higher total of 758.46 m² compared to the saleable area as found by the experts.

24.  The sole issue on this appeal is whether the Judge was right to hold that the Representation was false.  It is axiomatic that a statement must be false to be actionable as a misrepresentation.  The question here is what is the meaning the Representation conveyed by which its truth or falsity should be judged.  As shown in a number of authorities, the proper approach to this question is an objective one that focuses on what the words and conduct constituting the Representation would in the relevant context have conveyed to a reasonable person in the position and with the characteristics of the plaintiff:

(1)  In IFE Fund SA v Goldman Sachs International [2006] EWHC 2887 (Comm), Toulson J said at §50:

“ In determining whether there has been an express representation, and to what effect, the court has to consider what a reasonable person would have understood from the words used in the context in which they were used. In determining what, if any, implied representation has been made, the court has to perform a similar task, except that it has to consider what a reasonable person would have inferred was being implicitly represented by the representor’s words and conduct in their context.”

(2)  In MCI Worldcom International Inc v Primus Telecommunications Inc [2004] EWCA Civ 957 at §30, Mance LJ said:

“ whether there is a representation and what its nature is must be judged objectively according to the impact that whatever is said may be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee (just as contractual interpretation depends on ascertaining ‘the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract’: Investors Compensation Scheme Ltd. v West Bromwich B. S. [1998] 1 WLR 896, 912 per Lord Hoffmann).”

(3)  Cartwright, Misrepresentation, Mistake and Non-Disclosure (5^th ed)  at §3–06, cited by Ms Wu for the defendants, states that:

“ the test is whether: (a)  the words or conduct in fact led the representee to believe the alleged false fact, and (b)  it was reasonable for the representee to believe it from the words or conduct as he perceived them. Where there is a dispute over the meaning of a statement, this is the approach the courts should use in determining whether it is to be treated as a misrepresentation.”

This passage[5] was applied by this court in Yang Dandan v Hong Kong Resort Co Ltd (CACV 247/2015; 9 August 2016), at §§52-56.

(4)  In Chitty on Contracts (34^th ed), vol. 1, §9-006, it is stated that “the question is how the words would be understood by a reasonable person in the factual context”.

25.  The plaintiff’s pleaded case is consistent with this objective approach.  It was pleaded in its Re-Amended Reply that the term “saleable area” (實用面積)  was commonly understood by reasonable vendors and purchasers and real estate agents in Hong Kong to mean the area exclusively allocated to the property in question and excluding common areas.  There is no dispute that it was in this sense that the plaintiff in fact understood the Representation at the time. 

26.  It is common ground that the Code had no legal force and there was no statutory definition of the term “saleable area” applicable to the transaction in question.  The definition found in section 8 of the Residential Properties (First-hand Sales)  Ordinance (Cap 621)  does not apply to the Property as it is not a residential property.  In any event that Ordinance was only enacted in June 2012 (and came into effect in April 2013), although the Bill was released in November 2011 for public consultation.  But all this does not mean that the term “saleable area” and its Chinese equivalent “實用面積” do not have a generally understood core meaning.

27.  The plaintiff’s understanding at the time was that there could be a substantial difference between the gross floor area and saleable area of office units in Lippo Centre.[6] It was therefore concerned to find out the Property’s saleable area in order to assess its real market value and to negotiate the price with the vendors.[7] 

28.  The Code was the only available professional guide on the term at the relevant time.  The plaintiff’s expert testified that the Code was an authoritative guideline normally adopted in the market for the calculation of saleable area.  It was also generally accepted by the market and by professionals that saleable area included only floor area exclusively allocated to the subject premises.  This evidence was not challenged during his cross-examination; nor was it contradicted by the defendants’ expert, who simply said he was not sure how widely the Code was adopted in the market.  Both experts agreed that the saleable area of a commercial property may be measured using the definition in the Code.  When asked what the saleable area of the Property was, the defendants’ expert said it was 508.04 m²; in other words, all common areas were excluded.  There is no evidence at all, other than Ms Chan’s report which we discuss below, that suggests the “saleable area” of a property can include common areas on the floor and in the whole development.

29.  As Ms Lau – the defendant’s agent for present purposes – knew, the plaintiff had already received the particulars of the Property supplied by her, including its gross floor area (建築面積).  The subject of the plaintiff’s enquiry was the Plaintiff’s “實用面積” (saleable area).  Whilst to an ordinary person there may be ambiguity in the periphery of the meaning of the term, such as whether measurements are to be made to the centreline of walls and whether the thickness of walls is included, in our view its core meaning, as generally understood, is clear and refers to the area allocated exclusively to the property in question and does not include common areas.  The Judge cannot be faulted for saying that “saleable area represents how large the space the Plaintiff could exclusively enjoy for use as its office whereas gross floor area includes common area to be shared with others.”[8]  When the Representation was implicitly made by the defendants, in response to the plaintiff’s enquiry, that the saleable area of the Property was as shown in Plan A, the meaning as conveyed to a reasonable person in the position of the plaintiff was that the area allocated exclusively to the Property, excluding common areas, was in total 758.46 m². That is indisputably false.

30.  Ms Wu, who appeared for the defendants on this appeal but not below, placed heavy reliance on the fact that Plan A was prepared by Ms Chan, who was a Chartered Architect and Authorised Person.  Ms Wu pointed out that neither expert who gave evidence at trial said that Ms Chan was wrong in stating the values of saleable area in Plan A as she did.  As there was no applicable statutory definition of “saleable area” and the Code was not binding on Ms Chan, there was no reason why she could not employ a statutorily defined term “usable floor space” in calculating the saleable area.  As used in the Representation, the term “saleable area” is ambiguous, and its meaning should be taken in the sense in which the defendants intended it to be understood.

31.  We are not persuaded by this argument.  There is no explanation in the evidence why Ms Chan did the calculations in the way she did.  Her instructions for preparing Plan A were not disclosed.  In her report, she stated, in relation to each unit, that the saleable area was “equal to the ‘usable floor space’ (UFS)  of the subdivided unit … plus portion of the [Floor Common Area] in proportion …”, but when she came to the total saleable area of the Units, she included in addition a prorated portion of the common areas of Lippo Centre (i.e. the Building Common Area).  This discrepancy was not explained.  Nor did her report identify any basis in professional practice for the calculations.  Although she was initially nominated as the defendants’ expert in the action below, she was subsequently replaced by a professional surveyor.  As such her report cannot be taken as opinion evidence that the methodology she adopted was generally accepted or based on any professional practice.  The fact that neither expert expressly said that her calculations were wrong is not to the point.  It is not equivalent to evidence that her methodology reflected a generally accepted meaning of saleable area.

32.  It follows that the defendants have failed to show that the Judge was in any way wrong to find that the Representation was false.  It is unnecessary to deal with clause 5 of the Provisional Agreement.

Conclusion

33.  For the above reasons, the appeal was dismissed.

34.  At the hearing we ordered costs against the defendants but left open the question of the certificate for two counsel sought by the plaintiff.  We have decided that a certificate covering only the more senior counsel is an adequate award.