BEST LINKAGE LTD v. MARBELLA GARDEN LTD

HCMP 1437/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1437 OF 2014

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J U D G M E M T

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I.  INTRODUCTION

1. On 11 February 2006, the plaintiff purchased the property known as Shops Nos 1, 2, 3, 4 and 5 on Basement, Parkview Commercial Building, Nos 9 & 11 Shelter Street, Hong Kong (“Property”) for the consideration of $6,200,000, and it was mortgaged to DBS Bank (Hong Kong) Limited (“DBS”) under an all-monies mortgage together with an assignment of rental, and was further charged to Freeway Finance Company Limited (“Freeway”) under an all-monies legal charge.

2. On 11 June 2007, the mortgage and assignment of rental as well as the legal charge respectively in favour of DBS and Freeway were discharged/released, and the Property was re-mortgaged to Lei Shing Hong Credit Limited (“LSH”) by first legal charge together with an assignment of rental.

3. At all material times, the Property was subject to a tenancy agreement dated 19 March 2008 in favour of C King Entertainment Limited as tenant for a term of two years from 1 April 2008 to 31 March 2010 at the monthly rent of $65,000.

4. On 23 April 2008, the first legal charge and assignment of rental in favour of LSH were released, and the Property was mortgaged to The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) by an all-monies mortgage together with an assignment of rental.

5. On 18 June and 31 October 2008, the Property was further charged to Flying Mortgage Limited (“FML”) and LSH respectively by an all-monies second mortgage and all-monies third legal charge. 

6. By a provisional agreement for sale and purchase dated 24 April 2009 (“PASP”) signed by the plaintiff as vendor, the defendant as purchaser and ICMe Company Limited (“ICMe”) as the agent, the plaintiff agreed to sell and the defendant agreed to purchase the Property for a consideration of $10,500,000 (“Price”) with completion to take place on or before 29 June 2009 subject to existing tenancy.  The following were inter alia express terms of the PASP:

“This AGREEMENT is made 24^th April, 2009 BETWEEN the first party [the plaintiff] …… (hereinafter called ‘the Vendor’) and the second party [the defendant] OR ITS NOMINEE(S) …… (hereinafter called ‘the Purchaser’) and the third party [ICMe] …… (hereinafter called ‘the Agent’)

NOW IT IS HEREBY AGREED as follows:

1. The Vendor agrees to sell and the Purchase agrees to purchase, through the Agent subject to the terms and conditions herein contained, all that [the Property] ……

2. The purchase price of the [Property] shall be HK$10,500,000.00 which shall be paid by the Purchaser to the Vendor in the manner as follows:

(a) Initial deposit shall be paid upon the signing of this agreement in the sum of HK$200,000.

(b) Upon signing of the Formal Agreement for Sale and Purchase on or before 11^th May, 2009 A further deposit shall be paid in the sum of HK$850,000.00.

……

(d) Balance of purchase price shall be paid upon completion on or before 29^th June, 2009 at the Vendor’s solicitors in the sum of HK$9,450,000.00

The deposits payable under (a), (b) and (c) above shall be paid to the Vendor’s solicitors as stakeholders who may release the same to the Vendor provided that the balance of the purchase price is sufficient to discharge the existing legal charge/ mortgage and the title deeds of the [Property] shall have been approved and accepted by the Purchaser’s solicitors who shall have seven days to peruse and to raise requisitions or objection in respect of the title to the [Property] upon receipt of the said title deeds.

3. The [Property] is to be sold the Purchaser or its nominee(s), sub-purchaser(s) free from encumbrances.

4. …… The Purchaser agrees to purchase the [Property] subject to the existing tenancy.

……

7. Should the Purchaser fail to complete the purchase in the manner herein contained, the deposit shall be forfeited to the Vendor and the Vendor shall then be entitled at his absolute discretion to sell the [Property] to anyone he thinks fit and the vendor shall sue the Purchaser for any liabilities and/or damages to enforce specific performance.

8. 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 [Property] and the Purchaser shall not take any further action to claim for damages or to enforce specific performance.

……

13. This agreement supersedes all prior negotiations, representation, understanding and agreements of the parties hereto.”

7. The plaintiff also signed the PASP to acknowledge receipt of the initial deposit in the sum of $200,000 (“Initial Deposit”) paid by the defendant.  The Initial Deposit was paid to the plaintiff’s then solicitors C O Chan & Co (“COC”) as stakeholder.

8. By a letter dated 8 May 2009 by the defendant’s then solicitors Samuel Li & Co (“SLC”) to COC, the defendant (a) alleged it was induced by the misrepresentation by Mr Eric Chu (“Agent”) of IMCe as to certain features of the Property (“Misrepresentation”) to enter into the PASP, (b) gave notice to the plaintiff to rescind the PASP, and (c) demanded return of the Initial Deposit (“Rescission Letter”). As explained below, it is unnecessary for me to describe the Misrepresentation in any detail.

9. On 12 May 2009, COC in their reply denied the plaintiff and/or its agent ever made the Misrepresentation to the defendant (“Acceptance Letter”).  COC claimed the Rescission Letter amounted to repudiation of the PASP, and the plaintiff thereby accepted such repudiation and forfeited the Initial Deposit.  On the same day, SLC replied to remind COC they held the Initial Deposit as stakeholder, and demanded they would continue to do so until resolution of the dispute between the parties by court process or otherwise.

10. Subsequently, the plaintiff changed its solicitors to Christopher K Y Wong (“CKYW”).  On 4 June 2009, CKYW wrote to COC for copies of all correspondence and documents, and for release of the Initial Deposit to them.  On 5 June 2009, COC replied by sending copies of the PASP and Acceptance Letter to CKYW, and by enquiring whether CKYW would personally undertake to hold the Initial Deposit in the manner proposed by SLC.  On the same day, CKYW queried why they were required to give such undertaking and whether COC had given any undertaking to SLC to stakehold the Initial Deposit. 

11. On 6 June 2009, COC replied to say they had previously explained to the plaintiff through its director that “the relevant stakeholder money ought not to be released to it”, and again enquired whether CKYW would release the Initial Deposit to the plaintiff before resolution of the dispute between the plaintiff and the defendant through court process or otherwise.  COC also asked for future correspondence to be copied to all parties as there were competing claims for physical possession of “the relevant stakeholder money”.  On the same day, COC advised SLC of the above communications with CKYW, and further enquired whether the defendant still insisted “the relevant stakeholder money” should not be released until the dispute between the plaintiff and the defendant was resolved through court process or otherwise.  On 8 June 2009, SLC confirmed this was still the defendant’s position.  On 9 June 2009, COC expressed surprise about such stance since SLC had not (a) shown any authority in support thereof and/or (b) communicated with CKYW since they took over the matter.  COC made clear that upon termination of their retainer they were duty bound to transfer the stakeholder money to CKYW, and that SLC should deal with CKYW directly.

12. On 10 June 2009, CKYW wrote to COC to give an undertaking to settle their bill within three days of receipt of the Initial Deposit from them.  On the same day, SLC reminded COC that the defendant paid the Initial Deposit to COC as stakeholder who held “the stakeholder money” in accordance with the agreement among the plaintiff, the defendant and COC under the terms of the PASP, which agreement could not be varied without the consent of all three parties.  SLC warned COC that if they parted with “the stakeholder money” without the defendant’s consent, the defendant would hold them liable for all damages and would look to them for remedies.

13. On 10 June 2009, COC replied to note that although the defendant had questioned their capacity to interplead, it had not issued legal proceedings in respect of the Misrepresentation, so it would be unreasonable for COC to continue to hold “the stakeholder money” in face of the defendant’s inactivity and/or delay, and COC would further consider such request only if the defendant would indemnify them against loss and damages.  COC reminded that upon termination of their retainer they were duty bound to transfer the stakeholder money to CKYW, and SLC should deal with CKYW directly.

14. On 15 June 2009, SLC denied they had questioned COC’s capacity to interplead, but maintained their previous stance claiming that since the conditions in clause 2 of the PASP had not been fulfilled and both parties were claiming “the stakeholder money”, COC as stakeholder could not transfer “the stakeholder money” to CKYW or part with it until the dispute was resolved.  On the same day, COC complained that SLC had not taken any positive step to deal with CKYW but only chose to hold COC liable for all damages/remedies.  COC explained they did not wish to take out any interpleader application in order to save time and costs and because SLC could deal with CKYW, and gave notice they would send the Initial Deposit being “the relevant stakeholder money” to CKYW on the following day.

15. On 16 June 2009, COC sent the sum of $200,000 to CKYW being “the relevant stakeholder money” against their undertaking to settle COC’s bill of costs and to provide an agreed written indemnity.  The Initial Deposit was later paid to the plaintiff.

16. On 16 June and 15 July 2009 respectively, the plaintiff as vendor entered into a provisional agreement for sale and purchase and a formal agreement for sale and purchase for sale of the Property to Ng Sau Mui as purchaser for a consideration of $11,000,000.  But such agreements were cancelled on 30 April 2010.  On 6 August 2009, the third legal charge in favour of LSH was discharged.

17. By a Memorandum of Rescission dated 30 April 2010 (“Memorandum”), the plaintiff gave notice that in accordance with the PASP it had exercised its right thereto to rescind the PASP due to the defendant’s default, and copies of the Rescission and Acceptance Letters were annexed thereto. 

18. On 22 June 2010, the second mortgage in favour of FML was discharged.  On 7 March 2014, the plaintiff entered into an all‑monies second mortgage in respect of the Property in favour of Credit One Finance Limited (“COFL”).

19. On 15 April 2014, the plaintiff’s solicitors wrote to CKYW to ask for all correspondence and documents in respect of the Property.  On 8 May 2014, the plaintiff’s solicitors wrote to the defendant’s then solicitors Yung, Yu, Yuen & Co (“YYY”) to ask for copies of the copy PASP under memorial no 09062201540023 (“Copy PASP”) and the Memorandum under memorial no 10050602780010 pending registration at the Land Registry, and for details of the defendant’s conditions for vacating the Copy PASP and Memorandum pending registration at the Land Registry.

20. On 12 May 2014, YYY replied to say the defendant would only agree to vacate the Copy PASP and Memorandum pending registration at the Land Registry if the plaintiff would return the Initial Deposit and pay the defendant’s legal costs in relation to the Property.  YYY also alleged the Memorandum was prepared by Katherine Y W Or & Co (“KYWO”).  On 27 May 2014, the plaintiff’s solicitors wrote to KYWO to ask for a copy of the Memorandum.  On 29 May 2014, KYWO advised the Memorandum was neither prepared nor submitted to the Land Registry by them.  On the same day, the plaintiff’s solicitors wrote to YYY for copies of the Copy PASP and Memorandum.  On 5 June 2014, the plaintiff’s solicitors wrote to CKYW for a copy of the Memorandum.  CKYW provided such document on 3 July 2014.

21. On 13 June 2014, the plaintiff commenced the present proceedings by Originating Summons (“OS”) for the following reliefs:

(a) a declaration that the defendant had wrongfully repudiated the PASP and wrongfully failed to complete the sale and purchase of the Property pursuant to the terms of the PASP (“1^st Relief”);

(b) a declaration that the plaintiff is entitled to forfeit the Initial Deposit paid under the PASP in the sum of $200,000 (“2^nd Relief”);

(c) an order that the Copy PASP and Memorandum pending registration at the Land Registry against the Property be vacated (“3^rd Relief”).

22. By a provisional agreement for sale and purchase dated 28 July 2014, the plaintiff as vendor agreed to sell and Lei Sio Hong and Un Chi Tak as purchaser (“New Purchaser”) agreed to purchase the Property for a consideration of $23,000,000.  On 29 September 2014, the mortgage in favour of HSBC together with the assignment of rental were released.

23. On 9 October 2014, the defendant’s solicitors wrote to the plaintiff’s solicitors as follows:

(a) since whether the defendant was entitled to refund of the Initial Deposit under the PASP as a result of the Misrepresentation by “the estate agency” for which the plaintiff was responsible would be a matter for trial, the release of the Initial Deposit without any provision of alternative security by the plaintiff as protection for the defendant’s right to refund of the Initial Deposit meant the 3^rd Relief would not be appropriate;

(b) but the defendant was prepared to withdraw the Copy PASP and Memorandum that were pending registration at the Land Registry “in so far as there is security for assuring [the defendant’s] interest for refund of [the Initial Deposit] paid in the sum of $200,000.00 …… subject to the final resolution of the dispute between [the plaintiff and the defendant]”;

(c) the plaintiff’s reliance on clause 7 of the PASP, which had been deleted, was not justified;

(d) in any event, the plaintiff could only claim for recovery of actual loss suffered, but there was in fact no loss because of increase in the value of the Property;

(e) on the aforesaid basis, the defendant’s solicitors urged the plaintiff to discontinue the present proceedings..

24. On 15 October 2014, the plaintiff sold and assigned the Property to the New Purchaser as joint tenants for a consideration of $23,000,000, and the second mortgage in favour of COFL was discharged/released.

25. The correspondence between the plaintiff’s solicitors and the defendant’s solicitors during the period from 17 November 2014 to 9 January 2015 revealed discussions as to the possibility of the plaintiff providing and allowing a sum of $300,000 to be stakeheld as security against an order for immediate vacation of the Copy PASP and Memorandum pending registration at the Land Registry.  There was ultimately no consensus since issues arose over (a) the defendant’s enquiry as to whether the plaintiff would be agreeable to settle the defendant’s costs of and occasioned by the OS to be taxed if not agreed (to which the plaintiff did not agree), and (b) the defendant’s view that it was “ridiculous” to withdraw/vacate the Copy PASP and Memorandum pending registration at the Land Registry as a condition for the sum of $300,000 to be stakeheld.

II.  AFFIRMATION EVIDENCE

26. On 13 June, 5 July and 9 October 2014, the plaintiff respectively filed the 1^st affirmation of its director Lee Yik Kwong (“Lee”) (“Lee Aff”) and the 1^st and 2^nd affidavits of its solicitor Gordon Chan (“Chan 1^st and 2^nd Affs”) in support of the OS.  On 6 November 2014, the defendant filed the affirmation of its director Ng Yuk Chuen Gene (“Ng”) in opposition (“Ng Aff”).

(a)  Plaintiff’s affirmation evidence

27. Lee claimed the plaintiff considered the Property to be its valuable asset for generating rental income.  In/about 2009, the plaintiff had no intention to sell the Property, and had not provided any details of the Property to any estate agent, including the Agent of ICMe, or instructed any estate agent to act on its behalf to sell the Property.  In/about April 2009, the Agent telephoned Lee to say he had procured a purchaser for the Property, and to ask Lee whether the plaintiff would like to sell the Property or not.  The Agent told Lee (a) he had obtained Lee’s name and telephone number from some database and the particulars of the Property from a public search, and (b) the intended purchaser intended to purchase the Property at a price of $10,500,000.  Lee asked the Agent whether the intended purchaser knew of the particulars of the Property, including inter alia its actual size/area. The Agent told Lee the intended purchaser had physically inspected the Property, made enquiries/investigations, and was very familiar with the features of the Property.  Lee considered the offered price attractive and on behalf of the plaintiff agreed to the proposed sale.  Lee then asked the Agent to bring the preliminary agreement for sale and purchase together with the initial deposit by the intended purchaser to him.  At that time, Lee did not know the intended purchaser was the defendant.

28. Lee claimed the parties entered into the PASP on 24 April 2009.  The Agent went to see Lee with the PASP in triplicate, which were duly filled out and signed by the defendant, together with a cheque for the Initial Deposit in the sum of $200,000.  After checking the contents of the PASP, Lee signed on the plaintiff’s behalf.  Lee had never met or talked with any representative of the defendant.

29. By the Rescission Letter, the defendant alleged it was induced by the Misrepresentation as to features of the Property to enter into the PASP, to give notice to rescind the PASP, and to demand return of the Initial Deposit.  Thereafter, the defendant and SLC insisted that COC should hold the Initial Deposit as stakeholder until resolution of the dispute between the parties.  But COC was bound to release the Initial Deposit to CKYW when their retainer was terminated, and it was so released to CKYW on 16 June 2009 and later paid to the plaintiff.

30. Lee did not know the Agent/ICMe before the aforesaid transaction and had no previous dealings with them.  He claimed the plaintiff had never (a) instructed/appointed the Agent or ICMe as its agent to sell the Property or to make the Misrepresentation, (b) caused the Misrepresentation to be made directly or indirectly through the Agent and/or (c) had any knowledge of the Misrepresentation allegedly made by the Agent to the defendant.  It was only upon signing the PASP that the matter of a commission fee was brought up, and the plaintiff eventually agreed to pay ICMe a commission fee for the sale of the Property.  Therefore, at best (but the plaintiff did not so admit) ICMe became the plaintiff’s agent upon (but not before) the signing of the PASP. However, the defendant alleged the Misrepresentation was made before it signed the PASP, so in the circumstances the plaintiff never made any misrepresentation that the defendant relied upon in entering into the PASP, and the defendant wrongfully repudiated the PASP by issuing the Rescission Letter, and by failing to complete the sale and purchase of the Property by the Completion Date and to make full payment of the Price. 

31. Lee further claimed that at the time of commencement of the present proceedings, the title deeds of the Property were still kept by HSBC.  The plaintiff planned to re-mortgage the Property with another bank to further finance its business operations.  The Copy PASP and the Memorandum pending registration at the Land Registry were clogs on the title of the Property which obstructed the plaintiff’s intention to re‑mortgage the Property for re-financing.

(b)  Defendant’s affirmation evidence

32. Ng alleged that by virtue of clause 17 of the PASP, ICMe was the agent for both the plaintiff as vendor and the defendant as purchaser.  Ng confirmed the matters that related to him in the Rescission Letter, which was issued on behalf of the defendant, and “the facts therein asserted are all along maintained on the part of the Defendant”.  On such basis, Ng claimed he entered into the PASP on behalf of the defendant upon representations given by the Agent of ICMe being the estate agency for both the plaintiff as vendor and the defendant as purchaser, and that the defendant was entitled to rescind the PASP and ask for refund of the Initial Deposit.  But despite the defendant’s objection, the Initial Deposit was released to the plaintiff, who had not offered any alternative security for the defendant’s claim for refund of the Initial Deposit.  In such circumstances and bearing in mind that the plaintiff was a limited company in need of re-financing, Ng claimed that the registration of the Copy PASP should be maintained to protect the defendant’s interest.  Ng further claimed that the plaintiff was not entitled to the reliefs sought in the OS.

33. Ng also contended that Lee’s account of events was inherently not credible because of the discrepancy between Lee’s assertion on one hand that the plaintiff regarded the Property as a valuable asset for its rental income with no intention to sell the same, and his assertion on the other hand that he was willing to sell the Property when the Agent first approached him with a proposal for sale of the Property.

III.  DISCUSSION

34. At the hearing of the OS before me on 26 January 2015 (“Hearing”), Mr Yu, counsel for the plaintiff, confirmed that in light of the sale of the Property to the New Purchaser the plaintiff no longer sought the 3^rd Relief. 

35. Mr Chang, counsel for the defendant, informed the court the defendant conceded it was unable to make out a triable case on the evidence that the Agent was the plaintiff’s agent with either actual or apparent authority of the plaintiff when he made the Misrepresentation to the defendant, which representation led the defendant to enter into the PASP. That being the case, since the defendant gave notice of rescission of the PASP on the basis of the Misrepresentation then alleged to be attributable to the plaintiff, which contention Mr Chang now accepted could not be sustained, it naturally followed there was no triable or arguable defence to the plaintiff’s claim that the defendant had wrongfully repudiated the PASP by giving notice of rescission in the Rescission Letter premised on the Misrepresentation, and that the plaintiff had accepted such repudiation by the Acceptance Letter. 

36. Nevertheless, Mr Chang argued that this court should not grant the 1^st Relief on the basis that it would be useless and not serve any purpose.  Mr Chang submitted that since the plaintiff would not be entitled to forfeit the Initial Deposit and would only be entitled to seek its remedy in damages (if it suffered any actual loss which was doubtful), and further since there was no claim for and no relief sought in the OS for damages for the defendant’s repudiation of the PASP, there was no justification for this court to grant the 1^st Relief when the plaintiff could not forfeit the Initial Deposit and had not sought any remedy in damages.  He reminded that even if the plaintiff had sought any remedy in damages, it could do so directly without asking for the 1^st Relief.

37. In light of Mr Chang’s submissions, it was plain that the crux of the matter is whether or not the plaintiff was entitled to the 2^nd Relief, ie a declaration to the effect that it was entitled to forfeit the Initial Deposit in the sum of $200,000.00 paid under the PASP.  Mr Chang accepted that if the plaintiff was so entitled, there could not be any valid objection to the court granting the 1^st Relief in favour of the plaintiff.  That must be right because a declaration under the 1^st Relief as to the repudiation of the PASP would be essential to ground and support any forfeiture and retention of the Initial Deposit.  I therefore turn to consider whether the plaintiff was entitled to forfeit the Initial Deposit. 

38. Mr Chang took an initial “pleading point” in his submissions.  He pointed out that the Lee Aff claimed that pursuant to clause 7 of the PASP the plaintiff was entitled to (and did) forfeit the Initial Deposit, and that the defendant did not bring any action to annul the PASP and/or to claim for return of the Initial Deposit.  Mr Chang submitted that this stance must be incorrect because clause 7 of the PASP had been deleted at the time of signing the PASP.  He added that since the plaintiff did not correct this or rely on any other ground for forfeiture of the Initial Deposit in the Chan 1^st and 2^nd Affs even though this error had been pointed out in the Ng Aff, the plaintiff should be debarred from relying on any other ground to forfeit the Initial Deposit.

39. I am not persuaded by Mr Chang’s submissions.  Not only was such “pleading” point not taken in his written submissions, which rendered it doubtful whether he could do so in oral submissions, there was no merit to such argument.  It must not be forgotten that the present proceedings were commenced by way of originating summons, and there were no “pleadings” as such.  The OS had clearly set out the reliefs then sought by the plaintiff.  The Lee Aff and the Chan 1^st and 2^nd Affs that supported the OS were affirmation/affidavits as to fact.  It is unnecessary and, indeed, inappropriate for the plaintiff to set out submissions and/or argumentative contentions in such affirmation/ affidavits.  As seen below, the remaining issue as to the disposal of the Initial Deposit turned on the construction of the PASP (and this had been addressed in Mr Yu’s written submissions) and not on factual matters arising from the affirmation/affidavit evidence.  I cannot see how the erroneous reference to clause 7 of the PASP in the Lee Aff (which factual error was obvious and did not in any way take the defendant by surprise) had any bearing on the matter.

40. There was no dispute that the PASP was a concluded contract binding on the plaintiff and the defendant.[1] There was little disagreement between Mr Yu and Mr Chang on the general legal principles in relation to (a) nature of deposits and (b) their disposal upon default by the party who paid the same. 

41. In Polyset Ltd v Panhandat Ltd,[2] Chan PJ said as follows:[3]

“36. The payment of a deposit is quite common in various types of contract, including a contract for the sale of land. A deposit ‘serves two purposes: if the purchase is carried out, it goes against the purchase money - but its primary purpose is this, it is a guarantee that the purchaser means business’ (per Lord MacNaghten in Soper v Arnold (1889) 14 App Cas 429 at p.435). See also Howe v Smith (1884) LR 27 Ch D 89, per Cotton LJ at p.95, Bowen LJ at p.98 and Fry LJ at p.101. In other words, it is a guarantee for the performance of a contract. That being the case, the starting point is, and this is generally accepted, that the defaulting purchaser has no right to recover his deposit. See Ex Parnell, ex p Barrell (1874-75) LR 10 Ch App 512 which was accepted by the court in Howe v Smith at pp.94-95. Lord Browne-Wilkinson in Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573, considered that the law on the nature of a deposit is well settled. He said at p.578H:

  Ever since the decision in Howe v Smith, the nature of such a deposit has been settled in English law.  Even in the absence of express contractual provision, it is an earnest for the performance of the contract: in the event of completion of the contract the deposit is applicable towards payment of the purchase price; in the event of the purchaser's failure to complete in accordance with the terms of the contract, the deposit is forfeit, equity having no power to relieve against such forfeiture.”

42. Likewise, Ribeiro PJ said as follows in Polyset Ltd:

“63. Since the decision in Howe v Smith (1884) LR 27 Ch D 89, the legal nature of a deposit has been clear. Cotton LJ stated it as follows:

What is the deposit? The deposit, as I understand it, ... is a guarantee that the contract shall be performed. If the sale goes on, of course, not only in accordance with the words of the contract, but in accordance with the intention of the parties in making the contract, it goes in part payment of the purchase‑money for which it is deposited; but if on the default of the purchaser the contract goes off, that is to say, if he repudiates the contract, then ... he can have no right to recover the deposit. (p.95)

64. Fry LJ put it in the following terms:

Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed, and we must therefore inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract. (p.101)

65. His Lordship explained that the practice of taking such an earnest for performance was of great antiquity and concluded:

  ... that the expression used in the present contract that the money is paid as a deposit and in part payment of the purchase‑money, ‘relates to the two alternatives, and declares that in the event of the purchaser making default the money is to be forfeited and that in the event of the purchase being completed the sum is to be taken in part payment.’ (p.102)”

43. As regards the disposal of a deposit where completion did not occur due to the default of the party who made the payment, Ribeiro PJ in Polyset Ltd said as follows:

“56. Many types of contract call for one of the parties to pay money to the other in advance of the contract's performance. Contracts for the sale and purchase of land are a prime example. Completion usually takes place some time after execution of the contract and payment of sums made in anticipation of such completion. The issue which arises concerns cases where completion does not occur due to the default of the party who made the payments. The innocent party of course has his remedy in damages for breach of the contract. However, the question which the courts have had to answer is whether the innocent party is entitled in any event to forfeit the payments received, particularly where the breach has caused him no loss or only loss which is exceeded in value by the payments made.

…

66. It follows that if, on the true construction of the contract, the parties intend the advance payment as a deposit, they are taken to have agreed that it is to be forfeited in the event that the payer fails to complete. Five years after Howe v Smith, the House of Lords treated this proposition as beyond dispute: Soper v Arnold (1889) 14 App Cas 429 at p. 435.

67. Given their nature as a guarantee of performance, deposits have been regarded as subject to forfeiture regardless of whether non-performance by the party in breach has caused, or was thought likely to cause, the innocent party any, or as much, loss. Thus, in Hinton v Sparkes (1868) LR 3 CP 161, the vendor was held entitled to enforce an IOU in respect of a £50 deposit on the ground that such deposit could be forfeited when the purchaser failed to complete purchase of a public house, even though the actual loss suffered by the vendor was only £10, this being the deficiency arising on re-sale of the property to another buyer. In Howe v Smith itself, the £500 deposit was validly forfeited notwithstanding that the vendor managed to re-sell the property at the original price and so suffered no loss.

68. The object of a deposit is therefore not to provide compensation for loss resulting from the breach of a contract. The mechanism for such compensation is the claim for damages. Having forfeited the deposit for failure to complete, the vendor remains entitled at common law to sue for damages, giving credit for the forfeited deposit where such damages exceed its amount. This is reflected in standard clauses in modern contracts for the sale and purchase of land which provide (as does cl.26(a), discussed further below) for the vendor to forfeit the deposit and additionally to recover, inter alia, any deficiency arising on resale of the property, with such deficiency treated as liquidated damages, giving credit for the forfeited deposit: Shuttleworth v Clews [1910] 1 Ch 176. This is, for instance, how the standard covenant set out as cl. 10 in Pt.A of the Second Schedule to the Conveyancing and Property Ordinance (Cap.219), is structured.

69. The focus of a deposit’s operation is on the period elapsing between its payment and completion of the contract's performance. In entering into the contract, the vendor agrees to take his property off the market and to commit himself to the purchaser on the latter’s promise that the acquisition will duly be completed and the vendor duly paid at the completion date. The forfeitable deposit is tendered to encourage the vendor to make the necessary commercial act of faith. It is, as the authorities show, an “earnest”, that is, a thing of value given to signify serious intent on the purchaser’s part. It is also the quid pro quo for the vendor depriving himself of the ability to deal commercially with the property, and so of making any potentially greater profits, while awaiting completion. Unlike the vendor, the purchaser is able to profit by re-selling the property during this period, in reliance on the contract. If, at the end of the period, completion does take place, the purpose of the deposit is spent and it becomes absorbed as part of the purchase monies. If, on the other hand, completion does not occur as promised, the deposit’s forfeiture follows, whether or not the vendor has suffered any loss in consequence.”

44. Mr Chang submitted that whether the plaintiff was entitled to forfeit the Initial Deposit was a question of construction of the PASP to ascertain the true intention of the parties at the time of entering into the PASP.  He reminded that clauses 7-8 of the PASP (and clause 7 was a forfeiture clause) were specifically deleted at the time of the execution of the PASP. 

45. Mr Chang further submitted that clauses 7-8 of the PASP were “clean break” provisions.  He argued that had clause 7 of the PASP not been deleted, if the defendant failed to complete the purchase of the Property in the manner envisaged in the PASP, the Initial Deposit shall be forfeited to the plaintiff who would then be entitled at its absolute discretion to sell the Property to any third party, but the plaintiff would not be able to sue the defendant for damages or for specific performance.  Likewise, clause 8 of the PASP (had it not been deleted) provided that should the plaintiff fail to complete the sale of the Property in the manner envisaged in the PASP, the plaintiff shall refund the Initial Deposit together with a sum equivalent to the amount of the Initial Deposit as liquidated damages plus reimbursement of stamp duty, but the defendant shall not take any further action to claim for damages or specific performance. 

46. Mr Chang submitted that when these clauses were deleted at the time of signing the PASP, the parties would have known that if the defendant failed to complete the purchase of the Property, the plaintiff would lose the right to forfeit the Initial Deposit, and conversely, if the plaintiff failed to complete the sale of the Property, the defendant would lose the right to “liquidated damages”, and in either case the “innocent party” would be left to its remedies of suing for damages and/or for specific performance. 

47. Mr Chang submitted it would not have been the intention of the parties to destroy the reciprocity of clauses 7-8 of the PASP and to cause unfairness to the defendant by allowing the plaintiff to forfeit the Initial Deposit if the defendant failed to complete the purchase of the Property, but the defendant not being able to “reciprocally get the refund of the deposit as liquidated damages, in addition to claim for damages or specific performance” if the plaintiff failed to complete the sale.  Mr Chang argued this must be the parties’ true intention when entering into the PASP with clauses 7-8 therein deleted.  On such basis, the true meaning of the word “deposit” in clause 2 of the PASP to the parties would not be the same as found in usual provisional agreements for sale and purchase for upon deletion of clauses 7-8 of the PASP such word no longer meant an earnest or guarantee for performance of the contract, but simply part payment of the Price. Mr Chang submitted that the description of the sum of $200,000 paid by the defendant to the plaintiff as “deposit” would not be decisive or even indicative of the true common intention of the parties at the time of the signing of the PASP.  So when the sale and purchase of the Property fell through, either party could exercise its full remedies in damages and/or specific performance, but in the absence of such claim the Initial Deposit being part payment of the Price should be refunded to the defendant for total failure of consideration, and the plaintiff should not be unjustly enriched by retaining the Initial Deposit.

48. Mr Yu complained that the defendant was not entitled, through counsel’s submissions, to give extrinsic evidence to ascertain or interpret the parties’ intention when they entered into the PASP, and he reminded there was no affirmation evidence to construe the PASP in a way that suggested what the parties intended by deleting clauses 7-8 of the PASP was that the Initial Deposit paid pursuant to clause 2(a) of the PASP was intended as to be advance/part payment of the Price and not a deposit.

49. However, it appears to me that Mr Chang’s contentions turned on the construction of the PASP to be gleaned from the contents of the PASP (including the deleted clauses 7-8 thereof) rather than on any extrinsic evidence.  There was no hint in Mr Chang’s oral and written submissions that I should turn to any affidavit evidence outside the contents of the PASP to ascertain the parties’ intention.

50. Since Mr Chang submitted that the common intention of the parties as to the true meaning of the word “deposit” in clause 2(a) of the PASP turned on the effect of the deletion of clauses 7-8 of the PASP, I should first consider to what extent (if at all) I can consider the deleted provisions in the construction of the remaining parts of the PASP as agreed by the parties.

51. Mr Yu submitted that the function of the court was to construe that which had been agreed between the parties in the PASP; not that which had not been agreed.[4] He fairly recognised there was some authority for the view that regard might be had to what had been deleted, but he emphasised that the purpose was often restricted to resolving an ambiguity in the words retained.  Chitty on Contracts stated that:[5]

“…… However, when the parties use a printed form, and delete parts of it, there is some authority for the view that regard may be paid to what has been deleted as part of the surrounding circumstances in the light of which the meaning of the words which they chose to leave in is to be ascertained. But there is weighty authority to the contrary. In any event, it is doubtful whether the court can look at the words deleted except to resolve an ambiguity in the words retained. ……”

52. Mr Chang had no essential disagreement with such proposition.  He also turned to Lewison (cited by Mr Yu), which summarised such proposition as follows: “[despite] older authority to the contrary, the court will nowadays often look at words which the parties have deleted from their contract in order to resolve an ambiguity in the words which remain, although they are often an unsafe guide to meaning”.[6] Where “the parties may have contracted on the basis of a standard printed form and have simply deleted those clauses which were not to apply”,[7] the old authorities suggested that the deleted parts could not be looked at in construing the agreement, but they later gave way to a more liberal attitude and courts began to give consideration to delete terms in order to resolve ambiguities in the text that remained and to negative an inference sought to be drawn from surrounding circumstances that the contract bore a meaning positively rejected by the deletion.[8]

53. In Louis Dreyfus et Cie v Parnaso Cia Naviera SA,[9] Lord Diplock said as follows:[10]

“Where there is a standard form of words familiar to commercial men and contained in a printed form in general use … it seems unreal to suppose that when the contracting parties strike out a provision dealing with a specific matter, but retain other provisions, they intend to effect any alteration other than the exclusion of the provision struck out. I cannot, prima facie, at any rate, ascribe to them any intention of altering the meaning of the words in the provisions which they have chosen to retain. I say. ‘prima facie’ because there may be added or substituted words which drive one to the conclusion that they did intend to ascribe to the words retained a meaning modified by the added or substituted provisions; but, while I think that I must look first at the clause in its actual form without the deleted words to see if any assistance can be derived from them in solving the ambiguity, bearing in mind the prima facie rule which I have indicated.” (my emphasis)

54. However, Lewison cautioned that even if it were permissible to look at deleted words, the assistance they could give must necessarily be limited.  Lloyd J in The Golden Leader said as follows:[11]

“[The] use of a word or phrase in the deleted part of a clause may throw light on the meaning of the same word or phrase in what remains of the clause … But it seems to me quite another thing to say that the deletion itself has contractual significance; or that by deleting a provision in a contract the parties must be deemed to have agreed the converse. The parties have had all sorts of reasons for deleting the provision; they may thought it unnecessary; they may thought it inconsistent with some other provision in the contract; it may have been deleted by mistake.” (my emphasis)

Lewison submitted that the explanation given by Lloyd J pointed powerfully to the conclusion that a consideration of deleted words was an unsafe guide to the meaning of a contract.

55. It appears that the starting point is whether there is any ambiguity at all in the understanding of the contractual meaning of the PASP, and if there is, I should still look first at clause 2 in the PASP in its actual form without reference to the clauses 7-8 of the PASP to see if any assistance can be derived from them in solving the ambiguity.  But even if I should come to the view that any word or phrase in the deleted clauses 7-8 of the PASP may throw light on the meaning of word “deposit” in clause 2 of the PASP, it is doubtful whether I should have regard to the deletion of clauses 7-8 of the PASP itself as having any contractual significance or as suggesting that the parties must be deemed to have agreed the converse.

56. Mr Yu submitted there was no ambiguity in the nature of the Initial Deposit in clause 2 of the PASP since (a) the PASP was a standard form provisional agreement for sale and purchase with usual or standard provisions and clause 2 being one of them, (b) the words “Initial deposit” were used to reflect its true purpose as an earnest or guarantee for performance of the PASP, (c) the Initial Deposit and further deposit under clause 2 of the PASP in the total sum of $1,050,000 was in line with conventional conveyancing practice of the purchaser paying a deposit for sale of land that represented 10% of the Price, and (d) the correspondence between COC/CKYW and SLC in/after the Rescission and Acceptance Letters all referred to the Initial Deposit as deposit rather than any advance or part payment of the Price. 

57. I agree with Mr Yu there was no ambiguity in the remaining part of the PASP agreed by and binding on the parties.  Mr Chang submitted there was ambiguity because there was no express provision for forfeiture of the Initial Deposit other than in clause 7 of the PASP which had been deleted.  I am not persuaded by such argument.  There being no contrary indication otherwise, there is no reason why the prima facie position discussed in Polyset Ltd set out in paragraphs 42-43 above, ie in the normal way where a contract provides for the payment of a deposit, it is an earnest for performance and is taken to belong to the other party to the contract if the party paying the deposit defaults in performance of the contract, should not apply.  After all, deposits are very usual features of conveyancing transactions, and conveyancing transactions are common.  It is important there should be certainty attaching to the consequences of paying a deposit.  As Lord McNaughten said in Soper v Arnold,[12] everyone knew what a deposit was, it was a guarantee that the purchaser meant business, or as Robert Goff J put it in Portaria Shipping Co v Gulf Pacific Navigation Co Ltd, “…… it seems to be that the deposit which is required to be paid is plainly in the nature of security, so that the seller should know where he stands when, as Mr Chambers put it so elegantly, the buyer puts his money where his mouth is”.[13]

58. As Megarry & Wade, The Law of Real Property, put it, “[if] the vendor terminates the contract on account of the purchaser’s default, he may forfeit the deposit, even though the contract makes no express provision for so doing.  If that does not adequately compensate him for his loss, he may recover any additional loss as damages” (my emphasis).[14] I am not persuaded that the absence of any express reference to forfeiture of the Initial Deposit created any ambiguity.  I am unable to see that the Initial Deposit (which together the further deposit was only for the conventional 10% and which was expressed to be a deposit rather than mere advance/part payment[15]) should be regarded as losing its essential importance as an earnest or a guarantee of serious business, and as providing security for the ultimate fulfilment of the PASP, ie completion of the sale and purchase of the Property.  In a commercial transaction such as the PASP in which the Property was to be sold and purchased, the plaintiff as the vendor was entitled to know (and by virtue of clause 2 of the PASP and the general law in relation to deposits he would know) where it stood.

59. Given such conclusion, there is no basis for me to go further to consider the deletions in clauses 7-8 of the PASP in aid of construction of the PASP with a view to resolve any ambiguity (which I have found does not exist).  But I shall proceed to consider Mr Chang’s arguments in case I am wrong.

60. Mr Chang’s chief complaint is that the deletion destroyed the reciprocity represented by the “clean break” provisions for the vendor and the purchaser in clauses 7-8 of the PASP, and such destruction of reciprocity would cause unfairness to the defendant who would not be able to claim “liquidated damages” of an amount equivalent to the Initial Deposit should the plaintiff default in effecting the sale of the Property. 

61. In my view, such submissions fell foul against the warning by Lloyd J in The Golden Leader set out in paragraph 54 above in that the defendant was suggesting there was contractual significance by virtue of the deletion itself or the parties must have deemed to have agreed to the converse of the deletion, ie there would be no forfeiture of the Initial Deposit upon deletion of clause 7 of the PASP as a forfeiture clause.  Such use the deletion (instead of referring to a word or phrase in the deleted part to throw light on the meaning of the same word or phrase in what remained) was impermissible for the reasons explained by Lloyd J.

62. In any event, I disagree with Mr Chang’s understanding of the effect of the deleted clauses 7-8 of the PASP.  I agree with Mr Yu that these were “escape” clauses the effect of which was, in certain circumstances, to enable the respective parties to resile from the transaction.[16] Fok J (as he then was) in New Champion (Hong Kong) Limited v Treble & Trible Limited accepted that “escape” clauses in most provisional agreements allowed a party who wished to resile from the transaction after the provisional agreement to “buy his way out”: in the case of the vendor by returning the initial deposit doubled by a sum of equal amount which he must pay (double deposit), and in the case of the purchaser by foregoing the deposit.[17] In paragraph 37 of his judgment, the learned judge explained the effect of a provision similar to clause 7 of the PASP:

“Returning to the failure to complete in the present case, this was constituted, in my judgment, by the defendant’s failure to pay the balance of the purchase price on 12 December 2008. …… It was not necessary, in my opinion, for the defendant to do anything further for clause 7 to operate. The initial deposit it had paid stood forfeit to the plaintiff. The defendant could no longer maintain any claim to that sum of money and the plaintiff was then absolutely entitled to treat it as his own. Hitherto the sum would have been held by the plaintiff’s solicitors as stakeholder pending the completion of the sale. Upon the forfeiture of the initial deposit, the plaintiff would have been at liberty to call on its solicitors to pay over that sum to it absolutely and without any condition. ……”

As regards an escape clause in favour of a purchaser rather than a vendor, the learned judge considered with approval the observations by Cheung J (as he then was) in Lo Lau Ching v Ma Kam Fai that “[in] principle, I see no difference that the previous cases were all about vendors exercising their right under such clauses and the present case in which it was the purchaser who chose to exercise the right under Clause 7”.[18]

63. Further, whilst Fok J (as he then was) accepted that where two clauses were intended to operate together or reciprocally that mutuality might support the correctness of a particular construction and likewise militate against a construction that did not give rise to mutuality, he reminded that one must be careful not to exaggerate this proposition or elevate to the level of a hard and fast rule.  He recognised there was no complete symmetry of time and action for the clauses to operate mutually, eg (a) the condition triggering the operation of the clause in the case of the purchaser was when he failed “to complete the purchase”, and in the case of the vendor it was when he failed “to complete the sale”, (b) the obligations at completion were necessarily different (as reflected in the language of the two clauses), and (c) although payment of double deposit to the purchaser was not materially different from forfeiture of the deposit by the vendor, the vendor necessarily had to do a positive act to return the double deposit whilst it was not necessary for the defendant to do anything other than fail to complete whereupon the initial deposit stood forfeited to the vendor.[19]

64. It is obvious from the above explanation of the effect of clauses 7-8 of the PASP there was no exact or strict mutuality of the two provisions.  But even if there is, I cannot see how removal of those provisions gives rise to the construction contended for by Mr Chang.  The effect of clauses 7-8 of the PASP as explained above is that both parties retained the right to resile from the PASP by paying the same sum by way of alternative performance either by foregoing the Initial Deposit or conversely returning the Initial Deposit and the same sum in addition.  In that sense, both parties retained the right to escape from the transaction relatively cheaply.  It was implicit in clauses 7-8 of the PASP that depending on the circumstances such entitlement might work to the disadvantage of one party, eg the vendor might be disadvantaged if the purchaser resiled from the transaction in a falling market and the forfeited initial deposit would not sufficiently compensate for the decrease in market value, or the purchaser might be disadvantaged if the vendor resiled from the transaction in a rising market and the double deposit would not sufficiently compensate for the rise in market value. It is for this very reason that Fok J (as he then was) said that “[but] the answer to these and similar disadvantages in other cases is for the parties to a provisional sale and purchase agreement either to limit the time during which the escape clauses can operate, or to delete the escape clauses altogether, or to sign a formal sale and purchase agreement which, as I have noted above, would normally not include escape clauses ……” (my emphasis)[20] 

65. In my view, it is plain and obvious that the effect of the deletion of the “escape” provisions in clauses 7-8 of the PASP was that, as Mr Yu submitted, the PASP no longer provided for a mechanism enabling the parties to back out of the transaction with its potential advantages and disadvantages.  However, such deletion did not, as Mr Chang contended, to have the further effect to altering the nature of the Initial Deposit provided for in clause 2 of the PASP, which remained forfeitable as explained above. 

66. Having carefully considered Mr Chang’s submissions in light of the words “deposit” and “Initial deposit” used in clause 2 of the PASP in its contextual background including its terms, purpose and object, I have no hesitation in concluding there is no possibility of displacing the prima facie position by reason of a special contractual context.  In my view, the Initial Deposit provided for in clause 2 of the PASP was meant to be an earnest or guarantee for the performance of the PASP, and was forfeitable upon the plaintiff’s acceptance of the defendant’s default in completion by reason of the defendant’s repudiation of the PASP.

67. In a situation where the defendant could not perform by relying on a ground that was unarguable, its conduct did not excite sympathy.  The defendant had taken its chance with respect with the Initial Deposit, and unless it could show a breach by the plaintiff of its bargain, it was not entitled to have the Initial Deposit back.  The reasoning in Howe strongly supported a conclusion that a purchaser in default could not recover his deposit where the vendor was entitled to and did accept the purchaser’s repudiation.

IV.  CONCLUSION

68. By reason of the above, I grant an order in terms of the declarations in paragraphs 1-2 of the prayer of reliefs in the OS.[21] There is no reason why costs should not follow event.  I grant a costs order nisi that costs of the whole proceedings (including costs of the Hearing and all costs reserved, if any) be paid by the defendant to the plaintiff to be taxed if not agreed.