XCHRX CHINA LANDMARK HI-TECH DEVELOPMENT LTD. v. SAN FUNG LTD.

1996 No. A3243

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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INTRODUCTION

1. This is an appeal from an order made by Master Chu on the Defendant's summons under Ord. 14A. In order to understand the order she made, it is necessary to recite the facts in outline.

THE FACTS

2. By a provisional agreement dated 6th December 1995 ("the agreement"), the Plaintiff ("the purchaser") agreed to buy a house in Hong Lok Yuen from the Defendant ("the vendor"). The purchase price was $9m. An initial deposit of $500,000.00 was paid on the signing of the agreement, and a further deposit of $400,000.00 was payable on the signing of the formal sale and purchase agreement, which the agreement contemplated would be signed on or before 19th December 1995. The balance of the purchase price, i.e. $8.1m., was to be paid on or before 6th February 1996, which was the date fixed for completion.

3. In addition, the agreement contained the usual escape clauses. Clause 7 provided:

"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 said premises to anyone he thinks fit and the Vendor shall not sue the Purchaser for any liabilities and/or damages or to enforce specific performance".

Clause 8 provided:

"Should the Vendor after receiving the initial deposit paid hereunder fail to complete the sale in the manner herein contained, the Vendor shall immediately compensate the Purchaser with a refund of the initial deposit together with a sum equivalent to the amount of the initial deposit as liquidated damages and the reimbursement/payment (as the case may be) of stamp duty of the said premises and the Purchaser shall not take any further action to claim for damages or to enforce specific performance."

4. No formal sale and purchase agreement had been drawn up by 19th December 1995. Indeed, no formal sale and purchase agreement was ever executed, and 6th February 1996 passed without the sale being completed. That was because it had been discovered that a swimming pool had been installed at the property, for which the requisite permission had not been obtained under the Buildings Ordinance (Cap. 123). The pool was therefore an unauthorised structure. Negotiations between the parties' solicitors to resolve the impasse took place. Eventually, however, the parties adopted their final positions:

(i) The purchaser's position was that the vendor was in breach of the agreement. However, the purchaser elected to affirm the agreement. Accordingly, it claimed specific performance of the agreement and damages for its breach. The damages were intended to compensate the purchaser for getting, in place of what it had bargained for, namely, a house with a swimming pool for which the appropriate consents had been obtained, something less than it had bargained for, namely, a house with a swimming pool for which the appropriate consents had not been obtained.

(ii) The vendor's position was that it was not in repudiatory breach of the agreement, and that it was the purchaser who had repudiated the agreement by failing to complete the purchase on 6th February 1996. That was asserted by the vendor's solicitors in a letter dated 5th June 1996 to the purchaser's solicitors. In the light of that, the letter stated:

"Our client hereby accepts your client's repudiation of the [provisional agreement] and reserves all its rights."

However, the letter continued as follows:

"Strictly without prejudice to the above contention, if (which is denied) your client has not repudiated the [provisional agreement], our client hereby exercises its option to terminate the same pursuant to clause 8 thereof. We enclose our client's cheque in the sum of $1,247,500.00 payable to yourselves on behalf of your client pursuant to the said clause 8. This is made up of the refund of the initial deposit of $500,000.00 together with payment of the same amount as liquidated damages and $247,500.00 in respect of stamp duty paid/payable by your client."

THE VENDOR'S SUMMONS

5. It was against that background that the vendor applied under Ord. 14A for a number of questions of law to be determined. At the hearing of the summons, the vendor sought the determination of only one of those questions of law. That was:

"... if the Agreement was not terminated on 18th March 1996, ... whether the [vendor had] validly exercised its power under clause 8 of the Agreement to terminate the same on 5th June 1996."

Master Chu decided that the vendor had validly exercised its power to terminate the agreement under clause 8 on 5th June 1996. She went on to declare that the purchaser was precluded from claiming specific performance of the agreement, and she ordered that the action be dismissed, subject to the vendor paying to the purchaser the sum of $1,247,500.00 which had been tendered on 5th June 1996. That is the order against which the purchaser now appeals.

WAS CLAUSE 8 VALIDLY EXERCISED?

6. Two reasons are advanced by Mr. Geoffrey Ma S.C. for the purchaser in support of the argument that the vendor was not entitled by 5th June to rely on clause 8. A further reason was advanced in his skeleton argument. Mr. Ma told me that that argument is no longer being maintained before me, but he reserves the right to rely on that argument elsewhere if necessary. As for the two arguments on which Mr. Ma continues to rely, I must deal with each of them in turn.

(i) Conditional offer. The payment tendered on 5th June is said to have been conditional only. It did not represent an unequivocal offer to compensate the purchaser for the vendor's failure to complete the sale. It was expressly stated to be "strictly without prejudice" to the contention (which was expressly denied) that it was the purchaser who had wrongfully repudiated the agreement. Accordingly, even if the purchaser had accepted the sum tendered, it is said that the purchaser would have had to repay it to the vendor if the vendor had subsequently been proved to be correct in its primary contention. The acceptance by the vendor of what was alleged to be the purchaser's repudiatory breach of the agreement was intended, said Mr. Ma, to have some legal effect, and the reservation by the vendor of its rights must have included the vendor's right under clause 7 to forfeit the deposit. As Mr. Ma said, clauses 7 and 8 of the agreement were mutually exclusive. If the vendor was reserving its right to forfeit the deposit under clause 7, it could not at the same time have been able to invoke its right under clause 8 to escape its obligation to complete by tendering the sum which it did.

7. I cannot accept this argument. I do not read the tender of the sum in the letter of 5th June as conditional on the purchaser refuting the vendor's contention that it was the purchaser who had wrongfully repudiated the agreement. Indeed, I can discern no conditions attached to the tender of the sum at all. The words "strictly without prejudice to the above contention" did not mean that the vendor was thereby reserving the right to recover the sum paid in the event of it being found at the trial of the action that the purchaser had already wrongfully repudiated the agreement. What the words meant was that the tendering of the sum provided for by clause 8 was not to be construed as an admission that the vendor's primary contention was wrong. Nor do I read the acceptance by the vendor of what was alleged to be the purchaser's repudiatory breach of the agreement, and the reservation of its rights, as being inconsistent with the invocation of clause 8. Although it claimed to be entitled to invoke clause 7, it was electing not to do so, and was in fact electing to invoke clause 8. It was that election which distinguishes this case from Lee Gee Kee v. Chong Kai Tai [1996] 1 HKC 105 at p.116B-D (an appeal from which was allowed by the Privy Council on other grounds).

(ii) Delay. Clause 8 prevented the purchaser from seeking specific performance of the agreement or from claiming damages for its breach in limited circumstances. In order to gain the benefit of clause 8, the vendor had to pay to the purchaser the sum provided for by clause 8 "immediately" on its failure "to complete the sale in the manner ... contained" in the agreement. Mr. Edward Chan S.C. for the vendor contends that on a proper construction of clause 8, the payment had to be made, not immediately on the failure to complete, but immediately on the exercise by the vendor of clause 8. I reject that construction. It would mean, as Mr. Chan realistically conceded, that the vendor could always prevent the purchaser from enforcing the agreement, and it would render the remedy of specific performance a dead letter even if the vendor decided to invoke clause 8 months or even years later.

8. In the light of the proper construction of clause 8, Mr. Ma contends that the tender by the vendor on 5th June of the sum provided for by clause 8 did not immediately follow the vendor's failure to complete the sale in the manner contained in the agreement. That submission involves determining whether (a) there ever came a time when the vendor failed to complete the sale in the manner contained in the agreement, and (b) if so, whether that was soon enough before 5th June to make the tender of the sum provided for by clause 8 immediately after that failure had occurred.

9. Mr. Ma argues that the agreement contemplated the sale being completed on 6 February 1996 following the signing of a formal sale and purchase agreement by 19th December 1995. Since the formal sale and purchase agreement had not been signed by 19th December 1995, any subsequent completion would not have been completed, so Mr. Ma argues, in the manner contained in the agreement. I reject that argument. It is arguable that, although the agreement contemplated the signing of a formal sale and purchase agreement by 19th December 1995, there was no obligation on the parties to sign such an agreement then. That is because it is arguable that the only provision in the agreement about the signing of a formal sale and purchase agreement by 19th December 1995 did not require a formal sale and purchase agreement to be signed at all. It merely required the purchaser, in the event of the formal sale and purchase agreement being signed by that date, to pay the further deposit on such an agreement being signed. There are echoes of reasoning along those lines in the decision of the Court of Appeal in Yiu Yau Ping v. Fong Yee Lan [1992] 2 HKLR 167 at p.175.

10. But the principal ground on which I reject Mr. Ma's argument is that by 19th December 1995 no agreement had been reached on what terms the formal sale and purchase agreement should contain. I do not know why that was. Normal conveyancing practice would have required the vendor's solicitors to submit a draft to the purchaser's solicitors. I do not know whether their failure to do that was the reason why no agreement had been reached on its terms, or whether they had in fact submitted a draft but the purchaser's solicitors had not agreed its terms. If the correspondence is anything to go by, neither of the parties' solicitors regarded the fact that no formal sale and purchase agreement had been signed by 19th December 1995 as significant. They both continued to proceed as if completion could take place without one - as indeed it could. Accordingly, since the absence of a formal sale and purchase agreement did not prevent completion taking place on 6th February 1996, it follows that the vendor's failure to sign a formal sale and purchase agreement by 19th December 1995 did not amount to a failure to complete the sale in the manner contained in the agreement.

11. Mr. Ma's fallback argument was that since the agreement provided for completion to take place on 6th February 1996, and since the vendor did not complete the sale on that date, the vendor must have failed on that date to complete the sale in the manner contained in the agreement. I cannot accept that argument either. On 5th February, the vendor's solicitors were pressing the purchaser to complete on the following day. They requested the purchaser's solicitors for a draft assignment in accordance with normal conveyancing practice, which was for the purchaser's solicitors to submit a draft assignment for approval. It was the purchaser who declined to complete on 6th February. It is true that the purchaser declined to complete because of its concern about the lack of consent in respect of the swimming pool. But whether the purchaser was entitled to refuse to complete, in view of the fact that the swimming pool is now conceded to be an unauthorised structure, has yet to be decided. That is because one of the issues which the Ord. 14A summons sought a determination on was

"whether the [purchaser] was obliged to complete the sale and purchase of the property on 6th February ... by tendering the purchase price notwithstanding the fact that the swimming pool therein was an unauthorised structure."

Since Master Chu was not in fact asked to decide that issue, that issue remains an open one. I cannot decide it because it is by definition not appropriate for determination on an Ord. 14A summons. It follows that it may be held at any trial of the action that the purchaser's failure in breach of the agreement to perform its concurrent obligation to tender the purchase price on 6th February caused the vendor not to complete the sale. In that case, it could not be said that the vendor had failed to complete the sale in the manner contained in the agreement: the purchaser would have prevented the vendor from doing that.

12. Following 6th February, the parties took stock of the position. Neither of them pressed the other to complete the sale, and it is plain that the date originally fixed for completion having passed, the parties must be said to have impliedly agreed to defer completion for the time being. Eventually, on 11th March, the vendor's solicitors attempted to bring matters to a head by stating that the vendor was "ready and willing to complete the transaction on the basis of such title as [the vendor] may be able to pass". They gave the purchaser's solicitors a deadline of 18th March to indicate whether the purchaser wished to complete on that basis. The purchaser's solicitors replied on 18th March as follows:

"We are instructed to inform you that since your client is now in wrongful repudiation of the subject Provisional Agreement, our client will shortly commence legal proceedings against your client for such necessary reliefs."

That was followed by the issue of a writ, served on the vendor's solicitors by letter dated 26th March, which claimed (a) specific performance and (b) damages for breach of contract. Although the damages were sought in addition, as well as alternatively, to the claim for specific performance, the letter which enclosed the writ made it clear that the purchaser had elected to affirm the agreement. It is against that background that Mr. Ma contends that if the vendor could not be regarded as having failed to complete the sale in the manner contained in the agreement prior to 26th March, the vendor's failure to complete following the service of the writ amounted to a failure to complete the sale in the manner contained in the agreement. That was because the vendor would have seen that the purchaser had elected to affirm the agreement, to take an assignment of the property, and to claim damages for breach of the agreement by way of abatement of the purchase price.

13. This argument seems to me to suffer from the same vice as Mr. Ma's contention that the vendor had failed on 6th February to complete the sale in the manner contained in the agreement. The purchaser could not have elected to affirm the agreement if it had in fact lost the right to make that election by its failure to comply with the vendor's solicitor's deadline of 18th March. Whether it had lost the right to make that election has yet to be decided. That is because one of the other issues which the Ord. 14A summons sought a determination on was

"whether the [purchaser] was obliged to elect on or before 18th March 1996 ... as to whether it wished to complete the purchase and sale of the property or to rescind the Agreement".

The election was not made in the purchaser's solicitors' letter of 18th March because although that letter asserted that the vendor had wrongfully repudiated the agreement, the letter did not go on to say whether the purchaser accepted that wrongful repudiation as bringing the agreement to an end, or whether the purchaser was affirming the agreement and claiming damages for its breach. Since Master Chu was not in fact asked to determine whether the purchaser had lost the right to elect once 18th March had passed, the issue again remains an open one. It follows that it may be held at any trial of the action that there was no failure on the part of the vendor to complete the sale following the issue of the writ in the manner contained in the agreement, because the purchaser had by then lost the right to insist upon its completion.

14. I should add that this was not Mr. Chan's primary ground for refuting Mr. Ma's reliance on the service of the writ on 26th March. Mr. Chan's primary ground was that there was no question of the vendor failing to complete the sale on 26th March because the purchaser was not tendering at that time the balance of the purchase price. That argument, I believe, to be misconceived. By seeking a decree of specific performance from the court, the purchaser was asserting that the balance of the purchase price would be tendered once an order for specific performance was made.

15. It follows that I cannot decide whether any failure on the part of the vendor to complete the sale in the manner contained in the agreement occurred otherwise than immediately before the sum provided for by clause 8 was tendered on 5th June. The answer to the question depends on the determination of the two issues which I cannot decide, because they were thought inappropriate for determination on this summons under Ord. 14A.

TWO OTHER CONSIDERATIONS

16. There is one other reason which convinces me that this conclusion is correct. It relates back to the letter of 5th June. It will be recalled that in that letter the vendor purported to accept what it claimed to have been the purchaser's repudiatory breach of the agreement. That would only have been effective in law if the purchaser had in fact been in repudiatory breach of the agreement. Again, that was one of the issues which the Ord. 14A summons sought a determination on:

"... if the Agreement was not terminated on 18th March 1996 ... whether by virtue of the [purchaser's] failure to tender payment or make the Election by 5th June 1996, the [purchaser] was in repudiatory breach of the Agreement which repudiation was accepted by the [vendor] by its solicitors' letter dated 5th June 1996."

Again, that was one of the issues which, as it turned out, Master Chu was not asked to determine. If the vendor's purported acceptance of the purchaser's repudiatory breach is found at any trial of the action to have been effective, the vendor would not have been able to invoke clause 8 on 5th June, because the parties would already have been discharged from their rights and obligations under the agreement. Therefore, on the assumption favourable to the vendor that it had not failed to complete the sale in the manner contained in the agreement prior to 5th June, and if at the trial of the action it is found that the purchaser was in repudiatory breach of the agreement, the vendor could not have validly exercised its rights under clause 8, because (as Mr. Chan conceded) by then it no longer would have had the right to invoke clause 8. That is another reason why the question of law which Master Chu was asked to determine could not have been determined without her determining, at the same time, a matter which was no longer within her remit.

17. Finally, I want to deal with a particular problem which troubled me at one stage in the course of the hearing. The vendor could only have invoked clause 8 if it had in fact failed to complete the sale in the manner contained in the agreement. The vendor's case is that it had not failed to do that prior to 5th June. If that is right, when did it fail to do so? Mr. Chan says that it failed to do so on 5th June itself. The construction which I have placed on the letter of 5th June means that that is correct (assuming, of course, that the various issues which I cannot decide now are decided in favour of the vendor at any trial of the action). Since the tender of the sum provided for by clause 8 was unconditional, the vendor was informing the purchaser that it had decided not to complete the sale. That amounted to a failure on the part of the vendor to complete the sale in the manner contained in the agreement.

CONCLUSION

18. I have not dealt in this judgment with all of the complex and sophisticated arguments which have been deployed on this appeal. I have only dealt with those which seem to me to be determinative of the issues which I have to decide. The conclusion which I have reached is that the one question which Master Chu was asked to determine, namely whether the vendor had validly exercised its power under clause 8 to terminate the agreement on 5th June, was not one which could have been determined without determining a number of other issues which were not within her remit. It follows that the question which she was asked to determine was not one which, to use the words of Ord. 14A r.1(1)(a), "is suitable for determination without a full trial of the action". I regret having reached this conclusion, because I am sure that the parties were hoping that the determination of the question which Master Chu was asked to determine would have greatly assisted them in resolving their differences. However, for the reasons which I have endeavoured to give, the only order which I can make is to allow the appeal, to set aside the order of Master Chu, and to dismiss the vendor's summons under Ord. 14A.