LAW PING YING TRICIA AND ANOTHER v. HUI KIN SANG

DCCJ 3232/2010

IN THE DISTRICT COURT OF

THE HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3232 OF 2010

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JUDGMENT

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Background

1.  The defendant is the registered owner of the premises known as Flat A on the 2^nd Floor and the adjacent flat roof of Tung Fat House, No. 308 Sai Yeung Choi Street North, Kowloon, Hong Kong (“the Premises”).

2.  By a provisional agreement for sale and purchase in Chinese language dated 22 April 2010 and duly signed by the 1^st and 2^nd plaintiffs as purchasers and the defendant as vendor (“the Agreement”), the Premises were sold to the plaintiffs at the price of $2,500,000.00.

3.  Clause 4 of the Agreement has the following express terms in Chinese:-

“(1) 臨時訂金: 簽署本合約時, 買方須即付臨時訂金: HK$130,000.00

(2) 正式合約: 2010年5月15日或之前須簽署正式買賣合約及買方須付訂金: HK$120,000.00

(3) 完成交易: 2010年6月21日或之前須完成交易及買方須付清樓價餘款: HK$2,250,000.00”

4.  It means that (1) the plaintiffs have to pay a temporary deposit (臨時訂金) of $130,000.00 upon signing of the Agreement; (2) the parties have to sign a formal sale and purchase agreement and the plaintiffs have to pay a deposit (訂金) of $120,000.00 on or before 15 May 2010; and (3) the deal has to be completed and the plaintiffs have to pay the balance purchase price of $2,250,000.00 on or before 21 June 2010.

5.  The parties have no dispute that the plaintiffs have paid the temporary deposit of $130,000.00 to the defendant on 22 April 2010 upon signing of the Agreement.  However, the plaintiffs contend that they have also paid the deposit of $120,000.00 on 15 April 2010, whereas the defendant contends that the plaintiffs have not paid the same.

6.  It is also not disputed that the Premises were sold free from encumbrances as stipulated in clause 6 of the Agreement which reads as follows:-

“除另作聲明外，該物業是以免除所有產權負擔及在業權妥善之情況下售予買方。”

7.  The plaintiffs allege that the defendant was in breach of clause 6 of the Agreement in that the Premises were not free from encumbrances, and this is reflected by the following matters:-

(a) Before the date of signing of the Agreement (ie 22 April 2010), on 18 March 2010, the management office of Tung Fat House sent a letter of complaint of water leakage from the Premises and some photographs to the defendant.

(b)     The owner and the tenant of the flats immediately below (ie Flats A-C on the 1^st Floor of Tung Fat House), through their solicitors, sent a demand letter dated 12 May 2010 to the defendant’s solicitors whereby the defendant was requested to rectify the water leakage problem at the Premises.

8.  The plaintiffs also allege that the defendant should have known the water leakage problem as aforesaid but did not disclose the problem, which amounted to an encumbrance, to the plaintiffs before the signing of the Agreement.

9.  Thus, the plaintiffs contend that the defendant had failed to prove, show and/or give good title of the Premises on or before the scheduled completion date (ie 21 June 2010) and it was a repudiation of the Agreement.  By letter dated 23 June 2010 from the plaintiffs’ solicitors to the defendant’s solicitors, the plaintiffs accepted the repudiation.

10.  According to clause 8(2) of the Agreement, if the defendant fails to comply with the terms of the Agreement, he has to return to the plaintiffs the deposit paid by them immediately and compensate the plaintiffs with an amount equal to the amount of the deposit.  Clause 8(2) reads as follows:-

“賣方如不依照條款履行本合約，則須立即退回買方所付訂金，及須以訂金相同之金額賠償給買方”

11.  In the circumstances, the plaintiffs claim against the defendant for the return of the temporary deposit of $130,000.00 and the deposit of $120,000.00, as well as the compensation of $250,000.00 pursuant to clause 8(2) of the Agreement.

12.  The defendant, on the other hand, denies that he was in breach of clause 6 of the Agreement or that he had failed to prove, show and/or give title of the Premises on or before the scheduled completion date.  The defendant contends that the Premises were in fact free from encumbrances and the aforesaid matters relied on by the plaintiffs do not constitute an encumbrance to the Premises.  The defendant further contends that the plaintiffs had inspected the Premises before and after entering into the Agreement and should have noticed the aforesaid matters.

13.  The defendant also avers that the plaintiffs are not entitled to rely on clause 8(2) of the Agreement as it is a penalty clause, and that even if the plaintiffs were entitled to rely on that clause, the plaintiffs are only entitled to claim compensation based on the deposit already paid by them, ie $130,000.00.

14.  Thus, the defendant counterclaims against the plaintiffs for their breach of the Agreement and seeks for a declaration that he has completed his duty to prove, show and give good title as well as a declaration that he is entitled to forfeit the temporary deposit of $130,000.00.

The issues

15.  By the Agreed Statement of Issues in Dispute dated 10 May 2012, the parties agree that the following are the issues in this case:-

A.   On liability:

(1)Whether the defendant failed to show and/or give good title of the Premises as alleged by the plaintiffs?

(2)Whether the defendant repudiated the Agreement as alleged by the plaintiffs?

(3)Whether the plaintiffs breached the Agreement as alleged by the defendant?

B.   On quantum:

(1)If the defendant was found to have repudiated the Agreement,

(a)  what is the amount of deposit to be returned?

(b)whether clause 8(2) is enforceable?

(c)  if clause 8(2) is enforceable, what is the amount of liquidated damages?

(2)If the plaintiffs were found to have breached the Agreement, whether the defendant was entitled to forfeit the initial deposit?

Liability

16.  The above issues concerning liability turn on (1) whether there was indeed any water leakage problem at the Premises and (2) whether such a problem is an encumbrance of the Premises.  The defendant does not dispute that he has the duty to show and give good title of the Premises to the plaintiffs, and that the plaintiffs as purchasers should not be compelled “to take a title about which there is some doubt or which might involve the purchaser in litigation” as held by Rogers VP in Wong Kwok Yan & Chan Ching Sum v Pon Chi Lok, CACV 38/2008.

17.  The defendant also confirms at the trial that he will not rely on the defence that the Premises were sold on an “as is” basis and that he has no knowledge or notice of the water leakage problem of the Premises before signing the Agreement, as these two matters were not pleaded in his Amended Defence and Counterclaim.

18.  Having considered all the evidence and the submissions of the parties, I have no hesitation in finding that there was water leakage problem existing at the Premises before the completion date on 21 June 2010.  The aforesaid letters dated 18 March 2010 and 12 May 2010 respectively show clearly that the water leaking problems started in about March 2010 after the defendant had removed the illegal structures at the flat roof of the Premises and the water leaking problem continued in May 2010.  The water seepage investigation report (“the Report”) prepared by DCL Consultants Limited (“DCL”), which had inspections at the Premises and the flat below on 29 June 2010, 6 July 2010 and 21 July 2010, confirms that drainage leakage of the floor drain and floor leakage of the Premises are likely possible sources of seepage.  In fact, the Report indicates that it is almost certainly so.

19.  However, the defendant submits that the evidence as it stands is not sufficient to show that before completion on 21 June 2012, there was water leakage from the Premises.  The defendant relies on two matters to support this contention. First, the plaintiffs’ first witness, Mr Tsang Fung, Daniel, who is a director of DCL and produced the Report, confirmed in cross-examination that he cannot say what had happened before 29 June 2010 (the 1^st inspection by them).  Secondly, Mr Tsang confirmed that the test conducted by Food and Environmental Hygiene Department (“FEHD”) on 26 May 2010 did not bring about any positive results, which supports a reasonable inference that the water leakage found by DCL happened afterwards.

20.  I do not accept the defendant’s contention in this regard at all.  FEHD has never made a finding that there was no water leakage at the Premises.  They were just not sure about the source of water leakage.  In the letter dated 10 June 2010 from the BD/FEHD Office 2 (Mong Kok) to the tenant of the flat below the Premises, FEHD actually said that:-

“直至目前，仍未能確定引致滲水的源頭。由於滲水問題持續，本處會考慮進行專業調查。”

21.  It is clear from the said letter that FEHD did not state that there was no water leakage problem even though they were not sure about the source, but, on the contrary, it confirms that the water leakage problem was continuing and required professional investigation.  DCL was in fact engaged by FEHD to conduct such professional investigation.  No doubt, Mr Tsang of DCL cannot say what happened before 29 June 2010, as they only had the first inspection of the Premises on that day.  It is extremely far-fetched for the defendant to suggest that there was no water leakage problem before the intended completion date based on these two matters.

22.  I think the evidence shows clearly, or at least it is more probable than not, that there was water leakage problem shortly after the removal of illegal structures of the Premises around March 2010 and it was subsisting during the following months including the intended date for completion.  I also find that the source of water leakage, as confirmed by the Report, was the drainage leakage of the floor drain and the floor leakage of the Premises.  Thus, the short answer to the first question above is that there was water leakage problem at the Premises before the intended completion date.

23.  As to the second question of whether such water leakage problem is an encumbrance of the Premises, it is clear to me that the plaintiffs would be liable to the owner and the tenant of the flat below for water escaping from the Premises to the flat below.  The doctrine of Rylands v Fletcher is applicable here. Thus, there would be a potential claim made by the owner and/or the tenant of the flats below against the plaintiffs and it is an encumbrance of the Premises. The plaintiffs should not be compelled to take such a title as it would involve them in litigation (see Wong Kwok Yan and Chan Ching Sum v Pon Chi Lok, supra). 

24.  However, the defendant submits that the only person liable for nuisance would be the wrongdoer, ie the defendant, even if he is no longer in occupation of the Premises, and that the plaintiffs would only be liable if they allowed the continuance of the wrongdoing.  The defendant argues that even if there is a potential risk of litigation, such litigation would not be made against the plaintiffs and hence the plaintiffs failed to prove that there were encumbrances to the title.

25.  I do not see any merit in the defendant’s arguments at all.  In Lucky Health International Enterprise Limited v Chi Kit Company Limited and Loong Hock Limited, CACV 10 of 1999, Mortimer VP summarized the law clearly as follows:-

‘81. The vendor’s obligation – apart from the express terms of clause 19 of the Agreement to convey “free from encumbrances” – is to make good title. That is a title which at all times and in all circumstances can be forced on an unwilling purchaser.

82.   If a right or obligation can be enforced against the owner of land as owner, and therefore against the purchaser as owner, at the time of completion (the relevant time) the vendor will not be able to make good title.

83.   As to disclosure, it is the duty of the vendor to disclose to the purchaser any right or liability which can be enforced against it as owner as this would amount to an encumbrance.’

26.  From the above judgment, it is clear that in considering whether there is a good title shown, the relevant time is “at the time of completion”, and if at that time, an obligation can be enforced against the vendor as owner, and therefore against the purchaser as owner, the vendor will not be able to make good title. If the defendant’s submission is correct, it means that the plaintiffs would not be liable as owners (even though the defendant was liable as owner) at the time of completion, and one should look beyond the time of completion to see whether the plaintiffs would remedy the wrongdoing before they can be held liable.  This is obviously wrong and not in accordance with the above judgment.

27.  Thus, I have no hesitation in finding that the water leakage problem is an encumbrance which would subject the plaintiffs to potential litigation and hence the title is bad.

28.  From the above judgment, it is also clear that the defendant has a duty to disclose such a liability to the plaintiffs.  The evidence in this case shows clearly that the defendant did not disclose the water leakage problem to the plaintiffs.  It is not right for the defendant to suggest that the plaintiffs had inspected the Premises before and after entering into the Agreement and should have noticed the water leakage problem.  I agree with the plaintiff that the water leakage problem in this case is latent and could not be discovered by the plaintiff upon inspection of the Premises.

29.  Thus, I find that the Premises were not free from encumbrances, and my answers to the three issues on liability mentioned above are as follows:-

(1)The defendant has failed to show and/or give good title of the Premises to the plaintiffs;

(2)The defendant has repudiated the Agreement; and

(3)The plaintiffs did not breach the Agreement.

Quantum

30.  The parties dispute on whether the deposit of $120,000.00 was paid or not.  From the evidence, it is clear that the plaintiffs did pay $120,000.00 to their then solicitors, Messrs Tam & Partners (“TP”), who were acting for the plaintiffs for the purchase of the Premises.  On 15 May 2010, TP sent their firm’s own cheque of $120,000.00 (“the Cheque”) to the defendant’s then solicitors, Messrs S. Cheng & Yeung (“CY”).  The Cheque was drawn in favour of the defendant and for payment of the deposit pursuant to clause 4(2) of the Agreement.

31.  However, by letter dated 18 June 2010, TP notified CY that the further deposit (ie the payment represented by the Cheque) can only be released to the defendant pursuant to the provisions of the Agreement.  As the parties had dispute over the water leakage problem, no formal sale and purchase agreement was signed, and by letter dated the same date, CY replied to TP that the Agreement would be treated as the formal sale and purchase agreement and the further deposit would be released to the defendant accordingly.

32.  After several rounds of exchange of correspondence between TP and CY, the parties still could not agree on whether good title had been shown and hence no completion took place on 21 June 2010.  By letter dated 23 June 2010, CY notified TP that unless the plaintiffs complete the sale and purchase within the next 3 days, the defendant will accept the plaintiffs’ breach of the Agreement and thereafter the defendant will consider exercising his rights under the Agreement as he thinks fit.

33.  On the other hand, by letter also dated 23 June 2010, TP informed CY that they had instructions to demand from the defendant for the repayment of the deposits in the sum of $250,000.00 within 7 days thereafter, failing which legal proceedings will be instituted against the defendant for the recovery of the same.

34.  Nevertheless, no completion or repayment of the deposits took place thereafter.  The plaintiffs then changed their solicitors to Messrs Huen & Partners (“HP”). By letter dated 20 July 2010 from HP to CY, the plaintiffs demanded again for the return of the deposits in the total sum of $250,000.00 within the next 7 days, failing which legal proceedings will be commenced.  No reply to this letter was given by CY or the defendant.

35.  On 17 September 2010, the plaintiffs commenced the present proceedings against the defendant.  The defendant filed his Defence and Counterclaim on 29 October 2010.  In the Defence and Counterclaim, the defendant admitted that the plaintiffs had paid the deposit of $120,000.00.  However, the defendant amended the Defence and Counterclaim on 10 November 2011 and withdrew his admission of the payment of $120,000.00.  Instead, the defendant alleges that the Cheque was never released to the defendant as a result of the letter dated 18 June 2010 from TP to CY stating that the Cheque can only be released to the defendant pursuant to the provisions of the Agreement, and that as no formal agreement for sale and purchase was signed, the Cheque was not released to the defendant.

36.  By letter dated 22 November 2011 from CY to TP, CY purported to return the Cheque to TP for their further handling, as the defendant had amended his Defence and Counterclaim.  However, as TP were no longer acting for the plaintiffs, TP returned the Cheque to CY by their letter dated 24 November 2011.  In fact, at that time the plaintiffs were already acting in person in place of HP.  The Notice to Act in Person was filed on 15 November 2011.  The plaintiffs’ present solicitors, Messrs Chung Fong & Co, were appointed to act for them on 25 November 2011.

37.  The defendant contends that the Cheque was never passed to him as CY were requested by TP that the Cheque can only be cleared pursuant to the provisions of the Agreement, and as no formal sale and purchase agreement was signed, the defendant was never able to cash the Cheque.  The defendant also submits that according to clause 4(2) of the Agreement, the payment of $120,000.00 was conditional upon signing of the formal sale and purchase agreement, and that as held by Litton JA (as he then was) in Man Sun Finance (International) Corp v Lee Ming Ching Stephen [1993] 1 HKC 113, “the ‘balance of deposit’ was never ‘paid’.  It was tendered, but not paid.” 

38.  The defendant further submits that the plaintiffs should not enjoy double benefits of claiming for the sum of $120,000.00 from the defendant and subsequently demanding repayment of this amount from TP.  The defendant is however prepared to return the Cheque to the plaintiffs as it does not form part of the deposit of the Agreement.

39.  I do not accept any of the defendant’s submissions in this regard.  First of all, the wordings in clause 4(2) do not give rise to any interpretation that the payment of $120,000.00 was conditional upon the signing of the formal sale and purchase agreement.  The word “and” (“及” in Chinese) just indicates that both the signing of the formal sale and purchase agreement “and” the payment of $120,000.00 have to be done on or before 15 May 2010.  Unlike the case of Man Sun Finance, supra,there are no such words like “the deposit of $120,000.00 shall be paid upon signing of the formal sale and purchase agreement” in clause 4(2) of the Agreement.

40.  In fact, in See To Keung and Lee Hing Kin v Sunny Way Limited, CACV 25 of 2006, the Court of Appeal had to interpret the clause “於簽訂正式買賣合約之時或之前，即2004年11月8日加付訂金港幣$2,480,000.00”, which was translated to mean “Upon signing the Formal Agreement for Sale and Purchase or before, that is [on] 8 November 2004, further payment of deposit in the sum of HK$2,480,000.”  The Court of Appeal held that the obligation under this clause was just for the defendant to pay the further deposit of HK$2,480,000.00 on 8 November 2004 irrespective of whether a Formal Sale and Purchase Agreement was signed on that date.

41.  I think clause 4(2) of the Agreement is even clearer than the clause in the case of See To Keung, supra.  There can be no interpretation that the payment of $120,000.00 is conditional upon signing of the formal sale and purchase agreement.

42.  Moreover, TP had never made the payment of $120,000.00 conditional upon signing of the formal sale and purchase agreement.  The letter dated 18 June 2010 only stated that “the further deposits can only be released to your client pursuant to the provisions of the Provisional Agreement for Sale and Purchase dated 22^nd April 2010”.  It is just the defendant’s own interpretation that the payment was conditional upon such signing.  In fact, the defendant had ignored the plaintiffs’ request and treated the Agreement as the formal sale and purchase agreement.  The defendant is entitled to do that pursuant to the case of See To Keung, supra.  Thus, it does not really matter whether the parties had signed a formal sale and purchase agreement or not.

43.  Further, even if there was such a condition, it was waived by the defendant, as it was stated clearly in CY’s letter dated 18 June 2010 that “the further deposit will be released to our client accordingly”.  In other words, the payment of $120,000.00 was not only tendered by the plaintiffs but it was accepted by the defendant.

44.  The defendant cannot say that the plaintiffs would enjoy double benefits by claiming against the defendant and obtaining repayment from TP subsequently. The Cheque has already been issued to the defendant and is still in his possession.  The defendant can always ask TP to honour the Cheque.  It is trite law that a cheque should be honoured as cash.  If the validity period of the Cheque has expired, the defendant is entitled to ask TP to reissue a new cheque for the same amount.  I do not see how TP can resist issuing a new cheque to the defendant as they still have the plaintiffs’ money in their account.  This money is always intended to be passed to the defendant.  On the other hand, there is no reason for TP to refund the plaintiffs, as they did issue the Cheque to the defendant and they are liable to pay the money to the defendant.

45.  The fact that the defendant himself did not receive the Cheque from CY or have no knowledge of the Cheque is neither here nor there, as CY was acting as the defendant’s agent and they have clearly accepted the payment as aforesaid.  As the defendant is bound by the actions of CY, the subsequent return of the Cheque to TP after the Defence and Counterclaim was amended is also futile.

46.  Thus, it is my finding that the plaintiffs have paid the deposit of $120,000.00. Together with the temporary deposit of $130,000.00, a total deposit of $250,000.00 was therefore paid to the defendant.  The defendant is liable to refund the sum of $250,000.00 to the plaintiffs as a result of his repudiation of the Agreement as aforesaid.

47.  In addition, the defendant is also liable to pay a further sum of $250,000.00 as liquidated damages to the plaintiffs pursuant to clause 8(2) of the Agreement. I do not accept the defendant’s submission that clause 8(2) is a penalty clause.  The defendant argues at length that the parties had no pre-estimate of the damages and the amount payable is just an arbitrary figure which is picked in order to hold the vendor to the contract, or as the cases sometimes say, ‘in terrorem’ (see Cheung Ching Ping Stephen v Allcom Ltd [2010] 2 HKLRD 324).

48.  However, the amount payable by the defendant under clause 8(2) is just the same amount of the deposit paid, ie 10 % of the purchase price of the Premises.  As held by the Court of Final Appeal in Polyset Limited v Panhandat Limited, FACV 28 of 2000, 10% is the conventional amount in Hong Kong, and “Where (in the absence of fraud or vitiating factors other than excessiveness) the amount of an agreed deposit matches or is less than the conventional amount, its forfeiture will not attract judicial scrutiny, whether or not the innocent party has suffered any loss as a result of the other party’s breach”.

49.  The defendant seeks to argue that forfeiture of deposit by the vendor is different from the vendor paying damages to the purchaser.  I simply cannot see how the two situations can be different.  When forfeiture of 10% of the purchase price is a reasonable pre-estimate of the loss of the vendor, it should also be a reasonable pre-estimate of the loss of the purchaser.  When 10% is the conventional amount and attract no judicial scrutiny of the vendor, it should also be a conventional amount attracting no judicial scrutiny of the purchaser.

50.  Thus, in view of the judgment of Polyset Limited, supra, and as there is no fraud or other vitiating factors in this case, I accept that the amount payable by the defendant under clause 8(2) of the Agreement is a reasonable pre-estimate of the plaintiffs’ loss without further proof, and that clause 8(2) cannot be regarded as a penalty clause.  The plaintiffs are entitled to enforce clause 8(2) against the defendant.

51.  My answers to the above issues on quantum are therefore as follows:-

(1) (a)   The amount of deposit to be returned is $250,000.00.

  (b)   Clause 8(2) is enforceable.

  (c)   The amount of liquidated damages is $250,000.00.

(2)   The defendant is not entitled to forfeit the initial deposit.

Conclusion

52.  By reasons aforesaid, I find that the plaintiffs are entitled to judgment against the defendant as claimed.

53.  I therefore order as follows:-

(1)The defendant do pay the sum of $500,000.00 to the plaintiffs together with interests thereon at judgment rate from the date of the Writ until judgment and thereafter interests on all the outstanding judgment sums at judgment rate until payment.

(2)Costs order nisi: The defendant do pay the plaintiffs costs of the action to be taxed if not agreed.