CHEUNG CHING PING STEPHEN v. ALLCOM LTD

CACV 187/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 187 OF 2009

(ON APPEAL FROM HCA NO. 2208 OF 2008)

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BETWEEN

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a decision of Deputy High Court Judge Carlson given on 23 July 2009. The matter before the judge was an application for summary judgment under Order 14 of the Rules of the High Court. The plaintiff’s claim in the action was in respect of a contract to purchase a house, namely House No. 5 Colour by the River on Lot 999 in D.D. 214, Nam Wai, Sai Kung (“the property”). The plaintiff sought a declaration that he had rescinded the provisional agreement for the purchase of the property dated 20 November 2007 (“the agreement”) and claimed the return of the deposit together with the sum of HK$1 million as liquidated damages. The judge gave judgment in favour of the plaintiff. At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

2.  The agreement was in a familiar format with each clause being both in Chinese and English. There has been no dispute arising out of any difference between the two forms of wording. The purchase price of the property was given as $36 million. There was to be an initial deposit paid upon the signing of the agreement of $1 million. Upon the signing of the formal agreement for sale and purchase, on or before the 10 December 2007, a further deposit of $800,000 was to be paid. A further deposit of HK$1.8 million was payable on or before 19 January 2008. The balance of the purchase price was to be paid upon completion on or before 19 August 2008.

3.  Clause 7 of the agreement was in a common form and provided that the initial deposit would be forfeited to the vendor should the purchaser fail to complete the purchase in the manner provided in the agreement. The English version of clause 8 read as follows:

“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 the 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.  The clauses relating to commission payable by the purchaser and the vendor were deleted save that there was a provision which would be applicable if the vendor and purchaser agreed to cancel the transaction.

5.  Clause 18 was handwritten in Chinese and the translation pleaded in the statement of claim, in respect of which there has been no dispute, was:

“The Purchaser understands that the Deed of Mutual Covenants relating to the Premises is still being approved by the Lands Department regarding changes in the structural design of the retaining wall of the Lot and the change of the vehicle by-pass; this agreement shall be registered one month after the approval of the Deed of Mutual Covenant”

6.  Finally clause 19, also handwritten in Chinese, provided that the vendor would be responsible for the payment of the stamp duty.

7.  The judge held that time was of the essence of the contract and, in that respect, there has been no dispute on this appeal.

8.  The time for the completion of the contract, 19 August 2008, passed and on the following day the plaintiff’s solicitors wrote to the defendant’s solicitors. The letter was headed “SUBJECT TO CONTRACT BUT WITHOUT PREJUDICE TO THE PROVISIONAL AGREEMENT FOR SALE AND PURCHASE ENTERED INTO BETWEEN THE PARTIES”.

9.  The second paragraph of that letter read as follows:

“Whilst awaiting receipt from you certified copy of the duly executed Deed of Variation of Government Grant please send us a copy of the receipt demand note for the relevant Government charges, a copy of the draft Assignment of the Common Areas and the revised draft Agreement for Sale and Purchase.

Meantime, all our client's rights are reserved.”

10.  Apparently, there was no communication following that and on 11 September 2008 the plaintiff’s solicitors wrote again to the defendant’s solicitors. The letter was again headed with the same heading and on this occasion the body of the letter was short and succinct as follows:

“Without prejudice to our client’s rights please let us hear from you on the progress of the Deed of Variation and the application to amend the approved Deed of Mutual Covenant.”

11.  This elicited the following response from the defendant’s solicitors with the heading “Subject to Contract but without prejudice to previous binding agreement(s) (if any)”. The body of the letter read:

“  1.  Deed of Variation of Government Grant

We are still awaiting for the reply from Lands Department.

2.  Application to amend the approved Deed of Mutual Covenant

We send you herewith a copy of Letter dated 4 September 2008 for your reference.  As the LACO fee of $4,890.00 has already been paid by us, we are still awaiting for the reply from Lands Department.

We shall inform you the aforesaid upon our receipts from Lands Department.”

12.  On 10 October 2008 the plaintiff’s solicitors wrote to the defendant’s solicitors in the following terms:

“We are instructed to inform you, which we hereby do, that our client withdraws his offer to purchase the above property.  Please return to us stakeholder money in the total sum of HK$3,600,000.00 together with interest accrued thereon within the next 3 days hereof.”

13.  The title deeds were sent back to the defendant’s solicitors. That letter elicited a response from the defendant’s solicitors on 14 October 2008 which included the following:

“Our respective clients understand that the Provisional Agreement for Sale and Purchase signed by the parties is subject to the approval of the draft Deed of Mutual Covenant and slope upgrading works by the Lands Department.  The Lands Department has already issued letter of approval to the draft Deed of Mutual Covenant on 18^th March 2008.  In regard to the slope upgrading works, application for variation of the conditions in the Government Grant is in progress and we anticipate that approval will be granted shortly.

Please advise your client of his obligation to proceed with the transaction in accordance with the terms and conditions of the Provisional Agreement for Sale and Purchase dated 20^th November 2007.  Any failure to comply with the said terms and conditions by your client will be treated as unilateral repudiation of the contract and all deposits paid by your client will be forfeited.”

14.  On the following day the plaintiff’s solicitors wrote back, as the judge observed, pointing out that the vendors had not been in a position to complete because the requisite Government consents had not been obtained. The letter concluded by demanding return of the deposit by the following day, failing which legal proceedings would follow.

15.  On 28 October 2008, possibly, if the indication in the correspondence is correct, having consulted counsel, the defendant’s solicitors wrote indicating that they could not understand the basis of the plaintiff’s argument and asked for authority as to why the Provisional Agreement was void ab initio. This elicited a response dated 31 October 2008 in which the plaintiff’s solicitors stated:

“Even if, which is not admitted, the Provisional Agreement is not void, your client had committed a repudiatory breach by, inter alia, failure to show and give a good title (including but not limited to failure to produce the relevant Modification Letter from Lands Department) before completion date as stated therein.  In the circumstances, our client has accepted the repudiation and hence the Provisional Agreement – even if not void – is now discharged and our client released from any future performance thereunder.”

16.  In the court below, the plaintiff’s case was put on the basis that the defendant had been in no position to complete the contract when the date for completion arrived. Indeed it was not until January of the following year that the defendant’s solicitors wrote a letter in which they claimed that the defendant was then in a position to complete. It was thus the plaintiff’s case that he had been entitled to accept the defendant’s repudiation and that there had been no waiver on the plaintiff’s part.

17.  On the defendant’s part it was said that the plaintiff had adopted a “wait and see” attitude and, when the global financial downturn became apparent in October 2008, the plaintiff then chose to try extricate himself from the contract. It is the defendant’s case that the plaintiff was not entitled to wait as long as he chose before accepting repudiation and, if the plaintiff waited too long, he lost his right to accept repudiation.

18.  The judge held in the plaintiff’s favour saying at paragraph 39 of the judgment:

“39.  The question here is whether the August and September letters and the wait and see attitude, certainly until 10 October, very nearly two months after 19 August could be construed as a waiver.  It seems to me that the law will allow the innocent party a reasonable degree of latitude and what the court is required to look for is positive and unambiguous conduct that there has been a waiver and that the agreement remains extant.  I describe it as a latitude in the sense of the innocent party not having to jump in at the first opportunity after time for completion has passed and asserting repudiatory breach by the other contracting party.  Notwithstanding a passage of 10 weeks in this case, it seems to me that the purchaser was entitled to stand on his rights without expressly asserting them, to see how the matter developed.  Once it had become clear, (commercial considerations aside given the global financial crisis) that the vendor was in no state to complete any time soon, on the authority of cases such as Wellfit and Union Eagle Limited, the purchaser was entitled to pull the shutters down, assert repudiation and then accept it and claim his rights under the PSP.”

The plaintiff’s acceptance of the defendant’s repudiation

19.  On this appeal Mr Chain, who did not appear in the court below, maintained that although an innocent party was entitled to a reasonable time to make a decision as to whether to accept repudiation on behalf of a party in default, the innocent party was not entitled to an unlimited time to wait and see whether it suited him to accept the repudiation or affirm the contract. Relying on the facts in the cases of Wellfit Investment Ltd v Poly Commence Ltd & Another [1997] 2 HKC 236 and Union Eagle Ltd v Golden Achievement Ltd [1997] 1 HKC 173 he said that the period should be measured in minutes or hours, not in months. It was Mr Chain’s submission that if the innocent party waited for too long and did not act promptly, the correct question to be asked was whether there was a continued repudiation by the other party which the innocent party was entitled to accept. It was submitted that the judge asked the wrong question, namely as to whether there had been a waiver by the plaintiff of his rights and was wrong to consider whether the plaintiff had made a clear and unambiguous statement that he would accept late performance.

20.  In my view, the judge was correct in saying that the defendant is not entitled to rely upon the letters of 20 August and 11 September as a ground for saying that there had been a waiver of the breach or affirmation of the contract. Those letters made quite clear that they were without prejudice and they reserved all the plaintiff’s rights. Whilst Mr Chain is able to say that it would appear that the plaintiff might have been prepared to proceed with completion of the contract had the defendant been in a position to do so, I do not consider that the defendant is entitled to rely upon those letters to the prejudice of the plaintiff’s rights, still less as an act of waiver. Put shortly, the plaintiff had not prejudiced his rights and was still in a position to accept the repudiation in October and that he did.

21.  In so far as it was argued on this appeal that there was a limit to the length of time which an innocent party may take before deciding whether to accept repudiation or affirm the contract, it seems to me that the matter really revolves upon whether the delay is consistent only with an affirmation of the contract or, put in another way, the circumstances surrounding the delay dictate that the innocent party must have affirmed the contract or, at least, give rise to a condition where the party in default could raise an estoppel. Despite a request from the court, no authority could be produced by either counsel for the proposition that delay alone could bar an innocent party’s right to accept repudiation. Further research by the court has revealed a decision of the Court of Appeal in England, Allen v Robles and Another, Compagnie Parisienne de Garantie Third Party [1969] 1 WLR 1193 which supports the proposition that an innocent party may delay accepting a repudiation because lapse of time did not operate against a party who was entitled to elect to repudiate liability under a contract unless there was prejudice to the defendant or rights of third parties had intervened or the delay was of such a length as to be evidence that they had in truth decided to accept liability.

22.  That also seems to me to be the conclusion which was reached in Stocznia Gdanska SA v Latvian Shipping Co and others (No 3) [2002] 2 All ER (Comm) 768, [2002] 2 Lloyd’s Rep 436, by Rix LJ when he said at paragraph 87:

“In my judgment, there is of course a middle ground between acceptance of repudiation and affirmation of the contract, and that is the period when the innocent party is making up his mind what to do.  If he does nothing for too long, there may come a time when the law will treat him as having affirmed.  If he maintains the contract in being for the moment, while reserving his right to treat it as repudiated if his contract partner persists in his repudiation, then he has not yet elected.  As long as the contract remains alive, the innocent party runs the risk that a merely anticipatory repudiatory breach, a thing ‘writ in water’ until acceptance, can be overtaken by another event which prejudices the innocent party’s rights under the contract-such as frustration or even his own breach.  He also runs the risk, if that is the right word, that the party in repudiation will resume performance of the contract and thus end any continuing right in the innocent party to elect to accept the former repudiation as terminating the contract.”

Clause 8 of the agreement

23.  In the court below there appears to have been no discussion as to clause 8 of the agreement. The defendant did not raise any question as to the validity or applicability of that clause either in the pleadings or in the evidence. However, in the notice of appeal the point was taken that, first of all, clauses 7 and 8 ceased to be operative after the further deposit of $800,000 was paid on 10 December 2007 and, secondly, that, if clause 8 did remain operative, it amounted to a penalty. On the appeal the argument turned upon the latter point.

24.  Mr Chain took the point that the provision as to payment of $1 million in clause 8 was a penalty. He relied upon what was said in the advice of the Privy Council in the case of Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 for the proposition that for such a clause to be enforceable it must be a reasonable estimate of the cost to the innocent party should there be a breach of contract. Both in that case and in the decision of the Court of Final Appeal in the case of Polyset Ltd v Panhandat Limited [2002] 5 HKCFAR 234 reference is made to the fact that because of the long standing use of the provision of a deposit of 10% which would be forfeited on breach of contract, that provision would not attract judicial scrutiny, whether or not the innocent party, in that case the vendor, had suffered any loss as a result of the other party’s breach. However, unlike deposits, liquidated damages focused on the loss which was considered likely to result from any breach in the future. It was to be distinguished from a forfeiture of deposit since the innocent party in that case could claim damages in respect of any loss suffered over and above the value of the deposit. What had to be considered is whether the overriding purpose of provision was to impose a penalty, which would hold the party in terrorem, or whether it was a reasonable pre-estimate of loss.

25.  Miss Eu SC, who appeared on behalf of the plaintiff, took strenuous objection to the point being raised at this stage. She said that because the point had not been taken on the pleadings or in the evidence, the plaintiff was deprived of the opportunity of giving evidence either as to the circumstances in which clause 8 came to be incorporated into the agreement and as to how it can be said that it is a reasonable pre-estimate of the damages likely to be suffered by the plaintiff.

26.  As to the first point the format of the agreement is such that it can hardly be supposed that, on the face of the matter, there was negotiation leading to the drafting of clause 8. As to the question of pre-estimate, it was suggested in the skeleton argument that the parties may have taken into account the likely conveyancing legal fees, estate agent’s fees and designer fees. Of those, it can, of course, be said that the agreement itself showed that there would be no estate agent’s fees. Obviously there would be conveyancing legal fees. Whether there would be designer fees prior to completion and the purchaser having access to the property is not known.

27.  In my view, despite the fact that the point was not taken in the court below, there must be sufficient doubt on a summary judgment application as to whether the provision for the payment of $1 million as liquidated damages in clause 8 of the agreement constituted a penalty. It is true that the amount that fell to be paid was less than 3% of the contract price for the property and not, as Miss Eu pointed out, 10% as in the case of Chan Yuen Ka Crystal v Chu Cheong Kit Rayimond HCA 1459 of 2009, (14 October 2009), but, in reality, the proportion as compared to the purchase price can only be a very minor consideration. What is important is whether the $1 million was a genuine pre-estimate of the loss likely to be suffered by the purchaser. In my view there must be sufficient doubt about it as to warrant leave to the defendant to challenge the matter.

28.  I consider, therefore, that although the judgment on liability should remain and paragraphs 1 and 2 of the order of 23 July 2009 should remain, paragraph 3 of the order should be set aside and that there should be an order that there be an enquiry as to damages. I would make clear that on that enquiry it should be open to the plaintiff to establish that clause 8 constituted an enforceable provision as to liquidated damages and, in the alternative, the plaintiff should, of course, be entitled to establish the damages in fact suffered. In view of the fact that this was a new point taken on appeal and the plaintiff has succeeded on the main point in the appeal, I consider that the plaintiff should have the costs of the appeal and would make an order nisi to that effect.

Hon Le Pichon JA:

29.  I agree.