Lucky Health International Enterprise Ltd. v. Chi Kit Co. Ltd. and Another

CACV10/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 10 OF 1999

(ON APPEAL FROM HCMP 4041 OF 1997)

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J U D G M E N T

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Godfrey, J.A. :

Introduction

1. This is an appeal from an order of Barnett, J, made on 23 November 1998, whereby he dismissed the plaintiff purchaser's action claiming rescission of its contract with the defendant vendors and the return of its deposit. The issue in the case is whether the familiar principle that a vendor is bound to disclose to his purchaser a latent defect in title of which the vendor is aware extends to the case in which the vendor, being the owner of a unit in a multi-storey building, is aware of a claim against the incorporated owners of the building which, if not satisfied by the incorporated owners, may be enforced against the owners for the time being, but fails to disclose the existence of that claim to the purchaser.

The facts

2. On 21 February 1991, one Ta Xuong ("the claimant"), a plumber/electrician, was working on some scaffolding outside the Sun Hing Building, 607 Nathan Road, Mongkok. The scaffolding collapsed and the claimant fell from it, suffering devastating injuries.

3. On 9 February 1994, the claimant commenced proceedings by writ against the Incorporated Owners of the Sun Hing Building, claiming substantial damages against them as occupiers for the purposes of the Occupier's Liability Ordinance, Cap. 314. The writ was served on 16 February 1994.

4. In mid-1997, the defendant vendors ("the vendors"), aware of the claim and that it was substantial, offered a number of units in the Sun Hing Building for sale by tender. The vendors did not disclose the claim to prospective tenderers, either in the tender documents or at all.

5. On 15 August 1997, the Owners' Committee called on owners for a contribution towards the legal costs of the Incorporated Owners of the Sun Hing Building of the action brought by the claimant.

6. On 19 August 1997, the plaintiff purchaser ("the purchaser") became the purchaser, at the price of $118m, of the units offered by the vendors, with a scheduled completion date of 20 November 1997; and it paid a deposit of the $11.8m to the vendors.

7. On 6 October 1997, the trial of the claimant's action began before Seagroatt, J.

8. On 17 October 1997, at the conclusion of the trial, Seagroatt, J. reserved his judgment.

9. On 21 October 1991, the purchaser, becoming aware of the claim for the first time, complained (by its solicitors) of the vendors' failure to disclose the existence of the claim before the contract for sale and purchase was made on 19 August 1997.

10. On 30 October 1997, Seagroatt, J. gave judgment for the claimant in the action for $27,725,287 damages with interest and costs.

11. Thereafter, the vendors made a number of offers designed to indemnify the purchaser against the claim, all of which the purchaser rejected (as it was entitled to do). Finally, on 20 November 1997, the scheduled date for completion, the purchaser refused to go on with the contract, and, on 25 November 1997, the purchaser instituted these proceedings.

The law

12. Under s.17 of the Building Management Ordinance, Cap.344, a judgment obtained by the claimant against the Incorporated Owners of the Sun Hing Building may be enforced (with the leave of the court) against any owner for the time being of any unit; and under s.34, any such owner is liable to contribute to the debts of the Incorporated Owners of the Sun Hing Building in the event of the winding-up of that Corporation.

13. The purchaser, therefore, is at risk of being called on to satisfy the judgment obtained by the claimant, as the vendors (by offering to indemnify the purchaser against the risk) very properly recognised.

The purchaser's case

14. The purchaser says that in these circumstances, the title of the vendors is defective, for it carries in gremio this potential liability, that whoever is the owner of the units for the time being may be called on to satisfy the claimant's judgment.

The vendors' case

15. The vendors say that the existence of the claim, without more, does not render the title defective. At the date of the contract, 19 August 1997, there was no more than a possibility that, sometime in the future, the owner of the units (if a court so orders) might have to share with the owners of other units the burden of satisfying the judgment (if any) which the claimant might subsequently obtain.

The judgment below

16. The judge accepted the vendors' case. He held that a vendor is not obliged to disclose a mere potential liability such as this. Was he right?

The authorities

17. This case is sui generis. There is no directly relevant local authority and there is nothing in England (or Australia, or Singapore) comparable with the provisions of ss.17 and 34 of the Building Management Ordinance, Cap.344, so there is no directly relevant overseas authority either.

18. But, for the purchaser, we were pressed to follow a number of English authorities, in particular, Rignall Developments Ltd. v. Halil [1988] 1 Ch. 190. In that case (which the judge below seems to have misunderstood), Millett, J. held that a vendor was under a duty which she had not discharged to disclose to her purchaser the existence of an obligation, falling on the owner of the property for the time being, to repay to a local authority a sum equal to the amount of an improvement grant made to the vendor's predecessor in title.

19. For the vendors, we were pressed per contra to follow a number of Australian cases, the latest being McInnes v. Edwards [1986] VR 161, and also the Singaporean case of Huang Ching Hwee v. Heng Kay Pay [1993] 1 SLR 10. In the Australian case, the court held that the mere existence of circumstances which create the possibility or probability or risk that the property will in the future be subject to a statutory charge or burden does not constitute a latent defect in title. In the Singaporean case, the court held that whether or not a potential or inchoate statutory liability is an encumbrance and a blot on the title depends on the circumstances; the mere fact that a state of affairs exists which might bring into operation the provisions of a law imposing a liability or burden is not enough to constitute a defect in title. Before any question of defect in title arises, an intention to invoke the provisions of the law must have been manifested and brought to the notice of those concerned before the conclusion of the contract.

Conclusion

20. If it is necessary here to choose between the English approach, on the one hand, and the Australian and Singaporean approach on the other hand, I would adopt the English approach. I would hold that, from the date on which the vendors became aware of the claim which had been instituted here by the issue of the claimant's writ, they came under a duty to disclose to any prospective purchaser the fact that such proceedings had been issued. The issue of the proceedings manifested the existence of a claim which was capable of being enforced against any such purchaser as the owner for the time being of the units sold. Going back to first principles, I would hold it unconscionable for a vendor under a contract for sale of land to withhold the existence of such a claim (going as I think not to the quality of the property sold, but to the quality of the vendor's title) from the purchaser.

21. This need not give vendors, or their solicitors, any cause for concern. Solicitors acting for a vendor should inquire of their client whether he is aware of anything which might give rise to a liability, on the part of any owner for the time being of the property agreed to be sold, under the Building Management Ordinance, Cap.344. If the answer is yes, the contract should disclose the existence of the potential liability; if the answer is no, the contract should contain a declaration that the vendor is not aware of any such potential liability (similar declarations are in fact contained in the Conditions of Sale which formed part of the tender documents here, affecting many potential statutory liabilities but not, unfortunately, any potential liability under the Building Management Ordinance, Cap.344).

Result

22. I would allow this appeal; declare that the purchaser was entitled to rescind the contract; and order the vendors to return the deposit ($11.8m) to the purchaser with interest and to repay its costs of investigating the title. I would also order that the purchaser's costs of these proceedings (here and below) be taxed and paid by the vendors to the purchaser.

Rogers, J.A. :

23. In my view, this appeal should be dismissed.

24. This case has certain unusual features. Lying behind it is what, on any footing, must have been a massive claim by Mr. Ta Xuong against the Incorporated Owners of Sun Hing Building. The size of the claim can be gauged in relation to the purchase price offered by the Plaintiff on tender for a significant portion of Sun Hing Building.

25. More significantly, it seems, that the Incorporated Owners did not have relevant insurance which would have covered the claim. Nor, apparently, did the Incorporated Owners have sufficient cash funds to satisfy the claim.

26. As has been pointed out, Ta Xuong was injured as long ago as February 1991. No writ was issued until three years later. It would seem that the Incorporated Owners, as a body, did not, until very late in the action, consider that they would bear liability.

27. Another unusual feature of the case is that because the properties were being sold by tender, there would presumably have been time for pre-contract inquires to be made. This can be contrasted with the situation of the sale of many properties in Hong Kong where the purchaser is put under time pressure and often has little, or no, time at all before being in a position where he has to sign a sale and purchase agreement or lose the deal.

The claims made

28. It is important first of all, to consider the claims which were made in the re-amended notice of originating summons. They were: - firstly

"A declaration that the Defendants have not shown good title to the property the subject-matter of an Agreement for Sale and Purchase dated 19th August 1997 ..."

Secondly

"A declaration that, in the events which have happened, in particular, the appearance of the registration on 27th November 1997 of the judgment of Seagroatt J. ... against the Property, the Defendants would not have been able to assign the Property to the Plaintiff on the scheduled date of completion "free from encumbrances" in accordance with Condition 19 of the Conditions of Sales in the Agreement."

Thirdly

"A declaration that the Plaintiff was and is entitled to rescind the Agreement by reason of the material non-disclosure on the part of the Defendants and/or the inability on the part of the Defendants to assign to the Plaintiff on the schedule date of completion the Property "free from encumbrances" in accordance with Condition 19 of the Conditions of Sales in the Agreement."

29. It is unnecessary to set out Condition 19. It provides that the vendor would execute an assignment of the property free from encumbrances. For ease of presentation I have omitted from the third relief sought the reference in that to a mis-representation. That was deleted by amendment but that deletion is, perhaps, not without its significance.

The issues

30. It is the Plaintiff's primary case that the existence of the proceedings by Mr. Ta Xuong should have been disclosed by the vendors and that in any event, there was by reason of the judgment of 30th October 1997, if not by the commencement of the Action in 1994, an encumbrance to the title to the property such that the Plaintiff was entitled to rescission of the Agreement.

31. In examining the Plaintiff's case, it is necessary first of all to identify the relationship of Ta Xuong's claim and judgment to the property.

32. Ta Xuong had been injured whilst on scaffolding erected outside premises other than those which were the subject of the Agreement for sale between the Plaintiff and the Defendants. The Incorporated Owners played no part in the erection of the scaffolding nor in the engagement of Ta Xuong to carry out any work. It appears that the Incorporated Owners were, as a result, of the view that responsibility and hence liability lay with the owner or occupant of the premises at which Ta Xuong was carrying out work and not with the Incorporated Owners. Be that as it may, the action was held to have been correctly brought against the Incorporated Owners under section 16 of the Building Management Ordinance, Cap. 344.

33. It is only necessary to mention two further sections of that Ordinance. Under section 34 if the Incorporated Owners are wound up, the owners are liable, both jointly and severally, to contribute, according to their respective shares, to discharge the debts and liabilities of the Incorporated Owners.

34. Under section 17(1)(b) of the Ordinance, if a judgment is given against Incorporated Owners, execution to enforce that judgment may be made with leave of the tribunal against any owner. As an aside, it could be said that it might be expected that the tribunal would not be disposed to make an order which would result in execution of a judgment against an owner to a greater amount or percentage than that for which that owner would be responsible in the event of a winding-up. Whether or not the owners would, amongst themselves, have claims against those responsible for incurring the liability is another question. Leave under section 17(1)(b) is, of course, a matter of judicial discretion and hence it could not be ruled out, on an absolute basis, that execution to enforce a judgment for a liability caused by one of the other owners might be permitted against all or any one of the properties.

35. It would have been apparent, at least by the stage of the commencement of proceedings, that if Ta Xuong's claim were to succeed and in the absence of satisfactory insurance, the owners of premises in Sun Hing Building would have to make good the liability by means of contributions from the owners in accordance with section 21 of the Building Management Ordinance or otherwise.

36. Ta Xuong's claim was a monetary claim against the Incorporated Owners. It was not a proprietary claim against the land or any part of it. Nor was it a claim in respect of the land. If the claim were successful and if the Incorporated Owners did not satisfy the Judgment either from its own resources or through a claim on an insurance policy, the Lands Tribunal might give leave to enforce the judgment in whole or in part against an owner. Amongst the weapons in the armoury of a successful litigant who has obtained judgment against the Incorporated Owners is thus ultimately the possibility of registering a charge against the property of an owner.

37. At the stage of the issue of the writ however, the possibility of registration of a charge against the title of any of the owners in respect of any damages awarded remains just that, a possibility of something which may occur in the future if a number of events were to occur.

Was there an encumbrance?

38. In my view, even after the issue of a writ, where the Incorporated Owners are being sued on a claim for monetary damages such as Ta Xuong's claim, that claim does not constitute an encumbrance on the title to any property in the building. Under the heading "Good title" commencing at p. 409, Litton P.J. (then J.A.) in the case of Active Keen Industries Limited v. Fok Chi Keong [1994] 1 HKLR 396 explained that the expression "encumbrance" in relation to land invariably means some claim to the property or charge which could be imposed on the property. He then went on to analyse in relation to section 24 of the Buildings Ordinance that a liability arising because of common ownership created "a possibility that, sometime in the future, the owner of (a particular) flat might have to share with the other co-owners the cost arising out of something done to the building but does not affect the title to the flat: no more than if, for instance, the lifts should fail and the co-owners had to share the cost of repair or replacement."

39. In my view, where action is taken against the Incorporated Owners in a situation such as the present, the potential liability or liability which is sought to be enforced against the Incorporated Owners does not become an encumbrance on any owner's title, at least not until the time when the Lands Tribunal gives leave to execute against an owner. Naturally, of course, if a contribution were required from one of the owners, then a charge to that extent could arise.

40. I would mention for the sake of completeness that although Section 17(1)(a) of the Building Management Ordinance provides that a judgment against an incorporated owner may be executed against any property of the corporation, the corporation itself is not an owner of any shares of the relevant building. It is doubtful, in my view, as to whether the powers given to Incorporated Owners under Sections 18 and 19 of the Building Management Ordinance would empower the Incorporated Owners to hold title to property.

The estate duty cases

41. Reliance was placed upon the decisions in the cases of Lee Siu Man v. Chu Chi Wing [1992] 1 HKC 266 and Chan Fung Lan v. Lai Wai Chuen [1997] 1 HKC 1. It was said they were examples of instances where no charge or encumbrance had yet arisen and yet the title to property was held to be defective. Those cases involved the conveyance of properties which had been disposed of by way of gift within the previous three years. The defect arose because under section 18 of the Estate Duty Ordinance, Cap. 111.

"(1)(a) a rateable part of the estate duty on an estate, in proportion to the value of any property which does not pass to the executor as such, shall be a first charge on the property in respect of which estate duty is leviable;"

42. It is then provided that the property is not chargeable as against a bona fide purchaser for value without notice.

43. In my view it is clear that in cases such as those there would be a defect in the title. Under the provisions of s. 18(1)(a) the donee of the property could not take the property free from the liability that the property would be chargeable for estate duty. Indeed, if the property consisted of the whole or a majority of the donor's property, there may be no other property which could be used for the purposes of paying estate duty. If the donee of the gift therefore takes subject to that liability, he can only pass that property with the liability attached. The liability, of course, does not crystallise unless until death occurs within three years of the gift. Nevertheless, the charge is an automatic statutory charge which would come into effect on death without more.

44. Neither in my view does it assist to analyse the decision in Wah Ying Properties Limited v. Sound Cash Limited [1994] 1 HKC 786. In that case, Cheung J. (then Deputy Judge) had held that the fact that remedial work had been completed under a statutory scheme which would eventually lead to the issue of a certificate followed by the registration of a charge prevented the Defendant showing good title to the property, free from the risk, and without the possibility of litigation to the Plaintiff.

45. It is unnecessary to determine whether or not the broad words used in the Judgment would on their own be a sufficient definition of what is necessary to constitute an encumbrance. Two orders to the Defendant to carry out remedial work had been previously registered in the Land Office and work thereon had been carried out by the Building Authority. In the circumstances of the statutory scheme that would almost certainly bring with it the consequence that the Building Authority would require reimbursement which under the statutory scheme could be enforced against the property.

46. In so far as Cheung J. applied the rule as expressed in the Rignall case, to which reference is made below, in relation to a defect in title, the authority appears to me to be unexceptionable. It is hardly surprising that it was held that the Building Authority had a claim in respect of the costs of carrying out work in respect of the property and that that claim could be enforced against the property.

47. No such similar considerations apply in this case, since the liability to reimburse damages to one who has a claim against the Incorporated Owners is no more than a possibility that at some time in the future, the owner of a particular property within the building might have to share with his co-owners the cost arising out of something done in the building. In the Active Keen case, Litton P.J. likened that to sharing the costs of repair of the lifts.

48. In my view, therefore, there was no encumbrance affecting the vendor's title on the issue of Ta Xuong's writ. Neither do I consider the judgment which was given on 30th October 1997 constituted an encumbrance on or defect in the vendor's title. The judgment was against the Incorporated Owners. Liability of the individual owners of the property in Sun Hing Building would only arise subsequent to the Incorporated Owners' failure to satisfy the judgment if there had been insufficient insurance or other funds with which to satisfy the judgment. Therefore, until an event such as the grant of leave under section 17(1)(b) of the Building Management Ordinance, there would be no encumbrance or defect in the title of the vendor's property.

Was the Purchaser entitled to rescission?

49. The vendor was under an obligation to convey the title to the property free from encumbrance. That it could do until the registration of a charge or, at the earliest, the time when a debt became payable by an owner. Hence the vendor's obligation under the contract could have been satisfied as at the date for completion of the sale. On that day, the purchaser gave notice of rescission (more accurately repudiation) of the agreement. Since, in my view, there was no encumbrance on the property, the purchaser was not entitled to reject the vendor's title or to rescission of the Agreement on the basis that the vendor had failed to show good title. Therefore, unless it could rely upon some other basis for so doing, it was not entitled to rescission of the Agreement or to repudiate it.

The purchaser's argument as to rescission

50. The purchaser in this case relied for its right to rescission upon the proposition that "it is the duty of the vendor on a sale of land to disclose to an intending purchaser all facts of which it is aware which will or may prejudicially affect the purchaser by virtue of its ownership of the property, and which are not obvious (or patent) upon an inspection of the premises." It was said that this equitable duty required total candour and that the duty was an absolute one.

51. In my view, this proposition goes too far if the words "affect the purchaser by virtue of its ownership" are used to imply anything less than a defect in title or encumbrance. Heavy reliance was placed upon the judgment of Slade L.J. in Peyman v. Lanjani [1985] 1 Ch. 457 at 496-7. However, Slade L.J. was there considering a defect in title. The Judge said "Any fact which will prevent him from obtaining such a title to the property as he was led to expect constitutes a defect". If, as was said in Active Keen, a potential liability to contribute in the future should certain events occur does not constitute an encumbrance, the decision, in my view, does not assist the Appellant's case at all.

52. But the argument went further in that it was said that any existing facts which may in the future give rise to a potential or contingent liability on the part of the owner for the time being are material to title and must be disclosed.

53. As a proposition, in my view, that proposition also goes too far. It fails for a number reasons.

1. The rule which emerges from the cases applies in respect of encumbrances or other defects in title.

2. Even if the rule did apply to matters other than encumbrances or other defects in title it was limited to cases where the Court would refuse specific performance in circumstances where the Plaintiff was seeking to rely on a contractual term the effect of which would be to impose an imperfect title on a purchaser who had been kept in the dark about specific known circumstances of which complaint is made.

3. The rule does not apply to a claim for rescission. Rescission is available, for example, in cases of mis-statement or where the vendor had failed to show the title contracted for.

54. The cases show that contracts for the sale of land are not uberrimae fidei but that there is a rule of equity that if there is a defect in title or encumbrance of which the vendor is aware, the vendor cannot rely upon conditions in the contract purporting to prevent the purchaser objecting to the title on the basis of the defect or encumbrance unless full and frank disclosure is made of its existence. That proposition was stated by Millett J. inRignall Developments Limited v. Halil [1988] 1 Ch. 190 at 197 onwards. In that case the Court was dealing with a failure to disclose the registration of a condition of an improvement grant which had been made in respect of property. It is sufficient for the present purposes to point out that at p.199B, Millett J. held that good title to the property had not been shown because it had not been shown that the property was free from the risk of repayment of the grant which might be demanded from the Plaintiff. The grant was repayable on demand: see page 198H. In those circumstances, the Judge held that there would be a defect in title or encumbrance.

55. Millett J. relied upon the authority of Wills J. in Nottingham Patent Brick & Tile Co. v. Butler (1885) 15 QBD 261 at 271. That case again was a case of a defective title. In that case the defect in the title was constituted by a restrictive covenant which would bind the purchaser. Wills J. said amongst other things:-

"Such a condition, however, does not relieve the vendor from the necessity of disclosing any encumbrance or liability of which he is aware, but simply protects him if it should afterwards turn out that the property is subject to some burden or right in favour of a third person of which he is unaware ... It would be nothing short of a direct encouragement to fraud if a vendor were at liberty by a condition of this kind to sell to a purchaser as an absolute and unburdened freehold a property which he knew to be subject to liabilities which would materially reduce its market value ... In honesty and in law alike he was bound to give the purchaser full and fair information what it was that he had for sale, and what he was inviting him to buy, and, having failed to do so, he cannot insist upon a bargain procured by the suppression of material matters affecting the nature of the subject of sale."

Naturally, the nature of the subject of sale was the title to the property and it was a defect in the title to which the Judge was referring. If there were any doubt about the matter, reference could be made to the decision on the appeal in 16 QBD 778. Lord Esher MR at p.786 said:

"It seems to me an outstanding proposition that a vendor can by means of such conditions of sale force upon a purchaser a defective title, even though he (the vendor) knew of the defect. Now, that Butler did know of the defect seems to have been assumed by Wills J.; if you treat him as dealing himself with the purchasers he knew of the defect, and if, the conversation between his solicitor and the Plaintiffs' solicitor, at which he was present, amounted to nothing at all, then it comes to this, that he, knowing of the defect, by his agent put forth the condition of sale. If that is so, the case is absolutely within the authority of Haywood v. Mallalieu as it seems to me. It is impossible for a vendor, knowing of a defect in his title, either by himself or his agent to put forward conditions of sale which are to force upon a purchaser a bad title of which he knew, but which he did not disclose." (emphasis added)

56. It is of significance to note, however, that the Court of Appeal in the Nottingham Patent Brick case disagreed with Wills J. as to the effect of what had been stated at the time of sale. At p. 788 Lord Esher treated what had happened as equivalent to a mis-statement and on that basis it was said that the vendor was not entitled to keep the deposit. The other two Judges, Lindley L.J. and Lopes L.J., agreed with the Master of the Rolls. The judgments of each of these very distinguished Judges makes clear that whereas the criteria which I have outlined above would be sufficient to enable a purchaser to resist a claim for specific performance, it was the existence of an active mis-representation inducing the contract which gave rise to the entitlement to the purchaser to rescission of the whole contract and to recover the deposit. But for the mis-representation, the Court of Appeal would not have held that the deposit would have been recoverable.

57. The case upon which Lord Esher held that Wills J. was entitled to found his proposition to resist specific performance was Heywood v. Mallalieu 25 CHD 357. Again, in that case there was no question but there was a defect in title. In that case the defect was an easement over the land. Not only was the purchaser in that case entitled to avoid specific performance but because the title was defective, he was clearly entitled to the return of his deposit. There was, in that case, no condition of the contract, as there was in Nottingham Patent Brick case, which would have prevented the purchaser rescinding the contract short of there being a positive mis-statement.

58. Returning to the Rignall case, that was a case where the purchaser sought specific performance but wished to be relieved of the obligation to pay interest between the contractual day for completion and the day of actual completion, completion having been refused by the purchaser until the defect had been removed.

59. It can be seen, therefore, that the decision in the Rignall case was based upon that part of the judgment of Wills J. which related to resistance of a claim to specific performance. The Rignall case was not a case where it was held that the purchaser was entitled to rescission of the contract and in the Nottingham Patent Brick case the requirement of disclosure was held to extend merely to resistance of specific performance despite the exemption clause and not to the claim to rescission. Furthermore, Rignall and all the decisions upon which it is based involved defects in title constituting encumbrances. They did not relate to disclosure of facts which may in the future lead to potential or contingent liabilities on the part of the owners.

60. Most importantly, sight must not be lost of the fact that the rule as expressed by Millett J. in the Rignall case was that the vendor could not rely upon conditions which provide that the property is sold subject to matters which might be disclosed in a search (for example) unless full disclosure had been made. The rationale for the rule taken from Wills J. in the Nottingham Patent Brick case was that the vendor could not by a device such as that force upon a purchaser a title which had defects unless he had made plain what those defects were. Wills J.'s purported application of the same rule which led him to allow the purchaser's claim for return of the deposit was not relevant to Millett J.'s decision. Of course, in view of the three judgments in the Court of Appeal, Millett J. would not have been able to rely upon that part of the decision.

61. Finally, I should mention the case of Carlish v. Salt [1906] Ch. 335. In that case, a party-wall notice had been served under the London Building Act 1894. Joyce J. held that the service of that notice constituted a material fact and in so far as it imposed a liability of uncertain amount at some future time on the owner of the premises, the Judge considered that it constituted a latent defect not in the quality of but in the title to the property. There could be no doubt that the service of a party wall notice constituted a defect in title. In the first place, the building owner who had served the notice had a right of entering the house in question and of erecting the wall and under section 99 of the London Buildings Act, the sole property in the wall would be vested in that person until the contribution due from the owner of the house should be paid. In those circumstances, the vendor was clearly unable to give title to, in particular, that wall until those matters had been accomplished.

62. The Judge went on, however, to say :

"It is unnecessary for me to decide that there was on the part of the Defendants any fraud, even in the sense in which that word is sometimes used in Courts of Equity, but the Defendants concealed, for they did not divulge a fact known only to themselves which was material to the value of the property, and in the circumstances it would, I think, to use the language of James L.J. in Torrance v. Bolton be unconscientious for the Defendants to insist upon availing themselves of any legal advantages they may have obtained by the contract, and in particular the retention of the deposit."

63. Joyce J.'s Judgment was the subject of an extensive examination by the author of Williams on Vendor and Purchaser in Volume 50 of the Solicitors Journal at p.611 onwards. The author referred to the article in a number of footnotes in at least the 4th edition of his work.

64. The article explained for clear reasons, that the further extension of the principle on which Joyce J. said he was acting to require disclosure of a fact material to the value of the property known only to the vendor was wrong.

65. The article points out that Joyce J. cited the opinions of Sir W. Grant in Edwards v M'Leay G.Coop. 308, 312 and Lord St. Leonards in his Law of property as administered in the House of Lords and the Judgment of Lindley J. in Mostyn v West Mostyn Coal and Iron Co. 1 C.P.D. 145 at 155. But those relate solely to material defects of title, or the concealment of facts material to title. They do not in any way support the wider statement as to facts material to the value of the property.

66. Joyce J. then referred to the dictum of Bramwell J in Horsfall v Thomas 1 H & C 90 at page 100. But that case related to the sale by a manufacturer of an article (a cannon) which was ordered to be made by him for the buyer and did not relate to the sale of a specific chattel.

67. The article in question was a 68 pounds 95 cwt cannon. After a period of testing it blew up. The Action failed, but in the course of his judgment Bramwell B. said: "Now a manufacturer of an article is not always bound to point out its defects to the purchaser. If, indeed, there be a defect known to the manufacturer, and which cannot be discovered on inspection, he is bound to point it out." On the basis of that stray phrase Joyce J. founded his proposition and applied it by analogy to the sale of land.

68. Whilst that statement in relation to cannons which blow to pieces when being tested, would undoubtedly find favour with any rational court, its application as a matter of general proposition to all cases of sale of goods generally is in my view flawed. Of course there are many statutory provisions relating to sale of goods. But absent the sale by a trader who deals in such goods and absent any warranties or representations, if a specific chattel is sold by an individual for no particular purpose then no obligation of disclosure applies.

69. Joyce J. said that in ordering the return of the deposit with interest he was following the case of Stevens v. Adamson 2 Star 422. From the details contained in the report of that case, it would appear (as was referred to by Rigby L.J. in Re Leyland and Taylor's Contract [1900] 2 Ch. 625) that the purchaser had been let in to possession before completion. He had then been ejected by the landlord. In other words, the lease which the vendor had contracted to sell had been forfeited and had ceased to exist. In those circumstances, the vendor was unable to vest in the purchaser any title to the subject of the sale. It is hardly surprising, therefore, that the purchaser in Stevens v. Adamson was held to be entitled to the return of the deposit.

70. There can in some circumstances be cases where the Court may refuse specific performance and yet the grounds for rescission of a contract have not been made out. In many instances, the grounds for resisting specific performance would involve either substantial mis-description or mis-representation or indeed a failure to make the title contracted for. Hence, in my view, it is not the function of this Court on this appeal to determine whether the Court would grant specific performance. The issue is simply whether the purchaser was entitled to rescission.

Registration of the 30th October Judgement

71. Finally I should add that the second declaration sought was wrong in principle. No leave had apparently been obtained by the 27th November to enforce the Judgment against any of the owners. The Judgement that had been obtained was simply a judgment against the Incorporated Owners. There was no basis for the registration against the property of a person who was not a party to the Action. The mere entry of the judgment in the register had, therefore, no legal effect.

Mortimer V-P:

72. I agree with Godfrey JA for the reasons he advances that the appeal must be allowed but I would add a few words of my own. I accept with gratitude the rehearsal of facts in the earlier judgments but it is convenient to set out the salient ones.

The facts

73. On 21 February 1991 Ta Xuong sustained serious injuries when working in the common parts of the Shun Hing Building. On 9 February 1994 he brought an action against the incorporated owners claiming substantial damages under the Occupiers Liability Ordinance. Since before 1991 the vendors were owners of the units sold.

74. On 12 August 1997 after tender the vendors accepted the purchasers' offer of $118m for these units. They paid a deposit of $11.5m and signed a Memorandum of Agreement on 19 August 1997.

75. By clause 17 of the Agreement the purchaser was to pay the balance of the purchase price and complete on 20 November 1997. Under clause 19 the vendor had to assign the property "free from encumbrances" at the date of completion.

76. The incorporated owners at first adopted a "head in the sand" attitude to the personal injury action. But in 1994 solicitors were appointed to handle the case and in July 1995 its committee denied liability and sought counsel's advice.

77. As the vendor pointed out through counsel, during the 31/2 years interval between the writ and the acceptance of the tender, nothing further took place. However, on 15 August 1997, before the date of completion, there was a notice from the owners' committee to the members addressing the need for contributions towards the costs of the trial - it is to be noted that this was not a notice under the Deed of Mutual Covenant which gave rise to a liability to pay. On 30 October 1997 judgment was given by Seagroatt J in Ta Xuong's action against the incorporated owners for $25.7m plus interest and costs.

78. Neither the existence of the action nor the later judgment was disclosed by the vendor to the purchaser but having learned of the judgment on 12 November 1997 the purchaser claimed the right to rescission and return of its deposit on the basis that:

(a) the judgment was an encumbrance which precluded the vendor from fulfilling its obligation to make good title by the time for completion; and

(b) that in any event the failure to disclose the action and the judgment to the purchaser was in breach of its duty as vendor.

79. As a matter of record, on 27 November 1997 the judgment was entered in the Lands Registry under "Deeds Pending Registration" against all units in the building including those the subject of these proceedings as from the date of the judgment.

The issues

80. The issues for our determination are whether on the admitted facts the purchaser was in law entitled to claim rescission and return of its deposit on the basis that :

(a) the judgment was an encumbrance which precluded the vendor from fulfilling its obligation to make good title on the date of completion; and/or

(b) the failure to disclose the action and later the judgment to the purchaser was a breach of its duty as vendor.

The general principles

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.

84. In circumstances other than the multiple ownership of buildings in Hong Kong, an action against an owner under the Occupiers Liability Ordinance would create liability only against the owner or occupier at the time of the accident and would have nothing to do with the land or its successive owners. For buildings in multiple ownership in Hong Kong the situation is different. Liability arises for common areas as each owner is an owner of an undivided share. Liability also arises under s.24 of the Buildings Ordinance (Cap. 123). I respectfully agree with Litton JA (as he then was) in Active Keen Industries Limited v Fok Chi Keong [1994]1 HKLR 396 at 409 when he explained that the ordinary liability arising because of common ownership to contribute to expenses in the building does not give rise to an encumbrance. However, I would reserve the question whether it would be the duty of a vendor to disclose a wholly unusual or extraordinary expense for which a purchaser may become liable under s.24 of the Buildings Ordinance consequent upon his ownership.

The present facts considered

85. In this case there can be little doubt that the action brought by Ta Xuong and the following judgment for over $25.5m is an extraordinary and unusual liability imposed upon the incorporated owners. Furthermore, there is the important effect of s.17(1)(b) of the Ordinance which provides that if a judgment is given against a corporation, execution to enforce it may issue, with leave of the Tribunal, against any owner. This extends potential liability to successive owners. The liability also arises successively, first to contribute; second to the risk of an application for leave to enforce; and finally enforcement.

86. At the time of the acceptance of the tender and the agreement, there was a pending action against the incorporated owners under the Occupiers Liability Ordinance. This led to the judgment against the incorporated owners. Had the purchase of the units been completed, this would have involved the purchaser being liable to contribute towards the judgment and costs awarded against the incorporated owners. Failing this there would follow the real risk of an application for leave to enforce the judgment against the purchaser as the then owner of the units - as owner. This is additional to the registration of the judgment against the units.

87. It is a nice point whether this liability is a liability which affects the land and is a defect in title before leave is given to enforce. However, it is a liability which attaches to the owner of the units - as owner. The liability was merely contingent before the judgment at the time of the tender and agreement but crystallised after judgment and before the date of completion. Additionally, before completion it was open to Ta Xuong to apply for leave to enforce against the purchaser under s.17(1)(b).

88. In these circumstances I would uphold that the purchaser's claim to rescission and return of the deposit. The words of Wills J in Nottingham Patent Brick and Tile Co v Butler (1855) 145 QBD 261 at 271 are in point:

"The fourth condition provides that the property is sold subject to any matter or thing affecting the same, whether disclosed at the time of sale or not. Such a condition, however, does not relieve the vendor from the necessity of disclosing any incumbrance or liability of which he is aware, but simply protects him if it should afterwards turn out that the property is subject to some burden or right in favour of a third person of which he is unaware ... It would be nothing short of a direct encouragement to fraud if a vendor were at liberty by a condition of this kind to sell to a purchaser as an absolute and unburdened freehold a property which he knew to be subject to liabilities which would materially reduce its market value ... In honesty and in law alike he was bound to give the purchaser full and fair information what it was that he had for sale, and was inviting him to buy, and, having failed to do so, he cannot insist upon the bargain procured by the suppression of material matters affecting the nature of the subject of sale. I entirely acquit the defendant of anything like intentional misconduct, but in the preparation of the particulars of sale he unfortunately relied upon his solicitor, who, as I cannot help believing, was under the mistaken impression that he could better the position of the vendor by abstaining from making himself acquainted with the contents of the earlier deeds in his possession, and open to his perusal."

Further, I find much assistance from the decision of Millett J (as he then was) in Rignall Developments Ltd v Halil (1988)1 Ch 190 - a case which in part bears similarity to the present one.

89. The purchaser was seeking and was entitled to buy the units "free from encumbrance". The vendor was not entitled to force title on the purchaser together with the risk that it would be involved in proceedings to execute the judgment followed by litigation to recover from those otherwise liable. There can be little doubt that Ta Xuong will take all steps open to him to execute and enforce his judgment.

Conclusion

90. For these reasons I would hold that the fact of Ta Xuong's action ought to have been disclosed to the purchaser at the time of the Agreement and that the judgment given on 30 October 1997 before the date of completion amounted to an encumbrance and a defect in the vendor's title which entitled the purchaser to rescind the Agreement and to the return of its deposit. On these grounds, I would allow the appeal.

91. The consequence is that the appeal is allowed by a majority. We also make an order nisi that the vendor will pay the costs here and below.