GLADSON CHINA LTD. v. LAM ALEXANDER CHUN JUNE AND ANOTHER

CACV 291/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO.291 OF 2000

(ON APPEAL FROM HCMP NO.3602 OF 1995)

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J U D G M E N T

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Stock JA :

The agreement

1. In 1994 the appellants (to whom I shall refer as "the vendors") were the owners of a house and garden in Hong Lok Yuen. They placed the property on the market, and on 26 March 1994 Mr Wu Kwok-wing, a director of the respondent company (to which company I shall refer as "the purchaser") inspected the premises. On the company's behalf, he entered upon a provisional sale and purchase agreement dated 30 March 1994, to buy the property for the sum of $12.38 million. That agreement contained a clause (clause 12) said to be of relevance to this dispute which, in its material part, ran as follows:

"As regards the additional structures erected on the above property the owner shall produce evidence showing the legality of such structure."

An initial deposit of $500,000 was paid.

2. The additional structures to which that clause referred lie at the heart of the present dispute. They were three wooden pergolas, as well as an enlarged entrance porch. For the purpose of this appeal, only the entrance porch is relevant.

3. On 30 April 1994 an additional sum of $738,000 was paid to the vendors by the purchaser towards the deposit.

4. The formal sale and purchase agreement was concluded on 4 May 1994. It specified 31 August 1995 as the completion date. There are two clauses of particular significance to the dispute.

5. Clause 11 provides for the time in which requisitions are to be made:

"Any requisitions or objections in respect of the title or otherwise arising out of this Agreement shall be delivered in writing to the Vendor's solicitors within seven working days after the receipt of the title deeds by the Purchaser's solicitors and any further objection or requisition arising upon any reply to a former requisition shall be delivered to the Vendor's solicitors within seven working days from the receipt of such reply otherwise the same shall be considered as waived and the Purchaser shall be deemed to have accepted the Vendor's title....".

6. Clause 34 provides:

"Notwithstanding anything hereinbefore contained to the contrary, the Vendor warrants or represents that each and every fixture, fitting, erection, structure and building works on the Premises or any part or parts thereof is erected in all respects in compliance with the Building Ordinance and/or its subsidiary legislation and/or any other legislation or regulation. The Vendor shall be liable if it is discovered before completion of this sale and purchase that the present use of the Premises or any part or parts thereof is not a permitted user or that at the date hereof or before completion, there is any erection, structure, fittings fixture and/or buildings works (if any) in any part or parts of the Premises which is in contravention of the Building Ordinance and its subsidiary legislation and/or other legislation or regulation, the Vendor shall be held responsible for the demolition, alteration, removal, reinstatement, reinforcement and/or any other works relating to such illegal erection, structure, fixture, fittings and/or building works (if any) of for any costs and expenses of and incidental thereto whether or not such works are required by the Buildings Authority or other authority or body or otherwise. The Purchaser shall be entitled to rescind this Agreement."

7. The agreement also provided for the payment of a further deposit at the end of May 1994 in the sum of $1.238 million, which was duly paid, so that the total deposit paid by then was $2.476 million. The balance of the purchase price was, of course, to be paid upon completion.

Correspondence and requisitions

8. On 18 January 1995, the vendors' solicitors forwarded to the purchaser's solicitors the title deeds and documents relating to the property, thus bringing into play the time requirements for requisitions and objections imposed by clause 11 of the formal agreement. Included with those documents was correspondence relating to the porch extension. There was a letter from Hong Lok Yuen Estates Ltd dated 28 July 1988 offering to sell to the vendors 2.69 sq. meters of gross floor area to be used to extend the premises "in a manner approved by this company and by the relevant government authorities." The sum of $24,210 was paid by the vendors for that area. Then there is a letter dated 8 August 1988 from a chartered engineer acting on behalf of the vendors, addressed to the District Lands Office, Tai Po, submitting plans showing the addition of the new entrance porch and asking for "your consideration and formal approval". There is a letter from Hong Lok Yuen Estates Ltd to the District Lands Office dated 12 August 1988, confirming that the estates company had no objection to the proposed use of that area "subject to the approval of the Government Authorities". The reply from the District Lands Office is dated 23 August 1988, approving the plans subject, inter alia, to a requirement that "approval by the Building Authority is given". It is common ground that that authority was never sought or obtained.

9. Although requisitions were then raised by the solicitors in relation to the property, none was then raised in relation to the porch, or to any question concerning authorized or unauthorized structures at the premises.

10. In mid-June 1995, the purchaser instructed surveyors to inspect the property, and in mid-July that inspection was carried out. There is a written report by the surveyors dated 23 August 1995 to the effect that the porch was an unauthorized structure. But the purchaser or its solicitors received that information before that date, because the evidence is that it was on or about 25 July that the surveyors gave that information to the solicitors.

11. The question of the porch extension was revived, as between the parties, not by the purchaser's solicitors but by the vendors' new solicitors, Daniel K F Or & Co., when they wrote to the purchaser's solicitors on 14 August 1995. They said that they were instructed that when Mr Wu had inspected the premises in 1994, before the provisional sale and purchase agreement, the vendors had agreed with the purchaser that they would dismantle the porch at the purchaser's request but that the purchaser had said that he might wish to retain it. So the solicitors were writing to say that "as completion is drawing near, pursuant to the clause 34 of the said Agreement, please inform us in advance if you would like the porch of the property be dismantled as it would take some time to implement such works. If it is the alternative you would like to leave the porch as it is, our client is ready to oblige, however you must let us have your firm instruction within three days from the date of this letter."

12. In their reply dated 16 August 1995, the purchaser's solicitors referred to clause 12 of the provisional sale and purchase agreement (the clause requiring the vendors to produce evidence showing the legality of the structure), a clause, they said, not superseded by the formal agreement; and they asked the solicitors for the vendors "to produce satisfactory documentary or other evidence by way of proof of the legality of the structures constituted by the enclosed entrance porch in accordance with the express term of the Provisional Agreement and clause 34 of the formal agreement". They referred to the warranty in clause 34, and asked for evidence that the Building Authority had consented to the erection of the enclosed entrance porch.

13. The vendors' solicitors replied on 22 August. In essence, they said that the obligation of the vendors under clause 34 of the formal agreement was to demolish the structure upon the request of the purchaser, a structure of which the purchaser, they contended, was well aware before he entered upon the provisional agreement. The following day, they wrote a further letter saying that "as completion is imminent, we hereby confirm that, except for the question of the demolition of the porch, all requisitions raised by you had been answered."

Rescission

14. The final response came on 25 August, six days, that is before the date for completion. The purchaser's solicitors denied that the purchaser had ever asked for the structure to be demolished and they did not accept that the requisitions had been satisfactorily answered. There had been no direct reply to the request for proof of Building Authority consent. They cited clause 12 of the provisional agreement, clause 6 of the formal agreement which provided for sale of the property on an 'as is' basis, and asserted that clause 34 entitled the purchaser to rescind. Accordingly, they gave notice that the purchaser rescinded the agreement on the basis of the vendors' breach of the warranty recited in clause 34; the suggested misrepresentation by that clause; and the failure to show a good title. They demanded return of the deposit and other costs.

Claim and counterclaim

15. The purchaser subsequently issued proceedings by which it claimed declarations that good title had not been shown; that the vendors had failed sufficiently to answer the requisitions contained in the letter dated 16 August 1995; that the vendors had been in breach of the agreements; and that the plaintiff had rescinded, and was entitled to rescind, the agreement. The plaintiff also claimed return of the deposit of $2.476 million, as well as the cost of investigating title, agency commission and stamp duty, all of which cost amounted to $606,480.

16. By their Defence, the vendors recited the fact of approval of the estate company for the structural alteration, and the approval of drawings by the District Lands Office; and asserted that the entrance porch was structurally sound, so that the necessary approval would never have been difficult to obtain; that the purchaser knew or ought to have known that there was no approval by the Building Authority for the entrance porch; that the requisition concerning the porch was raised out of time, so that title must be deemed to have been accepted within seven days after timely requisitions (about other matters) were in fact answered on 22 April 1994; that the purchaser was estopped from relying on the lack of approval from the Building Authority, because the purchaser, knowing the true situation, never requested demolition or approval within such time as would have enabled the vendors to demolish or obtain approval; that in any event the existence of the structure without approval was, in the circumstances, not a defect in title, alternatively, not a defect which went to the root of title or which presented any risk of re-entry by the government such as to entitle the purchaser to rescind; and that the letter of 25 August 1995 constituted a wrongful repudiation of the formal agreement. The vendors thus counterclaimed damages in the sum of $3.88 million, being the difference between the sale price and the sum obtained by the vendors when they sold the property in July 1996; plus mortgage interest and other expenses in the total sum of $407,279.27.

The Judgment

17. The sole issue, as the learned judge at first instance rightly said, was whether the plaintiff was entitled to rescind the formal agreement because the entrance porch extension was not approved by the Building Authority. The allegations of other illegal structures were not pursued by the purchaser. The judge commented that the porch was but a very minor part of the property. The property as a whole enjoyed a gross floor area of about 2,150 sq. ft., and a garden of 2,800 sq. ft. He took the view that the dispute about the porch related to a trivial matter. The porch could easily have been demolished and approval from the Building Authority sought to rebuild it, all before the date of completion. The case turned upon the construction of clause 34 and, in particular, upon the last sentence of that clause. Did it enable the purchaser to rescind even if the vendors were prepared to demolish any structure which was there in contravention of the Buildings Ordinance; or was that an entitlement which only arose if the vendors refused to demolish? He was, he said, much tempted to construe clause 34 as requiring the purchaser to give notice to the vendors to demolish the structure and as enabling the purchaser to rescind only if the vendors then refused to do so. But he said:

"... on a proper construction of the clause, much requirements cannot be imposed. It will read too much into this clause when the words are simply not there. I think the ultimate sentence of the clause shows that it is for the purchaser to decide what he should do. If there are illegal structures, it may choose to ignore them and proceed to completion. It is also given the option to complete but requiring the vendors to demolish the illegal structures. Finally, it is given the right to rescind the agreement in any event."

18. So the judge found in favour of the purchaser on the question of its entitlement under clause 34.

19. On the question of requisitions, he noted that the requisition about the structure had been raised considerably out of time, but he took the view that the failure to raise that requisition in time was a failure waived by the vendors' solicitors who responded to it and made no complaint as to time. Instead, the vendors' solicitors had relied on clause 34 as a sufficient answer to the requisition.

20. In the circumstances, the judge delivered judgment in favour of the purchaser, for the amounts claimed.

Analysis

21. It is apparent from the language of the judgment that the judge felt the merits of the matter to lie with the vendors. That was wholly understandable, and one might be forgiven for thinking that the purchaser sought to rescind for no reason other than that the market had substantially fallen since the date of the sale and purchase agreement. It is clear that the entrance porch was but a minor part of the premises. The evidence established that the purchaser was well aware that the entrance to the house had been altered when he went to inspect the premises. That the legality of its erection was in question is clear from the very existence of clause 12 of the provisional agreement, and from the fact of clause 34. Yet it was not an issue pursued when requisitions were first raised, even though the documentation sent by the vendors' solicitors in January 1995, which specifically referred to the construction of the porch, quite obviously left open the question whether Building Authority consent had been obtained. As the purchaser must have known, the vendors were in a position to demolish the porch and were willing to do so. They were also in a position, time allowing, to seek consent to reinstate the porch. Given the approval of plans by the District Lands Office, and the nature of the structure, and the location of the property, it ought to have been obvious that consent was never going to be a real problem. It was the vendors themselves who revived the point and they were willing to carry out the works if asked. The judge's view of the merits was one which is easy to share.

22. That said, in so far as the judge felt constrained nonetheless to find in favour of the purchaser because of clause 34, his is a conclusion with which I respectfully feel bound to disagree. I do not believe that clause 34 called for such a restrictive construction. The sentence "The Purchaser shall be entitled to rescind this Agreement" is an odd sentence on its own. The draftsman - and I note that the clause was drafted by the purchaser's solicitors and not, as the judge was mistakenly led to believe, by the vendors' solicitors - has not, as one might have expected, articulated in the sentence itself the circumstances in which that entitlement to rescind was to crystallize. It seems to me that what precedes the last sentence in clause 34 begged clarification of the circumstances in which rescission was to be available. The last sentence does not however provide that clarification. It does not, for example, say that "notwithstanding any action of the vendors to demolish an unauthorized structure, or to reinstate it with authority, the purchaser shall be entitled to rescind the agreement." In the absence of such clarity, one is bound all the more to interpret the crucial sentence as part of the mosaic which is presented by the clause as a whole, within the context of the agreement and its factual background, and to ascertain "the meaning which [it] would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract." (per Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896, 912). In my opinion, it cannot, against the factual background of this case, have been intended that, in relation to any unauthorized structure, no matter how small, no matter how easily authority might be obtained, or with what facility the structure might be demolished and, if desired, reinstated, and regardless of the vendors' willingness to carry out such work entirely at their own expense, the purchaser was nonetheless to be entitled to rescind the agreement. Whilst clause 34 refers to any unauthorized structure, the fact in this case is that the question marks raised before the conclusion of the sale and purchase agreement were directed at known and minor structures; and the assumption that parties who enter a contract for sale and purchase intend to see it through to completion (see Twinkle Step Investment Ltd v. Smart International Industrial Ltd [1999] 4 HKC 441, 448B) carries particular weight within the factual matrix of this case.

23. The fact that the parties cannot have intended a right to rescind by mere reason of the existence of an unauthorized structure, regardless of the willingness and ability of the vendors to put the matter right, is reinforced by the terms of clause 19 of the sale and purchase agreement, which reads as follows:

"(a) The Vendor hereby warrants and declares that the Vendor has not received and is not aware of there being any notice from any Government or other competent authority or the Manager thereof or the Management Committee thereof requiring the Vendor to demolish or reinstate any part of the Premises. If it should be discovered that such notice existed prior to the date hereof or if such notice shall be served on or before the date of completion the costs of such demolition or reinstatement shall be borne by the Vendor absolutely in respect of which the Vendor shall indemnify the Purchaser.

(b) The Vendor hereby further declares that the Vendor has not received and is not aware of there being any notice from any Government or other competent authority or the Manager or Management Committee thereof requiring the Vendor as one of the co-owners of the Estate of which the Premises form part to effect repair to any common part of the Estate. If it should be discovered that any such notice existed prior to the date hereof or if such notice shall be served on or before the date of completion the costs for such repair shall be borne by the Vendor absolutely in respect of which the Vendor shall indemnify the Purchaser.

(c) The Vendor hereby undertakes to notify the Purchaser forthwith upon receipt or having knowledge of any of the aforesaid notices."

Quite evidently, it was envisaged that in the event that notice of some unlawful structure surfaced, the consequence was that the vendors were to demolish or reinstate as required. That, too, is the spirit in which clause 34 was, in my judgment, obviously drawn.

24. In my opinion, the intention of the parties, objectively ascertained, is that the obligations and rights provided under clause 34 were to be viewed in stages. There was a warranty that all was well but that if, contrary to that warranty, it transpired that all was not well, it was for the vendors to put the matter right at their own expense; but that if they would or could not do so, the purchaser was then entitled to rescind. That, it seems to me, is what must "be taken as the intention which reasonable people would have had if placed in the situation of the parties" (see Rearden-Smith Line Ltd v. Hansen-Tangen [1976] 1 WLR 989, per Lord Wilberforce, at page 996).

Clause 34: Conclusion

25. In the circumstances, I am satisfied that the purchaser was not, by reason of clause 34, entitled to rescind the agreement. The vendors offered, without being asked, to demolish the porch. There is no evidence that demolition could not have been effected in time for completion. Indeed, it is obvious from the terms of the solicitors' letter of 14 August that they thought that demolition could be effected in time. A question does arise whether clause 34 required the vendors also to reinstate any structure which was demolished with appropriate consent, for if that was a requirement, the vendors did not offer in the letter of 14 August to do so: the offer was restricted to an offer to demolish. I do not think that clause 34 required that in all circumstances, regardless of the nature of the structure and regardless of the wishes of the purchaser, there had to be a reinstatement. The clause specifies a host of works of different kinds that might be undertaken, and there is no warrant for reading them conjunctively. It may well be implicit in the clause that there was to be reinstatement if the purchaser so requested, but that provides no problem in this case for there was never any such request, nor any hint in the following correspondence that the failure to offer to reinstate (as well as demolish) was material to the decision to rescind. This was not a point taken either then or later. Instead, the purchaser would have none of it. It was not, by the date due for completion, interested in demolition or in reinstatement despite the provisions of clause 34. It chose instead to seek to rescind. But in these circumstances, the purchaser could not in my judgment avail itself of clause 34 to rescind the agreement.

26. In any event the clause carries with it, in my view, an implication that the purchaser is to notify the vendor what works, if any, he wished to be carried out, if and when he discovered the existence of an unauthorized structure, and to give the vendor a reasonable time in which to do so. The clause is not to be placed in an artificial setting, but rather in a setting which envisages a measure of cooperation between the vendor and the purchaser, which assumes that when a bargain is struck the parties intend to give effect to that bargain, and to bring it to fruition, so that they each secure substantially that for which they have bargained, and, in this case, cooperation to ensure that such works would be carried out to the purchaser's satisfaction. The purchaser in this case must have been put on notice in January 1995 that there was no Building Authority consent for the erection of the porch. Certainly, by late July, it knew in terms from its own surveyors that there was no such consent. It was incumbent then on the purchaser to tell the vendors whether it wished to have the porch demolished and, if so, whether it wished to have the porch reinstated as well. It did not do so, and it cannot fall properly for the purchaser in those circumstances to say that it is nonetheless entitled to rescind.

27. Accordingly, clause 34 does not avail the purchaser in this case.

Title

28. The grounds upon which the purchaser purported to rescind were those itemized in the letter of 16 August 1995, namely, clause 34, as well as the contention that the vendors had, by reason of the presence of the unauthorized structures, failed to show good title. The clause 34 point is now answered. As for the question of showing good title, the point fails, quite apart from the fact that in my judgment the subject matter of rights and obligations arising in respect of unauthorized structures was expressly dealt with by clause 34. The point fails because, first, the existence of the structure without prior consent of the Building Authority posed, in this case, no real risk of enforcement action and therefore did not constitute an encumbrance on title (see Douglas Ltd v Ji Shan International Ltd [1998] 2 HKC 165, 174); and, secondly, because in any event, the vendors were prepared to demolish it and, if demolished, the vendors were in my judgment still in a position to effect substantial performance of the agreement. As for risk of enforcement action, the structure is minor, has existed since 1988, is apparently in sound condition, is on private land in a low density area, and has been erected with the consent of the management company and of the District Lands Office. As for substantial performance, the structure occupies but a very minor proportion of the property and land to be conveyed; and is a matter which the judge (who incidentally heard some evidence on what was and was not important to the purchaser) rightly described as a trivial matter. We have seen the plans and photographs of this property, including a photograph of the porch structure. This was a three-storey house with three bedrooms, as well as maid's quarters, plus a dining room and living room, and a garage and extensive gardens. A suggestion that the porch was anything other than a very minor constituent of this property would in my view be untenable. I note too that in the report of the surveyors, whilst the lack of Building Authority consent is mentioned, there is no hint that in their opinion enforcement action is likely, or that consent would not be obtained if it were decided to demolish and reinstate the porch.

The requisition

29. In so far as it is suggested that the requisition raised by the purchaser in August was not satisfactorily answered - and I proceed on the basis that the right to object to the lateness of the requisition was waived by the vendors' solicitors in replying to the requisition as they did - I do not agree. In their letter of 22 August 1995, the vendors' solicitors said as follows:

"We refer to the clause 34 in the Agreement for Sale and Purchase signed by the Vendors and Purchasers dated 4th May 1994 which expressly dealt with your complaint that 'Notwithstanding anything herein before contained to the contrary, the Vendor warrants or represents that each ... in all respects in compliance with the Building Ordinance and/or any other legislation or regulation. The Vendor is liable if it is discovered before completion ... there is any erection ... in contravention of the Building Ordinance ...and/or other legislation or regulation, the vendor shall be held responsible for the demolition .... The purchaser shall be entitled to rescind this Agreement'. It is plainly stated in the paragraph that our client's duty is only confined to demolish the relevant erection upon your request and your client knew about the status of the said erection before he entered into the said Provision Agreement and he agreed to have his remedies provided for and also limited by the said clause in the said Agreement for Sale and Purchase.

You must let us know whether you wish to have the porch removed as soon as possible otherwise this may not be done by the date of completion."

Given the history of the matter, and the letters sent in January 1995, it is clear enough in my judgment that the vendors in that letter were saying to the purchaser that Building Authority's approval had not been obtained but that, if the purchaser desired demolition, the vendors had an obligation to demolish the structure which obligation it was prepared to meet. True it is that the solicitors could have been more direct in their answer, but any other reading of the letter would be unrealistic.

Conclusion

30. It follows, for the reasons I have given, that the purchaser wrongfully repudiated the agreement and that the vendors are entitled to damages as a result of that repudiation. Accordingly, I would set aside the judgment and orders made by the trial judge. The appellants are entitled to the declaration they seek, that the plaintiff has wrongfully repudiated the sale and purchase agreement. Damages are agreed, namely, in the sum of $4,287,279.27, comprising $3.88 million loss of profit and $407,279.27 legal fees, surveyors' fees, mortgage interest, and agent's commission. I would make orders accordingly.

Le Pichon JA:

31. I agree.

Burrell J:

32. I agree.

Stock JA:

33. It follows that this appeal is allowed. The order of the judge below is set aside. The plaintiff is ordered to pay to the defendant the sum of $4,287,279.27 and interest on the judgment sum at the rate of prime plus 2% from the date of issue of the proceedings to the date of this judgment, and thereafter at the judgment rate until the date of payment. There will be a costs order nisi that the plaintiff shall pay the defendants the costs of the appeal, and the costs below.