POLYSON JEWELLERY CO. LTD. AND ANOTHER v. CARLOS LIU SONG

HCA 12666/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12666/1997

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J U D G M E N T

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1. This action was brought by the 1st and 2nd Plaintiffs as the purchasers of a property to recover the initial and further deposits paid to the Defendant vendor and to claim damages as a result of the alleged repudiation of the transaction in that the Defendant had failed to answer requisitions satisfactorily and/or failed to show and give good title to the property. The property involved was a non-residential property known as Flat F, 7th Floor with flat roof, Lisa House, 33 Nelson Street, Kowloon, Hong Kong ("the Property").

2. Most of the facts giving rise to this action were not in dispute and I set them out in chronological order as follows.

3. The parties entered into a provisional agreement for sale and purchase dated 21 August 1997 ("the Provisional Agreement"), pursuant to which the Plaintiffs paid the Defendant an initial deposit of HK$50,000.00. The purchase price of the Property as agreed between the parties was HK$1,855,000.00.

4. Pursuant to the Provisional Agreement, they signed a formal agreement for sale and purchase of the Property dated 29 August 1997 ("the Agreement") and the Plaintiffs paid a further deposit of HK$506,500.00, bringing the total amount of the deposits paid to 30% of the purchase price. The material terms of the Agreement may be given as follows:

(1) The completion date was 21 November 1997 and time was stated to be of the essence in every respect of the Agreement (clauses 3, 5 and schedule 6);

(2) The vendor was obliged to show and give a good title to the Property pursuant to section 13 of the Conveyancing and Property Ordinance, Cap. 219 (clause 7);

(3) The Property was sold subject to and with the benefit of the Deed of Mutual Covenant (clause 8);

(4) Save as varied or excluded there were incorporated into the Agreement the conditions set out in Part A of the Second Schedule to Cap. 219, save and except condition 7 under the heading "Requisitions" (clause 9);

(5) Any requisition should be delivered to the Defendant's solicitors within 7 working days after the receipt of the title deeds by the Plaintiffs' solicitors and any further requisition arising from any reply to a former requisition should be delivered within 7 working days from the delivery of such reply otherwise the same should be considered as waived and the Plaintiffs should be deemed to have accepted the Defendant's title (clause 10(1));

(6) Should the Plaintiffs fail to comply with any provision of the Agreement, the Defendant might forthwith determine the Agreement by giving notice in writing to the Plaintiffs or their solicitors and the Defendant should be entitled to forfeit the initial and further deposits absolutely as damages and not as penalty (clause 26);

(7) Condition 10 in Part A of the Second Schedule to Cap. 219 should be amended to read as follows: "If the purchaser shall fail to comply with any of the terms and conditions of the agreement the deposit money shall be absolutely forfeited" and the words that followed (i.e. "as and for liquidated damages (and not as a penalty)") were to be deleted (clause 27(b));

(8) Should the Defendant fail to complete the sale of the Property, all moneys paid by the Plaintiffs should be returned to the Plaintiffs who should be entitled to recover from the Defendant any damages the Plaintiffs might sustain (clause 28);

(9) If either party should fail to complete the sale and purchase in accordance with the terms of the Agreement, the estate agent's commission paid or payable should be borne by the defaulting party (clause 32).

5. On 18 September 1997, the Defendant's solicitors delivered the title deeds to the Plaintiffs' solicitors. By a letter dated 22 September 1997 to the Defendant's solicitors, the Plaintiffs' solicitors raised, inter alia, these two requisitions of title:

(1) The Deed of Mutual Covenant dated 29 March 1973 ("the DMC") was executed by only one director of Pathway Company Limited ("Pathway"). The Plaintiffs' solicitors requested the Defendant's solicitors to supply the sealing clause in the articles of association of Pathway to prove due execution of the DMC.

(2) The assignment dated 12 September 1977 with memorial number 1439107 ("the Assignment") was executed by only one director of Roceil Limited ("Roceil") as confirmor. The Plaintiffs' solicitors requested the Defendant's solicitors to supply the sealing clause of Roceil to prove due execution of the Assignment.

6. The reply given to the above requisitions came in the letter of the Defendant's solicitors dated 15 October 1997. The Defendant's solicitors declined to supply the sealing clause of Pathway because the DMC was "beyond the intermediate root of title of 15 years as required". However, they provided a copy of the sealing clause of Roceil for the "reference" of the Plaintiffs' solicitors, notwithstanding that the Assignment was also beyond the intermediate root of title.

7. Further requisitions were raised by the Plaintiffs' solicitors by their letter dated 17 October 1997. The sealing clause of Roceil stipulated that every document required to be sealed should be deemed to be properly executed if sealed with Roceil's seal and signed by the chairman of the board of directors and countersigned by the secretary. The Plaintiffs' solicitors pointed out that the execution of the Assignment did not conform to the stipulation and requested the Defendant's solicitors to clarify if there was due execution by Roceil of the Assignment. The Plaintiffs' solicitors again requested for a copy of the sealing clause of Pathway.

8. The Defendant's solicitors replied to the further requisition by a letter dated 21 October 1997. They supplied a copy of the sealing clause of Pathway. In respect of the Assignment, the Defendant's solicitors stated that Roceil had executed the document as the confirmor, and as its function was merely to direct and confirm at the material time, the mode of execution "did not affect the passing of the legal title of the subsequent purchaser for value". Furthermore, it was asserted that as the Assignment was executed and registered twenty years ago, any right of action would have been time-barred and the likelihood of future litigation would be illusory, citing in support the case of MEPC v. Christian-Edwards [1981] A.C. 205. Lastly, the Defendant's solicitors also referred to the case of Royal British Bank v. Turquand (1856) 6 E. & B. 327 in answer to the requisition relating to the Assignment.

9. The Plaintiffs' solicitors responded by a letter of the same date. They pointed out that the articles of association of Pathway provided that any document required to be executed under seal should be signed by either the managing director or any two directors. As the execution of the DMC by Pathway was not in conformity with this requirement, the Defendant's solicitors were requested to clarify and explain. As for the reply given for the execution of the Assignment, the Plaintiffs' solicitors stated that they did not agree with the Defendant's solicitors that the execution of the Assignment did not affect the passing of legal title and insisted on clarification of the issue from the Defendant's solicitors.

10. There was no response from the Defendant's solicitors to this letter of the Plaintiffs' solicitors dated 21 October 1997 until 19 November 1997 which was just two days before completion. The reason for the lack of response, as pleaded in the Defence and Counterclaim, was that the Defendant's solicitors did not receive this letter until the Plaintiffs' solicitors wrote to them on 19 November 1997 chasing for an urgent reply to their letter of 21 October 1997 and enclosing a copy of the earlier letter for ease of reference. No evidence was led by the Defendant on the failure of his former solicitors to receive the letter as alleged. Further, in the response of the Defendant's solicitors dated 20 November 1997, it was not asserted by them that they had not received the October letter until they were provided with a new copy on 19 November 1997. I note also that the letter dated 21 October 1997 was stated to be sent to the Defendant's solicitors by fax and by hand. I find that the Defendant's solicitors did receive this letter in the latter part of October 1997.

11. On 19 November 1997, the Plaintiffs signed a formal sub-sale agreement of the Property with the sub-purchasers by which the Property was to be sold at HK$1,883,000.00. Thus, the profit the Plaintiffs would have earned if the transaction with the Defendant had gone through would be HK$28,000.00. It would appear from the sub-sale agreement that the Plaintiffs had entered into an earlier agreement with the sub-purchasers on 8 November 1997.

12. As mentioned above, on 19 November 1997, the Plaintiffs' solicitors wrote to the Defendant's solicitors chasing for an urgent reply to their letter of 21 October 1997. The Defendant's solicitors responded on the same day. Regarding the execution of the DMC by Pathway, they expressed the view that as the nature of the DMC was contractual, it would not in any event affect the title of the Property. They made the same point as they had done for the Assignment that the likelihood of litigation would be illusory and any right of action would have been time-barred. MEPC was again cited in support of this as well as Kan Wing Yau v. Hong Kong Housing Society [1988] 2 H.K.L.R. 187. As for the Assignment, the Defendant's solicitors asserted that as it was beyond the intermediate root of title, the Defendant had no obligation to answer that requisition.

13. The Plaintiffs' solicitors replied on 20 November 1997 and stated that they did not agree with the Defendant's solicitors and insisted on proof of due execution of the DMC and the Assignment.

14. The Defendant's solicitors maintained in their letter of the same date that all the Plaintiffs' requisitions had been answered satisfactorily and requested the Plaintiffs' solicitors to provide a draft assignment and letter of undertaking without delay in view of the scheduled completion date.

15. Subsequent thereto and on the same date, the Plaintiffs' solicitors wrote to the Defendant's solicitors referring to the case of Lo Shea Chung & Anr. v. Lo Hung Biu [1997] 2 H.K.C. 723 and suggested that confirmatory deeds confirming the validity of the execution of the DMC and the Assignment should be provided by the Defendant. By another letter of the same date, the Plaintiffs' solicitors stated that as the Defendant had not proved good title and the requisitions had not been answered satisfactorily, the Plaintiffs proposed to extend the completion date to seven days after the requisitions had been satisfactorily dealt with.

16. The Defendant's solicitors rejected all the above suggestions on 20 November 1997. They stated that further request to answer the two requisitions would not be entertained.

17. On 21 November 1997, which was the scheduled completion date, the Plaintiffs' solicitors wrote to the Defendant's solicitors stating their final stance on the requisitions. In respect of the DMC, they requested an undertaking from the Defendant's solicitors to provide the relevant board resolution or a confirmatory deed to prove due execution. As for the Assignment, the Plaintiffs' solicitors insisted on clarification if there was due execution as stated in their letter of 21 October 1997. They stated that the Plaintiffs would not proceed to completion unless and until the requisitions were answered to their satisfaction.

18. In the first reply of the Defendant's solicitors that day, they reiterated their position that further request to answer the requisition would not be entertained and stated that if the Plaintiffs should fail to complete by 5 p.m. the deposits would be forfeited.

19. In the second reply of the Defendant's solicitors that day which was erroneously dated 21 September 1997, they enclosed a copy of the annual return of Pathway for 1971 and asserted that the director who signed the DMC, one Mr Wu Chung, "is the Managing Director of [Pathway] unless contrary has been proved". They declined to send the relevant board resolution of Pathway relying on Turquand's case. I should point out that the annual return did not show in any way that Mr Wu Chung was the Managing Director of Pathway whether at the material time in 1973 or at all. As for the requisition regarding the Assignment, the Defendant's solicitors referred to an article by Raymond Hayes published in The New Gazette, September 1992 to say that they did not need to answer that requisition because only the equitable interest of the confirmor was disposed of in the Assignment and the role of the confirmor in the Assignment was purely contractual.

20. In the third reply of the Defendant's solicitors that day, they again stated that the requisitions had been answered fully and no further reply would be made. The warning on forfeiture of deposit if the Plaintiffs should fail to complete by 5 p.m. that day was also given.

21. Completion did not take place that day and on the next day, the Plaintiffs' solicitors wrote to the Defendant's solicitors stating that they were instructed to commence proceedings to recover the deposits forfeited. On 24 November 1997, the Defendant's solicitors asked the Plaintiffs' solicitors to return all title deeds and documents forthwith and this was complied with on 9 December 1997. The writ herein was issued on 24 November 1997. On 6 December 1997, the Plaintiffs entered into a cancellation agreement with the sub-purchasers by which the sub-sale agreement was cancelled and the deposit of the sub-purchasers was repaid.

22. The Defendant conducted the trial in person although he was legally represented in the beginning. He submitted that the Plaintiffs' requisitions were not made in good faith, that the Plaintiffs had no genuine intention of completing the purchase, and that the requisitions were made for the purpose of obtaining an extension of time for the Plaintiffs to complete the sub-sale. He pointed to the fact that due to the depressed state of the property market in the last quarter of 1997, the Plaintiffs were only able to secure a sub-purchaser on 8 November 1997 and a formal sub-sale agreement was entered into on 19 November 1997, two days before the scheduled completion date with the Defendant. I do not think the motive of the Plaintiffs was material provided that the requisitions raised by their solicitors were proper and reasonable. If the requisitions were reasonable and proper, the Defendant was obliged to give satisfactory answers whatever might have been the motives of the Plaintiffs in raising them.

23. The Defendant repeated the points taken by his former solicitors in their letters, which I have summarized above, to say that the requisitions had been fully dealt with. He also made new points in support of his argument that there was no defect in title notwithstanding the two requisitions. Insofar as these points were not taken by his solicitors when they answered the requisitions, even if these new points had any merit, they would not have helped him in resisting the Plaintiffs' claim that the requisitions had not been satisfactorily answered before the scheduled completion date. I therefore do not propose to deal with the new points raised by the Defendant for the first time in this trial.

24. I turn to the central issue whether the Defendant's solicitors had answered the two requisitions satisfactorily. As some of the answers given to the requisitions were identical, I will deal with some common answers before I consider those answers given separately to a particular requisition.

Pre-intermediate root of title

25. The Defendant's solicitors had replied to the effect that as the DMC and the Assignment were beyond the intermediate root of title of 15 years, they had no obligation to answer requisitions in respect of these documents. This is clearly wrong. The Plaintiffs' solicitors had referred them to the decision of the Court of Appeal in Lo Shea Chung & Anr. v. Lo Hung Biu, supra., on this point. Under clause 7 of the Agreement, the Defendant was obliged to show and give a good title to the Property pursuant to section 13 of Cap. 219. The obligation to give a good title would have extended back to the ultimate root of title. This is not affected by section 13. The duty to show good title would have extended back to the intermediate root, in accordance with section 13. If the purchaser should discover a suspected defect in the pre-intermediate root, he is entitled to raise requisition thereon and the vendor is obliged to give a satisfactory answer because the vendor's duty to give good title would have extended back to the ultimate root. See Dawson Properties Ltd. v. Hong Kong Niroku Ltd. [1997] 2 H.K.C. 800 at 808I to 809E; Ho So Yung v. Lei Chon Un [1998] 2 H.K.C. 697 at 704I to 705A; Hong Kong Conveyancing by Sihombing and Wilkinson, paras. V[166], VI[64.1].

The rule in Turquand's case

26. The Defendant's solicitors relied on the rule in Turquand' case to say that they were not required to furnish any further proof to establish due execution of the DMC and the Assignment. This common law rule provides that where persons deal with a company on a bona fide basis and without notice of the fact that the company's constitution has not been complied with, such persons are entitled to believe that certain persons have authority to act on behalf of the company and are not required to undertake an inquiry to determine whether the company's internal rules have been complied with. This rule will not protect an outsider who has notice that the articles of a company have not been complied with in the execution of a deed by the company. In respect of the DMC, the Plaintiffs' solicitors had knowledge that a deed was required to be executed by either the managing director or any two directors of Pathway and that the person who signed on behalf of Pathway was merely stated to be a director. As for the Assignment, the Plaintiffs' solicitors knew that the articles of Roceil required a deed to be executed by the chairman of the board of directors and countersigned by the secretary and that the Assignment was only signed by one who was described as a director. The rule in Turquand's case would not have applied to protect the Plaintiffs.

DMC a contractual document

27. The Defendant's solicitors claimed that as the DMC was contractual in nature, it would not affect the title of the Property and no reply to the requisition to prove due execution of the DMC was required. I do not consider this a sufficient or satisfactory answer to the requisition. The DMC is a title document, see Lim Sui Chun v. Billion Light Investment Ltd. [2000] 2 H.K.C. 621 at 625I to 626A; Hong Kong Conveyancing, para. VI[66]-[75]. If it was claimed that title would not have been affected in any way notwithstanding that the DMC might not have been properly executed, the Defendant's solicitors should give the basis or grounds for that assertion to answer the requisition satisfactorily.

Execution of the Assignment as confirmor

28. The Defendant's solicitors asserted that as Roceil had merely executed the Assignment as confirmor and its role was purely contractual, it was immaterial that the execution was not in compliance with the articles as the mode of execution did not affect the passing of legal title. There are two authorities against that proposition, Qualihold Investments Ltd. v. Bylax Investments Ltd. [1991] 2 H.K.C. 589 and Li Ying Ching v. Air-Sprung (Hong Kong) Ltd. [1996] 4 H.K.C. 418. I agree with these decisions. Roceil had purported to perform four acts in the Assignment - to request and direct the vendor to assign the Property to the purchaser, to acknowledge receipt of the amount paid to it by the purchaser, to assign to the purchaser such interest as it had in the Property, and to covenant that it had not created a defect or encumbrance affecting the purchaser's title to the Property - the same four acts the confirmor had purported to do as considered in Qualihold. I agree with the reasoning and conclusion in Qualihold that as any one of these acts could arguably be shown to be ineffective, the requisition on due execution of the Assignment had not been satisfactorily answered.

Limitation and no substantial risk of litigation

29. The Defendant's solicitors alleged that as the DMC was executed in 1973 and the Assignment was executed in 1977, any right of action would have been time-barred and the likelihood of litigation would be illusory. No facts or circumstances were put forward by the Defendant's solicitors in support of their assertions other than the fact that these documents were executed some twenty years ago. I note, for instance, there is no period of limitation prescribed in respect of an action to recover trust property. As regards the contention there was no possibility of litigation, it was incumbent on the Defendant to put forward facts and circumstances to show beyond reasonable doubt that the Plaintiffs would not be at risk of any litigation being brought for an adverse claim in the Property. I do not think the Defendant's solicitors had provided a satisfactory or adequate answer here.

Conclusion and reliefs

30. For the above reasons, I find that the Defendant had not discharged his contractual obligation to show good title as the two requisitions raised by the Plaintiffs had not been answered satisfactorily. The Defendant was not entitled to forfeit the deposits as he was the party in breach of the Agreement. He is liable to refund the deposits in the total sum of HK$556,500.00 to the Plaintiffs.

31. The Plaintiffs also claim damages for loss of profits in the sum of HK$28,000.00 being the difference between the contract price under the Agreement and the re-sale price in the sub-sale agreement. There was nothing in the evidence to suggest that a re-sale of the Property was within the contemplation of the parties at the time the Agreement was made. Indeed, the evidence of the 1st Plaintiff's director, Ms. Choi Moon Fa, was to the contrary. According to Ms. Choi, the Property was purchased as the office of the 1st Plaintiff which carried on a jewellery business. It was only when she decided for security reasons not to use the Property for that purpose that the Plaintiffs had looked for a sub-purchaser. I do not think the Plaintiffs are entitled to recover damages for this consequential loss. I should add that the Plaintiffs did not advance a claim for damages for failure to complete being the difference between the market value of the Property at the contractual time for completion less the contract price.

32. The Plaintiffs claim restitution of the expenses properly incurred in the investigation of title. The amount claimed was HK$11,950.00. Included in this figure were the fees of the Plaintiffs' solicitors in preparing the sub-sale agreement being HK$1,750.00 and their fees for preparing the cancellation agreement being HK$1,000.00. I propose to deduct these figures from the amount claimed as a re-sale was not within the contemplation of the parties when they concluded the Agreement. The net figure I allow is HK$9,200.00.

33. Under the Agreement, the defaulting party should bear the estate agent's commission. The amount the Plaintiffs were to pay the estate agent was HK$18,550.00 and this has not been paid. The Defendant would be liable for the estate agent's commission.

34. I give judgment to the Plaintiffs against the Defendant and I make the following declarations and orders:

(1) A declaration that the Plaintiffs are entitled to rescind the Agreement;

(2) A declaration that the requisitions in respect of the title to the Property raised by the Plaintiffs' solicitors pursuant to the Agreement have not been satisfactorily answered by the Defendant and that good title to the Property has not been shown by the Defendant in accordance with the Agreement;

(3) An order that the Defendant do refund to the Plaintiffs the initial deposit and further deposit in the total sum of HK$556,500.00;

(4) An order that the Defendant do pay the Plaintiffs the costs of investigating title in the sum of HK$9,200.00;

(5) A declaration that the Defendant is liable to indemnify the Plaintiffs for the estate agent's commission in the sum of HK$18,550.00;

(6) An order that the amounts in (3) and (4) are to carry interest from the date of service of the writ herein at 12% per annum until the date of judgment and thereafter at judgment rate until full payment.

35. I make an order nisi that the Defendant is to bear the Plaintiffs' costs of this action. If the Defendant does not apply to vary the order nisi as to costs within 14 days, it will be made absolute after that period.