NI TIEE BOR ROBERT AND ANOTHER v. GOLDEN CRANE INDUSTRIES LTD.

CACV120/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 120 OF 2000

(ON APPEAL FROM HCMP 4407 OF 1998)

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J U D G M E N T

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Hon Rogers, Acting CJHC :

1. This is an appeal from a judgment of Mr Recorder Chan SC given on 21 March 2000. In that judgment, the Recorder ordered the plaintiffs to pay the defendant the sum of $810,640 together with interest in respect of the plaintiffs' breach of an agreement to purchase a house in Shatin, namely House No. 37, Windsor Park Phase II, together with the car ports and the garden space. The Recorder also made a declaration that the defendant had rescinded the agreement by accepting the plaintiffs' repudiation of the same and that the defendant was entitled to forfeit the deposit and had forfeited the same. The plaintiffs appeal from that judgment.

The Fact

2. House No. 37 was owned by the defendant. The defendant is a private company, wholly owned by Mr Luk Siu Kai and his wife. Whilst the defendant was the owner of the House No.37, a number of alterations were made to the property. In his careful judgment, the learned Recorder set out those alternations which for convenience I repeat here :

(1) The kitchen on the ground floor was extended to outside the external wall of the house with additional enclosure walls and roof. In effect, this would mean that a new structure was built to be used as the kitchen.

(2) The internal side wall of the original kitchen was removed and the original kitchen area was converted into part of the dining area.

(3) The full height glazing of the living room was extended into the garden area with additional structural ceiling cover.

(4) The passageway to the master bedroom on the first floor was extended towards the garden with a structural floor slab in line with the glazing on the ground floor.

(5) The semi-circular balcony of the second bedroom on the first floor was enclosed and was roofed over so that the balcony would form part of the second bedroom.

(6) The glazing and the external walls of the master bedroom and the 3rd bedroom were extended out to the flat roof of the first floor.

(7) The bathroom of the master bedroom was relocated.

(8) The flat roof of the car ports on the ground floor was demolished and in place thereof a sloping glazing cover was constructed above the car ports spanning from the fence wall to the external wall of the house.

3. In May 1998, Mr Luk wished to sell the house. As the Recorder found, when Mr Luk approached the estate agents, he told them in general terms that there were alterations to the property although he did not specifically tell them of all eight alterations which are set out above. He instructed the agents to find a purchaser who would accept the property with the alterations. He did so because he was aware that the possible illegality of the alterations might give a purchaser an excuse to back out from a purchase. As the Recorder noted, the agent who was eventually responsible for selling the house informed Mr Luk that it would be usual for parties to sign a side agreement accepting the illegal structures and alterations instead of recording the same in the sale and purchase agreement lest the purchaser would have difficulties in raising a loan on mortgage if provisions relating to the acceptance of illegal structures were to be contained in the sale and purchase agreement.

4. Mr Ni, one of the two plaintiffs, first inspected the house in May of that year. The price asked was $20 million. When he first saw the property, Mr Ni was told of the alterations numbered (5) and (6) in the list above. The Recorder accepted Mr Ni's evidence that he thought that the extension to the master bedroom was merely an extension of the floor into the flat roof outside. The Recorder also found that Mr Ni was aware of the alterations numbered (4) and (8) in the list.

5. Some two months later in July 1998, it became clear that Mr Luk was prepared to allow the property to be sold at a much reduced price. When Mr Ni was informed of this by the agent, he went to see the property again but was not told anything further about the alterations. On this occasion, he brought along with him a cheque of $500,000 to be used as a deposit; he was asked by the estate agent to sign a provisional sale and purchase agreement and also a side agreement which had been prepared by the estate agent.

6. The general effect of the side agreement was to acknowledge the existence of the alterations and illegal structures. The first sentence reads :

"Notwithstanding anything contained herein to the contrary if it is found that there is in existence of any unauthorized alterations or illegal structures in the said Premises on or before completion, the Purchaser shall subject to the provisions herein below complete the sale and purchase of the said Premises."

7. The succeeding parts of the side agreement relate to the absence of notice from Government or any authorities in relation to the structures and are irrelevant for the purposes of these proceedings. The agreement concluded :

"For the avoidance of doubt, if any such notice shall be served by the Government upon the Vendor after completion, all costs and expenses for such reinstatement and restoration to the state conforming with the building plans shall be borne by the Purchaser absolutely Provided Always the Purchaser shall still be required to complete the sale and purchase absolutely Provided Always the Purchaser shall still be required to complete the sale and purchaser of the said Premises."

8. Mr Ni did not think that the side agreement would pose any problems because he was aware of the extensions at the time of his last visit and apparently he liked the house. The Recorder held that it would probably not have mattered to Mr Ni whether the provisions in the side agreement were to be set out in a separate document or were to be included in the provisional agreement as Mr Ni did not require any mortgage to finance his purchase.

9. On the same day, the estate agent obtained Mr Luk's agreement to sell the property for $14 million and Mr Luk signed the provisional sale and purchase agreement and accepted the preliminary deposit. He was also happy to sign the side agreement although he had not seen its terms before. The estate agent told Mr Luk that "he could keep the side agreement for himself" and that it was only necessary to give his solicitors the provisional sale and purchase agreement. Indeed, when the solicitors were initially instructed and whilst the formal sale and purchase agreement was in the course of being drafted, neither Mr Ni nor Mr Luk did give the solicitors the side agreement.

10. The formal sale and purchase agreement contained, amongst other provisions, clauses 12 and 19 which are set out below :

"12.0 The Vendor hereby warrants and declares that :-

(a) the Vendor has not received and is not aware of there being any notice from the Government or any other competent authority or the manager or the management committee of the Building of which the Property forms part (collectively "Relevant Authorities") requiring the Vendor to demolish or reinstate any part of the Property. If it should be discovered that such notice shall be served before the date of completion, the costs for such demolition or re-instatement shall be borne by the Vendor and the Purchaser shall have the option to rescind this agreement whereupon all the initial deposit paid by the Purchaser to the Vendor direct and the deposit paid hereunder shall be forthwith returned to the Purchaser by the Vendor in full but without any compensation interest or cost and neither party shall thereafter have any further claim against the other and the parties hereto shall at their own costs enter into and cause to be registered at the Land Registry an agreement for cancellation.

19.01 Save and except for the intents and purposes of the Stamp Duty Ordinance Cap.117, this agreement shall supersede all previous agreements whether verbally or in writing or implied between the parties.

19.02 This agreement constitutes the entire agreement between the parties hereto. Each of the parties hereto hereby acknowledges that in entering into this agreement he has not relied on any representation or warranty save as expressly set out herein and if there is any warranty or representation not set out herein, the same is deemed to have been withdrawn by the giving party or his agent immediately prior to the execution of this agreement."

11. When Mr Ni came to sign the formal sale and purchase agreement on 3 August 1998, he showed the solicitors' clerk with whom he was dealing a copy of the side agreement. Referring to the effect of clause 19, the solicitors' clerk informed Mr Ni that the side agreement could be ignored because the formal agreement superseded all previous agreements. But the Recorder held that the clerk was plainly aware of the inconsistency between the side agreement and the provisions in the formal sale and purchase agreement. The Recorder went on to find as a fact that the solicitors' clerk had told Mr Ni that he would bring the matter to the attention of the solicitors and if the solicitors thought it advisable then the formal sale and purchase agreement would be sent to the vendor's solicitors in its current form for the vendor's signature. However, when the agreement was sent to the vendor's solicitors nothing was mentioned about the conflict between the provisions of the side agreement and the terms of the formal sale and purchase agreement or, indeed, about the existence of the side agreement itself. Hence, the vendor's solicitors were ignorant until a much later time of the existence of the side agreement.

12. After the sale and purchase agreement was concluded, requisitions were raised about the alterations. This eventually led to the purchasers refusing to complete. The defendant later sold the house at a reduced price and the plaintiffs commenced these proceedings for the return of their deposit.

Findings of the Recorder

13. The Recorder held the parties had agreed to the terms of the side agreement and intended that those terms as well as those in the provisional sale and purchase agreement would form the basic terms of the formal agreement, he went on to hold that :

"It is quite inconceivable that the parties would have agreed to include clause 12.01(a) in its existing form if the attention of their solicitors had been brought to the side agreement. Equally I am of the view that as the terms in the side agreement were in fact agreed, it is certain that if the vendor's solicitors' attention had been brought to the existence of the side agreement they would have insisted on incorporating the side agreement into the formal sale and purchase agreement instead of allowing clause 12.01(a) to be a term of the formal sale and purchase agreement. Likewise if the vendor's attention was brought to the fact that clause 12.01(a) was inconsistent with the terms of the side agreement and that by the omission of the provisions of the side agreement from the formal agreement, the vendor would be deprived of the protection given by the side agreement, I am quite sure that the vendor would have insisted that the terms of the side agreement must be incorporated into the formal agreement and the purchasers or its solicitors would have no reason to refuse such request. Thus I am satisfied that the parties did intend to have the provisions of the side agreement as part of their agreement for the sale and purchase of the property and that the omission of these provisions and the inclusion of clause 12.01(a) was due to a mistake initially of both solicitors."

14. The Recorder then went on to hold that the purchasers or their solicitors were clearly aware of the mistake which had been made in the drawing up of the agreement and that Mr Luk and the vendor's solicitors were not aware of it. He considered that Mr Luk might well have been guilty of being too careless in the matter since he regarded the formal sale and purchase agreement as being a standard document.

15. On the basis of his findings of fact which I have outlined above, the Recorder came to the conclusion that the vendor was entitled to have the sale and purchase agreement rectified on the basis that there had been a mistake in the drawing up of that document; that the purchasers or their solicitors were aware of the mistake, that the vendor was not aware of it and that the document drawn up did not reflect the intention of the parties namely that the purchasers would be bound to purchase the property in accordance with the terms of the provisional sale and purchase agreement and the side agreement. Indeed Mr Mayne, who appeared on behalf of the appellants, agreed in the course of argument that the effect of the transaction was that the parties had agreed that there would be a sale of the house and that the purchasers would take the property with the alterations.

16. The appellants' arguments were that the vendor was not entitled to rectification or to have the sale and purchase agreement treated as if it were entitled to rectification and secondly, even if the side agreement or its effect should be treated as part of the agreement between the parties, it was not sufficient to prevent the purchasers from relying upon alterations and structural changes which had been made which would amount to defects in title in so far as those have not been specifically disclosed to the purchasers.

Rectification

17. Turning to the matter of rectification, on the facts as found by the Recorder, I consider that he came to the correct conclusion in relation to the matter of rectification of the sale and purchase agreement and the vendor's entitlement to have it construed as if it were rectified. At pages 14 and 15 of his judgment, the Recorder referred to the judgment of Citilite Properties Ltd v Innovative Development Co. Ltd [1997] 2 HKC 74 of Le Pichon J and cited from the judgment of Buckley LJ in Thomas Bates Ltd v Wyndham's Ltd [1981] 1WLR 505 at page 515. The four criteria which were set out by Buckley LJ are all in my view satisfied on the facts as found by the Recorder.

18. As Mr Wong SC who appeared on behalf of the respondent pointed out, the question which arises in this case is not simply that the sale and purchase agreement did not contain the provisions of the side agreement. Indeed it appears true that Mr Luk was content not to give the side agreement to his solicitors intending that it would not be repeated in the formal agreement. On the other hand it is also clear from the findings in the court below that the parties, and Mr Luk in particular, did not anticipate that there would be specific exclusion of the provisions of the side agreement in the formal sale and purchase agreement. The purchasers on the other hand were aware of the omission and the exclusion of the effect of the side agreement and they were aware of the mistake of the vendor's solicitors in drawing the formal agreement in terms which provided for the exclusion of that agreement. They did not draw that to the attention of the vendor's solicitors. Finally, there can be no doubt and indeed the Recorder so found that the mistake was one which would benefit the purchasers.

19. In developing his arguments, Mr Mayne sought to introduce an argument in relation to "clean hands" pointing out correctly that since rectification was an equitable remedy, it was subject to the rules of equity. In referring to the maxim that "he who comes into equity must come with clean hands", it must be borne in mind that as stated in Snell's Equity Thirtieth Edition paragraph 3-01, the equitable maxims "are not to be taken as positive laws of equity which will be applied literally and relentlessly in their full width, but rather as trends or principles which can be discerned in many of the detailed rules which equity has established."

20. The point sought to be taken by Mr Mayne was that the purpose of not including the side agreement in the formal sale and purchase agreement was that any potential lender to the purchasers would not be aware of, or put on notice of, any potentially illegal structures or alterations which might render the title to the property defective. Mr Wong took the point that this was a new argument which had not been raised previously and indeed had only been mentioned to him just prior to the court sitting. Without deciding whether the point would be open to Mr Mayne, the court permitted him to put the argument. It has to be said that he was not able to support it by reference to any authority or any statements of legal principle other than the bare reference to the maxim itself.

21. In my view, the argument is not valid in this case. The side agreement was legal in itself. There was in fact no lender who would have been involved. Hence, there was nobody who would or could have been deceived. In any event, any mortgagee would have lent money on the security of the property itself and not upon the security of the sale and purchase agreement. Furthermore, in so far as any representations or statements would have been made to a potential mortgagee, clearly they would have been made by the purchasers and not by the vendor. Any fraud, if it had been practiced, would have been practiced by the purchasers and would have been practiced by a combination of representations or otherwise. In my view, the question of any deception or fraud is speculative. Furthermore, I am not satisfied that the maxim has any application when the fraudulent intention was that of the party seeking to rely on the maxim and not that of the party seeking rectification. As Viscount Simonds said in Mason v Clarke [1955] AC 778 at 794 :

"But it was not suggested there that an innocent party is debarred by the other party's fraudulent intention from enforcing an agreement which is not itself illegal."

22. In my view, also quite apart from the fact that the argument appears to fail on its merits, I would not consider that it is open at this stage for the point to be taken on behalf of the purchasers. It is a point which should have been taken before the Recorder below and in the absence of that, and in the absence of it being raised properly on the appeal, it should not be allowed to be pursued at this stage.

The effect of the agreement

23. Mr Mayne's point as to the effect of the agreement was that there were serious defects in the title which were not disclosed to the purchasers prior to entering the agreement. These defects involved not merely structural alterations but alterations to the envelope of the house contributing to additional gross floor area and site coverage. The effect was therefore that they could not be considered as exempted works and indeed they altered the plot ratio.

24. The alterations which have been numbered (1), (3), (4), (5) and (6) all fall within the category of alterations which extend the gross area of the house. But, as has been pointed out above, the purchasers were aware either through Mr Ni's own observations or through being specifically told of the alterations (4), (5) and (6). The real point however seems to me to be that the purchasers were made aware, in general terms, that there were alterations to the house and the specific pointing out of the defects (5) and (6) was by way of example and not by way of exclusion. The alterations in (1) and (3) although extending the footprint of the house were similar in nature to the other alterations which had been made to the house. In my view, the purchasers had been made aware that there were alterations but they agreed to take the property with the alterations and did not insist on being told of or finding out the exact extent of the alterations prior to entering the agreement. Mr Ni was content to do so because he was prepared to take the risk associated with the unauthorised alterations. Those of which he was not specifically aware do not appear to me to be any different in nature to those of which he was specifically aware. As the Recorder said :

"I cannot find that because Mr Ni was merely told of these extensions, he was led into believing that there was no other alterations."

25. The two points taken by the appellants therefore fail. I would dismiss this appeal.

Hon Leong JA :

26. I agree.

Hon Wong JA :

27. I also agree and would dismiss the appeal.