FIRST SHANGHAI ENTERPRISES LTD. v. DAHLIA PROPERTIES PTE LTD.

HCA 13426/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13426 OF 1997

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JUDGMENT

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1. This is an action following upon the termination of an agreement for the sale and purchase of property. It is common ground that the agreement has been terminated. The Plaintiff ("the Purchaser") is seeking the return of funds paid as deposit and part payment, and damages, and a declaration that it is entitled to a lien over the property for the return of the deposit and part payment. The Defendant ("the Vendor") has filed a defence and counterclaim for a declaration that it has lawfully terminated the agreement and forfeited the deposits, and it in turn is claiming damages for breach of contract.

2. At the heart of the dispute is the issue whether the Purchaser was obliged to complete on 31 October 1997, the completion date under the Formal Sale and Purchase Agreement.

3. On 16 June 1999, Yeung J ordered that the question or issue of liability be tried as a preliminary issue before the question or issue of damages (if any).

4. Before I deal with the issue of liability, it would be helpful if I first set out the relevant facts.

Facts

5. The Vendor was the owner of 1,366 parts or shares of and in Inland Lot No.8615, together with the exclusive right to occupy one floor of Lippo Centre, a commercial building on Hong Kong Island built in 1986.

6. The Purchaser was interested in acquiring the property which it intended to occupy, and on 9 October 1997, the Vendor and the Purchaser entered into a Provisional Sale and Purchase Agreement for the sale of the property.

7. For some reason which was not relevant to the present proceedings, the parties decided to revoke the 1st Provisional Sale and Purchase Agreement, but on 14 October 1997 entered into a 2nd Provisional Sale and Purchase Agreement for the sale of the property at $223,410,000. A sum of $10,000,000 was paid as initial deposit.

8. For ease of reference, I shall refer to the working week of 13-18 October as Week I, that of 20-25 October as Week II and that of 27 October - 1 November as Week III.

Schedule under Provisional Sale and Purchase Agreement

9. The 2nd Provisional Sale and Purchase Agreement signed on the 14 October (Tuesday of Week I) provided for completion just over 2 weeks away on 31 October (Friday of Week III). It also provided that the Formal Sale and Purchase Agreement would be signed on or before 23 October 1997 (Thursday of Week II). It would thus be seen that, even by Hong Kong standards, this was a tight schedule.

1st Request for Title Deeds and Documents

10. The day following the 2nd Provisional Sale and Purchase Agreement, the Purchaser's solicitors wrote to the Vendor's solicitors asking for a draft Formal Sale and Purchase Agreement (in accordance with the practice that such agreements are drafted by solicitors for the Vendor) "together with all title deeds and documents for our approval as soon as possible".

11. No title deeds or documents were sent to the Purchaser's solicitors. However, at 8:45 p.m. on 17 October (Friday of Week I), the Vendor's solicitors sent a draft of the Formal Sale and Purchase Agreement.

2nd Request for Title Deeds and Documents

12. The next day 18 October (Saturday of Week I), the Purchaser's solicitors reverted with their amendments to the draft Formal Sale and Purchase Agreement, and reiterated their request for "title deeds and documents for approval as early as possible".

3rd Request for Title Deeds and Documents

13. On 20 October (Monday of Week II), the Vendor's solicitors made further amendments to the draft Formal Sale and Purchase Agreement but still did not send any title deeds or documents.

14. On 21 October (Tuesday of Week II), the partner at Livasiri & Co (the Purchaser's solicitors) dealing with the conveyancing, Mr John Lyndon Hodgson, spoke on the telephone with his counterpart at Woo Kwan Lee & Lo (the Vendor's solicitors), Miss Dora Chan Wai Yee. Mr Hodgson's File Note recorded:- "JLH requested Miss Chan to send the title deeds and documents as soon as possible and not to wait for execution of the formal agreement. JLH said that he did not want to receive the title deeds at the last minute and have no time to consider them".

15. Miss Chan did not dispute that Mr Hodgson had urged her to send the title deeds and documents as soon as possible, although her recollection was that this was on 22 October. In this respect, Mr Hodgson's recollection supported by his File Note should be the more reliable.

Formal Sale and Purchase Agreement

16. On 22 October 1997, the Formal Sale and Purchase Agreement was entered into by the parties, and a further deposit and part payment of $12,341,000 was paid by the Purchaser.

17. Clause 4 provided that time was of the essence, as indeed had been provided in the 2nd Provisional Sale and Purchase Agreement.

18. Clause 6 provided that the Vendor shall prove good title to the property prior to completion in accordance with Section 13 of the Conveyancing and Property Ordinance cap. 219. It further provided that the Vendor shall prove his title to the property at the Vendor's own expense and should at the like expense make and furnish to the Purchaser such certified or attested copies of any deeds or documents of title , wills and matters of public record as may be necessary to complete such title.

19. Clause 11 provided:-

"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 as soon as practicable within seven (7) working days after the receipt of the title deeds in the possession of the Vendor by the Purchaser's solicitors otherwise the same shall be considered as waived and the Purchaser shall be deemed to have accepted the Vendor's title (in which respect time shall be of the essence of this Agreement). If the Purchaser shall make and insist on any objection or requisition in respect of the title conveyance or any matter appearing on the title deeds or particulars or conditions or otherwise of the Property which the Vendor shall be unable or (on the grounds of difficulty, delay or expense or on any other reasonable ground) unwilling to remove or comply with or if the title of the Vendor shall be defective, the Vendor shall notwithstanding any previous negotiation or litigation be at liberty on giving to the Purchaser or his solicitors not less than three (3) working days' notice in writing to annul the sale in which case, unless the objection or requisition shall have been in the meantime withdrawn by the Purchaser or the same shall have been removed or complied with by the Vendor, the sale shall at the expiration of the notice be annulled the Purchaser being in that event entitled to a return of all the said deposit or deposits but without costs or compensation and provided the same is returned within five (5) working days without interest".

20. This clause will be considered in detail below. It should be noted that a period of 7 working days from 22 October (Wednesday of Week II) would expire on 30 October (Thursday of Week III), i.e. 1 day before the completion date. Therefore, if the title deeds were sent by the Vendor to the Purchaser on the day of the Formal Sale and Purchase Agreement, the period of 7 working days would still be prior to completion date.

4th Request for Title Deeds and Documents

21. However, no title deeds or documents were sent, and on the following day 23 October (Thursday of Week II), Mr Hodgson spoke on the telephone with Miss Chan again. His File Note stated:-

"JLH reminded Miss Chan that we had not yet received title deeds and documents. Miss Chan apologized explaining that she had been particularly busy on another matter recently and that there were a lot of title deeds and documents to put together. JLH said that this was all the more reason why he wanted them as soon as possible. Miss Chan said that the title deeds would be sent out that day or the following day."

22. Miss Chan did not dispute the fact that she had apologized and had told Mr Hodgson that she had been very busy the past few days. In cross-examination she agreed that she had told Mr Hodgson that there were quite a lot, in terms of volume or quantity, of title deeds and documents.

Delivery of title deeds and documents

23. It was not until 4:54 p.m. on 24 October (Friday of Week II) that a total of 96 title deeds and documents were delivered to the office of the Purchaser's solicitors. This was against the usual undertaking imposed in the letter accompanying the title deeds and documents that the Purchaser's solicitors were to hold the same to the order of the Vendor's solicitors and that they were returnable on demand.

Perusal of title

24. Mr Hodgson's evidence was that he was busy on 25 October (Saturday of Week II) and 27 October (Monday of Week III) with another large conveyancing transaction. He started perusing title in the afternoon of 27 October (Monday of Week III) and completed looking through the title deeds by 5:30 pm on 28 October (Tuesday of Week III), by which time it became apparent to him that the title deeds and documents were incomplete.

25. In the meantime, the Purchaser's bank had increased its lending rate and it requested an extension of time from the Vendor for completion. In the event, no extension was agreed because the parties could not agree on the rate of interest for the period of extension.

26. I should add that the evidence is that the Purchaser was not short of funds to complete the purchase. There is a Witness Statement from Mr Rankine Yeung Wai Kin, the Chief Financial Officer of the Purchaser, to the effect that the Purchaser was able to pay the balance of the purchase price from its own resources. He was not cross-examined on this aspect of his evidence and it was accepted at the hearing by leading counsel for the Vendor that the financial ability of the Purchaser was not in issue.

Purchaser's position

27. After Mr Hodgson became aware of the state of the title deeds and documents in the late afternoon of 28 October (Tuesday of Week III), which in his view made it increasingly unlikely to the point of being virtual impossible that there could be completion on the Friday, he advised the Purchaser to seek Counsel's opinion, which was taken on 29 October (Wednesday).

28. The next morning 30 October (Thursday), 5 working days after the delivery of the title deeds and documents on 24 October and 7 working days after the Formal Sale and Purchaser Agreement, a letter was sent by fax from the Purchaser's solicitors to the Vendor's solicitors. This said, amongst other things,:-

"Unfortunately, in breach of contract and despite our earlier requests for you to provide us with title deeds for approval as early as possible, you failed to deliver the title deeds to ourselves until shortly before the close of business on Friday 24th October 1997 and one document of title, the Agreement for Sale & Purchase Memorial No.6702820, was received only yesterday afternoon. This has given insufficient time for us to consider the title deeds and raise requisitions on them and does not allow time for you to deal with our requisitions sufficiently long in advance of completion to give us a proper opportunity to consider your replies. In any event, there appears to be a number of documents missing, in particular:

[Here, 13 items are set out]

As it is now impossible for you to produce these documents at least 7 working days prior to completion, which is scheduled to take place before 5:00 p.m. on Friday 31st October, time being of the essence, our client is left with no option but to accept your client's breach as a repudiation of the Agreement, which we hereby do, rendering further performance of the Agreement by our client unnecessary."

29. The title deeds and documents were returned and the return of the deposit was requested.

Vendor's actions

30. After the above letter was sent by fax from the Purchaser's solicitors to the Vendor's solicitors, there was a telephone conversation between Mr Hodgson and Miss Chan which is not helpful for present purposes as it would appear that Miss Chan had not had the opportunity to read the faxed letter at the time of the telephone conversation.

31. That evening, i.e. on the eve of completion date, at 7:21 p.m., a letter was sent by hand from the Vendor's solicitors to the Purchaser's solicitors denying that the Vendor had breached the contract and stating:-

"in order to prove title to the above property, we would answer your requisitions as follows:

[Here, responses to the 13 items were made, enclosing at least 11 documents]

...

We trust we have answered all your requisitions satisfactorily. We would reiterate that our client's obligation is to prove title before completion and therefore our client is not in breach of the agreement as alleged".

32. The original title deeds and documents which had been returned by the Purchaser's solicitors were not sent to them to enable them to consider the adequacy of these responses or the new materials sent.

33. Nor was any offer was made to extend completion date to enable the Purchaser's solicitors to consider them. Indeed, it was stated in this letter (sent at 7:21 p.m.) that "today ... is one day before completion".

34. This position was carried through to the next day (completion date) when the Vendor's solicitors sent a letter to the Purchaser's solicitors at 2:27 p.m. saying:-

"In the circumstances, if your client fails to complete the purchase of the above property before 5:00 p.m. today, our client shall treat your client in breach of the Agreement. Our client shall forfeit the deposit paid under the Agreement in accordance with Clause 20 of the Agreement without any further notice".

35. Meanwhile, the Purchaser's solicitors had replied to the letter from the Vendor's solicitors of the previous day, essentially reiterating their letter of the day before, and added:-

"The completion deadline is all but upon us and it is simply not possible for us to consider those documents and report on title to our client within the short time left available. We repeat our demand for the immediate return of our client's deposit ...".

36. The next morning, 1 November, the Vendor's solicitors informed the Purchaser's solicitors that the total deposit of $22,341,000 was forfeited as the Vendor had not received the balance of the purchase price at 5:00 p.m. the day before. This led to the present proceedings.

Issues

37. In the light of the relevant facts set out above, the following issues arise:-

(1) what did clause 11 of the Formal Sale and Purchase Agreement mean?

(2) was clause 11 unworkable, as has been submitted on behalf of the Vendor?

(3) if clause 11 was workable and meant that the Purchaser had 7 working days within which to raise requisitions, had it waived that entitlement?

(4) was the Purchaser entitled to terminate the agreement on 30 October (the eve of completion date)?

(5) what was the effect of the Vendor's response and delivery of new materials in the evening of 30 October?

(6) was the Purchaser obliged to complete on 31 October?

(7) would it be unconscionable for the Purchaser to rely on its strict contractual rights for the return of the deposits when its solicitors had acted for other clients who had acquired properties in the same development?

(1) Meaning of cl.11

38. Clause 11 provided that any requisitions or objections in respect of the title should be delivered to the Vendor's solicitors "as soon as practicable within seven (7) working days after the receipt of the title deeds in the possession of the Vendor by the Purchaser's solicitors" otherwise the same would be considered as waived and the Purchaser would be deemed to have accepted the Vendor's title (in which respect time was to be of the essence).

39. The first issue is whether this meant that the Purchaser had 7 working days after receipt of title deeds in which to raise requisitions (as the Purchaser submits), or whether it meant that the Purchaser had to raise requisitions "as soon as practicable" within a reasonable time (as the Vendor submits), the Vendor contending that the stated period of 7 working days was "unworkable" in the context of the time frame in this case and that therefore it should be ignored. On this contention, the reasonable time for the raising of requisitions would therefore be less than the period of 7 working days.

40. I would construe this clause as meaning that the Purchaser did have 7 working days after receipt of title deeds within which to raise requisitions. The courts should be very slow to ignore a specific time period agreed upon by parties in a written agreement, particularly when as here the agreement had been drafted, commented upon and re-drafted by experienced conveyancing solicitors who were dealing with their own work requirements. In my view, the specific time frame of 7 working days should be ignored only if it could be clearly shown that requisitions could not have been raised within the specified period before completion date in any circumstances, and as discussed in issue (2) below, cl. 11 was workable.

41. The words "as soon as practicable" in my view do not detract from the period of 7 working days which was specified. In the absence of the specification of 7 working days, it might have been argued that the words "as soon as practicable" meant say, 3 days (as was contended on behalf of the Vendor), but the actual period specified clearly defines or explains what these words meant.

42. I note that it has been accepted by the courts that where the parties have agreed that requisitions had to be delivered within 7 working days after the receipt of the title deeds by the purchaser's solicitors that the purchaser's solicitors must have that period of 7 working days after their receipt to consider the documents (Yeung Sau Chuen Sammy v Chung Chun Ting [1997] 4 HKC 34, Wong Bik Ching v Yu Hon Chung [1997] 4 HKC 38).

(2) Clause 11 was not "unworkable"

43. It was submitted on behalf of the Vendor that the period of 7 working days was not "workable" in the context of the factual situation.

44. The factual situation was that the Formal Sale and Purchase Agreement was made on 22 October (Wednesday of Week II). Completion was to be on 31 October (Friday of Week III), the 8th working day after 22 October.

45. The Vendor had agreed to cl. 11 (indeed it was in the original draft from the Vendor's solicitors) in the light of that time frame. The burden must be on the Vendor to say that it was "unworkable" and therefore had to be ignored.

46. In my view, cl. 11 was workable. First, it is important to note that this clause was included in the Formal Sale and Purchase Agreement which was signed on 22 October, before it was known that the Vendor would wait another 2 more days before delivering the title deeds. Certainly the Purchaser's solicitors did not know that they had to wait until 24 October to get them. As for the Vendor's solicitors, according to Miss Chan, she had the title deeds in the office but as it happened, she did not have the time to collate them until 24 October as she was very busy dealing with another matter.

47. Therefore when one is considering whether the period of "7 working days after receipt of title deeds" was workable, one should not consider that on the basis of 7 working days after 24 October (when the title deeds were actually delivered) but on the basis of 7 working days after 22 October (when it would have been reasonably expected that the title deeds would be delivered without delay). Although there was no express agreement as to when the title deeds would be delivered, it is well-established law that even though the obligations of a vendor to prove title is an obligation which he has to perform at completion, it is an obligation which in practice ought properly to be performed by the vendor well before the date fixed for completion (Re Priestley's Contract [1947] Ch 469, quoted in A Mayson Development Co. Ltd v Betterfit Ltd [1992] 2 HKC 533, 535).

48. If the title deeds had been delivered on 22 October therefore, requisitions could have been raised within the 7 working day period the day before completion date. It is true, as was fairly accepted by Mr Hodgson in cross-examination, that if there were requisitions raised on the last day of the agreed period, followed by the Vendor's answers to the requisitions and the Purchaser's consideration of the answers, all that could not have been done before completion on 31 October. However, if the Vendor was sure that it would be providing complete title deeds and documents on 22 October, no requisitions would have been needed or warranted and the parties would have been able to complete as scheduled. It was accepted by leading counsel for the Vendor that the 7 working day period for raising requisitions was workable if no requisitions were delivered on title deeds delivered upon the signing of the Formal Sale and Purchase Agreement.

49. It is not a question of whether it was reasonable to allow the Purchaser to have so much of the time left before completion to raise requisitions and to leave so little left for answers and any further matters. The courts should give effect to bargains freely made. In the present case, the Vendor took a calculated risk when it agreed to cl. 11 in the form that it took. After all, it is a vendor's own choice to place his property on the market, and it is not unreasonable to expect him to have prepared his title deeds and documents before doing so. By contrast, a purchaser is parting with his money and he is entitled to time to peruse title to make sure he is getting the good title that he is paying for.

50. In conclusion therefore, I find cl. 11 was workable and the Court should not ignore the express "7 working day" period or imply a "reasonable time" period in its place. It follows that the Vendor was in breach when it delivered the title deeds to the Purchaser only on 24 October, less than 7 working days before completion date.

(3) No waiver

51. The Vendor's further contention was that if the Vendor was in such breach, then the Purchaser had waived it by not objecting to the delivery of the title deeds on 24 October and by the negotiations for an extension of time referred to above.

52. I do not accept that contention. First, it is clear from the evidence that when the clients discussed an extension of time, that was separate from what the respective solicitors were doing on the conveyancing side. The clients' negotiations on 24 October were prior to a discussion about the late delivery of title deeds that Mr Yeung had with Mr Hodgson on 27 October (according to Mr Yeung's recollection as stated in his Witness Statement on which he was not challenged) or 28 October (according to Mr Hodgson's recollection as stated in his Witness Statement ).

53. As for the receipt of the title deeds on 24 October, I find that that is not such unequivocal conduct as to amount to a waiver of the Purchaser's contractual entitlement to 7 working days for the perusal of title and raising of requisitions. Unlike a situation of acceptance of goods sold and delivered, it must be remembered that the Purchaser's contractual entitlement was not the receipt of title deeds. It was to raise requisitions within the specified period. The Purchaser's solicitors would not have known, until the 96 title deeds were perused, what was the state of the title shown by the Vendor and whether requisitions would be required, and if so, their extent. In my view therefore, the receipt of the title deeds did not amount to a waiver.

(4) Purchaser entitled to terminate on 30 October

54. As it transpired, Mr Hodgson found after perusal of title that a number of documents were missing, and it is common ground that the 13 items in his letter were requisitions, although his evidence was that they were but part of more requisitions that he would have raised had the contract not gone off.

55. I find that the Purchaser was entitled to terminate the agreement on 30 October. It is clear that the requisitions were properly raised. They were not frivolous or unwarranted. They were not insubstantial either in volume or content. Any responses or new materials delivered in answer would need to be considered. It is well-established law that "a purchaser must be given reasonable time to consider the title of the vendor and his own position; the implied obligation of showing a good title would not have been discharged by disclosure on the day fixed for completion" (Active Keen Industries Ltd v Fok Chi-keong [1994] 1 HKLR 396, 406). Under those circumstances, completion being the next day in the absence of any agreement to postpone completion, the Purchaser was entitled to stand on its contractual rights to terminate the contract in anticipation of completion date.

(5) Effect of Vendor's response and delivery of new materials

56. The Vendor sent their responses and further materials that night at 7:30 p.m. It has been contended by the Vendor that these were not title deeds as such, but that is not pertinent when it has not disputed that it needed to provide those documents to show title. It has not been suggested that the requisitions were unwarranted. In the letter from the Vendor's solicitors accompanying the further documents that night, the Vendor's solicitors wrote in terms:- "in order to prove title to the above property, we would answer your requisitions as follows ...".

57. The effect of the Vendor's action was to keep the contract alive, even if the Purchaser were in breach in purporting to terminate the agreement by its letter of 30 October (which I have found was not the case).

58. Once the contract is kept alive, it is kept alive for the benefit of both parties. That contractual principle has been clear since the House of Lords decision in Fercometal in 1989. Therefore, when the Vendor sent the responses and new materials that night, it was incumbent upon it to respect the Purchaser's contractual rights as well.

59. The Purchaser should therefore have been sent the title deeds back and been offered sufficient time to consider the responses and the new documents sent. As they were sent at 7:30 p.m., they could only have been considered the next morning, i.e. completion date. It could not be right for the Vendor to have insisted on completion that very day.

60. As stated above, the requisitions were not unwarranted. The responses needed consideration and the new documents provided included powers of attorney and opinions on foreign law. There was a point on whether a power of attorney (which should be strictly construed) given to enable an attorney to purchase a property was wide enough to allow him to execute a document modifying terms of a deed of mutual covenant. There was another point on whether an agent not appointed under seal was executing a release in its own capacity as chargee or as agent. These are matters which no purchaser or his solicitors should be required to take a hasty decision on, even if the purchase price were less than the $223,410,000 here.

61. As a matter of completeness, I would add that even assuming Mr Hodgson had not taken Wednesday 29 October to instruct and consult counsel, and had raised the requisitions in the late morning or early afternoon of that day, the Vendor's responses and new materials would still only be available to the Purchaser on 30 October, and in light of the points stated above, the points raised in the requisitions would not have been concluded in time for completion on 31 October.

62. It is not open to the Vendor to say that if the Purchaser needed time, then it could have asked for it. The late delivery of the responses and new materials were of the Vendor's own doing. It having been in breach such as to render the Purchaser's performance of the contract impossible within the contractual time frame, it had the burden to "re-enable" such performance by offering further time (Wong Kam Lan v Well Win Investment Ltd [1996] 2 HKC 143, 150).

(6) Purchaser not obliged to complete on 31 October

63. It follows from the above that the Purchaser was not obliged to complete on 31 October, because it had lawfully terminated the agreement on 30 October, or (even if it had not) because the agreement was wrongfully terminated by the Vendor itself when it purportedly forfeited the deposits for the Purchaser's failure to complete on 31 October. It was common ground that the agreement had terminated by 1 November with the Vendor's letter stating the forfeiture and in any event, the deposits were never returned before proceedings were started by the Purchaser.

(7) No unconscionable conduct by Purchaser

64. The Vendor had submitted that it was unconscionable for the Purchaser to stand on its strict legal rights because its solicitors had acted for other purchasers in the acquisition of other units in the same development. I cannot accept that contention.

65. A vendor's obligation is one owed to the purchaser, not the purchaser's solicitors. Purchasers are free to change their solicitors at any stage of a conveyancing transaction. It cannot be suggested that the vendor's obligation to show and prove good title would vary with the identity of the purchaser's solicitors.

66. Further, in the acquisition of units even in the same development, different clients may have different positions as to whether or not they would accept a title. There may be different commercial considerations. Decisions may vary depending on whether a sub-purchaser or mortgagee would be prepared to take the title offered.

67. As shown in this case, conveyancing solicitors in Hong Kong (at least at that time) handled an enormous amount of work, often in rushed situations and sometimes delegating to others and retaining only a supervisory role. I accept Mr Hodgson's evidence that when he was dealing with this matter, he could not remember the problems with this development, and could only remember that there was a problem with Japanese law and a supplemental deed of mutual covenant. There is no evidence to the contrary. In my view, it is unwarranted to say that the fact that his firm had been handling transactions in this development would render it unconscionable for the Purchaser to recover its deposits.

Order

68. In the circumstances, I find that the Plaintiff Purchaser has made out its claim in liability and I would dismiss the counterclaim with an order nisi that costs follow the event, i.e. that the Defendant Vendor bear the costs of the action.