TUNG KIU YUING v. CHAN MEI YUET

1991, No. A2682

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an appeal by the plaintiff against the Order of a Master granting the defendant unconditional leave to defend upon an application by the plaintiff for specific performance under 0.86 of the Rules of the Supreme Court.

2. By an agreement in writing entitled "Provisional Agreement for Sale and Purchase" and dated 9th March 1991 the plaintiff agreed to buy and the defendant to sell a flat, the property of the defendant. An initial deposit totalling HK$40,000 was paid. A further deposit of HK122,000 was to be paid on 18th March 1991 upon the signing of a formal agreement. On that date the plaintiff's solicitors returned to the defendant's solicitors the formal agreement signed by the plaintiff together with a cheque for HK$122,000 in payment of the further deposit. By letter of the same date the defendant's solicitors (who are not the solicitors in these proceedings) informed the plaintiff's solicitors that their client would not proceed with the transaction and sent a cashier order for HK$80,000 representing a refund of the initial deposit and HK$40,000 liquidated damages pursuant to clause 2 of the Provisional Agreement.

3. The Provisional Agreement contained the following Terms:

"(1) The Vendor and the Purchase shall on the _____day of _______19___ enter into a formal Agreement for Sale and Purchase at________Solicitors at_____ a.m./p.m. Should either party hereto fail to comply with the same without the prior consent of the other party, the defaulting party shall be deemed to have been in breach of this Agreement.

(2) Should the Vendor be in breach of this Agreement after receiving the said initial deposit, the Vendor shall be liable to repay the said initial deposit to the Purchaser together with an additional sum equivalent to the said initial deposit as liquidated damages. In this event, the Vendor shall also pay to our Company a sum of HK$_________ as handling charges.

(3) Should the Purchaser be in breach of this Agreement after paying the said initial deposit, the said initial deposit shall be absolutely forfeited by the Vendor and the Purchase shall at the same time pay to our Company a sum of HK$_______ as handling charges.

(4) The Purchaser shall upon the signing of the said formal Agreement for Sale and Purchase pay to our Company a sum of HK$_______ as brokerage."

4. The Provisional Agreement was in both Chinese and English. The parties completed the Chinese version. For the purpose of this appeal, the English version is sufficient. I record, however, that should the matter go further, there may be some dispute as to whether the English version is an accurate translation of the Chinese version of clause (2).

5. It will at once be seen that the main issue is the interpretation of clause 2 and whether this affords the vendor what I prefer to call an "escape" but put jurisprudentially, a method of alternative performance of the agreement. The law happily was not in dispute. Parties to a contract may limit or extinguish their common law rights or equitable remedies provided that this is done in sufficiently clear and unambiguous terms. See WONG Lai-fan v. LEE Ha [1992] 1 HKLR 125. The underlying authority for this principle is founded largely on two cases. First, Szymonowski and Company v. Beck and Company [1923] 1 KB 457. The relevant passage was set out and relied upon by Godfrey J. in LEE Tak-kwong v. CHOI Pui-kei, Stephen and Another [1991] No. A2338 where the judge in commenting upon two cases said:

"The second was Szymonowski and Company v. Beck and Company [1923] 1 KB 457. That, again, was far away from the present case. It was a case about sale of goods, but two passages from the judgment in that case are worth recording for present purposes. Bankes L.J. said (at p.464):

"A buyer has, in the event of his seller breaking his contract, a prima facie right to avail himself of one or other of several alternative remedies and if the seller desires by a clause in the contract to restrict the buyer's right to those remedies he must say plainly whether he intends to deprive the buyer in certain events of all those remedies or only of one or more of them, and if so of which."

        Scrutton L.J. said at (p.466):-

"Now I approach the consideration of that clause applying the principle repeatedly acted upon by the House of Lords and by this Court - that if a party wishes to exclude the ordinary consequences that would flow in law from the contract that he is making he must do so in clear terms.""

6. The second authority is Abdul Cader Abdeen v. Abdul Careem Mohamed Thaheer [1958] AC 116, a decision of the Privy Council dealing with "escape" clauses in an agreement for the sale and purchase of land.

7. With that principle in mind the courts have in recent cases ruled as effective, in favour of vendors seeking to escape from a contract for the sale of land, a number of clauses which have in common some provision beyond simple repayment of any initial deposit and an additional sum as liquidated damages. Thus, in LEE Tak-kwong, the appropriate clause contained the additional words:-

"If the vendor in breach of contract failed immediately to compensate (the purchaser) by the amount of the deposit, the purchaser shall be entitled to take legal action to enforce the purchase by specific performance, and also to claim for any loss consequential thereupon."

In WONG Lai-fan the additional words were :

"And the purchaser shall not take any further action to claim for damages or to enforce specific performance."

8. In TSANG Siu-lan v. LAW Kwok-wo 1991 No. A4050, a decision of Mayo J., the relevant clause contained these words :

"Thereafter this Provisional Agreement shall also be of no effect."

9. It is interesting to note that the corresponding clause in relation to the purchaser contained the words:

"Then this Provisional Agreement shall also be nullified."

10. It was with some confidence therefore that Mr. Li, for the plaintiff, submitted that the wording of clause 2 in the Provisional Agreement deals with no more than the question of damages arising in the event of breach by the vendor and does not have the effect of extinguishing any other of the rights or remedies of the plaintiff purchaser. For the defendant, however, Mr. Chung, contended that Abdul Cader Abdeen repays a closer analysis than has been carried out in any of the recent judgments of the Court of Appeal or this court. He said that, unlike the clauses to which I have referred above and which contained some form of express exclusion, the clauses in Abdul contained no such wording, so that the exclusionary effect was necessarily implied by the Privy Council. He contended that it is at least arguable that clause 2 has the same implied effect.

11. Abdul involved an appeal from what was then Ceylon where, under Roman-Dutch Law, a party had a right to specific performance subject only to the discretion of the court to refuse the remedy in appropriate cases. The clauses with which the Privy Council was concerned were as follows :-

" 8. In the event of the purchaser being ready and willing to complete the said sale in terms hereof and the vendors failing, refusing or neglecting to execute and cause to be executed the said deed of transfer as aforesaid then and in such case the vendors shall repay forthwith to the purchaser the said deposit of rupees twelve-thousand five-hundred (Rs. 12,500/-) together with interest thereon at five per centum per annum from the date hereof to date of payment and shall also pay to the purchaser a sum of rupees fifteen-thousand (Rs. 15,000/-) as liquidated and ascertained damages and not as penalty.

    9. In the event of the vendors deducing a good and indefeasible title to the satisfaction of the said Mr. John Wilson and being ready and willing to execute or cause to be executed prior to the 31st day of December, 1947, the said transfer and to give vacant possession as aforesaid and the purchaser failing, refusing or neglecting to complete the purchase as aforesaid the purchaser shall pay to the vendors a sum of rupees fifteen-thousand (Rs. 15,000/-) as liquidated and ascertained damages and not as penalty and the vendors shall refund to the purchaser the said deposit of rupees twelve-thousand five-hundred (Rs. 12,500-)."

12. Lord Keith of Avonholm delivered the judgement of the Privy Council. He cited a passage from the judgment which was under appeal :

"It is only in the absence of agreement to the contrary that the Roman-Dutch law confers on a purchaser under an executory contract the right to select one of two alternative legal remedies under the Roman-Dutch law, namely, specific performance or damages. But we have here a categorical stipulation that if the primary obligation is not fulfilled for any reason whatsoever, two specified sums shall immediately become due. To my mind, the stipulated return of the deposit, being part of the purchase price, necessarily implies that the primary obligation to sell is then to be regarded as having come to an end. This negatives an intention that the purchaser could still demand, if he so chose, specific performance. It is also significant that, when one considers the relevant issue of mutuality, clause 9 provides that, should the purchaser default for any reason, he would, though liable to pay an agreed sum to the vendors as liquidated damages, be entitled to a refund of his earlier deposit. Clause 9 equally denies to the 'vendors' by necessary implication the alternative legal remedy of specific performance."

13. Lord Keith then went on to reject an argument that clause 8 was not a substituted method of performance but a stipulation only for damages for breach of contract which did not bar specific performance. He went on to give four reasons :

" First, where the right in general of a party to insist on specific performance of his contract or to claim damages is so clear under the Roman-Dutch law their Lordships have difficulty in appreciating why the parties should introduce into the contract the detailed and meticulous provisions of clauses 8 and 9 merely to fix the amount of damages in the event of the court finding itself unable or unprepared to give decree of specific performance.

    Secondly, the general framework of the contract suggests that clauses 7, 8 and 9 were designed to introduce modifications of what would otherwise be, subject to certain minor conditions, the unqualified obligation to sell or cause to be sold the property in question. Clause 7 is a clear modification of the legal consequences ordinarily following on a contract of sale, and clauses 8 and 9 are capable of a similar interpretation. Each of the clauses relates to a specific event or events which may follow the signing of the contract and provides for the consequences to follow thereon.

    Thirdly, clauses 8 makes no distinction between failure, refusal or neglect to execute or cause to be executed the deed of transfer. The same consequences are to follow from any of these events. Failure might have proceeded, though in this case it did not, from the refusal of the court to sanction and authorize a sale by the curators of the minor part-owners. In such an event the purchaser's only remedy would be under clause 8. The view of the Supreme Court was that this was a substituted obligation on the vendors who, having undertaken to cause a transfer to be executed, would be liable to pay to the purchaser the agreed sum of damages. Their Lordships see no reason to dissent from this view, and it is impossible in their opinion to differentiate between such a failure and a refusal of one of the parties to execute a transfer, which it is to be noted again results in a failure of the other vendors to cause a transfer to be executed.

    Lastly, clause 8 provides that on the occurrence of any of the events contemplated the vendors shall repay "forthwith" to the purchaser the deposited sum with interest at the rate of five per centum per annum. This, in their Lordships' view, points strongly to the construction that in the events contemplated the bargain for a sale has come to an end and has been replaced by the pecuniary stipulations in the clause. It is further significant, as Gratiaen J. points out, that there is a corresponding mutuality of obligation on the purchaser in clause 9 in the event of his failing, refusing or neglecting to complete the purchase."

14. Mr. Chung laid particular emphasis on the last reason. He said that the word "repay" is crucial and points strongly to cancellation of the contract. He said that, unless the contract is regarded as at an end, the question of repayment does not arise or become relevant. He said that this is pure logical analysis which is unaffected by the differences in the local law.

15. Mr. Li said that this case must be read in conjunction with Szymonowski and WONG Lai-fan, the effect of which is that the wording must be clear and unambiguous. Although Mr. Li did not go so far, I think it must be inherent in his argument that, if it is necessary to look for an implied term or effect, a clause cannot be said to be clear and unambiguous. He said that the clauses in Abdul are different from the clauses in the Provisional Agreement. I have to say that I have rather more difficulty than Mr. Li in finding any real distinction. To me the clauses seem fundamentally the same.

16. Mr. Li then referred to the second reason given by the Privy Council and in particular the final sentence thereof. I am bound to say I cannot see what assistance he can glean from that passage. Likewise, I see nothing in the third reason from which Mr. Li can take comfort.

17. With some force, however, Mr. Li pointed out that in the last reason, Lord Keith laid emphasis upon the word "forthwith" rather than the word "repay". He said that the former word does not appear in clause 2 of the Provisional Agreement.

18. In my judgment, the word "forthwith" is of some significance. If a contract is to be terminated or cancelled other than by performance of the primary obligation, it needs to be done promptly so that all parties know where they stand. In the case of breach of contract, however, where various remedies may be pursued, the payment of damages, whether pre-determined or not, does not assume or require the same urgency. The absence of the word in clause 2, therefore, is a pointer to the clause being no more than a clause determining the amount of damages.

19. Earlier, I said I prefer to call alternative or substituted performance clauses an "escape". Perhaps cancellation is better. I say that because that in reality is what they are. It is in my view, wholly unreal in relation to a contract where the primary obligation is the sale of land to speak of alternative or substituted performance by payment of a relatively small sum of money. Assuming the clauses are effectively drawn, the contract is simply escaped from or cancelled, not performed.

20. It is, therefore, not difficult to see why the Court of Appeal has stated that the wording of these clauses must be plain and unambiguous. Nor is it difficult to see why, in applying this principle, the courts have upheld as effective clauses that use language which indicates that the contract is cancelled or that remedies cannot be pursued. Anything less, in my judgment, is insufficient to allow a party to escape or cancel.

21. It is high time for this approach to be more widely appreciated. The rights of parties to a contract for the sale and purchase of land should be governed by language that explicitly states their intention. In my view, parties who fail to use words such as cancel or escape should not generally expect to be relieved of their primary obligations by this court. The existing mumbo jumbo to be found in agreements for the sale of land which, by sheer chance, may contain effective wording, should be replaced by some simple formula such as "This contract is cancelled if ....". Thus drafted, the contract will recognise its true nature, namely, an option which operates principally for the benefit of the vendor, at least in a rising market.

22. It follows that, notwithstanding Mr. Chung's careful argument of which I hope I have shown my appreciation and understanding, clause 2 falls far short of what I regard as a plain and unambiguous escape or cancellation clause.

23. It is therefore necessary for me to consider Mr. Chung's alternative contention, namely, that I can look to extrinsic evidence in order to interpret the clause if it is ambiguous. For the purpose of this appeal it is accepted that, before the agreement was signed, clause 2 was explained by the agent or broker as meaning that which the defendant would like it to mean. The plaintiff, who was present, said nothing to the contrary when this explanation was given. Mr. Chung said, but I think rather faintly, that this evidence can be used in determining the meaning of the clause. I reject this argument. What the agent thought the clause might mean is neither here nor there. The fact that the plaintiff did not demur from the explanation given by the agent does not import his understanding or intention.

24. Accordingly I allow the appeal. I make an order nisi in terms of the Minute dated 22nd May 1991 annexed to the plaintiff's application under 0.86.