TSANG WING MAN v. CHUNG ON LING

CACV 129/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 129 OF 2015

(ON APPEAL FROM HCA 1826/2012)

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J U D G M E N T

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Hon McWalters JA (giving the judgment of the court):

1.  This appeal arises from a consolidated action tried before Deputy High Court Judge Seagroatt (“the judge”) on 5-7 May 2015 with judgment being delivered on 8 May 2015.

2.  The consolidated actions involved a dispute over real property. The defendant took action to vacate a charge registered against his property by the plaintiff and the plaintiff took action seeking specific performance of an agreement for sale in respect of the same property.

3.  The plaintiff failed in her action seeking specific performance and the defendant succeeded in his action seeking removal of the charge.  The plaintiff was ordered to pay the defendant’s costs in both actions.

4.  The plaintiff appealed and at the hearing of the appeal we reserved our judgment which we said we would hand down at a later date.  This we now do.

The background to the dispute

5.  The property that is the subject of both actions is the ground floor and cockloft of No 1 Nam Shing Street, Tai Po.  This property is owned by the defendant and had been rented from him, on a monthly basis, by the plaintiff as business premises.  The plaintiff is a real estate agent and the premises were being used in connection with her business. 

6.  The plaintiff had been friends with the defendant and his wife since 1999.  In June 2011 the defendant informed the plaintiff that he had a purchaser for the property who was willing to pay $10 million for it.

7.  After some negotiation the defendant agreed to sell the property to the plaintiff for $9.8 million, and pending completion the property would continue to be let to the plaintiff at a monthly rent of $22,300.  This sale agreement was dated 28 June 2011 and was recorded in writing in Chinese.  The judge found it was “written by the defendant, the content emanating from the plaintiff.” The document was signed by both of them with the defendant’s wife signing as witness.  Under the sale agreement no deposit was required to be paid by the plaintiff. 

8.  This document tied the completion of the sale of this property to completion of the sale of a property owned by the plaintiff in the Mainland. The document recited:

“Completion date is within 3 days according to the sale and after completion of the property owned by the Purchaser at Longgang District, Shenzhen City, Guangdong.”

The plaintiff’s case

9.  The plaintiff’s case was that up until the date of her agreement with the defendant there had been negotiations with a developer in respect of her Shenzhen property but that nothing had been finalized.  The negotiations had been on-going since 2005 and revolved around a price of RMB8 million or RMB9 million.  The Amended Statement of Claim (“ASOC”) pleaded that as at May 2011 a Mainland developer was “considering to purchase” the plaintiff’s property.  In another part of the ASOC the plaintiff conceded that by May 2012 the sale of “the Plaintiff’s Mainland Property had yet to be materialized”. 

10.  The position of the plaintiff, as pleaded in the ASOC, is that terms should be implied into the sale agreement and once that is done there would be certainty as to the completion date.  These implied terms require the defendant to prove his title to the property before completion and that completion should be effected within a reasonable time of title being shown. The defendant, so the ASOC averred, had not proven title or provided the plaintiff with an opportunity to inspect the documents of title to the property.

11.  Ultimately, nothing ever happened in respect of the sale of the plaintiff’s Mainland property.  Meanwhile the defendant received another offer on his property and this caused him to arrange a meeting with the plaintiff and this took place in May 2012.  At this meeting the defendant informed the plaintiff that a prospective purchaser wished to buy the property for $11.5 million and he informed her he wished to proceed with this transaction. 

12.  In her ASOC the plaintiff said she refused to cancel the sale agreement she had with the defendant and she required him to “observe with the spirit of contract”.  The plaintiff further averred that prior to this meeting “the defendant had never demanded the Plaintiff to complete the transaction on any specific date or at all” but after this meeting the defendant telephoned her and told her he was putting the property up for sale.

13.  Shortly after this meeting, on 16 May 2012, the plaintiff registered the sale agreement as a charge on the property thereby preventing the sale of the property to any other purchaser going ahead.  The defendant’s solicitors then wrote to the plaintiff and the plaintiff described the content of that letter in paragraph 13 of the ASOC:

“By letter dated 15 June 2012 from the Defendant’s solicitors, the Defendant, inter alia, alleged that the Subject Agreement was not a provisional agreement for sale and purchase of the Property and was no more than a letter of intent.”

14.  This was followed, on 2 August 2012, by the defendant commencing proceedings to vacate the registered charge.

15.  By a letter dated 17 September 2012 the plaintiff gave notice to the defendant that completion of the transaction should be by 12 November 2012 and she also requested production of the relevant title deeds and documents of the property “for approval of title”.[1]

16.  The defendant’s response to this letter was pleaded in paragraph 15 of the ASOC which says:

“By letter dated 26 September 2012 from the Defendant’s solicitors, the Defendant refused the Plaintiff’s demand for completion. It was also alleged that the Subject Agreement was nothing but a letter of intention, there was no pass of consideration, it did not bind the Defendant and the sale and purchase of the Subject Property had been terminated in or abut the middle of September 2011 due to the inability of the Plaintiff to proceed with. No title deeds has yet been produced by the Defendant for inspection and approval of title by the Plaintiff. ”

17.  The plaintiff then averred in her ASOC that the defendant closed the bank account into which she had been paying rent and that since that date the defendant had refused to accept payment of rent.  By his conduct the plaintiff asserted that the defendant had repudiated the sale agreement and that the plaintiff was no longer obliged to complete since the defendant had not proven his title.

18.  On 4 December 2012 the plaintiff commenced these proceedings seeking specific performance of the sale agreement.

19.  As at the date of trial the plaintiff’s Shenzhen property remained unsold.

The defence case

20.  There was a disagreement between the parties on the crucial issue of the time frame for completion of the sale.  It was the defence case that the plaintiff represented that “she was in the process of selling her Mainland property, which was near the completion stage and that the sale of the Mainland property would be completed soon and in any event no later than 2 months’ time.”[2] She also represented that once the Mainland property was sold she would have the funds to “complete the purchase of [the defendant’s property] within 3 days after the Mainland Property was sold (i.e. no later than the end of August 2011).”[3]

21.  The defendant pleaded that upon reliance on these representations he agreed to sell his property to the plaintiff for $9.8 million with completion to take place within 3 days of the sale of the plaintiff’s Mainland property.  He also averred that prior to the signing of the agreement, the plaintiff told him that once the funds for the purchase of his property became available both parties would then instruct solicitors to complete all the formalities of the sale.  Such formalities would have included the procedures relating to proof of title.  Consequently, the terms that the plaintiff now sought to imply into the sale agreement in respect of proof of title could not be so implied.

22.  The defence explanation for the plaintiff not being required to pay a deposit was that the defendant believed the plaintiff when she said she was short of funds and when she represented that completion of the sale of his property would take place soon and in any event no later than 2 months’ time. 

23.  It was also the defence case that, upon the defendant’s instructions, the defendant’s wife contacted the plaintiff in early September 2011 and informed her that she had failed to complete by “the end of August 2011”, but that the defendant was willing to extend the time for completion until mid-September 2011.[4]

24.  The defendant also claimed that the plaintiff was a bad tenant, always being in arrears, and that the rental of $22,300 per month was significantly below market value and only agreed to by the defendant because he believed the plaintiff’s oral representation that completion would be within 2 months’ time.

25.  Like the plaintiff, the defendant also argued for additional terms being implied into the sale agreement.  In respect of completion it was his case that a term to the effect that the plaintiff shall complete the sale and purchase of his property within a reasonable time after the signing of the sale agreement should be implied.  The defendant went on to plead that in the circumstances, especially those surrounding the making of the sale agreement, a reasonable time for completion would be before the end of August 2011.

26.  What happened in the month of September 2011 was pleaded by the defendant in paragraph 24 of his Amended Defence and Counterclaim as follows:

“In or about the beginning of September 2011, the Defendant telephoned the Plaintiff to inform her that as she had failed to complete the purchase of the Subject Property by the end of August 2011, the time for her to purchase the Property had lapsed. The Plaintiff requested the Defendant to extend time to her to complete the purchase for a couple of weeks. The Defendant did not agree and gave her express notice that unless she completed the purchase by middle of September 2011, he would not sell the Subject Property to her and would not be prepared to grant any further extension of time for completion. The Defendant expressly informed the Plaintiff that if she failed to complete the purchase by the middle of September, she would put the Subject Property on the market for sale to other interested purchaser.”

27.  The defendant then pleaded that as the plaintiff had failed to complete the purchase by the middle of September 2011 he accepted her repudiation of the agreement.  He pleaded in the alternative that he had exercised his right to avoid or rescind the agreement as he was entitled to do by reason of the plaintiff’s misrepresentation.

28.  In respect of the plaintiff’s claim that he was obliged to prove his title to the property the defendant pleaded that as the proposed sale and purchase had been terminated in or about the middle of September 2011 it was pointless for the defendant to produce the title deeds to the plaintiff for her inspection.

29.  In his counterclaim the defendant claimed that the plaintiff had been trespassing on the property since 8 October 2012 thereby preventing him from selling or renting it and thus causing him to suffer financial loss. These losses were the inability to proceed with the sale of his property for HK$11.5 million or to rent it out at the then market rental of HK$45,000 per month.  The defendant claimed damages and mesne profits.   

The judge’s judgment

30.  Clearly the enforceability of the sale agreement was the key issue in this litigation for if the plaintiff could not succeed in enforcing the agreement then the defendant had to succeed in having it removed as a charge against his property.  Unsurprisingly, therefore, the judge turned his mind first of all to the nature of the sale agreement.  In his view it could not, because of its flaws, be properly characterised as a provisional sale and purchase agreement.  He was particularly concerned at the lack of consideration arising from the lack of a requirement that a deposit be paid and from the uncertainty in respect of completion. 

31.  On this latter issue of the uncertainty in respect of completion he summarised the effect of the plaintiff’s evidence as follows:

“I have concluded from her evidence that the state of affairs in respect of this property was no more than a hope on her part that a sale would at some time in the future materialise. If she thought that a contract for sale, at least, would result by the end of August 2011, that was not a reasonable one given the vague and non‑progressive interest by the developer on the mainland over several years. I have concluded on the basis of her own evidence that by June 2011 the prospect of a sale of her mainland property was at best speculative. The history since that date, with no information or documentation concerning that sale, shows that such expectation was unrealistic although she managed to convey to the defendant that it was highly likely and only completion stood in the way. For a few weeks the defendant took this assurance on trust. Yet the situation was very different from what the plaintiff hoped for, or wanted.”

32.  He described the plaintiff as knowing that there was no serious possibility of a completion date for the Shenzhen property and wanting to be allowed to treat the agreement as an indefinitely continuing option to purchase.  The judge said that the plaintiff’s evidence tended to suggest that she thought the sale agreement with the defendant was like a permanent open offer to her.  He described it as a homemade document, deliberately drafted by the plaintiff so as to favour her.  He said:

“On the face of it, the document provided, at its highest, an option to purchase for which there was no real consideration.”

33.  He concluded that its lack of consideration and vagueness as to completion made it unenforceable, saying:

“I am satisfied that the plaintiff in effect dictated the content of this agreement and it was deliberately couched in its vague form as to completion in order to give her as much time as possible. In that form however it is simply unenforceable – the lack of consideration and vagueness as to the completion date made it so.”

34.  This finding was enough, on its own, to dispose of the actions.  However, the judge went on to consider the factual issue of whether there had been an oral promise by the plaintiff to complete the purchase of the defendant’s property “by the end of August 2011” and the oral offer by the defendant of an extension of the completion deadline to mid-September 2011.

35.  In resolving this factual conflict the judge made it clear that, generally, he preferred the evidence of the defendant to that of the plaintiff. He said:

“I do not believe the plaintiff. I accept the defendant’s evidence, and that of his wife, on all material aspects.”

On another occasion in his judgment the judge described the plaintiff as “utterly unreliable as a witness”.

36.  The judge also had regard to the logic and probabilities of the situation saying:

“Common sense and logic also support their testimony.”

37.  On this basis the judge found that there was indeed an express oral promise by the plaintiff to complete the purchase of the defendant’s property by the end of August 2011 which the defendant had extended until mid-September 2011.  Consequently, by the time mid-September had passed, the plaintiff was in breach of her oral promise by failing to complete by the end of the extension period.

38.  The judge also went on to find that the plaintiff had misrepresented the position concerning “the sale of the Mainland property and the reality of the completion timetable”.  The judge described her testimony on these matters as follows:

“She was verging on the dishonest in these representations and was certainly reckless and misleading.”

39.  The judge said that he was satisfied that if the plaintiff had been candid with the defendant about the realistic prospects of the sale of her Shenzhen property, the defendant would not have extended the completion to mid-September.  The judge even went so far as to say that he thought it “highly likely” that if the defendant had been aware of the true position in respect of the Shenzhen property on 28 June 2011 he would never have entered into the agreement.

40.  The judge’s primary position, therefore, was that the document of which the plaintiff was seeking specific performance was not a properly constituted sale and purchase agreement as there was a lack of consideration and uncertainty in respect of completion.  It was not, therefore, enforceable. For this reason alone the plaintiff failed in her claim for specific performance of it.

41.  However, the judge went on to say that if he was wrong in finding that it was unenforceable, then, in any event, as the plaintiff was in breach of the provision for completion, there was no compliance by her with its terms so as to entitle her to obtain specific performance of it.  She failed to complete the transaction within the period allowed and she was, therefore, in breach of the agreement.  The defendant was entitled to repudiate the agreement and was free to sell the property to an alternative purchaser. 

The grounds of appeal

42.  The grounds of appeal attack the judge’s conclusion that the agreement was legally unenforceable when that was not an issue that was raised by the defendant in his pleadings or by the parties’ agreed list of issues of the trial.

43.  Furthermore, given that the pleaded cases of the parties was that completion would take place in accordance with the clause in the agreement and given that the defendant never pleaded any oral promise by the plaintiff to complete by the end of August 2011, the judge erred in finding that such a promise had been given.  A similar pleading point in respect of the extension to mid-September is made a separate ground of appeal.

44.  The 5^th ground of appeal asserts that the judge erred in law by not ruling on whether there was an implied term of the agreement that the defendant would be obliged to show and prove good title to the property.

45.  The 8^th ground of appeal complains that the judge’s finding in respect of the plaintiff’s misrepresentations was inconsistent with the defendant’s pleaded case.

46.  Complaint is also made that the judge ought to have found:

(i) that the defendant had affirmed the agreement in September 2011 when, after discovering the falsity of the representations, he nevertheless offered an extension of time to the plaintiff; and

(ii) that the defendant was in repudiatory breach of the agreement by not showing and proving good title to the property.

47.  In support of these grounds Mr Chong, for the plaintiff both at trial and on appeal, argued that enforceability of the agreement was not raised on the pleadings it was not a matter on which the judge could adjudicate.  Mr Chong’s position was that:

“... trial is not an independent search for the truth and that the agenda for trial was set by the parties and identified in the pleadings .... Hence it is not open to the trial judge to make a finding beyond the four corners of the pleadings.”

48.  On the question of whether the agreement was in law enforceable Mr Chong submitted that the judge had allowed himself to be influenced by his view that the agreement had been drafted by the plaintiff in order to favour herself at the expense of the defendant.  He also erred by allowing his reasoning to be influenced by the fact that the document is not a deed and that the agreement did not require a deposit to be paid.

49.  Mr Chong also submitted that there was an issue of procedural fairness as the parties were unaware of the judge’s concern with the enforceability of the agreement and so had no opportunity to address him on it.

50.  He relied on the same pleading argument to submit that the judge was precluded from making a finding that the plaintiff had orally promised completion by the end of August. 

51.  Mr Chong’s other main argument on appeal was that if an implied term of completion within a reasonable time was read into the sales agreement then the sales agreement was an enforceable contract and that during the currency of the “reasonable time” period the defendant was under a duty to show good title to the property and this he failed to do.

Discussion

52.  Many of the Mr Chong’s grounds of appeal rely on an argument that the pleadings do not just reveal and describe each party’s factual case and identify the factual issues for trial, but that they also act as blinkers upon the judge and prevent him from considering legal issues that he can identify as arising from the evidence but which neither party has expressly pleaded. 

53.  We have no hesitation in rejecting Mr Chong’s argument. None of the authorities to which Mr Chong has referred us support that proposition. His cases emphasise the importance of pleadings and explain the role they perform but that is as far as they go.  We do not wish in any way to devalue the importance of pleadings but their role is, essentially, to set out the factual basis of each parties case and to narrow the factual issues in dispute. Pleadings are not generally required to identify the legal questions which may arise from the facts.  They do not limit the legal issues the judge may consider when adjudicating on the legal rights of the parties on the evidence adduced before him. 

54.  Mr Chong’s submission requires that we determine what factual matters were raised by the pleadings.  As we have set out earlier in this judgment, on the plaintiff’s case negotiations for the sale of her Shenzhen property had been on-going since 2005 and by May 2012 its sale had still not taken place. The plaintiff accepted that, as a matter of fact, the sale and purchase agreement lacked certainty as to the completion date but that certainty could be obtained by implying terms. 

55.  The Amended Defence made clear that the defendant signed a document purporting to be a sale and purchase agreement for land which was silent on a key term – namely the date for completion.  The Amended Defence also made clear that the signing of the agreement took place as part of a process of negotiations during which the plaintiff orally represented to the defendant that the sale of her Mainland property “would be completed soon and in any event no later than 2 months’ time.”[5]  These pleadings clearly raised, as a matter of fact, that the sale and purchase agreement lacked a date for completion and that this was presently unascertainable with any certainty and was subject to further representations from the plaintiff.

56.  On these facts the judge was being asked to adjudicate the right of the plaintiff to have specific performance of the agreement.  Inevitably, before the judge could grant the plaintiff the remedy she sought he would have to satisfy himself that, as matter of law, the agreement was enforceable.  This was simply a legal issue that inevitably arose as a consequence of the facts contained in the pleadings.  Furthermore, the legal nature of the sales agreement and whether it was an enforceable contract had been raised as issues by the defendant’s solicitors in correspondence and this correspondence was referred to in the pleadings.  That it was an issue which would attract the attention of the judge could hardly come as a surprise to the parties.

57.  On this issue there are two matters that have to be addressed. The first is the impact on the legal nature of the document of the judge’s findings that there was no consideration and that there was a lack of certainty in respect of the completion clause.  The appellant argues that notwithstanding that no deposit was required to be paid there was still consideration.  It is not necessary to resolve this question as there can be no doubt that the judge was correct in finding that the completion clause lacked certainty. 

58.  The second issue of there being a lack of certainty in respect of completion which could only be cured by the judge finding an express oral promise by the plaintiff to complete by no later than the end of August 2011, raises the question of whether the contract satisfied the requirement of section 3(1) of the Conveyancing and Property Ordinance, Cap 219.  Section 3(1) requires that a contract for the sale of land be in writing.

59.  There is no appeal against the making by the judge of the finding of the oral promise and the extension of time for completion other than the grounds which argue that such findings were outside of the pleadings and for this reason were not open to the judge to make.

60.  As we have demonstrated, they were not outside the pleadings.  The findings were, in our view, clearly open to the judge and we are not at all surprised that he made them.  Having made them, the question becomes what consequences do they have for the two issues we have mentioned above that impact upon the enforceability of the sales agreement.

61.  Directly relevant to this question is the decision of the Court of Final Appeal in Kwan Siu Man v Yaacov Ozer (1997-98) 1 HKCFAR 343. Litton PJ in giving the leading judgment said at page 360G-I:

“ This shows the importance of s.3(1): the requirement of a memorandum of the contract as finally agreed between the parties after negotiations. It emphasizes the point that, to be legally enforceable, there must be a memorandum evidencing the contract and nothing else. The legislature, by enacting s.3(1), has clearly opted for certainty in such matters. It is important that those advising parties can see their legal positions clearly beforehand. If parties have truly entered into a binding contract for the sale of land, property rights cannot be left suspended and surrounded with doubt, to be determined years after the event depending on a Judge’s view of the ‘credibility’ of witnesses. It is no comfort to the parties to be told that, one day, a court of law (perhaps the Court of Final Appeal) will say whether they have a concluded bargain or not.”

62.  Bokhary PJ, in a separate concurring judgment said at page 362J-363C:

“ In today’s Hong Kong the fixing of a date by when a contract for the sale of land must be completed is at least generally (if not inevitably) of at least considerable (if not vital) commercial importance. There is no practice in the ordinary course of business here of treating the date for completion as a subsequent matter simply to be left to legal advisers to settle.

So even assuming that an open contract can be made under our law, still our courts should always be slow to find that such a contract has indeed been made in any given case. The making of such a contract is not to be found just because there has been a meeting of minds as to parties, property and price. For the strong probability would be that such meeting of minds was no more than one stage in the course of on-going negotiations. This is because in Hong Kong nowadays the inherent probability is that negotiations for the sale of land would, if successfully concluded, result in a contract which includes express terms as to other important matters in addition to parties, property and price: not least of all the date for completion.”

63.  Noting that the parties had left the date of completion to their lawyers to sort out Bokhary PJ said at page 364E:

“... But in the circumstances of this case, the matters left to the solicitors were much more than mere details. They included the very important matter of the date for completion. Accordingly all that the parties achieved was an agreement to agree: and that is not a contract. The law preserves bargains; but it does not create them: that must be done by the parties themselves, if it is to be done at all.”

64.  Thus the lack of certainty in relation to completion has an evidential relevance and a legal relevance.  Its evidential relevance is to whether the document the parties signed can be regarded as a contract or merely an agreement to agree.  Its legal relevance is that even if the agreement can be regarded as a contract does it, given that the completion clause can only be given certainty by the incorporation of an oral promise by the plaintiff and an oral extension of time by the defendant, satisfy the requirements of section 3(1) of the Conveyancing and Property Ordinance, Cap 219.

65.  In the circumstances of the present case the reality is that there was not only no date for completion, there was also no viable means for determining it.  As at 28 June 2011, the date of the sale agreement, the completion date for the plaintiff’s Shenzhen property was unascertainable as there did not even exist a draft contract of sale for it.

66.  In our view, on the basis of the evidence of the content of the sale agreement and the evidence that there was no basis for the plaintiff to harbour an expectation that the Shenzhen property would be sold within a reasonable period of time, the sale agreement is no more than an agreement to agree.  However, even if we were wrong in that view, for the very same reasons, the sale agreement would not comply with section 3(1) of the Conveyancing Ordinance and would therefore be unenforceable.

67.  For these reasons we agree with the judge that the lack of certainty in relation to completion resulted in the document not being a legally binding contract for sale of the property.

68.  Given our findings in respect of the document it is not necessary for us to address the other grounds of appeal.

Conclusion

69.  For these reasons we dismiss the appeal.  We see no reason why costs should not follow the event and so we make an order nisi that the plaintiff pays the defendant’s costs of the appeal.