SUNG WAI KIU AND ANOTHER v. WONG MEI YIN

[English Translation -英譯本]

Sale and purchase of small house (丁屋) - Legality - Sale and purchase of land or transfer of interest in land - Implied covenants - Implied clauses - Forfeiture of deposit of 80% of the purchase price - Liquidated damages - Penalty.

Despite the fact that sale and purchase of small house is in breach of conditions of grant, the government has never taken any positive action against such activities. From the angle of public interest and public policy, it is not really necessary to deem it illegal. The court should enforce the terms of the sale and purchase agreement concerned.

The sale and purchase of small house is a kind of sale and purchase of land or assignment of interest in land, which is governed by the implied covenants and implied clauses under the Conveyancing and Property Ordinance.

Where the purchaser is in breach of contract, the vendor may forfeit his / her deposit but it must be a reasonable one, otherwise it shall be deemed as a penalty whereby the contract terms could not be enforced in accordance with the law.

A deposit as high as 80% of the purchase price is in no way a true and reasonable deposit. The inherent contract terms in relation to forfeiture of deposit or compensation by double deposit are not binding and therefore not enforceable.

H.C. No. A 3979/94

IN THE SUPREME COURT OF HONG KONG

CIVIL JURISDICTION

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JUDGMENT

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Background

1. This case involves the sale and purchase of the 2nd floor and roof of the small house (hereinafter called the premises) erected on Lot No. 542 in Demarcation District No. 204, Yung Shue Au Village, Sai Kung (hereinafter called the Lot).

2. The original grantee of the Lot was Tsang Fong Yau. According to New Grant No. 11734, Tsang Fong Yau was granted the right to build a small house on the Lot in August 1980.

3. The terms and conditions of New Grant No. 11734 provide that none of the interests in the Lot and the buildings erected thereon shall be transferred unless consent has been given by the government and premium paid by the grantee. Should the grantee breach the relevant conditions of grant, the government shall be entitled to re-enter upon the Lot.

4. Tsang Fong Yau and other grantees (眾丁仔) of Lot Nos. 543, 544, 545, 546, 547 and 548 in Demarcation District No. 204 sold their own Lots with development entitlement. Tsang Fong Yau signed several documents in sequence which include agreement, Letter of Authorization, mortgage deed and will, etc. and made complex arrangements with an intention of assigning the Lot and development entitlement to Cheerbo Development Limited (Cheerbo). The grantees also reached an agreement with Cheerbo, authorizing Cheerbo to develop altogether the seven Lots in Demarcation District No. 204.

5. On 22.4.1991, Cheerbo reached an agreement with Wong Kwan Fung, trading as Ming Fai (Hong Kong) Trading Company (Ming Fai), to jointly develop the seven Lots as mentioned above by building seven small houses of three storeys each thereon.

6. According to the agreement made between Cheerbo and Ming Fai, Cheerbo was entitled to direct the grantees to dispose of all interests in the seven Lots in such manner as Cheerbo thought fit; whereas Ming Fai was responsible for building a three-storey small house on each Lot and settle other relevant expenses, including an appropriate amount for the payment of premium.

7. On 1.8.1991, Ming Fai entered into a Joint Venture Agreement with Wong Mei Yin (Miss Wong) and Mr Hui Fu Kwok to develop four of the seven Lots mentioned above, namely, Lot Nos. 542, 543, 545 and 548. Details of the Joint Venture Agreement are as follows :-

Joint Venture Agreement

8. Consequent upon the negotiation between Party A and Party B in respect of the joint venture of Nos. 542, 543, 545 and 548, Yung Shue Au, Sai Kung, New Territories, four village small houses (丁屋) in total, the parties hereto signed and made the following agreement :

(1) Party A undertakes to offer granted land (丁地) for the four small houses mentioned above, external walls have been built, the value being Hong Kong Dollars One Million Eighty Thousand only.

(2) Party B shall be responsible for all expenses for the construction and decoration work of the four small houses, which is to be contracted to a builder ('Ho Brother Construction Scoffolding and Erectors') at a contract price of Hong Kong Dollars One Million and Fifty Thousand Dollars only.

(3) Party A shall be responsible for the payment of welfare fee for the four small houses, and also assisting the individual male descedents (男丁) to complete the necessary procedures in relation to the construction sites, such as application for occupation permit, assignment, payment of premium, and to liaise in matters relating to the rural customs and practice, etc.

(4) Party B shall be responsible for supervising the contractor ('Ho Brother Construction and Scoffolding Erectors') in respect of the condition and quality of the construction and decoration work.

(5) Party A and Party B shall be jointly responsible for the payment of premium for the four small houses and all subsequent expenses on deeds for the sale and purchase at the solicitors' firm, such as the fee for assignment and the like.

(6) The net profit from the proceeds of sale of all the four small houses, after deducting the cost of land, construction and decoration expenses and all legal costs and disbursements, shall be shared equally between Party A and Party B, each entitles to a 50% share.

9. This agreement is hereby made for record purposes. It shall be observed and performed by the parties and shall take immediate effect upon being signed.

Dated : 1 August 1991

10. In early 1993, Miss Wong and the second plaintiff Li Pui Wan (Miss Li) signed a Provisional Agreement for Sale and Purchase in relation to the 2nd floor and roof of the small house erected on Lot No. 542. The Provisional Agreement for Sale and Purchase was drafted by Miss Wong, signed by both parties and witnessed and signed by the first plaintiff Sung Wai Kiu (Mr Sung). The contents of the Provisional Agreement for Sale and Purchase are as follows :

Provisional Agreement for Sale and Purchase

11. In the matter of the sale and purchase of land title to Lot No. 542, D.D. 204, Yung Shue Au Village, Sai Kung and the title to the premises on the 2nd floor (2/F) of the building erected thereon.

Vendor : Wong Mei Yin

Purchaser : Miss Li Pui Wan

(1) Purchase price : Hong Kong Dollars Five Hundred Thousand only.

(2) Method of payment : As follows.

(A) Initial deposit:	Hong Kong Dollars Four Hundred Thousand only.
(B) Balance:	Hong Kong Dollars One Hundred Thousand only, to be paid in full upon payment of premium made by the Purchaser on her own at the completion of the assignment.

(5) The Vendor guarantees that the previous deeds are clear and in order. If there is any existing mortgage, the Vendor shall discharge it before completion.

(6) If the Purchaser fails to pay up the balance of the purchase price upon completion, the deposit already paid shall be forfeited by the Vendor. The Vendor shall also have the right to re-sell the captioned premises.

(7) After signing this agreement, the Vendor shall not unilaterally repudiate this agreement by failing to sell the captioned premises in accordance with this agreement.

(8) The stamp duty for the Deed of Assignment for the sale and purchase of the captioned prermises shall be paid by the Purchaser alone.

(9) The fee for application to the government for assignment shall be borne by the Vendor.

(10) The premium payable to the government upon assignment shall be borne by the Purchaser alone.

(11) Upon completion of construction and delivery of vacant possession to the Purchaser, all water and electricity charges, rates, etc. and miscellaneous expenses shall be borne by the Purchaser.

(12) During the period of occupation by the Purchaser upon delivery of vacant possession, no rent shall be payable to the Vendor. Yet if the purchaser fails to pay up the balance of purchase price upon completion, the captioned building shall be delivered back to the Vendor.

(13) The Vendor and the Purchaser agree to instruct their own solicitors for handling the title deed procedures and to pay their own solicitors' fee.

(14) The Vendor shall be responsible for making arrangement for the existing male descendants or landlord to assign the title directly to the Purchaser at the time of completion.

(15) The Purchaser shall have the right to nominate a third party to sign the deeds with the Vendor at the time of completion.

(16) The Vendor guarantees that the 2nd floor of Lot No. 542 in D.D. 204 will be given government approval for payment of premium and assignment, otherwise the Purchaser shall have the right to rescind this agreement and the sale and purchase. In the event that this happens, the Vendor agrees to return the deposit already paid by the Purchaser together with a sum equals the amount of deposit to the Purchaser as compensation.

12. In December 1991, the parties already had an oral agreement in relation to the above transaction that Miss Wong should sell to Miss Li one third of the undivided share or part of Lot No. 542 together with exclusive right, use and enjoyment of the 2nd floor and roof of the small house erected thereon at a price of $500,000. During the period between December 1991 and January 1992, a total sum of $400,000 was paid to Miss Wong on four successive occasions by the plaintiffs as deposit.

13. The parties also reached an agreement that Miss Li should bear one third of the premium payable to the government in the matter of assigning the above Lot and the premises erected thereon. However, the parties failed to complete the sale and purchase in accordance with the agreement. Finally, in January 1994, through Wong Kwan Fung's arrangement, Tsang Fong Yau assigned the whole of the small house erected on Lot No. 542 to Lam's Holdings Co., Ltd. by title deed. The price was $4,000,000.

Plaintiffs' grounds of claim

14. According to the plaintiffs, Miss Wong kept on asking Miss Li to make an advance payment of $700,000 for the premium since July 1992. As Miss Wong failed to produce the relevant documents issued by the government and other documents of title to justify her request, the plaintiffs refused to pay. The Provisional Agreement for Sale and Purchase was not signed by Miss Wong until January 1993 upon the incessant demand of the plaintiffs.

15. In the plaintiffs' view, Miss Wong failed to show that the previous deeds were clear according to Clause 5 of the Provisional Agreement for Sale and Purchase, and did not perform Clause 16 by informing the plaintiffs that approval for the payment of premium and assignment had been granted by the government.

16. Despite the fact that the Letter of Compliance for the small house erected on the above Lot was issued in November 1992, Miss Wong never delivered vacant possession of the said premises to the plaintiffs in accordance with the agreement between the parties, thereby causing them to suffer loss.

17. Plaintiffs claimed against Miss Wong for loss of reasonable rent at $8,000 per month, calculated from February 1993.

18. Plaintiffs also demanded that Miss Wong return the deposit of $400,000 together with an extra sum equivalent to the deposit as compensation according to Clause 16 of the Provisional Agreement for Sale and Purchase.

Defence and grounds of counterclaim of the defendant

19. At the outset, the defence submitted that the agreement reached between Miss Li and herself had nothing to do with Mr Sung who had no right to take out proceedings against her in the capacity of a plaintiff.

20. The defence further submitted that the agreement between the parties was not on sale and purchase of land. Miss Wong was only responsible for arranging for the assignment of title of the premises to Miss Li from the title owner of the small house. In July 1992, she made arrangements for the handing over of the premises by Ming Fai to Miss Li. Vacant possession of the premises was thus delivered to Miss Li.

21. The defence also stated that the government had already approved the payment of premium and assignment of the Lot before 20.10.1993. Miss Wong even wrote to Miss Li on 8.11.1993 asking her to pay one third of the share of the premium of the Lot by 19th November, otherwise the deposit that Miss Li had paid would be forfeited. However, Miss Li ignored the request. Moreover, Miss Wong had already informed Miss Li that she could only afford to pay two third of the share of the premium for the Lot. In the event that the amount of premium for the Lot could not be paid in full when due, Ming Fai was entitled to rescind the agreement concerned in accordance with the Joint Venture Agreement made with Miss Wong and Hui Fu Kwok, thereby causing Miss Wong to suffer great monetary loss. Miss Wong considered that since Miss Li failed to perform the contract by paying one third of the share of the premium for the Lot, thereby causing her to suffer a loss of construction fee in the sum of $780,000 paid to Ming Fai for the building of the small house and loss of profit of $949,800, therefore she made a counterclaim against Miss Li for a total of $1,720,000 odd.

Evidence of the parties

22. Miss Li said that she first discussed and entered into agreement with Miss Wong in December 1991 on the sale and purchase of the premises. According to Miss Li, Miss Wong said that she would complete the procedures for payment of premium and other formalities before asking Miss Li to pay up the balance of the purchase price and the premium for removal of non-assignment restrictions. Miss Wong also warranted that the government would approve the assignment of the premises, otherwise the deposit of $400,000 would be returned together with an equivalent amount as compensation. Miss Wong also stated that after the Certificate of Compliance for the premises was issued, Miss Li could move into the premises in advance but should bear the water, electricity and other charges.

23. Yet in July 1992, Miss Wong asked Miss Li to deposit $700,000 in her bank account for her to pay the premium. She also remarked that Wong Kwan Fung of Ming Fai was in divergence of opinion with another partner, thereby causing this partner to retire from the joint venture. It also caused her and Wong Kwan Fung to get out of hand of their financial budget, so they asked Miss Li to make the payment of premium first.

24. Since Miss Wong went back on her word, Miss Li refused the request. It also greatly reduced her trust in Miss Wong, hence she asked Miss Wong to sign an agreement for sale and purchase as a means of protection. Miss Wong, however, declined to do so throughout on excuse of being too busy. In early January 1993, Miss Li wrote to Miss Wong to make it clear that she must obtain a Provisional Agreement for Sale and Purchase and an agreement for sale and purchase of land between the male descendents and Cheerbo before she was qualified to apply for a mortgage loan from the bank. On 30.10.1993, the parties met at the office of Miss Wong's husband, i.e. Miss Li's elder brother, and signed a Provisional Agreement for Sale and Purchase.

25. There were two copies of the Provisional Agreement for Sale and Purchase, prepared and filled out and signed by Miss Wong in advance. Other than giving her signature, Miss Li also wrote down the correspondence address. Mr. Sung endorsed as a witness upon the request of Miss Wong, and put down the date. Miss Li retained one copy of the document and the other was returned to Miss Wong. The copy retained by Miss Li is Exhibit P1.

26. Miss Li then asked for the related documents for assignment. Sometime in February 1993, Miss Wong provided her with four documents, namely, (1) New Grant No. 11734; (2) Agreement between Cheerbo and Ming Fai; (3) Joint Venture Agreement between Ming Fai and the Defendant and Hui Fu Kwok; and (4) Letter of Compliance issued by the District Lands Office for the small house erected on the Lot.

27. Miss Li requested that Miss Wong forward the agreement between the male descendents and Cheerbo, but Miss Wong and Wong Kwan Fung never gave her the agreement between the males descendents and Cheerbo, so she was unable to produce the documents required.

28. Miss Li learnt that the Letter of Compliance for the small house was already issued on 16.11.1992, so she asked Miss Wong to deliver vacant possession of the premises. However, Miss Wong refused her request on the ground that Miss Li did not pay $700,000 as the premium for removal of non-assignment restrictions. The parties thereby entered into a row and broke off with one another.

29. In November 1993, Miss Li sent Miss Wong a letter saying that she had come to the end of her patience against Miss Wong's perfunctory and delaying manner in respect of the delivery of vacant possession of the premises. She also warned Miss Wong that unless Miss Wong delivered vacant possession of the premises and forwarded the documents of title, otherwise she would resort to legal action. Since Miss Wong had no response at all, the plaintiffs filed a claim against Miss Wong in April 1994.

30. Miss Li had little knowledge about the details of 'small house' transaction. She only knew that a 'male descendent' is an indigenous New Territories resident; whereas one needs to pay the premium for removal of non-assignment restrictions upon the purchase of a 'small house'. Miss Wong also told her that it was not necessary for her to know too much of the details, and that even if Miss Wong had explained it to her, she would not be able to understand it.

31. Miss Li remarked that the reason for Miss Wong's refusing to proceed to sign the agreement at the solicitor's firm was that she had not obtained the agreement from Wong Kwan Fung. Moreover, she did not want Miss Wong Kwan Fung to realise that she had already sold the premises. All along she fully trusted Miss Wong. In addition to their sisters-in-law's relationship, Miss Wong was nice to her family members.

32. Miss Li frankly admitted that she did not have $700,000 to pay for the premium, but if the previous deeds of the premises were clear, she hoped that she could obtain a mortgage loan from the bank.

33. She reiterated that the Provisional Agreement for Sale and Purchase was signed on 30.1.1993. She said the responsibilities in relation to payment of premium set out in the Provisional Agreement for Sale and Purchase were same as what she understood to be, and also tallied with the agreement between the parties, i.e. Miss Wong should pay the premium first, and then she would reimburse Miss Wong.

34. Miss Li denied that Miss Wong had handed over the key to the premises to her, whereas all along Miss Wong alleged that the building of the premises was not yet completed. Though Miss Wong kept pressing on her for the payment of premium, Miss Wong failed to produce all of the documents of title. She was therefore unable to raise enough money, so all along she refused to pay.

35. Miss Li denied that she had tried to sell the premises, and said she never received any notice from Miss Wong pressing for the payment of premium. Moreover, Miss Wong never reported the details of the assignment of title and the agreement she made with Ming Fai. Miss Lee also denied having borrowed money from Miss Wong for the use of paying the premium.

36. Mr Sung, the husband of Miss Li, basically supported Miss Li's version. In fact he seldom participated in the deal with Miss Wong. Part of the deposit of $400,000 was paid by him, but it was through Miss Li. He said he had approached some honorary legal advisers and was told that problems would arise if the title deeds were not complete.

37. Mr Sung also stated that Miss Wong told him she was faced with financial difficulty because one of the three shareholders retired from the partnership. Therefore she requested that the plaintiff pay the amount of premium first. Mr. Sung indicated that he was not willing to comply, on the one hand because he had no money, and on the other because Miss Wong said the matter on payment of premium would be dealt with by Wong Kwan Fung. Since they did not know Wong Kwan Fung, they could not be rest assured that the arrangements were alright. He confirmed that the Provisional Agreement for Sale and Purchase was signed on 30.1.1993, and said it was Miss Wong who asked him to sign as a witness.

38. Mr Sung agreed that there was no document to show that he was one of the purchasers. He said his name could be added at any other time. He had been to the premises for less than ten times but, he denied having taken someone there to 'inspect the premises' with Li King Lun, the husband of Miss Wong, during the period between 1992 and early 1993. He denied that Miss Wong had said the premises could not be sold before the amount of premium was paid.

39. Mr Sung insisted that according to the contents of the Provisional Agreement for Sale and Purchase, Miss Wong was to be resonsible for paying the premium for removal of non-assignment restrictions first and complete the formalities before they reimburse the amount.

40. Miss Wong said besides explaining to Miss Li the details of the joint venture with Ming Fai, she also made it clear to Miss Li the nature of sale and purchase of 'small house', emphasizing that the interest could not be assigned before the premium was paid. She warned Miss Li she must be certain that she could afford the premium, otherwise it was not suitable to purchase the premises as other units would be affected.

41. Miss Wong alleged that Miss Li had all along been keeping an eye on the construction progress of the premises. Upon completion of construction in July 1992, she handed over the key to the premises to Miss Li in order to effect vacant possession. Miss Li then held a barbecue on the roof of the premises to entertain her relatives and friends.

42. In early 1993, knowing that the premium for the whole building amounted to $2,100,000, she immediately informed Miss Li in person to get the amount of $700,000 ready. Miss Li remarked that the amount was too huge that she could not afford it.

43. Later on, Miss Li said she needed to raise money and asked Miss Wong to sign a Provisional Agreement for Sale and Purchase for her to show to the bank to facilitate mortgage arrangement. The Provisional Agreement for Sale and Purchase was handed to Miss Li at Upper One Restaurant on 26.2.1993. At that time, she handed one of the two copies of Agreement to Miss Li, which she already filled out and signed, and retained the other. Miss Wong denied that Miss Li and Mr Sung signed the document in her presence. She said they never signed the copy that she herself retained. She also remarked that Miss Li had arranged to offer the premises for sale.

44. The correct amount of premium was not known until November 1993 through Ming Fai. So she informed Miss Li at once asking for the payment of $700,000. Later, as Miss Li could not afford the amount, she asked Ming Fai to apply for extension of payment for the premium. However, Miss Li was still unable to take out the $700,000 before the final date of payment of premium was due in December 1993, thereby making it impossible for her to hand in the total amount of premium to Ming Fai. Afterwards, Ming Fai settled the premium on their own, but forfeited Miss Wong's entire interest in the small house, thus causing her to suffer great loss.

45. She said due to certain reasons, she was still considering whether to claim payment from Ming Fai. Eventually, under detailed inquiry by the Court, Miss Wong admitted that she had other joint venture items with Ming Fai which had control over her. She was afraid that she would annoy Ming Fai, so she did not dare to claim payment from them. She also stated that if Ming Fai would take action against her regarding the other joint venture items, the loss she suffered would be even greater than that incurred in the small house transaction.

46. Miss Wong called Anthony K.T. Poon, Solicitor, to give evidence in detail on the arrangements made in relation to assignment of the premises by Tsang Fong Yau. For the first time, documents containing Tsang Fong Yau's signature for assignment of the premises were produced to the court.

47. The last two defence witnesses were Miss Wong's husband Mr Li King Lun and her colleague and good friend Miss Pang Woon Tai.

48. Li King Lun's evidence was that during the period from early 1992 to mid 1993, he accompanied someone to 'inspect the premises' (睇樓) under the request of Miss Li on several occasions. Mr Sung was present every time, and he also got the keys to the premises. It was Miss Li who made the arrangement for people to 'inspect the premises' on each occasion. Li King Lun also stated that after the incident, Miss Wong and Mr Wong Kwan Fung maintained a good relationship, and that they would meet twice a month on average up to present. He said he intended to use the 1st and 2nd floors of the small house as a dwelling place, but all along he did not proceed with his plan. He personally did not know the details because Miss Wong was the one who capitalize on the investment. It was therefore not appropriate for him to inquire about the details. Moreover, Miss Wong did not brief him on this.

49. Miss Pang Woon Tai confirmed that she received a document faxed over by Miss Li on 26.2.1993. She passed the document into the hands of Miss Wong. At the time, Miss Pang was working with Wan Kee Metal Ware Co. operated by Miss Wong's family members. On 30.6.1993, Miss Pang changed to work in Kam Lun Investment Co. which was run by Wong Kwan Fung. A month later, Miss Wong also transferred to Kam Lun Investment Co. where they worked together. From the time she commenced working with Kam Lun Investment Co. to the time she left the company in early 1995, Miss Wong had been assisting Mr Wong Kwan Fung in handling transactions on sale and purchase of small house.

Identity of the parties to the Agreement

50. Mr Sung pointed out that he had the right to take out proceedings and claim against Miss Wong directly in the capacity of a plaintiff. It was because he shared the payment of the deposit; and also because Miss Li had told Miss Wong that she would register his name as one of the owners of the premises.

51. The parties agreed with the entire arrangement for the transaction and all contacts were made between Miss Wong and Miss Li personally. Mr Sung never had a part in it, nor had he reached any agreement with Miss Wong. Since Mr Sung was not one of the parties to the agreement, he was not entitled to claim payment from Miss Wong as one of the plaintiffs in the capacity of a party to the agreement.

52. I accept the submission of counsel Mr Wong and order that Mr Sung is not entitled to act as one of the plaintiffs in this case and claim payment against Miss Wong directly. His claim against Miss Wong must be made through Miss Li.

Analysis of the law

(1) The first question of law raised in this case is the legality of the agreement between the parties.

53. Mr. Wong, counsel for the defendant, said the transaction between Miss Li and Miss Wong involved the sale and purchase and assignment of interest in small house. The transaction was yet to be approved by the government and the premium was not paid, so it was in breach of conditions of grant. By this reason, the transaction did not accord with public interest. The court should deem the transaction illegal, whereby the terms of the agreement between the parties should not be enforced. Therefore Miss Li's claim as well as Miss Wong's counter-claim should both be dismissed.

54. Kerr L.J. in Euro-Diam Ltd v. Bathurst [1990] Q.B.1 said :-

"The ex-turpi causa defence rests on a principle of public policy that the court will not assist a plaintiff who has been guilty of illegal (or immoral) conduct of which the court should take notice. It applies if in all the circumstances, it would be an affront to public conscience to grant the plaintiff the relief which he seeks because the court would thereby appear to assist or encourage the plaintiff in his illegal conduct or to encourage others in similar acts."

55. In this case, neither parties pleaded that the transaction was illegal. Generally speaking, the court is confined to dealing with issues raised in the pleadings, and thus will not deal with any issue not covered in the pleadings. However, when it involves the legality / illegality of a contract, the court must adopt special approaches to deal with it.

56. Devlin, J. in Edler v. Auerbach [1950] I K.B. 359 talked about the proper attitude the Court should adopt in cases involving illegal contracts:-

"Counsel then cited North Western Salt Company Ltd v. Electrolytic Alkali Company Ltd [1914] A.C. 461. That case, I think, authorizes four propositions : first, that, where a contract is ex facie illegal, the Court will not enforce it, whether the illegality is pleaded or not; secondly, that, where, as here, the contract is not ex facie illegal, evidence of extraneous circumstances tending to show that it has an illegal object should not be admitted unless the circumstances relied on are pleaded; thirdly, that, where unpleaded facts, which taken by themselves show an illegal object, have been revealed in evidence (because, perhaps, no objection was raised or because they were adduced for some other purpose), the Court should not act on them unless it is satisfied that the whole of the relevant circumstances are before it; but, fourthly, that, where the Court is satisfied that all the relevant facts are before it and it can see clearly from them that the contract had an illegal object, it may not enforce the contract, whether the facts were pleaded or not."

57. Mr Wong pointed out that since the transaction involved in this case contravened the conditions of grant, it was already ex facie illegal. In any event, the Court already had the whole of the facts of the case before it, which indicated that the parties were in breach of the conditions of grant, therefore the Court should not enforce any of the terms contained in the agreement.

58. I am satisfied that the whole of the facts of the case in relation to the transaction are before the Court, so although the illegality of the transaction between the parties was not pleaded, I must still consider this issue.

59. In my view, the agreement between the plaintiffs and the defendant is merely an agreement for sale and purchase of real estate and is therefore not ex facie illegal. The transaction was in breach of the conditions of grant, but did not involve any criminal or illegal act. The government could only regard the above breach of conditions of grant as a breach of contract, and it is entitled to re-enter upon the land. This breach is in no way different from other civil breach. The government would normally raise no objection to the sale and purchase and assignment of interest in small house so long as the grantee(s) paid the premium.

60. Defence witness Mr Anthony K.T. Poon, Solicitor, said in his evidence that the government had never given effect to re-entry on the land against the breach.

61. If a party to an agreement did not initiate any positive action to curb the breach of conditions of grant, from the angle of public interest and public policy, I do not consider it necessary to deem the assignment of small house title illegal for breach of conditions of grant, whereby not enforcing the agreement for assignment.

(2) Another question of law raised in this case is whether the agreement between the parties is a sale and purchase of land or assignment of interest in land :-

62. According to Section 35 of the Conveyancing and Property Ordinance, Cap. 219, Laws of Hong Kong, the sale and purchase of land or assignment of interest in land are governed by various implied covenants under different circumstances.

63. Paragraph A, Part I of the First Schedule sets out the implied covenants in respect of the assignor as follows :-

That, in the event of the land being partitioned by assignment, the assignor shall from the date of the assignment or other date therein stated pay the balance of the Crown rent on the due dates and observe and perform all the covenants (other than the covenant to pay the whole of the Crown rent) agreements and conditions contained in the Crown lease and any Deed of Mutual Covenant and on the part of the lessee to be observed and performed so far as the same relate to the portion of the land remaining vested in the assignor.

64. Part II of the First Schedule sets out the implied covenants in respect of an assignment to a purchaser for valuable consideration by a person who is expressed to assign as beneficial owner (the vendor) :-

(1) That the Crown lease is good, valid and subsisting.

(2) That, so far as the same relate to the land assigned :-

(a) the premium or other money (if any) and the Crown rent payable under and reserved by the Crown lease have been paid; and

(b) the covenants, terms and conditions contained in the Crown lease and any Deed of Mutual Covenant have been observed and performed, up to the date of the assignment.

(3) That the vendor now has good right and title to assign the land free from encumbrances and save as specified in the assignment and subject to the manner in which the assignment is expressed to be made.

(4) That the land may be quietly entered into and during the residue of the term of years created by the Crown lease (and any renewal thereof) held and enjoyed by the person to whom the assignment is expressed to be made (the purchaser) and any person deriving title under him without any lawful interruption of disturbance.

(5) That all such lawful acts, assurances and things for further or more perfectly assuring the land and every part thereof to the purchaser and to those deriving title under the purchaser shall, from time to time and at all times at the request and cost of the purchaser or any person deriving title under him, be executed and done (subject to the manner in which the assignment is expressed to be made) as by the purchaser or any such person may be reasonably required.

65. Further, Section 13 of the Conveyancing and Property Ordinance explicitly provides that a purchaser of land shall be entitled to require from the vendor, as proof of title to that land, production of the Crown lease relating to the land sold and --

(a) proof of title to that land --

(i) ... ... ...

(ii) ... ... ...

(b) production of any document referred to in the assignment, mortgage or charge mentioned in paragraph (a) creating or disposing of an interest, power or obligation, which is not shown to have ceased or expired and subject to which any part of that land is disposed of :-

... ... ...

66. Mr Wong submitted that the agreement between Miss Li and Miss Wong was not a sale and purchase of land nor assignment of interest in land. He said the contents of the agreement showed that it was an agreement for assignment of interest directly from the grantee or land owner to the plaintiffs through arrangements made by Miss Wong. He asked the Court to adopt an objective attitude in considering the genuine nature and purpose of the agreement between the parties.

67. I accept Mr Wong's submission. The Court should adopt an objective and reasonable attitude to consider the intentions of the parties when deciding the nature of the relevant agreement.

68. In Reardon Smith Line Ltd v. Hausen Tangen [1976] I W.L.R. 989 Lord Wilberforce at p. 996 said :

"When one speaks of the intention of the parties or the contract, one is speaking objectively. The parties cannot themselves give direct evidence of what their intention was and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties."

69. While considering the nature of the agreement between the parties, it should be viewed objectively as a whole.

70. Mr Wong focused on Clause 14 of the Provisional Agreement for Sale and Purchase between the parties. He said the clause indicated that Miss Wong was not the registered owner of the small house. She merely undertook to arrange for the existing grantee or land owner to assign his title to the purchaser directly upon completion.

71. Very often the vendor in a sale and purchase of land or assignment of land is not the registered owner of the property. The vendor may be a trustee, confirmor, mortgagee, legal chargee, or personal representative. The vendor may also arrange for the registered owner to make the assignment to the purchaser directly.

72. This does not affect the nature of the sale and purchase of land or assignment of interest in land.

73. The interpretation of 'land' under the Conveyancing and Property Ordinance is as follows:-

"Land" includes

(a) ... ... ...

(b) any estate, right, interest or easement in or over any land;

(c) the whole or part of undivided share in land or any estate, right, interest or easement in or over the whole or part of an undivided share in land; and

(d) things attached to land or permanently fastened to anything attached to land.

74. Throughout the incident, there was only one purpose of the transaction between Miss Li and Miss Wong whether pursuant to the verbal, written or overall agreement, that it was to cause the plaintiff to successfully purchase one third of an undivided share in Lot 542 and the entire right of use and enjoyment of the 2nd floor and roof of the small house erected thereon.

75. The defendant admitted in the first paragraph of her Statement of Defence that Miss Li and Miss Wong agreed to have the premises sold at $500,000 plus one third of the amount of premium for removal of non-assignment restrictions in respect of the Lot.

76. Further, the Provisional Agreement for Sale and Purchase between the parties clearly set out terms that are commonly used in the sale and purchase of land in general, which include location of the premises, particulars of parties, purchase price, method of payment, status of the premises, date of completion and parties' respective right and obligation, etc.

77. All of the foregoing is a clear indication that the agreement between the parties is of sale and purchase of land or assignment of interest in land.

78. By relying on Clause 14 of the Provisional Agreement for Sale and Purchase, the defendant alleged that the agreement was not one of sale and purchase of land or assignment of interest in land. This allegation is farfetched and cannot be substantiated.

79. I rule that the agreement between the parties is of sale and purchase of land or assignment of interest in land, and should therefore be governed by Section 35 of the aforementioned Conveyancing and Property Ordinance, the implied covenants set out in the Schedules and the implied covenants set out in Section 13.

80. Although the agreement between the parties did not show the nature of the defendant's title to the premises, as a vendor of the premises, the defendant should prove the following in accordance with the implied covenants applicable:

(1) that the premium and Crown rent payable of the premises have been paid in full;

(2) that the Crown lease or all covenants, terms and conditions of grant have been observed and performed;

(3) that she has good right and title to assign the land free from encumbrances.

81. As a vendor, Miss Li has the right to ask Miss Wong to produce the Crown lease in relation to the premises, and also documents used for the creation or disposition of certain interest, right or obligation in order to prove that she has the title to the premises.

82. Miss Wong, the defendant, failed to perform all of the above.

83. Since the sale and purchase between the parties is in breach of conditions of grant whereby the government is entitled to re-enter upon the Lot, the purchaser may suffer serious loss. It is evident that the vendor does not have good right and title, and thus should not assign the land in question free from encumbrances.

84. Provided that the vendor, before completion, had made it clear to the purchaser what were the likely consequences, the purchaser might not have the cause to file a justified complaint afterwards.

85. However, Miss Wong's evidence was that she only told Miss Li the sale and purchase between the parties could not proceed until the formalities of paying the premium were completed. She did not mention the possibility of a re-entry on land by the government. In fact she could not fully comprehend the situation herself, not to mention making a clear explanation to Miss Li. In this respect, the defendant Miss Wong has breached the relevant implied covenants.

86. Further, the fact that throughout the incident Miss Wong had not been able to produce the document showing that Tsang Fong Yau has assigned the interest on the Lot to Cheerbo was not in dispute. It was not until several days after the commencement of the trial that Mr Anthony K.T. Poon, the solicitor dealing with the matter at that time, produced the relevant documents to the Court to prove that at the time in question Tsang Fong Yau had already assigned the interest in the Lot to Cheerbo through various arrangements.

87. Section 13 of the Conveyancing and Property Ordinance explicitly provides that the purchaser of land has the right to require from the vendor production of all documents for proof of land title.

88. Such a request had already been made by Miss Li for the purpose of obtaining a mortgage loan from the bank to pay the premium. However, Miss Wong could only produce part of the documents, thereby breaching the implied terms in the agreement between the parties.

89. In actual fact, the written agreement of the parties already touched upon the issue. The following clause was stipulated in the Provisional Agreement for Sale and Purchase between the parties :-

(5) The Vendor guarantees that the previous deeds are clear and in order. If there is any existing mortgage, the Vendor shall discharge it before completion.

90. Although the above clause is vague and does not define the nature and parameters of "guarantees that the previous deeds are clear and in order", the Court cannot ignore the fact that plaintiffs had already paid Miss Wong $400,000 in accordance with the agreement. Had the sale and purchase had proceeded, they would have been made to pay an extra $800,000, which is a very huge sum to the plaintiffs. They have a right to be assured that all deeds are clear and in order and that by completing the transaction they would wholly own the interests in the premises. However, Miss Wong failed to produce the relevant documents which showed that Tsang Fong Yau had assigned the interest in the Lot to Cheerbo, thus causing the plaintiffs to reserve their decisions on the matter. It might also have undermined their application to the bank for a mortgage loan.

91. Having considered all of the above, I found that Miss Wong's act not only breached the implied terms in the agreement between the parties, but also breached the written agreement that they signed.

92. If we analyse it from the point of law, the person who breached the contract is in fact the defendant Miss Wong, and not the purchaser, i.e. the plaintiffs.

Analysis of the facts of the case

93. Despite the huge differences between the parties on the facts of the case, I do not consider it necessary to resolve all of them.

94. The differences mainly involve the following two aspects :

(1) whether the plaintiffs (purchaser) should themselves be responsible for paying the amount of premium before completion of assignment instead of the defendant (vendor) completing the formalities for premium first and then the purchaser reimbursing the amount of premium to her.

(2) whether vacant possession was already delivered to the plaintiffs (purchaser) in mid 1992.

95. On the issue of who should pay the premium first, I have considered all the evidence of the parties. There is no doubt the purchaser should bear one third of the premium for the small house in accordance with the agreement, but I do not accept the allegation of the defence that during the oral agreement it was already clearly stated that the purchaser should make advance payment of premium so that the vendor could afford the premium.

96. During the time of their oral agreement, the parties were sisters-in-laws of close and good relationship. The premium payable was not yet known at that time. Miss Li said according to Miss Wong, one third of the payment for premium would only be $100,000 to $200,000.

97. I do not deem it necessary for the parties to stipulate who should pay the premium first when they entered into the oral agreement. One credible situation is that the parties did not have a detailed agreement on this aspect at the time, but when Miss Wong later found out that the amount of the premium was huge, she asked Miss Li to make payment first. Miss Li did not give her a definite reply, but did not turn down her request rightaway in order to maintain a good relationship and avoid the forfeiture of the deposit. The parties remained at a stalemate on the above issue, thereby causing their relationship to break up.

98. In early 1993, Miss Li's trust in Miss Wong diminished, and for the sake of protecting her own interests, she asked Miss Wong to sign a Provisional Agreement for Sale and Purchase. I believe that when writing this Provisional Agreement for Sale and Purchase, Miss Wong had intended to tie Miss Li with the agreement so that she was bound to pay the amount for premium first, but the result was not as good as expected. The question of who should pay the premium first in respect of the Provisional Agreement for Sale and Purchase between the parties remained equivocal.

99. The following are examples of clauses in the agreement which failed to indicate clearly that Miss Li should pay the amount of premium to Miss Wong first :-

(2)(B) Balance :	Hong Kong Dollars one hundred thousand only, to be paid in full upon payment of premium made by the Purchaser on her own at the completion of the assignment.
(4) Completion date :	The transaction shall be completed within 14 days from the time payment of premium is approved by the government. When the time comes, the Purchaser shall pay the premium on her own and shall pay the balance of purchase price in full upon completion.

(10) The premium payable to the government upon assignment shall be borne by the Purchaser alone.

100. In my view, the parties failed to reach a definite agreement on who should pay the premium first. Miss Wong cannot unilaterally insist that Miss Li should be the one to pay the premium first, otherwise her act would be deemed as a breach of contract.

101. Since the parties had no agreement on the issue of who should pay the premium first, Miss Wong, as a vendor, should settle the premium payable before the interest in the premises could be assigned to the plaintiffs (the purchaser). She cannot deem the non-payment of premium of the plaintiffs (purchaser) as a breach of contract and refuse to proceed with the transaction.

102. On the issue of vacant possession, the defendant (vendor) relied on the evidence of Miss Li's elder brother Li King Lun. She firmly believed that between mid 1992 and early 1993 Miss Li had arranged for customers to "inspect the premises" on several occasions with a view to selling the premises for gain. In spite of the strong denial of Miss Li and Mr Sung, I found Mr Li's evidence more credible on the balance of probability. I also accept his evidence that Mr Sung actually possessed the key to the premises and that he was capable of taking customers there to "inspect the premises" whenever he wanted to.

103. Handing over of the key to the premises to the purchaser does not mean that vacant possession of the premises has been delivered. Pursuant to the Provisional Agreement for Sale and Purchase, the vendor is required to deliver vacant possession of the premises to the purchaser upon completion of construction, whereas the water and electricity charges, rates and miscellaneous fees shall be borne by the purchaser.

104. Despite the fact that the Occupation Permit was not issued until November 1992, Miss Wong said the key to the premises was already delivered to the hands of Miss Li in her mother's home sometime between July and August the same year. However, no decoration work had ever been done. There was no furniture in the premises, and Miss Li never moved in. At that time she and her husband were living in Tsuen Wan in the house of Mr Sung's parents. Had the premises been ready for occupation, Miss Li and Mr Sung should naturally have decorated the premises and prepared it as their dwelling place or holiday home. Evidence, however, revealed that they never had such a plan.

105. Miss Li accused Miss Wong of putting up a pretext all along by alleging that the construction of the premises had still not completed, so they could not move in.

106. I found that since Miss Li failed to comply with Miss Wong's suggestion of taking out the amount of premium payable in advance, Miss Wong did not make appropriate arrangement and explanation to enable Miss Li to move into the premises.

107. Though Miss Wong did not deliver vacant possession of the premises to Miss Li, in view of the parties' relationship, it is, so to speak, natural and not at all surprising to find that she handed over the key to the premises to Miss Li in order to facilitate her in arranging for customers to "inspect the premises".

108. According to the Provisional Agreement for Sale and Purchase, delivery of vacant possession was not a proper assignment of title to the purchaser, but was only a substantial giving out of the premises without conditions. I accept Miss Li's evidence that she firmly believed Miss Wong had not substantially delivered the premises to Miss Li unconditionally, with a pretext that construction of the premises has still not completed. I found that Miss Wong failed to comply with the terms of the agreement by delivering vacant possession of the premises to Miss Li after the construction was complete.

109. Whether on law or on facts, I am satisfied that the party in breach of contract is the defendant (the vendor) and not the plaintiffs (purchaser). Therefore Miss Wong should compensate Miss Li.

The issue of compensation

110. Miss Li's claim against Miss Wong only include two items : (1) Loss of rent, (2) Compensation by double deposit.

111. On the claim for loss of rent, Miss Li said Miss Wong failed to deliver vacant possession of the small house to her after its construction work was completed in February 1993, thereby causing her to suffer a loss of rent in the amount of $8,000 per month. However, on the aspect of claim for loss of rent, Miss Li did not produce any evidence to support her claim.

112. First of all, according to Miss Li's version it was not because vacant possession of the small house could not be delivered in time that caused her to rent another place of abode which incurred a loss of rent of rent at $8,000 per month, nor was it because vacant possession of the small house was not delivered that she was unable to lease it and earn rent. All along Miss Li was living in Mr Sung's home, and she never had any intention of leasing the small house. Further, there was no evidence of comparables to indicate the monthly rental of the small house as a reference for the court. Since Miss Li failed to produce any calculation basis to support her claim for loss of rent, it must therefore be dismissed.

113. Miss Li filed her claim for compensation by double deposit according to the oral agreement as well as Clause 16 of the Provisional Agreement for Sale and Purchase between the parties. The clause provides that the vendor guarantees that the premises will be given government approval for payment of premium and assignment, otherwise the purchaser shall have the right to rescind the agreement and the sale and purchase, whereas the vendor agrees to return the deposit already paid by the purchaser together with a sum equals the amount of deposit to the Purchaser as compensation.

114. If the parties stipulate in their agreement that a specified amount shall be paid by one party to the other in the case of a breach, the question of whether that clause is enforceable would depend on whether the specified amount is liquidated damages or penalty. The clause shall be enforceable in the case of the former, but void in the latter.

115. The liquidated damages must be the damages for estimated loss genuinely liquidated by the parties and not damages for the sake of deterring the party in breach of contract where loss is not estimated according to the possible consequence resulting from the breach. Of course, consideration of the relevant terms must be based on individual terms and conditions in each agreement.

116. The above provisions are applied with a certain degree of flexibility in respect of the sale and purchase of building or premises. Regardless of actual loss, either contractual party is entitled to forfeit the deposit of the other party who is in breach of contract, or ask for compensation in the sum of double deposit, but the deposit concerned shall usually not exceed 10% of the purchase price of the premises. This flexibility is derived through long-term practice under the common law. Hong Kong has all along been following this practice. But where in the case of a breach of contract if the deposit exceeds 10% of the purchase price, the party which asks for forfeiture of deposit/compensation against the other party in breach of the contract must demonstrate that the deposit that exceeds 10% of the purchase price of the premises is reasonable due to certain special circumstances.

117. Lord Browne-Wilkinson in Workers Trust and Merchant Bank Ltd v. Dojap Investments Ltd [1993] 2 All ER at p. 370 said:

" In general, a contractual provision which requires one party in the event of its breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages, being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule in the provision for the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established that the forfeiture of such a deposit (customarily 10% of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract."

118. In Liuggi Plantations Ltd. v. Jagatheesan [1972] MLJ. 89, where the vendor did not suffer any loss by reason of the purchaser's breach of contract, Lord Hailsham L.C. still ordered that the vendor was entitled to forfeit a deposit of 10% of the purchase price usually paid by the purchaser. Yet Lord Hailsham reiterated time and again that the amount of deposit must be reasonable. He said :

"But the truth is that a reasonable deposit has always been regarded as a guarantee of performance as well as a payment on account, and its forfeiture has never been regarded as a penalty in English law or common law usage."

119. Therefore in the above case of Workers Trust and Merchant Bank Ltd v. Dojap Investments Ltd, the English Privy Council determined that a deposit of 25% of the purchase price was not a reasonable amount of forfeitable deposit. The Privy Council also ordered that the Court could not make such order as forfeiting the deposit of 10% of the purchase price and repaying the remaining 15% only.

120. Lord Browne-Wilkinson at p. 376 said :

"The Court of Appeal took a middle course by ordering the repayment of 15% out of the 25% deposit, leaving the bank with its normal 10% deposit which it was entitled to forfeit. Their Lordships are unable to agree that this is the correct order. The bank has contracted for a deposit consisting of one globular sum, being 25% of the purchase price. If a deposit of 25% constitutes an unreasonable sum and is not therefore a true deposit, it must be repaid as a whole. The bank has never stipulated for a reasonable deposit of 10%; therefore it has no right to such a limited payment. If it cannot establish that the whole sum was truly a deposit, it has not contracted for a true deposit at all."

121. In this case, the purchase price was $500,000. The deposit was $400,000, as high as 80% of the purchase price. Even if the amount of premium was included, the deposit still took up 35% of the purchase price. From whatever angle, the said amount was in fact a penalty and not a true and reasonable deposit. Therefore the terms in relation to compensation by double deposit were neither binding nor enforceable.

122. Miss Li has no right to ask Miss Wong, according to the agreement, to pay the amount of double deposit as compensation. Miss Li can only get back the deposit of $400,000 that she paid.

123. Since I am satisfied that the sum of $400,000 is not a reasonable deposit but rather a penalty, the purchaser is entitled to obtain a court order to declare the contractual provision on forfeiture of deposit void and not enforceable. Even if Miss Li was the person in breach of the contract in this case, Miss Wong has no right to forfeit the deposit of $400,000. She must first prove that loss was incurred as a result of a breach of contract by Miss Li before she could file a justified claim.

Miss Wong's counterclaim

124. Since I ruled that the person in breach of contract was Miss Wong and not Miss Li, the counterclaim of Miss Wong is dismissed. Even if the breach was by Miss Li, Miss Wong must prove that the loss suffered by her was caused by Miss Li's breach in order to support a justified counterclaim . She must establish the causal relationship between the breach of contract and the loss, otherwise even if the other party was in breach of contract, she could not obtain any compensation. It is because the only liability of the other party is for the loss incurred as a result of the breach.

125. In other words, a breach of contract is not necessarily the only cause for loss, it must however be one of the crucial and substantial factors before the aggrieved party could claim compensation pursuant to the breach. In her statement of counterclaim, Miss Wong alleged that since Miss Li failed to pay her the sum of $700,000 for the premium, she thereby lacked funds to pay up the premium for the small house in whole. For this reason, Ming Fai repossessed the whole of the small house, causing her to suffer loss of construction fees as well as her share of profit. The facts of the case revealed that Ming Fai sold the small house at 4 million dollars in early January 1994 about two weeks after the formalities for payment of premium were completed. Miss Wong alleged that after selling the small house, Ming Fai did not repay her with any portion of the sale proceeds. I take a reserved attitude towards these allegations. Apparently Ming Fai had no reasonable ground at all to support such an act. If Miss Wong could not take out the sum for payment of premium and thus required Ming Fai to pay it for her, what Ming Fai had lost was only two weeks' interest of the premium payment. They have no excuse whatsoever to forfeit Miss Wong's entire interest in the small house. Under my further enquiries, Miss Wong admitted that her reason of not taking action against Ming Fai in respect of the small house was that she had other joint venture business with Ming Fai. She was afraid that she would break up with Ming Fai whereby greater loss would be incurred. Even if Miss Wong had not suffered any loss because of the small house, the loss has no causal relationship whatsoever with Miss Li's breach. Mr Wong, counsel for Miss Wong, also knew this obvious reason well and therefore did not make a forceful submission in this respect.

126. Since Miss Wong's counterclaim against Miss Li is not founded on any lawful or factual basis, so it is therefore dismissed.

127. Despite my decision that it was Miss Wong who breached the contract, the consequence would be the same from a practical point of view regardless of who did the breach, whereby Miss Wong should repay Miss Li the deposit she had paid. Either party cannot claim other forms of compensation against the other.

Conclusion

1. The claim against the defendant Wong Mei Yin by the first Plaintiff Sung Wai Kin is dismissed.

2. Judgement to the second plaintiff Li Pui Wan for her claim against the defendant Wong Mei Yin. Wong Mei Yin should repay HK$400,000 to Li Pui Wan with interest at 8% per annum as calculated from 1.1.1993.

3. The counterclaim against the second plaintiff Li Pui Wan by the defendant Wong Mei Yin is dismissed.

Dated : 17.1.1997