VICTORY STAR LTD v. NG FUNG YING AND OTHERS

HCA 9257/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9257 OF 1999

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J U D G M E N T

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1. The Plaintiff in this action was the purchaser of a shop premises at No. 16 Bowring Street, Ground Floor, Kowloon under an agreement of 9 September 1996. The Defendants were the vendors. They were the beneficiaries to the estate of Chiu Ka Lung ["the Deceased"] who died on 15 September 1995. At the material time, the Deceased was the registered owner of the shop. The agreed price was $9,600,000.00 and a deposit of $1,200,000.00 was paid. The agreement was unusual in that under Clause 5 thereof, completion would take place within 2 months from the date upon which the Letters of Administration in respect of the estate of the Deceased was granted.

2. It took considerable time before the Letters of Administration was granted. Eventually, it was granted on 15 March 1999. In the meantime, the Plaintiff had entered into sub-sale agreement on 29 January 1997 sub-selling the shop to Gay Fortune Development Limited ["GFDL"] and Wealth Busy Limited at the price of $13,800,000.00. Those two sub-purchasers in turn entered into sub-sub-sale agreement on 19 January 1998 further sub-sold the shop at $13,800,000.00.

3. On 18 July 1998, GFDL obtained a survey report in respect of the shop from Lee Mark & Associates Architects & Surveyors Limited. According to that survey report, unauthorized building works were found in the shop as follows,

(a) an approved open yard had been converted into a part of the shop;

(b) an approved WC had been removed and converted into storage area;

(c) another approved open yard had been covered by steel frame structures with a split-type air conditioning compressor attached to it;

(d) a cockloft had been erected in the shop.

The surveyor was of the opinion that if the unauthorized works were brought to the attention of the Building Authority, demolition order would be issued.

4. Solicitors acting for GFDL raised requisitions regarding these unauthorized building works with the solicitors for the Plaintiff on 1 August 1998. On 3 August 1998, solicitors acting for the Plaintiff raised the same requisition with solicitors for the Defendants.

5. There were subsequent correspondence between the solicitors on this topic. Bearing in mind that this is an Order 86 application, I do not find it necessary to set out all the relevant correspondence in this judgment. Suffice to say that initially, the Defendants' solicitors referred to the lack of risk of enforcement and an omission in the surveyor's report to refer to an approval of the Building Authority of 7 June 1967.

6. On 5 February 1999, Defendants' solicitors wrote to Plaintiff's solicitors and said the following,

"Without admission of the illegality of those structures/alterations especially any risk of enforcement by the Building Authority, our client is prepared to arrange with her tenant for their permission to carry out some remedial work in order to remove all those structures/alterations to the same condition as appeared on the approved Assignment plan, and such work will be completed before completion of the proposed sale."

7. Plaintiff's solicitors did not respond to Defendants' solicitors. On 23 March 1999, Defendants' solicitors wrote to Plaintiff's solicitors again and said,

"Without admission of any object or queries on any unauthorized structures ... our client will employ contractors to remove those structures before completion, unless we hear from you to its contrary within 7 working days from the date hereof, failing which, your objection will deemed to be waived or satisfied."

8. By that letter, the Defendants also informed the Plaintiff that the Grant of Letters of Administration has been issued on 15 March 1999 and gave notice for completion on or before 24 May 1999.

9. Again there was no response from Plaintiff's solicitors to that letter. The Defendants caused the necessary works to be done and this was certified by a certificate from an authorized person dated 17 May 1999. It was stated in the certificate, inter alia,

"The entire premises have been reinstated in general accordance with the Ground Floor Plan approved by the Building Authority ..."

10. Defendants' solicitors wrote to Plaintiff's solicitors on 18 May 1999 enclosing a copy of the certificate and offered re-inspection to the Plaintiff.

11. On 21 May 1999, Defendants' solicitors wrote to Plaintiff's solicitors asking the latter to furnish draft assignment and undertaking letters for approval and giving split cheques instructions in respect of the balance of purchase price. The Plaintiff did not respond.

12. On the scheduled date of completion, 24 May 1999, at about 3:23 pm, Plaintiff's solicitors faxed a letter to Defendants' solicitors and said as follows,

"Since it is an implied term of the Agreement for Sale and Purchase dated 9 September 1996 that the said property to be sold shall be on 'as is' basis and our client shall take the said property as it stand, our client could not be forced to accept a substantial variation of the said property agreed to be sold."

It was also said that the Plaintiff was entitled to rescind the sale and purchase.

13. The Plaintiff did not tender the balance of purchase price by 5:00 pm and the Defendants' solicitors forfeited the deposit of $1,200,000.00 by a letter dated 24 May 1999. By a separate letter of the same date, Defendants' solicitors also replied to the letter of the Plaintiff faxed at 3:23 pm.

14. The present action was commenced on 4 June 1999. The Plaintiff claimed rescission of the agreement of 9 September 1996 and return of deposit and damages. Although the Writ in this action was issued on 4 June 1999, the summons for Order 86 application was only issued on 29 October 2002 after Defence had been filed and pleadings had been amended and re-amended.

15. At the hearing, Mr Lee (counsel for the Plaintiff) asked for summary judgment on the basis that because of the reinstatement of the shop, the Defendants could not provide substantial performance of their obligations under the agreement. There is evidence before me that due to the reinstatement, the usable area of the shop would be reduced by 38% and the value of it would be reduced by 13%. Mr Lee disavowed any reliance on arguments based on "as is" basis.

16. Despite my initial misgivings concerning the substantial performance argument on the facts of the present case, I am prepared to assume Mr Lee is correct in that regard for present purposes. However, I am of the view that this is not sufficient to bring the Plaintiff home.

17. The principal argument of Mr Wong (counsel for the Defendants) is that because of the Plaintiff's lack of response to the letters of 5 February and 23 March 1999, the Plaintiff is estopped from insisting on getting a shop with all the unauthorized structures.

18. Mr Lee submitted that there cannot be any waiver or estoppel unless there was clear and unequivocal representation. Silence, he said, could not constitute such representation when there was no legal duty on the part of the Plaintiff to respond. He equated those letters from the Defendants solicitors to an offer by the Defendants to remove the unauthorized structures. Just like an offeree not being obliged to respond to an offer, the Plaintiff was not obliged to respond to the letters of 5 February and 23 March 1999.

19. Both counsel referred me to Para. 55 in Spencer Bower, The Law Relating to Estoppel by Representation (1977), the relevant statements of law are as follows,

"It is well established that under certain conditions silence or inaction may constitute a representation, as much as positive language or conduct, for the purpose of an estoppel. The main condition subject to which alone silence or inaction counts as a representation is that a legal (not a mere moral or social) duty shall have been owed by the representor to the representee to make the disclosure, or take the steps, the omission of which is relied upon as creating the estoppel."

20. The same principle can be extracted from the judgment of Buckley LJ in Spiro v Lintern [1973] 1 WLR 1002 at p. 1010-11,

"Where a man is under a duty - that is, a legal duty - to disclose some fact to another and he does not do so, the other is entitled to assume the non-existence of the fact. In such circumstances the conduct of the first man amounts to a representation by conduct to the second that the fact does not exist. In Bell v. Marsh [1903] 1 Ch 528, 541, Sir Richard Henn Collins MR put the point in this way:

"He [the plaintiff] is entitled to say that the representation was made, not merely by language used, but by conduct, and conduct may include negligence. A man may act so negligently that he must be deemed to have made a representation, which in fact he did not make, but because he has acted negligently he is deemed to have made it."

If A, having some right or title adverse to B, sees B in ignorance of that right or title acting in a manner inconsistent with it, which would be to B's disadvantage if the right or title were asserted against him thereafter, A is under a duty to B to disclose the existence of his right or title. If he stands by and allows B to continue in his course of action, A will not, if the other conditions of estoppel are satisfied, be allowed to assert his right or title against B: see Halsbury's Laws of England, 3rd ed., vol. 14 (1956), paras. 1178-1180. On similar grounds, in our judgment, if A sees B acting in the mistaken belief that A is under some binding obligation to him and in a manner consistent only with the existence of such an obligation, which would be to B's disadvantage if A were thereafter to deny the obligation, A is under a duty to B to disclose the non-existence of the supposed obligation."

21. The issue is therefore whether the Plaintiff owed the Defendants a legal duty to indicate its objection to the demolition of the unauthorized structures when such proposal was put forward in the letters of 5 February and 23 March 1999. In my judgment, it is patently arguable that the Plaintiff owed such a legal duty to the Defendants in the circumstances of the present case. In Mexon Holdings v Silver Bay International [2000] 1 HKLRD 935, at p. 942F to G, Litton PJ examined how the law expects vendor and purchaser to deal with each other in face of a title problem,

"A good title does not mean a perfect title, free from every possible blemish. Whenever a question like this arises, it must be approached from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain."

22. In the present context, as things stood in February and March 1999, the Defendants had to deal with an outstanding requisition relating to the unauthorized structures. They had a number of options open to them. They could have maintained that their original answers embodied in the letter of 10 August 1998 and marshalled more material to support those answers. Secondly, it might be possible for them to choose to annul the sale pursuant to Clause 9 of the Agreement of 9 September 1996. Thirdly, they might choose to offer the demolition of the structures which could be a satisfactory answer to the requisition if the Plaintiff did not object to the change to the premises as a result of the demolition.

23. By the letters of 5 February and 23 March 1999, the Defendants in effect proposed to the Plaintiff that they would go ahead with the third option if the Plaintiff did not object. I do not agree with Mr Lee's submission that the Defendants were shifting the burden of answering requisition to the Plaintiff. As I see it, the Defendants were exploring one possible option to solve the problem. The Plaintiff was perfectly entitled to write back to say this option was not acceptable because it would substantially vary the performance of the contract. Mr Lee submitted that at that stage the Plaintiff was waiting response from its own sub-purchaser and therefore could not decide. I do not accept this as a valid excuse for the Plaintiff's reticence. Firstly, there was nothing to stop the Plaintiff from telling the Defendants that it needed more time to consider as it was awaiting response from sub-purchaser. The ball would then be in the Defendants' court to assess what was the reasonable time that should be given to the Plaintiff bearing in mind that under Clause 17 of the Agreement time was of the essence and completion was to take place on 24 May 1999. Secondly, whatever took place between the Plaintiff and its sub-purchaser should not affect the rights and obligations between the Plaintiff and the Defendants. The lack of response from the sub-purchaser did not exonerate the Plaintiff from the legal consequence of its own failure to respond to the Defendants.

24. If the Plaintiff were really concerned about the variation in the performance of the contract caused by the proposed demolition, it is difficult to see why it did not raise objection soon after the receipt of the letters of 5 February and 23 March 1999. Bearing in mind the time frame for completion, it is at least arguable that the Plaintiff must have known that if it did not raise objection, demolition works would be undertaken by the Defendants very soon after 30 March 1999 (upon the expiry of the 7 days given to the Plaintiff to respond). In the circumstances, the omission of the Plaintiff to respond to the letter of 23 March 1999 falls squarely within the principle set out by Buckley LJ cited above.

25. Had the Plaintiff raised objection or indicated some reservation as to the demolition of the structures before 30 March 1999, the Defendants might not go ahead with the demolition and might have resorted to other options in dealing with the outstanding requisition. Hence, adopting the approach of Litton PJ, I am of the view it must be arguable that there is a legal duty on the part of the Plaintiff to object to the demolition in the circumstances of the present case.

26. The Plaintiff did not raise objection to the demolition until the eleventh hour prior to the deadline for completion. By then demolition works had been undertaken and the Defendants had suffered detriment not only in terms of the costs and expenses relating to the works but also in terms of its commitment to this option as resolution of the problem.

27. There is therefore a highly arguable defence of estoppel. Since this defence has been raised and all relevant material were known to the Plaintiff before the Order 86 summons was taken out, I would dismiss the summons and I propose to order the Plaintiff to pay the Defendants' costs of this application. I also intend to make a gross sum order under Order 62 rule 9(4)(b) and the costs shall be payable forthwith. Those orders on costs are orders nisi. If parties have no submission on those orders nisi and agree on the quantum, they could inform this court by letter as to the agreed figure. Otherwise, either party is at liberty to restore the question of costs before me.

Remarks: