TELE STEP LTD v. PONG MAN TAT

HCMP1543/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1543 OF 2010

---------------------------

----------------------

D E C I S I O N

----------------------

1.  This is a vendor and purchaser summons wherein the plaintiff (vendor) seeks to vacate registration of a provisional sale and purchase agreement (“the Agreement”) from the Land Registry and repayment of $21,000 by the defendant. The defendant (purchaser) counterclaims for payment of $4,000 being balance of liquidated damages.

UNDISPUTED FACTS

2.  The Agreement provides for sale and purchase of the suit property at a price of $460,000. The purchaser paid to the vendor $25,000 as initial deposit.  Clause 10 of the Agreement (“Clause 10”) provided that if the vendor failed to complete, the initial deposit would be refunded to the purchaser with an equivalent sum as liquidated damages (“the liquidated damages”).  No formal sale and purchase agreement was signed despite a stipulation to the contrary in the Agreement.

3.  The purchaser’s solicitors raised requisitions which were not answered by the vendor’s solicitors to the former’s satisfaction.   On the day before the designated completion date, the vendor served a notice to annul the sale unless the purchaser was prepared to withdraw his requisition. The purchaser refused. 

4.  By a letter dated 28 June 2010, the vendor’s solicitors annulled the sale and sent a cheque drawn in favour of the purchaser for the sum of $46,000 (“the 1^st cheque”) said to be for return/refund of the deposit.  (Counsel explained that this amount was the sum total of $25,000 paid and another $21,000 for further deposit which the vendor’s solicitors mistakenly thought the purchaser had also paid.)

5.  On the following day, the vendor’s solicitors enclosed a fresh cheque for $25,000 (“the 2^nd cheque”) drawn in favour of the purchaser in exchange for the 1^st cheque.  On the same day, the purchaser’s solicitor informed the vendor’s solicitors that the 1^st cheque had already been released to the purchaser.

6.  The vendor alleged that there had been payment by mistake and sought refund of $21,000. The purchaser relied on clause 10 to seek the balance of $4,000 as liquidated damages.  The parties were unable to come to terms over signing of a cancellation agreement.

7.  On 30.6.2010 the vendor re-sold the property to a third party (“the re-sale”).

8.  The originating summons was issued by the vendor on 16August 2010 seeking:

(i)    A declaration that the vendor had lawfully and effectively annulled the sale of the property;  

(ii)   A declaration that the Agreement is no longer registrable in the Land Registry and ought to be vacated.

(iii)  An order that the purchaser do repay the vendor the sum of $21,000 being money had and received.

The purchaser counterclaims for payment of $4,000 being the balance of the liquidated damages.

9.  On 8 December 2010, the purchaser discovered the resale and filed an affirmation exhibiting the land search record on 9 December.  The purchaser claims that the vendor lacks locus standi to seek the declarations.  The vendor sought to file an affirmation in reply on 9 December exhibiting the resale contract which imposed a duty on the vendor to apply for vacation of the registration of the Agreement.  The purchaser objects to the filing of this affirmation.

10.  Despite the lateness in the application for filing of the vendor’s, I gave leave for the vendor to file the affirmation in reply.  It, together with the purchaser’s affirmation, is relevant to the locus of the vendor to sue.  To exclude it is to ask the court to decide the substantive rights of the parties and yet shut its eyes to the real facts. 

THE ISSUES

11.  The issues are:

(i)    Whether or not the vendor has locus standi to seek the declarations prayed for;

(ii)   Whether the registration of the Agreement ought to be vacated;

(iii)  Whether there was an implied term in the Agreement to the effect that the vendor has a right to annul the sale if it was unable to answer the requisitions;

(iv)  Whether on a true construction of Clause 10, the vendor was obliged to pay the liquidated damages.

LOCUS STANDI OF THE VENDOR TO SEEK THE DECLARATIONS PRAYED FOR

12.  The vendor does have locus to sue by virtue of the provision in the re-sale contract which provides as follows:

“The parties hereto acknowledge that [the Agreement] is now in the course of registration against the Property, the Vendor undertakes to vacant (sic) and/or cancel the said registration of the [Agreement] at his own costs notwithstanding the completion of the sale and purchase shall has (sic) been taken place. This clause shall survive completion.”

13.  The re-sale contract does not appear to be a recent creation because it was produced on the day the purchaser queried the vendor’s locus.  The vendor has explained that because the assignment in relation to this re-sale was registered on the day after the re-sale contract, therefore the latter was not registered in the Land Registry. I accept this explanation although I consider that the vendor should have produced this re-sale contract at the time it filed its very first affirmation in support of the originating summons.

WHETHER REGISTRATION OF THE AGREEMENT OUGHT TO BE VACATED

14.  In Anstalt Nybro v. Hong Kong Resort Co. Ltd. [1980] HKLR 76, the Privy Council held that,

“… it is only where the agreement may create some interest legal or equitable in the parcel of ground that the instrument can be the subject of registration under the Ordinance.

     The question that has to be considered in the present case is this.  If the case proceeds to trial is there any likelihood that specific performance of the option agreement would be ordered? If so, then the land may be ‘affected’ by Nybro’s equitable interest and the agreement is registrable.  If not, there is no sufficient interest affecting the land and it was right to order the entries to be vacated.”

15.  Where an agreement was lodged as an instrument affecting land,  section 19 of the Land Registration Ordinance (Cap. 128) in relation to the court’s jurisdiction to vacate a lis pendens did not apply.  However, in Wong Kum Chi v. Lee Tit Ying [2003] 1 HKLRD 594, Deputy Judge Cheung, as he then was, held that

“This court does have the inherent jurisdiction to vacate the registration or purported registration of any instrument in the Land Registry which does not affect or no longer affects land. For the same reason, I am satisfied that this Court does have the jurisdiction, in an appropriate case, to grant a declaration in relation to the ‘registrability’, as it were, of any document which has been lodged for registration with the Land Registry even though it was not lodged for registration as a lis pendens.”

16.  I agree with Mr. Lee, counsel for the vendor, that the purchaser is just claiming for money judgment but not specific performance.  Any lien which the purchaser might have for return of the deposit was lost since the 1^st cheque he accepted already covered the entire initial deposit.  Therefore, although the Agreement was registrable in the first place, its registration ought to be vacated. 

ANY IMPLIED TERM FOR THE VENDOR TO ANNUL THE SALE IF HE CANNOT ANSWER THE REQUISITIONS

17.  It is common ground that the vendor has to prove title upon completion although there was no express term to that effect in the Agreement and the parties had not entered into a formal sale and purchase agreement: Gain Sky Limited v. Chau Tak Hing & another, HCA 917 of 2004, at para 24.   

18.  It is also common ground that the Agreement provided for sale of the property “free from encumbrances”.

19.  The implied term framed by Mr. Lee (“the Implied Term”) is in fact taken from clause 7(2) to Part A of the Second Schedule to the Conveyancing and Property Ordinance, Cap. 219 (“CPO”):

“If the purchaser shall make and insist on any objection or requisition either as to title or any matter appearing on the title deeds or otherwise which the vendor shall be unable or (on the grounds of difficulty, delay or expense or on any other reasonable ground) unwilling to remove or comply with, or if the title of the vendor shall be defective, the vendor whall notwithstanding any previous negotiation or litigation be at liberty to annul the sale in which case the purchaser shall be entitled to the return of the deposit but without costs or compensation and, if that return is made within 7 days, without interest.”

Mr. Lee fairly submits that the Implied Term can be differently worded from above but it is the substance of giving the right to the vendor to annul that is important.

20.  In Gain Sky Limited v. Chau Tak Hing & another, the learnedRecorder J. Fok, SC  had to deal with a similar implied term.  He held that:

(i)    A term will not be implied into a contract unless it satisfies the test of necessity.

(ii)   The provisional agreement in that case was not rendered “inefficacious, futile or absurd” without the implied term.

(iii)  The “officious bystander” test was not satisfied.  The implied term was not a straightforward and simply expressed term that the parties would, if asked at the time they signed the provisional agreement, have obviously assented to.  Even if it were more simply expressed, I do not consider that it is obvious in the circumstances that the plaintiff purchaser there would have agreed to its inclusion.

(iv)  To discern the parties’ presumed intentions, the Court looked to the express words in the provisional agreement.  There, the defendants agreed to sell the property free from encumbrances; the normal “escape” clause, which would have enabled the defendants to back out of the transaction, was expressly deleted.  This evidence of the parties’ presumed intentions outweighs any inference that might be drawn from the subsequent fact that the parties might have executed a formal agreement that included a vendor rescission clause.

(v)   The implied term is not to be implied on the basis that the provisional agreement was an “incomplete contract”.  The terms of the provisional agreement were clear enough and, even if the parties were not to go on to execute a formal sale and purchase agreement, the terms of the provisional agreement would be sufficient for its purpose of achieving the sale of the property by the defendants to the plaintiff.

(vi)  A contract must be complete at the time it is made.  When the provisional agreement was signed, the defendants undertook to convey the property free from encumbrances.  The fact that the conveyance of the Property would take place at the end of the process, in terms of time, does not mean that it is necessary to imply a right to back out of the transaction at an earlier stage in time just because the obligation to convey the property free from encumbrance might have become onerous or inconvenient.

(vii) The implied term would be contradictory to the express requirement on the part of the defendants to convey the property free from encumbrances.

21.  Mr. Lee agreed with all the legal propositions laid down by Recorder J. Fok SC but sought to argue that he had erred in applying them.  He submits:

(i)    In formal sale and purchase agreements, almost without exception, one can find an express term on a vendor’s right to annul and the express term selling a property free from encumbrances.  The suggestion that such 2 express terms are inconsistent with each other is unheard of.

(ii)   A title may be defective for various reasons.  The defect need not be related to an existing encumbrance.

(iii)  A vendor may have a good title and yet unable to prove the same by sufficiently answering requisitions raised by the purchaser, or the answering of such may involve huge expense, tremendous difficulty or substantial delay.

(iv)  If the vendor does not have the implied right to annul and it turns out that he is not able to prove a good title, this is tantamount to the vendor giving an implied warranty that his title is good and that he is prepared to pay the purchaser damages.  No court would imply such a warranty.

(v)   Any officious bystander would without hesitation shout out: how would a vendor ever guarantee that he has a good title?

(vi)  The Agreement was an incomplete agreement as it contemplated the signing of a formal sale and purchase agreement.

22.  Despite the persuasive arguments of Mr. Lee, I am not convinced that the learned Recorder had erred.  The principles he enunciated were not fact sensitive.  They apply with equal force to the present case.  The officious bystander and the parties to the Agreement would face the same situation as those in the case of Gain Sky.

23.  There have been many instances in the past where, for one reason or another, parties failed to enter into a formal sale and purchase agreement despite contemplating doing so.  The provisional agreement could still stand as a complete, enforceable agreement and I cannot see why the Agreement in this case cannot. 

24.  The CPO gives parties the freedom to adopt or not adopt clause 7(2).  If the lack of an annulment clause is tantamount to having the vendor give a warranty that he has good title, what is wrong with it?  It means that only the purchaser, but not the vendor, has the option to back out and/or make a claim against the vendor if good title is not proved. 

25.  The inclusion of the Implied Term might make the Agreement better for the vendor but that is not the reason for its inclusion.

THE TRUE CONSTRUCTION OF CLAUSE 10

26.  Clause 10 is clear in its meaning and needs no aid in interpretation.  It provides that:

“Should the Vendor after receiving the initial deposit paid hereinunder fail to complete the sale in the manner herein contained, the Vendor shall immediately compensate the Purchaser with a refund of the initial deposit together with a sum equivalent to the amount of the initial deposit as liquidated damages and the reimbursement / payment (as the case may be) of the stamp duty of the said premises and the Purchaser shall not take any further action to claim for damages or to enforce specific performance.”

27.  The manner of completion contemplated in the Agreement was to complete on 23 June 2010 by payment of the balance of the purchase price.  The vendor failed to do so.  It did not matter that it was due to his fault (like regretting the sale) or that of some reasons beyond his control.  He was liable to pay the liquidated damages to the purchaser.

28.  Even if I were to find that the vendor has the implied right to annul the Agreement, I do not agree that there must of necessity be an implied term that the purchaser should only be entitled to the return of the deposit but without costs or compensation.   The parties were at liberty to determine the remedies available when one party was in breach.  Clause 10 could sit comfortably with an implied term as to annulment (if incorporated). 

CONCLUSION

29.  The defendant purchaser had no right to insist on registration of the Agreement subject to payment of his $4,000.  The Implied Term should not be included in the Agreement.  The vendor was in breach in failing to answer the reasonable requisition of the purchaser.

30.  I therefore order as follows:

(i) The application for a declaration that the plaintiff had lawfully and effectively annulled the sale (by the plaintiff to the defendant) of the property under the Agreement is dismissed.

(ii) There be a declaration that the Agreement is no longer registrable under the Land Registration Ordinance against the Property.

(iii) There be an order that the registration of the Agreement in the Land Registry be vacated.

(iv) The claim by the plaintiff for repayment of the sum of $21,000 is dismissed.

(v) There be judgment on the counterclaim for the plaintiff to pay the defendant the sum of $4,000 being the balance of the liquidated damages.

COSTS

31.  The defendant has won in part.  The plaintiff has to come to court for vacation of the registration since the defendant has made the vacation of the registration conditional upon the plaintiff paying the balance of the liquidated damages. The proper order is for each party to bear its own costs and I make an order nisi accordingly, which will be made absolute 14 days after the handing down of this judgment. 

OTHER MATTERS

32.  Although both parties accepted that but for the registration issue, the matter could have been dealt with at the Small Claims Tribunal, I cannot see anything from the correspondence showing an attempt to resolve the matter without going to the High Court. Under the Civil Justice Reform, one of the underlying objectives of the rules is to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings and ensure fairness between the parties.  Parties should be more proactive and cooperative in choosing the forum and mode of dispute resolution.  In a case of this sort, some of the matters the practitioners should advise their clients would be e.g.

(i) To submit to the jurisdiction of the District Court.  A refusal to consent may be taken into account when the court considers the question of costs: Tam Wai Hung by her next friend, Zhou DaLue v.Chow Sin Kim and another, HCMP 1374/2010

(ii) For the parties' solicitor to each stakehold the relevant amount of damages, vacate the registration by consent / sign a cancellation agreement; the parties can then litigate at the Small Claims Tribunal as they deem fit.