XCHRX KONSAN (HONG KONG) LIMITED v. UNITREND COMPUTER LIMITED

1997 No. A3522

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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FACTS

1. By a provisional agreement dated the 8^th October 1996 the Plaintiff agreed to buy and the Defendant agreed to sell the property known as House No. 31 Hong Lok Road West, Hong Lok Yuen at the price of $13 million. Clauses 2, 7 & 8 are material for the purpose of this action and are as follows:-

Clause 2

"The purchase price of the said premises shall be HK$13,000,000.00 which shall be paid by the purchaser to the Vendor in the manner as follows:-

(a) Initial deposit shall be paid upon signing of this agreement in the sum of HK$300,000.00.

(b) Upon signing of the Formal Agreement for Sale and Purchase on or before 23^rd October 1996 further deposit shall be paid in the sum of HK$1,000,000.00.

(c) Further deposit shall be paid on or before _________ in the sum of HK$ _________.

(d) Balance of purchase price shall be paid upon completion on or before 8^th April 1997 at Vendor's solicitors in the sum of HK$11,700,000.00."

Clause 7

"Should the Purchaser fail to complete the purchase in the manner herein contained, the deposit shall be forfeited to the Vendor and the Vendor shall then be entitled at his absolute discretion to sell the said premises to anyone he thinks fit and the Vendor shall not sue the Purchaser for any liabilities and/or damages or to enforce specific performance."

Clause 8

"Should the Vendor after receiving the initial deposit paid hereunder 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 stamp duty of the said premises and the Purchase shall not take any further action to claim for damages or to enforce specific performance."

2. Pursuant to the provisional agreement the Plaintiff paid the initial deposit of $300,000.00.

3. On 23^rd October 1996 the Plaintiff through it's former solicitors sent to the Defendant's solicitors cashier orders in the sum of $1 million as further deposit payable upon the signing of formal agreement for sales and purchase. As the Plaintiff's then solicitors had not received the formal agreement from the Defendant's solicitors the $1 million was sent to the Defendant's solicitors on their undertaking not to release the same to the Defendant until they have approved and both parties signed on the approved agreement. In other words the further deposit had not been paid.

4. A draft formal agreement was sent by the Defendant's solicitors to the Plaintiff's then solicitors who objected to the title of the Defendant to the said property. Negotiation took place but the Defendant's solicitors did not accept the title was defective. There were exchange of letters. On the 9^th December 1996 the Defendant's solicitors maintained their view. By a letter of the 11^th December 1996 wrongly dated as 11^th November 1996 the Plaintiff's then solicitors asked for a confirmatory assignment to rectify the defect and reserved their rights to raise further requisitions. On the 14^th December 1996 the Defendant's solicitors pursuant to Clause 8 of the provisional agreement returned the cashier orders in the sum of $1 million and 2 cheques in the sum of $957,500.00 being the initial deposit, a sum equivalent to the initial deposit and the stamp duty paid.

5. On 7^th April 1997 the Plaintiff started the present proceedings for specific performance of the provisional agreement.

THE ISSUE

6. There are 2 summonses before me and the only issue is whether under the terms of the provisional agreement the Defendant is entitled to call off the sale by refund of the initial deposit plus an amount equivalent to the initial deposit and the stamp duty when the date for the signing of formal sale and purchase agreement had passed but before the date fixed for completion.

THE PLAINTIFF'S SUBMISSION

7. Mr. Chan S.C. for the Plaintiff submitted that on the true construction of Clause 8 of the provisional agreement the parties only intended the right to compensation the purchaser by paying to it a sum equivalent to the initial deposit to be exercisable before 23rd October 1996 i.e. the date when the formal sale and purchase agreement should be signed. He relied on the decision of Godfrey J. in Man Sun Finance (International) Corp. v. Lee Ming Ching [1993] 1 HKC 113. At p. 125 per Godfrey J.:

"..... If the relevant provision takes away the innocent party's right to specific performance but only on terms that the defaulting party performs some alternative obligation instead, then the defaulting party, given this option, must perform that alternative obligation strictly in accordance with its terms in order to take the benefit of the provision.

I approach the problem raised in the present case accordingly. The vendor was unwilling to enter into the formal sale and purchase agreement on the specified date..... Clause 8 must be construed as imposing an obligation on the vendor, if he wished to exercise the option conferred on him, to withdraw from the sale .....either on or before the specified date".

8. He submitted that the Clause "complete the sale in the manner herein contained" would only be satisfied if the formal sale and purchase agreement was in fact signed by 23^rd October 1996 failing which the sale would not be "in the manner contained" in the agreement and this would be so irrespective of whether there was a legally binding obligation on the parties to enter into a formal sale and purchase agreement by the 23^rd October 1996. The Defendant had delayed in supplying the draft before 23^rd October 1996 and was therefore at fault and was responsible for the formal contract not being signed before 23^rd October 1996 and hence "failed to complete the sale" in the manner contained in the agreement. To invoke the protection of Clause 8 the Defendant must immediately i.e. on 23^rd October 1996 refund the initial deposit and payment of compensation. Since the Defendant did not do as required of it, the Defendant had lost the right to do so.

9. Mr. Chan S.C. with his usual fairness had drawn my attention to 2 conflicting decisions of the High Court. In National Crown Ltd. v. Kai Wan Chung (HCA 14634/96 unreported) Findlay J. held that after the date for the signing of the formal sale and purchase agreement stated in the provisional sale and purchase agreement the right of the parties to terminate the agreement had gone. However such agrument was rejected by Keith J. in China Landmark Hi-Tech Development Ltd. v. San Fung Ltd. (HCA 3243/96 unreported)

DEFENDANT'S SUBMISSION

10. Mr. Leong for the Defendant on the other hand submitted that neither party was obliged to enter into a formal agreement for sale and purchase by 23^rd October 1996 and that it was not a mandatory step contemplated by the provisional sale and purchase agreement. In Yiu Yau Ping v. Fong Yee Lan [1992] 2 HKLR 169 at p. 174 per Nazareth J.A.:

"That a provisional agreement calls for a formal agreement that will supersede it, is not inconsistent with the former being a binding agreement."

11. At p. 175 Nazareth J.A. went on to say:

"It is consistent with that intention that payment is linked rather more directly to the signing of the formal agreement rather than the target date mentioned..... The formal agreement being different from the provisional agreement, the purchaser was entitled to decline to sign it and to suggest amendments."

IS THE SIGNING OF A FORMAL SALE AND PURCHASE AGREEMENT MANDATORY

12. In my judgment it is not mandatory. The effect of signing a formal sale and purchase agreement is that it supersedes and replaces the provisional sale and purchase agreement. In the absence of a formal sale and purchase agreement the provisional sale and purchase agreement subsists and is still a valid and binding agreement.

13. Apart from Yiu Yau Ping's case in Man Sun Finance (International) Corp. at p. 124 per Godfrey J.:

"From the moment the ink is dry on the parties' signatures, all references to the formal sale and purchase agreement are illusory; there is already in existence an immediately binding agreement and neither side is entitled to demand that the other side enter into a further one."

14. Further in China Landmark Hi-Tech Development Ltd. Keith J. said:

"..... it is arguable that the only provision in the agreement about the signing of a formal sale and purchase agreement by 19^th December 1995 did not require a formal sale and purchase agreement to be signed at all. It merely required the purchaser, in the event of the formal sale and purchase agreement being signed by that date, to pay the further deposit on such an agreement being signed."

HAS THE VENDOR LOST ITS RIGHT UNDER CLAUSE 8

15. Whilst I agree with Godfrey J. in Man Sun Finance (International) Corp. that the defaulting party must perform the alternative obligation strictly in accordance with its terms in order to take the benefit of the provision, the facts of the present case is slightly different from that case and that of National Crown Ltd.

16. In both Man Sun Finance (International) Corp. and National Crown Ltd. the purchaser on the specified date forwarded the formal sale and purchase agreement together with the cheque for further deposit. They have therefore performed their obligations under that clause. In the present case the cashier orders were not to be released to the vendor until a formal agreement is signed. The intention of the purchaser (Plaintiff) seems to be that the further deposit would be paid only at the signing of the formal agreement irrespective of the date.

17. I am slightly puzzled as to why requisition as to title should be done at this stage instead of before 8th April 1997 i.e. the date of the completion as is the usual conveyancing practice.

18. From the exchange of letters between solicitors it is obvious that the plaintiff's then solicitors were of the view that the execution of the assignment by the vendor (Defendant) in respect of the said property was defective and void and hence requested for a confirmatory assignment whilst the Defendant's solicitors were of the view that it had been properly executed and refused to execute a confirmatory assignment. Neither party had suggested a vendor and purchaser's summons to let the Court decide on this issue.

19. Both parties are entitled to their own views. As neither party was willing to compromise it is a deadlock.

20. In the circumstances it is not unreasonable for the Defendant to call off the sale and pay the compensation to the Plaintiff.

21. In passing I query why the Plaintiff would ask for specific performance 4 months later in respect of a property which title, (according to it's solicitors) is defective save and except that there was a surge in the property market during those months.

22. By reasons aforesaid I rule that the Defendant is entitled to call off the sale by refund of the deposit plus an amount equivalent to the initial deposit and the stamp duty. Costs to follow the event.