QUEEN ENERGY LTD. v. CHAN SHU KEUNG RAYMOND AND ANOTHER

HCA 2476/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL JURISDICTION

ACTION NO. 2476 OF 1998

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J U D G M E N T

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The Background:

1. The plaintiff company purchased a duplex unit in Parc Oasis (hereinafter called the "Property") from the defendants at a price of $19.60 million. The plaintiff paid a deposit of $600,000.00 upon signing the provisional sale and purchase agreement on 28 August 1997 and a further deposit of $1,360,000.00 upon signing the formal agreement on 12 September 1997. A further amount of $1,960,000.00 was paid on 26 September 1997. The completion date was 16 January 1998 and time is of the essence in every respect of the agreement.

2. Just three days prior to the scheduled completion date, PW2 (a direction of the plaintiff) inspected the Property with an architect and authorized person, PW1, introduced to him by his solicitors. PW1 identified certain unauthorized alterations in the kitchen. A store room in the kitchen which abutted into the sitting room had been demolished and converted into a bed space in the kitchen. The sitting room was enlarged to a better size square room. These are not structural alterations. PW1's objection is that the servant's toilet opened into the kitchen in contravention of regulation 36(4) of the Buildings (Planning) Regulations.

3. Two days later, on 15 January 1998, i.e. one day prior to the scheduled completion date, the plaintiff's solicitors raised requisition about the legality of the alterations and enclosed a copy of an architect's certificate issued by PW1. The defendants' solicitors purported to answer the requisition by saying that the alterations were non-structural and exempted from the operation of the Buildings Ordinance. They nevertheless "proposed a postponement of completion herein for 7 days" to investigate and to take remedial action.

4. However, on the following day, i.e. 16 January 1998, before the plaintiff's solicitors confirmed acceptance of their proposal, the defendants' solicitors sent a letter by hand and by fax to the plaintiff's solicitors at 1:29 p.m. They said in the letter that the defendants had caused necessary rectification work to be done and enclosed an architect's certificate certifying that the alterations did not involve the structure of the building and had been rectified. They offered an opportunity to inspect the Property at 4:00 p.m. and to extend completion date to 12:00 noon on 17 January 1998. Impliedly, the defendants' proposal or offer to extend the time for completion by 7 days was withdrawn before acceptance. The plaintiff's solicitors requested inspection at 4:15 p.m. and extension of completion by three days to 5:00 p.m. on 19 January 1998. The request for extension was refused.

5. PW1 and PW2 inspected the Property at 4:25 p.m. The toilet door was repositioned and a bed space was carved out of the kitchen by a wooden partition so that the toilet now opens into a re-constructed air-lock chamber instead of into the kitchen. PW1 was of the opinion that the partitions were not made of permanent material and could not satisfy the requirement under regulation 36(4) and that the surface of the partitions was not of impervious material at the lower 1.2 metres in contravention of regulation 45(2).

6. Fourteen minutes before the extended completion time on 17 January 1998, the plaintiff's solicitors faxed and delivered a letter with a second architect's certificate from PW1 to the defendants' solicitors alleging that there were still some contravention of the Buildings Ordinance involving non-exempted works. They also alleged that the physical state and condition of the Property is not the same as it was at the time of the signing of the provisional agreement and that the plaintiff "is not obliged to complete the sale and purchase." The defendants' solicitors did not answer the requisition but on 19 January 1998, the defendants terminated the agreement for the plaintiff's non completion.

The alleged defects:

7. According to PW1, the initial objection to the unauthorized alterations is that the servant's toilet opened into the kitchen in contravention of regulation 36(4) of the Buildings (Planning) Regulations. This was rectified by repositioning the toilet door and erection of a wooden partition to create an air-lock chamber. The plaintiff then raised two new objections.

8. Firstly, the air-lock separation of the toilet opening from the kitchen is constructed of timber stud which is not a material of a permanent nature. PW1 said that according to his knowledge and experience it is the policy of the Building Authority that the material used should be of a permanent nature, but he cannot pin point to any regulation stipulating such requirement. DW1, a structural engineer and authorized person, on the other hand said there is no requirement under the Buildings (Planning) Regulations for the use of permanent material. He said that he had obtained approval for use of "Ytong block", a foam plastic, in the kitchen in Jusco Department Store in Kornhill. Permanency in the material is a choice of the user rather than a requirement of the Building Authority. I have no doubt in his expert opinion. As such, this objection or requisition is not validly raised.

9. Secondly, PW1 said that the surface of the timber stud partition and a portion of the toilet wall are not made of impervious material at the lower 1.2 metres. That is a breach of regulation 45(2). However, under cross examination, he admitted that this defect could be easily cured by applying a coat of protective paint over the wood surfaces, which would cost about $1,000.00. He also confirmed that the alteration works did not involve the structure of the building and are therefore exempted from the operation of the Buildings Ordinance. This is in line with DW1's opinion.

10. In the two architect's certificates issued by PW1, he certified that the alterations are not exempted works under the Buildings Ordinance. However, in view of his answer under cross examination, this requisition had therefore been answered by DW1's certificate dated 16 January and could not have been raised again by a malicious repetition.

11. Thus, in the end, the only defect was about the wooden partitions which could be cured by a coat of paint 1.2 metres by 2 metres, which would cost about $1,000.00.

Whether the requisition was imprecise:

12. Mr Lin referred to the case of Chan Chik Sum v. Great Pearl Industries Ltd [1997] 1 HKC 27 and submitted that the requisition contained in the plaintiff's letter dated 17 January, if it is a requisition, is imprecise and therefore not properly raised. In that case, the basis of the first instance judgment was that because of the imprecise nature of the requisition, the court resolved in favour of the vendor. The ratio decidendi is not that any imprecise requisition may be struck out as of right. Whether a requisition is imprecise is a question of fact to be decided on the basis of the evidence of the individual case. If, despite certain imprecision, a sensible meaning can be made out, then the requisition has to be answered.

13. The plaintiff's solicitors wrote in the following terms:

"Pursuant to the Architect's Certificate dated 17 January 1998 (copy enclosed), we note that there are still some alterations in the above property which contravene the provisions of the Buildings Regulations. Please provide us with documentary evidence and enlighten us with the relevant authority/provision to prove that such alterations are exempted works under the Buildings Ordinance and Regulations for our perusal before completion."

The first sentence refers to contravention of the Buildings Regulations. Though the precise contravention is not stated, it has been clearly spelt out in the Architect's Certificate enclosed. The certificate quoted breaches of regulations 36(4) and 45(2) of the Buildings (Planning) Regulations, based on which PW1 concluded that the works are unauthorized and not exempted works. Though as analysed above, much of PW1's opinion is wrong, the objections are nevertheless adequately if not clearly spelt out. There is of course a slight ambiguity in the phrase "unauthorized and not exempted works" in that the word "and" could be read conjunctively or disjunctively. I have no difficulty in resolving that in favour of a disjunctive meaning. I therefore do not think there is any substance in Mr Lin's complaint of imprecision.

Whether requisition raised within time:

14. Clause 5 of the sale and purchase agreement provides that "any requisition or objection on title shall be delivered to the vendor's solicitors within 7 working days after the delivery of the title deeds to the purchaser's solicitors." The title deeds were delivered to the plaintiff's solicitors on 10 December 1997 and the time for raising requisition expired on 18 December. The requisition was not raised until 15 January 1998, when the plaintiff was deemed to have waived its right to raise requisition. However, by unreservedly answering and dealing with the requisition, the defendants had waived any objection as to the time for raising requisitions. Of course, as a result of the alteration works performed, the plaintiff was entitled to raise further requisitions arising out of those works, if raised within reasonable time of its inspection. Though the letter of 17 January from the plaintiff's solicitor was delivered to the defendants' solicitors 14 minutes before scheduled completion time, the requisition was, in view of the tight time frame, raised within reasonable time (but, see below as relating to another issue).

Risk of enforcement:

15. As I have held, the only valid objection that may reasonably be raised is that the wooden partitions were not made of impervious material at the lower 1.2 metres. The main difference between the opinion of PW1 and DW1 is that PW1 insisted that any contravention of the Buildings (Planning) Regulations, irrespective of its nature, is liable to enforcement action by the Building Authority. He did not agree with counsel that in view of the trivial nature of the breach, there is no real risk of enforcement action. The parties have not adduced any evidence from the Building Authority as to whether it would take enforcement action in relation to this coat of paint. No matter how trivial the breach is, I do not think the Building Authority would ever come up with any open confirmation that it will not take enforcement action. That would amount to flouting its own regulations and giving a licence to unauthorized breaches.

16. In my view, the risk of enforcement has to be assessed on the basis of objective facts. What is the test? Many authorities have been cited by counsel for both parties. Mr Lin relied on the common sense approach adopted by Liu J in Woomera Company Limited & Eskensen Investment Limited v. Provident Cetnre Development Limited, HCA No. 12647 (Unreported, 29 June 1984). On the other hand, Mr Lui submitted that the test is a very strict one and he referred to Spark Rich (China) Limited v. Valrose Limited Civil Appeal No. 249 of 1998.

17. In Woomera, the two plaintiffs together purchased 200 flats in Provident Centre from the defendant developer. They refused to complete and sought return of their deposits by alleging numerous deficiencies and breaches of Buildings Regulations in the construction of the blocks. Liu J, as he then was, relied on the oft-cited case of MEPC Ltd v. Christian-Edwards [1981] AC 205 and held that the issue was: "Is the court satisfied beyond reasonable doubt that Woomera and Eskensen as purchasers would not be at risk of a respective successful assertion against them of the Crown's right of re-entry?" He considered all the various contravention in his 41 page judgment. He found they were trivial in character and insubstantial in magnitude. He referred to the common sense attitude to be expected of the Building Authority as regards enforcement against minimal contravention. He then concluded that he was satisfied beyond reasonable doubt that the purchasers would not be at risk of re-entry by the Crown. This part of his decision was not interfered with by the Court of Appeal.

18. In Spark Rich (China) Limited, the unauthorized structure was a penthouse or a structure which has been sitting on the roof for over 40 years. Godfrey JA as he then was, held at page 10:

"Of course, whether a risk is real or not is a question of degree. How is this to be tested?

It is impossible to formulate any test as what is a real risk and what is a risk which is not real. So this is of little help. It is more helpful to state that if, in an "unauthorised structure" case, the court concludes that, beyond reasonable doubt, the purchaser will not be at risk of any successful action against him by the Building Authority, it should declare in favour of a good title shown : cp MEPC v. Christian-Edwards [1981] AC 205, per Lord Russell of Killowen at p. 220 (followed here in Kan Wing-yau v. Hong Kong Housing Society [1988] 2 HKLR 187 : see per Clough JA, at p. 194).

Now, the burden of showing a good title falls on the shoulders of the vendor. He must, therefore, in an "unauthorised structure" case, satisfy the purchaser (or, failing him, the court) that the risk of such action is one which a purchaser can safely be advised to disregard.

So the test may be usefully framed as follows : If the purchaser asks his solicitor : "Can I be sure that I can safely disregard the risk?" then, unless his solicitor (being a prudent and experienced solicitor) can properly advise him that he can, the purchaser cannot be obliged to accept the vendor's title, even if supplied by the vendor with opinion evidence to the effect that action by the Building Authority was unlikely."

19. Mr Lui submitted that the above test is a very strict one. The purchaser is not obliged to accept the vendor's title, even if supplied by the vendor with opinion evidence to the effect that action by the Building Authority is unlikely.

20. The unauthorised structure in Spark Rich (China) Limited was a very substantial one, being an entire floor added to the roof of the original building. Before formulating the above test, Godfrey JA said "Of course, whether a risk is real or not is a question of degree." Also in formulating the test, he emphasised the words '"unauthorised structure" case' repeatedly (see my highlighting in the passages above quoted). The structure involved is a very substantial one. Thus in a narrow sense, the test is applicable to "unauthorised structure" cases involving substantial unauthorised structures. In a broader sense, the test may be relaxed where the unauthorised structure involved is insubstantial because as Godfrey JA said whether a risk is real or not is a question of degree. Whether the test is to be applied in its narrow sense or in its broad sense, all comes down to a matter of common sense.

21. The contravention in the present case is trivial and insignificant. As Liu J said in Woomera, common sense attitude is to be expected of the Building Authority as regards minimal contravention. Bearing all these in mind when applying the test in Spark Rich (China) Limited, whether in the broad sense or in the narrow sense, a reasonable and prudent solicitor acting for the purchaser would have answered the question posed by the plaintiff purchaser by saying, "In the exercise of their common sense, the staff of the Building Authority will not be concerned about a trivial contravention such as this as to institute enforcement action against the property. You can safely disregard the risk. After all, what is $1,000.00 in a transaction of $19.60 million?"

22. Further support for the proposition that not all contravention will result in enforcement action could be drawn from Active Keen Industries Ltd v. Fok Chi-keong, [1994] 1 HKLR 396. Litton JA, as he then was, said at 407:

"In this case, the purchaser's solicitors, in their letter of 22 October 1992 stated that according to the decision in Giant River v. Asie Marketing Ltd. (supra) "the existence of unauthorized structures renders the title of a property defective". If they had paused to consider the proposition, they would have realized that, stated in such wide terms, it must be wrong. Were it otherwise there can be no sale and purchase of flats in buildings where there are illegal structures on the roof, or where there are unauthorized balconies."

If it is envisaged that some minor unauthorized structures on the roof or some unauthorized balconies would not render title defective by reason of risk of enforcement, the possibility that the Building Authority would take enforcement action for the owner's failure to put on an impervious coat of paint in a small part of a kitchen inside a domestic flat is, I think, a very fanciful one. In my view, no reasonable or prudent solicitor would have raised such a requisition at all, unless not acting in good faith. I am therefore driven to the conclusion beyond reasonable doubt that in view of the trivial nature of the contravention, the risk of successful enforcement action can be safely disregarded.

Should the requisition be answered:

23. In general, requisitions reasonably raised should be answered as part of the vendor's obligation in showing and proving title. However, where the requisition has no substance or should not have been raised, should it be answered? In Active Keen, Litton JA, as he then was, posed this question and answered it in this way at page 406, citing Godfrey J's remark:

"But assume the objection to have no substance. In such a case, as Godfrey, J remarked, this presents considerable difficulties. Is it enough for the vendor to say: "there is no substance in the purchaser's objection"? The judge answered this question as follows:

"If there is nothing the vendor can usefully add, I would hold that it is enough. .....(Godfrey J then proposed an answer to meet the peculiar facts of the case.)"

In my judgment the judge's approach must in principle be correct. If the matter was self-evident, the purchaser's solicitor cannot insist upon a fuller reply. But the vendor's solicitor must act with full candour, so that the purchaser can be reasonably certain that there are no facts and material relevant to the requisition known to the vendor which have not been disclosed. A requisition as to title is not an occasion for the parties' solicitors to bandy propositions of law: each party must decide for himself, ultimately, what the legal position is, based on the facts known to himself: although, obviously, if one party can persuade the other to his own point of view on the law, so much the better."

24. On the fact of the present case, not only were the requisitions frivolous and vexatious, they were not reasonably raised. What led to the requisitions was the slump in the property market since the end of 1997. The sale and purchase agreement was entered into on 28 August 1997, near the peak of the property market, for completion on 15 January 1998. Title deeds were delivered to the plaintiff's solicitors on 10 December 1997 and time for raising requisition expired on 18 December. Up till then no question had ever been raised about the legality of the alterations. Then the plaintiff, through its estate agent, requested DW4 for reduction of a few million dollars in purchase price. This part of DW4's evidence was not challenged by Mr Lui for the plaintiff, but he submitted that the evidence is hearsay evidence and inadmissible. I think this evidence is admissible as the purpose for adducing the evidence is to prove that a demand for reduction in purchase price was made and not as to truth of the content of the conversation. The estate agent is common agent for both the plaintiff and the defendant. When he related a request for reduction in price to the defendant, the agent must be acting as agent of the plaintiff and not otherwise. Mr Lui submitted that the agent may be acting on his own initiative. I reject that suggestion as being ridiculous. On the other hand, PW2 denied having made that request. It is all a matter of weight and I resolve that in favour of the DW4. I found DW4 a more credible witness than PW2.

25. It was then upon DW4's refusal to reduce the purchase price that the requisitions were made. It began with the plaintiff's solicitor introducing an architect, PW1, to the plaintiff for the purpose of looking for illegal structures. Except for the complaint about the toilet door, which has been rectified, the other requisitions are of no or insignificant substance. Even the architect, PW1, who invented all these requisitions did not honestly believe there is any substance in them. In relation to the use of "non permanent" material as partition, he could not pin point to any requirement under the regulations requiring use of permanent material. As for the use of non-impervious material in the partition, he readily admitted that the defect could be easily rectified by a coat of paint costing a thousand dollars, a really trivial contravention. As for the most serious complaint, i.e. the alterations were non exempted works, he readily admitted under cross examination that the works did not involve the structure of the building and were therefore exempted works. PW1 said that when he formed the opinion that the works were non exempted works, he had not consulted the approved plan. There was no basis for him to come to such a conclusion without looking at the approved plan. Further, according to DW1, he was satisfied from a visual inspection that the structural elements were not affected and that the alteration had not left any structural elements such as beams unsupported. He subsequently confirmed from the approved plans that in fact the alterations did not involve the structure of the building. Thus when PW1 certified in his certificate that the works involved non exempted works, there was no evidence to support his opinion. His answers in cross examination also suggest that he knew the allegation was untrue and that he was not acting bona fide. He was simply magnifying a small defect and creating a problem which does not exist. I therefore find that these requisitions were friviolous and vexatious and were made for the purpose of finding an excuse for not completing the sale and purchase.

26. The question then is: if the objections have no substance and are not made bona fide, can they be ignored? This is a more difficult question than that posed by Godfrey J in the first instance judgment in Active Keen. It is well established that if before the time arrives at which a party is bound to perform a contract, he expresses an intention to break it, or acts in such a way as to lead a reasonable person to the conclusion that he does not intend to fulfil his part, this constitutes an "anticipatory breach" of the contract and entitles the other party to treat himself as discharged from further performance and sue for damages forthwith or to wait till the time for performance arrives and then sue: Chitty on Contract Vol 1 (28th edition) para. 25-020. Applying that rationale to frivolous and vexatious requisitions, I think, in principle, they may be ignored. If the requisitions are not bona fide made to enable the parties to perform the contract in accordance with its terms, but for the purpose of annoying or delaying or excusing one from performing the contract, it evinces an intention no longer to be bound by the contract. No real purpose would be served by answering the requisitions as there is nothing the vendor can usefully add and the purchaser knew there is no substance in his requisition. But the decision not to answer frivolous and vexatious requisitions should be made with extreme caution. Prudence would suggest it is probably more advisable to answer, or at least to inform the other party that there is no substance in the objection and to remind the purchaser the consequence of non completion.

27. In the present case, the only defect is a very trivial one, costing the parties a thousand dollars. The size of the transaction was $19.60 million. The plaintiff's architect inspected the Property at 4:25 p.m. on 16 January. The defect he complained of was a very minor one. Even if the plaintiff was really serious about it, its solicitors could have raised the objection early on 17 January, instead of at the 14th minute. Not only that, the plaintiff's solicitors wrote in their letter dated 17 January 1998 as follow:

"Pursuant to the Architect's Certificate dated 17 January 1998 (copy enclosed), we note that there are still some alterations in the above property which contravene the provisions of the Buildings Regulations. Please provide us with documentary evidence and enlighten us with the relevant authority/provision to prove that such alterations are exempted works under the Buildings Ordinance and Regulations for our perusal before completion.

As the rectification works had been carried out by your client as mentioned in your said letter, the said property is now not at its physical state and condition as at the time of the provisional Agreement dated 28 August 1997 and the Formal Agreement for Sale and Purchase dated 12 September 1997. We are instructed that our client would not have agreed to purchase the said property in the present state and condition. The subject matter of what our client has contracted to purchase is now different. In these circumstances our client is not obliged to complete the sale and purchase."

28. Thus the plaintiff was still insisting in that letter that the alterations were non-exempted works. For reasons as I have explained, such allegation was not made bona fide. Further, the plaintiff is already evincing an intention not to complete despite there would be substantial performance. Though it would be desirable to answer the requisition, in a case of blatant bad faith such as this and when the plaintiff's solicitors have expressed that the plaintiff was not obliged to complete, it is futile to answer the requisition made at the 14th minute and to give further extention of time for completion. I therefore find in the peculiar facts of this case, there is no need to answer such frivolous and vexatious requisition. I am also satisfied that the defendants' solicitors have acted with adequate candour.

Reasonable time to consider requisition and to complete:

29. Mr Lui placed great emphasis on the fact that the defendants did not allow the plaintiff reasonable time to consider if the requisitions were properly answered to arrange for completion. The plaintiff inspected the Property at 4:25 p.m. on 16 January which was a Friday. The plaintiff's solicitors raised further requisitions at 11:46 a.m. on 17 January which was a Saturday. He said that the defendants' solicitors' refusal to extend completion time to 19 January, Monday, was unreasonable.

30. The general rule is that the purchaser must be given reasonable time to consider the title of the vendor and his own position, to satisfy himself on the matter, get his money ready and complete on the day fixed: per Litton JA in Active Keen. But these general rules have no application where the requisitions are not reasonably or bona fide raised. The plaintiff had adequate time between 4:25 p.m. on 16 January and 12:00 noon on 17 January to consider this $1,000.00 question and get his money ready. He chose not to, but instead repeated a requisition at the 14th minute, which in my view was not bona fide and when his own expert, PW1, did not even honestly believe in what he certified when alleging that the alterations were non exempted works. I find that the plaintiff had reasonable time to consider his position and to complete.

Substantial performance:

31. Mr Lui submitted that as a result of the alteration, the defendants were unable to deliver the Property in the "as-is" condition in breach of Clause 27 of the Agreement as the bed space in the kitchen is no longer there.

32. According to the defendants' surveyor, DW2, the alteration did not materially affect the value of the Property and there was no change in the internal area of the Property. His evidence in this regard could hardly be disputed. The bed space which originally was in the kitchen has been repositioned to the air-lock chamber behind the partition. The space there was about 1 metre by 2 metres. With the use of a sliding door as access from the kitchen to the chamber, a bed could just fit in but there would not be comfortable moving space inside. But the accommodation there could be improved with a foldable bed and suitably designed drawers. Maids in Hong Kong do not usually enjoy spacious servant's rooms. Speaking for myself, a secluded space as now carved out from the kitchen is more preferable than an open bed space in the kitchen. One could at least have a more private place to be more casual, or to relax oneself, to read or write private letters, to talk in private or to cry one's heart out in case of emotional stress and to sleep out of the views of others. If the alteration were not an improvement, at least, it does not make the Property worse than before.

33. In terms of usable area, this has been reduced by the thickness of the wooden partition of about two square feet. This is insignificant as it only affects the kitchen area and is in any event de minimis for a duplex unit of its size.

34. It is well established that in considering whether a vendor has shown good (albeit not perfect) title, the test is whether a court would at the instance of the vendor force the title upon an unwilling purchaser in a suit for specific performance (Farrand, Contract and Conveyance (4th ed.) p. 87, Manning v. Turner [1957] 1 WLR 91, Pyrke v. Waddingham (1852) 10 Hare 1). As the alteration is of a very minor nature, I am not satisfied that the breach deprived the plaintiff of substantially the whole benefit of the contract. PW2 emphasised the importance of the bed space and the significance he attached to it. He said he needed a maid and would not have bought the Property without the bed space. I do not think he was honest and sincere with that evidence. A bed space with a window is somehow available after the alteration. As I have found, a maid may prefer to have a secluded bed space than sleeping in an open kitchen. Different people may have different preferences. But what PW1 was saying is that the plaintiff would not have bought the Property without that bed space. It is hardly convincing that one would have placed so much importance in a bed space for a $19.60 million transaction. PW1 was exaggerating and was really finding excuses to wriggle out of a bad deal. I am satisfied that the defendants have shown and proven a title which a court of equity will force upon an unwilling purchaser in a suit for specific performance. The breach of Clause 27 is one which only sounded in damages.

Conclusion

35. I am therefore satisfied that the defendants have shown and proven good title to the Property. Accordingly, I dismiss the plaintiff's claim and grant the defendants a declaration (1) that the Agreement has been duly rescinded; and (2) that the deposit in the sum of $1,960,000.00 be forfeited to the defendants. I enter judgment for the defendants on their counterclaim and for damages to be assessed. In assessing the damages, discount has to be given to the plaintiff because of the alteration works in the kitchen. I also order that the lis pendens registered against the Property be removed. The plaintiff shall pay the defendants costs of this action, to be taxed, if not agreed.