GRAND MILLION DEVELOPMENT LTD. v. GLOBAL TIME INVESTMENTS LTD.

FACV No. 16 of 2000

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 16 OF 2000 (CIVIL)

(ON APPEAL FROM CACV NO. 346 OF 1998)

_____________________

___________________

J U D G M E N T

___________________

Chief Justice Li :

1. I agree with the judgment of Lord Hoffmann NPJ.

Mr Justice Chan PJ :

2. I agree with the judgment of Lord Hoffmann NPJ.

Mr Justice Ribeiro PJ :

3. I agree with the judgment of Lord Hoffmann NPJ.

Mr Justice Silke NPJ :

4. I agree with the judgment of Lord Hoffmann NPJ.

Lord Hoffmann NPJ :

5. In 1993 Simpson Development Investment (HK) Ltd ("Simpson") owned the site of what is now the Kut Kee Building in Central. On 16 August 1993 it entered into a building contract (incorporating the HKIA standard form) with K & R Construction Company Ltd ("the contractors"). The contract named Gordon Yeung & Associates as architect.

6. Construction was under way when, on 13 December 1993, Simpson entered into a provisional agreement to sell the building, when completed, to Grand Million Development Ltd ("Grand Million") for $256m. I shall call this the first agreement. On 11 March 1994 Grand Million entered into a provisional agreement to sell the building to Global Time Investments Ltd ("Global") for $405m. On 22 March 1994 Global entered into a provisional agreement to sell the building to Super Keen Investments Ltd ("Super Keen") for $600m. The last two provisional agreements were replaced by formal agreements dated 8 and 11 April 1994 respectively and I shall call them the second and third agreements.

7. The first agreement provided for completion within 14 days after issue of the Occupation Permit. Clause 14 provided that the building should be "completed with Occupation Permit issued on or before 30/6/1995 subject to the usual architect's extension". Time was to be of the essence. The second agreement provided in clause 23(b) that -

"in the event of [Grand Million] becoming entitled to exercise any right of rescission under the [first agreement], [Grand Million] shall within 7 days after [Grand Million] becomes aware of the existence of such right, notify [Global] in writing of such right, and irrespective of whether or not such notice has been given by [Grand Million], [Global] shall ...be entitled to rescind this agreement"

There was a similar provision in the third agreement. The result was that, subject to "the usual architect's extension", if the building was not completed and occupation permit issued by 30 June 1995, Grand Million would be entitled to rescind. And if Grand Million was entitled to rescind, then, subject to a point on its knowledge of the facts to which I shall return later, Global would be entitled to rescind the second agreement and Super Keen would be entitled to rescind the third agreement.

8. By June 1995 the market had fallen. Grand Million was still showing a reasonable profit; the evidence was that in April 1996 the completed building was worth $290m against the $256m contract price. But Global and Super Keen stood to make a substantial loss. They could however take comfort from the fact that the building was far from complete and it seemed likely that they would be able to rescind on 30 June. To their surprise, on 29 June 1995 Simpson produced a certificate from the architect Mr Yeung granting the contractors an extension of 294 days. Simpson sent it to Grand Million, which sent it to Global, which sent it to Super Keen. Neither Global nor Super Keen accepted the validity of the certificate. They rescinded the second and third agreements and demanded the return of their deposits. Grand Million decided to complete its purchase. The result was that Super Keen sued Global for its deposit and Global sued Grand Million.

9. The main question in the case is whether Mr Yeung's certificate was a valid grant of an extension within the meaning of clause 14 of the first agreement. What did the parties mean by "the usual architect's extension"? I think it is clear enough that they meant an extension of the time for completion of the building contract, granted by an architect pursuant to provisions usually found in building contracts. Such provisions are found in clause 23 of the HKIA standard form and there is no dispute that they are provisions of a kind usually found in such contracts. Indeed, we were told that the HKIA form is in universal use in Hong Kong.

10. So the parties to the first agreement were fixing the contractual date for completion of the building (on which depended the completion of the contract) by reference to machinery used for fixing the contractual date for completion of the building under the building contract. This may have a superficial logic, but for several reasons it was not a very sensible thing to do. The purpose of the machinery in the two contracts is quite different. In a building contract, the effect of the extension is to fix the date from which the contractor will be late and will have to start paying liquidated damages. There is no question of time being of the essence so as to allow either party to rescind the agreement. In the sale contract, on the other hand, the extension will fix a date for completion of the contract of which time is of the essence and non-compliance with which allows the purchaser to rescind.

11. This leads to the second problem. In the building contract it is well established that the architect's certificate is not conclusive. Either party can demand an arbitration and the arbitrator will form his own view on whether an extension should have been granted. But Mr Warren Chan SC, who appeared for Grand Million, said that one could not take so relaxed a view of the effect of a certificate when it is being used to determine the time of completion of a contract for the sale of land in a volatile market. He argued that the parties need to know where they stand and that the certificate should therefore be conclusive. In any case, Global and Super Keen had no contractual relations with the contractors and there was no possibility of an arbitration in which the merits of the grant of the extension could be debated. There seems to me some force in these arguments.

12. They lead on to the next point, which is that an architect under a building contract is performing a quasi-arbitral role in adjudicating, at least provisionally, between the claims of the owner and the contractor. Their interests are opposed in that the owner wants any extension to be no more than sufficient to retain the enforceability of his claim to liquidated damages, while the contractor wants it to be as long as possible. But the interests of the parties under the sale contract are not the same. In this case, for example, the interest of Simpson as owner was that the contractors should have no more than a reasonable extension, while their interest as vendors in a falling market was that the contractors should have long enough to finish the building. The position is made worse when, as appears to have been the case here, Simpson and the contractors were connected companies and Simpson therefore had no interest adverse to that of the contractors which the architect needed to protect. In such a case, the determination of rights as between owner and contractor, which is the primary purpose of the extension, can be overshadowed by its secondary use in affecting the rights of the purchaser and sub-purchasers.

13. All in all, therefore, the transplant of the architect's extension machinery from the building contract into the sale contract was a thoroughly bad idea. Nevertheless, it was what the parties did in the heady days of the 1994 property boom and they are bound by what they have agreed. What, therefore, did they mean by "the usual architect's extension"? Leading counsel then acting for Grand Million, opening the case at first instance before Findlay J., said that the architect's certificate qualified as a usual extension if he had acted bona fide and had come to a decision under the building contract. It did not matter whether his decision was right or wrong. Mr Scott SC, who appeared for Super Keen, argued that there should be the same freedom in disputing the certificate as the owner would have had under the building contract. Speaking for myself, I would be inclined to accept the former formulation. For the reasons Mr Chan gave, it is likely that, for the purposes of the sale contract, the parties intended a certificate by an architect acting within his powers under the building contract to be binding.

14. All that was necessary, therefore, was that the person giving the certificate should have been the architect duly appointed under the building contract and that he should have been exercising the powers conferred upon him by the contract. Did the certificate meet these requirements?

15. First, there is the question of whether Mr Gordon Yeung was the architect under the building contract. This may seem a strange question to ask, because the contract expressly said that he was. In the Court of Appeal, Keith JA (delivering the judgment of the court) said that this was enough. But I do not think that the question can be answered so easily. The architect under a building contract is the person who acts as agent of the owner to exercise powers and discharge duties under the contract, supervising the progress and due completion of the work. The parties to the sale contract must have intended to refer to an extension granted by a person who was actually acting as architect under the building contract. They could hardly have contemplated that it would be someone who had nothing to do with the contract but was merely named as architect. Nor do I think it helps to argue that he was at any rate architect for the purposes of granting the extension. This seems to me to beg the question of what counts as being the architect so as to qualify as the person who can grant an extension.

16. No doubt the parties to the building contract would not be in a position to deny that Mr Yeung was the architect, because they had agreed that he was. There may be a form of estoppel. It does not however follow that he was the architect for the purposes of the sale agreement, made between different parties. In this respect I agree with Finlay J.

17. The judge's findings of fact were that when Mr Yeung was named as architect under the contract, he was never intended to act in that capacity. The parties to the contract did not even tell him of his nomination. He was engaged only as an authorised person to prepare certain of the plans and to carry out those duties which under statute have to be performed by an authorised person. Simpson and the contractors were, as I have said, closely connected. The same person, a Mr Wong, acted for both; so much so, that when Mr Wong told Mr Yeung in June 1995 that an extension was required, he did not know whether Mr Wong was making the request on behalf of the owner or the contractor. They did not need an architect to supervise the contract and it was no doubt more economical to do without one. The first time Mr Yeung knew that he was the architect under the building contract was when he was asked to grant the extension and sent a copy to consult. He then saw his name on it. The judge found that if he was appointed architect, it was nearly two years after the commencement of the contract and for the sole purpose of granting an extension. I agree with the judge that he was not an architect within the meaning of clause 14 of the first agreement.

18. Even if Mr Yeung was the architect, the next question is whether he was acting under the building contract. In his certificate, he said that he was. He referred to clause 23 of the standard form, which lists under various heads the circumstances in which extensions may be granted. He specified the grounds upon which he had considered the application fell under one or other of these heads. But the grounds which he gave in the certificate were not easy to relate to the heads to which they referred. And in evidence it became plain that Mr Yeung had simply not applied his mind to the question of whether the specified grounds existed. He claimed to have been acting according to what he thought was fair and reasonable.

19. Mr Warren Chan said that this only means that Mr Yeung had got it wrong. He readily conceded that the extensions granted could not be justified according to the terms of clause 23. But he submitted that the certainty of outcome which the parties had wanted could not be achieved if the court was willing to inquire into whether Mr Yeung was justified. The certificate had to be taken at face value. Otherwise questions which needed instant answers would have to wait upon lengthy litigation.

20. I have already said that I think there is force in what Mr Chan says about the need for certainty. But he presses the argument too far. In the absence of express words making the certificate conclusive, I do not think that the parties should be assumed to have wanted certainty at the expense of having to accept total capriciousness and irrationality. They agreed to be bound only by something which could fairly be called an architect's certificate under the contract. This meant that they had to accept as final his answers to the question of whether the circumstances fell within one or other of the heads of clause 23. But they were not binding themselves to accept an extension granted without regard to whether they fell within any of those heads or not. Provided that the architect answered the right question, they had to accept his answer. They could not complain that the answer was wrong. But they did not agree to accept his answer to a different question altogether.

21. So for these two reasons, I would agree with the judge and the Court of Appeal that there was no "usual architect's extension" within the meaning of clause 14 of the sale agreement. It was not granted by the architect and it was not pursuant to the contract. Subject to Mr Chan's last point on clause 23(b) of the second agreement, Global and Super Keen were entitled to rescind.

22. The point on clause 23(b), which I have quoted earlier, turns upon the fact that the duty of Grand Million to notify Global that it has grounds for rescinding the first agreement depends, not surprisingly, upon it being aware of that fact. The clause goes on, however, to provide that if Grand Million does have grounds for rescission, Global may rescind the second agreement whether it has received such notice or not. Mr Chan submitted that this meant that although Global could rescind without having received a notice, it still had to show that Grand Million had been aware at the time of its own right to rescind. In the present case, there had been nothing to show that anyone knew of the right to rescind until Mr Yeung, giving evidence under subpoena at the trial, had disclosed the true circumstances in which the certificate had been given.

23. Mr Wong SC, who appeared for Global, said that this point had not been taken in the pleadings, before the judge, or for that matter in the Court of Appeal. If it had been in the pleadings, he might have been able to investigate the question of Grand Million's knowledge. Mr Chan fairly conceded that there was force in this objection. But in any case, I think that the construction for which he argues is unsustainable. The clause simply does not say that knowledge by Grand Million of its right to rescind the first agreement is necessary for the purpose of entitling Global to rescind the second agreement. It is hard to think of any reason why it should. Knowledge is what creates the obligation on the part of Grand Million to give notice. But since the agreement expressly provides that Global may rescind whether it receives such notice or not, there is no reason to construe that right as dependent on anything more than the existence of a corresponding right on the part of Grand Million.

24. I would therefore dismiss the appeal. I would make the same orders as to costs as the Court of Appeal in relation to this appeal.

1. Grand Million do pay to Global its costs of Grand Million's appeal;

2. Global do pay to Super Keen its costs of Global's appeal; and

3. Grand Million indemnify Global in the amounts of both the Global's and Super Keen's costs of Global's appeal.

Chief Justice Li :

25. The Court unanimously dismisses the appeal and make the orders on costs set out in Lord Hoffmann NPJ's judgment.