GRAND SUBJECT INVESTMENT LIMITED v. MABLE ROAD COMPANY LIMITED AND ANOTHER

1991, No.A8357

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This plaintiff in this action, Grand Subject Investment Limited ("Grand Subject") claims that on 28th November 1990 the 1st defendant Mable Road Company Limited ("Mable Road") agreed to sell to Grand Subject the 10th floor, Tower 2, Enterprise Square, Kowloon Bay ("the property"). Grand Subject seeks as against Mable Road specific performance of the alleged agreement. Grand Subject accepts that the alleged agreement was not made directly with Mable Road, but says that it was made with the 2nd defendant, First Pacific Davies (Hong Kong) Limited ("First Pacific"), acting on behalf of Mable Road. If, as Mable Road contends (and First Pacific accepts) First Pacific had no authority to enter into any such agreement on behalf of Mable Road, then, says Grand Subject, First Pacific is liable to Grand Subject for damages, for breach of warranty of authority, or, failing that, for damages for having made a number of negligent misrepresentations to Grand Subject in the course of the negotiations which preceded the making of the alleged agreement. I shall deal first with Grand Subject's case against Mable Road, as to which the material facts (as I find them) are as follows.

2. On 11th September 1989, Mable Road purchased from the Hong Kong Government at auction New Kowloon Inland Lot No.6115 on which the complex of buildings now known as Enterprise Square has been developed. The conditions of sale included the following Special Condition 14:-

"(14) (a) Subject to these Conditions, the Purchaser shall not except with the prior written consent of the Registrar General (Land Officer) and in conformity with any conditions imposed by him (including the payment of such fees as may be required by him):-

(I) assign, underlet or part with the possession of or otherwise dispose of the lot or any part thereof or any interest therein or any building or part of any building thereon (whether by way of direct or indirect reservation, including the grant of any right of first refusal, option or power of attorney in favour of any person, firm, company, corporation or group or by way of any other method, arrangement or document of any description) or enter into any agreement so to do; or

(ii) solicit or accept, whether directly or indirectly or through a solicitor, agent, contractor or trustee or through a corporation in which the Purchaser is the owner of shares or which is the owner of shares in the Purchaser or otherwise, any money or money's worth or other valuable consideration of any description in respect of the lot or any part thereof or any share or interest therein or any building or part of any building thereon or in respect of or in connection with or under or pursuant to any transaction, present or future, conditional or unconditional, whereby the lot or any part thereof or any interest therein or any building or any part of any building thereon is or may be sold, assigned, underlet or otherwise disposed of or affected, or enter into any agreement to do any of the things beforementioned; or

(iii) mortgage or charge the lot or any part thereof or any interest therein except for the purpose of the development thereof and then only by way of a building mortgage or charge in such form and containing such provisions as the Registrar General (Land Officer) shall approve or require.

unless and until he has in all respects observed, complied with and fulfilled all of his objections under these Conditions to the satisfaction of the Director and then only subject to the provisions of Special Condition No.(15) hereof.

(b) The Purchaser shall not assign, mortgage, charge, part with the possession of or otherwise dispose of any undivided share or shares in the lot or any part thereof together with the right to the exclusive use, occupation and enjoyment of any part or parts of the building or buildings erected thereon or enter into any agreement so to do except subject to and with the benefit of a Deed or Deeds of Mutual Covenant and Management Agreement which shall have been submitted to and approved by the Registrar General (Land Officer) in accordance with Special Condition No. (15) hereof.

(c) Every assignment, mortgage, charge, undercutting or other alienation of the lot or any part thereof or any interest therein shall be registered at the Land Office."

3. On 29th September 1989, First Pacific wrote to Kerry Properties Limited, an associate of one of the consortium of shareholders in Mable Road, soliciting appointment as marketing agents for the proposed development and setting out, among other things, its view that:-

"Pre-commitment on block by block basis should be carried out as soon as possible since it seems that there is a lot of companies nowadays who want to consolidate their operations. However, this might be affected by the need to apply for sale consent from Government."

What precisely First Pacific meant by "pre-commitment" is not spelt out in this letter and, indeed, is far from clear, at any rate to me. I should add, for the sake of completeness, that in other materials prepared by First Pacific for Mable Road, similar statements were made; to the effect, e.g., that it should be part of the marketing strategy to achieve high level of "pre-commitment"; to source "pre- commitment" of large space users within the shortest time so as to ensure high levels of take up in the early part of the campaign; to formulate a differential pricing strategy for the various floors and storeys of the development encouraging "pre-commitment" of Tower B and C and the lower floors; and so on. Of course, if a pre-commitment were to involve Mable Road in a breach of Special Condition 14, it would be most unwise for Mable Road to make it.

4. On 27th September 1990, First Pacific and Vigers (Hong Kong) Limited ("Vigers") were appointed as joint marketing agents for the development. The terms of the appointment were finally settled only on 7th January 1991, but I am satisfied that the agreement made on this latter date between Mable Road, First Pacific and Vigers falls to be treated as having effect, not only from 1st November 1990 as is expressly provided, but as from 27th September 1990, on the principle that parties who act in the course of negotiations on the assumption that, if and whenever an contract is made, it will govern what was being done meanwhile, will be treated as bound by that assumption : see Trollope & Colls Ltd v. Atomic Power Constructions Ltd [1967]1 WLR 333. The agreement created a fee structure for the remuneration of the agents and by Clause 3 provided as follows:-

"3.(a) The Joint Agents and each one of them shall diligently perform their functions and duties (which are more particularly set out in the First Schedule hereto) as the marketing agent of the Owner in respect of the Development.

(b) In performing their duties hereunder, the Joint Agents and each one of them shall observe and comply with, inter alia, the conditions which are more particularly set out in the Second Schedule hereto."

The First Schedule reads as follows:

" THE FIRST SCHEDULE ABOVE REFERRED TO

The functions and duties of the Joint Agents shall be as follows:-

1. To undertake the preparation and planning of suitable marketing programmes appropriate to contemporary conditions.

2. To market the Development, identify prospective tenants/purchasers and conduct personalised direct mail, arrange presentations of the Development to decision makers and other campaigns.

3. To co-ordinate all enquiries and negotiate acceptable terms and conditions according to the instruction given by the Owner in order to let or sell the Development or portions thereof.

4. To advise on market trends and their effect on rental levels and lease conditions as well as selling price level applicable to the Development.

5. To advise in respect of the preparation and production of suitable brochures, mailing shots. newsletters, video, etc., and to initiate and submit other leasing and sales tools for consideration.

6. To co-ordinate the advertising campaign with the appointed advertising agency and public relations consultants and the preparation and production of all brochures and other publicity material.

7. To advise on compilation of legal documents for the letting and selling of the Development.

8. To advise on material normally expected to be dispatched to tenants and purchasers, including but not limited to fitting out handbook, etc.

9. In general to perform all functions and duties as a professional marketing agent."

The Second Schedule reads as follows:-

" THE SECOND SCHEDULE ABOVE REFERRED TO

The marketing of the Development shall be governed by the following conditions:-

1. All matters relating to rental/sales policy, prospective target tenant/purchasers, and lease/sales negotiations shall be kept strictly confidential between the members of the Joint Agents' leasing/sales teams and the Owner.

2. All introductions and contacts shall be recorded in writing and a summary updated monthly.

3. Details of all meetings and negotiations with prospective tenants/purchasers shall be made and recorded on a "Subject to Contract" and "Without Prejudice" basis as will all formal letters of offer relating to premises in the Development.

4. No alterations or amendments shall be made to the standard lease form without the prior approval of the Owner.

5. Marketing progress meetings will be held on a weekly/biweekly basis between key personnel from the Owner and the Joint Agents.

6. Reasonable market rental/selling price levels shall be regularly reviewed and presented to the Owner for determination.

7. No liability for marketing costs either actual or implied, direct or indirect, shall be entered into by the Joint Agents without the prior written approval and authority of the Owner.

8. No comitment in respect of any letting and sales in relation to the Development shall be made by the Joint Agents unless with the prior written consent of the Owner.

9. In general to abide by and comply with all reasonable instructions as shall be given by the Owner in connection herewith from time to time."

5. The provisions of paragraphs 3 and 8 of the Second Schedule are of particular importance; they negate, in the clearest possible terms, any suggestion that by virtue of its appointment, First Pacific was at any time clothed by Mable Road with authority to commit Mable Road to a sale of the property. That, in my judgment, is the end of Grand Subject's case against Mable Road unless indeed Grand Subject can prove either (1) actual authority expressly conferred by Mable Road on First Pacific otherwise than by virtue of First Pacific's appointment; or (2) ostensible authority conferred by Mable Road on First Pacific by virtue of Mable Road's having held out First Pacific to Grand Subject as Mable Road's agent to commit Mable Road to the alleged sale. But Grand Subject can prove neither. It has proved that, at various marketing committee meetings at which representatives of Mable Road were present, it was agreed that the joint agents should be authorised to negotiate acceptable terms for sales and lettings; that the promotion campaign should try to convince prospects to "commit" to the building, or to make "pre-commitments" to purchase (whatever these phrases may mean); that drafts of letters of offer to purchase for "pre- consent" commitment should be prepared; and so on. But that is all; and, in my judgment, none of it comes anywhere near to the sort of formal act which would be required to prove Grand Subject's case that Mable Road had conferred on First Pacific actual authority to commit Mable Road to a sale of the property, especially when, as can be seen from the express terms of First Pacific's appointment, Mable Road intended precisely the contrary. And no case at all was made out in support of ostensible authority. Grand Subject's case against Mable Road, therefore, fails in limine; but I must go on with the narrative in order to deal with Grand Subject's case against First Pacific.

6. On 27th September 1990, the very day on which it was appointed as one of the joint marketing agents for the development, First Pacific wrote a letter introducing the development to a company which it called "C & C Fashion Products". This is the name of a successful and reputable company (or group of companies) in a substantial way of business in the leather goods trade. It is a family business, and prominent in its affairs is a member of the family called Cheng Shek To, Lysander ("Mr Cheng"). First Pacific's letter was marked for Mr Cheng's attention. The group needed bigger offices and the letter excited Mr Cheng's interest, especially the indication it contained of the developer's desire to "pre-commit" part of the development to reputable companies. Mr Cheng entered into negotiations with First Pacific's representatives, particularly a Mr Anthony Yuen ("Mr Yuen"), and Mr Cheng caused Grand Subject to be incorporated on 12th October 1990 as the vehicle for the proposed purchase.

7. I find that from Mr Yuen's point of view the negotiations were negotiations to tempt Mr Cheng into making an offer, not for immediate acceptance by Mable Road, but merely as an indication of serious interest on the part of Mr Cheng buttressed by the payment by him of a substantial sum of money. Such an offer would register Mr Cheng as a First Pacific introduction, rather than a Vigers introduction, if the deal came off. It would score some points for First Pacific with Mable Road and under the agreed agency fee structure would give First Pacific the lion's share of the agency fees for the particular deal.

8. From Mr Cheng's point of view, however, success of the negotiations would mean as he thought not only that he would get his foot in the door, but that he would be able to keep it there, that the developer would, indeed, be "pre-committed" to sell the property to him. However, I find it impossible to hold on the evidence that anything said by Mr Yuen to Mr Cheng in the course of the negotiations amounted to a clear and unequivocal representation by Mr Yuen to Mr Cheng that, if they were to agree on a price for the property, that alone would operate to commit Mable Road to the proposed sale at that price (in breach, of course, of the provisions of Special Condition 14 of the contract under which Mable Road had acquired the land under development). I am prepared to find that that was what Mr Cheng believed; but I am not prepared to find that he did so because that was what Mr Yuen had represented to him. Be that as it may, I find that an agreement on price was in fact reached. Mr Cheng offered, eventually, $1,500 per square foot; and in mid- November was given by Mr Yuen to understand that that price would be an acceptable price to offer.

9. On 20th November 1990, Mr Yuen sent to Mr Cheng a fascimile message. This was headed "Without prejudice and subject to contract" and reads as follows:-

"Dear Mr. Cheng

SUBJECT: 10/F Tower 2 Enterprise Square

At your request, I have prepared an offer letter incorporating the principal terms and conditions in respect of the proposed acquisition of the above property for your consideration.

If you have any queries to the Letter, please do not hesitate to contact me on 735 8722."

10. The draft "offer letter" sent with this communication was expressed as an offer, not from Grand Subject but from Central Forward Developement

Limited, another company associated with the C & C Fashion Group. It was addressed not to Mable Road but to First Pacific. It read as follows:-

"Dear Sirs,

Re:	ENTERPRISE SQUARE (CURRENTLY KNOWN AS NEW KOWLOON INLAND LOT 6115), KOWLOON BAY

We hereby offer to purchase from the Owner Mable Road Company Limited the premises hereinbelow mentioned in accordance with the following basic terms and conditions:

1. PREMISES

The 10th Floor, Tower 2, Enterprise Square.

2. AREA

A guideline area of 12,765 s.f. gross or thereabouts, as shown on the attached identification plan.

3. PURCHASE PRICE

HK$1,500.00 per s.f. gross.

4. PAYMENT TERMS

(i) An initial deposit equivalent to HK$500,000.00 is payable to (First Pacific Davies) upon submission of this offer to purchase. This deposit shall be transferred and form part of the deposit payable upon signing of the formal Agreement for Sales and Purchase.

(ii) A Deposit equivalent to 20% of the purchase price will be payable upon signing of the formal Agreement for Sales and Purchase which shall take place within 7 days upon receipt by us of the written notice from the Owner that the required consent to sell from Government has been obtained.

(iii) The balance of the Purchase Price (i.e. 80%) shall be payable upon completion of the sale and purchase transaction in contemplation which shall take place within 14 days upon receipt by us of the written notice from the Owner that the Owner is in a position to validly assign the Premises.

Provided that the said initial deposit shall be refunded to us together with the interest thereon should the Owner fail to sign the Agreement for Sales and Purchase in contemplation on or before 30th June, 1991.

5. STAMP DUTY, REGISTRATION FEE, ETC.

To be fully borne by us.

6. LEGAL FEES

Each party shall bear its own legal cost and expenses.

7. POSSESSION

Vacant possession of the Premises will be delivered to us upon completion of the sale and purchase transaction in contemplation.

8. GOOD TITLE

The Premises will be delivered to us with good title and free from encumbrances.

I should be grateful if you would recommend the above offer to the board of directors of the Owner for acceptance. We understand that neither this our offer nor the acceptance by you of the initial deposit aforesaid constitute a binding obligation on the part of the Owner to sell the Premises to us unless and until the formal Agreement for Sale and Purchase has been duly signed and exchanged after the required consent to sell from Government shall have been obtained by the Owner."

11. Mr Cheng referred this draft to his solicitor, Mr Ronald Poon of Messrs K.B. Chau and Co. By 28th November 1990, after some intervening dicussions, Mr Poon had agreed amended terms with Mr Yuen and had been authorised by Mr Cheng to sign the "offer letter" on Grand Subject's behalf. The "offer letter" in its final form, headed "Without prejudice and subject to contact", was addressed by Grand Subject to First Pacific and read substantially as did the original draft, but with certain material differences. The guideline area was, in the final form, stated to be not less than 12,866 sq.ft. gross; and the proviso to Clause 4 had been amended so as to read as follows:-

"Provided that the said initial deposit shall be refunded to us together with the interest (at the rate of 0.5% per month) thereon should the Owner fail to sign the Agreement for Sales and Purchase in contemplation on or before 30th June, 1991 without prejudice to our right for specific performance." [emphasis added]

And the following Specific Condition 9 had been added : -

"9. SPECIAL CONDITION

This offer shall be conditional upon the Owner having completed the building of which the premises form part on or before 30th September 1992 as certified by the Owner's architects.

If the building is not completed on 30th September 1992 this Offer shall be of no further effect and we shall be entitled to refund of the deposit with interest at the prime rate of the Hong Kong and Shanghai Banking Corporation from date of payment to date of repayment."

12. In exchange for the "offer letter" and his firm's cheque for $500,000, Mr Poon received a photocopy of the cheque endorsed with the words "received by Anthony Yuen for and on behalf of (First Pacific) 28th November 1990". First Pacific duly banked the cheque.

13. This exchange concluded the negotiations. First Pacific sent a copy of the "offer letter" to Kerry Real Estate Agency Limited, the marketing arm of Kerry Properties Ltd; but received an immediate and negative reply in a letter dated 29th November 1990 which read as follows:-

"We acknowledge receipt of a copy of the letter dated 28th November, 1990 from Grand Subject Investment Ltd. ("Grand Subject") to you.

You will appreciate that the relevant consent from the Government for the Owner to sell or grant any right or option to purchase has yet to be obtained; therefore, the Owner is unable at this juncture to consider Grand Subject's offer.

Nevertheless, we understand that the Owner will definitely bear Grand Subject's intention to purchase in mind when they are in a position to sell the property. After all, we have been confirmed by the Owner that Grand Subject's offer is so far the only offer they have received in respect of the premises in question."

14. Mr Yuen says he sent, by fascimile, a copy of the rejection letter of 29th November 1990 to Mr Cheng. A further copy was sent by hand. Mr Cheng says that he did not receive either of these; but it does not matter. So far as Mable Road was concerned, it did not accept the offer and whatever else may have been its result, the exchange relied on could not have constituted a contract between Grand Subject and Mable Road. Did the exchange then have any result at all? In my judgment, after the offer was transmitted by First Pacific to Mable Road and rejected (I need not speculate on what the result might have been if the offer had been accepted by Mable Road) the only legal obligation on anybody was an obligation on the part of First Pacific to return the $500,000 to Grand Subject. I accept that Mr Cheng believed that the result of the exchange, on his side, of the "offer letter" and the cheque, and on the other side, the receipt given by First Pacific for the cheque, was to constitute a legally binding agreement between Grand Subject and Mable Road to the effect that the latter would enter into a formal sale and purchase agreement for the sale of the property by Mable Road to Grand Subject at the price of $1,500 per square foot. Indeed, Mr Cheng appears to have been so advised by Mr Poon, at whose instance the words "Without prejudice to our right for specific performance" had been inserted, in the proviso to Clause 4 of the "offer letter", for just this purpose.

15. But whatever Mr Cheng or Mr Poon may have believed to be the result of the "offer letter", coupled with First Pacific's acceptance of the $500,000, my function is limited to construing the "offer letter" in order to see what if any contractual relationship between the parties was thereby intended to be constituted. As Sir Garfield Barwick said in Daiman Development Sdn. Bhd. v Mathew Lui Chin Teck [1981]1 MLJ 56 at p.58:-

"The question whether parties have entered into contractual relationships with each other essentially depends upon the proper understanding of the expressions they have employed in communicating with each other considered against the background of the circumstances in which they have been negotiating, including in those circumstances the provisions of any applicable law. Where they have expressed themselves in writing the proper construction of the writing against that background will answer the question. [Emphasis added] The purpose of the construction is to determine whether the parties intend presently to be bound to each other or whether, no matter how complete their arrangements might appear to be, they do not so intend until the occurrence of some further event, including the signature of some further document or the making of some further arrangement. The question is one as to expressed intention and is not to be answered by the presence or absence of any particular form of words."

16. If I were to construe the "offer letter" as Grand Subject invites me to do, I would be flying in the face of this valuable guidance, as well as in the face of the express terms of the "offer letter" headed as it is "without prejudice and subject to contract" and providing as it does that neither the offer nor the acceptance of it by First Pacific is to constitute a binding obligation on the part of Mable Road. And the parole evidence rule precludes me from receiving evidence to contradict the terms of the "offer letter".

17. Since then First Pacific did not purport to commit Mable Road to any binding obligation, the claim against First Pacific for breach of warranty of authority also fails. It gave no such warranty and it committed no such breach.

18. As to the alleged misrepresentations made by First Pacific to Grand Subject, no representations of sufficiently clear and unambiguous a character were established by the evidence such as would justify a decision in Grand Subject's favour on this aspect of the case.

19. There were a number of such representations alleged; e.g., that Mable Road had the intention to "commit" itself to interested purchasers; that Mable Road would devise packages to facilitate purchase of parts of the development, that a sale could be effected if an interested purchaser made a deposit of $500,000 forthwith; that if the purchaser should decide to acquire the 10th Floor, Mable Road would not seek to back out from the agreement in the event of any subsequent increase in market price; and so on. But I find none of these sufficiently established by the evidence. Even First Pacific's acceptance of the amendment made by Mr Poon to the proviso to Clause 4 of the "offer letter", knowing, as Mr Yuen told me, that it was "useless" to protect Grand Subject's interests, does not amount to such a representation. It is not to my mind attractive; but it is not actionable as a negligent misrepresentation, and that is what is required if Grand Subject is to succeed on this aspect of the case.

20. It will be obvious from what I have said that I have considerable sympathy for Mr Cheng. He was most anxious to secure the property. He did his utmost to do so. Since, as Mr Poon accepted, he was advised by Mr Poon that he had succeeded in doing so, the result of this action will be a serious disappointment for him.

21. I would express the hope that, in future, marketing agents who want prospective purchasers to "pre-commit" themselves to a purchase in a new development will be very careful to explain precisely what, on both sides, this "pre-commitment" is intended to entail; and that solicitors who act for such prospective purchasers will either ensure that the "pre-commitment" is legally binding on the developer or advise their clients in clear terms that it is not.

22. As for the present action, I find myself, not without regret, bound to dismiss it.