HOLDLY POWER DEVELOPMENT LTD. v. FIRST WAVE DEVELOPMENT LTD.

1992, No A5278

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. On the 30th October 1991, First Wave Development Ltd. ("the defendant") and Hertfordshire Ltd. ("the developer") entered into an agreement whereby the developer agreed to sell and the defendant agreed to buy workshop premises called No. 2, Ground Floor, Wan Wai Industrial Centre, Ngau Pui Wan Street, Fo Tan, Shatin, ("the property").

2. The defendant is in the business of buying and selling such property. The contemplated sale was to be a sub-sale.

3. On the 1st April 1992, the defendant entered into a sale and purchase agreement ("the agreement") with Holdly Power Development Ltd. ("the plaintiff"), whereby the plaintiff and the defendant respectively agreed to buy and sell the property for $9,280,000.00. The dispute which led to the present proceedings arises out of the agreement and it is necessary to refer to its terms. They are contained in a standard form evidently produced by the selling agents and headed "Letter of Confirmation".

4. After identifying the parties and the property, the agreement states the price at $9,280,000.00. Provision is made for an initial deposit of $300,000.00.

5. The purchaser is to attend at the offices of the property agent on or before the 10th April 1992 and to pay the balance of the deposit in the sum of $628,000.00.

6. There is a provision for the initial deposit to be forfeit if the purchaser fails to complete and for the vendor to pay $300,000.00 to the purchaser as compensation if it "avails itself of any pretext thereby causing the ... property unable to be sold".

7. Under the heading "Remarks" appears three clauses. It is necessary to quote them in full as follows :

(1) Both parties agree to attend the developer's office to deal with the transfer of name and completion formalities within 7 days from the availability of the occupation permit. If the occupation permit is available before 10th April 1992, it is not necessary to pay further deposit.

(2) At the time of completion of this property, it is subject to two tenancies, the rent being $15.00 per ft2. The landlord agrees that if the tenant terminates the tenancy earlier, it is necessary to have another tenant to take up the tenancy, the rent shall not be less than $15.00.

(3) First Wave Development Ltd. shall be responsible for the construction of partition walls in the unit, the materials used shall be H-type iron frames with tiles covering up to the ceiling. The toilet compartments shall be constructed on each side of the unit. There shall be electricity supply on each side, the load shall be 200M, one of which is a branch meter."

8. Finally, there is a clause providing that "the purchaser shall be responsible for all costs in relation to new agreement and transfer of name, the landlord shall be responsible for all legal costs for the cancellation of the agreement and the redemption of mortgage".

9. References in the agreement to "the landlord" are clearly intended to be references to the vendor.

10. A contract of similar type, though not identical to the agreement, was considered by the Court of Appeal in Chu Kit-yuk & Anor. v. Country Wide Industrial Ltd. & Ors., 1994 No. 120 (Civil) (Unreported). Clause 1 in the Remarks column of the agreement contemplated, as did the contract in the Chu Kit-yuk case (and here I respectfully adopt the analysis of the Court of Appeal) "a novation of the original contract" between the developer and the defendant, whereby the original contract would be cancelled and replaced by another one in which the developer agreed to sell to the plaintiff in substitution for the defendant.

11. I am satisfied that on the true construction of the agreement, it was a binding agreement for the sale and purchase of land. The plaintiff was, on payment of the sums due, to obtain the benefit of whatever interest the defendant had in the property.

12. It was a matter of mere machinery how that result was to be achieved. The agreement did not specify novation as the only way of achieving it. An assignment by the head vendor to the plaintiff with intermediate parties joining in as confirmors would be equally effective to pass the defendant's interest to the plaintiff.

13. By the 10th April, the plaintiff had paid the total deposit of $928,000.00. Unfortunately, however, the "transfer of name and completion formalities" have not taken place. The plaintiff says that it is ready, willing and able to complete the purchase of the defendant's interest, in one way or another, but the defendant has chosen to treat the agreement as having been rescinded due to the alleged default of the plaintiff.

14. The plaintiff now claims specific performance of the agreement; further or alternatively damages for breach of contract; alternatively a declaration that by reason of the repudiation of the agreement by the defendant, the plaintiff is relieved of all liability for the further performance of its obligation thereunder. There is also a claim for repayment of the deposit in the sum of $928,000.00 with interest. The plaintiff also seeks a declaration that it is entitled to a lien on the property for the deposit, interest, damages and costs.

15. There is a re-re-re-amended defence and counterclaim. The defendant's case is that it was entitled to rescind because the plaintiff failed to complete by 5 p.m. on the 1st September 1992 in circumstances where time had, according to the defendant, been made of the essence of the agreement.

16. It is common ground that the defendant purported to set the 1st July 1992 as the date for completion. The plaintiff did not turn up to complete on that date. That is not surprising, for Mr. Yau Wing Cheung the person who controls the plaintiff and would have been the person to turn up at completion, was in Australia. The plaintiff's case is that the defendant was not entitled unilaterally to set a date and the plaintiff did not agree to it.

17. Mr. Wu Kwon Yiu, a director of the defendant, has given evidence that when he told Mr. Yau that an occupation permit had been issued, Mr. Yau said he wanted to rescind and asked for the deposit to be repaid. Mr. Wu refused. He faxed a copy of an occupation permit to Yau's office, to the plaintiff's solicitors and to the estate agent. Then he telephoned Yau's office to set a completion date. Upon being told that Yau was in Australia, he telephoned the plaintiff's solicitors and said that completion would be at 2.30 p.m. on the 1st July 1992 which was a week later.

18. There was no agreement that completion would take place on the 1st July. There was and is a disagreement as to whether the occupation permit then relied upon by the defendant was the right one.

19. When the plaintiff failed to turn up on the 1st July, the defendant purported to treat the agreement as rescinded. The plaintiff then registered the agreement in the Shatin District Land Office on the 4th July 1992.

20. According to Mr. Wu, he telephoned Mr. Yau to complain when he heard about the registration. Yau told him that the defendant would have to continue to pay monthly instalments for a property which, because of the registration, it could not sell or rent, and the defendant would eventually have to beg the plaintiff to accept the return of the deposit. Mr. Yau denies saying that. I find on the balance of probabilities that the conversation did take place. He did make it clear that the registration was a counter to the purported rescission, but I do not accept that he expressed his object to be the return of the deposit. His subsequent conduct indicates that the plaintiff intended all along to proceed with the purchase.

21. After some reflection and a change of solicitors, the defendant decided to abandon the rescission and it affirmed the agreement. A completion date was fixed for the 28th August 1992. The agreement having been affirmed, the question whether the first purported rescission was justified became academic. It is clear, however, from the early history of the matter, that there was a certain lack of trust and goodwill as negotiations went forward.

22. When the parties turn up at the developer's office on the 28th August, they were referred to the developer's solicitors who told them that they would not proceed with the transfer of name procedure unless the plaintiff vacated the registration of the agreement. The developer was under no obligation to co-operate in the proposed transfer of name and it seems that it was not prepared to take the risk that it might be called upon to pay stamp duty on the higher consideration appearing in the registered agreement.

23. Faced with this new complication, the parties went off, arranging to meet again on the 1st September. They intended to execute a contract cancelling the agreement with a view to vacating the registration in order to remove the developer's objection to the proposed novation. The next step was to be the completion of the transfer of name procedure with the developer.

24. A draft cancellation agreement was produced by the plaintiff's solicitors. The parties met on the 1st September and negotiations took place about amendments put forward by the defendant. There is a conflict of evidence as to what exactly was said.

25. The draft provided for repayment of the deposit and the defendant wanted a receipt clause. According to the plaintiff's witnesses, the plaintiff considered a receipt clause to be unnecessary since it did not expect the refund to be made. It is the plaintiff's case that the defendant abandoned its insistence on the receipt clause. On the other hand, the defendant's witnesses say that the defendant maintained its demand. After giving consideration to all the evidence put forward, I find that the idea of a receipt clause was dropped.

26. Then an argument arose as to who would bear the costs of the defendant's approval of the draft. The defendant said that the plaintiff should bear those costs, and the plaintiff at first refused. There is a conflict of evidence as to what happened then. The plaintiff's case is that there was a decision to pay the defendant's costs and that the decision was made known to the defendant. That is denied on the part of the defendant. The amount involved was insignificant in relation to the transaction as a whole. Mrs. Yau, who was taking part in the negotiations, was angry at the raising of this new demand at such a late stage and at first refused. But I am satisfied that after being advised that the sum involved would be small, she agreed that the defendant would pay.

27. If I am wrong about the receipt clause and about the agreement to pay, it does not matter for I am quite satisfied that by about 5 p.m., the defendant had decided that it would not execute the cancellation agreement on any terms acceptable to the plaintiff.

28. Mr. Wu gave evidence that after the time when I find that he had dropped his demand for a receipt clause, he was advised by his solicitor, Linda Li, over the telephone that if he signed the cancellation agreement, he would have no protection and that if there was no receipt clause, he would have to refund the $928,000.00 deposit. It is evident that he was not willing to trust the plaintiff to honour the bargain once the agreement was cancelled.

29. Mr. Au, the defendant's solicitors' clerk, then announced that the defendant would not sign the cancellation agreement, but if the plaintiff would pay the difference in purchase price, the defendant would sign an undertaking to construct the partitions and execute an assignment at a later date. The proposal was rejected. The purchaser's solicitors' clerk asked Mr. Au if it was true that even if the plaintiff agreed to pay the costs, the defendant would not sign. Au said that it was so. At about 5 p.m., Au said that the defendant would forfeit the deposit since the plaintiff had failed to accept its final offer by 5 p.m. There is a conflict as to whether the indication came from the defendant's side just before or just after 5 p.m. that the defendant would not sign the cancellation agreement. The significance of the time is that the defence say that time was of the essence of the contract and that 5 p.m. was the deadline since that was the time when the office of the developer's solicitors would close.

30. On the 2nd September, the defendant's solicitors wrote to the plaintiff's solicitors saying :

".... our client has attended the developer's office yesterday at 3 p.m. and stayed there until 5 p.m. However, your client still failed to make payment of the balance of the purchase price to our client.

We are instructed to inform you, which we hereby do, that our client hereby exercises its right to forfeit all the deposits paid by your client and also hereby rescinds the sale of the property to your client. Our client would be free hereafter to deal with the property in manner as our client deems fit without any further notice or reference to you/your client."

31. I am satisfied on the evidence that the representatives of the plaintiff present at the meeting were ready and willing to proceed with the purchase in accordance with the terms of the agreement. Mr. and Mrs. Yau had with them a cashier's order for $2,710,810.73, the sum they needed to hand over if the cancellation of the agreement was formally effected and if the transfer of name procedure was followed. They did not expect to have to pay the full purchase price because it was understood that the defendant was paying instalments to the developer and that after the change of name, the plaintiff would stand in the defendant's shoes and continue paying the instalments.

32. I am satisfied that those representing the defendant on the 1st September knew that the cashier's order was there.

33. When the defendant decided not to co-operate in the cancellation of the agreement with a view to removing the registration, one way for completing the original agreement was blocked. But that was not the end of the matter. There was still an obligation upon the defendant to transfer its interest in the property to the plaintiff.

34. It is understandable that the defendant did not want to be left without an enforceable agreement. One solution might have been to cancel the agreement and at the same time execute a fresh one in substantially the same terms with any necessary variation as to dates. The parties would then, once the vacation of the registration had been effected, have been back in the position in which they had been before registration. Apparently, this possibility did not occur to the parties.

35. In any event, the change of name procedure not being practicable, it was still open to the parties to proceed with a view to an assignment between the head vendor and the plaintiff with other parties joining in as confirmors.

36. I reject the defence contention that the registration of the agreement constituted a breach of an implied term in the agreement. There is no reason to suppose that either party contemplated the possibility that the developer would react as it did to the registration and the plaintiff was entitled to register the agreement.

37. In order to succeed, the defendant needs to show that time was of the essence and that the plaintiff was in default.

Was time of the essence?

38. The 1st July 1992 was not an agreed date for completion. By letter of the 21st August 1992, the defendant's solicitors announced that the defendant was "prepared to lift the forfeiture against the deposit of HK$928,000.00 paid by your clients in relation to the above property on condition that your clients do immediately complete the sale and purchase of the above property according to the terms of the provisional agreement signed by our respective clients on 1st April 1992 ("the said agreement") through the estate agent, Advantage Properties."

39. With the letter were enclosed copies of the occupation permits relating to the building in which the property is situated. The letter stated that two tenants had been secured to rent the property at $15.00 per sq.ft. It also said that immediately after completion the works contemplated in relation to partition, toilets and electricity meters would be done. The letter went on :

"We hereby formally demand your clients to attend the office of the developer, Chinachem Group at top floor, Golden Plaza, 77 Mody Road, Tsimshatsui, Kowloon at 2.30 p.m. on 28th August 1992 to complete the sale and purchase in accordance with the said agreement. Your clients are required to pay the outstanding balance of the purchase price in the sum of HK$8,352,000.00 to our clients on completion on the said 28th August 1992 at 2.30 p.m. in the following manner :

(a) a cashier order in the sum of HK$2,710,801.73 in favour of our clients 'First Wave Development Ltd.';

(b) a cashier order in the sum of HK$5,641,198.27 in favour of Chinachem Agencies Ltd. or to complete all necessary financial arrangements with the developer and to release our clients from all liabilities to pay any outstanding balance of the purchase price and money in relation to our clients' purchase of the above property from the developer."

40. The last paragraph reads :

"Please note that should your clients fail to complete the purchase in accordance with the notice herein given on the said 28th August 1992 at 2.30 p.m., all monies previously paid by your clients shall be absolutely forfeited to our clients and our clients shall at their absolute discretion deem fit without any further notice or reference to you or your clients."

41. In fact, the copy occupation permits were not enclosed, but they were supplied by facsimile transmission on the 24th August. The plaintiff's solicitors wrote to the defendant's solicitors on the 26th August saying :

"Your client was never in a legal position to forfeit the deposit of HK$928,000.00 and therefore not in a position to demand and to dictate conditions. However, we are prepared in accordance with the agreement to complete the sale and purchase of the property on the 28th August 1992, at 2.30 p.m. at the stated office."

42. The defendant's solicitors replied on the 27th August saying that they did not agree with the view of the plaintiff's solicitors regarding the right to forfeit but that they were pleased to learn that the plaintiff was to complete the sale and purchase of the property, they said :

"We are instructed to notify your clients to comply with all the terms and conditions of the said agreement and to attend the completion at 2.30 p.m. on Friday, 28th August 1992 failing which, our clients will not hesitate to forfeit the deposit of HK$928,000.00 paid to them.

Our clients will wait for your clients at 2.30 p.m. on Friday, 28th August 1992 in the office of the developer, Chinachem Group, to complete the sale and purchase in accordance with the provisional agreement."

43. The occupation permit NT237/88 was issued on the 17th October 1988. That permit relates to the first six floors of the building, which is described as "a 6-storeyed factory building (stage 1)". On the face of it, the permit covers the property in question and it must have been available on the 1st April 1992, the date of the agreement. That cannot have been the occupation permit which the parties had in mind, for if it had been, completion would have been envisaged by the 8th April 1992, yet the 10th April was fixed for payment of the balance of deposit.

44. The terms of paragraph 1 under the heading "Remarks" suggests strongly that the parties contemplated the issue of some other occupation permit. In fact, more storeys were added to the building and a fresh occupation permit was issued on the 26th June 1992, referring to the new floors and incorporating the previous occupation permit by reference.

45. Although the previous permit did cover the property, I find that it was the later permit, not yet issued, which the parties had in mind when they signed the agreement. Accordingly, the defendant was not entitled to set the 1st July as the completion date. When completion did not take place on the 1st July, the defendant was not entitled to make time of the essence for there had been no failure on the part of the plaintiff to complete on a due date.

46. It follows that the 28th August was an agreed completion date but time was not of the essence.

47. When the parties took leave of each other on the 28th August, the plaintiff was not in default. It was ready, willing and able to complete and it had available the necessary cashier's cheque. The defendant, on the other hand, was not in a position to complete because it was not in a position at that time to procure the co-operation of the developer in the transfer of name procedure which was the means originally contemplated by the parties of fulfilling their contractual obligations.

48. Completion was postponed by agreement to the 1st September. Time was not of the essence and the argument about 5 p.m. is irrelevant.

49. The defendant has failed to establish that time was of the essence of the contract.

Was the plaintiff in default on the 1st September?

50. The plaintiff was on the 1st September, ready and willing to complete and to enter into the fresh contract cancelling the agreement as suggested by the developer and then paying over the necessary monies and following the transfer of name procedure. It was certainly not evincing an intention not to be bound by the agreement. I find as a fact that the requirement for a receipt clause had been dropped and the plaintiff was willing to pay the defendant's costs of approving the terms of the cancellation agreement. The defendant, on the other hand, had decided not to sign the cancellation agreement.

51. The defendant has failed to show that the plaintiff was in default on the 1st September and has fallen far short of showing that the plaintiff was evincing an intention not to be bound by the agreement.

Conclusion

52. The parties having failed to agree on the cancellation agreement, the transfer to the plaintiff of the defendant's interest in the property could not be effected by the machinery originally contemplated, i.e. the transfer of name procedure. Yet the defendant remained under an obligation to sell and the plaintiff remained under an obligation to buy the defendant's interest in the property for the consideration stated in the agreement. Those obligations remain today. It is a matter of sorting out the appropriate procedure for effecting the transaction. One way of doing it is to adopt the normal method of assignment and confirmation.

53. For the foregoing reasons, the plaintiff's claim succeeds. There will accordingly be an order for specific performance by the defendant of its obligation to sell the property to the plaintiff for the sum of $9,280,000.00, completion to take place within a reasonable time. There will be an order nisi for the plaintiff's costs of the claim to be taxed, if not agreed, and paid by the defendant.

54. The counterclaim for forfeiture of the deposit is dismissed. There will be an order nisi that the plaintiff's costs of the counterclaim be taxed, if not agreed, and paid by the defendant.

55. It is now for the parties to take the necessary steps to achieve completion of the agreement. If for any reason that cannot be done, the parties are at liberty to come back to court for any necessary directions. There will be liberty to apply.