LI PUI WAN v. WONG MEI YIN

[English Translation - 英譯本]

1997, NO. 49
(Civil)

IN THE HIGH COURT OF HONG KONG

COURT OF APPEAL

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J u d g m e n t

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Chan, CJHC(delivering the judgment of the Court of Appeal):

Background

1. The appellant (i.e. the second plaintiff in the Court of First Instance) and the respondent (i.e. the defendant in the Court of First Instance) are sisters-in-law. They had a dispute over the sale and purchase of certain premises which resulted in this litigation. After hearing the case, the trial judge entered judgment in favour of the appellant, and the respondent was ordered to return HK$400,000 to the appellant plus interest at 8% per annum as from 1.1.1993 together with costs at $5,000. The trial judge also dismissed the respondent's counterclaim against the appellant. The appellant now appeals against the judgment and seeks to have it reversed and her claim for loss of rent allowed. She also asks for an order that the respondent should pay her 10% of the purchase price as damages, and that the interest should be calculated as from 1.1.1992. The respondent is also dissatisfied with the decision of the trial judge and files a cross appeal to seek to set aside his order so that she does not need to return the sum with interest to the appellant.

2. If the arguments raised by the respondent in her cross appeal are accepted, the orders made by the trial judge against the respondent would have to be set aside, and the appellant's appeal for increasing the amount of damages would also be dismissed. For this reason, the Court of Appeal has to deal with the respondent's cross appeal before considering the appellant's appeal for increasing the damages.

Facts of the case

3. The subject premises involved in this case are the 2nd floor and roof of the small house erected on Lot No. 542 in Demarcation District No. 204, Yung Shue Au Village, Sai Kung. The Lot was granted to Mr Tsang Fong Yau under New Grant No. 11734 by the Government in August, 1980. According to the terms and conditions of the New Grant, Tsang Fong Yau was granted the right to build a small house on the Lot. Afterwards, Tsang Fong Yau assigned the title of the Lot with development entitlement to Cheerbo Development Limited. The grantees of six other adjacent Lots (who are commonly called the male indigenous descendents) also assigned their own Lots and development entitlements to Cheerbo, whereby Cheerbo had the right to build small houses on the seven Lots. On 22.4.1991, Cheerbo reached an agreement with Ming Fai (Hong Kong) Trading Company to jointly develop the seven Lots by building seven small houses of three storeys each on the Lots. On 1.8.1991, Ming Fai reached another agreement with the respondent and Mr Hui Fu Kwok to develop four of the seven Lots mentioned above.

4. In December 1991, the appellant and respondent entered into an oral agreement whereby the respondent sold to the appellant one third of the undivided share or part of the Lot together with the exclusive right, use and enjoyment of the 2nd floor and roof of the small house to be erected thereon at a purchase price of $500,000. During the period between December 1991 and January 1992, a total sum of $400,000 was paid to the respondent on four successive occasions by the appellant as deposit.

5. Commencing July 1992, the respondent incessantly demanded that the appellant pay $700,000 as the amount of premium for the removal of non-assignment restrictions. The appellant, however, refused payment because the respondent had failed to produce the relevant government documents and other documents of title. On 16.11.1992, construction of the building was complete and a Letter of Compliance was issued. Since the oral agreement was all that the parties had, the appellant was unable to obtain a mortgage loan from the bank in the absence of documentary support. Since the respondent had also failed to provide the appellant with the relevant government documents, the appellant did not pay the $700,000 premium. After further discussions between the parties, a Provisional Agreement for Sale and Purchase was finally signed on 30.1.1993. Nevertheless, the dispute between the parties was yet to be resolved as they were still unable to perform the agreement before the date the payment of premium was due in December 1993, thereby causing Ming Fai itself to settle the premium payable to the government and forfeit in full the respondent's interest in the small house.

Findings of facts

6. The trial judge made his findings on the facts after trial that the agreement between the parties was an assignment of sale and purchase of land or interest in land, hence they were bound by the terms of the agreement. Pursuant to Section 35 of the Conveyancing and Property Ordinance, Cap. 219, the sale and purchase of land or assignment of interest in land was governed by various implied covenants under different circumstances. The trial judge considered that the respondent had only told the appellant that the sale and purchase could not proceed until formalities for payment of premium were completed but did not mention the possibility of re-entry on the land by the government. She was already in breach of the relevant implied covenants by failing to make this clear to the appellant. Secondly, the respondent did not provide the appellant with all documentary proof in respect of land title, including the letter requiring the payment of premium, etc. in accordance with the terms of the Provisional Agreement for Sale and Purchase, thereby causing the appellant to be unsuccessful in obtaining a mortgage loan from the bank to pay the premium. Thirdly, the respondent failed to perform the agreement and show that she had good right and title to assign the premises to the appellant free from encumbrances. Fourthly, whether at the time of entering into the oral agreement or in the Provisional Agreement for Sale and Purchase, the parties had failed to indicate clearly who should pay the premium first. The respondent therefore cannot unilaterally insist that the appellant should be the person to pay the amount first. Lastly, although the respondent had handed over the keys to the premises to the appellant and her husband sometime in 1993 so that they could take customers there to inspect the premises (that is what is commonly called 'viewing the premises') when necessary, this does not mean that vacant procession of the premises was already delivered to the appellant. For the foregoing reasons, the trial judge ruled that it was in fact the respondent who was in breach of the agreement for sale and purchase. Therefore she was ordered to return the deposit of $400,000 plus interest and costs to the appellant.

Facts in issue

7. Mr Wong for the respondent said that the trial judge erred in his findings of facts. First, he should not have ruled that the respondent must have made an advance payment of premium prior to completion of the sale and purchase before she could claim against the appellant. Secondly, the burden of producing documents should not be imposed on the respondent. The appellant could not afford the premium at all, and the respondent had no responsibility to produce documents in order to assist the appellant in applying for a loan from the bank.

8. The clause [Clause (2) (B)] on the method of payment for the purchase price in the Provisional Agreement for Sale and Purchase stipulates that the balance of the purchase price is 'to be paid in full upon payment of premium made by the Purchaser on her own and completion of the assignment'. The clause on completion date (Clause 4) sets out clearly that 'The transaction should be completed within 14 days from the time payment of premium is approved by the government.' Clause 10 also provides that 'The premium payable to the government upon assignment shall be borne solely by the Purchaser.' We can see that this agreement clearly sets out that the purchaser (i.e. the appellant) herself shall be responsible for the premium which should be paid up upon completion and assignment. If the trial judge considered that the vendor (i.e. the respondent) was responsible for paying the premium first, this is not correct.

9. The trial judge, however, did not rule that the respondent had a responsibility to assist the appellant in applying for a loan. According to Clause 5 of the Provisional Agreement for Sale and Purchase, the respondent 'guarantees that the previous deeds are clear and in order'. Clause 16 states that the respondent 'guarantees that the 2nd floor of Lot No. 542 in D. D. 204 will be given government approval for payment of premium and assignment'. There are similar provisions in Section 35 (Part II of the First Schedule) of the Conveyancing and Property Ordinance whereby the respondent must ensure that the Crown lease is good, valid and subsisting. Further, Section 13 expressly provides that a purchaser of land shall be entitled to require from the vendor, as proof of title to that land, production of the Crown lease relating to the land sold and any document referred to. The trial judge ruled that the respondent failed to perform the terms of the agreement and provide the relevant documents in respect of title, and failed to observe the implied convenants in the Conveyancing and Property Ordinance by proving that she had good right and title to assign the premises. In other words, the respondent failed to provide the required documents in accordance with the law, thereby causing the appellant to be unsuccessful in obtaining a loan from the bank by means of the documents. The respondent therefore became the party who breached the contract. From the evidence of the case, we are satisfied that the findings of the trial judge are correct.

Legality of the contract

10. The main issue raised by Mr Wong in the cross appeal, which he also raised as a point of law before the trial judge, is that the parties were in breach of the conditions of grant by entering into the transaction prior to obtaining government approval and before paying the premium. Therefore, the transaction was not in accordance with public policy and the court should deem it illegal and not enforceable.

11. The trial judge cited the English authorities Euro-Diam Ltd v. Bathurst [1990] QB 1 and Edler v. Auerbach [1950] 1 KB 359 from the English Court of Appeal, and concluded as follows:

"In my view, the agreement between the plaintiffs and the defendant is merely an agreement for sale and purchase of real estate and is therefore not ex facie illegal. The transaction was in breach of the conditions of grant, but did not involve any criminal or illegal act. The government could only regard the above breach of conditions of grant as a breach of contract, and is entitled to re-enter upon the land. This breach is in no way different from any civil breach in general. Further, the government would normally raise no objection to the assignment of interest in small house so long as the grantee(s) paid the premium.

Defence witness Authony K. T. Poon, Solicitor, said in his evidence that the government had never given effect to re-entry on land against the breach.

If a maker of an agreement does not initiate any positive action to curb the breach of conditions of grant, from the public interest and public policy perspectives, I do not consider it necessary to regard the assignment of small house title in the breach illegal for breach of conditions of grant, whereby not enforcing the agreement for assignment."

12. Counsel Mr Wong submitted that two aspects in the trial judge's conclusion were incorrect: First, the breach of conditions of grant should not be deemed as an ordinary civil breach. Secondly, no conclusion should be made in the absence of substantial evidence that the government would normally raise no objection to the assignment of interest in small house so long as the grantee(s) paid the premium.

13. Counsel pointed out that it was an established policy for the government to grant land to male indigenous villagers in the New Territories for the building of small houses. The purpose was to safeguard the interests of male indigenous villagers descended through the male line. Where an indigenous villager assigned his title or development entitlement before consent and approval for payment of premium were obtained from the government, he was in breach of the conditions of grant, and against this established policy. It followed that the transaction in respect of title and development entitlement should be deemed illegal. No person in relation to the transaction, including the appellant and the respondent, was in a position to ask for specific performance of the contract or required to be held legally liable pursuant to the contract, otherwise illegal transactions would be connived at and the spirit of law undermined. Reference was made by counsel to the following English authorities: Holman v. Johnson[1875] 1 Cowp 341; Alexander v. Rayson [1936] 1 KB 169; and Horseferry Road Magistrates' Court, exp. Bennett [1994] 1 AC 42.

14. In our opinion, counsel's argument lacks a factual basis, and is also confusing on legal principles.

15. According to the law of contract, if a contract upon its formaion or performance contains elements of illegality and is in certain circumstances against public policy the court would not enforce it. What public policy in fact means is that there are certain principles which in the opinion of the court must persist in a civilized society. The question as to whether the court would refuse to enforce a contract depends on the seriousness and turpitude of the illegality. Generally, the court will consider whether the contract is in breach of common law or statute by its formation or performance; or injurious to good government either in the field of domestic or foreign affairs; or interferes with the proper working of the machinery of justice; or injurious to marriage or morality or economically against the public interest. (See Chitty on Contracts, Vol. 1, paragraphs 16-001, 16-003 and 16-005, and Euro-Diam Ltd v. Bathurst [1990] QB 1 and Edler v. Auerbach [1950] 1 KB 359).

16. The purpose of granting of land by the government in accordance with Chinese customary law with additional terms and conditions to New Territories male indigenous villagers is to provide some of the New Territories residents with special care. This situation differs greatly from the principles in the law of contract where the court refuses to make orders to enforce certain contracts because they are against public policy upon formation or performance. The granting of land by the government to indigenous villagers who are male descendents is a measure made under special circumstances. It has nothing to do with the principle under which by virtue of public policy, certain contracts are found illegal by the court. In our view, such measure adopted by the government in the granting of land should not be regarded as a public policy, and is quite different from the principle in common law which requires the court of law to uphold public policy.

17. In this case, there was insufficient evidence to show that the granting of land by the government to male indigenous villagers was a public policy. The respondent failed to produce any evidence to prove or cite any authorities to show what was the difference, if any, between the grant issued by the government to male indigenous villagers and the contract between the government and private organizations or citizens in general. A breached contract cannot be categorised as against public policy and declined attention by the court by reason of it being a contract made with the government. In our opinion, there is no difference between the granting of land by the government to male indigenous villagers and a landlord leasing his property to a tenant in the eyes of law.

18. Even if it was illegal for the parties to agree to proceed with a sale and purchase or completion at a later date without government approval or before paying the premium, this, in our view, does not constitute a breach of public policy. In fact, the sale and purchase or assignment of title and development entitlement of small houses similar to that in this case is also good for the public as the payment of premium brings revenue to the government. It also helps to solve the housing problem because people other than male indigenous villagers can also live in this sort of houses. However, if a male indigenous villager cannot afford to build a small house due to financial constraints but is not allowed to assign his title to somebody else, he will not be able to benefit from the policy and consequently it will not do any good to the general public. Over the years, the government has been considerably indulgent towards this sort of sale and purchase and in effect has amended the formerly so-called land grant policy. From the practical point of view, this measure has done more good than harm to the public.

19. As can be seen from the contract and agreement produced, the parties did not intend to breach the conditions of grant. It can only be regarded as technically 'jumping the gun'. In the agreement between Ming Fai and the respondent and Hui Fu Kwok, Clause 3 set out clearly that Ming Fai should be responsible for assisting the individual male descendents to complete the necessary procedures in relation to the construction sites, such as application for a occupation permit, assignment, payment of premium and to liaise in matters relating to the village's local conditions and customs, etc. Further, in the Provisional Agreement for Sale and Purchase between the appellant and respondent, Clause 4 also set out clearly that the transaction should be completed within 14 days from the time payment of premium was approved by the government. The agreement also mentioned the application to the government for assignment, and stipulated that the purchaser should pay the premium. Obviously, the contractual parties agreed that the sale and purchase would not be completed until formalities of application to the government for assignment were complete and the premium paid. The parties had no intention of completing the transaction prior to obtaining approval for assignment or payment of premium from the government. In our view, even if government approval had not been given and the amount of premium not settled at the time of formation of the contract, the parties did have the intention to complete the sale and purchase in accordance with the terms and conditions set down by the government. In the circumstances, this transaction of sale and purchase is not against public policy.

20. Counsel for the respondent pointed out that there was insufficient evidence in support of the proposition that normally the government would not object to the sale and purchase and assignment of such small houses so long as the grantee(s) paid the premium. However, likewise, there is no evidence to show that the government would still object to the sale and purchase and assignment of such small houses once the grantee undertakes to pay the premium. In this case, there is evidence to show that the government had already issued a Letter of Compliance for the small house on 16.11.1992 and asked the grantee to pay a premium of $2,100,000. If the government had no intention to give approval to the grantee (Tsang Fong Yau) of the Lot on assigning his title, there was no reason to request that he should pay the premium. Obviously, the position of the government was to approve the application and allow the sale and purchase and assignment so long as the applicant was willing to pay the premium.

21. For the reasons set out above, the respondent's cross appeal cannot succeed, and must therefore be dismissed.

22. The appellant raises three points as her grounds of appeal and seeks to reverse the judgment.

Claim for loss of rent

23. First of all, the appellant disagrees with the decision of the trial judge who dismissed her claim for loss of rent. She already set out in her Amended Statement of Claim that the method of calculation for the loss of rent claimed was based on the prevailing market rent, and the respondent never raised any objection. The respondent did not deliver vacant possession of the premises to her in accordance with the agreement, thereby depriving her of the right to use the premises. The only relief open to her was to rent equivalent or similar premises, and to claim for the loss against the respondent who must compensate her for the rent paid.

24. In his judgment, the trial judge gave his grounds of dismissing the appellant's claim as follows :-

"On the claim for loss of rent, Miss Li said Miss Wong failed to deliver vacant possession of the small house to her after its construction work was completed in February 1993, thereby causing her to suffer a loss of rent in the amount of $8,000 per month. However, on the aspect of claim for loss of rent, Miss Li did not produce any evidence to support her claim.

First of all, according to Miss Li's version it was not because vacant possession of the small house could not be delivered in time that caused her to rent another place of abode which incurred a loss of rent at $8,000 per month, nor was it because vacant possession of the small house was not delivered that she was unable to lease it and earn rent. All along Miss Li was living in Mr Sung's house, and she never had any intention of leasing the small house. Further, there was no evidence of comparables to indicate the monthly rental of the small house as a reference for the court. Since Miss Li failed to produce any basis of calculation to support her claim for loss of rent, it must therefore be dismissed."

25. The appellant admits in her submission that it had never been the case that as a result of the respondent's failing to deliver vacant possession of the small house to her in time, she needed to find another place of abode and hence she had to pay rent. She also admits that it had never been the case that as a result of the respondent's failing to perform the agreement, she was not able to lease the small house out for rent. Therefore she did not suffer any loss in this respect. In fact the appellant never produced any evidence to show that she had suffered any loss resulting from the respondent's breach. The argument of the appellant is in fact that she had not become the owner of the premises so she was deprived of the right to use the premises. However, the appellant already admits that since the respondent had failed to provide her with all documents in respect of title to the premises and the government letter requesting payment of premium at $2,100,000, she was unable to mortgage the premises with the bank and obtain a loan for paying the premium. In other words, the appellant admits that she did not have sufficient funds to pay the premium at that time and therefore did not complete the transaction. In such circumstances, she cannot claim damages by reason of her loss in the right to use the premises, including the claim for loss of rent.

Compensation for deposit

26. The second claim of the appellant is that the trial judge should have ordered the respondent to compensate the appellant for 10% of the purchase price, that is $50,000, as a result of the breach. The appellant says the trial judge was correct in not enforcing the agreement by ordering the respondent to pay the appellant a double deposit of a total of $800,000 as compensation, but there should not be no order whatsoever for the respondent to pay damages except ordering her to return the $400,000 she already received.

27. The trial judge considered that the double deposit to be compensated by the party in breach of the contract as stipulated in the sale and purchase agreement between the parties was in fact a penalty, and therefore this provision was not enforceable by the court. However, the trial judge said in his judgment:

"But where in the case of a breach of contract if the deposit exceeds 10% of the purchase price, the party which asks for forfeiture of deposit / compensation against the other party in breach of the contract must demonstrate that the deposit which exceeds 10% of the purchase price of the premises is reasonable in certain special circumstances."

28. The trial judge cited two cases, Workers Trust and Merchant Bank Ltd. v. Dojap Investments Ltd. [1993] 2 All ER 370, per Lord Brown-Wilkinson, and Liuggi Plantations Ltd. v. Jagatheesan [1992] MLJ.89, per Lord Hailsham LC. It was mentioned in both cases that a deposit of 10 % of the contract price could be deemed as a reasonable compensation. We agree that according to common law practice, a forfeiture of deposit would not usually be regarded as a penalty. Therefore the court may order forfeiture of deposit in certain circumstances as it sees fit. We also agree that in the usual circumstances, the contractual parties' agreement in setting the deposit at 10% of the purchase price is a reasonable one. However, that does not mean that the court must order the party in breach of contract to pay 10% of the purchase price as compensation. Whether to order compensation or not is decided on the merits of the case. In fact the court in the two cases above did not make any order for the party in breach to pay 10% of the purchase price as compensation. The most important factor which requires consideration is whether the agreed deposit was truly regarded by the parties as a reasonable compensation for anticipated loss.

29. The purchase price in this case is $500,000. While the parties agreed at a deposit of $400,000, this is obviously not a true deposit, but rather a partial payment of the purchase price. The parties did not mention, let alone agree upon, how much either party should compensate the other in the case of a breach. The appellant cannot subsequently ask the court to order the respondent to pay 10% of the purchase price as compensation simply because her claim for damages in the amount of double deposit was dismissed. Since the parties had no agreement as to setting the deposit at 10% of the purchase price, nor did they agree to take 10% of the purchase price as reasonable liquidated damages, the appellant's claim on this item cannot succeed and the judgment of the trial judge is correct.

Compensation for interest

30. Lastly, the appellant points out that there was no explanation in the written judgment of the trial judge as to why the interest for the $400,000 which the respondent was ordered to return was calculated as from 1.1.1993. The appellant says the respondent admitted that on four different dates, namely, 13.12.1991, 30.12.1991, 2.1.1992 and 10.1.1992, she collected a total of $400,000 from the appellant. So in the opinion of the appellant, the interest should be calculated as from 1.1.1992.

31. In our view, this argument cannot be sustained. What the judge must consider was when the respondent breached the contract and not when she collected the appellant's payments. Since the parties already agreed that the purchase price or deposit was to be paid by instalments, the dates of payment by the appellant could not be used as a yartstick. Calculation should start from the time when the respondent breached the contract, which is the time of crucial importance. According to the facts of the case, the Letter of Compliance for the premises was issued in November, 1992. It was not until early 1993 that the respondent learned about the amount of premium, so she could not be said to have already breached the contract on 1.1.1992. By fixing the date at 1.1.1993, the trial judge meant that the respondent had failed to perform the contract and to observe the provisions of the Conveyancing and Property Ordinance, Cap. 219, Laws of Hong Kong around that date, namely, the end of 1992 or beginning of 1993, and was therefore deemed as having breached the contract. There is nothing improper for the respondent to pay interest calculated as from 1.1.1993 for the compensated amount.

Conclusion

32. For the reasons set out above, we consider that there are no sufficient grounds in the appeal of the appellant and also the cross appeal of the respondent, both of which should therefore be dismissed. There is no order as to costs. As the respondent is represented by the Legal Aid Department, her own costs would be calculated in accordance with the Legal Aid Regulations.