XCHRX MAN WING FUN STEPHEN AND ANOTHER v. HO CHING YEE SUSANNA

HCA 3724/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3724 of 1997

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J U D G M E N T

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The application

1. This is an application under Order 14A issued by the defendant. Originally when the summons was issued, the issue I was asked to determine was not clearly specified. After an adjournment, the summons was amended to identify the issue. In essence, the issue which I was asked to determine was whether on true construction of the contract between the plaintiff and the defendant and in particular clause 8 thereof, the defendant would have the right to terminate the contract under that clause and if so whether the defendant had done so. Various affirmations were filed by both parties and there were some issues on facts between them. However the defendant was prepared to proceed with the application on the basis of all issues on facts to be resolved in the manner as stated in the affirmations filed by the plaintiff. The issue on facts was thus resolved.

The facts

2. This matter arose out of a sale and purchase agreement dated 21st November, 1996 in respect of the property of flat A 12th floor, Block 7, Carmel Heights, Hong Kong Garden (Phrase II), 100 Castle Peak Road, Tsing Lung Tau, New Territories, Hong Kong (hereinafter called the property). The plaintiff was the purchaser and the defendant was the vendor. The price was HK$3.3 million. The agreement took the form of what was generally known as the provisional sale and purchase agreement in the printed form supplied by the estate agent. For the purpose of this case, the material provisions in the agreement were clauses 2, 7 & 8 which were in the following terms :

"Consideration & Payment

2. The purchase price of the said premises shall be HK$3,300,000 which shall be paid by the Purchaser to the vendor in the manner as follows :

(a) Initial deposit shall be paid upon signing of this agreement in the ........

(b) Upon signing of the Formal Agreement for Sale and Purchase on or before 4-12-96 further deposit shall be paid in the sum of HK$260,000.-

(c) Further deposit shall be paid on or before "NIL" in the sum of "NIL"

(d) Balance of purchase price shall be paid upon completion on or before 18-3-97 at Vendor's solicitors in the sum of HK$2,970,000.-.

Purchaser fails to perform

7. Should the Purchaser fail to complete the purchase in the manner herein contained, the deposit shall be forfeited to the Vendor and the Vendor shall then be entitled at his absolute discretion to sell the said premises to anyone he thinks fit and the Vendor shall not sue the Purchaser for any liabilities and / or damages or to enforce specific performance.

Vendor fails to perform

8. Should the Vendor after receiving the initial deposit paid hereunder fail to complete the sale in the manner herein contained, the Vendor shall immediately compensate the Purchaser with a refund of the initial deposit together with a sum equivalent to the amount of the initial deposit as liquidated damages and the reimbursement / payment (as the case may be) of stamp duty of the said premises and the Purchaser shall not take any further action to claim damages or to enforce specific performance."

3. On 4th December, 1996, the vendor's solicitors sent to the purchaser's solicitors a draft formal sale and purchase agreement and informed the purchaser's solicitors that if the draft should meet with the purchaser's solicitors' approval, then the same should be signed and returned together with the purchaser's solicitors' cheque in the sum of HK$260,000 in favour of the vendor as the further deposit.

4. On the same day, the purchaser's solicitors wrote back to the vendor's solicitors. The letter said that it was unlikely that the formal sale and purchase agreement could be concluded on that day, 4th December, 1996. The letter went on to say :

"We are instructed by our client to show his/her sincerity in this transaction by sending you herewith a cheque/cashier order in the sum of HK$260,000 drawn in favour of [the vendor] to be held by your firm to our order .........

As soon as the formal Agreement is concluded, the said sum shall be appropriated as the further deposit payable thereunder. Otherwise we reserve our right to demand for the return of the said sum"

On the face of this letter only the cheque was enclosed. However it would appear from a later letter dated 28th December, 1996 from the purchaser's solicitors that they also enclosed with the letter the draft sale and purchase agreement amended in red. Exactly what amendment had been made to the vendor's draft was not clear.

5. It is plain that since the exchange of the letters on 4th December, 1996, the parties had not made any real effort to finalize the terms of the formal sale and purchase agreement. Instead, on 19th December, 1996, the vendor's solicitors sent to the purchaser's solicitors the title deeds and requested the purchaser's solicitors to send them the draft assignment. On the part of the purchaser's solicitors, they made requisitions on title by letter also dated 28th December, 1996.

6. What transpired was that notwithstanding the clear condition imposed by the purchaser's solicitors in their letter of 4th December, 1996, the cheque payable to the vendor was banked in and was paid on 5th December, 1996. Whether the purchaser's solicitors had found this out or not, by a letter dated 28th December, 1996, they wrote to demand the return of their cheque of HK$260,000 as the payment of the further deposit. This letter also mentioned that unless the formal sale and purchase agreement could be concluded before 30th December, 1996, the purchaser would presume that the vendor was not interested in concluding a formal sale and purchase agreement. It was said by the defendant that this letter was only received on 24th February, 1997. The plaintiff did not take issue with this suggestion. In any case, I do not consider the date of the receipt of this letter would in any way affect the issue that I have to decide. Plainly even if the letter was received promptly, up to 4th March 1997 the parties had both acted in such a way that they both wanted the sale and purchase to proceed. This was plain from the letter raising requisitions and the parties meeting at the property in January 1997 when early completion was discussed.

7. In the affirmation filed by the plaintiff, it was said that the plaintiff was asked by his solicitors to sign on a formal sale and purchase agreement. Counsel for the plaintiff asked me to infer from that statement that the plaintiff in fact did so sign as asked. Even if it was so, it was common ground that the signed document had not been sent to the defendant or her solicitors. I think that I am entitled to infer that the amended draft formal sale and purchase agreement sent to the vendor's solicitors on 4th December, 1996 could not be a copy signed by the purchaser already. It was most unusual for a party to sign on an agreement with amendment still in red. Such form of amended agreement was normally sent as draft as an invitation to the other side to agree to the terms of the draft and was not normally treated as an engrossed agreement ready for signature. In fact it was common ground that there was no exchange of formal contract and there was no formal sale and purchase agreement ever entered into between the parties.

8. There was a meeting between the parties in early January 1997 at the property. According to the plaintiff, in this meeting the defendant orally proposed that the completion should be advanced to 5th March 1997. The defendant denied having made such suggestion. In any event, there was no suggestion that the plaintiff there and then agreed to such proposal.

9. The plaintiff then made preparation for completion and obtained a mortgage from the Chartered Bank. After that, they instructed their solicitors to write to the vendor's solicitors telling them of their intention to advance the completion date to 5th March, 1997. The material part of the solicitors' letter was in the following terms :

"We are instructed by our client and write to inform you that our client would like to advance the date to 5th March, 1997. Please take your clients instruction and let us have your reply as soon as possible."

10. I pause here to remark that if it was ever in issue as to whether it was the vendor who suggested that the completion date should be advanced to 5th March 1997, I would have no hesitation in holding that it was plain and obvious that such suggestion did not come from the vendor. The terms of the letter of the purchaser's solicitors was completely against such contention. However as it was agreed that I should treat any conflict on facts as having been resolved in favour of the purchaser, I will assume that the vendor did make such a request for the advancement of the completion date to 5th March 1997 in the meeting in January, 1997.

11. In reply to the letter and in reply to the letter demanding the return of the $260,000 deposit, the vendor's solicitors wrote back on 4th March, 1997 saying that : "No formal agreement has yet been concluded and pursuant to clause 8 of the provisional agreement, our client now elects to rescind the provisional agreement and notice to that effect is now hereby given. The initial deposit together with the liquidated damages in the total sum of HK$140,000 shall be sent to you forthwith". In fact no payment was enclosed with the letter.

12. The purchaser did not accept that the vendor could exercise the right to terminate the agreement under clause 8. The purchaser's solicitors wrote back on 5th March, 1997 informing the vendor of the purchaser's position and also saying that the purchaser would take up the assignment on 18th March, 1997. By another letter also dated 5th March, 1997, the purchaser also tendered the draft assignment for the vendor's approval.

13. In reply by a letter also dated 5th March, 1997, the vendor's solicitors said that the agreement was properly terminated under clause 8, and further conceded that on top of the $140,000 the vendor would have to compensate the purchaser the stamp duty. Enclosed with the letter was a cheque in the sum of HK$466,000 which sum was made up of :

(1) $260,000 being the requested return of "further deposit";

(2) $140,000 being the sum of returned deposit and liquidated damages; and

(3) $66,000 being the stamp duty paid.

14. The purchaser did not accept that the vendor's exercise of that right was valid. The purchaser took objection on the ground that such right was no longer available to the vendor and that the vendor had waived such right. No objection was taken on the ground that the payment of the sum of $466,000 was not by legal tender.

15. The writ was issued on 11th April, 1997, and by 5th September 1998, the date of the summons for Order 14A application, the proceedings had proceeded to an advanced stage. Discovery was completed and witnesses statements had been filed, and the case was ready to be set down for trial. Even if the plaintiff did not set down the case for trial, there was of course nothing to prevent the defendant from doing so. If instead of taking out an application under Order 14A thus incurring the additional delay and cost and expenses of the filing of a series of affirmations by both parties, the case was at once set down for trial, it was possible that the case could have been tried already. As the area of disputes on facts was very small, the trial was unlikely to be long. From the point of view of cost, it was unlikely that taking out this Order 14A application would save cost. This is because even if the case was tried, bearing in mind that the dispute on facts was within a very narrow confine, the process of taking evidence was unlike to be long. On the other hand, by having a trial of the action, the parties could save all the cost of the summons and the various affirmations filed and the cost of the call over hearing of the summons.

16. The first issue I have to decide was whether by reason of the delay in the making of the application, this issue now put forward for my determination was suitable for determination without a full trial of the action within the meaning of Order 14A rule 1(a) at all. In the end, I came to the view that matters set out in the last paragraph were not relevant factors for considering whether the issue was suitable for determination under Order 14A rule 1(a). This was because it was clearly provided in Order 14A rule 1 that an application under Order 14A could be made at any stage of the proceedings. Hence an application could be made even at the beginning or during the course of the trial. If the issue raised had satisfied all other requirements of Order 14A rule 1(b) and was otherwise suitable for determination under Order 14A, I do not think that I have any discretion to decline to entertain the application solely on account of the fact that the issue was raised very late and that from the point of view of cost and case management, it would be more desirable to simply go for a trial of the action.

The effect of clause 8

17. It was common ground between the parties that clause 8 had effectively provided for an alternative mode of performance of the contract, so that the vendor may, upon satisfying all the requirements of clause 8, terminate the contract of sale and purchase (see Wong Lai Fan v Lee Ha [1992] 1 HKLR 125).

18. The real point of dispute between the parties was that given the provision in clause 2 of the agreement that the further deposit was to be paid upon the signing of the formal sale and purchase agreement on or before 4th December, 1996 and the fact that the vendor had cashed the cheque in the amount of the further deposit, was the right to terminate the agreement by the refund of the initial deposit and the payment of a further sum in the same amount of the initial deposit and the reimbursement of stamp duties paid, still available to the vendor on 5th March, 1997?

19. This question of the time limitation for the exercise of the right under escape clauses in sale and purchase agreement had been subject to a number of decisions. The effect of such clause would obviously depend on the particular wordings of the clause.

20. In Tsang Fan Hang v Hang Hing Construction Co. Ltd. [1981] HKC 343, there were a number of agreements involved all made in the same format. In one instance, on 21st July, 1978, the vendor and purchaser signed a memorandum of agreement which set out the property, the price and also the parties. In relation to the price, it was provided that a temporary deposit of 10% of the price was payable upon the signing of agreement in solicitors' firm on 5th August 1978. There would be 2 more payments each being 10% of the price to be paid at specified stages of the construction. The balance 70% was payable on the issuance of the occupation permit. The memorandum further provided that :

" (2) This company [the vendor] shall have the right to cancel this memorandum for sale and purchase before the execution of an agreement for sale and purchase of the above mentioned premises in a solicitors' firm and, thereupon, this company shall not be required to make any other payments to the purchaser apart from returning the deposit to the purchaser".

The purchaser paid the 10% deposit on 5th August, 1978 at the vendor's premises. No agreement was signed at the vendor's solicitors' office or any solicitors' office at all. When the purchaser wanted to make payment of the 2nd 10% deposit, the vendor's solicitors wrote to inform him of the vendor's exercise of the power to cancel the agreement. Penlington J. held that the right to cancel the agreement as provided by the memorandum of agreement remained until the signing of the formal agreements at the solicitors' office. Accordingly he dismissed the purchaser's action.

21. It is important to note that in coming to his decision, Penlington J. fully recognised that the agreement contemplated that it was temporary in nature and would be superseded by a proper legally drawn up document and that a deposit was to be paid which would be refunded if the vendor chose to cancel the agreement in the meantime. He also recognised that on the face of the memorandum agreement, the signing of the formal sale and purchase agreement and the payment of the first 10% deposit should be simultaneous. He said (at page 348A-C)

"Here, however, the two events, i.e. the signing of the formal agreement and paying the deposit, were to be simultaneous. It is not the plaintiffs' case that this meant that the parties had agreed that there was not to be such a formal contract but only that by accepting the deposits on 5 August, it had waived its rights under clause 2. I cannot see how that can be done. Clause 2 clearly contemplates that an initial deposit shall be paid, which it was, but there should be a right to cancel, notwithstanding, it specifically refers to the deposit being refunded. That right remains until the signing of the formal agreement which was not so signed before the right was, in fact exercised."

22. The decision of Penlington J. is distinguishable from the present one in that the wordings of clause 2 of the memorandum agreement there expressly said that the vendor shall have the right to cancel the agreement before the execution of the formal sale and purchase agreement. However there was no express provisions as to the time allowed for the exercise of such right to terminate.

23. In ManSun Finance (International) Corp. v Lee Ming Ching Stephen [1993] 1 HKC 113, the Court of Appeal was concerned with a provisional agreement which contained the clause that the balance of deposit of $617,500 shall be paid upon signing of formal agreement for sale and purchase on or before 3rd April, 1992. The provisional agreement further provided that -

"In the event the vendor is unable or unwilling (for whatever reasons) to enter into formal agreement for sale and purchase with the purchaser and all deposits already paid shall be double refunded to the purchaser without interest, otherwise the purchaser reserves the right to buy the premises."

On 3rd April, 1992, the purchaser's solicitors forwarded the formal sale and purchase agreement to the vendor's solicitors duly signed by the purchaser and also a cheque for the further deposit subject to the vendor's solicitors undertaking to return the executed agreement within 5 days. The vendor was not willing to enter into the agreement and the cheque for the further deposit was not presented. On 14th April, 1992, the vendor purported to exercise the right to terminate the agreement by offering a double refund of the initial deposit. The Court of Appeal held that as the provisional sale and purchase agreement had named the date of 3rd April, 1992 as the date for the signing of the formal sale and purchase agreement, if the vendor should elect to adopt the alternative performance of refunding double the deposit, it must do so on the same day. As the vendor failed to elect the alternative performance and to refund the double deposit on 3rd April, 1992, the vendor's right to terminate the contract by the refund of the double deposit was lost.

24. Again the case of Man Sun Finance was distinguishable from the present case in that the condition attached to the relevant clause was "in the event the vendor is unable or unwilling (for whatever reasons) to enter into the formal agreement". On the terms of the provisional agreement, this event could only occur latest by 3rd April, 1992 and in fact the event did occur when the vendor did not sign the formal sale and purchase agreement sent to its solicitors. Furthermore, this event could occur even though there was no legal obligation on the part of the vendor to enter into any formal sale and purchase agreement.

25. Chronologically, the next decision which dealt with the timing of the exercise of the right under an escape clause was the decision of Findlay J. in National Crown Limited v Kai Wan Chung (1996 No. A14634). The decision was made on 16th May, 1997. In this case, the parties entered into a provisional sale and purchase agreement which provided that the further deposit was to be paid on or before 10th December, 1996 upon the signing of the formal sale and purchase agreement. The provisional agreement also contained a pair of escape clauses identical to clauses 7 & 8 in the present case. The vendor's solicitors did not deliver any draft formal sale and purchase agreement to the purchaser despite repeated requests by the purchaser's solicitors. In the end, on 10th December, 1996 the purchaser's solicitors delivered a formal sale and purchase agreement containing terms which were the same as those of the provisional agreement signed by the purchaser and also a cheque for the further deposit to the vendor's solicitors. On 12th December, 1996, the vendor's solicitors returned the draft agreement and the cheque and exercised the right to terminate the agreement under the escape clause. The vendor's solicitors also enclosed with the letter the appropriate refund of the initial deposit and the compensation and the stamp duty. Findlay J. held that the vendor was not entitled to rely on the escape clause after 10th December, 1996, the date mentioned in the agreement for the signing of the formal sale and purchase agreement. I shall refer to the reasoning of his decision later.

26. The same point arose for decision in the case of China Landmark Hi-Tech Development Limited v San Fung Limited (1996 No. A 3243) which was a decision of Keith J. on 11th July, 1997. However, as National Crown Limited was just decided about 2 months before and the decision was unreported, National Crown Limited was not cited before Keith J. In China Landmark Hi-Tech Development Limited the provisional sale and purchase agreement provided that a further deposit was to be paid on signing of the formal sale and purchase agreement on or before 19th December, 1995. The balance of the purchase price was payable on completion on 6th February, 1996. There was likewise the pair of escape clauses on terms identical with those in the present case. Owing to some disputes over the legality of a swimming pool, the purchaser did not accept title and in consequence thereof the agreement was not completed on 6th February, 1996. However neither party took step to determine the agreement. Eventually, on 5th June, 1996 the vendor purported to exercise the right to terminate the agreement by refunding the initial deposit and also by payment of the compensation and stamp duties under the escape clause. In an Order 14A application, one of the issue which Keith J. was asked to determine was whether the power to terminate the agreement on the part of the vendor could still be validly exercised in the light of the delay.

27. On the part of the purchaser, it was contended that the tender by the vendor on 5th June, 1996 did not follow the vendor's failure to complete the sale in the manner contained in the agreement, and accordingly, the vendor's exercise of that right was not valid. In dealing with this argument, Keith J. said :

"That submission involves determining whether (a) there ever came a time when the vendor failed to complete the sale in the manner contained in the agreement, and (b) if so, whether that was enough before 5th June to make the tender of the sum provided for by clause 8 immediately after failure had occurred.

Mr. Ma [counsel for the purchaser] argues that the agreement contemplated the sale being completed on 6 February 1996 following the signing of a formal sale and purchase agreement by 19th December 1995. Since the formal sale and purchase agreement had not been signed by 19th December 1995, any subsequent completion would not have been completed, so Mr. Ma argues, in the manner contained in the agreement. I reject that argument. It is arguable that, although the agreement contemplated the signing of a formal sale and purchase agreement by 19th December, 1995, there was no obligation on the parties to sign such an agreement then. That is because it is arguable that the only provision in the agreement about the signing of a formal sale and purchase agreement did not require a formal sale and purchase agreement to be signed at all. It merely required the purchaser, in the event of the formal sale and purchase agreement being signed by that date, to pay the further deposit on such an agreement being signed. There are echoes of reasoning along those lines in the decision of the Court of Appeal in Yiu Yau Ping v Fong Yee Lan [1992] 2 HKLR 167 at p. 175.

But the principal ground on which I reject Mr. Ma's argument is that by 19th December 1995 no agreement had been reached on what terms the formal sale and purchase agreement should contain. I do not know why that was. Normal conveyancing practice would have required the vendor's solicitors to submit a draft to the purchaser's solicitors. I do not know whether their failure to do that was the reason why no agreement had been reached on its terms, or whether they had in fact submitted a draft but the purchaser's solicitors had not agreed its terms. If the correspondence is anything to go by, neither of the parties' solicitors regarded the fact that no formal sale and purchaser agreement had been signed by 19th December 1995 as significant. They both continued to proceed as if completion could take place without one - as indeed it could. Accordingly, since the absence of a formal sale and purchase agreement did not prevent completion taking place on 6th February 1996, it follows, that the vendor's failure to sign a formal sale and purchase agreement by 19th December, 1995 did not amount to a failure to complete the sale in the manner contained in the agreement.

Mr. Ma's fallback argument was that since the agreement provided for completion to take place on 6th February 1996, and since the vendor did not complete the sale on that date, the vendor must have failed on that date to complete the sale in the manner contained in the agreement. I cannot accept that argument either." [The Judge went on to explain that since the issue as to whether the purchaser was obliged to complete the sale on 6th February, 1995 was not an issue that was suitable for determination in an Order 14A application before him, he could not decide that issue and hence it could not be said that the fact that there was no completion on the completion date of 6th February 1995 must be because of the failure to complete by the vendor or by the purchaser].

28. If the reasoning of Keith J. was followed, it would appear that prima facie the vendor was entitled to succeed in the case before me as although the vendor had not exercised the right to terminate the agreement by 4th December, 1997, the date named in the provisional agreement for the signing of the formal sale and purchase agreement, there was no obligation on the part of the vendor (and also the purchaser) to sign the formal sale and purchase agreement at all, and hence the fact that the formal agreement was not signed on 4th December, 1997 would not amount to a failure to complete the sale in the manner contained in the provisional sale and purchase agreement. It would also follow that the vendor would still be entitled to exercise the right under the escape clause by 5th March, 1998 subject to other consideration like waiver and estoppel. Unlike the case of China Landmork Hi-Tech Development Limited, in the present case, the right to terminate was exercised before the contractual completion date, and hence the further complication of who was in breach in failing to complete on the completion date did not arise.

29. The same issue arose again in Konan (Hong Kong) Limited v Unitrend computer Limited (1997 No. A 3522). In this case, the parties had not signed any formal sale and purchase agreement although the purchaser's solicitors had sent to the vendor's solicitors a cashier order in the sum of the further deposit to be held by vendor's solicitors on their undertaking not to release the same to the vendor until the formal sale and purchase agreement was signed. Before the completion date, the vendor purported to exercise the right to terminate the agreement under the escape clause by refunding the initial deposit and paying the compensation provided under that clause. The question before the court was whether the vendor's exercise of that right was valid. Deputy Judge Wesley Wong held for the vendor. The decisions of Findlay J. in National Crown Limited and Keith J. in China Landmark Hi-Tech Development Limited were cited in argument before him. It is not at all clear as to why the Deputy Judge would reject the reasoning of Findlay J. However it would appear that the Deputy Judge came to the decision as he did mainly because he took the view that there was no mandatory provision in the provisional agreement to bind the parties to sign any formal sale and purchase agreement.

30. As the decisions of National Crown Limited, China Landmork Hi-Tech Development Limited and Konsan (Hong Kong) Limited were all first instance decisions of the High Court, there was no binding judicial authority on me on the true construction of clause 8 of the agreement in the present case. Having considered the reasons given, I am of the view that reasoning given by Keith J. was to be preferred. I come to this view conscious of the fact that Keith J. did not have the benefit of the judgment and reasoning of Findlay J. However I am of the view that even without the benefit of the decision of Keith J. I would still consider that the decision of Findlay J. in National Crown Limited should not be followed.

31. It is now well settled that a clause in the form of clause 2 of the present case did not have any effect of imposing any legal or contractual obligation on the part of either the vendor or the purchaser to enter into a formal sale and purchase agreement (see Man Sun Finance (International) Corporation v Lee Ming Ching Stephen [1993] 1 HKC 113 at 124, Luxebond Investment Ltd. v Super Asian Investment Ltd. [1998] 2 HKC 308). Unless and until the parties had entered into a binding formal sale and purchase agreement replacing or superseding the provisional agreement, the provisional agreement continued to be binding on the parties. Plainly clauses 7 and 8 being part of the terms of the provisional agreement should still continue to be binding and the rights given to the parties under these clauses should still be available unless (a) on true construction of the agreement, the right granted under these clauses had ceased by a certain date or upon the happening of a certain event, or (b) the rights had ceased to be exercisable because the conditions for the exercise of those rights had ceased to exist. The effect of the decision of Findlay J. in National Crown Limited was that on true construction of the agreement, the right would cease to be exercisable once the date stated on the agreement for the signing of the formal sale and purchase agreement had passed and the parties had not entered into a formal sale and purchase agreement. The reasoning for this conclusion was contained in the following passage of the judgment of Findlay J. (emphasis added) :

" The seller's right to back out of the agreement, with the consequences mentioned in clause 7 [which was on identical terms as clause 8 in the present case] arose if he failed to complete the sale in accordance with the agreement. Generally, completion of a sale of land by the seller is the execution of an assignment in favour of the purchaser. This is the final act in the performance of various obligations by both parties. In this case, it is argued on behalf of the purchaser that the seller's obligation to complete the sale in accordance with in (sic) the agreement means, not just to execute the assignment on or before 7 January, 1997, but also to do what else is required of him under the agreement leading to that final act. This, in my view, must be right...

The agreement contemplated the signing of a formal agreement for sale and purchase on or before 10 December, 1996 upon which event the purchaser would be obliged to pay a further deposit of $755,000. The parties contemplated that this would happen because the agreement provides for the payment of the balance of the price only $11,295,000 upon completion on or before 7 January, 1997. If there was no formal agreement, and therefore no payment of $755,000, the amount payable upon completion on or before 7 January 1997 would have, not $11,295,000 but 12,050,000. There is no provision in the agreement that deals with a situation in which there is no formal agreement and no payment of the further deposit.

Mr. Mumford argues that the seller was not obliged to enter into the formal agreement. It is true that there was nothing the purchaser could do if the seller refused to enter into the formal agreement, even if it followed "all the terms and conditions of the provisional agreement". If nothing else had happened, the parties would be bound by the provisional agreement, the seller would have been entitled to his price and the purchaser would have entitled to receive assignment of the flat. Nevertheless, as part of the completion of the sale according to the terms of the agreement, he undertook to do what was contemplated by the agreement, to sign a formal agreement on or before 10 December, 1996 and to accept the further deposit of $755,000. He refused to do these things, or in the words used by the agreement, he failed to do them. Having failed to complete the sale in the manner specified in the agreement, he was entitled to refund the deposit, plus an amount equal to the deposit, and the stamp duty payable, and walk away, free from any other obligations. But he was entitled to do this only on 10 December, 1996, or before that date, he having told the purchaser on 2 December, 1996 through the property agents, that he would not complete the sale. What the seller was not entitled to do was fail to take the step towards completion of the sale as provided for in the agreement, and then return double the deposit and the stamp duty in his own good time, leaving the purchaser waiting. That could not have been what the parties contemplated.

It is clear that the parties contemplated that clause 7 would operate only up to the time the further deposit was due because the English version speaks plainly of refunding the initial deposit. It does not contemplate that matters have proceeded beyond this stage because no provision is made for returning the further deposit that might have been paid on 10 December 1996....

Mr. Mumford argues that the seller could indeed have decided that he did not wish to go through with the sale right up to 7 January, 1997 [the completion date]. But why stop there? If clause 7 is to be interpreted as meaning that the seller had the right to back out at any time, having failed to complete the sale, he could sit on his hands, leaving the purchaser in limbo, until he was faced with an imminent order for specific performance. This cannot be what the parties intended.

In my view, the only reasonable construction of the intention of the parties from the words of their agreement is that, after the receiving the initial deposit but before the next step was required of him, the seller was entitled to relieve himself of all his obligation under the agreement by returning the initial deposit, paying a sum equal to that deposit and the stamp duty. It is inconceivable that the parties envisaged that the other would be entitled to allow the time for signing the formal agreement and payment of the further deposit to pass without him doing anything, and then to expect the purchaser to wait in-definitely to know if the seller intended to go through with the deal or back out. That offends one's common sense."

32. I am prepared to agree that when clause 8 of the agreement spoke of "failed to complete the sale in the manner herein", the word "complete" would not just include the act of the execution of the assignment and the payment of the balance of the purchase money, but may include any other act which the parties had agreed to do before to complete the sale. In other words, I agree with the views of Findlay J. that in the context "complete the sale in the manner herein" would mean "to do what else is required of him under the agreement leading to the final act". However in my view, what is required of the vendor (and for that purpose also the purchaser) to do must mean what is required of him as a matter of contractual obligation. While it may well be true that at the time of the provisional agreement, both parties envisaged that a formal sale and purchase agreement would be signed in due course, if as a matter of construction of the provisional agreement and as a matter of law, there was no contractual obligation to enter into a formal sale and purchase agreement, I do not see how it could be said that the vendor (or the purchaser) could be said to have failed to enter into the formal sale and purchase agreement. This was especially so when the terms of the formal sale and purchase agreement were not yet agreed. In my view Findlay J.'s observation that "as part of the completion of the sale according to the terms of the agreement, [the vendor] undertook to do what was contemplated by the agreement, to sign a formal agreement on or before [a certain date]" was contradictory in terms. I could not see how it could be said that the vendor had "undertaken" to do anything which he was not contractually bound or required to do. What the parties may have contemplated was not the same as what was required of the parties as a matter of contractual obligation.

33. I do not see how it could be said that because there was no formal sale and purchase agreement having been entered into by 4th December 1996, the vendor had thereby "failed to complete the sale in the manner herein contained" within the meaning of clause 8 of the provisional agreement. In this respect, it is to be noted that clause 8 was under the marginal caption "vendor fails to perform". This would further support the construction that "fail to complete the sale in the manner herein contained" would require certain default on the part of the vendor in performing the contractual provisions.

34. Referring to the other reason given by Findlay J., viz. that it must be the contemplation of the parties that the escape clause would operate only up the time the further deposit was due, I am of the view that the question of the intention of the parties must be gathered from the terms of the contract. It is well settled that by employing the words in clause 2 of the provisional agreement, the parties had merely agreed that the date named in that clause was merely the target date for the signing of the formal agreement and that if a formal agreement was indeed signed, then the further deposit would be payable upon signing. Thus if it so happened that the formal sale and purchase agreement was not signed on the target date set out in clause 2, then plainly no further deposit was payable on that target date, and there was no obligation on the part of the vendor to receive that further deposit on that day either (see Helath Link Investment Ltd. v Pacific Hawk Investment Ltd. [1995] 1 HKC 249). Thus it cannot be said that the parties had agreed that by 4th December, 1996 the vendor must do something (whether it be the signing of the formal sale and purchase agreement or the receipt of the further deposit) so that if there was no signing or no payment or receipt of the further deposit, the vendor had failed to perform the agreement in accordance with its terms.

35. Although clause 8 merely provided for the refund of the initial deposit received and had made no provision for the refund of any further deposit received, I do not think that this would affect my view on the construction of this clause. If no formal agreement was entered into, the provisional agreement did not required any payment of any further deposit and hence there would be no need to make any provision relating to the refund of the further deposit. If the parties should enter into a formal agreement, then it must be the case that their rights and obligation thereafter would be governed by the terms of the formal agreement and likewise, there was no need for the provisional agreement to make any provision relating to the refund of the further deposit.

36. I am not attracted by the argument that if the right to back out under clause 8 was not restricted to the 4th December, 1996, the target date for the signing of the formal sale and purchase agreement, then logically there could be no time limit for the exercise of that right. In my view, the right was to be exercised as soon as it could be said that the vendor had failed to complete the sale in accordance with the terms of the provisional agreement. As the agreement clearly provided that completion was to take place on or before 18th March, 1997, and if the failure to complete on that day was due to the fault of the vendor, then plainly if the vendor would like to back out from the sale, he would have to refund the initial deposit and pay the compensation in accordance with clause 8 immediately on 18th March, 1997. He could not wait to exercise his right at a later date.

37. Thus in my view, on true construction of the provisional agreement, the vendor would be entitled to exercise the right under clause 8 on 5th March, 1997.

Other consideration : waiver, estoppel & variation

38. It was however argued that in the present case, the right to back out under clause 8 was lost because (a) the vendor had accepted the payment of the further deposit on 5th December, 1996 and/or (b) the vendor had requested for early completion on 5th March, 1997.

39. I do not think that the acceptance of the sum of $260,000 by the vendor would have any effect on the vendor's right under clause 8 in this case. It must be remembered that the tender of the further deposit was expressed to be made on a voluntary basis - namely to demonstrate the purchaser's sincerity, and there was no suggestion in the letter of 4th December, 1996 that once the vendor should elect to take the money, the vendor was bound to accept the terms of the formal sale and purchase agreement as the purchaser may suggest. Furthermore, the payment was upon the condition that the same should be held by the vendor's solicitors to the order of the purchaser's solicitors. The vendor's solicitors should not release the same to the vendor unless and until the formal agreement was concluded. It is true that the vendor's solicitors had acted in breach of such condition imposed on them. The consequence would then be that they would be personally liable to refund the amount to the purchaser's solicitors. Indeed, there was a demand for such refund on 28th December, 1996. In these circumstances, it could hardly be said that in fact there was any payment of the further deposit at all.

40. Even if there was a voluntary payment of the further deposit, I cannot see how it could be said that the parties' right under the provisional agreement had been varied. Nor could I see how it could even be argued that by accepting the further deposit, the vendor had somehow represented to the purchaser that the right under clause 8 would not be exercised (see Tsang Fan Hang v Hang Hing Construction Co. Ltd. [1981] 1 HKC 343 at 348C-H).

41. Likewise in relation to the request made by the vendor that completion should take place on 5th March, 1997, even accepting the contention of the purchaser that the vendor did make such a request, this would only support the inference and contention that up to the date of the meeting in January 1997, the vendor still wanted to sell the property. I could not see how it could be contended that the vendor had thereby represented that any other rights under the provisional agreement was to be waived or varied.

42. Finally it was contended that the vendor had failed to refund and pay compensation by legal tender. However as the purchaser had not taken any objection on that score but instead had taken objection merely on the ground that the vendor was not entitled to exercise the right to terminate, the right to be paid by legal tender was waived.

Conclusion & Order

43. For all the above reasons, I am of the view that the issued raised in the amended summons must be answered in favour of the vendor.

44. Upon the defendant's acknowledging that she was obliged to pay to the plaintiff the amount tendered by the defendant to the plaintiff by the letter dated 5th March, 1997, the plaintiff's claim herein is dismissed with cost to the defendant. The cost would obviously include the cost of this application. I will also grant the defendant the relief in terms of paragraphs (1) & (2) of the defendant's counterclaim. On my finding, the defendant having validly terminated the agreement, there was no cause of action against the plaintiff for damages for breach of contract. However the defendant had indicated to me that the defendant intended to amend its counterclaim to plead a new cause of action viz. damages for slander on title. In the light of the intended amendment, I would not make any further order in relation to the defendant's counterclaim.