BRAIN FUTURE LTD. v. CENTURY CROWN LTD.

CACV 196/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 196 OF 1999

(ON APPEAL FROM HCMP 813/1998)

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J U D G M E N T

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Godfrey, J.A. (giving the first judgment at the invitation of Nazareth, V.P.) :

Introduction

1. This is an appeal from a decision of the Court of First Instance (Cheung, J.) in a dispute between vendor and purchaser. The court below resolved the dispute in favour of the vendor. The purchaser now appeals.

The issues

2. The case concerns the validity of a requisition, raised by the purchaser and said to be a requisition on title, which the vendor claims to have been raised out of time and anyway to have answered satisfactorily. The purchaser contends otherwise and asserts, further, that the vendor was in breach of its duty to cooperate with the purchaser in order to see that the transaction was brought to a successful conclusion.

3. I shall defer further consideration of these issues until after I have stated the material facts.

The facts

4. The facts are as follows.

5. The parties entered into a provisional sale and purchase agreement on 31 August 1997 for the sale by the vendor to the purchaser of Shops A and B on the Ground Floor of Tak Yan House, Stage 14, 14-18 Lo Tak Court, Tsuen Wan, New Territories, Hong Kong, subject to existing tenancies. The provisional sale and purchase agreement was superseded by a formal sale and purchase agreement dated 19 September 1997 ("the agreement") which provided for the completion of the transaction to take place on 23 February 1998.

6. The purchase price was HK$28,800,000, which was to be paid in stages, and which included deposits totalling HK$5,760,000 which were duly paid by the purchaser to the vendor. (The sale was in fact a sub-sale, but nothing turns on this.) The agreement contains a number of provisions which are material to the issues which fall to be resolved. These are clauses 7, 12, 13(a) and 22(d).

7. Clause 7 of the agreement provides as follows :-

"7. The Purchaser hereby declares and confirms that the Purchaser is fully aware that he is purchasing the Property in its present physical state and condition. The Property is and will be sold on an 'as is' basis and in the physical state and condition as it stands and no warranty or representation whatsoever has been given or is made by the Vendor or his agents regarding the physical state and condition thereof or of the building of which the Property forms part ('the Building'). In particular and without limiting the generality of the foregoing, no warranty or representation is given or made by the Vendor or his agents on any of the following matters, namely :-

(a) the physical state and condition, quality or fitness of the fittings and finishes or the installations and appliances (if any) incorporated in the Property or in the Building;

(b) the physical state and condition of the Property or of the Building or of any structures or erections therein or thereto;

(c) the area of the Property; and

(d) the composition of the Property or of the Building or the nature or manner of their construction."

8. Clause 12 of the agreement provides, so far as is material, as follows :-

"12. The Vendor shall show prove and give a good title to the Property pursuant to Section 13 of the Conveyancing and Property Ordinance Cap.219 at his own cost and expense. ..."

9. Clause 13(a) of the agreement provides as follows :-

"13. (a) Any requisitions or objections in respect of the title or otherwise arising out of this Agreement shall be delivered in writing to the Vendor's solicitors as soon as practicable within seven (7) working days after the receipt of the title deeds by the Purchaser's solicitors otherwise the same shall be considered as waived and the Purchaser shall be deemed to have accepted the Vendor's title (in which respect time shall be of the essence of this Agreement)."

(The date from which the period of seven days referred to in clause 13(a) started to run may be accepted as being the date of the agreement itself; the title deeds (at any rate, some of them) appear to have been delivered by the vendor's solicitors to the purchaser's solicitors before the date of the agreement.)

10. Clause 22(d) of the agreement provides as follows :-

"22. (d) The Vendor has no knowledge as to whether or not any unauthorised or illegal structure or alteration exists on or within or appertains to the Property and the Purchaser, having inspected the Property, shall take the same on an 'as is' basis."

(The reference to an "as is" basis in clause 7 is a reference in the context of the physical state of the premises; the reference to an "as is" basis in clause 22(d) is a reference in the context of unauthorised or illegal structures.)

11. A number of requisitions on title were raised on 15 September 1997 by the purchaser's solicitors, but nothing turns on these. The requisitions with which we are presently concerned were not raised until much later, on or about 14 February 1998. It was not until then, says the purchaser, that it became aware of the existence, or possible existence, of a latent defect in the premises, that is to say, the erection therein of a cockloft or cocklofts for the construction of which no authority had been obtained from the Buildings Ordinance Office and which were consequently illegal structures.

12. On 14 February 1998, the purchaser's solicitors took this up with the vendor's solicitors, enclosing a letter from a firm of engineers and architects supporting their point.

13. On 15 February 1998, the vendor's solicitors replied, referring to the provisions of clause 13(a) of the agreement and adding this :-

"Further, clause 7 of the Sub-Agreement for Sale and Purchase states that your client are fully aware that they are purchasing the property in its present physical state and condition and the property will be sold on an 'as is' basis. Unless there is strong proof showing that your alleged modifications were made after signing of the Sub-Agreement, there is no justification for your client to back out from this clause."

14. The purchaser's solicitors replied on 16 February 1998 saying this :-

"1. Clause 13(a) of the Agreement for Sub-sale and Purchase (the 'Sub-sale Agreement') only refers to documentary title. The modification or defect of the property mentioned in our letter of 14 Feb 1998 cannot be discovered or reviewed upon examination of title deeds. The 7 working days limitation period for raising requisition is irrelevant here.

2. Regarding clause 7 of the Sub-sale Agreement, the property will be sold on 'as is basis' is only based on the assumption that the structure of the property is legal. Please note that 'as is basis' does not mean that the structure can be illegal."

15. The vendor's solicitors replied on 18 February 1998, disagreeing with the point taken by the purchaser's solicitors as to clause 13(a) of the agreement, and adding this :-

"The term 'as is basis' is simple to understand. The property is open to inspection by your client before the signing of the Agreement for Sale and Purchase and your client had every opportunity to ascertain the legality of the structures. Once your client had signed the Agreement and accepted clause 7 incorporated therein, it is construed that your client was satisfied with the then existing condition and physical state of the property. ..."

16. On 19 February 1998, the vendor's solicitors wrote to the purchaser's solicitors, referring to a letter from an authorised person which expressly stated that there was no cockloft in the premises, and adding : "thus all your requisitions are accordingly satisfied". It became crystal clear there was a dispute of fact between vendor and purchaser as to the physical state of the premises. The purchaser was alleging the existing of the cocklofts, and the vendor was denying this. Each side had material which might be said to have supported its case.

17. On 20 February 1998, the purchaser's solicitors wrote to the vendor's solicitors saying this :-

"(a) The defects in title are not discoverable upon any examination of the title documents supplied by you. In the premises, the time which requisition on title imposed by Clause 13 is irrelevant.

(b) The defects in title are latent defects which could not have been discovered upon any inspection of the said premises per se as they were not obvious to one's eyes. Your client has failed in its duty to inform our client the latent defects.

(c) The property was all along actually occupied and controlled by your client/the tenants continuously after the signing of the Sale and Purchase Agreement. It would be prudent and more accurate to have a pre-completion inspection (as usually all purchaser do) to ensure whatsoever use or tempering your client/the tenants may have on the property and if the Sale and Purchase Agreement had been complied with before completion is done. Our client's inspection at over 10 days prior to completion had been most appropriate."

18. They concluded as follows :-

"We now refer to your second letter of 19th Feb 1998 enclosing your Architect Certificate. Clearly your expert had missed the two cocklofts and the two separate entrances covered by metal doors. If your expert had been more careful and read ours' report particularly the photos, they could clearly see the portions of 2 cocklofts clearly above the 2 shop-fronts of the shops with ventilation slots. The unauthorized openings to such cocklofts and the metal doors could be seen clearly from the last few photos of our expert report."

(I must interpose here that, on the contrary, it is now accepted by the purchaser that there are in fact no such cocklofts.) The letter ended with the following :-

"If your same expert or otherwise still cannot see or locate the problem structures and works, our client is prepared to arrange a joint inspection possibly at your client's costs."

19. The vendor's solicitors replied to the purchaser's solicitors on 21 February 1998, saying that there was "no point" in the suggested joint inspection.

20. The date for completion came and went. The purchaser failed to complete, and the vendor purported to forfeit the deposits paid by the purchaser.

The law

21. A purchaser wishing to protect his own interests ought to inspect the property he intends to purchase before he agrees to purchase it. However, even if he does not do so, all is not necessarily lost. Unless he enters into a contract which qualifies or modifies his rights, he will be entitled, at any time, on discovering a latent defect in the physical state of the property, to draw the existence of that defect to the attention of the vendor and require it to be removed, if possible, before completion. Failing such removal, the purchaser will be entitled to throw up the contract. This applies to a latent defect in the form of an illegal structure, the existence, and illegality, of which is discovered by the purchaser only after having entered into the contract. If the purchaser has not entered into a contract qualifying or modifying what would otherwise be his rights, he is entitled to say to the vendor that here is a defect in the vendor's title which might lead to an action on the part of the authorities which would cause him to lose the benefit of his purchase, and so a defect entitling him to withdraw from the contract.

Conclusions

22. I agree with the submission of Mr. Robert Tang, S.C., who has said all that could possibly be said on behalf of the purchaser, that generally speaking, provisions as to time for requisitions are irrelevant in such a case as this. However, it is always open to a vendor to seek by contract to restrict the rights the purchaser might otherwise have to object to the title, and if the purchaser enters into a contract which does in fact restrict his rights, then of course the purchaser is bound by his contract, and cannot assert the rights he would otherwise have had. So here, it is, in my judgment, perfectly clear that the purchaser was bound, by virtue of clauses 7 and 22(d), to take the property in its existing physical state and condition, with or without the existence of the cocklofts and, if there were any cocklofts, even if these were unauthorised or illegal structures.

23. As to the question of the validity of the relevant requisition, I am, for my part, prepared to accept that the purchaser, having reasonable grounds to believe that there might be a cockloft or cocklofts in the property because it had an expert's report to that effect, was entitled to raise its requisition in this respect, even though it raised it late. But the answer to the requisition was that there was no cockloft; and that (being correct) was a perfectly satisfactory answer. There being no cockloft, there could be no question of its construction being illegal or unauthorised.

24. In those circumstances, I have, for my part, no doubt at all that the requisition was satisfactorily answered by the vendor.

25. But what then happened, says the purchaser, is that the vendor failed to cooperate with the purchaser in endeavouring to ascertain what the true facts were. The purchaser claims to have requested a "joint inspection" of the property together with the vendor. Even if its solicitors' letters are to be read as having done so (which is doubtful), in my judgment, the purchaser had no right to request such a joint inspection and the vendor was under no duty to allow it. The purchaser might perhaps have been entitled to request a sole inspection. That raises a question of law which is currently, as I understand it, the subject of consideration by the Court of Final Appeal, but I need not further consider it here, for that was not the request which was made. It was a request for a joint inspection. That was, as I have said, not a request to which the vendor was bound to accede.

26. In the end, I am of the opinion that the requisitions raised by the purchaser here as to the existence of a cockloft were properly raised but were properly answered, and the vendor committed no breach of duty by failing to accede to the purchaser's request (if made) for a joint inspection.

27. In these circumstances, the purchaser's failure to complete on the due date was a fundamental breach of contract, and the vendor was entitled to forfeit the purchaser's deposits, as the judge below held. The judge having come to the right conclusion, we have no option but to dismiss this appeal, and that is the course which I propose we should take.

Stock J. :

28. I agree with the judgment that has just been delivered, and wish to add only a few words on the question whether, even assuming, contrary to the finding thus far, that there was some right to a joint inspection, there was in fact any request for such an inspection.

29. The case for the applicant is predicated on the suggested failure on the part of the vendor to fulfill a duty to co-operate with the plaintiff to ascertain whether it was getting what it bargained for. That suggested failure is in turn predicated on a number of assertions of fact in the Notice of Appeal : first, that the plaintiff entertained a reasonable suspicion of the presence of cocklofts; and secondly, that the plaintiff requested or demanded a joint inspection to satisfy itself whether its suspicions were justified.

30. The truth is that the allegations of fact have no foundation and that being so, the contention of a breach, in my judgment, falls apart :

(1) There was no question of a reasonable suspicion of the presence of cocklofts in respect of which the plaintiff required assurance which the vendor failed to provided. The plaintiff was asserting as a fact established beyond peradventure that there were cocklofts. The architect for the plaintiff even went so far as to state the purpose for which the cocklofts were used.

(2) There was in my judgment no question of a request for a joint inspection. I am satisfied that the letter of 20th February 1998 from the plaintiff's solicitors was not a request for an inspection or for clarification. It was an assertion that the vendor's experts were in effect talking through their hats, and that if they were not sighted enough to see the obvious, the purchaser's expert would point it out to them, at the vendor's own cost. The letter that followed on 23rd February 1998 is, I think, a little disingenuous in its suggestion that a request for an inspection had been made.

(3) There is further no question of any refusal by the vendor of any request by the purchaser to carry out an inspection on its own; nor, indeed, at the time of the correspondence, any suggestion by the purchaser that it had not been able to inspect.

31. Since the contentions of fact upon which the appeal is founded lack true substance, the appeal itself must fail, and I agree that it should be dismissed.

Nazareth V-P:

32. I also agree that the appeal should be dismissed.

33. It is a curious if not bizarre feature of this appeal that there were never any illegal structures. The cocklofts simply did not exist. Their existence was only in the purchaser's architect's imagination. He was not able to gain access to the space beyond the false ceilings. Therefore, he simply imagined that there might be cocklofts in place there. In those circumstances the architect being the agent of the purchaser, I entertain serious doubt as to the validity of any requisition founded only upon that flawed basis. But assuming that the purchaser was entitled to raise the requisition, then I would agree with Godfrey JA that the requisitions were properly answered.

34. As to the so-called request for joint inspection, as Stock J has explained, the documents in which such request is said to be contained simply do not provide any support for that suggestion. Moreover, I share the doubts expressed in Godfrey JA's judgment as to whether the purchaser could insist on a joint inspection by the defendant.

35. Coming then to the question to which Mr Robert Tang SC ultimately reduced his submission, this was: Assuming that the purchaser had asked for joint inspection in the circumstances of the case, whether his refusal to accede to the request for a joint inspection was a breach of the purchaser's duty to cooperate to bring the transaction to conclusion. As I have said, I am unable to make that assumption but even upon it, I am not persuaded that there was a duty to cooperate in the manner suggested.

36. Another difficulty with the alleged request is Mr Tang's submission that regardless of the deficient way the request for a common inspection was made, what mattered was that it was understood in that way by the vendors. That seems to me a highly questionable basis for contending that such a request was made.

37. At the end of the day, as the judge observed, the plaintiff in this case was not denied the right to inspect the property. The purchaser had that right and indeed exercised it before the agreements were entered into. Moreover, the purchaser in fact inspected the property through its agent, the architect, who made an inspection for what it was worth. It seems to me that the judge was right in taking the view that having commissioned an inspection which came out wrong, the purchaser could not thereby acquire a right to further inspection. For all the reasons given by my Lord, as indicated, I would also dismiss the appeal.

38. Accordingly, the appeal is hereby dismissed.