WISE THINK GLOBAL LTD v. FINANCE WORLDWIDE LTD

FACV No. 3 of 2013

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 3 OF 2013 (CIVIL)

(ON APPEAL FROM CACV NO. 10 OF 2011)

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Between :

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RULING

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Mr Justice Chan NPJ:

1. This is the Ruling of the Court.

2. On 12 November 2013, the Court handed down judgment allowing the appeal by the appellant (Purchaser) and ordering specific performance of the Provisional Agreement made between the Purchaser and the respondent (Vendor) on 31 December 2009.  It further ordered, among other things, that the Purchaser do lodge within 14 days of the handing down of judgment an agreed form of the order for specific performance and that in default of agreement, each party do lodge its form of order for the Court to determine without further hearing the appropriate form of order.

3. The parties having failed to agree on the form of order, each party filed its own draft.  The Purchaser submitted a letter of explanation and the Vendor a written submission in support of their respective draft forms of order.

Matters in dispute

4. The parties do not dispute that the registration of the relevant instruments at the Land Office should be vacated.  We would make an order to this effect, adopting paragraphs 3(b) and (c) in the Purchaser’s draft.

5. The parties, however, cannot agree on the following matters:

(i) the need for a formal sale and purchase agreement;

(ii) objections and requisitions with regard to the showing and giving of title;

(iii) adjustments to be made to the balance of the purchase price upon completion; two items arise for consideration: the rental income and profits (less outgoings) received by the Vendor after the contractual date of completion and the liability of the Purchaser to pay interest on the balance of the purchase price after that date; and 

(iv) costs of these proceedings.

Formal sale and purchase agreement

6. The Vendor submits that the parties should sign a formal sale and purchase agreement before completion. We reject this suggestion. The Court ordered specific performance of the Provisional Agreement.  It is not appropriate and we do not see any purpose at this late stage in having a formal sale and purchase agreement when what the parties ought to do now, after such a long delay as a result of this litigation, is to proceed to completion as soon as practicable.

Objections and requisitions

7. The Provisional Agreement made no provision for the showing and proving of title and the raising of objections and requisitions.  That being the case, completion of the sale and purchase should thus proceed as if the parties had entered into an open contract.  In the case of an open contract, the vendor is under an obligation to show a good title upon completion.  As Ferrand on Contract and Conveyance (4^th ed 1983) at p 84 puts it, “the vendor’s obligation to show a good title is an immutable part of the scenery of an open contract”.

8. The existence of the vendor’s obligation to show a good title in the absence of express provisions has been accepted by the Hong Kong courts as arising by necessary implication.  In Active Keen Industries Ltd v Fok Chi Keong [1994] 2 HKC 67, after citing Emmet on Title, para 2.072, Barnsley’s Conveyancing Law and Practice (3^rd ed) para 245-246, Williams on Title (4^th ed) p.565, the Court of Appeal said at p.77:

“This obligation arises by necessary implication from the contract itself. This accords with common sense. Were the law otherwise, the purchaser might be left in the position of having to make a snap decision on the day fixed for completion, on scanty information, as to whether to complete or not. It follows that this obligation, falling on the vendor to properly answer requisitions and inquiries, if reasonably raised by the purchaser, must be discharged within a reasonable time, to enable the purchaser to satisfy himself on the matter, get his money ready and complete on the day fixed.”

9. It would also follow from what was said by the Court of Appeal in that paragraph that the purchaser is entitled to a reasonable opportunity to raise objections and requisitions on the vendor’s title.

10. There is no valid reason in the present case to dispense with the Vendor’s obligation to show and give good title or to deny the Purchaser the opportunity to raise objections and requisitions.  Furthermore, the Court should not, by an order of specific performance, force a doubtful title on the Purchaser, in case the title is shown to be doubtful.  The order for specific performance would in that case turn out to work to the Purchaser’s detriment.  In our view, the Purchaser must be provided with a reasonable opportunity to raise objections and requisitions and the Vendor the chance to answer them.  We would thus adopt paragraphs 3(d) to (g) of the Purchaser’s draft form of order, subject to the making of adjustments which will be discussed below.

Adjustments to be made on completion

11. One of the main disputes between the parties concerns what adjustments can or should be made upon completion and how this should be dealt with in the court order.  This dispute involves consideration of (i) the rental income and profits (less outgoings) received from the Property by the Vendor and (ii) any interest payable by the Purchaser on the balance of the purchase price, both as from the contractual date of completion.

12. The Purchaser submits that it is entitled to an account by the Vendor of all the rental income and profits received by the Vendor (less outgoings) from the Property after the contractual date of completion and that it should be credited with such income upon completion.  Alternatively, the Purchaser asks for the matter to be remitted to the Recorder for assessment.

13. This is resisted by the Vendor which argues that this amounts to a claim for damages and that the High Court has no jurisdiction to make an award of damages under s 12 of the Conveyancing and Property Ordinance, Cap 219 (on which the Purchaser relied to apply for relief).  Alternatively, it is submitted that even if the court has such a jurisdiction, the whole matter including whether the Purchaser is entitled to such income without first paying the balance of the purchase price, whether the Purchaser should be liable to pay interest on the balance of the purchase price, and whether such interest should be deducted from the such income upon completion should be decided by the High Court after hearing evidence and submissions.

Vendor’s duty to account and Purchaser’s liability to pay interest

14. It is well established that after the contractual date of completion, the purchaser becomes entitled in equity to the property and so becomes entitled to the rental income and profits less outgoings after that date.  Thus, where completion takes place on a date other than that specified in the contract, the vendor is liable on completion to account to the purchaser for such income. Ordering the vendor to give such an account is, contrary to the Vendor’s submission, not making an award of damages or compensation.  The court hearing a vendor and purchaser summons clearly has the power to make such an order.

15. On the other hand, the purchaser who has not yet paid the vendor the balance of the purchase price because completion has been delayed should normally be liable to pay interest on such balance after the contractual date for completion because he has had use of the money during the meantime while the vendor did not have the benefit of the money which he would have received had the sale been completed on the agreed date.

16. The vendor’s duty to account for the rental income and profits (less outgoings) he has received and the purchaser’s liability to pay interest on the balance of the price after the date on which completion should have taken place are reciprocal obligations.  This is the consequence of the application of the equitable principle that equity treats as done what ought to have been done.  As Ferrand on Contract and Conveyance (4^th ed 1983) at p 192, puts it:          

“… equity looks on that as done which ought to be done, so the purchaser enjoys the income and suffers the outgoings of the property and the vendor is entitled to interest on the price, each as if the completion had taken place on the contractual date.”

This is further explained by the learned author as follows:

“This is almost self-explanatory. First, as to income, the vendor must account to the purchaser for all the rents and other profits of the property accrued due since the contractual completion (see, e.g. Lord Eldon in Paine v Meller (1801) 6 Ves 349, at p.352, and Plews v Samual [1904] 1 Ch 464). Secondly, as to outgoings, the purchaser must repay to the vendor that proportion of the outgoings of the property – rents, rates, etc – paid by him in respect of the same period (per Romilly MR in Carrodus v Sharpe (1855) 20 Beav 56 at p. 58; Barsht v Tagg [1900] 1 Ch 231).”

17. As to the purchaser’s liability to pay interest, in Esdaile v Stephenson (1822) 1 Sim & St 122, Leach VC said at 193:

“Where there is no Stipulation as to interest, the general rule of the Court is, that the Purchaser, when he completes his Contract after the time mentioned in the Particular of Sale, shall be considered as in Possession from that time, and shall from thence pay Interest at 4l. per cent, taking the Rents and Profits. If, however, such Interest is much more in amount than the Rents and Profits, and it is clearly made out that the delay in completing the Contract was occasioned by the Vendor, there, to give effect to the general rule, would be to enable the Vendor to profit by his own wrong; and the Court, therefore, gives the Vendor no Interest, but leaves him in Possession of the interim Rents and Profits.”

18. Again, Cozens Hardy J in Barsht v Tagg [1900] 1 Ch 231, 234-235 said:

“I think it is settled law that, in the absence of any stipulation on the subject, the vendor must bear all expenses and outgoings of property sold down to the time when a good title was first shewn, so that the purchaser could prudently take possession, and also pay interest on his unpaid purchase money from that time, and as from that time all such expenses and outgoings must be borne by the purchaser: see Carrodus v Sharpe.”

19. Similarly in Plews v Samuel [1904] 1 Ch 464, Kekewick J said (at p 468) that from that day (date fixed for completion) the purchaser was entitled to possession and liable to pay interest on unpaid purchase money.

20. The respective rights of the vendor and purchaser were further discussed by Wilberforce J in Re Hewitt’s Contract [1963] 3 All E R 419, 422:

“In approaching the question of the construction of conditions of sale, it is well established that the court should have regard to the normal rules of equity as regards the respective rights of vendor and purchaser, and, particularly, as regards their rights pending the completion of the sale. Equally it is clear (and is not disputed in essence by the purchasers here) that on general principle it is not right that the purchaser both should have the income of the property as from the date of the contract and in addition should be relieved from paying intereston the purchase money.” (emphasis added)

The learned judge added:

“That shows that where the sale is delayed by the vendor’s default, the general rule is that the vendor, instead of getting the interest, must be satisfied with the interim rents and profits; but he does not lose both ways. That is undoubtedly the general position.” (emphasis added)

21. Thus, it has long been established that where the court has granted specific performance of a sale and purchase agreement, it has the power to make an order for adjustments to be made upon completion in respect of the rental income and profits (less outgoings) received by the vendor and the payment of interest by the purchaser since the contractual date of completion. See for example the decree made in Bridges v Robinson (1811) 3 Merr 694 and the minutes of order drawn up in North v Percival [1898] 2 Ch 128.

Should the Vendor account for rental income received

22. In the present case, we see no reason why the Vendor should not be ordered to give an account of the rental income and profits it had received less any outgoings expended since the contractual date of completion.  Apart from challenging the court’s jurisdiction, the Vendor’s written submission does not raise any real ground of dispute.

23. The Property is a shop (business premises) and the sale is subject to an existing tenancy.  In the letter dated 9 December 2013 from the Purchaser’s solicitors, there was a reference to the rental income being $88,000 per month although it was not clear what the outgoings were.  The gross rental income from 26 February 2010 (the contractual date of completion) to 25 November 2013 (when the tenancy expired) would be about $3.96 million.  The outgoings expended on the Property would include government rent and rates, management fees and air-conditioning, all of which can easily be ascertained within a short time.  One does not need an elaborate assessment to arrive at the more reliable figures for these items. 

24. We would therefore order the Vendor to give an account for the actual rent and outgoings between 26 February 2010 and 25 November 2013 and it should do so within 14 days from the date of the order to be made pursuant to this Ruling.  This would allow ample time to enable an adjustment to be made to the balance of the purchase price upon completion.

Should the Purchaser be liable to pay interest

25. As to the purchaser’s liability to pay interest, Leach VC in Esdaile v Stephenson clearly envisaged that there might be cases where it would be unfair to order the purchaser to pay interest on the balance of the purchase price to the vendor.  The learned judge mentioned the situation where the interest payable by the purchaser was much more than the income received by the vendor and that this was caused by the vendor, in which case, the court would give no interest to the vendor but allow him to keep the income.

26. In Re Hewitt’s Contract, Wilberforce J also considered similar situations where the court had to make a decision.  In that case, he took the view that the purchaser should be relieved of this liability where the sale has been delayed by the vendor’s default.  What would amount to default on the part of the vendor in order to disentitle him to the payment of interest had been discussed in many decisions.  See for example, North v Percival [1898] 2 Ch 128 and Re Young and Harston’s Contract (1885) 1 Ch D 168, 174 and the cases referred to in Gibson’s Conveyancing (21^st ed, 1980) at p 172 to 173. However, these cases must be approached with caution since they involved express provisions in the relevant conditions of sale regarding the payment of interest and the decisions turned on the construction of the word “default” contained in those provisions in the context of those cases.

27. In our view, the court is undoubtedly asked to exercise its equitable jurisdiction and we think that as a general rule, the purchaser should be ordered to pay to the vendor interest on the balance of the purchase price after the contractual date of completion unless it is unfair to do so.  Ultimately, the court has to decide whether in the circumstances of the case, it would be unfair to deprive the vendor of such interest while requiring him to account for the rental income without getting paid the full purchase price, or to relieve the purchaser of the liability to pay interest while allowing him to have the benefit of the rental income for which he has not yet fully paid.  (See the remarks made by Wilberforce J in Re Hewitt’s Contract as highlighted in paragraph 20 above.)

28. In the present case, the Vendor purported to exercise its right under an escape clause in the Provisional Agreement which permitted cancellation of the sale and purchase upon payment of a sum which was double the amount of all the deposits paid.  The Court held that the Vendor had failed to pay the correct amount and thus could not rely on such escape clause. In these circumstances, we think it would not be unfair to order the Purchaser to pay interest on the balance of the purchase price after the contractual date of completion until the actual date of completion. And we so order.

29. As to the rate of interest, we are inclined to approach the question on the basis that the interest chargeable should reflect a rate which the vendor might have had to pay to borrow the amount which, treating as done what ought to be done, he ought to have had the use of from 26 February 2010.  Taking the matter broadly, we think that 4% per annum from that date to the date of actual completion would be appropriate in the circumstances of this case.  Taking the period to be, say, 4 years, this comes to around $2,300,000.  In any event, the exact figure would not be difficult to arrive at and does not need any elaborate assessment.  We direct the Purchaser to provide such a figure within 14 days from the date of the order to be made pursuant to this Ruling. 

Adjustments to be made in this case

30. We would also order that the balance of the purchase price should be adjusted upon completion by taking into account the amount of net income received by the Vendor and the interest payable by the Purchaser.  It may well be that depending on the actual amount of these items, the credit for net income may simply be offset by the interest chargeable, with little difference between the two figures.

Costs

31. Finally, in relation to costs, we would order the return of the sum of $350,000 (initially paid by the Vendor pursuant to the order of the Recorder, but then restored to the Vendor by order of the Court of Appeal) and return of the sum of $670,000 paid under the costs order made by the Court of Appeal, now set aside. 

32. As to the costs which the Vendor is ordered to pay to the Purchaser for the proceedings in the Court of Appeal and this Court, we would leave them to be taxed if not agreed.  We decline to make any order that such costs be taken into account in the calculation of the balance of the purchase price to be payable upon completion, first, the payment of costs is of a different nature and secondly, taxation takes time and completion should not be further held up by such process.

Conclusion

33. The Purchaser has the charge of the order and should file a draft order within 7 days to reflect the orders made in this Ruling [in paragraphs 4, 10, 24, 28, 29, 30 and 31 above].  We would give liberty to apply to the Registrar in respect of the working out of this order.  We would also order that the costs of sorting out the form of order should be paid by the Vendor.