XCHRX FORD JOINT LTD. v. KEEN LLOYD (HOLDINGS) LTD.

HCA 21393/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. HCA 21393 OF 1998

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J U D G M E N T

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1. I have before me an application for summary judgment under Order 14 and an application for interim payment under Order 29. The application under Order 14 is for a declaration that the Sale and Purchase Agreement and the Supplementary Agreement had been effectively terminated with no further obligation of performance on the part of the Plaintiff. The Order 29 application is for interim payment of some $12 million as being the minimum sum due to the Plaintiff on the non completion of the purchase of the property.

2. By the Sale and Purchase Agreement made in October 1997 ("the Agreement") the Defendant as purchaser agreed to buy from the Plaintiff the vendor, a house on the Peak for $71 million with completion on the 6th August 1998 and with payment of $7.1 million as Deposit and $3.55 million as Part Payment. Clause 23 of the Agreement provides:-

"If the Purchaser shall fail to ... complete the purchase ... the Deposit shall be absolutely forfeited to the Plaintiff who may ... rescind this Agreement and retain the Part Payment ... on account of any loss ... to be suffered by the Vendor over and above the amount of the Deposit forfeited ... and ... either retain the Property or resell .... If on any such resale the Vendor incurs a loss, the aggregate of such loss and all costs and expenses reasonably incurred in any such re-sale (less the amount of the Deposit forfeited) shall be paid by the Purchaser to the Vendor and the Vendor shall be entitled to appropriate the Part Payment retained as aforesaid towards payment of the same .... And any deficiency after such appropriation shall forthwith be recoverable by action Provided further that the Purchaser shall not be called upon to pay for such loss, costs and expenses unless the Property is re-sold within 6 months of the rescission of this Agreement and in the event of there being no concluded contract for the resale of the Property by the Vendor within the aforesaid period of 6 months, the Vendor shall return the Part Payment to the Purchaser but without any interests .... This clause shall not preclude or be deemed to preclude the Vendor from taking other steps or remedies to enforce the Vendor's rights under this Agreement or otherwise ....."

3. Completion however did not take place on the 6th August 1998 but instead the parties entered into a Supplementary Agreement on 10th August 1998. The Supplementary Agreement provided that:-

(a) completion was extended to the new completion date of 24th October 1998;

(b) the Purchase Price was reduced to $63 million so long as there was completion on the new completion date of 24th October 1998;

(c) the Defendant was to make further Part Payments totalling $9.585 million;

(d) the Plaintiff can "exercise its rights under Clause 23 of the principal agreement .... without prejudice to any other rights and remedies of the vendor under the Agreements" and further provided that the new payments totally $9.585 million shall also be regarded as Part Payments which the Plaintiff under Clause 23 was entitled to retain and to appropriate against its loss.

4. The Defendant did not complete on the 24th October 1998 and by letter dated 9th November 1998, the Plaintiff demanded the Defendant to complete on or before 5 p.m. on 18th November 1998 and reserved all its rights under the Agreement and Supplementary Agreement. The Defendant did not complete on 18th November 1998. By letter dated 4th December 1998, the Plaintiff accepted the wrongful repudiation by the Defendant and rescinded the 2 Agreements and issued proceedings on the 14th of December 1998.

5. At the hearing before me two large issues fall to be decided:-

(1) Whether there is a defence to the Action because the Plaintiff was in repudiatory breach of the 2 Agreements by reason of the fact that it was too late on the 4th of December 1998 for the Plaintiff to accept the repudiation of the Defendant's non completion;

(2) Whether the minimum quantum of damages payable is arguable because of the dispute as to the scope of Clause 23 and the right to damages under common law and to the reasonableness of the resale price.

6. I will consider each of those two issues in turn.

ARGUABLE DEFENCE-ACCEPTANCE OF REPUDIATION

7. The undisputed facts of this case show that the Defendant was repeatedly unable to complete and eventually when the game was up on 18th of November 1998 (the market having fallen by that stage to probably less than half of the original purchase price), rather than pay the remaining balance of some $41 odd million, it chose to forgo the $20 million which had already been paid to the Plaintiff. There was no correspondence which showed that the Defendant was either willing and able to complete after 18th November 1998 or contending after the 4th December 1998 letter that the Plaintiff was in wrongful breach and had no right to terminate the Agreements. The Affirmation of Ng Kam Sing dated 4th March 1999 in opposition to the Order 14 application shows a dispute on quantum of how much the Plaintiff can recover and not a dispute on liability of whether the Plaintiff was in wrongful repudiation of the Agreements. The about-face of the Defendant on liability came later, after the Plaintiff had sold the property in April and thereby to a large extent neutralised the objections of the Defendant to the claim for damages. Common sense suggests that the innocent party here is the Plaintiff and the party in the wrong is the Defendant but the Defendant boldly asserted to the contrary. Does the Defendant have a good point. I say no. For me what is advanced by the Defendant is, if I may use an expression which is perhaps less than wholly courteous to the Defendant's counsel, sophistry and I hope I will do Counsel for the Defendant no discourtesy if I do not honour the arguments presented without merit with detailed analysis.

8. The argument of the Defendant on liability as I understand it takes the following form. Upon the repudiation of the Agreements by the Defendant with no completion on the 18th November 1998, the Plaintiff has an option of accepting the repudiation of the Defendant but such acceptance of repudiation must be exercised within a reasonable time, namely a few days from 18th November 1998 and that by the 4th of December 1998, it was too late for the Plaintiff to exercise such an option. Alternatively it was put that the silence of 17 or 18 days amounted to affirmation of the Agreements. Therefore the letter of the 4th December 1998 was of no effect and the Agreement continued to be valid and the Plaintiff repudiated the Agreement when it sold the property in April 1999 and therefore the Plaintiff was in wrongful repudiation and liable to the Defendant. As can be seen the argument of the Defendant if it has any substance is to turn the case on its head and render the innocent party to be the party in the wrong.

9. In my judgment, the fundamental fallacy of the argument of the Defendant is to contend that the right of election given both by Clause 23 and by common law can only be exercised in a restricted way. It is to be noted that Clause 23 confers on the Plaintiff the following rights:-

(i) right to forfeit the Deposit;

(ii) right to rescind the Agreements;

(iii) right to resell the property;

(iv) right to retain the Part Payments on account of loss to be suffered by the Plaintiff provided the property is sold within 6 months of rescission;

(v) right to recover from the Defendant loss on resale provided the property is resold within 6 months of rescission of Agreement;

(vi) right to appropriate the Part Payments towards payment for such loss provided the property is resold within 6 months of rescission of Agreement.

It is to be noted that except for rights (iv), (v) and (vi), none of the other rights has any expressed contractual time limitation on its exercise. Under Clause 23, there is, I hold, no fetter on the exercise of the right of rescission or forfeiture of Deposit. This ought to be a complete answer to the bizarre suggestion of the Defendant that the Plaintiff was in wrongful repudiation.

10. There is arising at common law upon the non-completion by the Defendant also two rights of the Plaintiff which it is at liberty to elect. One is a right to affirm the contract and hold the Defendant to the bargain of completing the purchase and for the exercise of that right the Plaintiff as vendor probably would need to give a new notice to the Defendant of the new date of completion. There is another right (which is inconsistent with the right of affirmation of Agreements) which is the right to accept the repudiation of the Defendant and put an end to the contract. The two rights of affirmation and acceptance are mutually exclusive and therefore the exercise of one right would preclude the exercise of the other right. But there is no question of one right not being able to be exercised unless it can be shown either that such right has been clearly abandoned or waived or such a right cannot be exercised because the other inconsistent right having already been exercised. In this case, subject to but I will say later, there is no question that there had been any exercise of the right of affirmation of the Agreement before the 4th of December 1998 by the Plaintiff and in this context, I must state that in my judgment mere non acceptance of repudiation cannot be treated as affirmation of the Agreement. The second question then is whether it can be said that the right of acceptance of repudiation has been clearly abandoned by the Plaintiff by the 4th of December 1998. The answer for me is clearly no. I cannot therefore find any basis at common law for the contention of the Defendant that the Plaintiff is disabled from exercising its right of acceptance of repudiation.

11. The case of the Defendant was also alternatively put on the basis that the right of election upon repudiation by the Defendant must be exercised by the Plaintiff within a reasonable time. No authority in support of that proposition has been cited to me and I note in this connection that the Choi Siok Pin judgment is of no assistance as it turns on the necessity of a fresh notice giving reasonable time to complete. On the other hand against that proposition, there is high and very persuasive authority of Sargent v A.S.L. Developments Ltd. [1974] 131 C.L.R. 635 where at 656 Mason, J. (as he then was) said:-

"A person confronted with a choice between the exercise of alternative and inconsistent rights is not bound to elect at once. He may keep the question open, so long as he does not affirm the contract or continuance of the estate and so long as the delay does not cause prejudice to the other side. An election takes place when the conduct of the party is such that it would be justifiable only if an election had been made one way or the other... So, words or conduct which do not constitute the exercise of a right conferred by or under a contract and merely involve a recognition of the contract may not amount to an election to affirm the contract."

In Cox v Crook [1981] ICR 823 at page 828 the following is said:

"If one party commits a repudiatory breach of a contract, the other party 'the innocent party' can choose one or two course: he can affirm the contract and insist on its further performance or he can accept the repudiation in which case the contract is at an end. The innocent party must at some stage elect between these two possible courses: if he once affirms the contract his right, to accept the repudiation is at an end. But he is not bound to elect within a reasonable or any other time. Mere delay by itself (unaccompanied by any express or implied affirmation of the contract) does not constitute affirmation of the contract; but if it is prolonged it may be evidence of an implied affirmation."

There is in my judgment no basis for the contention that it is not open to the Plaintiff to accept the repudiation of the Defendant because it is not within a reasonable time.

12. The real case that was strongly put forward at the hearing is that there was affirmation of the Agreements because of a lapse of some 17 or 18 days and that in the context of Hong Kong conveyancing where volatility prevails, 17 or 18 days is clear evidence of affirmation. I do not agree. Whether reasonable time is the applicable test or whether lapse of time might imply affirmation of the agreement is the test (assuming both are possible in law which I have rejected), I am of the view that the Plaintiff in the circumstances had properly exercised its right of acceptance and has not waived its right of acceptance of repudiation. In this connection, it must not be overlooked that we are concerned with a very large transaction involving some $71 million and the decision of whether to give further time for completion (with its risks and various consequences) or to terminate the agreement by acceptance of repudiation (with also its attending risk and various consequences) cannot be easily or likely made. Having regard to the total time taken on this deal and the fact that after the 18th of November 1998 the Defendant was not pressing for an answer on the election, I am of the judgment that in all the circumstances an election made on the 4th December 1998 cannot arguably be said to be too late or unreasonable or amounting to affirmation of the Agreement.

13. On this issue, therefore, I conclude that the Plaintiff had rightly exercised its right of termination by the acceptance of repudiation on the 4th of December 1998. The declarations of termination sought under paragraph 1 of the Order 14 Summons should be made and the Plaintiff is entitled to judgment for damages to be assessed.

INTERIM PAYMENT - RESALE UNREASONABLE

14. A number of issues are raised in respect of the Interim Payment application. They are the following:-

1. Whether Clause 23 can be said to be a penalty because it allows the Plaintiff to chose the timing of resale;

2. Whether Clause 23 in relation to resale should be subject to an implied term of reasonable time to resell the property;

3. Whether on the facts the Plaintiff had failed to take reasonable steps to sell and therefore arguably will not be able to rely on Clause 23;

4. Whether if Clause 23 cannot be relied on, the Plaintiff can rely on the alternative case of common law damages not being displaced by Clause 23.

I will deal again with each of these issues in turn.

Penalty

15. It is to be noted that Clause 23 when it gives the 6 months window for resale is not necessarily benefiting the Plaintiff alone as 6 months period of time can also benefit the Defendant. This is not a one way provision which is bound to benefit the Vendor or bound to penalise the purchaser but it can be seen as a reasonable provision whereby the Vendor is given a reasonable time to resell subject to the overriding provision that it must not resell at a gross undervalue. It is a clause of common usage in conveyancing in Hong Kong and had never being successfully challenged as being a penalty. In my view so long as the Plaintiff resells bona fide, there is nothing penal about the liability for any deficiency within the 6 months of resell period and I hold therefore that Clause 23 is clearly not a penalty.

Implied term of duty to sell within reasonable time

16. As an alternative, the attack on Clause 23 is that there is an implied term in Clause 23 that the power of resale is to be exercised as soon as possible or within a reasonable time to mitigate the loss. The difficulty of this proposition is that an implied term cannot be read into a contract when it is inconsistent with the express term in the contract of 6 months period for resale. Furthermore it is not necessary for business efficiency.

17. Reliance was placed by the Defendant on the judgment of Cheung J. in another Keen Lloyd case HCMP 3577/98 where it was said consequent on concession that resale must be carried out within a reasonable time. But as pointed out by Mr. Mok for the Plaintiff the relevant clause in that case did not have a 6 months resale provision and it seems to be me that there is really no judicial support for the proposition advanced by the Defendant on this argument. I find therefore also against the Defendant on this point.

18. It is useful at this juncture to take note in relation to the emphasis on reasonableness, that there is built-in already into the Clause 11, a test of reasonableness which reads "if on any such resale the vendor incurs a loss the aggregate of such loss and all the costs and expense reasonably incurred in any such resale shall be paid by the purchaser." So, in my view, this clause does have the built-in protection for the purchaser.

Failure by the Plaintiff to sell within reasonable time

19. The case advanced by Mr. Chan for the Defendant is that it will be open to the Defendant to argue on assessment that there had been no proper exercise by the Plaintiff of Clause 23 because the Plaintiff did not do anything to sell the property until March 1999 and therefore was in breach of its duty to sell within reasonable time or could not meet the requirement of Clause 23. Even assuming that there is a legal basis for this contention (which I have found there is not), the evidence before me clearly shows that the Plaintiff did try to sell almost immediately after the rescission letter had been sent. Letters on pages 688 and 687 are to such effect and it is also on oath in paragraph 5 of Elisabeth Chan's 2nd Affirmation. So there is no factual basis for the assertion or for that purported defence.

Displacement of common law damages remedy

20. The case of Mr. Mok on interim payment however was even stronger because he said and I accept that there is clear authority that Clause 23 does not displace the common law damages remedy and that therefore the Plaintiff even if Clause 23 remedy is not available can fall back on the cumulative additional remedy of common law damages and on that basis the amount now sought is indisputably due. Mr. Chan concedes that if there is no arguable case of legal displacement of common law damages then he cannot argue against the amount claimed in the interim payment application. The issue is whether there is an arguable case of displacement. In Wommera v Provident Center [1985] HKLR 263 the Court of Appeal held on an application to allow amendment to introduce claim for common law damages in addition to the claim for the equivalent of Clause 23 damages that the two rights are cumulative rights and the Court of Appeal allowed the amendment. Sir Alan Huggins said at page 269 of his judgment:

"I am not persuaded that there is anything which prevent us to upholding the common law remedy and has not been excluded. I see that clause as providing the vendor with an alternative remedy at common law - a remedy which on the one hand is limited by the conditions contained in the clause and on the other hand is more readily available and also to enable the vendor to obtain a liquidated sum more speedily than he could obtain unliquidated damages on common law.

21. Sir Alan also said a little bit further up the page that "the court will always lean against exclusion of common law rights save where an intention to exclude is clear". In this case, certainly there is no clear intention to exclude it. But in fact it is the other way round. There is substantial scope for the view that the additional common law right to claim damages has been preserved. This is to be seen at page 12 of the bundle under the Proviso in Clause 23 of the Agreement and also at page 33 under Clause 3(a)(iii) of the Supplementary Agreement. I am therefore content to have the Court of Appeal's powerful support that Clause 23 is not exclusive or exhaustive of the remedy available to the vendor and that the common law damages remedy is still extant.

22. On assessment of damages, in my view, the Plaintiff will be able to rely on common law damages claim and on that basis it cannot be doubted that the market price of the property would be about $30 million or in other words that the Plaintiff could recover from the Defendant some $20 million, namely a sum far in excess of the $12 million now sought in the interim payment application.

23. On the basis of the above findings against the Defendant on the four issues argued, the question left is to ask what should be the reasonable resale price to form the basis of the damages which the Defendant has to pay under Clause 23 or under common law. The debate is therefore between the $23 million which was the realised price of resale and any other figure of resale which the Defendant by credible evidence must show as being reasonably realisable by the Plaintiff on resale of the property. In the bundle, there are valuations ranging from $28 million to $40 million and there are offers ranging from $21 million to $28 million.

24. The highest figure put forward by the Defendant was $40 million. Having regard to all the material put before this court, I believe it is a figure very much probably on the high side. I suspect in reality the best sale figure which can be obtained by the Plaintiff on resale is probably a figure much closer to the Plaintiff's figure than to the Defendant's figure. But as this is an application for interim payment I would err on the side of caution. However, on any basis the Plaintiff is entitled to interim payment calculated on loss based on the Defendant's best case. The difference between the contract price of $71 million and the Defendant's figure of $40 million is $31 million. $31 million is more than the combined total of $20,235,000 for Deposit and Part Payments already made by the Defendant. There is a shortfall of $10,765,000. It is proper to add to that figure of $10,765,000 the surveyor fees of $3,600, resale legal costs of $45,020 and mortgage interest of $1,693,250.79. The proper figure for interim payment therefore should be $12,506,870.79 ($10,765,000 + $3,600 + $45,020 + $1,693,250.79). The Defendant is to pay this interim sum immediately and the balance of the claim of the Plaintiff for damages is to be assessed by the Registrar.

25. The Plaintiff is to have the costs of the Order 14 Summons and of the Order 29 Summons with Certificate for two Counsel.