SMART MAX ENTERPRISE LTD v. SPEEDY WAY LTD

CACV 4/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 4 OF 2011

(ON APPEAL FROM HIGH COURT ACTION NO. 665 OF 2007)

____________

BETWEEN

____________

________________

J U D G M E N T

________________

Hon. Cheung JA:

1.  I agree with the Judgment of Yuen JA.

Hon. Yeung JA:

2.  I agree with the Judgment of Yuen JA and have nothing to add.

Hon. Yuen JA:

3.  This is an appeal from a judgment of Andrew Cheung J. given on 17 December 2010 ordering the Defendant (“the Vendor”) to return a deposit in the sum of $948,000 and to pay damages in the agreed sum of $4,505 to the Plaintiff (“the Purchaser”) for an aborted sale and purchase of two factory units in Kwun Tong.  The learned judge also gave certain ancillary orders and ordered the Defendant to pay the Plaintiff’s costs.

Sale and Purchase Agreement

4.  The parties had entered into a Provisional Sale and Purchase Agreement on 13 September 2006 followed by a Formal Sale and Purchase Agreement (“FSPA”) signed on 24 October 2006.  Completion date was 27 February 2007 between the hours of 9:30 am and 5:00 pm.

5.  Clause 5(a) of the FSPA provided amongst other things that the Vendor “shall show give and prove a good title to the property” in accordance with s.13 of the Conveyancing and Property Ordinance and make and furnish to the Purchaser such attested or certified copies of any deed or documents of title in accordance with that section as may be necessary to complete such title.

6.  Clause 6 provided that “any requisition or objection on title shall be delivered to the Vendor’s solicitors within seven business days after receipt of the relevant title deeds and documents by the Purchaser’s solicitors who shall within 7 working days reply to the answers delivered by the Vendor’s solicitors otherwise the same shall be considered as waived (in which respect time shall be of the essence)” (Emphasis added). 

7.  Clause 6 went on to state that if the Purchaser insisted on any requisition or objection which the Vendor was unwilling or unable to comply with, the Vendor would be at liberty to annul the sale by giving 7 days notice, and if the Purchaser did not withdraw the requisition or objection in the meantime, the sale would be annulled and the Vendor should return the deposit (with interest if the return is made after 7 days).

8.  Clause 13 provided that time was to be of the essence of the Agreement.

Requisition No. 4

9.  On 12 October 2006 the Vendor’s solicitors sent the title deeds and documents to the Purchaser’s solicitors.

10.  Seven days later on 19 October 2006 the Purchaser’s solicitors raised 4 requisitions.  Requisition no. 4 is material.  It read as follows:

“In Assignment Memorial No.UB7351170, the Vendor executed its part by one director, please prove for due execution”.

The Assignment referred to was an assignment in 1997 (“the Assignment”) by which the Vendor acquired its title from a company called Alan Textiles Ltd (which is the “Vendor” referred to in the requisition), which had a registered office in Hong Kong.  The execution clause in the Assignment stated only as follows:

“SEALED with the Common Seal of the Vendor and SIGNEDby Lau Hon Leung, its director”.

11.  Pausing here, I note that Table A of the Companies Ordinance Cap. 32 provided that the common seal of a company shall only be used by the authority of the directors or of a committee of directors, and every instrument to which the seal is affixed must be signed by a director and counter-signed by the secretary or a second director or by some other person appointed by the directors for the purpose.  It is therefore clear that unless Alan Textiles’ sealing article was different from that in Table A, the Assignment was obviously not properly executed.  The Purchaser’s solicitors were therefore right to raise the requisition.

12.  There was no answer from the Vendor to Requisition No.4.  Nor did it give notice annulling the sale under Clause 6 (see para. 7 above).

Cover letter for draft assignment

13.  On 7 February 2007, 4 months after Requisition No. 4 was raised and 20 days before completion, the Purchaser’s solicitors sent a draft assignment to the Vendor’s solicitors for approval, under cover of a letter that stated, amongst other things:

“With reference to our previous correspondence herein, we send you the draft Assignment of the Property for your approval on behalf of your client, the Vendor, subject to the satisfaction or compliance of the requisitions or objections on title raised by us in our previous correspondence on or before the date of completion”. (Emphasis added).

14.  I will return to this letter when I discuss the Vendor’s submissions on how it should be construed.

15.  Still no answer to Requisition No. 4 was provided by the Vendor, and no notice to annul the sale was given.

Day before completion date

16.  On 26 February 2007, 1 day before completion date, the Purchaser’s solicitors wrote to the Vendor’s solicitors as follows:

“We refer to our letter of 19th October 2006 [containing Requisition No. 4, see para. 10 above] and put on record that up to date, you have not replied us in respect thereof. All rights of our clients are hereby reserved.

In this connection, we would like to draw your attention to the Active Keen’s decision”.

17.  Active Keen Industries Ltd v Fok Chi-keong [1994] HKLR 396 is the well-known judgment of this court (Power V-P, Nazareth and Litton JJA) which held that the “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” (p.405).  In particular, it was held that that obligation would not have been discharged by disclosure on the day fixed for completion (p.406).    

18.  There was no reply to this letter from the Vendor or its solicitors.

Completion date

19.  On completion date, at 12:52pm, the Vendor’s solicitors faxed a letter to the Purchaser’s solicitors purportedly giving answers to the 4 requisitions raised 4 months earlier.  Answer No. 4 said that a copy of the sealing provisions of Alan Textiles was enclosed - in fact, it was not enclosed with the faxed letter, nor even with the hard copy sent by hand which was received by the Purchaser’s solicitors at 2:24pm.

20.  It was not until 3:03pm that the Vendor’s solicitors faxed to the Purchaser’s solicitors a copy of the relevant pages of Alan Textiles’ articles of association.  This stated that Clause 71 of Table A did not apply and there was substituted the following provisions:

“20(a) The Seal of the Company shall not be affixed to any deed or instrument except by the authority of a resolution of the Board and in the presence of one of the Directors of the Company and such Director shall sign every deed or instrument in which the Seal of the Company is affixed in his presence”. (Emphasis added).

21.  At shortly after 5pm that day, the Purchaser’s solicitors wrote to the Vendor’s solicitors putting on record that the Vendor solicitors’ “reply to our requisitions was only received today afternoon and no reasonable time is allowed for us to consider your answers” (Emphasis added).  The Purchaser’s solicitors said they were taking instructions and reserved their client’s rights.

Vendor’s offer of postponement

22.  The next day at 11:05 am, the Vendor’s solicitors faxed a letter to the Purchaser’s solicitors saying:

“Without prejudice to our clients’ rights and powers under the Agreement for Sale and Purchase dated 24^th October 2006 entered into between our respective clients, our client is prepared to accept completion of the above property to be postponed to 5:00pm of 28^th February 2007".

In other words, there was less than 6 hours notice of a postponement of completion by 1 day after requisitions were answered on completion date.

Termination of the Agreement

23.  That afternoon at 3:09 pm the Purchaser’s solicitors wrote to the Vendor’s solicitors pointing to the Vendor’s breach of the law as set out in Active Keen in giving answers to requisitions only on the day of completion, and also rejecting the answers to two of the other requisitions.  The Purchaser’s solicitors informed the Vendor’s solicitors that the Purchaser had decided to rescind the transaction and asked for the return of deposits.

24.  On the same day, the Vendor forfeited the deposits.

25.  On 2 April 2007 the Purchaser commenced proceedings.  (It is not known why it took more than 3 years for the parties to bring the proceedings to a hearing).

Hearing before A. Cheung J

26.  At the hearing before Andrew Cheung J in December 2010, the Purchaser relied only on Requisition No.4 and argued it had not been properly answered.  Alan Textiles’ sealing provisions required a resolution of the board before the seal could be affixed.  The Vendor did not supply a copy of the board resolution, nor did the execution clause on the Assignment state that the common seal had been affixed pursuant to a board resolution (see Grand Trade Development Ltd v Bonance International Ltd ([2001] 2 HKLRD 759).  

27.  Counsel then appearing for the Vendor conceded that Requisition No.4 had not been properly answered.  However it was argued by the Vendor that the Purchaser had waived that requisition in that (1) the Purchaser had not pressed for an answer during the 4 months between the raising of the requisition and completion date, (2) it did not seek to annul the sale, and (3) its solicitors had sent a draft assignment.

28.  The learned judge held that the Purchaser had not waived the requisition by waiting for an answer for 4 months or by sending the draft assignment (see para. 13 above), and that the right to annul under the Agreement did not lie with the Purchaser, but with the Vendor.  Accordingly judgment was given in favour of the Purchaser.

Appeal                                                                          

29.  On appeal, counsel for the Vendor argued that

(a) by the letter of 7 February 2007 (see para. 13 above) the Purchaser had extended time for answering the requisitions to completion date,

(b) (withdrawing the concession before the learned judge), Requisition No. 4 had been duly answered, by reason of the operation of s.23A Conveyancing and Property Ordinance Cap.219 (“CPO”), and

(c) there was reasonable time in the 2 hours between 3pm and 5pm to consider the answer, as the answer was simple in the light of s.23A. 

It was also argued that the Purchaser had by its solicitors’ letter of 28 February 2007 (see para. 23 above) waived their right to object to the answer to Requisition No. 4.

Effect of letter of 7 February 2007

30.  I respectfully agree with the learned judge that the Purchaser had by its solicitors’ letter dated 7 February 2007 extended time for answering the requisitions to completion date.  Accordingly if the Vendor did not provide any answers at all by that day, the Purchaser would have been entitled to terminate the Agreement then.  But that does not mean that if the Vendor did deliver answers that day (say, at 4:59 pm and however complicated the answers), the Purchaser’s solicitors were obliged to consider the answers and decide whether or not to complete within that day.  I am not entirely clear whether that construction was suggested by counsel for the Vendor, but if it was, it would defy common sense.

31.  So the question is: how much time did the Purchaser’s solicitors have to decide if the answers were sufficient?

32.  I note that clause 6 of the FSPA provided that “the Purchaser’s solicitors ... shall within 7 working days reply to the answers delivered by the Vendor’s solicitors otherwise the same shall be considered as waived (in which respect time shall be of the essence)”.  In my view, the parties had thereby expressly (or at least impliedly) agreed that the Purchaser’s solicitors had 7 working days to consider answers to requisitions. 

33.  Accordingly when the Purchaser extended the time to answer requisitions to the date fixed for completion, and Vendor delivered answers that day, the Purchaser was entitled to 7 working days thereafter to consider them.  It follows that by demanding that the Purchaser complete within 1 day after answers were delivered, the Vendor was in breach of the Agreement and the Purchaser was entitled to terminate it.  In my view, that is sufficient to dispose of the appeal.    

Operation of s.23A CPO

34.  As for the answer to Requisition No.4, counsel now appearing for the Vendor withdrew the concession made by his predecessor before the learned judge, and submitted that when Alan Textiles’ sealing provision was provided, the sight of that provision triggered the operation of s.23A CPO which raised a presumption of due execution, and the Vendor was thereby “precluded” from demanding anything further.                            

35.  Section 23A in full reads as follows:

(1) A deed purporting to be-

(a) executed prior to the commencement of section 9 of the Law Amendment and Reform (Miscellaneous Provisions) Ordinance 2003 (14 of 2003) by or on behalf of a corporation aggregate; and

(b) attested by a signatory or more than one signatory, where the signatory or each of the signatories, if more than one, is a person who could have been authorized under the articles of association or other instruments of the corporation,

shall, until the contrary is proved, be presumed for the purposes of proof of title to any land to have been duly executed by the purported signatory or signatories, as the case may be, with the authority conferred by the articles of association or other instruments of the corporation, whether or not the source of the authority or the means by which such authority was purportedly conferred is apparent from the deed.

(2) Where any deed is or has been produced by a vendor as proof of title to any land and that deed purports to have been executed by a corporation aggregate not less than 15 years before the contract of sale of that land, it shall for the purposes of any question as to the title to that land be conclusively presumed-

(a) as between the parties to that contract; and

(b) in favour of the purchaser under that contract as against any other person,

that the deed was validly executed.

(3) This section applies only to deeds produced as proof of title to any land pursuant to contracts for the sale of such land entered into on or after the commencement of section 9 of the Law Amendment and Reform (Miscellaneous Provisions) Ordinance 2003 (14 of 2003).

36.  Counsel for the Purchaser did not object to the withdrawal of the concession and sought leave to file a Respondent’s Notice to answer the s.23A point, which was granted.  He argued that s.23A expressly dealt with proof of title only, so  that by analogy with s.13 of the CPO as considered in Yiu Ping Fong v Lam Lai Hing [1999] 1 HKLRD 793, it only applied to the stage of showing of title, and not to the stage of giving of title.

37.  In light of my view that the Vendor was not entitled to require the Purchaser to complete the day after the answers were delivered, it is not necessary to decide this point, but I am minded to think that it may be too simplistic to draw an analogy with s.13 (as it has been understood in Yiu v Lam) just because both sections contain the words “proof of title”.

-     It is clear that s.23A was enacted to resolve difficulties caused by defective corporate execution of deeds, difficulties which had been illustrated in a series of cases which had been brought to court.  Those difficulties would not be resolved at all if s.23A only allowed a presumption of due execution at the showing title stage, but not at the giving title stage.  A purposive interpretation of s.23A therefore requires that it should apply to both stages. 

-     Section 13 deals with a different situation.  One starts with the principle that a purchaser is entitled to be given original title deeds at completion (because, amongst other reasons, an equitable mortgage in favour of a third party can be created by the deposit of title deeds).  Whilst there can only be 1 set of original title deeds, many sets of certified true copies may be made at various times.  The production of certified true copies at the showing title stage would be adequate to enable title to be investigated, but in my view it cannot be adequate at the giving title stage (with the exceptional case of lost title deeds) because a set of certified true copies would not give the purchaser the security provided by his possession of the original title deeds.

Reasonable time

38.  The operation of s.23A CPO does not however mean that the Vendor was entitled to require the Purchaser to complete within 1 day of providing Alan Textiles’ sealing article.  Even if one ignores clause 6 (see paras. 32-33 above), the Purchaser was still entitled to reasonable time to consider the risk of accepting title without sight of the board resolution.    The Purchaser might wish to consider with its solicitors or counsel whether s.23A applies; if it does, since the facts of this case do not give rise to a conclusive presumption under s.23A(2), whether the presumption might be rebutted; in considering that aspect, whether they should make enquiries with Alan Textiles, the Vendor’s immediate predecessor-in-title, the Assignment having been executed only 9 years previously.  These deliberations would take time and the Purchaser could not be reasonably expected to complete within a day.

39.  Pausing here, I would just like to comment on the point made in the Vendor’s reply submissions that if the Purchaser wanted more time, it could have made a “counter-offer”.  In my view, a vendor who has delayed in providing answers to requisitions for 4 months, and who does not deliver answers until the date fixed for completion, was obliged to give the purchaser a reasonable time to consider them.  It is a matter of law, not a matter for negotiations, as if the vendor can make a small opening bid first and then haggle with the purchaser.

No waiver in letter of 28 February 2007

40.  Finally the Vendor suggested that the Plaintiff by its solicitors’ letter of 28 February 2007 had waived Requisition No.4.  In my view, the letter started with the complaint of lack of reasonable time to consider the answers, and it would be completely inconsistent to construe the letter to mean that the Purchaser accepted the answers, whether substantively or by way of waiver.

41.  Accordingly, I would dismiss the appeal.  The parties having agreed that costs would follow the event, the Appellant is to pay the costs of the Respondent.