HOWARTH CHEUNG NATALIE JANE Y. S. v. TSANG HONG KWANG OK AND ANOTHER

HCA 2298/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 2298 OF 2012

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J U D G M E N T

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1.  The plaintiff was the vendor while the 1^st defendant and her husband, the 2^nd defendant, were the purchasers of a residential property with car parking space at Conduit Road under a preliminary sale and purchase agreement. The sale fell through. The parties blame each other for repudiation of the agreement.

2.  This is the defendants’ application for summary judgment on their counterclaim.

BACKGROUND

3.  The defendants are the owners of the property in question.  Through estate agent, the parties entered into the preliminary agreement dated 27 November 2012 for the sale of the property in question at the price of HK$25,000,000 to the plaintiff (“the Preliminary Agreement”).

4.  The Preliminary Agreement contained, among others, the following terms:

Clause 2(a)

“The purchase price of the said premises shall be HK$25,000,000.00 which shall be paid by the Purchaser to the Vendor in the manner as follows:

(a) HK$1,240,000.00 shall be paid upon signing of this Agreement as deposit.

……”

Clause 8

“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 caused by the Purchaser’s default of this Agreement.”

Clause 9

“Should the Vendor after receiving the deposit paid hereunder fail to complete the sale in the manner herein contained the Vendor shall immediately compensate the Purchaser with a sum equivalent to the amount of the deposit as liquidated damages together with the refund of the deposit and the Purchaser shall not take any further action to claim for damages or to enforce specific performance.”

5.  The plaintiff signed the Preliminary Agreement and tendered to the estate agent her cheque for the initial deposit dated 26 November 2012 drawn in favour of the defendants’ then solicitors.  The estate agent brought the Preliminary Agreement and cheque to the defendants.  The defendants signed the agreement; and the cheque was forwarded to their then solicitors.

6.  On 4 December 2012, the defendants were informed by their then solicitors that the cheque was dishonoured upon presentment.  The bank subsequently advised that the cheque was dishonoured because “drawer’s chop/signature differs from specimen in our [the bank’s] possession”.

7.  Upon knowledge about the dishonour, the plaintiff, according to her, drew a new cheque for the estate agent to bring to the defendants.  She subsequently learned from the estate agent that the defendants had decided not to proceed with the deal due to the bounced cheque and refused to accept the new cheque.

8.  Later on the same day, the plaintiff’s husband visited the defendants’ at home.  The plaintiff’s own case is that the defendants, as well as their daughter, maintained that the deal had already been terminated on the ground that the initial deposit was not paid pursuant to the Preliminary Agreement.  There was said to be further negotiation.  But the fact remained that there was no further agreement between the parties.

9.  On the following day, 5 December 2012, the defendants, through their then solicitors, formally gave notice of termination of the Preliminary Agreement on the ground that the plaintiff’s failure to pay the initial deposit pursuant to the agreement amounted to repudiation, which they accepted.

10.  The plaintiff took the initiative to commence litigation.  Hence the present action.  The plaintiff seeks specific performance of the Preliminary Agreement; further or alternatively, damages for the defendants’ failure or refusal to complete.

11.  By way of counterclaim, the defendants seek declaration that they were entitled to terminate and have validly terminated the Preliminary Agreement for the repudiation of the same by the plaintiff.  They claim the sum of HK$1,240,000 equivalent to the amount of the initial deposit and orders for the vacation of the registration of the Preliminary Agreement and the writ herein against the property.

THE MAJOR DISPUTE

12.  The major dispute lies in the following questions:

(1) Whether the dishonour of the cheque amounted to repudiation of the Preliminary Agreement on the part of the plaintiff;

(2) If yes, whether the defendants have validly accepted the repudiation and terminated the Preliminary Agreement;

(3) If yes, whether the defendants were entitled to the claim the amount equivalent to the initial deposit.

THE PRINCIPLES

13.  The applicable principles are trite.  For summary judgment to be entered, the court has to be satisfied that there is no triable issue or any other question that ought to be tried.  To resist summary judgment, the defendant to the claim must show a credible defence.  The determination of the court does not take the form of a mini-trial of difficult points of law or factual dispute on affidavits.

WHETHER THE PLAINTIFF WAS IN BREACH

14.  After hearing the plaintiff, it strikes me as very important to set out in the first place the contractual obligation that she is said to have been in breach of.  Clause 2(a) is clear.  It was the plaintiff’s obligation to pay the initial deposit upon the signing of the Preliminary Agreement.

15.  Each case must depend on its own facts.  But in the context of secondary property market in Hong Kong, time is usually of the essence of the sale and purchase agreement.  In Wong Wai Chi Ann v Cheung Kwok Fung Wilson [1996] 3 HKC 287, the Court of Appeal acknowledged that and said (at 290G):

“……Of course, each case must depend on its own facts. But in the absence of special circumstances, it will usually be the case that a provisional agreement for sale and purchase in the common form in use in Hong Kong will be treated as one of which time is of the essence, although no express provision in that behalf in contained in the agreement……”

16.  In Ho Chi Keung v Yip Lai Ping, DCCJ 7062/2003 (19 October 2004, per HH Judge To (as he then was)), the cheque for payment of the initial deposit tendered upon the signing of the provisional sale and purchase agreement was bounced.  It was common ground that time was of the essence in relation to payment of the initial deposit.  But the learned judge added (at §18):

“……That must be right in the circumstances of the typical transaction of this kind and as the obligation to pay arose immediately upon signing the Agreement……”

17.  Likewise, in Wong Man Hong v Poon Kin Chiu, DCCJ 5363/2006 (8 May 2008, per HH Judge Au (as he then was)), the cheque for payment of the initial deposit, pursuant to the provisional agreement containing the same term as clause 2(a) in the present case, was bounced.  The learned judge said that:

“35. However, it is well established that, even though there is no express provision to make the time of paying an initial deposit as of the essence, unless there are special circumstances to suggest otherwise, the time requirement on the payment is regarded as of essence in a conveyancing transaction in Hong Kong. See: Wong Wai Chi v Cheung Kwok Fung [1963] 3 HKC 287 at 290D-H per the late Godfrey JA (as he then was); Sihombing & Wilkinson, Hong Kong Conveyancing – Law and Practice, Vol 1(A), para 351.

36. Further, the failure to pay the initial deposit under a conveyancing agreement on time has also been held to be a fundamental breach of the agreement, which entitles the innocent party to accept and terminate the contract, and to recover the deposit by way of an action. See: Millichamp v Jones [1982] 1 WLR 1422 at 1430G, per Warner J.

37. Given the weight of these authorities, I reject Mr Wong’s submission that there is arguably no fundamental breach of the provisional agreement in this case.  Whether the initial deposit should have been paid on 26 August 2006 (as provided in the agreement) or 28 August 2006 (as under the alleged condition as held above), time was of the essence, and any lateness or failure to pay it on time (as in present case) constituted a breach of the agreement of which the Plaintiffs were entitled to accept.”

18.  Sun Lee Kyong Sil v Jia Weili [2010] 2 HKLRD 30 was another instance of the cheque drawn by the purchaser for payment of the initial deposit being dishonoured upon presentment. The provisional agreement contained similar term as clause 2(a) in the present case.  The learned Recorder rehearsed the relevant case law in detail; and came to this conclusion (at §38):

“On the basis of the authorities cited above, I find that time was of the essence of the Provisional Agreement in the present case despite the absence of any express provision to that effect. I base my finding on the nature of the transaction and the property, namely, the sale of a flat in a large development in the secondary market. I further base my finding on the surrounding circumstances, namely, the volatile property market in Hong Kong and the fact that completion was to take place within a relatively short time, ie about nine weeks from the date of the Provisional Agreement.”

19.  Mr Lin argued that when the initial deposit was paid by way of a cheque, there should be an implied term that the cheque only needed to be honoured in reasonable time.

20.  Mr Lin referred to AG of Belize v Belize Telecom Ltd [2009] 2 All ER 1127, Ng Chun Kong Calvin v First Star Development Ltd [2007] 3 HKLRD 281 and Peregrine Systems Ltd v Steria Ltd [2005] EWCA Civ 239 (CA) for the principles for implication of term to the contract in accordance with the circumstances of each case.  As a matter of principle, I do not see that this is controversial.

21.  Mr Lin specifically referred to Pantland Hick v Raymond & Reid [1893] AC 22 for the purpose of illustrating that where time for performance of a contractual obligation is not agreed so that reasonable time is implied, the party under the obligation will not be treated as in breach for delay in performance if it was attributable to causes beyond his control and if he has neither acted negligently or unreasonably.  As a matter of principle, I do not see that this is controversial either.

22.  Applying the above principles, Mr Lin submitted that as the initial deposit was paid by cheque, the parties contemplated that the defendants would not get paid until the cheque was cleared.  But the time of which was nowhere mentioned in the agreement.  There should therefore be an implied term that the cheque would be honoured within reasonable time.  As the cheque was dishonoured out of no fault on his client’s part, it was still within reasonable time for the cheque to be honoured if it was re-presented.

23.  It was precisely because of how the above argument was advanced on behalf of the plaintiff that I found it necessary to emphasize at the outset the contractual obligation under the Preliminary Agreement, of which she is said to have been in breach.

24.  Unlike cases such as Pantland Hick, the time for the performance of the contractual obligation under clause 2(a) to pay the initial deposit was spelt out, namely, upon the signing of the Preliminary Agreement.  As previously held, such time, in the present context, was of the essence.

25.  Now the argument seems to suggest that the position changes if the payment is by cheque.  Does it?

26.  Mr Li referred to the acknowledgement of receipt of the cheque signed by the defendants.  As Mr Hui submitted, one cannot refer to the defendants’ acknowledgement of receipt of the cheque and turn round to say that the contractual obligation under clause 2(a) became that to pay and to accept payment of the initial deposit by cheque.

27.  At the time of the Preliminary Agreement, the cheque was accepted for payment of the initial deposit upon the understanding that it (unless post-dated, which was not the case here) would be honoured upon presentment, be that right after the signing of the agreement or whenever the defendants chose to present it. Whether and when the cheque should be honoured does not depend on whether the defendants would have been able to use the money other than to stakehold it.

28.  If authority is needed, what the learned judge said in Ho Chi Keung (at §18), with respect, best summarised that:

“……Clause 2(b) of the Agreement provides that the initial deposit shall be paid upon signing of the Agreement……The vendor agreed to payment by cheque instead of legal tender. Where a cheque is offered in payment, it amounts to conditional payment of the amount of the cheque which, if accepted operates as a conditional payment from the time when the cheque was delivered: Homes v Smith [2000] 1 Lloyds Rep Banking 139 at 143. The cheque was issued on Sunday, 26 October 2003, as payment of the initial deposit upon signing the Agreement, pursuant to Clause 2(b) of the Agreement. The obligation to pay arose at the time of signing the Agreement. In the circumstances, it must be implied that the cheque shall be met upon first present on the first business day after its delivery, i.e. 27 October 2003, and that this is a fundamental term of the Agreement.”

29.  The learned judge in Ho Chi Keung referred to the first presentment of the cheque.  This was because of the purchasers’ argument that the cheque was dishonoured as a result of their mere oversight, and that they should be entitled to a second opportunity to comply with the payment obligation.  The argument was rejected (at §§19-21).  The learned judge said (at §22):

“……Whatever might have been the bank’s reason for the not clearing the cheque and however sympathetic one may be with the purchasers, they were in breach of this fundamental term in respect of which time was of the essence. The vendor was entitled to treat the breach as repudiatory and decide for itself what to do with the property. There was no obligation on the part of the vendor to accept the purchasers’ assurance that there were funds in his account and to re-present the cheque and to wait and see for a second time whether the cheque will be honoured while holding herself bound by the Agreement……”

30.  Similar argument for the availability of a second chance after the cheque for payment of initial deposit has been dishonoured was dismissed by the learned Recorder in Sun Lee Kyoung Sil (at §§20(b)-(d); 39-45); and by the learned judge in Wong Man Hong (at §§34-38).

31.  Fundamentally, implication of such a term in respect of the time for honouring the cheque will not sit well with the actual contractual obligation to pay the initial deposit upon the signing of the agreement, the time of which is of the essence.

32.  Mr Lin sought to distinguish the above cases on the facts by reference to the reason for the dishonour.  He argued that in the present case, by ensuring that her account was funded to meet the demand for payment upon presentment of the cheque, the plaintiff could not have done more.  Indeed the plaintiff disputes the correctness of the bank’s refusal to honour the cheque.

33.  This is not the occasion to resolve the dispute between the plaintiff and her banker as to whether the latter was right in taking issue with her signature on the cheque and refusing to clear the cheque.  But the defendants were at the receiving end of the consequence of what happened between the plaintiff and her banker, which the defendants had absolutely no part of or control over.  The defendants, and they only can, look to the primary obligation under the contract. That was the understanding at the time when the Preliminary Agreement was signed.  The defendants should not be subject to criticism for being harsh or unreasonable for doing just that.  Whether the plaintiff can look to her banker for recourse is another matter that is beyond this court in the present case.

34.  Despite Mr Lin’s industrious effort in arguing otherwise, I take the view that upon dishonour of the cheque in the present case, the plaintiff was in breach of the obligation to pay the initial deposit upon the signing of the Preliminary Agreement.  This was repudiatory in nature irrespective of the question of fault behind the dishonour that the plaintiff has been emphasizing.  I also take the view that the issue of whether the defendants were entitled to terminate the Preliminary Agreement by accepting the repudiation is beyond reasonable dispute.

WHETHER THE DEFENDANTS HAVE VALIDLY TERMINATED THE PRELIMINARY AGREEMENT

35.  It is the plaintiff’s own case, according to the affirmations of her and her husband, that the estate agent already informed her of the defendants’ decision to terminate the Preliminary Agreement; and their refusal to accept the new cheque drawn by her on 4 December 2012.  The same stance was reiterated by the defendants and their daughter during the visit by the plaintiff’s husband to the defendants later on the same day.  Irrespective of the dispute as to what was negotiated during the meeting, there is no real dispute that no agreement was reached.  The letter from the defendants’ then solicitors followed on the following day.

36.  The letter from the former solicitors dated 5 December 2012 was criticised for being incoherent.  As far as whether the same adequately and unequivocally communicated to the plaintiff the defendants’ election to terminate the Preliminary Agreement is concerned, I disagree with the criticism.

37.  That the dishonoured cheque was still in the possession of the defendants or their solicitors is not indicative of any contrary stance: see Ho Chi Keung (at §24).

38.  There is no allegation or evidence of any other representation on the part of the defendants that could have amounted to affirmation of the Preliminary Agreement or that the plaintiff has somehow acted upon.

39.  It is beyond argument that the Preliminary Agreement was validly terminated.

WHETHER THE DEFENDANTS ARE ENTITLED TO CLAIM THE SUM OF HK$1,240,000

40.  Mr Lin submitted that the defendants are in any event not entitled to claim the sum of HK$1,240,000 equivalent to the amount of initial deposit as a matter of law and pleading.

41.  The pleaded basis for the claim is clause 8 of the Preliminary Agreement.  The plaintiff claims for forfeiture of the initial deposit or the same amount as liquidated damages.

42.  In Sun Lee Kyong Sil, the plaintiff sued the defendant both for damages and on the dishonoured cheque.  The basis for the claim for damages (at §19(h)) was clause 7 of the agreement there (at §6) which was identical to the terms of clause 8 of the Preliminary Agreement in the present case.  Finding for the plaintiff, the learned Recorder also found (at §46) that the defendant was liable to pay damages to the plaintiff in the sum of the initial deposit.  The plaintiff was also adjudged to be entitled to the same as the amount of the cheque subject to no double recovery.

43.  In Wong Man Hong, the basis for the claim for damages that could be discerned from the judgment is a similar provision in the provisional agreement there (at §7(2); 19).  Finding for the plaintiffs, the learned judge entered judgment in the amount of the initial deposit.

44.  There is no reason to doubt that the courts in the above cases must be aware of the fact that the initial deposit was not in the hands of the vendor available for forfeiture when they awarded damages to the vendors in the amount of the initial deposit.

45.  Nevertheless, Mr Lin asked that these cases be considered with caution because the issue of the vendor’s entitlement to claim the amount of the initial deposit, he submitted, was not actually argued.  He now advanced argument in this respect, relying on Lowe v Hope [1970] 1 Ch 94 and the Australian case of Kathopoulos v Bjelica Investments Pty Ltd (1979) 25 ALR 309.

46.  In Lowe, the agreement stipulated deposit to be payable to the solicitors for the vendor as stakeholder.  It did not provide for forfeiture of deposit.  The purchaser of the land in question had paid less than 10% of the deposit to the vendor.  The vendor eventually rescinded the agreement and claimed for forfeiture of the contractual deposit.  Pennycuick J held (at 97G-98H) that a vendor who elects to rescind is entitled to forfeit the deposit which he has in his hands. However he is not entitled to enforce the provisions of the rescinded contract.  Therefore it would be contrary to principle that a vendor having rescinded a contract so that the contract is at an end should at that stage be entitled to insist that the purchaser shall hand over to him the balance of the deposit with a view to its forfeiture.

47.  The principle mentioned above was applied in relation to the amount of the deposit payable under the contract of sale but not in fact paid by the purchaser by any means (except for the less than 10% paid to the vendor): see Lowe (at 98F).  In the present case, the initial deposits had indeed been paid by cheque, only that the cheque was dishonoured.

48.  Even assuming that the claim for forfeiture of the initial deposit not in their hands, as a matter of principle, is questionable, the defendants do have the alternative claim for the amount of initial deposit as liquidated damages.  When the agreement was terminated, their right as the vendor to the initial deposit as a debt has already accrued.  Mr Hui referred to the New Zealand case of Watson v Healy Lands Ltd [1965] NZLR 511, which involved dishonour of the cheque tendered for the payment of initial deposit for the purchase of land.  The vendor (the defendant) decided to sue on the cheque.  But Woodhouse J (at 516) had the following comment:

“……I do not doubt, therefore, that ……the dishonour of the cheque immediately entitled the vendor here to treat the contract as at an end. In fact it was decided to sue on the cheque, but in my opinion this did not affect the defendant’s rights under the contract…..Even if the contract had been rescinded before any payment by the plaintiff, I think it is likely that the defendant here would still have been entitled to sue directly for the unpaid deposit. (See, for example, Stonham (supra) 340, 709)……”

49.  However, Mr Lin submitted that one cannot legitimately turn the right to forfeit a deposit, which was in fact unpaid, into that to the same amount as liquidated damages.  He referred to the case of Kathopoulos.

50.  In Kathopoulos, the agreement for sale and purchase of land provided for the payment of deposit; and should the purchaser default by failing to complete, the deposit paid, except so much of it as exceeds 10% of the purchase price, shall be forfeited to the vendor.  The deposit was never paid.  Muirhead J said (at 324):

“……It seems to me that the recoverability of moneys equating the unpaid deposit will to some extent depend upon the wording of the contract. In the present case it seems to me that the issue is an open one; but as I said previously I do not consider a court should treat a deposit as liquidated damages upon rescission, unless the parties have so agreed. Nor, once the contract has been rescinded, should unpaid deposit moneys retain an identity so as to be recoverable as damages; an entirely different concept to forfeiture of such moneys paid by way of earnest to the bargain……”

51.  So the starting point of the learned judge in addressing this open issue was the terms of the contract.  It was indeed on this basis that the learned judge (previously at 322) decided to reject the argument that a purchaser ought not to be allowed to put himself into a better position by his default than if he had performed the contract by due payment of the deposit.  In doing so, the learned judge actually said:

“……But the notion is contrary to the wording of cl 15……To treat it otherwise places it in the category of agreed liquidated damages and the contract, in my view, bears no such interpretation. It may be illogical or a little harsh that an indulgent vendor should be penalized for not collecting his deposit, but of course if the contract goes off by reason of the purchaser’s default, the loss on resale can ordinarily be recovered……”

52.  Indeed, the vendor’s claim in that case was not confined to the liquidated amount but also damages for breach of contract.  Importantly, the learned judge acknowledged that the vendor had the right to claim damages for loss on resale by reason of the purchaser’s default.

53.  But in my view, Kathopoulos does not come to his assistance in the circumstances of the present case.  The terms of the Preliminary Agreement are materially different.  Like any typical provisional agreement in secondary property deal in Hong Kong, the Preliminary Agreement contained clauses 8 and 9, which by contract set out the remedies of the vendor and the purchaser respectively in the event of breach on the part of the other.  As far as the vendor is concerned, his remedy in such event is not only agreed but also confined to be the amount of the deposit.  Clause 9 mirrors the mutual agreement on the same amount recoverable by the purchaser in the event of the vendor’s default.  Unlike Kathopoulos, the parties in the present case contracted out of the right of any other claim, be it for damages or specific performance.

54.  In my view, this answers the query raised by Mr Lin as to whether the defendants may claim the amount of the initial deposit as liquidated damages.  Whether or not described as liquidated damages or merely damages, the pleading of and reliance on clause 8, in my view, suffice and enable the court to award damages, if claimed, in the amount of the initial deposit that the defendants should have received pursuant to the clause.  To say that the defendants have not pleaded the basis for the entitlement to the amount of initial deposits as damages, in my view, is too technical to be fairly arguable.

55.  During the hearing, Mr Lin cast doubt on the defendants’ claim by questioning if the defendants are also entitled to claim the amount of the further deposit payable.  The simple answer is that the vendor cannot do so.  Clause 8 (as in clause 9 concerning the purchaser’s right) contractually confines the vendor’s right to the amount of the initial deposit and no further.  Further, the further deposit becomes payable only upon the signing of the formal agreement. This clearly did not happen as the provisional agreement has already been terminated.  The absurdity of the defendants’ claim suggested by Mr Lin does not exist.

OTHERS

56.  The defendants ask for the vacation of the registrations of the Preliminary Agreement and the writ of summons against the property, if judgment is entered in its favour.  This was no real dispute that the court has the power to do so for good reason pursuant to section 19 of the Land Registration Ordinance, Cap 128.

57.  The defendants are also concerned about the contractual liability to commission to estate agent.  Clause 12 of the Preliminary Agreement provided that in case the sale and purchase was not completed, it should be the defaulting party who should compensate the estate agent and pay all the duties.  The defendants seek a declaration that the plaintiff has failed to complete under clause 12.  This is unnecessary, in view of the above findings and the declaration to be made below.

 ORDER

58.  In the circumstances, I allow the defendants’ application and make the following order:

(1) Declaration that the defendants have validly terminated the Preliminary Agreement due to the plaintiff’s repudiation;

(2) Order that the registration of the Preliminary Agreement against the property in the Land Registry be vacated;

(3) Order that the registration of the writ of summons herein against the property vacated;

(4) Judgment to the defendants in the sum of HK $1,240,000 with interest thereon at 1% above the prime rate of the HSBC from the date of writ to judgment, and thereafter at the judgment rate until full payment.

59.  It must follow that the plaintiff’s claim cannot stand.  I therefore dismiss the same.

60.  As to costs, I make a nisi order that the plaintiff shall pay the defendants’ costs of this action including this application.  Costs shall be taxed, if not agreed.  In the absence of any application to vary within 14 days, this costs order shall become absolute.