CAMBERRA INVESTMENT LIMITED v. CHAN WAI TAK otherwise known as FREDERICK CHAN

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The plaintiff agreed to purchase a flat for HK$715,000 from the defendant, and a contract of sale was signed on 5 January, 1987. A deposit of $70,000 or slightly less than 10% was paid. Kwan & Kwan, solicitors, acted for both parties.

2. The date of completion was specified in the contract for sale as "on or before l8 February, 1987."

3. Paragraph 14 of the contract provided that "time shall in every respect be of the essence of this Agreement".

4. The plaintiff as "confirmor", then sold the flat to Madam Mak Kwai Ying on 16 February, 1987, for the identical amount, namely $715,000, and a deposit of $30,000 was paid to the plaintiff. The date of completion of that agreement was also "on or before 28 February, 1987".

5. Kwan & Kwan again acted for the plaintiff in this transaction, but Madam Mak instructed Yung, Yu, Yuen & Co., solicitors, to act on her behalf.

6. On the morning of 28 February, 1987, Yung, Yu, Yuen & Co. on behalf of Madam Mak, raised a requisition on title in a letter to Kwan & Kwan. The letter is dated 28 February, and was received on the morning of day.

7. It had been anticipated that completion of both transactions would take place before 1 p.m. on 28 February, at the offices of Kwan & Kwan, Madam Mak would pay her outstanding balance of $685,000 to Kwan & Kwan who would accept it on behalf of the plaintiff as second vendor, and then, as to $645,000, on behalf of the defendant as original vendor.

8. Because the requisition on title could not be immeidiately complied with, Mr. Siu, a managing clerk at Kwan & Kwan, (an unqualified solicitor, but with fifteen to sixteen years experience) and the person who was handling these transactions, found himself in difficulty.

9. I do not propose to discuss in detail the events at the offices of Kwan & Kwan on the morning of 28 February, 1987. Suffice to say that there was a flurry of activity, caused by the fact that the plaintiff found itself unable to complete because Madam Mak was not ready to complete. There were phone calls, discussions, conferences - but all to no avail because the defendant simply insisted on enforcing his rights under the contract. He demanded completion on the 28 February. And that was that.

10. Mr. Siu had been contacted by Yung, Yu, Yuen on Friday 27 February and told that there was a problem about title. It was not a problem which had troubled him in acting for the plaintiff. A prudent and competent conveyancer would have immediately got in touch with Mr. Ng, a director of the plaintiff company, and told him that since completion by madam Mak was doubtful, the plaintiff should ensure that he, Siu, was put in funds to complete. As I have mentioned, Mr. Siu was acting for both plaintiff and defendant. He knew time was of the essence. But he was not prudent or competent, and he placed the plaintiff, his own client, in a situation where it simply could not complete on 28 February, 1987, as it was obliged to do pursuant to its agreement with the defendant.

11. When the defendant heard from Mr. Siu on the morning of 28 February that there were problems, he immediately went to another solicitor, and had prepared a letter, which reads as follows:

12. The evidence suggests that the defendant handed this letter to Mr. Siu at 12.45 p.m. on Saturday 28 February. The defendant then waited at the offices of Kwan & Kwan until about l.25 p.m., when he left.

13. Mr. Siu continued to try and salvage the situation and Mr. Ng finally came in with a cheque for $645,000 at 2.30 - 3 p.m. on 28 February. Attempts were thereafter made to contact the defendant, but he could not be found.

14. On Monday 2 March, Mr. Ng gave Mr. Siu two cashier orders (p44a & b), totalling $645,000, and took back the cheque (P44). He said that he didn't present the cashier orders on 28 February, "because when I heard he refused the delay, the bank had closed. It was after 1 p.m. in fact, I was waiting to see if the defendant would agree to delay the transaction because-of the problem with the deed. Another matter was that Kwan & Kwan was trying to put things right and to see if Mak's solicitors would accept things and send payment to Kwan & Kwan." He said that he was ready and willing to complete.

15. However, the defendant was not thereafter prepared to complete, and stood by his acceptance of what he considered to be the plaintiff's repudiation on 28 February, 1987.

16. I was informed that the flat has still not been sold.

17. The plaintiff now claims as follows:

18. The defendant avers that time was of the essence and that plaintiff was in breach by not completing on 28 February, whereby it repudiated the agreement, which such repudiation the defendant accepted. The agreement is therefore at an end. The defendant counterclaims for an declaration that he is relieved and discharged from all liability for further performance of his obligation and a declaration that the defendant is entitled to forfeit the deposit of $70,000.

19. It is obvious, from the evidence, that this transaction broke down only because it was taken for granted that Madam Mak would provide the necessary funds to enable the plaintiff to settle with the defendant. The plaintiff was always willing and able to complete, and it made available the balance of the purchase price on Monday, 2 March, as soon as was possible in all the circumstances.

20. That is all I wish to say about the facts.

21. I propose to briefly deal with some preliminary matters of law, before turning to the real issues of the case, namely, whether specific performance can and should be decreed, and if not, whether the return of the deposit can and should be ordered.

22. The first matter to decide is whether time was of the essence. Clearly, it was. Paragraph 14 of the agreement states:

23. Nothing could be clearer than that. Mr. Wong, for the plaintiff, submitted that since paragraph 5 specifically made time of the essence in relation to requisitions, it should not be regarded as of the essence in relation to other matters, unless specifically made so. He did not press the matter, but in my judgment, paragraph 14 puts the question beyond any doubt whatsoever, and there is simply nothing further to be said. As Farrand puts it, at p.181 of his textbook on Contract & Conveyance (4th Edn.) :

"The first exception involves nothing more than construing the contract to see whether or not the parties have expressed in it their intention that time shall be of the essence. If they say so explicitly, then that is that." (my underlining).

In Raineri v. Miles and Another⁽¹⁾, Lord Edmund-Davies posed this question, at p.1080:

"Question l: Does a failure by a party to a contract for the sale of land to complete the contract on or before the stipulated completion date amount to a breach of contract even where the time for completion was not originally, and had not become, capable of being regarded in equity as "of the essence?"

24. He went on at p. 1085, to hold that the question should be answered in the affirmative.

25. It follows that where time is of the essence, the failure to complete "on or before" the stipulated date must also be a breach of contract.

26. The handing over of the cheque for the $645,000 by Mr. Ng, of the plaintiff to Mr. Siu acting on behalf of both the plaintiff and defendant, did not amount to completion. In Pape v. Westacott ⁽²⁾, Lindley, L.J. said at p.279:

"He did not get cash. He did not even get a cheque which in his ordinary course of business he would transmit to his principal. He got a cheque payable to himself for the rent in arrear ...... and he was the person to get in the amount of the cheque and remit part of such amount to his principal. If that cheque were cashed the cheque itself would be utterly unimportant. But what right had he to part with the licence without getting the rent due? There is no proof of any usage or custom that would authorize such a transaction and it does appear to me-having regard to the fact that he took a piece of paper which, in the ordinary course, he would not send to his principal at all, and, above all, that that piece of paper was never cashed he has not pursued the authority with which he was entrusted..... and when you look at the decision in Pearson v. Scott  you will find that Fry, L.J. ...... cites with approval a passage from Byles, J.'s judgment in Sweeting v, Pearce which I will read. He says: "It is not disputed that the general rule of law is that an authority to an agent to receive money implies that he is to receive it in cash.  If the agent receives the money in cash the probability is that he will hand it over to his principal: ..... and upon' that principle it has been held that the agent as a general rule cannot receive payment in anything else but cash."

27. In Blumberg v. Life Interests and Reversionary Securities Corporation⁽³⁾, it was held that a solicitor who was authorized to accept a tender of mortgage money on behalf of his client was not at liberty to accept a banker's cheque and tender of a cheque by the mortgagor to the solicitor was accordingly insufficient.

28. Mr. Siu himself acknowledged this principle when he was asked what he thought he was supposed to do with the cheque, and he said: "To get it marked good and hand it to the defendant". In other words, unless it became as good as cash, it could not be used to effect completion. This was conceded yet again when Mr. Ng, on behalf of the plaintiff, replaced the cheque with two cashier orders, i.e. the equivalent of cash, on Monday, March 2, 1987. The cheque was not good enough, and Mr. Siu knew it.

29. In those circumstances, I am satisfied that time was of the essence, and that there was a breach by the plaintiff of the contract, insofar as it failed to complete on or before 28 February, 1987, as it was obliged to do. Whether or not the defendant was premature in handing to Siu the letter of acceptance of the plaintiff's repudiation is irrelevant. The fact is that the plaintiff did not complete on 28 February, 1987.

30. The defendant relies on paragraph 11 of the Agreement (P7), which reads as follows:

"11. If the purchaser shall fail to comply with any of the terms of this Agreement, the deposit money paid hereunder shall be absolutely forfeited as liquidated damages (and not as penalty) to the vendor ........"

31. Unfortunately, there is no legislation in Hong Kong, so far as I have been able to ascertain, similar to section 49(2) of the Law of Property Act 1925, which provides:

"Where the court refuses to grant specific performance of a contract, or in any action for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit."

32. In the present case, I would certainly have thought fit, under that section, to order the repayment of the deposit to the plaintiff, who was quite blameless in the matter, who was at all material times willing and able to complete, and who was, two days after he was obliged to do so, willing, ready and able to complete.

33. But after reviewing the authorities, I have reluctantly concluded that I can neither decree specific performance, nor order a return of the deposit.

34. The starting point is, of course, Steedman v. Drinkle ⁽⁴⁾. Viscount Haldane, delivering the judgment of the Privy Council, said at page 280:

"In the present case there has been no such agreement to extend time, nor anything that amounts to waiver of the right to treat time as of the essence. While, therefore, the Court below was, in the present case, right in holding that the appellant could not insist on forfeiture in accordance with the strict terms of the agreement, their Lordships are of opinion that there was no justification for decreeing specific performance."

35. In an earlier case, Kilmer v. British Columbia orchard Lands Ltd.⁽⁵⁾, the Privy Council did decree specific performance, but Viscount Haldane in Steedman v. Drinkle, at p.280, felt that since time had been declared to be of the essence in that case, specific performance

"could only have been decreed if their Lordships were of opinion that the stipulation as to time had ceased to be applicable. On examining the facts which were before the Board it appears that their Lordships proceeded on the view that this was so. The date of payment of the instalment which was not paid had been extended, so that the stipulation had not been insisted on by the company. The learned counsel who argued the case for the purchaser contended that when the company had submitted to postpone the date of payment they could not any longer insist that time was of the essence. Their Lordships appear to have adopted this view, and on that footing alone to have decreed specific performance as counterclaimed."

36. From this I derive the principle that if time is of the essence, and there is a breach by the purchaser, specific performance will not be decreed, whatever other relief may be granted.

37. In Stockloser v, Johnson⁽⁶⁾, Romer, L.J., said (at p. 498), that the decreeing of specific performance by the Privy Council in Kilmer's case was "only justified, as is pointed out in Steedman v, Drinkle on the footing that the vendors had waived the stipulation as to time being of the essence - and therefore had not validly rescinded the contract."

38. In Legione and Another v. Hateley⁽⁷⁾ Gibbs, C.J. and Murphy, J. referred to Steedman v. Drinkle, Kilmer v. British Columbia, and Brickles v. Snell and went on to say, at p.300:

"These eases have naturally been followed in Australia and it has been accepted that where a condition making time of the essence of the contract has not been waived it is not possible to grant specific performance to a purchaser who is in default; .......

 

        The Three decisions in the Judicial Committee do not provide satisfactory authority on this question. .... Dixon, J. doubted the explanation of Kilmer v. British Columbia Orchards Land Ltd. which was given in Steedman v. Drinkle and Brickles v. Snell. We respectfully share those doubts."

39. Despite the doubts of such eminent Australian judges, and in the absence of any other authority, I am bound by the principle in Steedman v. Drinkle.

40. I turn therefore to the question of the return of the deposit.

41. In Shiloh Spinners v Harding⁽⁸⁾, Lord Wilberforce said, at p. 722:

"There cannot be any doubt that from the earliest times courts of equity have asserted the right to relieve against the forfeiture of property. The jurisdiction has not been confined to any particular type of case. The commonest instances concerned mortgages, giving rise to the equity of redemption, and lease, which commonly contained re-entry clauses; but other instances are found in relation to copyholds, or where the forfeiture was in the nature of a penalty. Although the principle is well established, there has undoubtedly been some fluctuation of authority as to the self limitation to be imposed or accepted on this power. There has not been much difficulty as regards two heads of jurisdiction. First, where it is possible to state that the object of the transaction and of the insertion of the right to forfeit is-essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made within interest, if appropriate, and also costs (.......)...... Secondly, there were the heads of fraud, accident, mistake or surprise, always a ground for equity's intervention, the inclusion of which entailed the exclusion of mere inadvertence and a fortiori of wilful defaults."

42. His Lordship continued, at p.723:

"But it is consistent with these principles that we should reaffirm the right of courts of equity in appropriate, and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result."

43. In the same case, Lord Simon of Glaisdale, went perhaps even further, stating at p.726:

"equity has an unlimited and unfettered jurisdiction to relieve against contractual forfeitures and penalties."

44. Thus, in Steedman v. Drinkle, land was sold for $16,000 and $l,000 was paid on signing the agreement. The agreement provided that in the event of default in any one, of 6 subsequent instalments, the vendor should be at liberty to cancel the agreement and to retain, as liquidated damages, the payments already made, and that time was of the essence. Default was made in payment of the first instalment. The Privy Council agreed that the forfeiture of the money was a penalty from which relief should be granted.

45. In Starside Properties Ltd. v. Mustapha⁽⁹⁾, the defendant purchased a house, and defaulted on instalments. The agreement provided that in the event of default, the plaintiffs would be entitled to rescind and forfeit all sums paid by way of deposit.   The judge found that this was a penalty clause, and granted time to pay. The defendant defaulted again, and applied for a further extension of time. The judge dismissed the application on the ground that it was only in cases where relief from forfeiture for non-payment of rent was sought, did the court have jurisdiction to vary the terms of its earlier order granting relief. It was held on appeal that the court had jurisdiction to grant relief when the provision for forfeiture was penal in character. No distinction could be drawn between cases of relief for non-payment of rent and other cases where relief against forfeiture was sought.

46. Edmund Davies, L.J. cited a passage from Shell, Principles of Equity (27th Edn. 1973) pp. 537, 538) :

"The principle is that in appropriate and limited cases courts of equity will grant relief against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result and the provision for forfeiture is added as security for the production of that result. In determining whether a case is appropriate for relief (and in particular whether his default was wilful), how grave the breaches were, and what disparity there is between the value of the property forfeited and the damage caused by the breach. In general, equity granted relief only where the forfeiture in substance was merely security for payment of a monetary sum; but the jurisdiction is not confined to such cases,......."

47. However, in relation to this case, Emmet on Title, (19th Edition, at 8/93 and 8/94) points out that:

"the relief in question was only further time to pay the balance of the price, but the inference may be drawn that in appropriate circumstances the relief could take the form of recovery of the deposit itself.  However, at present it is impossible to foresee the courts treating the usual ten per cent deposit provision as a penalty clause. .... Nevertheless the Starside case could be relied on as showing that the court has jurisdiction to give a purchaser further time after expiry of a notice to complete in an ordinary way."

48. That these principles are not applicable to a deposit, as opposed to an initial payment or an instalment, is amply borne out by the authorities. In Stockloser v. Johnson, Romer, L.J. said at p. 499:

"Pausing then at this point, it appears to me that the cases established that if a purchaser defaults in punctual payment of instalments or purchase money, the court will, in a proper case, relieve the purchaser from his contractual liability to forfeit instalments (apart from the deposit) already paid to the extent of giving him a further chance and further time to pay the money which is in arrear if he is able and willing to do so; but the cases do not, in my judgment, show that the court will relieves such a purchaser to any further extent than this."

49. Romer, L.J., specifically excluded the forfeiture of a deposit from the benefit of the equity which he had discerned in the decided cases. On the other hand, Denning, L.J. (at p. 490) in the same case, thought that the cases showed that when

"there is a forfeiture clause or the money is expressly paid as a deposit (which is equivalent to a forfeiture clause), then the buyer who is in default cannot recover the money at law at all. He may, however, have a remedy An equity, for, despite the express stipulation in the contract, equity can relieve the buyer from forfeiture of the money and order the seller to repay it on such terms as the court chinks fit, that is, I think, shown clearly by the decision of the Privy Council in Steedman v. Drinkle, where the Board consisted of a strong three, viscount Haldane, Lord Parker and Lord Summer."

He maintained this Opinion in Bridge v. Campbell Discount Co. Ltd.⁽¹⁰⁾, where he said (at p. 631) that equity would grant restitution of a deposit if it was a penal sum.

50. Whereas isomer, L.J. did not treat steedman v. Drinkle as a case involving a deposit, Denning, L.J. appears to have done so. However, from the judgment of Viscount Haldane (at p. 277) it appears that the money for which relief against forfeiture was granted was an initial payment, and not a deposit.

"The facts were shortly these : James Campbell White agreed by writing ...... to sell 160 acres of land ........ for 16,000 dollars, of which 1000 dollars were paid on signing the agreement ...... and the balance was payable in annual instalments .......”

51. I have no doubt that the authorities clearly establish that there is no remedy in equity for the return of a deposit, where a purchaser defaults in payment of the balance of the purchase price.

52. Howe v. Smith⁽¹¹⁾ established that although a deposit was part payment of the purchase price if the contract was completed, it was also a guarantee for the performance of the contract, and that the plaintiff, having failed to perform his contract within a reasonable time, had no right to a return of the deposit.

53. In Linggi Plantations Ltd. v. Jagatheesan⁽¹²⁾, Lord Hailsham, L.C. (delivering the judgment of the Privy Council), said at p.91:

"It needs to be pointed out that the law relating to the forfeiture of deposits has always been treated as entirely distinct and separate from the learning introduced into English law by the distinction between liquidated damages based on a genuine pre-estimate of the loss likely to be suffered in event of a breach and a penalty where equity came to the rescue of the obligee on a bond or other contractual provision imposing a penalty under a contract where the penalty exceeded the actual damage. The latter combination of rules derives from the Chancellor's jurisdiction in equity to relieve an obligee from the harshness of the common law. But the law relating to deposits, as Fry, L.J. pointed out in Howe v. Smith, has a much longer pedigree, being imported from the civil law at least as early as Bracton, and, assuming the deposit or earnest to be reasonable, forfeiture of a deposit was not normally the subject of equitable relief ........ It is also implicit in the decision in Howe v. Smith which is the source of all modern learning as to the nature of deposits, and it has been followed again and again ever since. In particular Lord Dunedin in Mayson v. Clouet establishes the fundamental difference between part payments which are recoverable in certain circumstances and deposits which are not."

He ends his judgment, at p.94, as follows:

"No doubt, as Cotton, L.J. says in Howe v. Smith at p.95, there may be cases where equity would relieve a purchaser who has paid a deposit and then defaulted, although it is to be said that the last word is probably not yet spoken on this subject ....... But the truth is that a reasonable deposit has also been regarded as a guarantee of performance as well as a payment on account, and its forfeiture has never been regarded as a penalty in English law or common English usage."

54. Thus, in Windsor securities v-Loreldal and Lester ⁽¹³⁾, Oliver J. held that a deposit of £135,000, being ten percent of the purchase price, should be forfeited when the purchasers failed to complete according to the terms of the agreement. He said:

"There was nothing in the facts of the present case to show that the forfeiture was unreasonable or in the nature of a penalty."

55. It is very difficult to understand why equity has seen fit to distinguish between a deposit and other types of interim payment. In my view, it is quite unrealistic to maintain that the forfeiture of a deposit is not penal in nature.

56. Despite a number of tantalising obiter and other judicial suggestions to the effect that equity will or should relieve against forfeiture of a deposit, I have unhappily concluded that there is in fact no equity which empowers me to grant relief against the forfeiture of a deposit, in the event of default of payment in time, where time is of the essence.

57. It is also difficult to understand why Hong Kong has not adopted sec. 49(2) of the Law of Property Act 1925. If it had done so, I repeat that I would have had no hesitation in ordering a return of the plaintiff's deposit.

58. In the present case, while it would not be entirely accurate to describe the defendant's conduct as unconscionable, he having done no more than enforce his rights under the agreement, the fact is that it is manifestly unjust in the circumstances for him to retain the deposit and enjoy the benefit of the increase in the value of the property, which I assume to be the case. I can only express the hope that the plaintiff is compensated by Kwan & Kwan, and if not, that it succeeds at law in recovering an amount equal to the deposit from the said firm.

59. There will be judgment for the defendant on the claim, and in the terms sought on the counter-claim.

60. I will hear counsel on costs.

(1)    [1981] A.C. 1050

(2)    [1894] 1 Q.B.D. 272

(3)    [1897] 1 Ch. 171

(4)    [1916] A.C. 275

(5)    [1913] A.C. 319

(6)    [1954] 1 All E.R. 630

(7)    [1963] 57 A.L.J.R. 292

(8)    [1973] A.C. 691

(9)    [1974] 2 All E.R. 567

(10)    [1962] A.C. 600

(11)    [1884] 27 Ch. D. 89

(12)    [1972] Malayan Law Journal 89

(13)    [1975] The Times, 10 or l1 September