SUN WEALTHY LTD v. GALANT MOTORS LTD

CACV184/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 184 of 2005

(on appeal from HCA NO. 2475 of 2004)

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Date of Hearing: 22 February 2006

Date of Judgment: 22 February 2006

Date of Handing Down Reasons for Judgment: 28 February 2006

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal from the order of Deputy High Court Judge Muttrie dated 11 May 2005 dismissing the plaintiff’s Order 86 application.  The judge also made declarations pertaining to Clause 11 of the sale and purchase agreement entered into between the plaintiff as purchaser and the defendant as vendor pursuant to an Order 14A summons issued by the defendant which was heard at the same time.  At the conclusion of the appeal hearing, this court allowed the plaintiff’s appeal with costs with written reasons to be handed down later.

3.  The main issue arising on this appeal relates to the proper construction of Clause 11 of the agreement which allows the vendor to annul the sale in certain circumstances:

“11. Any requisitions or objections in respect of the title shall be delivered in writing to the Vendor’s solicitors within seven (7) working days after the date of receipt of the title deeds by the Purchaser’s solicitors and further requisitions (if any) shall be raised within 7 working days of receipt of reply by the Vendor’s solicitors to the Purchaser’s initial requisitions (whether this Agreement is duly entered by the parties or not) otherwise the same shall be considered as waived (in which respect time shall be of the essence of this Agreement).  If the Purchaser shall make and insist on any objection or requisition in respect of the title conveyancing or any matter appearing on the title deeds or particulars or conditions or otherwise of the Property which the Vendor shall be unable or (on the grounds of difficulty, delay or expense or on any other reasonable ground) unwilling to remove or comply with or if the title of the Vendor shall be defective, the Vendor shall notwithstanding any previous negotiation or litigation be at liberty on giving to the Purchaser or his solicitors not less than five (5) working days’ notice in writing to annul the sale in which case, unless the objection or requisition shall have been in the meantime withdrawn by the Purchaser or the same shall have been removed or complied with by the Vendor, the sale shall at the expiration of the notice be annulled the Purchaser being in that event entitled to a return of all the said deposit or deposits forthwith but without interest, costs or compensation.”

4.  Condition 7(2) in Part A of the Second Schedule to the Conveyancing and Property Ordinance, Cap. 219, is similar to Clause 11 but there are differences.  Condition 7(2) reads:

“(2) If the purchaser shall make and insist on any objection or requisition either as to title or any matter appearing on the title deeds or otherwise which the vendor shall be unable or (on the grounds of difficulty, delay or expense or on any other reasonable ground) unwilling to remove or comply with, or if the title of the vendor shall be defective, the vendor shall notwithstanding any previous negotiation or litigation be at liberty to annul the sale in which case the purchaser shall be entitled to the return of the deposit but without costs or compensation and, if that return is made within 7 days, without interest.”

It will be seen at once that the principal difference is that Condition 7(2) does not provide for a period of notice to be given: the exercise of that right i.e. the act of annulment and “notice” being synonymous.

5.  It is common ground that where the statutory right of annulment applies to an agreement (which is not the present case), for the right to annul the sale to arise, there must be (1) an objection to the title; (2) an inability or unwillingness on the part of the vendor to remove that objection; (3) a communication to the purchaser of the existence of this inability or unwillingness; and (4) an insisting by the purchaser on his objection, notwithstanding this communication.  See per Sir H M Cairns LJ in Duddell v Simpson (1866) 2 Ch App 102 at 109.  The issue between the parties in this case was whether all those conditions had to be satisfied before the defendant (“the vendor”) could validly serve a Clause 11 notice.

6.  It is clear from the way Clause 11 is drafted that the vendor’s right to give a notice under that clause is conditional upon certain events happening: not only has there to be a requisition or objection made by the purchaser, there has to be an inability or unwillingness on the part of the vendor to answer the requisition or objection and an insistence on the part of the purchaser that the requisition be answered.  Before one can “insist” on something being done, one has to be made aware that the other party i.e. the vendor is unable or unwilling to do to what was requested.  Implicit in the word “insist” is the notion that the person “insisting” is aware of the inability or unwillingness on the part of the vendor.  That is no different from the inability or unwillingness having to be communicated to the other party who then has the option of taking no further action or “insisting” that the requisition or objection be answered or complied with.  I do not therefore accept Mr Jat SC’s submission that Clause 11 contains no requirement that the purchaser be informed of the vendor’s inability or unwillingness to answer the requisition.  The conditions precedent to the service of a valid Clause 11 notice are thus no different from those under Condition 7(2).

7.  There is of course a material difference between Clause 11 and Condition 7(2).  Clause 11 affords the purchaser a locus poenitentiae: during the period of notice, he has the opportunity of changing his mind and withdrawing the requisition whilst under Condition 7(2) there is no such opportunity.  Rather, that condition favours the vendor by giving him a way out of the transaction should he find himself unable or unwilling to answer the requisition provided the four conditions are satisfied.  The notice itself operates as the annulment of the sale.

8.  Mr Jat invited the court to read Clause 11 as enabling the vendor to serve a notice before the fulfilment of the four conditions mentioned above with the caveat that it would only be effective if by the time the notice expires, all four conditions have in fact been fulfilled.  He further submitted that the purchaser’s failure to withdraw would amount to insistence.  Mr Jat’s analysis was that they were two sides of the same coin.  But such a reading deprives the word “insist” of its natural meaning.  The purchaser is made to decide whether to withdraw the requisition rather than to decide if he should persist with the requisition.  For my part, I am unable to accept Mr Jat’s reading of Clause 11.  I would add that Che Yin Har Monlita v Liu Kon Keung and Fung Sau Kuen, 27 October 1992, unreported, HCA No. 457 of 1991 relied on by Mr Jat is of no assistance on the construction of Clause 11.

9.  Mr Jat’s fallback position was that even if, on the true construction of Clause 11, all four conditions had to be satisfied before the notice could be served, those conditions were in fact satisfied.  This in turn requires a consideration of the relevant facts.

The facts

10.  The property which was the subject of the sale and purchase was a shop.  It was one of three units into which a much larger unit had been partitioned in 1989 – 1990.  On 3 September 2004, the purchaser’s solicitors raised a number of requisitions including the following:

“3.   The Architect Certificate dated 10^th November 1989 is a plain copy only and no reference was made to any plan to show the partition of the shops referred therein. How could we ascertain the partitions mentioned in the certificate are the existing partition of Shops A1, A2 and A3.”

11.  The point of concern was that the architect’s certificate did not contain any plan to correlate it to what actually existed on the ground.  The requisition attracted the following reply from the vendor’s solicitors on 6 September 2004:

“3.     We would like to refer you to the Floor Plan annexed to Assignment Memorial No.4409844.  We note that the Architect Certificate and the Floor Plan were both signed by the same signatory of Messrs. Ie & Chung Associates.  We take the view that no doubt the plan referred to in the Architect’s Certificate is the one annexed to the said Assignment Memorial No.4409844.”

12.  Upon receipt of that letter, by letter dated 7 September 2004, the purchaser’s solicitors asked for a certified copy of the architect’s certificate.  On the following day, they sent a reminder to the vendor’s solicitors who replied by letter dated 8 September 2004 to the effect that they had written to Tong & Tsoi, the solicitors who had acted for the vendor when it acquired the property.  The letter went on to say this:

“We are awaiting a reply from them and shall revert to you as soon as possible.”

13.  That letter was faxed to the purchaser’s solicitors at 15.10 hours in the afternoon.  Less than an hour later, the vendor’s solicitors faxed a second letter stating:

“We are now instructed by our client, to give you notice in pursuance of Clause 11 of the said Agreement for Sale and Purchase which we hereby do, that on grounds of difficulty to remove or comply with your objection to our client’s title, our client hereby give you 5 working day’s notice to annul the sale.

Unless the said objection shall be withdrawn on or before the expiring date of this notice, the said Agreement shall be terminated and our client will refund the deposit money to your client.”

14.  By letter dated 13 September 2004, the purchaser’s solicitors forwarded the draft assignment and undertaking to the vendor’s solicitors for approval “without prejudice to the requisitions raised in our previous correspondence”.  What was sent included a draft completion letter requiring a certified copy of the architect’s certificate to be sent to the purchaser’s solicitors no later than “60 days from the completion date”.  Time for completion expired at midnight on 13 September 2004.

15.  When was the requisition for a certified copy of the architect’s certificate made?  Mr Jat’s position was that that was implicit from the requisition made on 3 September 2004 because there was a reference to there being “a plain copy only” and that, effectively, requisition 3 contained two requisitions, one express and one implied.  I do not agree.  The language used did not warrant such a reading.  The purchaser did not expressly ask to be provided with a certified copy.  Its concern was that the partition was not the original partition thus it would be unauthorized, such as would lead to enforcement action by the Building Authority.  The express requisition made perfect sense on its own withoutthe need to imply a request for a certified copy.  Moreover, despite Mr Jat’s insistence that the reference to “a plain copy only” was an implied requisition for a certified copy, the vendor’s solicitors did not ask Tong & Tsoi for this when they first wrote to them on 6 September in relation to the requisitions raised by the purchaser on 3 September.  That letter concerned requisition 5 only and nothing else.

16.  In my view, on a fair reading of the correspondence, the requisition for a certified copy was only made in the purchaser’s letter of 7 September.  The vendor’s response contained in the first letter sent on 8 September was plainly not a refusal to comply with the requisition.  To the contrary, it was advising the purchaser’s solicitors that it was taking steps to procure a certified copy.  It would follow that when the second letter being the notice to annul was sent later the same day, there had not yet been a refusal which had been communicated to the purchaser.  The notice was thus premature and invalid.

Reasonableness

17.  Mr Chan SC who appeared for the purchaser raised a further issue, namely, whether the vendor’s unwillingness or inability to provide the certified copy was based on reasonable grounds.  Given the holding that the Clause 11 notice was invalid, the issue does not arise.  Suffice it to say that had it been necessary to deal with the issue, I would have found that no reasonable grounds existed for the following reasons. 

18.  When the vendor’s solicitors eventually asked Tong & Tsoi for a certified copy of the architect’s certificate after receiving the purchaser’s letter of 7 September, the request was framed in the following terms:

“Please let us have a certified copy [of the architect’s certificate] for completing the chain of title.”

That, of course, was a wrong characterization of the need for the architect’s certificate and, in so doing, it would appear that the vendor’s solicitors were acting unreasonably.  It also explains the answer received from Tong & Tsoi which was to the effect that the architect’s certificate had nothing to do with the chain of title.  It should also be noted that Tong & Tsoi never said whether or not such a certified copy was in their possession.

19.  Even if it were reasonable for the vendor to have inferred that they did not have such a copy, the point was made by Mr Chan for the purchaser that Tong & Tsoi were but another agent of the vendor and vendor ought to have directed inquiries to Chung & Kwan, the solicitors who acted for the party from whom the vendor had acquired the property and/or the architect who, according to the Government’s website was still registered as an authorized person at the relevant time and whose contact details were shown on the website.  Although the certificate was issued in 1989, had a copy been faxed to the architect, I would agree that the likelihood is that he would have been able to indicate whether or not a certified copy was available.  In my view, the vendor was acting unreasonably in failing to take these steps.

Hon Suffiad J:

20.  I agree wholly with the reasons given by the Hon Le Pichon JA and have nothing further to add.