WONG KA YU STEWART v. FUNG KWAI KWONG AND ANOTHER

DCCJ 3167/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION No. 3167 OF 2006

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JUDGMENT

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Introduction

1.  This action arose out of an aborted conveyancing transaction. The plaintiff claims against the defendants for, among other things, return of a deposit in the sum of HK$100,000 and a sum in the like amount as liquidated damages under a provisional agreement.

Relevant facts

2.  The background facts are mostly evidenced by contemporaneous documents and not in dispute. A summary is as follows.

3.  The defendants are brothers and at the material time, they were, and still are, the registered owners of a property known as House No. A12 Evergreen Villa, Yuen Long, New Territories (“the Property”).

4.  On 13 January 2006, the plaintiff as purchaser and the defendants as vendor entered into a provisional agreement (“the provisional agreement”) whereby the plaintiff agreed to purchase the Property at HK$4.2 million (“the purchase price”).

5.  The following terms of the provisional agreement are pertinent to these proceedings:

(1)   The purchase price shall be paid by the plaintiff to the defendants in the manner as follows:

(a)   HK$100,000 shall be paid upon signing of the provisional agreement as initial deposit;

(b)   HK$320,000 shall be paid upon signing of the Formal Agreement for Sale and Purchase on or before 10 February 2006 as balance of deposit (“the Further Deposit”);

(c)    HK$3,780,000 shall be paid upon completion of the transaction and on or before 13 April 2006 as balance of purchase price. (Clause 3)

(2)   Should the plaintiff fail to complete the purchase in the manner herein contained, the deposit shall be forfeited to the defendants and the defendants shall then be entitled at their absolute discretion to sell the Property to anyone they think fit and the defendants shall not sue the plaintiff for any liabilities and or damages. (Clause 6)

(3)   Should the defendants after receiving the initial deposit paid hereunder fail to complete the sale in the manner herein contained, the defendants shall immediately compensate the plaintiff with a refund of the initial deposit together with a sum equivalent to the amount of the initial deposit as liquidated damages and the plaintiff shall not take any further action to claim for damages or to enforce specific performance. (Clause 7).

6.  The plaintiff duly paid the initial deposit of HK$100,000 upon signing the provisional agreement.

7.  For the purpose of this transaction, the plaintiff instructed Messrs Huen & Partners (“HP”) and the defendants instructed Messrs Winnie Lo & Wong (“WLW”).

8.  By a letter dated 9 February 2006, HP approached WLW and requested for their draft Agreement for Sale and Purchase and the title deeds and documents to be delivered to them at least two clear days before the date scheduled for the signing of the Formal Agreement for Sale, i.e. 10 February 2006.

9.  On the same day, WLW sent their draft Agreement for Sale and Purchase to HP.

10.  On 10 February 2006, HP sent back WLW their draft with their proposed amendments.

11.  On 14 February 2006, WLW sent HP a revised draft for their approval.

12.  On 15 February 2006, HP returned the revised draft to WLW for their action.

13.  On 16 February 2006, WLW sent HP the third draft for their approval.

14.  By a letter dated 20 February 2006, WLW indicated that they found their insistence on extraneous terms to be incorporated into the Formal Agreement for Sale and Purchase was an unilateral breach of the provisional agreement and demanded that HP should return the signed Formal Agreement for Sale and Purchase (enclosed therewith) with the further deposit before 5 p.m. on 21 February 2006. (“the Demand”). Otherwise, the defendants should exercise their rights to forfeit the initial deposit.

15.  By a letter dated 21 February 2006, HP indicated to WLW that there was no Formal Agreement for Sale and Purchase enclosed with their previous letter. In the said letter, HP did not insist on any terms to be incorporated to the Formal Agreement for Sale and Purchase.

16.  It was not until 1:51 p.m. of 21 February that WLW sent to HP by fax a copy of the Formal Agreement for Sale and Purchase. According to the Demand, the plaintiff only had slightly more than 3 hours to return the signed copy together with a payment of the Further Deposit.  

17.  By a letter dated 23 February 2006 (“the Letter”), WLW notified HP that by reason of their failure to pay the Further Deposit pursuant to the Demand, the defendants exercised their right under the provisional agreement to forfeit the initial deposit.

18.  By a letter dated 27 February 2006, HP pointed out to WLW that the Further Deposit was only payable upon signing the Formal Agreement for Sale and Purchase and that the plaintiff accepted the repudiation of the provisional agreement by their letter dated 23 February 2006 and would thereby rescind the provisional agreement. HP further asked for the return of the initial deposit and the like amount as liquidated damages.

Issue

19.  HP have raised seven issues in their draft Agreed Statement of Issues pursuant to the order of Master Pang dated 22 November 2012. However, Messrs Kok & Ha, former solicitors for the defendants, only agreed that the only issue should be whether the defendants were entitled to forfeit the plaintiff’s initial deposit in the sum of HK$100,000 on 23 February 2006. This question turns on whether the plaintiff had committed the alleged repudiatory breach of the provisional agreement prior to the Letter.

Evidence

20.  The plaintiff and the 1^st defendant filed their respective witness statements. At trial, they both confirmed the truth in the contents of their witness statements, which added little to the uncontroversial facts narrated above. Their oral testimony was very brief and the plaintiff was only cross-examined as to whether he had really intended to complete the sale of the Property. I find this irrelevant. Whether the notice of rescission contained in the Letter was a valid one is, after all, a question of law.

Analysis

21.  It is common ground that no formal agreement for sale and purchase was signed on or before 10 February 2006, the date fixed for signing of the Formal Agreement for Sale and Purchase. Notwithstanding this, the parties treated the provisional agreement to be still alive and negotiation about the terms of the Formal Agreement for Sale and Purchase continued. The Demand was made on that basis.

22.  I first deal with the question as to when the payment of the Further Deposit was payable. The defendants say that it was payable by 5:00 p.m. on 21 February 2006 as per the Demand. The plaintiff says that it was payable if and only if the Formal Agreement for Sale and Purchase was signed. On the authorities, the plaintiff must be right.

23.  In the decision of the Court of Appeal in Wise Think Global Ltd v Finance Worldwide Ltd [2013] 1 HKLRD 513[1], Tang VP (as he then was) considered a provision relating to payment of a further deposit similar to that of the provisional agreement in the present case. The provision read:

“Upon signing (a formal SPA) on or before 23 November 2007 further deposit shall be paid in the sum of HK$4,621,000”.

24.  Tang VP found that the language of the provision was clear and the further deposit was to be paid “Upon signing” of the Formal Sale and Purchase Agreement. The Vice President maintained that his view was amply supported by authorities. Then, he referred to three other cases in which a similar provision was considered in the deliberation of the issue as to when or upon what event the further deposit became payable.

25.  First, the Vice President referred to Yiu Yau Ping v Fong Yee Lan [1992] 2 HKLR 167. There, in construing the meaning of a similar provision, Nazareth JA came to the following conclusion:

“As to the first, it seems to us that on any reasonable reading of Clause 2(b) of the provisional agreement, its clear intention is that $132,000 ‘shall be paid on the signing of [the] formal agreement” with the 28^th March 1991 as the target date. It is consistent with that intention that payment is linked rather more directly to the signing of the formal agreement rather than the target date mentioned ... As a matter of construction, we do not accept that Clause 2(b) required the payment of $132,000 to be made on or before 28^th March 1991 if that turned out not to be the date of signing of the formal agreement.”

26.  Tang VP went on to consider the following oft-cited dictum of Clough JA in Link Brain Ltd v Fujian Finance Co Ltd [1990] 2 HKLR 353:

“Clause 4(b) requires that the relevant payment be made by the purchaser “upon signing the Sale and Purchase Agreement”. It seemed to us that this language was clear and unambiguous and could only mean that no payment could be required under this clause unless and until the Sale and Purchase Agreement to be signed within seven days of the receipt of the Agreement by the purchaser’s solicitors; but we could see no reason why clause 4(b) should therefore be construed as providing for the making of the relevant payment on the 31^st January 1989 whether or not the Sale and Purchase Agreement had been signed.”

27.  Lastly, the Vice President referred to another Court of Appeal decision in Heath Link Investment Ltd v Pacific Hawk Investment Ltd [1995] 1 HKC 249 where a similar conclusion was reached.

28.  The Vice President was referred to another decision of the Court of Appeal in See To Keung v Sunny Way Ltd [2009] 5 HKLRD 300. In that case, Yuen JA reached a different conclusion but as the Vice President pointed out, the decision turned on the special wording of a rather different provision.

29.  In the dissenting judgment of Yuen JA in the Wise Think Global Ltd v Finance Worldwide Ltd case, her Ladyship actually referred to the See To Keung case but at the end her Ladyship came to the same conclusion as the Vice President on this issue. Her Ladyship concluded (at §65.1):

“Where the parties have signed a clause in a provisional SPA stating that “upon signing the formal sale and purchase agreement on or before [date], the further deposit of [$X] shall be paid”, this Court has held in a number of judgments that the two obligations were “linked”, to be “simultaneously performed”, and “mutually dependent on each other.”

30.  In the premises, I am driven to the conclusion that the plaintiff was not obliged to pay the defendants the Further Deposit on 21 February 2006 when the Formal Sale and Purchase Agreement was not signed. The payment of the Further Deposit and the signing of the Formal Sale and Purchase Agreement were two obligations to be simultaneously performed under the provisional agreement. The defendants wrongly accused the plaintiff of failing to pay the Further Deposit in the Letter and they were not entitled to terminate the provisional agreement and forfeit the initial deposit. The plaintiff thus was entitled to accept their repudiation by HP’s letter dated 23 February 2006.

31.  It is a well-established rule that even if an innocent party gives a wrong or inadequate reason or no reason at all, he may justify his refusal to perform a contract if there were at the time facts in existence which would have provided a good reason, even if he did not know at the time of his refusal: Chitty on Contracts, Vol.1, 31^st Ed., §24-024.

32.  In the Letter, the only ground that the defendants relied on to rescind the provisional agreement was the non-payment of the Further Deposit. However, in the defence, the defendants also complained about the plaintiff’s failure to sign the Formal Sale and Purchase Agreement pursuant to the Demand. For the sake of completeness, I shall briefly deal with this complaint too.

33.  It was provided in the provisional agreement that the parties were to sign a Formal Sale and Purchase Agreement on 10 February 2006. For this obligation, time should be of the essence: Lee Kenny v Wong Kwok Yan [1994] 2 HKC 309 (CA) per MacDougall VP at p.311 G-H. 

34.  However, as observed above, the parties continued to work on the terms of the Formal Sale and Purchase Agreement after 10 February 2006. Once time has ceased to be of the essence, the obligation on the plaintiff was to perform within a reasonable time thereafter. After the lapse of a reasonable time, the defendants were entitled to give notice fixing a time for performance and time could not become of essence again without reasonable notice: Chen & Anor. v Lord Energy Limited [1997] 3 HKC 270 at p.277F-G.

35.  In the present case, the Demand made on 20 February 2006 was unreasonable in the circumstances and the plaintiff could not possibly be expected to return a signed copy of the Formal Sale and Purchase Agreement before 5:00 p.m. on the following day, particularly given the fact that the draft copy was only faxed to the plaintiff in the afternoon of 21 February 2006. I therefore conclude that the defendants’ refusal to perform the provisional agreement as indicated by the Letter amounted a repudiation.

Conclusion and Orders

36.  By reason of the foregoing matters, I conclude that the plaintiff is entitled to the return of the initial deposit and the like amount of liquidated damages payable under Clause 7 of the provisional agreement.

37.  I allow the plaintiff’s claim and make the declaration sought to the effect that the plaintiff has validly rescinded the provisional agreement. I also order that the defendants do return to the plaintiff the initial deposit of HK$100,000 and do pay the plaintiff a further sum of HK$100,000 as damages.

38.  The plaintiff also asks for interests to be paid on the two sums. I note that after the close of pleadings in October 2006, the plaintiff only applied for directions for filing and serving of list of documents in August 2012. I do not know why the plaintiff allowed this litigation to be in a sleeping mode for almost six years. Absent any explanation, I am not inclined to allow the plaintiff any pre-judgment interests on the two sums.    

39.  I see no reason why costs should not follow the event. I make an order nisi that the defendants do pay the plaintiff costs of this action, to be taxed if not agreed.

40.  Lastly, interpretation service in relation to this judgment can be provided to the defendants if they so apply for.