CHAN KOON WAH v. YOUNG TAK LOR

FOR REFERENCE

DCCJ3649/2001

Land - Sale and Purchase agreement - Forfeiture of Deposit - Valuation - show Good Title - Government Lease - Secondary Evidence - Sec. 13 (1) of Conveyancing and Property Ordinance, Cap. 219.

There was a sale of government land by public auction in 1915 to two trustees but government lease or grant evidencing such sale can be traced. Land Registry records indicate that land registration records were lost during the war. The first entry in the present Land Registry records for the land in question indicate the Defendant vendor as owner by succession in 1979 to one of the said trustees. In 1997, by a home-made agreement in Chinese the Defendant vendor agreed to sell and the Plaintiff agreed to purchase the land at $1.2 million. This agreement was replaced in 1998 by another home-made agreement under which the deposit was increased to $300,000 and the completion date changed to 30 May 1998. Although no completion took place on 30 May 1998, afterwards solicitors for the Defendant vendor delivered title deeds to solicitors for the Plaintiff purchaser to show title. Solicitors for the Plaintiff purchaser by a requisition pointed out there was no government lease and demanded proof of such. Solicitors for the Defendant vendor answered that no government lease or other document in the form of a grant could be traced or produced. Documents relating to the public auction were, however, shown. After some further correspondence, the parties broke off on or about 5 November 1998. The Plaintiff purchaser sues for return of deposit paid and the Defendant vendor counterclaims damages for loss of bargain.

Held: (1) section 13 (1) of the Conveyancing and Property Ordinance, Cap. 219 requires only proof of demise of the land in question by the government, not proof strictly in the form of a government lease or deed of grant; hence, in the absence of a government lease or similar document, secondary evidence proving indeed there was demise and the terms thereof may be tendered to show good title; (2) since the parties had entered into only rudimentary written agreements, their transaction was governed by open contract; (3) since the parties continued to deal with the question of title after the 30 May 1998, completion must be deemed to have been postponed again by mutual agreement so that requisitions raised after the 30 May 1998 were still in time; (4) since the Defendant vendor had shown good title, the Plaintiff purchaser was wrong not to proceed with the sale and purchase; (5) since there was no clear and express contractual provision for forfeiture of deposit, and the deposit being in excess of the customary 10% without special circumstances justifying it, the Defendant vendor was not entitled to forfeit any amount; the Defendant vendor nonetheless is entitled to damages (to be assessed) for loss of bargain; (6) for assessment of damages turning on the value of land, the valuation date in the circumstances of this case should be the date on which the parties finally broke off from the transaction.

FOR REFERENCE

DCCJ3649/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3649 OF 2001

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__________

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JUDGMENT

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1. The Plaintiff purchaser and the Defendant vendor entered into a provisional sale and purchase agreement ("the first agreement") in respect of two pieces of land ("the Property") at the total price of HK$1,200,000.00 on 5th November 1997. Pursuant to the said agreement and a further agreement dated 2nd February 1998 ("the second agreement"), the Plaintiff paid to the Defendant a total sum of HK$300,000.00 as deposit ("the Deposit"). The Plaintiff's solicitors in their requisitions on title asked for a copy of the new grant by the government of the Property. The Defendant's solicitors answered that the only documents the Defendant could produce were some documents to show that there was a sale by public auction by the government of the Property. Consequently the Plaintiff cancelled the agreements and commenced this action for return of the Deposit.

The issues

2. There are lots of peculiar features in this case posing a number of potentially difficult points of law. Fortunately, during the course of trial, counsel for the parties were able to simplify matters and so, as counsel for the Plaintiff puts it in his final submission, it has been agreed between the parties that the issues of this action are confined to (1) whether the Defendant had shown good title to the Plaintiff, (2) whether the requisitions were made out of time, and (3) whether the Deposit was forfeitable. However, I should point out that, in fact, the Defendant does not plead right to forfeit the Deposit; instead, the Defendant counterclaims for damages to be assessed.

Title

3. It is not disputed that the first agreement and the second agreement are valid contracts for the sale and purchase of property. However, as will be seen, the two agreements were rudimentary home-made agreements and so, except for certain terms and conditions that will be addressed later on, I hold (and I believe counsel for the parties also agree) that the transaction between the party relating to the Property is governed by an open contract. In other words, standard statutory terms and conditions prescribed by the Conveyancing and Property Ordinance, Cap. 219 ("the Ordinance") and common law apply to the transaction.

4. So far as title is concerned, the Conveyancing and Property Ordinance, Cap. 219 provides that:-

13. Proof of title and recitals

(1) Unless the contrary intention is expressed, a purchaser of land shall be entitled to require from the vendor, as proof of title to that land, only production of the Government lease relating to the land sold and -

(a) proof of title to that land-

(i) where the grant of the Government lease was less than 15 years before the contract of sale of that land, extending for the period since that grant; or

(ii) in any other case, extending not less than 15 years before the contract of sale of that land commencing with an assignment, a mortgage by assignment or a legal charge, each dealing with the whole estate and interest in that land;

(b) production of any document referred to in the assignment, mortgage or charge mentioned in paragraph (a) creating or disposing of an interest, power or obligation, which is not shown to have ceased or expired and subject to which any part of that land is disposed of; and

(c) production of any power of attorney under which any document produced is executed where that document was executed less than 15 years before the contract of sale of that land.

(2) Where this section requires the production of any document, it shall be sufficient to produce a copy-

(a) attested, before 1 November 1984, by 2 solicitors' clerks; or

(b) certified by a public officer or a solicitor,

to be a true copy.

(3) Subject to subsection (1), where any document produced as proof of title to any land contains a recital of any document dated or made before the date from which a vendor is required to prove title, the purchaser of that land shall assume, unless the contrary is proved, that-

(a) the recital is correct;

(b) the recital gives all the material contents of the document recited; and

(c) the document recited was duly executed and perfected.

(4) A recital, statement, and description of any fact, matter or party contained in any document of title, mortgage, declaration or power of attorney relating to any land and dated or made not less than 15 years before the contract of sale of that land shall, for the purposes of any question as to proof of title concerning the parties to that contract and unless the contrary is proved, be sufficient evidence of the truth of that recital, statement and description.

(4A) Where any document is or has been produced by a vendor as proof of title to any land and that document purports to have been executed, not less than 15 years before the contract of sale of that land, under a power of attorney, 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 an other person,

that the power of attorney-

(i) was validly executed;

(ii) was in force at the time of the execution of that document; and

(iii) validly authorized the execution of that document.

(5) This section affects only the rights ad obligations of the parties to contract for the sale of land entered into after the commencement of this section.

14. Conversion of equitable interest to legal estate where right to Government lease

(1) Where a person has a right to a Government lease of any land upon compliance with any conditions precedent, then, upon compliance with those conditions-

(2) Where, under an agreement for a Government lease entered into before 1 January 1970, a person has a right to a Government lease upon compliance with any conditions precedent he shall be deemed, for the purpose of this section, to have complied with those conditions on the commencement of this section.

(3) Where under an agreement for a Government lease entered into on or after 1 January 1970, a person has a right to a Government lease upon compliance with any conditions precedent, he shall be deemed, for the purposes of this section, to have complied with those conditions-

(a) upon the issue by the Government of a certificate that those conditions have been complied with and the registration of that certificate in the Land Registry under the Land Registration Ordinance (Cap. 128); or

(b) upon the endorsement by the Government on the Government lease of a note to the effect that those conditions have been complied with and the registration of a copy of that endorsement in the Land Registry under the Land Registration Ordinance (Cap. 128); or

(c) upon the entry on the register kept in the Land Registry under the Land Registration Ordinance (Cap. 128) relating to the land of a note to the effect that those conditions have been complied with.

(4) Where a person has a right to a Government lease of any land and that right is not subject to any conditions precedent-

(a) the equitable interest under that right shall become a legal estate in that land as if held under a government lease issued in accordance with that right; and

(b) for the purposes of section 42 and any other law, such a Government lease shall be deemed to have been issued on the commencement of the Conveyancing and Property (Amendment) Ordinance 1988 (31 of 1988) or on the date of the grant of that right, whichever is the later.

(5) Where a person has a right to a Government lease of any land and that land is partitioned by assignment or otherwise by deed, this section shall apply to each part of that land constituted by that partition, as it applies to the whole of that land, as if there were a right to a Government lease of each such part.

(6) Where a person has a Government lease, or a right to a Government lease, of any land and additional land is granted to that person with the intent that he should hold it as part of the land leased, this section shall apply to that additional land as if that additional land were part of the land originally leased and held subject to any further conditions precedent imposed when that additional land was granted.

14A. Modification of Government lease

(1) Any modification in writing by the Government of the covenants, terms or conditions of a Government lease shall have the same effect as if made by deed.

(2) Subsection (1) applies to a modification made before or after the commencement of the Conveyancing and Property (Amendment) Ordinance 1988 (31 of 1988).

5. In addition, Mr. Lee, counsel for the Defendant, drew my attention to Leung Kwai-lin v. Wu Wing-kuen [2001] HKLRD 212, a Court of Final Appeal decision. In that case, a power of attorney forming part of the chain of title had been lost and the vendor could only produce a statutory declaration to the effect that the (lost) power of attorney appeared to be duly executed. The purchaser contended that the vendor was unable to show good title. The Court of Final Appeal unanimously held that, in relation to the missing power of attorney, good title had been shown. In particular, Litton NPJ said at p. 219,

"As Godfrey JA remarked, s. 13 (1) was enacted to facilitate conveyancing: It is an enabling provision and does not preclude clear and cogent evidence of the existence, due execution and contents of the power of attorney being put forward - unless precluded by the contract itself."

6. Admittedly the instant case is not on all fours with Leung Kwai-lin v. Wu Wing-kuen. In the present case, the Defendant cannot say definitely whether a government grant had been in existence or that such a grant had been lost. In Leung Kwai-lin v. Wu Wing-kuen, the document of title in question did exist for a period of time. Moreover, the document of title called for by the Plaintiff in this case goes to the root of title whereas the power of attorney in Leung Kwai-lin v. Wu Wing-kuen was an intermediary link of the chain of title. Nevertheless, I believe the principle laid down by the Court of Final Appeal should apply to the present case so that the Defendant vendor may rely on cogent secondary evidence to prove good title.

7 ． In the present case, the dispute is not that the Defendant could not produce authentic proof of title, but rather that the evidence produced did not establish good title. The Plaintiff purchaser insisted on seeing a document - the government grant relating to the property. The Defendant vendor could not produce such a document. In fact, the Defendant vendor could not even say whether there had ever been such a kind of document relating to the property.

8. Section 13 (1) of the Ordinance refers to "the Government lease". The Court of Final Appeal in Leung Kwai-lin v. Wu Wing-kuen has pointed out that that subsection is an enabling provision that does not preclude secondary evidence for proof of title. Now, I think what the Court of Final Appeal actually means is that section 13 (1) of the Ordinance defines the type of title required, not the form of title required. The type of title required is that the Property in question has been demised by the government (or the Crown before 1997) so that the Property can be held by private citizens and is not government property. In other words, if there is acceptable proof that the government has demised the Property, even though the demise is not evidenced by a document in the form of a government lease, the requirement for title for the purpose of section 13 (1) of the Ordinance is satisfied. I am reinforced in this view by section 14 of the Ordinance, which clearly envisages that grant of land by the government may not be evidenced by or in the form of a government lease. In the premises, I must proceed to examine the evidence produced by Defendant vendor to see if such evidence amounts to proof of valid demise of the Property.

9 , Before considering the evidence relating to the government grant, it should be noted that land search reveals that for each lot comprising the Property the Defendant vendor is registered as the owner by succession on 3rd August 1979 and the entry is the first entry in the records. The memorial (No. 221704) for the registration says that the Defendant vendor succeeded Yeung Chuk-cho ("the original grantee"). The same District Land Registry records for each lot comprising the Property also state that:-

"REMARKS : ORIGINAL GRANT, LEASE TERM, ITS DATE OF COMMENCEMENT & RENT CANNOT BE TRACED IN THE LAND REGISTRY"

In addition, the Defendant vendor produced a letter (in Chinese) dated 11th November 1981 addressed to him by the Yeun Long District Officer stating that "the records relating to the lots had been lost during the War". Obviously, what had been lost were the records of the Land Registry or the District Office. The District Officer could not possibly state that the owner (whoever he was) of the lots comprising the Property had lost deeds and documents (if any) previously in the possession of that owner.

10. The evidence relied upon by the Defendant vendor as proof of valid demise of the lots comprising the Property and the terms thereof consist of extracts from the file CSO File No. 1632/1941 held in the government Public Records Office. These extracts include-

(a) A record which on the face of it shows that "Application has been made [by Yeung Chuk-cho together with another person as trustees for a firm called Yut Wa & Co.] for 6 lots of land (including the Property)" and an Assistant Land Officer of the Hong Kong government recommended on 23rd November 1914 for "sale by public auction." On this same document, it can be seen that the then Colonial Secretary on 9th December 1914 by command approved the application for sale by auction.

(b) A copy of the Hong Kong Government Gazette 1632 of 1914 which reads "It is hereby notified that the following Sales of Crown Land [i.e. the 6 lots of land aforementioned] by Public Auction will be held at the Au Tau Police Station at 10.00 a.m. on Thursday, the 21st day of January, 1915." It is also apparent on this Gazette notice that the asking price for the 6 lots of land add up to $41.00.

(c) A record which on the face of it in part reads "Purchased this day by Applicant of ...... for $41.00 ...... (signed) Assistant Land Officer 21 January 1915".

(d) An extract which reads:-

"GENERAL CONDITONS OF SALE OF LAND
IN THE NEW TERRITORIES
(From Govt. Gazette of 1906)

Govt. Gazette Notification No. 365

It is hereby notified that, until further notice and unless otherwise stated, the following General Conditions of sale will be applicable to all sales of Crown Land in the New Territories (Exclusive of that portion described as "Southern District Mainland" in the order of Council dated the 15th March, 1906, Government Notification No. 212 of 1906) in the same manner as if the said General Conditions were included in the published particulars and conditions of Sale in each case. Special Conditions of sale will be separately set forth:-

General Conditions of Sale

1. The highest bidder above the upset price shall be the Purchaser, and if any dispute arises between two or more bidders for any lot, such lot shall be put up again at a former bidding.

2. No person shall, at any bidding, advance less than one dollar or such other sum as shall be named at the time of sale.

3. Immediately after the fall of the hammer, the Purchaser of each lot shall sign a Memorandum of Agreement, in the form hereinafter contained, for completing the purchase according to these conditions, and shall, within three days of the day of sale, pay to the Assistant Land Officer for and on behalf of His Majesty the King the full amount of Premium at which the lot shall have been purchased.

4. The Purchaser of each lot shall also have Boundary Stones of a size and pattern to be approved by the Assistant Land Officer, marked with the Registry Number, placed at each angle of the Lot within one month of the date of sale.

5. The Purchaser of each lot shall, where such lot is sold as a Building Lot, build and finish, fit for occupation, before the expiration of twenty four calendar months from the day of sale, on a good substantial and workmanlike manner with walls of stone or brick and lime-mortar and roof of tiles or such other material, one or more good and permanent messuage or tenement upon some part of his lot, as may be approved by the Assistant Land Officer, and in all other respects to the satisfaction of the Assistant Land Officer, and shall expend thereon in ratable improvements not less than the amount specified in the particulars of sale.

6. No sewage or refuse water will be allowed to flow from any lot on to any of the adjoining lands, whether belonging to the Crown or to private persons, neither shall any decaying, noisome, noxious, excre-mentitious, or other refuse matter be deposited on any portion of any lot, and in carrying out any works of excavation on any lot no excavated earth shall be deposited on each lot or Crown Land adjoining in such manner as shall expose the slopes of such excavated earth to be eroded and washed down by the rains. The Purchaser of each lot shall see that all refuse matters are properly removed daily from off the premises.

7. The Purchaser of each lot shall pay the Assistant Land Officer or such other officer who may be appointed to receive the same a proportionate part of the annual rental specified in the particulars of Sale of such lot on the 30th day of June next after the date of sale, and thereafter shall pay such annual rental by equal yearly payments on the 30th day of June in each and every year during the term of years for which the lost is sold.

8. When the conditions herein contained have been complied with to the satisfaction of the Assistant Land Officer, the Purchaser of each lot shall be entitled to and shall execute on demand a Lease from the Crown of the ground comprised in each lot for the term of years for which the lot has been sold, at the annual rent stated in the Particulars of Sale of the Lot payable yearly on the 30th day of June in each and every year, such Crown Lease shall, unless otherwise provided, be in the form set out in Schedule A hereunder and there shall be deemed to be incorporated in such Lease unless otherwise expressly excepted or provided the terms, exceptions, reservations, covenants, conditions, provisos and agreements shall be binding on the Lessee, his executors, administrators and assigns in the same manner as if they had been incorporated and written in such Lease.

9. Should the Purchaser of any lot neglect or fail to comply with any of the General or Special Conditions of Sale of such lot, his Premium, or any portion thereof which may be paid, shall be there-upon forfeited to His Majesty who shall be at full liberty either to enforce the sale, or to resell the Property at such time and place in such manner as to His Majesty shall seem fit, and in some of a re-sale, the increase, if any, of the Premium or Purchase Money shall be retained by His Majesty, and the deficiency, if any, and all costs and expenses shall be made good by the defaulter and be recoverable as liquidated damages, or at the option and pleasure of His Majesty, to no enter and resume the property as if no sale had ever taken place, in which case also the Premium paid by the Purchaser shall be thereupon wholly forfeited to His Majesty. But such re-entry shall not exonerate the original purchaser, upon a subsequent re-sale of the property, to make good the deficiency, if any, upon such re-sale, and all costs and expenses as ascertained to be recoverable as aforesaid.

10. Possession of each lot sold shall be given to the Purchaser thereof, and deemed to have been taken by him on the day of sale.

11. No verandah shall be constructed so as to project over Crown Land.

12. No house shall be more than two stores in height.

13. In the event of the Purchaser of any lot assigning the benefit of the agreement signed by him under General Condition 3, the assignee and all subsequent assignees shall be bound by all the General and Special Conditions of Sale, and all powers and remedies shall be enforceable against him to the same extent as if such assignees where the original Purchaser.

14. The exact area boundaries and measurements of each lot shall be determined before the issue of the Crown Lease and the Premium and Crown Rent shall be then adjusted in accordance with the area and the amounts of Premium and Crown Rent at which the lot was sold.

 

	............................
	Assistant Land Officer

MEMORANDUM OF AGREEMENT BY THE PURCHASER

Memorandum that ........................ of ...................... the person whose name is hereunder written has been this day declared the highest bidder for the lot described in the particulars of Sale and hereunder specified opposite to his said name and signature, and does hereby agree to become the Lessee thereof, under and subject to the General and Special Conditions of the Sale of such lot, and on his part to perform and abide by the said conditions.

Registry No.	Annual Rental	Amount of Premium at which purchased	Signature of purchaser
Survey District No. Lot No.	$	$

Dated this .................... day ............... 19.........

.........................................
Witness to signature of purchaser"

(e) An extract which reads:

"GN697 of 1909

No. 697 - It is hereby notified, with reference to Government Notification No. 365 of 1906, that the following Special Conditions will not in future be set forth at length in the Particulars and Conditions of Sale of lands in the New Territories but will be referred to by the number given to them in this notice:-

Special Conditions

1. No building of any description shall be erected on the lot.

2. The Crown Rent mentioned in the Particulars of Sale is subject to reassessment at the end of the first five years from the date on which the Lot is sold and thereafter such rent shall be paid as shall be fairly and impartially fixed by the Surveyor to His Majesty the King or by such other person as shall be appointed by the Governor of Hong Kong for that purpose as the fair and reasonable rental value of the ground at the expiration of the said period of 5 years and a special proviso to that effect shall be inserted in the Crown Lease of the said Lot.

3. The purchaser shall not during the term for which the Lot is sold permit or allow the land to remain uncultivated according to the custom of the country for a period of five consecutive years at any time after the date on which the lot is sold and a covenant to that effect shall be inserted in the Crown Lease of the said Lot.

4. The purchaser shall not have or be entitled to any right of access to the sea or to any right of access to any water which may be near to the said Lot or on which the same abuts or to any compensation whatever in the event of any reclamation being made between any part of the said Lot and such Sea and water and a special proviso to that effect shall be inserted in the Crown Lease of the said Lot.

 

	G.H. Wakeman,
	Land Officer

29th October 1909"

(f) An extract which reads:

"GN 278 of 1911

No. 278 - It is hereby notified, with reference to Government Notification No. 697 of 1909, that the following Special Condition of Sale is added to the Special Conditions contained in the aforesaid Notification and will be referred to by the Number given to it in this Notification :-

Special Condition

No. 5 - Without the consent of the District Officer no grave shall be made on, nor shall any human remains be interred in, or deposited on the land sold either in earthenware jars or otherwise, and a covenant to this effect shall be inserted in the Crown Lease of the Lot.

 

	P. Jacks,
	Land Officer.

8th September 1911."

11. Naturally, Mr. Lee for the Defendant vendor contended that the documents set out above prove demise by the government and the terms of the demise. Mr. Wan for the Plaintiff purchaser, on the other hand, attacked the cogency of the documents. First, it is said that proof of approval of sale by public auction does not prove that there was an actual sale. But there is in fact a record of sale as one can see in Document (c). Secondly, Mr. Wan contended that Document (c) does not refer to any land and the word "Applicant" in that document does not identify the Applicant in Document (a) nor connect that document or the purchase to the person succeeded by the Defendant vendor. But on that document, the price of $41.00 and the date of 21 January 1915 correspond to the notice (Document (b)) of public auction of the lots in question. Moreover, that document and Documents (a) and (b) are together taken from the government file CSO File No. 1632/1441 held in the government Public Records Office. So I am more than satisfied that Document (c) deals with, inter alia, the lots comprised in the Property.

12. Thirdly, Mr. Wan queried the capacity of the original grantee because on the face of Document (a), the original grantee appeared as only one of two trustees. This query is disingenius. For the purposes of Section 13(1) of the Ordinance, who was, or the capacity of, the grantee is utterly irrelevant. In my view, all that Section 13(1) of the Ordinance requires is proof of demise of the Property by the Government. A vendor is not required to show the complete chain of devolution from the initial demise by the government to the vendor. Under Section 13(1) of the Ordinance, complete title consists of (1) the initial demise by the government and (2) title for not less 15 years before the intended sale to the purchaser. In between (1) and (2), the property demised by the government may have passed through many hands and the capacity or interest of the grantee under the initial demise by the government may have changed.

13. It has been seen that the term and conditions of the demise from the government in 1915 can be ascertained from Documents (d), (e) and (f). But Mr. Wan pointed out that Paragraph 3 in Document (d) stated that a Memorandum of Agreement (in the format shown at the end of that Gazette notice) has to be signed by the purchaser and the Defendant vendor cannot produce the relevant signed Memorandum of Agreement. Again, I find this fourth argument misconceived. The Memorandum of Agreement, if there was one such signed by the original grantee, does not require signature by the government. The Memorandum of Agreement obviously was a document, after signing by the original grantee, to be handed over to the government for keep-sake. The original grantee and his successors and assigns should not have possession of that document. Thus a purchaser has no right to demand production of this document as proof of title.

14. In short, in view of the package of documents considered, I find that the Defendant vendor has shown good title.

Timing for requisitions

15. Following my finding that the Defendant vendor has shown good title, the Defendant vendor's case that the Plaintiff purchaser was late in raising requisitions becomes inconsequential. However, in deference to counsel's submission, I will deal with this issue.

16. According to the first agreement and the second agreement, completion date was postponed from 5th February 1998 to 30th May 1998. Still completion did not take place by 30th May 1998. Before 30th May 1998, the Plaintiff purchaser had no solicitors acting for him. Therefore, title deeds were not sent to the purchaser's side as would be the case if there were solicitors for the purchaser who could give undertaking to hold the title deeds to the order of the vendor. And, the Plaintiff purchaser never raised requisition before 30th May 1998. But the matter did not end after the passing of the 30th May 1998. The trial bundle contains copies of correspondences between solicitors. What happened was that solicitors came into the scene to act for the Plaintiff purchaser some time after 30th May 1998. Those solicitors raised the requisition on title, i.e. that in the absence of the Government lease there was no good title. Solicitors for the Defendant vendor answered the requisition by saying that there was no trace of a government lease.

15. Now, since the Defendant vendor, for good reason, did not deliver title deeds to the Plaintiff purchaser to show good title until after the last agreed completion date, and because when solicitors for the Plaintiff purchaser raised requisition on title the Defendant vendor did not intimate that the requisition was late but instead endeavoured to answer the requisition, the Defendant vendor must have accepted that the requisition was in time. Even if the Defendant vendor indeed did not regard the requisition as being raised in time, taking into account the history and the circumstances of the case, I hold that the requisition was raised in time.

Forfeiture of deposit

16. As already mentioned, the question of forfeiture was never raised in the pleadings. Parties may of course agree to bring up new issues before the court if such issues are crucial to the determination of the case. However, it will be seen, the claim for forfeiture of deposit in this case hardly has any merit.

17. The Deposit amounts to $300,000, 25% of the total consideration for the Property at $1.2 million. Counsel for the parties have no quarrel that relevant principles governing forfeiture of deposit can be found in Workers Trust & Merchant Bank Ltd. v Dojap Investments Ltd. [1993] A.C. 573. The Lord Browne - Wilkinson delivering the advice of the board said,

" In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established that the forfeiture of such a deposit (customarily 10 per cent of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract.

This exception is anomalous and at least one textbook writer has been surprised that the courts of equity ever countenanced it: see Farrand, Contract and Conveyance, 4th ed. (1983), p. 204. The special treatment afforded to such a deposit derives from the ancient custom of providing an earnest for the performance of a contract in the form of giving either some physical token of earnest (such as a ring) or earnest money. The history of the law of deposits can bet raced to the Roman law of arra, and possibly further back still: see Howe v. Smith (1884) 27 Ch.D. 89, 101-102, per Fry L.J. Ever since the decision in Howe v. Smith， the nature of such a deposit has been settled in English law. Even in the absence of express contractual provision, it is an earnest for the performance of the contract: in the event of completion of the contract the deposit is applicable towards payment of the purchase price; in the event of the purchaser's failure to complete in accordance with the terms of the contract, the deposit is forfeit, equity having no power to relieve against such forfeiture." (pp. 578-579)

" In Linggi Plantations Ltd. v. Jagatheesan [1972] 1 M.L.J. 89 Lord Hailsham of St. Marylebone L.C. delivered the judgment of the Board which upheld the claim to forfeit a normal 10 per cent. deposit even though the vendor had in fact suffered no loss. He referred on a number of occasions to a requirement that the amount of a deposit should be "reasonable" and said, at p. 94:

"It is also no doubt possible that in a particular contract the parties may use language normally appropriate to deposits properly so-called even to forfeiture which turn out on investigation to be purely colourable and that in such a case the real nature of the transaction might turn out to be the imposition of a penalty, by purporting to render forfeit something which is in truth party payment. This no doubt explains why in some cases the irrecoverable nature of a deposit is qualified by the insertion of the adjective 'reasonable' before the noun. But the truth is that a reasonable deposit has always 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."

In the view of their Lordships these passages accurately reflect the law. It is not possible for the parties to attach the incidents of a deposit to the payment of a sum of money unless such sum is reasonable as earnest money. The question therefore is whether or not the deposit of 25 per cent. In this case was reasonable as being in line with the traditional concept of earnest money or was in truth a penalty intended to act in terrorem." (p.579)

" However although their Lordships are satisfied that the practice of a limited class of vendors cannot determine the reasonableness of a deposit, it is more difficult to define what the test should be. Since a true deposit may take effect as a penalty, albeit one permitted by law, it is hard to draw a line between a reasonable, permissible amount of penalty and an unreasonable, impermissible penalty. In their Lordships' view the correct approach is to start from the position that, without logic but by long continued usage both in the United Kingdom and formerly in Jamaica, the customary deposit has been 10 per cent. A vendor who seeks to obtain a larger amount by way of forfeitable deposit must show special circumstances which justify such a deposit." (p.580)

" In the present case, the attorney for the bank in evidence sought to justify the amount of the 25 per cent. deposit in part by reference to the amount of the transfer tax which would have been payable, viz., $862,500. This evidence indicates that far from the amount of the deposit having been fixed upon as a reasonable amount of earnest, the amount was substantially influenced by fiscal considerations having nothing to do with encouragement to perform the contract.

For the rest, although the attorney for the bank gave evidence that the amount of the deposit was fixed in part because it was a sum set "to ensure that persons do not bid frivolously at the auction" she also sought to justify the amount of the deposit by reference to the payments that would have had to be made on completion, i.e. tax, stamp duty, auction costs and auctioneer's commission. She accepted that the amount of the deposit was far in excess of what would have been required to cover the maximum out of pocket expenses which would have attended completion.

Their Lordships agree with the Court of Appeal that this evidence falls far short of showing that it was reasonable to stipulate for a forfeitable deposit of 25 per cent. of the purchase price or indeed any deposit in excess of 10 per cent. As for the tax element, the Board do not suggest that it would be unreasonable for a vendor to require advance payment of an amount sufficient to discharge the liability for transfer tax on or before completion. But it does not follow that such advance payment of tax should be capable of forfeiture if completion does not take place: such tax is either not in the event payable or is recoverable by the vendor. However, quite apart from the specific tax element in this case, there is in the view of the Board no sufficient evidence to justify a deposit of 25 per cent as being a true deposit." (p.58)

"In the view of their Lordships, since the 25 per cent. deposit was not a true deposit by way of earnest, the provision for its forfeiture was a plain penalty. There is clear authority that in a case of a sum paid by one party to another under the contract as security for the performance of that contract, a provision for its forfeiture in the event of non-performance is a penalty from which the court will give relief by ordering repayment of the sum so paid, less any damage actually proved to have been suffered as a result of non-completion: Commissioner of Public Works v. Hills [1906] A.C. 368. Accordingly, there is jurisdiction in the court to order repayment of the 25 per cent. deposit.

The Court of Appeal took a middle course by ordering the repayment of 15 per cent. out of the 25 per cent. deposit, leaving the bank with its normal 10 per cent. deposit which it was entitled to forfeit. Their Lordships are unable to agree that this is the correct order. The bank has contracted for a deposit consisting of one globular sum, being 25 per cent. of the purchase price. If a deposit of 25 per cent. constitutes and unreasonable sum and is not therefore a true deposit, it must be repaid as a whole. The bank has never stipulated for a reasonable deposit of 10 per cent.: therefore it has no right to such a limited payment. If it cannot establish that the whole sum was truly a deposit, it has not contracted for a true deposit at all." (p.582)

18. As I understand it, although the Privy Council started with the principle laid down in Howe v. Smith that a vendor had an implied right (i.e. without express contractual provision) to forfeit a deposit paid as ernest money under a contract for the sale and purchase of land, the board in Linggi Plantations Ltd. v. Jagatheesan and in Workers Trust & Merchant Bank Ltd. v. Dojap Investment Ltd. has effectively modified that principle so that the right, whether under express provision or by implication, is upheld only if the deposit amounts to no more than 10% of the consideration. If the amount sought to be forfeited exceeds 10%, the claim to forfeiture has to be justified. And if the higher percentage cannot be justified, the vendor can forfeit nothing - not even the customary 10%. Thus, logically, a claim for forfeiture in excess of 10% has got to be justified and based on express contractual provision. This is because the law as a matter of general principle does not automatically recognize a right to forfeit more than 10% and, even if the parties did impliedly agree to forfeiture, the law nevertheless requires objective justification and gives the court the power to order refund for want of justification.

19. In the premises, the first thing to look for, in a case involving a deposit of more than 10%, is express contractual provision for forfeiture. In the instant case, the first agreement and the second agreement read:-

The First Agreement

"PROVISIONAL AGREEMENT FOR SALE AND PURCHASE

Purchaser : Chan Koon Wa or his holding company

Vendor : Young Tak Lor

Purchaser and Vendor both agreed that in consideration of the sum of Hong Kong Dollars One Million and Two Hundred Thousand, HKD1,200,000, Purchaser will purchase from the Vendor the land known as Lot Nos. 4160 and 2124 [(signed) Young Tak Lor (signed) Illegible] both in Demarcation District No. 104 of an area of about 9,600 square feet [i.e. 22 fen (transliteration) of land] [the words "and 2124" were deleted].

Purchaser now pays in advance a sum Hong Kong Dollars One Hundred Thousand as deposit.

Cheque No: 700882. [one word deleted]

Completion will be held on or before the 5th day of February 1998.

The sale and purchase is on a "must buy and must sell" basis. [one word deleted] Neither party could cancel that Agreement.

Should the sale and purchase cannot be completed on the 5th day of February 1998, the deposit will be invalidated.

 

Purchaser Chan Koon Wa	Vendor Young Tak Lor
ID No.XXXXXXX(X)	ID No.XXXXXXX(X)
Signature (signed) Illegible	Signature (signed) Young Tak Lor
	5-11-97"

The Second Agreement

"Parties to Provisional Agreement:-	Young Tak Lor , hereinafter
	Chan Koon Wa

called	(Party A)
	(Party B)

On the 5th day of November last year, Party B discussed with Party A of intending to purchase two pieces of land situated at Sun Tin District, known as Lot Nos. 4160 and 2124, both in Demarcation District No. 104. The selling price is One Million and Two Hundred Thousand Hong Kong Dollars. As stated, completion must be held unequivocally on the 5th day of February 98. No postponement would be allowed. Now owing to a certain kind of problem, Party B requests Party A to concede to alter the completion date to (the month and day of month were deleted and substituted) 30th May this year [(signed) Young Tak Lor (singed) Illegible.] Party B voluntarily pays a further deposit in a sum of Hong Kong Dollars of (the word of "four" was deleted and substituted with the word "two") Two Hundred Thousand [(signed) Young Tak Lor (singed) Illegible] (together with the sum of One Hundred Thousand Dollars that had been last), amounting to a total sum of (the word of "five" was deleted and substituted with the word "three") [(signed) Young Tak Lor (singed) Illegible] Three Hundred Thousand Dollars. After compromising, Party A agrees to the request of Party B. If the sale and purchase cannot be completed unequivocally on the due date, the total amount of deposits that had been paid on the two occasions will be invalidated. With the consent of Party B, no objection will be allowed. Now this written agreement is prepared in duplicate. Each party retains one copy as proof. This agreement is specially made as evidence.

Signatory:	(Party A)(signed) Young Tak Lor		Hong Kong Identity Card No.	B873269(3)
	(Party B)(signed) Illegible			C576295(0)

This 20th day of February 1998"

20. Now, both agreements provided that "the deposit will be invalidated". I must confess the meaning of "invalidated" in the context is not entirely clear to me. Because "invalidation" is not predicated on failure on the part of the purchaser to complete, no officious bystander should think that even if it was the vendor who defaulted the Deposit would still be retained by the vendor. Nor is it right to think that the Plaintiff purchaser agreed to forgo his money even if the vendor unilaterally decide not to complete. Hence, "invalidated" cannot be equated with "forfeited".

21. In the absence of clear or express provision for forfeiture in the contract, I hold that the Defendant vendor has no basis to claim forfeiture of deposit (of any percentage).

22. In case I am wrong on the proposition that there must be clear and express contractual provision to base a claim for forfeiture of deposit, so that the Defendant vendor is in any case entitled to show special circumstances to justify forfeiture of a larger deposit, I proceed to look at the arguments advanced by Mr. Lee for the Defendant vendor in this regard. Mr. Lee has, in his characteristic eloquence, pointed out a number of features in the transaction, i.e. that it involved agricultural land bought for investment purpose, that such land is usually acquired by a limited number of land developers, etc. Quite frankly, I cannot see how these features lead to a reasonable conclusion that a larger deposit is justified. The fact that this was not the ordinary run of the mill purchase of domestic flat transaction does not automatically mean that special circumstances existed to justify a larger deposit.

23. Mr. Lee also suggested that at the time the second agreement was signed, property prices were falling and the market was stagnant. If that is true, I see all the less reason for a larger deposit because there would be the purchaser's market unless the larger deposit was paid to help out a vendor having liquidity problems during general economic turmoil.

24. Mr. Lee also contended that the large deposit was justified because of the risk of the purchaser being impecunious and unable to pay damages for failure to complete. Such risk is inherently present in every transaction but in the present case the risk was even less because the total consideration at $1.2 million - much less than the average price of a small flat in a multi-storey building anywhere in Hong Kong - could not result in so unaffordable damages for someone whom Mr. Lee said was buying for investment.

25. In any event, even if arguably there were special circumstances for a larger than the customary 10% deposit, the Defendant vendor has not come near to showing why a 25% deposit instead of a 20% or 15% deposit was justified.

26. For all the reasons given, I hold that the Defendant vendor is not entitled to forfeit any deposit. The Defendant vendor is, therefore, left with recourse to damages only (to be assessed) by proving loss of bargain.

Damages

26. On assessment of damages, both parties relied on the opinion of expert valuers. However, neither the parties nor the experts shared the same view as to the relevant date for valuation. As a result, not only did the valuation date had to be determined by the court, at least one party did not have a valuation report based on the correct valuation date. Doing the best I could, I decided to fix the valuation date, then gave leave to the parties to prepare further expert evidence so that damages may be assessed on a date to be fixed before me or any other judge.

27. On the valuation date, normally, it is the completion date. However, in this case, the parties had by conduct and representation as I have held agreed to postpone the completion date of 30 May 1998. Eventually, solicitors for the Defendant vendor wrote two letters to solicitors for the Plaintiff purchaser who in turn responded :-

(1) letter from solicitors for the Defendant
vendor dated 8th October 1998

"Messrs. Leung Kin & Co.,
Solicitors,
7-9th Floor,
Hang Seng (YL) Building,
Yuen Long, N.T.

Dear Sirs,

Re: Lot No. 4160 and 2124 both in
D.D. No. 104, Yuen Long, N.T.

We refer to the above property and our letter dated 3 August 1998, we should be grateful if you would inform us whether your client (the Purchaser) is still interested in the purchase of the said property, and if not, please return to us all the relevant documents sent to you on 9 July 1998.

 

Yours faithfully,"

(2) letter from solicitors for the Defendant
vendor dated 4th November 1998

"Messrs. Leung Kin & Co.,
Solicitors,
7-9th Floor,
Hang Seng (YL) Building,
Yuen Long, N.T.

Dear Sirs,

Re: Lot No. 4160 and 2124 both in
D.D. No. 104, Yuen Long, N.T.

We refer to our letter dated 8 October 1998 and write to inform you that since we do not hear any further from your client, we are instructed that the offer of the sale of the above lots is now withdrawn and void.

Please return to us the Agreement for Sale and Purchase (in duplicate) and all relevant title deeds and documents for our client's retention.

 

Yours faithfully,"

(3) letter from solicitors for the Plaintiff
purchaser dated 5th November 1998

"Messrs. Rowdget W. Young & Co.,
Solicitors,
7th Floor, O.T.B. Building,
Yuen Long,
New Territories.

Dear Sirs,

Re: Lot Nos. 4160 and 2124 both in
Demarcation District No. 194,
Yuen Long, New Territories, Hong Kong

We refer to the above properties and our previous correspondences.

We are instructed by our client to give you notice which we hereby do that since your client has failed to prove good title of the abovenamed properties, our client now exercise his right to cancel the Agreement made between our respective clients and demand the return of his deposit paid hereunder. Kindly take your client's instruction and refund the deposit paid by our client in respect of the above properties within seven days' hereof.

	Yours faithfully,"
	(Signed)
	LEUNG KIN & CO."

28. In the light of the concluding correspondences between solicitors for the parties, I have no difficulty in finding that the parties finally broke off, whether by way of breach or acceptance of repudiation, on the 4th or 5th November 1998 which must be date for assessment of loss. The difference of one day does not matter at all in terms of property value. Accordingly, I held that the 5th November 1988 should be the valuation date.

Order

29. For reasons already given, I give judgment for the Defendant vendor on liability with damages to be assessed. For assessment of damages, I hold that the valuation date is 5th November 1998. There is leave to the Defendant to file fresh expert valuation report, such report to be served on the Plaintiff at least 28 days before the hearing for assessment of damages. There is also leave to the Plaintiff to file expert valuation report in answer, if appropriate, within 14 days thereafter. No expert may be called at the hearing for assessment of damages unless written report filed and served as ordered. Costs of the whole action reserved.