SHIH PHILIP v. LI WAI KEUNG

DCCJ 2901/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2901 OF 2006

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Dates of hearing  :   11, 14-16 April; 7-10 July; 1 August 2008

JUDGMENT

Background

1.  The dispute in this case centers on a home-made document, and the meaning and legal effect which should be attached to such document.  The protagonists in this complex web of events are: first, Madam Woo, an enterprising lady who has money to spare and makes loans to friends and aquaintances, and who makes a business out of introducing people to gamble at a mah-jong parlour.  Secondly, there is Madam Wong, a frequenter of mah-jong parlours where she met Madam Woo, and who admits to be seriously in debt at the material time.   Then, there is Mr. Li (the Defendant), who is a close friend and co-habitee of Madam Wong. 

2.  There are other minor players.  The Plaintiff, Philip Shih ("Philip"), is Madam Woo’s son.   Madam Woo has another son, Allen Lee ("Allen").  They are parties to various agreements in these proceedings.  Madam Wong’s sister has a former boyfriend, Mr. Kwan.  Mr. Kwan features in the story, because he drafted the Agreement which is the subject of these proceedings, and liaised between Madam Woo and Madam Wong at a material time.  Finally, there is another Mr. Wong, unrelated to Madam Wong but held out by her to be the "elder brother" and a lender at a crucial time.

3.     The claim made in these proceedings is for specific performance of a Chinese Agreement made between Mr. Li and Philip on about 2 July 2003 ("Agreement"), whereby Mr. Li agreed to assign and convey his interest in the property described as 237A, To Kwa Wan Road, first floor ("Property") to Philip.  Mr. Li and Philip had acquired the Property as tenants in common in equal shares under a Deed of Assignment dated 2 July 2003 ("Assignment").

4.  The Agreement recites that Madam Wong and Mr. Li were indebted to Philip for $200,000, and that each of Mr. Li and Philip owns 50% of the interest in the Property.  The Agreement provides that upon Mr. Li repaying the sum of $200,000 to Philip within 3 years, Philip will transfer back to Mr. Li 50% of the interest in the Property：

“三年内清還港幣二十萬元給施飛後，施飛交回該單位百份之五十業權給李偉強。”

The Agreement then set out terms and conditions as to the manner of repayment of the sum of $200,000, and other conditions to apply within the interim period of 3 years for repayment.

5.  The Agreement provides that $100,000 is to be repaid by Mr. Li by 18 installments between July 2003 and December 2004, in default of which Mr. Li will lose his 50% interest in the Property：

“第一期十萬元正由二零零三年七月開始至二零零四年十二月（分十八期）還清，如果違反上述協議，李偉強將會同時失去上述單位百份之五十業權，而該單位全部業權將由施飛擁有”

 It further stipulates that the remaining $100,000 will be repaid by 18 installments between January 2005 and June 2006, and upon such repayment, Philip will lose his 50% interest in the Property, of which Mr. Li will become the 100% owner.

“第二期十萬元正由二零零五年一月開始至二零零六年六月（分十八期）還清，由此年七月起該上述單位之業權亦為李偉強全部擁有，施飛亦失去該單位百份之五十業權，雙方各不相欠。”

6.  It is not disputed that Madam Woo is Philip's real principal when Philip made the Agreement.  On their part, Mr. Li and Madam Wong had never made distinction between their respective roles, rights and liabilities under the Agreement.  In essence, Mr. Li's defence to the claim of specific performance is that the Agreement is a sham for what was in actual fact intended by the parties to be a mortgage for a loan made by Madam Woo to Madam Wong and Mr. Li, and that the Agreement and Assignment should not be enforced.  It was pleaded in the Defence that the provision in the Agreement which stipulates that Mr. Li will lose his 50% interest in the Property in the event of his failing to pay $100,000 by December 2004 is unconscionable, or a clog on the equity of redemption, or penal, and that the provision and the Agreement should not be enforced, or is void.

The Issues

7.  The issues for determination by the court at trial are :

(1)  What was the meaning and effect of the Agreement?

(2)  If the Agreement is a mortgage, is there a clog on the equity of redemption, and if yes, what is the effect?

(3)  If the Agreement confers an option to repurchase, was the option exercised?

(4)  Is the Agreement unconscionable?

(5)  Is the Agreement penal?

(6)  Should the Agreement be specifically enforced, or are damages an adequate and appropriate remedy?

What was the meaning and effect of the Agreement?

8.  When construing the meaning and effect of the Agreement, the Court has to give regard not merely to the individual words the parties have used, but to the Agreement as a whole, as well as the factual and legal background against which the Agreement was concluded and the practical objects which it was intended to achieve.  (See Jumbo King Ltd. v. Faithful Properties Ltd. (1999) HKCFAR 279.)  The background of the parties’ execution of the Agreement is accordingly relevant, but there is serious debate and conflict with regard to the factual background of this case.

9.  It is not disputed that Madam Wong and Mr. Li originally acquired the Property in their joint names in March 1991.  According to the records at the Land Registry, the Property was mortgaged by Madam Wong and Mr. Li in November 2000.

10.   It is Madam Woo's case that in late 2002, Madam Wong approached her for a loan, explaining that she was in financial difficulty, that the outstanding mortgage loan on the Property was approximately $300,000, but that she and Mr. Li had not been able to repay the mortgage loan installments for almost 10 months.  In other words, the mortgagee was literally on the doorstep and about to recover possession of the Property from Madam Wong and Mr. Li.  Madam Woo claims that she lent Madam Wong $20,000 in late 2002.  Madam Wong admits that she had a loan from Madam Woo, but that it was $15,000 made in early 2002.  According to Madam Woo, Madam Wong informed her in late 2002 that she and Mr. Li would like to sell the Property at a price of $480,000 to pay off her debts, and she asked Madam Woo to introduce purchasers to her. 

11.  According to Madam Woo, she did introduce someone who offered to buy the Property at $480,000, with completion and delivery of vacant possession to take place in 2 months.  Madam Woo claims that Madam Wong told her that despite her dire straits, she did not wish to part with the Property and wished to delay the sale, so persuaded Madam Woo to purchase the Property from her at a lower price of $410,000, but with a longer completion period of 6 months.  According to Madam Woo, Madam Wong also said that if she had the money in 6 months' time, she would buy back the Property from Madam Woo, but pay interest to compensate Madam Woo for the legal costs and expenses incurred.  Madam Woo agreed to this proposal, and nominated her son, Allen, to make the purchase.  Madam Wong asked for payment of a deposit of $100,000.

The Provisional Agreement

12.  The documents therefore show that on 5 October 2002, a standard form Provisional Agreement for Sale and Purchase ("Provisional Agreement") was signed between Allen as purchaser, and Madam Wong and Mr. Li as vendors of the Property for the stated purchase price of $410,000.  Under the Provisional Agreement, the purchase price was to be paid in 3 installments.  A total sum of $20,000 ($16,000  + $4,000)  was stated to have been paid on the signing of the Provisional Agreement.  A further sum of $80,000 was stated to be payable on or before 7 October 2002 upon the signing of a formal sale and purchase agreement, and a sum of $310,000 to be payable on or before completion 6 months later, on 7 April 2003.  In accordance with Madam Woo's version of events, the Provisional Agreement states that the Provisional Agreement can be canceled, and the deposit returned, if one month's prior notice is given.  A separate handwritten document was signed by Allen, confirming that if Madam Wong and Mr. Li give one month notice before completion, the deposit of $100,000 paid can be returned with interest and legal costs as compensation.

13.  On 8 October 2002, a formal Sale and Purchase Agreement was signed by the parties to the Provisional Agreement.  A total deposit of $100,000 is stated in the agreement to have been received by Madam Wong and Mr. Li.  According to Madam Woo, $40,000 of this was paid directly to Viewcon HK Ltd ("Mortgagee"), as requested by Madam Wong, to partly discharge her mortgage debt.

14.  On Madam Wong's part, she claims that she had never really intended to sell the Property under the Provisional Agreement.  She alleges that when she approached Madam Woo in about October 2002 for another loan to pay off the debt to the Mortgagee, Madam Woo had insisted that she must have some security "in hand" (“有揸手”) before she would make any further advance to Madam Wong.  Madam Wong claims that at Madam Woo's insistence, the Provisional Agreement was signed, but the period of time specified in the Provisional Agreement for completion was actually intended to be the date for repayment of a loan of $100,000.

15.   Hence, it is Madam Wong's case that the Provisional Agreement was a mortgage as security for money advanced and to be advanced by Madam Woo to Madam Wong to pay off Madam Wong's debts, including the debt then due to the Mortgagee in respect of the Property.  Madam Wong claims that she had not received the alleged first deposit of the stated purchase price on the day of the signing of the Provisional Agreement.  The sums of $16,000 and $4,000 actually represented the earlier debt of $15,000 she owed to Madam Woo and outstanding interest thereon (making up a total of $16,000), and interest of $4,000 on the further loan of $80,000 advanced by Madam Woo under the Provisional Agreement.  She acknowledged in Court that the $80,000 actually represents $40,000 advanced to and received in cash by Madam Wong and Mr. Li on 7 October 2002, and $40,000 paid directly to the Mortgagee on 15 October 2002.

16.  The documents show that on 29 March 2003, a few days before 7 April 2003 (the date specified in the Provisional Agreement as the scheduled completion of the sale and purchase), Madam Wong and Mr. Li signed a document requesting Allen to postpone completion of the sale and purchase to 6 June 2003.

17.  Madam Woo said that at about the same time, she asked Allen to apply for financing to proceed with what she regarded as a genuine purchase as she was not optimistic that Madam Wong and Mr. Li would be purchasing back the Property on the extended date for completion.  Allen did not wish to take up the Property and would rather sell it.  Madam Woo therefore asked her other son, Philip, to acquire the Property from Allen.  An agreement was signed between Allen and Philip on 31 May 2003, with Allen selling as confirmor and Philip agreeing to purchase the Property from Mr. Li and Madam Wong at the price of $450,000.  Philip proceeded to arrange for a mortgage loan for completion of the purchase on 6 June 2003.

18.  On the day scheduled for completion on 6 June 2003, neither Madam Wong nor Mr. Li appeared.  When Madam Woo spoke to Madam Wong later about the completion, Madam Wong explained that Mr. Li was unhappy that Madam Wong had sold the Property because of her debts.  Madam Wong therefore asked Madam Woo to agree to retain Mr. Li as 50% owner of the Property and to agree to the sale only of 50% of the Property.  According to Madam Woo, because Madam Wong was so reluctant to part with the Property, and she was also prepared to oblige by giving her and Mr. Li more time to buy back the Property, a compromise was reached.  Madam Woo (and through her, Allen and Philip) would agree that Madam Wong and Mr. Li would only sell half of the Property to Madam Woo, with an option to Madam Wong and Mr. Li to buy back the Property. 

19.  On her part, Madam Wong did not dispute that she had agreed to a genuine assignment of her half share of the Property in 2003 (“真退出”).  Notwithstanding her evasive evidence, it is clear to me from what she said that Mr. Li was obviously displeased with Madam Wong for having lost their Property as a result of her debts and her entering into the Provisional Agreement, although Madam Wong emphasized that what she had lost was only her half share.  Madam Wong also emphasized in her evidence that she was concerned in 2003 that Mr. Li would not, as a result, lose his half share, and accepted that Madam Woo had rendered assistance in this regard.

20.  It seems therefore that in 2003, Madam Woo and Madam Wong reached some consensus in relation to a compromise of the Provisional Agreement (“Compromise”).  Instead of Allen acquiring 100% of the Property from Madam Wong and Mr. Li, it was agreed that Mr. Li would retain his 50% interest, so Philip and Mr. Li would each hold 50% of the Property.  By then, Madam Woo had paid about $180,000 under the Provisional Agreement (including the part payments of the purchase price of $410,000 under the Provisional Agreement and legal and other fees and expenses), which had been received by and for the benefit of Madam Wong and Mr. Li.  Financing was still required from the bank in order to pay off the balance of Madam Wong's and Mr. Li's indebtedness to the Mortgagee, which stood at $338,023.01 by early June 2003.  Madam Woo also claims that a separate loan of $20,000 extended to Madam Wong in 2003 was still outstanding to her.  Accordingly, the plan and agreement reached was that if Mr. Li and Madam Wong could pay back to Madam Woo a total sum of $200,000 in 2 installments within a period of 3 years, they could purchase back, in effect, Madam Wong's half share of the Property she had sold under the Provisional Agreement.  The mortgage loan of $287,000 obtained by Philip from Wing Lung Bank would be used to finance the purchase of the Property at the price of $410,000, and would in the interim of 3 years be serviced by Mr. Li/Madam Wong and Philip/Madam Woo in equal shares.  The "buy back option" was subject to a timetable for payment of the sum of $200,000 and further terms and conditions later set out in the Agreement.

21.  On 23 June 2003, a mortgage loan of $287,000 was obtained from Wing Lung Bank ("Wing Lung Facility") in the names of Philip and Mr. Li to finance the purchase of the Property.  On 26 June 2003, a formal Sale and Purchase Agreement was signed between Madam Wong and Mr. Li as vendors, and Mr. Li and Philip as purchasers, for sale of the Property.  The stated purchase price remained $410,000.  Completion was stated to take place on or before 30 June 2003.  Pursuant thereto, the Assignment was signed on 2 July 2003, whereby the Property was transferred from Madam Wong and Mr. Li to Mr. Li and Philip for the stated consideration of $410,000 received.

22.  The parties accept that when the above formal Sale and Purchase Agreement and the Assignment were signed, they did not inform the lawyers of the whole extent of the Compromise.  They decided instead to entrust to one Mr. Kwan the task of drawing up the necessary document to record the agreement in relation to the payment of the sum of $200,000 for the "buy back option".  Mr. Kwan worked in a solicitors firm, and appears to be in charge of the documents dispatch department of the firm.  Under Mr. Kwan's advice, the Agreement (summarized in paragraph 3 and 4 above) was prepared and signed by Mr. Li and Philip, and witnessed by Mr. Kwan and Madam Woo.  Part of the confusion in this case arose largely because of the fact that the parties chose only to disclose a part of the story in the Agreement.

23.  According to Madam Woo, the intention of the parties throughout October 2002 to July 2003 was that Madam Wong and Mr. Li would have the right to purchase back the Property, so long as they "pay back" the money Madam Woo had paid out under the Provisional Agreement and the outstanding loan of $20,000 separately advanced to Madam Wong.  The Provisional Agreement itself so provides by stating that upon one month's notice being given, the sale and purchase can be canceled.    As for the Agreement, Madam Woo's understanding is that Mr. Li is already registered as 50% owner of the Property pursuant to the Assignment, but if Madam Wong and Mr. Li wished to have Philip's 50% transferred back to him and Madam Wong, they must pay $100,000 by December 2004, and another $100,000 by June 2006, in the manner set out in the Agreement.  Paragraph 2 of the Agreement provides that Mr. Li would lose his 50% interest in the Property if he should fail to pay $100,000 by December 2004, but Madam Woo's evidence is that she and Philip were prepared all along to give Mr. Li and Madam Wong up to 2 June 2006 to pay the entire sum of $200,000.  However, according to Madam Woo, Mr. Li and Madam Wong had abandoned all plans to repurchase the Property after November 2004.  On the facts, Madam Woo and Philip did not take any action in relation to the Property until 14 June 2006, after the expiration of 3 years from 2 July 2003.  Throughout, the Property remained in the joint names of Mr. Li and Philip.

24.  There is no dispute that under the Agreement, Mr. Li and Philip were each to pay 50% of the mortgage installments under the Wing Lung Facility arranged by Philip (i.e. $1,500 per month), as well as the management fees and charges for the Property in the interim of 3 years.  Madam Woo could rent out the front portion of the Property and keep the rent as interest, whereas the rear portion was to be used by Madam Wong and Mr. Li.

25.  It is also not disputed that Madam Wong and Mr. Li only paid Madam Woo a total sum of $9,800 over the entire period of 3 years, and defaulted in payment of the mortgage installments under the Wing Lung Facility from January 2005.  Madam Woo accordingly claims that by 14 June 2006 when proceedings were instituted, she had given ample time to Mr. Li and Madam Wong to repay the sum of $200,000, and that she is entitled to enforce the Agreement in respect of Mr. Li's default.

The meaning of the Agreement

26.  The meaning of the Agreement is what the parties using the words against the relevant background would reasonably have been understood to mean.  To use the often quoted words of Lord Hoffman in Jumbo King Ltd. v. Faithful Properties Ltd. (1999) HKCFAR 279:

"The construction of a document is not a game with words.  It is an attempt to discover what a reasonable person would have understood the parties to mean.  And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.  Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well.  That language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended. … If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.  The court is not privy to the negotiation of the agreement - evidence of such negotiations is inadmissible -and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession.  Or one of the parties may simply have made a bad bargain.  The only escape from the language is an action for rectification, in which the previous negotiations can be examined.  But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean.  Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail."

27.  Bearing in mind that there is no claim for rectification of the Agreement in these proceedings, the Court must give effect to the ordinary meaning of the words used in the Agreement, understood in the context of the parties' dealings and the background leading to the execution of the Agreement, as summarized in the preceding paragraphs.  In my view, the Agreement can only mean what the words used clearly say: If Mr. Li/Madam Wong repay the sum of $200,000 to Philip/Madam Woo within 3 years, i.e. by June 2006, Philip's 50% interest in the Property will be vested in or transferred to Mr. Li; and if Mr. Li/Madam Wong fail to repay this sum by June 2006, Mr. Li's 50% interest in the Property will be lost and become vested in Philip.  The Defence highlights the inconsistencies in the wording used in the first and second paragraphs of the Agreement, but the above meaning of the Agreement is apparent when it is considered as a whole.  The evidence given in Court by both Madam Woo and Madam Wong is clear on what they understood the Agreement to mean.  Madam Woo's evidence is as summarized in paragraph 23 above.  Madam Wong's evidence is that she and Mr. Li could either repay $200,000 within 18 months, or within 3 years.  She said that if the $200,000 was repaid within 18 months, they could have the Property back immediately, but they must repay $100,000 within 18 months. She admitted that Mr. Kwan had emphasized to her, when the Agreement was explained, that they must pay within 3 years.

The effect of the Agreement

28.    It is Madam Wong's case that she had never agreed to sell the Property, but had only borrowed money from Madam Woo.  Throughout her testimony in court, she repeated the phrase that the transactions were "genuine mortgage" ("真抵押"), but "sham sale and purchase" ("假買賣"). However, after hearing Madam Wong's evidence when she was questioned further about these claims of hers, I have doubts as to whether Madam Wong truly understood the meaning of these assertions.  Although she claims that the transactions in 2002 and 2003 were all intended to create a mortgage only in favor of Madam Woo, Madam Wong alleges at the same time that Madam Woo would not be entitled to "take" the Property from her ("唔會食我間屋").  If the parties had intended the transactions to be "a genuine mortgage", the parties must have discussed and agreed on the consequences of Madam Wong's default, and the effect of such default on the "mortgage" or "security" intended.  To assert that Madam Woo is not entitled to "take" the Property is inconsistent with the claim that the parties had intended and agreed that the Property was to be furnished as security for a mortgage, as Madam Wong asserts.  It suggests that the term "sham mortgage" has only been seized upon by Madam Wong after the event in order to look for a way out of the Agreement.  Contrary to her contention, I am satisfied from Madam Wong's evidence that she fully understood that if she or Mr. Li did not repay $200,000 by June 2006 by way of exercise of the right to buy back the Property, they would lose the Property absolutely.

29.  I can well appreciate that Madam Wong did not wish to have to sell and part with the Property, but it is clear from the parties' evidence that Madam Wong was in serious financial difficulties between 2002 and 2006, and that she had no real alternative but to sell the Property in order to pay off her creditors.  Unfortunately, her subjective intention does not restrict or confine the meaning of the Agreement, which must be objectively interpreted.  Nor is her subjective and unilateral understanding of the rights and remedies of the parties under the Agreement relevant, to the extent that such understanding is not expressed in the Agreement or actually contradicts the provisions of the Agreement.

30.  The fact that Madam Wong did not wish to lose the Property in fact adds credibility to Madam Woo's case, that Madam Wong had in October 2002 proposed to Madam Woo that the Property be sold to the latter at a lower price, but with a longer period for completion, as Madam Wong was still harboring the hope then that she would have money to buy back the Property in 6 months.  Madam Wong's assertions, that a period of 2 months for completion is usual for a genuine sale, whereas the period of 6 months for completion is consistent with a "mortgage"; that she could pay interest to Madam Woo for her loans in such amounts and at such times as she could manage; and that despite any delay or default in repayment of her debt, Madam Woo would not enforce the security in the Property (which security Madam Wong alleges Madam Woo had driven hard to obtain), are simply not believable.

31.  Having heard and carefully considered the evidence, I accept that Madam Wong proposed to sell the Property to Madam Woo at a lower price than the $480,000 offered, in exchange that she be given the option to purchase back the Property within 6 months upon giving prior notice to cancel the sale, and upon Madam Woo paying $100,000 as a deposit of the purchase price, so that payment of the sum due under the existing mortgage can be made to the Mortgagee and the balance to Madam Wong.  Madam Woo agreed to this because it did afford her some security as opposed to a simple loan.  As Madam Woo explained, if Madam Wong could repay to her the money she had spent, she would have been happy to let Madam Wong and Mr. Li buy back the Property before June 2003.  When Madam Woo asked Mr. Li before the scheduled completion date if they would be purchasing back the Property, Mr. Li had told Madam Wong that they did not have the money to do so, and Madam Woo accordingly arranged for first Allen and then Philip to take up the purchase.

32.  The Compromise in 2003 did not essentially change the nature of the arrangement between the parties.  Madam Woo agreed to give further time to Madam Wong and Mr. Li to exercise the option to purchase back the Property. If they were to "buy back" the Property from Madam Woo, Madam Woo would have to be "repaid" the sums she had paid out under the Provisional Agreement, and hence the perhaps unfortunate or confusing choice of the terms "repay" and "debt" used in the Agreement. 

33.  The mere fact that a transaction is intended, in a general sense, to provide security does not mean that a mortgage has been created.  It depends on the circumstances of each case whether such a transaction is a sale with an option to repurchase, or a mortgage properly so called. (See Snell’s Equity, para 35-05.)  The question in all cases is what the real intention of the parties was.

34.  On the evidence adduced in this case, I am satisfied that the intention of Madam Woo, Madam Wong and Mr. Li when they made the Provisional Agreement and when they signed the Agreement was to enter into a sale and purchase of the Property, with a right given, first to Madam Wong and Mr. Li in October 2002 to repurchase the Property before June 2003, and then to Mr. Li in July 2003 to repurchase the Property before June 2006.  Madam Wong's acknowledgment that there was a genuine assignment of her interest in the Property in July 2003 strengthens the case of the parties' intention to enter into a genuine sale with an option of repurchase.  I am satisfied that at all material times, Madam Wong and Mr. Li fully appreciated that they had the right to buy back the Property by payment of the sum of $200,000, but they had to do so by June 2006 at the latest.  The option was in their hands, and was obviously to their advantage.  In the interim, Madam Woo and Philip took possession of the front portion of the Property, was at liberty to lease it out and keep the rents, and importantly, assumed the obligations and liabilities of a co-owner of the Property to discharge the mortgage installments and payment of the management fees and outgoings.  I do not accept that the substance of the transactions constitutes a mortgage.

35.  Having held that the transactions including the Agreement constitute a sale, and not a mortgage, I accept that the time-limit for the exercise of the right of repurchase must be exactly observed, time being of the essence of an option (United Scientific Holdings Ltd. v. Burnley BC [1978] A.C. 904).  Madam Wong and Mr. Li understood at all material times that if Mr. Li wished to have the Property transferred back to him, payment of the sum of $200,000 must be made within 3 years by June 2006.  Madam Woo also considered that the time limits under the Agreement were essential.  I therefore find that if Mr. Li/Madam Wong fail to repay the sum of $200,000 to Madam Woo through Philip by 2 June 2006, Mr. Li is liable to lose his 50% interest in the Property and Philip is entitled to have the Property vested in his name absolutely.  Although Counsel briefly referred in argument to the 3 years commencing 6 August 2003, this was never pleaded in the Re-Amended Defence which refers to the period of 3 years from 2 July 2003.

If the Agreement is a mortgage, is there a clog on the equity of redemption, and if yes, what is the effect?

36.  This issue falls aside, in view of my ruling on the first issue.

If the Agreement confers an option to repurchase, was the option exercised?

37.  Madam Wong claims that in October 2004, she was able to find one Mr. Wong to purchase the Property at $600,000.  She claims that Mr. Wong agreed to lend her $200,000 out of the purchase price to repay Madam Woo so that the Property could first be transferred back to Mr. Li pursuant to the Agreement, and then sold to Mr. Wong at $600,000.  Madam Wong claims that she asked Mr. Kwan to arrange a meeting with Madam Woo, and on 13 November 2004, she informed Madam Woo at a meeting that she was in a position to repay the outstanding loan of $200,000, and would like the Property to be transferred back to Mr. Li.  She claimed that at the meeting, Madam Woo informed her that she had just let out the Property, and vacant possession of the Property could not be delivered.  Madam Wong then telephoned Mr. Wong to inquire if he would still purchase the Property without vacant possession.  According to Madam Wong, Mr. Wong was still prepared to purchase the Property, but Madam Woo refused to transfer the Property back because she had let out the Property.  Consequently, Madam Wong and Mr. Li considered Madam Woo to be in breach of the Agreement, and refused to make any further payment of the mortgage installments.

38.  According to Madam Woo, shortly before the expiration of the period of 18 months when Mr. Li was supposed to pay back $100,000, in about October 2004, she had asked Mr. Li if he would be in a position to buy back the Property.  Madam Woo's evidence is that Mr. Li informed her that neither he nor Madam Wong had the money to buy back the Property, and asked Madam Woo to let out the front portion (which was then vacant after a series of failed tenancies), which Madam Woo proceeded to do.  Then on 13 November 2004, when Madam Wong told Madam Woo at their meeting that she was able with her purported elder brother Mr. Wong's help to buy back the Property, Madam Woo was still prepared to let her do so but she told Madam Wong that the Property had just been let out so that the purchase would have to be subject to the new tenancy.  On Madam Woo's account, Mr. Kwan who was also present at the meeting said that vacant possession had to be given, and that Madam Woo would have to compensate the tenant to move out.  Madam Woo's evidence is that Madam Wong then telephoned Mr. Wong, and then reverted to say that Mr. Wong would not purchase without vacant possession.  Madam Woo refused to be responsible for paying compensation to the tenant to obtain vacant possession, and she reminded Madam Wong that it was Mr. Li who had asked her to let out the Property.  On hearing this, Madam Wong expressed her frustration at Mr. Li, and then left.  According to Madam Woo, she made further inquiries after the meeting with Mr. Kwan as to whether the purchase to Mr. Wong could still proceed, but was told that Mr. Li would not be re-purchasing the Property without the sale of the Property with vacant possession to Mr. Wong.

39.  Madam Wong maintains that Mr. Wong was prepared to purchase the Property without vacant possession, and that it was Madam Woo who refused to agree to Mr. Li's repurchase of the Property in November 2004.  Mr. Wong was also called to give evidence.  He claims that he had been prepared to purchase the Property without vacant possession, and was in a position to lend $200,000 to Madam Wong and Mr. Li to procure the transfer of the Property back to Mr. Li.

40.  Mr. Li (who is the Defendant named in these proceedings) was not called to give evidence, despite having made statements which were filed in these proceedings.  The parties are fully aware, from the time the pleadings were filed, that there are polarized versions of the factual events presented by Madam Woo and Madam Wong, and that Mr. Li's discussions with Madam Woo in October and November 2004 in particular, on whether the option to buy back would be exercised, and whether the front portion of the Property should be let out, are hotly in dispute.  Notwithstanding that Mr. Li did attend court during the trial, he was not called to give evidence on these matters, and I consider that, by his failure to give evidence and to present himself to be cross-examined, an adverse inference can be drawn against him in relation to his role in these discussions and meetings with Madam Woo.

41.  I also consider Madam Wong's evidence to be totally unreliable as a whole.  Her memory as to the dates and sequence of events (including the dates of the alleged loans and the date of the receipt of the payment of $40,000 from Madam Woo in October 2002) are faulty and contradict the contemporaneous documents.  I do not accept that these inconsistencies are due entirely and simply to lapses in memory.  Her evidence on the loans for which the alleged security was given, and the alleged interest thereon, cannot be explained and do not really tally with the figures stated in the Provisional Agreement.  On the documentary evidence adduced, Madam Wong’s original assertion in her witness statement (which she had to retract in her evidence in Court), that she had never received from Allen or Philip any part of the $410,000, was clearly a lie.   Leaving aside Madam Woo’s role behind Allen and Philip, the $40,000 deposit under the Provisional Agreement was paid by a cheque issued by Allen in favour of Madam Wong and Mr. Li on 7 October 2002.  Further, Madam Wong was evasive throughout her evidence as to Mr. Li's participation and involvement in the matter.  I do not believe her evidence that she had informed Madam Woo on 13 November 2004 that the Property could be transferred back to Mr. Li without vacant possession, as she claims to have done. 

42.  More importantly, Madam Wong's assertion that Mr. Wong was prepared to accept the Property without vacant possession directly contradicts the document prepared by Mr. Wong, and the evidence Madam Wong herself gave in relation to this document.

43.  According to Madam Wong's evidence, Mr. Wong inspected the Property on 12 November 2004, and it was one or two days thereafter that Mr. Wong prepared a document ("Declaration") and gave it to Madam Wong, with the strict instructions that the Declaration must be signed by Philip at the solicitors' office before the $200,000 can be released and paid to Madam Woo and Philip.  Under the Declaration, Philip was required to guarantee ("保證") that vacant possession of the Property would be delivered.  Madam Wong claims that Mr. Wong had informed her that the Declaration had to be signed and returned to him, and he would not purchase the Property if the Declaration was not signed.

44.  In view of Madam Wong's evidence in relation to the Declaration, I totally reject her claim that she had either during her meeting with Madam Woo on 13 November 2004 or thereafter informed Madam Woo that the Property could be transferred back to Mr. Li and delivered without vacant possession.  Even if she had, as she claims, informed Madam Woo at the meeting on 13 November 2004 that Mr. Wong would be prepared to accept the Property without vacant possession, it is clear from the Declaration that after 13 November 2004, Mr. Wong had insisted on vacant possession to be given, such that Madam Wong and Mr. Li would not have indicated to Madam Woo after 13 November 2004, when Madam Woo had made further enquiries through Mr. Kwan, that vacant possession could be dispensed with.  For the same reason, I also reject Mr. Wong's evidence in this regard.  Despite his attempts to do so, Mr. Wong was not able to explain away the inconsistency between the Declaration and his purported willingness to accept the Property without vacant possession. 

45.  I therefore accept that Mr. Li had not exercised his right to repurchase the Property by December 2004.  There is no evidence that Mr. Li or Madam Wong had at any time after November 2004 and before June 2006 made repayment of the sum of $200,000 under the Agreement, or exercised any right to repurchase the Property.

Is the Agreement unconscionable?

46.  There is some suggestion that the Property was worth more than $410,000, the stated purchase price under the Provisional Agreement and the Assignment.  Counsel for Mr. Li pointed out that Madam Wong and Mr. Li purchased the Property at $560,000 in 1991, and that the Property was mortgaged in November 2000 for $450,000.  Counsel suggests in submission that the value of the Property in November 2000 should be $642,857 to $750,000, on the basis that the mortgage loan should reflect 60% to 70% of the value of the Property.  Madam Wong herself claims in her evidence that the market value of the Property in October 2002 was $750,000.  Counsel for Mr. Li also relies on Madam Woo's claim that the Property could be leased out at $4,500 per month, and that the return rate of letting out the Property should be 7%, to suggest that the value of the Property should be about $771,428.

47.  I agree with Counsel for Madam Woo that the evidence adduced is not sufficient to prove that the value of the Property was in the region of $750,000 in October 2002 or July 2003.  There is no evidence on the circumstances in which the mortgage loan was obtained in November 2000, or the terms of the mortgage loan.  It is unclear whether Madam Woo's estimate of the monthly rental income of $4,500 and of the rental return (which is not substantiated by any evidence) reflects the rental income and return in October 2002. 

48.  When Mr. Wong (himself an experienced property agent) allegedly offered to purchase the property in November 2004, he offered $600,000 on the basis that the Property could also be used for commercial purpose, and admitting that the value would be 10% less for domestic property, such as the Property.  Mr. Wong also admitted that the price of the Property was lower in 2003 as a result of SARS, and that property prices had risen in 2004 (when he made the offer of $600,000).  I accept that taking the Defence case to the highest, the Property could not be worth more than $600,000 in July 2003.  When Madam Wong asked Madam Woo to find purchasers of the Property in October 2002, she asked for a price of $480,000, and that was the price offered by one of the potential purchasers introduced by Madam Woo.  I would consider $480,000 to be a more reasonable reflection of the market value of the Property in October 2002, and adopted in July 2003.

49.  On Madam Woo's evidence, although Madam Wong had asked for the Property to be sold in October 2002 at $480,000, she agreed to reduce the price to $410,000 as stated in the Provisional Agreement in exchange for a longer completion period of 6 months, an option out with an opportunity to repurchase the Property, and a larger deposit of $100,000. Even if there was a difference between the market price of the Property in October 2002 or July 2003 and the purchase price of $410,000 agreed between Madam Woo and Madam Wong, I do not consider that any such difference in this case is sufficient for the court to refrain from enforcing the free bargain made between the parties, on the basis that it is at a gross undervalue to be unconscionable.

50.  Madam Wong and Mr. Li do not allege that they had been pressurized by Madam Woo in any way to enter into the Provisional Agreement and the Agreement.  I have no doubt that Madam Wong entered into these agreements with full understanding of the terms and the bargain. Mr. Li appeared to have followed Madam Wong's directions at all material times.  On the evidence, I do not accept that either Mr. Li or Madam Wong had suffered any serious disadvantage as a result of any morally culpable conduct on the part of Madam Woo to find that the Agreement should not be enforced.  Madam Wong and Mr. Li had had the benefit of Madam Woo's payments at a critical time: Madam Wong and Mr. Li received $40,000 in cash, and their outstanding mortgage loan of over $330,000 was paid off with Madam Woo's payments under the Provisional Agreement and the Wing Lung Facility.  They also had the benefit of an option to buy back the Property and not lose ownership for a certain period of time.

Is the Agreement penal?

51.  Mr. Li claims that the Agreement, in providing that he will lose his 50% interest in the Property if he fails to pay $100,000 within 18 months, and providing that the entire Property should be vested in Philip absolutely if he fails to pay $200,000 within 3 years, is penal.  The burden of proving a penalty is on Mr. Li.

52.  It is argued that the provisions in question are not genuine pre-estimates of Madam Woo's damage, and greater than any possible loss that may be sustained by Madam Woo.

53.  As held by Wuang, J in Re Mandarin Container & Others [2004] 3 HKLR 554 :

"The modern approach to penalty clauses is to look at whether in respect of a commercial contract, the disputed provision can be said to be unconscionable or oppressive by reason of its being extravagant, exorbitant or excessive and that the court should be slow to find terms agreed by the parties to be in terrorem rather than genuine agreement providing for fixed formula of loss."

54.  Also quoting from Wuang, J in the case of Phillips Hong Kong Ltd. v. Attorney General of Hong Kong [1993] 1 HKLR 269 :

"Even in the situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss, so long as the sum payable in the event of non-compliance with the contract is not extravagant, having regard to the range of losses that it could reasonably be anticipated it would have to cover at the time the contract was made, it can still be a genuine pre-estimate of the loss that would be suffered and so a perfectly valid liquidated damage provision."

55.  As a preliminary and important point, in considering whether the disputed provisions are penal, the relevant time is when the Agreement was made, i.e. July 2003. 

56.  Under the Provisional Agreement dated 5 October 2002, the formal Sale and Purchase Agreement dated 26 June 2003 and the Assignment dated July 2003, the purchase price of the Property transferred to Philip and Mr. Li is $410,000.  Mr. Li's 50% interest in the Property, which he is liable to lose under the Agreement as a result of his failure to make payment of the sum of $200,000, was worth $205,000 at the time of the Agreement. 

57.  I am satisfied on the evidence that Madam Woo had paid out a total sum of $196,811.50 representing: the deposits of the purchase price paid under the Provisional Agreement; the $20,000 advanced in September 2003; the payments made to discharge the debt to the Mortgagee; the legal costs and expenses paid in connection with the purchase; as well as management fees, rates and other legal fees which Madam Woo paid on behalf of Madam Wong and Mr. Li in relation to the Property.  In addition, Madam Woo and Philip had to make payment of Mr. Li's half share of the mortgage installments under the Wing Lung Facility from January 2005 to June 2006 as a result of Mr. Li's default, which totaled $25,500.  Madam Woo and Philip also paid $5,640 in respect of management fees and outgoings which Mr. Li failed to pay between July 2003 and June 2006.  By June 2006, Madam Woo/Philip had paid out at least $227,951.50 in respect of the Property as a result of Mr. Li's breach of the Agreement, excluding Philip's half share of the mortgage installments up to June 2006 (which is $54,000).

58.  As Counsel for Madam Woo pointed out, even assuming that the Property was worth $480,000 at the time of the Agreement, Mr. Li's 50% interest in the Property was worth $240,000 at the time of the Agreement.

59.  Considering Madam Woo's actual loss or damage as a result of Mr. Li's breach of the Agreement (as shown in paragraph 57 above), the anticipated range of $200,000 provided at the time of the Agreement in July 2003 cannot be regarded as extravagant, exorbitant or excessive in terms of the value of the 50% interest in the Property that Philip and Madam Woo obtained as a result of Mr. Li's breach, be it $205,000 or $240,000.  Any additional compensation Madam Woo can obtain from letting out the front portion of the Property was not certain or guaranteed at the time of the Agreement in 2003.  In all the circumstances, I do not accept that the provisions in the Agreement which provide for Mr. Li to lose his interest in the Property upon default in payment of the sum of $200,000 are penal.

60.  As Madam Woo and Philip did not take any action to dispose of or deal with Mr. Li’s 50% interest in the Property when he failed to make payment of $100,000 by December 2004, the argument that the disputed provision in the second paragraph of the Agreement is penal is academic.

Should the Agreement be specifically enforced, or are damages an adequate and appropriate remedy?

61.  On the broader question of whether specific performance should be granted, and whether damages are an adequate remedy, I accept the submission made by Counsel for Madam Woo that the modern approach is to ask whether specific performance will do more perfect and complete justice than an award of damages, and whether it is just, in all the circumstances, that a plaintiff should be confined to his remedy in damages (Chitty on Contracts, para 20-775). 

62.  On the facts of the present case, I agree that it is relevant to bear in mind the questionable abilities of Madam Wong and Mr. Li to pay the monthly mortgage installments, management fees and other incidental expenses for the Property (as evident from the history of events), and the fact that Philip has assumed a joint and several liability to pay for these mortgage installments.  If specific performance is not granted, Mr. Li continues to hold the Property in his name but it is likely that Philip will have to continue to bear the entire financial burden to discharge the mortgage and other debts in respect of the Property, or suffer the consequences of Mr. Li's failure to pay his share.  From the evidence, it is not in dispute that since July 2003, Philip and Madam Woo have been paying their half share of the outgoings in respect of the Property, and have had to pay Mr. Li's half share whenever he defaulted.  It is not disputed that Mr. Li had ceased paying his half share of the mortgage installments altogether since January 2005.  Philip claims that from July 2003 up to September 2008, Madam Woo had on his behalf paid a total sum of $195,360 in respect of all the mortgage installments, management fees, government rent and rates in respect of the Property.

63.  I also bear in mind the fact that since November 2003, neither Mr. Li nor Madam Wong had taken any step to seek the transfer back of the Property to them.  As mentioned earlier in this Judgment, they had had the benefit of Madam Woo's payments at a critical time.  The earlier mortgage debt of over $330,000 was discharged.  Although they had to continue servicing the Wing Lung Facility, their monthly share of mortgage installments was reduced from the over $9,000 per month previously paid to the Mortgagee in 2002, to $1,500 per month under the Wing Lung Facility.  On the other hand, as can be seen from Madam Wong's own evidence, she and Mr. Li had adopted a cavalier attitude towards payment of the sum of $200,000 in the manner in which they had agreed to do under the Agreement.  The option to buy back the Property was for the benefit of Mr. Li and Madam Wong, but despite their insistence on retaining Mr. Li as joint owner of the Property, neither Mr. Li nor Madam Wong had bothered to pay even the management fees and outgoings in respect of the Property, save for 4 months of management fees, let alone the mortgage installments. 

64.  As Madam Wong's evidence suggests that the value of the Property has risen from July 2003, the issue raised is that an order for specific performance would mean that Philip would be able to reap the benefits of the rise in value of the Property.  Under the Agreement, the parties agreed that if Mr. Li fails to pay $200,000 by June 2006 the Property would be vested in Philip.  Philip is to take and has taken the risk in the rise, or fall, of the value of the Property.  In July 2003, the property market in Hong Kong was in turmoil at the height of SARS, and Philip was to bear the consequences of the fluctuating market.  If the value of the property had fallen below $200,000 by December 2004, Mr. Li could have refused to pay and Philip would have no right to insist that Mr. Li should pay the $200,000 by June 2006 instead of taking the Property back.  In the interim, Philip would have had to pay the mortgage installments.

65.  In all the circumstances of this case, I am satisfied that Madam Woo or Philip should not be confined to a remedy in damages, and that specific performance will do more perfect and complete justice.  In ordering specific performance of the Agreement, Philip will have to repay to Mr. Li, in accordance with condition (2) of the Agreement, the sum of $9,800 acknowledged to have been paid by Mr. Li under the Agreement towards

payment of the sum of $200,000.

66.  In relation to the counterclaim, this is dismissed.  The counterclaim includes a claim for an account of the rents received by Philip or Madam Woo by virtue of their letting out the front portion of the Property in July 2003.  However, under condition (1) of the Agreement, the parties acknowledged that Philip is entitled to retain the rental income from the front portion of the Property, as compensation for interest or by way of Mr. Li's payment of interest on the sum of $200,000.  On a plain reading of conditions (1) and (2) of the Agreement, and for condition (1) to make sense, the reference in condition (2) to repayment of “sums received” can only be to the sums received from Mr. Li towards payment of the sum of $100,000 before December 2004.  There is no dispute that the only payments ever made by Mr. Li in respect of the sum of $200,000 were all made between September 2003 and April 2004, totaling $9,800.  Mr. Li is bound by the expressed bargain made between the parties, which permits Philip to retain the rental income received from the front portion of the Property.

Conclusion

67.  For the above reasons, I will allow judgment in favor of Philip in terms of paragraph (1) of the prayer to the Re-amended Statement of Claim, and dismiss the Counterclaim but order that Philip do pay to Mr. Li the sum of $9,800.  I will further make an order nisi that Mr. Li is to pay the costs of these proceedings, to be taxed if not agreed, with certificate for counsel. Mr. Li’s own costs are to be taxed in accordance with the Legal Aid Regulations.