CHAN YUEN KA CRYSTAL v. CHU CHEONG KIT RAYMOND

HCA1459/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1459 OF 2009

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J U D G M E N T

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1.  This is an application under Order 14A in an action which was commenced in the District Court.  The plaintiff’s claim was for rescission of the agreement and repayment of deposits and damages for breach.

2.  The action has a much longer history than would seem desirable.  When the matter came before this Court today, the defendant objected that the questions raised under Order 14A were inappropriate.  However, it seemed to the Court that the dispute between the parties lay in a comparatively small compass and it was undesirable that this matter should be protracted any further.  The defendant said that there really was only one main issue left in the case, a number of issues having been raised in the course of the proceedings.  As such, there then became an agreed series of questions - which I will refer to later in this judgment - and those have been agreed between the parties on the basis that the resolution of that will resolve this case.

3.  The matter started with a provisional sale and purchase agreement dated 27 January 2008; that related to Flat 19, 30^th Floor, Tower 1, The Metropolis Residence, No. 8 Metropolis Drive, in Kowloon.  The purchase price for the property was $4.38 million and there was an initial deposit, which was paid upon the signing of the agreement, of $130,000.  The English version of the agreement provided that upon the signing of the formal sale and purchase agreement on or before 12 February 2008, there would be a further payment of $308,000 with the balance of $3.942 million being payable on completion.  I will refer to the terms of the provisional sale and purchase agreement later.

4.  There was some delay and other proceedings were commenced because the formal sale and purchase agreement was not signed, as provided for, on 12 February.  It is dated 8 March.  Nothing remains outstanding in respect of that.

5.  The formal sale and purchase agreement provides, in clause 10, that:

“In the event of the Vendor failing to complete the sale (for any cause other than the default of the Purchaser or except as herein provided) in accordance with the terms and conditions hereof, all money and deposits paid hereunder shall be returned forthwith to the Purchaser who shall also be entitled to recover from the Vendor damages (if any) which the Purchaser may sustain by reason of such failure on the part of the Vendor and it shall not be necessary for the Purchaser to tender an Assignment to the Vendor for execution.”

Paragraph 11 provides that:

“Nothing in this Agreement shall be so construed as to prevent either the Vendor or the Purchaser from bringing an action and obtaining a decree for specific performance of this Agreement either in lieu of the aforesaid damages or in addition to such damages as the party bringing such action may have sustained by reason of the breach by the other party to this Agreement.”

6.  The agreement provided, as is normal, that the vendor should give good title to the premises and, at his own expense, prove such title.  That is in accordance with the standard provisions; the vendor must not only have good title but must show good title.

7.  The sale and purchase agreement had an unusual clause.  In clause 31, it provided:

“(a)      It is hereby declared by the parties hereto that the Provisional Agreement for Sale and Purchase dated 27^th January 2008 (“the Provisional Agreement”) entered into between the parties hereto is annexed in ANNEXURE II herein contained.

(b)        It is hereby declared by the parties that all the Terms and Conditions contained in the Clauses and Remarks of the Provisional Agreement shall be incorporated into this Agreement and such Terms and Conditions and Remarks shall be deemed to have been repeated, contained and provided herein.  It is further declared by the parties that if there is any Terms and  Conditions and Remarks in the Provisional Agreement contradictory to those terms and conditions herein provided, such Terms and Conditions and Remarks contained in the Provisional Agreement shall prevail.”

8.  The matter which arose which is relevant to this agreement is that, on 13 March, the plaintiff’s solicitors wrote to the vendor’s solicitors that they noted that an originating summons had just been registered in the Land Registry against the captioned property and they gave the memorial number.  The letter carried on:

“As your client is obliged to show give and prove a good title before completion, please:-

a.  vacate the registration of the said Originating Summons before completion;

b.  procure completion of the registration of the said Assignment (i.e. “okay deed”) before and not later than 21 days after completion so that registration of our forthcoming Assignment will not be held up similar undertaking will be imposed on you on completion.”

9.  That elicited a response, not from the vendor’s solicitors but from the vendor himself, who is a practising solicitor.  The material part of that made reference to the originating summons and I need only quote one paragraph which read:

“In any event, in so far as the issues in the Summons related to this conveyancing transaction, they are confined to the chain of the plaintiff’s title to the Property as covered by the Provisional Agreement.”

10.  And then it goes on to refer to other issues in the summons.

11.  A copy of the originating summons, however, does not seem to have been provided by the defendant or his solicitors.  On 14 March, the plaintiff’s solicitors wrote back in reply in respect of the requisition which they had raised:

“Without prejudice to our client’s right and position in this matter and in order to have the transaction be completed without delay, we are instructed that our client is prepared to complete the sale and purchase with your client as scheduled on 17^th March 2008 provided that your firm shall provide us with a copy of the Originating Summons Memorial No. 08012401630053 forthwith and further give an undertaking upon completion to:-

1.  let us have a copy of the Notice of Discontinuance filed by your client to High Court Action No. 374 of 2008 within 14 days after completion;

2.  cause the registration of the Originating Summons Memorial No. be vacated from the Land Registry within 21 days after completion; and

3.  procure completion of the registration of the Assignment in favour of Chu Cheong Kit Raymond dated 4^th January 2008 (ie. “okay deed”) before and not later than 21 days after completion so that registration of our forthcoming Assignment will not be held up.”

12.  That elicited a further response from the defendant himself.  The third paragraph of his letter of 14 March said:

“The Originating Summons was registered by the Respondent, we have no authority to withdraw the registration with the Land Registry.  The relief sought in the Originating Summons serve to provide further improvement of the title of the Vendor and your client as the Purchaser, the hearing day of the Summons had yet been given by the presiding Judge His Hon. Justice Reyes.  It is in the interest of the Vendor and the Purchaser to discontinue this originating process merely to facilitating the vacating of the Land Registry’s registration.  Besides, the Vendor needed this proceeding to sort out the money matters between him and the Respondent (which has no bearing on the Respondent’s claim against the Property, which had been overreached when she signed various documents since 2005, in particular, a declaration which she executed in an independent firms solicitors Baker McKenzie.  A copy of this letter is enclosed for your attention.”

13.  Again, the originating summons was not provided and the correspondence continued.  The defendant’s own solicitors replied on 15 March, indicating that the defendant himself had been replying in respect of the issues relating to this originating summons which had been taken out by the defendant against what appears to have been his former fiancée.

14.  On 17 March, which was the day for completion, the plaintiff’s solicitors again wrote, saying that:

“On any view, your client’s title to the Property is both defeasible and defective by virtue of the matters disputed by the former co-owner in the Originating Summons proceedings.  Messrs Raymond Chu & Co. have conceded themselves that the issues in those proceedings relate to ‘the chain of [Mr Chu’s] title to the Property as covered by the Provisional Agreement (dated 27^th January 2008 made by our respective clients)’.  See their letter dated 13^th March 2008 sent to us and copied to you.

Although Messrs Raymond Chu & Co. have argued hard for the merits of Mr Chu’s claim in those proceedings in various letters sent to us (and copied to you), with respect, their effort in this regard does little to subdue our client’s concern over Mr Chu’s title which can now only be removed by an affirmative judgment of the Court in those proceedings announcing for Mr Chu’s title as he professes to have.  We doubt if we could see such a judgment coming in the near future.  This is most unsatisfactory.”

15.  Then finally came the letter which was timed at 7 p.m. on the day for completion, which read:

“We would like to hereby put on record that our requisition in respect of Originating Summons Memorial No. 08020500250019 as raised in our letters to you dated 13^th and 14^th March 2008 has not been satisfactorily answered.  This is so notwithstanding what Messrs Raymond Chu & Co. asserted in their letters dated 13^th and 14^th March 2008.  Indeed, Messrs Raymond Chu & Co. admitted that the said Originating Summons was registered at the Land Registry by the Respondent in those proceedings and they had no authority to withdraw the registration.

Our position re the said Originating Summons has been clearly stated in our 1^st letter today - amongst other things we stated that your client’s title to the Property is both defeasible and defective by reason of the registration of the said Originating Summons.  As stated, there is no reply from your end up to now.

It has now passed the schedule completion time.  In view of the nature of the requisition re the said Originating Summons, we take the view that your client is in repudiatory breach of the Formal Agreement for Sale and Purchase made by our respective clients on 8^th March 2008 by reason of his failure to show and give good title to the Property, including his failure to answer our requisition re the said Originating Summons either satisfactorily or at all.”

16.  It would appear that though there is, indeed, a strong case on behalf of the defendant, that although the defendant may have shown a marketable title, it cannot be said on his own correspondence, that the defendant had shown a good title because when he referred, in his letter, to “serving to provide further improvement of the title of the vendor,” that speaks for itself and that really, it seems to me, settled the situation.

17.  The questions under Order 14A that have been settled this morning are as follows:

“(1)      Whether on a true and proper construction of the Formal Sale and Purchase Agreement dated 8^th March 2008, clause 8 of the Provisional Agreement for Sale and Purchase dated 27^th January 2008 forms part of the terms of the Formal Sale and Purchase Agreement so that the purchaser was not entitled to claim specific performance of the Formal Sale and Purchase Agreement.

(2)        If the answer to (1) above is in the affirmative, what is the amount that the Vendor has to pay the Purchaser?  Was it $130,000 or $438,000?

(3)        If the answer to (1) above is in the affirmative, does clause 8 of the Provisional Agreement as incorporated in the Formal Sale and Purchase Agreement amount to a penalty and is unenforceable?”

18.  In respect of that, it is necessary to refer to the terms of the sale and purchase agreement.  The first thing that must be observed is that, as in all these provisional sale and purchase agreements, the standard form, it is both in Chinese and in English.  The Chinese comes first, on top, and the English is underneath.  That said, there is a clause which is intended to resolve any ambiguities but, unfortunately, it has an alternative and that alternative has not been completed, so that does not help.

19.  What perhaps does help is that there were additional clauses under the heading ‘Remarks’ and these were all in Chinese.  It seems to be quite clear that when one looks at those, really, one has to say the provisional sale and purchase agreement was intended to be read in Chinese because that is why the additional clauses were put in Chinese.  It is unnecessary to refer to those clauses in full.  They relate to the power of attorney which was executed both by the defendant and the lady who was the defendant to the originating summons which has already been referred to, which had been taken out by the defendant in these proceedings, and the lady in question had sought to register that in the Land Registry.

“2   該物業之成交價為港幣

The purchase price of the said Premises shall be HK$4,380,000.

(a)   於簽訂本合約之同時即付臨時訂金港幣

Initial deposit shall be paid upon signing of this agreement in the sum of HK$130,000

(b)   於簽署正式買賣合約之時或以前，即

Upon signing of the Formal Agreement for Sale and purchase on or before 12-02-2008

加付大訂港幣

down payment shall be paid in the sum of HK$308,000

……

8.    如賣方在收取訂金後，不依本合約之條款完成買賣，

Should the Vendor after receiving the initial deposit paid hereunder all to complete the sale in the manner herein contained, the

則賣方除須退還買方所付之訂金全數外，並須以同等數目之金額賠償予買方。

Vendor shall immediately compensate the Purchaser with a refund of the initial deposit together with a sum equivalent to the amount

另負責繳付本合約之釐印費，

of the initial deposit and as liquidated damages and the payment of stamp duty of this agreement

惟買方不得再向賣方追究任何責任，包括其他賠償及申請強制執行令。

and the Purchaser shall not take any further action to claim for damages or to enforce specific performance.”

20.  The first thing that occurs as a result of that, before going to consider the exact terms of clause 8 and what it means, is whether or not that has survived as part of the formal sale and purchase agreement which was executed on 8 March.  That would be despite paragraph 10 and 11.

21.  In my view, clause 8 of the provisional sale and purchase agreement does survive.  It is a clause which is standard in provisional sale and purchase agreements in Hong Kong.  It is frequently there.  It has been referred to in a number of cases as an alternative method of performance of the contract.  The context in which that has been referred to, from the cases which I have been able to consider over the adjournment, has been that the vendor may perform the provisional sale and purchase contract by providing a return of the deposit and an amount which is equivalent to that deposit, and that is the alternative form of performance, as has been referred to in one of the cases which was recited in court today, Man Sun Finance (International) Corp v Lee Ming Ching Stephen [1993] 1 HKC 113.

22.  The important point on that is that if the vendor wishes to adopt this alternative method of performance, he has to do it strictly in accordance with that clause and that means that he has to come up with the money straightaway, or at least within 24 hours.  If one looks at it simply in that way, there is no conflict between that and clause 10.

23.  In any event, clause 31 of the sale and purchase agreement is in such specific terms in subclause (b) as stating that the terms and conditions of the provisional sale and purchase agreement should continue and are repeated and contained, that I can see absolutely no reason why that should not be so.  In my view, that is the way the sale and purchase agreement was drafted and that remains so.  So clause 8, in my view, remains.

24.  The next question which arises is what is the sum which the vendor has to pay under clause 8.  Here there is a discrepancy between the English and the Chinese versions, but having had the Chinese version explained to me in court, it seems to me quite clear that what is referred to in clause 8 as being returnable is not simply the initial deposit but the deposit which has been paid.  So in other words, it might be, if only the initial deposit has been paid, only the initial deposit, but if both deposits have been paid, it is both deposits.  That arises from a construction of the Chinese version which, as I understand it, refers to the “whole” deposit paid or the “full” deposit paid.

25.  The final question which has been raised is does that constitute a penalty.  As has already been said, clause 8 has been interpreted by the courts in Hong Kong to be an alternative method of performance and the cases on that go back so far that to disturb that at this stage would be quite wrong.  But the question arises, not as to whether the vendor can rely on that but can the purchaser rely on that if the vendor is unwilling?

26.  Attention has been drawn to two cases.  One is the Workers Trust & Merchant Bank Limited v Dojap Investments Limited [1993] AC 573, and the other is Polyset Limited v Panhandat Limited (2002) 5 HKCFAR 234.  Both cases refer to the question of the forfeiture of the deposits which the purchasers had paid and whether that constituted a penalty.

27.  In the first case, which is a decision of the Privy Council, Lord Browne-Wilkinson, who gave the advice, said, at page 578:

“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.”

Pausing there for a moment, I would say that that really is an exposition of the law as to liquidated damages and penalties as explained in such cases as Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79.  Continuing with the citation from the Workers Trust & Merchant Bank case:

“One exception to this general rule is the provision for 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 from the breach of contract. 

This exception is anomalous and at least one textbook writer has been surprised that the courts of equity have even countenanced it (see Farrand Contracts and Conveyance 4th edition 1993, page 204).  The special treatment afforded to such a deposit derives from the ancient custom of providing an earnest for performance of a contract in the form of giving either a physical token of interest (such as a ring) or earnest money...”

Then he goes on to explain the history of “earnest”.

28.  The same point was raised in the case of Polyset.  That was a case where an unusually high percentage of the purchase price was payable as a deposit.  It was an unusual contract with a very long completion date and that had been explained to the purchaser, and the market was particularly volatile.  Nevertheless, the Court of Final Appeal considered that that was not enforceable, although the judgments do show that, in general, a 10 per cent deposit, which was standard in contracts for the sale of land, would be regarded as an earnest for performance which was enforceable where there is an interval between the time when the contract is made and the time of payment in full becomes due.

29.  One matter which seems to me to arise in this case is whether it would cause consternation, to say the least, if it were held in this case that this clause, when sought to be enforced by the purchaser, constituted a penalty?  In my view, it would not.  The purpose of this clause is to provide, as I have said, an alternative method of performance on the part of the vendor, which has been accepted for a sufficiently long time as valid.  It is strictly construed and he has to pay the money immediately and, if he does that, then the purchaser has no further claim.

30.  One way in which the matter may be looked at is that, although the clause might be considered a penalty, the vendor using the clause would be waiving any rights to allege that such was a penalty.  Of course, he does not have to take the point and if he wishes to terminate the contract and pay what is referred to as ‘liquidated damages’ of an amount equivalent to the deposit then, it seems to me, he is entitled to do so.

31.  But it does seem to me that when one looks at the two cases, the Workers Trust case and the Polyset case, that if the purchaser wishes to rely on this clause, he would be seeking to enforce what constitutes a penalty because it cannot be said that it is a genuine pre-estimate of the damages.  There is no suggestion that there was any attempt to estimate the damages, it is an arbitrary figure which is picked in order to hold the vendor to the contract, or as the cases sometimes say, ‘in terrorem’.  If that is right, then the vendor has to fall back on the provisions of clause 10 of the sale and purchase agreement and would be entitled to damages.

32.  So it seems to me that, in this case, the answer is, yes, it is a penalty but the purchaser is entitled to the return of the deposit and also to claim damages, whatever they may be.  For example, if there have been any expenses paid or, no doubt, his solicitor’s conveyancing costs and possibly the estate agent’s fees, these all may be claimable.

(Submissions on costs)

33.  Questions of costs are always difficult to decide; however, having looked at all the papers in this case and seeing the course that this action has taken, I have no doubt that the plaintiff is entitled to the costs up to today.  In relation to the costs of today, the defendant does rely on the fact that he offered to return the deposit but that is not enough.  He has to return the deposit and pay damages and he did not offer to pay that in the correspondence to which my attention was drawn in the skeleton argument.  So that is not sufficient.

34.  In the course of these proceedings, the defendant has taken almost every point.  He has had the matter transferred from the District Court to the High Court because he was claiming specific performance, but then dropped the claim to specific performance.  So up to today, I see absolutely no reason why the plaintiff should not get her costs.

35.  As regards the criticism of the questions which have been raised under Order 14A in the summons which was today, I am not entirely in agreement that they are inappropriate given the issues which arose in this case.  I am not myself much of a fan of Order 14A as a matter of procedure.  I do not think it is a very good procedure at all, having discrete issues decided.  But it is quite clear that that procedure exists and parties can make use of it if they think it is appropriate.

36.  So the question arises, what about the costs of today, what is the fair order for the costs of today?  In my view, I think the plaintiff should get half the costs of today.  The defendant has succeeded in getting rid of the same amount as the total deposit but he still has to pay damages and I am not convinced that there are no damages in this case.  So I consider that the plaintiff should get the costs of the action up to today and half the costs of today.