POPULA INVESTMENTS LTD. v. LEUNG YUN ON

HCA 3970/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3970 OF 1998

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(Consolidated by Order of Master Lok dated the 30th day of June, 1998)

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J U D G M E N T

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1. In what is now a consolidated action, the plaintiff is Leung Yun On and the defendant Popula Investment Limited. They are parties to an agreement for sale and purchase of a property situated at Tai Hang Hau, Clearwater Bay, the plaintiff being the vendor and the defendant the purchaser. On due date the transaction was not completed. The plaintiff vendor is suing the defendant purchaser for specific performance and damages for breach of contract. The defendant counterclaims for a declaration that it has rescinded the contract and for a refund of the deposits paid and damages.

The History

2. The property is a free-standing village house of three storeys, constructed on Lot 534 Demarcation District 230. It is in a development comprising houses of a similar style and construction.

3. Lot 534 is held by virtue of a lease from the Government and subject to conditions contained in building licence no. 1007 dated 22 December 1981. The licence lays down the type of construction permitted to be built and limitations on its use. The licence also provides that the portion of the lot not built upon shall continue to be used for agricultural and garden purposes, in accordance with the lease.

4. An unnumbered clause at the end of the licence gives the Crown (now its successor, the Government) the right of re-entry without compensation in the event of default as follows:

"It is hereby agreed and declared as follows:-

(a) Should the Licensee fail or neglect to observe or comply with any of the conditions of this Licence, the Crown shall be entitled to re-enter upon and take back possession of the lot or any part thereof and all or any buildings, erections and works thereon or on such part, and thereupon this Licence and the rights of the Licensee hereunder shall absolutely cease and determine (in respect of such part if the re-entry is upon a part only) but without prejudice to the rights, remedies and claims of the Crown in respect of any breach, non-observance or non-performance of the terms and conditions hereof.

(b) In the event of re-entry by the Crown for or in respect of or arising out of the breach, non-observance or non-performance by the Licensee of the provisions of this Licence, the Licensee shall not be entitled to any refund of the premium paid by him or any part thereof or to any payment or compensation whatsoever whether in respect of the value of the land or any amount expended by the Licensee in the preparation, formation or development of the lot or otherwise."

5. The plaintiff is an indigenous villager. Lot 534 was given to him as a vacant lot by his father. He built the house. When it was finished the District Lands Officer, Sai Kung, wrote to him by letter of 5 March 1983 to certify that the house had been inspected and conformed in all respects with licence 1007.

6. Then, towards the end of 1983, the plaintiff built a swimming pool within the grounds. No approval was sought from or given by the Building Authority or District Lands Officer prior to its construction and none has been asked for or given since.

7. In March 1997 the plaintiff listed the property for sale. That came to the attention of one Tang King Sing (Mr Tang) a salesman employed by Goodfortune Realty (Holdings) Limited (Goodfortune), one of the real estate agencies in the area. A local investor called Ng King Ming (Mr Ng), known to Mr Tang because he had bought and sold through Goodfortune in the past, had earlier told him to look out for a suitable home for his family. He was particularly keen on a village house with a large garden and a pool. Mr Tang told him of the new listing; he professed interest and Mr Tang set up a meeting on site towards the end of March. Present were the plaintiff and Messrs Ng and Tang. During the course of the inspection Mr Ng asked the plaintiff about the pool. How the plaintiff responded is in dispute, to which I will return.

8. In the event, through the officers of Goodfortune, a deal was struck and a provisional agreement entered into, Mr Ng using his family owned company, the defendant, to be the named purchaser. The parties engaged solicitors. The plaintiff employed C W Heung & Partners (C W Heung) and Mr Ng those who regularly acted for him in conveyancing matters, Chan, Lau & Wai (CLW). In due course the provisional agreement came to be replaced by a formal agreement dated 22 April 1997. The agreement stated the purchase price of $11 million of which 10 %, $1.1. million, was due by the signing of the formal agreement, with the balance to be paid on the date for completion being 15 December 1997.

9. For the purpose of this judgment I propose to reproduce some of the clauses of the agreement which are pertinent, as follows:-

"TIME OF ESSENCE

4. Time shall in every respect be of the essence of this Agreement.

CAPACITY OF PARTIES

6. The Vendor shall assign the Property as BENEFICIAL OWNER to the Purchaser or the Purchaser's nominee or nominees or sub-purchaser or sub-purchasers free from all incumbrances ... ...

GOOD TITLE

7. The Vendor shall give good title to the Property and shall prove title in accordance with Section 13 of the Conveyancing and Property Ordinance and shall make and furnish the Purchaser such certified copies of any deeds or documents of title, wills and matters of public record as may be necessary to prove such title. The costs of verifying the title by inspection and examination, including search fees, shall be borne by the Purchaser who shall also, if the Purchaser requires copies of any documents in the Vendor's possession relating to the other premises retained by the Vendor as well as to the Property pay the cost of such copies.

DOCUMENTS OF TITLE

8. Such of the documents of title as relate exclusively to the property the subject of this Agreement shall be delivered to the Purchaser. All other documents of title in the possession of the Vendor shall be retained by the Vendor who shall, if so required on completion of the sale give to the Purchaser a covenant for safe custody thereof and for production and delivery of certified copies thereof, such covenant be prepared by the Purchaser.

REQUISITION OF TITLE

9. (a) Any requisition or objection in respect of the title shall be delivered in writing to the Vendor's solicitors within 7 working days after the receipt of the title deeds by the Purchaser's solicitors.

(b) The Purchaser shall be deemed to have accepted the Vendor's title if requisition or objection on title is not delivered to the Vendor's solicitors within the time stipulated above.

(c) If the Purchaser's Solicitors shall deliver any requisition or objection in respect of title of the Property, all answers to the requisitions shall be deemed satisfactorily answered if the Purchaser's Solicitors do not raise further requisitions or objection within 2 working days after receipt of the said answers.

(d) If the Purchaser shall have made requisition or objection on title within the time stipulated above and shall insist on any objection or requisition either as to title or any matter appearing on the title deeds or otherwise which the Vendor shall be unable or (on the grounds of difficulty, delay or expense or on any other reasonable ground) unwilling to remove or comply with, the Vendor shall notwithstanding any previous negotiation or litigation be at liberty on giving to the Purchaser or his solicitors not less than five (5) days'notice in writing to annul the sale in which case unless the objection or requisition shall have been in the meantime withdrawn by the Purchaser or the same shall have been removed or complied with by the Vendor, the sale shall at the expiration of the notice be annulled and the Purchaser shall be entitled to the return of the deposit but without costs or compensation. Provided that in that event neither party shall have any claim against the other of them or their solicitors and the parties hereto shall at their own costs enter into and cause to be registered in the Land Registry an Agreement for Cancellation.

FULL AGREEMENT

14. This Agreement comprises all the terms agreed between the parties hereto and no warranties or representations express or implied are or have been made.

CONDITION OF PROPERTY

15. The Property is sold on an "as is" basis. The Purchaser shall be deemed to have inspected and made all necessary enquiries and shall be deemed to be fully satisfied with and accepts in all respects the existing state, condition and finishes of the Property and shall take the Property as it stands. No warranty is given by the Vendor on any of the following matters, namely:-

(a) The physical state and condition, quality or fitness of the fittings and finishes or the installations and appliances (if any) incorporated in the Property or in the building of which the Property forms part.

(b) The permitted user of the Property.

(c) The fitness of the Property for development or the redevelopment potential of the Property.

(d) The construction of the Property is in accordance with the Approved Plan of the Building of which the Property forms part.

(e) The respective positions, measurements (if any) and boundaries stated and shown on any plan referred to or furnished with this Agreement.

INCORPORATION OF PART A OF 2ND SCHEDULE (CAP. 219)

20. There are incorporated into the Agreement as if they were herein written the conditions respectively on the part of the Vendor and the Purchaser set out in Part A of the Second Schedule of the Conveyancing and Property Ordinance Cap. 219 unless they are inconsistent with the provisions herein in which event the provisions herein shall prevail."

(Clause 5 of the second schedule to Cap. 219 states: "The Misrepresentation Ordinance Cap. 284 applies to this agreement.")

"28. In the event of the Vendor failing to complete the sale of the said Property in accordance with the terms hereof, all moneys paid by the Purchaser to the Vendor pursuant to the provisions of this Agreement shall forthwith be returned 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. The parties hereto shall also sign a Memorandum or Agreement for Cancellation of this Agreement if the provision of this clause become operational.

29. Should the Purchaser fail to observe or comply with any of the terms and conditions herein contained (including without limitation any failure to pay the Purchase Price or any part thereof in the manner, on the date and within the time herein stipulated) the Vendor may (without tendering an Assignment to the Purchaser) forthwith determine this Agreement by giving notice of termination in writing to the Purchaser or his solicitors to such effect and the Vendor shall thereupon be entitled to re-enter upon the said Property and repossess the same if possession shall have been given to the Purchaser free from any right or interest of the Purchaser therein and the Vendor shall be entitle to forfeit all the said deposit or further deposit or instalments of the Purchase Price paid to the Vendor absolutely as liquidated damages (and not as penalty). Upon determination of this Agreement the Vendor may resell the Property by public auction or by private sell.

30. 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 neglect or refusal of the other party to complete the said sale and purchase at the time and in manner herein provided."

10. By due date the defendant had paid the deposits. On or by 20 May 1997 C W Heung sent to CLW documents of title to comply with clause 8 of the agreement. Not included was the Government lease evidencing the land grant of Lot 534, or a certified copy of it; nothing turns on this. What was included was licence 1007, and the letter of 5 March 1983 from the DLO. CLW did not under Clause 9(a) requisition within seven working days.

11. In November 1997 the parties agreed to defer completion until 25 February 1998 in consideration for the defendant paying a further $1.1 million on account of the purchase price and as an additional deposit. Mr Ng also paid to the plaintiff $100,000.00 as compensation for the delay. The deferral was at Mr Ng's request because of difficulties generally being experienced by purchasers arranging finance in the aftermath of the dramatic collapse in the market in the latter part of 1997.

12. By February 1998 the defendant's application for mortgage assistance from its bank was successful, but subject to a favourable surveyor's report to be submitted before final approval. The respective solicitors prepared for completion by an exchange of letters, preparation and approval of the assignment and instructions on split cheques on 24 February, the day before the due date. The letter from CLW to C W Heung included the following paragraph:-

"Without prejudice to the outstanding requisitions on title (if any), we enclose herewith the draft Assignment relating to the above premises for your approval on behalf of your client, the vendor......"

13. But then there was a setback. The defendant had instructed a firm of architects to comply with the bank's request for a survey. I reproduce a letter sent by the architects to the defendant's solicitors:

"FOTTON ELA ARCHITECTS LTD.

Date: 21 February, 1998

Chan, Lau & Wai
6th Floor, China Building,
No. 29 Queen's Road, Central,
Hong Kong

Attn: Mr. Simon Tuet

Dear Sirs,

RE: Lot 534 in D. D. 230, Tai Hang Hau, Sai Kung

We have inspected the captioned lot on 19 February, 1998 and a swimming pool is found on the North-western side of the site.

Please be advised that construction of swimming pool is always regarded as non-exempted building work under the Building Ordinance. Unless prior approval and consent were obtained from the Building Authority, the aforesaid swimming pool will be regarded as unauthorised building work, and removal of the same might be required by the Building Authority. Besides, permission from the District Lands Office is also required for the construction of the swimming pool.

You are recommended to look into the legality of the aforesaid swimming pool.

Yours faithfully.

_______________________
Ervin Lee Siu Man
Authorised Person - List 1
Registered Architect
Director"

14. C L W, acting for the defendant's bank in the transaction, advised it not to lend on the security with the prospect that the title was contaminated by an illegal structure.

15. Then they wrote to C W Heung, by letter of 24 February, stating that this prevented the plaintiff from showing and giving good title, putting him in breach of the agreement. C W Heung's response of 25 February was that any objection to title was out of time and that the defendant's rights if any to requisition had long since been waived or had lapsed. It was a long letter, of which I reproduce part of paragraph 4:-

"4. ... ... we are instructed to put on record that before the signing of the Provisional Agreement for Sale and Purchase, a Mr. Ng who represented your client specifically asked our client whether our client had obtained approval from the Building Authority regarding the construction of the existing swimming pool and our client answered "no". By asking the abovementioned question, your client not only knew of the existance of the swimming pool but also aware of the effect of the existance of the said swimming pool without approval from the Building Authority. In the premises, your client is not entitled to raise requisition on the legality of the said swimming pool."

16. C L W's reply of the same date was to hold out for an answer to its requisition. Of the matter raised in C W Heung's paragraph 4, they had this to say:-

"On second thoughts, our client has no idea whether the existence of the swimming pool was illegal upon signing of the formal Agreement for Sale and purchase but until receipt of the architect's report on 24 February 1998. Therefore, we raise requisition on the said illegal structure forthwith on 24 February 1998."

17. In the event the transaction was not completed on due date or thereafter. Each party claimed the other was in breach, and that continues. Each issued proceedings, resulting in the consolidation to which I have referred.

The Pleadings

18. The plaintiff claims the defendant, by refusing to complete on due date, was in breach of the agreement and sues for specific performance and damages under Clauses 29 and 30.

19. During the course of his closing submission Mr Tam representing the defendant sought leave to amend its pleadings. The application was opposed by Mr Chan for the plaintiff. I acceded to the proposal that I should reserve my decision until after the closing submissions and rule on the application either before or during judgment to be handed down. I now do so.

20. It was a late application - it could hardly have been later - with no explanation why it had not been made pre-trial. On the other hand it raises no new allegation or issue and is rather a tidying up of one of the counterclaims. I am satisfied that the plaintiff will not be prejudiced if I accede to the application and am thus prepared to grant it. The formal order and costs are recorded at the end of this judgment.

21. The defence and counterclaim as now amended and pursued at trial is that the plaintiff having failed to answer the defendant's requisition of 24 February 1998 the defendant was entitled to rescind. Furthermore the plaintiff misrepresented the status of the swimming pool, inducing the defendant to commit to the purchase when it otherwise would not have done so. By reason of the illegality of the pool the plaintiff was in breach of Clause 6 of the agreement for failing to assign the property free from all encumbrances, and of Clause 7 thereof for failing to show and give good title.

22. As a consequence the defendant denies liability and counterclaims for a declaration that it has rescinded the agreement and for a refund of the deposits paid and, as damages, other expenses incurred.

Misrepresentation

23. I propose to deal with this issue first.

24. It is the defendant's case that Mr Ng was induced into committing the defendant to the purchase by the plaintiff's fraudulent misrepresentation, made to Mr Ng when he was inspecting the property, that the swimming pool was an authorized structure. On the face of it, if it can prove that, it has the right to rescind. But Clause 14 of the agreement under the heading 'full agreement' purportedly excludes any pre-contractual representation.

25. However, that is not the end of the matter. Clause 20 incorporates the Misrepresentation Ordinance (MO). And Clause 4 of the MO states:-

"4. Avoidance of provision excluding liability for misrepresentation

If a contract contains a term which would exclude or restrict -

(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or

(b) any remedy available to another party to the contract by reason of such a misrepresentation,

that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 3(1) of the Control of Exemption Clauses Ordinance (Cap. 71); and it is for the person claiming that the term satisfies that requirement to show that it does."

26. Clause 3(1) of the Control of Exemption Clauses Ordinance (ECO) states:-

"3. The "reasonableness" test

(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Ordinance and section 4 of the Misrepresentation Ordinance (Cap. 284) is satisfied only if the court or arbitrator determines that the term was a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made."

27. What all this amounts to, in my view, is that it is for the defendant to prove that it was induced to purchase the property because of the plaintiff's misrepresentation. If it can do so then it is for the plaintiff to prove that Clause 14 may be invoked to exclude any representation made before the agreement was signed because that was a fair and reasonable term to include having regard to all the circumstances.

28. I shall deal with these by first reviewing the evidence to see if there was a misrepresentation. I mention before I do so that it is clear on the facts that if there was a misrepresentation it can only have been fraudulent, not innocent. That being so there is no need for me to consider the distinction between the two, which primarily goes to the remedy available.

The Evidence

29. The plaintiff came first. He met Messrs Tang & Ng for the first time when they came to view the property. The house was let and the tenants were entertaining, so the inspection was limited to the garden, the swimming pool and the outside of the house only. When they got into the garden Mr Ng went straight up to the pool and asked him if he had applied for a licence before building it. He replied that he had not, but that the pool was built more than ten years ago. Then he was asked whether the garden was Crown Land or privately owned. He replied that it was private and part of the property that had been given him by his father. There were no more questions; in fact the meeting lasted no more than ten minutes.

30. Two or three days later he received a telephone call from Tang, who told him Mr Ng was interested to buy but not at the asking price of $13.5 million. He responded that he would go down to $12 million but no lower.

31. Two or three days after that, being 31 March 1997, he was invited by Tang to his office. There he was shown a form of provisional agreement signed as an offer on behalf of a family company of Mr Ng for $11 million. Tang also waved before him a cheque for $1 million made out to him, telling him it was the initial deposit and his to take and bank if he accepted the offer. After hesitation he decided to accept with some amendments and additions to the offer which were agreed by Mr Ng over the telephone. One of these was to defer settlement from June to coincide with the time by which vacant possession would be available. He said the unusually large deposit was not his idea. He also said that Mr Ng had inspected the property before the agreement was signed only on the one occasion.

32. A few days after that Mr Ng telephoned and asked if he could get access to the house itself. He got the tenant's permission and they went through all the rooms. Mr Ng seemed happy and left. There was no mention of the pool.

33. Going forward in time to when the parties, in November, agreed to extend completion, he said two to three days later Mr Tang telephoned. He was told Mr Ng was now wanting to resale or let the property and asked if he could have a set of keys to facilitate viewing. By this time the tenants had moved out and he agreed to do so.

34. On 24 February at 5:30 pm his solicitor telephoned to say that the purchaser was refusing to complete because he had just learned the swimming pool was an unauthorized structure. He at once telephoned Ng to remind him of what was said about the pool before the agreement. It was Ng's idea to hold a meeting and they met at a local restaurant that evening, with Tang attending also. Ng said: 'It turns out your pool is not authorized.' He replied: 'On the first day you asked one question about the pool and I told you about the pool and also about the garden.' But Ng said he was not able and not willing to buy. He proposed that the plaintiff relist the property and sell to another; that he would not insist on a refund of his deposit until another buyer had been found. He declined that proposal and left. There were no further meetings.

35. At no stage after the first inspection did either Tang or Ng raise the issue of the pool's legality or anything else about the pool.

36. The defendant's case as I shall come to was put to him in cross-examination; in particular that when asked about the pool and whether it was legally built he was vague and equivocal at first and then, when pressed, said it was. His response to that was unequivocal: 'Definitely not.'

37. Then I heard from Mr Ng. By way of background I learned, in examination in chief and cross-examination, that he was at the material time and still is a resident of the District of Sai Kung. During 1996 and 97 he was active in exclusive real estate investment, variously having bought and sold three houses worth $10 million or more and a shop costing $6 million. He professed to be familiar with the buying and selling of real property, and the usual conveyancing procedures.

38. He was an acquaintance of Mr Tang, whose employer agency he had sometimes used in previous buying and selling. So it was that he asked him to look out for a house for his family with a large garden at or around the $10 million mark. When shown the plaintiff's property he was at once taken with the garden, the seaview and the designer swimming pool. He said he asked the plaintiff many questions about the pool; in particular whether it was an authorized structure. He was especially concerned about this because he knew of someone who had bought a house with a pool only to learn afterwards it was unauthorized. He was caught with a requisition that required him to backfill the pool and then apply to have it reinstated at considerable expense and delay. But when he tackled the plaintiff with a direct question the response was vague and indirect. The plaintiff said he was an indigenous villager and as such was exempt from certain laws and procedures by which others might be caught. Moreover the pool had been in the ground for more than ten years. When asked again he said once a deposit was paid the documents concerning this, held by the bank as mortgagee, could be inspected. He, Mr Ng, was not satisfied and pressed on. He specifically asked the plaintiff if the garden and swimming pool were included in the deeds, meaning were they his to sell and was the pool an authorized structure. This time the plaintiff assured him that they were.

39. It was on the strength of this assurance, after a second visit to the property, that he committed the defendant to buy and to pay the deposit. Had he known the pool was not legal he would not have bought. He said the size of the deposit was at the insistence of the plaintiff - it was not his proposal to tempt him into accepting a lower figure. The agency, Mr Tang's employer, charged him only one half of the commission otherwise payable in deference to his custom. He engaged CLW to act for the purchaser having used that firm in past transactions.

40. Having committed the defendant he then asked Mr Tang to get a copy of the swimming pool approval document. But that did not happen. Tang told him, repeatedly, that the plaintiff told him, repeatedly, that it was held amongst the title papers. In the end he did not press it. He had no reason to doubt the plaintiff's word.

41. When it came to instructing CLW to represent the defendant in the purchase he did not mention the swimming pool and the importance to him that it was legal. He was content to rely on the plaintiff's word that it was and that the documents would be transferred and examined and the defendant's interests were protected in the usual way. CLW did not report any problems about title and he assumed from that that all was in order.

42. He did ask for and was given a set of keys two or three months before completion but not for the purpose of attempting to sell or let the property; rather, it was to allow a decorator access for measuring.

43. It was not until the surveyor's report of 24 February that he came to learn, for the first time, that the swimming pool was not, after all, authorized. It was he who arranged the meeting with the plaintiff. He proposed to the plaintiff an extension of three months to give the plaintiff the opportunity to rectify the title; otherwise he would not complete. When the plaintiff refused to do so the transaction foundered.

44. In cross-examination the plaintiff's case was put to him; in particular that during the one and only visit to the property that preceded the agreement the plaintiff had responded to his question about the legality of the pool with the direct answer that it was unlicensed. He denied that.

45. Finally I heard from Mr Tang. He has been in real estate since 1991 and mostly in the Sai Kung District. He confirmed he knew Mr Ng because he regularly bought and sold expensive properties in the area, dealing often with his employer; that was why he was charged half commission.

46. Taken to the inspection meeting he recalled Mr Ng asking the plaintiff whether the swimming pool was in the approved plan. The plaintiff's response was that it had been there for a long time, with words to the effect that everything was included in the title, and that any purchaser would not be troubled by the legality issue. Mr Ng asked the same question many times and the same reply was forthcoming. He cannot now recall whether the plaintiff said: 'I have Government approval,' or: 'I have not.'

47. When it came to the signing of the provisional agreement it was the plaintiff who called for the unusually high initial deposit.

48. There was no need to include a clause that the swimming pool was an approved structure because the parties were content to leave it out. Moreover matters concerning title were for the solicitors to sought out.

49. Mr Tang was taken to a document which he said he was the author of. Its English translation is as follows:

"I, the undersigned Tang King Sing and holder of HKIC No. G331012(3). While I was working with Goodfortune Realty Holdings Limited, I pulled together a sale and purchase on 31 March 1997 in respect of a property at Lot 534, Demarcation District 230, Tai Hang Hau, Lung Ha Wan, Clearwater Bay. The sale price was HK$11,000,000. The registered owner and seller was Leung Yun On (holder of HKIC No. 525544(0)) and purchaser was Popula Investments Limited. I now declare that, at the material times, the said owner/seller said the garden and the swimming pool would be sold together with the building on the said land and such garden and swimming included in the deed to be sold together with the above-mentioned property.

(Sd. Danny Tang)

Date: 31 March 1997 Signed: _____________________"

50. He said that he wrote this because "There were disputes over the swimming pool so Mr Ng wanted something like this to be written down to act as a guarantee." This was a curious response because when taken to the date he said it was written out and signed on that date, the date of the provisional agreement, when there was, apparently, no dispute. I return to his evidence.

51. After the provisional agreement was signed he said Mr Ng asked him to get a copy to him of the document verifying the pool as an authorized structure. He spoke to the plaintiff and requested the same. The plaintiff told him he was an indigenous villager; that many houses had similarly constructed swimming pools many of which, including his, were many years old. He said there was no need for further verification. He also said the documents were held by the solicitors and would be exchanged in due course. That was all he was given to relay to Mr Ng; there was never to be forthcoming the approval or a copy of it.

52. He said when the difficulties concerning title arose, as the date for completion approached in February, there was not one but at least three meetings between the parties; but no agreement to resolve the problems was reached.

Findings of Fact

53. The foregoing is a bare summary of what the three witnesses of fact had to say. As a summary it reveals many discrepancies; for instance concerning the number of inspections undertaken by Mr Ng before he committed the defendant to buy, the number of meetings at which the parties attempted to resolve their differences, whose idea it was that the initial deposit be unusually large, why it was that Mr Ng wanted keys before completion; and so on. But the one crucial question is: did the plaintiff represent to Mr Ng that he had Government approval to build the pool, making it a legal structure, when he knew full well he did not?

54. It is Mr Ng's evidence, backed up by Tang, that when confronted the plaintiff was vague and equivocal, speaking of his status as an indigenous villager exempting him from certain laws, telling him how long the pool had been in the ground as an assurance that he and it were safe from Government intervention. Only when pressed, repeatedly, did he say, unequivocally, that yes he did have approval. This it seems to me, would be an extraordinary response, if indeed he made it.

55. If he in fact had the approval, why not say so straightaway, without a spiel about his status and the age of the pool? And why lie, when the lie could so easily be uncovered, by anyone sensible enough to check the records? Mr Ng said he would not have committed the defendant had he known the pool was illegal. That is clearly the prudent approach of a cautious and experienced investor. So why did this prudent person investing $11 million in a home purchase not want to see proof of this, easily established, before committing himself, or else provide for it in the agreement or, at the very least, alert his solicitors for the need to requisition timeously for this? And, nearly a year later, on the eve of completion, when he learned that all along he had been misled, why did he not confront the trickster upon whose word he had relied, and brand him a liar? Why did he not, on being shown paragraph 4 of C W Heung's letter, instruct CLW to respond protesting about the deception practised on him?

56. Mr Ng did none of these things. Instead, at the outset, he blithely committed the defendant on the unconfirmed word of a stranger whose preliminary, lackadaisical response would surely have rung alarm bells; if, that is, Mr Ng has told me the truth. I am satisfied he has not.

57. There was no reference to the swimming pool's legality in the agreements, no alerting the solicitors to requisition for the approval, no protestations of fraudulent misrepresentation on 24 February, no branding the plaintiff a liar, because Ng was content to accept that there was no approval and take the risk that the authorities would turn a blind eye. Why he chose to fabricate what happened is not material. But no doubt the bank's election to turn down his application for a mortgage at the eleventh hour was motivation enough.

58. But I have to deal with Tang's account as well, for he supported Ng's evidence at least on the vital issue. In fact I found him to be a singularly unimpressive character whose version of events was quite often at odds with that of Ng. Even on the all important matter of what was said at the first inspection the two versions differed. Quite patently, one only has to read the so-called declaration of 31 March 1997 to see that it was written months after that date as a rather feeble attempt to bolster Ng's lie. But even if not a fraud it would have been of no value; it makes no reference to the swimming pool being a legal structure.

59. Tang as I find was quite capable of lying when it suited, and he chose to do so before me, presumably under a misguided sense of loyalty to a good customer.

60. If any further confirmation is necessary it is to ask, rhetorically, why the plaintiff would have troubled to lie about the status of the swimming pool before a witness, given the almost certain likelihood that the lie would be quickly found out. In fact, as I am satisfied, only he has told me the truth. He had told Ng he had no licence to build the pool making it an illegal structure. There was no misrepresentation at all.

Good Title

61. The remaining three issues raised by the defendant in the counterclaim can be included under the one head: has the plaintiff failed to demonstrate that he was able to assign the property encumbrance free (Clause 6) and to give and prove good title (Clause 7)?

62. Is the illegality of the pool an encumbrance? In my view it is. An encumbrance is a right or interest in the land which may subsist in third persons to the diminution in the value of the land; see Halsbury's Laws of Hong Kong Volume 16 paragraph 230.0365.

63. It is also a blot on an otherwise good title preventing thus a vendor from giving and proving good title.

64. I have already made findings of fact that Mr Ng as the alter ego of the defendant was told that the pool was illegal before committing the defendant to the purchase. But this was not included as a term of the agreement, and thus does not entitle the plaintiff to bypass his obligations under Clauses 6 and 7 of the agreement.

65. In Gloag and Millers Contract [1883] 23 Ch D 320 Fry J said at p. 327:-

"if the contract expressly provides that a good title shall be shown, then, inasmuch as a notice by the vendor that he could not shew a good title would be inconsistent with the contract, such a notice would be unavailing, and whatever notice of a defect in the title might have been given to the purchaser, he would still be entitled to insist on a good title. In the present case it appears to me that an absolute right to a good title is given by the contract, and that consequently no notice given to the purchaser before the contract can exonerate the vendor from the obligation to shew a good title."

66. The editors of Halsbury (supra) support this view. Again at paragraph 230.0365:-

"It seems that the covenant will be breached even if the covenantee had notice of the existence of the incumbrance, if the assignment was not made expressly subject to it: Page v. Midland Rly Co [1894] 1 Ch 11, CA (Eng)".

67. The issue thus boils down to this: has the defendant by its failure to requisition for the removal of the incumbrance, that is the pool's illegality, in compliance with paragraphs 9(a) and 4 of the agreement accepted the plaintiff's title in its imperfect state? Has it otherwise in its conduct waived its rights to requisition out of time?

68. Mr Tam argues that it has not because the incumbrance goes to the root of the plaintiff's title, and the defendant's solicitors, with no notice of the existence of the pool let alone its illegality could not, acting with due diligence, have requisitioned within the time limit of Clause 9(a) for the removal of the defect. He submits in these circumstances it is not encumbent on the purchaser to requisition within the prescribed time limit and he may not be regarded as having waived his rights by not doing so in time; see Mexxon Holdings Limited v. Silver Bay International Limited [1999] 3 HKC 756, at p. 762 G to I.

69. A defect is one that goes to the root of title where it prevents the vendor from being able to pass title to the purchaser; for instance there is a defective execution in the chain of title. It can also go to the root where there has been a breach of the terms of the original grant or subsequent licence of such consequence that there is a risk of repossession and loss of the property.

70. In this case, whether or not the pool's illegality goes to the root of title is determined by the degree of risk of the Government exercising its right of re-entry of the property for breach of licence 1007, invoking the term of the licence I have already reproduced. In this regard I am assisted by the report of Mr Sunny Yeung FRAIA registered architect, who was called to produce the report and be examined on it. He said at p. 4:

"9. I was also requested to advise on the likelihood of any enforcement action by the Buildings Department in respect of the subject swimming pool.

As stated above, the competent authority to sanction unauthorised structures erected in breach of the licence grant is the District Lands Office. Without any referral from the DLO for the matter to be taken over by the Buildings Department, it is unlikely that the BD will assume responsibility and take any enforcement action.

Even if, in the unlikely scenario, the Buildings Department assumes jurisdiction over the unauthorised work erected on the subject Lot, I am of the opinion that any enforcement action (if at all) will be given a very low priority in accordance with the current policy of the BD. As the existing pool is a building work of minor nature, and it does not constitute any imminently dangerous situation where there is an obvious danger to life or property, the chance of any enforcement action is remote.

10. In conclusion, I advise as follows:

10.1 The existence of the swimming pool on the Lot is not a major breach of the licence conditions, which would result in revocation of the licence and re-entry of the land by the Government.

10.2 The minor breach could be rectified easily by backfilling of the pool with suitable materials.

10.3 The existing swimming pool is in a sound condition. It poses no danger to the building nor the adjacent slopes.

10.4 The application for approval/short term waiver in respect of the swimming pool in the subject Lot has a good chance of success."

71. For the reasons given above, I am satisfied the prospect of Government re-entry is unrealistic and so remote that practically speaking there is no risk. I thus conclude the defect does not go to the root of title. Mr Tam's argument that those representing the defendant, exercising due diligence, could not have been aware of the defect until the receipt of the unfavourable report of 21 February 1998 really falls away by virtue of my finding of fact that Mr Ng was specifically told the pool was unlicensed. It was his case that it was a matter of some concern to him that the pool was legal ('I would not have bought had I known the pool was not legal'). It was incumbent upon him, aware of an improvement whose legal status was troubling him, to make immediate enquiry, and on time. He did neither. The defendant by this omission failed to exercise due diligence. That disposes of the defendant's case under this head. But for completeness I come to consider whether by additional conduct it waived its rights to object to the plaintiff's title.

72. I have already recorded that as the date for completion approached the parties' solicitors prepared for the same, and that CLW sent to C W Heung a draft assignment. Was this a waiver?

73. In Hillier Development Limited v. Tread East Limited [1993] 1 HKC 285, the Court of Appeal said that it could amount to one. Penlington J A at p. 291 quoted (with approval) from Farrand on Contract and Conveyance (4th Ed) at p. 130:

"An implied acceptance of title depends on whether it appeared from the purchaser's conduct that he intended to waive any objections. This is a question of fact only to be determined in the light of the whole of the circumstances of the case. The quality of conduct to be looked for involves the performance by the purchaser of acts which a prudent purchaser would not normally perform until a good title has been shown, ie not until completion would be bound to take place.

Conduct implying acceptance of the title may take many forms (eg payment of the purchase price), two only of which are worthy of special mention. First, the submission of a draft conveyance for approval by or on behalf of the vendor is significant if not conclusive (see per Plummer MR in Burroughs v Oakley (1819) 3 Swanst 159 at 171; the circumstances there were that questions arising on the title had still to be discussed; see also Sweet v Meredith (1862) 8 Jur (NS) 637). In practice, however, the draft conveyance very often accompanies the purchaser's requisitions, the covering letter stating that it is submitted subject to the answers being satisfactory. This time-saving device should never imply acceptance of the title."

74. Then referring to the facts of the case before him, the learned judge had this to say:-

"Here that was certainly not the case. The purchaser's requisitions had been forwarded on 8 May 1990 and had been replied to on 30 May. Nothing further had been received from the purchaser's solicitors indicating in any way that they were dissatisfied with the reply which, on the face of it, seemed to be perfectly proper. The draft conveyance was then sent almost two months afterwards. It certainly did not accompany the requisitions. Short of a letter from the purchaser's solicitors expressly stating that they considered their requisition had been satisfactorily answered, it is difficult to see what else they could have done to indicate to the vendor's solicitors that they now accepted the vendor's title. The letter which accompanied the draft deed said it was for the vendor's solicitor's approval and enquired as to the way in which the cheques for the purchase money should be made out. There was not the slightest indication in that letter that there was any unsatisfied requisitions. As Mr Patrick Fung for the vendor has said, it is highly desirable that requisitions should be forwarded to the vendor's solicitors promptly. In my opinion from the circumstances here it must be implied the purchaser's solicitor had accepted the vendor's title on 24 July by forwarding the draft deed of assignment."

75. In my view there is no distinction, at least no material distinction, between the two cases. It is true that CLW began its letter with the words 'without prejudice to the outstanding requisitions on title (if any)' but these words are not magically catch-all, designed to deal with future requisitions. There were no requisitions, outstanding or otherwise; the assignment was effectively forwarded without reservation. This amounted to a waiver.

76. The defendant failed to requisition for clear title within the terms of Clause 9(a) and by Clause 9(b) had thereby accepted the plaintiff's title.

Conclusion

77. The defendant having failed to complete in terms of the agreement the plaintiff's claim under Clauses 29 and 30 for specific performance and damages to be assessed wholly succeeds. The defence and counterclaim fail.

78. There are two orders. The first deals with the amendment to the defence and counterclaim, the second to the action itself. Mr Chan prepared a draft in the event of a successful claim and I now adopt the draft as amended. The costs orders are nisi at first instance.

The Orders

79. Clause 20 of the statement of defence and counterclaim is amended by substitution of the following Clause 20:

"20. Further or in the alternative, by reason of the matters concerning the Pool set forth in paragraphs 9 to 12 above, the Plaintiff was unable to convey to the Defendant what it had contracted to purchase as it was an express term of the agreement dated 22nd April 1997, inter alia, that the Plaintiff should assign the Property to the Defendant free from all incumbrances."

Costs of the amendment are to the plaintiff taxed if not agreed.

80. Order that the agreement dated 21st April 1997 in the writ of summons mentioned be specifically performed and carried into execution.

LET the following enquiry be made:

1. An enquiry of what damages have been sustained by the plaintiff by reason of the defendant not having specifically performed the said agreement.

LET interest be computed at a rate to be determined by this Court on the sum of HK$8,800,000.00 being balance of the purchase price for the property comprised in the agreement from 25th February 1998 when the purchase ought to have been completed according to the terms of the said agreement to the date to be fixed by this Court as hereinafter directed.

LET the following accounts be taken:

2. An account of what is due to the plaintiff for the balance of the said purchase money and interest.

3. An account of the rents and profits of the said property received by the plaintiff or by any person or persons by his order or for the use of the plaintiff since 25 February, 1998.

LET what shall be coming upon the said accounts of rents and profits be deducted from the amount of the balance of the said purchase money and interest and costs when so computed and assessed as aforesaid and the balance certified.

IT having been adjudged that the defendant has accepted the title of the plaintiff to the said property, LET the plaintiff be at liberty to prepare and execute the said conveyance to the defendant as an escrow to be delivered to the defendant as hereinafter provided such conveyance to be settled by this Court in case the parties differ.

UPON the plaintiff at a time and place to be appointed by this Court after the said conveyance shall have been so executed delivering to the defendant the said conveyance together with all deeds and writings in its possession custody or power relating solely to the said property and giving an acknowledgement and undertaking for safe custody of the deeds relating to other property, LET the defendant at the same time and place pay to the plaintiff the amount of the certified balance.

AND the parties are to be at liberty to apply.

And it is further ordered that costs are to the plaintiff taxed if not agreed.