RECALL INTERNATIONAL LTD v. PANTEN LTD

CACV 43/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 43 OF 2017

(ON APPEAL FROM HCA NO 1896 of 2012)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

1.  The Plaintiff in these proceedings was the purchaser under a sub-sale agreement of 23 February 2012 in a conveyancing transaction. The Defendant was the vendor in the sub-sale agreement. It was the purchaser under the Head Agreement of 7 February 2012 with the then registered owner as the head vendor. The subject matter of the sale was a unit in an industrial building, viz Workshop A, 7^th Floor, Morlite Building [“the Building”], No 40 Hung To Road. The Plaintiff itself also entered into a sub-sub-sale agreement with another company on 30 August 2012. The agreed completion date was 5 October 2012 at noon. The sub-sale was not completed though the Defendant itself completed the purchase with the head vendor.

2.  Title deeds had been delivered to the Plaintiff’s solicitors on 16 April 2012.  Shortly before completion, on 3 October 2012, the Plaintiff purported to raise requisition arising from the discovery of a writ of summons issued in HCA 1658 of 2012.  In that action, the owner of the external wall of the Building, Wealth Treasure Corporation Limited [“WTCL”], brought a claim of trespass against various owners of the Building (including the head vendor) and sought injunctive relief in respect of an entrance [“the subject entrance”] of the Building.  WTCL claimed that the subject entrance was originally part of the external wall which had been unlawfully pulled down in breach of the approved building plans and the deed of mutual covenant.  WTCL further alleged that it had reinstated the wall on or around 22 July 2012 but subsequently on or around 23 July 2012 the defendants in that action demolished the reinstated part of the wall again.  Further attempts to reinstate the wall by WTCL was met with obstruction.  In the action, WTCL sought injunctive relief against the defendants in that action and damages for trespass.

3.  Apart from the subject entrance, there were other entrances at the Building.  Thus, there are other means of access. 

4.  Solicitors for the Plaintiff wrote a letter on 3 October 2012 to the Defendant’s conveyancing solicitors referring to HCA 1658 of 2012.  They asked for these information:

“ Please give particulars of such litigation including the nature of the claim, the amount involved, the legal opinion on the likely outcome of such litigation and the amount of legal costs that may have to be borne by the owners of the said building.”

5.  That letter was written apparently before the solicitors had sight of the writ.  It mistakenly claimed that the Incorporated Owners of the Building was a party to that action [“the IO”].  In fact, the IO was not a party and the claims advanced by WTCL were made against the individual owners personally.  There was no question of the IO bearing the liability for damages or costs in that action.

6.  Further correspondence ensued.  For present purposes, it is not necessary for us to recite at length the course of such correspondence.  It suffices to highlight the following aspects.  First, on 4 October 2012, solicitors for the Plaintiff obtained a copy of the writ (and therefore should have found out that the IO was not a party).  In a later letter of 4 October 2012, the solicitors asked the conveyancing solicitors for the Defendant as to the resolution of the claim in HCA No 1658 of 2012 before completion “so that the property can be assigned to [the Plaintiff] free from” the claim of WTCL.  In a subsequent letter of 4 October 2012, solicitors for the Plaintiff asserted that the claim constituted “an incumbrances at law” which needed to be removed before completion.  Second, the conveyancing solicitors for the Defendant copied letters from the solicitors for the head vendor responding to the query about HCA No 1658 of 2012 to solicitors for the Plaintiff.  In those letters, solicitors for the head vendor emphasized that the claims in that action only raised personal claims and did not relate to title.  The head vendor took the view that the claims had no merit and it would contest the same vigorously. 

7.  The Defendant gave an extension to the Plaintiff up to 4:30 pm on 5 October 2012.  The Plaintiff did not complete, maintaining that they should have reasonable time to consider the answers to their requisition and that the Defendant had failed to prove title.  On 8 October 2012, solicitors for the Defendant wrote a letter to solicitors for the Plaintiff in which they accepted the repudiation of the agreement by the Plaintiff and forfeited the deposit.  On 12 October 2012, the Plaintiff commenced the present action seeking specific performance of the agreement and damages or alternatively return of deposit and damages.  

8.  Pleadings were filed and closed on 18 March 2013 with the filing of the Reply and Defence to Counterclaim by the Plaintiff on 6 February 2013. 

9.  On 22 June 2016, almost 4 years after the commencement of proceedings, the Plaintiff applied under Order 86 for summary judgment for specific performance.  That application was heard by Recorder Stewart Wong SC on 9 November 2016.  On 23 January 2017, the learned Recorder gave judgment to the Plaintiff. 

10.  This is the appeal by the Defendant against the judgment of the Recorder.

11.  The Recorder held that the query regarding HCA 1658 of 2012 was a requisition which went to title.  Such conclusion was premised on his holding that the subject matter of the sale included the right to use the subject entrance, see [33] to [36] of the judgment.

12.  At the hearing of the appeal, counsel agreed that the subject matter of the sale is the central issue in the appeal.  Mr Warren Chan SC (appearing together with Ms Patricia Lam for the Plaintiff) candidly accepted that if he failed to persuade us that the right to use the subject entrance was part of the subject matter of the sale, the Order 86 judgment would have to be set aside and the matter should go to trial.

13.  The agreement between the Plaintiff and the Defendant was the provisional sale and purchase agreement of 23 February 2012. In the agreement, the description of the subject matter of the sale can be found in Clause 1:

“ The Vendor agrees to sell and the Purchaser agrees to purchase … all that Workshop A on 7^th Floor, Moblite Building No 40 Hung To Road Kowloon.”

The workshop was defined as the said premises in the agreement.

14.  Clause 3 provided that the said premises were to be sold to the purchaser free from encumbrances.  Clause 11 provided that the said premises was sold to the purchaser on an “as is” basis. 

15.  In the agreement, there was no reference to the common parts of the Building or the right to use any specific entrance in the Building.

16.  Thus, Mr Chan properly and fairly accepted that there was no express provision in the agreement between the Plaintiff and the Defendant giving rise to any warranty by the Plaintiff as to the right to use the subject entrance. 

17.  In Hong Kong, ownership of a unit in a multi-storey building invariably takes the form of ownership of share(s) in the land subject to the rights and obligations in a deed of mutual covenants, see Kung Ming Tak Tong Co Ltd v Park Solid Enterprises Ltd (2008) 11 HKCFAR 403. For the sale of a unit in a multi-storey building, even though there is no express reference to the deed of mutual covenants in the agreement, a reference to a particular unit in a building as the subject matter of sale is equivalent to a reference to the share(s) attributable to that unit together with the rights and obligations under the relevant deed of mutual covenants or similar instrument.  Upon completion, a purchaser would be assigned the shares together with the rights and subject to the obligations under the deed of mutual covenants. 

18.  The right of an owner to use the common parts and common facilities of the building is governed by the deed of mutual covenants and the statutory provisions in the Building Management Ordinance Cap 344.

19.  In the present context, the right to use the entrances of the Building constitutes one of the rights of the co-owners holding shares in the Building under the deed of mutual covenants.  The title to such rights stems from the proper transfer of the shares attributable to the workshop in question.  A purchaser of the shares would obtain the right to use entrances as conferred upon each co-owner under the deed of mutual covenants, no more and no less. 

20.  The deed of mutual covenants in respect of the Building does not identify the entrances.  The dispute in HCA 1658 of 2012 apparently stemmed from a dispute on whether the subject entrance was a legitimate entrance as prescribed for under the deed of mutual covenants.  In other words, if WTCL were correct in its assertion that the subject entrance was not an original entrance and the deed of mutual covenants did not confer any right to any co-owner to use the same as a common part, then there was no right to use the subject entrance as an incidence to the shares attributable to the workshop to be sold under the agreement between the Plaintiff and the Defendant. 

21.  On the other hand, if WTCL were incorrect in such assertion, the Plaintiff would be entitled to use the subject entrance as an incidence of the ownership of the shares attributable to the workshop.  As noted earlier WTCL had not asserted any claims against the IO.

22.  Hence, whatever outcome in the HCA 1658 of 2012 regarding the legality of the subject entrance would not compromise the rights of the Plaintiff under the deed of mutual covenants.     

23.  In a conveyancing transaction, a vendor must show and give title in respect of his unit.  But as Ms Audrey Eu SC (appearing together with Mr Jonathan Chang) submitted, and we agree, in the absence of a specific provision in the agreement to such effect, the vendor does not warrant that what appeared to be common parts or facilities at the time of the agreement could always be used or enjoyed on an “as is” basis.  Unless the agreement contains a specific provision stipulating for the same, a vendor does not warrant that what appeared to be common parts or facilities were actually common parts or facilities of the building in accordance with the deed of mutual covenants and the Building Management Ordinance. 

24.  Before us, Mr Chan disavowed any reliance on arguments based on warranty or the right to use the subject entrance by way of implied necessity.  Counsel however argued that the right to use the subject entrance was part of the subject matter of sale because the deed of mutual covenants referred to “entrances” and a reasonable bystander who inspected the building at the time of agreement would regard the subject entrance as one of the entrances referred to therein. 

25.  With respect, we cannot accept this contention. In the context of this Order 86 application, the Plaintiff only relied on the terms of the agreement which, as we observed, did not contain any warranty as to the subject entrance being one of the entrances provided for in the deed of mutual covenants.  The Plaintiff had also abandoned all claims based on misrepresentation, see footnote 1 at [31] of the judgment of the Recorder. Whatever assumption a reasonable bystander might have made when he inspected the property, there is no basis to suggest that the Defendant had agreed to sell a right to use the subject entrance over and above what a co-owner was entitled to under the deed of mutual covenants.

26.  Mr Chan also prayed in aid the answer given by the head vendor to the effect that the subject entrance was one of the entrances of the Building and had been used as such.  With respect, we cannot see the legal basis for using that answer as an aid to identify the subject matter of the sale in the agreement or the construction of the deed of mutual covenants.

27.  In our judgment, there is at least a triable issue on whether the right to use the subject entrance is part of the subject matter of the sale. 

28.  It is also arguable that the Plaintiff’s solicitors were incorrect in asserting that HCA 1658 of 2012 constituted an encumbrance on the title.  As the writ only advanced personal claims against the defendants in the action, there was no proprietary claim against the property as such. 

29.  Mr Chan submitted that the substance of WTCL’s claim was premised on the right to use the subject entrance.  Even assuming that such a claim, if successful, could have an impact on the use of the subject entrance notwithstanding that no in rem relief was sought, in light of the doubts we have on the right to use the subject entrance as part of the subject matter of the sale, such impact could not be regarded as a blot on the title in the context of the agreement between the Plaintiff and the Defendant.

30.  Mr Chan also submitted that irrespective of the merit of the Plaintiff’s case on a blot on the title, the answer given by the Defendant’s conveyancing solicitors did not address the issue in the same way as we analysed the same above.  However, due to the lateness of the requisition of 3 October 2012, if it was not a matter going to the root of title, the Defendant was not obliged to answer the same. 

31.  As Litton JA (as he then was) observed in Active Keen Industries Ltd v Fok Chi-keong [1994] 1 HKLR396 at p. 407 and p.413, the contractual duty to answer a requisition is not onerous:

“ If the matter was self-evident, the purchaser’s solicitor cannot insist upon a fuller reply. But the vendor’s solicitor must act with total candour, so that the purchaser can be reasonably certain that there are no facts and material relevant to the requisition known to the vendor which have not been disclosed. A requisition as to title is not an occasion for the parties’ solicitors to bandy propositions of law: each party must decide for himself, ultimately, what the legal position is, based upon the facts known to himself …

The contractual duty to answer requisitions properly is not an onerous one.  All that is required of the vendor is candour and common sense.”

32.  As Mr Chan accepted that the matter should go to trial if there is a triable issue on the subject matter of the sale, we have not heard full submissions from counsel on the adequacy of the replies by the Defendant (in forwarding the replies by the head vendor) if the right to use the subject entrance was not part of the subject matter of sale.  In the circumstances, we do not wish to comment on this aspect of the case in this judgment.

33.  For these reasons, we allow the appeal, set aside the judgment granted by the Recorder and grant unconditional leave to defend to the Defendant. 

34.  There is no dispute that costs of the appeal should follow the event.  We make a costs order that the Plaintiff shall pay the costs of the Defendant in the appeal, with certificate for 2 counsel.  The costs below shall be costs in the cause of the action.