NG CHUN KONG CALVIN t/a KO AND CO v. FIRST STAR DEVELOPMENT LTD

HCA2450/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2450 OF 2004

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J U D G M E N T

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1. This is an application made by the defendant for judgment pursuant to Order 14A of the Rules of the Court or alternatively for striking out under Order 18 rule 19.

2. The defendant is the developer of land at Hung Hom Bay.  Originally it was a wholly owned subsidiary of Wai Kee Holdings Limited and subsequently Sun Hung Kai Properties Limited acquired an interest in the company as did the New World Group of Companies.

3. The development of the land was originally undertaken pursuant to the Private Sector Participation Scheme (“PSPS”).

4. Under this scheme, purchasers of the units developed would be nominated by the Hong Kong Housing Authority (“HA”) at a stipulated price and in the event that all of the units were not sold within a prescribed period HA was required to purchase the flats.

5. The plaintiff is the sole proprietor of a firm of solicitors.  He claims in the Statement of Claim to have entered into an agreement with the defendant whereby his firm would provide legal services to the defendant free of charge and the consideration for this was that the plaintiff would represent the purchasers of the flats at agreed costs.

6. There were to be 2,470 residential flats, 1 kindergarten, commercial space of 3,000 square metres and 494 car parking spaces.

7. Para. 5 of the Statement of Claim is as follows :

“It was also an implied term of the Agreement based on the mutual intention of the parties or as a matter implied by law or to give the same business efficacy that the Defendant would not terminate Ko and Co.’s retainer so as to deprive Ko and Co. of the opportunity of earning its fees arising out of the sale and purchase of the residential units and the non-residential units of the Development.”

8. The Hong Kong Government made various announcements in relation to housing policy.  In September 2001, it announced that there would be a moratorium on all sales of HOS flats until the end of June 2002.  Shortly before the expiration of that period, it said that only a limited number of flats were to be sold and that the flats, the subject of the defendant’s development, were not included amongst these.

9. The Occupation Permit in relation to the development was issued in August 2002 and the certificate of compliance and the consent to assign were issued in November 2002.  At this time the Secretary for Housing announced that there would be no further sales of PSPS flats and the flats under construction would be disposed of by “market-friendly” means.  The relevant part of the announcement was in this form :

“	8.	Given the significant changes undergone in our economy and property market over the past few years, Government believes that home ownership should essentially be a matter of personal choice and affordability.  In this respect, Government should withdraw from its previous role as direct housing provider and refrain from competing with the private residential market.  Instead, Government should facilitate low-income families to become home owners through the more flexible and well tested means of loans.
	9.	Subject to Members’ agreement to accept Government’s request to halt the production and sale of HOS/PSPS flats, we will dispose of the completed and other committed HOS/PSPS flats, estimated to be in the region of 20,000 units, through market-friendly means such as conversion into PRH, service apartments, hostels re-housing of families affected by Urban Renewal Authority projects, sale to the Housing Society for rental purposes, etc.  The Department will establish a task force to consider all feasible options and coordinate the disposal of these surplus HOS/PSPS flats.
	10.	As regards the disposal of the small number of unsold and returned units, we propose to restrict the sale of these units of GF applicants.  The disposal arrangements will be drawn up carefully.  The objective is to dispose of these units in an orderly manner that will not compete directly with the private property market.  Details of the arrangements for disposing of the surplus HOS flats and the residual sale arrangements will be submitted to the Strategic Planning Committee and Home Ownership Committee for consideration in due course.”

10. Nothing further happened until June 2003 when the defendant issued legal proceedings against HA for breach of the contract it had with them in relation to the development.

11. Thereafter the defendant and HA entered into negotiations with a view to resolving the impasse which had arisen.  It was eventually agreed that if the defendant paid an additional premium of $864 million, the terms of grant under which the land was held would be modified to enable the defendant to sell the flats as a private residential development.

12. In February 2004, Sun Hung Kai wrote to the plaintiff informing him that his services were no longer required and invited him to send a bill in respect of the professional services he had rendered on a quantum meruit basis.  The plaintiff declined to do this and made a claim for $18,196,888 which was based on an assumption that 95% of the prospective purchasers of flats would avail themselves of his services.  It is this claim which is the main subject of this litigation.

13. The first matter which has to be considered is whether the outstanding issues in this litigation can properly be the subject matter of an application under Order 14A and further whether a striking out application is appropriate.

14. Before an Order 14A application can properly be considered, it needs to be established that the application will be determinative of the relevant issues and that there is no dispute on the facts such as would require adjudication after hearing viva voce evidence.

15. In my view, the circumstances of the present case meet this test.

16. The terms of the contract are in writing and fairly clear.  Also the announcements made by the Hong Kong Government are in the public domain and can be readily understood.  The issues, if decided in favour of the defendant, would be determinative of this litigation.  This being the case, I am satisfied that I should proceed to hear the summons on its merits.

17. In his most helpful submission, Mr Yu, SC for the defendant argued that as a consequence of the Government’s announcement in November 2002 the contract between the parties had been frustrated.  The other issue upon which he placed reliance was to criticize the plaintiff’s reliance upon the term which the plaintiff attempted to imply in the contract at para. 5 of the Statement of Claim referred to earlier in this judgment.

18. I will consider the question of the implied term first.

19. The extent to which terms can be implied in a contract are severely circumscribed.

20. Lord Pearson had this to say at page 609 of his judgment in Trollope & Colls Ltd v. North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 :

“Faced with the conflict of judicial opinion in this case, I prefer the views of Donaldson J. and Cairns L.J. as being more orthodox and in conformity with the basic principle that the court does not make a contract for the parties.  The court will not even improve the contract which the parties have made for themselves, however desirable the improvement might be.  The court’s function is to interpret and apply the contract which the parties have made for themselves.  If the express terms are perfectly clear and free from ambiguity, there is no choice to be made between different possible meanings: the clear terms must be applied even if the court thinks some other terms would have been more suitable.  An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them: it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves.”

21. Some guidance can also be derived from the observations of Staughton LJ at page 3 of Scottish Power Plc v. Britoil & Ors, 141 SJ LB 246 — The Times, 22 December 1997 :

“	The background or surrounding circumstances
	It has been established law for the greater part of this century that contracts are not construed in a vacuum.  The court is entitled to know the surrounding circumstances which prevailed when the contract was made : see Charrington & Co Ltd v. Wooden (1914) AC 71 by Lord Dunedin at p. 82.
	Equally it is established law first, that subjective evidence of intention by either party is not admissible.  I do not regard that as a quirk of English law, justified only by policy considerations.  It is justified because the court is looking for the common intention of the parties, and not what intention each had in pectore.  Both parties are entitled to know, or to have the means of knowing, what the contract means at the moment when it is made.
	Secondly, evidence of negotiations is not admissible.  That again is not in my view an exception created for policy reasons from what would otherwise be a general rule.  It results from the sound notion that until a contract is made negotiations represent what one party or the other hopes to achieve, not what the contract “actually” means.
	What then is comprised by the surrounding circumstances, or the factual matrix as the fashionable phrase is today?  To my mind it must mean the immediate context of the contract, facts which both parties would have had in mind and known that the other had in mind at the time when the contract was made.
	There is little authority on the point.  Perhaps the reason is that (as I understand) the Law Reports are reluctant to report cases which concern the interpretation of contracts, because they are too complicated.  A better reason might be that they are frequently one-off decisions, not raising any issue of principle.  In recent times I have tried to summarize established principles in New Hampshire Insurance Co v. MGN Ltd (no. 1), 15 June 1995, and a later appeal in the same case on 6 September 1996, both unreported.  In the second appeal I said this:
	‘	The boundary of what may be considered surrounding circumstances … is unfortunately not easy to draw.  All too often a great deal of evidence is produced under that head which is of little or no help in interpretation.’
	That was an echo of what I had said in Youell v. Bland Welch & Co [1992] 2 Lloyds Rep 127 at p. 133:
	‘	The notion is [that] what the parties had in mind, and the Court is entitled to know, [is] what was going on around them at the time when they were making the contract.  This applies to circumstances which were known to both parties, and to what each might reasonably have expected the other to know.’
	Then I turn to the decision of the House of Lords in Investors Compensation Scheme Ltd v. West Bromwich Building Society (1997) CLC 1243, and the speech of Lord Hoffmann (with which Lord Goff of Chievely, Lord Hope of Craighead and Lord Clyde agreed).  It was concerned with a claim form which those seeking compensation under the scheme were required to sign; that may have constituted a contract but not one made by any ordinary commercial process.
	Lord Hoffmann at p. 1257 prefaced his reasons ‘with some general remarks about the principles by which contractual documents are nowadays construed.’  His second principle was this :
	‘	The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include.  Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.’
	No authority is cited for that proposition, and it is not possible to tell whether it was the subject of argument.  There does not appear to have been any dispute as to what matrix should be taken into account; the only fact external to the claim form which seems to have assumed importance was that the scheme managers provided with the claim form ‘an explanatory note which was a model of clarity.’
	As I indicated in the cases cited earlier, it is often difficult for a judge to restrain the enthusiasm of counsel for producing a great deal of evidence under the heading of matrix, which on examination is found to contribute little or nothing to the true understanding of the parties’ contract.  All, or almost all, judges are now concerned about the huge cost of litigation.  I have to say that such a wide definition of surrounding circumstances, background or matrix seems likely to increase the cost, to no very obvious advantage.  Since the decision in the Investors Compensation case Saville LJ in National Bank of Sharjah v. Dellborg, 9 July 1997 (New Law Publishing), wrote on the same theme with reference to the surrounding circumstances, and so did Judge LJ.  I would add to what they have written a plea that we should confine surrounding circumstances, as I said in Youell’s case, to
	‘	What the parties had in mind, what was going on around them at the time when they were making the contract.’”

22. It seems to be fairly clear that the parties had not considered the possibility that the PSPS might be discontinued by the Hong Kong Government at some time in the future.

23. There is also the question of the extent to which it is open to a client to terminate a retainer with his solicitor.

24. The position is stated in section 4 of Cordery on Solicitors (Butterworths) at page E/401 :

“	A  Termination by the client
	[651]
	The client may terminate the retainer at any time and for any reason.  When instructions are withdrawn the solicitor will be entitled to charge the client for work done on a quantum meruit basis and may have a lien over certain documents belonging to the client until his reasonable charges are paid.”

25. Although no authority is cited for this proposition, there is ample authority on this.

26. In Court v. Berlin and Others [1897] 2 QB 396, A.L. Smith LJ said at page 400 :

“… The Divisional Court appears to have held that they were not liable on the ground that the liability for the costs of the different steps in the action must be taken to arise upon fresh instructions given de die in diem.  If that was the ground of their decision, it appears to me to be contrary to the decision of this Court in the case of Underwood, Son & Pipe v. Lewis (1), in which it was held that the retainer of a solicitor in a common law action gives rise to one entire contract for the conduct of the action to its termination, and the solicitor cannot in the midst of the action throw up his retainer and sue for his costs already incurred except in certain cases referred to in the judgment in that case.  The question here is whether in a case where a partnership firm employs a solicitor to conduct a common law action for them in the ordinary way, namely, on the footing that his contract is an entire contract to conduct it to the end, it is open to the partners to dissolve partnership inter se, and then to say that the action was after that date no longer being conducted by the solicitor on their behalf.  It is no doubt open to a client whilst the action is pending to withdraw the solicitor’s retainer.  I think, though it is not necessary to decide the point, that the dormant partners might upon the dissolution have given notice to the plaintiff that he was no longer to conduct the action on their behalf, and that, if they had done so, they would not have been liable.  But in this case no such notice was given.  Under these circumstances I think that they were liable for the costs incurred subsequently to the dissolution of partnership in the prosecution of the action.”

27. There is also a statement to this effect in para. 114 of volume 44(1) of Halsbury’s Laws of England, 4^th edition Re-issue.  This reads :

“It seems a term will also be implied enabling the client to withdraw the retainer at any time.  A withdrawal should be plainly expressed for ‘something definite clear and precise’ is required to withdraw the retainer.”

28. Mr Edward Chan, SC for the plaintiff contended that while it may be true that it is open to a client to withdraw a retainer, this does not mean that such withdrawal overrides other contractual relationships which may exist.

29. He cited as authority for this proposition the judgment of Fenton Atkinson J at page 588 of J.H. Milner & Son v. Percy Bilton Ltd [1996] 1 WLR 1582 :

“	In my judgment, if this was an agreement at all, it was not an entire contract.  It was an agreement to employ the solicitors in work of a certain class, which might extend over a period of years and involve legal work of various kinds, but it was a clear contemplation on both sides that bills would be rendered and paid as the matters proceeded; there would be no question of the solicitors’ having to wait for payment until they completed the whole of the lettings of these flats; and of course the client was getting benefit as matters proceeded.  So, what is the position as to the termination of retainer where there is no entire contract?  The view expressed in Cordery on Solicitors, 5th ed. (1961), p. 96, is that in such a case one of the ways in which a retainer may be determined, without giving rise to a breach of contract, is ‘by discharge by the client in the absence of any agreement to the contrary,’, and that, among other things, would cover the case, for examples, where a solicitor had been employed to act in certain matters for some particular fixed period of time, for one year or any given period; and I refer to Sir Thomas Lund’s article on solicitors in 36 Halsbury’s Laws of England, 3rd ed. (1961) p. 69, para. 98, where he is considering the period of retainer, and the view there expressed is ‘… that a term will also be implied enabling the client to withdraw the retainer at any time,’ and authorities are quoted in a footnote, all of which, I think, have been referred to by counsel.  In note (k) this appears :
	‘	If a contract is entire, then, unless a term is implied enabling a party to terminate it, termination thereof by a party before the time for performance is completed or has arrived gives the other party a right of action’;
	and there is a reference there to a well-known case of estate agents’ commission — George Trollope & Sons v. Martyn Brothers.  The note goes on :
	‘	This principle is applicable to a contract of retainer as to other contracts, but there is not, it is believed, any reported instance of a claim for damages having been advanced upon the withdrawal by the client of an indefinite retainer.’
	I understand the reference there to indefinite retainer to cover the case where there is a retainer but there is not an entire contract; and those passages read from Cordery on Solicitors and from Halsbury’s Law are the view that in fact I have taken of this case.” (My emphasis)

30. Mr Edward Chan also called in aid the observations made by Southin J in the British Columbia Supreme Court Case of Re Ladner Downs & Crowley,41 DLR (4^th) 403 1987 DLR Lexis 1956 at page 18 when after considering a number of English authorities he concluded at page 18 that “the relationship between solicitor and client is contractual” (although it may give rise to a liability in tort).

31. According to Mr Edward Chan what this all meant was that while it may well be true that a client can at any time withdraw a retainer, this does not mean that all other contractual considerations should be disregarded.

32. In the present case, his client had assumed a considerable risk in entering into the instant contract with the defendant.  There was amongst other considerations a risk that purchasers of the flats may not instruct his firm and instruct their own solicitors.  In addition to this, there was also the risk that if the flats were not all taken up by purchasers and HA was required to take them back after the 20-month period referred to in the scheme, they may use their own in-house lawyers for the purchase which may result in the plaintiff getting very little in the way of fees.

33. Mr Edward Chan also argued that the cases dealing with the rights of clients to terminate a retainer had limited application on account of the fact as explained earlier in this judgment, the defendant would not be paying any legal fees.  It was intended that these would be borne by the purchasers of the flats.  This being the case, many of the reasons or justifications referred to by various judges as to why clients should be able to withdraw a retainer would have no application as the work in question would for the most part be performed for the purchasers.

34. After giving this matter careful consideration, I have come to the conclusion that Mr Edward Chan’s submissions are well founded and that a term should be implied in the contract between the parties that business efficacy required that the defendant should be held to its bargain if the contract has not been frustrated.

35. I will now turn to the other question, namely whether the contract has been frustrated.

36. It was Mr Yu’s case that when the parties had entered into the contract in February 2000, it was clearly contemplated by everyone concerned that it would be subject to the PSPS.  The headings on the correspondence exchanged between the parties reflected this.  Certainly it was not envisaged that the scheme would be discontinued.

37. An important element of the scheme was that HA would nominate the purchasers and the price of each unit would be determined.

38. It was clear from the announcement that PSPS was being discontinued and that there was no prospect of it being resumed in the foreseeable future.

39. This being the case, the change in the Government’s policy meant that it was now impossible for the contract between the parties to be concluded as originally anticipated.

40. Mr Edward Chan’s answer to this was that if one had regard to the basic overall situation there had been no fundamental change.

41. The defendant had developed the land.  While it was true that the PSPS had been discontinued, it had nonetheless proved to be possible to obtain the Government’s permission to sell the flats on the open market.  As the flats could now be sold, it could not be said that the contract had been frustrated.  The only differences were that there was no restriction now on the price which could be charged for the flats and anyone who wished to purchase the flats could do so.

42. So far as the plaintiff was concerned, it would be a relatively simple matter for his firm to modify the conveyancing documentation so as to make it applicable to the changed circumstances.

43. What the plaintiff had been concerned with all along was simply the opportunity to undertake the conveyancing work for prospective purchasers.  As it now transpired there would be purchasers of the flats he just wished to have the benefit of the contract he had entered into with the defendant.

44. The test to determine whether or not the performance of a contract has been frustrated is conveniently encapsulated in the commentary at para. 23-007 in Volume I of the 29^th Edition of “Chitty on Contracts” Sweet & Maxwell 2004.  It reads :

“Introduction.  Although the existence of the doctrine of frustration is now firmly established, its juristic basis remains rather uncertain.  However in J. Lauritzen AS v. Wijsmuller BV (The Super Servant Two), Bingham L.J. set out the following five propositions which describe the essence of the doctrine.  These propositions, he stated, were ‘established by the highest authority’ and were ‘not open to question.’  The first proposition was that the doctrine of frustration has evolved ‘to mitigate the rigour of the common law’s insistence on literal performance of absolute promises’ and that its object was ‘to give effect to the demands of justice, to achieve a just and reasonable result, to do what is reasonable and fair, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances.’  Secondly, frustration operates to ‘kill the contract and discharge the parties from further liability under it’ and that therefore it cannot be ‘lightly invoked’ but must be kept within ‘very narrow limits and ought not to be extended.’  Thirdly, frustration brings a contract to an end ‘forthwith, without more ado automatically.’  Fourthly, ‘the essence of frustration is that it should not be due to the act or election of the party seeking to rely on it’ and it must be some ‘outside event or extraneous change of situation.’  Finally, a frustrating event must take place ‘without blame or fault on the side of the party seeking to rely on it.’”

45. I am satisfied that this is an accurate and complete statement of the law on this topic.

46. It will be noted that one important aspect of this doctrine is that it is necessary to have regard to the position at the time of the intervening event.  In the instant case, that is the Government’s announcement in November 2002.  It would also appear not to be permissible to have regard to what subsequently transpires because once it is established that the contract has been frustrated it comes to an end forthwith.

47. Accordingly it is necessary to consider the position as it was in November 2002.

48. At that time it was manifest that the PSPS scheme was being terminated and that the flats in the development could not be sold in accordance with the scheme.

49. On any realistic basis, the fact that the development was being undertaken as a PSPS scheme was of central importance and in my view went to the very root of the subject matter of the contract between the parties.

50. It is also clear that the discontinuance of the scheme could not in any way be held to have been contributed to by the defendant thus making them in no way to blame for what transpired.

51. In November 2002, it could not have been reasonably foreseen by anyone that the flats would in the future be sold in the private sector.  If thought had been given to this, the most probable outcome would have been that the flats would have reverted to HA and the plaintiff would have been unlikely to obtain the benefits from the contract he anticipated.

52. A further aspect of this matter is that it is not, in my view, proper to take cognizance of subsequent events whereby the defendant sought to mitigate losses.

53. Having regard to all of the evidence before me, I have come to the conclusion that the contract between the parties was indeed frustrated.

54. The consequence of this is that the defendant’s application for summary judgment is successful and I so order.  It is of course the case that the plaintiff is entitled to his fees on a quantum meruit basis but that is not a matter strictly speaking with which I am presently concerned.

55. I make an order nisi that the defendant will have their costs in this action.