TEAM MASTER LTD. v. TUNG FONG HUNG MEDICINE CO. LTD.

HCA 13944/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13944 OF 1998

____________

_______________

J U D G M E N T

_______________

1. The plaintiff and defendant are parties to a document headed Provisional Tenancy Agreement. Each claims the other has wrongfully repudiated it. The plaintiff sues for consequential loss. The defendant counterclaims for refund of a deposit paid.

Background

2. The plaintiff is Team Master Limited (Team Master). On 26 January 1998 it entered into an agreement to purchase shop premises in Yuen Long (the Shop). Completion was scheduled for 28 February 1998. The Shop was tenanted to the defendant Tung Fong Hung Medicine Company Limited (Tung Fong Hung) for two years expiring on 31 July 1998. The purchase by Team Master was subject to that tenancy. Also on 26 January, in anticipation of Team Master becoming the owner and landlord of the Shop, Team Master as landlord and Tung Fong Hung as tenant contracted to continue the tenancy for a further two years from the expiry date of the existing tenancy, by entering into the Provisional Tenancy Agreement to which I have referred. Pertinent terms of that document are the following:-

"2. The Landlord and Tenant agree to enter into the Formal Tenancy Agreement on or before 30 June 1998.

3. The term of the tenancy shall be 2 years from 1 August 1998.

5. The monthly rental for the said premises shall be $120,000 exclusive of rates, water, electricity, gas and management fees.

6. Rental deposit shall be $360,000.

8. Upon signing of the Formal Tenancy Agreement the Tenant shall pay

(a) the balance of the rental deposit of $360,000;

(b) the rent for the first month of $120,000.

13. The Landlord and Tenant agree that they shall separately appoint their own solicitors. The Landlord shall be represented by Messrs Tony Lam and Harrace Lau whereas the Tenant shall be represented by Messrs Vincent T K Cheung Yap & Co. Each party shall pay his own legal costs. The stamp duty shall be borne equally by the Landlord and the Tenant."

Alongside the word "Remarks" was recorded:-

"The above tenancy agreement shall take effect from the above property successfully purchased by Team Master Limited."

3. The document was signed for and on behalf of each party.

4. Team Master's purchase was completed on due date - 28 February 1998.

5. The next sequence of events was the exchange of letters between Messrs Tony Lam and Harrace Lau (Tony Lam) and Vincent T K Cheung Yap & Co. (Vincent Cheung) for the purpose of settling the terms of the Formal Tenancy Agreement referred to in clause 2. On 27 May Tony Lam sent a first draft inviting execution and return if in acceptable terms and $160,000 to satisfy clause 8(a) ($200,000 was already held by Team Master and counted as part payment). Vincent Cheung's response of 13 June was to return the draft with a large number of changes. The letter concluded with this paragraph:-

"Nothing contained in this letter or the draft Tenancy Agreement shall bind our client unless and until the same is signed by our client."

6. Tony Lam's next letter was to respond to the various changes proposed. Its final paragraph read as follows:-

"Without prejudice to the said Provisional Tenancy Agreement, nothing herein shall bind our client before signing and exchange of the finalised Tenancy Agreement."

7. A number of letters followed as the solicitors grappled to find common ground on the form the Formal Tenancy Agreement was to take. By 9 July the sticking points had been whittled down to the content of one clause. On that date Vincent Cheung proposed a revised wording. Tony Lam responded on 11 July, accepting that proposal. The letter is important in the context of these proceedings and I shall repeat the contents verbatim:-

"	11th July 1998
Re:	Tenancy Agreement of Shop A, Ground Floor, No. 161 Castle Peak Road, Yuen Long, New Territories.

We refer to your letter of 9th July 1998.

We are instructed that our client has no objection to your revised wording to clause 3(c) of our draft Tenancy Agreement as set out in your said letter.

We send you herewith the re-engrossed Tenancy Agreement. We write to confirm that the balance of the rental deposit and first month's rent payable under the new tenancy (after taking into account HK$200,000.00 existing rental deposit held under existing tenancy to be carried forward) shall be in the sum of HK$280,000.00 instead of HK$160,000.00 as per our cover of 27th May 1998. You are hereby requested to send us the re-engrossed Tenancy Agreement duly executed by your client on or before 5:00 p.m. on 15th July 1998 together with your cheque in the said sum drawn in favour of our client (as to which time shall be of the essence), failing which our client shall treat your client to have repudiated the Provisional Tenancy Agreement dated 26th January 1998.

Please also send us a cheque for $3,602.50 drawn in favour of the Government of the Hong Kong Special Administrative Region being your client's half share of stamp duty.

We reiterate the last paragraph of our letter of the 22nd June 1998 to you."

8. But by the deadline of 5 p.m. 15 July the Formal Tenancy Agreement had not been signed. Instead by letter of that date which was sent and received at about 5 p.m. Vincent Cheung wrote to Tony Lam the text of which I shall also repeat in full:-

"	15th July 1998
Re:	Tenancy Agreement of Shop A on the Ground Floor of Lin Won Building, No. 161 Castle Peak Road, Yuen Long, New Territories, Hong Kong ("the Property")

We refer to your letter dated 11th July 1998 and the subsequent telephone conversations between your Ms Keung and our Ada Tang today.

In order to show our client's sincerity, we send you herewith the following cheques being the amount payable by our client upon signing of the Tenancy Agreement of the Property in respect of the Property for your further action:-

1. HK$280,000.00 drawn in favour of "Team Master Limited" being balance of the rental deposit and the 1st month's rental in advance subject to your firm's undertaking to deal with the same in compliance with Clause 8 of the Provisional Tenancy Agreement dated 26th January 1998; and

2. HK$3,602.50 drawn in favour of "The Government of the Hong Kong Special Administrative Region" being half share of the stamp duty payable on the Tenancy Agreement."

9. Tony Lam's response of 16 July sent and received mid-morning was to note non-compliance with the deadline imposed and gave an extension to it to 5 p.m. that day, time being of the essence. Vincent Cheung replied the same day to the effect that the time limit was not acceptable and that their client was still reviewing the proposed terms of the Formal Tenancy Agreement. Still on the same day, after the deadline, Tony Lam wrote again the final four paragraphs of which I repeat verbatim:-

"

16th July 1998

......

Since your client has failed to execute and return the Tenancy Agreement to us before 5:00 p.m. today, our client treats your client to have repudiated the provisional agreement. Your client is hereby demanded to deliver up vacant possession to our client forthwith.

Our client shall take proceedings against your client to claim against your client for all loss and damage as may be suffered by our client as a result.

All our client's rights are expressly reserved.

We return herewith the cashier orders in the sum of HK$280,000.00 and HK$3,602.50."

10. Meanwhile Vincent Cheung had returned the draft Formal Tenancy Agreement with three clauses revised. Tony Lam responded to that on 17 July that they were unacceptable and that their client maintained its position as recorded above.

11. Vincent Cheung wrote by letter of 17 July refuting Team Master's claim that their client had repudiated the Provisional Tenancy Agreement, imposing their own deadline in paragraphs I repeat verbatim:-

"

17th July 1998

......

Accordingly, unless you shall withdraw the contents of your letter to us of today's date at or before 5:30 p.m. today, 17 July 1998, our client shall treat your client's insistence upon our client's execution of the existing form of the Tenancy Agreement, with various clauses which have not been agreed or accepted by our client under the Agreement incorporated, as a repudiatory breach of the Agreement on your client's part.

Meanwhile, all rights and remedies of our client against your client arising out of the matters noted above, whether under the Agreement or otherwise, are hereby expressly reserved.

We repeat and reiterate that our client has been and is always ready willing and able to perform its obligations set out in the Agreement."

12. Tony Lam by letter of 17 July declined to oblige. Vincent Cheung by letter of 18 July gave notice that their client regarded Team Master to be in repudiatory breach.

13. Nothing further was done or said. At or shortly after the expiry date of the existing tenancy Tung Fong Hung vacated the Shop. Team Master retained the $200,000 deposit.

The Pleadings

14. Team Master pleaded wrongful repudiation and claimed in damages for consequential loss, assessed by it to amount to $1,084,250 together with interest. Tung Fong Hung counterclaimed repudiatory breach and for the refund of the $200,000, and interest.

The Issue

15. Which party has repudiated the Provisional Tenancy Agreement, and is liable for the other's loss?

Conveyancing in Hong Kong

16. That question is best answered by my summarising first what in practice takes place when parties in Hong Kong want to buy and sell or let and take a tenancy of premises. Commonly they will be introduced by a broker who will then endeavour to get them to agree on the essential terms; price, completion date and so on if it is a sale and purchase, amount of rent, term and so on if it is a tenancy. He will have to hand a ready supply of agreement forms which will probably be described as provisional. If the parties can agree the essential terms he will incorporate these into the provisional form and get them to sign. There will likely be a clause requiring the parties by a given date prior to the completion date to sign a "formal" agreement to supersede the provisional. This is designed to be a much fuller document, comprising not only the essential terms as recorded in the provisional agreement but, ideally, the sort of safeguards that a prudent vendor and purchaser, or landlord and tenant as the case may be, properly advised, would require to be included to protect their interests. Usually there is also a further cash obligation to be met by the purchaser or tenant on the date the formal agreement is signed.

17. Of course the so-called provisional agreement's status depends on its wording as dictated by the intentions of the parties. But typically it is intended to be binding on the parties once signed. The benefit of that is apparent. The parties having agreed the essential terms can speedily commit themselves and thereafter proceed on the certainty of a binding contract, whilst then allowing their respective solicitors enough time to negotiate for them the terms of the formal agreement by which ultimately the parties will be bound. So the best of both worlds; speed and then, prior to completion, security.

18. All well and good if they are able to agree the terms of the formal agreement. But what if they cannot agree? This is not a fanciful scenario. The parties on advice may have diverse views on whether or not a clause should or should not be included, or the form it takes. In practice the solicitors, like the brokers, have standard forms and the parties after negotiation usually agree on the final terms. But this cannot be assumed. One or the other may, acting reasonably or unreasonably, refuse to sign.

19. What happens next is a matter of construction of the provisional agreement and the conduct of the parties in arriving at the impasse. Assuming the provisional agreement contains the essential details and provides no escape route, the parties will remain committed and bound to complete according to its terms. If a party refuses to do so he puts himself at risk of enforcement proceedings.

20. This proposition has been tested many times in the courts of Hong Kong. One example is the case of Lam Tam Yi & Another v. Chak Wai Man [1992-93] CPR 377. A purchaser and vendor were parties to a provisional agreement which contained the usual term that the parties would by a given date enter into a formal agreement at which time the purchaser would pay a further deposit. During the course of negotiating the terms of the formal agreement, the vendor unilaterally repudiated the provisional agreement. He claimed the provisional agreement was not a concluded and binding contract but even if it was it had been rescinded by subsequent correspondence, which made reference to the parties not being bound and that negotiations were subject to contract. The purchaser sued for specific performance.

21. Godfrey J (as he then was) allowed the claim.

22. The headnote to the case adequately sets out his reasons and the principle to which I have referred as follows:-

"(1) The provisional sale and purchase agreement was intended to take effect and did take effect as an immediately binding agreement for the sale and purchase of the property. It was true that it looked to the execution of a formal sale and purchase agreement and the terms of the agreement would have to be settled by the court in case the parties differ. The formal agreement will contain no more than what is required by the provisional agreement and such other terms as may be implied by law in order to give effect to that provisional agreement. There is no lack of certainty of terms. The question is one as to expressed intention. Daiman Development Sdn Bhd v. Mathew Lui Chin Teck [1981] 1 MLJ 56 followed.

(2) The correspondence between the solicitors treating the sale as 'subject to contract' and stating that the provisional agreement should not be a binding contract had no effect as a binding contract had by then already come into existence. The provisional agreement was not therefore rescinded by the correspondence.

(3) Once it is decided that the provisional sale and purchase agreement is not itself an agreement subject to contract, the obligation under it is to sign a contract of sale which implements a sale for which agreement has already been made."

23. But where the parties negotiate towards a formal agreement being executed and in the course of that one of the parties makes demands as to what is to be incorporated in it that are so unreasonable that he must be taken to be demonstrating an intention no longer to be bound by the contract into which he has already entered, he might well be held to have repudiated it.

24. In the case of Keung Shiu Tang v. D H Shuttlecocks Limited [1994-5] CPR 335, the parties were vendor and purchaser in a provisional agreement which called for the signing of a formal agreement. The purchaser proposed terms which the vendor not only did not agree with but found amounted to a repudiation. He refused to proceed and held as forfeited the deposit already paid. The purchaser won a suit of specific performance and the appeal against that decision was dismissed. Godfrey JA (as he then was) said at p. 360:-

"Speaking for myself, I can discern absolutely nothing in the correspondence to which I have referred which evinces an intention on the part of the purchaser to repudiate the contract. Quite the contrary; the purchaser was anxious to ensure he obtained the property.

If, during the course of the negotiations in these cases over the content of the formal sale and purchase agreement, one party or the other makes demands as to what is to go into the formal sale and purchase agreement which are so unreasonable that he must be taken to be demonstrating an intention no longer to be bound by the contract into which he has already entered, then he may well be held to have repudiated it.

But a repudiation is not to be lightly inferred. There is now a trilogy of cases in which the court has made it clear that the mere fact that you insist on what you think are your rights, even if you later turn out to have been wrong about that, is not to be treated as evincing an intention on your part to repudiate the contract. The earliest of the three cases I have mentioned was James Shaffer Ltd v. Findlay Durham & Brodie [1953] 1 WLR 106, in which Lord Justice Singleton (referring to a judgment of Lord Justice Atkin in an earlier case) said this:

After he had cited definitions of repudiation he added, 'They all come to the same thing, and they all amount at any rate to this, that it must be shown that the party to the contract made quite plain his own intention not to perform the contract.'

In the second case, Sweet & Maxwell Ltd v. Universal News Service Ltd [1964] 2 QB 699, Lord Justice Harman (at p. 703) said, in relation to the passage I have cited:

That again is the test, and judged by that test, I do not think the defendants in this case made it plain that they did not intend to perform the contract. It was attractively suggested that what they did was to say 'we will only perform the contract 'upon our terms and not on yours,' and that the contract they offered was a different contract from that which they were bound to perform and that, therefore, they repudiated. But I do not think that a person who maintains his view of the construction of what is, after all, a not very perspicuous document is repudiating because he says, 'my view of it is this, and this I will do' and the other man says, 'well, my view is different.' Let them go to the court and have the matter determined as they can. But to seize upon an attitude of that sort and call it repudiation in order to serve an object which was then of course dear to the hearts of the plaintiffs, who wanted to get rid of this deed, is not, in my opinion, justified, and I would therefore differ from the judge's view on that.

The Lord Justice went on to say, 'If there was no repudiation, there ought to be specific performance.'

In the third case, Woodar Investment Development Ltd v. Wimpey Construction UK Ltd [1980] 1 WLR 277, Lord Wilberforce, at p. 283, said that the proposition that a party who takes action relying simply on the terms of the contract and not manifesting by his conduct an ulterior intention to abandon it is not to be treated as repudiating it; and he agreed with what had been said in the James Shaffer Ltd case and the Sweet & Maxwell case.

Applying these well-settled principles of law to the facts of this case, I find myself entirely unable to come to the conclusion that here we should infer from the conduct of the purchaser an intention to repudiate the contract."

Liability

25. It is now for me to determine at whose feet, Team Master's or Tung Fong Hung's, the act of repudiation lies, by applying the principles to which I have referred.

26. The completion of Team Master's purchase of the Shop satisfied the condition to which the Provisional Tenancy Agreement was subject and it became binding on the parties. That is not in dispute. If the parties were not to have succeeded in reaching a consensus on the form of the Formal Tenancy Agreement (apart from the inclusion of the essential terms already agreed) then the parties would have been committed to proceed under the Provisional Tenancy Agreement with payment of the balance of deposit and first month's rental due under clause 8 deferred to completion date, the first day of the tenancy. This much is clear from Lam Tam Yi and similar authorities.

27. But clause 2 was there for a purpose and not to be ignored. Whilst the parties could not have been forced to agree terms not already settled an obligation arose that they negotiate towards that end and, in the doing, adopt a reasonable approach. That is what they did. Mr Chan representing Team Master said he counted 32 proposed amendments to the original draft that Tony Lam sent on 27 May. During the course of the exchange of correspondence those were whittled down to final acceptance as to form on 11 July. So, he submitted, the date by which the Formal Tenancy Agreement was scheduled to be completed, 30 June, having passed, Team Master was justified in imposing the deadline with time of the essence for the signing of the Formal Tenancy Agreement and payment of the moneys then due. Tung Fong Hung's refusal to do so within the time limit imposed in these circumstances and subsequent introduction of fresh demands for alteration of the Formal Tenancy Agreement constituted conduct so unreasonable as to give Team Master the right to treat that as repudiation.

28. The validity of that argument depends, or at any rate is influenced, by the parties' respective positions as at 11 July. At first blush it would seem that agreement had been reached committing them to sign the Formal Tenancy Agreement on those terms. But at the outset by their letter of 13 June Vincent Cheung took the precaution of making the negotiations subject to contract, a safeguard Tony Lam also preserved for their client by letter of 22 June. These words are not meaningless legal mumbo jumbo. They ensure that whatever is said or transpires during the course of the negotiations the party in question will not be bound until the Formal Tenancy Agreement is actually signed.

29. So there could have been no agreement until pen was put to paper, and that had not happened at the time of Tony Lam's letter of 11 July. It follows that it was not open to Team Master unilaterally to impose a time limit, make time of the essence and then pronounce non-compliance as repudiation by Tung Fong Hung. This would be tantamount to saying:- "We insist we come to agreement by a given time. If we do not we shall treat that as your repudiating our bargain."

30. But was Tung Fong Hung in any event behaving unreasonably by bringing fresh negotiations to the table after apparent consensus had been reached? Had it by that made demands on the form of the Formal Tenancy Agreement which were so unreasonable that it must be taken to be demonstrating an intention no longer to be bound in contract? As Godfrey JA said, that cannot be lightly inferred. By the letter of 15 July Vincent Cheung demonstrated their client's good faith by inviting Tony Lam to be stakeholder for the moneys due and payable under clause 8 pending signing of the Formal Tenancy Agreement. None of the additional amendments sought were in any way untoward. Tung Fong Hung was doing no more than having second thoughts on what it wanted incorporated into the Formal Tenancy Agreement, a right to which it was wholly entitled, that having been reserved by both parties at the outset. To put beyond doubt Tung Fong Hung's intentions concerning completion, I record verbatim the last paragraphs of Vincent Cheung's letter of 16 July:-

"

16th July 1998

......

Pending the agreement and settlement of the terms and conditions of the Tenancy Agreement between our respective clients, the Agreement remains as the agreement between our respective clients concerning the leasing of the premises noted therein.

We look forward to receiving from you the engrossment of the Tenancy Agreement, with the amendments set out in the enclosed Tenancy Agreement incorporated, for our further handling as soon as possible.

Please note that our client has been and is always ready willing and able to perform its obligations set out in the Agreement."

31. That final sentence speaks for itself. There was nothing at all to infer from Tung Fong Hung's conduct an intention to repudiate.

32. I find that Tung Fong Hung did not repudiate the contract. It follows that Team Master did. The answer to the question posed, being the issue to be resolved, is Team Master, and it must be held to account accordingly.

Quantum

33. There is no dispute between the parties on quantum that Tung Fong Hung should be entitled to a refund of the deposit should, as has transpired, it succeed on liability. Judgment follows.

Judgment

34. The plaintiff's claim is dismissed.

35. There shall be judgment in favour of the defendant on the counterclaim for $200,000 together with interest thereon at 8% per annum from 18 July 1998 to the date of this judgment of $30,641.

36. Costs shall be to the defendant taxed if not agreed.

37. The order for costs shall be nisi at first instance.