CHAN MAN CHOI AND ANOTHER v. POON FOOK WAH AND ANOTHER

CACV 385/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 385 OF 2000

(ON APPEAL FROM HCA 4870 OF 1998)

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J U D G M E N T

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Hon Woo JA:

Background

1. This is an appeal by the defendants against the judgment of Deputy Judge Gill given on 14 July 2000 after a four-day trial.

2. The action arose out of a sale and purchase agreement dated 22 October 1997 ("the agreement") made between the defendants as vendors and the 1st plaintiff as purchaser in respect of a property known briefly as Shop J Shun Hing Building, Yuen Long, New Territories, which was a shop with a cockloft. The time fixed for completion of the transaction was 23 February 1998 by 5 p.m. On 6 January 1998, the 1st plaintiff notified the defendants that she nominated the 2nd plaintiff as the purchaser. On about 23 January 1998, the 1st plaintiff discovered, through the services of an architect retained by her, that the outer wall of the cockloft of the shop protruded beyond and outside the boundary of the building ("the structure"). As a result, requisitions were made as to whether the structure was legal and had been made with the approval and consent of the Building Authority. The Judge held that the defendants had not shown good title to the property because they had failed to show that the alleged "modifications" done by them purportedly to remove the structure prior to the completion date had been "properly, competently and completely performed". He therefore concluded that the 2nd plaintiff, as the nominee of the 1st plaintiff, had the right to rescind the agreement and ordered that the defendants refund to the 2nd plaintiff deposits amounting to $798,000 and liquidated damages in the sum of $45,870 together with interest and costs. From this judgment, the defendants now appeal.

3. The Judge identified three issues in his judgment. He said:

"... the issues are:

1. The plaintiffs having challenged the legality of the [structure] putting the defendants in potential breach of clause 22(a) of the ... agreement, had the defendants answered such requisition satisfactorily and in time?

2. If so, were the plaintiffs in any event entitled to call upon clause 19 and rescind or did the remedies if any lie in clause 21?

3. If the defendants succeed in their counterclaim is it as against the first plaintiff or second plaintiff?"

4. The conclusions of the Judge referred to above dealt with the first issue. He did not deal with the third issue, apparently because he had found on the first issue in favour of the plaintiffs. On the second issue, he said:

"For the sake of completion (sic) I should add that were the defendants to have shown and given good title the plaintiffs were not, in my view, entitled to rely on clause 19 and insist on Shop J being sold to them without demolition of the unauthorised structure. The last part of the last sentence may not be read in isolation from the rest of the clause. Clause 19 was designed to protect the defendants from having to improve the shop. Were the defendants to have responded properly to the plaintiff's requisition their, the plaintiffs' remedies, if any, would have lain in clause 21."

Relevant clauses in the agreement

5. The clauses of the agreement relevant for the determination of this appeal are set out below:

10.(a) The Vendor shall only be required to show and give a good title to the Property at his own expense in accordance with Section 13 of the Conveyancing and Property Ordinance (Cap. 219).

19. The Purchaser acknowledges that he has been invited to inspect the Property or has caused it to be inspected on his behalf and that he is entering into this Agreement on the basis of such inspection and of the terms hereof and not in reliance on any representation or warranty whatever written oral expressed or implied made by or on behalf of the Vendor. The Purchaser purchases with full knowledge of the physical condition of the Property and takes it as it stands. Therefore, the Property is and will be sold on an "as is" basis.

21.(a) No error, omission or misstatement herein or in any plan furnished or any statement made in the course of the negotiations leading to the contract shall annul the sale or entitle the Purchaser to be discharged from the purchase or any of his obligations hereunder. Any such error, omission or misstatement shown to be material shall entitle the Purchaser to proper compensation only.

(b) No immaterial error, omission or misstatement (including a mistake in any plan furnished for identification only) shall entitle either party to compensation.

(c) Sub-clause (a) shall not apply where compensation for any error, omission or misstatement shown to be material cannot be assessed nor enable either party to compel the other to accept or convey a property differing substantially (in quantity, quality, tenure or otherwise) from the Property agreed to be sold if the other party would be prejudiced by the difference.

(d) The Misrepresentation Ordinance applies to this Agreement.

22.(a) The Vendor hereby warrants and declares that there is no unauthorized or illegal structure or alteration in, to or above the Property or any part thereof and also that the Vendor has not received and is not aware of there being any notice from any Government or other competent authority requiring the Vendor to demolish or reinstate any part of the Property....

Grounds of appeal

6. By the notice of appeal, the defendants raised seven grounds, as follows:

1. The Judge erred in holding that the defendants had failed to satisfactorily answer the plaintiffs' requisition on title relating to the illegal structure which extended beyond the cockloft of the premises when the defendants had plainly shown the plaintiffs both by photographs and in writing that the unauthorized extension (the identity and location of which was never in dispute and were known to and not disputed between the parties) had wholly been removed well before completion.

2. The Judge erred in concluding that given the answer as stated in paragraph 1 above, the lack of candour and misrepresentation (the latter of which is denied) of law prevented such answer from being satisfactory.

3. The Judge erred in holding that the removal of the illegal extension "called into question the structural stability of the building" when there was no or no sufficient evidence to that effect.

4. The Judge erred in holding that the defendants as vendors had failed to show that the removal of the unauthorized extension had been properly, competently and completely performed when (a) that was never the subject matter of any requisitions by the plaintiffs; and (b) that there was no or no sufficient evidence that the works were not properly, competently and completely performed bearing in mind that the allegation was one of negative averment.

5. The Judge ought to have found that on a true and proper construction of clause 21 of the agreement, the plaintiffs were in any event not entitled to refuse to complete the sale and purchase even if, which is denied, there was error or misstatement in the agreement.

6. The Judge ought to have found on the evidence that as the 1st plaintiff was a trader in shop premises and the 2nd plaintiff was admittedly her nominee, by demolishing the illegal extension, the defendants would in the circumstances still have been able to substantially perform the contract, especially having regard to clause 21 of the agreement.

7. The Judge ought therefore to have found that the plaintiffs by refusing and/or failing to complete by the time of completion (time being of the essence) were in wrongful repudiation of the agreement.

The scope of the appeal

7. Mr Chain, for the defendants, clarified his position at the commencement of the hearing before us. He stated that the success of the appeal hinged on the resolution of both of two points in favour of the defendants, namely (1) the plaintiffs' requisition on the structure had been satisfactorily answered, and (2) the plaintiffs' remedy for the defendants' breach of clause 19 was limited by clause 21 to compensation and the plaintiffs were not entitled to rescind the agreement. It would not suffice if he only succeeded on one of these two points.

8. Mr Chain did not dispute the finding of the Judge that the structure was illegal, following the concession that he had made to the Judge in his closing address. There is no ground of appeal challenging the Judge's finding that the illegal structure was contrary to the title. Nor did Mr Chain raise any argument against the finding that the plaintiff's requisition was reasonably raised. He did not rely on the requisition being raised late or out of time either.

9. I now proceed to examine the issues in this appeal on these bases.

The requisition and grounds 1 to 4

10. Whether the requisition on the structure had been satisfactorily answered is raised in the first four grounds of appeal. By ground 1, the defendants challenge the Judge's finding that they had failed to satisfactorily answer the requisition. It is to be noted that before the Judge, as recorded in his judgment, Mr Chain, who also represented the defendants at trial, made what the Judge described as an "expected" concession in his closing address that the structure was illegal. The defendants' challenge to the Judge's finding relates to the sufficiency of the defendants' response to the plaintiffs' requisition.

11. The plaintiffs first raised the existence of the structure alleging it to be illegal in their solicitors' letter of 26 January 1998. A requisition was made by their solicitors' letter of 6 February 1998 in which was enclosed a copy of the report of the plaintiffs' architect on the structure. The letter then reads:

"In light of the said Report, kindly let us have the relevant approval and consent from the Building Authority so as to prove good title to the Property.

We reserve our right to raise further requisition on your reply."

12. The architect's report was a short one. After referring to the architect's inspection of the assignment plan registered in the Yuen Long Land Registry by Memorial No. 315848 dated 11 April 1986, it stated:

"It was found on site that the floor slab of cockloft floor was extended outward and enclosure walls were built over it.

That alteration work led to an increase in gross floor area and was contravening regulation 21 of Building (Planning) Regulations. The construction of that structure without getting prior approval and consent from the Building Authority was illegal and should have committed an offense.

Furthermore, that structure impose additional loading on the existing building and might impede its structural stability."

13. The defendants' solicitors sent a letter of 18 February 1998 to the plaintiffs' solicitors stating that the defendants did not agree with the allegation that the structure was unauthorized or with the contents of the report of the plaintiffs' architect. The letter went on:

"Having made out our stance clearly and without prejudice to our stance, in order to ease your client's worry, some modifications have been made in the property.

In the premises, our client believes that your client's worry has been eased and we are of the view that our client's title is good. A set of photograph is enclosed herewith for your reference."

14. There were in fact two photographs referred to in that letter and they now appear on p 119 or p 485 of the appeal bundle. The defendants place reliance on these photographs, as amounting to a satisfactory answer to the plaintiffs' requisition.

15. The "modifications" referred to in the letter of 18 February 1998 above referred to were not carried out in accordance with the requisition made by the plaintiffs' solicitors. They were made on the defendants' own volition. The photographs enclosed in that letter showed the shop front of Shop J from two angles. They appeared to show that the shop front was flush with the shop front of the neighbour in the same building. However, the sign on which the name of the shop was shown seemed to have jutted outside the boundary of the building. Mr Chain contended that these two photographs together with the letter of 18 February 1998 had plainly shown that the unauthorized extension had wholly been removed well before completion. It was recorded in the judgment that the evidence of the 1st defendant was that when the transaction fell through, the defendants had the extension rebuilt as before. The Judge conducted a site visit with the parties and their representatives and he viewed the property with the rebuilt extension. His findings are as follows:

"The shop is still owned by the defendants. It is one of a number having similar dimensions in Shun Hing Building. According to the plans each shop front is flush with its neighbours. Upstairs the front wall comprises an H beam about 18 inches in height with windows above. However Shop J does not conform. At ceiling height on the first floor a canopy spanning the width of the shop protrudes some four feet outwards. Side walls run from the canopy down to the ground. At the height of the H beam a steel plate extends outwards between the two side walls. The window above the H beam has been relocated between the front edges of the canopy, the side walls and steel plate. The result is an enclosure beyond and at the same height as the H beam with direct access from the cockloft, whose net useable area of 217.4 sq feet has been increased by an additional 31.4 sq feet. Downstairs the roller shutter at the shop's entrance has been relocated at the outer edge of the steel plate. The result is that the ground floor net useable area of 190.1 sq feet has been increased beyond the exterior of the building to the relocated shutter by an additional 25 sq feet."

16. On whether the requisition relating to the structure had been sufficiently answered the Judge had this to say:

"This proposition was considered by Yuen J in Leung Wing Fai v. Onlink Investments Limited [2000] 1 HKLRD 725. In that case, as here, the purchaser sought evidence that a particular structure was not illegal, stating the obvious that if it was the vendor's title was defective. The vendors on enquiry found the structure was illegal. Their solicitors wrote as follows:

We are of the view that there was no real possibility that the Crown would re-enter the above property and your client had knowledge of not only the existence of the said alleged illegal structure but the consequences of the existence of the said alleged illegal structure. We further opine that once the alleged illegal structure is re-instated back to its original position there will be no question of re-entry by the Crown.

The vendors then proceeded to have the offending structure demolished and looked to the purchaser to complete on due date. The purchaser refused, claiming the vendor had failed to show a good title.

Yuen J said at p. 729:

The question in this case is whether the demolition had been done before completion date, and whether it had been done properly. In both these respects, the burden is on the vendor to prove to the purchaser that the demolition had been done before the completion date, and that it had been done properly.

And at p. 730:

As I have said, the burden is on the vendor to prove to the purchaser that by the completion date of 29 December 1997 the demolition works had been completed. There was no such positive assertion by the vendor at any stage whether before or after completion.

More importantly there is no evidence that the demolition work had been properly done. A warning bell had been rung by the purchaser's architect in his letter dated 18 December 1997, and by a detailed second report prepared for the purposes of these proceedings, the architect has expounded on what needed to be done for proper demolition works.

...

There is no evidence from the vendor that the demolition works had been done properly in compliance with the matters referred to by the architect. There is no evidence that the work had been done under the supervision of the vendor's own architect, and it would appear from the documentary evidence that the vendor's own architect's scope of work had been limited to simply advising that the demolition be done. Given that the existence of unauthorised building works has been acknowledged, if the vendor were to say that such an unauthorised building work had been removed, the burden is on the vendor to show that the removal had been properly, competently and completely performed.

For this reason, I would declare that good title to the property had not been shown by the vendor defendant in accordance with the agreement when on 29 December 1997, no or no adequate evidence was put forward by the vendor to show that such demolition works had been properly and completely done.

I respectively agree with Yuen J's findings on the facts of the case tried before her.

Reverting to the case before me, the defendants did appoint their own architect to test the plaintiffs' challenge. But of course that was a wasted exercise given that by the time he arrived they had removed the extension. That itself was the clearest indication that they admitted its illegality, for why otherwise remove it? But instead of exhibiting candour as per Litton JA's direction in Active Keen, their solicitors wrote the letter of 18 February the relevant parts of which I have already reproduced on pages 9 and 10 of this judgment. Of course there is in that letter a patent misrepresentation of the law, for illegal structures are not limited to those the subject of 'any notice building order or whatsoever from the Government that the property is being affected by any unauthorized structure which can be disclosed in the land search record.'

The letter goes on to record:

'Having made out our stance clearly and without prejudice to our stance, in order to ease your client's worry some modifications have been made in the property.

In the premises our client believes that your client's worry has been eased and we are of the view that our client's title is good.'

Notwithstanding the lack of candour and misrepresentation of the law, does that paragraph amount to a proper answer to the plaintiffs' requisition?

The answer I suggest is a resounding 'No'.

The nature and extent of the illegal extension and the manner of the construction called into question the structural stability of the building. This is clear from Mr Lau's report and evidence. This necessitated, as in Leung Wing Fat, proper controls to ensure that structural stability was restored.

Madam Lam admitted that there were no such controls. The defendants' obligations extended a good deal beyond reporting 'some modifications have been made', expressing the belief 'your client's worry has been eased'. To show good title, the burden was on them to show that the removal of the unauthorised building work had been properly, competently and completely performed. And they failed to do so.

The result as I find is that the defendants did not answer the plaintiffs' requisition satisfactorily. This gave the second plaintiff as nominee of the first plaintiff the right to rescind the formal agreement and now to recover its loss under clause 15."

17. I am not persuaded that the Judge erred in the manner as described in ground 1 of the grounds of appeal or at all. Although the Judge did pass comment on the lack of candour and misrepresentation of law in the letter of 18 February 1998, the subject of ground 2 of appeal, I do not think that it can reasonably be inferred that the conclusion that he reached was based on these comments alone. I shall revert to ground 2 later.

18. Regarding ground 3, the Judge said:

"The nature and extent of the illegal extension and the manner of the construction called into question the structural stability of the building. This is clear from Mr Lau's report and evidence."

Mr Lau was the plaintiffs' architect referred to above. His report squarely raised the query as to structural stability of the building. The reaction of the plaintiffs to the photographs provided by the defendants was recorded in a letter of the plaintiffs' solicitors dated 21 February 1998:

"... it appears from the copy pictures as enclosed in your letter dated 18th February 1998 that there is still existing a structure extending/protruding outward from the cockloft of the Property which is obviously part of the said alteration work. Therefore, the issue of illegal structures remains unanswered by your client."

19. This should have drawn the attention of the defendants and their legal advisers as to the value of their photographs. However, despite the continuous requisitions made by the plaintiffs through their solicitors' letters, the defendants were content with the modifications they had made and did not ensure that the removal of the structure had been properly, competently and completely performed within a reasonable time before completion. As found by the Judge, they employed their own architect to test the plaintiffs' challenge, but they did not employ the architect to ensure that the removal was properly done.

20. As pointed out by Mr Tang SC, for the plaintiffs, the photographs indeed bear witness that the removal works had not been properly done. They show what appear to be remnants of steel bars coming out from the bottom of the canopy above the cockloft; at least these bars had not been removed.

21. From the content of the letter of 21 February 1998 cited above, it can be seen that the plaintiffs complained that the structure had not been properly, competently and completely removed. Their requisition relating to the structure continued and it was part of the duty of the defendants to show good title under clause 10(a) of the agreement and to respond satisfactorily. Evidence was adduced on how the removal work was done. The Judge had obviously considered it, and he summarised the 2nd defendant's evidence as follows:

"She said that prior to the demolition they had not sought the approval of the Building Authority, no authorised person was engaged to oversee the work and no structural engineer was appointed to check on structural stability.

After the transaction failed they decided to reinstate the extension and did so earlier this year in its original form. No prior approval was sought and no authorized person or other professional was engaged in the construction."

As the Judge found that that duty having not been performed properly, the defendants had failed to discharge their burden of showing good title. Ground 4 fails.

22. While Mr Chain did not make any submission to us that Yuen J's decision in Leung Wing Fai on which the Judge relied was wrong, he stressed that whether or not the removal was done properly, competently or completely, with or without the necessary approval of the Building Authority, that at most would be a matter of the defendants having committed an offence under the Buildings Ordinance but did not affect title. Mr Chain produced no authority in support of this contention. More importantly, I do not think that he should be allowed to raise this point because it was not a ground of appeal. Even if he were allowed to do so, I do not agree with it.

23. The letters written by the plaintiffs' solicitors raised the requisitions about the illegality of the structure. They requested the defendants to provide the approval of the Building Authority in order to prove that the structure was legal. When the defendants replied that they denied that the structure was illegal, they also notified the plaintiffs that they had removed the structure, enclosing the two photographs referred to above. The plaintiffs' solicitors then objected to the removal for it had taken away a part of the property agreed to be sold on an "as is" condition under clause 19 of the agreement. Unless the defendants admitted or accepted that the structure was illegal, and based on that told the plaintiffs that it was to be removed, such as a confession and avoidance, the plaintiffs were put in an unsure position as to whether they were able to rely on clause 19 and require the defendants to reinstate the structure. As said before, the report of the plaintiffs' architect a copy of which had been furnished to the defendants' solicitors had raised the point about the structural stability of the building, and the letter of 21 February 1998 from the plaintiffs' solicitors also informed the defendants of their reaction towards the said photographs. Once it is not disputed that the requisition was reasonably raised, and Mr Chain did not take any point on this before us, the question for the court's decision was whether the requisition had been satisfactorily answered. I do not think that the defendants are entitled now to say that the illegal structure having been removed, whether or not completely, competently or properly, it did not affect title. They had simply not satisfied the Judge that they had discharged the burden to show good title to the plaintiffs. It would be unjust to allow the defendants to take this point after what had been gone through in the correspondence in which the defendants steadfastly maintained their stance that the structure was not illegal.

24. Mr Tang submitted that it was not sufficient for the defendants to deny that the structure was illegal and then to say that "in order to ease your client's worry, some modifications have been made in the property". This answer and the other answers given by the defendants in the correspondence up to the time fixed for completion were equivocal, misleading and wrong. Mr Tang asked us to make comparison with Kok Chong Ho v Double Value Development Limited (CA 90/91, 5 December 1991, unreported) referred to by Litton JA (as he then was) in Active Keen Industries Limited v Fok Chi Keung [1994] 2 HKC 67 at 76A-D:

"That was another case of 'discrepancies' between the occupation permit and the plan annexed to the DMC and the recitals and descriptions therein. There, the court held that, in the circumstances of that case, the purchaser's solicitor had made a reasonable requisition as to title; even if there was no real risk of enforcement proceedings by the Building Authority, the vendor was not entitled to specific performance if he had not satisfactorily answered the requisitions raised by the purchaser. The court, in allowing the purchaser's appeal, held that the purchaser was entitled to rescind the agreement and recover the deposit. It is worth emphasizing that in Kok's case the vendor's solicitors contended that the flats had been authorized when plainly they had not, and the question as to whether the Building Authority might take 'enforcement action' was never raised by the vendor before the proceedings had begun: the court concluded (p 19) that 'by the time the agreement ... was rescinded ... it was too late for the vendor to rely on any evidence in support of exemption or relating to the enforcement practice of the Building Authority'."

25. In my opinion, the defendants were obliged to show good title and to answer requisitions as to title satisfactorily. Had they wanted to rely on clause 21 (dealt with below under grounds 5 and 6), they should have admitted that the structure was illegal and told the plaintiffs that they (the plaintiffs) were not entitled to rescind but only entitled to compensation under clause 21(a) if there was an error or misstatement about the legality of the structure and such error or misstatement was material. Having taken the stance, throughout, that the structure was not illegal, they cannot now be heard to say that the plaintiffs were in the circumstances only entitled to compensation at most but not to rescind. Their removal of the structure was not performed properly, and despite their now accepting that the structure was illegal, they had not answered the justifiable requisition of the plaintiffs satisfactorily and they had failed to show good title to disentitle the plaintiffs to rescind. The Judge probably made the finding of lack of candour on the part of the defendants and their misrepresentation, complained of by ground 2 of appeal, in this regard.

26. Mr Chain referred us to Active Keen and two other cases in support of his contention that the requisition had been sufficiently and satisfactorily answered in the circumstances of this case. In Active Keen, at 79B-E, Litton JA said:

"But assume the objection to have no substance. In such a case, as Godfrey J remarked, this presents considerable difficulties. Is it enough for the vendor to say, 'there is no substance in the purchaser's objection'? The judge answered this question as follows:

'If there is nothing the vendor can usefully add, I would hold that it is enough. Certainly, a sufficient answer to the purchaser's objection would have been this, "You will see from the deed of mutual covenant dated 21 March 1964, and from the assignment to the vendor's predecessor in title dated 16 July 1964, that the building of which this property forms part was laid out in its present arrangement some 28 years ago. The Building Authority is aware of the position and has raised no threat of enforcement proceedings. In the premises, the purchaser's objection is without substance."'

In my judgment, the judge's approach must in principle be correct. 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, although, obviously, if one party can persuade the other to his own point of view on the law, so much the better." (emphasis added)

27. Mr Chain also drew our attention to Mexon Holdings Ltd v Silver Bay International Ltd [2000] 1 HKLRD 935 where Litton PJ said at p 942F-J:

"A good title does not mean a perfect title, free from every possible blemish. Whenever a question like this arises, it must be approached from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain. If the purchaser, in truth, had a real concern over the way the 33rd floor had been partitioned in 1992, it could have written a letter to the Building Authority expressing its concern, upon the assumption that the Building Authority would act in a fair and reasonable manner. The purchaser's solicitors' letter of 6 November said they noticed that the architect's certificate did not specify that the partitioning did not 'contravene the fire regulations'. They did not say when they first noticed this fact. The director who later on made an affirmation in support of the purchaser's case did not in turn say when this matter had first come to his notice. Assuming it was shortly before the letter of 6 November was written, (not necessarily a sound assumption), there was still ample time for the matter to be clarified with the Building Authority. Instead the purchaser chose to put forward a case based upon surmise and conjecture as to what the Building Authority might do because of the alleged 'contravention of reg. 41(1)'. These are hardly the circumstances under which equity would go to the aid of an allegedly aggrieved party." (emphasis added)

28. At p 944D-H Bokhary PJ said:

"... This purchaser's requisition was raised out of time: almost fully five months after the expiration of the period fixed by the sale and purchase agreement for raising requisitions. It is therefore unnecessary to decide what the position would have been if the requisition had been raised within time. Whatever the position might then have been, I do not think that the purchaser can succeed in the actual circumstances of the present case.

Although it could have asked the Building Authority what attitude he took and then adduced evidence of his response, the purchaser has chosen instead to invite the Court to in effect proceed by way of surmise as to what the Building Authority might do. I doubt if that is a choice open to a purchaser who is out of time for raising requisitions and who asks the court in effect to relieve him of the ordinary contractual consequences of his lateness. Nor does the purchaser's difficulties end there. It is not adequately explained why its requisition was as late as it was. One cannot rule it out as a real possibility that the purchaser was watching the property market for a time before deciding to raise its requisition." (emphasis added)

29. Mr Chain relied on these judgments for the propositions that (a) whether a requisition as to title has been answered satisfactorily or sufficiently has to start on the premise that both the vendor and purchaser were willing parties to see the transaction through to completion, that (b) where the matter relating to the requisition is self-evident the threshold as to whether it has been sufficiently answered is lowered, and that (c) the court will not exercise its equitable powers to assist a purchaser who is merely watching the market as a speculator. I agree with these propositions. Proposition (c), however, must be examined in the circumstances of the case in which the judgments were given. In Mexon, the purchaser raised a very late requisition, long after the time allowed by the contract for it to do so, on the travel distance from the property agreed to be purchased to a fire resistant door, it being 22 metres, against the stipulation in the Code of Practice on Provisions of Means of Escape that such be 18 metres. It was in that context and in the special circumstances that Litton and Bokhary PJJ refused to allow the requisition of the purchaser to enable it to rescind the contract.

30. Mr Chain made the point that the 1st plaintiff and her nominee the 2nd plaintiff were speculators on commercial properties and at the beginning of 1998, when a downfall of the realty market commenced, they were merely raising the requisition concerning the illegal structure to enable themselves to get out of the agreement. They were therefore not willing purchasers wishing to see the transaction through to completion. Moreover, the subject matter of the requisition was self-evident and the plaintiffs must have appreciated how the answers from the defendants meant and the defendants' position on it.

31. These considerations cannot be looked at from the angle presented by one side. The whole circumstances of the case must be examined. The Judge made no finding that the plaintiffs were speculators. The evidence was that the 1st plaintiff agreed to buy the shop and let it back to the defendants for a year. The completion time, agreed by both parties, was set at about 5 months from the date of the agreement. I cannot say that the reasonable inference must be that the plaintiffs were speculators. The requisition about the illegal structure was raised after the time allowed for it in the agreement, but the defendants did not raise any objection as to lateness and indeed, as Mr Chain fairly conceded, had waived their right to so object by taking action in an attempt to remove the subject of the dispute. Even at the very late stage before completion date, the letter of 21 February 1998 from the plaintiff's solicitors to the defendants' solicitors above referred to contained the following:

"... your client has not yet sufficiently answered our requisitions and/or proved good title to the Property. In this regard, as our client is always willing, ready and able to purchase the Property which she has contracted for but not the modified one, our client is quite willing to accept an offer from your client to postpone the completion until your client could reinstate the Property to the physical condition as at the date of the Provisional Agreement for Sale and Purchase TOGETHER WITH the relevant valid approval from the Building Authority."

I am not prepared to infer from the evidence that the plaintiffs were not willing purchasers wishing to put through the deal. Until the very late concession before the Judge made by their counsel that the structure was illegal, the defendants had maintained their stance that they did not admit the structure being illegal. They even alleged that the structure was merely for decoration purpose and was never used as part of the property agreed to be sold. In my judgment, considering all the circumstances of this case, I am not persuaded that the Judge erred in any way in making the finding that the requisition had not been satisfactorily answered.

Grounds 5 and 6 - substantial performance

32. Regarding grounds 5 and 6, in my view, in a sense they merely confirm the Judge's ruling cited above when he dealt with the second issue that he had identified. However, these two grounds do not assist in reinforcing the other grounds of appeal or stultifying the finding that the requisition regarding the structure had not been satisfactorily answered. This is also implicit in Mr Chain's clarification made at the commencement of the hearing before us that the appeal would only succeed if the two points that he identified were decided in favour of the defendants.

33. Although there is no respondent's notice challenging this finding, counsel for both parties raised matters concerning the operation of clause 21, in relation to grounds 5 and 6. In my view, a reasonable reading of the second issue and the Judge's finding on it, set out in his judgment as cited above, is that had he not found against the defendants on the requisition issue, he would have found in favour of the defendants that the plaintiffs were not entitled to rescind but were only entitled to compensation under clause 21. However, both counsel appeared to share a different view, that the Judge only said that the plaintiffs' remedies laid in clause 21, he did not expressly make a finding whether the plaintiff was entitled to compensation under clause 21(a) or to rescind under clause 21(c). In deference to counsel's arguments, I shall state my views briefly, though these views are, in the light of my judgment on the requisition point, unnecessary for the determination of this appeal.

34. The arguments of counsel are based on the common ground that the structure was illegal. Mr Chain accepted that there was an error or misstatement about the structure being legal, because a warranty or declaration was made by the defendants in clause 22(a) that "there is no unauthorized or illegal structure or alteration in, to or above the Property or any part thereof". If the warranty that the structure was legal was a material error or misstatement, Mr Chain contended that the plaintiffs were only entitled to compensation under clause 21(a) but not to rescind. He submitted that the provisions of clause 21(c) for disapplying clause 21(a) require the satisfaction of one of two conditions, namely, that compensation for the error or misstatement shown to be material cannot be assessed or that the property to be conveyed without the error or misstatement is different substantially (in quantity, quality or tenure or otherwise) from the property agreed to be sold and the plaintiffs would be prejudiced by such difference. He submitted that these two conditions must be considered together. He asked us to decide whether the difference in the present case was substantial and whether the plaintiffs would be prejudiced by it.

35. In In re Contract between Fawcett and Holmes (1889) 42 Ch D 150, there was a misstatement that the property containing only 1,033 square yards contained 1,372 square yards. There was a condition that errors of description should not annul the sale, but that if they were pointed out before completion compensation should be allowed for them. The Court of Appeal held that the purchaser had got substantially what he had contracted to buy, that the deficiency of quantity, though considerable, did not so affect the substance of what he had bargained for so as take the case out of the condition, and that he must complete with compensation. At p 156 of the report, Lord Esher MR said:

"If the misdescription is within that condition the vendors must have specific performance allowing compensation. But if the error is such as not to be within the condition, it would be difficult to say that the vendor could have specific performance on the terms of giving compensation, unless the error is a trifling one.

The principal question, then, is, whether the error in the present case comes within the condition. It is contended on the one side that the condition applies, however great the error may be; it is contended on the other side that the condition only applies where the error is trifling. I think that neither view is right. Contracts, substantially in the same terms, have often been before the Courts, and have not been construed according to either of those extreme views. The Courts have said that such a condition is not applicable to every misdescription, for instance it would not apply to a fraudulent one, nor to one the compensation in respect of which could not be ascertained. Are there any other kinds of misdescription to which it will not apply? I think that in Flight v Booth (1 Bing. (N.C.) 370, 377), Tindal C.J., lays down a rule which is easy to be understood though often difficult of application. 'In this state of discrepancy between the decided cases, we think it is, at all events, a safe rule to adopt, that where the misdescription, although not proceeding from fraud, is in a material and substantial point, so far affecting the subject-matter of the contract that it may reasonably be supposed, that, but for such misdescription, the purchaser might never have entered into the contract at all, in such case the contract is avoided altogether, and the purchaser is not bound to resort to the clause of compensation.' This is a negative proposition, but a pregnant one. If the error is of such consequence that it may be reasonably supposed that but for the misdescription the purchaser would not have bought, the error is not within the condition. In each case therefore the question depends on the view of the Court as to the importance of the misdescription."

36. Mr Chain drew our attention to the fact that although the difference in area in Fawcett was about 25%, the Court of Appeal there affirmed the judgment of North J that that did not entitle the purchaser to refuse to complete, but only to compensation. He also referred us to Watson v Burton [1957] 1 WLR 19, which concerned a misstatement to the extent of 40% of the area agreed to be sold. Wynn-Parry J held that the difference was substantial and the purchaser had been prejudiced by the difference. Wynn-Parry J also said at p 27 of the report:

"On the review of the authorities I conclude, as I have said, that the question whether or not the difference is substantial is a matter which is left to the court to decide in each case."

37. On the facts, Mr Chain accepted that the illegal structure amounted to about 14% of the total area of the property agreed to be sold. Indeed, both the shop and cockloft had their areas reduced. He maintained that the misstatement must not be merely more than de minimis and contended that the difference was not substantial nor would the plaintiffs be prejudiced by it.

38. Mr Tang submitted that the two authorities, as properly understood, cannot be relied on to say that a difference of 25%, let alone 14%, in area was not substantial. Although in Fawcett, the Court of Appeal treated the misdescription creating a 25% difference in area as entitling the vendor to specific performance with compensation to the purchaser, Mr Tang directed our attention to the judgments of the two judges sitting with Lord Esher to demonstrate why the Court so held. At pp 158-159, Cotton LJ said:

"... It is said that the purchaser does not get nearly the quantity of land he bargained for, and that the discrepancy is so great as to take the case out of the condition as to compensation. The particulars contain a clear and correct description of what is sold, followed by a misdescription as to quantity. It appears to me that the misdescription does not affect the substance of what the Petitioner intended to purchase. The property was separated by a wall from the portions which Fawcett had sold. I do not say that such a difference of quantity as what exists here could not in any case alter the substance of what a purchaser intended to buy, but here, what he intended to buy was a well-defined and fenced-off property, consisting of a house, yard, and outbuildings. Now in Dyer v Hargrave (10 Ves. 505, 507) Sir W. Grant says, 'It is impossible to refuse a performance of this contract. It is much too late to contend, that every variance from the description will enable a man to resist the performance. The principle is, that if he gets substantially that, for which he bargains, he must take a compensation for a deficiency in the value.'" (emphasis added)

39. Fry LJ also concluded at p 160 that:

"In the present case, I think, the purchaser gets substantially what he contracted to buy, and must complete with a compensation for deficiency in quantity."

Mr Tang asked us to consider Fry LJ's judgment in the context of his observation made in the course of counsel's submission, at p 153:

"Here you get all you saw."

40. While Mr Tang accepted that it is for the court to decide whether a difference between the property agreed to be sold and the property as misdescribed is substantial and whether such difference would prejudice the affected party, he submitted that the court should first start by looking at the evidence of the subjective view of the affected party, if such evidence is available, and then examine whether such subjective view was justified or not in the circumstances. In such examination, the court should consider whether the subjective view had been reasonably held or not, and even in the absence of evidence of the subjective view, the court could and should examine all the circumstances of the case to decide if the difference is substantial and if the affected party would be prejudiced by it. He derived support from Fry LJ's utterance in the course of counsel's submission cited above. He also relied on a passage in Wynn-Parry J's judgment at p 28 of Watson v Burton, as follows:

"The defendant also told me that had he known the actual area of the property in question he would not have bid ￡4,000, or anything like that figure. Indeed, he told me he would have stopped bidding at about ￡3,000. I observe that in the statement of facts in Wittemore v Wittemore (L.R. 8 Eq. 603, 604) it is stated: 'The purchaser in his affidavit stated that he would not have purchased at that sum' - that was the purchase price - 'if he had known the actual area of the ground.' It seems to me that that is a circumstance to which I should give serious consideration. In the present case the defendant contracted for an area of 3,920 square yards, and upon that basis bid up to ￡4,000. In those circumstances I come to the conclusion that the defendant has proved the second condition in the proviso to paragraph 35 of the Law Society's Condition of Sale, 1953, namely, that he has been prejudiced by the misstatement."

41. I accept Mr Tang's submission as to how the court should approach the subject.

42. Mr Chain was vigilant to point out to us that paragraph 35 of the Law Society's Conditions of Sale in Watson v Burton was quite similar to clause 21(c) in this appeal, but that paragraph did not make provision for compensation. He also compared that with the provision dealt with in Fawcett, providing compensation only but no right to rescind. It appears to me what he was trying to say is that even 25% of difference in area would not prejudice the plaintiffs, let alone the 14%. He also stressed the fact that on the evidence the 1st plaintiff was buying the shop as a speculator and the 2nd plaintiff was but a vehicle for the 1st plaintiff to hold the shop. Insofar as the compensation was commensurate with the area diminished by the removal of the illegal structure, the difference was not substantial, and even if substantial, it would not prejudice the plaintiffs, because they would be fully compensated for it by an amount as decided by the court. He also referred us to the correspondence in which the defendants offered compensation to the plaintiffs.

43. I accept Mr Tang's submission that the "prejudice" in clause 21(c) should be considered by the court as not a prejudice that could be covered by the compensation referred to in that sub-clause, but instead should be the prejudice as would be encountered by the plaintiffs because of the difference between the property they contracted to buy with the misstatement as to the illegal structure and the property without the illegal structure. I think this is a more reasonable construction of clause 21(c). If, for example, there is a huge difference in the area caused by a misstatement in a contract, as in the case of Watson v Burton or even worse, where the price agreed is calculated at unit rate of the area as represented, then the compensation can be easily ascertained and if taken into account for reduction in the price as either offered by the vendor or decided by the court, no prejudice will ever be suffered by the purchaser. The prejudice under clause 21(c) therefore should be examined without taking into consideration the compensation aspect of the provision.

44. Mr Tang referred us to the testimony of the 1st plaintiff as summarised by the Judge although the Judge had not made any finding on it or stated whether he had accepted it. He asked us to look at this evidence as a starting point to consider whether clause 21(c) should apply to this case. The Judge said:

"When Mr Lau's (the architect's) report revealed the extension at the front of Shop J was an illegal structure and the defendants had carried out what their solicitors had referred to as modifications to it she professed no wish to complete, as the property was no longer what she had bargained for. An attractively presented frontage had been demolished. Some unsightly skeletal frame-work remained. More importantly and unpalatably the useable areas of both ground and first floors had been significantly reduced in size. To her mind the work unilaterally undertaken by the defendants had converted the shop from a good investment to an unsound one which deficiency could not be made good by a reduction in price."

45. If the Judge had by his decision on the second issue identified by him meant to have concluded that the plaintiffs were not entitled to rescind, I would hold that he erred in this respect. My view is that the 1st plaintiff would not have bought the shop for the price that she agreed to pay for it, as stated in the agreement, had she known that the structure extending the shop front as well as the front part of the cockloft was illegal, without which structure the area of the shop she contracted to buy would be reduced by 14%. The useable areas of the shop and the cockloft as contracted to be sold were respectively 215.1 square feet and 248.8 square feet, and the reduced areas were respectively 25 square feet ant 31.4 square feet. In respect of a small shop like this, the reductions are in any view significant. One also has to take into consideration the circumstances in Hong Kong where the price of properties is almost always linked to the unit rate for each square foot. I consider that this difference was substantial. I cannot see why the subjective view and the reasons of the 1st plaintiff herself would or should have been rejected by the Judge had he set his mind on them. I conclude that more probably than not, the difference would prejudice the plaintiffs. It follows that the situation should be within the ambit of clause 21(c) and that clause 21(a) should not apply.

46. Mr Chain also relied on Summit Link Ltd v Sunlink Group (HK) Co Ltd [2000] 2 HKLRD 724, which involved a pantry illegally built covering about 0.9% of the area agreed to be sold. The difference in area created by the removal of the pantry in that case was considered by this Court (differently constituted) as insubstantial. Mr Chain asked us to note that the Court's decision was made even though the question of the pantry was raised as a requisition and the vendor had it removed before completion on a without prejudice basis, without the consent of the purchaser and without admitting the illegality. I was one of the members of the Court in that case. As far as I can remember, no point was taken as to whether the removal of the illegal pantry before completion had been properly, competently or completely done, nor was any point taken as to whether the requisition on the pantry had been satisfactorily answered. This is also borne out by the whole judgment. That case does not help Mr Chain at all in respect of either requisition or substantial performance.

47. Nevertheless, my views above on substantial performance can only be obiter as a result of my judgment on grounds 1 to 4 and the concession of Mr Chain that even if he succeeded on substantial performance the appeal would not be decided in his favour unless he also succeeded on requisition.

Ground 7

48. Ground 7 is merely a wrap up ground, based on the success of the other grounds. In view of my judgment on grounds 1 to 4, ground 7 fails.

Conclusion

49. As grounds 1 to 4 and 7 fail, the appeal must be dismissed. I would make an order accordingly. I would also make an order nisi that the defendants do bear the costs of this appeal.

Hon Keith JA:

50. Subject to one reservation, I agree that this appeal should be dismissed for the reasons given by Woo JA. My reservation relates to the finding of fact which Woo JA makes as to whether the 1st Plaintiff would have bought the shop had she known that (a) the structure was illegal and (b) restoring the shop to its original proportions would have resulted in a loss of surface area of about 14%. I agree that what the 1st Plaintiff wanted the shop for is relevant to the question whether she was prejudiced by the breach of the warranty about the legality of the structure. However, if what she intended to do with the shop had been decisive to the outcome of this appeal, I would have wanted to remit the case back to the judge for him to make the appropriate findings of fact. As it is, that could no longer be decisive to the outcome of the appeal since the defendants' failure to upset the judge's finding that the requisition had not been satisfactorily answered has meant that this appeal has had to be dismissed on that ground alone.

Hon Wong JA:

51. I also agree that this appeal should be dismissed. The result is that the appeal is dismissed with an order nisi for costs to the plaintiffs.