XCHRX CITY FAMOUS LTD. v. PROFILE PROPERTY LTD.

HCA7926/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7926 OF 1998

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J U D G M E N T

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The facts

1. By an agreement dated 30th September 1997 ("the Principal Agreement"), the Plaintiff agreed to buy from Joylane Limited ("the Head Vendor") 21 shops in Portion B on the Ground Floor of the Commercial Development, Locwood Court, Kingswood Villas, No.1 Tin Wu Road, Tin Shui Wai, Yuen Long, New Territories. The completion date was 30th June 1998 and the purchase price of HK$104,903,000 was to be paid by instalments of which HK$5,245,150 was to be paid within 120 days from 30th September 1997 i.e. on 28th January 1998.

2. After entering into the Principal Agreement, the Plaintiff entered into three agreements for sub-sale and sub-purchase, all dated 3rd October 1997 ("the Sub-sale Agreements") in which the Plaintiff as vendor agreed to sell and the Defendant as purchaser agreed to purchase some of the shops referred to in the Principal Agreement for the total price of HK$25,616,500. The Sub-sale Agreements were varied by supplemental agreements dated 5th December 1997 and 18th March 1998 regarding the time of payment of the purchase price.

3. By a supplemental agreement dated 27th January 1998 ("the Supplemental Agreement") entered into between the Head Vendor and the Plaintiff, the parties agreed that the sum of HK$5,245,150 was to be paid on 30th June 1998, i.e. at the time of the completion of the sale instead of on 28th January 1998. The other terms of payment remained unchanged.

4. Under the Sub-sale Agreements as varied, the Defendant had to make payment to the Plaintiff in the sums of HK$500,000, HK$390,000 and HK$110,000 respectively on or before 15th May 1998.

5. By a letter dated 7th May 1998 (and three subsequent letters) the Defendant's solicitors requested the Plaintiff to produce documentary evidence that it had duly paid the sum of HK$5,245,150 to the Head Vendor on or before 28th January 1998 as agreed under the Principal Agreement. The Plaintiff's solicitors informed the Defendant's solicitors that the sum had been postponed to 30th June 1998 as agreed by the Head Vendor.

6. By a letter dated 15th May 1998, the Defendant's solicitors alleged that the Plaintiff had repudiated the Sub-sale Agreements in that it had breached Clause 14.01(c) of the Sub-sale Agreements by modifying or amending the manner of payment under the Principal Agreement without the prior written consent of the Defendant. The Defendant accepted the repudiation, rescinded the Sub-sale Agreements and demanded the return of $3,061,650 paid by the Defendant under the Sub-sale Agreements.

7. By a letter dated 15th May 1998, the Plaintiff's solicitors alleged that the Defendant had failed to make further payments under the Sub-sale Agreements on 15th May 1998 and accepted the Defendant's repudiation of the Sub-sale Agreements.

The applications

8. The Plaintiff applied for summary judgment for, among other relief, a declaration that the three Sub-sale Agreements between the Plaintiff and the Defendant had been validly terminated by the Plaintiff, and the Plaintiff is entitled to forfeit the deposits of $2,561,650 paid under the Sub-sale Agreements and damages to be assessed.

9. The Defendant also issued a summons under O.29, r.2 and the inherent jurisdiction of the court for an order that the Plaintiff be ordered to pay the sum of $3,061,650 into Court.

Clause 14.01

10. The Sub-sale Agreements provide, inter alia, that time shall be of the essence of the Agreement (Clause 6.01). Clause 14.01 further provides that :-

"14. PERFORMANCE OF THE PRINCIPAL AGREEMENT

14.01 The Vendor hereby agrees and undertakes with the Purchaser that :-

(a) the Vendor has up to the date hereof observed and performed and will perform and observe all the terms and conditions on his part as purchaser as contained in the Principal Agreement; and

(b) in the event of any breach or non-performance of any term or conditions in the Principal Agreement on the part of the Head Vendor, the Vendor will without prejudice to any other rights or remedies of the Purchaser hereunder, upon being required by the Purchaser so to do, (at the cost and expense of the Purchaser and subject to the indemnity hereinafter contained) take all necessary steps and actions to procure the due performance and observance by the Head Vendor of its obligation and the terms and conditions under the Principal Agreement Provided that the Purchaser shall reasonably indemnify the Vendor against all losses, costs, expenses, claims, damages, liabilities and actions which the Vendor may incur or sustain as a result of taking any such step or action.

(c) The Vendor shall not without the prior written consent of the Purchaser make or agree to any modification or amendment of the Principal Agreement or agree to waive or to release any of the obligations of the Head Vendor under the Principal Agreement.

14.02 In the event of the Vendor becoming entitled to exercise any right of rescission under the Principal Agreement, the Vendor shall, within 1 day after the Vendor becomes aware of the existence of such right, notify the Purchaser in writing of such right of rescission, and irrespective of whether or not such notice has been given by the Vendor, the Purchaser shall, notwithstanding any provisions herein contained to the contrary, be entitled to rescind this Agreement by serving written notice of rescission of the Vendor. In addition, the Purchaser shall be entitled within 4 days after the receipt of such notification by the Vendor to direct the Vendor in writing to refrain from exercising such right of rescission and the Vendor shall not exercise any right of rescission under the Principal Agreement unless the direction is revoked by the Purchaser or unless the Purchaser shall fail to give any direction to the Vendor within 4 days of receipt of the Vendor's notice under this clause, in which event, the Vendor shall be entitled to exercise or to refrain from exercising such right of rescission as the Vendor may think fit.

14.03 The Purchaser shall reasonably indemnify the Vendor against all losses, costs, expenses, damages, liabilities, claims and actions which the Vendor may incur or sustain as a result of the Vendor refraining from exercising any right of rescission under the Principal Agreement pursuant to the direction of the Purchaser.

14.04 The Purchaser shall not be entitled to exercise the right of rescission under Clause 14.02 above if (a) the Purchaser has given direction to the Vendor to refrain from exercising any right of rescission under the Principal Agreement, (b) such direction remains unrevoked and (c) the Vendor has not acted contrary to such direction.

14.05 In the event of the Purchaser serving notice of rescission on the Vendor pursuant to Clause 14.02 above or in the event of the Vendor exercising any right of rescission under the Principal Agreement where the Purchaser has failed to give any direction pursuant to Clause 14.02 above or such direction has been revoked by the Purchaser, then, (without prejudice to the rights of the Vendor under Clause 14.03 above), this Agreement shall be rescinded whereupon the provision of Clause 18 hereof shall apply, mutatis mutandis, to the return of the Deposit and Further Payment."

The issue

11. The issue in this case is whether the amendment of the Principal Agreement without the written consent of the Defendant constituted a repudiation on the part of the Plaintiff on the Sub-sale Agreements which entitled the Defendant to rescind the Sub-sale Agreements. This depends on the construction of Clause 14.01(c). The clause may be construed either as a condition, a breach by the Plaintiff will amount to a repudiation of the Sub-sale Agreements and entitle the Defendant to rescind, or the clause may be in the nature of a warranty, a breach by the Plaintiff will only entitle the Defendant to seek damages, or the clause may be in the nature of an intermediate term and the remedies available to the Defendant will depend on the consequence of the breach.

Illustrations of a term construed as a condition

12. A succinct summary is contained in Chitty on Contract, 27th Ed., Vol. 1, Para 12-038 on the situations in which a term of a contract will be held to be a condition:

(i) if it is expressly so provided by statute;

(ii) if it has been so categorised as the result of previous judicial decision (although it has been said that some of the decisions on this matter are excessively technical and are open to re-examination by the House of Lords);

(iii) if it is so designated in the contract or if the consequences of its breach, that is, the right of the innocent party to treat himself as discharged, are provided for expressly in the contract; or

(iv) if the nature of the contract or the subject-matter or the circumstances of the case lead to the conclusion that the parties must, by necessary implication, have intended that the innocent party would be discharged from further performance of his obligations in the event that the term was not fully and precisely complied with.

Otherwise a term of a contract will be considered to be an intermediate term. Failure to perform such a term will ordinarily entitle the party not in default to treat himself as discharged only if the effect of breach of the term deprives him of substantially the whole benefit which it was intended that he should obtain from the contract.

The Plaintiff's approach

13. The Plaintiff is prepared to accept, for the purpose of the summary judgment application, that the Principal Agreement had been varied by the Plaintiff without the prior written consent of the Defendant. Mr Edward Chan, S.C., Counsel for the Plaintiff, submitted that Clause 14.01(c) was in the nature of an intermediate term. The consequence of breach by the Plaintiff did not entitle the Defendant to rescind the Sub-sale Agreements. Despite the criticism of Miss To, Counsel for the Defendant, on the approach adopted by Mr Chan, there really is no difference in the approach urged upon me by the parties in this case. The proper approach is one of the construction of the clause. In Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 QB 26, Upjohn LJ at page 64 stated that :

"... Where, however, upon the true construction of the contract, the parties have not made a particular stipulation a condition, it would in my judgment be unsound and misleading to conclude that, being a warranty, damages is necessarily a sufficient remedy.

In my judgment the remedies open to the innocent party for breach of a stipulation which is not a condition strictly so called, depend entirely upon the nature of the breach and its foreseeable consequences. Breaches of stipulation fall, naturally, into two classes. First there is the case where the owner by his conduct indicates that he considers himself no longer bound to perform his part of the contract; in that case, of course, the charterer may accept the repudiation and treat the contract as at an end. The second class of case is, of course, the more usual one and that is where, due to misfortune such as the perils of the sea, engine failures, incompetence of the crew and so on, the owner is unable to perform a particular stipulation precisely in accordance with the terms of the contract try he never so hard to remedy it. In that case the question to be answered is, does the breach of the stipulation go so much to the root of the contract that it makes further commercial performance of the contract impossible, or in other words is the whole contract frustrated? If yea, the innocent party may treat the contract as at an end. If nay, his claim sounds in damages only."

Criticism of Hongkong Fir

14. Miss To, referred to the speech of Lord Roskill in Bunge Corporation, New York v. Tradax Export S.A. Panama [1981] 1 WLR 711 at page 725 where he stated that :

" My Lords, I find nothing in the judgment of Diplock L.J. in the Hongkong Fir case [1962] 2 Q.B. 26 which suggests any departure from the basic and long standing rules for determining whether a particular term in a contract is or is not a condition and there is much in the judgment of Sellers L.J. with which Upjohn L.J. expressly agreed, to show that those rules are still good law and should be maintained. They are enshrined in the oft quoted judgment of Bowen L.J. in Bentsen v. Taylor, Sons & Co. [1893] 2 Q.B. 274, 281 :

'There is no way of deciding that question except by looking at the contract in the light of the surrounding circumstances, and then making up one's mind whether the intention of the parties, as gathered from the instrument itself, will best be carried out by treating the promise as a warranty sounding only in damages, or as a condition precedent by the failure to perform which the other party is relieved of his liability.'

That well-known passage will be found quoted by Sellers L.J. in the Hongkong Fir case [1962] 2 Q.B. 26, 60. I would add a reference in this connection to the judgment of Scrutton L.J. in In re Comptoir Commercial Anversois and Power, Son & Co. [1920] 1 K.B. 868,899, where he added to the statements of the same principle in the Exchequer Chamber in Behn v. Burness (1863) 3 B. & S. 751 and in Oppenheim v. Fraser (1876) 34 L.T. 524 his own great authority."

In my view what Lord Roskill said was not a criticism of the approach in Hongkong Fir. It was in response to the test suggested by the appellants in that case, namely, one must consider the breach actually committed and then decide whether that default would deprive the party not in default of substantially the whole benefit of the contract : see the speech of Lord Wilberforce at page 715.

Defendant's submission

15. Miss To in a very persuasive submission argued that the clause was drafted by the Plaintiff with words expressed in sufficiently definite, imperative and unqualified terms. It is plain and clear from the ordinary meaning of the words that any kind of variation is prohibited and not restricted to those which would release the Head Vendor's obligations. The effect is to allow the Defendant to have full control on how transactions were to take place between the Head Vendor and the Plaintiff. As the main purpose of the Sub-sale Agreements was for the sale and purchase of the shops, it is rather peculiar and unusual for a sub-purchaser to impose on a sub-vendor obligations to make sure that the sub-vendor would perform his contract with the head-vendor in a fixed manner. Hence the deliberate inclusion of Clause 14.01(c) by the parties demonstrated that the stipulation is so vital to the contract that its complete and exact performance by one party was a condition precedent to the obligation of the other party to perform his part. The Defendant also argued that it was not acting unreasonably because all that it had insisted upon was for the Plaintiff complying with the original terms of the Principal Agreement with the Head Vendor.

My construction

16. It is clear from a reading of the whole of Clause 14 that the Defendant was given wide power to direct the Plaintiff how to deal with the Head Vendor in different situations. However, I am unable to accept the Defendant's argument that because the Defendant was given such a wide power, Clause 14.01(c) must necessarily be construed as a condition. Nor do I accept the argument of the Plaintiff that the clause would only be construed as a condition in the event that the Plaintiff waived or released the Head Vendor's obligation under the Principal Agreement. In my view, because of the width of Clause 14.01(c), I cannot imagine that the parties had truly intended that the slightest trivial breach by the Plaintiff of that clause would constitute a repudiation. Assistance can be obtained from the following :

"A term is most likely to be classified as intermediate if it is capable of being broken either in a manner that is trivial and capable of remedy by an award of damages or in a way that is so fundamental as to undermine the whole contract"- Chitty on Contracts, 27th Ed. Vol.1, Para.12-033.

17. In Wickman Machine Tools Sales Ltd. v. Schuler A.G. [1974] AC 235, Lord Reid at page 251 stated that :

" The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear."

18. In my view, this clause comes squarely within the ambit of an intermediate clause and the consequence of a breach will depend on the nature of the breach. It is an intermediate clause because it is capable of being broken in a trivial way or in a fundamental manner. The modification of the payment terms under the Principal Agreement does not affect, in any way, the performance of the Plaintiff towards the Defendant in the Sub-sale Agreements. The modification does not render the Plaintiff being unable to perform the Sub-sale Agreements.

Other arguments

19. Miss To further argued that where the likely effect of a breach of a contractual term is serious loss or damage for the promisee, this will be a strong indication that the term is a condition. In the present case, breach of Clause 14.01(c) can be attained by grave consequences. Bowen LJ in Bentsen v. Taylor, Sons & Co. [1893] QBD 274 held that :

"... In order to decide this question of construction, one of the first things you would look to is, to what extent the accuracy of the statement the truth of what is promised would be likely to affect the substance and foundation of the adventure which the contract is intended to carry out."

In my view, this statement does not assist the Defendant at all. The amendment of the Principal Agreement in this particular transaction in breach of the clause would not affect the substance and foundation of the contract between the Plaintiff and the Defendant.

20. Miss To further argued that the difficulty in assessing damages is an indication in favour of construing the clause as a condition. She submitted that this is plainly the situation in this case : see Lord Lowry in Bunge at p.720 F and Mcdougall v. Aeromarine of Emsworth Ltd. [1958] 1 WLR 1126 at 1133. The problem with assessing damages is clearly one of the factors to be taken into account. However, in the present case, the breach by the Plaintiff would, in my view, only entitle the Defendant to have nominal damages.

Triable issue ?

21. Miss To argued that this being an application for summary judgment, the Defendant has at least raised a triable issue that Clause 14.01(c) may amount to a condition and hence the Defendant should be given leave to defend. While there is some attraction in this argument, ultimately the question is simply one of the construction of a clause of the Sub-sale Agreements. The task of construction is the same whether it is to be done at this stage or at the trial. In my view no useful purpose is served by deferring the issue to a later stage.

The Defendant's application for the money to be paid into Court

22. Defendant's application is clearly misconceived. The dispute between the Plaintiff and the Defendant is not over the ownership of a sum of money. There really is no property or subject matter in dispute which would give rise to the application of O.29, r.2 which deals with the preservation of the subject matter of the cause. Furthermore, there is no inherent jurisdiction to order the Plaintiff to make payment into Court. What the Defendant in effect is seeking is to ask the Plaintiff to furnish security for a judgment which it has not yet obtained. There simply is no jurisdiction by the Court to make such an order.

Conclusion

23. In the circumstances, the Plaintiff is entitled to its claim for summary judgment. The damages will, of course, have to be assessed. The Plaintiff is entitled to costs nisi of the application for summary judgment. The Defendant's application is dismissed with costs to the Plaintiff.