LUK STANLEY HO CHANG v. FOOK MAN FINANCE CO LTD

CACV 131/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 131 OF 2006

(ON APPEAL FROM HCMP NO. 1808 OF 2005)

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REASONS FOR JUDGMENT

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Hon Cheung JA :

1. I agree with the reasons for judgment given by Sakhrani J.

Hon Yuen JA :

2. I agree with the reasons given by Sakhrani J.

Hon Sakhrani J :

3. On 8 December 2006 we dismissed the defendant’s appeal from the judgment of Deputy Judge Muttrie dated 8 February 2006 with costs to the plaintiff.  We indicated at the time that reasons in writing would be given later.  These are my reasons for dismissing the defendant’s appeal.

The facts

4. These proceedings concern Flat A on the 4^th Floor, Kam Kok Mansion, 82-84 Kimberley Road, Kowloon (“the said premises”).

5. By a sale and purchase agreement dated 26 July 2005 made between the plaintiff as purchaser and the defendant as vendor the defendant agreed to sell the said premises to the plaintiff at a price of $2,350,000 (“the Agreement”).  Completion was to be on or before 25 August 2005.  By clause 13 time was of the essence of the Agreement.

6. After the Agreement was entered into but prior to completion the plaintiff discovered that the Incorporated Owners of Kam Kwok Mansion (“the IO”) had at a meeting held on 4 July 2005 passed resolutions to carry out major repairs to the building and also to replace the lift.  The plaintiff claimed that by virtue of clause 18 of the Agreement the defendant was responsible to pay for contributions for the cost of the works.  The defendant disagreed.

7. The plaintiff offered to complete subject to :

(1) the deduction of the estimated cost of $80,000 from the purchase price which sum would be held by the defendant’s solicitors as stakeholder; and

(2) the defendant’s solicitors’ undertaking to release to the plaintiff’s solicitors within seven days of demand the said sum of $80,000 or an appropriate part thereof as shall be requested by the IO and if the said sum of $80,000 were insufficient, then to secure any deficit from the defendant and arrange payment to the plaintiff’s solicitors within 14 days of demand.

8. This was refused by the defendant.  The defendant denied that it was responsible to pay for the share of the cost of the works and insisted on full payment of the balance of the purchase price on completion.

9. Completion did not take place.  The defendant purported to forfeit the deposits already paid.

The proceedings

10. The plaintiff issued a vendor and purchaser summons on 25 August 2005 the date of completion.

11. The Originating Summons (“the OS”) was amended on 5 November 2005.  By the amended OS the plaintiff sought the following declarations:

“1.     A declaration that the Defendant is obliged under the terms of the Agreement for Sale and Purchase of the premises known as “Flat A on 4^th Floor, Kam Kok Mansion, Nos. 82-84 Kimberley Road, Kowloon, Hong Kong” dated the 26^th day of July 2005 to bear and pay its share (“the Share”) of the costs of the works in connection with or arising out of the resolutions of the Incorporated Owners of Kam Kok Mansion passed on the 4^th day of July 2005.

2.        A declaration that the Plaintiff is not obliged to complete the purchase of the said premises or tender the balance of the purchase price for the said premises to the Defendant or its solicitors unless and until the Defendant has borne and paid the Share or the Defendant’s liability to bear and pay the Share has been secured by provision of a bank guarantee or solicitors’ undertaking acceptable to the Plaintiff.

3.        In the event of the Defendant’s failure or refusal to bear and pay the Share or provide the bank guarantee or solicitors’ undertaking to secure its liability to bear and pay the Share, a declaration that the Plaintiff is entitled to deduct the sum of HK$80,000.00 being the best estimate of the Share (or such other sum as more accurately reflects the Share) from the balance of purchase price payable to the Defendant when tendering the balance to the Defendant for completion.”

12. The matter came before the Judge and by his judgment dated 8 February 2006 he gave judgment for the plaintiff in the terms of the 1^st and 2^nd declarations as set out above and in the terms of the 3^rd declaration as amended as follows:

“ In the event of the defendant’s failure or refusal to bear and pay the Share, a declaration that the plaintiff is entitled to deduct the sum of HK$72,000.00 from the balance of purchase price payable to the defendant when tendering the balance to the defendant for completion.” 

13. The Judge also made an order nisi that the costs of the proceedings be to the plaintiff to be taxed if not agreed.

The appeal

14. This is the defendant’s appeal against the judgment of the Judge.

15. The outcome of the appeal depends on the proper construction of clause 18 of the Agreement.  

16. Clause 18 provided as follows:

“ The Vendor warrants and declares that the Vendor has not received and is not aware of there being any outstanding notice or order from any Government or other competent authority or the Manager or resolutions passed by the Management Committee or The Incorporated Owners of the building of which the said Premises form part requiring the Vendor as one of the co-owners of the building to effect repair or renovation to any common part or facilities of the said building.  If it should be discovered that any such notice or order or resolutions existed prior to the date hereof imposing responsibility on the part of the Vendor as one of the co-owners of the building to effect repair or renovation, the Vendor’s share of the costs for such repair or renovation shall be borne and paid by the Vendor absolutely and subject as aforesaid the Purchaser shall complete the purchase of the said Premises.  The Vendor hereby undertakes to notify the Purchaser forthwith in writing upon receipt of any of the aforesaid notices or orders or resolutions.”

17. Clauses of this type are commonly found in sale and purchase agreements in Hong Kong.  These concern the cost of repair or renovation works to be carried out to common parts or facilities of a building.  When purchasing property, an intending purchaser obviously would want to know what financial obligations he has to incur for anticipated repair and renovation works to the common parts or facilities of a building.  Whether contributions to the cost of such repair or renovation works are to be paid by the vendor or by the purchaser depends on the construction of the particular clause in each case.

18. The first part of clause 18 sets out the warranty given by the defendant as vendor.  The warranty was that at the time of the agreement the defendant has not received and is not aware of any outstanding notice or order from any Government authority or resolutions passed by the management committee or the IO “requiring the Vendor as one of the co-owners of the building to effect repair or renovation to any common part or facilities of the said building”.

19. The second part of clause 18 provides that if any such notice or resolutions existed at the date of the agreement “imposing responsibility on the part of the Vendor as one of the co-owners of the building to effect repair or renovation, the Vendor’s share of the costs of such repair or renovation shall be borne and paid by the Vendor absolutely and subject as aforesaid the Purchaser shall complete the purchase of the said Premises”.

20. The question in this appeal is whether the resolutions passed by the IO on 4 July 2005 which existed at the date of the agreement were resolutions envisaged by clause 18.

Resolutions of 4 July 2005

21. The minutes of the owners’ meeting of the IO held on 4 July 2005 show clearly that resolutions were passed to carry out overall major repair works (“the repair works”) to the building and to replace the lift.  Before the resolutions were passed those attending the meeting had the benefit of explanations given by a Mr Kwong of Wu Lik Electrical and Mechanical Company Ltd and a Mr Siu of KCL Building Renovation Consultants Company Ltd as to the lift replacement and the repair works to the common parts of the building.  The repair works were particularised at the meeting as shown in the minutes.  Estimated costs were also provided.  With the benefit of the detailed explanations and estimation of costs involved the owners resolved to carry out the repair works and the replacement of the lift. 

Resolutions of 14 September 2005

22. By the resolutions of 14 September 2005 the owners resolved to appoint “Wu Lik” as the contractor for the lift replacement at the cost of $360,000.  They also resolved to select “Tak Po” as the successful tenderer for the repair works at the price of $1,976,000 and authorized the management committee with full authority to negotiate the terms of contract with “Tak Po”.  To give some leeway to the IO it was assumed that the cost of the repair works would be $2,000,000.

23. It was also resolved on 14 September 2005 that contributions be made in accordance with the Deed of Mutual Covenant (“DMC”) and in respect of the said premises the contributions came to a total of $72,000 for the repair works and lift replacement.

24. Mr Lo, for the defendant, submitted that the resolutions of 4 July 2005 did not impose any responsibility on the defendant as vendor to pay for any contributions.  He submitted that there was no liability imposed on co-owners to pay for any share of the costs of the repair and replacement of the lift.  It was his submission that it was only the subsequent resolutions of 14 September 2005, passed after the completion date, that imposed any liability on the owners to pay for the costs of the repair works and the replacement of the lift.

25. I am unable to accept Mr Lo’s submissions.

26. Whilst it is correct that the resolutions of 4 July 2005 did not specifically provide that the owners of the building would be responsible for the payment of the repair costs and replacement of the lift, this does not mean that there was no liability on the part of the owners to pay for them.  It was clearly resolved by the owners at the 4 July 2005 meeting to go ahead with the repair works and the replacement of the lift.  Plainly the resolutions had financial implications.  Someone would have to pay for the repair works and the replacement of the lift.  Obviously the only ones who were liable to make payment were the owners of the building although at that time the cost of the same and the amount of contributions from each owner was not yet ascertained.  It was not necessary at the meeting of 4 July 2005 to determine the exact amount of contribution due from each owner.  The manner of contribution to be made by individual owners were set out in the DMC or the Building Management Ordinance Cap. 344 (“the Ordinance”).  Once the resolutions were passed, they were binding on all the owners (section 14(1) of the Ordinance).

27. The owners also resolved on 4 July 2005 to follow up the matter with tender invitations and selection of contractors.  As the value of the goods or services to be procured was likely to exceed $100,000, the procurement of such goods or services had to be by invitation to tender (section 20A(2) of the Ordinance).

28. The owners also resolved at the 4 July 2005 meeting that the IO should open a bank account for contributions toward the costs of the overall repair with authorized signatories to the bank account.

29. Mr Lo also submitted that the Judge was wrong to come to the view at paragraphs 17 and 18 of his judgment that once the resolutions of 4 July 2005 were passed the owners could not change their collective mind on the resolutions passed and that once it was decided to do the repair works and lift replacement there was no going back.  I would agree with Mr Lo that the Judge was wrong to say that once it was decided to do the repair works and the lift replacement there was no going back.  That does not, however, matter in my view.  What was clearly decided by the owners by the resolutions of 4 July 2005 was to carry out the repair works and lift replacement and this had obvious financial implications.  Clause 18 referred only to a “resolution imposing responsibility”.  It did not state that the exact amount of responsibility or liability had to be known at the time the resolutions were passed.

30. Clause 18 also deals with the situation where there is a notice or order from a Government authority.  Thus, for instance, where there is a building order the cost of complying with the building order may take some time to ascertain and a vendor’s share of such costs may not be known before the scheduled completion date.  In Hui Mei Yu Anastasia v King Best Enterprise Ltd (HCA 9317/1998, unreported judgment of Deputy Judge To, 10 July 2000) a building order was discovered 5 days before completion.  The plaintiff vendor undertook to pay for her share of contribution to the costs of complying with the building order.  The costs were only determined nearly two years later.

31. Clause 18 does not provide for the exact amount of liability or contribution to be known at the time of the resolutions and Mr Lo’s submission that the resolutions of 4 July 2005 are not caught by clause 18 is, in my view, untenable.

32. I would also observe that by the letter dated 20 August 2005 from the managers of the building to the plaintiff’s solicitors it was stated, inter alia, that “major repair works will be carried out to this Mansion”.  It went on to give the estimated costs and to state that each owner will contribute to the costs in accordance with the DMC.  This shows that the managers of the building also regarded the resolutions of 4 July 2005 as imposing liability on the owners of the building to contribute to the cost of the repair works and lift replacement.

33. In Chi Kit Co. Ltd. v. Lucky Health International Enterprises Ltd [2000] 3 HKC 143 it was held that the liability to meet a contribution was a liability which attached to the owner for the time being and his successors in title and bound the unit so long as the contribution remained unpaid.

34. Whilst it is correct that the IO would seek to make owners for the time being liable for the cost of the repair works and lift replacement, this does not affect the contractual arrangement made between the vendor and purchaser of any particular unit. Here,the plaintiff and defendant have by clause 18 contractually bound themselves as to who is liable to pay for a contribution of such costs.

35. The Judge at paragraph 21 of his judgment held, correctly in my view, that by the resolutions of 4 July 2005 liability was fixed on the individual owners to pay for the cost of the repair works and lift replacement in the proportions provided for in the DMC even though the quantum of that cost had not yet been established.  It seems to me that on a proper construction of clause 18 the resolutions of 4 July 2005 were resolutions “requiring the Vendor as one of the co-owners of the building to effect repair or renovation to any common part or facilities of the said building”.

36. The second part of Clause 18 provided that the vendor’s share of the costs “shall be borne and paid by the vendor absolutely and subject as aforesaid the Purchaser shall complete the purchase”.  As the exact contributions for each owner were not ascertained at the time of completion, the offer was made by the plaintiff’s solicitors to complete subject to the deduction of $80,000 to be stakeheld by the defendant’s solicitors and the undertaking of the defendant’s solicitors as set out above at paragraph 7.

37. The Agreement makes no provision for stakeholding and the giving of such an undertaking that was requested by the plaintiff’s solicitors.  At paragraph 23 of his judgment the Judge said :

“It is true that the Agreement makes no provision for stakeholding and that Clause 3 requires payment in full on completion.  Clause 4 also requires that the vendor show and give a good title.  If there is an outstanding requirement to pay for repairs, the IO will be able to seek recovery of it from the owner from the time being of the Property.  After completion, that would be the plaintiff.  So the liability would be an encumbrance on the title.  A possible way to complete the title, and allow the defendant to give a good title clear of the encumbrance, would be by way of stakeholding and undertaking, as suggested by the plaintiff’s solicitors.  Counsel for the plaintiff refers, in this connection, to the case of Lam Mei Hing & Anor v. Chiung Shiu Yin [1995] 3 HKC 247, where the court ordered an undertaking and a stakeholding to allow completion where the encumbrance was a building order.  I do not see any practical difference between a building order and the resolution here.”

38. I entirely agree with what the Judge said.  It seems to me that if the plaintiff had gone on to complete the purchase with full payment of the purchase price there would have been a liability on him to pay to the IO the contribution of $72,000 for the repairs and replacement of the lift as resolved by the 14 September 2005 resolutions.  Such liability would be an encumbrance on title.  If he failed to pay the same the IO would have the power to register a charge against the said premises under clause 15(b) of the DMC and section 19 of the Ordinance.

39. Clause 18 made it plain that the defendant’s share of the costs of the repair or renovation shall be paid by the defendant absolutely and “subject as aforesaid” the purchaser shall complete the purchase.  It is clear that the plaintiff was only obliged to complete subject to the defendant having paid his share of the costs.  

40. I am unable to accept Mr Lo’s submission that on completion the plaintiff should have tendered the full purchase price.  Although the Judge at paragraph 8 of his judgment said that the plaintiff tendered cheques in settlement this was not in fact so.  This does not, however, matter in my view.  The payment of money and perfection of title are simultaneous transactions in a contract for sale of land unless there are terms to the contrary.  The purchaser is not obliged to tender the balance of the purchase price if it is clear that the vendor is not in a position to perform his obligations under the agreement (Chong Kai Tai & anor v Lee Gee Kee and anor [1997] 1 HKC 359).

41. The fact that time was made of the essence of the Agreement did not mean that the vendor was entitled to be paid the purchase price on completion when the defendant himself was unable or unwilling to make title to the property in accordance with the contract (Kay Kam Yu v AIE Co. Ltd [1996] 1 HKC 239).

42. The proposal put forward by the plaintiff’s solicitors of a stakeholding of the sum of $80,000 by the defendant’s solicitors together with the undertaking sought was a reasonable and sensible way of dealing with the problem and of discharging the encumbrance.  This was rejected by the defendant.

Was there acceptance of repudiation?

43. Mr Lo also submitted that the plaintiff by serving the unamended OS seeking a refund of deposits already paid had accepted the repudiation of the Agreement by the defendant.  Like the Judge, I do not regard the claim for refund of deposit as acceptance of repudiation.  The plaintiff by the unamended OS, before the amendments were made on 5 November 2005, sought a refund of deposit after the Court found in his favour by granting the 1^st and 2^nd declarations and then only in the event of a failure by the defendant to bear and pay the share or provide the security asked for.  The defendant was being given a further opportunity upon the Court granting the 1^st and 2^nd declarations to complete the sale.  Furthermore, by the 5^th letter of 25 August 2005 from the plaintiff’s solicitors to the defendant’s solicitors sent after the OS was issued, the plaintiff made it plain that he wished to proceed with the sale. 

44. It seems to me that the Judge was right to find in favour of the plaintiff and to give judgment for the plaintiff in the terms of the declarations as set out above at paragraph 12.

45. For those reasons the appeal was dismissed with costs to the plaintiff.