WONG KAM FUNG AND ANOTHER v. SMART PROFIT ENTERPRISES LTD

CACV 139/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 139 OF 2014

(ON APPEAL FROM HCMP NO. 346 OF 2014)

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REASONS FOR JUDGMENT

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Hon Kwan JA (giving the Reasons for Judgment of the Court):

1. The central issue raised in this appeal by the defendant purchaser is a short one, and it is whether the defendant is entitled to claim an equitable lien over the property of the plaintiffs so as to maintain its registration of the sale and purchase agreement against the property at the Land Registry, notwithstanding that the plaintiffs have not presented for payment the cheque tendered by the defendant for the deposit.

2. Anthony Chan J rejected the defendant’s claim of equitable lien.  He held it is simply against common sense to suggest that the defendant would have a lien over the property for repayment of the deposit when the undisputed fact is that the proceeds of the cheque had never left the drawer’s bank account or gone into the hands of the plaintiffs.  He ordered the defendant to forthwith cause or procure the vacating of the registration of the agreement against the property.

3. We agree with the judge and dismissed the appeal at the conclusion of the hearing with costs.  These are our reasons.

The background

4. The relevant background facts, taken largely from the judgment below, may be stated as follows.

5. The subject property is a shop in Lockhart Road and O’Brien Road, Wanchai.  The registered owners are an elderly couple.  The wife is the 1^st plaintiff and the husband the 2^nd plaintiff.

6. On 31 October 2013, the wife signed a provisional sale and purchase agreement to sell the property to Fancy Terrace Ltd (“FTL”) at $17 million (“the 1^st PSPA”).  She signed for herself and purportedly on behalf of the husband in his absence.  The property agent that was involved in the 1^st PSPA was one Jamie Leung of Midland Realty (Shops) Ltd (“Midland”).  Jamie Leung had represented to the wife that an authorisation would be prepared for the husband to sign after he returned to Hong Kong.  However, on the husband’s return later that day, he refused to sign a letter of authorisation to authorise the wife to sign the 1^st PSPA on his behalf.

7. The couple was approached by other agents of Midland the next day about an offer to purchase the property at a higher price.  In the belief that the 1^st PSPA was ineffective, they signed a provisional sale and purchase agreement to sell the property to Smart Profit Enterprises Ltd, the defendant herein, at $18.8 million (“the 2^nd PSPA”).  The defendant was owned by one Tony Lo Chin Ho, who is a director of Midland.  Upon signing of the 2^nd PSPA, the defendant tendered a cheque dated 1 November 2013 in the sum of $500,000 as payment of the initial deposit.  It was made payable to the plaintiffs’ then solicitors, Messrs Wong, Fung & Co.

8. The 1^st PSPA and the 2^nd PSPA were registered one after the other at the Land Registry on 6 November 2013.

9. Between 4 and 15 November 2013, correspondence was exchanged between the plaintiffs’ solicitors and the solicitors for FTL.  The plaintiffs asserted that the 1^st PSPA was null and void as the husband did not authorise the wife to sign it.  This was met with FTL’s denial and assertion that the 1^st PSPA was valid and binding.  On 18 November 2013, FTL issued a writ against the couple seeking specific performance of the 1^st PSPA and damages.  This is HCA 2222/2013.

10. Meanwhile, on 11 November 2013, the plaintiffs’ solicitors wrote to the defendant’s solicitors Messrs Kok & Ha inviting the defendant to consider agreeing to cancel the the 2^nd PSPA and alleging that it was entered into on the fraudulent misrepresentation and assurances of the agents of Midland.

11. The defendant’s solicitors replied by letter dated 15 November 2013, stating that as the 1^st PSPA had been duly registered in the Land Registry, the plaintiffs could not possibly proceed with the sale of the property in accordance with the 2^nd PSPA and had thereby repudiated the 2^nd PSPA, which was accepted by the defendant.

12. Under the 2^nd PSPA, the defendant was obliged to pay a further deposit of $1.38 million on 15 November 2013.  No payment was ever made.

13. On 16 November 2013, the plaintiffs’ solicitors replied to the letter of the defendant’s solicitors.  They stated that it was premature to allege that the plaintiffs had repudiated the 2^nd PSPA by reason of the registration of the 1^st PSPA as completion was on 20 January 2014.  Instead, it was the defendant who was in breach of the 2^nd PSPA and had repudiated the agreement as it had failed to pay the further deposit on or before 15 November.  The plaintiffs’ solicitors gave notice that the plaintiffs thereby accepted the defendant’s repudiation as bringing the agreement to an end and purported to forfeit the initial deposit of $500,000.

14. On 17 December 2013, the plaintiffs issued a writ against Midland, Tony Lo, the agents of Midland involved in the 1^st PSPA and 2^nd PSPA, and Smart Profit Enterprises Limited (the defendant herein), alleging breach of real estate agent’s duties, misrepresentation and conspiracy to injure. They claimed damages and rescission of the 2^nd PSPA.  This is HCA 2458/2013.

15. The plaintiffs filed a defence and counterclaim in HCA 2222/2013 asserting that the wife had no authority to sign the 1^st PSPA on the husband’s behalf and that the 1^st PSPA was not binding on them.  They had also made a sanctioned offer to FTL to sell the property to it on a without admission of liability basis and informed FTL’s solicitors on 28 January 2014 that their defence and counterclaim was to be read subject to the sanctioned offer and that the purchaser of the 2^nd PSPA had already accepted repudiation.  They stated that if necessary an urgent application would be made to the court for removing the registration of the 2^nd PSPA.  Kok & Ha were copied on the relevant correspondence.  This was followed by two letters of the plaintiffs’ solicitors to Kok & Ha dated 29 January and 5 February 2014 requesting the withdrawal of the registration of the 2^nd PSPA.  On 6 February 2014, the plaintiffs’ solicitors sent the title deeds and documents of the property to the solicitors of FTL.

16. As no positive reply was received from Kok & Ha, the plaintiff issued the originating summons in these proceedings on 13 February 2014, seeking a declaration against the defendant that the 2^nd PSPA has been terminated and an order that the defendant shall forthwith procure the vacating of the registration of the 2^nd PSPA against the property.

17. It is common ground that when the defendant accepted the repudiation of the 2^nd PSPA on 15 November 2013, that document ceased to be an instrument affecting land and therefore ceased to be registrable under section 2(1) of the Land Registration Ordinance, Cap 128[1].  It is also common ground that the defence and counterclaim of Smart Profit Enterprises Limited in HCA 2458/2013 (in which it claimed repayment of the initial deposit of $500,000 under the 2^nd PSPA, damages for breach of the 2^nd PSPA, and a lien on the property for the return of the initial deposit and for all damages and other sums of money, interest and costs awarded in its favour) has not been registered as a lis pendens against the property.

18. In the court below, the sole basis of the defendant’s claim for an equitable lien, by which it was contended that the registration of the 2^nd PSPA could be maintained, was premised on the payment of the initial deposit as part of the purchase price[2].  It is not in dispute that the cheque for the initial deposit, which has been kept by the plaintiffs’ solicitors, has never been presented for payment.  The plaintiffs’ offer to return the cheque to the defendant, made by letter dated 28 March 2014 and repeated in the husband’s affirmation in reply of 25 April 2014, was not accepted by the defendant.  By the time the application was heard before the judge in June 2014, the cheque could no longer be presented for payment as it was over six months old.

The defendant’s arguments on appeal

19. Ms Queenie Lau raised three main arguments on behalf of the defendant in this appeal.

20. Firstly, she submitted that by forfeiting the initial deposit of $500,000 on 16 November 2013(albeit wrongfully), the plaintiffs had treated it as part payment for the property and it ceased to be stakeheld by the plaintiffs’ solicitors.  The plaintiffs’ act of refraining from cashing the cheque did not have the effect of undoing the act of forfeiting the deposit.  Hence, the judge should have held there was part payment of the purchase price to give rise to an equitable lien.

21. Secondly, she contended that there was no authority for the requirement that money must have been paid on account of the purchase price before a lien arises.  The defendant has made a claim for damages and costs arising from the plaintiffs’ wrongful forfeiture of the deposit in its defence and counterclaim in HCA 2458/2013.  So quite apart from having an equitable lien for the deposit paid, the judge should have held that the defendant has a lien arising from its claim for compensation in connection with the 2^nd PSPA.

22. Thirdly, she contended that in assessing the amount of security that should be provided by the plaintiffs to secure the defendant’s claim for the registration of the 2^nd PSPA to be vacated (on the premise that the claim for an equitable lien had been upheld), the judge wrongly preferred the expert evidence of the plaintiffs and failed to provide any reason for doing so.  She also argued that the judge was wrong in refusing to allow the defendant to rely on a skeleton bill to substantiate its claim for costs.

23. These arguments of the defendant will be dealt with in the order set out above.

Part payment of the purchase price

24. Ms Lau’s arguments here are a repetition of her arguments before the judge.  The judge dealt with them fully in §§37 to 44 of the judgment.  He took the view that the cases cited by her (Dynasty Target Development Ltd v Aibo Investment (China) Ltd, DCCJ 462/2005, 4 November 2005, at §30; and New Champion (Hong Kong) Ltd v Treble & Triple Ltd, HCA 2691/2008, 21 July 2010, at §37) do not assist her arguments.  The judge regarded the point on forfeiture as a red herring and in any event the purported forfeiture of the deposit by the plaintiffs was “highly questionable in terms of its legal basis”[3].  Bearing in mind the undisputed fact that the money had never left the account of the drawer of the cheque or gone into the plaintiffs’ hands, it is “simply against common sense” to suggest that the defendant would have a lien over the property for the repayment of the deposit.  And it is obvious that the defendant is not in a position to sue the plaintiffs for the return of the deposit, if it is necessary to test this against the ratio of Combe v Swaythling [1947] 1 Ch 625 at 628 to 629.

25. We are in complete agreement with the judge.  We affirm his holding there was no part payment of the purchase price to give rise to an equitable lien.

Lien arising from claim for compensation

26. Ms Lau’s contention that there does not appear to be any authority which lays down a requirement that money must have been paid on account of the purchase price before a lien arises is plainly wrong.  Authorities abound in this respect, and quite a number have been cited by the parties.  A few examples will suffice:

“864. Purchaser’s lien. A purchaser of land who has paid a deposit or money on account of the purchase price to the vendor and has then lawfully repudiated his contract has, in addition to a legal lien on any title deeds in his possession, an equitable lien on the vendor’s interest in the land agreed to be sold for all sums paid by him under the contract on account of the purchase money, together with interest on it.” (Halsbury’s Laws of England (5^th ed), vol 68, §864)

“The purchaser of land who has paid to the vendor a deposit (or other money towards the purchase price) has a common law lien in respect of title deeds that he may have in his possession. … However, as with the vendor, the purchaser also has an equitable lien over the land itself in the hands of the vendor for any deposit or instalment of his purchase-money which the purchaser has paid to the vendor (and not merely to a stakeholder) without obtaining a conveyance. … The lien extends not only to the purchase-money actually paid, but also to interest thereon, and to money paid as interest on the unpaid purchase-money, and to the costs properly incurred by the purchaser.” (Snell’s Equity (32^nd ed), §44-014)

“There can be no doubt, I apprehend, that when a purchaser has paid his purchase-money, though he has got no conveyance, the vendor becomes a trustee for him of the legal estate, and he is, in equity, considered as the owner of the estate. When, instead of paying the whole of his purchase-money, he pays a part of it, it would seem to follow, as a necessary corollary, that, to the extent to which he has paid his purchase-money, to that extent the vendor is a trustee for him; in other words, that he acquires a lien, exactly in the same way as if upon the payment of part of the purchase-money the vendor had executed a mortgage to him of the estate to that extent.” (Rose v Watson (1864) 10 HLC 672 at 683, per Lord Cranworth)

“The lien is created by the contract under which the money is paid as part of the purchase-money, and on the faith that the contract will be carried out, and not by the default of the vendor.” (Whitbread & Co Ltd v Watt [1901] 1 Ch 911 at 915, per Farwell J)

27. Similar statements appeared in Combe v Swathling, supra at 627 to 628, and in Li Sze Fat v Cheng Ka Leung Tommy [2000] 3 HKC 224 at 232D to E.

28. Ms Lau’s further contention that just as the payment of a deposit gives rise to a purchaser’s lien, so does the subsistence of a claim for compensation is equally untenable.  Her reliance on the statement in Snell’s Equity at §44-004 (that an equitable lien “arises by operation of equity from the relationship between the parties, rather than by any act of theirs”), which was cited with approval in Super Keen Investments Ltd v Global Time Investments Ltd [1996] 4 HKC 355 at 360D and Karex (Hong Kong) Ltd v Fortune Talent Development Ltd & Ors [1999] 3 HKLRD 397 at 404G, was misconceived.  In Super Keen and Karex, the purchaser had paid a deposit to the vendor, and on the termination of the agreement asserted an equitable lien for the return of the deposit.  The point in issue with was whether the purchaser’s lien should be extended to cover a claim for damages for loss of profits.

29. Super Keen, Karex, and a further case cited by Ms Lau, Lee Fu Wing v Yan Po Ting Paul [2009] 5 HKLRD 513 at §§117 to 128[4], are authorities for the proposition there are no reasons in principle to limit the remedy of an equitable lien only to cover the purchaser’s deposit but this remedy may be extended to cover the purchaser’s claim for damages for loss of profits if the court finds it just to do so.  These cases do not provide support for Ms Lau’s contention that the mere claim of the purchaser for damages could give rise to an equitable lien where there is no entitlement to a lien in the first place arising from the payment of a deposit or money on account of the purchase price to the vendor.

30. The judge is entirely correct to hold in §34 that there are two requirements to be satisfied before a purchaser can claim an equitable lien over the vendor’s property, namely, (a) money has been paid on account of the purchase price, and (b) the money has been paid to the vendor.

Quantum of security

31. The last contention of Ms Lau may be dealt with shortly.

32. Her main complaint was that the judge had failed to give any reason for preferring the expert evidence of the plaintiffs, citing in support Flannery v Halifax Estate Agencies Ltd [2000] 1 WLR 377 at 381G to 382D and Wear Me Apparel LLC v Lam Na [2013] 2 HKLRD 1156 at §§29 to 34.  But as these cases made amply clear, the extent of a judge’s duty to give reasons depends on the subject matter, the context in which the decision-maker is operating and the circumstances of the case in question.

33. In the present case, the judge had ruled against the defendant that it does not have an equitable lien over the property in §44.  Out of deference to counsel, he said in §47 that “had the lien claim been upheld [he] would not have hesitated to vacate the registration of 2^nd PSPA upon the payment of an appropriate amount to secure [the defendant’s] claim”.  He then mentioned the defendant’s claim for damages in §50 and stated that he preferred the expert evidence produced by the plaintiffs, namely, that the estimated damages should be in the region of $200,000.

34. It is correct that no reasons were given for preferring the plaintiffs’ expert evidence to the expert evidence adduced by the defendant.  But one must bear in mind that what the judge said about the quantum of the security to be provided, had he found a purchaser’s lien in favour of the defendant, was entirely obiter.  We do not think the judge could be rightly criticised for not explaining why he preferred the plaintiffs’ expert evidence in these circumstances.

35. There is also nothing in the complaint that the judge refused to allow the defendant to rely on a skeleton bill which had not been properly adduced as evidence and was produced late.  We see no basis to interfere with the case management power of the judge.

36. For the above reasons, we rejected all the arguments advanced by the defendant in this appeal and dismissed the appeal with costs.

Arguments in the respondent’s notice

37. The plaintiffs filed a respondent’s notice seeking to affirm the judgment on additional grounds.  Given our conclusion that the appeal must be dismissed, it is not strictly necessary to deal with the arguments addressed in that notice.

38. We would just mention for the record that Mr John Hui argued before the judge even if it should be held there is a lien in favour of the defendant, the registration of the 2^nd PSPA could not be maintained as that agreement had been terminated and the defendant should have registered instead its defence and counterclaim in HCA 2458/2013 as a lis pendens.  Mr Hui had cited to the judge a passage in the judgment of Deputy Judge Whaley in Fung Kan Wai v Leung Shui Fat [1998] 2 HKC 115 at 123E to G.  The judge declined to deal with this argument, as he did not think it was covered directly by any authority cited to him and he had not been assisted on the implication of the arguments on the issue of priority under the Land Registration Ordinance (at §46).

39. In the respondent’s notice, Mr Hui not only repeated his argument below but went further to contend that the purchaser’s lien in the present case (if it existed) is an unwritten equity and not registrable and that the decision to the contrary of Yuen J (as she then was) in Li Sze Fat v Cheng Ka Leung Tommy, supra at 232G to 233B was wrongly decided.  We have reservations as to the correctness of this further contention.  But as mentioned earlier, it is not necessary to address the additional arguments in the respondent’s notice and we decline to make a ruling on the additional questions.

[1] Judgment, §§29, 30

[2] Judgment, §32

[3] The express forfeiture clauses in the 2^nd PSPA had been deleted, calling into question whether an agreement to forfeit could be implied in the circumstances (Damon SA v Hapag-Lloyd SA [1985] 1 WLR 435 at 450H to 451A).

[4] Another case of similar effect is Smart Max Enterprise Ltd v Speedy Way Ltd [2011] 1 HKLRD 798 at §40, cited by the judge at §48 of the judgment.