CHANNEL GREEN LTD v. HUGE GRAND LTD

HCMP 2052/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2052 OF 2011

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J U D G M E N T

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Introduction

1. This case turns on the proper contractual interpretation of two non-standard provisions in a Sale and Purchase Agreement (“SPA”) dated 17 June 2011 and made between the plaintiff (“Channel Green”) as purchaser and the defendant (“Huge Grand”) as vendor.

2. The SPA relates to the intended sale and purchase of a property at the junction of Prince Edward Road West and Fa Yuen Street, Kowloon (“Property”).  The Property is made up of 10 shops namely, Shops B1, B2, C1, C2, D, E, F1, F2, A1 of F3 and A2 of F3 (“Shops”) and an open forecourt (“Forecourt”) where there were stalls-on-wheels (“Stalls”) up to around mid-September 2011.

3. The SPA was preceded by a Provisional Sale and Purchase Agreement (“PSPA”) dated 2 June 2011 and made between Ho Ching Wai (“Ms Ho”) as purchaser and Huge Grand as vendor, and Timberland Strategy Property Consultants (“Timberland”) as agent for the vendor and purchaser.  Ms Ho nominated Channel Green to be the purchaser under the subsequent formal agreement, the SPA. 

4. Ms Ho is a director of Channel Green, a company incorporated in the British Virgin Islands.  She gave evidence that she has at all material times been the beneficial owner of Channel Green, and that it is not related to the Town Health Group of companies (see below).

5. The two non-standard provisions in question appear both in the PSPA and in the SPA.  Though the PSPA is in Chinese, the SPA is mainly in English, but the two material terms are reproduced in the SPA (at clauses 30 and 31) in the Chinese form as they appeared in the PSPA (at clauses 7 and 8) as follows:

“30. 該物業是以現狀售予買方，買方已視察及明白該物業之現時狀況，買方不得因該物業存有任何未經批准之加建、改建或潛建之建築物，而向賣方提出質詢或藉此理由拒絕成交或拖延成交。

31.   成交日或之前，該物業如收到任何政府有部門發出之清拆令，修葺令或其他命令，解除該等命令之費用及工程費用由買方負責。”

6. The certified translation of those terms is as follows:

“30. The Property is sold on an ‘as is’ basis to the purchaser. The purchaser has inspected and understands the existing state of the Property, and the purchaser shall not raise any questions/inquiries or refuse to complete or delay completion of transaction on the ground that there are any unauthorized additions, alterations or illegal structures on the Property.

31.   On or before the date of completion, if the Property receives any demolition order, repair order or other order issued by any governmental department, the expenses for the discharge of such orders and the cost of carrying out such works shall be borne by the purchaser.”

7. However, it is common ground between Mr Edward Chan SC (appearing with Mr Paul Lam SC for Channel Green) and Ms Lisa Wong SC (appearing with Ms Queenie Lau for Huge Grand) that the words “questions/inquiries” in Clause 30 can in context properly be regarded as a reference to “requisitions”.

8. Deposits of $36 million, totalling 15% of the agreed purchase price of $240 million, were paid by Channel Green to Huge Grand.  Completion under the SPA was scheduled to take place on 14 October 2011.  However, this did not occur in circumstances where Channel Green claims entitlement to have the deposits returned, and also has a claim to damages for the wasted legal costs and professional expenses of investigating title, and seeks an indemnity against any potential liability for estate agent fees due to Timberland.  Huge Grand originally counterclaimed for specific performance of the SPA but by letter dated 17 June 2013 elected instead to terminate the SPA and forfeit the deposits.

9. Hence, in issue is whether Huge Grand has shown and proved that it has a good title to the Property as required by the SPA.

The Requisitions

10. Though Channel Green’s Amended Originating Summons referred to several more requisitions, at trial Channel Green pursued only two requisitions called Requisitions 5 and 7 (as the points in the other requisitions essentially boiled down to the points in those two).

11. Requisition 5 concerned breaches of two of the Special Conditions of the Conditions of Sale (“Government Lease”), namely:

(1)   Special Condition (7) (“SC7”) which states:

“Space shall be provided within the lot for the parking of not less than 12 private cars and the space so provided shall not be used for any other purpose.”

(2)   Special Condition (8) (“SC8”) which states:

“No structure shall be erected on any part of the area coloured red and hatched black on plan, but projections over such area at upper floor levels may be permitted as approved by the Director of Public Works.”

12. These conditions are said to have been breached because of:

(1)   the absence of the car parking spaces mandated under SC7 which were originally provided for in the Forecourt but which became occupied by the Stalls; and

(2)   the extension of some of the Shops into the area of the Property that is required by SC8 not to be built over (“Non-Built Over Area”).

13. Requisition 7 was in essence a request for documentary proof that the listed breaches of the Deed of Mutual Covenant (“DMC”) in respect of the Building, alleged in a letter dated 17 June 2011 from the solicitors forthe Incorporated Owners of the Building (“IO”), had been remedied.  Those breaches listed were:

(1)   the entire façade overhanging on the external wall fronting Prince Edward Road;

(2)   the split air-conditioning units overhanging on the external wall along the rear lane;

(3)   the overhead cover of the light well (located between Flats C and D, Ground Floor, close to Prince Edward Road West); and

(4)   the steel-framed racks abutting the structural wall.

14. (In passing, I would point out that there seems to be no real dispute as to the existence of the breaches of SC7 and SC8.)

15. Mr Chan says that Huge Grand has failed to answer these requisitions on title satisfactorily, and so has failed to show and prove good title.

16. Ms Wong says Huge Grand’s answers to these requisitions were that they were both about “unauthorised additions, alterations and illegal structures on the Property” within the meaning of Clauses 30 and 31 of the SPA so that Channel Green was precluded by those provisions from raising such requisitions.  (It is helpful at this stage to identify that Ms Wong has made plain that no question of waiver arises in this case; Huge Grand’s stance is simply predicated on what it says is the proper contractual interpretation of Clauses 30 and 31.)

The Contest

17. The contest on the proper contractual interpretation of Clauses 30 and 31 is between:

(1)   whether they precluded Channel Green from raising any requisition arising from the existence of unauthorised additions, alterations or illegal structures on the Property, but only insofar as the requisition was about a contravention of the Buildings Ordinance or the subsiduary legislation under it (collectively “BO”) (as contended by Channel Green); or

(2)   whether they precluded Channel Green from raising any requisition at all arising from the existence of unauthorised additions, alterations or illegal structures on the Property – even if the requisition was not about a contravention of the BO, for example including a requisition about a breach of the Government Lease or the DMC (as contended by Huge Grand).

Applicable Principles

18. The principles applicable to the approach to contractual interpretation or construction are well-known and both Mr Chan and Ms Wong placed reliance upon similar passages from the authorities (though with some different points of emphasis).

19. I think I can take the general statement of summarized principles from the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, at 912F-913F:

“I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384-1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 is always sufficiently appreciated.  The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life.  Almost all the old intellectual baggage of “legal” interpretation has been discarded.  The principles may be summarised as follows.

(1)   Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)   The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include.  Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3)   The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.  They are admissible only in an action for rectification.  The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life.  The boundaries of this exception are in some respects unclear.  But this is not the occasion on which to explore them.

(4)   The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.  The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Lie Assurance Co Ltd [1997] AC 749.

(5)   The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.  On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.  Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201:

‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’ ”

20. Subsequently, in Jumbo King Ltd v. Faithful Properties Ltd (1999) 2 HKCFAR 279, at 296D, Lord Hoffmann NPJ also said:

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.”

21. In the context of an agreement in a sale and purchase agreement containing a contractual waiver of the right to raise requisitions on title, reference can usefully be made to what was said by Deputy High Court Judge A To (as he then was) explained in Ip Kam Wah v Fair City Group Ltd [2005] 4 HKLRD 168, at §24:

“… ultimately, as regards any term of the contract providing for a waiver of the right to raise requisition, the question is what have the parties agreed in the light of all the surrounding circumstances and the factual matrix…”

22. But this should be read with the benefit of what was said by Lord Hoffmann NPJ in the Jumbo King case, after pointing out that in principle the parties are free to modify the common law obligation in respect of giving and proving good title, and whether a particular clause is wide enough to preclude the purchaser from raising a requisition or objection on title is a matter of construction, at 299G:

“Prima facie, it is the duty of the vendor to deduce and then convey a good title and if he relies upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so.”

23. Of course, I accept as trite that the content of pre-contractual negotiations is inadmissible for the purposes of construing a contractual document: see Prenn v Simmonds [1971] 1WLR 1381, at 1384-1385.  On the other hand, pre-contractual negotiations may be admitted as evidence to establish facts which may be relevant as part of the background “matrix” known to the parties: see Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, at §42.

24. Ms Wong has emphasized that she does not seek to place reliance on evidence of negotiations excluded by the Prenn case. But she does place reliance on evidence of the factual background, which is admissible, as even the Prenn case shows, at 1385H:

“… evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the “aim” of the transaction.”

25. Mr Chan sought to place reliance on the case of Giant River Ltd v Asie Marketing Ltd [1990] 1 HKLR 297 where Deputy High Court Judge Cruden held at 312B and 313F-G respectively:

“The law is well settled that mere knowledge does not of itself operate to modify a contractual term.”

“As a matter of law, even if the plaintiff were fully aware of the affect on title, as that disclosure would have preceded the execution of the agreement, it would not have reduced the obligation of the vendor to show good title on the date for completion.”

26. He also referred me to Regent Summit (Hong Kong) Ltd v Smart Business (Asia) Ltd [1998] 2 HKC 718 and (CACV 138/1998, 23 October 1998), and Strong & Associates Ltd v Flywin Company Ltd (CACV 40/2001, 9 October 2001), which followed the Giant River case.

27. But I accept Ms Wong’s submission that those were cases where the argument for waiver of requisitions or objections in respect of title was predicated only upon the purchaser’s knowledge of the title defect, in the absence of an express waiver (such as Clause 30).  But where there is such an express term, and because parties to a sale and purchase of land are free to agree whatever terms they like (even for a defective or imperfect title), the effect or extent of the term simply requires construing what the parties agreed in the light of the surrounding circumstances and the factual matrix.

28. Of course, as Ms Wong accepts, the vendor has the burden of showing that, on the proper construction, the language of the waiver clearly has the effect of shifting the risk of a defect in title to the purchaser.  But there is no “overpowering principle” in a contract for sale and purchase of real property that the vendor must not mislead the purchaser in any way or must give full disclosure.  It is only a rule of construction that the court will avoid construing a contract in such a manner as would enable a vendor to mislead the purchaser.  The duty of disclosure is to be understood in this light: see the Jumbo King case at 299I, and the Ip Kam Wah case at §24.

Factual Matters

29. Unless the context otherwise makes clear, all dates referred to in this section are to dates in 2011.

30. Many of the factual matters are not in dispute, and can be found in the various contemporaneous documents.

31. There is, however, a dispute as to the role of Ms Ho and the knowledge that she had or which is to be attributed to her.  I can deal with this dispute as I traverse the other factual matters.

32. It is this dispute of fact which gave rise to Huge Grand’s application, to which Channel Green consented, to cross-examine Ms Ho.  That led in turn to Channel Green’s application, to which Huge Grand also consented, to cross-examine the Timberland agent To Oi Wai (“Ms To”). At trial, whilst Ms Ho was tendered for cross-examination, no cross-examination was in fact conducted by Ms Wong; whereas Mr Chan did cross-examine Ms To.

33. The only other witness was a Johnny Lai Chik Yeung, whose affidavit was admitted without cross-examination.  Other than confirming the affidavit evidence of Ms To, Mr Lai’s affidavit is, however, rather argumentative or contains material relating to the negotiation process. I do not think its content helps much for the purposes of deciding the issues in this case, and indeed neither Mr Chan nor Ms Wong referred to that content at all during the trial.

34. Huge Grand became owner of the Property under an agreement for sale and purchase dated 7 May 2010.  That agreement specifically referred to, and provided for a purchase by Huge Grand subject to:

(1)   the erection of structures over the Non-Built-Over Area in breach of SC8, which had been the subject-matter of a letter dated 1 March 2010 from the District Lands Office, West Kowloon (“DLO”);

(2)   the existence of other unauthorized building structures and issue of Building Orders and Fire Safety Direction in respect of them;

(3)   the existence of unauthorized encroachments on one of the lightwells which had not been approved by any government authorities or the IO.

35. As stated above, the Property comprised the Shops and the Forecourt.  A tenancy agreement dated 3 December 2010 granted a tenancy of the Forecourt to a company which in turn granted licences to the individual stall-holders of the Stalls.  The term of the tenancy was for five years, albeit it was determinable after two years on three months’ notice from either party.

36. When it came for Huge Grand to market the Property for sale, it appointed Ms To / Timberland for that purpose.  In the event, all negotiations which led to the PSPA were conducted between Ms To and a Mr Cyrus Leung, an employee of a company within the Town Health Group of companies.

37. On 5 January, Ms To went with a colleague to the office of Town Health Group to make a presentation of 5 properties (which did not include the Property).  Apart from Mr Leung and other persons of the Town Health Group, Ms Ho was present. However, Ms Ho did not provide any business card.

38. On 15 February, Ms To emailed to Mr Leung some information about the Property, including floor plans and photos. 

39. Two days later, on 17 February, Ms To emailed to Mr Leung a bundle of documents including the Conditions of Sale of the Government Lease and the DMC.  Plainly, those documents revealed the existence of SC7 and SC8, and the location and boundaries of the Non-Built-Over Area. Also sent were previous Building Orders and Letters of Withdrawal Memorials, which identified certain unauthorized building works (“UBWs”), and that no certificate of compliance had been issued in respect of the Building Orders.

40. On 18 February, Ms To emailed to Mr Leung extracts of a feasibility report, which again identified SC7 and SC8 under the heading of “Government Lease Conditions” and the original location of the shops and the 12 car parking spaces on the Forecourt.

41. At some point before 2 March, Ms To had a conversation with Mr Leung (it not being suggested Ms Ho took part) in which attention was drawn to the existence of the Stalls on the Forecourt where there were supposed to be 12 car parking spaces, and the existence of unauthorized structures next to the lightwell at Shop F3.

42. On 2 March, Ms To went with her boss to the Town Health Office and gave a presentation about 6 properties, including the Property.  Again, Ms Ho was there.  Ms To had previously emailed copies of documents, including about the Property, for use at the presentation.  The asking price for the Property was stated to be $380 million.

43. During the presentation, questions were raised by the Town Health side about the Forecourt, which had been designated for parking spaces but which had the Stalls.  The CEO of Town Health, Dr Cho, apparently commented that without the Stalls on the Forecourt, the Property was worth only around $200 million.

44. After the presentation, Ms To asked Mr Leung if they wished to test the waters, and it was agreed that Ms To should put forward an offer of $288 million.  The offer as drafted suggested a 10% deposit and a completion period of 4 months.  In her oral evidence, Ms To said the proposed terms came from, that is were proposed by, Mr Leung.  I accept as a fact that means the 4 month period was suggested by Mr Leung.  Anyway, the offer (which did not name any particular purchaser) was rejected by Huge Grand.

45. On 7 March, Ms To emailed to Mr Leung further information about the Property, including documents whereby the Building Department refused to approve the application for building works involving the cancellation of the car parking spaces, pending the submission of the relevant detailed conditions of the lease regarding car parks and vehicular access points.

46. On 23 March, Ms To emailed to Mr Leung further documents concerning Huge Grand’s application to the Transport Department to cancel the car parking spaces.  These emphasized the existence and then current breach of SC7.  Also sent was the agreement by which Huge Grand purchased the Property in 2010, which identified the various matters already stated above by reference to that agreement.

47. On 11 April, Ms To resent to Mr Leung the email dated 23 March.

48. In a telephone conversation between Mr Leung and Ms To on 25 May, there was some discussion as to a possible price or offer at $240 million, but Ms To informed Mr Leung that Huge Grand might not be able to resolve the issue arising from the absence of car parking spaces on the Forecourt if that were the price.  On the same day, as authorized by Mr Leung, Ms To prepared a revised offer at the price of $240 million.  That offer also carried forward from the last the 10% deposit and the 4 month completion period.  The soft copy of the revised offer was email by Ms To to Mr Leung on 30 May.

49. The offer at the price was accepted by Huge Grand around the end of May, and the drafting of the PSPA began.  Various emails were sent on 31 May and 1 and 2 June between Ms To and Mr Leung, with drafts attached.

50. Early on the morning of 2 June, an amendment was made to a previous draft to require a director of the corporate tenant of the Forecourt to give a personal guarantee for the tenancy for the period 5 December 2010 to 4 December 2012.  This term was added at the request of Mr Leung (who asked for the revised draft to be sent to “us”).

51. Ms To says she asked Mr Leung who was going to sign the PSPA from his side, and he said a senior member of the Town Health management.  In a version of the draft PSPA emailed by Mr Leung to Ms To at 12.28pm on 2 June, Mr Leung had typed in the name “Ho Ching Wai” (ie Ms Ho) as the name of the purchaser.  This was the first occasion on which that name had been put forward for that purpose.

52. In the afternoon of 2 June, Mr Leung met Ms To and gave her three copies of the PSPA signed by Ms Ho, and a cheque for the initial deposit of $7.2 million drawn by Ms Ho.

53. Later that day, Ms To went to see Mr Lai of Huge Grand, but he said he wanted to make some amendments.  Ms To hand wrote the amendments on the PSPA, which Mr Lai initialled as he signed the three copies.

54. As a result of that, Ms To had to obtain Ms Ho’s acceptance of the amendments.  So on 3 June she made an appointment through Mr Leung to see Ms Ho at the Town Health Office.  Ms To then put the face (she had seen at the two previous presentations at those offices) to the name of Ms Ho.  Ms Ho initialled her acceptance of the amendments.

55. An email copy of the final form PSPA was emailed to Mr Leung by Ms To on 4 June.  As stated above, the PSPA contained clauses identical to the Clauses 30 and 31 as were taken later into the SPA.

56. In cross-examination by Mr Chan, Ms To was asked if it was explained to her that Ms Ho was the purchaser named in the PSPA for the reason that, although she has no connection to Town Health she had been present at the presentations because Dr Cho thought she might be interested, and she took over the purchase when Town Health decided it was not interested in purchasing the Property.  Ms To denied being told this.

57. Mr Chan was hampered in this line of cross-examination as Ms Ho had not actually stated in her affidavit that she had informed Ms To at any time that she was not connected to the Town Health Group of companies.  Reliance was simply placed on the very much weaker point that Ms Ho had not given Ms To a business card showing her as connected to Town Health (she not having given a card at all).  This is despite the fact that Ms Ho filed a second affidavit specifically to seek to answer Ms To’s evidence that Ms Ho had been described to her, Ms To, as a member of senior management of the Town Health Group.

58. Nor was Mr Leung called to give evidence or make any affidavit, yet he plainly could have given relevant evidence.  It is also correct to say that no explanation has been offered as to why Mr Leung might not have given evidence.  These are circumstances which entitle me to draw adverse inferences from the absence of a material witness: see, for example, Wisniewski v Central Manchester Health Authority [1998] PIQR 324, at 340.  That unexplained absence of evidence seems to me significantly to weaken the case being put forward by Ms Ho and Channel Green.

59. In the circumstances, I have no hesitation in accepting Ms To’s evidence that it was never suggested to her that anyone other than the Town Health Group was purchasing the Property, and that she had at all times worked on the basis that Mr Leung was acting for that group and the purchaser was within that group.

60. I note that Ms Ho sought in her affidavit to distance herself from the Town Health Group, and she was not formally challenged by any cross-examination.  Ms Ho certainly was a former employee of the Town Health Group and was at least close enough to the group or its staff that she was invited to presentations made by Timberland.

61. But in any event, whether or not Ms Ho and Channel Green are wholly independent of the Town Health Group may not need to be decided.  Where all negotiation from the purchaser’s side was conducted through Mr Leung, I have no difficulty in holding as a fact that whatever knowledge and documents were provided to him by Ms To were at some point of time before the PSPA provided by him to Ms Ho. 

62. As stated, Ms Ho was present in various meetings throughout the process, and I think it more likely than not that she was kept abreast of matters as they progressed.  But even assuming she was a latecomer to the deal, and replaced Town Health on its ‘referral’, she would likely have been handed the ‘file’ or told of the progress to date and she was plainly content to allow Mr Leung to continue to act as the purchaser’s agent, both before and after the PSPA.

63. I also bear in mind that had Mr Leung been called as a witness, he could have spoken to what was or was not said or passed by him to Ms Ho.  Again, that he did not give evidence weakens Ms Ho’s evidence on the point.  Further, though Mr Chan suggested that information obtained by Mr Leung as agent for one principal does not transfer to another principal in a concurrent agency, there was no concurrency on Ms Ho’s own case, but she would (as I find) have known or then been told of the information when she stepped into the deal.

64. It is hardly surprising Ms To continued to think Mr Leung was acting for the same principal.  There is no proper evidential basis for suggesting she was ever told otherwise.  Indeed, even after Mr Leung was provided on 4 June with a draft agreement which in its body and at the signature block described Ms Ho as being “of Town Health International Investments Limited”, neither he nor Ms Ho ever suggested Ms To had thereby made a mistake.

65. According to clause 3 of the PSPA, the parties to it were to sign the formal agreement by 15 June. 

66. On 8 and 9 June, Ms To emailed to Mr Leung the occupation permit of the building which forms part of the Property, and the building plan of the ground floor.  The occupation permit shows approval of the ground floor of the building should be used as three shops for non-domestic use, and the building plan shows approval of the Forecourt for 12 car parking spaces, and would identify extension of the front of some of the Shops beyond what was approved.

67. By a letter dated 14 June, the DLO informed Huge Grand that there was a contravention of SC7 and SC8 and, hence, the Government was entitled to re-enter the Property. Huge Grand was demanded to remedy the breach within 28 days by 12 July; but a forbearance period of 3 additional months would be given upon payment of a forbearance fee of HK$96,436.  This letter was only provided by Huge Grand to Channel Green on 28 June, only after the date of the signing of the SPA.

68. On 17 June, Ms Ho signed a Nomination whereby she nominated Channel Green to enter into the SPA, which was executed the same day.

69. In addition to Clauses 30 and 31, other relevant clauses of the SPA include:

(1)   clause 8(a), which  provides that:

“Subject to Clause 30 and 31 hereunder, the Vendor shall give title to the Property in accordance with Section 13A of Conveyancing and Property Ordinance (Cap 219). The Vendor shall in accordance with Section 13 of the Conveyancing and Property Ordinance, prove his title to the Property at his own costs...”

(2)   clause 10, which provides that:

“On payment of the balance of the Purchase Price on completion, the Vendor and all other necessary parties (if any) shall execute to the Purchaser or his nominee or sub-purchaser a proper Assignment of the Property subject as hearin provided but otherwise free from incumbrances. The Vendors shall assign the Property as beneficial owner.”

(3)   clause 16, which identifies that portions of the Property are sold subject to and with the benefit of certain tenancies;

(4)   clause 23, which provides that:

“There are incorporated into this Agreement as if they were herein written the conditions respectively on the part of the Vendor and the Purchaser set out in Part A of the Second Schedule to the Conveyancing and Property Ordinance Chapter 219 unless they are inconsistent with the provisions herein in which event the provisions herein shall prevail.”

(5)   clause 24, which provides that:

“This Agreement sets out the full agreement between the parties hereto and supersedes any other representations, commitments, agreements or understandings, written or verbal, that the parties hereto may have had prior to this Agreement with respect to the subject matter of this Agreement.”

70. Also on 17 June, or at least by letter dated 17 June and sent by post, solicitors for the IO drew Huge Grand’s attention to intrusions which infringed the DMC, being (a) the entire façade overhanging on the external wall fronting Prince Edward Road; (b) the split air-conditioning units overhanging on the external wall along the rear lane; (c) the overhead over of the light well (located between Flat C & D, Ground Floor, close to Prince Edward Road West); and (d) the steel-framed racks abutting the structural wall. The IO asked for immediate remedial action to restore the common parts mentioned in accordance with the Building Plan, failing which they would seek enforcement through court proceedings.

71. There then followed the various correspondence, including the requisitions and responses, between the solicitors (“WKLL” and “KH” respectively) acting for Channel Green and Huge Grand in the transaction (which same solicitors are now acting for the parties in this litigation).

72. As stated, it was on 28 June that KH informed WKLL that Huge Grand received the letter dated 14 June from the DLO, and KH also asked Channel Green to pay the forbearance fee purportedly pursuant to Clauses 30 and 31 of the SPA.  This request was pursued a few days later, but on 8 July WKLL disagreed to pay the forbearance fee on the ground that it was Huge Grand’s obligation to do so as part of its duty to prove and give good title.

73. In response on 11 July, KH claimed that the breaches of SC7 and SC8 arose solely by reason of the existence of unauthorized structures and that fell within the ambit of Clauses 30 and 31.  Essentially, from this point onwards, the main battleground between the parties as is reflected in these proceedings had been established.

74. Later in July, Huge Grand paid the forbearance fee on a without prejudice basis; WKLL asked for the breaches of SC7 and SC8 to be remedied before completion or it would be impossible to prove and give good title.  The parties joined issue on the proper meaning of Clauses 30 and 31. 

75. The discussions in correspondence continued through August, September and October.  Channel Green was provided with a copy of the IO’s complaint letter, and was told that no further word had been received nor steps taken.  Whilst Huge Grand also continued to take some steps to seek from the DLO either a temporary waiver, or acceptance of the condition of the Property, and whilst some progress was made (including with the assistance of experts), it seems that ultimately no fully satisfactory response was received.

76. The SPA had called for completion between 10am and 5pm on 14 October.  But, by letters dated 14 October:

(1)   Channel Green, though WKLL, elected to terminate the SPA on the ground that Huge Green had failed to show and prove good title by the deadline for completion;

(2)   Huge Grand, through KH, claimed that Channel Green had breached the SPA and that, unless it agreed to complete the sale by 21 October 2011, Huge Green would seek specific performance;

(3)   WKLL replied that, as Channel Green had elected to terminate the SPA, there was no point for Huge Grand to propose extension of the completion date.

Proper Construction of Clauses 30 and 31

77. It is clear that Clauses 30 and 31 qualified the title that Huge Grand had to prove and give: Clause 8(a) shows this.  That much is common ground; the question is as to the extent of the qualification, and I have already identified the competing constructions argued for by the parties.

78. In support of its case, Huge Grand says that the narrower interpretation offered by Channel Green is negated by the words of Clause 30 in their natural and ordinary meanings.  First, attention is drawn to the Property being sold on an “as is” basis.  Next, emphasis is placed by Ms Wong on the word “any”, where Clause 30 prohibited Channel Green from raising “any” requisitions on the ground that there were “any” unauthorised additions, alterations or illegal structures on the Property.

79. So, says Ms Wong, the use of the word “any” twice before “requisitions” as well as before “unauthorised additions, alterations or illegal structures on the Property” identifies a clear bar to all requisitions about all “unauthorised additions, alterations or illegal structures on the Property” without distinguishing:

(1)   between different “unauthorised additions, alterations or illegal structures on the Property” by nature, types, extent or the legal bases upon which title could be affected thereby; or

(2)   between different requisitions by the legal bases relied upon in making the objections to title.

80. For his part, Mr Chan places reliance in particular on the words “on the ground that” before the words “unauthorized additions, alterations or illegal structures”.  But I do not think this focus assists; those words simply mean something like “because of the fact of” or “arising from the fact of”. 

81. In any event, whilst some focus on individual words (as suggested by either of Ms Wong or Mr Chan) might provide help, I must construe in the end seek to construe all the words in context.

82. Mr Chan also says that the fact that Huge Grand was trying to obtain a rectification of the problems, or dispensation from the DLO as regards them, is not inconsistent with his construction that Clause 30 nevertheless required Huge Grand prove good title without risk of government action over the breaches of SC7 and SC8.  But whether it is consistent or not (or “not inconsistent” to use Mr Chan’s litotes), does not seem to me to answer the question as to what is the proper construction, which depends on the words used in context.

83. I do not think the wording of Clause 30 is limited to the situation where a requisition is premised upon a contravention of the BO, but which could not apply where a requisition is made by reference to the same contravention(s) based on a breach of the Government Lease or the DMC.

84. Mr Chan’s submission that there is no express provision in Clause 30 that Channel Green was precluded from raising requisitions or objections to title in respect of any breach of the Government Lease or the DMC merely begs the question as to the proper meaning of the clause.  For it can just as easily be pointed out that the clause does not expressly limit the precluding of requisitions to situations of a breach of the BO.

85. In Modern Sino Ltd v Art Fair Co Ltd [1999] 3 HKLRD 847, at 850F-G, Yuen J (as she then was) pointed out:

“The presence of substantial buildings works not included in approved building plans immediately gives rise to at least three questions:

(a) is there a risk of enforcement action by the Building Authority?

(b) is there a risk of re-entry by Government as lessor?

(c) is there a risk of action against the owner by co-owners under the deed of mutual covenant (DMC)?”

(original emphasis)

86. Of course, Mr Chan is right when he points out that there may be a breach of a government lease without there necessarily being a breach of the BO, and vice versa, but in line with the point made in the Modern Sino case, the parties in this case were certainly alive to both possibilities.

87. The fact that Clause 30 is a clause relating to questions of title, but has no limitation identified as to how title might be affected by any unauthorised additions, alterations or illegal structures on the Property, seems to me to show that what is intended to be precluded is any requisition irrespective of the basis upon which any such unauthorised additions, alterations or illegal structure might affect title.

88. That this is the correct construction of Clause 30 is also shown by reference to the prevailing background facts or “matrix” (as it is sometimes known).

89. The prospective purchaser had been informed of, and knew of, numerous and substantial “unauthorised additions, alterations or illegal structures on the Property”, including:

(1)   the removal of the 12 car parking spaces from the Forecourt, where the Stalls had been added, in breach of SC7;

(2)   the extension of some of the Shops into the Non-Built Over Area in breach of SC8 (and even if the precise extent of protrusion was not evident from simply looking at the site, the documents provided showed this);

(3)   the existence of various other miscellaneous unauthorised additions or alterations at various parts of the Property;

(4)   that there had been notices from and correspondence from different government departments about these breaches.

90. It is noteworthy that Ms Ho was present at the presentation by Ms To on 2 March, when specific questions were asked about the presence of the Stalls in the Forecourt where there were supposed to be 12 car parking spaces, being in breach of SC7, and an opinion was expressed as to how the removal of the Stalls would affect the value of the Property.

91. Whilst it may be correct that Ms Ho or Channel Green did not know of every single unauthorised addition, alteration or illegal structure on the Property, I do not think that there was an obligation on Huge Grand to have made such disclosure.  Where a purchaser is made aware of unauthorised additions, alterations or illegal structures in general terms, and where specific examples of defects have been identified, then the purchaser will bear the full risks of the existence of those unauthorised items: see Ni Tiee Bor Robert v Golden Crane Industries Ltd (unreported, CACV 120/2000, 19 September 2000). 

92. In that case, the purchaser had been told of 4 out of 8 alterations, but agreed to complete the sale and purchase even if it was found that there was in existence any unauthorised alterations or illegal structures.  As the purchaser did not insist on being told of or finding out the exact extent of the alterations prior to entering the agreement, he was held to have been prepared to take the risk associated with the unauthorised alterations.  Merely because he had been told of only some alterations, he was not led into believing that there were no other alterations.

93. That chimes with a passage from the Jumbo King case, where Lord Hoffmann NPJ, at 299F, specifically had in mind the position where a vendor either did not actually know of the defect but had means of knowledge, or if the matter was technically a defect in title but something which a purchaser might reasonably be prepared to accept.

94. In the context of the present case, the possibility of problems arising with more than one government department (that is, not simply the Building Authority) had been made clearly known to the potential purchaser of the Property.  The purchaser also knew that Huge Grand itself had only the previous year been prepared to purchase the Property notwithstanding the matters as to breaches of the Government Lease and the BO, and complaints from the IO (all of which are expressly covered in the relevant purchase agreement: see above).

95. I therefore accept that it is apparent from the insertion of Clauses 30 and 31 in their precise terms (carried, as they were, directly from clauses 7 and 8 of the PSPA) as against the background as to the parties’ knowledge about the Property that the provisions were inserted to relieve Huge Grand of the obligation to deal with any requisitions on title arising from the existence of unauthorised additions, alterations or illegal structures on the Property, at the Property.

96. Mr Chan says that Clause 30 cannot have covered any breach of SC7, as that is concerned with the provision of parking spaces, which is unrelated to and does not depend on the existence of any unauthorized building structures.  But he misses some of the words in the clause; as the plan of the Property makes clear, and as a visit to the site would identify, the presence of the Stalls was by way of unauthorized additions, and the parking spaces were deleted or altered without authorization.  The plan also shows there are some structures which block the parking spaces marked.  There are some things built over the Non-Built Over Area, and the vehicular access is at least hampered if not blocked.

97. So it seems to me that on the proper construction of the Clauses 30 and 31, the Requisitions 5 and 7 were not permitted, and Huge Grand has satisfied the burden of showing that, on the proper construction, the language of the waiver clearly had the effect of shifting the risk of a defect in title to the purchaser.

98. I consider that the requisitions were given a proper response, or were properly answered, by Huge Grand’s reliance on what it said was the proper construction of the clauses, which obviously included an acceptance or assertion of the existence of the various unauthorized additions, alterations or illegal structures and breaches of the Government Lease, BO and DMC.

Conclusion on Termination

99. In the circumstances, I accept that Huge Grand was entitled to terminate the SPA, and is entitled prima facie to succeed on its defence and counterclaim.  Channel Green’s claim falls to be dismissed.

Forfeiture of Deposit

100. However, whilst Huge Grand is prima facie entitled to succeed on its counterclaim, it has abandoned its claim to specific performance and seeks to forfeit the deposits paid in the sum of $36 million.

101. That sum represents a 15% deposit, which is higher than the “conventional” 10%.  As a result, as Ms Wong accepts by reference to Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234 at §90, Huge Grand needs to show that:

(1)   exceptional circumstances existed to justify the higher amount; and

(2)   such exceptional circumstances related to a true deposit’s purpose as an earnest of performance and as compensation for the vendor’s withdrawal of his asset from the property market pending completion, providing an objective justification for the higher sum.

102. Huge Grand seeks to justify taking a 15% deposit by relying on the evidence of Ms To that the normal completion period for the sale and purchase of commercial properties of a nature similar to the Property would be 3 months and the conventional deposit would be 10% of the purchase price.  But a 15% deposit was required by Huge Grand and agreed to by Channel Green because of the extended completion period of 4½ months asked for by Channel Green.  It was said that because the completion period was 1½ months, namely half again of the usual period of 3 months, the deposit was also correspondingly increased by 5%, namely half again of the usual deposit of 10%.

103. Mr Chan criticized Ms To’s evidence in this regard, first by pointing out that she was not sufficiently experienced to offer any compelling or “expert” view as to the normal completion period for commercial property sales, and secondly because her own evidence was inconsistent if it is remembered that she drew up offers for purchase of the Property with 4 month completion periods put forward against a 10% deposit.

104. As to the latter point, I have already held that the 4 month period was put forward on the suggestion of the then prospective purchaser, namely on the proposal by Mr Leung as an invitation to what the vendor might agree.  That does not make Ms To’s evidence inconsistent (and, indeed, it might be said rather to be consistent with the later request by the purchaser for a 4½ month completion period).  As to the first point, I see no reason to doubt Ms To’s view of the normal completion period, and no contrary evidence was put forward for Channel Green.

105. But in any event, I consider it to be clear on the materials that once the drafting of what came to be the PSPA was commenced, there was a clear correlation between the amount of the deposit and the period of completion.  In the drafts from 31 May to 1 June, the deposit was shown as 10% against a 3 month completion period.  In the drafts on 2 June and the final version of that date, the deposit was shown as 15% against a 4½ month completion period.  The drafting changes to the deposit and completion period were simultaneous, and it seems obvious that one was changed in the context of the change to the other, as well as identifying the proportional link.

106. The actual amount of increase was not really the subject of challenge by Mr Chan as inherently unreasonable, and Ms To had described a higher deposit for a longer completion period as “normal”.

107. In the Polyset case at §107, Ribeiro PJ expressly accepted that “a vendor may legitimately demand a larger quid pro quo for keeping his property off the market during the more prolonged period”.  Of course, it will in every case be a question of degree as to whether or not the particular demand is assessed to be reasonable and aptly linked to the extended completion period.

108. In this case, Mr Chan pointed out that there is no evidence of any uncertainty or particular volatility in the market, and indeed the market might then have been rising.  But I would think it obvious that the longer any completion period, during which the vendor has taken his property off the market, the longer the vendor is at risk of the vicissitudes of the market and the less reliable any prediction as to market movement. Depending on the larger deposit demanded, those facts alone might justify that demand.

109. Here, I am wholly satisfied the circumstances identify an objective justification for the higher deposit as an exception to the more normal 10%, and that those circumstances did relate to a true deposit’s purpose as an earnest of performance and as compensation for the vendor’s withdrawal of his asset from the property market pending completion.

110. I therefore hold that Huge Grand is entitled to forfeit the deposits in the sum of $36 million.

111. (Had I not so held, I would have accepted Mr Chan’s submission that if the deposit amount cannot be objectively justified, the whole of it would be required to be returned, leaving the vendor to make good any claim in damages, but where here the vendor could not do so on the evidence before the court.)

Conclusion

112. In conclusion, I dismiss Channel Green’s claim, and I hold that Huge Grand is entitled to forfeit the deposits in the sum of $36 million.

113. As to costs, I make an order that the costs of the action shall be paid by Channel Green to Huge Grand, with certificate for two Counsel.  That order shall be nisi in the first instance, but shall become absolute after 14 days unless an application for variation of the order is made before that time.  I shall deal with any variation application on paper submissions, by reference to a timetable I am sure I can leave Mr Chan and Ms Wong sensibly to agree.