ORIENTAL SHARP LTD v. HONG KONG HOUSING AUTHORITY AND ANOTHER

CACV 426/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 426 of 2006

(on appeal from HCA NO. 8794 of 2000)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a judgment of A Cheung J given on 2 November 2006.  The matter before the judge was a claim by the plaintiff as the developer under one of the Private Sector Participation Schemes (“PSPS”).  At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

2.  The background to the PSPS scheme and its implementation has been fully set out in the judgment below and there is no need to repeat it here.  No issue has been taken on any of the facts set out therein.  For the purposes of this appeal it suffices to say that in April 1996 the plaintiff, which is a subsidiary of a large group, entered a contract with the Government.  That contract is encapsulated in Conditions of Sale for the grant of land for development as part of the PSPS projects.  The terms of the contract with the Government require the plaintiff to develop the site into both residential housing and commercial premises.  There were two phases.  In the first phase there were to be 2648 residential housing units and in the second phase there were to be 1260 units.  The development was known as Charming Garden.  This case is not concerned with the commercial part of the development.  In respect of the housing units there were special provisions which were similar to other PSPS schemes.

3.  The intent behind the PSPS scheme was that the housing units would be sold at less than the market price for units of that type to applicants who would be nominated by the defendant.  Although the PSPS scheme would provide housing at a reduced cost to the applicants, successful applicants were required to retain their units for a number of years and were not allowed to sell them on unless they paid an extra amount for the privilege.  The effect of clause 26 of the Special Conditions of the Conditions of Sale was that the plaintiff was required to sell the units at a price which was to be determined by the defendant with a deposit varying between 5% and 10%, again to be directed by the defendant, but that the plaintiff would only receive $15,000 per square metre of total saleable area.  Any excess in the sale price over that figure would go to the defendant and any shortfall in the sale price would be made up by the defendant.

4.  Under clause 24 of the Special Conditions the defendant was required to nominate the persons to whom each unit would be sold.  Sub-clause (24)(a)(ii)I provided that, if the person nominated did not sign a sale and purchase agreement, the plaintiff was required to inform the defendant who would then nominate another person to purchase the unit.  Sub-clause (24)(a)(ii)II provided for circumstances where a nominated person had signed the sale and purchase agreement but did not pay the balance of the purchase price.  The provisions of that sub-clause together with the salient parts of sub-clause (24)(b) are relevant for the purposes of this case and are set out as follows:

“	(24)	(a)	(ii)	Within the period of 12 months specified in sub-clause (a)(i) of this Special Condition, if a nomination in respect of a unit shall have been made by the Hong Kong Housing Authority, but the home-owner :-
				……….
				II.	having paid the deposit, fails to pay the balance of the purchase price for the unit by the time specified for payment in the agreement for sale and purchase (the time for payment being due within the said period of 12 months), the Purchaser shall inform the Director of Housing thereof by notice in writing within 14 days of such failure whereupon the Hong Kong Housing Authority acting through the Director of Housing shall within four calendar months of such notification nominate another home-owner to purchase the unit in question and shall specify the purchase price at which such unit shall be purchased by the home-owner and in such event the Purchaser shall only be entitled to an amount equal to the purchase price (less the deposit paid by the original home-owner) which would have been payable by the original home-owner had the failure not taken place.
				……….
		(b)	After the expiry of the period of 12 months specified in sub-clause (a)(i) of this Special Condition, the Purchaser (i.e. the plaintiff) shall inform the Director of Housing by notice in writing of :-
			(i)	any unit in respect of which no nomination in accordance with sub-clause (a)(i) of this Special Condition shall have been made by the Hong Kong Housing Authority acting through the Director of Housing, within 28 days after the expiry of the said period of 12 months;
			(ii)	any unit in respect of which the Hong Kong Housing Authority acting through the Director of Housing, shall have failed to make a further nomination in accordance with sub-clause (a)(ii) of this Special Condition, within 28 days after the expiry of the said period of 12 months;
			(iii)	any unit in respect of which a nomination shall have been made in accordance with sub-clause (a)(i) or (a)(ii)I, of this Special Condition but the home-owner having paid the deposit referred to in Special Condition No. (26)(b)(v) hereof has failed to pay the balance of the purchase price for the unit by the time specified for payment in the agreement for sale and purchase (the time for payment being due after the expiry of the said period of 12 months), within 28 days of such failure.
			Any or all the units above referred to shall be purchased by the Hong Kong Housing Authority or its nominee from the Purchaser at the price fixed therefor in accordance with Special Condition No. (26)(b)(iv) hereof (but not the said price as may be varied under Special Condition No. (26)(c) hereof) less, in the event of the home-owner failing to pay the balance of the purchase money, the amount of the deposit paid by the home-owner, and in respect of such purchase the Purchaser and the Hong Kong Housing Authority or its nominee shall be deemed to have executed on the date of the expiry of the said period of 12 months an agreement for sale and purchase or any such unit or units in the form approved by the Director under Special Condition No. (26)(b)(ii) hereof, and all the provisions of the said form of agreement for sale and purchase shall then apply for all purposes governing the said sale and purchase in the same way as if it had been duly executed by the Purchaser as vendor and the Hong Kong Housing Authority or its nominee as purchaser in respect of each such unit or units …
		…”

5.  Sub-clause 24(d) provided that the plaintiff should, if called upon so to do by the Director of Housing, rescind any sale and purchase agreement in cases where there had been any misrepresentation or false statement in the application process.  The Director of Housing would then nominate another home-owner to purchase the unit in respect of which the agreement for sale and purchase has been rescinded at whatever price was considered appropriate and the plaintiff would only be entitled to an amount equal to the purchase price (less the deposit paid by the original home-owner) which would have been payable for the unit by the original home-owner had the rescission not taken place.  Again if there was no new nomination the defendant would purchase the unit at the price which would have been payable by the original home-owner had the rescission not taken place less the deposit paid by the original home-owner.

6.  From these provisions it is quite clear that if a nominated person had paid a deposit then either there would be a successful re-nomination of another person to purchase the unit or the defendant itself would purchase the unit.  In either case the plaintiff would be entitled to the $15,000 per square metre but would have to take into account any deposit which had been paid and forfeited.

7.  In practice what happened is that the defendant required a nomination fee from a home-owner.  That fee would be either 5% or 10% of the price of the unit.  That fee was then treated as being the deposit under the agreement that would be signed by the home-owner with the plaintiff.

8.  In the present case the defendant had determined the original sale price of the units to be $40,000 per square metre.  At an administrative meeting on 26 June 1997 it was agreed that when the deposits were paid the amounts would be divided between the plaintiff and the defendant in the ratio of 15/40.  The amount that the plaintiff received would then be taken into account in the reckoning, when all the units had been sold.  Altogether there were 3908 nominations and 3488 agreements for sale and purchase were executed.

9.  Before completion took place there was a well documented downturn in the economy which has been commonly referred to as the Asian financial crisis.  The net effect was that the open market value of equivalent units dropped to such an extent that home-owners became less inclined to consider their nomination a valuable asset.  Coupled with that there were various changes in government policy in relation to housing which made it understandable that home-owners might wish not to complete the purchase of the units in respect of which they had been nominated.

10.  Although there were claims in respect of other home-owners, the claim that was extant on this appeal was in respect of 946 home-owners.  They had entered agreements for the sale and purchase of units as home-owners and had paid their deposits but then expressed their wish not to complete the transactions.  In respect of some of them they received letters from the defendant informing them that their request to withdraw from the sale and purchase agreement was approved and that their application had been cancelled, but in respect of all these 946 home-owners the plaintiff itself entered cancellation agreements.

11.  It is said on behalf of the plaintiff that it did so because it was a matter of fait accompli that the purchasers had already secured the agreement of the defendant that they could cancel their sale and purchase agreements.  In respect of most of those 946 home-owners the deposit of at least 5% was forfeited.  There were some who, for one reason or another, the defendant permitted the nomination fee to be returned.  In respect of all those units the defendant either successfully nominated a new person to purchase the units or, in respect of some of the units, purchased them itself.  In summary the plaintiff did receive $15,000 per square metre in respect of all the units.

12.  The claim in this action was on the basis that the plaintiff was entitled to the whole of the deposit in respect of each of the 946 units in addition to the $15,000 per square metre which it has already received.  In the course of argument it was made clear that the claim was in respect of the whole of all deposits, irrespective of whether the whole of the amount originally paid as nomination fee had been returned to the home-owner and irrespective of the 15/40 split that had been the subject of the administrative meeting discussion on 26 June 1997.

13.  The plaintiff’s claim to the deposits in addition to the amount of $15,000 per square metre under the contract was first made in a letter dated 15 April 1998 from the plaintiff’s parent company to the defendant.  It is clear that the plaintiff and its parent were well aware that there was a difference of opinion as to that claim.  In their letter dated 13 May 1998 to the defendant, the plaintiff’s solicitors referred to the difference in views between the two parties and were content that the matter should be sorted out later.  Two days later the defendant replied saying that the forfeited deposits would be dealt with in accordance with the terms of the government grant.  When the plaintiff’s solicitors pursued the matter again the Housing Department wrote on 22 June 1998 that the matter should be dealt with in the final account upon the completion of the projects under the terms of the Grants and the confirmed minutes of the conveyancing meeting held on 26 June 1997 and notes of the conveyancing arrangement in respect of phase 2 of Charming Garden dated 16 October 1997.  The relevant part of those minutes and notes read:

“	In any case of rescission, the total amount receivable by the developer as listed in Appendix G would remain unchanged, that is the developer would not have any share on the money forfeited from nomination fees/deposits already paid by the nominees in cases of recession.”

14.  The judge below considered that the matter was covered by sub-clause 24(a)(ii)II or in the alternative 24(b)(iii) of the Special Conditions.  In a lengthy judgment in which the arguments of both sides were fully set out, the judge held in the defendant’s favour and considered that the matter was covered by those 2 provisions and also that, in effect, the plaintiff and the defendant had contracted the time before the defendant could nominate replacement home-owners to take over the units that the original nominees no longer wished to purchase.

This appeal

15.  On this appeal Mr Chan SC, who appeared on behalf of the plaintiff in this court, argued first of all that special condition 24(a)(ii)II did not apply in this instance because it only applied where the home-owner failed to pay the balance by the time specified in the sale and purchase agreement.  His argument was that there was no time specified because clause 1 of the cancellation agreements provided that the sale and purchase agreements were “cancelled and shall be deemed to be null and void and of no further effect”.

16.  In my view the judge’s approach was entirely correct.  The short answer must be that the various purchasers (home-owners) who signed sale and purchase agreements did not complete the purchases and pay the balance of the purchase price for the units by the time specified in the agreements irrespective of whether or not those agreements had been cancelled.  As the judge below correctly said, it is as though the cancellation agreements cut short the time which was required for the plaintiff to wait for the failure to take place and accepted that it never would take place.  That way all parties were benefited because the plaintiff and the defendant would be put in a position whereby they could accelerate the subsequent nomination of new home-owners for the units, no doubt at prices which were by then acceptable to those who would be interested.

17.  The argument that the original sale and purchase agreements were of no effect could not, it seems to me, assist the plaintiff because the amounts which were deemed to satisfy the requirement for the deposits had in fact been paid to the defendant as nomination fees.  They were then treated by the parties as being the deposits.  If the sale and purchase agreements were truly of no effect whatever those payments were they would not be deposits, because on the plaintiff’s argument there was no requirement for there to be any deposit, but they would be the nomination fees.  The plaintiff cannot rely simply on clause 2 of the cancellation agreements which provided that “Upon cancellation of the said Agreement, the parties agree that the Vendor shall be entitled to forfeit the said deposit”.  If the money was paid as a nomination fee payable to a first party and was notionally allocated in satisfaction of a requirement for a deposit under an agreement between 2 other parties, those other 2 parties cannot agree amongst themselves that they will cancel their agreement, and arrange that one of them will pocket the nomination money on the basis that their agreement no longer existed.  That would be a fraud on the first party.  In those circumstances it would be the first party, in this case the defendant, that would be entitled to that money.

18.  I would add that Mr Chan argued the minutes of the conveyancing meeting held on 26 June 1997 were irrelevant because what was said only applied in cases of rescission and these were cases of cancellation.  Semantically that argument may be correct, but I have little doubt that what was intended was to cover a situation such as the present where the sale and purchase agreements were not carried out.

19.  There was a subsidiary argument in respect of 28 home-owners that there was a wrongful interference with contract namely the sale and purchase agreements.  The judge below dismissed the claim on the basis that the home-owners had not breached their contracts because the option to forfeit deposits was an alternative open to them under the contract.  Whilst I would not dissent from that I consider that any such claim must be fundamentally unsound because the plaintiff cannot demonstrate that it has suffered any damage.  The plaintiff was only entitled to $15,000 per square metre and that it received whether the units were purchased by nominated home-owners or by the defendant.

20.  I have no hesitation in saying that this appeal should be dismissed.  It not only fails on the argument but also lacks any semblance of merit.  I would make an order nisi of costs in favour of the 1^st defendant.

Hon Le Pichon JA:

21.  I agree with the judgment of Rogers VP.

Hon Reyes J:

I. INTRODUCTION

22.  There are 2 main issues. 

23.  The first is whether Oriental Sharp is entitled to receive more than the guaranteed sum under the Conditions of Sale (that is, $15,000 per sq. m. times total saleable area).  Here it is accepted that (despite reference therein to “the Government” instead of the Housing Authority) special conditions 24 and 26 of the Conditions of Sale constitute a contract between the Housing Authority and Oriental Sharp.

24.  The second is whether the Housing Authority wrongfully induced 28 of 946 original purchasers to breach their sale and purchase agreements with Oriental Sharp.  Here it is accepted that the Housing Authority was not a party to the pertinent sale and purchase agreements.

II. DISCUSSION

A. Issue 1:  Whether entitlement to more than guaranteed sum

A.1 Formulations of the issue

25.  The parties have treated this issue as an argument over Oriental Sharp’s entitlement to the deposits forfeited by the 946 original purchasers who failed to pay the balance of the price for their units.  But, for reasons which I explain below, I prefer my formulation of the issue.  Ultimately, I do not think that the difference in formulation affects the outcome on this issue.

26.  I prefer my formulation because it makes plain that there is no dispute that Oriental Sharp is at least entitled to the guaranteed sum.  The Housing Authority is not contending, for example, that Oriental Sharp is only entitled to the guaranteed sum less any initial deposit paid.  On the contrary, the Housing Authority has paid Oriental Sharp the guaranteed sum.  But Oriental Sharp claims to be entitled to more.

27.  The controversy arises because, the 946 original purchasers having defaulted, the Housing Authority either nominated new purchasers or itself to replace the original purchasers. 

28.  When the new purchasers or the Housing Authority bought the 946 units over which there had been default, they did so at a reduced price from that payable by the original purchasers.  But in accordance with the Conditions of Sale the Housing Authority ensured that Oriental Sharp received the guaranteed sum which was not affected by the reduction in the purchase price. 

29.  However, in paying the guaranteed sum, the Housing Authority took account of the fact that Oriental Sharp had received initial deposits from the 946 defaulting original purchasers.  The Housing Authority therefore only topped up to the extent of the guaranteed sum less the initial deposits received by Oriental Sharp from the 946 defaulting original purchasers.

30.  By these proceedings, Oriental Sharp essentially claims that the Housing Authority was wrong to have so acted.  Instead (according to Oriental Sharp) the Housing Authority should have paid the whole of the guaranteed sum without deducting the amount of the deposits paid by the 946 original purchasers.  It was wrong for the Housing Authority to take account of these initial deposits (Oriental Sharp says) because they constituted compensation for the interest and other financial charges which Oriental Sharp had to bear by reason of the delayed payment of the purchase price for the 946 defaulting units.

31.  The answer to the first issue hinges on whether special condition 24(a)(ii)II of the Conditions of Sale governs the treatment of the deposits paid by the 946 defaulting original purchasers. 

32.  This is because sc. 24(a)(ii)II states that, where (having paid a deposit) an original purchaser “fails to pay the balance of the purchase price for the unit by the time specified in the agreement for sale and purchase,” Oriental Sharp is only entitled to “an amount equal to the purchase price (less the deposit paid by the original [purchaser]) which would have been payable by the original [purchaser] had the failure not taken place”.  By the special condition, Oriental Sharp has no entitlement to another deposit from a new purchaser in respect of a unit for which an original purchaser has already paid a deposit.

33.  Accordingly, if sc. 24(a)(ii)II governs, in the case of the 946 units on which the original purchasers defaulted, Oriental Sharp can only be entitled to receive the corresponding portion of the guaranteed sum from the Housing Authority, no more, no less.

34.  Andrew Cheung J answered the question of the application of sc. 24(a)(ii)II in the affirmative.  For the reasons which I set out in the next section, I respectfully agree with him.

A.2 Application of sc. 24(a)(ii)II

35.  Merely on a reading of its plain and ordinary meaning, sc. 24(a)(ii)II applies here.  The 946 original purchasers self-evidently “failed to pay the balance of the purchase price by the time specified” in their respective agreements for sale and purchase.

36.  But Edward Chan SC (appearing for Oriental Sharp) submits that this straightforward reading of sc. 24(a)(ii)II is erroneous.

37.  Mr. Chan points out that the 946 original purchasers entered into cancellation agreements with Oriental Sharp prior to the time specified for completion in the various sale and purchase agreements.  In each case, the cancellation agreements stipulated that the corresponding sale agreements previously entered into between an original purchaser and Oriental Sharp were “cancelled” and “deemed to be null and void and of no further effect”.

38.  The result (Mr Chan argues) is that the agreements for sale and purchase ceased to specify a time for the payment of the balance of the purchase price.  No time for completion being any longer specified in the cancelled agreements for sale and purchase, sc. 24(a)(ii)II cannot (Mr. Chan reasons) be applicable.

39.  The entry into cancellation agreements by the 946 original purchasers (Mr. Chan submits) was something that was not envisaged by the persons who drafted the Conditions of Sale. If the Conditions do not deal with the situation, Oriental Sharp must be entitled to retain for itself (rather than account to the Housing Authority for) the deposits paid to it by the 946 original purchasers before their agreements were cancelled.

40.  I am not persuaded by Mr. Chan.

41.  First, the Housing Authority and Oriental Sharp (acting by its solicitors) expressly agreed in correspondence that the cancellation agreements were to be executed without prejudice to the parties’ respective rights and entitlement under the Conditions of Sale.  Thus, it is neither permissible nor proper to treat the cancellation agreements as in any way affecting the Conditions of Sale.

42.  Second, in any case, as a matter of principle, the cancellation agreements (to which the Housing Authority was not a party) cannot affect the construction or ambit of the expression “by the time specified in the agreement for sale and purchase” in the Conditions of Sale (to which the original purchasers who entered into the cancellation agreements were not a party).

43.  To put it starkly, assume that A enters into contract X with B.  B later executes contract Y with C to the effect that an expression in contract X is to be regarded as null and void and of no effect as far as B and C are concerned.  I do not see how contract Y can affect the construction or ambit of the relevant expression in contract X as far as A and B are concerned.

44.  Mr. Chan attempts to get around this difficulty by noting that a copy of the cancellation agreement was shown to the Housing Authority prior to execution of the same by the 946 defaulting original purchasers.  The Housing Authority (it is said) made no comment on (and therefore must have implicitly approved) the draft shown.

45.  That may have been what happened.  But I do not see how such fact can have any bearing on the problem. 

46.  Merely because the Housing Authority was aware of Oriental Sharp’s cancellation agreement would not somehow make the Housing Authority a party to such contract. This must especially be so where it was agreed among all concerned that the cancellation agreements were to be without prejudice to the parties’ rights under the Conditions of Sale.

47.  Third, in any event, the fact that, by a cancellation agreement, it was agreed that a corresponding sale and purchase agreement would be nullified, cannot alter the hard reality that the (now cancelled) agreement literally continues to specify a time for completion.  Whether or not legally obliged to complete by such specified time after signing a cancellation agreement, the original purchaser still “fails to pay the balance of the purchase price ... by the time specified” within the terms of sc. 24(a)(ii)II. 

48.  I do not think that it is here relevant for ascertaining whether a payment has been (or has failed to be) made at a specified time that an original purchaser is, due to subsequent events, no longer obliged to complete by such time. Special Condition 24(a)(ii)II says nothing about an original purchaser failing to pay contrary to a subsisting legal obligation.  It only refers to the original purchaser’s failure to pay.

49.  I therefore conclude that sc. 24(a)(ii)II governs the situation of the 946 original purchasers.

50.  By way of fallback, Mr. Chan argues that Oriental Sharp is at least entitled to an apportionment of forfeited deposit under sc. 26(c). 

51.  The latter term concerns the situation where the Government unilaterally varies the sale price of a housing unit. In such case, a developer like Oriental Sharp would be entitled to a top up from the Housing Authority where the new sale price results in less than the guaranteed sum being received by Oriental Sharp.  But if the new sale price leads to the developer receiving more than the guaranteed sum, the excess must be paid over to the Housing Authority. 

52.  As far as I can see, there is nothing in sc. 26(c) to justify a general apportionment of deposit along the lines suggested by Mr. Chan.  If anything, sc. 26(c) confirms Cheung J’s view that under the Conditions of Sale Oriental Sharp is entitled to no more than the guaranteed sum.

B. Issue 2: Whether interference with sale and purchase agreement

53.  Cheung J rejected Oriental Sharp’s contention on wrongful interference on 2 principal bases.

54.  First, there was a problem of causation.  Cheung J was not persuaded that Oriental Sharp had established a causative link between any act of the Housing Authority that could be characterised as wrongful and the default of an original purchaser. 

55.  In the case of a majority of the 946 original purchasers, there was no evidence that they had opted to withdraw from completion due to any specific conduct by the Housing Authority.

56.  On the other hand, some 28 of the 946 original purchasers became entitled to a refund of their deposit as a result of a change in housing policy due to the recession in the property market.  This entitlement to a refund (Cheung J thought) could have played a part in the decision of these few purchasers not to complete.  But (Cheung J observed at §225) “the Housing Authority was and is fully entitled to announce whatever new policy relating to housing it sees fit to pursue”.

57.  Mr. Chan does not seek to overturn Cheung J’s finding of an absence of causation in the case of the majority of purchasers.  Mr. Chan limits his criticism to the situation of the few who became entitled to a refund of their deposit. 

58.  The Housing Authority may have been able to adopt whatever policy it deemed appropriate.  But (Mr. Chan argues) that change of policy encouraged 28 purchasers to default on their obligations to Oriental Sharp.  That change in policy (Mr. Chan suggests) was accordingly “wrongful interference” under tort law.

59.  I disagree with Mr. Chan.  I fail to see how there can be something “wrongful” (in whatever sense) in the Housing Authority changing its policy in response to economic conditions in Hong Kong.

60.  Second, Cheung J found that, on a true construction in their factual matrix, the sale and purchase agreements provided for alternative modes of performance on the part of a purchaser. Having paid a deposit, the latter could either pay the balance of the purchase price or forfeit the deposit.

61.  In opting not to pay the balance of the price, the 946 purchasers were not (Cheung J reasoned) breaching their sale and purchase agreements otherwise than in a technical sense. They were instead merely taking an alternative to completion (namely, forfeiture of their deposit) which was contractually open to them.   

62.  The situation (Cheung J held) was akin to that in Wong Lai-fan v. Lee Ha [1992] 1 HKLR 125 where the Court of Appeal held that under the relevant contract the purchaser could either proceed to completion or opt to pay a “double compensation” for failing to complete.  Specific performance could not be ordered in such case.

63.  Given the lack of causation and wrongful interferernce mentioned above, it is unnecessary for me to assess this second basis.  I merely record here for completeness that I am inclined to agree with Cheung J’s approach and conclusion on this point. 

III. CONCLUSION

64.  Oriental Sharp fails on both issues.  I would dismiss its appeal with costs.

Hon Rogers VP:

65.  There will therefore be an order in terms of paragraph 20.