NEW CHAMPION (HONG KONG) LTD v. TREBLE AND TRIPLE LTD

HCA 2691/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2691 OF 2008

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D E C I S I O N

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Introduction

1. This is a dispute between the purchaser and the sub-purchaser in a conveyance transaction.  Both parties phrased various questions of law to be decided by this Court. By the determination, it should dispose of the disputes between the parties in the present proceedings.

Background

2. On 26 March 2007, the Plaintiff entered into a head SP agreement with the Developer to purchase an uncompleted building known as Flat A, on 43^rd, 45^th and Flat Roofs, Tower 3, Bel-Air together with Car Parks Nos. 60 and 61 on level 8 (collectively “the Property”) at $36,390,000.

3. After about 8 months, by a Provisional SP Agreement dated 9 November 2007 (“the Provisional SP Agreement”), the Plaintiff sub-sold the Property to the Defendant at $45,600,000.  The Defendant paid the Plaintiff an initial deposit of $2,219,000.

4. Thereafter, although no formal SP Agreement was signed, the Defendant did pay the Plaintiff a further deposit of $4,621,000 on 23 November 2007.

5. About 1 year later, the Developer informed the Plaintiff to complete the sale on or before 12 December 2008.  The Plaintiff in turn notified the Defendant accordingly.  However, there was no completion.

6. On 12 December 2008, the Plaintiff’s solicitors complained to the Defendant’s solicitors of  the failure to complete and said that:

“…… our client shall claim against your client for all losses and damages suffered by our client as a result of your client’s breach and shall further require your client to indemnity our client for all losses and damages claimed by the Head Vendor, Hong Kong Cyberport (Ancillary Development) Ltd.  And in the meantime, our client reserves all rights under the said Provisional Agreement for Sale and Purhcase.”

7. The Defendant’s solicitors disagreed and replied on 15 December 2008 that:

“According to Clause 7 of the Provisional Agreement for Sale and Purchase dated 9 November 2007 of the Premises, which provides as follows, your client is only entitled to forfeit the initial deposit of the purchase price in the event that our client does not complete the purchase of the Premises ……

We are instructed to request and demand your client to pay to us on behalf of our client the sum of HK$4,621,000 …… by Thursday 18 December 2008, failing which our client shall commence legal proceedings against yours without further notice, in which case your client will be liable for additional interest and costs.”

8. On 19 December 2008, the Plaintiff issued the present proceedings claiming, inter alia, recession of the Provisional SP Agreement, damages and indemnity of claim by the Developer.

9. The Defendant contested the proceedings.  Briefly, it argued, among others, that even if it failed to complete the sub-sale, under clause 7 (“Clause 7”) of the Provisional SP Agreement, only the initial deposit was to be forfeited and the Plaintiff could not sue for damages. It counterclaimed for various matters, including repayment of the further deposit of $4,621,000.

10. The Plaintiff denied the case of the Defendant and replied, inter alia, that it had never exercised the right of forfeiture under Clause 7.  Further, if it was a right conferred upon the Defendant, it also had not exercised the same.

11. On 24 March 2009, the Plaintiff issued a summons under Order 14, Order 14A and Order 15 rule 16 RHC against the Defendant.  About one month later, on 28 April 2009, the Defendant also took out similar summons.

12. Usual directions were given to both summonses at call-over hearings and parties later appeared before me for 2 days arguing the matter substantively.  Mr. C. Wang of Counsel represented the Plaintiff and Mr. Jean-Paul Wou acted for the Defendant.  Having heard from the parties, I reserved my decision to be handed down.  I now do so.

Preliminary matters

13. At the outset of the hearing, both parties applied to amend their respective application by adding reference to Order 86 RHC.  Mr. Wang agreed to that of Mr. Wou.  I therefore allowed the same and dispensed the filing and service of the Amended Summons.

14. However, as to that of Mr. Wang, Mr. Wou opposed to it.  To avoid the waste of time and costs, I allowed the same on a de bene esse basis.  Having reviewed the matter again, I see no reason to refuse it.  It is only a matter of formality.  At all times, parties know exactly the position taken by the other side.  I see no prejudice suffered by the Defendant.

Discussion

15. Both parties framed different questions in different ways to be resolved by this Court in their application.  However, in my view, it really boils down to the interpretation of Clause 7.  It states that:

“買方悔約 Purchaser fails to perform

7.  如買方未能履行本合約之條款完成買賣，賣方除將買方已付之臨時訂金沒收外，並有權將該物業再行售予他人，惟賣方不可再為此向買方追究任何責任或要求任何賠償或特定履行。 Should the Purchaser fail to complete the purchase in the manner herein contained, the initial deposit shall be forfeited to the Vendor and the Vendor shall then be entitled at his absolute discretion to sell the said premises to anyone he thinks fit and the Vendor shall not sue the Purchaser for any liabilities and/or damages or to enforce specific performance.”

16. Upon consideration of the authorities and submissions from both Counsel, I have decided the matter in favour of the Defendant.

17. Yuen JA in See To Keung v Sunny Way Ltd (CACV 25/2006) sum up the law relating to provisional sale and purchase agreements as follows:

“ (1)   A provisional agreement is immediately binding on the parties.  Although it provides for a formal sale and purchase agreement to be signed, such formal agreement would only be to incorporate the express terms of the provisional agreement, to express any implied terms, and to add any new terms that may subsequently be agreed ……

(2)   Accordingly it is perfectly possible for the parties to proceed to completion without a formal agreement being signed ……

(3)   In most provisional agreements there is an “escape clause” i.e. a clause allowing a party who wishes to resile from the transaction within a short period of time after the provisional agreement to “buy his way out”.

- In the case of a vendor, he agrees to return the initial deposit to the purchaser, doubled by a sum of equal amount which he must pay the purchaser (“double deposits”).

- In the case of a purchaser, he forgoes the initial deposit.

This has also been referred to as “alternative performance” – an alternative to specific performance of the sale and purchase.  Where the vendor seeks to rely on the escape clause by paying double deposits, he must do so in strict compliance within the time allowed by the provisional agreement (Man Sun Finance v Lee Ming-ching Stephen [1993] 1 HKC 113).

(4) If the provisional agreement provides that “upon signing the formal sale and purchase agreement, a further deposit of $X shall be paid”, the purchaser is not signed (Fujian Finance Co Ltd v Link Brian [1990] 2 HKLR 353; Yiu Yau-ping v Fong Yee-lan [1992] 2 HKLR 167; Health Link Investment Ltd v Pacific Hawk Investment Ltd [1995] HKC 249).  These are all Court of Appeal judgments binding on this court.  It may be thought that in such a situation, the vendor is in an unfavourable position compared with the purchaser.  The purchaser would have the property “reserved” under an agreement binding on the vendor and he can wait until close of completion date before he decides (after considering the state of the market) whether to complete or not.  If the purchaser is a “2-dollar” company and decides not to complete after all, all that it loses would be the initial deposit.  The disadvantage to the vendor is obvious.  Of course, that is a good reason for vendors to insist on a larger initial deposit, but it is in the nature of “initial” deposits that they are relatively small sums, especially if there is an escape clause involving the payment of double deposits or forfeiture of the initial deposit.

(5) However, this is all subject to the true construction of the agreement made between the parties in the individual case.”

18. Both Counsel confirmed with me that they had not been able to locate a direct authority on a clause similar to that of Clause 7.  Hence, it turns on the construction of its own and I take the following views.

(a)   The parties did not sign the formal SP agreement, so their position continued to be governed by the Provisional SP Agreement.

(b)   The Defendant was not obliged to pay the further deposit of $4,621,000 as no formal SP agreement was signed.  It nevertheless went on to pay the same.

(c)   Clause 7 is the “escape clause” in the Provisional SP Agreement to cater for situation wherein the purchaser fails to perform, the consequence being that “the initial deposit shall be forfeited to the vendor and the vendor shall then be entitled at his absolute discretion to sell ……”.  The words are plain and clear.  Neither of the parties has to do anything further to trigger the operation of the same.

(d)   Mr. Wang tried to argue otherwise in light of the Clause 8, the “escape clause” when the vendor failed to perform.

“賣方悔約 Vendor fails to perform

8.  如賣在收取臨時訂金後，不依本合約之條款完成買賣則賣方除須退還買方所付之臨時訂金全數外，並須以同等數目之金額賠償買方。另賣方須負責繳付/退還本合約之印花稅（如有），惟買方不得再向賣方追究任何責任，包括其他賠償或特定履行。 Should the Vendor after receiving the initial deposit paid hereunder fail to complete the sale in the manner herein contained, the Vendor shall immediately compensate the Purchaser with a refund of the initial deposit together with a sum equivalent to the amount of the initial deposit as liquidated damages and the reimbursement/payment (as the case may be) of stamp duty of the said premises and the Purchaser shall not take any further action to claim for damages or to enforce specific performance.”

He submitted that Clause 8 had to be triggered by the vendor’s tendering of double amount of initial deposit, so did Clause 7 similarly in principle.  However, nothing was done by either of the parties to trigger Clause 7 and as such, the Plaintiff could sue for damages under contract law in general.  I respectfully disagree such proposition because of the difference in drafting and choice of words in the 2 Clauses.  If one closely compares them, the argument of Mr. Wang applies only to Clause 8, but not Clause 7.  In the latter, there can only be one consequence when the purchaser fails to perform, namely, the forfeiture of the initial deposit.

19. In conclusion, I will dismiss the application of the Plaintiff and answer its 3 questions as follows:

Q1:  Whether in light of the undisputed facts of the case the right of the Plaintiff to claim damages against the Defendant is affected by Clause 7 of the Provisional Sale and Purchase Agreement dated 9 November 2007 when neither the Plaintiff nor the Defendant has triggered the operation of the clause.

A1:  The operation of Clause 7 only requires the failure of the Defendant (the Purchaser) to perform, and nothing further.  Once it happens, the initial deposit is forfeited to Plaintiff (the Vendor).  It shall then be entitled to sell the Property, but not sue for damages or specific performance.

Q2:  That if the said question be answered in the negative, then interlocutory judgment be entered for the Plaintiff against the Defendant for the declaration and indemnity in the terms of the Statement of Claim and for damages for breach of the contract dated 9 November 2007 and made between the Plaintiff and the Defendant, mentioned in paragraph 9 of the Statement of Claim, to be assessed, and for interest as therein claimed to be assessed, and costs to be taxed.

A2:  Not applicable.

Q3:  If the question be answered in the positive then the action be dismissed and that the Plaintiff do pay the Defendant’s costs thereof.

A3:  The Plaintiff’s claim shall be dismissed with costs to the Defendant for the answers as provided under Q1.

20. On the other hand, as to the 2 questions raised by the Defendant:

Q1:  WHETHER under Clause 7 of the Provisional Agreement for Sale and Purchase dated 9 November 2007, the Plaintiff (vendor) is entitled to claim the relief, if at all, as pleaded in the Statement of Claim filed herein?

A1:  No.

Q2:  WHETHER under Clause 7 of the Provisional Agreement for Sale and Purchase dated 9 November 2007, the Plaintiff (vendor) was entitled to retain the Further Deposit of HK$4,621,000?

A2:  No.

Further Directions and Costs

21. I will leave the parties with 21 days from today to agree on the exact order to be granted in light of my decision, failing which, either of them may apply to come back before me for 0.5 hour to resolve the same.

22. I see no reason why costs should not follow the event. There will be an order nisi that the Plaintiff shall pay the Defendant costs of proceedings as well as both of the application, including all costs reserved and Certificate of Counsel for hearings on 15 June and 3 August 2009, to be summarily assessed by me, 0.5 hour reserved, failing agreement by the parties within 21 days.