RUSKY & ROSE IMPORTS LTD. v. LOON WEAR GARMENT FACTORY LTD.

1993 No. A9625

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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THE FACTS

1. By a provisional agreement in writing dated 10th September 1993, the Plaintiff agreed to buy premises on the 13th floor, Pat Tat Industrial Building, 1 Pat Tat Street, Kowloon from the Defendant for the sum of $7,200,000.00. The Plaintiff intended to use the premises as its factory. On the signing of the provisional agreement, the Plaintiff paid an initial deposit of $200,000.00 to the Defendant. The agreement was in Chinese, but according to the certified translation clause 3(b) of the agreement provided that the payment of the next instalment of the purchase price should be as follows.

"(b) Second payment : The Purchaser shall, upon the signing of the formal agreement for sale and purchase at the solicitors' offices on or before 10th October 1993, pay to the Vendor ... $1,240,000.00."

The agreement went on to provide, in effect, for completion of the transaction by 31st January 1994, by which date the balance of the purchase price had to be paid.

2. On the morning of Friday, 8th October, the Plaintiff's solicitors received from the Defendant's solicitors the engrossment of the Sale and Purchase Agreement which incorporated those amendments to it which the Plaintiff's solicitors had requested. That was the document which had to be signed on behalf of the Plaintiff on or before 10th October. However, the document was not signed on behalf of the Plaintiff by that date, nor did the Plaintiff arrange for the sum of $1,240,000.00 to be paid to the Defendant's solicitors by then. Accordingly, on 11th October, the Defendant through its solicitors alleged that the Plaintiff had repudiated the provisional agreement, and the Defendant accepted the Plaintiff's repudiation of the provisional agreement (a) by declining to proceed with the sale of the premises, and (b) by forfeiting the Plaintiff's initial deposit of $200,000.00 pursuant to clause 6 of the provisional agreement. Although the Plaintiff executed the Sale and Purchase Agreement on 11th October, and although its solicitors sent the executed Agreement and the Plaintiff's cheque for $1,240,000.00 to the Defendant's solicitors later on 11th October, the Defendant declined to accept them, saying that it was too late.

THE ISSUES

3. In these proceedings, the Plaintiff denies that it was in breach of the provisional agreement at all. Initially, the Plaintiff claimed various forms of relief, but it has now abandoned all these claims apart from the return of the initial deposit of $200,000.00 with interest and declaratory relief. The Plaintiff's case is that :

(i) the Defendant's solicitors acquiesced in the postponement until 11th October of the performance of those obligations of the Plaintiff which, but for that acquiescence, the Plaintiff would have had to perform by 10th October,

(ii) because 10th October was a Sunday, the performance of those obligations of the Plaintiff which would otherwise have had to have been performed by 10th October was postponed by operation of law to 11th October,

(iii) upon its proper construction, clause 3(b) of the provisional agreement required the Defendant, as well as the Plaintiff, to execute the Sale and Purchase Agreement by 10th October, and since the Defendant could not have done that on 10th October because the Defendant's solicitors' offices were closed, the performance of the obligations of the Plaintiff which would otherwise have had to have been performed by 10th October was postponed until such time as the Defendant would have been ready, willing and able to execute the Sale and Purchase Agreement.

If the Plaintiff is found, despite these arguments, to have been in breach of the provisional agreement, it has two further arguments :

(iv) Time was not of the essence for the performance by the Plaintiff of itsobligations under clause 3(b) of the provisional agreement. Accordingly, its failure to perform those obligations which were required to be performed by 10th October did not amount to a repudiatory breach of the provisional agreement.

(v) Even if time was of the essence for the performance by the Plaintiff of its obligations under clause 3(b) of the provisional agreement, it was, in all the circumstances of the case, unconscionable for the Defendant to treat the provisional agreement as repudiated.

I propose to deal with each of these arguments in turn.

(i) ACQUIESCENCE

4. The Plaintiff's case on acquiescence was based on a conversation over the telephone between Chu Kam Hung, a conveyancing clerk employed by the Plaintiff's solicitors who was handling the transaction within the firm for the Plaintiff, and Candy Chan, a conveyancing clerk employed by the Defendant's solicitors who was handling the transaction within the firm for the Defendant. Mr. Chu's evidence was that at about 12:15 p.m. on Saturday, 9th October, Miss Chan telephoned him. She asked him if the Sale and Purchase Agreement had been signed, and when the Agreement could be delivered and the balance of the deposit paid. He told her that the Agreement had not yet been signed. However, he added that since 10th October was a Sunday, the obligations which the Plaintiff would otherwise have had to perform by then could be postponed to the Monday. When she said that those obligations could have been performed on 9th October, he reminded her that the obligations did not have to be performed on 9th October : the provisional agreement permitted them to be performed on 10th October.

5. If Miss Chan had made no further response, and if I accepted Mr. Chu's evidence, the Plaintiff might have had the makings of a case that the Defendant, through Miss Chan, had acquiesced in the postponement until 11th October of the performance of those of the Plaintiff's obligations which would otherwise have had to have been performed by 10th October. But Mr. Chu in his evidence in chief accepted that his conversation with Miss Chan did not end there. He said that she was not sure whether the Plaintiff's performance of those obligations could be postponed until 11th October. Indeed, after a pause for thought, she went so far as to say : "I don't think so". In the context, that could only have meant that she did not think that the Plaintiff's performance of those obligations could be postponed until 11th October. That evidence completely destroyed the Plaintiff's case on acquiescence : far from going along with the postponement of the Plaintiff's obligations until 11th October, Miss Chan was telling Mr. Chu that she did not agree with his assessment of the legal effect of the last day for the performance of the Plaintiff's obligations being a Sunday. Although Mr. Alan Leong for the Plaintiff did not formally abandon the Plaintiff's case on acquiescence, he realistically did not seek to argue otherwise.

(ii) CONVEYANCING PRACTICE

6. A custom or practice may be implied into a contract if that custom or practice is so notorious and widespread that the parties must be presumed to have intended that the custom or practice is to be incorporated into the contract. Mr. Leong asserts that there was a conveyancing custom and practice in Hong Kong at the time that when the last day stipulated for payment of a sum of money or for the execution of a document falls on a day which is not a business day, the time for the performance of the obligation is automatically postponed to the next business day.

7. I reject that assertion. There is no evidence before me whatever of the existence of such a conveyancing custom and practice - let alone evidence of its notiriety. Indeed, Mr. Chu was asked what happened when the last day on which money is to be paid or a document is to be executed falls on a Sunday. Despite his 16 years as a conveyancing clerk, he could not recall what had happened in those cases. That suggests that no custom or practice of the kind asserted by Mr. Leong exists.

8. Mr. Leong drew my attention to section 71(1)(b) of the Interpretation and General Clauses Ordinance (Cap. 1) which provides :

"In computing time for the purposes of any Ordinance - ... if the last day of the period [for doing any act] is a public holiday ... the period shall include the next following day, not being a public holiday ..."

By virtue of the definition of "public holiday" in section 3 of that Ordinance, and having regard to section 3 of, and the Schedule to, the Holidays Ordinance (Cap. 139), a Sunday is a public holiday. However, this section has no direct application to the present case because it provides for the computation of time for the purpose of any Ordinance, and not for the construction of private contractual obligations. Although the section shows that the legislature has given thought to the problem of what should happen if the last day on which something is required to be done falls on a public holiday, the fact remains that there is no evidence that the custom or practice contended for by Mr. Leong actually exists.

9. Mr. Leong also drew my attention to clause 35 of the Sale and Purchase Agreement which provided that :

"when any of the date or dates stipulated for payment herein or if the Completion Date shall otherwise fall on a day which is not a business day ... such date or dates for payment or the Completion Date (as the case may be) shall automatically be postponed to the next business day."

However, if there was a custom or practice of the kind which Mr. Leong asserts, there would have been no need for an express provision to be included in the Sale and Purchase Agreement to that effect.

10. Recognising these difficulties, Mr. Leong relies on an alternative ground for implying a term to the effect that the parties must be presumed to have intended that if the last day for the signing of the Agreement or for the payment of the balance of the deposit fell on a Sunday, the Plaintiff's performance of those obligations would be postponed until the following day. He claims that the parties were probably not aware when they signed the provisional agreement that 10th October was a Sunday. Thus far I agree. However, he goes on to say that if that fact has been pointed out to the parties at the time, they would both have said that in that event the Plaintiff's obligations would be postponed until the following day. I disagree. There is no evidence to that effect. Mr. Leong could have asked the Financial Controller of the Plaintiff, whom he called as a witness, that. He did not do so. I have no evidence on the topic from whoever signed the provisional agreement on behalf of the Defendant. For all I know, they could have said (if the fact that 10th October was a Sunday had been pointed out to them) that the Plaintiff would have had to perform its obligations by 9th October. Mr. Leong relies on what the parties had expressly agreed in clause 35 of the Sale and Purchase Agreement as evidence of what they would have agreed if the fact that 10th October was a Sunday had been pointed out to them when the provisional agreement came into existence. But I do not suppose for one moment that clause 35 was drawn to the parties' attention : it was included, I imagine, in the agreement because that was one of the conventional clauses that conveyancing solicitors include.

(iii) DEPENDENT PROMISES

11. Despite the language of clause 3(b) of the provisional agreement, the parties contemplated that the Sale and Purchase Agreement would be signed on behalf of the Defendant (a) after it had been signed on behalf of the Plaintiff, and (b) after it had been returned to the Defendant's solicitors duly signed on behalf of the Plaintiff. That is plain from the correspondence between the parties' solicitors in the week beginning 4th October. Mr. Leong did not seek to argue otherwise. Accordingly, the fact that the Agreement was not signed on behalf of the Defendant by 10th October did not mean that the Defendant had not been ready, willing and able to do so. It was the Plaintiff's solicitors who prevented the Agreement being signed on behalf of the Defendant by 10th October by not arranging for it to be signed on behalf of the Plaintiff by then. If it had been signed on behalf of the Plaintiff and if it had been returned to the Defendant's solicitors by 10th October, the Agreement would have had to have been signed on behalf of the Defendant by 10th October, unless there was an agreement to extend its time for doing so until later. However, the need for the Defendant's solicitors to make arrangements for the Agreement to be signed on 10th October did not arise, because the Agreement was not signed on behalf of the Plaintiff by 10th October.

(iv) TIME OF THE ESSENCE

12. The provisional agreement did not expressly provide for the time for the performance of the Plaintiff's obligations under clause 3(b) to be of the essence. The question therefore is whether time for performance was, by necessary implication, intended by the Plaintiff and the Defendant to be essential, and therefore to be strictly complied with.

13. On 4th October, the Plaintiff's solicitors requested the Defendant's solicitors to make the relevant title deeds to the premises available for approval. The Defendant's solicitors replied to that letter on 5th October. They said that they would pass them on, once they had been obtained from the Defendant's mortgagees. The Defendant's solicitors had not done so by 10th October. Mr. Leong argues that since the Defendant's solicitors must have realised that the Plaintiff's solicitors could not satisfy themselves of the Defendant's title to the premises by 10th October, the Defendant's solicitors could not have been requiring the Plaintiff to perform the obligations imposed on it by clause 3(b) by 10th October.

14. I reject that argument for two reasons :

(i) tTe Plaintiff's solicitors did not need to have to satisfy themselves of the Defendant's title to the premises before advising the Plaintiff to perform the obligations imposed on it by clause 3(b) by 10th October. If a defect in the Defendant's title were to have been discovered after the Sale and Purchase Agreement had been signed, it would have been open to the Plaintiff to treat the Defendant's inability to pass good title as a repudiatory breach of the Sale and Purchase Agreement, entitling the Plaintiff to rescind it.

(ii) Mr. Leong claims that his argument is supported by the decision of the Court of Appeal in Wong Kwok Yan v. Lee Kenny (Civ. App. 151/93). I disagree. It is true that the Court took the view that, by simply informing the purchaser's solicitors that the relevant title deeds would be sent when they were available, the vendor's solicitors could not have considered the time for the performance by the purchaser of obligations similar to those imposed on the Plaintiff by clause 3(b) to have been of the essence. But the Court plainly considered that what the vendor's solicitors thought was hardly decisive of the issue, because the question was to be determined by reference to the proper construction of the relevant clause in the provisional agreement. The Court concluded that, on a proper construction of the clause which was equivalent of clause 3(b), the parties had intended the time for the performance of the purchaser's obligations under that clause to be of the essence.

Far from assisting the Plaintiff's case, Wong Kwok Yan supports the Defendant's. In my view, the obligations imposed on the Plaintiff by clause 3(b) are indistinguishable from the obligations imposed on the purchaser by the relevant clause in Wong Kwok Yan.

15. Moreover, the time for performance was expressed in clause 3(b) to be "on or before" 10th October. The use of that phrase was referred to by Lord Fraser of Tullybelton in Raineri v. Miles [1981] A.C. 1050 at p. 1089 B - C :

"A promise to do something on a certain date is not implemented by doing the thing within a time, reasonable or otherwise, after that date. The argument to the contrary is made, if anything, more difficult by the words 'or before' which introduce a limited degree of elasticity and make it all the more impossible, in my view, to imply any further elasticity."

Even if I did not think that I was prevented by the authority of Wong Kwok Yan from holding otherwise, the language of clause 3(b) is, in my view more consistent than not with the parties having intended that the time for the performance of the Plaintiff's obligations under it was to be of the essence. Indeed, if it had been pointed out to the representatives of the Plaintiff and the Defendant who signed the provisional agreement that the agreement did not expressly provide that the 10th October deadline had to be strictly adhered to, I am sure that they would both have said that that was too obvious to need spelling out. For these reasons, therefore, I find that time was of the essence for the performance of the Plaintiff's obligations under clause 3(b), and its breach of clause 3(b) amounted to a repudiatory breach of the provisional agreement.

(v) UNCONSCIONABLE CONDUCT

16. In Wong Kwok Yan, the Court of Appeal acknowledged the existence of the principle that the court has jurisdiction to relieve a defaulting purchaser from the consequences of his repudiatory breach of a provisional agreement by failing to comply with a stipulation as to time which is of the essence. That jurisdiction will be exercised when it would be unconscionable to permit the vendor to insist on his strict legal rights. That jurisdiction enable the Court of Appeal in Wong Kwok Yan to uphold the purchaser's claim for an order for specific performance of a provisional agreement despite the purchaser's failure to comply with a stipulation as to time which was of the essence.

17. This jurisdiction is derived from the celebrated decision of the High Court of Australia in Legione v. Handley (1983) 152 C.L.R. 406. It is important to remember, however, that in recognising the existence of this jurisdiction the court made it clear that it was a jurisdiction which should be exercised only in exceptional circumstances. Indeed, two members of the Court, Mason and Deane JJ., thought that only unconscionable conduct on the part of the vendor could constitute such exceptional circumstances. In my view, the exercise of the jurisdiction should be limited in that way. Thus, in Wong Kwok Yan, the Court did indeed identify unconscionable conduct on the part of the vendor. It follows that it is not enough for the Plaintiff in the present case to show that the Defendant would not have been prejudiced in any way if the obligations imposed on the Plaintiff by clause 3(b) had been performed on 11th October, or that the proposed completion on 31st January 1994 would not have been jeopardised. As Mr. Philip Wong for the Defendant correctly submits, a purchaser cannot be criticised for insisting on his strict legal rights if he has not been shown to be at fault in any way.

18. I can discern no fault on the part of the Defendant. Its solicitors responded promptly to the Plaintiff's solicitors' request for a draft Sale and Purchase Agreement. They were prompt in sending to the Plaintiff's solicitors the engrossment of the Sale and Purchase Agreement incorporating the mutually agreed amendments to it. It is true that they did not send to the Plaintiff's solicitors by 10th October the relevant title deeds, but I have already explained why the Plaintiff's solicitors did not need them by 10th October. In particular, I do not think that Miss Chan can be criticised for not being more positive when she spoke to Mr. Chu on 9th October, or for not subsequently informing him that 10th October was the deadline for the performance of the Plaintiff's obligations under clause 3(b). If anyone was at fault, it was the Plaintiff's solicitors who (a) erroneously took the view that since 10th October was a Sunday, the performance of the Plaintiff's obligations was automatically postponed to 11th October, and (b) waited until shortly before the time when solicitors' offices usually close before informing the Defendant's solicitors of their view of the law. In the circumstances, I find that it would not be unconscionable to permit the Defendant to insist on its strict legal right.

THE PLAINTIFF'S CLAIM

19. The effect of these findings is that the Plaintiff's claim for the return of the deposit of $200,000.00 and for consequential declaratory relief fails, and its claim must therefore be dismissed. I make an order nisi that the Plaintiff must pay to the Defendant the costs of the claim to be taxed if not agreed.

THE DEFENDANT'S COUNTERCLAIM

20. In addition, the effect of my findings is that there must be judgment for the Defendant on its counterclaim. I declare that the Defendant was entitled to rescind the provisional agreement, that it was thereupon discharged from all its liabilities thereunder, and that it was entitled to forfeit the deposit of $200,000.00.

21. In November 1993, in order to preserve its interest in the premises, the Plaintiff registered its writ in the Land Registry as a lis pendens. The Defendant counterclaims for an order that this registration be vacated. In addition, the Defendant counterclaims damages because (a) the registration of the lis pendens prevented it from selling the premises to another purchaser, and (b) in the meantime, the price which could have obtained for the premises has fallen. These counterclaims were not included in the Amended Defence and Counterclaim. Towards the end of the trial, I gave leave for the Counterclaim to be re-amended to enable the Defendant to make these counterclaims. I did not see any prejudice which the Plaintiff would suffer which could not be compensated for by a suitable order for costs.

22. Once the Plaintiff was no longer claiming specific performance of the provisional agreement, the Defendant became entitled to an order vacating the registration of the lis pendens, and I therefore make an order to that effect. I also make an order that the Plaintiff must pay to the Defendant the costs of the counterclaim to be taxed if not agreed, though I do not suppose that the counterclaim has so far involved any costs over and above those incurred in defending the Plaintiff's claim.

23. I turn to the Defendant's counterclaim for damages. The Plaintiff is liable to pay to the Defendant on its counterclaim such damages as are found to flow from the Plaintiff's breach of contract. The clause in the provisional agreement which entitled the Defendant to forfeit the deposit of $200,000.00 was clause 6. That was because the forfeiture of the deposit was provided to be one of the consequences of the Plaintiff's failure to comply with the terms of the provisional agreement. However, another of the consequences which clause 6 provided for was that the Defendant would be entitled to sell the premises to anyone. By registering its lis pendens, the Plaintiff prevented the Defendant from exercising its right to sell the premises to anyone until such time as the registration was vacated. In preventing the Defendant from exercising that right, the Plaintiff acted in breach of clause 6, now that, by this judgment, I have decided that the Plaintiff's repudiatory breach of clause 3(b) entitled the Defendant to invoke clause 6.

24. In view of the lateness of the amendment, the relevant evidence was not available at the trial. It was therefore not possible for me to determine whether the Defendant had in fact suffered any loss and damage by reason of the Plaintiff's breach of clause 6. I therefore direct that that assessment be adjourned to a date to be fixed. In view of my knowledge of the case, I think that it is preferable for that assessment to be conducted by me, but if I am unavailable for one reason or another, I direct that the assessment be carried out by a Master.

25. The fact that I have directed such an assessment does not, of course, mean that I have formed any view as to whether the Defendant in fact sustained any loss or damage. After all, the suggestion that there has been a reduction in the price which the Defendant could obtain for the premises since the date on which the lis pendens was registered does not lie easily with the Defendant's unwillingness to allow the Plaintiff until 11th October to perform its obligations under clause 3(b). One of the reasons why the Defendant was unwilling to do that may well have been the belief on the part of its directors that the premises could be sold to another purchaser at a price higher than that which the Plaintiff had agreed to pay. Moreover, section 19 of the Land Registration Ordinance (Cap. 128) gives the court power, "during the pendency" of the lis pendens, to order the vacation of the registration. It was therefore open to the Defendant to mitigate its loss by applying for such an order. It may be that if such an application had been made, the Plaintiff would have decided sooner than it did that it would not seek specific performance of the provisional agreement, in which case the Plaintiff may well have consented to the vacation of the registration.

26. The Defendant must of course decide whether to proceed with its counterclaim for damages in the light of these considerations. If it does, it must bear in mind that it faces the possibility of an adverse costs order on the assessment, because I may well conclude that the issues raised on the assessment could have been determined in the course of the trial at no additional cost to the parties if the counterclaim for damages had appeared in the original formulation of the counterclaim.

27. Finally, I give the parties liberty to apply for such directions as they may wish me to make in connection with the assessment.