ARTIFUL LTD v. LAM YING BON, LAURENCE

HCA2522/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2522 OF 2001

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J U D G M E N T

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1. This action concerns the sale and purchase of a property known as Unit E, ground floor together with the adjoining garden, the Notting Hill, No.1 (formerly No.21), Shan Tung Terrace, Hong Kong ("the Property").

2. By a provisional sale and purchase agreement dated 22 April 2001 ("the Provisional Agreement"), the plaintiff agreed to sell and the defendant agreed to buy the Property at HK$3.12 million. The events leading to the signing of the Provisional Agreement, insofar as they are not disputed, can be summarized as below.

3. The Notting Hill is a residential development developed by the plaintiff. In April 2001, it was still under construction. On 22 April 2001, it was launched for sale as an uncompleted property. The sales office was located at 1/F, Chuang's City Tower, Wanchai, Hong Kong ("the Sales Office"). A show flat that corresponded to the Property was put up at the Sales Office. A board with information of the saleable area of the Property and the gross areas of Unit E and the garden was put up at the entrance to the show flat. Specifically, the board contained a floor plan of the Property and description in Chinese to the effect that the gross floor area of Unit E was 488 square feet, the saleable area of Unit E was 351 square feet and the gross floor area of the garden was 141 square feet. Exhibition boards displaying information of the Notting Hill were also put up at the Sales Office. Sales brochures and a price list covering three units were also available at the Sales Office. While Jones Lang LaSalle Limited ("Jones Lang") was appointed as the exclusive agent of the Notting Hill, other property agencies and their agents were also invited to be present for the launch.

4. In the afternoon of 22 April 2001, the defendant together with his aunt went to the Sales Office. The precise time of their visit is in dispute. The plaintiff's case is that they came at about 5 p.m. whereas the defendant says it was 6:45 p.m. that they arrived. Nothing, however, turns on this. It is common ground that downstairs the Chuang's City Tower, the defendant and his aunt were greeted by Mr Eddy Ho, an agent of Midland Realty Property Limited.

5. The three of them took the lift to the Sales Office. It is common ground that the defendant had gone into the show flat and that later that day, he had paid a visit to the construction site accompanied by Mr Ho and his aunt. There is however considerable dispute as to what in fact transpired at the Sales Office and inside the show flat as well as at the construction site. What is not in dispute is that after visiting the construction site, the three of them returned to the Sales Office, stopping at the defendant's residence on the way to pick up his cheque book.

6. It is also not in dispute that at some stage that afternoon, the defendant expressed an interest to purchase the Property, although there is dispute as to when precisely the defendant indicated his interest. The price of the Property was not listed on the price list. Initially the price quoted by the plaintiff was $3.29 million. After negotiations, the price of $3.12 million was agreed between the defendant and Mr Danny Chan of Jones Lang. Consequent upon this, the Provisional Agreement was signed by the defendant and by Mr Chan on behalf of the plaintiff.

7. The Provisional Agreement contains the following terms that are relevant to these proceedings :

(1) Under clause 6 :

(a) $50,000 of the initial deposit has to be paid upon the signing of the Provisional Agreement.

(b) $102,000, the balance of the initial deposit was to be paid upon the signing of the formal sale and purchase agreement.

(c) A further deposit of $156,000 was to be paid within 14 days from the signing of the formal sale and purchase agreement.

(2) Under clause 7, the defendant was to attend the office of the plaintiff's solicitors, Messrs Deacons ("Deacons"), on or before 25 April 2001 to sign the formal sale and purchase agreement.

(3) Under clause 9(a), should the defendant fail to pay the further deposit or to sign the formal sale and purchase agreement or fail to observe the terms and conditions of the Provisional Agreement, the initial deposit shall be forfeited to the plaintiff. The plaintiff may rescind the agreement and either retain the Property or resell it.

(4) Under clause 9(c), nothing in the Provisional Agreement shall be construed as to prevent either party from bringing an action and obtaining a decree for specific performance either in lieu of the aforesaid damages or in addition thereto.

8. Upon the signing of the Provisional Agreement, the defendant drew a cheque for $50,000 as payment of part of the initial deposit. The cheque was dishonoured upon presentation. After some discussions, it was agreed that the sum be paid by a cashier order on 25 April 2001. It was further agreed that the balance of the initial deposit was to be paid together with the further deposit within 14 days from the signing of the formal sale and purchase agreement.

9. In the morning of 25 April 2001, the defendant accompanied by Mr Ho, went to the office of Deacons and handed over the $50,000 cashier order. He was given a formal sale and purchase agreement ("the Formal Agreement") to sign, but he asked to take it away to peruse it, promising to return later in the afternoon. He did not return in the afternoon, but phoned Mr Ho saying he had an urgent meeting and would go to Deacons' office the following day to sign the Formal Agreement.

10. On 26 April 2001, however, the defendant made a complaint to Mr Ho over phone. There is some dispute as to what was the complaint. But eventually, Mr Ho faxed the defendant an undated note setting out the calculations of the saleable area and the unit price per square feet by reference to the gross floor area of the Property. The header shown on the fax suggests that the note was faxed on 27 April 2001.

11. There is no dispute that the defendant did not return to Deacons' office and did not sign the Formal Agreement. On 27 April 2001, Deacons on behalf of the plaintiff wrote to the defendant and forfeited the $50,000 deposit but held the defendant liable under the Provisional Agreement. On 7 May 2001, Messrs Hastings & Co. ("Hastings") replied that Mr Ho had misrepresented the area of Unit E of ground floor to the defendant, and that the defendant thereby rescinded the Provisional Agreement.

12. It is agreed between the parties that the market value of the Property as at 25 April 2001, the date of the alleged breach, was $2.73 million and its current value is $2.4 million.

The action

13. On 5 June 2001, the plaintiff issued the Writ herein, indorsed with the Statement of Claim. The plaintiff claims that the defendant is in breach of the Provisional Agreement in failing to pay the $50,000 deposit at the time of signing the Provisional Agreement and in failing to execute the Formal Agreement. At the trial, Mr Hingorani for the plaintiff indicates that the breach in relation to the payment of $50,000 would not be pursued. The relief that the plaintiff claims are :

(1) an order for specific performance of the Provisional Agreement;

(2) a declaration that the plaintiff was entitled to forfeit the $50,000 deposit;

(3) damages in breach of contract in lieu of or in addition to an order for specific performance; and

(4) an indemnity for all loss and damages arising out of or in connection with the breach of contract.

Mr Hingorani has indicated that no additional damages is claimed by the plaintiff if an order for specific performance is granted. It also appears that no material has been put forward by the plaintiff in support of the relief for indemnity.

14. By the Defence and Counterclaim filed on 7 July 2001, the defendant denied having been in breach of the Provisional Agreement. The defendant further pleads that the plaintiff, acted by Mr Ho, had fraudulently misrepresented to him that the gross floor area of Unit E, ground floor was 500 odd square feet when it is in fact only 488 square feet. Relying on the misrepresentation, he signed the Provisional Agreement and he only discovered the true position upon reading the Formal Agreement on 25 April 2001. He therefore rescinded the Provisional Agreement on 25 April 2001 by refusing to sign the Formal Agreement and not paying further deposits. By reason of the misrepresentation he has suffered loss represented by the $50,000 he had paid. The defendant therefore counterclaims for :

(1) a declaration that he had validly rescinded the Provisional Agreement or alternatively that the Provisional Agreement was rescinded;

(2) an order for the refund of $50,000; and

(3) alternatively, damages for misrepresentation.

The second and third relief are in fact repetitions as Mr Man for the defendant confirms that there is no other damages claimed, save the $50,000 deposit paid.

15. Shortly before the commencement of the trial, the defendant issued a summons applying to amend the Defence and Counterclaim. The application was not opposed and leave was granted on the first day of the trial. In connection with the amendment, the defendant filed a second supplemental witness statement, to which the plaintiff objected. Mr Hingorani takes the point that the statement is in essence an amended witness statement, such that it is more appropriate for the matters to be canvassed in oral evidence than be dealt with in a witness statement. Observations were also made that the witness statement might give rise to discovery of the attendance note of the defendant's solicitors and the possibility of issuing a subpoena to the defendant's solicitors to deal with the matter raised in the second supplemental witness statement. On further deliberations by counsel, the defendant did not seek leave for the filing of the second supplemental witness statement while the plaintiff indicated it would not subpoena the defendant's solicitors.

16. The amendment to the Defence and Counterclaim raises three matters. Firstly, the plea of fraud was withdrawn. Secondly, the representation said to have been made by Mr Ho was amended. It is now pleaded that Mr Ho had stated the gross area of Unit E ground floor to be 520 square feet, instead of 500 odd square feet as previously pleaded. Thirdly, it is now pleaded that by the forfeiture of the $50,000, the plaintiff had acted to bring the Provisional Agreement to an end and has lost the right to claim specific performance.

17. In the Reply and Defence to Counterclaim, the plaintiff denies there was any misrepresentation of the gross area of Unit E. It is pleaded that misrepresentation was raised for the first time in Hastings' letter dated 7 May 2001. It is further averred that by reason of the defendant having inspected the show flat, which corresponds to the Property, the defendant did not rely on any misrepresentation, even if made.

Issues

18. The issues fall to be determined at the trial are :

(1) whether Mr Ho had made a misrepresentation as to the gross area of Unit E;

(2) if there was misrepresentation, whether the defendant had relied on it in signing the Provisional Agreement; and

(3) if the answers to (1) and (2) are in the negative, whether the plaintiff has lost the right to a decree of specific performance.

The evidence

19. The plaintiff called three witnesses, Mr Ho, Mr Chan and Mr Kwan Siu Yuen, who has been responsible for overseeing the sales and promotion of the Notting Hill. Mr Ho had been an estate agent since 1995. His evidence is that before the defendant and his aunt went into the show flat at the Sales Office, he had pointed out to them the board at the entrance of the show flat and related the information on it. Then they went inside the show flat and the garden area and stayed for about 10 minutes.

20. Inside the show flat, the defendant mentioned that he had been living in studio flats and found studio flats suited him well. The defendant also indicated an interest to go to the site to look at the view and the aspects. He could not recall whether the defendant had asked him about the size of the show flat while inside the show flat, he however denied he had to refer to his documents before answering the defendant. He also denied having answered that it was 520 square feet. According to Mr Ho, the three of them exited the show flat through the garden and looked at the model and the display boards placed there.

21. Then they went to the construction site in the defendant's car. They stayed at the site for about 15-20 minutes. After the site visit, Mr Ho said the defendant appeared to have a strong desire to buy, so he asked the defendant whether he had got a cheque book with him. As a result, the defendant stopped at his residence at Chaterhouse Hotel and picked up his cheque. According to Mr Ho, even after they returned to the Sales Office, the defendant had not decided on which unit to buy. Eventually after discussing with his aunt, the defendant decided to get the studio flat on the ground floor that had a garden. At that time, Units E, F and G had not yet been sold. In the end, the defendant decided to buy Unit E because he had seen the show flat, which was an 1:1 scale reproduction of Unit E.

22. Before deciding on Unit E, the defendant had enquired with the developer the price for Unit E because this was not included in the price list. After some discussions between the defendant and Mr Chan, the price was agreed at $3.12 million. The defendant also asked about the management fee and Mr Chan told him it was $2 per square foot for 488 square feet.

23. Mr Ho said that when he telephoned the defendant on 26 April 2001, the defendant complained that the terms in the Formal Agreement were unfair and that he had spoken to his friends and realized that the price was too expensive. At the defendant's request, Mr Ho faxed over the note that set out the calculations of the average square foot price of Unit E.

24. Mr Ho emphatically denied that he had told the defendant that the size of the Property was 520 square feet. He pointed out that on that date, none of the units had an area of 520 square feet.

25. As for Mr Chan, he testified that in the afternoon of 22 April 2001, Mr Ho told him that his client was interested in the Property and asked what was the lowest price that the developer was prepared to accept. After negotiations, the price of $3.12 million was arrived at. Before signing the Provisional Agreement, the defendant had enquired about the management fee and was told by Mr Chan that it was $2 x 488 square feet. Mr Chan had also explained the Provisional Agreement including the price and saleable area of the Property.

26. Mr Kwan deals primarily with the promotions and sales activities of the Development. His evidence suggests that the sale of the Development had been slow due to the downturn of the property market. Despite constant advertisements, no one had expressed interest recently to buy the ground floor studio flats with adjoining gardens.

27. The defendant also testified. He said he had lived in England for 21 years before returning to Hong Kong in 1997. For convenience of his work, he stays in Chaterhouse Hotel and the rent is paid by his employer.

28. The defendant said that on that day after going into the Sales Office, he went straight to the show flat and then the garden. He found the garden disappointing and thought it was more like a balcony. Inside the show flat, he asked Mr Ho about the size. After checking with the folder he was holding, Mr Ho told him it was 520 square feet, and there was also a garden of 100 odd square feet. The defendant said he stayed in the show flat for no more than a minute before he went outside to look at the model of the building. Afterwards, he went back to the garden and exited through the entrance, and took the staircase to his car.

29. At the construction site, he told Mr Ho that he was interested in Unit E on the ground floor and asked him the size of it. Mr Ho told him again it was 520 square feet with a garden of 100 odd square feet. He said he was not aware that the show flat at the Sales Office was a show flat of the Property. The defendant said Mr Ho then telephoned the Sales Office, and told him the Property was available and he had reserved it. Owing to this, they stopped to pick up his cheque book on the way back to the Sales Office.

30. The defendant denied he had asked about the monthly management fee. Rather, he said, after signing the Provisional Agreement, he was told the purchase price came to about $6,000 per square foot. When being cross-examined, he identified Mr Chan as the one who told him this.

31. As to 25 April 2001, the defendant explained that he was in a hurry so he took the Formal Agreement away to read it. In the course of reading, he noted the area of the Property, when converted from square metres to square feet, was not even 500 square feet. So on 26 April 2001, he telephoned Mr Ho and questioned him about the size. The defendant said Mr Ho called later and told him for the first time that it was 488 square feet. At his request, Mr Ho prepared and faxed him the note of calculations. The defendant said he did not complain it was too expensive because his concern was the discrepancy in size and the misrepresentation made by Mr Ho; the price was not his concern. According to the defendant, Mr Ho promised to liaise with the developer on the possibility of a price reduction and to see how it could be resolved.

32. In my view, in assessing the evidence of the witnesses, it is necessary to bear in mind the key issue in dispute, namely, whether there was any misrepresentation as to the area of the Property. As a matter of inherent probability, I consider it improbable that Mr Ho would have told the defendant that the area of Unit E was 520 square feet. Firstly, the sales exhibition was confined to a particular development and the number of units involved was not tremendous. The information in respect of the gross and saleable areas of the Property and the floor plan were freely available at the Sales Office. Apart from the board at the entrance of the show flat, there was also the promotion board. These coupled with the fact that Mr Ho had been an estate agent for some years suggest that the chances of Mr Ho being mistaken as to the area of Unit E and that of the garden was very low. If he was in doubt, he could always consult the information available at the Sales Office. It is in fact Mr Ho's evidence that he had noted down the gross areas of the different units in his copy of the sales brochure, a matter which is not challenged by the defendant. Given Mr Ho's evidence that none of the units of the development had an area of 520 square feet, there is no conceivable reason for Mr Ho to have mistaken the area of Unit E to be 520 square feet. Similarly, there is no convincing reason why Mr Ho would fail or omit to inform the defendant that the show flat was showing the Property.

33. Mr Man submits that given Mr Ho and Mr Chan had been practising as estate agents for a number of years, it is possible that they had remembered the incident wrongly. In my view, this submission will be relevant if accuracy of memory is contested. But in the present case, it is a very specific allegation, i.e. the making of a representation that the Property was 529 square feet in area. It is most unlikely that would be failure of memory or confusion

34. Secondly, if Mr Ho was not mistaken, then the only inference would be that he deliberately misrepresented the area of the Property. But with the information so prominently displayed at the Sales Office, it would be unlikely for him to get away with the misrepresentation. Mr Ho would no doubt appreciate the risks and consequences in making such a misrepresentation. In any case, the defendant had withdrawn the allegation of fraud. It would not be open to the defendant to build a case of deliberate misrepresentation.

35. In terms of credibility, the defendant's evidence contains some unconvincing features. Throughout from the letter of Hastings dated 7 May 2001 to the Defence and Counterclaim and his 1st and 2nd witness statements, the defendant's case was that Mr Ho and the plaintiff's representatives had made a false statement about the area of the Property, that Unit E was of 500 square feet odd and the garden was of 100 square feet odd. Yet shortly before the trial commenced, the defendant amended the pleading and supplemented its witness statement to withdraw the allegation of fraud and to change the misrepresentation to 520 square feet. The defendant's explanation was that he had noticed the mistake about 520 square feet right after Hastings had sent out the letter. He said he had pointed it out to his solicitors but was told that he could correct it later on when he came to testify in court. Then shortly before the trial, he told his legal adviser that 500 odd could mean a lot of things and he insisted on putting the matter right. The first doubt that arises is how did the allegation of fraud came about in the first place. Additionally, quite apart from the fact that there is no reason for the defendant to have approved the Hasting's letter, the Defence and his witness statements despite the inaccuracies detected, what the defendant has failed to explain is whether he accepted the advice that he could correct it later when he came to give evidence. If he did not, it is difficult to understand why no attempt was taken to correct the content of Hastings' letter or to amend the pleadings until so close to the trial. Alternatively, if he did accept the advice, then why did he keep reminding his solicitors of the discrepancy and insist on effecting the amendments to the pleadings and the alterations to the witness statement?

36. The defendant was also obviously in difficulties when being cross-examined on the identity of the person whom he claimed to have told him at the Sales Office that the unit price was about 6,000 per square foot. It was after much prevarication that the defendant settled with the answer that this was said by Mr Chan.

37. Further, it is the defendant's evidence that his great and main concern was space and not the price. If this is indeed the case, one wonders why, having gone inside the show flat, he would still be interested to make a purchase. According to him, he had stayed in his friend's flat in Tai Po, which was some 550 square feet, so he was looking for a flat of some 500 square feet in size. The actual size of the show flat, excluding the garden, was only 351 square feet. If the defendant was so concerned with and sensitive to space, it must have struck him that the show flat was rather small and certainly much smaller than the Tai Po flat that he used to live in. That would have put him on the enquiry to find out the exact size of the show flat. On the other hand, if he did not feel or think that the show flat was too small or much smaller than the Tai Po flat, then his evidence that he would not have signed the Provisional Agreement had he known that the Property did not have 520 square feet is doubtful.

38. In addition, it is illogical for the defendant to say that it was when he read Schedule 3 of the Formal Agreement that he first discovered that the Property was not 520 square feet. Schedule 3 of the Formal Agreement only set out the saleable areas of Unit E and the garden to be 32.610 and 13.054 square metres respectively. According to the defendant, he was aware that the term "area" could mean saleable area or gross floor area, and that when Mr Ho mentioned 520 square feet, he took that to mean gross area. That being the case, the defendant could not have discovered that the Property was not 520 square feet in size by just reading Schedule 3. When I put this to him, the defendant was driven to say that what he found to be wrong was the percentage of the usable area being too low. That however is not his pleaded case or evidence all along.

39. I also find it hard to believe his assertion that he was not aware that there was a difference in the percentage of saleable area among developers. Although he did spend a number of years in the U.K., he had been back to Hong Kong for three to four years by 2001. He had also gone through the boom and the downturn of the property market. It cannot be said that he has little or no idea of the operation of the local property market.

40. In short, I do not regard the defendant as a truthful and reliable witness. I find the account of events given by Mr Ho and Mr Chan to be more credible and probable. Where their evidence differs from that of the defendant, I prefer the former. I find as a fact that Mr Ho did not represent to the defendant that the Property was 520 square feet in size. On the contrary, he had shown the defendant and his aunt what was written on the board at the entrance at the show flat. I also find that the defendant was aware that the show flat was showing the Property on an 1:1scale. I find too that the defendant had asked about the management fee before signing the Provisional Agreement and was told by Mr Chan that it was $2 x 488 square feet. I also find that Mr Chan did not tell the defendant that the purchase price was $6,000 odd per square foot.

Issues 1 and 2: misrepresentation and reliance

41. On the basis of the above findings, the defendant has failed to prove that Mr Ho had made a representation as to the gross area of the Property. The defence case of misrepresentation therefore fails. It follows that it is not necessary to consider the issue of reliance.

Right to specific performance

42. For the defendant, it is argued that the plaintiff has lost the right to specific performance.

43. The defendant's argument is that by forfeiting the $50,000 deposit and by communicating the forfeiture to the defendant in Deacons' letter dated 27 April 2001, the plaintiff had evinced an intention to treat the Provisional Agreement as coming to an end. It is therefore not open to the plaintiff to revive the contract to obtain a decree of specific performance.

44. In considering this argument, it is necessary to have regard to the terms of clause 9 of the Provisional Agreement. Under clause 9(a), it gives the plaintiff a right to forfeit the deposit in the event of breach on the defendant's part. At the same time, it also confers a discretion on the plaintiff as to whether to rescind the sale. Evidently, clause 9(a) envisages the plaintiff forfeiting the deposit and enforcing the contract by specific performance. This interpretation is reinforced by the terms of clause 9(a) which refers to the parties' right to obtain a decree for specific performance as being in lieu of or in addition to the damages set out in clause 9. It does not by its terms confined to liquidated damages, as submitted by Mr Man.

45. In Deacons' letter dated 27 April 2001, the forfeiture of the deposit was expressly stated to be according to clause 9(a). The final paragraph further expressly reserved the plaintiff's rights to damages and/or a decree of specific performance either in lieu of or in addition to damages. I cannot agree that the letter can be read as giving notice to the defendant of the plaintiff's intention to terminate the Provisional Agreement. All that it did was to give notice of the forfeiture of the deposit. This is to enable the solicitors to pass on the deposit to the plaintiff. It is not an assertion of a damages claim that amounts to discharging both parties from the performance of the Provisional Agreement.

46. The basic tenets for Mr Man's submissions that the Provisional Agreement had gone such that the plaintiff had lost the right to specific performance do not exist upon analysis of clause 9 and the Deacons' letter.

47. As to the submission that it would be harsh and absurd for the plaintiff to compel performance of the Provisional Agreement while forfeiting the deposit, Mr Man says this amounts to double recovery. In my view, it is important to bear in mind that it is permissible for a party to claim damages in addition to a decree for specific performance : section 17, High Court Ordinance. It is not the defendant's pleaded case that the deposit forfeited is not properly in the nature of damages. I also do not understand Mr Man to be making such a submission. That being the case, the suggestion that it will be unfair or absurd for the plaintiff to retain the deposit while enforcing the sale is misplaced.

48. Other than the argument that the plaintiff has lost the right to specific performance, the defendant has advanced no other objection to the claim for specific performance. Having regard to Mr Kwan's evidence, I am satisfied that it is an appropriate case to grant the equitable remedy of specific performance.

Conclusion

49. For the reasons set out above, there will be judgment for the plaintiff on the claim as follows :

(1) an order of specific performance by the defendant of the Provisional Agreement; and

(2) a declaration that the plaintiff was entitled to forfeit the initial deposit in the sum of $50,000 paid by the defendant on 25 April 2001.

The defendant' s counterclaim is dismissed. There is no reason why costs should not follow event. Accordingly, there is also an order nisi that the defendant pays the plaintiff the costs of this action, including any costs reserved, to be taxed if not agreed.