XCHRX SAMOVER CO. LTD. v. CHEUNG PUI CHING CATHEEN AND ANOTHER

HCA22049/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL JURISDICTION

ACTION NO. 22049 OF 1998

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D E C I S I O N

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Facts:

1. The plaintiff was the developer of a residential estate called Forest Hill. By an agreement dated 1.12.1997 (hereinafter called the "Agreement"), it sold a penthouse unit, identified as Penthouse No. 19A and car parking space No. 36 (hereinafter together called the "Property") to the defendants for $11,212,000. The defendants paid a total initial deposit of $1,121,200. The scheduled completion date was 15.1.1998.

2. On 10.12.97, the plaintiff's then solicitors (hereinafter called "SFKS") sent the title deeds and various other documents to the defendants' solicitors (hereinafter called "YTT"). The defendants paid a further deposit of $1,121,200 on 15.12.1997. There was some correspondence between the solicitors between 10.12.1997 and 11.1.1998 about physical defects in the Property but not about defects of title.

3. By a letter dated 12.1.1998, YTT raised certain requisitions. This letter was received by SFKS at 6:06 p.m. on 13.1.1998, in effect, one working day before the scheduled completion date. SFKS replied that the requisitions were not raised within reasonable time and the defendants were deemed to have accepted the title to the Property. However, without prejudice to that contention, they answered the requisition "as a matter of courtesy". The reply was received by the plaintiff at 4:52 p.m. on 14.1.1998.

4. The defendants did not complete on 15.1.1998. There was further correspondence between SFKS and YTT. On 22.1.1998, in accordance with Clause 17(1) of the Agreement, SFKS issued a notice to the defendants to make good their default by 12.2.1998. Further correspondence was exchanged between the solicitors which failed to bring about the completion. Eventually on 30.4.1998, SKFS issued a notice of termination to the defendants. The defendants replied through YTT that they accepted the plaintiff's repudiation on 13.5.1998.

5. The plaintiff resold the Property with another parking space No. 6 in substitution for parking space No.36 for $7,802,000 on 28.6.1998. Parking space No. 36 was sold at a later date on 25.9.1998 for $500,000. The plaintiff now seeks summary judgment for the deficiency between the contract price and the re-sale price in accordance with Clause 17(3) of the Agreement or for damages to be assessed. The defendants counterclaimed for a declaration that they are discharged from further performance of the Agreement because of the plaintiff's failure to answer requisitions and for return of the initial deposit and or the further deposit and damages.

The Requisitions:

6. In the statement of defence, the defendants alleged that the plaintiff had failed to answer three requisitions: para. 8(f), (i) and (j) of the defence.

7. It is not unusual for a development of this size to be financed by a consortium of banks. By a debenture incorporating a building mortgage dated 10.3.1994, the plaintiff charged unto the Chase Manhattan Bank, N.A. (hereinafter called "CMB" and described in the debenture as "the Agent") as trustee for the consortium of banks (described in the debenture as "the Beneficiary") the land upon which the development was built as security for a loan facility of up to $800 million. The debenture was signed by Richard Mounce as authorised attorney of CMB.

8. On 15.7.1996, CMB executed a power of attorney appointing Richard Mounce as its lawful attorney to conduct and administer the general banking business of CMB. The power of attorney expressly provided that it shall become null and void if Mounce shall cease to be an officer of CMB.

9. On 17.7.1996, Mounce executed a deed of delegation appointing Warran Ho as attorney of CMB with authority to do and perform all or any of the acts, matters and things which Mounce was authorised to do by the power of attorney from CMB. Eventually, on 4.10.1996, Warran Ho executed a release on behalf of CMB releasing the plaintiff of its obligations under the debenture and reassigning the land unto the plaintiff.

10. The first requisition was for proof that Mounce was an officer of CMB at the time of execution of the deed of delegation. In my judgment, this has been adequately answered by production to the defendants' solicitors of the confirmation letter issued by CMB. The letter certified that Mounce's power of attorney was not revoked until 14.11.1996, i.e. well after the date of execution of the deed of delegation and the date of execution of the release by Warran Ho.

11. The second requisition was that the power of attorney to Mounce did not empower Mounce to make and execute any release, whether in the form as alleged in the release or to "assign" or "reassign" the land unto the plaintiff. In their reply to YTT, SFKS referred to Clause 20 of the power of attorney which gave Mounce "the power to sign, execute, deliver and register any conveyance, public deed, public and private instrument, contract, bond, guarantee or other engagement whatsoever, to ratify and confirm legal acts and instruments". "Conveyance" is a word with a very wide meaning. Basically, it covers deeds or instruments other than a will whereby an interest in land is transferred from one person to another. In my view, the power to sign, execute, and deliver any conveyance is wide enough to include the power to release, assign, reassign and discharge as used in the release. This must be well known to conveyancers. The answer is clear on the face of the documents. To raise such a requisition one day before the scheduled completion date is a clear indication of lack of good faith. In my judgment, this requisition should not have been raised at all but has, in any event, been adequately answered by SFKS's letter dated 14.1.1998.

12. The third requisition was for proof that CMB while acting as agent for the consortium of banks had consent of those banks to execute the release. Though CMB was described as "The Agent" of the consortium, it is in fact the trustee. The land was charged unto CMB in its capacity as trustee of the consortium as security for the loan under the terms of the debenture. Upon repayment of the loan, in accordance with Clause 3.1(c) of the debenture, CMB was under a legal obligation to execute the release. There is no need for CMB to obtain consent from the consortium, nor can any member of the consortium prevent CMB from executing the release, upon repayment of the loan. In my judgment, the answer is also clear on the face of the debenture and the requisition should not have been raised. It has, however, been adequately answered by SFKS's letter dated 14.1.1998.

13. Mr. Li submitted that though there is no contractual provision in the Agreement as to the period within which requisitions may be raised, they should be raised at least 14 days before completion. However, as the first requisition is concerned with an encumbrance over the plaintiff's title to the land, it goes to the root of the title and such requisition could be raised any time before completion. It has, however, been adequately answered.

14. Mr. Mak on behalf of the defendants submitted that the plaintiff's duties were to show good title by answering requisitions raised within a reasonable time before completion and to prove good title by proper evidence at the date of completion, namely, either on 15.1.1998 or at the latest on 22.1.1998 when the plaintiff gave notice under Clause 17(1) of the Agreement. He argued that the plaintiff's letter of 15.1.1998 only reached the defendant's solicitor after the scheduled completion date and that by their letter dated 10.2.1998, the plaintiff's solicitors were still answering the requisitions and providing documents required.

15. I have already found that requisitions were adequately answered by SFKS's letter dated 14.1.1998. That letter bore a time chop at 4:52 p.m. on 14.1.1998. Receipt of that letter was also acknowledged in YTT's reply dated 14.1.1998, though in the letter YTT asked for a copy of the legal opinion and confirmation letter already enclosed in SFKS's letter and repeated their second and third frivolous and vexatious requisitions. I have no reason to believe that the legal opinion and confirmation had not been annexed to SKFS's letter sent to YTT by hand and by fax on 14.1.1998. In view of the lack of good faith shown by YTT in making the requisitions just one working day before the scheduled completion date, I find that YTT's letter requesting for a copy of the legal opinion and confirmation after the requisitions were adequately answered in a letter delivered both by hand and by fax was just a self serving letter fabricating an excuse for delaying and refusing completion.

16. As for SFKS's letter dated 10.2.1998, it is just a repetition of their position and not an answer to any outstanding requisitions as the requisitions have, in my judgment, been adequately answered. Thus the requisitions had all been dealt with before the scheduled completion date. The defendants have no reason not to complete the sale and purchase.

Plaintiff's acceptance of Defendant's repudiation:

17. In para. 12 of the proposed amended defence, the defendants alleged that the plaintiff had failed to accept the defendants' repudiation within a reasonable period of time. The plaintiff gave the defendants 21 days notice to complete on 22.1.1998. That period expired on 12.2.1998. But the plaintiff did not accept the defendants' repudiation until two and half months later on 30.4.1998. However, according to Leung's 3rd affidavit, the parties have entered into a series of "without prejudice" correspondence instigated by YTT starting from 10.2.1998, shortly before the notice period expired. The negotiation ended on 17.4.1998. Two weeks after that, the plaintiff accepted the defendants' repudiation. These facts are not disputed by the defendants. Because of the intervening negotiation, I am satisfied that the plaintiff has accepted the defendants' repudiation within a reasonable period. This defence must fail.

Timing on resale:

18. The Property with another parking space in substitution was sold on 28.6.1998, while parking space No. 36 was sold separately on 25.9.1998. In para. 15 of the statement of defence, the defendants pleaded that the property resold was not the same property which formed the subject matter of the Agreement because a different parking space has been sold in substitution. This defence must fail for two reasons. Firstly, Clause 17 of the Agreement does not require the penthouse and the parking space to be sold as one package. In any event, the Property with the substituted parking space and parking space No. 36 were both sold within six months of the plaintiff's acceptance of the defendants' repudiation. Secondly, the plaintiff's duty to mitigate would have required it to take the course it took. In his 1st and 3rd affidavits, Mr. Leung explained that the best offer he could secure was from Cenwell Limited which offered to purchase the penthouse and parking space No.6 instead of No. 36. In a falling market, it was sensible and reasonable to accept the offer rather than to wait indefinitely for someone who would buy the entire Property and to let the resale value of the penthouse fall further, especially as the penthouse represented the substantial value of the Property. If the buyer would insist on a parking space in substitution, there must be a good reason for it. It must be that parking space No. 6 was more attractive than No. 36 and if sold with the penthouse would enhance the value of the penthouse and the parking space together. Parking space No. 6 must have a value no less than than of parking space No. 36.

Penalty Point:

19. In para. 15A of the proposed amended defence and counterclaim, the defendants alleged that Clause 17(3) which gives the plaintiff the right to to re-sell the Property within six months and claim the deficiency in price against the defendants is a penalty clause. Mr. Mak submitted that six months were not a reasonable time and that Clause 17(3) was drafted for the convenience and benefit of the plaintiff and not a genuine pre-estimate of loss.

20. Clause 17 is a standard term in sale and purchase agreements under the "consent scheme" which was the result of extensive consultation with the legal profession. That does not necessarily give the clause the force of legality and prevent it from being a penalty clause. However, it reflects on what the profession considered as reasonable to both vendors and purchasers.

21. In Au Siu Fun and others v. Lenvin Limited & Ng Yuk Man, HCA 3481 of 1998, I have held, relying on Johnson v. Agnew, [1979] A.C. 367, that the common law rule that damages for breach of contract are to be assessed as at the date of breach is not necessarily applicable to sale and purchase of real property. Unlike movable property, there may not be an immediately available market for all forms of real property. Real property, particularly houses, has certain unique characteristics. It offers different attraction to different buyers who may have different needs and preferences. One has to allow for a reasonable time for a genuine buyer with a reasonable offer to come by. It is true that property market in Hong Kong has always been volatile. When the market is going up, the clause presents no problem to either party as the question of deficiency does not arise. Of course, when the market is falling, the longer one hangs onto the property, the greater is the loss. However, one cannot say with certainty when the market will stabilise or when there will be a rebound for the vendor to take advantage of. Bearing in mind the nature of real proeprty, I do not consider six months an unreasonable period. To certain extent, it protects the purchaser, in that it draws a line beyond which the vendor will have no further claim except for forfeiture of the deposit. I therefore consider Clause 17(3) as a clause providing for a genuine pre-estimate of loss and not a penalty clause.

22. Mr. Mak submitted that the plaintiff's remedy is limited to the right of forfeiture of deposit of up to 10% of the purchase price under Clause 17(2)(a). I cannot agree. In my judgment, Clause 17(2)(a) only provides for the usual remedy of forfeiture, while Clause 17(3) provides for deficiency in the event of a resale within six months. The right to recover deficiency is not excluded by forfeiture of the deposit.

Whether genuine resale:

23. In para. 17 of the defence, the defendants pleaded that the resale was not genuine or otherwise at market value. It is common knowledge that the property market collapsed very rapidly towards the end of 1997. The Property was sold at a substantially reduced price. I am satisfied on the basis of Leung's 1st affidavit that the plaintiff had made genuine efforts to promote the sale of the Property as well as other units in the development. It offered price reduction and appointed five agents. The resale price is in line with the market price as reflected in the Property Price Analysis Report prepared by Memfus Wong Surveyors Limited of sales of various units in the same development. The analysis is based on actual transactions recorded in the Land Office. The 2nd Defendant exhibited a price list he obtained from a property agent which showed higher offer prices. However, these were offer prices and did not reflect the price of the actual transaction. I am satisfied that the plaintiff has accepted the best offer at the material time and the resale was at market price. There is nothing to suggest that the buyer was in anyway related to the plaintiff. Accordingly, I am satisfied that the resale was a genuine one.

Conclusion:

24. I am satisfied that the plaintiff has adequately answered the requisitions before the scheduled completion date and that the defendants' defence and counterclaim, whether as it stood or as intended to be amended, disclosed no defence or cause of action. I therefore enter judgment for the plaintiff and dismiss the defendants' defence and counterclaim save the counterclaim for the return of the additional deposit, which the plaintiff has agreed to set off against its damages to be awarded.

25. I am satisfied that the resale was a genuine resale at market price. For reasons I have explained, I accept that the value of parking space No. 6 sold in substitution was no less than the value of parking space No. 36, if sold at the same time. I consider that in assessing the deficiency on resale under Clause 17(3), the plaintiff should give credit to the 10% deposit forfeited under Clause 17(2)(a). Therefore, I assess the deficiency as follow:

Difference between contract price and resale price ($11,212,000 - $7,802,000)	$3,410,000
Commission on resale	$ 117,030
	$ 3,527,030

	Less : 10% deposit forfeited:	$ 1,121,200
Deficiency:		$ 2,405,830
	Less : Set off of additional deposit:	$ 1,121,200
Damages:		$ 1,284,630 =======

26. Accordingly, I enter judgment on liability against the defendants, jointly and severally, for breach of the sales and purchase agreement. As such, there is no need to grant the declarations sought by the plaintiff. I assess the plaintiff's damages to be $ 1,284,630, together with interest on the said sum at the rate specified in Clause 3 of the Agreement (i.e. 2% per annum above prime rate). The defendants shall pay the plaintiff's costs of the action, with certificate for counsel, to be taxed if not agreed. The defendants' counterclaims are dismissed save as to the additional deposit which has been set off. There be no order as to costs on the counterclaim.