WONG LAI FAN v. LEE HA

Civil Appeal No 175 of 1991

Headnote

    A provisional sale and purchase agreement provided that "should the Vendor ... fail to complete ... the Vendor shall immediately compensate the Purchaser with a sum equivalent to ... the initial deposit as liquidated damages ... and the Purchaser shall not take any further action to claim for damages or to enforce specific performance."

    The Vendor refused to complete, instead tendering the sum stipulated to the Purchaser, who refused to accept and claimed specific performance.

    Held: Dismissing the Purchaser's appeal and upholding the High Court's refusal to grant specific performance, that the Vendor was entitled to pay the sum stipulated instead of completing the sale.

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J U D G M E N T

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Nazareth, J.A. (giving the judgment of the Court):

1. This is an appeal against the decision of Mayo J. granting the plaintiff's application by originating summons for a declaration that she effectively rescinded a Provisional Agreement for the sale of her flat to the defendant, who was the purchaser, and that the registration of that Agreement at the Land Office by the purchaser should be vacated. The material parts of the Provisional Agreement were as follows:

"1. The Vendor shall sell and the Purchaser shall purchase all that Flat 1609 Blk J Kornhill Quarry Bay (hereinafter called the said premises) through the Agent subject to the terms and conditions herein contained.

2. The purchase price of the said premises shall be HK$2,450,000.00 which shall be paid by the Purchaser to the Vendor in the manner as follows:

(a)   HK$80,000.00 shall be paid upon signing of this agreement as initial deposit.

(b)    HK$165,000.00 shall be paid upon signing of formal agreement for sale and purchase on or before 3-4-91 as balance of deposit.

(d)    HK$2,205,000.00 shall be paid upon completion or before 22-4-91 as balance of purchase price.

6.    Should the Purchaser fail to complete the purchase in the manner herein contained the deposit shall be forfeited to the Vendor and the Vendor shall then be entitled as 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 caused by the Purchaser's default of this agreement.

7.    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 sum equivalent to the amount of the initial deposit as liquidated damages together with the refund of the initial deposit and the Purchaser shall not take any further action to claim for damages or to enforce specific performance."

8.    In consideration of the service rendered by the Agent, the Agent shall after this agreement be entitled to receive HK$ (nil) from the Vendor and HK$17,150.00 from the purchaser as commission such commission shall be paid not later than 3-4-90 (sic).

9.    If in any case either the Vendor or the purchaser fails to complete the sale and purchase in the manner herein contained the defaulting party shall compensate at once the Agent $17,150.00 as liquidated damages."

It is not in dispute that the initial deposit of $80,000 was duly paid. On 3rd April 1991, the vendor's duly appointed attorney wrote to the purchaser's solicitors concluding in the following terms:

"Pursuant to the said Provisional Agreement for Sale and Purchase, I sent (sic) you herewith a cheque for HK$160,000.00 and payaole to your client Lee Ha being the refund of the initial deposit and a sum equivalent to the amount of the initial deposit as liquidated damages in full and final settlement of the said Provisional Agreement for Sale and Purchase. Kindly acknowledge receipt."

2. The purchaser's solicitors replied on the following day, 4th April, refusing to accept the vendor's repudiation or cheque, which they returned, stating that the purchaser would insist on specific performance; they added that the Provisional Agreement had been registered in the Land Office to prevent resale to another person and requested the vendor's solicitors to sign a formal agreement to avoid unnecessary litigation.

3. The vendor's attorney responded on the same day, stating that the owner did not wish to proceed with the sale, and that pursuant to clause 7 of the Provisional Agreement, he had on behalf of the owner exercised her rights and discharged her obligations by compensating the vendor with the sum of $160,000 in full and final settlement of the vendor's claim. He pointed out that if the purchaser insisted on specific performance, the vendor would strongly contest the proceedings, and he urged the purchaser to vacate the registration of the Provisional Agreement.

4. On 11th April 1991 the vendor took out her originating summons. It came for hearing before Mayo J. on 25th September 1991. Shortly before the hearing, the same question of whether a vendor's refusal to perform a provisional agreement in similar form came before the High Court in two other actions brought by purchasers and were heard contemporaneously between 29th and 31st July 1991.

5. In Fong Yee Lan v. Yiu Yau Ping, High Court Action 1991 No. A3299, Deputy Judge Leong, as he then was, upon a provisional agreement in terms that, so far as were revealed, are identical to those of the Provisional Agreement in this action, held on 31st July 1991 that the purchaser was entitled to specific performance. Likewise, after the initial deposit was duly paid, and when the formal sale and purcnase agreement signed by the purchaser was sent to the vendor with the further deposit under clause 2(b), the latter started unequivocally that he was not proceeding with the sale. Furthermore he did not pay back either the initial deposit or the further deposit. In substance the Deputy Judge's reasons were that, first, it is more than plain on a reading of clause 7 that the limit to further claims for damages and specific performance by the plaintiff is conditional on the payment by the defendant of the stipulated sum, and that the obligation to pay arises immediately upon the defendant failing to perform the agreement; second, that "fail" is far from unambiguous and could include neglect, failure or default, and that to extend to the inclusion of deliberate refusal, it had to be clear and unambiguous, and in any case had to be construed contra proferentem, and any doubt or ambiguity resolved against the vendor and in favour of the purchaser. He stated that:

"The main purpose of the provisional agreement is for the defendant to sell his property and the plaintiff to buy it. In the absence of clear and unambiguous expression in the agreement, it would be absurd to assume that the parties to an agreernent of this nature would have intended that one party may be at liberty to wilfully resile from his primary obligation under the agreemant at any time by simply paying back the deposit paid initially on signing the agreement together with an additional equivalent amount. To do so would be to reduce the agreement to a declaration of intent.

    The intention of the parties must be that they never contemplated that the defendant's deliberate refusal to complete would be covered under Clause 7. To construe otherwise would be inconsistent with the object of the agreement."

As we have seen, he accordingly found for the purchaser.

6. Mayo J. did not think such reasoning could withstand logical analysis. He did not find it possible to discern the "main purpose" of the Fong Yee Lan provisional agreement without having regard to the full terms of the document, and considered there was more to it than an agreement for the sale and purchase of the property. He accepted that little purpose would be served by attempting to fathom the motives of the vendor in this case in deciding not to continue with the sale of the property. The fact of the matter was that she failed to enter into the formal sale and purchase contract, and he considered that it mattered not whether this was due to refusal, neglect or default. The central issue he considered was whether the relevant wording of the clauses is such as to extinguish the parties' common law rights and equitable remedies, which he did not think had been directly addressed in that judgment. We will return to that matter in the context of counsel's submissions on the issues in this case.

7. The other action was Lee Tat Kwong v. Choi Pui Kei High Court Civil Action 1991 No. 2338 also unreported, which came before Godfrey J., who on 30th July 1991 found for the vendor. His decision is also the subject of an appeal to this Court, which awaits hearing. The material provisions comparable to clauses 6 and 7 of the Provisional Agreement in this case were contained in clause 11 of the provisional agreement before him in the following terms:

"If the Purchaser does not within the stipulated time go to the solicitors office to deal with the procedures, the vendor is entitled to forfeit the provisional deposit, and further has the right to resell the property or retain it for his own use. If the vendor in breach of contract failed, within the stipulated time, to go to the solicitors' office to deal with the procedures, the vendor shall compensate the purchaser by twice the amount of the provisional deposit in the total sum of HK$40,000.00 and the purchaser is not entitled to dispute that. If the vendor in breach of contract failed immediately to compensate (the purchaser) by the amount of the deposit, the purchaser shall be entitled to take legal action to enforce the purchase by specific performance, and also to claim for any loss consequential thereupon."

It can readily be seen that there are differences between the foregoing clause and clauses 6 and 7 in this case.

8. At page 4 of his judgment Godfrey J. said this:

"The mere fact that a contract contains a liquidated damages clause, or a clause of a similar nature, is not generally an admission that the parties have agreed..that damages are an adequate remedy, or that one party has an option to pay or perform. Specific performance will, despite such a clause, be granted, if it is the appropriate remedy. The relevant principles have long ago been settled and are restated with conspicuous clarity in Sir Edward Fry's classic work on The Specific Performance of Contracts, 6th Edition, (1921), Chapter 3. As Sir Edward Fry there points out (at p. 65):

'S.S.140 ... where a contract is substantially performed by the payment of a sum of money, the Common Law remedy being adequate, Equity will not interfere. Hence, in cases where there is added to the contract a clause for the payment of.a sum of money in the event of non-performance, the question arises whether the contract will be satisfied by the payment or whether it will not. In the former case, Equity will not interfere; in the latter, it may.

S.S. 141 The question always is, What is the contract? Is it that one certain act shall be done, with a sum annexed, whether by way of penalty or damages, to secure the performance of this very act? Or is it that one of two things shall be done at the election of the party who has to perform the contract, namely, the performance of the act or the payment of the sum of money? If the former, the fact of the penal or other like sum being annexed will not prevent the Court's enforcing performance of the very act, and thus carrying into execution the intention of the parties: if the latter, the contract is satisfied by the payment of a sum of money, and there is no ground for proceeding against the party having the election to compel the performance of the other alternative."

Mayo J. accepted the foregoing test in Sir Edward Fry's work ("Fry") and concluded that:

"there was mutuality in the operation of the clauses and clearly an attempt was being made by the parties to provide for a financial solution to the problems which would be encountered if either of the parties opted not to enter into the formal sale and purchase agreement".

He referred to the conclusion to which Godfrey J. came, i.e. that the clause before him was in sufficiently clear terms to confer upon the vendors an option to decide whether or not to go ahead with the contract and, if not, to pay the moneys referred to in clause 11. He concluded that the effect of clauses 6 and 7 was very similar to clause 11 considered by Godfrey J. and stated that he could see no good reason for coming to a different conclusion to that of Godfrey J.

9. Mr. K.L. Lui for the purchaser does not dispute the foregoing principles quoted from Fry. On the contrary, he refers also to paragraph 142 of Fry upon which he relies:

"142 From what has been said it will be gathered that contracts of the kind now under discussion are divisible into three classes:

(i) Where the sum mentioned is strictly a penalty - a sum named by way of securing the performance of the contract, as the penalty in a bond:

(ii) where the sum named is to be paid as liquidated damages for a breach of the contract:

(iii) where the sum named is an amount the payment of which may be substituted for the performance of the act at the election of the person by whom the money is to be paid or the act done.

    Where the stipulated payment comes under either of the two first-mentioned heads, the Court will enforce the contract, if in other respects it can and ought to be enforced, just in the same way as a contract not to do a particular act, with a penalty added to secure its performance or a sum named as liquidated damages, may be specifically enforced by means of an injunction against breaking it. On the other hand, where the contract comes under the third head, it is satisfied by the payment of the money, and there is no ground for the Court to compel the specific performance of the other alternative of the contract."

10. Mr. Lui submits that it is only by inclusion in class (iii) that specific performance can be excluded, and that as clause 7 falls within either class (i) or (ii) specific performance must be granted. He relies not only upon the foregoing passages in Fry, but also upon spry's Principles on Equitable Remedies, 4th Ed., para. 141 and Halsbury's Laws of England, 4th Ed., Vol. 44 para. 415, which are to a similar effect. Ultimately, the question of whether specific performance has beer barred or excluded, as recognised by Mayo J. and indeed not disputed by Mr. Lui, turns upon the construction of clause 7 in the context of the Provisional Agreement.

11. In that regard Mr. Lui's main submission is that the "further action" excluded by clause 7 contemplates some initial action,and that the intention of the clause is to bar the enforcement of specific performance by the purchaser where there has been such initial action on the part of the purchaser. In the circumstances of this case, the initial action by the purchaser would, he submits, have been the acceptance of the stipulated amount i.e., equivalent to the amount of the deposit, had it been accepted, Since the stipulated amount was not accepted, there was no initial action and therefore no further action to enforce specific performance can be taken. The word "further" must be given its effect. The provision for "damages" in clause 7 and in clause 6, and the references to "damages", "liquidated damages", "specific performance" and "default agreement" all strongly suggest that failure to complete was a breach of the agreement, the main purpose of which was the sale and purchase of the property, and therefore the forfeiture of the deposit was not to be an alternative mode of performance but in effect simply an agreed amount of damages obviating proof of actual damages. Mr. Lui also contended that clause 7 only gave the purchaser the option to accept payment and did not oblige him to accept it, but that once accepted, the stipulated amount would be all the compensation to which the purchaser would be entitled.

12. Mr. Edward Chan, Q.C. for the vendor does not dispute the principles cited from Fry; nor does he contend that the Provisional Agreement expressly provided that payment by the vendor of the stipulated amount is to be an alternative mode of performance. There is, therefore, no need to address the extensive submissions made on the latter point, nor the related authorities. However, Mr. Chan submits that the plain intention and meaning of clause 7 in the context of the Provisional Agreement is that if she does not complete, the vendor, being in possession of the purchaser's deposit, shall pay it back together with an equivalent sum and that no further action shall be taken to claim for damages or to enforce specific performance. This, he says, upon analysis, is in effect provision for substituted performance within the scope of paragraph 142 (iii) of Fry.

13. In developing his submissions, Mr. Lui points to the words "the vendor shall not sue the purchaser for any liabilities" in clause 6 of the Provisional Agreement which, he submits, clearly bar further action or remedies. Why, he asks rhetorically, was the same simple formula not used in clause 7 to bar the purchaser from enforcing specific performance?

14. The manifest reason, it seems to us, is that the vendor, being in possession of the purchaser's deposit, has only to forfeit it, whereas the purchaser for his part might well have to take legal action to recover the amount of his deposit, which necessitates express clarification that it is only furtner or other action that is barred. This different formulation of clauses 6 and 7 is also entirely consistent with, and indeed indicative of a mutual intention to limit, as it were, the total price to be paid for non-completion by either party at the interim or provisional, pre-formal sale and purchase agreement stage to an amount equal to the initial deposit; it is also consistent with the view taken by Mayo J. The mandatory obligation to immediately pay the stipulated amount imposed by the word "shall" where it first appears in clause 7 points very strongly to the foregoing being the intention of the parties. It is not disputed that the parties to such an agreement may so limit their damages for non-completion "if a correct formula of drafting is adopted" as Mayo J. put it, citing Abdul Cader Abdeen v. - Abdul Careem Mohamed Thaheer [1958] AC 1.16.

15. Mr. Lui's ingenious if strained construction of clause 7, upon further examination, reveals some curious and anomalous features. If the vendor in breach of her mandatory obligation refuses to repay the deposit, thereby compelling the purchaser to sue, she will be able to bar the purchaser from taking action to recover other damages or enforce specific performance. Such a premium upon breach of the agreement could not be accepted as the intention of the parties without language of the clearest and wholly unambiguous sort that can be seen to be absent. Furthermore, to accommodate voluntary payment of the stipulated amount by the vendor, which conceivably is quite likely to be made under such a provision, Mr. Lui was constrained to argue that in such event it is the actual acceptance of the amount that would constitute the action by the purchaser which would attract the bar to further action. This latter submission seems to us to involve inversion of the ordinary.meaning of "action". Mr. Lui was also constrained to submit that while there was a mandatory obligation upon the vendor to pay the stipulated amount, there was no corresponding obligation upon the purchaser to accept it, but.on the contrary that the purchaser had an option whether or not to accept it. On the wording of clause 7, and in the context and circumstances of the Agreement, that does not seem to us to be right.

16. Mr. Lui accepts the lack of mutuality implicit in his construction of clauses 6 and 7, that is adverted to in the judgment of Mayo J; but he submits, in reliance upon Lee Tat Kwong, that such lack of mutuality is not fatal. Assuming without deciding that that is so, it is sufficient to note that that mutuality lends some support to the construction that produces it and conversely, its absence militates against a construction that does not produce it.

17. Returning to Tong Yee Lan, Mr. Lui's stance was that the judgment was right in its interpretation of clauses 6 and 7, although he did not found his submissions upon it. Mr. Chan for his part took the view that it was not for him to argue the appeal in Fong Yee Lan; if his submissions meant that the judgment was wrong, so be it. Turning then to that judgment, Mayo J. was obviously right in his observation that the main purpose of the provisional agreement is unclear. Before us, both the execution of the formal agreement, and the ultimate sale and purchase have been touched upon. We do think it necessary or indeed proper in the circumstances, particularly in the absence of direct submissions, to express any opinion upon that question. It is suficient to say that even if the answer were certain, it could not alter the clearly expressed intention of clause 7.

18. To proceed with that judgment, while we have no quarrel with the recognition that it is the "clear and unambiguous expression in the agreement" that is to prevail, the approach to refusal to complete was manifestly upon the basis that the main purpose of the provisional agreement was the sale and purchase. Moreover, to say that to extend the limitation of damages and remedies in clause 7 to wilful refusal would reduce the agreement to a declaration of intent is to overlook the compensation that the vendor would have to pay, albeit limited to the amount of the initial deposit.

19. On its plain and ordinary meaning, failure includes all failure howsoever caused, i.e. including refusal. We can find nothing in the agreement, nor is there anything in the judgment, to warrant the construction that "failure" was not to include refusal (nor, we might add, has any justification emerged in the appeal before us). On the contrary, the construction contended for by Mr. Lui would mean that "fails" in clause 9, expressly linked as it is to "defaulting", has a different meaning from "fail" in clause 7 where default implicit in refusal would be excluded. Accordingly as it appeared to Mayo J., it appears equally to us, that in the circumstances it was refusal even more than involuntary failure that was intended as an option by the parties, i.e. to provide that at that provisional stage the vendor (and indeed the purchaser under clause 6) could refuse to complete and have her total liability limited to the amount of the initial deposit. On the wording of the provisional agreement and what is disclosed in the judgment (and in this appeal), we do not accept that it was not the intention of the parties to either provisional agreement to provide for refusal to complete. In our view, for the foregoing reasons, the Deputy Judge was wrong in construing clause 7 as not barring the purchaser from action for damages or enforcement of specific performance upon the vendor immediately upon failure paying the amount stipulates by clause 7.

20. Reverting to Mr. Lui's submissions, we do not accept his contention that the provisional agreement before Godfrey J. in Lee Tat Kwong offered a stronger foundation than the Provisional Agreement in this case for concluding that it was the intention of the parties to confer an option on the vendors, if they chose not to go ahead with the contract by specifically performing it, to pay the stipulated amount instead. On the contrary, in contrast to the implication or inference that has to be derived from the purchaser's entitlement to take legal action if the vendor fails immediately to pay the stipulated compensation in clause 11 there; here in clause 7 the bar is stated in express terms. Moreover, there is not the ambiguity in clause 7 that is inherent in the words "and the purchaser is not entitled to dispute that" in clause 11 before Godfrey J. Accordingly we reject also the suggestion that Mayo J. was wrong in finding support for his conclusions in the judgment of Godfrey J. because of dissimilarity in the provisional agreements.

21. As we have indicated, in our judgment, upon its true and proper construction clause 7 provides the vendor with the option of immediately paying the amount stipulated instead of completing. In our view that effect or intention is plain and, moreover, sufficiently clear to dispose of or meet the contra proferentem rule, and the necessity for clarity in the limitation or exclusion of liability and ordinary rewedies (see Szymonowski and Company v. Beck and Company [1923] 1 KS 457) both of which were mentioned in Fong Yee Lan and relied upon by Mr. Lui.

22. In our judgment, therefore, it is clear from its wording, particularly in its context, that its effect is that upon the vendor compensating the purchaser with the amount stipulated immediately upon her refusal to complete the sale in the manner provided, it is not open to the purchaser to take any action to claim damages or to enforce specific performance.

23. For the reasons we have given, the appeal is dismissed and we order, nisi, that the respondent is to have her costs.