XCHRX TRIVEST INVESTMENT LIMITED v. FAKO PROPERTIES LIMITED

1994 No.A2945

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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1. On 26th February 1994, the Defendant, as Vendor, and the Plaintiff as Purchaser entered into a written agreement ("the Agreement"), the relevant parts of which I now set out :

" MEMORANDUM FOR SALE AND PURCHASE

Vendor	:	Fako Properties Ltd.
		Room 2701, Tower 1, Admiralt Centre
		No. 18, Harcourt Road, Hong Kong
Purchaser	:	Trivest Investment Ltd.
		Room 1603, Fairmont House,
		8, Cotton Tree Drive,
		Hong Kong
Date	:	26th February 1994
Subject Properties	:	Shop Nos.5-32, 39-49 on the 2nd Floor
		Admiralty Centre, No.18, Harcourt Road,
		Hong Kong
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The vendor as beneficial owner hereby agrees to sell and the purchaser hereby agrees to purchase the above subject Properties subject to the following principal terms and conditions.

Properties

Shop Nos.5-32, 39-49 on the 2nd Floor, Admiralty Centre, No. 18, Harcourt Road, Hong Kong

Area

21,386 sq.ft. gross approximately for reference only.

Consideration

HK$128,316,000.00 (HONG KONG DOLLARS ONE HUNDRED TWENTY EIGHT MILLION AND THREE HUNDRED SIXTEEN THOUSAND ONLY)

Payment Terms

a)	Initial Deposit	HK$1,000,000.00 being initial deposit shall be payable by the purchaser to the vendor upon signing this memorandum.
b)	Down Payment	10% of the total consideration, less the initial deposit, shall be payable by the purchaser to the vendor upon signing the Agreement of Sale and Purchase on or before 11th March 1994.
c)	Further Deposit	20% of the total consideration shall be payable by the purchaser to the vendor's solicitors on or before 11th April 1994 to be held by them as stakeholders pending approval of title to the subject Properties, such approval shall be given not later than 25th April 1994.
d)	Balance	The balance of 70% of the total consideration shall be payable by the purchaser to the vendor on or before the 11th August 1994 whereby the whole transaction shall be completed by way of assignment.

 

Agreement for Sale and Purchase

The vendor's solicitors shall prepare the draft Agreement for Sales and Purchase in accordance to the terms and conditions set out in this memorandum to be reviewed by the purchaser's solicitors as soon as possible and the formal Agreement for Sale and Purchase shall be executed by both parties on or before 11th March 1994.

Completion of Transaction

The whole transaction shall be completed by way of assignment on or before 11th August 1994.

Legal Costs

Each party shall bear its own legal costs incurred in this transaction.

Stamp Duty

To be borne by the purchaser solely.

Agency Commission

The vendor agrees hereby to pay an agency commission equivalent to 1% of the total consideration to its agent (Vigers China Ltd.) of which 50% shall be payable upon the purchaser's payment of 20% of the total consideration and the other 50% shall be payable upon completion of this transaction.

Default

a) In the event of the purchaser failing to comply with the payment terms and other conditions stated above, the total amount of the deposit already paid shall therefore be forfeited by the vendor, and the vendor can then resell the subject properties without giving further notice to the purchaser, and purchaser shall have no further right whatsoever under this memorandum.

b) In the event of the vendor failing to complete the transaction while the purchaser meets its payment obligation and other conditions herein, the total amount of deposit already paid shall be refunded by the vendor to the purchaser plus the purchaser shall also be entitled to an compensation of the same amount of value of the total refund, and thereafter the purchaser shall have no further right or claim."

2. That same day the Plaintiff paid the initial deposit of $1 million.

3. By a letter dated 7th March 1994 the Defendant's solicitors informed the Plaintiff's solicitors that the Defendant would not proceed with the sale and purchase, and enclosed a cheque for $2 million in the Plaintiff's favour as a refund of the $1 million initial deposit plus an amount of the same value in purported compliance with paragraph (b) of the Default Clause in the Agreement.

4. Meanwhile, on 4th March 1994, the Defendant had entered into another agreement to sell the same shops to a different buyer at a higher price, completion of that transaction being set for 18th August 1994.

5. The Plaintiff's solicitors on 8th March 1994 wrote to the Defendant's solicitors to the effect that the Plaintiff did not accept the Defendant's unilateral rescission and returned the cheque for $2 million.

6. According to the Agreement, the formal sale and purchase agreement should be signed on or before 11th March 1994. On 11th March, the Plaintiff's solicitors sent the Defendant's solicitors a cheque for $11,831,600 as the "Down Payment" contemplated by (b) of the Payment Terms in the Agreement.

7. The same day, the Defendant's solicitors returned the cheque for $11,831,600 to the Plaintiff's solicitors, at the same time reiterating to the effect that the Defendant regarded itself as no longer bound by the Agreement.

8. Since then, at all material times, it has been known to the Defendant's solicitors that the Plaintiff has been willing to hand to the Defendant's solicitors $11,831,600 for the "Down Payment", and to perform all its obligations under the Agreement, whilst the Defendant has throughout been willing to pay the Plaintiff $2 million pursuant to (b) of the Default clause.

9. The Plaintiff on 28th March 1994 took out a writ seeking specific performance and other relief against the Defendant arising from the Agreement. Two summonses are presently before the court. One is the Plaintiff's under O.86 for an order for specific performance. The other is the Defendant's under O.14A, O.18, r.19 and O.33, r.3 and the court's inherent jurisdiction, seeking, broadly speaking, the court's acknowledgment that the Defendant has fulfilled all its obligations under the Agreement.

10. Both sides agree that the sole issue before the court is whether, on its true construction, paragraph (b) of the Agreement's "Default" clause enabled the Defendant to discharge all its obligations towards the Plaintiff under the Agreement by its tender of $2 million to the Plaintiff on 7th March 1994.

11. The dispute is of a type frequently litigated in the Hong Kong courts of recent years in the context of what are generally described as "Provisional" or "Preliminary" contracts.

12. A point taken immediately for the Plaintiff was that here, far from describing itself as "Preliminary" or "Provisional", the Agreement is headed up as, "Memorandum For Sale And Purchase". While that is no doubt so, the court has to look at the Agreement as a whole and pay heed to its substance, as well as its label.

13. The content of the Agreement is, to my mind, all of a piece with what one finds in contracts headed up "Provisional" or "Preliminary" agreements for the sale and purchase of land, and, in my judgment, the principles which have evolved in the Hong Kong case law relating to "Preliminary" or "Provisional" agreements should be applied here.

14. Unsurprisingly, the most basic rule of construction in this area, as in almost all areas, is that the court has to look at the actual words used, and what the context was. That said, the court can hardly ignore that clause (b) under "Default" bears more than a passing resemblance to the Clause 7 in Wong Lai-fan v. Lee Ha [1992] HKLR 125 which I now set out together with the Clauses 2 and 6 which preceded it :

"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.

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."

15. There, the defendant purchaser, tendering before 3.4.91 an amount totalling twice the deposit, was held by the Court of Appeal to have discharged all his obligations, so that the plaintiff seller was refused Specific Performance or any other relief.

16. It is said for the Plaintiff that an indicator against (b) of the "Default" clause having the qualities of what is known in this branch of the law as an "escape clause" or "cooling off period" is the mandatory language, in particular the word "shall" in the context of the parts of the Agreement headed "Payment Terms", "Agreement for Sale and Purchase" and "Default". That argument cuts little ice, however, in the light of the Court of Appeal's decision in Lee Ming Ching v. Man Sun Finance (International) Corporation Limited, Civil Appeal No.203 of 1992 where similar mandatory language did not cause an escape clause to fail. The same approach is to be found in Wong Lai Fan v. Lee Ha, too. Nor do I think that the words "The vendor as beneficial owner hereby agrees to sell and the purchaser hereby agrees to purchase the above subject Properties subject to the following principal terms and conditions." at the beginning of the Agreement militate against the existence of an "escape clause" elsewhere in the Agreement.

17. Ms. Audrey Eu, Q.C., for the Plaintiff, helpfully took the court back to basics, reminding the court of Fry's three categories of contract, (her submission D2), only the latter of which relieves a party from fulfilling his obligations by payment of a sum of money as an alternative mode of performance.

18. I agreed with her, too, that the court should strive to uphold the primary contract which in the present case would be completing the transaction by assignment of the suit premises to the Plaintiff in exchange for the full purchase price. I accept, too, that the burden is on the party wishing to get out of the contract prematurely, who has to satisfy the court that, on a strict construction, applying the contra proferentum rule, the words and circumstances of the contract are sufficiently clear and unambiguous to permit that party to elect for the alternative mode of performing the contract by paying the stipulated sum.

19. For the Plaintiff, it was argued that the very use of the word "Default" pointed towards the Agreement being of the type which continues to exist even after the one wishing to get out of the contract has paid the sums arising under the Default clause. I fail to see why "Default" should have the significance the Plaintiff claims. No doubt, the Defendant's case would have been stronger if the heading had been "Opting Out", "Escape Clause", or "Cooling Off Period", rather than "Default", but I consider "Default" good enough to give rise to an alternative mode of performance by paying a sum of money.

20. A stronger point taken on behalf of the Plaintiff related to the significance of the opening words of (b) "In the event of the vendor failing to complete ...", rather than, "In the event of the vendor failing to execute the formal sale and purchase agreement ..."

21. According to the argument on the Plaintiff's behalf, that means, at least, that so long as the purchaser has tendered the Deposits and Down Payment under the "Payment Terms" part of the Agreement, the purchaser will be entitled to twice whatever has been paid to the vendor, meaning that if the Plaintiff has tendered the full 30%, it will get back whatever the Defendant has accepted by way of deposit (in our case $1 million), plus 30% of the purchase price by way of compensation. That would be for starters according to the Plaintiff, since it would also have the right to get damages for breach of the Agreement and/or Specific Performance.

22. I do not construe (b) under Default in that way. I see in (b) mutuality with what is contained in (a) where, in the event of the purchaser being in breach of the contract the vendor can only forfeit "... the total amount of the deposit already paid ..."

23. In (b), the echo of those very words to my mind indicates that in the event of the vendor being in breach he only has to pay the purchaser twice "... the total amount of deposit already paid ..." I think the words "already paid" mean what they say, and not "already tendered" Why there should be this huge disparity between what the purchaser gets and what the vendor gets under the Default clause, as interpreted by the Plaintiff, I cannot see.

24. The word "complete" in "In the event of the vendor failing to complete ..." is in my view no more than slovenly drafting for "failure to comply with its obligations and other conditions".

25. Failure to complete, in context means, no more than completing the next stage of the transaction. In the present case, that means failing to accept the 10% Down Payment before 11th March 1994. Any time before 11th March 1994 the Defendant could elect for the alternative mode of performance by returning to the Plaintiff twice the deposit already paid.

26. Where the Hong Kong courts have found in favour of a party wishing to call off a provisional agreement for the sale and purchase of land, the time between signing the provisional agreement and paying twice the deposit to get out has been described as "a cooling off period".

27. In the case before me, it was pointed out on the Plaintiff's behalf that, if (b) of the Default clause were to be construed as the Defendant urges, it would be an awfully long time to cool off, since the Defendant would have had from 26th February up until 10th August to exercise the right of election it claims. Although "cooling off" is a catchy metaphor, I do not think that too much should be made of it. I can see no good business or other reason why parties to a sale of land should not agree to a protracted period of alternative performance, with the cost of such an election escalating as time goes by. In fact, it is a perfectly sensible business arrangement.

28. In view of the above, I am satisfied that the Defendant has discharged all its duties under the Agreement so that the Plaintiff's summons stands dismissed, and I grant the Defendant an Order in accordance with Para.1 of its own summons.