CHARTER VIEW DEVELOPMENT LTD. v. GOLDEN RICH ENTERPRISES LTD. AND ANOTHER

CACV 42/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 42 OF 2000

(ON APPEAL FROM HCA 7056/1999)

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J U D G M E N T

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Ribeiro JA :-

1. On 26 August 1999, the 1st Defendant applied for the Statement of Claim in this action to be struck out on the grounds that it fails to disclose a reasonable cause of action or is otherwise an abuse of the process. Master Ho acceded to this application but granted the plaintiff an opportunity to amend, ordering the Statement of Claim to be struck out in default of proper amendment. The plaintiff appealed and in his Judgment handed down on 19 January 2000, Seagroatt J allowed the appeal. The 1st Defendant now appeals to this court seeking either to have the Statement of Claim struck out or to have Master Ho's order restored.

The plaintiff's claim

2. The plaintiff, as purchaser, entered into nine separate contracts with the 1st defendant as vendor, for the sale and purchase of parcels of land in Sai Kung. It alleges that such contracts were concluded through the 2nd defendant, who is one of its directors and who is also said to have acted as agent for the 1st defendant.

3. The nine contracts bear various dates between 7 August 1993 and 27 November 1993. In each case, the 1st defendant was agreeing to sell the land at a time when it did not have title thereto and was proposing eventually to assign the property as confirmor of an assignment by the existing owners. Completion was agreed to take place "within 1 month after completion of the relevant succession procedures", indicating that impediments preventing the existing owners from conveying title had to be removed before the agreements could be performed. Notwithstanding the contingent nature of the 1st defendant's title, the plaintiff paid deposits to the 1st defendant totalling $1,332,984 pursuant to these nine contracts, equivalent to 20% of the overall purchase price.

4. On 25 September 1995, another $1,332,984, representing a further 20%, was paid to the 1st defendant as additional deposit. The plaintiff's case is that in consideration of such further payment the 1st defendant, through its agent the 2nd defendant, agreed to a variation of the nine sale and purchase agreements making completion due on or before 5 April 1997. The plaintiff also pleads in the alternative that it was an implied term of the nine contracts that the defendant should assign the properties to it within a reasonable time from the date of signing such contracts.

5. As against the 2nd defendant, it is alleged that in consideration of the additional deposit, he promised that if, for whatever reason, the 1st defendant should fail to assign the properties to the plaintiff by 5 April 1997, he would on demand reimburse to the plaintiff the total sum of $2,665,968 paid by way of deposit. (This promise has for convenience been referred to as a guarantee; although its precise legal status may be a matter for doubt not material for present purposes)

6. The Writ was issued on 29 April 1999, some two years after the pleaded completion date. It is not in dispute that as at the date of the appeal, the 1st defendant had not assigned the property to the plaintiff and had not repaid the deposits. The 2nd defendant had also not reimbursed the deposits despite the plaintiff's demands. The plaintiff alleges that such matters constituted breaches by the 1st defendant of the nine contracts and a breach by the 2nd defendant of his guarantee.

The relief sought

7. It is therefore the plaintiff's case that the time for completion has long passed and that the 1st defendant is in breach of its contracts.

8. As Lord Wilberforce pointed out in Johnson v Agnew [1980] AC 367 at 392-4, where one of the parties to a contract for the sale of land fails to complete, the other can either treat the party in default as having repudiated the contract, accept the repudiation, and proceed to claim damages for breach of the contract, both parties thereafter being discharged from further performance of the contract; or he may seek from the court an order for specific performance with damages for any loss arising from delay in performance. These are remedies which can be sought in the alternative, with an election as to which to pursue being made at the trial.

9. In the present case, the plaintiff did not seek either of these remedies. As against the 1st defendant it claimed :-

"a declaration ....... that :-

(a) by the 1st defendant's conducts [sic] as set out ....... above, it has evinced an intention to be no longer bound by the said Contracts;

(b) that the plaintiff is entitled to accept the 1st defendant's repudiation of the said Contracts; and

(c) that upon the plaintiff's acceptance of the 1st defendant's repudiation of the said Contracts, the plaintiff is entitled to refund from the 1st defendant of the [deposits] and damages for breach of the said contracts by the 1st defendant."

As against the 2nd defendant, the plaintiff's claim was for "the said sum of $2,665,968".

10. It will be apparent from the foregoing that while the plaintiff complains of breaches of contract by the 1st defendant, it has not purported to accept any repudiation or done anything to bring the contracts to an end.

Inconsistent claim against the 2nd defendant

11. Mr Patrick Fung SC, appearing for the 1st defendant, developed two arguments in favour of striking out the Statement of Claim. The first can be summarised in the following propositions :-

(1) The claim against the 2nd defendant only makes sense if the sale and purchase contracts have been brought to an end so that reimbursement of the deposits can be called for.

(2) This is wholly inconsistent with the case made against the 1st defendant which proceeds on the footing that the contract continues in existence for the benefit of both parties.

(3) This is embarrassing to the 1st defendant and so should be struck out as an abuse.

In my judgment, this argument fails. The viability of the claim must be judged separately in respect of each defendant. In any particular case, the averments contained in the Statement of Claim and the relief sought may disclose a perfectly good case against some defendants but not against others.

12. In the present case, the 2nd defendant may or may not be able to contend that in the absence of any plea that the nine contracts had been terminated, no cause of action has arisen against him for reimbursement of the deposits. However, there is no inconsistency in the claim against the 1st defendant. Throughout, it proceeds on the footing that the contracts have not been terminated and seeks relief on a consistent basis.

13. The 2nd defendant is not before the court. Having dealt with this argument, there is no need to make any further reference to him and the remainder of this judgment is concerned only with the position of the 1st defendant.

A declaration seeking the court's advisory opinion based on hypothetical facts

14. Mr Fung's second, and more substantial, argument is that the action must fail because the relief sought raises questions based on hypothetical facts for the advisory opinion of the court, this being relief that, on well-established principles and on authority, the court will not grant. In my judgment, this objection to the action as presently constituted is well-founded.

15. There is no doubt that declaratory relief has for many years been embraced in common law jurisdictions as a valuable and flexible remedy appropriate for use in many different contexts. This is recognized in O 15 r 16 of the High Court Rules which provides that :-

"No action or other proceeding shall be open to objection on the ground that a merely declaratory judgment or order is sought thereby, and the court may make binding declarations of right whether or not any consequential relief is or could be claimed."

However, the courts have also made it clear that they will not entertain applications for declarations in relation to issues which are in a material sense merely hypothetical or academic. As pointed out in Zamir and Woolf, The Declaratory Judgment, Sweet & Maxwell, 2nd Ed, at p 127, it is of particular importance that the declaration sought must be based on concrete facts. If it is not, and if, for instance, there is no dispute in existence or the dispute is based on purely hypothetical facts or if the dispute has ceased to be of any practical significance, the court's established practice is to refuse declaratory relief. The court will in particular refuse to give an advisory opinion sought by a plaintiff in the guise of declaratory relief in respect of a situation that has not arisen and may never arise.

16. In the present case, the plaintiff asks the court to declare that the 1st defendant has repudiated the nine contracts and that the plaintiff would be entitled to accept such repudiation if he chooses to do so, not having previously purported to accept.

17. In law, non-acceptance of a repudiation means that the contract remains in place and continues to bind both parties, with their mutual rights unaffected. As Asquith LJ (in Howard v Pickford Tools Ltd [1950] 1 KB 417 at 421) stated in his oft-quoted dictum :-

"An unaccepted repudiation is a thing writ in water and of no value to anybody: it confers no legal rights of any sort or kind. Therefore a declaration that the defendants had repudiated their contract with the plaintiff would be entirely valueless to the plaintiff if it appeared at the same time, as it must appear in this case, that it was not accepted."

That such is the position where a repudiation has not been accepted is not in doubt: see, for example, White and Carter (Councils) Ltd v McGregor [1962] AC 413 at 427 and 444; the decision of the Court of Final Appeal in Ji Shan International Investment Ltd v Resources Main Enterprises Ltd [1999] 1 HKC 12 at 15.

18. Howard v Pickford Tools Ltd was a case where the plaintiff was employed as the defendant's managing director and contended that he was entitled by his contract to be allowed to carry out his duties without undue interference. He complained that the defendant had evinced an intention not to be bound because its chairman's conduct had made it impossible for him to perform his side of the contract. Nonetheless, the plaintiff remained at his job and was, at the time of the appeal, still working for the defendant.

19. After the Master had struck out the action, McNair J had allowed it to proceed after an amendment was made whereby the plaintiff sought a declaration :-

" ....... that the conduct of the defendants set forth in para. 4 hereof is such as to constitute repudiation by the defendants of the contract and that the plaintiff is excused further performance of his obligations under the contract." (at p 419)

In other words, the plaintiff sought a ruling from the court as to whether the defendant's conduct constituted a repudiation, without his ever having purported to accept such repudiation and indeed, after he had affirmed the contract, as his continued employment showed.

20. Since, as a matter of law, the unaccepted repudiation "conferred no legal rights of any sort or kind", the existing contractual rights of the parties were unaffected by it. Moreover, the plaintiff's subsequent conduct affirming the contract with full knowledge of the alleged breach meant that he could not later change his mind and seek to rely on the earlier breaches complained of as the basis of treating himself discharged from the contract: Bentsen v Taylor Sons & Co [1893] 2 QB 274. It was therefore a case where the declaration sought was "academic" in at least two senses: it involved seeking a declaration about an unaccepted repudiation which was legally a non-event and which, in the light of the plaintiff's subsequent conduct barring future acceptance of any such repudiation, could have no practical effect.

21. Asquith LJ therefore described the declaration sought in such circumstances as "entirely valueless". Lord Evershed MR shared this objection, stating (at p 421) that at best, it involved asking for advice as to what the legal position would be if the chairman's conduct was repeated in the future :-

"Although Ord. 25, r. 5 [the precursor to the equivalent of our O 15 r 16 set out above], is most useful in the jurisdiction which it confers, and I am not anxious to put unnecessary limitations upon it, it is plain that it could not, and should not, be used so as to require the court to answer academic questions. In effect that is what would happen here, for, if Mr. Cumming-Bruce is right, it would be possible for a person who alleged that he had been wronged to ask the court to declare in his favour that that was conduct which he could, if he had liked, have accepted as repudiation and which accordingly, if it were repeated, could then be so accepted."

The Master's order striking out the action was accordingly restored by the Court of Appeal.

22. The courts of Australia have adopted similar rules restricting the availability of declaratory relief where merely hypothetical issues are raised. Gibbs J in The University of New South Wales v Moorehouse (1975) 122 CLR 1 at pp 9-10, stated the principles as follows :-

"However the power, although wide, is not unlimited. In Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 437, I expressed the opinion that the Scottish rules summarised by Lord Dunedin in Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 at 448 should in general be satisfied before the discretion is exercised in favour of making a declaration. The first of those conditions is that 'the question must be a real and not a theoretical question'. As a general rule, the power to make a declaration will not be exercised when the Court is called upon to answer a question that is purely hypothetical: see In re Barnato (deceased); Joel v Sanges [1949] Ch 258 at 270. In accordance with that principle, the Court of Appeal in Odhams Press Ltd v London and Provincial Sporting Newsagency (1929) Ltd [1936] Ch 357 refused to make a declaration that the plaintiffs, who were unable to prove any specific infringement of copyright, were joint owners of the copyright in compilations of starting prices or betting odds made by their representatives. ..... Many other examples may be found in the books of cases in which a declaration has been refused because it was claimed in relation to circumstances that had not occurred and might never happen."

23. Two recent decisions of the New South Wales Court of Appeal applied these principles to the question whether a plaintiff was entitled to a declaration as to the right to terminate a contract where there has been no election to terminate and are very much in point.

24. The first is Galaxy Communications Pty Ltd v Paramount Films of Australia Inc (Unreported, CA 40080/98, 27 March 1998) where Stein JA, with whom Priestly and Meagher JJA agreed, stayed the proceedings, stating as follows :-

"I am not the least inclined to find limits on the beneficial jurisdiction of this Court to make declarations of right, but it is one thing to declare present contractual rights of the parties, another to declare (them) contingently on the plaintiff electing to take some course that he has not yet taken is not bound to take and may not take. In the present case the plaintiff has said that, If I were to find that he was entitled to rescind, then he would rescind, but he would not in any way have been bound to do so if I had made the declaration that is sought. .......

I think the court ought to hesitate to make declarations as to the potential effect on the contractual position of the parties of events upon which a party has not yet acted and which would not alter the existing contractual rights unless he did so act. ... [A]s Else-Mitchell J observed in Ku-Ring-Gai Municipal Council v Suburban Centres Pty Ltd it is not generally the function of the courts to entertain applications designed primarily or solely as a means of obtaining advice as to the legal potentials of a situation that has arisen between the parties." (at p 37)

"In my opinion, ....... the proceedings before the Commercial Division which remain are an abuse of process and unreasonably oppressive to the claimants. They involve hypothetical future rights which may produce no foreseeable consequences for the parties. They potentially (affect) the contractual positions of the parties in circumstances where one party has not yet acted and indeed, may not." (at p 39)

25. The Galaxy decision was followed in Sanderson Computers Pty Ltd v Urica Library Systems BV (Unreported, CA 40280/98, 30 June 1998) where the court at first instance had made declarations regarding the respondent's entitlement to terminate a particular agreement by notice where there had been no prior election to terminate. Sheller JA, with whom Mason P and Powell JA concurred, set aside the declaration, stating as follows :-

"For reasons which are described in the judgment of Priestley JA in Galaxy, there will always be a problem where a claimant which has not terminated an agreement, seeks a declaration that it is entitled to do so. The declaration speaks from the time that it is made. Before a notice of termination is given or expires, events may overtake its validity. It is undesirable that questions such as waiver, and even more undesirable that questions about relief against forfeiture, be dealt with at all before there is a completed termination. Even if the respondent presently intends to give a notice of termination, it may delay it and fresh questions about election and waiver may arise. Such considerations firmly support the conclusion that in the present case his Honour's exercise of the discretion to grant such a declaration miscarried. With all respect to his Honour, until such time as the respondent elected to terminate, the question as to whether it was entitled to do so remained hypothetical and abstract."

The Judge's decision

26. Seagroatt J rejected the argument advanced below based on Howard v Pickford Tools Ltd. He upheld the validity of the claim on the basis of dicta stressing the value and usefulness of declaratory relief as a means for ascertaining whether a party is bound by any contract in question. He did not, however, have the benefit of either of the New South Wales judgments in this context.

27. One case relied on by the Judge was Societe Maritime Commerciale v Venus Steam Shipping Co Ltd (1904) 9 Com Cas 280 where Channell J stated (at p 290) as follows :-

"As to the point that the plaintiffs are not entitled in any event to a declaration, I think that the objection is not well founded. I think that in reference to a mercantile transaction of this sort parties are entitled now to come to the Court and say, 'It is important to us in reference to this contract, which has a year and a half to run, to know whether we are bound by it or not.' I think they are entitled to come, showing a reason for asking that, to ask for a declaration. They are not entitled to come and ask a Court of law for an opinion upon a speculative or academic question; but showing the necessity of a decision upon it, I think they are entitled to a declaration as to whether or not the contract is binding upon them. They are not bound at their peril to refuse to perform it and then to be liable to heavy damages for not performing it for the space of the next year and a half. If they are wrong, they would be liable for damages down to the time of the judgment of the Court while they are refusing to perform; but upon the Court saying that they were bound, they would then say:-'We will now go on with it for the remainder of the time.' I think that is a sufficient reason. I think, therefore, that they are entitled to some form of declaration that they are not bound to the defendants in the present state of things. ......."

With respect, that case does not assist the plaintiff in the defence of its pleading as it stands. As is evident from the passage cited, Channell J fully accepted that parties are "not entitled to come and ask a Court of law for an opinion upon a speculative or academic question." The case with which he was concerned did not raise questions of that kind. The dispute was over the question whether the defendants had become entitled to the benefit of a contract with the plaintiff either because that contract had been concluded on their behalf by one Lockie acting as their agent, or because they were assignees of the contract which Lockie had made as principal. It was on the basis of these concrete facts that the court was asked by the plaintiffs to declare "whether or not the contract is binding upon them". The claim therefore raised questions concerning the existence or otherwise of accrued contractual rights and duties on the basis of non-hypothetical facts.

28. The Judge also relied on Spettabile Consorzio Veneziano di Armamento e Navigazione v Northumberland Shipbuilding Co Ltd (1919) 121 LT 628. At first instance, Bailhache J (at p 629) stressed the usefulness of declaratory relief as follows :-

"In this case I am asked to exercise, I think, one of the most useful functions of the commercial court - namely, to say between parties to contracts whether those contracts are still binding upon them. That is a function of the court which saves parties in commercial transactions from a great deal of uncertainty and a great deal of money."

In the Court of Appeal, Duke LJ (at p 634), who with the rest of the court upheld Bailhache J, stated :-

"That ruling [of Channell J in the abovementioned case] entitles parties to assume that they may come to court in a properly framed action and obtain the decision of the court as to what the rights are in respect of the matter in dispute."

The judgment of Atkin LJ (at p 635) was also cited by the Judge, as follows :-

"This form of action is, I think, one of the most valuable contributions that the courts have made to the commercial life of this country ....... The procedure before the court is now open to them, which is unchallenged, by which they can come to a court and in a very short time have those disputes resolved. That they can do without exposing themselves to the risk of having to take a definite course, in repudiating a contract which, if it is wrong, may involve them in a very large sum of money."

In my view, such dicta must be understood in the factual context of the case. The parties were debating whether, in the light of the position each had taken in correspondence and otherwise, they continued to be bound by shipbuilding contracts which would require the plaintiff shipowners to accept ships that the defendant shipbuilders would build; or whether, on the contrary, the contracts had been terminated by a repudiation effectively accepted. The facts were unusual, as Bailhache J pointed out (at p 630) as follows :-

"The case is peculiar because, first, it was the Italian company who were claiming that contracts were at an end and the [defendants] who were saying that the contracts were on foot. Afterwards the position changed, and it was the [defendants] who desired to say that the contracts were not on foot, and the Italian company who desired to uphold those contracts.

[An action originally commenced by the plaintiff] was abandoned, and ....... another writ was issued in which the Italian company completely abandoned their original view, and instead of asking for a declaration that the contracts were at an end, bring an action for specific performance. In that action in substance they ask for a declaration that the contracts are still on foot. "

The defendants sought to argue that they had successfully accepted the plaintiffs' alleged repudiation of the contract on 1 May 1919 (see p 630). The plaintiffs on the other hand, sought a ruling that the purported acceptance was of no effect because any earlier repudiation by them had ceased to be available for acceptance (ibid).

29. The court was therefore again being asked to determine whether the concrete acts of the respective parties carried the legal consequence of terminating the relevant contracts. It was not being asked whether there was an available act of repudiation so that if, hypothetically, the plaintiff should in future, and contingent upon the court's determination, decide to accept it, it could, but might not, bring the contract to an end.

30. It is perhaps worth noting that Duke LJ's dictum cited by the Judge and set out above stresses the requirement that the action be "properly framed" and that the decision of the court concern the parties' accrued rights and, by necessary implication, not issues based on hypothetical facts. As Atkin LJ stated (at p 635) :-

"The writ takes the form of asking for a declaration as to the rights of the parties. I agree that it asks for alternative declarations, and it asks for relief in addition to the declarations. But the substance of it appears to me to be this: that the plaintiffs in the action are asking the court to declare whether or not they are any longer bound by the contracts."

Plainly, this was not a case involving hypothetical questions and the dicta emphasising the value of declaratory relief were pronounced in that unobjectionable context. Accordingly, in my view, this authority also provides the plaintiff no assistance.

The principles applied to the present case

31. Mr Geoffrey Ma SC appeared for the plaintiff in this court but not below. He fairly accepted that, with the action as presently constituted, the plaintiff would be entitled to keep its options open even if the declarations presently sought were to be granted at the end of the trial. If the court should declare that the 1st defendant had repudiated the contract, the plaintiff could at that stage decide whether or not to accept such repudiation. If, for instance, it had by then become apparent that the existing owners would be able to assign good title to the land, the plaintiff could, notwithstanding the declarations sought, abandon any thought of accepting the repudiation and instead press for specific performance. It is unclear whether the Judge was made fully aware of this position.

32. In my judgment, applying the abovementioned principles to the present case leads to the conclusion that the relief sought is impermissible. The plaintiff is asking the court for legal advice as to whether, if, hypothetically, it should choose to assert that the 1st defendant has repudiated the nine contracts and to accept such repudiation, its action would be held to be lawful. It is an action for an advisory opinion based on a hypothetical course of action which may or may not eventuate. The court declines to act as legal adviser in such cases.

33. Mr Ma, however, informed the court that his instructions were that, although his clients' options might remain open as a matter of law, their actual interest was in securing refund of the deposits that had been paid to the 1st defendant. If the plaintiff is prepared to amend its claim to make that the objective of the action, the defects identified above are likely to be curable. I would therefore consider it proper to afford the plaintiff an opportunity to amend and to order the Statement of Claim struck out only in default of proper amendment.

34. It is therefore my view that Seagroatt J's order should be set aside and that the order of Master Ho should be restored. While the plaintiff is granted leave to amend before formulation of any amendment, the defendants are obviously not precluded from taking proper objection to relevant aspects of any amended pleading that may be filed.

35. In my view, an order for costs nisi should be made requiring the plaintiff to pay the 1st defendant's costs here and before Seagroatt J since the incurring of such costs was necessitated by the plaintiff's challenge to Master Ho's order which has now been restored.

Rogers JA :-

36. I agree.

Godfrey VP :-

37. I also agree.