SILVERPOLE LTD. v. CHINA PRIDE INVESTMENT LTD.

1991, No. A8894

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. Mr Tanabe has a law practice in Wakayama City, Japan. He is the principal beneficial owner of the plaintiff. Using the plaintiff as a vehicle, he caused to be invested time and again in Hong Kong landed properties. In the process, he engaged Persona Properties (HK) Ltd. The personalities who served Mr Tanabe's company were Mr Murayama and Mr Uemura. In the latter part of 1991, Mr Tanabe was introduced to 121 carpark spaces in the North Point Centre. For the intended purchase of these carpark spaces, Mr Tanabe dispatched two lady employees to Hong Kong for a survey. Some three days later, on 12th August 1991, he came to Hong Kong himself and viewed these properties with Mr Murayama. Another three days later, on 15th August 1991, a $300,000 deposit was paid to the defendant upon the signing of a Memorandum. Mr Murayama and Mr Uemura were made alternate attorneys for the plaintiff.

difficulties. The facts are complex but within a short compass, though relatively intense. The law on deposit calls for a comprehensive review and counsel's final written submission did not reach me until 9th February. I propose to deal with the truly essential facts. I have had the full chronology from counsel with supporting documents, to all of which I have gratefully made cross references in my deliberation of every relevant facet in this case.

2. The deposit was paid as a deposit. See Part V of the First Schedule to the Sub-Sale Agreement and its Clause 3(2). Section 36 of the Conveyancing and Property Ordinance (enacted in 1984) allows the covenants and conditions mentioned in the Second Schedule to the Ordinance, or any of them, to be incorporated by reference. Para. 10 of that Second Schedule was adopted in Clause 10 of the Sub-Sale Agreement between the plaintiff and the defendant. Clause 10 reads as follows:

"If the purchaser shall fail to comply with any of the terms and conditions of this agreement, the deposit shall be absolutely forfeited as and for liquidated damages (and not as a penalty) [to] by the Vendor who may (without being obliged to tender an assignment to the purchaser) rescind this agreement and [either] resell the property as a whole or in lots, [and either] by public auction or by private contract, or partly by the one and partly by the other, and subject to such conditions and stipulations as to title or otherwise as the Vendor may think fit. Any deficiency arising from such re-sale and all expenses attending the same or any attempted re-sale shall be made good and paid by the purchaser as and for liquidated damages, and any increase in price realised by any such re-sale shall belong to the Vendor. This clause shall not preclude or be deem to preclude the Vendor from taking other steps or remedies to enforce the Vendor's right under this agreement or otherwise. On the exercise of the Vendor's right of rescission under this Agreement the Vendor shall have the right, if this Agreement shall have been registered in the Land Office, to register at the Land Office an instrument to rescind the sale of the property. This clause shall not prevent the Vendor from recovering, in addition to liquidated damages, damages representing interest paid or lost by him by reason of the Purchaser's failure." (Words in square brackets are found in para. 10 of the Second Schedule).

3. The defendant's obligations to use its best endeavours to introduce a financier for the $13 million loan and to offer to lend the same amount as a private loan were embodied in Clause 19 of the Sub-Sale Agreement:

"19 Lisa Yung arranged for two bankers from the Hua Chiao Commercial Bank to meet Mr Tanabe and the two gentlemen from Persona Property (HK) Ltd. She had obtained some of the internal documents from the plaintiff and faxed them over to Hua Chiao Commercial Bank. To her understanding, the Hua Chiao Commercial Bank had indorsed the application for the $13 million bank loan in principle subject to production and approval of other usual documentation such as survey reports. When the Sub-Sale Agreement was signed, these two bankers from Hua Chiao were present at the invitation of Lisa Yung. Mr Tanabe had little recollection. Mr Uemura could not even remember the name of the bank but he recalled that the Hua Chiao Bankers requested Mr Tanabe to provide documents. There was a Mr Barry Law who was liaising with Lisa Yung and serving the plaintiff. Mr Law's status was unclear and possibly that contributed to the last-minute confusion. Lisa Yung had been led to believe that the Hua Chiao Commercial Bank loan was not required and that the plaintiff preferred to approach the China State Bank. In fact, Mr Tanabe would understandably wish to be backed by Japanese bankers. The China State Bank, the Sanwa Bank, the Fuji Bank were all approached without fruitful results. In the meantime, Lisa Yung felt morally obliged to notify the Hua Chiao Commercial Bank that their facilities would no longer be needed.

4. The defendant was anxious as to whether a private loan would be sought. Lisa Yung was certainly less than enthusiastic in providing the private loan if a bank loan could be procured. The defendant's interest was exclusively in these 121 carpark spaces. Lisa Yung would certainly wish to see the end of the deal and have matters concluded for her one-project company. She would not like to see her defendant company being tied up by the private loan of $13 million and thereafter having to search for a replacement bank loan to take over the $13 million mortgage at the defendant company's costs and expenses. Mr Norman Yung had been after Mr Hodgson on this question of $13 million loan, particularly the need of the defendant to offer to lend it. On 3rd October 1991, Mr Hodgson's reply to Mr Yung's enquiry was non-committal. On 17th October 1991, Mr Hodgson wrote to Mr Norman Yung that a private loan was needed. In the meantime, Lisa Yung had come to know of the unsuccessful attempts of the plaintiff to secure a bank loan and as she would feel embarrassed to go back to Hua Chiao Commercial Bank, the Hong Kong Bank at Aldrich Bay was contacted. Mr Koo, the manager of that branch, had been overseeing a Mr Hodgson in the name of his firm, agreeing to the extension of a month for completion but only on terms. On his return to Hong Kong on 22nd October, Mr Hodgson discussed the proposed terms for extension with clients, and a decision was taken that it would be more beneficial for the plaintiff to complete without the extension on what were regarded as onerous terms. On 22nd October, Mr Hodgson wrote to Mr Norman Yung stating that the terms for the proposed extension were not acceptable and that the plaintiff would complete tomorrow on 23rd October with the assistance of the private loan under Clause 19(2) of the Sub-Sale Agreement from the defendant. My references to correspondence between Mr Hodgson and Mr Norman Yung and vice versa, relate obviously to communications between their respective firms.

5. After office hours, Mr Hodgson had a series of conversation with Mr Norman Yung. In passing, Mr Hodgson mentioned the absence of Mr Tanabe and Mr Norman Yung seized upon this information and the probable inability of Mr Tanabe to execute in Hong Kong his personal guarantee to gently edge the plaintiff, through Mr Hodgson, towards an extension as the solution. The defendant was less than keen in providing a private loan and was then seeking to insist on a strict performance of Clause 19(2) in the hope of persuading the plaintiff into taking the extension on its terms. Mr Norman Yung even insisted, at one time, on Mr Tanabe signing the personal guarantee in his firm. There was some explanation offered as to why the plaintiff regarded the terms as being unacceptable. Mr Yung was at pains to justify the need for, in effect, reimbursement by those terms. Mr Hodgson proposed to give his firm's undertaking to supply the guarantee soon after 23rd October. Mr Norman Yung queried whether that would give rise to the problem of past consideration. In all, Mr Hodgson offered three alternatives: the other two were for Mr Uemura to sign the guarantee or postponing the completion for a few days. Mr Yung was not drawn to these alternatives but proposed more equitable terms. In fact, at 7 p.m. on the same day, 22nd October, Mr Norman Yung faxed to Mr Hodgson the modified terms, primarily allowing an apportionment of the carpark spaces' rental as from 23rd October 1991.

6. On these events, there would seem to be no substance in the defendant's complaint that the plaintiff was less than responsive to its previous enquiries as to the need of a private loan; nor is there any real substance in the defendant's charge that Mr Hodgson and his firm were inactive in transmitting such enquiries to their client, the plaintiff. Not only was the turn of events sudden after the arrangement made with the Hong Kong Bank, but the demand of such terms for the extension was wholly unexpected. Mr Barry Law had mentioned not a word of it at the meeting between Mr Koo and the plaintiff on 18th October. Whether or not these terms were fair and reasonable in meeting only out-of-pocket expenses of the defendant, the plaintiff was caught by surprise but was nevertheless not prepared, on legal advice, to accept them. The defendant, through Lisa Yung, must have known all along the position of the plaintiff. The defendant had acquiesced in the plaintiff searching for a banker on its own. The defendant should have kept the completion date on 23rd October 1991 well in mind so as to enable or facilitate the discharge of its obligation under Clause 19(1) of the Sub-Sale Agreement. Afterall, the defendant as vendor was to use its best endeavours to have a financier in place for financing the purchase to the extent of $13 million on the agreed date of completion.

7. It is not necessary to apportion blame. The situation was, or must have been allowed by both sides to develope into the one the parties ultimately had to face, and by throwing in some unacceptable extra conditions for the extension at the last moment, the defendant cannot be said to have used its best endeavours to have a bank loan in place for financing the completion pursuant to Clause 19(1). The defendant made it onerous for the completion date to be extended. In effect, it interfered with the processing of the loan and ultimately the financing of the purchase. If the plaintiff had been told by Barry Law, or Mr Koo, or Lisa Yung, or Mr Norman Yung, or any one from the defendant on 18th October or soon thereafter that such further conditions would attach to the extension, there would have been ample time for the guarantee and the mortgage to be executed in escrow for completion with the defendant's private loan on 23rd October. There might even be some chance for the plaintiff to procure other bank loans in between 18th October to 23rd October. On facts, the defendant would seem to have breached Clause 19(1) of the Sub-Sale Agreement and would therefore seem not to be entitled to forfeit the deposit. But before I reach a conclusion, I should examine how the plaintiff's case is pleaded.

8. The facts I find call for a closer scrutiny of the plaintiff's pleaded case. The defendant had introduced a willing financier and "caused" that financier to agree to advance a loan albeit for completion on a postponed date.

The transaction would have been smoothly completed with an extension but for the defendant's unilateral demand for additional terms. The defendant's demand frustrated its own "endeavour(s) to introduce (a) financier to the Purchaser to finance the Purchaser's purchase". It was not the situation as contemplated by Clause 19(2) that the defendant was "unable to cause such financier to advance such loan". The case was that the defendant was able to but was obstructive. In that sense, the defendant had not used "its best endeavour(s)" to introduce a financier for the plaintiff's purchase. If the defendant had, by itself or through others such as Barry Law, Lisa Yung or Mr Norman Yung, disclosed these additional terms before Mr Tanabe left Hong Kong on 20th October, he could have signed a guarantee before his departure. The objective of Clause 19(1) was not achieved and it was in effect left unfulfilled. The plaintiff's case against the defendant under Clause 19(1) of the Sub-Sale Agreement as pleaded in paragraph 7 of the Amended Statement of Claim is that the defendant did not or did not attempt to introduce any financier to the plaintiff to finance its purchase. Both parties have accepted that the defendant had offered to lend a private loan of $13 million to the plaintiff for completion. The plaintiff's case in its paragraph 8 of the Amended Statement of Claim is that such an offer had been made pursuant to Clause 19(2) of the Sub-Sale Agreement, that is to say, on the premise that the defendant was "unable to cause such financier to advance such loan". On such assumed premise in order to invoke Clause 19(2), it would be inconsistent for the plaintiff to take advantage of a breach of Clause 19(1). However, in paragraph 10 of the Amended Statement of Claim, the plaintiff seeks to rely on breach of Clause 19(1) as well as breach of Clause 19(2). I would treat the plaintiff's claims on these breaches as having been made in the alternative. That would seem to be the intention of the pleader. Consequently, the defendant was, I find, in breach of Clause 19(1).

9. I turn next to consider Clause 19(2) as an alternative. My understanding of the law is at variance with that of Mr Hodgson. The provision of a personal guarantee for securing due performance of the mortgage as part security for the private loan was a concurrent condition with the granting of the loan under Clause 19(2). To construe the granting of the loan as either an independent condition or a condition precedent would expose the defendant to "the risk of having to perform without any security for the performance of the (plaintiff)". This court would be reluctant to classify Clause 19(2)(ii) as an independent condition or a condition subsequent unless the intention is very clear. There is no such clear intention in this case. Trietel on the Law of Contract, 8th edn. (1991) at p.665 advocates that such risk "would be eliminated if the two performances were held to be concurrent conditions; for this reason the law should, in doubtful cases, favour such a classification whenever simultaneous performance by both parties is possible". I endorse and consider myself properly guided by that statement.

10. The plaintiff's case is that the offer made by the defendant to lend the private loan of $13 million had been accepted but that in breach of the agreement to lend, such private loan of $13 million was not made available for the plaintiff to purchase. It is true that the plaintiff did not provide Mr Tanabe's private guarantee on 23rd October, but the plaintiff was placed in such a dilemma by both parties. Circumstances were such that Mr Tanabe left Hong Kong with a fixed notion that matters would be smoothly proceeded with to fruition. Even if Mr Tanabe could have been contacted for an urgent journey to Hong Kong on the 22nd October, he might not be able to make the 3 p.m. or 5 p.m. on 23rd October. As I will later explain, Mr Norman Yung extended time for completion to 5 p.m. Mr Tanabe was an hour and 50 minutes from the airport in Tokyo. The flight to Hong Kong would take 3 1/2 hours. There would be further travelling time from Kai Tak to the office of Mr Hodgson. Even taking into account Mr Tanabe's one hour's advantage in the time difference, he might not be able to make 3 o'clock or 5 o'clock in the afternoon on 23rd October. Moreover, negotiation seemed to have been somewhat kept alive at least up to 7 p.m. on 22nd October when Mr Norman Yung faxed over the modified terms for extension.

11. The provision of a personal guarantee of Mr Tanabe and the granting of the loan under Clause 19(2) were concurrent conditions. The defendant was within its rights to demand for it on granting the loan. The defendant's demand was made in full awareness of the absence of Mr Tanabe and after the unexpected sudden turn of events. The plaintiff's solicitors, through Mr Hodgson insisted to approve the draft documents and his insistence was acceded to. Mr Hodgson's request could by no means be said to be unreasonable as at least the plaintiff's solicitors were entitled to see that these drafts were in standard form without material variations. Motive was irrelevant as it was irrelevant for the defendant's insistence on strict compliance with Clause 19(2)(ii). I accept that the draft mortgage had not come before Mr Hodgson before 5 p.m. on 23rd October. The guarantee was a guarantee for the due performance of the mortgage without which the guarantee itself could not be finalised. However, by 5:37 p.m. on 23rd October, Mr Hodgson intimated that the draft guarantee could be approved as it was but urged Mr Norman Yung to send over the draft mortgage. Apart from the fact that the unilateral extension to 5 o'clock was arbitrary and unreasonable in the circumstances, the plaintiff's solicitors could not have been in a position to verify the standard forms together by 5 p.m. on 23rd October for completion. The crux of the matter is that the defendant was not entitled to rescind the contract, terminating it and forfeiting its deposit by or around 5 p.m. on 23rd October. Mr Norman Yung managed to transmit the letter of termination dated 23rd October only in the morning of the following day. However the defendant meant to and did adhere to the 5 o'clock extended deadline. In that light, the defendant failed to provide the loan for completion. Whether Mr Hodgson was able to check the standard forms soon after 5 p.m. and whether Mr Tanabe could at all be in Hong Kong soon after 5 p.m. on 23rd October for completion are matters quite immaterial. At the time the defendant purported to exercise its right to rescind, it had not left the plaintiff's solicitors with sufficient time to verify the drafts together. Its purported rescission was wrongful. I accept that the normal practice and the general rule is that the purchaser's solicitors do not need to approve the standard form mortgage or guarantee proposed to be used in the instant case. Afterall, the Way Foong Credit standard forms had been specifically mentioned. The defendant insisted on a virtually technicality and the plaintiff's solicitors likewise laid claim to some procedural entitlement. It is evident that contractually the defendant was in the wrong. Justice nevertheless seems to be done in the circumstances of this case.

12. Mr Norman Yung extended time for completion to 5. Completion was not a matter exclusively for the benefit of the defendant who could not, as suggested by Miss Eu, unilaterally waive it. On 23rd October, the defendant made it impossible for completion to be had at 3 p.m., and the unilateral extension of time to 5 o'clock was unreasonable in the circumstances. There were 11 letters exchanged on that day from 9:38 a.m. to 5:37 p.m. The draft guarantee was faxed over at 9:38 a.m. and the fax finished at 9:44 a.m. Then at 10:04 a.m. Mr Norman Yung faxed to Mr Hodgson to the effect that both the mortgage and the guarantee were ready for execution. Therefore, the plaintiff was virtually called upon to agree to the guarantee in just a little over 20 minutes from 9:44 to 10:04. The guarantee was a guarantee for securing due performance of the mortgage, and Mr Hodgson did not have the draft mortgage on his desk until shortly after 5 p.m. A letter was faxed by Mr Norman Yung to Mr Hodgson at 3:23 p.m. which was said to contain the draft mortgage. But in fact the draft mortgage was not faxed over but sent over by messenger soon after that fax of 3:23. Mr Hodgson himself did not have the draft mortgage on his desk until after 5 p.m. With 11 letters exchanged on that day and the draft mortgage not faxed over with the letter itself at 3:23 p.m. but subsequently sent over by messenger, it would be difficult to surmise how long the draft mortgage had remained in Mr Norman Yung's custody and how pre-occupied his despatch staff were on that particular day. We have the sworn evidence from Mr Hodgson that he did not have the draft mortgage on his desk before 5. I have, without hesitation, accepted Mr Hodgson's evidence. The last letter written on 23rd October by Mr Norman Yung to Mr Hodgson was well after 5:37 p.m., in which the defendant purported to terminate the Sub-Sale Agreement and forfeit the deposit under the pretext that the remittance of the plaintiff sent over for completion was $13 million short. Mr Norman Yung attempted but failed to fax letter over to Mr Hodgson in the evening of 23rd October, and it was not transmitted until the next day I do not have to decide what was the reasonable time for extension from 3 p.m. on 23rd October, but I should have thought it should be at least a day or two, by which time Mr Tanabe would be in Hong Kong. Mr Tanabe in fact came to the office of Mr Hodgson at about 2 to 3 p.m. on 24th October. He would have been in time to sign the personal guarantee for completion, to get the private loan of $13 million and to complete, had the defendant allowed a reasonable time to complete after 3 p.m. on 23rd October.

13. Alone, the funding the defendant needed to lay out for completion with the head vendor was merely $4.11 million. Cheques had been given to the firm of Mr Norman Yung though not banked for payment until later. Mr Norman Yung's firm was prepared to oversee the completion on the force of these cheques. It would not be correct for the plaintiff to say that the defendant had insufficient fund itself to complete with the head vendor.

14. In conclusion, the plaintiff succeeds in its claim for the repayment of its deposit and the defendant's Counterclaim fails.

15. It is quite unnecessary to deal with the sums paid as deposit and relief against forfeiture. However, in deference to counsel's arguments and for the sake of completeness, I would proceed on the supposition that the defendant succeeded on its allegations. The sum of $5.46 million was forfeited. What has caused not inconsiderable discomfort is the unanimous acceptance that the deposit paid was also a pre-estimate of liquidated damages. I cannot share the parties' joint view even after a period of concerned deliberation. I will state my view and thereafter apply the law and facts to the joint view espoused by the plaintiff and the defendant.

16. My view is: before the decision of the Privy Council in Workers Trust andMerchant Bank Ltd. v. Dojap Investments Ltd. [1993] 2 WLR 702, the concept of a deposit was unsettled. It was not clear whether a deposit was, or was treated as liquidated damages. See p.107 of "Penalties and Forfeiture" by C.J. Rossitter (a 1992 Australian publication). When an excessive deposit was forfeited, it was then debatable whether the court was, in effect, "declaring forfeiture penal and applying the jurisdiction to relieve against penalties" or whether the court was exercising an equitable and discretionary jurisdiction to relieve against forfeiture. It was at one time suggested that the jurisdiction to relieve forfeiture of an excessive deposit should really be identified "as one relieving against penalties". See p.113 ibid. But the nature of a deposit was then considered more in line with liquidated damages. "Both sums (deposit and instalment of purchase price) should be viewed for what they are, namely, liquidated damages". See p.115 ibid. In that unsettled state, I believe, it was often provided that the stipulated deposit paid was to be forfeited "as and for liquidated damages (and not as a penalty)". That accounts precisely for the situation with para. 10 in Schedule 2 to the Conveyancing and Property Ordinance, s.36. We have here a repetition of para. 10 in Clause 10 of the Sub-Sale Agreement. After the Workers Trust case, there is no further need to consider a forfeited deposit in the light of the court's inherent equitable jurisdiction to grant relief. Nor need the fate of the found excessive deposit be determined by an application of the penalty rules. The decision in Workers Trust is logical, clear cut and simple to apply. Lord Browne-Wilkinson, in his speech at p.705B-E, laid down the principle:

"(1) Unless it can be justified as a genuine pre-estimate of the loss, generally forfeiture of a sum of money for a breach of contract is an unlawful penalty;

(2) In a sale of contract of land a genuine deposit is an exception to this general rule;

(3) Such an exception is an anomaly;

(4) The anomaly derives from the ancient custom of providing an earnest for the performance of a contract Howe v. Smith (1884) 27 Ch. D. 89 pp. 101-102, per Fry L.J.;

(5) Equity has no power to relieve against a forfeiture of a genuine deposit."

17. In deciding whether a deposit is a genuine deposit, the amount demanded must be "reasonable as earnest money". See p.706D. It must be "reasonable as being in line with the traditional concept of earnest money" and not "in truth a penalty intended to act in terrorem". The amount must not be "substantially influenced by fiscal (and I might add, other irrelevant) considerations having nothing to do with encouragement to perform the contract". See p.707G. Therefore, an excessive deposit is not a genuine deposit and not forfeitable as such. It must be repaid as a whole. Relief against its forfeiture need not be considered except that the vendor "is entitled to deduct the amount of (damages suffered as a result of the purchaser's failure to complete) from the 'deposit'." See Workers Trust, supra. p.709D.

18. Treatment of an excessive amount of liquidated damages is wholly different. In Jobson v. Johnson, [1989] 1 WLR 1026, it was decided by the English Court of Appeal that a penalty clause would remain a valid term of the contract enforceable, subject to equitable relief (whether or not expressly pleaded) to an amount up to the actual loss. Jobson v. Johnson affirmed the decision in Public Works Commissioner v. Hills [1906] AC 368, which was said by Lord Browne-Wilkinson in Workers Trust to be a "clear authority that in the case of a sum paid by one party to another under the contract as security for the performance of that contract, a provision for its forfeiture in the event of non- performance is a penalty from which the court would give relief by ordering repayment of the sum so paid, less any damage actually proved to have been suffered as a result of non-completion" p.708H.

19. When parties agree to a sum as an earnest for the performance of the contract, as a rule they would hardly be interested in what in law is the difference between a deposit and pre-estimated loss. In asking for a genuine deposit, the vendor's concern is only that the purchaser "means business". At the time of the Memorandum, there was little time to focus on genuine loss. As a matter of fact, the amount of a deposit must not be "substantially influenced by (irrelevant) considerations having nothing to do with encouragement to perform the contract". Clause 10 of the Sub-Sale Agreement could not have been intended to alter the nature of the deposit. Para. 10 in Schedule 2 to the Conveyancing and Property Ordinance would, so it seems, require adjustment after the Workers Trust case. Clause 10 is a composite clause. It enables the vendor on termination to forfeit the deposit and resell and claim any deficiency over and above the deposit as liquidated damages. If deposit paid under the Sub-Sale Agreement had been intended also as a genuine pre-estimate of liquidated damages, the vendor would not have been logically able to claim further liquidated damages over and above the deposit. Clause 10 deals with forfeiture against an unsettled historical background. It was not intended to have and did not have, in my view, the effect of altering the very nature of the $5.46 million deposit paid under the Sub-Sale Agreement.

20. Neither the Law Society, nor any senior member of the profession, was called or asked to express a view on the amount of the deposit. Save for the normal 10% deposit for Hong Kong, I would not place reliance on the less than impressive Hong Kong conveyancing experience of Mr Norman Yung, Mr Hodgson, Mr Eric Fu, or for that matter, Lisa Yung, particularly when none of them was a wholly disinterested party. In "Conveyancing Solutions 3: Remedies under the Contract" by Ruth Annand and Brian Kain (1988), doubt is expressed at p.48 as to whether the court would treat 10% as a penalty in a rising market. Professor Adams writes in the Law Society Gazette of the issue dated 9th November 1983, p.2811 that 10% has been used in England as the usual deposit at least since 1902. In an article by Peter Aherne published in the Law Society Gazette, August 1993 issue, he recounts the long history of Hong Kong of extracting a 10% deposit, and Mr Aherne refers to more recent requirements for a much larger deposit. In "Hong Kong Conveyancing and Property Ordinance" by Sara Nield who was with the Hong Kong University for about 10 years from 1982 to 1992, at p.242, she refers to "the usual 10% deposit" for England but in Form 2 in her 3rd Schedule at p.263, Miss Nield suggests that the usual rate for Hong Kong is 10% to 20%. In "Conveyancing in Hong Kong" by Hartley Bramwell (1981), in footnote 5 at p.121, the author suggests that "the deposit should be moderate and the normal 10% of the purchase price is clearly acceptable ... as would probably anything up to about 25%". In "Hong Kong Conveyancing Law and Practice" Vol.1, by Judith Sihombing and Michael Wilkinson (1993), in para. 498 at VIII 219, the authors postulate that 15% might be treated as a penalty.

21. The English Law Commission in 1975 and the Californian's Law Revision Commission in 1973 were both of the opinion that even the usual 10% deposit was unreasonable and excessive and recommended as appropriate a deposit not exceeding 5%. See pp.108, 107 "Penalties and Forfeiture" by C.J. Rossitter. Indeed, there would seem to be little justification for granting a blanket immunity to a 10% deposit but for its universal acceptance. It must, therefore, mean that the arbitrary 10% is itself, more often than not, exorbitant and that it is even more unjustified in a rising market. A deposit is afterall a guarantee that the purchaser means business or a guarantee for the performance of the contract. In my view, it would be immensely difficult to justify over 10%. In a more unstable and uncertain market, it is conceivable that more incentive should be built into the deposit to deter withdrawal from a speculative transaction. But with 10%, by its nature, being already regarded as unreasonable and excessive, what could provide the justification for lifting the percentage over 10? Moreover, the added market risk should not be so reflected in the deposit as would lift it across the threshold of insurance from the confines of an earnest. The amount should not transgress its scope as an earnest, "a guarantee that the purchaser means business" Soper v. Arnold (1889) 14 AC 429 at p.435 per Lord MacNaughten or "a guarantee that the contract should be performed" Howe v. Smith supra, at p.95 per Cotton L.J. No added percentage should be such as would, in effect, provide an all risks insurance coverage. Of course, once it passes over the traditional 10%, the entire percentage (not just the extra) has to be justified. That would not be an easy task because few have attempted to justify the traditional 10% and succeeded. It would be a more burdened attempt after the Workers Trust case. The defendant, through its witnesses, suggested that the nature of the carpark spaces was unusual, neither commercial nor residential, and that for these 121 carpark spaces financial assistance was hard to obtain. The substantial amount involved $27.3 million; it was a whole floor property; the attractive profit to the defendant was too damaging to forego and the defendant's own commitment as confirmor was heavy on a deposit of its own to the head vendor to the tune of $5.55 million; the property was located next door to a carpark available at $20 million; the defendant was to provide a $13 million financial support. There were other peripheral matters advanced for my consideration, but theoretically and in reality it would be trying to justify even the 10% in the present 20% deposit. There have been cries elsewhere for reduction in the traditional 10%. It would not be correct to assume 10% is the proper rather than traditional amount for a normal situation. It would be equally incorrect to seek to justify only the extra 10% taking the initial 10% as a norm. None of these factors listed for my consideration would, at least in a rising market, warrant doubling the already hard to justify usual 10%. Its universal acceptance is not rational. The amount of the deposit in this case, i.e. 20%, is in my view unreasonable as earnest money, and as guided by the decision of Lord Browne-Wilkinson in the Workers Trust case supra, at p.709 A/B, this deposit of 20% is an excessive deposit. It would have therefore to be repaid, in any case, by the defendant to the plaintiff as a whole. Since what is expected to have been suffered as damages by the defendant is insubstantial, I would not be prepared, even if the plaintiff had been in breach, to order a retention of any part of the forfeited deposit as security for the damages in the defendant's Counterclaim.

22. Acknowledging the joint view of counsel, i.e. that the deposit was also a genuine pre-estimate of the likely loss, insofar as it was a deposit, I would find it as an unreasonable amount. Insofar as it was paid as liquidated damages, I would find that no satisfactory evidence had been led to justify the 20%.

23. In the circumstances, since the plaintiff was not in any way in breach, its claim succeeds. The Counterclaim is dismissed. Costs in the action and the counterclaim be, subject to what counsel have to say, costs for the plaintiff against the defendant. I would invite counsel to suggest the proper order to be made.