WIN JOYCE INVESTMENT LTD v. LIU KAM CHEONG

HCA287/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 287 OF 2004

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J U D G M E N T

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1.  This is the defendant’s appeal against the Master’s decision made on 22 July 2004 granting summary judgment against the defendant on liability with damages to be assessed.  The appeal turns on the construction of a clause in a sub-sale agreement between the parties in respect of a property known as House no. 17, 24^th Street, Hong Lok Yuen, Tai Po, New Territories (“the Property”).

The factual background

2.  The salient facts of the case are not in dispute.  By a sale and purchase agreement dated 9 August 2003 (“the Head Agreement”), the defendant agreed to purchase the Property from one Ocean Win Fashion Company Ltd (“the Head Vendor”) at the price of $8.3 million to be completed on or before 9 January 2004.

3.  By a sub-sale and sub-purchase agreement dated 8 October 2003 (“the Sub-sale Agreement”), the plaintiff (“the Purchaser”) agreed to purchase the Property from the defendant (“the Vendor”) at the price of $9.98 million to be completed on or before 1:00pm on 9 January 2004.  Completion was to be by way of solicitors’ undertakings.

4.  Pursuant to the Sub-sale Agreement, the Purchaser had paid to the Vendor deposits in the total sum of  $998,000.

5.  On the date due for completion, the Purchaser through its solicitors paid the balance of the purchase price to the Vendor’s solicitors and in accordance with the latter’s split cheque instructions.

6.  The Head Vendor was unable to discharge the mortgages over the Property and did not execute the requisite assignment by 9 January 2004.  The cheques for the balance of the purchase price under the Sub-sale Agreement were returned to the Purchaser.

7.  By a letter dated 9 January 2004 from the Vendor’s solicitors to Messrs Fairbairn, Catley, Low & Kong (the solicitors who acted for the Head Vendor but had on 8 January 2004 given notice that they had no instruction from the Head Vendor on the transaction), the Vendor accepted the repudiation of the Head vendor and terminated the Head Agreement.  The relevant part of the letter reads:

“Wrongfully and in breach of the [Head] Agreement, your client failed to give title of the [Property] to our client’s sub-purchaser free from encumbrances on the date of completion.  We are instructed by our client to give your client notice, which we hereby do, that our client exercised his contractual right to rescind the [Head] Agreement.

Further or in the alternative, your client refused and or failed to execute the assignment and complete the sale in accordance with the terms of the said Agreement and has thereby wrongfully repudiated the [Head] Agreement.  We are instructed by our client to give your client notice, which we hereby do, that our client accepts your client’s repudiation and rescinds the [Head] Agreement.”    

8.  By another letter of the same date from the Vendor’s solicitors to the Purchaser’s solicitors, the Vendor returned to the Purchaser the deposits.  In the letter, the Vendor informed the Purchaser of the Head Vendor’s breach and claimed to rescind the Sub-sale Agreement.  The relevant part of this letter reads:

“We wish to inform you that the Head Vendor has failed to complete the sale and give a good title to your client in accordance with the Head Agreement dated 9 August 2003.  Our client has exercised his right of rescission; further or alternatively accepted the Head Vendor’s repudiation and rescinded the Head Agreement. …

In accordance with clause 26(f) of the Sub-sale Agreement, the Sub-sale Agreement is treated as rescinded.  We are instructed by our client to, which we hereby do, return to your client the initial and further deposits in the total sum of $998,000.00.” 

9.  By a letter dated 20 January 2004, the Purchaser through its solicitors indicated it accepted the Vendor’s breach of the Sub-sale Agreement and reserved the right to claim damages arising form the breach.  The Vendor was also invited to accept liability for the breach with damages to be assessed.

10.  By a letter dated 21 January 2004, the Vendor’s solicitors stated that since the Vendor had rescinded the Head Agreement, under clause 26(f) of the Sub-sale Agreement, the Purchaser had no further claim against the Vendor upon the return of the deposits paid.

11.  On 14 February 2004, the Purchaser issued the Writ herein.  On 5 March 2004, the summons seeking summary judgment was issued.  On 22 July 2004, the Master heard the summons and granted summary judgment against the Vendor on liability with damages to be assessed.  On 28 July 2004, the present Notice of Appeal was filed.

12.  In the meantime, the Vendor had on 17 March 2004 commenced proceedings under HCA 617 of 2004 claiming against the Head vendor for, inter alia, damages for loss of profits by reason of the Head Vendor’s repudiation of the Head Agreement.

The defence

13.  The defendant’s sole defence is that under clause 26(f)  of the Sub-sale Agreement, he owes no further liability to the plaintiff upon the return of all the deposits paid.  The plaintiff disputes this, contending that clause 26(f) does not apply on the facts of the case. 

The relevant contractual provisions

14.  Several provisions in the Head Agreement and the Sub-sale Agreement are relevant to the determination of this appeal.  They are set out below.

Under the Head Agreement:

Under the Sub-sale Agreement:

The parties’ arguments

15.   For the Vendor, it is argued that as a result of the Head Vendor’s breach, the Vendor is entitled to accept the repudiation and rescind the Head Agreement.  Alternatively, it is said that the Vendor is also entitled to rescind under clause 16 of the Head Agreement.  The Vendor says that his right to rescind is a right under the Head Agreement such that clause 26(f) of the Sub-sale Agreement shall apply. 

16.  It is the Vendor’s submission that clause 26(f) applies to all cases of rescission, irrespective of whether the right to rescind is pursuant to the express terms of the Head Agreement or is implied by the Head Agreement, or arises by operation of law.  This is because the source of such a right, however based, is the Head Agreement.  It is also said that in providing that “[i]f the Vendor shall exercise any right of rescission under the Head Agreement, …”, clause 26(f) envisages more than one form of right of rescission under the Head Agreement.

17.  For the Purchaser, it is argued that clause 26(f) of the Sub-sale Agreement only applies where a party is exercising the right to rescind under the Agreement or pursuant to the terms of the Head Agreement.  It does not and is not intended to apply to a case like the present, where the Head Agreement was terminated by reason of the Head Vendor’s repudiatory breach.   The Purchaser also contends that the term “rescind” in clause 26(f) should be strictly construed as referable to rescission ab initio, rather than a discharge or termination by reason of breach.  It is submitted that as it is a case of the Vendor accepting the breach of the Head Vendor, the Vendor has not exercised his right to rescind under the Head Agreement, and clause 26(f) therefore does not apply.

The issue

18.  The only dispute in this case is whether clause 26(f) applies.  It is one of construction.  The words that call for construction are: “If the Vendor shall exercise any right of rescission under the Head Agreement”.   The Vendor’s case is that by reason of the Head Vendor’s repudiatory breach, he had exercised his right to accept the breach and terminated the Head Agreement.  The point for determination is whether the Vendor’s acceptance of the Head Vendor’s repudiation and termination of the Head Agreement is an exercise of the Vendor’s right of rescission under the Head Agreement within the meaning of clause 26(f).

The meaning and scope of clause 26(f)

19.  The useful starting point is to consider the contractual provision in question.  The words “any right of rescission under the Head Agreement” in its plain and natural meaning must be referring to a contractual entitlement to rescind the Head Agreement.  It is referring to any right of rescission under the Head Agreement and not any right of rescission of the Head Agreement.  

20.  When read in the context of the Sub-sale Agreement, clause 26(f) has the effect of conferring upon the Vendor a right or option not to proceed with the Sub-sale Agreement upon the occurrence of the event stipulated in clause 26(f).  Clause 26(f) further enables the parties to be restored to the pre-contract position with no liability for claims. This is to be contrasted with clause 13(a), which treats other instances of the Vendor’s inability to complete as a breach on the Vendor’s part with the attending consequences of claims for damages and/or specific performance.  Clearly, the parties’ intention must be for clause 26(f) to apply in very specific circumstances, and not to every instance of termination of the Head Agreement by the Vendor. 

21.  It follows that it cannot be the parties’ intention for clause 26(f) to apply to a situation where the Vendor was rendered unable to complete the sale by the Head Vendor’s repudiatory breach of the Head Agreement.  If it were otherwise, clause 13(a) would have very narrow application, especially when the Vendor was in fact contracting as a confirmor.  At the same time, clause 26(f) would have very wide application. In my view, a construction of clause 26(f) that will result in it having a wide application is inconsistent with the parties’ primary intention to sell and purchase the Property, apart from not being warranted by the plain language of the provision.   If clause 26(f) were to extend to termination brought about by the Vendor’s acceptance of the Head Vendor’s repudiatory breach, one of the consequences is that while the Vendor can proceed against the Head Vendor and recover damages, including loss of profits, under clause 16 of the Head Agreement and/or the common law, the Purchaser is left with no recourse.  There is nothing in the present case to justify an inference that the parties would have intended this to be the case and for clause 26(f) to receive the wide interpretation contended for by the Vendor.  This is so notwithstanding that prima facie clause 26(f) is a provision to the benefit of the Vendor.  

Right of rescission vs. right of termination

22.  The right that the Vendor had exercised in the present case is the right to elect to discharge the Head Vendor and himself from the further performance of the Head Agreement by reason of the Head Vendor’s repudiatory breach.  The Vendor argues that the right is conferred by the express provision of clause 16 of the Head Agreement.  I do not agree.  The essence of clause 16 is to confirm or reserve the Vendor’s right to damages in addition to the right to have the deposits returned.  The clause does not provide for a right to rescind the Head Agreement. It may have the effect of removing the Vendor’s common law right of insisting on the sale, but it does not confer a contractual right of termination that is additional to or separate from the common law right of termination upon repudiation. 

23.  The common law right to terminate by acceptance of repudiation that the Vendor had exercised is different from the right of rescission envisaged by clause 26(f) of the Sub-sale Agreement.  Although both have the practical effect of bringing the contract to an end, the causes for the discharge of the contract are different.  In the case of the former, the discharge is brought about by a repudiatory breach of the contract.  As for the latter, the discharge is by agreement, being an exercise of the right under the contract agreed between the parties.  

24.  Additionally, the acceptance of a repudiatory breach only puts to an end the remaining unperformed contractual obligations.  As to the obligations of the party in default which remain unperformed, there is substituted by implication of law, a secondary obligation to pay damages for the loss sustained by the innocent party in consequence of the non-performance of the contractual obligations: Photo Production v. Securicor Ltd [1980] AC 827 at 849.   In the present case, this is demonstrated by the Vendor’s claim against the Head Vendor under HCA 617 of 2004 for damages in breach of contract.  By contrast, the contractual right to rescind as provided by clause 20(iii) of the Head Agreement envisages the parties being restored to the pre-contract position as if the Head Agreement had never come into existence.

25.  The distinctions were recognized by the House of Lords in the well known case of Johnson v. Agnew [1980] AC 367.  Referring to the situation where a vendor accepts the repudiation of the purchaser, and both parties become discharged from further performance of the contract, Lord Wilberforce stated (at 392H-393D) that:

“At this point it is important to dissipate a fertile source of confusion and to make clear that although the vendor is sometimes referred to in the above situation as “rescinding” the contract, this so-called “rescission” is quite different from rescission ab initio, such as may arise for example in cases of mistake, fraud or lack of consent.  In those cases, the contract is treated in law as never having come into existence.  (Cases of a contractual right to rescind may fall under this principle but are not relevant to the present discussion.)”

26.  In Heyman v. Darwins Ltd [1942] AC 356 at 399, Lord Porter also made similar observations on the distinction between rescission of a contract and discharge of a contract by acceptance of a repudiatory breach as follows:

“To say that the contract is rescinded or has come to an end or has ceased to exist may in individual cases convey the truth with sufficient accuracy, but the fuller expression that the injured party is thereby absolved from future performance of his obligations under the contract is a more exact description of the position.  Strictly speaking, to say that an acceptance of the renunciation of a contract is rescinded is incorrect.  In such a case the injured party may accept the renunciation as a breach going to the root of the whole of the consideration.  By that acceptance he is discharged from further performance and may bring an action for damages, but the contract itself is not rescinded.” 

27.  In accepting the Head Vendor’s repudiation and terminating the Head Agreement, the Vendor was not exercising a right of rescission under the Head Agreement.  Clause 26(f) does not apply.

28.  The Vendor has argued that the words “any right of rescission” in clause 26(f) mean that the clause applies to all cases of rescission, irrespective of whether the right to rescind is pursuant to the express or implied terms of the Head Agreement or by operation of law. 

This argument does not assist the Vendor given that the right that the Vendor had exercised, upon a proper analysis, is not a right of rescission.

29.  As an aid to this argument, reference was made to the speech of Lord Diplock in Lep Air Services Ltd v. Rolloswin Investments Ltd [1973] AC 331 at 349-350.  It was said that in accepting a wrongful repudiation, the innocent party “is exercising a right conferred upon him by law of which the sole source is the original contract.”  The statement was made in the context of a discussion on whether an acceptance of repudiation amounts to a fresh agreement or a variation of the original agreement.  The point that was made is that the right to elect to accept the repudiation flows from the original contract.  It does not shed light on whether a party who accepts a wrongful repudiation is exercising a right of rescission under the contract in question.  

30.  As to the argument that the term “rescission” can be used in a broad sense, it is true that the term “rescission” has sometimes been used to include termination: see for example Yau Fook Hong Co Ltd v. Pang Cheung So [1986] HKC 313 at 319-320.   But it does not follow that the mutual understanding of the parties in the present instance must be that the right of “rescission” stated in clause 26(f) extends to the Vendor’s right to elect to accept the Head Vendor’s repudiatory breach and to terminate the Head Agreement.  The fact that there was a lapse of 11 days before the Purchaser’s solicitors replied to the letter from the Vendor’s solicitors dated 9 January 2004 cannot be taken as an indication that the Purchaser had understood clause 26(f) to apply to a termination by acceptance of wrongful repudiation.  

31.  As a fall back position of the Purchaser, Mr Jat SC argues that clause 26(f) should be construed contra proferentum in the event there is any ambiguity as to whether it includes termination by repudiatory breach.  For the reasons indicated above, I do not consider there is any ambiguity as to the meaning of clause 26(f).  It is therefore not necessary to consider whether the rule of contra proferentum applies.

Conclusion

32. For the reasons set out above, the decision of the Master to enter summary judgment against the defendant on liability with damages to be assessed is correct.  The defendant’s appeal is therefore dismissed.  Applying the normal rule of costs follow event, I make an order nisi that the defendant pays the plaintiff the costs of the appeal, to be taxed if not agreed.  There is a certificate for two counsel.