LUXEBOND INVESTMENT LTD. v. SUPER ASIAN INVESTMENT LTD.

MP 794 OF 1998

IN THE HIGH COURT OF THE HONG KONG

SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.794 OF 1998

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J U D G M E N T

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1. I have before me a vendor and purchaser summons for the sale of landed property. In terms of that summons the Plaintiff ('the Purchaser') seeks a declaration that, because of a repudiatory breach of the agreement of sale by the Defendant ('the Vendor'), it was entitled to rescind the contract and seek damages. The summons is opposed; the vendor wishing to proceed to completion. As the date specified for completion is set for a few days ahead, both parties have sought an urgent judgment.

Relevant background

2. On 5th November 1997, in terms of a provisional agreement, the Vendor agreed to sell and the Purchaser agreed to purchase a residential apartment in Kowloon for a price of HK$7,000,000. Clause 2 of the provisional agreement - which bore the annotation 'Consideration and Payment' - read as follows:

"The purchase price of the said premises shall be HK$7,000,000 which shall be paid by the Purchaser to the Vendor in the manner as follows:-

(a) Initial deposit shall be paid upon signing of this agreement in the sum of HK$300,000.

(b) Upon signing of the Formal Agreement for Sale and Purchase on or before 18th November 1997 further deposit shall be paid in the sum of HK$750,000.

(c) Further deposit shall be paid on or before - [Nil].

(d) Balance of purchase price shall be paid upon completion on or before 22nd April 1998 at Vendor's solicitors in the sum of HK$5,950,000."

3. The provisional agreement contained the usual escape clauses. As concerns remedies available to the purchaser, clause 8 provided:

"Should the vendor after receiving the initial deposit paid here under fail to complete the sale in the manner herein contained the vendor shall immediately compensate the purchaser with a refund of the initial deposit together with a sum equivalent to the amount of the initial deposit as liquidated damages and the reimbursement/payment (as the case may be) of stamp duty of the said premises and the purchaser shall not take any further action to claim damages to enforce specific performance."

4. Under cover of a letter dated 13th November 1997, the Vendor's solicitors forwarded a draft of the formal agreement for sale and purchase ('the formal agreement') to the purchaser's solicitors. The second paragraph of the letter read:

"If the said draft Agreement meet your approval without any amendment, please treat them as formal engrossment and arrange the same to be signed by your client(s) and thereafter return them to us together with your cheque in the sum of HK$750,000.00 being the deposit money payable under the said Agreement. Please note that the executed Agreement must be attested."

5. The purchaser's solicitors obtained their client's signature to the formal agreement, had it attested and then returned it to the Vendor's solicitors together with their cheque (drawn on their client's account) for the sum of $750,000 being the further deposit due. The signed formal agreement and cheque were delivered under cover of a letter dated 18th November 1997 which read:

"With reference to our letter of 13th November 1997, we send you herewith the Agreement for Sale and Purchase (in duplicate) in respect of the above property duly signed by our client and attested by us for your further action.

We also send you herewith a cheque for the sum of HK$750,000.00 being the further deposit payable to your client under the Agreement, the receipt of which please acknowledge.

Please note that the said cheque is sent to you subject to your firm's undertaking to return to us within the next 3 days from the date hereof the original of the said Agreement duly signed by your client and attested by you."

6. The request that, after signature by the Vendor, the formal agreement be returned was of course unilateral. There was no such stipulation in the provisional agreement.

7. At this juncture, I should also mention that there was no written stipulation in the provisional agreement that time be of the essence.

8. It appears that the authorised representative of the Vendor was under the impression that, as concerns the signing of the formal agreement, time was not of the essence as he was in Macau on 18th November 1997 and, for business reasons, was apparently unable to return to Hong Kong to sign the agreement until a week later; that is, on 24th November 1997.

9. I am advised that, pending signature of the formal agreement by the Vendor's representative, the Vendor's solicitors held the Purchaser's cheque and only cashed it after signature when the duly attested formal agreement was sent to the Purchaser's solicitors.

10. Prior to 24th November, however, the Purchaser's solicitors had been pressing for a resolution of matters and, when it was discovered on 22nd of that month that the Vendor had still not signed, notice was sent accepting the Vendor's 'wrongful repudiation' of the provisional agreement and demanding 'compensation' in terms of clause 8 thereof.

The Purchaser's case

11. The alleged wrongful repudiation was, according to the purchaser, founded on two bases; first, the Vendor's failure to sign the formal agreement on the date stipulated in Clause 2 (b) of the provisional agreement and second, the Vendor's failure to return the formal agreement duly signed and attested within the three days stipulated in the letter of 18th November.

12. Mr. Mak, counsel for the purchaser, has not pressed the 'three day' submission. Instead, the purchaser founds its claim for a declaration that it was entitled to accept the Vendor's repudiatory breach of the provisional agreement on the uncontested fact that the Vendor failed to sign the formal agreement on or before the day stipulated.

13. Mr. Mak has submitted that the signing of the formal agreement on or before the date stated in Clause 2(b) was a binding contractual obligation imposed on both parties. The completion date, he said, was a long way ahead and the purchaser was being asked to pay a substantial deposit of HK$750,000. It therefore expected and sought the 'protection' that a formal agreement would provide. In the circumstances, time was of the essence and the failure by the Vendor to sign the formal agreement on due date amounted to a breach which went to the root of the provisional agreement.

The Vendor's position

14. But was there, as Mr. Mak expressed it, a 'binding contractual obligation' in terms of clause 2(b) for the Vendor to sign a formal agreement on or before the stated date or indeed to sign the formal agreement at all? Mr. Wong, who appeared for the Vendor, argued that there was not.

15. I hope I do him no injustice when I summarise his submissions in the following manner. Clause 2 of the provisional agreement was simply a 'price-and-manner-of-payment' clause. The clause first stated the agreed purchase price and then went on to detail how that price was to be paid; namely, in three tranches: by two deposits and the balance on completion. The stipulation that the second deposit was to be paid at the time of the signing of the formal agreement directed the time when the second deposit was to be paid; it did no more than that. If the Vendor failed to sign the formal agreement, the purchaser had no obligation to pay the second deposit and was able to retain that second deposit until the Vendor did sign. Mr. Wong has argued that the date stipulated in Clause 2(b) was a 'target date' and no more than that.

16. It appears that the provisional agreement in this case was a standard broker's agreement and Mr. Wong has referred me to earlier decisions of our courts on such brokers' agreements couched in effectively the same wording.

The nature of the provisional agreement

17. In Man Sun Finance (International) Corp v. Lee Ming Ching Stephen [1993] 1 HKC 113, Godfrey J. (as he then was), sitting as a Court of Appeal judge, considered the nature of brokers' provisional agreements. Having considered the commercial imperative behind such agreements - essentially enabling the real estate agent to secure its commission - he then considered whether such provisional agreements are immediately binding agreements or are instead agreements subject to contract. He expressed the problem in this way:

"The truth is then that all these are transactions 'in which each side hopes the other will act like a gentleman and neither intends so to act if it is against his material interests': Goding v Fraser [1967] 1WLR 286, 293 per Sachs J. In these circumstances, the first and the most fundamental problem which these forms pose is this. Will the signing of the form by the intending vendor and the intending purchaser bring into effect an immediately binding agreement for sale and purchase? The broker hopes so; for this is his best hope of getting his commission (or 'service charge' or 'compensation' or 'liquidated damages'; the label does not matter) if the intending vendor and the intending purchaser, or one of them, fails to sign the formal sale and purchase agreement.

That is all very well from the point of view of the broker; but not, or not necessarily, from the point of view of the intending vendor and the intending purchaser. If the signing of the broker's form brings into existence an immediately binding agreement (if, in other words, the agreement between the parties is not an agreement subject to contract), neither side will be able, in the absence of express stipulation, to withdraw from the transaction simply by refusing to sign the formal sale and purchase agreement. The court will grant a decree of specific performance against the defaulting party in the absence of any stipulation in the agreement clearly operating to preclude the other party from claiming that remedy. The failure of the defaulting party to sign a formal sale and purchase agreement will be entirely irrelevant."

18. The judge accepted that there may be provisional agreements which by their wording are no more than agreements to agree which are no agreements at all. But if that is not the case, he went on to say that -

".... the signing of the form brings into existence an immediately binding agreement, it does so on the terms on which it expressly contains and, otherwise, on the terms of what the law describes as an 'open contract'. From the moment the ink is dry on the parties' signatures, all references to the formal sale and purchase agreement are illusory; there is already in existence an immediately binding agreement and neither side is entitled to demand that the other side enter into a further one. The existing agreement, so long as it contains all the essential terms of a contract for the sale of land (the price, the date of completion; whether vacant possession is to be given) stands on its own and is from that moment on specifically enforceable at the suit of either party."

19. In the matter now before me I am satisfied that the signing of the provisional agreement dated 5th November 1997 did bring into existence an immediately binding agreement. This is not disputed by either counsel. Indeed the purchaser seeks damages for breach in terms of that very agreement.

20. Of course, parties may stipulate in a contract that a formal agreement must be entered into by a specific date. The parties may make time of the essence in that regard. The question is: have the Vendor and Purchaser in this case done so?

A consideration of clause 2

21. In Man Sun Finance supra Litton J.A. (as he then was) commented that it is not helpful to see how differently formulated contractual provisions have been construed by other courts when the task at hand is to decide upon the proper construction of the agreement before the court. That must be the case. Each agreement depends on its own wording. But brokers' agreements of the kind in this case often carry an almost standard wording.

22. In Yiu Yau Ping v. Fong Yee Lan [1992] 2 HKLR 167 the Court of Appeal had to consider a provisional agreement in which the 'payment' clause read:

"The purchase price of the said premises shall be HK$4,320,000.00 which shall be paid by the Purchaser to the Vendor in the manner as follows:

(a) HK$300,000.00 shall be paid upon signing of this agreement as initial deposit.

(b) HK$132,000.00 shall be paid upon signing of formal agreement for sale and purchase on or before 28th March 1991 as balance of deposit.

(d) HK$3,888,000.00 shall be paid upon completion or before 10th May 1991 as balance of purchase price."

23. Inter alia, it was argued before the Court of Appeal that it was an obligation in the nature of a condition that the formal agreement be executed on or before the date given in sub-clause (b) and that payment of the second deposit be paid on that date. This argument was not accepted by the Court. Nazareth J.A. (as he then was) said at page 175 of the judgment:

"As to the first, it seems to us that on any reasonable reading of Clause 2(b) of the Provisional Agreement, its clear intention is that $132,000 "shall be paid on the signing of [the] formal agreement" with the 28th March 1991 as the target date. It is consistent with that intention that payment is linked rather more directly to the signing of the formal agreement rather than the target date mentioned. Moreover, given all the matters that would have to be dealt with in the six days between the signing of the Provisional Agreement at the Centaline Property Agency on 22nd March and 28th March, which would undoubtedly have been in the contemplation of the parties, particularly Centaline, and which in the event they were not able to conclude, the parties are most unlikely to have intended execution of the formal agreement by 28th March to be a condition of the contract. It follows from such construction of Clause 2(b), that even if payment of the $132,000 by 28th March 1991 were a condition resulting from the "expectation of the Vendor" as Mr. Litton put it, it is highly unlikely to have been intended to be a condition independent and in advance of execution of the formal agreement."

24. In the later Court of Appeal judgment of Health Link Investment Ltd. v. Pacific Hawk Investment Ltd. [1995] 1 HKC 249 at page 256, the learned Vice President encapsulated his meaning Yiu Yau Ping when he said:

"... it is not without significance that this court, differently constituted, reached a similar conclusion in Link Brain Ltd. v. Fujian Finance Co. Ltd. [1990] 2 HKLR 353, 364 E-F, where it held that provision in the preliminary agreement for payment by the purchaser 'upon signing the sale and purchase agreement' was clear and unambiguous and could only mean that no payment could be required unless and until the sale and purchase agreement had been signed; and likewise in Yiu Yau Ping v. Fong See Lan [1992] 2 HKLR 167."

25. In an unreported decision of Keith J. in 1996 concerning a provisional agreement which contained a 'payment' clause of seemingly the same wording, the judge considered Yiu Yau Ping supra when he said:

"It is arguable that, although the agreement contemplated the signing of a formal sale and purchase agreement by 19th December 1995, there was no obligation on the parties to sign such an agreement then. That is because it is arguable that the only provision in the agreement about the signing of a formal sale and purchase agreement by 19th December 1995 did not require a formal sale and purchase agreement to be signed at all. It merely required the purchaser, in the event of the formal sale and purchase agreement being signed by that date, to pay the further deposit on such an agreement being signed. There are echoes of reasoning along those lines in the decision of the Court of Appeal in Yiu Yau Ping ...."

26. Admittedly, in this judgment (China Landmark Hi-Tech Development Ltd. v. San Fung Ltd. [A 3243/1996]) Keith J. did not base the ratio on the passage quoted. That passage is expressed in terms of it being only 'arguable'. In respect of the provisional agreement before me, however, I am satisfied that it is worded in a way that accords with the vendor's submission; namely, that it is a 'payment' clause. Accordingly, clause 2(b) could only mean that the purchaser was under no obligation to pay the second deposit of $150,000 until and unless the formal agreement had been signed. The fact that the purchaser did in fact forward the deposit before signature cannot alter the construction and intent of the provision.

27. Accordingly, clause 2(b) cannot be read to mean that the Vendor was under a binding contractual obligation to sign on or before the stipulated date and that his failure to do so amounted to a fundamental breach of the provisional agreement.

28. In my judgment, there being no written provision that time was of the essence, the stated date was no more than a 'target date'. I cannot see how, in equity, in the absence of any express provision, the Purchaser is able to repudiate the contract simply because the trigger mechanism which obliged him to pay a further deposit was not activated on due date by the Vendor.

29. Before concluding, I mention that I have been referred by counsel for the Purchaser to a reported judgment of Cheung J. in which he too had to consider the terms of a provisional agreement for sale and purchase. That was the case of Choi Siok Pin and Another v. Lui Bing Bing Betty [1994] 3 HKC 675) in which the relevant portion of the headnote reads:

"(4) Since the parties had appointed one day only for the signing of the formal agreement and the payment of the outstanding deposit and did not allow for any reasonable time thereafter, the time provided was not a target date but a condition of the contract. Time was of the essence."

30. In that case, however, the contractual provisions were formulated in a materially different manner. There was, for example, a separate clause related to the signing of a formal agreement and time was stated to be of the essence. I was, therefore, unable to obtain any assistance from that authority.

Conclusion

31. As the date stated in clause 2(b) of the provisional agreement was a 'target date' only and not a condition of the contract which obliged the Vendor to sign on or before that date, I am satisfied that the Purchaser was not entitled to rescind the contract. The Purchaser's application is therefore dismissed. There will be an order nisi for costs in favour of the Vendor with liberty to apply within 14 days.

(M. J. Hartmann)

32. Judge of the Court of First Instance