PANLEAD DEVELOPMENT LTD v. HELEN YEE FONG CHUNG

A6853/92

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. A6853 OF 1992

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J U D G M E N T

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1. On the second day of the trial of this matter, the Defendant conceded liability for the capital sum claimed; that is, the return of a $200,000.00 deposit, together with interest. It was further conceded that damages should be paid for loss of bargain and legal costs too.

2. However, aside from the identified sum of $200,000.00, the parties were unable to reach agreement on the manner in which such concessions should be calculated. As the litigation had already been so protracted, although Defendant submitted that these matters should be adjourned to a Master for assessment, I ruled that the necessary assessments would be contained in this judgment.

3. To better understand the issues, some background to the litigation must first be given.

A brief history

4. On 28th June 1992, in terms of what is commonly called a provisional agreement of sale and purchase, the Defendant agreed to sell to the Plaintiff a residential premises situated in Braemar Hill Mansions, Hong Kong ('the apartment') for a sum of $4,800,000.00. In terms of that agreement, a deposit of $200,000.00 was paid by Plaintiff to Defendant. A further sum was due to paid upon the signing of a formal agreement for sale and purchase and the balance upon completion. The only sum paid, however, was the $200,000.00, that being the sum which Defendant has conceded should be refunded to Plaintiff.

5. Plaintiff had a number of concerns in respect of the formal agreement for sale and purchase. I am satisfied they were genuine and material concerns. What was of the greatest concern to Plaintiff, however, was the fact that a search by its solicitors had revealed that there was registered against title an existing agreement in terms of which Defendant had seemingly sold the apartment in May 1988 to a company called Sarrayo Investment Company Limited. There was no indication that this registration against title had been amended or cancelled. The discovery, naturally enough, resulted in Plaintiff's solicitors seeking assurances from Defendant that she was able to pass good title and, if so, how it was possible. By letter dated 9th July 1992, Plaintiff's solicitors wrote as follows:-

"Upon a search made of the above property in the Land Office, we noticed that there is registered a Chinese Property Sale and Purchase Agreement dated 27th May 1998 made between your client as Vendor and Sarrayo Investment Company Limited as Purchaser by Memorial No. 3762108. It thus appears to us that your client had already entered into a prior agreement to sell and accordingly unless the Chinese Agreement is cancelled or declared null and void, your client is unable to sell. Please clarify."

6. It appears from the letter-head references that the Defendant, was an assistant solicitor in the firm representing her. Concerning Plaintiff's query, while her solicitors acknowledged it, they did not deem it proper to give an explanation. Instead, while avoiding the issue, they demanded that the formal agreement for sale and purchase be signed failing which Defendant would treat Plaintiff as being in breach and forfeit the deposit of $200,000.00. That of itself, frankly, I consider to be a high-handed approach but, despite further queries, Defendant's attitude only stiffened.

7. On 10th July 1992, Plaintiff's solicitors wrote in respect of the endorsement against title:-

"In the absence of an explanation acceptable to us on paragraph (b) above your client does not have good right and full power to sell."

8. On 15th July, a reply was requested but none was received. As a result, on 23rd July, Plaintiff's solicitors wrote as follows -

"Please note that the date of completion fixed in the Provisional Agreement for Sale and Purchase is the 7th August 1992 when the property is to be assigned to our client free from incumbrances.

From the record of the Land Office your client is unable to give good title to our client and is in breach of the Provisional Agreement. In the circumstances, we are instructed by our client to give your client notice through you that unless we hear from you with your written explanation acceptable to us that your client has good right and full power to sell the property free from incumbrances within the next 2 days our client will exercise its rights under the Provisional Agreement and hold your client responsible for all damages."

9. Defendant's solicitors replied the following day, without explanation as to the endorsement against title, to the following effect:-

"We are instructed that our client has good right and full power to sell the property free from incumbrances. We repeat the last paragraph of our letter to you dated 8th July 1992 that our client has already given you the ultimatum to sign the Sale and Purchase Agreement and return to us before 4:00 p.m. on the 10th July 1992...."

10. Defendant's solicitors continued:-

"We must stress that this is our final ultimatum. Our client has been very reasonable all along. Should there be any litigation unnecessarily taken out by your client, our client will seek an order for indemnity costs against your client for its unreasonable conduct in this matter."

11. The Plaintiff's solicitors - in my view, reasonably - still sought some form of explanation and replied on 24th July, saying:-

"Thank you for your letter of to-day's date. You have not answered the question (b) in the 2nd paragraph of our letter dated 10th instant, in view of this we fail to see how your client can claim that it has good right and full power to sell. Your reply on this is required before noon to-morrow."

12. Again, the reply offered no explanation. Dated 24th July, it said simply:-

"We refer to your letter of 24th July 1992 and would like to advice you that our instructions are that our client is in a position to sell the property free from incumbrances."

13. By letter dated 25th July, Plaintiff's solicitors still sought an explanation, asking the following question:-

"Thank you for your letter by fax of yesterday despatched at 6:45 p.m. Will you please explain having regard to the registration of a prior agreement to sell, how your client can sell the property free from the said registered agreement?"

14. Defendant clearly considered Plaintiff's insistence in seeking an explanation before it signed the formal agreement for sale and purchase to be a breach of the provisional agreement and, in terms of a letter dated 28th July, declared that to be the case in the following terms:-

"Despite our written assurances and our Mr. S. C. Chan's oral assurances to your Mr. Charles Sin that our client was in a position to give a good title free from incumbrances, you have failed to return the engrossments of the Sale and Purchase Agreement as required by noon on 25th July 1992 being the extended time therefor. In the circumstances, our client considers your client to be in breach of the Provisional Sale and Purchase Agreement and forfeits the initial deposit of HK$200,000.00."

15. This brisk exchange of correspondence still begs the question, of course, whether the Defendant was in a position to give good title as she had so patently represented? The answer, on the basis of the known documents, is that she was not. More than that, she must have known that she was not in such a position, not at least to do so in good faith. Why is that? It can be explained as follows.

16. In respect of the agreement of May 1988, the purchaser was what appeared to be a limited company calling itself Sarrayo Investment Company Limited. It gave an address at 6/B, 78A Bonham Road, Hong Kong. The agreement recorded that Defendant was paid a deposit of $30,000.00.

17. There is further evidence that in February 1989, an action was instituted in the Supreme Court (No. A642 of 1989) in terms of which a company called Sorrayo Investments Limited sought specific performance of the agreement for sale and purchase, the statement of claim setting out a reasonably complex history of events that had precipitated the action.

18. It may well be that by June and July 1992 this action in the Supreme Court had become moribund in that Plaintiff had failed to prosecute proceedings while Defendant, to employ an English adage, had been content to let sleeping logs lie. However, there is no evidence that in 1992 the Defendant had taken any steps to dismiss the action brought against her. It was, therefore, in its strict sense, an on-going action and could at any time have been rescusitated by the Plaintiff. This must have been known to Defendant.

19. In 1992, therefore, to pass good title, the endorsement of Sarrayo Investment Co. Ltd. had to be removed. It goes without saying, of course, that it could only be removed with the consent of that company or by order of some competent tribunal. It is a fact that the endorsement was later removed in terms of a cancellation agreement dated 18th November 1993 duly registered by memorial number 5848722. The cancellation agreement was registered at that later time to enable Defendant to sell the apartment under a third agreement of sale, this time for a sum of $6,450,000.00 to two purchasers: Ng Yun Chun and Leung Shuk Ching.

20. If there was a cancellation agreement registered in November 1993 to allow title to be passed in terms of the third agreement, this would indicate that Sarrayo Investment Co. Ltd. had consented or that it had been done in terms of an order of a competent tribunal. However, neither is the case. Put plainly, the Defendant, I am satisfied, drew up a false agreement. In 1997, in her witness statement, the Defendant confirmed her actions. They can be described in the following terms:-

(a) As was usual, the provisional agreement of sale made in May 1988 had been prepared by the real estate agents who had entered the name of the purchaser on that agreement as Sarrayo Investment Co. Ltd. The solicitors who registered the agreement against title must also have used the same name. However, the proceedings instituted in the Supreme Court (as it then was) in February 1989 spelt the name of the purchaser differently as Sorrayo Investments Limited.

(b) It would appear that in 1988, when Defendant encountered difficulties with the purchaser, she caused a search to be made at the companies office and discovered that there was no company registered under the name of Sarrayo Investment Co. Ltd.. Perhaps this is not surprising as the true name may have been Sorrayo Investments Ltd.. Armed with this knowledge, Defendant then arranged for a company which she controlled to change its name from Obion Limited to Sarrayo Investment Company Limited. The formal certification, dated 7th October 1988, falls into that six month period between the collapse of the sale and the purchaser instituting action.

(c) Of course, assuming the name per se meant little; it was the use to which the assumed name was put that was important. In this regard, on 18th November 1993, the Defendant, in her personal capacity, entered into an agreement with the company she controlled which had been called Obion Ltd. but was now known as Sarrayo Investment Company Ltd. In terms thereof, the agreement of sale registered against title by memorial 3762108 was purportedly cancelled and a deposit of $30,000.00 refunded. Clause 2 of that agreement read:-

"IN CONSIDERATION of the return of the Deposit Money to the Purchaser as aforesaid the parties hereto hereby cancel the said Agreement to the intent that the said Agreement shall hereafter in all respects be null and void and release each other from the obligations respectively contained in the said Agreement."

(d) The agreement was signed by Defendant on her own behalf and again by her on behalf of the purchaser. Quite clearly, in light of the litigation which had been instituted against her, Defendant had to know that this was a fraudulent agreement. Obion Ltd. (whether under its original name or its new) had never entered into the agreement to purchase the apartment and had never paid a deposit of $30,000.00. How then could it profess to cancel an agreement it had never entered into and obtain refund of a deposit it had never paid? In my judgment, the agreement must have been intended to deceive.

21. Historically, this is how the endorsement against title was removed and how Defendant purported to pass title pursuant to the third sale agreement. Of immediate relevance to the present Plaintiff, the Defendant has accepted that this is how she would have purported to pass title to it if that sale had been concluded.

22. The litigation which is the subject of this judgment commenced in 1992. It was defended inter alia on the basis that:-

"Despite repeated assurances of the Defendant that she would be able to pass good title to the Plaintiff at the time of completion of assignment of the said premises the Plaintiff failed and refused to sign the formal agreement for sale and purchase and thereby failed and refused to deliver the same to the Defendant or the Defendant's solicitors at the expiry of the aforesaid deadline. Further the Plaintiff wrongfully refused to purchase the said premises. In the premises the Plaintiff was in breach of the said agreement." [see Defendant's re-amended defence]

23. It was, however, only in June 1997, just before trial, that Defendant stated how she had intended to pass title. In her witness statement (dated 23rd June 1997), she said -

"At this juncture, I return to the matters relating to the 1988 Agreement and give my reasons for asserting that this was not an incumbrance or impediment to title, as follows:-

(a) In and before May 1988, I was already the registered and beneficial owner of the property.

(b) In May 1988, through Midland Realty International Ltd., a property agent, I signed an Agreement in Chinese writing dated 27 May 1988 ("the 1988 Agreement"), made between me as vendor and a party by the name of Sarrayo Investments Co. Ltd. as purchaser for sale of the property for the price of $1,960,000.00 and upon the terms and conditions therein contained, including payment of an initial deposit of $30,000.00 (out of the said purchase price) upon signing thereof and a further deposit on 8th June 1988 when a formal Agreement would be signed between the parties; and the balance (of the said purchase price) upon completion fixed on 15th June 1988 at the offices of Solicitors.

(b) After a search was made, I came to know that there was then no existing company or corporate body registered by such a name, and it transpired that no formal Agreement was ever signed by me, nor any payment of a further deposit made. As a result, the 1988 Agreement was aborted and was never completed.

(c) I do not know by what means the 1988 Agreement (copy of which I produce) was registered in the Land Registry by memorial No. 3762108, but this was not registered by me.

(d) Eventually to safeguard against any person claiming any interest in the name of Sarrayo Investment Co. Ltd., I acquired a "shelf" limited company by the name of Obion Limited, having a registered capital of $10,000.00 divided into 10,000 shares of $1.00 each, and caused each of the two subscriber shares of $1.00 each to be transferred by the subscribers to me and my sister Amy Chung Yee Ping ("Amy") and the name of this Company to be changed to and registered as Sarrayo Investment Co. Ltd. ("Sarrayo"). Later, I caused myself to be appointed the director and secretary of Sarrayo and Amy to be appointed its director. Ever since, Sarrayo was under my control and management with Amy's agreement.

(f) As I was in full control of Sarrayo and the 1988 Agreement was aborted, it could be formally cancelled at will by and between me and Sarrayo, at any time before completion."

24. The Defendant, however, must have know that at the relevant time the 1988 agreement was not aborted in the sense that it was of historical interest only. It was the subject of Supreme Court litigation. It was therefore a 'live' matter, whether litigation was being actively pursued or not. In my judgment, Defendant's suggestion that she could pass good title in the manner suggested by her was manifestly misplaced. It is difficult to see how a solicitor could have had an honest belief in the truth either of what she represented to the Plaintiff's solicitors in June and July 1992 or, if title had in fact been passed, of the honesty of the passing of that title.

25. In what must have been the knowledge of her true position, the Defendant nevertheless declared the Plaintiff to be in breach of the provisional agreement and forfeited the $200,000.00 she had received. Frankly, in my judgment, such an action by an officer of this Court is open to the gravest criticism. The Defendant clearly did not explain how she intended to pass good title because she must have known her proposal would have been met with incredulity by the other side. Despite this, Defendant resisted Plaintiff's litigation over an extended period and, even after she was forced in 1997 to make the revelations in her witness statement, she persisted in her defence. To assist her in this regard, technical points such as non-payment of stamp duty were raised. As I have said, it was only on the second day of trial that her counsel conceded that the deposit of $200,000.00 should at least be refunded.

Damages for loss of bargain

26. As I have said, Defendant conceded that damages for loss of bargain should be paid. As I understand it, this concession was made on the basis of an exception to Bain v. Fothergill (1874) LR 7 HL 158; namely, where the vendor enters into the contract of sale knowing he or she would not be in a position to pass good title on completion or where the vendor is reckless or indifferent as to whether he or she would be able to pass good title then substantial damages may be sought by the injured party.

27. While this concession was made, the quantum of damages could not be agreed. Plaintiff argued that the loss of bargain should be assessed at the date of issue of its writ; that is, 8th October 1992. Defendant argued that it should be assessed at 31st July 1992, that being the date when Plaintiff accepted that there would be no completion of the agreement and demanded a refund of the deposit.

28. Plaintiff's expert, Colliers Jardine (Hong Kong) Limited, assessed the open market value of the apartment subject to vacant possession as follows: -

(a) As at 31st July 1992: $4,990,000.00

(b) As at 8th October 1992: $5,350,000.00

29. In a later report, the same experts made an assessment of the open market value of the apartment subject to an existing tenancy for a term of two years at a monthly rental of $20,000.00. The assessment resulted in exactly the same figures as those applicable for vacant possession.

30. It was argued by Defendant that a property with vacant possession most always be more highly valued than one subject to an existing tenancy. Mr. Man Chui Fai, Plaintiff's expert witness, agreed that this was normally the case but there were times in the market when the 'end user' price and the 'investor' price were the same; especially where, for example, the market was rising and there was demand, as was the case in 1992. Put simply, apples and pears may normally command different price but there may be occasions, depending on the state of the market, when they command the same price. I accept that opinion as being a rational one and one based on accumulated experience of the Hong Kong market.

31. As for the relevant date for assessment of damages, I accept the principles stated by Master Jennings in Lee Hon Kai and Another v. Wellshurg Industrial Ltd (HCA No. A1485 of 1994): -

"The normal rule in cases of failure to complete a contract for the sale and purchase of land was that damages were the market value of the property at the contractual time for completion less the contract price. However, such a measure could be grossly unfair to a buyer if prices had escalated between the contractual date for completion and the date of judgement as the award he obtained would fall far short of giving him the means of acquiring an equivalent property. While he could not complain if he ought to have acquired an equivalent property before the escalation of prices, he might be able to show good reason why he did not do so (McGregor on Damages, 14th edn., para. 719)."

32. It has been argued on behalf of Plaintiff that damages should be assessed at the date of issue of the writ because, once there had been repudiation, it would have taken Plaintiff at least two months to find another property and go through the legal processes required. In addition, it must be remembered that Defendant was holding the deposit of $200,000.00 which would have placed a financial restraint on Plaintiff. This may, of course, have been the case. But damages must be proved and, as defence defence counsel pointed out, there has been no evidence that Plaintiff was actively seeking an alternative property at the time or was, in fact, under financial constraints. I accept his argument. In my opinion, no good reason has been shown to extend the assessment date to 8th October 1992.

33. The equities, therefore, dictate that damages should be the open market value of the apartment as at 31st July 1992 less the contract price; that is, $4,990,000.00 less $4,800,000.00 which results in a figure of $190,000.00

The measure of costs

34. Defendant accepted that she could not resist an order that the Plaintiff's costs should be paid by her. However, in light of the historical background that I have detailed, Plaintiff argued that its costs should be taxed on the indemnity basis, or at least on the common fund basis. This was opposed by Defendant who sought a taxation of costs as between party and party.

35. The matter of indemnity costs was considered by Godfrey J.A. in Sung Foo Kee Ltd. v. Pak Lik Company (Civil Appeal no. 68 of 1996). In that judgment, he cited with approval the dicta in the unreported English Court of Appeal judgment of Disney v. Plummer per Kerr LJ:-

"... I wholeheartedly agree with the course which the judge took in relation to this ill-advised and, if I may say so, stupidly conducted piece of litigation. It is the sort of robust attitude which should be taken to pieces of litigation of this kind. The defendants still suffer, even when they win. But they should at any rate have been given such assistance as can be provided by the rules. I do not accept, as counsel submitted, that indemnity costs are only appropriate if there is some deception or underhand conduct on the part of the losing party, but not if the litigation is merely fought bitterly or even unreasonably."

36. Macmillan Inc. v. Bishopgate Investment Trade Ltd. (10th December 1993, unreported, chancery Division) was also cited with approval; Millet J saying:-

"The power to order taxation on an indemnity basis is not confined to cases which have been brought with an ulterior motive or for an improper purpose. Litigants who conduct their cases in bad faith, or as a personal vendetta, or in an improper or oppressive manner, or who cause costs to be incurred irrationally or out of all proportion as to what is at stake, may also expect to be ordered to pay costs on an indemnity basis if they lose, and have part of their costs disallowed if they win. Nor are these necessarily the only situations where the jurisdiction may be exercised; the discretion is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be 'appropriate'."

37. Applying these principles, I am satisfied that Plaintiff's application for costs on an indemnity basis is irresistible. In my judgment, these has been underhand conduct practised by Defendant. Because of the complexities of the matter, I am satisfied a certificate for two counsel should be given.

Interest rates

38. The litigation in this matter has run since late 1992, a period in excess of five years. During that period, interest rates have fluctuated considerably. To order interest to run at the judgment rate as it varied from time to time would, in my opinion, place on the parties the onerous task of compiling a detailed table of fluctuating rates. Common sense dictates a flat rate which I shall make 9% per annum.

39. The Defendant has argued that she should not be penalised with interest calculated from the date of summons as the Plaintiff has not persistently pursued its litigation; her counsel submitted that there were dormant periods not of her making. In my judgment, there is some merit in this contention. I will, therefore, order interest to run from 1st September 1993; this I consider in all the circumstances to be appropriate.

Orders

40. It is declared that at all times material to Plaintiff's agreement to purchase the property known as Flat C, 14th Floor, Block One, and Carport E64, Braemar Hill Mansions, Hong Kong, Defendant was unable to pass good title thereto.

41. It is further ordered that:-

1. The sum of $200,000.00, being the equivalent of the deposit in respect of which Plaintiff claims a refund, be paid by Defendant to Plaintiff.

2. Interest shall accrue on the said sum of $200,000.00 from 1st September 1993 at the rate of 9% per annum.

3. Defendant do pay Plaintiff damages in the sum of $190,000.00.

4. Defendant do pay Plaintiff's costs to be assessed on the indemnity basis, there being certificate for two counsel.

5. There be liberty to apply.