CHAN GUAN LI XIA v. FUNG WAI HING & ANOTHER

CACV 1671/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1671 OF 2001

(ON APPEAL FROM HCMP NO. 2891 OF 1998)

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REASONS  FOR  JUDGMENT

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Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge Muttrie given on 4 July 2001 whereby the plaintiff's claim was dismissed, judgment was entered for the 1st and 2nd defendants against the plaintiff on their counterclaim and they were awarded HK$773,060.60 with interest. At the hearing of this appeal, this court allowed the appeal declaring that the 1st and 2nd defendants had failed to answer the requisitions satisfactorily and show good title and ordered the refund of the deposit of $338,000 with interest and other relief including an assessment of damages. We indicated that we would give our reasons in writing later which we now do.

2. This action concerned Flat G on the 8th Floor of Capilano Court, Pictorial Garden, Shatin together with car park no. 287. The history of the matter goes back to 18 January 1998 when Chu Wai Kuen ("the 1st purchaser") offered, through a real estate agent, to purchase the property. The offer price was HK$3,300,000. There was a cheque, dated 18 January 1998, drawn on the 1st purchaser's account at the International Bank of Asia Limited ("the bank") for HK$300,000. There was also a provisional sale and purchase agreement dated 27 January 1998 on the real estate agent's standard form (for convenience, this will be referred to as the "1st purchaser's agreement"). Clause 7 of the 1st purchaser's agreement provided that if after receiving the initial deposit the vendor should fail to complete the sale, the deposit plus a sum equivalent to the amount of the deposit would be paid to the purchaser together with reimbursement of the stamp duty and "... the Purchaser shall not take any further action to claim for damages or to enforce specific performance."

3. What is not in dispute is that the 1st defendant paid the cheque into the defendants' bank account on 31 January 1998 and it was returned on 3 February 1998 marked "account closed". About a week later the bank confirmed to all parties that there had been a clerical error and the notation should have been that payment had been countermanded.

4. It might be noted that on 2 February 1998 the Hong Kong and Shanghai Banking Corporation Limited executed a release of a mortgage to secure general banking facilities over the property and on the same day a charge to secure banking facilities was executed in favour of Po Sang Bank Limited. These were both subsequently registered on 17 February 1998.

5. On the same day that the defendants were informed that the 1st purchaser's cheque had been dishonoured they signed another provisional sale and purchase agreement through another estate agent, this time with the plaintiff ("the 2nd purchaser"). The purchase price in respect of the 2nd purchaser's sale was $3,380,000. At that time, the 2nd purchaser was neither informed about the 1st purchaser's agreement nor that the 1st purchaser's cheque had been dishonoured.

6. The 1st purchaser had been in the Mainland over the period of the Chinese New Year and returned to Hong Kong on 4 February 1998. When the 1st purchaser was informed by the estate agent that the cheque had been presented and dishonoured the 1st purchaser went to the defendants' premises and attempted to give them another cheque and persuade them to continue with the sale of the property to the 1st purchaser. That was rebuffed.

7. On 9 February 1998, solicitors on behalf of the defendants, Yaddy Cheung and Co., gave notice to the 1st purchaser of the dishonour of the cheque and claimed to forfeit the initial deposit. To complete the picture a writ (HCA 3033 of 1998) was issued on 27 February 1998 on behalf of the defendants in the present proceedings against the 1st purchaser in which it was pleaded that the letter of 9 February 1998 impliedly accepted the 1st purchaser's repudiation. That writ was not apparently served until approximately 4 March 1998. It should be noted that another firm of solicitors was by then acting for the present defendants, namely, Messrs Lai and Leung.

8. In the intervening time a writ (HCA 3132 of 1998) was issued on 2 March 1998 in the name of the 1st purchaser against the present defendants. The writ claimed that the 1st purchaser had reached an agreement with the estate agent that the 1st purchaser's cheque, which, as has already been noted, pre-dated the date of the 1st purchaser's agreement by some 9 days, would not be presented unless and until the terms of the offer of purchase had been clarified with the defendants and the 1st purchaser had given prior consent to the presentation of the cheque. It was said that the provisional sale and purchase agreement had been signed by the 1st purchaser on approximately 18 January and had been kept by the estate agent. The 1st purchaser had instructed the bank to stop payment of the cheque on departure for the Mainland on 25 January on the basis that the plaintiff could withdraw those instructions once the matter had been clarified. It was alleged in the statement of claim that the estate agent had told the present defendants when they signed the provisional sale and purchase agreement on 27 January that the 1st purchaser's cheque should not be presented for payment until the 1st purchaser returned to Hong Kong after Chinese New Year and had confirmed that the cheque could be presented. It was said that the present defendants had nonetheless presented the cheque. The writ was amended on the following day. Acknowledgement of service of the writ was filed by Messrs Lai and Leung on 4 March 1998. Acknowledgement of service of the amended writ was filed by yet another firm of solicitors Pang, Tang, Wan and Choi much later, on 20 March 1998.

9. Meanwhile, on 6 February 1998, the 2nd purchaser's solicitors conducted a land search and verified that there were no third party interests registered in respect of the property. On that basis, on 18 February 1998, the formal sale and purchase agreement between the 2nd purchaser and the defendants was entered. This provided for completion on or before 5 pm on 16 March 1998. The 2nd purchaser's sale and purchase agreement was registered in the Land Registry on 6 March 1998.

10. In the intervening time, the 1st purchaser's agreement had been delivered to the Land Registry for registration on 13 February 1998. Messrs Woo, Kwan, Lee & Lo, who are the solicitors who are acting for the defendants in these proceedings, wrote on 20 February 1998 to the solicitors who were recorded as having delivered the 1st purchaser's agreement for registration. They commenced the letter by identifying themselves as the solicitors acting for Po Sang Bank Limited and asked for sight of a copy of the provisional sale and purchase agreement because it might prejudice the position of their clients.

11. On 16 March 1998, the stipulated completion date, the 2nd purchaser's solicitors conducted a pre-completion search and discovered the entry in relation to the 1st purchaser's agreement under a heading "Deeds pending registration". The 2nd purchaser's solicitor immediately wrote to Messrs Woo, Kwan, Lee & Lo and drew their attention to that matter. They pointed out that as the date of the 1st purchaser's agreement was prior to the agreement for sale and purchase of 18 February 1998 and it had not been cancelled or rescinded the defendants could not assign the property free from encumbrance and were therefore in breach of agreement. They indicated that the 2nd purchaser would not "prior to the cancellation or rescission of the 1st purchaser's agreement, complete the purchase of the said property." There was a further exchange of correspondence. The 2nd purchaser's solicitors indicated that they required proof that the 1st purchaser's agreement had been cancelled or rescinded together with documentary evidence within the next two days otherwise they would have no alternative but to seek the appropriate remedy.

12. On the following day the 2nd purchaser's solicitors wrote indicating that they had by then received a copy of the 1st purchaser's writ seeking specific performance and that in the circumstances there was clearly an encumbrance. It is unnecessary to recite the full terms of the interchanges in correspondence between the solicitors, that is set out in the judgment below. Insofar as any of the arguments are relevant they will be considered shortly.

13. To complete the relevant events, a further search was conducted by the 2nd purchaser's solicitors in mid-June which revealed that the 1st purchaser's provisional sale and purchase agreement was still recorded as a deed pending registration. These proceedings were commenced by writ dated 24 June 1998 and the defendants obtained judgment against the 1st purchaser, effectively concluding any claim which the 1st purchaser had, on 14 July 1998.

The judgment below

14. There were, in effect, two main reasons why the judge below held in the defendants' favour. Whilst he was disposed to consider that a valid claim by the 1st purchaser would have been an encumbrance on the defendants' title, he held, on his analysis of the facts some three years after the event, that the 1st purchaser's claim had been invalid and that because the 1st purchaser's cheque was dishonoured the defendants had been entitled to "rescind" the 1st purchaser's agreement or treat it as cancelled. The judge then went on to deal with the question of the 1st purchaser's agreement which had been lodged for registration at the Land Registry and concluded that, since it had not been registered but was only pending registration, the 2nd purchaser would obtain priority because their sale and purchase agreement of 18 February had been registered.

This appeal

15. In my view, the approach to the question of the 1st purchaser's claims was clearly wrong. The matter has to be looked at as of the date for completion of the 2nd purchaser's contract: that was 16 March 1998, or up to 18 March on the basis that the 2nd purchaser was prepared to extend the time for two days. It was not until 16 March 1998 that the 2nd purchaser became aware of the 1st purchaser's agreement. Furthermore, it was probably not until the following day that the 2nd purchaser's solicitors became aware of the 1st purchaser's writ which had been acknowledged on behalf of the defendants on 4 March.

16. As has already been pointed out, the defendants had a number of different solicitors firms acting for them. Whether, Messrs Woo, Kwan, Lee & Lo were aware of the two actions between the 1st purchaser and the defendants prior to 17 March is unclear. Certainly their search conducted in February had put them on notice as to the 1st purchaser's agreement and on 24 February they had received the letter from the 1st purchaser's solicitors enclosing a copy of that agreement. It would have been surprising, given the fact that they were acting for the Po Sang Bank Limited, the mortgagees, as well as for the defendants that they had not made full enquiries and been informed of the two actions by the defendants. In their letter of 16 March to the 2nd purchaser's solicitors they stated that their clients had rescinded the provisional sale and purchase agreement with the 1st purchaser. They presumably would have known that only if they had seen the writ issued on behalf of the defendants: Messrs Yaddy Cheung & Co's letter of 9 February does not refer either to accepting repudiation or to rescission of the contract. Furthermore, it is likely that the judge below might not have been informed that the defendants had been well aware of the 1st purchaser's writ. Even in this court counsel for the defendants, who had appeared below, submitted in his written skeleton "in any event, the vendor did not have knowledge of that writ" (referring to the 1st purchaser's writ). That, as I have indicated, is very far from the truth. It was clearly the defendants' duty to disclose the existence of the claim made by the 1st purchaser and specifically the action which had been commenced.

17. In my view it is indisputable that the defendants did not show good title as of 16 or even 18 March 1998. No solicitor could have permitted the 2nd purchaser to go ahead with the completion with the knowledge which they had particularly after having sight of the 1st purchaser's writ. It is not to the point that the 1st purchaser's claim ultimately failed. A perusal of the court file in HCA 3033 of 1998, the action brought by the defendants against the 1st purchaser, discloses that the judge hearing the Order 86 proceedings for summary judgment might have been disposed to give the 1st purchaser leave to defend had a payment in of the deposit amount been tendered.

18. Quite apart from that, however, the 2nd purchaser was put in a position whereby the 1st purchaser's claim could only be assessed once the facts pleaded in the statement of claim in HCA 3132 of 1998, the 1st purchaser's action, had been ascertained. It was not sufficient for the defendants' solicitors to put the defendants' case that there had simply been a dishonour of the cheque which entitled the defendants to treat the 1st purchaser as being in breach. That, as Mr Chong, on behalf of the plaintiff, pointed out, was to look at one side of the case in isolation.

19. The argument put forward on behalf of the defendants that they could in any event rely upon clause 7 and pay the 1st purchaser the equivalent of the deposit was fraught with difficulty. Having issued a writ themselves on 27 February claiming to have accepted the 1st purchaser's repudiation of the contract, it is difficult to see how the defendants could in March have turned around and made use of clause 7 by tendering an amount equal to the deposit. Furthermore, even if they had done so, and even if the provisions of clause 7, prohibiting the 1st purchaser from pursuing a claim for specific performance once that sum had been paid, were enforceable, there would still be difficulties arising as to whether the 1st purchaser would be entitled to trace the proceeds of sale of the property.

20. In my view, faced with the situation which existed up until the time the 1st purchaser's claim was finally disposed of in July 1998 any attempt to foist the title of the property on the 2nd purchaser would have precipitated the 2nd purchaser into litigation. In the case of M.E.P.C. Ltd v Christian-Edwards and Others [1981] AC 205 at 220 C-D Lord Russell put the test in this way:

"In my opinion if the facts and circumstances of a case are so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the incumbrance, the court should declare in favour of a good title shown."

21. The circumstances of this case are so far removed from the criteria enunciated by Lord Russell that it is pointless to elaborate further. In my view, the 2nd purchaser's solicitors would have been failing in their duty had they advised that the completion should proceed. The defendants had not shown good title as of 16-18 March 1998: in the circumstances their solicitors had not adequately answered the requisitions in respect of the 1st purchaser's claims.

22. Any argument that the requisitions were late is in my view wholly unmeritorious. In the first place, the lateness of the requisitions was wholly due to the failure on the part of the defendants to disclose the matters as I have referred to in paragraphs 15 and 16 above. That failure of disclosure was inexcusable. Furthermore, the matters raised went to the root of title and being matters which had only then become known to the 2nd purchaser, no reliance could be placed on the time limits for raising requisitions.

23. In view of the foregoing, it is unnecessary to consider questions relating to whether the delivery of the 1st purchaser's provisional sale and purchase agreement to the Land Registry for the purposes of registration was a matter which should have affected the 2nd purchaser. In my view, however, the matter is clear. The Land Registration Ordinance and Regulations do not provide for a register of deeds pending registration. Regulations 5 and 10 of the Lands Registration Regulations, however, provide that registration shall take effect from the date of the receipt of the memorial. That was apparently 13 February 1998. Whereas therefore as of 16 March 1998 the 1st purchaser's provisional sale and purchase agreement was not, as such, registered, there was, on the face of the matter no apparent reason why it should not have been registered, it was therefore in the position of a document which was in all likelihood to be registered. As and when it would be registered, it would have taken priority over any registration on the part of the 2nd purchaser. In those circumstances there was clear notice that there was likely to be an incumbrance on the property which would affect title. For that reason also it seems to me that until the question of registration of the 1st purchaser's agreement had been settled good title had not been shown.

24. In those circumstances, the plaintiff clearly had a good claim to relief sought.

Hon Le Pichon JA:

25. I agree.

Hon Yeung J:

26. I agree.