FUNG KAN WAI AND ANOTHER v. LEUNG SHUI FAT AND OTHERS

HCA6859/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.6859 OF 1997

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J U D G M E N T

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1. The Plaintiffs, being husband and wife and being the purchasers of Block A, 2nd floor and roof of Lung King Villa in Lung Mei Village New Territories ("the Property") bring this claim against the Defendants for breach of the Sale and Purchase Agreement and ask for the return of the deposit paid by them alternatively damages for breach of that Agreement.

Background

2. The 2nd and 3rd Defendants are also husband and wife and together operate and carry on business as property developers. The 1st Defendant is an indigenous villager in the New Territories who is granted land by the Government to build a village-type house in the New Territories. It appears that a practice has developed in the New Territories whereby property developers would purchase this right to build from the indigenous villager and then would handle the necessary application with the relevant government department on behalf of the indigenous villager. At the same time the developer would make themselves responsible for the costs of building the village-type house and would sell off the units as "pre-sold units" to purchasers even before the relevant building licence and/or government permission were obtained so as to generate the cash needed for the building. This appears to have been what happened in this case and accounts for the fact that the 1st Defendant has been named as one of the Defendants albeit that the real dispute is between the Plaintiffs and the 2nd and 3rd Defendants who were the actual vendors although in name the 1st Defendant must necessarily be a vendor.

3. However, at the outset of this case I was informed by counsel for the Plaintiffs that no point would be taken by the Plaintiffs that the Agreement is either unlawful or against public policy.

The Plaintiffs' Case

4. The Plaintiffs' case is that they entered into a Sale and Purchase Agreement for the Property on 31st March 1994 ("the Agreement") with the Defendants. They dealt with the 3rd Defendant at all times and she represented the other two Defendants at all times. The purchase price was $1,480,000. The Agreement was a standard form printed in Chinese. At the time of the signing of the Agreement on 31st March 1994, it is common grounds that $296,000 (which included an initial deposit of $30,000) had been paid to and received by the 2nd and 3rd Defendants. The sum of $296,000 represents 20% of the total purchase price of the Property.

5. Clause 3 of the Agreement provides as follows : -

"Stage 1 : 20% of purchase price payable upon signing this agreement, HK$296,000 (including initial deposit of $30,000).

Stage 2 : The purchaser shall, within two weeks of the starting/completion of construction works in respect of the second floor of the building, pay 10%, $148,000.

Stage 3 : The balance of $1,036,000 shall be paid within one month of the issuance of the certificate of compliance and the payment of premium (pay all balance)."

Before moving on, it should be pointed out that in the English certified translation of the Agreement, that part of Clause 3 is translated as : "Stage 2 : The purchaser shall, within two weeks of the starting (my underlining) of construction works ...". However at the hearing, both counsel informed me that the Chinese character used can equally mean "starting" or "completion" and that at all times both parties and their legal advisers have treated, understood and accepted that the obligation under Stage 2 in Clause 3 arises upon the completion of construction works in respect of the second floor. I have been asked by both counsels to add back the word "completion" into the certified translation and to treat Stage 2 of Clause 3 as referring to "completion" rather than "starting" of construction works in respect of the second floor.

6. The Plaintiffs say that it is implied in the Agreement, in particular Clause 3 thereof, that the Defendants were under a duty to inform the Plaintiffs as to when completion of construction works in respect of the second floor takes place. The Plaintiffs deny that they have ever been notified by the Defendants of such before 8th January 1996 but that several days after 8th January 1996, the 1st Plaintiff saw on his desk in his office in Tai Po Plaza a faxed message from the Defendants informing him that the building work for the 2nd floor of the building in respect of which the Property was located had been completed in September 1995 and that he would have to pay the further 10% i.e. $148,000 within seven days failing which the Defendants would re-sell the Property and refund all the deposit to him.

7. Adhering strictly to the terms as contained in the Agreement the Plaintiffs say that they are entitled to 14 days notice. On that basis the 1st Plaintiff delivered a cheque in person to the 3rd Defendant's office for $148,000 on 17th January 1996 but it was not accepted by the 3rd Defendant. On 20th January 1996, the 1st Plaintiff sent by post a cheque for $148,000 to the 3rd Defendant's office. This cheque was returned to the 1st Plaintiff by the 3rd Defendant. Accordingly the Plaintiffs say that the Defendants are in breach of the Agreement by refusing to accept the cheque on 17th January 1996 and/or by returning the cheque on 20th January 1996.

8. The Plaintiffs also rely on a further argument which Mr Sham for the Plaintiffs calls a "lawyer's point". As I understand it this is not a point which the Plaintiffs, as laymen, rely on but is an argument put forward by their counsel. Clause 8(iii) of the Agreement provides -

"If the construction of the above-mentioned property shall not be completed by 31st December 1994, or the certificate of compliance shall not be issued (by that date), then the purchaser shall be entitled to a refund of all sums paid plus bank interest, and the agreement shall be cancelled. However (the purchaser) shall also be entitled to continue to request the developer to complete this agreement."

9. Mr Sham's argument is this. It is common ground that the construction of the building in which the Property is located was not completed by 31st December 1994 and the certificate of compliance was only issued on 22nd August 1996. Relying on Clause 8(iii) of the Agreement, Mr Sham submits that the Plaintiffs, despite having given instruction in writing to the builder on 26th September 1995 that they required a double sink for the kitchen and also indicated the various tiles they wished for the kitchen wall, the floor, the roof, the toilet floor and the balcony floor, thereby indicating their intention to continue with the Agreement after the material date of 31st December 1994, are now still in a position to request the refund of all sums paid plus bank interests.

The Defendants' Case

10. The Defendants' case is that since around March 1995 building works started in respect of the Property. Construction work up to the 2nd floor was completed towards the end of August. Upon completion of the construction works up to the 2nd floor, the 3rd Defendant's secretary, Miss Ng Ming Chu, informed all the purchasers by phone that the further 10% had to be paid in two weeks time in accordance with the agreement. She had called both Plaintiffs informing them of same. All the other five purchasers apart from the Plaintiffs had paid the further 10% deposit by 9th October 1995.

11. In the case of the Plaintiffs, after the Plaintiffs had been contacted by Miss Ng, the Defendants did not receive any response from the Plaintiffs so at the instruction of the 3rd Defendant, a letter was prepared by Miss Ng and sent by post to the Plaintiffs' home address as appears on the Agreement. This letter was in Chinese, dated 1st October 1995 and signed by the 2nd Defendant. The contents of the letter informed the Plaintiffs that the construction of the 2nd floor of the building (in respect of the Property) had been completed in August and reminded them that the further 10% had to be paid within two weeks of such completion otherwise the deposit would be forfeited and the Property resold.

12. After this letter was sent to the Plaintiffs, Miss Ng followed up with several further phone calls to the 1st Plaintiff. From the conversation she had with the 1st Plaintiff, she was told by the 1st Plaintiff that he was having some financial difficulties and requested time for payment.

13. Subsequently the 1st Plaintiff spoke directly to the 3rd Defendant on the phone repeating that he was in financial difficulty. As a result the 3rd Defendant agreed over the phone to allow an extension of time until 1st January 1996 to the Plaintiffs for payment of the further deposit.

14. On 2nd January when no further deposit was forthcoming form the Plaintiffs, Miss Ng again called up the 1st Plaintiff by phone. On the phone the 1st Plaintiff told her he would contact the Defendants direct. A further seven days extension was granted by the 3rd Defendant to the 1st Plaintiff. When by 8th January, the Defendants did not hear from the Plaintiffs, the 3rd Defendant (who was not in her office in the earlier part of that day) gave instructions to Miss Ng on the phone to issue yet another letter to the Plaintiffs and to fax this letter to the 1st Plaintiff's office since by then it was known to the Defendants that the 1st Plaintiff was a real estate agent working in Joy House Property Agency Co. which also had dealings with the Defendants' property development business.

15. Due to a misunderstanding by Miss Ng of the 3rd Defendant's instructions given over the phone, Miss Ng had erroneously put in this letter faxed to the 1st Plaintiff words to the effect that if the Plaintiffs failed to pay the further 10% deposit within seven days, the Property would be resold and all the deposit would be refunded back to the Plaintiffs. (This was the faxed letter which the Plaintiff said he saw on his office desk several days after 8th January 1996.)

16. Later the same day when the 3rd Defendant returned to the office and noticed this error on the letter which had already been faxed to the 1st Plaintiff's office, she immediately instructed Miss Ng to prepare a further letter also dated 8th January 1996 retracting this error and informing the Plaintiffs that if the Plaintiffs still ignore this letter, the Defendants will resell the Property and forfeit all the deposits received by them. This second letter dated 8th January 1996 was hand delivered by Miss Ng to the 1st Plaintiff's office in Tai Po Plaza. However according to Miss Ng, she did not hand the letter directly to the 1st Plaintiff but gave it to a female at the 1st Plaintiff's office to be handed to the 1st Plaintiff.

17. When no response was received from the Plaintiffs pursuant to this second letter of 8th January 1996 after seven days, the 3rd Defendant wrote another letter on 15th January 1996 to the Plaintiffs giving notice that the Property would be resold and all the deposit forfeited in accordance with the terms of the Agreement. This letter was sent by post to the Plaintiffs' home address as stated in the Agreement.

18. It is because of this notice given by the Defendants in respect of forfeiting the deposit and reselling the Property that the Defendants did not accept the Plaintiffs' cheque for the further payment of $148,000 on 17th January 1996 and returned the Plaintiffs' cheque for same sent by post on 20th January 1996.

19. Subsequently, having accepted the Plaintiffs' repudiation of the Agreement, the Property was re-sold by the Defendants to one Lai Ka Pik in March 1996 for $2,180,000.

20. Based on this, the Defendants say that it was the Plaintiffs who were in breach of the Agreement for failing to pay the further deposit of 10% until after the Defendants had issued the notice of 15th January 1996 forfeiting all the deposit paid.

21. Moreover the Defendants counterclaim against the Plaintiffs for damages for breach of the Agreement, declarations that the Agreement has been terminated by the letter of 15th January 1996 and that the Defendants are entitled to forfeit the deposit of $296,000.

22. The Defendants also counterclaim for damages for wrongful registration by the Plaintiffs of the lis pendens which I shall deal with later.

Findings of Fact

23. It can be seen from the above that the main issue of fact in dispute between the parties in this case revolves around whether or not the letters of 1st and 15th October 1995 and also the second letter of 8th January 1996 as well as the letter of 15th January 1996 were sent by the Defendants and/or were received by the Plaintiffs. Also in dispute is whether or not there were the phone conversations between the 1st Plaintiff on the one hand with either the 3rd Defendant or her secretary Miss Ng on the other hand in September and the early part of October 1995 and also in early January 1996 when the 1st Plaintiff is alleged to have asked the 3rd Defendant for extension of time for the payment of the further amount of $148,000.

24. Having seen and heard the 3rd Defendant and her witness, Ng Ming Chu, I find them both to be honest and truthful witness. Both their evidence of informing the Plaintiffs, in particular the 1st Plaintiff by phone and later by letter of the completion of construction of the 2nd floor of the building in which the Property was located are supported by the fact that other purchasers of other units in the same two blocks (i.e. Block A and Block B) were also notified at or about the same time at the end of August or early September 1995 and all the other purchasers had by 9th October 1995 already paid their further payments due in their respective agreements which contain similar terms to the Agreement.

25. On the other hand, I find the version of events as told to me by the 1st Plaintiff odd and unsupported by reason. I cannot imagine that the Defendants would have notified all the other purchasers of Block A and Block B but for some unknown reason have left out notifying the Plaintiffs in August or September of the completion of construction of the 2nd floor of the building in respect of the Property, especially when the Defendants depend upon the various stages of payment by these purchasers to finance the construction of the building. Neither can I visualise the fact that three letters sent by ordinary pre-paid post at different dates to the 1st Plaintiff's home address (which is stated in the Agreement) and one letter hand delivered to the 1st Plaintiff's office by Miss Ng would all of them fail to reach the 1st Plaintiff. It may just be possible if one such letter failed to reach its destination by reason of its being misdirected along the way but the chances of all four letters failing to reach the 1st Plaintiff must be so small as to be almost negligible. The only conclusion that I can draw from this evidence of the Plaintiff is that the 1st Plaintiff was not entirely frank and truthful to the Court when he gave this evidence that he did not receive those letters (excepting the first letter of 8th January 1996 sent by fax).

26. I accept, however, that the two Plaintiffs together (as can be seen from their various bank accounts statement produced) had sufficient money during the period from September 1995 to January 1996 to have been able to pay the further payment of $148,000.

27. On the other hand, I also accept the evidence of the 3rd Defendant and that of her witness Miss Ng that the 1st Plaintiff gave the reason of financial difficulty in asking for extension of time to pay the further payment.

28. The conclusion that I draw from these two pieces of evidence is that the 1st Plaintiff was seeking to stall or to delay paying the 10% further payment for as long as he thought he could. In doing so he overstepped the line and when he received the letter of 15th January 1996 from the Defendants informing him that his deposit was to be forfeited, the 1st Plaintiff tried to deliver a cheque in person to the 3rd Defendant's office on 17th January 1996 but unfortunately for him the Defendants would not accept it. A classic case of the 1st Plaintiff getting burnt playing with fire.

29. I therefore make the following findings of facts of those issues in dispute :

1. Construction of the building in which the Property was located was completed up to the 2nd floor in the sense that the superstructure had been built up to the 2nd floor some time towards the end of August 1995 which was the sense understood and intended by the parties to the Agreement.

2. The Plaintiffs were informed by Miss Ng Ming Chu by phone of this fact some time in September and further informed that the further payment of 10% had to be paid in two weeks time.

3. When there was no response from the Plaintiffs to this request, the letter dated 1st October 1995 was sent to the Plaintiffs by the Defendants.

4. Some time between the 1st and 15th October 1995, the 1st Plaintiff, by phone, requested the 3rd Defendant for extension of time to pay the further 10% payment which was agreed to by the 3rd Defendant and an extension granted to the end of the year.

5. The Defendants issued the letter of 15th October 1995 to confirm the said extension of time, this letter being addressed and posted to the Plaintiffs' residential address.

6. On 1st January 1996, the 3rd Defendant again chased after the 1st Plaintiff by phone for the payment of the further 10% when the 1st Plaintiff again requested a further seven days extension.

7. On 8th January 1996 when no payment was forthcoming from the Plaintiffs, a letter prepared by the 3rd Defendant's secretary was faxed to the 1st Plaintiff's office. This letter contained an error due to a misunderstanding by Miss Ng of the 3rd Defendant's instructions in that it stated words to the effect that if the further 10% was not received by the Defendants within one week, the Property would be resold and the deposit would be returned to the Plaintiffs by the Defendants upon the resale.

8. However, immediately on the same day and before such offer was accepted by the Plaintiffs, the Defendant hand delivered a second letter of the same date to the 1st Plaintiff's office correcting that error.

9. When after seven days and no further deposit was paid by the Plaintiffs, on 15th December 1996, the Defendants sent a letter to the Plaintiffs' residential address informing the Plaintiffs that the Property would be resold and the deposit forfeited in accordance with the Agreement which I find was sent to and received by the Plaintiffs.

10. After receipt of the letter of 15th January 1996, the 1st Plaintiff tried to tender the further 10% payment by a cheque on 17th January 1996, but it was not accepted by the Defendants. Likewise a cheque for the same amount sent by registered post by the Plaintiffs to the Defendants on 20th January 1996 was returned by the Defendants.

11. The Property was resold by the Defendants to one Lai Ka Pik for $2,180,000 on 25th March 1996.

Liability on the Plaintiffs' claim

30. On these facts as I have found them, it is clear that the Plaintiffs were in breach of the Agreement.

31. Neither do I accept the further argument put forward by Mr Sham that the Plaintiffs are entitled to a refund of all sums paid plus bank interest under Clause 8(iii) of the Agreement for the simple reason that after 31st December 1994, the Plaintiffs had elected to continue with the Agreement by giving instructions to the builder as to their requirement for the various parts of the Property and must necessarily therefore be estopped from alleging otherwise.

32. Accordingly the Plaintiffs' claim is dismissed.

Defendants' Counterclaim and Reliefs sought

33. Insofar as the Defendants' counterclaim is concerned, it follows that the Defendants are entitled to a declaration that the Agreement was terminated by the Defendants' letter of 15th January 1996.

34. As for the Defendants' counterclaim for damage for breach of contract, it is not disputed that the Property was resold by the Defendants to Lai Ka Pik in March 1996 for $2,180,000. As such the Defendants have suffered no loss as a result of the Plaintiffs' breach. Accordingly there will be no damages awarded for the breach by the Plaintiffs.

35. The Defendants have also counterclaimed for a declaration that they are entitled to forfeit the total sum of $296,000 paid by the Plaintiffs as deposit. This sum represents 20% of the purchase price for the Property. The clause which the Defendants rely on in the Agreement is Clause 8(i) which provides as follows : -

"The purchaser's obligations : If the purchaser shall breach this agreement, the vendor shall be entitled to forfeit the initial deposit paid by the purchaser, and to re-sell the said property by any means. The purchaser shall not object thereto."

36. In this respect, the Plaintiffs have taken two points. Firstly that the reference to "initial deposit" in Clause 8(i) means and is intended by the parties to mean the "initial deposit of $30,000" referred to in Clause 3 Stage 1 of the Agreement (which has already been stated above). Secondly, if the words "initial deposit" referred to in Clause 8(i) refers to the full deposit of $296,000 already paid, then it tantamounts to a penalty clause and is unenforceable.

37. In this connection I have been referred to the Privy Council case of Workers Trust & Merchant Bank Ltd v. Dojap Investment Ltd. [1993] AC 573, (being an appeal from the Court of Appeal of Jamaica) and also extensively to Hong Kong Conveyancing, Cases and Materials by Sihombing and Wilkinson. I have also been referred to the local case of China Pride Investment Ltd. v. Silverpole Ltd. [1994] 2 HKC 341 where the Court of Appeal applied the decision in the Workers Trust case.

38. I respectfully accept that the law as stated in China Pride by the Court of Appeal to be the correct law in Hong Kong relating to 'deposits' of over 10%.

39. Coming back to the present case I note first of all that Clause 8(i) of the Agreement allows the vendor to forfeit the "initial deposit" paid by the purchaser if the purchaser should be in breach of the Agreement. Secondly I note that the only other reference to "initial deposit" in the Agreement is contained in Clause 3 where under Stage 1 the initial deposit refers to $30,000. I note also that neither the sum of $296,000 nor the sum of $148,000 are referred to as deposits in Clause 3 or any other part of the Agreement. Moreover, it is a cardinal principle that in construing a document, the same word used in different parts of the same document should be given the same meaning.

40. In all the circumstances of this case, I have come to the conclusion that the parties intended that in the event of a breach of the Agreement by the purchaser (in this case the Plaintiff), the Defendants vendor would be entitled to forfeit the initial deposit of $30,000.

41. In the circumstances it is not necessary for me to decide whether or not the $296,000 was or was not a penalty if it was to be forfeited. However if it was necessary to decide that issue, I would have no hesitation in holding that it was a penalty and not a genuine pre-estimate of damages in case of breach. The reason is that in all the circumstances of this case, there is nothing to suggest that there was any special reason to fix a genuine pre-estimate of damages at 20% of the purchase price. Rather the only plausible reason that I can see for a payment of 20% at the signing of the Agreement was because the Defendants vendor depended on these payments agreed to be made at various stages in order to finance the building or construction of the Property. As such this 20% of the purchase price paid when the Agreement was signed by the parties herein on 31st March 1994 did not represent and was not intended to represent earnest money to ensure the performance of the Agreement. Thus it can only be a penalty and unenforceable.

42. Lastly, I turn to deal with the Defendants' claim for damages due to the wrongful registration of the lis pendens. Having found the Plaintiffs to be in breach of the Agreement, it appears at first blush that the Defendants must be entitled to damages for the wrongful registration of the lis pendens by the Plaintiffs.

43. However, on further reflection of the matter, particularly in view of my judgment above that the Defendants are only entitled to forfeit the initial deposit of $30,000 and therefore that the balance of the $266,000 has to be returned to the Plaintiffs, and which have all this time been held by the Defendants, I am of the view that there has been no wrongful registration of the lis pendens. Accordingly the Defendants' counterclaim in this respect fails.

Conclusion

44. To sum up, I shall make the following orders : -

1. The Plaintiffs' claim is dismissed;

2. A declaration that the Agreement was terminated by the Defendants' letter of 15th January 1996;

3. There will be no damages awarded for the Plaintiffs' breach of the Agreement as the Defendants have suffered none;

4. A declaration that the Defendants are entitled to forfeit the initial deposit of $30,000, the balance amount of $266,000 to be returned to the Plaintiffs;

5. The Defendants' counterclaim for damages for wrongful registration of the lis pendens by the Plaintiffs is dismissed.

Costs

45. I shall make the following costs order nisi that the costs of the Plaintiffs' claim and the costs of the Defendants' counterclaim be to the Defendants to be taxed if not agreed and that the Plaintiffs' own costs to be taxed in accordance with Legal Aid Regulations.