MAXY LTD. v. COIN ORGANIZE LTD. and Others

No. A1457 of 1992

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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Introduction

1. This case involves the sale of two tenement properties, each of three storeys, at nos. 103 and 105 Parkes Street, Yaumatei. The properties were owned by the 1st Defendant and the 2nd Defendants respectively. A formal sale and purchase agreement was made on 31st December 1991 by which the Defendants agreed to sell the properties to the Plaintiff at a price of $12.6m. It is the Plaintiff's case that it agreed to purchase the properties because, through their agent Lee Kam (Mr. Lee), the Defendants wrongly represented that the properties could be redeveloped for commercial and/or residential purposes when, in fact, the properties were zoned as an open space. It is the Defendants' case that the same Mr. Lee was the Plaintiff's agent and that it was made plain to Mr. Lee that the properties could not be redeveloped.

The Plaintiff's case

2. Daniel Kwan (Mr. Kwan) is an architect and authorised person and a director of the Plaintiff. His business is that of property developer. He met Mr. Lee in 1985 when the property market was down. Mr. Lee interested Mr. Kwan in trading in Chinese products. He also arranged one or two property transactions on behalf of Mr. Kwan, for example, the sale of a piece of farmland in the New Territories.

3. At the end of 1989 according to Mr. Kwan, Mr. Lee approached him saying that the properties were for sale, that they were included in the town plan for redevelopment and the price was $12m. Mr. Kwan was interested in purchasing for redevelopment for commercial or residential use. After looking at the properties, Mr. Kwan had further discussions with Mr. Lee but said that the price was too high because of the poor market after the 4th June incident. After consulting the owners Mr. Lee said that the price could not be cut so Mr. Kwan left the matter.

4. By mid-1991, the property market was better. Mr. Kwan said he phoned Mr. Lee to enquire if the properties were still for sale. After making enquiries Mr. Lee told Mr. Kwan that the properties were still for sale but at a price of HK$13m. There then followed discussion and negotiation through Mr. Lee, as a result of which Mr. Kwan agreed to pay $12.6m for the properties. The Plaintiff was incorporated on 5th September 1991 and, although there is no evidence on this point, it seems likely that Mr. Kwan incorporated it for the purpose of this transaction.

5. During the course of negotiations conducted through Mr. Lee, Mr. Lee showed Mr. Kwan two documents. The first, Exh. P2 dated 25th November 1991, written out by Mr. Lee gave the address of the property, the area, the price $13m and details of the deposit, completion and of existing tenancies. It was signed by Mr. Lee. The second, Exh. P1 dated 5th December 1991 again in Mr. Lee's handwriting, was similar to the previous document except the price was stated to be $12.6m and contained the wording "already included in the government's town development area". It also gave details of the vendors' solicitors.

6. Mr. Lee told Mr. Kwan that Mr. Kwan should pay commission of 1%. To this Mr. Kwan agreed, as he also agreed to Mr. Lee's advising him that the owners would also pay commission.

7. It was Mr. Kwan's evidence that, before signing the agreement at his solicitors' office on 31st December, he both looked at the properties and went to see the district layout plan for Yaumatei. He noted that the relevant block in Parkes Street was marked C/R and R/A both of which notations allow commercial/residential development. He failed to notice O noted on the same block which does not permit redevelopment. In any event, he said, there were no street numbers shown on this plan so he could not tell the location of the properties on the plan. Because of what Mr. Lee had told him, however, and because of the two documents which he had been shown, Mr. Kwan was confident that he could redevelop the properties.

8. Having signed the agreement, Mr. Kwan applied for mortgage facilities from his bank which required a valuation. Mr. Kwan instructed a reputable firm, Vigers, to carry out the valuation. A few days later he learned for the first time from the valuer that there were doubts about whether the properties could be redeveloped because they were probably in an O zone. Mr. Kwan asked his solicitors to investigate. On 8th January 1992, the solicitors wrote to the Planning Department seeking clarification as to the zoning of the properties. In the meantime, Mr. Kwan through Mr. Lee arranged to meet the owners of the properties. There was a meeting in the Windsor Hotel between Mr. Kwan, Mr. Lee, Tam Siu Lun (Mr. Tam), one of the named 2nd Defendants, and Li Sik Kwan (Mr. Li).

9. At the meeting, Mr. Kwan said that they had not told him the truth and asked them to "tell me exactly if the property is in an open area or redevelopment area". Mr. Tam just smiled and said that there should be no problem and that Mr. Kwan should just apply for redevelopment. Mr. Kwan said that he was investigating and if he discovered that he could not rebuild the properties, he would rescind the agreement and ask for his deposit back. Mr. Tam simply said "Don't worry". Apart from casual chatting, the meeting concluded.

10. By letter dated 21st February the Planning Department advised the Plaintiff's solicitors that the properties were zoned as open space. On 27th February, the solicitors wrote to the Defendants' solicitors saying that because of the Defendants' wrongful conduct, the agreement was rescinded and the deposit should be repaid.

11. Mr. Lee gave evidence on behalf of the Plaintiff. I should say at once that I found his evidence somewhat confusing and that he was not a very satisfactory witness.

12. Mr. Lee said that he came to know about the properties through Wong Kwan (Mr. Wong) who is one of the 2nd Defendants. He and Mr. Wong were in the China trade business and it was customary for Mr. Lee to visit Mr. Wong's office to talk and have coffee. During one of these talks around, 4th June 1989, Mr. Wong said that the owners of the two properties were interested in selling and if Mr. Lee could find a buyer, he should introduce him. According to Mr. Lee at that stage no price was mentioned and he was unable to find any person interested in buying the properties. Eventually, however, something began to develop. Mr. Lee approached Mr. Kwan who showed some interest. When this approach was made is not entirely clear. According to Mr. Lee it was late 1989, or late 1990 around October, or in 1991. What is clear, however, is that there were not 2 separate and distinct discussions about the property, one in 1989 and another in 1991 as Mr. Kwan's evidence suggested. It is to be inferred, in my view, that as far as Mr. Lee is concerned, he approached Mr. Kwan for the first time about these properties sometime in 1991, an approach which ultimately led to the signing of the agreement. Indeed, Mr. Lee expressly said in chief that in 1989 Mr. Kwan was not in Hong Kong so that he was not able to tell him about the properties.

13. As a result of Mr. Kwan's interest Mr. Lee went back to Mr. Wong who in turn introduced him to Mr. Tam who was authorized to speak on behalf of the owners of the two properties. There followed a series of meetings initially between Mr. Lee, Mr. Tam and Mr. Wong, subsequently between Mr. Lee, Mr. Tam and Mr. Li in the Ma Wah Restaurant. It was at one of these meetings that Mr. Tam said the price would be $13.5m. When Mr. Lee related this to Mr. Kwan, Mr. Kwan indicated that it was too much. Later Mr. Tam reduced the price to $13m. Eventually $12.6m was agreed upon.

14. It was during these meetings that, according to Mr. Lee, Mr. Tam effectively dictated details of the properties and the transaction which Mr. Lee recorded in Mr. Tam's presence and which are the two notes Exhs. P1 and 2.

15. It must be noted that Mr. Lee was very clear that both Mr. Wong and later Mr. Tam repeatedly emphasized that the properties could be developed because they were in the area of the town plan. Indeed, Mr. Wong stressed that a building of 12 storeys could be put on the site as had been done nearby.

16. In his evidence, Mr. Lee explained how Mr. Li came to be involved. Mr. Li came to know about the possible sale and wanted to join in. Mr. Li and Mr. Tam were ex-colleagues from the civil service. Mr. Lee was not enthusiastic about this but, because the two were old colleagues, he accepted that if Mr. Li became involved he would have more assistance in getting the deal done and would then at least get some commission.

17. As far as commission is concerned, Mr. Lee's evidence was thoroughly unsatisfactory. Initially, as I understood it, his evidence was that he would receive commission from Mr. Tam. He then suggested that the commission would be shared with Mr. Li upon the basis of the one who did more work getting the greater share. Finally, it appears that once the deal was done Mr. Lee saw Mr. Tam pay Mr. Li $30,000.00 while Mr. Lee himself received his 1% commission from Mr. Kwan, a commission which Mr. Kwan has not sought to recover from Mr. Lee. He also said in chief that he had asked Mr. Tam for payment but Mr. Tam did not pay. In spite of Mr. Lee stressing that commission is important, he took no steps to recover it from Mr. Tam largely, as I understood it, because they were friends.

18. Mr. Lee's account of the meeting in the Windsor Hotel, after the agreement had been signed, largely follows that of Mr. Kwan. Mr. Lee did say, however, that Mr. Tam asked for the deal to be delayed a little. It was suggested by Mr. Chain on behalf of the Defendants that, in saying this, Mr. Lee was distorting what had occurred in order to assist the Plaintiff. I reject that. I have no doubt that this was simply an unnoticed and uncorrected error on Mr. Lee's part.

The Defendants' case

19. Mr. Tam gave evidence on behalf of all the owners. He said that he was contacted by Mr. Lee in August 1991, Mr. Lee having been referred to him by Mr. Wong. A meeting was arranged at the Ma Wah Restaurant at which Mr. Lee told Mr. Tam that he was the agent of an architect Mr. Kwan who was very interested in buying the properties. According to Mr. Tam, he immediately told Mr. Lee that the properties were classified by Government in an area for public use on which no buildings could be built. Mr. Lee replied that he was not afraid of that because "We had checked very clearly. My boss knows many people and had a way to get rebuilding done". Mr. Lee then asked about the price but Mr. Tam was unable to fix a price until he had talked to the owner of 103 who was away on a trip. Mr. Lee did not at the meeting ask for any commission.

20. At the end of August, Mr. Lee again paged Mr. Tam and a meeting was arranged for the same restaurant. At this meeting, Mr. Li was also present at Mr. Lee's request because he, Mr. Lee, hoped that Mr. Li would strengthen the impression of sincerity on the part of Mr. Lee.

21. At this meeting, Mr. Tam said to Mr. Lee and Mr. Li that the properties were classified for public use and, while saying this, he traced a figure O on the table with his finger to indicate that there was an O on the layout plan. Mr. Lee said that his boss knew ways around it and could have redevelopment done because he knew many people.

22. According to Mr. Tam, no price was discussed at that meeting. He had later meetings with Mr. Lee alone, during the course of which agreement was reached as to price.

23. After agreement had been reached and the formal agreement signed, Mr. Tam said Mr. Lee paged him about 10 days later and arranged a meeting at the Windsor Hotel to see Mr. Kwan. At the meeting, Mr. Kwan said that he had made a mistake and hoped to postpone completion for three months pending his application to Government for redevelopment. Mr. Tam immediately rejected this proposal and said that if Mr. Kwan could not complete on time the deposit would be forfeited. In response to this, Mr. Kwan suggested settling the matter by paying Mr. Tam $1m. Mr. Tam said he would have to discuss this with the owners.

24. Subsequently, Mr. Tam through Mr. Lee rejected Mr. Kwan's settlement proposal. Mr. Tam said that Mr. Lee never asked him for commission nor did Mr. Tam pay $30,000.00 to Mr. Li.

25. Mr. Li gave evidence on behalf of the Defendants. He said that he was asked by Mr. Lee in August 91 to have a word with his friend Mr. Tam in order to prove that Mr. Lee was really helping Mr. Kwan to buy the properties and so strengthen Mr. Tam's confidence in him. Mr. Li agreed to help and attended one meeting with them at the Ma Wah Restaurant. Mr. Li's evidence about that meeting was consistent with that of Mr. Tam save that, in addition to Mr. Tam drawing a circle on the table, he said that Mr. Tam also pointed it out on a plan.

26. Mr. Li said he next saw the parties at the Windsor Hotel where Mr. Kwan admitted that he was negligent and asked for an extension of three months.

27. The Defendants also called a surveyor Mr. Chan Cheung Kit, F.R.I.C.S. He had prepared a valuation of the properties as at February 1992. In his valuation report, which he produced in evidence, Mr. Chan said that properties had been zoned as open space since 1971. He put the existing use value at $1.62m and the open market value at $5m. The latter valuation was arrived at on the basis that, when resumed, the Government would pay compensation of about $9m for the properties. Mr. Chan's view, however, and it is one which I find entirely reasonable, was that no purchaser would pay $9m for the properties for a return of $9m. In deciding how much to offer for the properties, the purchaser would also have to take into account the possibly long lapse of time between his purchase and resumption by the Government. Mr. Chan therefore thought it proper to discount by approximately 40% in arriving at his valuation.

28. Mr. Chan, who had some 15 years experience in surveying in Hong Kong, also explained how it is possible to ascertain from a layout plan in which zone a property is located. This is done by obtaining a copy of a Government survey map of a scale 1:1000 which is readily available from the Planning Department and which shows property numbers. The layout plan of 1:5000 is then magnified and overlaid on the survey plan. This process takes approximately half an hour. In any event, he agreed with me that by simply looking at the two plans for this area side by side it can readily be seen that at the very least there is suspicion about the zone in which the properties lie and anyone looking at these plans would have been put on enquiry.

Assessment

29. I have already indicated my difficulty with Mr. Lee's evidence. I was also not impressed by Mr. Kwan. In particular, I find his explanation for failing to identify where the properties were zoned on the layout plan to be unconvincing. Mr. Kwan had been to visit the properties. He must have had some idea of their position in the block in question. He would have had no more difficulty than I in seeing that a question mark arose about their zoning. This he could have established even without reference to the survey plan but which, without resorting to the overlay method, would have put him in the picture. As an architect and authorized person, Mr. Kwan must plainly be conversant with plans and planning. I cannot accept that, because as he said he had been assured by Mr. Lee on behalf of the Defendants that redevelopment was possible, he simply looked at the layout plan, saw the notation R/A and, having seen what he expected to see, failed to notice the O. Such an explanation simply defies credulity.

30. After the agreement had been signed and Mr. Kwan was alerted to the possibility that the properties were zoned as open space, I find, as Mr. Chain submitted, that the reaction of Mr. Kwan and his solicitors was unusual. Even if the correct zoning remained to be determined, I would have expected Mr. Kwan's solicitors not only to have written to the Planning Department with an enquiry as they did but to have alerted the Defendants' solicitors at least to the possibility that Mr. Kwan had been misled. I do not accept that this might have led to stirring up trouble unnecessarily. Instead, there was correspondence between the solicitors in the usual tenor leading up to completion of a sale and purchase. It was not until the day before completion that the solicitors sent their detailed letter rescinding the agreement. In my view, the reaction of Mr. Kwan and his solicitors is more consistent with Mr. Kwan himself having made an error, as is the Defendants' case, than a discovery that Mr. Kwan may have been seriously misled by the Defendants.

31. It is also strange that Mr. Kwan apparently paid Mr. Lee his commission. Mr. Kwan had discovered within a few days of the agreement that there were doubts about the development potential of the properties. Yet he still paid the commission, a payment which on the evidence as to customary time of such payment would have been after suspicion was aroused. It is curious, to say the least, that Mr. Kwan should not only have been prepared to part with $126,000.00 but not have sought to recover it once litigation ensued. Such action is more consistent with Mr. Lee being the Plaintiff's emissary, if not his formal agent. Their continuing good relations suggest the same.

32. In the same vein, Mr. Kwan's own evidence of his somewhat muted approach at the meeting at the Windsor Hotel tells against a feeling on his part that he had been misled. Indeed, if he had been misled about the redevelopment potential of the properties as he said, I find it difficult to understand why he should be offering $1m as compensation to get out of the deal.

33. In contrast, both Mr. Tam and Mr. Li were more satisfactory witnesses. I take into account that Mr. Li is an ex-police officer and accustomed to giving evidence in Court. I also take into account, as Mr. Ross for the Plaintiff pointed out, that in relation to the meeting in the Windsor Hotel, Mr. Li had to resort to saying that he did not hear all the conversation when pressed for details of it. Given that it was a small meeting consisting of 4 persons only and that Mr. Lee absented himself at least part of the time in order to make telephone calls, I am less than impressed that Mr. Li, who had friendly connections with both parties, did not pay attention throughout.

34. In contrast, however, Mr. Li's evidence about the meeting in the Ma Wah Restaurant, particularly in relation to Mr. Tam drawing a circle on the table, had a very real ring of truth about it.

35. The difficulty I have with Mr. Tam's evidence is why he should initially have asked $13.5m for the properties. He, and presumably his co-owners, had acquired 105 in about 1981. He said, however, he did not know about the zoning of the property until a sale fell through sometime before 1989 when the purchaser learned of the zoning. Litigation between them was settled when the purchaser agreed to accept the return of half the deposit. By then, of course, Mr. Tam was aware of the problems associated with the properties. Indeed, he was at pains to point it out to Mr. Lee. Given that the property was purchased by him for $2.9m, given the valuation now placed on the properties in 1992 (albeit with hindsight) I confess to having some difficulty in understanding why Mr. Tam says that the final price of $12.6m was reasonable. I also found difficulty in accepting that he was unable to give any figure as to the price which had been agreed upon in respect of the sale which fell through.

36. Notwithstanding these difficulties, I am satisfied that, having regard to the quality of the witnesses and to the quality of the evidence which they gave, on the balance of probabilities the Defendants' version is more likely than not. It is, I suppose, conceivable that Mr. Tam and his co-owners were just hoping that some gullible purchaser would come along as indeed he appears to have done. And given the background of Mr. Kwan it seems unlikely that the Defendants would have tried to pull the wool over his eyes and misrepresented the zoning of the properties.

Conclusion

37. I find as a fact therefore that Mr. Lee was not the Defendants' agent. Indeed, it is quite clear from the evidence that Mr. Lee was acting on behalf of and as agent for Mr. Kwan and the Plaintiff. That being the case, it was accepted I think that no further findings of fact are necessary and that the Plaintiff's case must fail. Although other matters were pleaded on behalf of the Plaintiff, for example, mistake, these were not pursued at trial. The Plaintiff pinned its case to Mr. Lee being the agent of the Defendants so that the Defendants would be liable for any representations made by him in that capacity. But I go further and find that no representation as to redevelopment was made to Mr. Lee by Mr. Tam.

38. The Plaintiff's claim is therefore dismissed. It is not necessary for me in the circumstances to determine whether or not the Defendants could have taken advantage of Clause 30 of the agreement, a clause by which the Defendants withdrew any warranties or representations which may have been made about the properties and in particular any representation about redevelopment. For the sake of completeness, however, I should say that I have no doubt that this is a form of exclusion clause which falls within the provisions of Section 4 of the Misrepresentation Ordinance Cap. 284 so that it is for the Defendants to show that Clause 30 is fair and reasonable if they wish to rely upon it.

39. The agreement with which I am concerned is an arm's length one, made between parties of more or less equal status. In fact, if anything, the advantage lies with the Plaintiff in view of Mr. Kwan's profession and experience. I accept that, if it had been necessary for me to determine this point, I must necessarily have found that the Defendants had made a serious misrepresentation to the Plaintiff. The clause is one which was drawn up by solicitors and approved by independent solicitors acting for the Plaintiff. Mr. Kwan said that this clause was not really drawn to his attention and that, had he been aware of it, he would have raised queries. If true, that is unfortunate but not a factor which aids the Plaintiff here. I see no reason in the circumstances why it should not be permissible for the Defendants to be allowed to withdraw any representations they might have made.

40. I must aid that, after I had drafted the last paragraph, my attention was drawn by the Defendants to Mc Cullagh v. Lane Fox and Partners Ltd (1996) P.N.L.R. 205. The decision gave me comfort. I did not, in the circumstances, consider further submissions to be necessary.

41. There remains the Defendants' counterclaim for forfeiture of the deposit or for damages. The deposit represented 20% of the consideration for the sale. The Plaintiff resisted the claim for forfeiture on the basis that the deposit did not represent a genuine pre-estimate of damage. Mr. Chain was content to accept that and rely on the claim for damages.

42. No evidence was led by the Plaintiff, on which the burden lies, as to any failure on the part of the Defendants to mitigate their damage. Nor was any evidence led by it as to the valuation of the property, save that Mr. Kwan said that the real value he would put at a quarter or a fifth of the agreed price. For my part, I see no reason not to accept the valuation advanced by Mr. Chan, namely $5m. That being the case, it not being disputed that the true measure of damages is the difference between the market and contract prices, I find the damages to be $7.6m.

43. Accordingly, the Plaintiff's claim is dismissed. There will be judgment for the Defendants on their counterclaim for damages of $7.6m.

44. I make an order nisi that the Defendants should have the costs of the action.