ALL PORTS HOLDINGS LTD v. GRANDFIX LTD

CACV 1102/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1102 OF 2000

(ON APPEAL FROM HCA 15000 OF 1999)

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J U D G M E N T

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Hon Le Pichon JA:

1. This is an appeal from the order of Hartmann J dated 1 December 2000 dismissing an appeal by the defendant from an order made by Master B Kwan granting summary judgment against the defendant in O.86 proceedings.

2. The proceedings arise out of a provisional sale and purchase agreement ("the agreement") entered into by the plaintiff as purchaser and the defendant as vendor on 15 July 1999 whereby the defendant agreed to sell G/F shop premises at No.17 Cameron Road in Tsimshatsui ("the property") to the plaintiff for the sum of $31.7 million. Some two and half months earlier, on 30 April 1999, the Building Authority had written to the Incorporated Owners of No.15-17 Cameron Road to the effect that a recent inspection of the external and common areas had revealed certain dilapidations and defects and upon ownership information being available, an order would be served under the Buildings Ordinance (Cap.123) requiring works to be carried out.

3. On 20 August 1999, the Building Authority served orders made under both section 26 and section 24 of the Buildings Ordinance on the Incorporated Owners. The 26 orders were later registered against the title of the building. The section 26 order required certain works (specified in the order) to be carried out to the common areas and external areas of the building, such works to be completed within three months, ie, by 20 February 2000. On the same day as the date of the orders, the Incorporated Owners served a notice inviting all owners or representatives to attend a meeting on 15 September 1999 to discuss, among other matters, the works required by the Buildings Department.

4. On 9 September 1999, the defendant's solicitors raised a requisition, seeking confirmation as to whether the vendor had received any notice or order from the Buildings Department requiring the Incorporated Owners to effect repairs and demolition work to the building. On 13 September 1999, having by then received a report from their own architect that the rear portion of the property was an illegal structure, the purchaser's solicitors raised a requisition about it, and, at the same time, followed up on the requisition relating to building orders, having on 11 September received confirmation from the Buildings Department as to the issuance of orders under both sections 26 and 24 of the Buildings Ordinance. Further correspondence on the requisitions ensued.

5. Under the agreement, time was of the essence and completion was scheduled for 15 September on or before 5.30 p.m. The parties failed to resolve their differences prior to the deadline for completion. At 5.36 p.m. on the day of completion, the plaintiff's solicitors wrote to the defendant's solicitors alleging that the defendant had failed to show and prove a good title and that the breach amounted to a repudiation of the provisional agreement and demanded the return of the deposits in the sum of $3.17 million.

6. The plaintiff issued its writ on 18 September 1999 and took out the O.86 summons for final judgment for (1) a declaration that the agreement had been lawfully rescinded by the plaintiff; alternatively, (2) rescission of the agreement; (3) declarations that the defendant had failed to show a good title to the property and to satisfactorily answer requisitions on title and that the defendant was unable to give a good title free from incumbrances upon completion; (4) the return of the deposit and interest thereon. It also sought an interlocutory judgment for damages to be assessed.

7. On 31 May 2000, Royal Property Consultants Limited, who were the estate agents acting for both parties, sued both the plaintiff and the defendant for their commission (HCA 5455 of 2000). Under the agreement, if the sale goes off, the estate agents remain entitled to their commission and it is the party in default who has the obligation to pay that commission.

8. The master granted summary judgment on 18 September 2000 and that decision was upheld by the judge. The main issue before him was whether the requisitions had been sufficiently answered. He dealt with the requisition on illegal structures first. The vendor's case was that it did not need to address requisitions concerning illegal structures because clause 19 of the agreement barred the purchaser from raising any requisition about them. The judge rejected this submission, holding that clause 19 did not have the meaning contended for by the vendor. Accordingly, by failing to answer those requisitions, the vendor had failed to show a good title. As to the requisition concerning the building orders (and it was noted that in fact only the section 26 order had been pleaded), he held that as the issue was whether it amounted to an encumbrance on title, it was an issue to be resolved at trial. He also ruled on subsidiary issues: whether rescission by the purchaser was too late since time was of the essence and whether there would be a risk of inconsistent findings. However, he affirmed the order for summary judgment based on his interpretation of clause 19.

9. In this appeal, there are two main issues:

(1) whether the requisition concerning the section 26 order was sufficiently answered; and

(2) whether clause 19 of the agreement had the effect of barring the plaintiff from raising requisitions concerning illegal structures.

The section 26 order

10. The requisition was first raised by the purchaser's solicitors on 9 September 1999 when they sought confirmation as to whether or not the vendor had received any order from the Buildings Department requiring the Incorporated Owners to effect repairs or demolition works to the building of which the property formed a part. The letter went on the say:

"If there is such a notice or order issued, it is an incumbrance affecting the Property which your client is obliged to discharge before completion."

Notwithstanding the fact that completion was less than a week away, there was no immediate response to this letter. On 13 September 1999 the purchaser's solicitors wrote again to the vendor's solicitors enclosing a copy of a letter from the Buildings Department they had received on 11 September advising that two orders had been issued under sections 24 and 26 of the Building Ordinance. The letter continued:

"The two building orders are incumbrances affecting the title of the Property. Please let us have evidence to show that said Orders have been duly complied with."

11. There was a flurry of letters on 14 September, the day before the date scheduled for completion. The vendor's solicitors replied to the 14 September letter as follows:

"Our client had no notice of the two Orders until receipt of your letters under reply. However, as a gesture of goodwill and not otherwise, our client is prepared to deposit a sum of HK$50,000.00 with us as security for payment of its share of the cost of complying with the said Orders which has yet to be ascertained. The said sum shall, in our view, be sufficeint for such purpose."

This elicited a written response later the same day from the purchaser's solicitors rejecting the offer to deposit $50,000.00 as security and further stating that:

"Your attention is drawn to the fact that the said two Building Orders have been issued and enforcement action is to be taken by the Building Authority if the same are not complied with. Your client cannot discharge his duty as the Vendor to show a good title thereof before the date scheduled for completion."

The vendor's solicitors wrote a second letter the same day stating:

"As long as our client is willing to pay for its share of cost of complying with the 2 Orders and is able to provide security by way of cash deposit, there is no ground for your client not to complete (Lam Mee Hing and Leung Hing Wah v. Chiang Shu Yin [HCMP No.1866 of 1995]). If your client is of the view that HK$50,000.00 is not a sufficient deposit, our client is prepared to place as a deposit such amount as may be certified by an architect as his fair share of the estimate cost."

This second letter from the vendor's solicitors was sent well after office hours. The purchaser's solicitors replied on 15 September reiterating that it was the vendor's obligation to discharge the two orders issued by the Building Authority before completion. They went on to say that since the costs for complying with them could not be ascertained, the proposed sum of $50,000.00 as security for complying with the said orders was unrealistic and unreliable and therefore not acceptable to the purchaser.

12. The vendor's solicitors maintained the stance that the vendor remained ready and willing and that the purchaser was obliged under the provisions of the agreement to complete the sale and purchase. The purchaser's position was that the vendor had failed and/or refused to answer, inter alia, the requisition relating to the building orders, that the vendor had failed to show and prove good title to the property and was therefore in breach of contract, which repudiation the purchaser elected to accept. It therefore sought the return of the deposit of $3.17 million. The letter accepting the vendor's repudiation reached the vendor's solicitors at 5.36 p.m. on the 15 September.

13. The section 26 order which was addressed to the Incorporated Owners of the building, read:

"I am of the opinion that the building known as Nos. 15-17 Cameron Road, Kowloon on K.I.L.8536 is liable to become dangerous.

2. In exercise of the powers vested in me by section 26 of the Buildings Ordinance, I HEREBY & DECLARE that such building is liable to become dangerous and I HEREBY ORDER you as owner to carry out the following works and such works are to be commenced by 20th November 1999 and to be completed by 20th February 2000.

Common areas and external areas of the building only

(a) Remove loose cracked and otherwise defective concrete from the reinforced concrete structure of the building, clean existing exposed steel bars of loose rust and foreign matter, provide and securely fix in place additional steel bars as necessary and reinstate. New concrete is not to be placed prior to inspection by the Building Authority.

(b) Remove all loose and defective external rendering and internal plastering.

(c) Repair, secure or replace all loose and defective window frames and glazing.

All works specified in this Order shall be carried out to such standard acceptable to the Building Authority and in compliance with the regulations."

Although the requisition also referred to the section 24 order, for present purposes, only the section 26 order is relevant. As noted above, the plaintiff in its statement of claim limited its complaint to the section 26 order.

14. In Active Keen Industries Ltd v. Fok Chi Keong [1994] 2 HKC 67. Litton JA held (at 82G) that:

"...an order served on all the owners under Section 24(2) would in law be effective, and could bring in its train the consequence that, eventually, the apportioned cost of removal is charged against the title of the individual owners under Section 33(9). This would then constitute an encumbrance."

Are these observations applicable to a section 26 order? Under section 26 of the Buildings Ordinance, where an order has been served on the owner, if the order is not complied with, the Building Authority may carry out the work and recover the cost of so doing from that owner. Where, as in the present case, the order has been registered at the Land Registry against the building to which the order relates, the cost of any work carried out by the Building Authority is recoverable from the person who, as at the date of completion of the work, is the owner. Further, under section 33(9), once the certificate of the cost due to the Building Authority for the works had been issued and a memorial of it had been registered, the cost and interest thereafter accruing is a first charge on the building. Thus, the observations of Litton JA (as he then was) in Active Keen in relation to an order made under section 24 are equally applicable to an order made under section 26. In my judgment, the section 26 order created a potential blot on the title.

15. Leaving aside the possibility of a charge under section 33(9) of the Buildings Ordinance, if the works are carried out by the Incorporated Owners, the owner of the property will be liable to meet the contribution. In Chi Kit Company Limited v. Lucky Health International Enterprise Limited [2000] 2 HKLRD 503, the Court of Final Appeal held that the liability to meet a notice of contribution fixed by the management committee goes with the unit and is imposed upon the owner for the time being. Though not charged on the property, the liability binds it and therefore that liability can also constitute a blot on the title, or an incumbrance.

"Such a liability, if it were so extraordinary having regard to matters such as its nature or magnitude as to be wholly outside the contemplation of a reasonable purchaser, would constitute a defect in title."

See per Bokhary PJ and Sir Anthony Mason NPJ at 516C. Later on in the joint judgment, they elaborated upon what would be considered extraordinary (at 518J-519D):

"As against the respondent it can be urged that a general liability to meet future contributions levied by the management committee is not only foreseeable but expected. That is certainly true in relation to contributions to meet ordinary running expenses. And contributions in relation to the cost of renewal of particular parts of the property, though not necessarily expected, are within the contemplation of a reasonable purchaser. The same may be said about contributions to meet a liability to a third party in contract or tort. There is no occasion why, in the ordinary course, a purchaser should need protection against a liability to contribute to expenses of this kind. Where, however, the liability to contribute is extraordinary in view of its magnitude so that it exceeds what any reasonable purchaser might be expected to have in contemplation, there is a powerful case for saying that there is a defect in title ..."

16. Contributions resulting from having to comply with orders served under section 26 of the Buildings Ordinance where a building had become dangerous can hardly be characterized as "ordinary running expenses". Nor could they properly constitute costs for "renewals" required from time to time. So the possibility of the liability to pay a contribution required by the Incorporated Owners to comply with the section 26 order constituting a blot on the title under the Chi Kit principle cannot be ruled out altogether.

17. Further, I do not read the Chi Kit judgment as affecting the section 33(9) encumbrance point decided in Active Keen. Chi Kit concerned an award of damages for personal injuries sustained by a workman against the incorporated owners for $25.7 million together with interest and costs. The issue in that case was whether the purchaser was entitled to rescind the contract on the ground that the liability on the part of unit owners arising out of the action constituted a defect in the vendor's title. It was held that under section 17(1)(b) of the Building Management Ordinance, the Lands Tribunal had a discretion to grant leave for such judgments to be enforced against the owners personally and that meant that execution could issue "against the property of an owner, including his share in the building". Even if the liability to contribute is found not to amount to a blot on the title under the Chi Kit test, that would not necessarily dispose of the section 33(9) encumbrance point. The potential of the property becoming subject to an encumbrance under that section remains.

18. Despite the somewhat infelicitous language used in the letters of 9 and 13 September, the purchaser was effectively saying to the vendor, 'How are you going to remove this potential blot on title created by the building order and pass good title?' Ms Eu SC, who appeared for the purchaser, submitted that it was a perfectly legitimate requisition for the purchaser to have raised. I agree.

19. The purchaser's case is put simply on the basis that the vendor has failed to answer the requisition. The onus was upon the vendor to answer the requisition raised. It would have to show that the works required by the section 26 order would not create a blot on title. The onus and the standard of proof required are well settled. As appears from the joint judgment of Bokhary PJ and Sir Anthony Mason NPJ in the Chi Kit case at 517B-C:

"The burden is on the vendor to prove a good title to the very high standard of proof beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of an incumbrance (MEPC Ltd v. Christian-Edwards [1981] AC 205 at p. 220). The vendor discharges his obligation if he shows to that standard that he is in a position to convey the estate or interest contracted to be sold 'without any blot, or possibility of litigation to the purchaser' (Re Stirrup's Contract [1961] 1 WLR 449 at p.454)."

20. The vendor's response dated 14 September contained no explanation whatsoever. In fact, the vendor said it did not know that such orders had been issued. It was submitted that that was no answer to the requisition nor, indeed, was the offer to provide security either in the sum of $50,000 (the basis of computation not having been disclosed) or in such sum as may be certified by an architect as the fair share of the estimated cost. The problem was precisely that there was no evidence available at that point as to the exposure or potential liability of the owner of the property under the order. It is to be noted that under section 33(9) of the Buildings Ordinance, the amount recoverable is not restricted to a pro-rata share by reference to the number of undivided shares held. The cap was the value of the owner's interest in the premises. (See section 33(9)(a)(i)).

21. It was therefore incumbent upon the vendor to demonstrate at the time the requisition was raised that the section 26 order would not be a blot on the title. This it could do either by showing that the order had been dealt with to the satisfaction of the Building Authority or that the cost of the works had been adequately provided for, such that no encumbrance under section 33(9) could ever arise.

22. Where, because of time constraints, no proper estimate was available, as was the present case, Miss Eu submitted that it must be a matter about which the parties will have to renegotiate and, in the absence of any mutually acceptable arrangement, it was open to the vendor to rescind the contract and return the deposit. What Miss Eu no doubt had in mind were the vendor's rescission clauses. Such express rescission provisions are common in standard sale and purchase agreements. However, the parties here never executed a formal agreement and the agreement entered into contained no such provision. Since the burden of showing good title is on the vendor, the inability to answer the requisition satisfactorily would inevitably result in a breach of contract with the attendant consequences.

23. Mr Yuen, who appeared for the vendor, raised a new point in his reply. He cited the passage from Chi Kit at 517D-G to the effect that, under English law, anything which happened to the estate between the time of the sale and the time of completion caused without the vendor's fault is at the risk of the purchaser and pointed to the section 26 order having been issued after contract but before completion. Whether and to what extent this principle applies in Hong Kong is less than clear. It cannot be assumed that it applies in Hong Kong. Even the Court of Final Appeal suggested that the approach of the Hong Kong courts to the existence of a defect in title arising from the presence of an unauthorized structure may be different (at 518G). Not only was Mr Yuen's new point never raised as an answer to the requisition at the relevant time, it was also not raised in the court below or in the notice of appeal. In my judgment, it is now too late for the point to be taken. It would require full submissions from the parties but that was not feasible given the stage at which it was raised. I do not therefore propose to go into the merits of the submission save to say that the service of the section 26 order, although effected after the date of the agreement, did not come as a surprise given that in April, several months before the agreement, the Building Authority had written to advise that an order would be served once the identity of the owners had been ascertained.

24. I have no hesitation in concluding that the vendor failed to answer the requisition concerning the section 26 order satisfactorily, thereby failing to show a good title. It therefore follows that the purchaser was entitled to accept the vendor's repudiation of contract and, for this reason, the appeal must be dismissed.

25. In this connection, I should briefly mention the vendor's submission that the acceptance was too late in that it had to occur prior to the expiration of the time fixed for completion. That submission appears to be misconceived. There is no principle of law that so requires. Mr Yuen was unable to cite any authority in support of his proposition, Union Eagle Ltd v. Golden Achievement Ltd [1997] CPR 491 being of no assistance in this context.

Clause 19

26. In view of the conclusion that I have reached on the section 26 order point, it is strictly unnecessary to deal with the second main issue which arises in this appeal but in deference in counsel's submissions, I will endeavour to deal with the point briefly.

27. Clause 19 read:

"The 'Purchaser' agrees and accepts all existing condition/states of the Property and shall not rely upon any pretext to refuse to complete the transaction or to raise any objections."

Other clauses of the agreement that are pertinent for present purposes are the following. Clause 3 provided that the property was to be sold "free from encumbrances". Clause 11 provided that the property was sold "on an 'as is' basis". Clause 12 provided that the agreement superseded all prior negotiations, representation, understanding and agreements of the parties thereto. These provisions, unlike clause 19, formed part of the printed portion of the agreement. Clause 19, on the other hand, was a handwritten addition.

28. The issue is whether clause 19 is capable of being construed as including "illegal or unauthorized structures". Mr Yuen submitted that in construing the clause, the agreement has to be looked at as a whole against the factual and legal background in which it was concluded as well as the practical objects it was intended to achieve. See per Lord Hoffmann in Jumbo King Limited v Faithful Properties Limited [1999] 2 HKCFAR 279 at 296E.

29. Mr Yuen referred the court to the evidence filed relating to pre-contract negotiations culminating in clause 19 being in its present form. The court was also shown what were said to be earlier drafts of clause 19. But given clause 12 of the agreement and the parol evidence rule, I fail to see how such evidence can be admissible. That being so, in the context of the present case, it is a little obscure what 'factual and legal background' could be adduced which is admissible and which would assist in the construction of clause 19.

30. Mr Yuen accepted that prima facie, the phrase "all existing condition/states of the property" would not extend to illegal structures. It is really saying no more than that the property was being sold "as is". However, he submitted that in construing clause 19, there were two canons of construction or presumptions that were particularly relevant. First, there was the following passage in Chitty on Contracts, 28th edition, Vol.1, para. 12-068:

"Where the contract is contract is contained in a printed form with writing superadded, the written words, if there should be any reasonable doubt about the sense and meaning of the whole, are to have greater effect attributed to them than the printed words, inasmuch as the written words are the immediate language and terms selected by the parties themselves for the expression of their meaning, and the printed words are a general formula adapted equally to their case and that of all other contracting parties upon similar occasions and subjects."

It was submitted that it set out the correct approach where, as in the present case, the agreement was in printed form with several clauses (including clause 19) superadded in writing. Second, in construing a contract all parts must be given effect where possible, and no part of it should be treated as inoperative or surplus. This is the presumption against redundant words. See Kim Lewison, The Interpretation of Contracts at para 6.03. It was submitted that the effect of these considerations is that clause 19 did not replicate clause 11 and must mean something other than a sale "as is".

31. Notwithstanding these canons or presumptions, they do not assist if on the face of the provision, no ambiguity arises. It is the vendor's case that the parties understood between themselves that "condition/states" included "illegal structures". That is not evident from a reading of clause 19. It is dependant on parol evidence that is not admissible save where there is an ambiguity on the face of the document. If none arises, that is the end of the matter.

32. In Jumbo King, the purchaser sought to raise requisitions on the cocklofts being unauthorized structures. The contract contained an express provision (clause 18(e)) excluding any warranty or representation by the vendor that the property was erected in compliance with the Buildings Ordinance and providing specifically that the purchaser was not entitled to raise any requisition or objection or to rescind the agreement or claim damages by reason of any such contravention. Clause 19 then provided that the purchaser was purchasing the property in its "present state and use" and should not make any objection as to title or raise any requisition in connection therewith. The property was sold on an "as is" basis. It was further provided that no warranty was being given by the vendor on the physical state and condition of the property. One of the questions which arose for decision was whether the purchaser could raise objections to the vendor's title as to whether the cocklofts were unauthorized structures. Litton PJ found for the vendors on the basis of clause 18(e). Lord Hoffmann NPJ agreed with Litton PJ. However, he referred to "clauses 18(e) and 19" as precluding the purchaser from raising any such objection to title. It is not at all evident that Lord Hoffmann would have found for the vendor in the absence of clause 18(e). This is reinforced by Lord Hoffmann's observations in Jumbo King,(at 299G) that, if a vendor relies upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so. In the present case, clause 19 clearly fell short of what was required. Accordingly, I do not read Jumbo King as authority for the proposition that a provision for sale on the "as is" basis and referring to its physical state and condition is capable of extending to illegal structures.

33. For these reasons, clause 19 is not a proper answer to the requisition raised by the purchaser on 13 September 1999 concerning illegal structures. By maintaining that it was under no obligation to answer the requisition because the purchaser was barred by clause 19 from raising it, the vendor failed to answer that requisition. The appeal should therefore also be dismissed on this basis.

Inconsistent findings

34. The defendant further submitted that there is a risk of inconsistent findings inasmuch as it is a live issue in HCA5455 of 2000 is as to which of the vendor and purchaser was in default. That alone cannot be a valid reason for refusing to grant summary judgment when it is appropriate to do so, particularly since the other litigation is not between the same parties.

Conclusion

35. I would dismiss this appeal with an order nisi that costs be to the plaintiff.

Hon Rogers VP:

36. I agree. There will be an order as proposed.