TEAM MASTER LTD. v. TUNG FONG HUNG MEDICINE CO. LTD.

CACV245/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO.245 OF 2000

(On Appeal from HCA No.13944 of 1998)

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J U D G M E N T

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Le Pichon JA :

1. On 26 January 1998, the plaintiff/appellant as landlord and the defendant/respondent as tenant entered into a provisional tenancy agreement. It is common ground that the provisional agreement was binding on the parties. The issue which arises in this appeal is whether the judge below was right in holding that it was the plaintiff rather than the defendant who repudiated that contract.

2. Prior to the parties entering into the provisional agreement, the plaintiff had entered into an agreement to purchase the premises subject to the defendant's tenancy. Completion was scheduled for 28 February 1998. The provisional agreement anticipated the acquisition of the premises by the plaintiff and was conditional on the plaintiff completing the purchase which it did on 28 February 1998. The provisional agreement contained provisions relating to the rent payable, the length of the tenancy, the rental deposit, legal costs and stamp duty. In addition, it provided :

"2. The landlord and tenant agreed to entered into the Formal Tenancy Agreement on or before 30 June 1998 subject to the terms and conditions herein contained.

....

8. Upon signing of the Formal Tenancy Agreement the tenant shall pay:-

(a) the balance of the rental deposit of $360,000;

(b) the rent for the first month of $120,000."

3. The parties began negotiations for a formal tenancy agreement. A first draft was sent to the tenant's solicitors on 27 May 1998. The tenant's solicitors replied on 13 June with their preliminary amendments. They expressly reserved the right to make further amendments and stated that nothing in the letter or the draft tenancy agreement "shall bind our client unless and until the same is signed by our client". The landlord's solicitors sent counter-amendments on 22 June stating that without prejudice to the provisional agreement, "nothing herein shall bind our client before signing and exchange of the finalized tenancy agreement."

4. Negotiations continued in this fashion. 30 June came and went without agreement having been reached. The parties continued their negotiations concerning the amendments to the draft tenancy agreement. By 8 July, the original 32 amendments had been whittled down to one. On 9 July, the tenant's solicitors proposed certain revised wording to deal with the outstanding issue. The letter continued :

"We trust that such provision is acceptable to your client.

Please take your client's instructions on the above provision and refer to us as soon as possible."

Unlike their earlier letters, the tenant's solicitors did not, in their letter of 9 July, expressly reserve their client's rights. It was not qualified in any way.

5. On 11 July, the landlord's solicitors wrote to accept the revised wording proposed by the tenant to resolve the only outstanding issue. They enclosed the re-engrossed tenancy agreement stating :

"...You are hereby requested to send us the re-engrossed Tenancy Agreement duly executed by your client on or before 5:00 p.m. on 15th July 1998 together with your cheque in the said sum drawn in favour of our client (as to which time shall be of the essence), failing which our client shall treat your client to have repudiated the Provisional Tenancy Agreement dated 26th January 1998."

Please also send us a cheque for $3,602.50 drawn in favour of The Government of the Hong Kong Special Administrative Region being your client's half share of stamp duty."

The tenant's solicitors replied on 15 July as follows :

"We refer to your letter dated 11th July 1998 and the subsequent telephone conversations between your Ms Keung and our Ada Tang today.

In order to show our client's sincerity, we send you herewith the following cheques being the amount payable by our client upon signing of the Tenancy Agreement of the Property in respect of the Property for your further action :-

1. HK$280,000.00 drawn in favour of 'Team Master Limited' being balance of the rental deposit and the 1st month's rental in advance subject to your firm's undertaking to deal with the same in compliance with Clause 8 of the Provisional Tenancy Agreement dated 26th January 1998; and

2. HK$3,602.50 drawn in favour of 'The Government of the Hong Kong Special Administrative Region' being half share of the stamp duty payable on the Tenancy Agreement."

6. By letter dated 16 July, the landlord's solicitors objected to the undertaking sought to be imposed on them as regards the cheque for the $280,000 because it meant that as long as the tenancy agreement was not signed, it could not be cashed. After referring to their client having made time of the essence for the execution of the tenancy agreement to be on or before 5 p.m. on 15 July, they extended the deadline to 5 p.m., 16 July.

7. Just before the expiration of the deadline, the tenant's solicitors faxed the following letter to the plaintiff's solicitors :

"We refer to your letter to us dated 16 July 1998 and write to inform you that the time limit imposed unilaterally by you on our client under the first paragraph on page 2 of your letter is not acceptable to our client.

Please note further that our client is, in the meantime, still reviewing the terms and conditions of the Tenancy Agreement provided by you and we hereby reserve our client's rights to make further amendments thereto. In the event that the undertaking imposed upon you by our letter to you dated 15 July 1998 is not acceptable, please return to us the cheques enclosed with such letter forthwith."

The landlord's solicitors responded to the effect that the tenant's excuse that it was still reviewing the terms and conditions of the tenancy agreement was not convincing and for the record, set out the nature of the telephone conversation between the representatives of the two firms referred to in the tenant's solicitors' letter of 15 July. The landlord's solicitors continued :

"Since your client has failed to execute and return the Tenancy Agreement to us before 5:00 p.m. today, our client treats your client to have repudiated the provisional agreement. Your client is hereby demanded to deliver up vacant possession to our client forthwith.

Our client shall take proceedings against your client to claim against your client for all loss and damage as may be suffered by our client as a result.

All our client's rights are expressly reserved.

We return herewith the cashier orders in the sum of HK$280,000.00 and HK$3,602.50."

Later that same day, after the deadline had passed, the tenant's solicitors sent a second letter proposing further amendments to the draft tenancy agreement.

Time of the essence

8. It is strictly unnecessary to consider whether time was originally of the essence for the execution of the formal tenancy agreement under clause 2 of the provisional agreement, although by analogy with the holding in Wong Wai Chi Ann v. Cheung Kwok Fung Wilson [1996] 3 HKC 287 which concerned a provisional agreement for sale and purchase, there is a strong case for saying that time was originally of the essence. The holding in the Wong Wai Chi Ann case can be found in the judgment of Godfrey JA (as he then was) at 290D and G :

"In these provisional agreements for sale and purchase and today's secondary market in Hong Kong, everybody does, and usually, proceed on the footing that time is to be of the essence ... Of course, each case must depend on its own facts. But in the absence of special circumstances, it would usually be the case that a provisional agreement for sale and purchase in the common form in use in Hong Kong will be treated as one of which time is of the essence, although no express provision in that behalf is contained in the agreement."

9. Whether or not time was of the essence for the execution of the tenancy agreement, once the agreed date for completion has passed, a party may serve a notice to complete on the other under the general law. A clear statement of this principle may be found in the speech of Lord Diplock in United Scientific Holdings Ltd v. Burnley Borough Council [1978] AC 904 at 928 F :

"...Once the time had elapsed that was specified for the performance of an act in a stipulation as to time which was not of the essence of the contract, the party entitled to performance could give to the other party notice calling for performance within a specified period: and provided that the period was considered by the court to be reasonable, the notice had the effect of making it of the essence of the contract that performance should take place within that period."

See also Barnsley's Conveyancing Law & Practice, 4th Ed. at 426-427. It is therefore clear that the landlords were entitled to make (or re-make) time to be of the essence for the performance of clause 2 of the provisional agreement.

10. As regards the length of notice, it is trite law that the notice must be reasonable and whether it was so would depend on the particular facts. The relevant considerations are set out in Barnsley (supra) at 427 as follows :

"To be effective the notice must limit a reasonable time for performance. In determining this issue of reasonableness the court considers all the circumstances of the case - what at the date of notice remains to be done to complete, the reasons for the delay and the attitude of the innocent party to it."

11. Was the notice reasonable?

12. 11 July was a Saturday. Even if one were to discount the weekend, the tenant had three full working days to execute the tenancy agreement which had been the subject of intensive negotiations between the parties for the preceding six and a half weeks. There was no new amendment to consider as the remaining obstacle was overcome through the landlord's acceptance of the tenant's proposal. Having regard to these circumstances, I consider that the notice given for performance was reasonable. Whilst in addition to executing the tenancy agreement, the tenant had to draw two cheques, in the sum of $280,000 in favour of the landlord and $3,602.50 in favour of the Government of the HKSAR in respect of the tenant's half share of stamp duty, the tenant's ability to raise the deposit monies within this time ought not to be a relevant factor. For one thing, it was not the same as having to raise finance for the purchase of a property. Even in the latter case, it is by no means clear that the purchaser's ability to do so is a relevant factor. See Barnsley (supra) at p.427. In any event, time for performance was extended by another day to 5 p.m. on 16 July.

Repudiation

13. The landlord's position was that given the history of the negotiations between the parties, it was perfectly reasonable for the landlord to have proceeded on the basis that the terms as agreed on 11 July were acceptable to the tenant. In any event, the tenant's response by their solicitors' letter dated 15 and 16 July before the expiration of the time limit imposed was inadequate : if the tenant was not prepared to execute that tenancy agreement, then it had to say why it was refusing to do so. It could not simply refuse to give a meaningful response. For the tenant, it was submitted that it could not be compelled to execute the tenancy agreement in the form attached to the letter of 11 July but that it would have had no excuse had it been required to execute a formal agreement that incorporated the terms of the provisional agreement and such other terms as were implied by law in the absence of express agreement. In effect, the tenant's submission was that the landlord's notice was deficient in that it should have been framed so as to present the tenant with two options, viz. to execute the tenancy agreement as it stood on 11 July or to execute an agreement incorporating the terms of the provisional agreement and such other terms as are implied by law.

14. At the hearing, it appeared to be common ground between the parties that the tenant was not under any obligation to execute the tenancy agreement sent by the landlord on 11 July. I question the correctness of the assumption of the parties that there had been no concluded agreement as to the terms of the formal tenancy on 11 July. As noted above, the tenant's letter of 9 July proposing a solution to the last remaining obstacle over the terms of the lease was an open letter. There was no express reservation of rights nor was it said to be subject to contract. In my judgment, it was an offer that was capable of acceptance. This offer was clearly accepted by the landlord : not only did the letter of 11 July say so, the tenancy agreement was re-engrossed for execution. Although the landlord's solicitors purported to reiterate the 'subject to contract' reservation first set out in their letter of 22 June, had the tenant executed the tenancy agreement, it would hardly lie in the mouth of the landlord to deny that it was bound. It follows that, in my judgment, there was a concluded agreement as to the terms of the tenancy as at 11 July which was binding on the parties, that time was made of the essence for execution of that tenancy agreement by 5 p.m. 15 July, later extended to 5 p.m. 16 July, that by failing to execute that agreement by the time stipulated, the tenant repudiated the contract.

15. Even if I were wrong that the 9 July letter had the effect of making an offer capable of acceptance, the tenant was nonetheless in repudiation of the provisional agreement for the following reasons. Turning first to the letter of 15 July from the tenant's solicitors, no point was taken that there was no concluded agreement over the terms of the tenancy. All it did was to refer to a conversation between the representatives of the two firms of solicitors. The contents were not disclosed. However, it is apparent from the response of the landlord's solicitors dated 16 July 1998 that a request was made for the tenancy agreement to be executed in the name of the tenant's nominee which proposal was not accepted by the landlord. So far as the cheque of $280,000 is concerned, by making it subject to an undertaking to deal with it in compliance with clause 8 of the provisional agreement, it could not be cashed since under clause 8 those monies were only payable upon the signing of the formal agreement. In other words, it was nothing more than a piece of paper. It might have been different had the monies been paid to the landlord's solicitors pending the resolution of any outstanding issues. But no outstanding issue is in fact discernable from the letter of 15 July.

16. Turning now to the letter dated 16 July received by the landlord's solicitors prior to the expiration of the deadline, all that was said was that the tenant was still reviewing the terms and conditions. Given the six and a half weeks of intensive negotiations, it is difficult to believe that this was a genuine reason. Counsel for the tenant submitted that had the tenant been required to execute an agreement that embodied the terms of the provisional agreement and such other terms implied by law, his client would have been bound to execute such an agreement. Alternatively, even if no formal agreement were to be executed, the tenant would be obligated to pay the balance of the rental deposit and the first month's rent at the commencement of the tenancy which was then only two weeks away. See Link Brain Ltd v. Fujian Finance Co. Ltd [1990] 2 HKLR 353.

17. The effect of the tenant's stance is that it could effectively drag matters out such that clause 2 of the provisional agreement would be rendered meaningless. The point of clause 2 was that the landlord should receive the balance of the deposit together with the first month's rent a month before the commencement of the tenancy. It is common ground that the parties genuinely sought to agree the terms of the tenancy agreement and neither side was to blame for not being able to reach agreement on the terms until 11 July. It was reasonable for the landlord to proceed on the basis that as all the difficulties had been ironed out after more than six weeks of negotiations, the version agreed as at 11 July was acceptable to the tenant. If (contrary to my view) it was still open to the tenant to change its mind and the tenant was not prepared to execute the tenancy agreement in that form, then it was incumbent on the tenant to make known its position before the expiration of the deadline, time being of the essence. It was unreasonable in those circumstances not to give a meaningful response : either it should have raised the amendments which it sought to raise after the expiration of the deadline, or indicate that it would only be prepared to execute an agreement incorporating the terms of the provisional agreement and such other terms as are implied by law. The letters of 15 and 16 July set out above fall far short of what was required. Given the circumstances of the case, in particular the purpose of clause 2 of the provisional agreement, the history of the negotiations and the fact that the tenancy was to commence on 1 August which was only two weeks away, the tenant's conduct was tantamount to a repudiation of the provisional agreement.

Conclusion

18. I would allow the appeal and order that the judgment below be set aside.

19. So far as the landlord's claim for damages is concerned, these need to be assessed and, for that purpose, the matter is to be remitted back to a judge of the Court of First Instance for directions.

20. There is to be an order nisi that the defendant do pay to the plaintiff its costs here and below.

Yeung J:

21. I agree.

Rogers VP:

22. I agree with the judgment of Mrs Justice Le Pichon JA. The appeal will be allowed accordingly and there will be an order in the terms proposed.