LEE SIU WAI FLORENCE v. PRIWAY INVESTMENTS LTD

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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REASONS

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1. This is an appeal by the Defendant Vendor against the Order of Master Kwan made on 22 October 1997 that interlocutory judgment be entered against the Defendant for damages to be assessed for breach of a Sale and Purchase Agreement dated 18 December 1996 ("the Agreement") in respect of a property known as Flat B, 26^th Floor, Fu Shan Mansion, Kao Shan Terrace, 25 Taikoo Shing Road, Taikoo Shing ("the Property"). The reasons for dismissing the appeal appear below.

The facts

2. The Plaintiff as Purchaser and the Defendant as Vendor entered into a Provisional Sale and Purchase Agreement ("the Provisional Agreement") on 4 December 1996. Clause 2 provided that the purchase price of $4.8 million was to be paid as to $200,000 upon the signing of the Provisional Agreement as deposit, as to $280,000 upon the signing of an Agreement on or before 18 December 1996 and the balance on completion on or before 15 January 1997. Clause 7 contained what is commonly called the "double deposit" provision which enables a vendor not to complete by paying the purchaser by way of compensation double the amount of deposit as liquidated damages.

3. On 11 December 1996, William Sin & So wrote to the Defendant in the following terms :

Dear Sirs,

It would appear that on 2 December 1996, one Jennifer Cheung for and on behalf of Priway Investment Limited entered into a provisional agreement with Chu and Tsui for the sale of the Property at $4.57 million ("the Earlier Agreement") Under the Earlier Agreement, the parties were to enter into a formal agreement on or before 16 December 1996. The Earlier Agreement did not contain an address for the Defendant. Yet the letter was addressed to the Defendant not at its registered office but at the Fei Ngo Shan address which appears in the Provisional Agreement of 4 December.

4. The Defendant apparently took the view and continues to be of the view that it is not bound by the Earlier Agreement. Miss Cheung who purported to act on its behalf is neither a shareholder nor director of the Defendant. It would appear that the Defendant did not enter into any formal agreement with Chu and Tsui on 16 December as provided for in the Earlier Agreement. It is not known what response was given to William Sin & So. Nor is anything known about Miss Cheung's involvement or relationship with the Defendant. The Defendant entered into the Agreement with the Plaintiff on 18 December. At no stage before or after the Agreement did it disclose to the Plaintiff that there was a potential claim. On 14 January 1997 which was the day before completion, the Plaintiff caused a search to be made and discovered that the Earlier Agreement as well as a writ issued against the Defendant had been lodged for registration. Plainly, completion could not take place on 15 January, the date scheduled for completion.

5. On 15 January 1997, the Plaintiff's solicitors wrote to the Defendant's solicitors confirming that completion could not proceed because of the registrations of the Earlier Agreement and the writ. They went on to say:

The Defendant's solicitors maintained that the Earlier Agreement and the writ had been wrongly registered as the Defendant had not entered into the Earlier Agreement. Notwithstanding this stance, at no stage did the Defendant apply to vacate the registrations. On 28 January, after perusing the Earlier Agreement and the writ, the Plaintiff's solicitors asked for the return of the deposits pursuant to Clauses 32(a) and 33 of the Agreement. On the same day, almost a fortnight after the scheduled completion date, the Defendant's solicitors took issue with the assertion that the Defendant had been in breach of Clauses 32(a) and 33, stating that:

The Agreement

The Agreement which superseded the Provisional Agreement did not contain the "double deposit" provision which was in Clause 7 of the Provisional Agreement.

The Defence

6. The Defendant submits that Clause 21 applies to the present case and that the Defendant was entitled to annul the sale without being liable to the Plaintiff for any compensation.

7. In my judgment, the Defendant's reliance on Clause 21 is misplaced. If Clause 21 is read as a whole, that part, namely the third sentence that is relied on by the Defendant is clearly referable to and applies only where a requisition or objection is delivered within 7 working days after the receipt of the title deeds by the Purchaser's solicitors. Where the requisition or objection is not made pursuant to the mandatory time limits set out in Clause 21, title is deemed to have been accepted and the provision enabling the Vendor to annul the sale does not arise. Even if the provision could be read as free-standing and not constrained by what precedes it in Clause 21, it remains constrained by the requirement that not less than 7 days' notice to annul the sale be given. It follows that this right cannot be exercised unless notice is given by the Vendor at least 7 days before the date fixed for completion. In the present case, the Defendant's purported exercise of the right must be bad since it did not occur till some two weeks after the completion date and without complying with the mandatory condition precedent of giving 7 days' prior notice.

8. In any event, there are other reasons why Clause 21 is of no avail so far as the Defendant is concerned. It is common ground that the Vendor may not rely on Clause 21 where he has been guilty of conduct that is reckless or unreasonable. In other words, the Vendor may not rely on that provision if he is himself at fault. The nature of the equitable principle appears from the following passage from the judgment of the Privy Council delivered by Viscount Radcliffe in George Alexander Selkirk v. Romar Investments Ltd. [1963] 1 WLR 1415 at 1422-3:

"... a vendor, in seeking to rescind, must not act arbitrarily, or capriciously, or unreasonably. Much less can he act in bad faith. He may not use the power of rescission to get out of a sale 'brevi manu,' since by doing so he makes a nullity of the whole elaborate and protracted transaction. Above all, perhaps, he must not be guilty of 'recklessness' in entering into his contract, a term frequently resorted to in discussions of the legal principle and which their Lordships understand to connote an unacceptable indifference to the situation of a purchaser who is allowed to enter into a contract with the expectation of obtaining a title which the vendor has no reasonable anticipation of being able to deliver. A vendor who has so acted is not allowed to call off the whole transaction by resorting to the contractual right of rescission: see In re Jackson and Haden's Contract [1906] 1 Ch.412, C.A.; Baines v. Tweddle [1959] Ch.679; [1959] 3 WLR 291; [1959] 2 All ER 724, C.A."

9. In the present case, the Defendant made no attempt whatsoever to apprise the Plaintiff of the potential claim made by William Sin & So on behalf of Chu and Tsui. It will be noted that the Earlier Agreement and the writ were not lodged for registration until 21 December, i.e. three days after the Plaintiff and the Defendant had entered into the Agreement. Had the Plaintiff been advised earlier, she might not have entered into the Agreement or she might have chosen to negotiate different terms such as the retention of the double deposit provision and the omission of Clause 21, or she could have decided to register the Provisional Agreement although she was under no duty to do so. See Megarry & Wade's Law of Real Property 5^th Ed. p. 187. By being kept in the dark, the Plaintiff was lulled into inaction and refrained from taking steps that were open to her. The Defendant now seeks to take advantage of its own wrong, namely its failure to disclose the latent defect of title. That it should not be allowed to do.

10. Further, although the Defendant asserts that the registrations are wrongful, it took no steps whatsoever to vacate them. One is therefore left with bare and unsubstantiated assertions. Had it been as clear a case as the Defendant asserts, there would have been no logical reason for it not to have applied to vacate the registrations. To date, it has remained coy about Miss Cheung's role or relationship with the Defendant: whilst maintaining that Miss Cheung is neither a shareholder nor a director, it does not seek to explain who Miss Cheung is or what connection she had or has with the Defendant. She cannot be a total stranger. Indeed, it would be difficult to envisage how a total stranger would or could purport to sell the Property on behalf of the Defendant.

11. The truth of the matter is that on the scheduled date for completion, the Defendant was not in a position to offer a title free from encumbrances which was its obligation: see Sihombing and Wilkinson's Hong Kong Conveyancing Vol.1, V[35,47] and Megarry & Wade (op.cit.) at pp.611-2. That inability did not stem or arise from any requisition or objection raised by the Plaintiff.

12. In any event, in order to come within Clause 21, the burden is on the Defendant to establish "the grounds of difficulty, delay or expense" on which it sought to rely in its letter of 28 January 1997. That burden it has failed to discharge: it adduced no evidence in support.

13. Counsel for the Defendant also sought to argue that the Plaintiff, having asked for the return of the deposit, had in fact rescinded the contract and is therefore not in a position to seek specific performance. The submission is misconceived, based, as it were, on a misreading of Clauses 32 and 33. Those clauses, whilst providing for immediate repayment of the deposit(s) paid, clearly preserve the Purchaser's right to bring an action for specific performance.

14. As regards Clause 33, the further submission was that the validity of the "third party claim" has first to be established. Under the Agreement, the Defendant's obligation was to show and prove good title on the completion date. Where it is not able to do so because of a third party claim, there is nothing in Clause 33 that postpones the Vendor's liability to a damages claim until after the determination of the validity or otherwise of the third party claim.

15. There is no defence to the Plaintiff's claim for damages which, pursuant to the Master's Order, are to be separately assessed. Accordingly, the appeal is dismissed with costs.