YUEN POK INTERNATIONAL ENTERPRISE LTD v. VALLE AGNES MALLARI

CACV 228/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 228 OF 2011

(ON APPEAL FROM DCCJ 1707/2011)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1.  On 23 May 2012, we allowed the plaintiff’s appeal from the order and decision dated 13 October 2011 of the Acting Chief District Judge to vacate the registration of a lis pendens. We now give our reasons.

The facts

2.  The lis pendens related to a property known as 1^st Floor, 352A Hennessy Road, Hong Kong, the subject matter of a provisional agreement for sale and purchase dated 10 April 2011 between the parties.  The plaintiff (appellant) was the purchaser and the defendant was the vendor.  The purchase price was $2,830.000 and an initial deposit of $90,000 was paid on the signing of the provisional agreement.

3.  Four days after entering into the provisional agreement, the defendant made another provisional agreement with a third party with a view to selling the same property at a higher price.

4.  The provisional agreement between the parties provided for the payment of a further deposit of $193,000 “upon signing of the formal agreement for sale and purchase on or before 19 April 2011” (“在簽訂正式買賣合約之時，即19 April 2011或以前須加付定金港幣193,000”).

5.  Clauses 6 and 7 of the provisional agreement read :

“6. Should the Purchaser fail to complete the Purchase in the manner herein contained, all the deposit paid pursuant to clause 2 hereof shall be forfeited to the Vendor and the Vendor shall then be entitled at his absolute discretion to sell the said Premises to anyone he thinks fit. The Purchaser shall be liable to pay the stamp duty of this agreement and the Vendor shall not sue the Purchaser for any liabilities and/or damages or to enforce specific performance.

 7.    Should the Vendor after receiving the initial deposit paid hereunder, fail to complete the sale in the manner herein contained, the Vendor shall immediately compensate the Purchaser with a refund of the initial deposit, together with a sum equivalent to the amount of the initial deposit as liquidated damages and the reimbursement/payment (as the case may be) of stamp duty of the said Premises and the Purchaser shall not take any further action to claim for damages or to enforce specific performance.”

6.  Clause 7, a common provision found in provisional agreements for sale and purchase typically used by estate agents in Hong Kong, has been variously known as a “Centaline clause”, a “double compensation clause” or an “escape clause”.

7.  The defendant sought to make use of Clause 7 to back out of the provisional agreement.  On 18 April 2011, his solicitors wrote to the plaintiff’s solicitors indicating that the defendant would not proceed with the sale and purchase and would be prepared to compensate the plaintiff with a sum of $180,000 in accordance with Clause 7, provided that the plaintiff would undertake to execute and return a cancellation agreement within 3 working days upon receipt of the compensation.  The letter enclosed a draft cancellation agreement for the plaintiff’s approval.

8.  By a letter of the same date, the plaintiff’s solicitors replied, asking the defendant “to act in accordance with the terms and conditions of the Provisional Agreement for Sale and Purchase dated 10 April 2011 within the time limit described”.  The letter pointed out, quite correctly, that there was no need to execute the proposed cancellation agreement pursuant to the terms and conditions of the provisional agreement.

9.  On the following day, that is, 19 April 2011, the date mentioned in the provisional agreement for the signing of the formal agreement for sale and purchase, the plaintiff’s solicitors sent to the defendant’s solicitors a cheque for $193,000 being the further deposit pursuant to Clause 2 of the provisional agreement, even though no formal agreement for sale and purchase was signed on that day.

10.  By a letter of the same date, the defendant’s solicitors returned the cheque for $193,000 to the plaintiff’s solicitors, saying that the defendant would not proceed with the sale and purchase and would “in due course” pay to the plaintiff a sum of $180,000 being the refund of the initial deposit and payment of the liquidated damages in accordance with Clause 7 of the provisional agreement.

11.  The plaintiff’s solicitors replied on the same day that the plaintiff required the defendant “to act in accordance with the terms and conditions of the Provisional Agreement … within the time limit prescribed” in the event she should exercise her right under Clause 7.  No payment of the “double compensation” was made on that day.

12.  This prompted the plaintiff’s solicitors to write on the following day (20 April 2011) to say that the defendant had failed to comply with Clause 7 of the provisional agreement by returning the initial deposit together with a sum equivalent to the amount of the initial deposit “on 19 April 2011”.  The letter maintained that the defendant no longer had the right to withdraw from the transaction by reliance on Clause 7.  The letter went on to say that the solicitors would register the provisional agreement against the property in the Land Registry and the plaintiff demanded specific performance of the contract between the parties.

13.  On the same day, the defendant’s solicitors wrote to enclose their cheque for the sum of $90,000 as well as a cheque by the defendant in the same amount, being refund of the initial deposit and payment of liquidated damages, purportedly in accordance with Clause 7 of the provisional agreement.

14.  On 21 April 2011, the plaintiff by solicitors rejected the payment of the two sums.

15.  In the subsequent correspondence, the solicitors put forward their respective arguments on whether the defendant had been late in invoking Clause 7 to back out of the sale.

Proceedings below

16.  Proceedings were commenced in the District Court on 6 May 2011 to seek, amongst other things, specific performance of the provisional agreement for the sale and purchase of the property.  As mentioned, the writ was registered as a lis pendens in the Land Registry against the property.

17.  By a summons dated 31 May 2011, the defendant applied to vacate the registration of the lis pendens, on the ground that she had successfully backed out of the transaction pursuant to Clause 7 of the provisional agreement.  The defendant was successful before the Master as well as Poon, Acting CDJ.  The judge essentially decided the application on the basis that there was no time limit for the vendor’s exercise of her right to back out of the transaction pursuant to Clause 7 of the provisional agreement (para 36).  He took the view that by her solicitors’ letter dated 18 April 2011, the defendant had unequivocally elected to perform under Clause 7 rather than to proceed to completion.  It was not necessary for her to tender payment at the same time of her letter in order to invoke Clause 7 provided that a clear intention to rely on the clause had been evinced (paras 39 and 40). The judge concluded that by making payment on 20 April 2011, the defendant had successfully invoked Clause 7 to withdraw from the transaction (para 42).  In the circumstances, the judge saw no reason to delay vacating the lis pendens and he therefore dismissed the appeal from the Master’s decision (para 43).

18.  Aggrieved by the judge’s decision, the plaintiff appealed.

The issues

19.  In view of the result and the fact that the case will go to trial in the District Court, the less said about the issues raised, the better.  I will therefore be very brief with my reasons for allowing the appeal.

20.  Clause 7 gave the vendor an alternative way to perform the provisional agreement for sale and purchase, that is, to make payment of a “double compensation” to the purchaser to back out of the transaction.  The successful invoking of this provision would bar any claim by the purchaser for specific performance.  And if the claim for specific performance was successfully barred, there could be no answer to the application for vacating the lis pendens.  To decide whether Clause 7 has been successfully invoked, arguments have focused on whether there was a time limit to the vendor’s exercise of her right under Clause 7 to back out of the deal.  There is also the question of construction regarding the word “immediately” in Clause 7 to consider.

The arguments

21.  The purchaser’s argument was that there was indeed a time limit for invoking Clause 7.  The argument was that under the provisional agreement for sale and purchase, the further deposit had to be paid on or before 19 April 2011, as per the Chinese wording (as opposed to the English wording) of Clause 2(c), even though the Chinese wording here was slightly different from that used in See To Keung v Sunny Way Ltd [2009] 5 HKLRD 300, 305.  Given that Clause 7 only mentioned the repayment of the initial deposit and the payment of an additional sum equivalent to the initial deposit (as per the English wording), it was not meant to survive the payment of the further deposit.  Putting the two together, there was indeed a deadline for the exercise of the vendor’s right under Clause 7, that is, 19 April 2011.

22.  The purchaser therefore argued that the last day for the vendor to invoke Clause 7 to back out of the deal was 19 April 2011 but she did not do so until the following day when she made payment of the double compensation.  That was too late, according to the purchaser.

23.  The purchaser’s argument involved a question of construction of the word “immediately” in Clause 7 when it referred to the vendor having to “immediately compensate” the purchaser with a refund of the initial deposit together with a sum equivalent to the amount of the initial deposit as liquidated damages should the vendor fail to complete the sale in the manner provided in the provisional agreement.

24.  According to the purchaser, “immediately” means what the word says.  It does not mean within a period of reasonable time or 24 hours.  In the context of the present case, it meant 19 April 2011 but not later.  Man Sun Finance (International) Corp v Lee Ming Ching Stephen [1993] 1 HKC 113, 125F‑H; Allied Asset Limited v Kenley Investment Ltd HCA 4614/1998, 5 November 1998 (Cheung J), pages 10‑12; but cf Chan Chun Ming Coleman v Chung Lik Keung HCA 4025/1991, 17 June 1992 (Barnett J), page 6.

25.  For the vendor, Mr Ernest Cheung disputed all this.  He argued that there was no time limit for the exercise of the vendor’s right under Clause 7.  19 April 2011 was not a deadline for that purpose.  The further deposit need not be paid or accepted on or before 19 April 2011.  It was only payable upon the signing of the formal agreement for sale and purchase.  There was no obligation on the part of the parties to sign the formal agreement on 19 April 2011.  In any event, “immediately” in the present context meant within 24 hours.  Counsel further adopted the point made by the judge below that once the vendor elected for alternative performance, it need not be followed by immediate payment of the double compensation – all the purchaser could do was simply to sue the vendor for the double compensation in court.

My view

26.  In my view, the purchaser’s arguments are at least arguable.  I do not believe the authorities have gone so far as to say that under a provisional agreement for sale and purchase of terms similar to the present one, there is no obligation on the part of the parties to enter into a formal agreement for sale and purchase.  The principles of law summarised by Yuen JA in paragraph 4(a) and (b) of See To Keung certainly do not go that far.  There the judge said:

“As I understand it, the law relating to provisional sale and purchase agreements (as they are generally drafted) may be summarised as follows:

(a) A provisional agreement is immediately binding on the parties. Although it provides for a formal sale and purchase agreement to besigned, such formal agreement would only be to incorporate the express terms of the provisional agreement, to express any implied terms, and to add anynew terms that may subsequently be agreed (Chu Wing Ning v NganHing Cheung(unrep, HCA 9409/1991, [1992] HKLY 603))

(b) Accordingly it is perfectly possible for the parties to proceed to completion without a formal agreement being signed.However if noformal agreement is signed because one party has insisted on the inclusion of a clause that is unreasonable, that insistence may beregarded, depending on the individual circumstances, as conduct evincing an intention no longer to be bound by the terms of the provisional agreement (DH Shuttlecocks Ltd v Keung Shiu Tang [1994] 1 HKC 286).”

27.  It is one thing to say that if the parties were to genuinely and reasonably disagree on the terms to be included in the formal agreement, nobody would be in breach if no agreement could be signed on or before the date set out in the provisional agreement (whereupon the further deposit had to be payable).  It is another to say that the parties were not, at least, under an obligation to sign on the specified date a formal agreement prepared by lawyers, containing substantially the same terms already agreed in the provisional agreement (and no more) and any other terms implied by law, less the escape clause which, as explained, was never intended to survive the signing of the formal agreement and payment of the further deposit.  This being the case, it is at least arguable that under the timetable provided in the present provisional agreement for sale and purchase, Clause 7 was not intended to survive beyond 19 April 2011, when at least a formal agreement containing the bare terms already agreed (inclusive of all other terms implied by law) was to be signed, whereupon the further deposit would be payable.  Put another way, the last day for the exercise of the vendor’s right to back out of the transaction was intended to be no later than 19April 2011.

28.  All this is quite independent of the argument based on the Chinese wording of Clause 2(c) which I also find to be arguable.  In other words, it is arguable whether Clause 2(c), particularly in the light of its Chinese wording, obliged the payment of the further deposit on or before 19 April 2011.

29.  Either way, it is arguable that on the proper construction of the provisional agreement, Clause 7 was intended to lapse after 19 April 2011, save where (under the first argument discussed above) the formal agreement could not be signed by 19 April 2011 due to genuine and reasonable disagreements between the parties on what terms to be included in the formal agreement, or where the date was otherwise postponed by mutual consent.

30.  But even if this was not the case and assuming that Clause 7 was intended to last so long as the further deposit remained unpaid for whatever reasons, still it would be arguable that the vendor, having chosen to rely on it on the 18^th (or the 19^th), had to follow it through to its logical end by making payment of the double compensation “immediately”, failing which Clause 7 would not work to bar a claim for specific performance.  An escape clause must be complied with “strictly” in order to take effect : Man Sun at p 125H.

31.  All this leads to the next issue concerning the true meaning of the word “immediately” in Clause 7.  The clause provides for the vendor’s compensating “immediately” the purchaser of the initial deposit and the liquidated damages should she fail to complete the sale and purchase of the property in accordance with the terms contained in the provisional agreement. In this regard, I think it is at least arguable that immediately means what it says.  It does not mean within a reasonable time, nor does it mean within 24 hours. In any event, I reject the suggestion that the vendor can rely on Clause 7 without making payment of the double compensation at all, leaving it to the purchaser to sue her for payment of the double compensation in court.  This suggestion cannot stand with the authorities mentioned above.

32.  This being the case, it is arguable that the vendor did not “immediately” make payment of the double compensation, and therefore could not rely on the bar to specific performance stipulated in Clause 7.

33.  That was sufficient to dispose of this appeal.  The judge exercised his discretion on the basis that the plaintiff’s claim was incontestably barred by Clause 7.  That, as explained, was a false premise.  The exercise of discretion had to be disturbed.  It being arguable that the plaintiff’s claim for specific performance is not barred by Clause 7, in the circumstances of the present case, the discretion should be exercised against vacating the registration of the lis pendens.

Outcome

34.  For these reasons, the appeal was allowed, the orders below were set aside, and the application to vacate the registration of the lis pendens was dismissed.  We also gave the costs here and below of the application to vacate the registration of the lis pendens to the plaintiff, to be taxed if not agreed.

Hon Tang VP:

35.  I agree and have nothing to add.