CHI KIT CO LTD AND ANOTHER v. LUCKY HEALTH INTERNATIONAL ENTERPRISE LTD

FACV No. 18 of 1999

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 18 OF 1999 (CIVIL)

(ON APPEAL FROM CACV No. 10 OF 1999)

_____________________

Between:

_____________________

__________________

J U D G M E N T

__________________

Chief Justice Li :

1. I agree with the judgment of Mr Justice Litton PJ and the joint judgment of Mr Justice Bokhary PJ and Sir Anthony Mason NPJ.

Mr Justice Litton PJ :

Introduction

2. Sun Hing Building, built in the early 1960s, is a 27-storey composite building standing on Nathan Road, Mongkok. From the 11th floor upwards the building is for domestic use. The lower floors are for commercial use. It has two basements for car-parks.

3. Since about September 1966 the appellants (vendors) have been owners of various units comprising an 11.5% share in the land and building as follows: 53 car parking spaces in the lower basement, various units on the 9th and 10th (commercial) floors, 24 domestic flats in the upper floors. These (described in the tender documents as "the Property") were offered for sale by tender in July 1997.

4. The title deeds and documents relating to the property were made available for inspection by prospective purchasers when the invitation to tender was published. The units were offered for sale subject to existing tenancies. The Conditions of Sale (later incorporated into the agreement as part of its terms) provided in clause 19 that upon payment of the purchase price the vendors would "execute to the purchaser an assignment of the property subject as enumerated in the Conditions of Sale but otherwise free from encumbrances".

5. Clause 26 of the Conditions of Sale states :

"26. The Purchaser shall not be entitled to raise any objection or requisition in respect of the title to the Property and shall be deemed to have accepted the Vendor's title to the Property prior to the Purchaser's submission of his tender. The Purchaser further declares confirms undertakes and warrants that the Purchaser shall complete the purchase of the Property in accordance with the terms contained herein irrespective of whether the Vendor's title to the Property is good or defective notwithstanding any rule of law or equity to the contrary."

6. The respondent (purchaser) submitted a tender for $118 million. This was accepted and an agreement for sale and purchase dated 19 August 1997 was signed, pursuant to which the purchaser paid deposits totalling $11.8 million. Completion was due to take place on 20 November 1997.

7. After the agreement was signed the title deeds and documents were delivered to the purchaser's solicitors who raised no objections or requisitions with regard to the vendors' title upon perusal of the material. On the face of such material, the vendors' title was unimpeachable.

How the litigation arose

8. In February 1994 an action for damages for personal injuries was instituted against The Incorporated Owners of Sun Hing Building, a body corporate formed under s.8 of the Building Management Ordinance, Cap. 344. This arose from an accident 3 years earlier when a workman fell from bamboo scaffolding erected against the outside wall onto a scavenging lane at the back of the building and sustained very serious injuries. The scaffolding was old and disused. The workman had, at the suggestion of an employee of the incorporated owners, climbed up to the 3rd floor to help locate a burst pipe on the outside wall of the building. The bamboo collapsed. He fell and was rendered quadriplegic. In his action against the incorporated owners for damages, he based his cause of action on the fact that the corporation was an occupier of the common parts pursuant to the Occupiers Liability Ordinance, Cap. 314, and was negligent in allowing the scaffolding to remain and become dangerous. He also claimed that the corporation was vicariously liable for the actions of their employee in suggesting that he should use the scaffolding in tracing the leak.

9. In January 1997 the trial of the workman's claim was imminent. At a meeting of the management committee of the corporation on 30 January 1997 it was decided that counsel should be instructed and money raised from the owners. On 15 August 1997 (4 days before the memorandum for sale of the property was signed) the committee published a notice to the effect that the claim (for over $30 million) had been set down for trial and substantial fees had to be collected from the owners.

10. The trial began on 6 October and lasted 2 weeks. The incorporated owners were not legally represented as the management committee had failed to raise the necessary funds, though two members of the committee were heard in person. On 30 October 1997 Seagroatt J gave judgment in the workman's favour for $25.7 million together with interest and costs. It was a record sum and much prominence was given to it in the news media.

The purchaser's action

11. On 21 October 1997 the purchaser's solicitors wrote to the vendors' solicitors drawing attention to the legal proceedings and (1) asking what "remedial action" was proposed so that the property could be sold "free from all encumbrances" and (2) complaining that the failure to disclose the existence of the claim constituted "material non-disclosure". The vendors' solicitors replied on 3 November enclosing a copy of Seagroatt J's judgment and offered to set aside a sum of $4 million out of the proceeds of sale, based upon the vendors' proportionate share of liability pursuant to the judgment, to be held by the solicitors as stakeholders.

12. On 10 November 1997 the purchaser's solicitors wrote rejecting the vendors' proposal and stated:

"The judgment sum is HK$25,725,287.00 together with interest and costs to be taxed. Under section 17(1)(b) of the Building Management Ordinance Cap. 344, the judgment creditor is entitled to apply to Court to levy execution to enforce the Judgment against any owner. Our client is particularly worried by declarations made by a number of small owners to the mass media to the effect that they have no money to satisfy the Judgment. Upon completion, our client may well be faced with the prospect of having execution of the Judgment levied against itself with the consequence of having the abovementioned properties charged by the judgment creditor."

13. The letter went on to say that by clause 19 of the Conditions of Sale the vendors had agreed to assign the property "subject as enumerated in these conditions but otherwise free from encumbrances"; as a result of the vendors' failure to disclose the existence of the proceedings they were guilty of "material non-disclosure and misrepresentation"; if the purchaser had been made aware of the proceedings it would not have tendered for the property. In these circumstances the purchaser gave notice of rescission and demanded the return of the deposit of $11.8 million.

14. By letter dated 11 November the vendors' solicitors replied saying that as the purchaser was not an owner at the time of the accident and as no act or omission giving rise to the corporation's liability could be attributed to the purchaser, there was no possibility of leave being given under s.17(1)(b)¹ of the Building Management Ordinance to enforce the judgment against it. However, to "cater for the most unlikely situation" of a charge arising against the property after completion, the vendors undertook to set aside a sum of $33,025,758 out of the proceeds of sale, or make available a bank guarantee for that amount, or any reasonable amount as the purchaser might suggest. This was subject to the condition that the purchaser would co-operate at the vendors' expense in opposing any application for leave to enforce the judgment.

15. This offer was rejected.

16. The deadline for completion - 3 p.m. on 20 November 1997 - expired. No completion took place. By letter dated 21 November the vendors' solicitors gave notice of rescission and forfeiture of the deposit.

17. Thus the battle lines were drawn.

18. On 25 November 1997 the purchaser issued an originating summons seeking, among other reliefs, a declaration (1) that the vendors had not shown good title to the property and (2) that the purchaser was entitled to rescind the agreement "by reason of the material non-disclosure and/or misrepresentation on the part of the [vendors]". On the eve of trial those reliefs were amended by deleting the reference to "misrepresentation" and adding an averment to the effect that the purchaser was entitled to rescind on account of the vendors' inability to assign the property "free from encumbrances in accordance with Condition 19 of the Conditions of Sale ...".

The proceedings in the courts below

19. The matter went before Barnett J who, by his judgment dated 23 November 1998, dismissed the purchaser's claim. He held that the possibility of the vendors having the judgment (or a proportionate part thereof) enforced against them was a potential liability which was personal to them; this was not a defect in title or an encumbrance upon the title; hence there was no obligation falling on the vendors to disclose the claim prior to the contract.

20. The purchaser, being aggrieved, appealed to the Court of Appeal. That court by a majority (Mortimer VP and Godfrey JA), Rogers JA dissenting, allowed the purchaser's appeal with costs. Hence the vendors' appeal now before us.

Effect of s.17(1)(b)

21. The first question which arises on this appeal is this: If the purchaser had completed the sale and had become the registered owner of the property, could the judgment for $25.7 million (or a proportionate part of it) have been enforced against it at the instance of the injured workman? In this regard it makes no difference to the issue that, at the time of the trial before Barnett J, in November 1998, the judgment had in fact been satisfied. The point turns upon a proper construction of s.17(1)(b) of the Building Management Ordinance.

22. Where judgments have been obtained against incorporated owners, s.17(1)(b) empowers the Lands Tribunal to grant leave for such judgments to be enforced against the owners personally.

23. The expression used in s.17(1)(b) is "against any owner". Does this mean (i) against an owner who was owner at the time the liability was incurred as Mr Robert Tang SC, counsel for the vendors, contends or (ii) against an owner for the time being (that is to say, someone who was an owner at the time of the application for leave), as Mr John McDonnell QC, counsel for the purchaser, argues?

24. In section 2 owner means -

"(a) a person who for the time being appears from the records at the Land Registry to be owner of an undivided share in land on which there is a building; and

(b) a registered mortgagee in possession of such a share."

25. This, at first blush, concludes the argument in Mr McDonnell's favour. But this would be disregard the introductory words in section 2 "In this Ordinance, unless the context otherwise requires ...". The argument thus becomes a little more sophisticated. It is Mr Tang's case that the context in which the word owner is used requires its meaning in s.17(1)(b) to be restricted, in the way he contends for.

26. His argument, in a nut-shell, is this: The primary object of the Ordinance is to facilitate the incorporation of owners of flats; if there were no incorporation, and a visitor were injured, liability for breach of a common law duty of care would fall on the owners personally; they would bear joint and several liability; this liability would not attach to the land and would not pass by operation of law to successive owners. It would, Mr Tang suggests, be contrary to the primary object of the statute to enlarge the class of persons who would attract personal liability, when the statute plainly aims at encouraging incorporation. Hence, Mr Tang argues, "owner" in s.17(1)(b) means owner at the time the liability was incurred; it cannot mean someone like the purchaser who comes along years later.

27. Is this argument, superficially attractive, correct in the context of the entire statutory scheme?

Scheme of the statute

28. Focussing first of all on s.16 of the Ordinance, one sees that when the owners of a building have been incorporated under s.8, their rights, powers, privileges and duties in relation to the common parts "shall be exercised and performed by" the corporation; and their liabilities shall be enforceable against the corporation "to the exclusion of the owners". After incorporation a visitor injured on the common parts will no longer be able to seek redress against the owners personally.

29. In relation to contingencies such as suits by third parties, it would be a matter for the corporation (or more accurately its management committee) to decide whether to establish and maintain a contingency fund under s.20(2). A contribution might be required from the owners from time to time. Under s.22(3) the amount payable by an owner constitutes a debt due to the corporation: Here it must mean owners for the time being. In other words, once a demand for payment has been made of an owner, the liability attaches to his interest in land and passes to his successors in title. This is reinforced by s.23 which empowers the corporation in limited circumstances to pass an owner's liability on to an occupier for the time being of the unit concerned. This view of s.22 is consistent with the provisions of the Deed of Mutual Covenants in the present case. Clause 16(2)(f) provides that where an owner fails to pay a contribution as determined by the management committee within 30 days, that sum (together with the costs and expenses incurred in recovering the same) "shall be charged on the share or interest of the defaulting owner" and a memorial of such charge may be registered in the Land Office against that share.

30. Similarly, if a corporation is wound up under s.33-34², the owners for the time being have to contribute according to their respective shares; there is no basis on which a distinction could be drawn between owners who owned shares in the building at the time the liability was incurred and owners at the commencement of the winding-up.

31. It must be borne in mind that the primary meaning of "owner" in the Ordinance is "a person who for the time being appears from the records at the Land Registry to be the owner of an undivided share ...". In my judgment, there is nothing in the context which requires the meaning of owner in s.17(1)(b) to be construed differently. This construction accords with the scheme in the Deed of Mutual Covenants applicable in the present case - and perhaps countless others - where the rights and liabilities of owners generally pass with the land.

32. If the position were otherwise, the management of multi-storey buildings, particularly in large estates, would be a highly complex affair. In the course of managing such properties, all kinds of liability might be incurred by the corporation: claims by employees for damages for wrongful dismissal, severance pay etc; claims by contractors for the supply of goods and services; and claims by third parties arising from the corporation's occupation of the common areas. Some of these claims might be contested, others settled. Eventually judgment of one kind or another might be entered against the corporation. Plainly, the management committee would treat them alike and would seek contribution from the owners for the time being to satisfy the liabilities as they arise, if the funds established for the purpose were insufficient or if they needed topping up. Hence, liability would fall on the owners for the time being as a matter of course: It would be an odd thing, in these circumstances, if the recourse to the owners under s.17(1)(b) should be treated differently.

33. This was the assumption upon which all four judges in the courts below proceeded. In my judgment, this approach is correct. The Lands Tribunal is empowered under s.17(1)(b) to give leave to enforce judgment against an owner who becomes owner after the date when the original liability was incurred. The tribunal's discretion is wide. Depending upon the circumstances of the case it might in its discretion limit the order in the first place to the owner's proportionate share in the land and building, leaving the balance (if any) to be recovered upon the winding up of the corporation. Conceivably, there might be circumstances where it would be proper to give leave for a larger proportion or even the entire judgment to be executed against one owner, leaving it to that owner to seek contribution from his co-owners.

"Blot on title"

34. The workman's claim for damages against the corporation, and the eventual judgment given on that claim, was extraordinary in magnitude. There is no suggestion, upon the material before us, that the management committee considered it unlikely to succeed or that it had received advice to that effect. The judge found as a fact that a few days before the memorandum of agreement was signed there was a call for contribution from the owners towards the legal costs involved in defending the claim: The amount sought was $800,000 and it had to be collected by 6 September. The claim was said to be for over $30 million. In these circumstances it would not have been unusual if the committee had sought substantial contributions from the owners towards a contingency fund to be established under s.20(2) to meet part of the claim even before judgment. But after judgment, the requirement of contributions from the owners became a certainty: The corporation did not have the resources to satisfy the judgment. On any view of the facts, the purchaser of the units was, at the time of contract, very likely to be saddled with liabilities wholly outside its contemplation: After Seagroatt J's judgment, this became a certainty.

35. This is the context in which the question of the "blot on title" must be viewed. The crucial point is this: A liability which attaches to an owner for the time being is one which binds successive owners and thus runs with the property. Whilst, in the case of a multi-storey building, there might be many such liabilities which are ordinary incidents of property ownership, here the court is faced with a liability wholly outside the contemplation of a reasonable purchaser. The question thus arises: What this is a defect in title? In this regard I have read in draft the joint judgment of Mr Justice Bokhary PJ and Sir Anthony Mason NPJ and agree with it.

Conclusion

36. I also agree with Mr Justice Bokhary PJ and Sir Anthony Mason NPJ on the two remaining points: The offer of indemnity and clause 26 of the contract.

37. In these circumstances, the appeal must be dismissed, with costs.

Mr Justice Ching PJ :

38. I agree with the judgment of Mr Justice Litton PJ and the joint judgment of Mr Justice Bokhary PJ and Sir Anthony Mason NPJ.

Mr Justice Bokhary PJ and Sir Anthony Mason NPJ:

39. The judgment of Mr Justice Litton PJ relieves us from the necessity of stating the facts except in so far as further elaboration is needed to explain our conclusions on the points that arise for decision.

40. The question at issue is whether the respondent purchaser was entitled to rescind the contract for sale on the ground that the liability or potential liability on the part of unit owners ("the owners") arising out of the action brought by the injured workman against the incorporated owners of the building ("the corporation") constituted a defect in the appellant vendors' title. The respondent's rescission was expressed to be for non-disclosure of a latent defect in title. Nonetheless the respondent will be entitled to succeed if it can show that a defect in title prevented the appellants from either showing or giving a good title, subject to any qualification made by the contract to the vendors' obligations in these respects.

The Building Management Ordinance, Cap. 344 ("the Ordinance")

41. The first question for decision is as to the nature and scope of the liability of unit owners to meet a liability of the incorporated owners, it being common ground that the corporation was directly liable to the injured workman for the amount of the judgment which he was awarded. In the ordinary course of events, a liability (including an unexpected liability) of the corporation would be met from the funds of the corporation established under s.20 of the Ordinance. The management committee would determine under s.21 the amounts to be contributed by the owners. The amount to be contributed by an owner towards the amount determined under s.21 is fixed by the management committee in accordance with the deed of mutual covenant (if any) and is payable at such times and in such manner as the management committee may determine (s.22(1)). In the absence of appropriate provision in a deed of mutual covenant, the amount to be contributed by an owner is fixed by the management committee in accordance with the respective shares of the owners (s.22(2)). The amount so payable by an owner is a debt due and payable from him to the corporation (s.22(3)).

42. If it becomes necessary to enforce a judgment against a corporation, execution may issue against (a) any property of the corporation or (b), with the leave of the Lands Tribunal, against any owner (s.17). What is required is leave to issue execution to enforce a judgment against a corporation against an owner, not leave to issue an action against an owner. And in the winding-up of a corporation, the owners are liable, both jointly and severally, to contribute, according to their respective shares, to the assets of the corporation to an amount sufficient to discharge its debts and liabilities (s.34).

43. We agree, for the reasons given by Mr Justice Litton PJ, that the references to "owner" in the provisions to which we have referred are references to "owner for the time being". In our view, the contrary argument advanced by the appellants is plainly incorrect.

44. The consequence of this interpretation is 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. The contribution liability, though proportionate to the share of the owner, has the potential to merge into a joint and several liability on a winding-up for an amount sufficient to discharge the corporation's liabilities. Moreover, there is the potential liability under s.17(1)(b) to suffer an execution for a judgment against the corporation. That liability is not expressed to be limited to the proportionate share of an individual owner.

45. There is no reason to think that leave under s.17(1)(b) would be refused if the corporation is unable to meet a judgment against it and the execution is limited to the proportionate share of the individual owner. If execution in a greater amount were sought against an individual owner, difficulties would arise. The Tribunal might require other owners to be joined or served and evidence given as to their financial situation. But in a case where some owners are unable to make good their proportionate share of the total liability, the Tribunal could grant leave to execute beyond the level of the proportionate share of an individual owner. After all, in a winding-up, unit owners are jointly and severally responsible for the amount necessary to discharge the corporation's liabilities.

46. Viewed in this light, the judgment against the corporation obtained by the workman on 30 October 1997 for $25,725,287 with interest and costs had a special significance. Subject to leave, it became enforceable against unit owners, just as if it were a judgment against a unit owner for the time being.

Is the liability of an owner to meet a contribution a defect of title?

47. Although the liability is not a charge on the unit itself, it is a liability which goes with ownership of the unit. It is a liability which is imposed in virtue of ownership of the unit. In Jones v. Barnett [1899] 1 Ch. 611 at 620, Romer J noted "In Wharton's Law Lexicon I find 'incumbrance' defined as being 'a claim, lien, or liability attached to property'" (our emphasis). Although the liability of the unit owner to meet a contribution is not charged on the unit, it binds the unit and therefore it can constitute a blot on the title or an incumbrance. See Rignall Developments Ltd v. Halil [1988] 1 Ch. 190. There Millett J held that an improvement grant under the Housing Act 1974 which was repayable on demand by the owner for the time being of the property, was more than a personal liability "because the potential liability binds successive owners of the property affected" (at 199).

48. Accordingly, we disagree with the statement of Barnett J at first instance in the present case when his Lordship said with reference to a unit owner's liability to pay a contribution :

"What is not well understood, at least by me, is that the reverse is also true if Mr Fung is correct, namely that a liability personal to the owner qua owner somehow translates into an encumbrance on his property".

With respect, this statement overlooks the circumstance that a liability which attaches to the owner for the time being is one which binds successive owners and thus binds the property. It is not a liability which is merely personal to the owner at a given time.

49. In Active Keen Industries Ltd v. Fok Chi-keong [1994] 1 HKLR 396, Litton JA said (at 409) :

"The expression 'encumbrance' in relation to land invariably means some claim to the property or charge which could be imposed upon the property."

As that statement was not directed to a liability which binds successive owners of property in their capacity as owners of the property, we do not regard it as having any application to the question which arises here.

50. It follows in our view that the liability to pay a contribution, once it attaches to the owner of a unit, goes with the unit and binds successive owners of the unit so long as the contribution remains unpaid. 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.

51. As the judgment in this case was delivered after contract (12 August 1997 subsequently recorded in a memorandum on 19 August) but before the date fixed for completion (20 November 1997), the question is : what is the position when, before the date fixed for completion, judgment in respect of such a liability in a substantial amount has been obtained against the corporation?

Does the existence of the liability confirmed by the judgment constitute a defect in title?

52. The effect of the judgment is simply to convert the pre-existing cause of action by the workman against the corporation into a matter of record, transit in rem judicatam (The Koursk [1924] P.140 at 149, per Bankes LJ). The delivery of the judgment enables us to see, with the benefit of hindsight, that there was a cause of action giving rise to an actual liability on the part of the corporation, the amount of that liability being ascertained by the judgment. So, at the time of contract there was an actual, not merely a contingent, liability on the part of the corporation.

53. The effect of the judgment was that execution could issue against the property of the corporation and, subject to leave, against an owner and that means against the property of an owner, including his share in the building. The entry of the judgment also created a situation in which the management committee had no alternative but to give notice to the unit owners under ss.21 and 22, determining the amounts of contribution payable by them to meet the judgment and the time when the amounts were to be payable. No such notice was given before the time fixed by the contract for completion. But, the judgment having been given against the corporation, the issue of such notices was a matter of certainty because the corporation was unable to pay the amount of the judgment from funds available to it.

54. Nevertheless, had the contract been completed on the date fixed for completion, the vendor would have been able to convey what on its face at that date was a good title. But it was a title which, after the date fixed for completion, would certainly subject the owner to a very substantial and extraordinary liability arising out of the use and occupation, prior to contract, of the common parts of the building by the corporation, a use and occupation which gave rise to the liability in tort.

55. 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 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" (In re Stirrup's Contract [1961] 1 WLR 449 at 454).

56. The general principle is well-recognised that as from the date of the contract for the sale of land, if anything happens to the estate between the time of sale and the time of completion, caused without the vendor's fault, it is at the risk of the purchaser (Lysaght v. Edwards (1876) 2 Ch D 499, per Jessel MR; Megarry & Wade, The Law of Real Property 6th ed, 2000, at 696; Williams on Vendor and Purchaser 4th ed, 1936, at 547). So, if a notice or order issued by a local authority which would otherwise constitute a defect in the vendor's title was not given or served so as to become effective before the contract, the purchaser cannot complain. He has agreed to purchase subject to the risk that such a notice or order may issue after he has become the equitable owner of the property. (See Turner & Sutton : Actionable Non-Disclosure 2nd ed., 1990, para.7.13). Hence in Fletcher v. Manton (1940) 64 CLR 37, where the statute authorising a demolition order required service of it on the owner before it became effective and the order was served after the date of the contract, it was held that the purchaser had become the equitable owner upon the making of the contract and that, as the property was thenceforth at his risk, he must bear the loss consequential upon demolition. The service of the notice did not enable the purchaser to rescind the contract.

57. In England, it seems to have been accepted that the existence of circumstances which create a risk, even a probability, that the property will become liable to a statutory charge or burden does not constitute a latent defect in title. (Re Allen and Driscoll's Contract [1904] 2 Ch. 226; In re Forsey and Hollebone's Contract [1927] 2 Ch. 379 at 386; see also Carlish v. Salt [1906] 1 Ch. 335.) It is said that the existence of a potential or inchoate statutory liability is not enough (Re Farrer and Gilbert's Contract [1914] 1 Ch. 125; Manning v. Turner [1957] 1 WLR 91; Megarry and Wade, The Law of Real Property, 6th ed.,2000, 695; but cf. Rignall Developments, where Millett J (at 198), having described what was a contingent liability as "potential", went on to say (at 199):

"It was for the defendant to show a good title to the property free from the risk that repayment of the grant might be demanded from the plaintiff, and she failed to do so".

58. In other jurisdictions, a view similar to that taken in England, has generally prevailed. See Huang Ching Hwee v. Heng Kay Pay [1993] 1 SLR 100; Carpenter v. McGrath [1996] 40 NSWLR 39; but cf. Watkin v. Wilson [1985] 1 NZLR 666.

59. In Hong Kong, the courts have held that there is a latent defect in title where, when the contract is made, there is a significant or substantial risk that an authority would take enforcement action, culminating in a right of re-entry pursuant to a condition in the antecedent Crown or Government lease, in relation to unauthorised structures on the property contracted to be sold (Woomera Co Ltd v. Provident Centre Development HCA No.12647 of 1982; Giant River Ltd v. Asie Marketing Ltd [1990] 1 HKLR 297 at 309-310; Kok Chong-ho v. Double Value Developments [1993] 2 HKLR 423; Active Keen v. Fok Chi-keong [1994] 1 HKLR 396 at 410; Lo Miu Ling v. Tam Hung Ping [1998] 2 HKLRD 541 at 550). See also Lee Siu Man v. Chu Chi Wing [1992] 1 HKC 266 at 269-270; Chan Fung Lan v. Lai Wai Chuen [1997] 1 HKC 1 at 10. Although the judgment of Barnett J at first instance in the present case [1998] 4 HKC 656 may be regarded as a departure from this approach , the judgment rested on what is, for present purposes, an unduly narrow conception of an incumbrance. Conversely, where the risk of action being taken in relation to the presence of an unauthorised structure on the land may be safely disregarded, there is no defect in title (Spark Rich (China) Ltd v. Valrose Ltd (1999) CACV No.249/98). In the same vein, it was held (in Jumbo Gold Investment Ltd v. Yuen Cheong Leung [2000] 1 HKLRD 763 at 770-771) that there is no defect in title even though there may be a breach of condition giving the Government a right of re-entry if there is in truth no real risk of the Government actually exercising that right.

60. The approach taken by the courts in Hong Kong to the existence of a defect in title arising from the presence of an unauthorised structure on land the subject of the sale is now so well entrenched that we should not depart from it. That conclusion does not dispose of the question here because the nature of the defect complained of is different.

61. Though different, the defect in title to which the respondent purchaser is exposed has its source in the use and occupation of common property in which the vendors as the owners of units had rights of enjoyment. The appellants' ownership of 7,217 undivided shares in the Sun Hing Building (out of 62,639 shares) entailed ownership of a corresponding share in the corporation (Ordinance, s.39). The defect relates to the title of the property sold, because the potential liability to contribute to the funds of the corporation and satisfy the judgment is an inseparable incident of the ownership of the undivided shares.

62. 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 - not because it simply affects the value of the unit (which it may do in a very substantial way) but because it will affect at some time in the future the title. It will affect the title and the purchaser will end up not with a title free from liability (which he contracted to get) but with a title which carries with it a substantial liability even if limited to its proportionate share or, if not so limited, an even greater liability. Here that greater liability could conceivably amount to $25,725,287 plus interest and costs.

63. In the present case the incumbrance does not have its origins, as the incumbrances in a number of the cases do, in the exercise of powers by the Government or a statutory authority. It arises out of the tortious liability of the corporation for the antecedent use and occupation of the common property. In this situation, there is no reason to treat the incumbrance or blot on title which subsequently arises as a fortuitous risk which the purchaser should bear.

64. Another matter which might be urged against the respondent is that an intending purchaser should make inquiries before contract and protect himself either by not entering into a contract or by entering into a contract with an appropriate contractual provision. There are two answers to this suggestion. First, the management committee of the corporation is under no obligation to answer inquiries about the financial position of the corporation or the likely amount of contributions to be sought from unit owners. It is therefore unlikely that inquiries will prove a fruitful source of relevant information. Secondly, and more importantly, the practice in Hong Kong according to which binding contracts for the sale of units are ordinarily brought into existence does not allow for the making of inquiries by purchasers before contract. In the ordinary run of cases, a provisional but legally binding contract, produced by a property agent, anxious to clinch a deal, is signed by the parties. It is against this background that the relevant principle governing the vendor's obligation to show and give a good title is to be ascertained.

65. What we have just said is a sufficient response to an argument based on the maxim caveat emptor. The maxim should not be applied so that it leaves a purchaser exposed to a serious detriment the risk of which is solely within the knowledge or the means of knowledge of the vendor.

66. On the question of the appellants' knowledge we should refer to the findings of the primary judge. His Lordship found that the appellants before contract knew of the pending action and of the amount potentially involved. The action had been on foot for three years prior to the contract which was made on 12 August 1997. The learned judge also found that the appellants' agents or representatives (one of whom was a member of the committee of the corporation) should have made it their business to find out how the action was progressing and about the business of the corporation generally. The judge found that the appellants had knowledge of all relevant matters. In the words of the judge (at [1998] 4 HKC 656, 660G) the appellants

"knew of the pending action; of the amount potentially involved; of the call by the notice of 15 August 1997 for contributions towards costs; and by 30 October of the threat that the judgment might be enforced against individual owners."

67. So, even before the date of the contract, the appellants were aware of the magnitude of the claim, the existence of the pending action and inferentially that the hearing was not far off.

68. The magnitude of the judgment liability was such as to be wholly outside the contemplation of a reasonable purchaser.

The offer of indemnity

69. The appellants rely upon an offer of indemnity which they made. They offered to set aside a sum of $33,025,758.00 out of the purchase price or, alternatively, make available a bank guarantee for that amount or any other reasonable amount that the respondent might nominate. This offer was designed to reinforce an undertaking to meet the judgment in the event that the Lands Tribunal should give leave to enforce the judgment against the respondent after completion of the contract.

70. The offer of indemnity did not resolve all the problems which flowed from the existence of the potential liability. Barnett J, at first instance, outlined them in this way ([1998] 4 HKC 656 at 661), quoting what a director of the purchaser said on affirmation :

"after completion the new owner of the Property would still have to be burdened with proceedings regarding the enforcement of the Judgment, any appeal or cross-appeal and the potential claims for contribution from and against the numerous small co-owners. This was never within the contemplation of the Plaintiff at the time when it submitted the Tender. This would also affect the saleability of the Property and the ability of any purchaser to obtain a mortgage thereon. This is because if a property is subject to substantial litigation, its marketability is substantially reduced for people would not like to be involved in and/or burdened with court proceedings. The purpose of the Plaintiff in purchasing the Property was for investment. The marketability of the Property which affects the price, was the dominant factor in its consideration whether to tender for the Property. If the litigation had been disclosed, the Plaintiff definitely would not have tendered for the Property."

71. There was, in addition, evidence (which was uncontradicted) that the two banks which had been prepared to finance 60% of the purchase price withdrew on learning of the judgment. Sub-purchasers lost interest for the same reason.

Clause 26 of the contract

72. The appellants rely upon cl. 26 of the contract. Clause 26 is in these terms:

"The Purchaser shall not be entitled to raise any objection or requisition in respect of the title to the Property and shall be deemed to have accepted the Vendor's title to the Property prior to the Purchaser's submission of his tender. The Purchaser further declares confirms undertakes and warrants that the Purchaser shall complete the purchase of the Property in accordance with the terms contained herein irrespective of whether the Vendor's title to the Property is good or defective notwithstanding any rule of law or equity to the contrary."

73. There are two relevant elements in cl. 26. The first is that the purchaser shall be deemed to have accepted the vendor's title prior to the submission of the tender. The second is the undertaking to complete whether the vendor's title is good or defective "notwithstanding any rule of law to the contrary".

74. Clauses of this kind have not been regarded as compelling a purchaser to accept a defective title when the vendor has failed to disclose defects of which he was aware (Becker v. Partridge [1966] 2 QB 155 at 171, per Danckwerts LJ). This result has been attributed to a rule of law which overrides the contractual provision. But the preferable view expressed by Lord Hoffmann NPJ (with whom Li CJ and Nazareth NPJ concurred) in Jumbo King Ltd v. Faithful Properties Ltd (1999) 2 HKCFAR 279 at 299, is that the question is one of construction of the relevant contractual provision. His Lordship said:

"Prima facie, it is the duty of the vendor to deduce and then convey a good title and if he 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. As Farrand says, the question is whether the purchaser would have been aware of the risk he was being asked to take. So, for example, general words which did not identify any specific defect in title have been held inadequate to protect the vendor against liability for a serious defect which he could easily have discovered: Becker v. Partridge".

That is the case here. The respondent was not aware of the risk it was being asked to take. It was not aware of the defect.

75. In the result, the appeal should be dismissed with costs.

Chief Justice Li :

76. The Court unanimously dismisses this appeal with costs.