KSDY INTERNATIONAL CO LTD AND ANOTHER v. HONWAY (CHINA) LTD

HCA 4514/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4514 OF 2002

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J U D G M E N T

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1.  This case concerns the sale and purchase of a property.  The defendant was the vendor.  The 2^nd plaintiff was the purchaser, and signed a provisional sale and purchase agreement.  It then nominated the 1^st plaintiff to sign the formal sale and purchase agreement and to take up the property.  However, the defendant withdrew from the sale, in purported reliance on an option to withdraw on repayment of “double deposit”.  The plaintiffs now claim for specific performance, damages, and loss of rent.

The facts

2.  The following facts are undisputed or indisputable, and largely appear from the correspondence.

3.  The subject property was a shop at the Ground Floor, including cockloft, No 110 Yu Chau Street, Kowloon (“the Property”).  The defendant was and still is the registered owner of the Property, which was subject to a lease between the defendant and Best Leader International Industrial Company (“the Lease”).  The defendant and the 2^nd plaintiff entered into a provisional sale and purchase agreement dated 3 October 2002 (“the Agreement”).  The price was $4.2 million, and completion was to take place on 4 November 2002.  $100,000 was to be paid as initial deposit on the signing of the Agreement; $320,000 was to be paid, as balance of deposit, on the signing of the formal sale and purchase agreement on or before 10 October 2002.  The balance of $3,780,000 was to be paid on completion.  See Clause 2 of the Agreement which is set out below.

4.  The 2^nd plaintiff paid the initial deposit on 3 October 2002.  When its director, Mr Chan Man Fat, signed the Agreement, he handed over a cheque to the estate agent, Mr Ko Kin Yip, Anthony. The plaintiffs’ solicitors were Messrs Dibb Lupton Alsop (“DLA”) and the defendant’s were Messrs Fan Wong & Tso (“FWT”), and they began to prepare for completion in the normal way.

5.  Correspondence between the solicitors commenced on 9 October 2002.  DLA asked FWT for a draft formal agreement for sale and purchase and the title deeds and informed them that the 2^nd plaintiff would nominate the 1^st plaintiff to sign the formal agreement and take up the Property.  FWT sent back a draft formal agreement, which DLA returned the next day amended, along with a cashier order for $320,000 drawn in FWTs favour as the further deposit.  On 15 October, DLA sent FWT a draft nomination document, along with further amendments to the draft formal agreement.  On 17 October DLA asked for comments on the draft nomination and the draft formal agreement, and the title deeds, which had not yet been sent.  FWT replied that they were not in a position to comment on the draft nomination document as it did not concern the defendant and that they were taking instructions on the proposed amendments to the draft formal agreement and would revert as soon as possible.  This was followed by a reminder from DLA to FWT on 22 October.

6.  On 22 October, the 2^nd plaintiff executed the Nomination, whereby it nominated the 1^st plaintiff to take up the formal sale and purchase agreement and the subsequent assignment of the Property, and gave notice to and directed the defendant to execute the formal agreement for sale and purchase and the subsequent assignment direct to the 1^st plaintiff.  DLA sent FWT a copy of the Nomination on 23 October.

7.  Then on 24 October 2002, FWT informed DLA that they had no further instructions to act for the defendant to deal with the Property.  They returned the cashier order for HK$320,000 and the FWT’s cheque for HK$100,000 in favour of the 2^nd plaintiff, in repayment of the initial deposit.

8.  On 28 October 2002, DLA wrote directly to the defendant at its registered office, saying, in effect, that the Agreement remained in full force and effect, that the plaintiffs would continue to perform it, and that completion should go ahead on 4 November as agreed.  They also asked for the title deeds and substantive replies to the points raised in correspondence.  However, the completion date came and went, without any response from the defendant.

9.  DLA then, on 8 November 2002, wrote a letter before action to the defendant containing an ultimatum that completion should take place on 13 November at 2 p.m., failing which the plaintiffs would hold the defendant liable for breach of the Agreement.  I set out the relevant parts when I come to consider the effect of this letter below.

10.  On 13 November 2002, FWT again came into the picture.  They wrote to DLA that the defendant no longer wished to proceed with the sale of the Property, and sent a cashier order for HK$ 100,000 in favour of the 2^nd plaintiff as compensation payable under Clause 7 of the Agreement and a draft cancellation agreement.  On 15 November, DLA returned the cashier order, indicated that the plaintiffs were still willing and able to complete and requested that the defendant propose a new completion date.  However, on 18 November, FWT reiterated that the defendant no longer wished to proceed, and again sent the cashier order for $100,000, purportedly as compensation under Clause 7 of the Agreement. 

The relevant clauses

11.  Clause 2 of the Agreement reads :

“The purchase price of the said premises shall be HK$[4,200,000] which shall be paid by the Purchaser to the Vendor in the manner as follows :

(a) HK$100,000.00 shall be paid upon signing of this agreement as deposit.

(b) HK$320,000.00 shall be paid upon signing of formal agreement for sale and purchase on or before 10/10/2002 as balance of deposit.

(d) HK$3,780,000.00 shall be paid upon completion on or before 04/11/2002 as balance of purchase price.”

Clause 7 reads :

“Should the Vendor after receiving the deposit paid hereunder fail to complete the sale in the manner herein contained the Vendor shall immediately compensate the Purchaser with a sum equivalent to the amount of the deposit as the liquidated damages together with the refund of the deposit and the Purchaser shall not take any further action to claim for damages or to enforce specific performance.”

The plaintiffs' case

12.  The plaintiffs’ pleaded case is that the defendant breached the Agreement by failing to complete the sale and purchase on or before 4 November 2002.  On 8 November 2002, the plaintiffs informed the defendant that they were still willing and able to complete.  The plaintiffs were not informed of the defendant’s intention not to proceed until 11 November when the defendant’s estate agent communicated it to their solicitors.  On 13 November, the defendants informed the solicitors that it no longer wished to proceed with the sale and purchase, and sent a cashier order for $100,000 in purported compensation under Clause 7.  The plaintiffs aver that, under Clause 7, the defendant was obliged to refund the total deposit of $420,000 plus compensation of $420,000.  In the circumstances, the plaintiffs were entitled to reject the cashier order for $100,000, and they are entitled to specific performance, alternatively damages in the sum of $840,000 plus lost rent of $294,000, being rent for the remainder of the term of the Lease which the 1^st plaintiff would have received after completion.

The defendants' case

13.  The defendant’s pleaded case is that terms were to be implied into the Agreement, that each party would co-operate with the other to secure its performance and neither party would, by his own act or default, prevent its performance by the other party.  Prior to 10 October 2002, the defendant informed the 2^nd plaintiff, through the latter’s estate agent, that it did not intend to proceed and would compensate the 2^nd plaintiff by return the initial deposit of $100,000 and pay compensation of $100,000 in terms of Clause 7 of the Agreement.  The 2^nd plaintiff breached those implied terms by refusing to cooperate with the defendant and preventing the defendant’s performance of its obligation under Clause 7.

14.  The defendant avers that the 2^nd plaintiff further breached the Agreement by indicating that it would nominate the 1^st plaintiff to sign the formal sale and purchase agreement in its place, and by insisting on the nomination of the 1^st plaintiff to execute the formal Agreement, the 2^nd plaintiff evinced an intention to repudiate the Agreement.  The defendant accepted that repudiation and was therefore discharged from its obligations under the Agreement.  It further pleads that the 1^st plaintiff is not entitled to sue on the Agreement because it is not a party thereto, and further denies that it was in breach of the Agreement.

15.  The defendant further says that on 13 November 2002 it informed the 2^nd plaintiff that it had duly exercised its right under Clause 7 and was ready and willing to compensate the 2^nd plaintiff by returning the initial deposit and paying $100,000.  It denies that it was liable to pay compensation in the sum of $420,000.

The Issues

16.  The defendant through counsel abandoned the issue as to the validity of the nomination.  The issues are, therefore, 

(1) Whether the defendant had validly exercised its option under Clause 7 (this needs further examination, see below);

(2) Whether the defendant has breached the Agreement; and

(3) What are the remedies to which the plaintiffs are entitled?

Evidence

17.  Much, if not all of the live evidence was irrelevant to the issues in this case, but for the sake of completeness I will set it out in brief.  The 2^nd plaintiff’s director, Mr Chan Man Fat, says that in the beginning the agent, Mr Ko, came to him with the provisional sale and purchase agreement.  He signed it and Mr Ko took it away, along with his company’s cheque for $100,000.  He did not have the money to buy the shop, so he went to Mr Wong Wai Kwong, who is the 1^st plaintiff’s director, in the hope of borrowing some money; and they decided ultimately that the 1^st plaintiff would buy the shop.  They were friends, and both in the cloth trade.  Under cross-examination Mr Chan denied allegations by the defendant that he had harassed the sitting tenant in the Property; and he insisted that he first heard that the defendant would not proceed with the sale on 11 November 2002, when Ms Jenny Chung of DLA told him so.  He agreed that he did not accept the $100,000 compensation offered, because he believed that if the vendor wanted to back out, it had to pay $420,000 and not $100,000 as compensation.

18.  Mr Wong gave much the same evidence as to how the agreement came about that his company would take up the property.  He too insisted that he did not know, before 11 November, that the defendant would proceed; but he did know that as at 24 October FWT had no further instructions from the defendant and had sent DLA the cheque for $100,000 and the cashier order for $320,000.

19.  There is also evidence from Ms Mok, a solicitor with DLA, that on 31 October 2002, she advised Mr Wong of his rights if the vendor did not proceed, and got his instructions that he would not accept damages, and that proceedings should be instituted.  So she passed the file to her litigation department, where Jenny Chung worked.  It does not appear from Ms Mok’s evidence that anyone had actually told her firm, by then, that the defendant would not proceed to completion, though, as she explained in re-examination, she reckoned that the vendor was considering not completing because the draft of the formal sale and purchase agreement had not been finalised and the deeds had not been sent to her firm; and indeed that was why she had not yet prepared and sent out the draft assignment.

20.  Mr Ko’s evidence is that he got Mr Chan’s signature and cheque, and took the papers to Madam Leung, a director of the defendant, who then accepted the offer after discussion, and signed the Agreement.  On 7 October, Madam Leung complained that the buyer had caused a nuisance to the tenant by warning him that if he did not pay rent on time, the buyer would kick him out.  Mr Ko and Madam Leung agreed that, since only $100,000 had been received, all that needed to be done was to pay back the $100,000 plus compensation of $100,000.  On the same day Mr Ko told Mr Chan that the defendant would do this; but Mr Chan refused to accept it.  Madam Leung asked Mr Ko to help her to settle the matter, and he then had a meeting with Mr Chan who insisted that he would proceed with the purchase and send the vendor the balance of deposit.

21.  Mr Ko said, in oral evidence which was not foreshadowed in the statement which he adopted, that after this meeting he had told the purchaser’s solicitors, whose identity he could not remember, that the defendant would not proceed.  Under cross-examination, he said he had spoken on two occasions before 10 October to a male clerk in the solicitors’ firm.

22.  The defendant’s director, Madam Leung said that Mr Ko had come to her with the Agreement and persuaded her to sell, even though the price was half of what she had paid for the property.  She said that later her tenant had complained to her of harassment by the purchaser.  The tenant said that Mr Chan and a woman had come to him and demanded payment of $400,000, or he would be evicted.  In fact, it appears that the tenant was in arrears of rent payable to the defendant.  In any event, Madam Leung and her fellow directors decided not to proceed with the sale.  She told Mr Ko this on 7 October, and told him to tell the purchaser that the defendant would return the deposit of $100,000 and pay compensation of $100,000.  Later Mr Ko told her that the 2^nd plaintiff did not accept this.  She told FWT on 8 October that she was not proceeding, and was advised that, since only $100,000 deposit had been paid, all the defendant had to do was to repay that and pay compensation in the same amount.  She was further advised to get the agent to deal with this, so as to save costs.  She asked Mr Ko to try to settle the matter but his attempts were unsuccessful.  Then on 10 October, she heard that FWT had received the further deposit and told them to return it.

23.  From cross-examination it appears that Madam Leung asked Mr Ko to come and collect a cheque for $200,000 which could be tendered to the 2^nd plaintiff, but he did not come for it; he said he would contact the buyer first.  This is not in the witness statement, nor is it in Mr Ko’s evidence.  There was some variation in Madam Leung’s evidence as to her reasons for seeking to cancel the sale.

24.  Obviously, Madam Leung’s reasons for cancelling the sale are irrelevant.  It does not matter whether she was impelled to do this because the 2^nd defendant threatened to make her tenant pay $400,000 or be evicted; or because the tenant owed her rent; or even because she thought better of the bargain.  Nor, in my view does it matter whether Mr Ko told Mr Chan, or the 2^nd defendant’s solicitors, before 10 October that the defendant would not proceed; as will be made clear below, unless that was coupled with an actual tender of the compensation of $100,000, it was worth nothing.  But if it is necessary to make a finding of fact, on this latter point, because of the discrepancies in their evidence, I believe neither Mr Ko nor Madam Leung, and I do not accept that Mr Ko told either Mr Chan or his solicitors, before 10 October or at all, that the defendant would not proceed and would return the initial deposit and pay equivalent compensation.  Nor do I believe that Madam Leung so instructed her solicitors.  If she had done so, they would surely have communicated it to DLA.

Clause 7

25.  It appears from the pleadings that the plaintiffs’ case is that although the defendant breached the Agreement by failing to complete by 4 November 2002, when time was extended to 13 November, the defendant failed to pay compensation of $420,000, and this entitled the plaintiffs to reject the $100,000 tendered, and to compel performance by the defendant.  In other words, Clause 7 was still alive and the defendant could properly have exercised its rights under that clause by paying compensation equivalent to the full deposit.

26.  The case appears to have changed somewhat.  In his opening, Mr Fung, for the plaintiffs, put his case on the basis that the completion date, i.e. 4 November 2002, was the last date on which the defendant could exercise its option under Clause 7.  In order to exercise the option, the defendant had to tender the compensation payable, which was $100,000, by that date; but it did not, and it was not open to the defendant to tender this sum later on.

27.  Mr Ng, for the defendant, argues that the plaintiffs have abandoned their original case but Mr Fung argues that the real point of his case is that the defendant breached the Agreement by failing to complete in time.  The plaintiffs’ case is not that it waived the breach, but then there was a further breach before 13 November.  Counsel had confined his case to the initial deposit, not the whole deposit, because the defendant had failed to pay anything by the completion date.  He did not abandon the claim for compensation equivalent to the whole deposit, because it was arguable that that was the sum to be paid; but the point was that nothing was paid before the completion date and so the defendant was not entitled to make any payment thereafter.

28.  The defendant’s case has also changed.  Originally the main thrust of it was that, because of the terms to be implied, it was sufficient for the defendant to tell the plaintiffs, as it did before 10 October 2002, that it would not complete but would return the initial deposit plus $100,000.  The plaintiffs breached the implied terms by failing to co-operate and indicating that it would not accept this proposal, and further by failing to accept the $100,000 when it was tendered on 13 November.  However, it appears now that, although the issue of the implied terms is still alive, the main thrust of the defence is that time for completion and final payment was never of the essence, but if it was, the plaintiffs affirmed the contract, by failing to accept the defendant’s repudiation of it, and they extended the time for completion by their letter of 8 November 2002.

29.  Mr Fung points out that these matters are not specifically pleaded and take the plaintiffs by surprise.  The defendant should not be allowed to rely on them, though, in any event, they are bad.

30.  I have to say that it seems to me, on a reading of the Amended Statement of Claim, that the plaintiffs’ original case was based on the defendant’s failure to pay compensation of $420,000, rather than $100,000, by 13 November.  That could only be relied on if the plaintiffs considered that the contract was still alive, in all its terms, up to that date.  But in effect, this was not relied on at the trial.

31.  As to the defendant’s case, neither affirmation or extension is specifically pleaded; what is pleaded at paragraph 24 of the Re-amended Defence is that the defendant on 13 November informed the 2^nd plaintiff that it had exercised its right under Clause 7 before 10 October and was ready, willing and able to compensate the 2nd plaintiff with the sum of $100,000 together with refund of the initial deposit.  This refers back to paragraphs 9-13 where it pleads that it had elected not to proceed prior to 10 October 2002, in pursuance of Clause 7.  The defendant could have admitted that the contract was still alive as to all its terms, and pleaded that it could rely on Clause 7 by tendering $100,000 on 13 November; but that it not what it pleaded.

32.  Where there is a departure from the pleadings, the court might ask itself “such questions as whether the “new version” was a radical departure or merely variation, modification or development of an issue that was already before the court; and whether the other party’s preparation or conduct of the case would have been different if the “new version” was the one that it had originally come to the court to meet.”  Poon Hau Kei v Hsin Chong Construction Co. Ltd & Ors [2003] 2 HKLRD 56.

33.  I do not see that any pleading point is of great importance in this case.  We are not concerned with the sort of situation where one party has been put at a disadvantage by being unable to call evidence to meet a new case advanced at the last minute.  Such evidence as has been called in this case is, as I have indicated, pretty much irrelevant, because what I am concerned with, at the end of the day, is to decide whether the defendant has breached the Agreement by failing to complete, or whether it has properly relied on Clause 7.

34.  There are, therefore, I think, three sub-issues to be considered under Clause 7, namely whether the terms contended for by the defendant were to be implied into the Agreement; whether the time for completion and final payment was of the essence, and if it was, whether the plaintiffs affirmed the contract, by failing to accept the defendant’s repudiation of it, or extended the time for completion by their letter of 8 November 2002.

Implied terms

35.  The terms contended for are that each party would co-operate with the other to secure its performance and neither party would, by his own act or default, prevent its performance by the other party.

36.  A classic statement of the law on implication of terms, which encapsulates both the “business efficacy” and the “officious bystander” tests appears in B.P. Refinery (Westernport) Pty. Ltd v President, Councillors and Ratepayers of Shire of Hastings [1978] 52 ALJR 20.  Lord Simon, delivering the majority opinion said at page 26 :

“Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express.  In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

37.  It is true that the court may be willing to imply a duty of
co-operation.  See Chitty on Contracts, 29^th Edition, paragraph 13-011, where the following passage from Mackay v Dick (1881) App. Cas. 251 at 253 is reproduced :

“Where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectively be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.”

38.  Here, the defendant’s case is that it indicated to the plaintiff, by Mr Ko, that it would undertake the alternative performance provided for by Clause 7 and the 2^nd defendant, by Mr Chan, indicated that it would not accept that.  This was a wrongful refusal of co-operation and it prevented the performance of the defendant’s obligation under Clause 7.

39.  I have not accepted, on the evidence, that this happened.  But if it did, I cannot see that a general implied duty of co-operation was necessary.  What Clause 7 required was the handing back of the deposit, and the tender of the compensation.  Clause 7 would operate perfectly well without any duty on the purchaser to agree in advance to an indication by the vendor that it would take the Clause 7 option.  Equally, a refusal by the purchaser to agree would not prevent the vendor from paying back the deposit and tendering the compensation.  It follows that there was no need for the implied terms, to give business efficacy to Clause 7.

Was time of the essence?

40.  The defendant argues that it has never been the plaintiffs’ case that time was of the essence, nor was it an express term of the Agreement.  The dates given in Clause 2 are merely target dates.  It is said that the situation is similar to that in Luxebond Investment Ltd v Super Asian Investment Ltd [1998] 2 HKC 308. 

41.  In Luxebond, there was a provisional agreement with a clause similar to Clause 2 of the Agreement.  It provided for payment of an initial deposit on the signing of the provisional agreement, payment of a further deposit on the signing, on a specified date, of a formal agreement, and payment of the balance on the date stated for completion.  The purchaser’s solicitors sent the vendor’s solicitors a formal agreement and a cheque for the further deposit, on the specified date, but the vendor did not sign the formal agreement until some six days later.  The purchaser meanwhile sought a declaration that it was entitled to rescind the provisional agreement of sale and purchase and seek damages as a result of the vendor’s repudiatory breach of agreement, in failing to sign the formal agreement on or before the stipulated date.  Hartmann J, after considering various cases, held that the clause was no more than a payment clause.  The purchaser could not rescind simply because the trigger mechanism which obliged him to pay a further deposit was not activated by the defendant on the due date.

42.  Mr Ng argues that Clause 2 of the Agreement is, likewise, a payment clause.  It does not make time of the essence for payment of the further deposit and execution of a formal agreement, and by extension it does not make time of the essence for completion.  Therefore, the defendant could still exercise its rights under Clause 7 after 4 November 2002.  He also makes some reference to admissions by the plaintiffs, under cross-examination, which indicate that what was important to them was not the time of completion, but that they should get compensation of $420,000; but the question of whether time is of the essence is a question of law.  It is also one of construction of the contract which is to be carried on an objective basis.  The parties’ declarations of subjective intent are irrelevant and inadmissible.

43.  Luxebond was a case which arose from a vendor’s failure to enter into the formal sale and purchase agreement by the specified date.  In the instant case, however, the vendor not only failed to enter into the formal sale and purchase agreement by the specified date, but also failed to take any action at all, so that the completion date came and went.

44.  In arriving at his decision Hartmann J considered at length the case of Man Sun Finance (International) Corp. v Lee Ming Ching Stephen [1993] 1 HKC 113, CA.  In that case, the preliminary agreement provided for the payment of a temporary deposit on its signature, the payment of the balance of deposit on the signing of a formal agreement on or before 3 April 1992, and the payment of the balance on or before 25 June 1992.  There was a specific requirement that the formal agreement be “completed” on or before 3 April 1992.  Clause 8 was similar to Clause 7 in the Agreement, in that it provided that if the vendor was unable or unwilling to enter into the formal agreement, all deposits already paid should be refunded, otherwise the purchaser reserved the right to buy the premises.

45.  Godfrey J, as he then was, but sitting as a judge of the Court of Appeal, considered at length the true construction and effect of the preliminary agreement, which was a broker’s standard form, signed by parties who intended in due course to enter, after taking legal advice into a formal sale and purchase agreement.  Godfrey J considered that such an agreement may be no agreement at all, but an agreement to agree; but he went on at page 124 C-E to say that where :

“... the signing of the form brings into existence an immediately binding agreement, it does so on the terms on which it expressly contains and, otherwise, on the terms of what the law describes as an ‘open contract’.  From the moment the ink is dry on the parties’ signatures, all references to the formal sale and purchase agreement are illusory; there is already in existence an immediately binding agreement and neither side is entitled to demand that the other side enter into a further one.  The existing agreement, so long as it contains all the essential terms of a contract for the sale of land (the price, the date of completion; whether vacant possession is to be given) stands on its own and is from that moment on specifically enforceable at the suit of either party.”

His Lordship then went on to deal with Clause 8, at page 125F-126C, in these terms :

“The problem which has to be addressed in all these cases, as it seems to me, is whether the provision which the provisional agreement makes in relation to a failure by one of the parties to sign the formal sale and purchase agreement is one which limits (and, if so, to what extent) what would otherwise be the right of the other party to insist on specific performance.  If the relevant provision takes away the innocent party’s right to specific performance but only on terms that the defaulting party performs some alternative obligation instead, then the defaulting party, given this option, must perform that alternative obligation strictly in accordance with its terms in order to take the benefit of the provision.

I approach the problem raised in the present case accordingly.  The vendor was unwilling to enter into the formal sale and purchase agreement on the specified date.  Under Clause 8, he was entitled in that event to call off the contract (which was an immediate binding contract) by paying the purchaser double the amount of his preliminary deposit of $ 200,000; i.e. $ 400,000; otherwise the purchaser’s right to specific performance would remain unaffected.  Clause 8 must be construed as imposing an obligation on the vendor, if he wished to exercise the option conferred on him, to withdraw from the sale, to pay the $ 400,000 either on or before the specified date.  It cannot be right to attribute to the parties an intention that the vendor, having failed to enter into the formal agreement of sale and purchase on the specified date, was to be entitled to keep the purchaser waiting indefinitely for his $ 400,000.

In fact, it is perfectly clear that the vendor did not promptly tender the $ 400,000 to the purchaser; he waited until 22 April 1992 before making any such tender.  If the vendor, on or before the specified date 3 April 1992, had tendered the $ 400,000 to the purchaser and the purchaser had refused it, the matter would have been entirely different; in those circumstances, I would have had no hesitation in holding that the purchaser had lost his right to specific performance.  But that is not what happened.  No such tender was made until 22 April 1992”

46.  In Man Sun Finance, it was held that the preliminary agreement did contain all the essentials of a binding contract; and in the instant case, I have heard no suggestion that the Agreement did not contain those essentials and I am satisfied that it did.

47.  Applying the same principle as that stated by Godfrey J, it seems to me that, in order to avoid liability for specific performance of the primary obligation to accept full payment and assign the property to the purchaser, by the exercise of the option provided by Clause 7 to undertake the alternative obligation of return of the deposit and payment of compensation, the defendant had to perform that alternative obligation strictly in accordance with its terms.  That would require the actual payment of the compensation, as well as the return of the deposit.

48.  Now it may be that, as in Luxebond, the primary obligation could be regarded as not including the payment of $320,000 by the specified date of 10 October 2002, but only on the execution of the formal agreement.  In fact the cashier order was sent to FWT on that date, although it was not cashed.  But really that does not matter, given that the compensation was never tendered until after the completion date.  Even if time was not of the essence for the parties to enter into a formal agreement, it would still be of the essence for completion.

49.  The time for performance of the primary obligation was the stated completion date of 4 November 2002.  At common law, a term of a contract stipulating the time of its performance was always regarded as an essential term.  In contracts for the sale of land, where time was not specially stated to be “of the essence” equity might restrain the vendor from recovering his equitable interest, or would not allow the purchaser to repudiate, because one or other party had been unable to complete. A discussion of this point appears in the judgment of Litton JA in Man Sun Finance at 119C-120A.

50.  For an illustration of this principle see also SeeTo Keung & Anor v Sunny Way Ltd[2005] 4 HKC 535, another case involving the construction of a preliminary sale and purchase agreement containing a clause similar if not identical to Clause 2 here.  Recorder J Fok SC, after extensive consideration of various authorities held (at paragraph 57) that there was no obligation to sign the formal agreement, so the date stipulated in the clause was merely a target date but at the same time observed that “time was obviously of the essence in respect of the parties’ respective obligations due to be performed at completion”.

51.  It seems to me that the provision in Clause 2 for completion, i.e. performance of the primary obligations on 4 November 2002, must be regarded as an essential term.  It is suggested that the plaintiffs were not in a position to complete on 4 November 2002 because the draft assignment, which they should have prepared, had not been sent to FWT by that date.  Of course it had not been sent, because after 28 October, as far as DLA knew, FWT had no instructions.  DLA had written directly to the defendant but had received no reply.  There is therefore no good reason in equity to say that the plaintiffs should not be allowed to repudiate.

52.  If the primary obligation had to be performed by 4 November it seems to me that the performance of the optional alternative obligation could not be later than that date.  Strict performance of the alternative obligation would require actual payment of compensation, if not by 10 October, then in any event by 4 November 2002.

53.  Support for this is to be found in the case of Leung Shuk Kam v Cheung Suet Fun Maria Ausilia, HCA 6182 of 1991, where Deputy High Court Judge Ribeiro QC, as he then was, said at paragraph 72 :

“While the agreement contains provision for pecuniary alternatives, the 1st Defendant has never in fact sought to avail herself of any such alternative.  She has never sought to exercise any option to tender pecuniary compensation to the Plaintiff pursuant to the terms of the provisional agreement.”

54.  This decision was affirmed on appeal by the Court of Appeal in CACV 182 of 1992.  See also Man Wing Fun Stephen v Ho Ching, HCA 3724 of 1997 in which at paragraph 36 Mr Recorder Edward Chan SC at §36 said :

“In my view, the right was to be exercised as soon as it could be said that the vendor had failed to complete the sale in accordance with the terms of the provisional agreement.  As the agreement clearly provided that completion was to take place on or before 18th March, 1997, and if the failure to complete on that day was due to the fault of the vendor, then plainly if the vendor would like to back out from the sale, he would have to refund the initial deposit and pay the compensation in accordance with Clause 8 immediately on 18th March, 1997.  He could not wait to exercise his right at a later date.”

55.  It follows that the plaintiffs would have the right to specific performance, arising from non-completion or non-performance of the alternative obligation, as from 4 November 2002.

Affirmation/Extension of Time

56.  The arguments here arise from DLA’s letter of 8 November 2002 to the defendant.  The relevant parts read :

“As the completion date has now lapsed and we have yet to receive your comments to our said letter [of 28 October 2002] or amendments to the draft Agreement for Sale and Purchase, we assume that you have no intention to complete the sale and purchase of the Property and are therefore in breach of the Provisional Agreement.

On behalf of our client, we hereby give you notice that our client is still willing and able to complete the sale and purchase agreement and proposes that such completion shall be taken place at our office on Wednesday 13 November 2002 at 2:00 p.m.  If, however, you fail to complete as suggested by our client herein, our client will hold you liable for preach of the Provisional Agreement for which our client will commence legal proceedings without any further notice.”

57.  Obviously the defendant’s failure to complete on 4 November 2002, time being of the essence, amounted to repudiation by non-performance.  It is said that the plaintiffs’ offer to complete amounts to non-acceptance of the defendant’s repudiation, and therefore the Agreement remains alive, for the benefit of both parties, as to all of its terms.

58.  It seems to me that, once 4 November had come and gone, the contract was at an end.  The plaintiffs had the right to treat it as such, as regards both the defendant’s primary obligation to assign the property to them, or one of them, and its alternative obligation under Clause 7, and to sue for specific performance. In the alternative, they had the right to treat the Agreement as continuing and call for performance; and if they did, they affirmed it, so that the Agreement would remain in existence for the benefit of both parties.

59.  As I have said, there were two alternative obligations here the plaintiffs could, I think, choose which one should remain alive.  They could have chosen payment of the deposit and compensation, in which case their obligation not to seek specific performance would have remained alive; or they could have chosen completion, in which case their obligation to pay would have remained alive.  They chose the latter.  I do not see how, in the circumstances, the defendant could come back on 13 October and offer the alternative performance.  Its option in that respect had lapsed.

Did the defendant breach the Agreement?

60.  As I have indicated, the Agreement contained all the essentials of a binding contract for the sale of land.  The defendant was obliged to complete by 4 November 2002 and it did not.  It was accordingly in breach of the Agreement.

Remedies

61.  The plaintiffs’ claim is for specific performance, or in the alternative damages in the sum of $840; damages in the sum of $294 in respect of loss of rent, interest and further or other relief or damages.

Specific Performance

62.  The plaintiffs elect to seek specific performance.  The defendant has not sought to establish any discretionary bar to specific performance and accordingly the plaintiffs will have judgment in their favour for this remedy.

63.  Mr Fung asks the court to direct the parties to liaise with a view to agreeing an order incorporating all the necessary and proper steps to achieve the completion of the sale and purchase pursuant to the Agreement, taking into account the nomination of the 1^st plaintiff.  Such an order was made in the case of Gain Sky Ltd v Chau Tak Hing & Anor, HCA 917 of 2004.  I agree, and I so direct.  If the parties cannot agree on the form of the order they will have liberty to apply. 

Damages – loss of rent

64.  The Property was sold subject to a lease for a term from 20 May 2001 to 19 May 2003.  The rent was $45,000 per month.  If the sale and purchase had been completed, the purchaser would have received the rent from 4 November 2002 to 19 May 2003.  This is calculated at $294,000.  The loss of such rent obviously arises from the breach.

65.  The 2^nd plaintiff claims judgment for this sum.  In fact the 1^st plaintiff would have taken the Property as nominee and would have received the rent.  The effect of the nomination would have been to substitute the 1^st plaintiff as purchaser and it would have paid the balance of the purchase price.

66.  Strictly speaking the Agreement was between the 2^nd plaintiff and the defendant only, and the 1^st plaintiff is joined because it has an interest in the question of the manner in which the contract should be performed; see Order 15 Rule 6 (2)(b)(ii) of the Rules of the High Court and the commentary at paragraph 15/6/11 of the Hong Kong Civil Procedure 2006.  The 1^st plaintiff has no contract with the defendant itself.  I have heard no specific argument on the point but I suppose that the 2^nd plaintiff’s claim laid on the basis that the defendant is liable to it in contract and it, by reason of the nomination, has incurred a liability to the 1^st plaintiff, or would hold any damages on trust for the 1^st plaintiff.

67.  I will give judgment in favour of the 2^nd plaintiff for this sum with interest thereon from the date of the writ until payment at the judgment rate.  In case of any problems arising I will make the order nisi, so that the parties will have two weeks from the date of judgment to apply to be heard on any point arising and if there is no application the judgment will be made absolute.

Damages – loss of use

68.  The 2^nd plaintiff claims damages to be assessed for loss of use of the property from 20 May 2003 until the sale and purchase is completed pursuant to the judgment for specific performance.  I have heard no specific argument against this.  Such an order was made in Gain Sky Ltd, above.  I make the same order here, but again, since the actual loss would have been borne by the 1^st plaintiff, I will make the order nisi. 

Costs

69.  The defendant will pay to the plaintiffs the costs of the action to be taxed if not agreed.  Since the judgment is to be handed down, the costs order is nisi.