TSANG SZE LOK v. POLYLINE DEVELOPMENT LTD.

HCA19615/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.19615 OF 1999

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J U D G M E N T

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1. In this action, the plaintiff claims against the defendant the return of a deposit paid under an agreement between the plaintiff and the defendant dated 15 August 1997 of $347,000.00 and damages of $280,000.00, $10,000.00 and $12,900.00.

Background

2. The plaintiff is a housewife who also carries on business selling goods in flea markets. The defendant is a developer specialising in the development of small village houses in the New Territories.

3. In July 1997, the plaintiff was looking to buy a small village house. She already owned a property in Shatin where she was living with her husband and two sons. It was her evidence that the property was too small for the family and she and her husband wished to move to a larger property. Being unable to afford a larger flat in an urban area, she decided to purchase a village house.

4. She was introduced by a good friend, Madam Li, to one Yeung Pui Chun ("Ms Yeung") of Land Exchange, a firm of estate agents in Taipo ("the Agent"). The plaintiff was taken to see completed village houses at a number of developments in Taipo including Po Fu Garden, a development of the defendant. She found these too expensive. She was then asked by Ms Yeung to consider what she was told were "short-term uncompleted property development" which, according to Ms Yeung were properties which could be completed in one to two years.

5. Ms Yeung then introduced her to three ladies, Fong Lai Chun, Leung Yin Fong and Chan Ching Yee ("the original purchasers"), who had originally entered into an agreement with the defendant to purchase a three-storey small village house, yet to be constructed, at Block 83, Po Fu Garden, Section E of Lot 1057 and Section D of Lot 1062 in DD No.23 ("the premises"). Ms Yeung told the plaintiff that the original purchasers were willing to sub-sell the ground floor and the 1st floor and that the price for the ground floor flat with garden and the right to use one car parking space was $2,150,000.00 and the price for the 1st floor flat was $1,950,000.

6. On 5 August 1997, the plaintiff paid a deposit of $50,000.00 to the original purchasers and on 7 August 1997, she entered into an agreement with the original purchasers and the Agent ("the Transfer Agreement") whereby she agreed to purchase from them the "subscription right" of the Ground Floor of Block 83, Po Fu Garden, DD 23 Lot No.1057E and 1062D, Po Sam Pai, Tai Po ("the Property"), for an "assignment fee" of $280,000.00 payable to the original purchasers.

7. By the Transfer Agreement, the plaintiff was to pay the further deposit of $324,000.00 and to complete the transfer procedures on 15 August 1997 in accordance with the agreement executed between the original purchasers and the defendant and to pay the original purchasers the assignment fee of $280,000.00. The plaintiff also agreed to be bound by that agreement and to assume all the interests and perform all legal responsibilities of the original purchasers in respect of the Property. Further, the plaintiff also agreed to pay a fee to the Agent of $21,500.00 on the 15 August 1997.

8. On 15 August 1997, the plaintiff, her friend Madam Li, Ms Yeung of the Agent and the original purchasers went to the defendant's office. There, the original agreement between the defendant and the original purchasers was cancelled and the plaintiff executed an agreement between herself and the defendant for the purchase of the Property ("the Agreement") for $1,870,000.00. The plaintiff gave to the original purchasers a cheque dated 15 August 1997 for $324,000.00 and another of the same date for $280,000.00 in accordance with the terms of the Transfer Agreement. She also paid the Agent a fee of $12,900.00 and paid the transfer fee of $10,000.00 to the defendant.

9. The plaintiff's case is that before she paid over these sums of money and executed the Agreement, the defendant, through Mr Ching Lin Chuen, its director, represented and warranted to her that the construction of the premises was to commence by the end of 1997 and the completion date would be in the summer of 1998. She says that had it not been for the representations and warranties, she would have given up the deposit she had already paid to the original purchasers and abandoned the rights acquired under the Transfer Agreement in respect of the Property.

10. The principal factual dispute therefore centers on what was said between the plaintiff and Mr Ching at the defendant's office on 15 August 1997 since none of the alleged warranties found their way into the Agreement. No date is specified in the Agreement for the completion and assignment of the Property other than that completion shall be within one month of the Government issuing the Certificate of Compliance and receipt for the additional premium.

11. By summer of 1998, not only had construction of the premises not been completed; it had not even commenced. On 19 October 1999, the plaintiff's solicitors wrote to the defendant alleging these representations and that the plaintiff had entered into the Agreement in reliance on them. The letter then went on to allege that the defendant's failure to proceed with the construction of the Property more than one year after the signing of the Agreement despite the plaintiff's repeated requests evinced an intention on the part of the defendant not to be bound by the contract and constituted a wrongful repudiation which they on the plaintiff's behalf accepted. Return of the deposit of $374,000.00 was demanded as was a sum of $324,000.00 by way of compensation for the wrongful repudiation.

12. On 27 October 1997, the defendant's solicitors replied, saying that upon their instructions, the plaintiff was at all times well aware before entering into the Agreement that the premises were under development project of uncompleted indigenous village houses and that the building works would be commenced after the approval had been granted by the Government. Also, that it was never a term of the Agreement that the building works should commence "at the date of your said letter and/or within 1 year after the date of the ... agreement". They went on to say that any legal action would be vigorously contested and reminded the plaintiff to honour her obligations under the Agreement warning that if the plaintiff were to be in breach of her obligations, the defendant would exercise its rights under the Agreement without further notice.

13. Proceedings were commenced by the plaintiff by writ issued on 29 December 1999.

Agreements between the original purchasers and the defendant

14. The first agreement between the original purchasers and the defendant related to the premises and was dated 10 December 1996. This agreement was then cancelled and new agreements entered into with the defendant whereby the original purchasers were to purchase the ground floor and the 1st floor of the premises and one of them, Fong Lai Chun, was to purchase the 2nd floor and roof.

15. On both these new agreements, the words "ding name" have been handwritten on to the agreement and underneath the name of the ding (indigenous villager). In the case of the agreement relating to the ground and 1st floor, the name "Chan Chiu Wah" is clearly visible.

The land

16. A land search carried out on behalf of the plaintiff in relation to the land on which the Property was proposed to be built shows the following : Chan Chiu Wah became the registered owner of Section E of Lot No.1057 in DD 23 on 13 May 1994, the defendant became the registered owner on 12 October 1998 and one Pang Koon Hing became the registered owner on 11 August 1999; the defendant became the registered owner of Section D of Lot No.1062 in DD 23 on 28 August 1992, Chan Chiu Wah became the registered owner on 16 June 1994, the defendant became the registered owner once again on 12 October 1998 and Pang Koon Hing became the registered owner on 11 August 1998.

The applications to build a small village house and the defendant's discovery

17. In paragraph 7(e) of the Defence, the defendant had pleaded as a positive averment that the application for the development for the premises and the commencement of the building works were currently being processed by the Government and the Government had never rejected the application nor had the Government refused to issue the certificates for commencement of building works. Notwithstanding this plea, the defendant had made no discovery whatsoever relating to applications made by it or by the indigenous villager for the building of a small village house under the Government's small village house policy. Discovery was not pursued by the plaintiff's solicitors

18. It was not until 17 September 2001 after the close of business that the defendant's solicitors attempted to serve upon the plaintiff's solicitors a supplemental list of documents saying that the list would be filed the next day which was the first day of hearing. Three documents were listed relating to an application made by Pang Koon Hing to the District Lands Office for the building of a small village house. From these documents it appears that an application was made in the name of Pang Koon Hing on 15 July 1999.

19. Counsel for the defendant sought to withdraw this list. However, in the light of the defendant's pleaded case and after hearing counsel, I ordered that the list should be filed and that the defendant should make further discovery of all applications made in relation to the land. The defendant's solicitors wrote to the District Land Office to ask for copies of all documents in the possession of the Office relating to applications to build a small village house on the land including application forms, correspondence, notices, statutory declarations, undertakings and the current status of the applications.

20. The defendant's 2nd supplemental list of documents included those which the District Land Office supplied to the defendant's solicitors as a result of the above request. One was an application to the District Land Office for the building of a small village house made by Chan Chiu Wah on 2 May 1994 and the other was a copy of the letter from the District Land Office in reply dated 30 May 1994 acknowledging receipt of the application, informing Mr Chan that applications would be processed in batches according to their dates of application and that prompt action could not be taken to process his application. Mr Chan was also informed that he would be contacted when action could be resumed in his case for submission of details in connection with his application.

21. These were the only documents which the defendant disclosed relating to applications made and the two documents relating to the application by Chan Chiu Wah were obtained not from the defendant but from the District Land Office. All that these documents show is the dates of the applications but nothing else. They certainly do not show what happened to the applications or any progress.

22. The defendant has never disclosed any documents relating to dealings with either the land or with the indigenous villagers whose names were used to make the applications. Despite these deficiencies in the defendant's discovery, the plaintiff wished the hearing to proceed.

The cases as pleaded

23. In the Statement of Claim (not pleaded by counsel appearing for the plaintiff at trial), a number of representations are pleaded as having been made by Mr Ching on 15 August 1997 in addition to the ones alleged in the letter of 19 October from the plaintiff's solicitors to the defendant. These include representations that the defendant would transfer the land to an indigenous person ("a Ding") of the New Territories in order to comply with the government regulations, that the defendant had already engaged a Ding and his name was Chan Chiu Wah and that the transfer would be completed in October 1997. It is pleaded that the plaintiff entered into the Agreement in reliance on them and in the belief that the defendant did have the plan and arrangement in place to construct the premises and to commence construction by the end of 1997.

24. It is also pleaded that the representations became conditions of the Agreement, or otherwise amounted to a collateral agreement or a collateral warranty by the Defendant that the Defendant was the developer for the Premises and that the defendant was obliged to commence construction of the premises by the end of 1997.

25. The plaintiff's claim is that the Agreement has been repudiated by the defendant. So far as this claim is concerned, it can only be on the basis that the pleaded representations became conditions of the Agreement breach of which would amount to repudiation.

26. The plaintiff's alternative claim is that the representations were false and misleading in that the defendant did not transfer the land to the Ding and the defendant did not or could not have had any permission or proper plan or arrangement at the material time to procure that the construction of the premises commence by the end of 1997.

27. A further alternative claim is that the defendant was in any event obliged to proceed with the construction of the premises with all reasonable due diligence and speed which the defendant had manifestly failed or refused to do whereby the defendant had wrongfully repudiated the Agreement.

28. The solicitors' letter of 19 October 1997 (pleaded as being dated 22 October 1997) is relied on as the acceptance of the defendant's repudiation alternatively as the exercise of the right of rescission upon the defendant's misrepresentation and breach of collateral warranty.

29. The return of the deposit was claimed and the other sums paid by the plaintiff were claimed by way of damages.

30. In the course of the hearing, I gave leave to the plaintiff to re-amend the Statement of Claim arising out of the very late discovery by the defendant.

31. The defendant by its defence denied that the representations had been made or warranties given as alleged. Its case was essentially that the proposed development was that of indigenous village house and that building works could only be commenced after approval had been given by the Government, of which the plaintiff was well aware, that the completion date contained in the Agreement was within one month after the Government had issued the certificate of compliance and receipt for additional premium and that the time periods pleaded in the Statement of Claim for obtaining Government approval and the permit to commence building works after the land had been transferred into the name of an indigenous villager were absolutely impossible and that half a year was absolutely insufficient to build a village house.

32. The defendant accepted that it was an implied term that building works of the premises should be commenced within a reasonable time after the Government had approved the development and had permitted the commencement of building works but averred that the applications were being processed.

33. The defendant also averred that the plaintiff had expressly shown an intention not to perform her obligations under the Agreement and was thus in breach of the Agreement. The defendant counterclaimed specific performance alternatively damages on the basis that it had always been and was willing and ready to perform its part of the Agreement. However, towards the close of the hearing, counsel for the defendant withdrew the counterclaim on behalf of his client.

The evidence

34. The plaintiff and Mr Ching, the defendant's director, gave evidence, their witness statements standing as evidence-in-chief. No other witnesses were called.

35. The plaintiff supplemented her witness statement by giving evidence-in-chief about the payments made by cheque on 15 August 1997 to the original purchasers. This was done at the defendant's office. She said that the persons present at the defendant's office on that occasion were Mr Ching, his secretary identified as Miss Li, the original purchasers, the plaintiff's good friend Madam Li and Ms Yeung of the Agent. Later, in cross-examination, she said that a lady whose name she could not remember from another firm of estate agents, Wan Hing Realty Co. ("Wan Hing"), was also present.

36. It appears from the agreements entered into between the original purchasers and the defendant that Wan Hing were the agents acting in those transactions although it is not clear whether they were the agents of the defendant.

37. In cross-examination, the plaintiff accepted that before she signed the agreement attached to her witness statement as TSL-4 ("the Transfer Agreement"), she had read and understood what it was all about and had agreed to the terms in it. She was referred to clause 3(c) and accepted that she knew that she would have to perform in accordance with the subscription agreement entered into between the original purchasers and the defendant if she purchased the Property from the original purchasers. She confirmed that she knew what the terms of the subscription agreement were and that when she signed the Transfer Agreement, she intended to perform in accordance with the subscription agreement.

38. Her evidence in her witness statement was that she had been given a copy of the subscription agreement by one of the original purchasers, Leung Yin Fong on the night of 5 August 1997 and the copy she was given was attached to her witness statement as TSL-2.

39. When cross-examined about clause 9 of the subscription agreement and whether she knew that she could only refuse to perform its terms if there was a failure to obtain approval for construction of the premises from the Government, she replied "Yes, but at the time I knew there was already a permit for building works. I bought only after I knew that they had a permit to commence building works."

40. She confirmed that the document attached to her witness statement as TSL-1 called a Certificate of Exemption in that witness statement was the document she was shown by Leung Yin Fong on 5 August 1997 as being the permit to commence building works. She said Ms Yeung had also told her that the document was the permit for commencement of building works.

41. She was asked whether she believed that the document was a permit to commence building works to which she replied that she half believed and half doubted but that after explanation, she believed it.

42. Up to this point in cross-examination, she was only giving evidence of what she had been told and shown by the original purchasers and Ms Yeung before she paid the deposit of $50,000 on 5 August 1997 and signed the Transfer Agreement on 7 August 1997.

43. She was then asked about paragraph 12 of her witness statement in which she said that at the meeting (on 15 August 1997 at the defendant's office), after she had asked Mr Ching some questions including about the completion date of the premises, Mr Ching made representations to her as set out in her witness statement.

44. Her evidence was that what she asked Mr Ching was whether the document (TSL-1) was a permit to commence building works to which he replied that it was true, that she asked when the building work would commence to which he replied "At the end of the year, 1997" and that she asked approximately how long it would take to which he replied "Around summer vacation of 1998."

45. Counsel for the defendant then asked "Anything else?" and she replied that she asked Mr Ching why this was not written into the contract and Mr Ching's answer was that it was not necessary, that it was the same for every purchaser, that the defendant was a large developer who would not need to cheat them of several hundred thousand dollars and that the three ladies had even bought a whole house.

46. The plaintiff then said that the original purchasers said that if the developer did not begin building, they would break his head. The plaintiff says that she then turned to her friend, Madam Li and asked her what to do to which her friend replied that since the director had said it, she had nothing to fear. After that, she signed the cheques for the deposit and the assignment fee.

47. The plaintiff confirmed that that was everything which had been said between Mr Ching and herself before the cheques were signed and that it was mainly because Mr Ching had told her that the building works would be completed at the summer vacation that she decided to continue with the purchase.

48. It was put to her that on 15 August 1997, there was no discussion between herself and Mr Ching as to the identity of the applicant (meaning the applicant for the building of a village house on the land) to which she replied that it was all written in the contract. She confirmed that there was no discussion.

49. She said that before signing the Agreement, Ms Yeung said to her that the director had already explicitly stated that the building works would begin at the end of the year and be complete in the summer vacation.

50. TSL-1 is addressed to one Yuen Chi Hung at No.26 Po Sam Pai Village Tai Po. It is a demand note for an administrative fee for Lot 1280 in DD 23.

51. When the plaintiff was cross-examined about the fact that the name on the demand note was not Chan Chiu Wah and that the lot number was not the land on which the Property was to be built, she said that the fact that the name was not Chan Chiu Wah had been explained to her. She admitted that she did not understand the explanation she was given but that she was told not to be afraid. When asked whether she had spotted the differences in the name and the lot number between TSL-1 and the agreement produced to her by the original purchasers, her answer was that she did not pay particular attention to the name, her concern being whether it was a permit to commence building works. She said that she only paid attention to the lot number and she realised that it was different.

52. It was put to her that prior to October 1999 and after 15 August 1997, she had not approached or contacted the defendant to find out what had happened to the construction of the Property. Her evidence was that she telephoned the defendant's office after the summer vacation 1998. She spoke to Mr Ching's secretary who informed her that there were some problems with the Government and when she asked what problems, Miss Li gave no reply. The plaintiff said she was at a loss what to do so she approached Ms Yeung who told her to wait. It was also her evidence she telephoned the defendant's office every year. However, she did not ask for a refund or an already completed flat instead.

53. When it was put to her that her evidence of Mr Ching's representations that TSL-1 was a permit to commence building work, his refusal to reduce the warranty about the date of commencement and completion of works and her telephone contacts with the defendant after the summer vacation 1998 were all recent inventions, she denied it.

54. Mr Ching's oral evidence-in-chief was that apart from the exchange of greetings, he had no conversation or discussion with the plaintiff on 15 August 1997. In cross-examination, he explained the procedures and steps involved in the development and construction of a small village house from the finding of the land, the indigenous villager, the application by the villager to the District Land Office and the various approvals and permits necessary before the house could be occupied. Clearly, Mr Ching was very familiar with these matters.

55. He was also cross-examined about his knowledge of TSL-1 and the plaintiff's evidence as to his representation that it was a permit to commence building works. He said that he had never seen it before and he denied that the plaintiff had asked about it on 15 August 1997. He also denied that the plaintiff had asked him to include in the Agreement any promise or warranty as to the date of commencement or completion of building works.

56. He identified TSL-1 as a demand note for the administrative fee. He had previously explained that when the villager's application to build a small house was approved and his entitlement verified, the villager would be required to pay an administrative fee.

57. According to his account of the procedures, the permit to commence building works came at a later stage in the process after the villager had signed a deed relating to the proposed small village house.

58. When asked whether TSL-1 was a demand note in relation to a property which the defendant was involved in developing, Mr Ching said "No". He also said that the named villager was not a person who had sold land to the defendant nor had the defendant sold land to the named villager. He said he had no recollection of the lot number.

59. However, later on in his cross-examination, he was asked again whether the defendant had any dealings relating to the lot which was the subject of the demand note and when reminded of the name, "Yuen Chi Hung", he replied that having made enquiries in the office, that the villager had made an application to the Government which was later cancelled when it turned out that the villager was not entitled to make application. This had happened in 1997.

60. The defendant was also cross-examined about the original purchasers' attitude to the delay in construction and whether they were patiently waiting for the construction. He replied that they were. However, later, when a writ and Statement of Claim issued by the original purchasers against the defendant was produced, he admitted that they had commenced proceedings but that the proceedings had been settled.

61. In relation to the name of the "ding", Chan Chiu Wah, being handwritten onto the agreement between the original purchasers and the defendant, he said that the purpose was to enable the defendant to remember which villager was the relevant applicant.

62. Mr Ching's explanation for the delay and the change in the ownership of the land on which the Property was to be constructed was that in 1998, it came to the defendant's knowledge that Chan Chiu Wah was in financial difficulties and the defendant had the land assigned to another person in case the land was seized. A fresh application had to be made by the new ding and the application automatically went to the back of the queue.

Findings

63. The plaintiff gave her evidence in an honest and straightforward manner. She was unshaken in a vigorous cross-examination by counsel for the defendant. The fact that she was credulous and na?ve does not affect the fact that she did rely upon the developer. I accept her evidence as to why she paid the deposit to the original purchasers despite her doubts about TSL-1. This makes it all the more credible why she would ask Mr Ching to confirm that the document about which she had doubts was indeed the permit to commence building work before she proceeded with the transaction.

64. TSL-1 can only have come from the defendant. The plaintiff was given a copy by the original purchasers. No lay person could be expected to be knowledgeable in the procedures involved in building a small village house. That makes it understandable why the plaintiff should accept from Mr Ching that the document was indeed a permit to commence building works.

65. It was submitted by counsel for the defendant that the document so obviously did not relate to the land in question nor to the villager Chan Chiu Wah and Mr Ching would not likely represent that it was a permit to commence building works on the land. If Mr Ching had denied it on 15 August 1997, not only would the sale to the plaintiff have fallen through, the sale to the original purchasers might have as well.

66. Even though it is not alleged that any of the representations made to the plaintiff prior to 15 August 1997 were made by agents of the defendant, the defendant must also have been involved at the stage when the plaintiff signed the Transfer Agreement as the detail of what deposit was required to be paid on 15 August 1997, namely $374,000.00, can only have come from the defendant. There was no apportionment of deposit or instalment payments between the various floors of the premises specified in the agreements between the original purchasers and the defendant so that this figure could only have come from the defendant.

67. Mr Ching was an unreliable witness. He first denied all knowledge of the demand note and the lot number or the villager involved only later retracting. He also said that the original purchasers were waiting patiently for the completion of the development until later confronted with the writ which had been issued.

68. I find that the representations of which the plaintiff gave evidence were made and the collateral warranty was given.

69. Clearly, construction has not started and on the evidence given by Mr Ching himself, the defendant could not have had the intention or the plan to commence construction by the end of 1997 let alone complete by the summer vacation of 1998. The defendant did not produce any documents to show that by 15 August 1997 such approvals and permits had been obtained which would have enabled construction to start and complete in accordance with the representations and warranties.

70. I therefore find that the defendant did make the pleaded misrepresentations to the plaintiff which she relied upon in entering into the Agreement and that the defendant is in breach of collateral warranty.

Relief

71. Although it is submitted that the plaintiff is only entitled to damages and not rescission because she has affirmed the transaction after the supposed completion date had passed, the defendant has given no evidence relating to such affirmation. On the defendant's evidence, the plaintiff did not communicate with the defendant at all until the solicitors' letter of October 1999. On the plaintiff's evidence, all that she did was to make enquiries. This does not amount to an affirmation or any conduct which precludes her from seeking rescission.

72. The solicitors' letter of October 1999 has been pleaded as an exercise of the right to rescind. I hold that the plaintiff is entitled to rescind and to the return of the deposit of $374,000.00 and to the repayment of the transfer fee of $10,000.00 paid by way of damages. The plaintiff is also entitled to damages flowing from the misrepresentation of $280,000.00 paid to the original purchasers on 15 August 1997 which she would not have paid but for the misrepresentation.

73. The plaintiff is also entitled to interest from the date of rescission and her costs of the action.