TSE CHUN HUNG HERBY AND ANOTHER v. CHANG CHUNG PAUL

HCA9293/1991

H E A D N O T E

Conveyancing Practice - Contract - Implied Term - Condition Precedent - Completion - Sale and Purchase Agreement

The parties entered into a sale and purchase agreement whereby the Defendant would sell as confirmor a flat to the Plaintiffs. The mortgage on the flat had to be discharged for passing title free from encumbrances to the Plaintiffs. Despite repeated requests by solicitors for the Plaintiffs to solicitors for the Defendant for instructions on how the balance of the purchase price should be paid by split cheques, solicitors for the Defendant refused or failed to give instructions. The Plaintiffs refused to complete by payment of the balance of the purchase price to solicitors for the Defendant in one sum on the ground that it would be contrary to prevalent conveyancing practice. The Defendant maintained that payment in one sum would suffice.

Held: (1) The parties having engaged solicitors as professional agents to carry out the conveyance, it was their common intention that the conveyance would be conducted in accordance with prevalent conveyancing practice of the profession; it matters not that the parties as lay persons had no specific knowledge of the prevalent conveyancing practice of solicitors for knowledge of agents is imputed to their principal. (2) Having regard to Edward Wong Finance Co. Ltd. v. Johnson, Stoker and Master, the practice of completion by split cheques has been enshrined in law. (3) Both as a matter of common intention and for business efficacy, there is an implied term for the contract between the parties that the conveyance shall be conducted in accordance with prevalent conveyancing practice of solicitors which translates to a condition precedent for the vendor to give instructions for split cheques in appropriate cases. (4) The instructions for split cheques must be correct. Thus those receiving instructions may require satisfactory proof of the correctness of the instructions. (5) Since the Defendant did not give instructions on split cheques required in this case, the Plaintiffs were entitled to damages and refund of deposit.

HCA9293/1991

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9293 OF 1991

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REASONS FOR JUDGMENT

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In this case, I am dealing with, in a manner of speaking, the wrong end of a chain sale of a property situate and known as Flat G, 7th Floor, Primrose Mansion, Harbour View Gardens in Taikoo Shing ("the Property"). The parties involved in the chain and essential particulars of the transactions along the chain are as follows.

2. The head vendor, Empirical Investments Limited, had the Property mortgaged to Dai Sing Bank Limited for unlimited amount. So, as can be expected, the Sale and Purchase Agreement between the Plaintiffs and the Defendant for the Property ("the Contract") provided for conveyance free from encumbrances. Also not disputed is that the Plaintiffs sought mortgage finance to pay for the purchase price under the Contract.

3. The Contract was executed on 24th May 1991. What then followed can be gleaned from the following extracts of correspondence among solicitors:-

4. Essentially, there is indisputable evidence that solicitors for the Plaintiffs requested solicitors for the Defendant to give instructions as to how payment of the balance of purchase price under the Contract should be made by split cheques. The request was made well in advance and repeated. The requests were made partly in view of demand from solicitors for the Plaintiffs' mortgagee and partly on account of a Law Society Circular. Despite the requests, solicitors for the Defendant asked for payment in one sum made to their name for completion. Solicitors for the Plaintiffs refused to complete in that manner. Completion did not take place as scheduled and indeed the whole chain of transactions was aborted. The day following the completion date, there were cross accusations by correspondence of repudiatory breach between solicitors for the Plaintiffs and solicitors for the Defendant.

5. Counsel, viz. Mr. Ho for the Plaintiffs and Mr. Chun for the Defendant, agreed that there are three issues for full trial:

(1) It is common ground that solicitors for the parties herein agreed some time on 31st May 1991 that there should be an extension of time for completion in view of the dispute over whether there should be split cheques. However, the Plaintiffs side says that the extension was open ended whereas the Defendant's side says that the extension was to 2 p.m. 31st May 1991 only.

(2) It is not disputed that each side on 1st June 1991 sent to the other side a letter alleging repudiation by the other side. But each party accuses the other party of sending the repudiatory letter first thereby putting the Contract to an end and thus should be liable for breach of the Contract.

(3) The Plaintiffs contend that it is an implied term of the Contract or alternatively a condition precedent for completion that the Defendant must give instructions on split cheques. The Defendant does not accept such propositions and argued that the Plaintiffs should have paid the balance of the purchase price in one sum to solicitors for the Defendant.

6. Obviously, the first two issues are factual ones requiring hearing of evidence primarily from solicitors. The third issue involves a legal point or points. I was apprehensive of the prospect of having to decide on conflicting evidence from solicitors under oath. I also believed that the case may be resolved on points of law without hearing evidence thereby saving time and costs. Fortunately counsel were happy to deal with the third issue first as a preliminary issue. With assistance from counsel, I therefore concentrated on the question of split cheques.

THE PLAINTIFFS' CASE

7. Mr. Ho for the Plaintiffs contended that the parties being lay persons had to rely on solicitors to carry out the conveyance. It must be their intention that the conveyancing process up to and including completion be conducted in accordance with the prevalent practice of solicitors in Hong Kong. In this respect, the Plaintiffs rely on the opinion of a solicitor very experienced in conveyancing matters. The expert opinion is that where the property the subject of the conveyance is mortgaged the payment of the balance of the purchase price upon completion is invariably by way of split cheques one of which would be made payable to the mortgagee to ensure redemption. This practice has the backing of the Law Society. On 25th November 1981, the Law Society of Hong Kong issued Circular No. 84/81 which states, inter alia, that:-

" SALE AND PURCHASE AGREEMENTS,
HONG KONG CONVEYANCING PRACTICE

Re: Johnson, Stokes & Master v.
Edward Wong Finance Co. Ltd. -
Civil Appeal No. 184 of 1980

1. The Council has directed the Conveyancing Sub-Committee to consider the above case and, in particular, the obiter comments of Sir Denys Roberts, Chief Justice, and Mr. Justice Simon Li.

2. The Sub-Committee has reported to the Council and the Council has resolved to issue this circular as an interim circular pending the outcome of the further appeal in this case to the Privy Council.

.........

4. The Council is further of the view that a solicitor acting for a purchaser should split the completion cheque between the vendor's solicitor and the vendor's mortgagee. In a typical instance, where the property is subject to a registered Mortgage, the vendor's solicitor should give to the purchaser's solicitor a written memorandum showing the principal and interest required to discharge the Mortgage. The purchaser's solicitor should, on completion, send to the vendor's solicitor his cheque for this amount payable to the mortgagee direct. The balance of the sum payable upon completion should be paid to the vendor's solicitor. It is important that where the Mortgagee's cheque is drawn in favour of a bank the cheque should state the name of the party to whose credit the cheque is to be paid i.e.

"Pay ABC Bank Ltd. Account John James Smith".

The Council is of the view that this should become a routine practice. Solicitors acting for vendors must be in a position to answer the enquiry and expect the completion cheque to be split accordingly."

8. In the premises, there must be an implied term in the Contract that the Defendant gives reasonable notice before completion date as to how the balance of the purchase price be split. Alternatively, Mr. Ho suggested, it is a condition precedent to payment by the purchaser of the balance of the purchase price for completion that the vendor gives instructions on how the payment should be divided for redemption of outstanding mortgage and other purposes. In this case, there was an outstanding mortgage for unlimited amount, solicitors for the Plaintiffs had in good time requested instructions on how the balance of the purchase price should be split and the Defendant refused or failed to give the instructions requested, so there was a repudiatory breach of the implied term on the part of the Defendant. Alternatively, the Defendant having failed to satisfy the condition precedent, the Plaintiffs were entitled to refuse to proceed with completion. On either ground, the Defendant is liable to the Plaintiffs in damages and for refund of all deposits.

THE DEFENDANT'S CASE

9. Those representing the Defendant sought to counter the Plaintiffs' case at every turn and in depth. I will deal with each point under separate headings in the process of reaching my decision. Credit, however, should be given to Mr. Chun for the Defendant in advancing the following arguments.

10. Counsel said that there is no place in this case for the implied term contended for by the Plaintiffs. According to DP Refinery (Westerport) Pty v. The Shire of Hastings 16 ALR 363 applied in Happy Dynasty Ltd. v. Wai Kee (Zens) Construction & Transportation Co. Ltd. & Others [1998] 1 HKLRD 314, no term should be implied if the contract is effective without it. The Contract here under consideration is obviously an effective one and so admits of no implied term. By the same authorities, a term should not be implied unless it is one that goes without saying. Or, to put it in another way, the term to be implied had to be within the common intention of the parties. But "the parties" are lay persons, not solicitors or lawyers. The parties - lay persons had no knowledge about solicitors' conveyancing practice or Law Society Circular. The question of split cheques could not have entered into the mind of the parties when they negotiated the Contract. Hence, there is no question of common intention on split cheques. The same authorities relied upon by the Defendant also stipulate that an implied term must not contradict any express term of the contract. Mr. Chun suggested that the implied term contended for by Mr. Ho contradicts Clauses 2, 16 and Schedule III of the Contract.

11. As to conveyancing practice, Mr. Chun argued that there should be no reliance on trade practice unless it is notorious to the parties. Again, the parties being lay persons could not have knowledge of any solicitors' conveyancing practice or Law Society Circular. Regarding Law Society Circular No. 84/81, counsel pointed out that it is stated to be an interim circular pending the outcome of the appeal to the Privy Council of Johnson, Stokes & Master v. Edward Wong Finance Co. Ltd.. Following the decision by the Privy Council in that case, the circular must lapse. Moreover, the Circular, even if it survived the Privy Council decision, applies to a straight sale between vendor and purchaser only; it does not apply to other cases like conveyance by a confirmor to a purchaser as in this case. Also, the Edward Wong Finance case concerns the professional duty of solicitors only; it does not affect the contractual relationship between vendors or confirmors and purchasers.

12. Last but not the least, Mr. Chun contended that Clause 2 and Schedule III of the Contract and the assignment executed by the parties herein provide quite clearly that the whole of the balance of the purchase price must be paid to the Defendant. By Clause 16 of the Contract, solicitors for the Defendant had been appointed as agent of the Defendant to receive all monies payable to the Defendant. It follows that the Plaintiffs had no reason to insist on split cheques.

13. Mr. Chun also made some subsidiary points which I think may be more conveniently dealt with later in this judgment.

IMPLIED TERM

14. In Happy Dynasty Ltd. v. Wai Kee (Zens) Construction & Transportation Co. Ltd. & Others [1998] 1 HKLRD 314, Yam J at page 317-318 held that:-

"In DP Refinery (Westerport) Pty Ltd v The Shire of Hastings 16 ALR 363, the Privy Council had provided a useful test to be applied in determining whether or not a term should be implied. At p. 376 Lord Simon, in giving the judgment of the Privy Council, says:

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 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.

It was submitted by the defendants that none of these criteria are satisfied by the implied term pleaded by Happy Dynasty. I however disagree."

Even on a superficial reading of the dictum of Lord Simon, I cannot possibly agree with Mr. Chun that all five conditions must be satisfied for a term to be implied. Lord Simon quite clearly said that the conditions may overlap. Mr. Ho drew my attention to Chitty on Contracts, 27th Edition, Volume 1 para 13-004 which reads:-

"The court will be prepared to imply a term if there arises from the language of the contract itself, and the circumstances under which it is entered into, an inference that the parties must have intended the stipulation in question. An implication of this nature may be made in two situations: first, where it is necessary to give business efficacy to the contract, and, secondly, where the term implied represents the obvious, but unexpressed, intention of the parties. These two criteria often overlap and, in many cases have been applied cumulatively, although it is submitted that they are in fact, alternative grounds. Both, however, depend on the presumed intention of the parties." (Emphasis added)

15. In my view, with all respects, the five conditions laid down by Lord Simon are, in a number of respects, circular tautology and does not really assist judicial decision making. Of course an implied term must be reasonable and equitable. This goes without saying as a paramount condition. As for the second condition, "that no term will be implied if the contract is effective without it" is obviously the converse of "it must be necessary to give business efficacy to the contract" and does not elaborate on the meaning of business efficacy. The third condition is an alternative to the second condition. In my opinion, whereas the second condition depends on an objective assessment of what business efficacy requires the third condition depends on what the parties wanted as manifested by the circumstances of the case although they did not express it in so many words. Obviously if a term cannot be formulated with sufficient precision for enforcement, it cannot be a term at all. So the fourth condition is a re-statement of basic contract law principle that a contractual term must not be vague. The fifth condition is axiomatic; it does not provide a test for inconsistent implied terms.

16. I started with the premise that the parties in this case instructed solicitors, professional agents, to act for them in a conveyancing matter. The whole point of hiring professional agents is so that the work would be done according to professional standards. If the proverbial question was put to the Plaintiffs and the Defendant as reasonable persons, I have no doubt each of them would answer, "Oh, of course, the transaction must be conducted in accordance with the standard practice of lawyers."

17. For prevalent conveyancing practice, one does not really need expert evidence. One finds that clearly stated in Law Society Circular No. 84/81 and in the reported advice of the Board in Edward Wong Finance Co. Ltd. v. Johnson, Stokes & Master [1984] 2 W.L.R. 1. There, Lord Brightman delivered their Lordships judgment as follows:-

" In the opinion of their Lordships, the risk of loss to the appellants by placing the money at the disposition of the vendors' solicitor unquestionably involved a foreseeable risk, the risk of an embezzlement by the recipient. Such a risk is usually remote, but is none the less foreseeable. The foreseeability of the risk is proved by the fact that it had indeed been foreseen by the profession. In October 1959 a subcommittee was appointed by the Law Society of Hong Kong to consider, and if thought fit, make recommendations on a number of matters including whether any and what changes should be made in the conveyancing practice prevailing in Hong Kong, and particularly to consider and make recommendations for the prevention of frauds and for safeguarding the interests of members of the public and of the Law Society in conveyancing matters.........

Their Lordships turn to the question whether the risk could have been avoided in the instant case. The answer, in their Lordships' view, is that it could readily have been avoided without in any way undermining the basic features of the Hong Kong style of completion. For example all that is needed in such a case is that the purchaser's or lender's solicitor should take reasonable steps to satisfy himself that the vendor's or borrower's solicitor has authority from his client to receive the purchase money or loan; and, in the case of property already subject to a mortgage which is to be discharged, so much of the purchase price or loan as is needed to discharge the prior mortgage could be paid by cheque or draft in favour of the mortgagee or his duly authorised agent, and not by a draft in favour of the vendor's solicitor. Simple precautions such as these would ensure that the purchaser or lender was placed by his solicitor in the favourable position which he ought to occupy when he parts with his money, that is to say, he would have an unanswerable claim against the other side for specific performance of that party's obligation to execute the appropriate assurances.

Their Lordships feel confident that simple steps such as these would not undermine the basic principles of the Hong Kong style of completion because they are in fact those advocated by the Law Society itself in a circular to members dated 25 November 1981, which was helpfully produced during the hearing of this appeal. The important provisions of the circular are these:

"3. The council is of the view that sale and purchase agreements should contain a clause stating clearly that payment by the purchaser of the balance of the purchase price to the vendor's solicitor constitutes a full discharge of the purchaser's obligations. A vendor should have drawn to his attention that, by the sale and purchase agreement, he has appointed his solicitor as his agent for the purposes of collecting the instalments, (if any), and balance of the purchase price due to him. If the vendor and purchaser are separately represented and the vendor objects to this clause being included, then it may, of course, be omitted but the solicitor acting for the purchaser will then by upon notice that he should insist upon a formal completion or otherwise satisfy himself that the cheque will be received by the vendor. 4. The council is further of the view that a solicitor acting for a purchaser should split the completion cheque between the vendor's solicitor and the vendor's mortgagee. In a typical instance, where the property is subject to a registered mortgage, the vendor's solicitor should give to the purchaser's solicitor a written memorandum showing the principal and interest required to discharge the mortgage. The purchaser's solicitor should, on completion, sent to the vendor's solicitor his cheque for this amount payment to the mortgagee direct. The balance of the sum payable upon completion should be paid to the vendor's solicitor..." (pp 8-10)

18. So the highest judicial authority has approved a conveyancing practice introduced by Law Society Circular No. 84/81 for split cheques. The decision of the Board moreover placed a professional duty on Hong Kong solicitors to prevent embezzlement by recipient of the balance of the purchase money. The recipient obviously includes any person or party in whatever capacity who may receive payment as stakeholder, agent or trustee. I cannot discern from the judgment of the Board that the force of their decision is restricted to the case of a simple conveyance from one vendor to one purchaser.

19. In the premises, both on the basis of common intention and as the circumstances required, there is ample justification for an implied term that the Contract shall be performed through solicitors in accordance with prevalent conveyancing practice of solicitors which includes payment of the balance of the purchase price by split cheques. However, with respects, I do not think the alternative contention of implied term and condition precedent by Mr. Ho is sound. Logically, there must be first an implied term and then that term is translated into a condition precedent as is appropriate in this case. Specifically, the condition precedent is that the Defendant must give instructions, in good time, as to how the payment for the balance of the purchase price should be split. I hasten to add that the instructions must be correct. That may seem trite but one must think of the possibility not only of deliberate deception but also that of innocent mistake. The element of correctness gives the payer or those acting for the payer the right to insist on satisfactory proof of correctness.

LAW SOCIETY CIRCULAR NO. 84/81

20. In the light of the reported decision of the Privy Council in the Edward Wong Finance case, I should think all the attacks mounted by Mr. Chun on Law Society Circular No. 84/81 fall by the way side. The highest judicial authority endorsed and approved the views published on behalf of the professional body. The recommendations of the Law Society have become enshrined in law even if the Circular lapsed automatically as an interim measure. The circular may arguably be taken as not extending to cases of sale by confirmors, but, as I have noted, the Privy Council decision covers payment to all types of recipients. If the Law Society Circular is conditional upon the outcome of appeal, the effect of the Circular has been fortified and progressively modified by the decision of the Privy Council.

KNOWLEDGE OF THE PARTIES

21. Mr. Chun argued that the parties as lay persons had no knowledge of conveyancing practice or Law Society Circulars. The point being made is that the parties could not have intended to adopt a specific stipulation as to split cheques. This argument can be disposed of summarily. The Contract was negotiated through solicitors as agents. It is trite law that knowledge possessed by an agent is imputed to the principal. Of course, this does not detract from the answer provided by Mr. Ho who pointed out that the term implied does not need to descend to details of every step in the conveyancing process. An all inclusive and pervasive term that the conveyance shall be conducted in accordance with prevalent conveyancing practice and professional standards is sufficient.

CONTRARY EXPRESS PROVISIONS

22. Mr. Chun suggested that the implied term is contrary to the following provisions in the Contract:-

"2. The purchase price shall be such sum and shall be paid and satisfied by the Purchaser to the Vendor in such manner as set out in the third Schedule hereto.

16. (i) The Vendor declares that Messrs. Ng and Yung, Solicitors & Co., are the Vendor's Agents for the purposes of receiving all monies payable to the Vendor pursuant to this Agreement including the balance of the purchase money payable upon completion.

(ii) The Vendor further declares that the payment to such Agents of any deposit, instalments of the purchase money and the balance thereof (if any) shall be a full and sufficient discharge of the Purchaser's obligations hereunder.

THE THIRD SCHEDULE ABOVE REFERRED TO

The purchase price of the said Premises shall be the sum of HONG KONG DOLLARS TWO MILLION NINE HUNDRED THOUSAND ($2,900,000.00) which shall be fully paid and satisfied by the Purchaser to the Vendor in the following manner:-

(a) An initial deposit of HK$20,000.00 has been paid by the Purchaser to the Vendor direct (receipt whereof is hereby acknowledged).

(b) A further deposit of HK$270,000.00 shall be paid on the date of signing hereof.

(c) The balance of HK$2,610,000.00 shall be paid on completion.

It is hereby agreed and declared that any sum paid to Messrs. Ng and Yung as Agent for the Vendor shall be held by Messrs. Ng and Yung as stakeholders who shall release the same to the Vendor only if they are satisfied that the balance of purchase price payable by the Purchaser on completion is sufficient to pay off the said Mortgage referred to in Clause 22 hereof and other incumbrances (if any) and/or the title deeds and documents relating to the said Premises had been delivered to the solicitors of the Purchaser and duly perused or deemed to have been duly perused by them."

23. According to counsel, the sum effect of these provisions in the Contract requires the Plaintiffs to pay the full balance of the purchase price to solicitors for the Defendant. In reply, Mr. Ho for the Plaintiffs said that these provisions concern liability only, they do not go into the manner for payment.

24. In my view, Clause 16 and the last paragraph in the Third Schedule defines the authority of solicitors for the Defendant. They are irrelevant in the present context. In so far as they touch upon payment, they apply to monies "payable" and "paid". They do not govern what is really payable to the Defendant. Clause 2 requires deeper analysis. It is highly illuminating that Clause 2 contains the wording "shall be paid and satisfied by the Purchaser to the Vendor". Thus it envisages not just payment, but satisfaction. It is trite law that satisfaction of liability to pay may be by way of payment to another party in appropriate circumstances. In a case like this, it is obligatory on the Plaintiff and the Defendant to see to it that appropriate portions of the balance of the purchase are paid to the mortgagee and prior confirmors or vendors so that property and title would pass down the chain to the Plaintiffs. Payment of those portions due to other parties up the chain is satisfaction and cannot possibly be said to be inconsistent with Clause 2. Clause 2 contains the words "in such manner as set out in the Third Schedule". In fact the Third Schedule says no more than that the balance of $2,610,000 shall be paid on completion. So there is a lacuna regarding the manner in which the $2,610,000 should be paid. I accepted Mr. Ho's argument that the implied term fills the lacuna in respect of manner of payment not provided for in the Contract.

25. Mr. Chun also sought to rely on the wording of the assignment executed by the parties in escrow. I do not think it is appropriate to refer to the assignment. In fact it was Mr. Chun who reminded me that an ex post facts document cannot be used in aid of construction of a contract.

BUSINESS EFFICACY

26. The business efficacy in this case is the need affirmed by unchallengeable judicial authority to prevent embezzlement by recipients. Mr. Chun suggested at one stage that he did not see how split cheques could achieve that purpose. He said that if solicitors for the vendor cannot be trusted then no payment at all should be made to them; on the other hand, if a cheque can be handed over to those solicitors then why the need to split it into two or more. I could not believe such spurious argument would be advanced until I heard it. Counsel cannot be so na?ve as not to know the protection afforded by crossed and "account payee only" bills of exchange.

CONCLUSION

27. Having decided that there was an implied term of the Contract leading to a condition precedent that the Defendant had to give correct instructions in good time as to split cheques, I thought the case would be finally disposed of. But, no, Mr. Chun sought to argue that my decision on the preliminary point of law is not necessarily fatal for the defence. He pointed out that there was an agreed extension of time for completion. According to the Plaintiffs' case, the extension was open-ended. It would be open to the Defendant to give instructions on split cheques during the extension period. But since the Plaintiffs had treated the Contract as at an end before the extended time was closed the Plaintiffs were in repudiatory breach.

28. I rejected this heroic attempt to salvage the Defendant's case. In the first place, it was the Defendant's case, as made known in open court at the start of the trial that the extension of time for completion was for one hour only, from 1 p.m. on 31st May 1991 to 2 p.m. 31st May 1991. The Defendant at no time gave instructions on split cheques before 1 p.m. or 2 p.m. on 31st May 1991. This being so, taking his case at the highest, the Defendant must fail for not giving the requisite instructions before the deadline he contended for. In the second place, the Defendant's case, as pleaded, is not about the time by which instructions on split cheques should be given but rather the Plaintiffs must pay the entire balance of the purchase price to solicitors for the Defendant without split cheques. Lastly, it is clear from the evidence by way of a letter from solicitors for the Defendant to solicitors for the Defendant's immediate vendor up the chain that the Defendant was in no position to give correct instructions to the Plaintiffs because those parties up the chain did not in turn give instructions to the Defendant.

29. In the premises, unless I am corrected on appeal, my ruling on the preliminary point of law effectively decided the action.

JUDGMENT

30. Accordingly, I pronounced judgment for the Plaintiffs in that there be refund of deposits in the total sum of $290,000 with interest thereon and particularized damages in the total sum of $24,950.69 as agreed. And costs of the action to the Plaintiffs.

31. I take this opportunity to thank both counsel for handling this case so sensibly thereby cutting short the length of trial to one-third of the allotted time.