KAREX (HONG KONG) LTD. v. FORTUNE TALENT DEVELOPMENT LTD. AND OTHERS

CACV 116/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 116 OF 1999

(ON APPEAL FROM HCA 7422 OF 1998)

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J U D G M E N T

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Mayo, J.A.:

1. The subject matter of this litigation relates to a series of sales and sub-sales of shop premises at Lockhart Road, Wanchai (the property).

2. The principal agreement was entered into on 3rd March 1997 between D1 and D2. The consideration for the agreement was HK$34,500,000 and D1 received a deposit of $3,450,000. There were a series of sub-sales and eventually by a sub-sub-sub-sub-sale dated 19th September 1997 D5 sold the property to the Plaintiff who paid D5 a deposit of $6,750,000. It is significant to note that the way in which these sale and sub-sale agreements were drafted. It was D1's interest as head vendor which was each time the subject of the sale or sub-sale.

3. It is the Plaintiff's case that D5 failed to answer requisitions on title which were raised by the Plaintiff and D5 forfeited his deposit. The Plaintiff claims that this was in breach of the sub-contract. The Plaintiff's claims against the other Defendants are on the basis that they are constructive trustees in respect of the deposit he paid and he pursues this claim as an equitable assignee. The Plaintiff also initially made his claim in agency and claimed an entitlement to lodge a lien in respect of the deposit he paid on the title. The claim for agency has been discontinued.

4. So far as the claim for the lien is considered it is relevant to add that by an agreement dated 24th January 1998 made between D1 and D2 they cancelled the principal agreement apparently with the intention defeating the Plaintiff's claim to a lien.

5. D1 made an application to the Master to strike out part of the Plaintiff's claim and for an order that the lis pendens it had registered against the property should be vacated. The Master dismissed this application and D1 appealed to Cheung, J. Cheung, J. allowed the appeal to the extent that the claims based on agency and on the lien were struck out. It is against this judgment that the present appeal is proceeded with.

6. In effect the only live issue now is the question of the entitlement to the lien and hence the right to register a lis pendens against the property.

7. Mr. Edward Chan, S.C. for the Plaintiff argued that the Judge had accepted that the Plaintiff did have a claim as a constructive trustee. This had largely been on the basis of the judgment of Lord Hoffmann, N.P.J. in Ji Shan International Investment Ltd. v. Resources Main Enterprises Ltd. [1999] 1 HKC 12. In his judgment he had said:

"Ji Shan [the sub-purchaser] was entitled in principle to enforce the contract, whatever Resources [other sub-purchasers up the chain] might have to say about the matter ... When Ji Shan undertook to complete and when it commenced proceedings for specific performance, the contract was alive and Ji Shan was entitled to enforce it ..."

8. This was referred to by Cheung, J. at p. 70 of the appeal bundle.

9. While it was appreciated that the remedy being pursued in that case was specific performance whereas only a claim for the return of the deposit was being pursued in the present case there was no reason not to apply the same principles.

10. This reasoning was also in conformity with an interjection which was made by Rigby L.J. while Lord Alverstone, M.R. was delivering judgment in Davies v. Thomas [1900] 2 Ch 462 at 466:

"[RIGBY L.J. Even if there is no lien, are not the trustees of the will trustees for the plaintiff? A trustee for a beneficiary becomes, if the beneficiary assigns his interest, a trustee for the assignee.]"

11. So far as the Plaintiff was concerned the Judge was not prepared to take the further step of holding that the Plaintiff was entitled to a lien on the property. It would appear that one of the main reasons for this was on account of the views expressed by Lord Cairns, L.C. at p. 109 of his judgment in Aberaman Ironworks v. Wickens [1868] 4 Ch. App. 101. The passage in the judgment was cited by the Judge at p. 75 of the appeal bundle with emphasis added:

"I have next to advert to the demand which is made on the part of the Plaintiffs for a lien in respect of the purchase-money which has been paid. That question stands thus: - ￡50,000 was paid by Wickens (i.e. the Defendant) to Bailey (i.e. the Vendor) on account of the purchase of the estate. According to the decisions which were referred to - the case of Wythes v. Lee, and the case of Rose v. Watson - Wickens, in the event of the purchase going off, would have a lien for this ￡50,000 upon the Aberaman estate belonging to Bailey. In like manner the company (i.e. the Plaintiff), in their turn, for the purchase-money which they paid Wickens would, in the event of their contract going off, have a lien upon any interest which Wickens might possess in the Aberaman estate; (emphasis added) and, according to the decisions to which I have referred, Wickens, to the extent of the ￡50,000 he paid, had become in equity the owner, by way of incumbrance, of a corresponding amount in value on the Aberaman estate. It appears to me, therefore, upon the authority of those decisions, to be clear that the company, supposing the ￡50,000 had not been repaid by Bailey to Wickens, would have been entitled to maintain a bill against Wickens and Bailey to prevent the money getting back into the hands of Wickens. In point of fact, when the bill was filed, the ￡50,000 had in part been repaid to Wickens, but part of the amount remained in specie in the form of a bill of exchange of Bailey's which had not been paid. This bill of exchange was intercepted by the injunction of the Court; and in respect of it I find ￡6232 is now in Court. Upon that sum it appears to me the Plaintiffs in this suit have established their right to a lien. The decree of the Vice-Chancellor, therefore, must, in my opinion, be reversed; and a decree must be made directing an account of the purchase-money paid by the company to Wickens, and repayment of it, with interest at 4 per cent from the time of payment."

12. It needs however to be borne in mind that the case is clearly distinguishable from the instant case. The first point which was made by Mr. Chan was that the dispute in Aberaman Ironworks was between sub-purchasers and no vendor of the property was involved. Also Lord Cairns never considered the problem in the context of there having been a breach of trust.

13. Mr. Chan also referred to the recent English Court of Appeal case of Hughes v. MacPherson and another (unreported) 17 March 1999. Sir Richard Scott, V.C. referred to Aberaman Ironworks and analysed the situation in this way:

"The correct analysis of the state of affairs produced by the setting aside is that, in my judgment, UCB became entitled, as part of its security and the only enforceable part of its security, to the benefit of the equitable lien to secure repayment of the sum paid by Mr MacPherson to Mr Hughes. The judge was, in my opinion, wrong to exercise his discretion in the way that he did. He could not, in my view, on the one hand, hold that UCB had constructive notice of Mr. Hughes' rights to have the conveyance to Mr MacPherson set aside and, on the other hand, produce a result under which UCB's Legal Charge still bound the estate that was restored to Mr Hughes. There is an evident inconsistency, in my view, in that result. The inconsistency derives, I think, from a failure to recognise the limit of the rights that UCB can claim against Mr Hughes, namely, the rights Mr MacPherson can claim against Mr Hughes, that is to say, the equitable lien to secure the repayment of the sums Mr MacPherson had paid under the agreement to Mr Hughes. That leaves a question of what order should be made in this case."

14. Mr. Chan submitted that in considering the present case it was necessary to bear in mind that D5 had failed to answer the requisitions which the Plaintiff had raised under the sale and purchase contract between them and had given D5 notice on 30th December 1997 terminating the contract and had gone on to give notice of this to all other interested parties.

15. He went on to contend that subsequent to the termination of the agreement the Plaintiff had a lien through D2. When D2 entered into the cancellation agreement with D1 on 24th January 1998 the Plaintiff's equitable interest reverted back to D1 particularly having regard to the fact that he had notice of the dispositions. Whatever the position may have been on the termination of the contract between D5 and the Plaintiff it was clear that when the cancellation agreement was concluded the Plaintiff had a lien through D1.

16. The main point made by Mr. Kwok, S.C. for D1 was that before there could be any question of a lien coming into existence the head agreement between D1 and D2 had to be terminated. Also it had to be established that the termination had not been D2's fault.

17. On the case which had been pleaded in the Statement of Claim this had not been established. The only reference in the pleadings to rescission was in Clause 21(P) where reference is made to D3 purportedly giving notice of rescission allegedly on the basis of D4's breach of their sub-sub-agreement.

18. As D1 had not been a party to this he could not have been affected by the rescission. It was apparent that the transaction which had triggered this litigation was the cancellation agreement. At the time when this agreement was concluded the Plaintiff had no interest in the land which could properly be the subject of a lien.

19. The real question which has to be resolved is the nature of the interest which was acquired by the Plaintiff when he entered into the agreement with D5. What is clear from the documentation is that the interest of D1 as head vendor of the property was sold to the purchaser or sub-purchaser as the case may be. This is consistent with Mr. Chan's contention that D1 held the Plaintiff's interest in the property as a constructive trustee.

20. It is also consistent with Farwell, J's analysis of the position in a similar situation which arose in Whitbread & Co. Ltd. v. Watt [1901] 1 Ch. 911. He said at p. 914 and 915:

"... The matter came before the House of Lords in Rose v. Watson. (2) That case, to my mind, is on all fours with the present. There was first a contract, then a mortgage with notice, and then default by the vendor, and the House of Lords held that the purchaser who had paid a deposit had a charge for that deposit and interest in priority to the mortgagees. It is put by Lord Cranworth thus (3): 'There can be no doubt, I apprehend, that when a purchaser has paid his purchase-money, though he has got no conveyance, the vendor becomes a trustee for him of the legal estate, and he is, in equity, considered as the owner of the estate. When, instead of paying the whole of his purchase-money, he pays a part of it, it would seem to follow, as a necessary corollary, that, to the extent to which he has paid his purchase-money, to that extent the vendor is a trustee for him; in other words, that he acquires a lien, exactly in the same way as if upon the payment of part of the purchase-money the vendor had executed a mortgage to him of the estate to that extent.' And Lord Westbury in the same case had previously pointed out that the money paid in conformity with the contract was part of the purchase-money under the contract, and said (4): 'It was money advanced upon the faith that the land, the subject of the contract, would become the property of the respondent; and being so paid as part of the purchase-money under the contract, and being paid in advance, on the faith of the vendor's performance of the contract, I think that your Lordships will have little difficulty in coming to the conclusion that those sums of money thus paid formed principal sums, in respect of which there became a lien from the time of the payment of them; in consequence of the subsequent failure of the vendor to perform the contract, and becoming such lien, they bore fruit consequently - that is to say, they entitled the person who is possessed of that lien to claim interest in respect of them.' The lien is created by the contract under which the money is paid as part of the purchase-money, and on the faith that the contract will be carried out, and not by the default of the vendor. The default gives rise to the necessity for enforcing the lien, but the lien arises from the contract. I see no reason why a condition that, if 300 houses are not built, the purchaser may rescind should be held to differ in any way from the ordinary condition in a contract that, if the purchaser makes or insists upon any requisition or objection to the title which the vendor is unable or unwilling to comply with, the vendor may rescind. There is no default there, but I venture to think it would not be arguable, and I do not think counsel for the defendant contended, that the purchaser in such a case would have no right to a lien in the same way as if the purchase went off by reason of want of title on the part of the vendor. It is not default. It is rather misfortune. I hold, therefore, that on authority and on principle the purchaser has a lien, both when the contract goes off for want of title and when the contract is rescinded under a condition enabling the purchaser to rescind. If the purchaser himself makes default the case is entirely different. If the purchaser makes default in such a way as to deprive himself of any debt at all, he cannot have a lien for that which does not exist."

21. I have no doubt that the Plaintiff's claim in relation to the lien is arguable. That is all that has to be established on a strike out application. This being the case, in my opinion, the appeal should be allowed and the master's order should be restored.

22. There then remains outstanding the question of the amount to be secured by the lien.

23. Mr. Chan argued that thelis pendens should refer to damages which the Plaintiff would be seeking.

24. He placed reliance upon the observations made by Waung, J. at 359 of Super Keen Investments Ltd. v. Global Time Investments Ltd. [1996] 4 HKC 355:

"The heavy firepower of Mr Chan was directed towards the proposed reamendment of lien on the damages. The subject matter is the purchaser's lien on the default of the vendor and Mr Chan made the powerful point that there is no legal authority saying that there is a lien for damages for loss of profit. He said that while there is authority that equitable lien for deposit paid and that lien could extend to interests and costs, that is the limit of the purchaser's lien and he said that Halsbury's Laws of England on this aspect was wrong. It seems to me that the point is clearly arguable having regard to Halsbury's Laws, Vol 28 para 560-1 and the specimen forms in Atkin, Court Forms. Elaborate arguments were advanced to me by Mr Chan to say that it is clear law that no equitable lien exists for damages in respect of loss of bargain and he cited some old cases in support of his contentions. I found the authority of Whitbread v Watt [1902] 1 Ch 835, which unfortunately was not cited to me by Mr Chan, to be of some guidance. The case concerned the extent of the equitable lien of the purchaser and whether it extends to a case as in that one where the contract was terminated not due to any fault of the vendor but pursuant to a power in the contract for the vendor to rescind. Vaughan Williams LJ said at p 838:

The lien which a purchaser has for his deposit is not the result of any express contract, it is a right which may be said to have been invented for the purpose of doing justice. It is a fiction of a kind which is sometimes resorted to at law as well as in equity ... When Lord Westbury in Rose v Watson speaks of 'transfer to the purchaser of the ownership of a part of the estate corresponding to the purchase-money paid,' and Lord Cranworth speaks of the purchaser being exactly in the position of a mortgagee of the estate to the extent of the purchase-money which he has paid, those expressions are merely verbal vehicles to carry the right which justice demands that the purchaser should have.

Sterling LJ at p 840 also referred to the foundation of the doctrine of lien being the desire to do justice between the vendor and the purchaser. It seems to me that having regard to what was said by the English Court of Appeal in the Whitbread case as the basis of the equitable lien of the purchaser namely to do justice to the purchaser, I see no reason in principle why equity would not recognise the defendant's right to a lien for its damages in respect of its loss of profits. If nothing else, the authority of Whitbread v Watt demonstrates that the point is wholly arguable and in the circumstances, my subsequent perusal of authorities seem to confirm my original view of the equitable reach of the principle of purchaser's lien to cover damages in respect of loss of profits. As was said at p 456 of Snell Equity, an equitable lien arises by operation of equity from the relationship between the parties rather than by any act of theirs. Leave should be given therefore for this heavily contested item of claim."

25. I consider that this is also eminently arguable and that at least the lien would not be limited to the $3,450,000 deposit D2 paid to D1.

Rogers, J.A.:

26. I agree that this appeal should be allowed.

27. It is trite law that on an application to strike out a pleading or part thereof on the basis that it does not disclose a cause of action, or defence, as the case may be, that such an application should only be granted if there is no arguable case. It is not for the Court to strike out a pleading simply on the basis that there is a slim chance of success.

28. Although points of law may be decided on interlocutory proceedings such as strike out applications, that should not occur if there are disputed questions of fact or if subjective elements such as motive, might be relevant.

29. In this case I consider that the Plaintiff's claim in respect of the lien is arguable and that the matter should proceed to trial, and it is undesirable for me to say any more at this stage.

Nazareth, V.-P.:

30. I agree with Mayo and Rogers JJ.A.

31. The predominance of authority cited seems to me to be the effect that a vendor becomes a constructive trustee for a purchaser who has paid part of the purchase money and for the purchaser's assigns of whom he has notice; and that the purchaser is entitled to an equitable lien upon the vendor's interest in the property to secure his payment if the sale and purchase agreement goes off, and presumably likewise their assigns.

32. Moreover, besides Aberaman being distinguishable in the manner pointed out, it seems to me at least arguable that it does not go quite so far as Cheung, J. accepted in the present context.

33. I also agree, for the reasons Mayo, J.A. has given, that the amount of the lien claimed is not restricted to $3,450,000.

34. Accordingly, I would also agree that the appeal be allowed, that the Judge's order be set aside, and that there should be an order nisi that the appellant have its costs of this appeal and before the Judge to be taxed if not agreed.

35. The appeal is accordingly allowed with the orders proposed.