REGAL SUCCESS VENTURE LTD v. JONLIN LTD. AND ANOTHER

CACV 221/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 221 OF 1999

(ON APPEAL FROM HCMP 5118/1998)

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J U D G M E N T

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Hon Godfrey JA :

Introduction

1. This is a purchaser's appeal from an order of His Honour Judge Anthony To (sitting as a deputy judge of the Court of First Instance of the High Court) made on 25 June 1999. By his order, the judge resolved a dispute between vendor and purchaser in favour of the vendor. The issue, in essence, is whether in the events which happened the purchaser was entitled to terminate its contract with the vendor pursuant to a provision in the contract which entitled it to do so "... if the Solicitors [Vincent T.K. Cheung, Yap and Co.] shall not be satisfied that [the vendor] has a good title to the Property ..."

The facts

2. The material facts are as follows.

3. "The Property" (owned by a company all the issued shares in which were the subject of the sale) consisted of a number of undivided shares in some land in Kowloon on which had been erected a building known as "Sun Hing Building".

4. These shares carried the right to the exclusive use of a number of shop and office units within that building, and also the exclusive right to use certain exterior parts of the building for the purpose of erecting thereon a signboard or signboards.

5. The contract (to which a guarantor associated with the vendor was also a party) was made on 6 June 1998. Completion was to take place 3 months thereafter. The consideration was to be calculated in accordance with the provisions in that behalf contained in the contract and was substantial. So were the purchaser's deposits.

6. Clause 5(a) of the contract related to title. It reads as follows :-

"5. TITLE

(a) Subject to Clauses 5(b) and (c), the Vendor and the Guarantor shall at their own costs and expenses prove that the Company has a good title to the Property in accordance with section 13 of the Conveyancing and Property Ordinance (Cap. 219) to the satisfaction of the Solicitors Provided that any requisitions or objections in respect of the title or otherwise in respect of the Property shall be delivered in writing by the Solicitors to the Vendor not later than seven (7) Business Days after the date of receipt of the title deeds and documents concerning the Property by the Solicitors otherwise the same shall be considered as waived (in which respect time shall be of the essence of the Agreement) and if the Solicitors shall make and insist on any objection or requisition in respect of the title which the Vendor and the Guarantor shall be unable or (on the grounds of difficulty, delay or expense or on any other reasonable ground) unwilling to remove or comply with or the Solicitors shall not be satisfied that the Company has a good title to the Property in accordance with section 13 of the Conveyancing and Property Ordinance (Cap. 219), the Purchaser shall have the option to terminate this Agreement by notice in writing to the Vendor or the Guarantor, whereupon this Agreement shall be terminated the Purchaser being in that event entitled to a return of the Deposit which shall have been paid by the Purchaser forthwith and if the return is made within three (3) days without interest, costs or compensation."

("The Solicitors" referred to in this Clause are the firm I have identified above.)

7. In a lengthy letter (which I do not think it necessary to set out here) dated 20 July 1998, addressed to the vendor and copied to the purchaser, the Solicitors, citing the decision of the Court of First Instance in a case called Jumbo King Limited v. Faithful Properties Limited, stated, among other things, that they took the view that the vendor's title to the "exclusive right" to erect signboards on the exterior of the building was defective, because no undivided share in the land and building had been allocated "to such area". They said they would advise the purchaser on that issue accordingly, and would revert to the vendor after taking the purchaser's instructions.

8. On 27 August 1998, the purchaser wrote to the Solicitors instructing them to demand, pursuant to clause 5(a) of the contract, the return of all the deposits paid by the purchaser.

9. On 28 August 1998, the Solicitors replied to the purchaser, amplifying the reasons they had given for their concern as to this issue, but listing a number of factors telling the other way, as to which they said this :-

"We are concerned that, notwithstanding the judgment in the Jumbo King Limited's case, the above factors may affect a court's decision if the present issue shall be taken to the court for resolution and settlement.

In light of the above comments, you may wish to re-consider your position under the Agreement for Sale and Purchase dated 6 June 1998."

10. On 2 September 1998, solicitors now instructed for the purchaser wrote to solicitors now instructed for the vendor as follows :-

"We refer to a letter from Vincent T.K. Cheung, Yap & Co. dated 20th July 1998 raising requisitions in respect of the Property which remain unanswered. We note that, despite the imminent Completion Date, the Vendor has been unable to remove the requisitions raised. We also note that Vincent T.K. Cheung, Yap & Co., being the Solicitors (as defined in the Agreement for Sale and Purchase), consider that the Company's title to the Property is defective.

We are accordingly instructed to exercise the option granted to the Purchaser to terminate the Agreement for Sale and Purchase pursuant to Clause 5(a) of the Agreement for Sale and Purchase.

Please treat this letter as formal written notice to your clients that the Agreement for Sale and Purchase is hereby terminated and that the Deposit in the sum of HK$16,000,000.00 should be returned to our client forthwith."

11. On 3 September 1998, the vendor's solicitors write to the purchaser's solicitors refusing to accept this, and the battle lines were drawn.

The law

12. The Jumbo King decision at first instance mentioned above was overruled by the Court of Appeal, and that court's decision has been affirmed by the Court of Final Appeal. Now that the dust has settled, it is clear that there was no substance in the objection raised by the Solicitors as to the title to the "exclusive right" to erect signboards.

13. However, the vendor cannot object to the purchaser's termination of the contract under the provisions in that behalf contained in clause 5(a) if the Solicitors had, in fact, advised the purchaser that they were not satisfied as to the title. That is subject only to this, that such advice must have been given reasonably and in good faith : see Chin Chiu Cheng v. Kan Fat Cotton Co. Ltd. [1999] 2 HKC 502.

The issue

14. The issue then is simply whether the Solicitors here (acting reasonably and in good faith) did advise the purchaser that they (the Solicitors) were not satisfied as to the title.

The judgment below

15. The judge, after carefully reviewing the correspondence summarised above, expressed the opinion that the Solicitors "had never made any unequivocal statement that they were not satisfied with the proof of title"; that if they had expressed a view to that effect, it was "not one which a reasonably competent solicitor would have reached"; and that they had not "acted in good faith in refraining from forming an opinion in favour of satisfactory proof of title".

Conclusion

16. I have reached a different conclusion from that reached by the judge. As it seems to me, the correspondence summarised above does reveal that the Solicitors had advised the purchaser that they, the Solicitors, were not satisfied with the title, thus triggering the purchaser's right, which it duly exercised, to terminate the contract under the relevant provision of clause 5(a). I can see no warrant at all for questioning the good faith of the Solicitors, and very little for questioning the reasonableness, at the time it was given, of their advice. The decision at first instance in the Jumbo King case, although wrong, did lead to uncertainty as to the validity of rights to exclusive use not, or apparently not, supported by the allocation or allotment of such rights to an undivided share or undivided shares in land. The Solicitors clearly never reached any concluded view as to whether the title was good or bad; but that is not what was required of them. It is, in my judgment, sufficient that they should have concluded that there were doubts as to the title, for that is quite enough for them to declare themselves, as I am satisfied that they did, not satisfied with it.

Result

17. Accordingly, I would allow the appeal; set aside the order made below; substitute for it a declaration that in the events which happened, the purchaser has validly terminated the contract pursuant to clause 5(a) of the contract and is entitled to repayment of its deposits (with such consequential orders as to payment as may be necessary); and order, pursuant to Order 42 rule 5B(6) of the Rules of the High Court, that the purchaser's costs, here and below, be taxed and paid by the vendor to the purchaser.

Hon Rogers JA :

18. I have had the advantage of reading in draft the judgment of Godfrey JA. I agree with it and with the draft order proposed.

19. The crucial question in this case is whether the plaintiff was entitled to terminate the Agreement on the grounds that the "Solicitors" were not satisfied that the defendant had a good title to the Property.

20. In my view, the Solicitors unequivocally stated that the title was defective in their letter of 20 July 1998. At that time, the Solicitors were entitled to rely upon the decision at First Instance in Jumbo King Ltd v. Faithful Properties Ltd & Ors HCMP No. 160 of 1998. Their view in the matter cannot be regarded as anything other than a view formed in the light of careful perusal of current authorities. Still less could that view be said to have been perverse or not bona fide.

21. The plaintiff's instructions to the Solicitors on 27 August were plain and unequivocal instructions to terminate the Agreement. The Solicitors' letter of 28 August whilst in some respects, softening the objection to title, did not advise the plaintiff that the Vendor had good title. Rather it draws the plaintiff's attention to the fact that it might be held that there was good title, for example, on the basis of continuous occupation and enjoyment for more than 20 years, which might trigger provisions of the Limitation Ordinance.

22. It appears to me that the Agreement and in particular Clause 5(a) was designed so that the plaintiff could avoid such difficult questions relating to title. The thrust of the Agreement was that the Solicitors should have to be satisfied as to title; this would give the plaintiff security without the necessity for litigation. The fact that the Solicitors were acting for both parties was thus, in the circumstances, more understandable.

23. Even if paragraph 2 of the Solicitors' letter of 20 July 1998 could be considered a requisition rather than an objection, there was no answer prior to the termination of the Agreement which in my view was properly effected by the letter of 2 September 1998 from the plaintiff's new solicitors if not by the letter of 28 August 1998 from the plaintiff addressed to the Solicitors but evidently passed on to the Vendor.

24. In view of the terms of the Agreement and in particular the fact that if the plaintiff were to terminate the Agreement if it would have to do so, prior to the date for completion which was fast approaching, and the fact that the objection to title raised in the letter of 20 July had never been answered, in my view it cannot be said that the termination was premature. Furthermore, the matters raised in the defendants' solicitors' letter of 4 September would not, it seems to me, answer the objection based on the First Instance decision in the Jumbo King case.

25. The only remaining matter in the judgment below is whether the Solicitors were incompetent in failing to appreciate that the decision in Leung Kwok-kau v. Tam So-wa [1968] HKLR 673 showed that the objection based upon the Jumbo King decision was misplaced. Even if the decision in the Leung Kwok-kau case would have provided an unanswerable proof that the Vendor's title were good, there seems to me to be no justification in imposing upon the Solicitors any higher standard of care than normal. In my view, however, the Leung Kwok-kau case does not assist in the resolution of the matter. The fact that there can be no legal estate in the vertical surface of the wall does not seem to me to affect the issue as to whether the right to use a wall can be passed.

Hon Keith JA :

The construction and ambit of cl. 5(a)

26. Cl. 5(a) of the agreement lies at the heart of this appeal. Its construction is disputed. It is set out in its entirety in the judgment of Godfrey J.A., and it is unnecessary for me to repeat it here. Mr. Denis Chang S.C. for the purchaser contended that the critical words of cl. 5(a) are:

".... the Vendor and the Guarantor shall .... prove that the Company has a good title to the Property .... to the satisfaction of the Solicitors .... and if .... the Solicitors shall not be satisfied that the Company has a good title to the Property ...., the Purchaser shall have the option to terminate this Agreement ...."

Thus, the purchaser's option to terminate arose irrespective of any objections or requisitions as to title which may have been served on the vendor. Once Messrs. Vincent T.K. Cheung, Yap & Co. ("Cheung Yap") formed the view that they were not satisfied with the company's title, the purchaser's right to terminate the agreement had been triggered.

27. I cannot go along with this construction of cl. 5(a). It fails to give effect to the provisions in cl. 5(a) relating to requisitions and objections. In my view, the proviso to cl. 5(a) limited the circumstances in which the purchaser could exercise its right to terminate the agreement under cl. 5(a) if Cheung Yap chose to make any objections to, or serve any requisitions on, the vendor relating to the company's title. If they did, the purchaser's right to terminate the agreement under cl. 5(a) only arose if one or other of two alternative conditions were fulfilled:

(a) if "the Vendor and the Guarantor [are] unable or (on the grounds of difficulty, delay, expense or on any other reasonable ground) unwilling to remove or comply with" the requisition or objection, or

(b) if Cheung Yap are not "satisfied that the Company has a good title to the property in accordance with section 13 of the Conveyancing and Property Ordinance (Cap. 219)".

Since section 13 of the Conveyancing and Property Ordinance sets out the manner of proving title, condition (b) would only be satisfied if Cheung Yap were not satisfied that the company's title to the property had been proved.

28. A further question arises as to the ambit of condition (b). At what stage was it open to Cheung Yap to form the view that it was not satisfied that the company's title to the property had been proved? Since condition (b) only arose if Cheung Yap had chosen to make objections or serve requisitions relating to the company's title, any view formed by Cheung Yap before they had considered the responses to the objection or requisition would not have been an opinion of the kind contemplated by condition (b). Having said that, though, condition (b) contemplated that any response to the objection or requisition should be received within a reasonable time. Accordingly, in order to give effect to the presumed but unexpressed intention of the parties, it is, in my view, necessary to imply into condition (b) a requirement that Cheung Yap's view - that they were not satisfied that the company's title to the property had been proved - had to be formed after they had considered any response to the objection or requisition, provided that that response was received within a reasonable time of the objection or requisition.

29. But suppose that Cheung Yap's concern about the company's title was based upon a defect which the vendor contended was capable of being remedied by the date fixed for completion? Could the parties really have intended that in those circumstances Cheung Yap's lack of satisfaction about the company's title to the property should entitle the purchaser to terminate the agreement under cl. 5(a)? I think not. Accordingly, in order to give effect to the presumed but unexpressed intention of the parties, it is, in my view, necessary to imply into condition (b) a requirement that, if the vendor contended that the defect which was causing Cheung Yap not to be satisfied that the company's title to the property had been proved was a defect which was capable of being remedied, Cheung Yap had to have formed the view (in good faith and on reasonable grounds) that the defect was either incapable of being remedied by the date fixed for completion or had not in fact been remedied by that date.

30. Before turning to the application of cl. 5(a) to the facts, there is one further issue as to the ambit of cl. 5(a) which Mr. Ronny Tong S.C. for the vendor and the guarantor raised. He contended that it takes very clear language for the court's jurisdiction to determine whether a good title had been proved to be ousted. He argued that the language of cl. 5(a) was not so clear as to cause the views of Cheung Yap as to title to oust that jurisdiction. I reject this argument. It is sufficient for me to state that I regard the language of cl. 5(a) as clear on the topic. The effect in law of the language used was to make proof of title dependent on the views of Cheung Yap, provided that they were held (a) in good faith and (b) on reasonable grounds: see Hudson v. Buck (1877) 7 Ch.D. 683 at p.687 (which contains Fry J.'s classic statement of the law in this area), Curtis Moffat Ltd. v. Wheeler [1929] 2 Ch. 224 at pp.233-235 (not following obiter dicta to the contrary in Hussey v. Horne-Payne (1879) 4 App. Cas. 311), Caney v. Leith [1937] 2 All E.R. 532 (in which Farwell J. considered all the relevant authorities) and the recent local case of Chin Chiu Cheng v. Kan Fat Cotton Co. Ltd. [1999] 2 HKC 502.

The application of cl. 5(a) to the facts

31. In their letter of 20th July 1998 to the vendor, Cheung Yap objected to the company's title. That objection was based on the fact that no undivided share in the land and the building had been allocated to that part of the building on which the vendor was said to have the "exclusive" right to erect the signboards. The proviso to cl. 5(a) was therefore invoked. It is plain that in that letter Cheung Yap had expressed the view that the company's title was defective. It is also plain that, although Cheung Yap were having second thoughts about that view by the time they wrote their letter of 28th August 1998 to the purchaser (with a copy to the guarantor but not, curiously enough, to the vendor), they still had some doubts about the company's title. It could therefore accurately be said that Cheung Yap were not at that stage satisfied that the company's title to the property had been proved. Indeed, in the light of the current state of the law, as expressed by Mr. Recorder Kwok S.C. in Jumbo King Ltd. v. Faithful Properties Ltd. (HCMP 160/98) at first instance on 9th July 1998, it is not, in my opinion, possible to say that the view expressed by Cheung Yap was not held in good faith or on reasonable grounds.

32. Cheung Yap had not, at that stage, had the vendor's response to the objection to title. But five weeks had passed, and the date for completion was only a week or so away. More than enough time had been given to the vendor for its response. Cheung Yap were thus entitled to form their view on the question of title without waiting any longer for a response from the vendor.

33. The only remaining question, therefore, relates to the remediability of the supposed defect in title. Mr. Tong argued that the defect perceived by Cheung Yap was capable of being remedied, because the company could have allocated an undivided equal share to that part of the building by the date fixed for completion. That may or may not be so, but even if the company could have done that, and even if that would have removed the supposed defect, the critical fact is that the vendor had never pointed that out to Cheung Yap. Accordingly, the limitation on the application of condition (b) to reflect defects which were capable of being remedied did not arise.

34. In summary, therefore,

(a) although Cheung Yap were having second thoughts by 28th August 1998 as to whether the company's title was defective, they were not at that stage satisfied that the company's title had been proved,

(b) the absence of any response by that date from the vendor to Cheung Yap's letter of 20th July 1998, and the imminence of the date fixed for completion, entitled Cheung Yap then to give effect to their lack of satisfaction about the company's title,

(c) the vendor's failure to inform Cheung Yap of its contention that the defect which Cheung Yap were concerned about was capable of being remedied by the date fixed for completion meant that Cheung Yap's failure to address that question was not something about which the vendor could subsequently complain.

Conclusion

I have very considerable sympathy for the Deputy Judge who had difficult questions of contractual construction and their application to the facts of the case to decide. The fact that, rightly or wrongly, I have reached a different view from him in no way detracts from the clarity of his judgment, which was exceptionally well argued. But for the reasons which I have endeavoured to give, I agree that the appeal should be allowed, with the orders which Godfrey J. A. proposes.