CHAN TAN v. TONG HOI, LO

IN THE COURT OF APPEAL

1997, No. 151

(Civil)

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J U D G M E N T

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Godfrey, J.A. (giving the first judgment at the invitation of Nazareth, V-P) :

Introduction

1. This is an appeal from Wong, J., who on 10 July 1997 upheld an order of Master Chu under which the plaintiff Chan Tan ("the vendor) was granted, under Order 86 of the Rules of the High Court, specific performance of an agreement in writing dated 23 August 1994 for the sale of shares, being an agreement made between three parties, namely, the vendor, one Leung Sum Wing as "purchaser", and the defendant one Tong Hoi, Lo as "second purchaser". The second purchaser, who has been ordered to perform his obligations under the agreement, now appeals.

The agreement

2. By the agreement, the vendor agreed to sell to the purchaser (or, failing him, the second purchaser) and the purchaser agreed to buy from the vendor 5% of the shares in a company called Wide Tech Shipping Limited at what was described as "the value" of HK$2,500,000.

3. This sum was to be paid by twenty-four basic monthly instalments of HK$20,000 to be paid by the purchaser to the vendor at the end of every current (sic) month starting from the end of August 1994 until the end of July 1996. Any dividends in relation to the shares were to be made directly to the account of the vendor and to be credited as a partial payment received from the purchaser.

4. It was provided that if, by the end of August 1996, the total sum of HK$2.5 million had not been settled in full, the vendor would be entitled to additional interest of HK$500,000, and the payment schedule of the agreement would be extended for twelve months, starting from the end of August 1996 up to the end of July 1997.

5. Clause 4 of the agreement reads as follows :

"If either the vendor or the second purchaser, is found offending against this agreement, the offending party, if in case of the vendor, the second purchaser will receive from the vendor compensation of Hongkong dollars one million five hundred thousand only (HKD1,500,000.00) together with all partial payments have been made by the purchaser and the second purchaser according to the payment terms of this agreement. In case the second purchaser offends against this agreement, the vendor will have the rights to forfeit all the partial payments received from the purchaser and/or the second purchaser, and the vendor will have the rights to collect from the second purchaser the difference of payment, with which together with all forfeited partial payments by the vendor to make up the total amount of Hongkong dollars one million five hundred thousand only (HKD1,500,000.00) for compensation within thirty (30) days counting from the day when the second purchaser offends this agreement, and the vendor will deal with these subject shares freely without any objection of and/or any obligations to the purchaser and/or the second purchaser, and this agreement will be null and void."

The second purchaser's case

6. It is said on behalf of the second purchaser, who has been called on to honour his obligations under the agreement after a default by the purchaser on 30 March 1996, that he is entitled to rely on clause 4 as excluding the vendor's right to specific performance. Alternatively, it is said that there was omitted by common mistake from the agreement a provision to the following effect :

"The second purchaser shall have the right at any time before a decree of specific performance shall have been made by the court to pay the difference between $1.5 million and all partial payments and shall not be required to purchase the subject shares."

7. It is said that if the agreement is rectified in this way, the second purchaser would be entitled to avoid the provisions of the agreement by paying the vendor the appropriate sum at any time, and cannot be subjected to a decree of specific performance. And the second purchaser relies on a solicitor's letter dated 6 November 1996 which is said to have exercised his right to do so and on a payment made into court by him on 11 November 1996 of the appropriate sum.

The law as to rectification

8. It is trite law that an action for rectification of a contract cannot succeed in the absence of clear and convincing proof of a common intention on the part of all parties to the contract as a result of which the expression of their agreement in the contract needs to be corrected in some specific way. There may be no evidence as to the exact words which the parties used to express their common intention, but that does not matter. What does matter is that the party seeking rectification should be able to formulate precisely what needs to be inserted into the contract in order to give effect to that common intention.

The present case

9. In the present case, the defence put in for the second purchaser contains the following paragraph 5 :

"5. At a meeting between the 1^st Purchaser, the Plaintiff and the Defendant, it was agreed that 5% of Wide Tech's shares held in the Plaintiff's name as aforesaid should be sold back to the 1^st Purchaser at the consideration of HK$2,500,000.00 to be paid by instalments. The Plaintiff requested the Defendant to act as a relief, or second, purchaser, of the Shares should the 1^st Purchaser be in default of payment. The Defendant was reluctant but finally agreed so to act as the relief, or the second, purchaser on condition that an option be given to him to avoid performing the Agreement upon payment of a specific sum. The Defendant suggested the said specific sum to be HK$1,500,000.00 less any payment made by or on behalf of the 1^st Purchaser and interests or dividends paid by Wide Tech. The Plaintiff agreed and suggested that she may be given the same option to avoid performing the Agreement. The Defendant agreed."

10. It is no doubt pursuant to this arrangement that the agreement was drafted as it was: the second purchaser was himself the draftsman. The question remains whether it contains an error in that it fails properly to reflect the common intention of the parties. The vendor denies that it contains any such error : she never intended that her remedy of specific performance should be excluded in the event of the second purchaser's default.

11. Paragraph 8 of the defence of the second purchaser reads as follows :

"8. Save the Defendant says and avers that Clause 4 of the Agreement gives him and the Plaintiff the right or option to avoid performing the Agreement upon payment of the sum of HK$1,500,000.00 less the said partial payments, paragraph 4 is admitted."

12. Clause 9 of the defence reads as follows :

"9. Alternatively, if, which is denied, the Court finds that Clause 4 of the Agreement does not have the effect as pleaded in paragraph 8 hereinabove, the Defendant says and avers that Clause 4 of the Agreement has by reason of a mistake common to the contracting parties been drawn up so as to militate against their intentions and oral agreements as pleaded in paragraph 5 hereinabove, and that the same ought to be rectified to embody and put into effect the said oral agreements."

13. The case for the second purchaser is not perhaps assisted by the fact that it has been put somewhat differently at different times. For example, in an affirmation of one Yau Kin Keung made on 7 January 1997, the deponent says this in paragraph 4 :

"..... The Defendant said expressly to the Plaintiff that he would enter into the agreement as a second purchaser only on condition that an option be given to him to avoid performing the Agreement upon payment of a specific sum. The Defendant suggested the said specific sum to be HK$1,500,000.00 less any payment made by or on behalf of the 1^st Purchaser and interests or dividends paid by Wide Tech. The Plaintiff agreed and suggested that she may be given the same option to avoid performing the Agreement. The Defendant agreed. It must be emphasised here that there was no obligation whatsoever for the Defendant to purchase the Plaintiff's shares, and it was in the above circumstances that the agreement was signed. ....."

14. In an affirmation made by the second purchaser himself on 23 January 1997, the second purchaser says this in paragraph 7 :

"..... I said expressly to the Plaintiff that I would enter into the agreement as a relief purchaser only on condition that a choice be given to me to limit my loss, and avoid performing the Agreement, upon the payment of a specific sum. I suggested the said specific sum to be HK$1,500,000.00 less any payment made by or on behalf of the said Leung Sum Wing and interests or dividends paid by Wide Tech. The Plaintiff agreed and suggested that she may be given the same option to avoid performing the Agreement. I agreed."

Is there an arguable case for rectification?

15. There is considerable uncertainty in all this as to what exactly it is said the common intention was. If the second purchaser is right, the common intention was that his obligation would amount to no more than a guarantee of the performance of the purchaser's duty under the agreement, his own liability being limited to HK$1.5m, which seems highly unlikely. It is not at all clear when it is that the second purchaser's alleged option can be exercised, or whether there is any time limit for that exercise. The idea that the parties should have solemnly agreed that the alleged option should be exercisable at any time before a decree of specific performance shall have been pronounced by the court appears to me to be absurd. Certainly, parties to an agreement can agree that, on a failure of a party to perform his part of the contract, the other party shall be entitled only to a money payment by way of compensation, and not to specific performance; but this does need to appear with clarity : it is not the general rule. However, the vendor was prepared before us to accept that there is an arguable case for rectification here and so I shall proceed on that footing, as did the judge.

The judgment below

16. I turn now to the judgment of Wong, J. below. The judge recited the facts and referred to the agreement. He said :

"It is clear that the deadline was the end of July 1996 by which time the transaction must be completed. Even if Clause 4 does create the option which was contended for, what is the factual issues to be tried to support the defence of rectification of a common mistake. The Defendant clearly knew what he had contracted for. He wrote to the Plaintiff to acknowledge his obligations under the Agreement and at the end of the letter he said :

'(I) wish that both parties can complete all relevant procedures and formalities within the period prescribed by the previsions, that is, the deadline is before the end of July, 1996, all consequences (thereof) should be borne by you.'"

(I should add that an agreement of this sort is one in the nature of which time is of the essence: see Hare v. Nicoll [1966] 2 QB 130.)

17. The letter to which the judge had referred was a letter in the Chinese language of 30 March 1996, in which (I read from the translation in English) the second purchaser had remarked "I am obliged to perform (such duty as) to take over subscription of the above shares .....". Then came, as the judge noted, two demand letters from the plaintiff's solicitors. On 16 October 1996, the first letter mentioned by the judge, the second purchaser wrote again to the vendor, pleading friendship, favour and bad business, and offering to pay $800,000. On 6 November 1996 he offered to pay $1.5 million (less the amount already paid). This offer, as the judge said, was promptly rejected. The judge concluded :

"In my view, the issues are clear and there is nothing for a trial to resolve. The Defendant knew all the time what his obligations were and the deadline was the end of July 1996. He would have to pay the sum of HK$2,500,000 if he wanted to take the shares and if he did not want the shares he would pay HK$1,500,000 less any amount already paid in either event. This is clearly a case that the Defendant 'has not a shadow of defence', Reichel v Magrath (1889) 15 App Cases 665."

Conclusion

18. I agree with the judge. Clause 4 of the agreement cannot possibly be construed as excluding the vendor's right to specific performance. In my view, no case has been made out which should go to trial for the rectification of the agreement so as to exclude that right of the vendor; but even on the footing that the second purchaser has made out an arguable case for rectification, the second purchaser's attempt to exercise his alleged option was after the end of July 1996 and was therefore made too late. I would add that the second purchaser's letter of 30 March 1996 appears to be an election to proceed with the transaction, rather that the reservation of an alleged right to avoid it.

19. Mr. Chain for the second purchaser accepts that if the defence offered by a defendant to a claim by a plaintiff under O.14 is "practically moonshine" the court can and should reject it.

20. In my judgment, the defence offered in this case is not "practically moonshine"; it is pure moonshine. For these reasons, I would dismiss this appeal.

Cheung, J.

21. I agree.

Nazareth V-P:

22. I also agree.

23. Mr Chain has sought to rely upon paragraph 4 of the affirmation of Yau Kin-keung and paragraph 7 of the second purchaser to found his case for rectification; and in the end it comes to only that. The version there is disputed by the vendor. Mr Chain's final formulation of the rectification itself is faced with obstacles. The most obvious of these is that no payment of the balance of the amount of $1.5m was made. To contend that payment could be made after the time of completion of the agreement (and even after an order for specific performance) as he was constrained to, is clearly absurd as Godfrey JA has pointed out.

24. The appeal is accordingly dismissed with an order, which Mr Chain acknowledges he is unable to resist, that the appellant pay the respondent's costs of the appeal.