HANSUN INVESTMENT LTD v. SINCERE UNION DEVELOPMENT LTD AND ANOTHER

HCMP 351/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 351 OF 2007

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J U D G M E N T

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1.  This is an application for determination of a question of law or construction under O. 14A r.1 RHC; alternatively, as a preliminary issue under O. 33 rs. 3 and 4.  Consequential declarations and orders are also asked for.

Background

2.  The proceedings began life as an originating summons.  The plaintiff (Hansun Investment) having on 5 July 2004 completed the purchase of premises at 203, Tung Choi Street Kowloon (the property) from the 2^nd defendant (Asia Champion) and registered the assignment, seeks to have cleared from the title registration of a provisional agreement for sale entered into prior in time between Asia Champion as vendor and the 1^st defendant (Sincere Union) as purchaser. 

3.  What happened in that transaction was that following their committing to the provisional agreement Sincere Union paid in two instalments $1.83 million towards the purchase price to Asia Champion’s solicitors to be held by them as stakeholder pending completion.  Sincere Union then registered the provisional agreement. 

4.  But the parties fell out over the terms of the formal agreement for sale and purchase, so there was none.  Nor was there completion on the due date, 5 July 2004, or thereafter.

5.  The sale having thus fallen through, Asia Champion treated Sincere Union as being in repudiatory breach of the provisional agreement and gave notice accepting such repudiation, and thus that the deposit was forfeited. 

6.  There then followed correspondence between the solicitors for the parties concerning their respective rights.  I shall return to this, for it features materially in the case made for Hansun Investment in support of its application.

7.  Meanwhile on the same day designated for completion of the sale to Sincere Union, Asia Champion sold the property to Hansun Investment and completed forthwith.  Having in due course registered the assignment to it, Hansun Investment received financial accommodation from a company called Extra Power Limited (Extra Power), which registered a legal charge against the title.

8.  Sincere Union declined to enter into a cancellation agreement with Asia Champion or otherwise cause the registration of the provisional agreement to be vacated; this gave rise to Hansun Investment’s originating summons, filed in February 2007.  By its terms it seeks declarations that the provisional agreement has been terminated and that Sincere Union is not entitled to pursue specific performance.

9.  Sincere Union responded by filing Proposed Points of Counterclaim, serving Hansun Investment, Asia Champion and Extra Power.  By its terms it claims that it was Asia Champion that was in repudiatory breach of the provisional agreement, but that it had not accepted that; thus the provisional agreement has not been terminated, preserving to it its remedies, including specific performance.  The alternative remedy of the return of the deposits paid is in the meantime preserved by its lien, protected by the registration of the provisional agreement. 

10.  Sincere Union counterclaims for the vacating of the assignment to Hansun Investment and charge in favour of Extra Power.

11.  With matters of fact, namely the status of the parties to the provisional agreement in dispute, the proceedings were converted into an action with directions.  This took place in August and September 2007.

12.  Sincere Union filed a counterclaim seeking from Asia Champion specific performance or in the alternative damages.  Against Hansun Investment it claims that the registration of the assignment to it be vacated.

13.  Then it was that Hansun Investment made the application that is before me; I come to that next.

The Application for Determination of a Question of Law or Construction, or a Preliminary Point

14.  This was made and filed in November 2007, and invites resolution of the following two questions:

(i)  has the provisional agreement between Asia Champion and Sincere Union been terminated?

(ii)    is Sincere Union barred from enforcing the provisional agreement by specific performance?

15.  Consequent upon a positive answer to these questions, declarations to that effect are sought.  Further, that registration of the provisional agreement be vacated, upon Hansun Investment providing sufficient security to protect Sincere Union’s prospective right to a purchaser’s lien over the property. 

16.  Finally, it seeks an order striking out Sincere Union’s counterclaim against it.

17.  Sincere Union filed its own application seeking a dismissal of Hansun Investment’s application. 

18.  Asia Champion and Extra Power indicated no interest in the application and were given leave to take no part.

The Issue

19.  There is really only one.  Regardless of the outcome of disputes of fact and law between Asia Champion and Sincere Union, is Sincere Union to be barred from pursuing specific performance, and should it with appropriate and adequate protection afforded by Hansun Investment be required to give up its purchaser’s lien over the property?

The Case in Opposition

20.  Mr Campbell representing Sincere Union submitted the application was misconceived; that declaratory relief sought by Hansun Investment was not available to it because it was not a party to the provisional agreement; thus it has no right to intervene.  It was for this reason that Sincere Union filed its application for a dismissal. 

21.  In support of this contention, Mr Campbell took me to two cases; Meadows Indemnity Co. Ltd v The Insurance Corporation of Ireland PLC [1989] 2 Lloyd’s Rep.298, and Yarwinder Gill v Siu May Tsang [2003] WL 21554631 (Ch. D).

22.  In the former case, Nourse LJ said at p.309:

“I accept the general submission that was made to us that a person not a party to a contract has no locus, save perhaps in exceptional circumstances, to obtain a declaration in respect of the rights of other parties to that particular contract.  It would be contrary to the whole principle of privity to allow such a person to obtain such a declaration.  He has no ‘rights’ in respect of that contract and has no claim for relief under it.”

In the latter case, Geofrey Vos QC referred to the above passage, and then said at para.41:

“41.   This was not a case, like Meadows, where a stranger to a contract was seeking declarations as to the rights of others.  Pamigold was simply seeking to be heard as to the proper order to be made, in a case where its own interests were intimately concerned.  That is not to say that the court will allow a party in Pamigold’s position to make unlimited submissions as to the rights and duties arising under the First Contract.  The court should, I believe, be (and has been) astute to ensure that Pamigold was not intermeddling in the rights of the parties to the First Contract and in the order of specific performance, to which it was not a party.  That is, however, something different from being heard in defence of its legitimate interests, as the party that had paid for and gone into possession of the Property.  Even if the Meadows dictum were directly applicable, I would hold that the circumstances of this case were exceptional, so that Pamigold could and should have been heard before Master Price, and now before me.”

23.  Secondly, the court having last year converted the originating summons into an action because of the material disputes of fact and law in the determination of the respective rights and remedies of Asia Champion and Sincere Union, those disputes should be resolved before a finding to determine the status of the preliminary agreement can be made.  And one area involving Hansun Investment needs to be explored; namely, that Hansun Investment purchased and completed on the very day set aside for completion of the sale to Sincere Union.  The terms of that should, he submitted, “excite strong suspicion” that the parties committed to that transaction before the due date for completion of the provisional agreement.

24.  These issues must, he submitted, bear strongly in the exercise of the court’s discretion where the remedy sought is specific performance.

25.  I shall deal with these preliminary objections first.

The Appropriateness of the Application

26.  I have no difficulty in finding that Hansun Investment is entitled to pursue the declaratory relief it applies for.

27.  As Mr Ho SC representing Hansun Investment submitted, this is not about his client intermeddling in a contract between other parties to determine their respective rights, but the seeking of a determination of the dispute between itself and Sincere Union over which of them has priority on the register.  That is the lis between them; the existence of an encumbrance on the title.

28.  Secondly, that there remains at large a significant dispute between two of the parties giving rise to the converting of the summons into an action does not of itself render inappropriate a preliminary point application.  This is because the outcome turns on the availability to Sincere Union of the remedy of specific performance, given the best case scenario (for Sincere Union) that it succeeds on liability.  It is not about the exercise of a discretion.  It is whether the remedy of specific performance as a matter of law is or is not available to it.

29.  This availability is largely determined by the correspondence and conduct (or inactivity) which followed the non-performance of the provisional agreement following the due date of completion.

30.  I come to deal with that next.

Is Specific Performance Available?

31.  I begin by quoting from the speech of Lord Wilbeforce in House of Lords case of Johnson v Agnew [1980] AC 367, which dealt with the remedies available to an innocent vendor (or, for that matter, an innocent purchaser) where the other side fails to complete a contract for the sale or purchase of property.  He said at p.392:

“In this situation it is possible to state at least some uncontroversial propositions of law.

First, in a contract for the sale of land, after time has been made, or has become, of the essence of the contract, if the purchaser fails to complete, the vendor can either treat the purchaser as having repudiated the contract, accept the repudiation, and proceed to claim damages for breach of the contract, both parties being discharged from further performance of the contract; or he may seek from the court an order for specific performance with damages for any loss arising from delay in performance.  (Similar remedies are of course available to purchasers against vendors.)  This is simply the ordinary law of contract applied to contracts capable of specific performance.

Secondly, the vendor may proceed by action for the above remedies (viz. specific performance or damages) in the alternative.  At the trial he will however have to elect which remedy to pursue.

Thirdly, if the vendor treats the purchaser as having repudiated the contract and accepts the repudiation, he cannot thereafter seek specific performance.  This follows from the fact that, the purchaser having repudiated the contract and his repudiation having been accepted, both parties are discharged from further performance.”

32.  In this case both parties claim the other was at fault.  Asia Champion made it clear where it lies; it claimed Sincere Union was in repudiatory breach and accepted that repudiation which terminated the contract.  Thus it was entitled to forfeit the deposits and sell to Hansun Investment.

33.  For its part, what steps did Sincere Union take?  For the answer, I turn first to the correspondence, between its solicitors Charles Yeung Clement Lam Liu & Yip (CYCL) and those representing Asia Champion, Hui & Lam (HL). 

34.  The first letter from CYCL, dated 5 July 2004, was in response to a letter from HL of the same date in which HL gave notice that its client was holding Sincere Union in repudiatory breach and that it accepted that repudiation and that the deposits were forfeited.

35.  CYCL recorded the history of the events and then put their client’s position:

“In view of the above, your client has, in breach of the terms of the Provisional Agreement, failed to complete the transaction.  Your client’s purported forfeiture of the stakehold money of HK$1,830,000.00 (‘the Stakehold Money’) is wrongful and wholly without basis.  You are, therefore, requested to return the Stakehold Money to us for our onward transmission to our client.  If you shall unlawfully transfer and/or release the Stakehold Money to your client or any third party, our client will claim against your firm personally for the Stakehold Money.  In addition, our client will claim against your client for all losses damages to be suffered by them due to your client’s breach of the Provisional Agreement.  All our clients’ rights in this case are hereby expressly reserved.

…”

36.  On 7 July CYCL wrote again, calling for “the return to our client forthwith” of the deposit, of $1.83 million.

37.  On 10 July CYCL wrote again:

“We refer to our letter dated 7^th July 2004.

We now write to inform you the following:-

As the transaction was fallen through, we will arrange for the cashiers orders be cancelled.

We will further remit the balance of the purchase price in the sum of HK$16,470,000.00 to our client accordingly.

In the meantime, please return to us, on our client’s behalf, the stakehold money of HK$1,830,000.00”

38.  And on 21 February 2005 CYCL wrote:

“We put on record that the one who was in breach of the Provisional Agreement is your client because your client failed to make the arrangement to complete the transaction on the scheduled completion date.  The sum of HK$1,830,000.00 (‘the Stakehold Money’) should be returned by your client to ours.  Our client will not, as unreasonably suggested by you, relinquish its claim on the Stakeheld Money.”

39.  As a matter of historical fact, Sincere Union did not, and nor did anyone on its behalf, take any step to pursue specific performance of the provisional agreement or give notice of its intention to do so, before service of Hansun Investment’s originating summons in February 2007, more than 30 months after the date of completion.

40.  In respect of this correspondence, and this inactivity, Mr Ho submitted that the stance consistently taken by Sincere Union was all along that the transaction had in the words of its solicitors “fallen through”, giving rise to its persistent demand for the return of moneys part paid, and the cancellation of the cashiers’ orders for payment of the balance.

41.  The fact that the provisional agreement had been registered does not assist Sincere Union, for the protection of registration cannot last beyond the time when it ceases to be registrable; that is, when specific performance is no longer available.

42.  He quoted from a passage in a Privy Council case Anstalt Nybro v Hong Kong Resort Co. Ltd [1980] HKLR 76, read by Lord Lane at page 81:

“There is no doubt that the agreement was prima facie registrable. …

…

The question that has to be considered in the present case is this.  If the case proceeds to trial is there any likelihood that specific performance of the option agreement would be ordered?  If so, then the land may be ‘affected’ by Nybro’s equitable interest and the agreement is registrable.  If not, there is no sufficient interest affecting the land and it was right to order the entries to be vacated.”

43.  In short, Sincere Union clearly intimated that it was neither willing nor ready to continue with the purchase.  The contract was no longer on foot or alive for performance.

44.  Mr Campbell submitted that there was no election made by Sincere Union to the effect that the provisional agreement was at an end.  Concerning the letter of 5 July from CYCL to HL whose concluding paragraph I have reproduced, he said it makes the following points:

“(i)   it states that Asia Champion had breached the Provisional Agreement;

(ii)   it states that the forfeiture of the deposit was unlawful;

(iii)   it demands a return of the stake held money for onward transmission to Sincere Union;

(iv)  it states that Sincere Union would make a claim for all losses suffered as a result of the breach of the Provisional Agreement by Asia Champion;

(v)   it is specifically stated that ‘all our client’s rights in this case are hereby expressly reserved.”

45.  He put particular store by the fifth point, referring to the case Stocznia Gdanshka SA v Latvian Shipping Co. [2002] 2 Lloyd’s Rep.436, wherein Rix LJ noted the importance of an “express reservation of rights” in negating the presumption that a party was abandoning its common law rights.

Discussion and Determination

46.  Certainly Sincere Union did not in words spelt out as such accept Champion Asia’s repudiation and terminate the agreement, as did Champion Asia.

47.  But the acceptance does not have to be as succinctly communicated.  As Lord Steyn said in Vitol SA v Norelf Ltd [1996] AC 800 at p.810:

“My Lords, the question of law before the House does not call for yet another general re-examination of the principles governing an anticipatory breach of a contract and the acceptance of the breach by an aggrieved party.  For present purposes I would accept as established law the following propositions.  (1) Where a party has repudiated a contract the aggrieved party has an election to accept the repudiation or to affirm the contract: Fercometal S.A.R.L. v Mediterranean Shipping Co. S.A. [1989] A.C. 788.  (2) An act of acceptance of a repudiation requires no particular form: a communication does not have to be couched in the language of acceptance.  It is sufficient that the communication or conduct clearly and unequivocally conveys to the repudiating party that that aggrieved party is treating the contract as at an end. …”

48.  It seems to me that the matter is resolved by answering this question: if one had been the recipient of the letters written by CYCL post the completion date, could one treat them as unequivocal conveyance by Sincere Union that the provisional agreement is at an end?

49.  What is apparent when one reads the letters (and not just the highlights I have reproduced) is that CYCL are persistently calling for the return of the deposits which of course is the antithesis of keeping the contract to purchase alive.  That is coupled in one of the letters with the somewhat ungrammatical but clearly stated expression:  “As the transaction was fallen through” and cancellation of the cashiers’ orders, signalling an intention by their client to return the purchase moneys to its pockets and the termination of contractual relations.

50.  That as I find quite plainly spells out the position taken by the aggrieved purchaser.

51.  Does the reservation of rights keep the door open?  I find not.  In the context of the letters, I believe that amounts to the reservation by Sincere Union of its right to sue for damages over and above the recovery of the $1.83 million. 

52.  Nowhere in the correspondence do CYCL refer to specific performance.

53.  It is true that silence or inactivity will generally not be regarded as the communication of acceptance of a repudiation, because those states do not usually amount to a clear and unequivocal communication.  Here there has been both silence and inactivity, and that following the correspondence I have referred to.  As I find, that further endorses and confirms Sincere Union’s communicated election to accept the repudiation. 

54.  And once a repudiation has been accepted, the acceptance cannot be withdrawn; see Chitty on Contracts 29^th edition para. 24-013.

55.  It follows therefore that the provisional agreement has been terminated, by whom, for the purpose of this exercise, it matters not.  If Sincere Union were to win on liability after trial, its remedy against Asia Champion will lie only in damages.

The Purchaser’s Lien

56.  Hanson Investment having stated a willingness to put up sufficient security in the shape of a guarantee or bank’s performance bond to protect Sincere Union’s claim under this head, I can deal with this without regard to the merits of the claim.

57.  Registration of the provisional agreement shall be vacated upon completion of such security, with liberty to apply if the parties cannot settle the terms.

The Counterclaim

58.  The counterclaim against Hansun Investment is to be struck out.

The Order

59.  I turn to Hansun Investment’s application to recite the terms of the order.

60.  The questions posed at 1(i) and (ii) are answered in the positive, determined pursuant to O.14A r.1 RHC;

there shall be:

declarations sought at 2(i) and (ii);

an order in terms of 3(i), with liberty to apply;

a declaration as per 3(iii);

an order as per the first part of 3(iv).

61.  The application of Sincere Union for a dismissal is dismissed.

62.  Costs are nisi.  They are to Hansun Investment taxed if not agreed.