YEAR HARVEST INVESTMENTS LTD v. LABOUR BUILDINGS LTD

HCA 1899/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1899 OF 2008

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J U D G M E N T

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Introduction

1.  This is a summons under Order 86 RHC by which the Plaintiff seeks summary judgment in respect of a very substantial conveyancing transaction relating to a building at 11 Changsha Street, Kowloon which was being operated as two hotels.  The Plaintiff was to be the purchaser and the Defendant, the owner of the building, was vendor.  The consideration to be paid for the building was $160 million which was to include the transfer by the Defendant to the Plaintiff of the guesthouse licences for the two hotels, being the Tatami Hotel which occupied the Ground Floor to the 17^th Floor and the Hampton Hotel from the 10^th Floor to the 18^th Floor.

2.  The Orders sought by the Plaintiff appear in a proposed Minute of Judgment which to be found at A/82-84.  Mr Anderson Chow SC, who appears for the Plaintiff, is asking for orders in terms of para.1, a declaration that the Defendant has not shown good title to the property; para.3, a declaration that the Defendant has not fulfilled a condition precedent of the conveyance by failing to transfer the guesthouse licences for the two hotels in the building; para.5, a declaration that the Defendant has repudiated the Agreement and that the Agreement has been terminated since 30 September 2008 so that the Plaintiff is no longer bound by it or, alternatively, that the Defendant has annulled the Agreement on 30 September 2008 upon the expiration of the notice of annulment given to the Plaintiff’s solicitor on 22 September 2008 pursuant to Clause 11.02 of the Agreement and finally, under para.6, a declaration that the Plaintiff is entitled to the return of the deposit of $16 million together with accrued interest on that amount now held by Messrs Iu, Lai and Li (“ILL”).

3.  As is apparent from the relief that is asked for, the Plaintiff is alleging that the Defendant has failed to show good title and has repudiated the Agreement with the result that it is now entitled to the return of its $16 million deposit and for damages to be assessed.

The Issues

4.  The pleadings, comprising the statement of claim, a Defence and Counterclaim and a Reply and Defence to Counterclaim are 79 pages long and pre-date the issue of the summons for summary judgment by 6 months.  For the purposes of this summons, Mr Chow has confined himself to three issues, which if he succeeds on, will entitle the Plaintiff to the return of the $16 million deposit and damages to be assessed for breach of the Agreement depending on the basis upon which it is proved that the Agreement came to an end.  If it was by effective notice of annulment by the Defendant, then the Plaintiff is only entitled to the return of the deposit but, if it was by repudiatory breaches by the Defendant in having failed to show good title and to transfer the guesthouse licences then the relief would be in the form of damages to be assessed in addition to the return of the deposit.

5.  On the Defendant’s behalf, Miss Catrina Lam submits that on the basis of this application for summary judgment, she is comfortably able to demonstrate that there are triable issues on each of the matters raised by Mr Chow so that the Defendant should have unconditional leave to defence.

6.  I propose to set out the issues first as they arise on the conduct of the transaction and then separately discuss each on the basis of the evidence.

7.  It is helpful to begin by way of background by referring to the fact that the building had originally been mortgaged to the Bank of East Asia.  Arrears had accumulated on the mortgage and the bank sought to enforce its rights under the mortgage.  After a lengthy trial before Gill DHCJ, the bank succeeded and the building had to be sold by the Defendant in order to satisfy the bank’s judgment including the repayment of the mortgage and the arrears.  This sale to the Plaintiff was part of the measures taken by the Defendant to relieve itself from the consequences of the bank’s judgment against it.  Put shortly, it had to pay the bank by obtaining finance elsewhere to do so and then, by selling the building repay its obligations to its creditors who had provided the finance to enable it to pay off the mortgage to the bank.

8.  There are three issues which require resolution by me.  Firstly, did the Defendant fail to furnish the original or certified copies of the title deeds to the building before completion.  Secondly, has there been a failure by the Defendant to transfer the two guesthouse licences to the Plaintiff on or before completion and finally, what was the effect of the Defendant’s purported notice of annulment on 22 September 2008.

9.  In respect of each of these issues, Miss Lam has sought to provide a justification or other response which, she submits, clearly raise a dispute between the parties which can only be resolved at the trial of the action.

10.  In order to understand how the parties have engaged each other on the issues, it is necessary to refer to the conduct of the Agreement for the sale of the building in relation to the material terms of the Agreement from which these issues have emerged.

The Course of the Dispute

11.  On 22 May 2008, the parties entered into a Provisional Agreement for the sale of the building by the Defendant to the Plaintiff for $160 million.  Completion of the conveyance was set to be on or before 30 September 2008 [B1/39-41].  On 6 June 2008, the parties entered into a Formal Agreement for sale [B1/177-196] by which the Provisional Agreement was superseded [Clause 27/186-187].  There are a number of terms in the Formal Agreement to which specific reference needs to be made.  The purchase price of $160 million was to be payable in the three tranches of $5 million, $11 million and, $144 million to be paid on completion.  The Defendant was required to prove title in accordance with section 13 of Conveyancing and Property Ordinance and to furnish to the Plaintiff:

“such original (if they relate exclusively to the Property) or certified or attested copies of any deeds or documents of title (if not relating exclusively to the Property).”

Clause 10.01-2 [B1/180-181].  Any requisitions on title would have to be delivered in writing not later than 14 working days counting from the date of receipt by the purchaser’s solicitor of the “original title deeds … or certified copies thereof ” (as the case may be) from the vendor.  Clause 11.01 [B1/181].  If the purchaser shall make and insist on any objection or requisition which the vendor shall be unable or unwilling to remove or comply with, or if the purchaser shall object to the vendor’s title as being defective, the vendor shall be at liberty, on giving seven working days notice in writing to the purchaser, to annul the sale, in which case all deposits shall be returned to the purchaser without interest, costs or compensation.  Clause 11.02 [B1/181-182].  The vendor undertook to discharge the mortgage with the Bank of East Asia on or before completion and undertook not to create or permit to be created any charge or further charge or mortgage which may affect the property or enter into any agreement to do so.  Clause 19.01 [B1/184].  Time was of the essence in every respect.  Clause 24 [B1/186].  The deposits and part payments in the total sum of $16 million would, as soon as possible after a bank account was opened in the joint names of the purchaser’s and the vendor’s solicitors’ be paid into that account and dealt with in accordance with the provisions of Clause 30.1 [B1/187-188].  The vendor agreed to transfer the two guesthouse licences in respect of the Tatami and the Hampton Hotels to the purchaser or as directed by the purchaser on or before completion.  This term was a condition precedent to the completion of the Formal Agreement.  The vendor would first transfer the Hampton Hotel licence after the Formal Agreement was signed and then transfer the Tatami Hotel licences on or before completion.  Clause A2 of the Third Schedule [B1/91].

12.  It is now necessary to separately deal with the evidence in respect of each of these three issues.  The evidence essentially, as it usually does in disputes of this sort, comprises the correspondence passing between the solicitors as exhibited and commented on in the parties’ affirmations.

(a)  Non-production of the Title Deeds

13.  The relevant correspondence has been identified by Mr Chow in his written argument at para.11 pages 6 and 7.  Rather than reproduce here what would need to be long passages from letters, I will summarise the effect of the correspondence identifying each letter as necessary.  On 29 May 2008, ILL (the Plaintiff’s solicitors) wrote to Waller Ma Huang and Yeung (“WMHY”) introducing themselves as now acting for the Plaintiff in place of Johnson Strokes and Master (“JSM”) and, amongst other important requests, which don’t matter for present purposes, asked to be sent “All original title deeds of these property for approval of title” [B1/63A].  On the same day, ILL delivered a second letter to WMHY referring to WMHY’s letter of 26 May which they had sent to JSM enclosing copy title deeds.  ILL responded in this way insisting on original title deeds:

“We wish to put on record that for the purposes of approving the Vendor’s good title to the Property, we require inspection of the original title deeds relating to the Property exclusively (not just plain copies or certified copies).  Plain or certified copies of title deeds obtained from the Land Registry would not be considered acceptable for the purposes of proving title.  Hence, we will not raise requisitions on title in respect of title deeds relating to the Property exclusively until such original title deeds have been produced to us.”

[B1/86]  On 1 September 2008, a further letter was sent by ILL to WMHY again asking for “the original of the title deeds of the Property to be sent to us for our approval on behalf of our client which we will undertake to hold to your order and returnable on demand” [B1/219].  On 5 September 2008, WMHY responded to say that “the original title deeds and documents” were with the solicitors firm of Fan and Fan who would allow inspection at their offices and that an appointment should be made with them for that purpose [B1/224].  Fan and Fan were the firm of solicitors who were now acting for Winland Mortgage Limited who had granted a mortgage on the property to enable the Defendant to redeem the mortgage with the Bank of East Asia.  On 8 September, ILL responded to WMHY.  Given its importance, I will set out here the material part of the letter:

“We should mention that it is the Vendor’s duty to prove good title to the Property.  Without prejudice to our client’s rights under the Agreement for Sale and Purchase entered into between the Vendor and the Purchaser and in line with conveyancing practice, please send us the title deeds of the Property for our approval of title and rely to the issues raised in our 2 letters dated 1st September 2008 as completion was scheduled to take place on 30^th September 2008.  It is only about 3 weeks from now to the date of completion.  Bearing in mind that the guest house licences have to be transferred to our clients and our client will have to source potential mortgagee to finance the transaction, it is important that we should be provided with the title deeds and all relevant information as soon as possible.  We look forward to hearing from you.”

[B1/226-227].  Notwithstanding the firm tone of that response, on the following day a solicitor from ILL attended the offices of Fan and Fan and inspected the original title deeds for most of that morning.

14.  On 18 September, ILL wrote to David WT Chan & Co. who were now representing the Defendant [B1/266] reminding them of the Defendant’s obligation to produce to the Plaintiff original or certified or attested copies of the title deeds, although now that they had inspected the originals on 9 September at the offices of Fan and Fan, they were able to raise 19 requisitions on title which are set out in that letter including a request for production of the original title deeds.  The following day, the 19 September, Fan and Fan took over from David WT Chan & Co. as the representatives of the Defendant on the conveyance and on 22 September, they delivered a letter to ILL purporting to annul the Agreement.  Given the way that the annulment was said to take effect, this letter, short as it is, ought to be set out here:

“We refer to the Property and your letter of 18^th September 2008 addressed to Messrs. David W.T. Chan & Co. raising requisitions on title of the Property.

We are instructed to give you notice to annul the sale pursuant to clause 11.02 of the Agreement for Sale and Purchase dated 6th June 2008 entered between our client as the vendor and your client as purchaser of the Property (‘the Agreement’) that the Vendor is unable and unwilling to remove or comply with your objection or requisitions as stipulated in your letter dated 28^th September 2008.  Unless the objection or requisitions as stipulated in your said letter dated 18^th September 2008 shall at the expiration of this notice ie. Seven (7) working days from the date of this notice be withdrawn, the sale of the Property shall at the expiration of this notice be annulled.”

The reference to ILL’s letter of 28 September is a typographical error and plainly refers to 18 September [B1/274].  There then followed a letter from Fan and Fan dated 24 September [B1/276] which purported to be a substantive reply to the requisitions raised by ILL in their letter of 18 September.  And so, having purportedly exercised their right to annul just two days previously, Fan and Fan were now treating the Agreement as still afoot.  That aside, Mr Chow refers to para.5 on page 2 of this letter [B1/277] which refers to a list of title deeds and documents which were to be delivered to the Plaintiff on completion.  That list is at page 278 and in respect of the title deeds, items 7 to 22, Mr Chow observes that it is only copies of the title deeds that are to be delivered and not the originals as the Agreement requires.  Additionally, Mr Chow says that this purported compliance by the Defendant falls foul of the Agreement because what was to be tendered would be on completion whereas the obligation was to provide originals before completion (emphasis provided).

15.  The final letter in the series to which reference needs to be made is a long one dated 30 September 2008 [B1/323-328] sent by ILL to Fan and Fan.  It seeks to explain in detail why ILL contend that the Defendant has not complied with its obligations under the Agreement by failing to prove good title timeously, that is to say by 30 September.  At page 327, the complaint is repeated that there has been a failure to produce the original title deeds to the property.

(b)  The Defendant’s Response on the Title Deeds

16.  Miss Catrina Lam has responded in a series of crisp and brief submissions to the effect that, at bottom, the evidence in this matter amply raises triable issues so that there is no scope for a summary disposal of this matter.

17.  On the title deeds, her submission is that the correct view of the evidence is that there is an arguable case that the Plaintiff had waived its right to require delivery of original or certified copies of the title deeds prior to completion.  She refers to a letter from WMHY to ILL dated 29 May 2008 [B1/67] in which they refer to the fact that ILL have already been furnished with copy title deeds from JSM, the Plaintiff’s previous solicitors.  Mr Chow’s response to this is that copies will not to do and that the Agreement requires the originals to be produced.  Miss Lam has also referred to the fact that ILL knew that the originals were with Fan and Fan [B1/224] and that ILL’s Miss Tai had spent the whole morning at Fan and Fan’s offices on 9 September 2008 inspecting the title deeds [B1/245] as a result of which ILL have been able to compile, on my count, 19 separate requisitions including of course for the delivery to them of the original title deeds before completion.

18.  The attraction of Miss Lam’s case is that by having copies of the title deeds and by having inspected the originals for a “whole morning” and therefore being able to compare the originals with the copies that they had in their possession, ILL would have satisfied themselves with the authenticity of the original title deeds and that the copies in their possession were true copies.  Significantly, following the inspection of the originals ILL were able to raise all the requisitions that they needed to.

19.  Mr Chow submits that this is not good enough.  Firstly, under Clauses 10.01, 10.02 and 11.01 the Defendant had the duty to deliver the original title deeds to ILL before completion.  By way of analysis, he makes specific reference to Clause 11.01 under which the time for raising requisitions would not run until ILL had received the original or certified copies of the title deeds (as the case may be) after which ILL had 14 days to raise their requisitions.  From these provisions, Mr Chow says that it must be obvious that the Defendant’s obligation was to deliver the originals or certified copies well before completion.

20.  As a matter of construction, Mr Chow is right and subject to waiver which I will come to shortly, the Defendant was in breach of the Agreement by not delivering the title deeds before completion.

21.  As to waiver, one can readily see the attraction of Miss Lam’s submission that the Plaintiff, apart from being unduly technical in the sense that ILL’s Miss Tai had spent a very productive “whole morning” at Fan and Fan’s offices poring over the original title deeds and was able to investigate everything that she needed to and as a result produced 19 requisitions for the Defendant’s solicitors to respond to.  In fact, so burdensome were the requisitions that the Defendant at first declined to deal with them and purported to annul the Agreement — more of which presently, the Plaintiff has in all the circumstances waived strict compliance with the Agreement by the Defendant.  In the face of an application for summary judgment these facts, says Miss Lam, must merit closer investigation at the trial of the action.

22.  When one considers the to and fro of the correspondence, it is absolutely plain that ILL were not waiving the Plaintiff’s right to have delivered to it before completion the originals, this notwithstanding Miss Tai’s inspection of them on 9 September.  I have already referred to the relevant correspondence in this regard, these being ILL’s letters to WMHY of 8 September [B1/226], their letter to David WT Chan on 10 September (para.3/245) [B1/245], their letter to David WT Chan [B1/266 and 268] and finally, to Fan and Fan [B1/327 at page 5].  See Chitty, 30^th Edition, Vol.1, paras. 22-040 and 22-044.  Where the Plaintiff’s position had been made clear that it was continuing to insist on its rights, it cannot be said that it had waived its rights in this regard.

23.  In such circumstances, where the Defendant had failed to make delivery of the original title deeds and the defence of waiver in this regard has no prospect of success, I conclude that the Defendant has committed a repudiatory breach of the Agreement which by its letter of 30 September [B1/323] the Plaintiff’s solicitors have accepted and this, by itself, has the effect of entitling the Plaintiff to judgment.  There is simply no prospect of the Defendant being able to provide any viable answer to this view of the facts which must result in summary judgment for the Plaintiff.  I will refer to its remedies consequent upon this judgment after I have dealt with the two remaining issues.

Annulment

24.  This refers to the notice of annulment from Fan and Fan at B1/274 dated 22 September.  Notwithstanding this letter, two days later Fan and Fan sent another letter, B1/276, purporting to provide detailed answers to the requisitions.  Mr Chow has submitted that for an annulment to be effective proper reasons need to be advanced.  None were and both parties by their conduct had gone on to treat the Agreement as still afoot and conducted themselves in that way.  For her part, Miss Lam also submits that there has been no valid annulment.  In my view, the purported annulment was an aberration for which no valid reasons have been shown to exist and so, for the purposes of this summary jurisdiction no point can be taken on this issue by either party.  Where both parties really chose to ignore the notice of annulment at the time it also falls to be ignored by me in this proceeding.  The clear evidence is that as a Notice, it was ineffective and the parties treated it as such.

The Failure to Transfer the Hotel Licences

25.  The importance of this feature cannot be understated.  The fact that this building was being operated as two licensed hotels, provided value to the whole transaction.  This was the conveyance of a building which had an existing earning capacity and indeed actually was earning an income.  Accordingly, the Agreement specifically provided for the transfer of the hotel licences as a condition precedent.  Firstly, the transfer of the Hampton licence after the Formal Agreement had been signed and the Tatami had to be transfer on or before completion.

26.  Now Mr Chow relies very firmly on the fact that it was only on 30 September (completion day) that Fan and Fan sent the application forms for the transfers which were unsigned.  I appreciate that for much of the period from early June 2008 when the Formal Agreement was signed the Defendant, almost certainly, was principally pre-occupied with extricating itself from the consequences of the judgment obtained against it by the Bank of East Asia for over $86 million, which required it to find alternative finance secured on the building which it eventually did from Winland Mortgage Limited.  The simple fact of the matter is that it neglected this highly important obligation of transferring the guesthouse licences as provided for in the Agreement.  Of course, it would have been for the Plaintiff to have put up a fit and proper person as licensee who would meet with the approval of the Licensing Authority.  Such applications could not be considered by the Licensing Authority overnight, as it were, hence the built-in provision to transfer the Hampton licence after the signing of the Formal Agreement in June thereby giving a lengthy lead-in time up to completion and then for the Tatami on or before completion.  This was totally neglected by the Defendant and whilst the Plaintiff does not appear to have shown very much urgency in this regard, the primary obligation was on the Defendant to at least start up the process by producing signed transfer application forms in good time.  This it had signally failed to do.  It cannot really lie in the Defendant’s mouth to now say that the Plaintiff had failed to assist it in proceedings in the Court of Appeal whilst it was seeking a stay of the judgment in favour of the Bank of East Asia and also, well after the event, to suggest that the Plaintiff’s candidate as licence holder, its director Mr Sin, was unsuitable.  There is no evidence that this was so, and it is much too late for the Defendant to take this sort of point now after it was plainly in breach of this part of the Agreement by leaving it to the very last moment to start the process of transfer by sending blank unsigned transfer forms on the day of completion.

27.  This therefore also amounts to a repudiatory breach of the Agreement by the Defendant which the Plaintiff accepted by its letter of 30 September.  On this basis as well, the Plaintiff is entitled to judgment.

Remedies

28.  Accordingly, there must be judgment to the Plaintiff in the terms of the Minute of Judgment A/82-84.  As to para.5 of the Minute, the form of the judgment will be as in the first part of the paragraph because there has been no valid annulment of the Agreement by the Defendant for the reasons which I have already given, in which circumstances the alternative form of para.5 of the Minute has no application.