MEXON HOLDINGS LTD. v. SILVER BAY INTERNATIONAL LTD.

FACV No. 16 of 1999

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 16 OF 1999 (CIVIL)

(ON APPEAL FROM CACV No. 76 OF 1999)

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Between:

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J U D G M E N T

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Mr Justice Litton PJ:

Introduction

1. Lippo Tower is a well-known landmark in the Central District of Hong Kong. It forms part of the large commercial complex called Lippo Centre. It is over 30 storeys in height. Prior to the end of 1992 the whole of the 33rd floor was in one ownership. At the end of that year the 33rd floor (which in gross measures about 1364m2) was subdivided into six units with common facilities such as corridors, lavatories etc. to be shared by the co-owners. The units were sold off and a sub-deed of mutual covenants was created for the purpose of allocating undivided shares in the land and building to the various units, and to regulate the rights of the co-owners of the 33rd floor inter se.

The agreement

2. This appeal concerns the unit known as Room 3301 on the 33rd floor which was bought by the appellant (purchaser) from the respondent (vendor) under an agreement dated 29 May 1997. Completion of the transaction was due to take place on 31 January 1998. Clause 13 provides:

"13. Requisitions and objections (if any) in respect of the title or description of the said Property or otherwise arising out of this Agreement shall be delivered in writing to the Vendor's solicitors within 7 workings days after receipt of all the title deeds and documents by the Purchaser's Solicitors. Any requisition or objection not so delivered shall be deemed to have been waived."

3. Clause 15 says:

"15. Time shall in every respect be of the essence of this Agreement."

4. On 3 June 1997 the title deeds and documents were delivered to the purchaser's solicitors. Among the documents was a certificate by an authorized architect Mr Chung dated 10 November 1992 which says:

"(1) The sub-division of the captioned premises into 6 units (as shown in the attached plan) complies in every respect with the present Building Ordinances and Regulations.

(2) The partition walls as illustrated in the attached plan and indicated in red making such sub-division do not involve structural alteration and are exempted works under the present Building Ordinances and Regulations. These partitionings do not require the submission of plans for the approval of the Building Authority under the present Building Ordinances and Regulations.

(3) The partition wall between 2 units abut upon the window mullion only."

5. The vendor's solicitors supplied at the same time a letter dated 17 November 1992 from the managers of Lippo Tower giving their approval to the partitioning of the 33rd floor into the six units as proposed and stating their agreement to the sub-allocation of undivided shares in the land and building.

6. There was, on the face of the documents, nothing which contradicted the truth or accuracy of the statement in the architect's certificate. The vendor had, on the basis of those documents, shown a good title to the property agreed to be sold. The documents, as Rogers JA said in the Court of Appeal, showed "a clear chain leading back to the base of the title".

The requisition or objection

7. On 6 November 1997, long after the time limit in clause 13 had expired, the purchaser's solicitors wrote to the vendor's solicitors as follows:

" We refer to the above property and to the Architect Certificate dated 10th November 1992 in relation to the partitioning of the 33rd Floor on which the above property is located.

We noticed that the said Certificate did not specify that such partitioning did not contravene the Fire Regulations applicable.

Please let us have a fresh Architect Certificate to confirm same."

8. The vendor's solicitors replied:

" According to Clause 13 of the Agreement for Sale and Purchase dated 29th May 1997 signed by our respective client, you have failed to raise requisitions and deliver the same to us within the 7-working day requisition period. Therefore, your client is deemed to have waived his right to raise requisition on title to the above property and to have accepted the title thereto. In this connection, we shall not entertain your requisition so delivered after the requisition period."

9. There followed an exchange of letters in which the purchaser's solicitors said that the time limit did not apply as the requisition went to the root of title: a proposition which the vendor's solicitors denied. This exchange of letters advanced the matter no further.

Further objection taken

10. On 16 December the purchaser's solicitors wrote enclosing a letter from Mr Andy K.M. Leung, an authorized architect, saying that from the assignment plan for the 33rd floor it appeared that the layout of Room 3301 might have "contravened Building Regulation 41(1) by failing to comply with clause 12(b)(ii) of the Code of Practice on Provisions of Means of Escape". The letter went on to say that to find out if the layout of Room 3301 was such that the "travel distance" referred to in the Code of Practice was in fact exceeded, site measurements would have to be taken. They were later taken. On 21 January 1998 the purchaser's solicitors wrote, enclosing a letter from Mr Leung stating as follows:

"... the Premises has contravened Building (Planning) Regulation 41(1) by failing to comply with clause 12(b)(ii) of the Code of Practice on Provision of Means of Escape, since the maximum travel distance from the Premises to the entrance of the escape staircase enclosure has exceeded 18M."

11. The purchaser's solicitors said that unless the vendor's solicitors could provide "clear evidence" that the Building Regulation had not been contravened, they could not advise the purchaser to accept the vendor's title.

12. On 31 January the purchaser rescinded the agreement and demanded the return of the deposit. The vendor's response was to forfeit the deposit for wrongful repudiation, reserving the right to claim for damages for breach of contract against the purchaser.

The Proceedings

13. On 12 February 1998 the purchaser issued an originating summons for declarations:

(1) That its requisitions and objects in respect of the vendor's title had not been sufficiently answered by the vendor;

(2) that the vendor had failed to show a good title to the property, and

(3) that it was entitled to determine the agreement.

14. The purchaser sought an order for the repayment of the deposit.

15. The matter was heard by Findlay J who, by his judgment dated 2 February 1999, granted to the purchaser the reliefs sought. His judgment was, however, quashed on appeal by the Court of Appeal (Nazareth V-P, Mayo and Rogers JJA). That Court held unanimously that the purchaser's requisition must be deemed to have been waived as it was out of time; since the requisition did not go to the root of title, the time limit in clause 13 could not be disregarded; the purchaser was therefore bound in law to complete.

16. The purchaser being dissatisfied appealed to this Court, seeking a restoration of Findlay J's judgment.

The vendor's obligation

17. The vendor's obligation under clause 12 of the agreement was to show a good title to the property and "to furnish to the purchaser such attested or certified copies of any deeds or documents of title" as might be necessary to complete such title. This obligation was discharged in early June 1997 when the necessary documents were delivered to the purchaser's solicitors. There is no doubt that on the face of those documents the vendor had shown a good title.

Two hurdles

18. The purchaser, in the circumstances of this case, had two hurdles to surmount: (1) Whether it had raised sufficient doubts concerning the vendor's title, such that it could reasonably have said that the title which the vendor was proposing to convey on completion was not a good title; (2) whether the alleged "defect" raised in the requisition was of such nature and extent that, in law, the time limit in clause 13 of the agreement could be disregarded, or be deemed to be inoperative.

19. Both points (1) and (2) above focus on the alleged breach of Regulation 41(1). There was, unfortunately, not much elaboration of the point in Findlay J's judgment. What it boils down to is this: If, because of the way the 33rd floor had been partitioned, there was a real risk that some governmental agency such as the Building Authority or the Director of Fire Services might lawfully have intervened, resulting in the property being saddled with a substantial incumbrance, or causing the owner's occupation and quiet enjoyment of the property to be substantially disturbed, then the first hurdle at any rate might well have been surmounted. The question of equity's intervention, to relieve the purchaser from the consequences of its own bargain, limiting the time for requisitions of title, might then have come into play.

Means of escape

20. When the purchaser's solicitors first wrote in early November saying that they "noticed" that the architect's certificate of 10 November 1992 did not specify that the partitioning "did not contravene the Fire Regulations", and asked for a fresh certificate to "confirm the same", this was a meaningless request. There are no such things in the statute book as "Fire Regulations". Later, the purchaser's solicitors wrote enclosing a letter from the architect Mr Leung which complained of failure to comply with the Code of Practice on Provisions of Means of Escape. This is a Code published by the Building Authority for the guidance of authorized persons and others responsible for the design of new buildings. It provides guidance to the exercise of discretion by the Building Authority under s.16 of the Buildings Ordinance, Cap. 123 in dealing with the approval of plans for new buildings. The Code defines "travel distance" as the distance required to be traversed from any point in a storey of a building to the nearest fire-resisting door in the staircase enclosure. Clause 12(b)(ii) of the Code - which Mr Leung claimed had been breached - says in effect that for a building with two or more staircases the maximum travel distance is 36m, but when the exit route is in one direction only the maximum travel distance is 18m. The Code, as mentioned earlier, relates to new buildings; it would seem to have no application to internal partitioning works which do not involve the structure of the building. Whether, by such works, a fire hazard might have been created, that is an entirely different matter: That would involve the consideration of circumstances by the Director of Fire Services, not the Building Authority. For the purposes of this appeal, this point can be disregarded: Mr Kotewall SC counsel for the purchaser has in the course of the hearing expressly disavowed any suggestion that there might have been a fire hazard created on the 33rd floor.

Regulation 41(1) of the Building (Planning) Regulations

21. Mr Leung had, as earlier mentioned, asserted that "the premises ... contravened Building (Planning) Regulation 41(1)".

22. Regulation 41(1) states:

"(1) Every building shall be provided with such means of escape in case of emergency as may be required by the intended use of the building."

23. The Planning Regulations, as the name implies, govern the planning of buildings, before they are built. The intended use of Lippo Tower was commercial. There is no suggestion that the tower block, as built, had not been provided with adequate means of escape in case of fire. The subdivision of the 33rd floor into six units in 1992, according to the architect's certificate of 10 November 1992, did not involve the structure of the building. It required no submission of plans for approval under s.16. Such work was exempted from the provisions of the Ordinance: s.41(3). Hence it is highly questionable whether the Code of Practice was engaged at all, in the context of this case. This point, highly relevant to the alleged defect in the title, was barely touched upon in Findlay J's judgment. The judge said:

"It seems to me that there was a prima facie case here that the sub-division of the floor might have resulted in an unauthorized partition because there had been no proper provision for adequate means of escape in case of emergency."

24. The judge reached this conclusion upon the competing testimony of the two "experts", Mr Chung and Mr Leung, both architects. Their expertise was necessarily confined to their own field. The proper interpretation of the Buildings Ordinance and its Regulations, and the question of how the Code of Practice applied within the statutory scheme, were matters for the judge alone to decide: They were not matters within the expertise of Mr Chung or Mr Leung. Unfortunately, that was not how the matter was approached at trial. The judge said he "preferred" Mr Leung's evidence to that of Mr Chung and hence found for the purchaser.

25. The point on which the alleged "contravention" of Regulation 41(1) was based is this: Upon a close measurement, the distance from the furthest corner of Room 3301 to the nearest fire-resistant door was found to be approximately 22m: That is, 4 metres over the "maximum travel distance" stipulated in clause 12(b)(ii) of the Code. If the Code applied to the internal partitioning work effected on the 33rd floor in 1992 then the Code had not been followed to the letter. Assuming that was so, the question still remains: How is this relevant to the title which the vendor had contracted to convey? And, perhaps even more pertinent in the context of this case, how does this fact assist the purchaser in overcoming the time-limit in clause 13?

First principles

26. A good title does not mean a perfect title, free from every possible blemish. Whenever a question like this arises, it must be approached from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain. If the purchaser, in truth, had a real concern over the way the 33rd floor had been partitioned in 1992, it could have written a letter to the Building Authority expressing its concern, upon the assumption that the Building Authority would act in a fair and reasonable manner. The purchaser's solicitors' letter of 6 November said they noticed that the architect's certificate did not specify that the partitioning did not "contravene the Fire Regulations". They did not say when they first noticed this fact. The director who later on made an affirmation in support of the purchaser's case did not in turn say when this matter had first come to his notice. Assuming it was shortly before the letter of 6 November was written, (not necessarily a sound assumption), there was still ample time for the matter to be clarified with the Building Authority. Instead, the purchaser chose to put forward a case based upon surmise and conjecture as to what the Building Authority might do because of the alleged "contravention of Regulation 41(1)". These are hardly the circumstances under which equity would go to the aid of an allegedly aggrieved party.

The Court of Appeal

27. The Court of Appeal proceeded on the basis that there was a "blot" on the vendor's title and that the judge's finding in that regard could not be disturbed. For my part, that conclusion is highly questionable having regard to the circumstances as outlined earlier. Be that as it may, the Court of Appeal went on to conclude that such "blot" was, as Mayo JA puts it, "of a peripheral nature" and that the vendor was justified in declining to entertain the requisition: It was months out of time. In this regard the Court of Appeal is plainly correct. 7 working days for the purchaser's solicitors to scrutinize the title deeds and documents might have been an extremely short time. But, in entering into the agreement, the parties were separately represented by solicitors. The purchaser could have bargained for a longer time: completion was not to take place until 8 months after the contract. In principle, courts give effect to bargains freely made: Though, as was observed in Jumbo King Ltd v. Faithful Properties [1999] 2 HKCFAR 279 at 294, there are undoubtedly cases in the books where a clause restricting inquiries into the vendor's title has been held not to be a bar to relief when the purchaser discovered from other sources that the proffered title was worthless. In the circumstances of this case any discussion of the juridical basis of such an approach would be wholly academic. The so-called defect went nowhere near to the root of the vendor's title.

28. Equally academic would be a discussion as to whether the assistance of equity might be withheld from the purchaser because the "defect in title" might have been discovered by it by the exercise of "due diligence" at an early stage.

Conclusion

29. It would be appreciated that the approach to the purchaser's requisition taken in this judgment is somewhat different from that taken by the Court of Appeal. I would, for the reasons given above, dismiss the purchaser's appeal.

Mr Justice Ching PJ:

30. I agree with the judgment of Mr Justice Litton PJ.

Mr Justice Bokhary PJ:

31. I agree with Mr Justice Litton PJ's judgment. If I may say so, I view it as a significant contribution towards the case law which serves to preserve bargains. And I propose to say just a few words as to why I take that view.

32. It will be observed at once that the judgment of course studiously avoids prejudging what the position might be in any instance where the attitude of the Building Authority or the Director of Fire Services is known. In the present case the purchaser's requisition on title is raised solely by reference to what the purchaser contends it is reasonable to apprehend that the Building Authority might do.

33. Shortly stated, the purchaser's argument runs along the following lines. There is, the purchaser argues, a real risk that the Building Authority will use his powers under s.24 of the Buildings Ordinance, Cap. 123, so as to make a demolition order against the partitioning wall in question, or will use the threat of such an order to force the sealing off of so much of the unit in question as would bring the unit's means of escape travel distance within the code of practice maximum. It appears that about 13 percent of the unit would have to be sealed off to achieve this. The foregoing risk, the purchaser argues, would constitute an encumbrance on the title.

34. Either party could have - but has not - adopted the course of asking the Building Authority what attitude he took, and then adducing evidence of his answer. I say nothing as to which, if either, party such an omission would adversely affect in a case where a requisition is raised within time.

35. But this is not such a case. This purchaser's requisition was raised out of time: almost fully five months after the expiration of the period fixed by the sale and purchase agreement for raising requisitions. It is therefore unnecessary to decide what the position would have been if the requisition had been raised within time. Whatever the position might then have been, I do not think that the purchaser can succeed in the actual circumstances of the present case.

36. Although it could have asked the Building Authority what attitude he took and then adduced evidence of his response, the purchaser has chosen instead to invite the court to in effect proceed by way of surmise as to what the Building Authority might do. I doubt if that is a choice open to a purchaser who is out of time for raising requisitions and who asks the court in effect to relieve him of the ordinary contractual consequences of his lateness. Nor does the purchaser's difficulties end there. It is not adequately explained why its requisition was as late as it was. One cannot rule it out as a real possibility that the purchaser was watching the property market for a time before deciding to raise its requisition.

37. Whatever may be the basis and scope of the court's jurisdiction to entertain a late requisition it must at least be necessary for there to be a strong case in which the party invoking such jurisdiction has taken all practicable steps in his power to make the position as clear as possible for the court. That cannot be said to be the position in the present case.

Mr Justice Mortimer NPJ:

38. I would add a few words upon the relevance of Regulation 41(1) of the Building (Planning) Regulations and in particular the question raised by Mr Justice Litton PJ whether the Code of Practice 1986 is engaged at all in this case.

39. Clause 13 of the agreement imposes fewer restrictions upon the purchaser than the equivalent considered by this Court in Jumbo King Ltd v. Faithful Properties [1999] 2 HKCFAR 279. Nevertheless, as was pointed out in argument by Lord Cooke NPJ, the disputed requisition was made long out of time and the burden rests upon the purchaser to justify it.

40. Mr Kotewall SC seeks to justify the requisition on the basis that the partition wall between rooms 3301 and 3301A involves a breach of Building (Planning) Regulation 41(1).

41. As can be seen from the facts detailed by Mr Justice Litton PJ, Mr Kotewall SC can only establish a breach of Regulation 41(1) by reference to the Code of Practice. His difficulty is that on its face the Code of Practice applies only to new buildings. It sets out the Building Authority's policy towards the approval of plans for new buildings. This is consistent with Regulation 41(1) as a planning Regulation providing for the means of escape required by the intended use of a building.

42. I am far from satisfied that the purchaser has demonstrated that Regulation 41(1) applies to Room 3301 in the circumstances of the case. Indeed I would have been prepared to dismiss the appeal on this basis but for the fact that counsel had not previously engaged this issue either at first instance or in the Court of Appeal.

43. As it is, I entirely agree with the judgments of Mr Justice Litton PJ and Mr Justice Bokhary PJ. For the reasons they give I would dismiss the appeal.

Lord Cooke of Thorndon NPJ:

44. I agree.

Mr Justice Litton PJ:

45. The Court unanimously dismisses the appeal with costs.