SUMMIT LINK LTD. v. SUNLINK GROUP (HONG KONG) CO. LTD.

HCMP No. 2439/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MICELLANEOUS PROCEEDINGS NO. 2439 OF 1998

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J U D G M E N T

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This is a Vendor and Purchaser Summons by the Plaintiff vendor concerning the sale of Units 3601-3602 on the 36th Floor of Peregrine Tower of Lippo Centre ("the Property"). The Plaintiff seeks declarations that, inter alia, (i) title requisitions have been satisfactorily answered by the Plaintiff; (ii) the Plaintiff has delivered proof of good and valid title to the Defendant; and (iii) consequential relief.

2. By a Sale and Purchase Agreement dated 6th January 1998 ("the Contract"), the Plaintiff sold the Property to the Defendant at $40,850,000. Completion was to take place on 28th May 1998. The Defendant has paid deposits totalling $8,170,000.

3. The relevant terms of the Contract are:-

"Clause 4(a) The Vendor declares that all title deeds relating exclusively to the Property will be delivered to the Purchaser's Solicitors. Should the Purchaser require certified copies of the Government Leases or other title deeds and documents not in the Vendor's or in his mortgagee's/chargee's possession to complete such chain of title extending to at least 15 years before the date hereof, all costs and expenses for obtaining such certified copies of any documents in the Vendor's or his mortgagee's/chargee possession as well as to the Property the purchaser shall pay the cost of such certified true copies.

(b) For the purpose of enabling the purchaser to approve the title of the property, the purchaser shall accept

(i) production of photocopies of the title deeds or documents of title of the property to which the purchaser is entitled in law (other than those relate exclusively to the Property) together with

(ii) an undertaking from the Vendor's solicitors to deliver the original thereof (if it relates exclusively to the Property) or a certified copy thereof from the Land Registry within seven days upon their receipt of the same from the Land Registry but in any event not later than 60 days after completion

as sufficient production and delivery of such title deeds and documents without requiring for the production and delivery of the same prior to completion. The failure of the Vendor to furnish certified copies of the said title deeds and documents to the Purchaser on or before the date of completion shall not by itself be a ground for delaying or postponing completion by the Purchaser or be treated as a default or failure of the Vendor to complete the sale and purchaser herein.

(c) The requisitions or objections in respect of the title or otherwise arising out of this Agreement shall be delivered in writing to the Vendor's solicitors within 7 working days after the receipt of all the title deeds by the Purchaser's solicitor or within 7 working days of the reply of the Vendor's solicitor to such requisitions otherwise the same shall be considered as waived (in which respect time shall be of the essence of the agreement). (Emphasis supplied)"

4. Title deeds of the Property were delivered to the Defendant's solicitors on 7th January 1998. By a letter dated 14th January 1998, the Defendant's solicitors raised requisitions. There followed a series of exchange of correspondence between solicitors for the Plaintiff and solicitors for the Defendant on numerous issues on title or on adequacy of answers to requisitions. In fact, as of the day before trial, the Defendant maintained that there were seven outstanding requisitions. However, on the day of trial, counsel for the Defendant abandoned three of the seven outstanding requisitions. The surviving requisitions, each fatal to the Plaintiff's case, constitute one prong of attack. The other prong of attack relate to an unauthorised pantry annexed to the Property which was demolished before time for completion.

5. It is common ground that if the Plaintiff succeeds the Plaintiff is entitled to damages being the difference of $40,850,000 and $31,450,000 (the agreed market value of the Property on completion date and arguably further less $200,000 if value of the demolished pantry is not to be taken into account) and credit is to be given to the $8,170,000 deposit already paid. On the other hand, if the Defendant succeeds, it is entitled to full refund of $8,170,000.

6. Both counsel opened with several general legal principles which in deference to counsel ought to be tackled first.

Time for Proof of Title

7. Miss Wong for the Defendant contended that a vendor must (i) properly answer requisitions and (ii) prove title within a reasonable time before completion to enable the purchaser to satisfy himself on the matter, get his money ready and complete on the day fixed. The authority for these propositions is the celebrated case of Active Keen Industries Ltd v. Fok Chi-keong [1994] 1 HKLR 396. Litton JA (as he then was) held at 405 and 406 that:

"Whilst I expressed hesitation in the course of the hearing of this appeal on this point, I am satisfied that even though the Chinese agreement is wholly silent on the question of objections and requisitions as to title, there is an obligation on the vendor to show a good title. This obligation arises by necessary implication from the contract itself. This accords with common-sense. Were the law otherwise, the purchaser might be left in the position of having to make a snap decision on the day fixed for completion, on scanty information, as to whether to complete or not. It follows that this obligation falling on the vendor to properly answer requisitions and inquiries, if reasonably raised by the purchaser, must be discharged within a reasonable time, to enable the purchaser to satisfy himself on the matter, get his money ready and complete on the day fixed.

Obviously, if a purchaser raises a substantial objection as to the vendor's title and there are facts within the vendor's knowledge which, if revealed, might meet the objection, and the vendor chooses to withhold that from the purchaser, the vendor clearly cannot, on the day fixed for completion, turn round and say to the purchaser. "Now I will both show you a good title and make you good title; you pay the balance of the purchaser price today or I will rescind." The purchaser must be given reasonable time to consider the title of the vendor and his own position; the implied obligation of showing a good title would not have been discharged by disclosure on the day fixed for completion."

In the present case some of the answers or response to requisitions on title reached the Defendant as late as completion day. In one instance, the Plaintiff took steps to cure the problem raised by requisition but did not report on progress.

8. If I understand correctly Mr. Chan for the Plaintiff, the counter-argument runs like this. In the absence of specific time limit for answering requisitions, although there is an obligation to give the purchaser reasonable time to prepare for completion, the vendor cannot be held in default if the purchaser does not put the vendor on notice of the need to comply by a certain time. For support, counsel relied on Emmet on Title (19th Edition) at pp 5/104-5:-

"5.081 Times for replies and observations - Most sets of conditions of sale did not specify any particular time within which a vendor must reply to his purchaser's requisitions. However, the Standard Conditions of Sale (3rd edition, 1995) stipulate a time-limit of four working days after receipt of requisitions for the vendor to reply (Condition 4.1.1). If a late reply is followed by a late completion the purchaser may be able to claim compensation (Condition 7.3).

Otherwise, where a vendor has failed to reply to a requisition within a reasonable time, the purchaser wishing to insist upon a reply should serve a notice on the vendor fixing a time within which the vendor is to reply and which is to be of the essence (see per Upjohn LJ in Re Stone and Saville's Contract [1963] 1 WLR 163, at p.171). Service of such a notice will not be necessary where the vendor has acted so that the only reasonable inference is that he is not going to reply, for instance, by serving a notice to complete whilst there are outstanding requisitions (ibid).

It is usually provided in practice that the purchaser's observations on the vendor's replies to requisitions must be made within a stipulated number of days, time being of the essence: see Standard Conditions of Sale (2nd edition, 1992) Condition 4.1.1 - three working days. Otherwise the implication appears to be that the purchaser has the same time for his observations as for his original requisitions. Also if the vendor's reply to an original requisition has had to take the form of a supplementary abstract of title, then further requisitions on the abstract are regarded as original requisitions for which the purchaser has the appropriate time (Re Ossemsley [1937] 3 All ER 774). Where the vendor's solicitors purported to reply to a requisition (as to the statutory acknowledgement regarding documents of title) by writing a letter which gave no answer to the particular question (also failing to reveal the lack of a valid acknowledgement concerning an earlier conveyance), the Court of Appeal held that there had been no 'reply' at all: accordingly time did not run against the purchaser so as to entitle the vendor to serve a notice to complete: Pratt v. Betts (1973) 27 P & CR 398."

9. In Re Stone and Saville's Contract [1963] 1 W.L.R. 163 at 171, Upjohn LJ (as he then was) said:

"I only desire to add one sentence on the first point. No doubt it is true that in the ordinary case where one party, the vendor, fails to answer a requisition, it is normally right for the purchaser, insisting on the requisition, to give some notice making time of the essence and putting a period within which the vendor must answer the requisition. That was not done in this case and the judge in the court below held that it was unnecessary. In my judgment he was entirely correct in doing so. There had been repeated reminders that this important requisition No. 22, which really went to the root of the whole contract, had not been answered and it was plain from their letter of July 26 that the purchaser's solicitors were taking a very serious view of the omission to answer this requisition. But no answer came and all that happened was that on August 11 a notice to complete was given by the vendor. That notice as consistent, and consistent only, with the view that the vendor considered that he had completely fulfilled his part of the bargain and the purchaser was failing to perform hers. In those circumstances the only reasonable inference that could be drawn was that the vendor was not going to answer their important requisition, and, therefore, it was quite unnecessary to give any notice making time of the essence."

10. In this case, completing the argument, the Defendant did not put the Plaintiff on notice that it needed whatever minimum time reasonably necessary. The Defendant just did not come to complete because the property market had fallen.

11. Miss Wong, on the other hand, had an ingenious reply. Counsel pointed out that in England time is not of the essence for estate contracts. In Hong Kong, and particularly provided in the Contract, time is of the essence. Hence it is not appropriate to follow the English practice as demonstrated in Emmet on Title and Re Stone and Saville's Contract.

12. The controversy did not stop with timing. Mr. Chan tried to impress upon the court that conveyancing is not a game of battle, but a game of co-operation. It is no good for one or the other party setting up trip-wires and then wait silently to watch the opposite party fall before reaching the finishing line. Miss Wong retorted by saying that each party ought to know its duties and obligations, especially where there are solicitors acting, and that therefore there is no need for reminder by any kind of notice about time running out or matters outstanding.

13. I should think some kind of notice putting time of the essence is immensely desirable. I say so for practical reasons. First, to set the time table for orderly completion. "Reasonable time" per se does not make allowance for the special circumstances of the parties or a peculiar requisition. A purchaser may need as little as half an hour's time to obtain a cashier order for completion. Another may need a couple of days' advance notice in order to draw on banking facilities. The vendor does not usually know what sort of time is "reasonable" for the purchaser. It is much better that the purchaser puts the other party on notice. Of course, there may be the odd purchaser who wants everything done yesterday; in such case the purchaser begs unwarranted litigation and cannot expect sympathetic hearing. In this respect, I envisage there can be a global notice and particular notices. A global notice caters for time needed for general final preparation. I would expect, in the vast majority of cases, the purchaser would sensibly specify by notice that he be given at least a few hours or one day. A particular notice is specific to a particular matter. For instance, if there is requisition on a particular title document which requires rectification, the purchaser may justifiably need a few days to study and to do research on the rectified document or new document to decide whether the method of rectification is acceptable. But in a case of requisition for production of say certified copy of occupation permit which is available somewhere, it should not take more than a couple of minutes for the purchaser to satisfy himself that the certified copy eventually produced is acceptable.

14. The second practical consideration is to minimise misunderstanding. The vendor may believe that a particular requisition has been answered or does not need further attention when in fact the purchaser is waiting for a better response. In some cases, the parties may argue for cross purposes. A concluding notice forces the parties to focus on the real issue to be resolved by what point in time. Of course, I take on board the argument that conveyancing solicitors need no reminder. However, it is Murphy's Law - whatever can go wrong will go wrong - that the courts should endeavour to abolish. It is far much better to set up proof against fools in practice than to look for proof of the worse fool at trial.

15. As to the law, time for answering requisitions cannot be of the essence where the contact does not stipulate any deadline for the purpose. The time, if essential, is absent. In the normal course of events, a purchaser is bound by contact to have money ready for completion. If at the moment for completion the vendor is unable to deliver good title or possession, there is nothing to stop the purchaser from withholding payment and claim damages. A purchaser has no right to extra advance notice for completion where completion date and hour(s) have been provided for by contract. Again, in the normal course of events, the requisitions raised by a purchaser should specify how defect or deficiency may be cured. If the vendor comes on completion day with the cure as demanded, it does not take more than simple checking by the purchaser to verify that its demand has been met.

16. Miss Wong treated Active Keen as the Bible for conveyancing lawyers. On the duty to properly answer legitimate requisitions, Active Keen is the authority. However, on the question of time for answering requisitions, with respects, Miss Wong has definitely over-stated. In Active Keen the Court of Appeal was dealing with an open contract which did not provide at all for objections and requisitions as to title. In a case like the instant one, where there is contractual provision for raising objections and requisitions and for the time for doing so and time for completion but not the time for answering, the clear intention of the parties must be that the vendor may have up to the moment for completion to prove title. There is no place for the court to re-write or supplement the contract for the parties. Had they wanted, the parties could have inserted further stipulations as to time for answering requisitions. They could also make such time of the essence by serving notice.

17. In conclusion, Mr. Chan for the Plaintiff has correctly stated the law on this issue.

18. Even if I am wrong in coming to the conclusion I just did, the "reasonable time" stipulated by the Court of Appeal in Active Keen is very short indeed in the run of the mill cases as I have explained in Paragraph 15 supra. So short that it is counted by the hour rather than days. Where a purchaser does need extra time to get the money ready, provided the reason is made known to the vendor, the purchaser is entitled to reasonably longer time warning before completion. Or, if the vendor deals with a requisition otherwise than in the manner demanded by the purchaser, the purchaser is entitled to time in terms of days to reason with such response. In other words, "reasonable time" is to be determined by reference to circumstances and reasons made known to the vendor, not by what the purchaser asserts ex post facto is needed. It is I presume quite wrong to hold on to a minimum reasonable time of two days just because the court has mentioned two days in a previous case.

Sufficiency of Undertaking

19. Miss Wong suggested that a vendor's obligation to show and prove good title is not discharged by an undertaking or an offer of an undertaking to produce title deeds and documents on a date after completion. The authority for this proposition is Sunlink Group (Hong Kong) Co Ltd v. Sorrayo Investments Ltd [1999] 2 HKLRD 468. There, Yuen J at 476 held that:

"However, the purchaser was not obligated to accept such an undertaking. There was nothing in the agreement for sale and purchase, whether express or implied, that bound the purchaser to accept such an undertaking, which gave no indication of the time "after completion" by which the certified true copies would be produced. The fact that the purchaser had, on one previous occasion much earlier on, accepted an undertaking presented in more certain terms does not bind it to accept this one.

The fact that completion by undertaking may have been expected does not mean that such an undertaking may be forced on an unwilling purchaser. In my view, the obiter dictum of Bokhary JA in Chu Wing Yip v. Leung Siu Yuk [1997] HKLRD 29 at p.34 has to be read in the light of the estoppel in that case."

20. Counsel further relied on Chau Fei and Another v. Li Yee Wah [1995] 2 HKC 806 where Barnett J held at 808 that:

"I reject Mr. Lee's subsidiary argument that there was an implied term in the agreement that reliance could be placed upon the usual practice in the legal field of undertaking to provide certified copies after they had been obtained from the Land Registry. First, such an argument was not raised in relation to the requisition until the defendant, through his solicitor, filed an affirmation in response to the plaintiffs' originating summons. Second, a term will only be implied into an agreement if it is necessary to give efficacy to the agreement. There was no such necessity in relation to the agreement between the parties. Third, para 28 of the agreement provides that the agreement 'sets out the full agreement between the vendor and the purchaser and supersedes all previous agreements whether in writing or oral or implied ...'. In the face of such a provision, it is difficult to see how the defendant can suggest that there was some implied term. In any event, the evidence of the defendant's solicitor is wholly inadequate to establish any such legal practice."

21. Although no authority was cited before Barnett and Yuen, JJ or me on this point, Mr. Chan was unable to advance any argument to the contrary. I reject undertakings to deliver proof of title after completion for the simple reason that they defeat the very purpose and contractual duty of proof on or before completion. However, in this case, the Defendant did agree to accept undertakings and is bound by Clause 4(b) of the Contract.

Extent of Proof

22. Miss Wong suggested that the burden being on a vendor to prove good title, it is no answer for the vendor to say that the purchaser himself can verify a matter by taking a simple step. The authority for this proposition comes from the Court of Final Appeal. In Chen and Another v. Lord Energy Ltd [1999] 1 HKLRD 205, the Chief Justice held at 210-212:-

"By the first requisition, the purchaser's solicitors requested a certified copy of the letter attaching the carpark layout plans which were registered pursuant to special condition 17. A land search would reveal its registration and the purchaser's solicitors must have conducted the search since the requisition identified it by reference to the Memorial number of its registration. Obtaining a certified copy was a straightforward matter involving minimal expense. It could have been done by the solicitors for either party. However, the vendor's solicitors maintained that the document did not affect title and the purchaser's solicitors insisted on its production. The position of both parties over such a simple matter could be said to be unmeritorious.

The legal position was that the obligation was squarely upon the vendor to show good title. Where a document needs to be produced by the vendor as proof of title, it is no answer for him to say to the purchaser that he could easily obtain it himself.

In my view, the letter attaching the carpark layout plans was a document which the vendor needed to produce (by way of certified copy) to prove title. Special condition 16 required carparking spaces to be provided. Apart from requiring the approval and registration of the carpark layout plan, Special condition 17 obliged the developer, and hence its successors in title, to maintain the carpark spaces in accordance with the approved plan and not alter the layout except with the prior consent of the Director. To show good title to the carpark sold, the vendor had to prove by producing the document that it is a carparking space corresponding with the approved plan. If it did not, the carpark sold would be a carparking space provided in breach of the conditions of exchange and Government would be entitled to take action in respect of such breach in which event its use and enjoyment would be affected.

Sir John Swaine SC, who addressed us for the vendor on the first requisition, argued that if this were the purchaser's concern, then the requisition should have so stated specifically. In that event, he accepts the vendor would have to produce the letter attaching the carpark layout plans. I do not accept this argument. It ignores the point that it was the vendor who had the duty of showing good title.

I therefore consider that the Judge and the Court of Appeal were right in holding that the first requisition had not been satisfactorily answered.

In coming to her view, the Judge (Le Pichon J) relied on the following statement of Mr Recorder Edward Chan QC in Wong Bik Ching v. Yu Hon Chung & Another (unrep., MP No 2969 of 1996, 15 May 1997):

I am of the view that prima facie when an instrument was registered against the property and it was not apparent from the land search that the document had ceased to affect the property, the document ought to be treated as part of the title deeds which the vendor should make available to the purchaser.

It should be emphasised that on this approach, the matter is only prima facie and it may therefore be displaced on examination. Provided this approach is understood to apply to registered instruments that are properly registerable under the Land Registration Ordinance (Cap. 128), I think it is sound. I agree with Godfrey JA in the Court of Appeal (with whom Mortimer V-Plaintiff and Rogers JA agreed) when he referred to documents that are properly registerable and said:

Occupation permits, certificates of compliance and other instruments of that sort which demonstrate that the vendor is entitled to a legal estate in the premises and that his title is not defeasible are instruments by which the premises "may be affected" (see s.2(1) of the Land Registration Ordinance (Cap. 128). The are properly registerable at the Land Office and ought to be produced to the purchaser when he asks for their production."

23. Mr. Chan for the Plaintiff derived assistance from Jasmin Enterprises Ltd v. Chan Yuk Hon [1998] 4 HKC 224. In that case, Sakhrani J decided at 229 that:

"Turning to requisition No 4, the purchaser's solicitors asked for proof of payment of Government rent up-to-date. The stand taken by the defendant's solicitors was that it was the purchaser's burden to prove the outstanding Government rent and unless the contrary was proved they were not prepared to entertain that request. That was not a particularly helpful attitude that was adopted but as counsel for the defendant submitted it was done on principle and that unless there was some reason to suspect that Government rent had not been paid this was not a proper requisition. Of course, the plaintiff's solicitors could have easily checked the matter of whether or not Government rent was outstanding. This could have been done by completing a simple enquiry form from the Treasury on payment of a fee of $60.

The obligation on the vendor is to show good title. If Government rent had not been paid, that would be a ground for forfeiture of the Crown lease in which case good title could not be shown. If there was some reason to suspect that the Government rent was not paid then the plaintiff was certainly entitled to require proof. However, it has not been shown to me that there was any reason to suspect non-payment of Government rent. I accept the submission made by counsel for the defendant that in the circumstances of the case this was not a proper requisition."

24. Whereas Miss Wong contended that in the light of Lord Energy the decision by Sakhrani J in Jasmin must be regarded as per incuriam, Mr. Chan sought to draw a distinction. Counsel submitted that the plan in Lord Energy defined the parcel of the property to be conveyed and so is part of the chain of title. However, in Jasmin and in the present one, the chain of title is complete when a certified copy of the Government Lease is produced. Proof of payment of ground rent or compliance with other terms and conditions of the Government Lease are not normally obligatory otherwise vendors would face the impossible situation of having to prove the negative whenever a purchaser demands proof of non-breach of covenants in the Government Lease or other title deeds.

25. I believe the principle is already well settled. The basic duty of the vendor is to prove good title, the duty to show and prove cannot be discharged by putting it on the purchaser. Although it is not the practice in Hong Kong to prepare an abstract of title, what should be listed in the abstract of title is a pretty good test of what are documents of title that need to be shown and proved. Moreover, as is made clear in Lord Energy, every registerable document along the chain of title must be shown and proved by the vendor by certified true copy.

26. There is a second type of documents (which may be called Subsidiary Documents) a vendor is obliged to show and prove. They are documents required to remove imperfections or doubts apparent on the face of documents of title referred to in the preceding paragraph. All the authorities indicate that Subsidiary Documents need to be shown and proved like documents of title. See for instance Lee Chat (articles of association required) cited post.

27. Thirdly, purchasers often demand evidence of removal or discharge of real or potential liability that may affect title. Although the demands are made by requisition, they concern at worst the quality of the title rather than the subsistence of title. The sorts of real or potential liability imaginable in this context are all incidental to ownership. In other words, issues over whether there is real or potential liability are premised on the party being challenged having ownership of and title to the property. Take for instance the obligation to pay government rent, rates and management fees, of course non-payment may render the vendor's title defeasible. But until the vendor's title has been defeated, I think it would produce rather surprising results if the courts were to hold that the vendor who has not paid government rent, rates or management fees does not retain the full legal and equitable estate of the property. Thus, even prima facie evidence of non-observance of covenants or building laws does not per se disprove that the vendor has title to convey as contracted. This should be distinguished from the case of a vendor's spouse who is not a registered owner or co-owner but who has an equitable interest for his/her contributions to the equity of the property. The equitable interest of a contributing spouse is a vested interest constituting an encumbrance that must be cleared before title can pass to a purchaser. The vendor's title, for practical and legal purposes, has been diminished or defeated by the spouse's interest. The rights, on the other hand, of a creditor of accounts payable or a beneficiary of covenants to be enforced do not make the vendor's legal and equitable estate of the property any lesser or defeated. However, there is a long line of well known English and Hong Kong authorities which decided that if title may be defeated even though the vendor still has the full legal and equitable estate, the vendor is deemed not to possess good title and by definition cannot prove good title.

28. Nonetheless, two questions remain. The first is the evidence required regarding removal or discharge of real or potential liability that may affect title. In view of the unimaginable range of circumstances in which a vendor's title may be defeated by real or potential liability, the courts have not laid down any rigid rule on the evidence required. It is at least arguable that neither s.13 of the Conveyancing and Property Ordinance, Cap. 219 nor the usual contractual provisions relating to proof of title covers these matters because they are extraneous to the chain of title. In for instance the case of unauthorised building works or illegal structures which may attract government enforcement action, Litton PJ observed in Active Keen that a purchaser is in as good position as the vendor to assess the likelihood of enforcement and hence the distinguished judge wondered what "satisfactory evidence" is needed from the vendor. Certainly, I believe there is no stipulation for particular mode or standard of proof. Sometimes, prima facie evidence is enough . See the Surrayo case below.

29. The second question is under what circumstances must the vendor produce evidence. It has been argued that a vendor cannot be expected to prove the negative. Put another way, it is said that the vendor cannot demand proof of compliance with all covenants in documents of title except in the case of certificate of compliance considered in Lord Energy where the certificate of compliance is a document of title that vests the legal estate in the owner of the root of title. In Sunlink Group (Hong Kong) Co Ltd v. Surrayo Investments Ltd [1999] 2 HKLRD 468, Yuen J after deliberation and considering the authorities held that a vendor has to show and prove that covenants have not been broken, but he needs only adduce sufficient prima facie evidence of the performance of the covenants as can reasonably be expected. What can reasonably be expected must depend inter alia on the nature of the covenants. Thus a vendor cannot reasonably be expected to adduce evidence of compliance with a covenant to maintain trees regularly. For matters that turn on the law, no one has suggested that a vendor has to produce a certified copy of a reported judgment in his favour. In fact, parties are discouraged from bandying propositions of law. It is apparent from the judgment of Litton PJ in Active Keen that on requisitions relating to quality of title all that the vendor has to do is to be candid and to reveal all the facts known to the vendor.

Wrongful Termination or Forfeiture

30. In Lee Chat & Another v. China Roll Industries Ltd [1998] 1 HKC 269, Le Pichon J observed at 276-277:

"The purchasers' case is that cl 7 of the agreement gave them seven working days from the receipt of the title deeds to raise requisitions or objections. They rely on Yeung Sau Chuen Sammy v. Chung Chun Ting & Anor (MP 4080/92, unreported). The agreement in that case also contained a provision similar to cl 7. The date fixed for completion was 31 December 1992. Certified copies of some of the title deeds were not delivered to the purchaser's solicitors until 29 December 1992. Godfrey J (as he then was) held (at p.3):

The obligation of the vendors to supply originals or certified copies of these documents of title fell to be discharged only on the date fixed for completion which was 31st December 1992. However, since the debentures and reassignments were documents of title, it was necessary for copies of them to be provided to the purchaser's solicitors sufficiently long in advance of the date fixed for completion to give the purchaser's solicitors a proper opportunity of considering those documents of title and raising any requisitions upon them.

... When not all the title deeds are delivered, and there are others which are delivered later, it follows that in relation to those title deeds of which copies are delivered late, the purchaser's solicitors must have seven working days after their receipt to consider those documents.

In the present case, no copies of the debentures and reassignments were delivered until what purported to be certified copies of them were sent to the purchaser's solicitors on 29th December 1992. In my judgment, the purchaser's solicitors were entitled to seven days to consider these. They were not given that time; because, on 31st December 1992, the vendors, treating the failure of the purchaser to complete on that date as repudiatory in character, treated the contract as at an end by reason and purported to forfeit the purchaser's deposit.

I do not think that Yeung Sau Chuen laid down any immutable rule that in every such case, forfeiture may not occur during the seven days following delivery of the title deeds. Situations may arise where requisitions are in fact raised and satisfactorily answered during that seven-day period and the right to raise further requisitions may, in appropriate circumstances, be spent. Whether it is so would depend on the actual circumstances and generalisations are unlikely to be of assistance. if there had not been an express reservation in the present case, and the only requisition raised is the second requisition which I have held was not properly raised, the defendant might well be right that, in those circumstances, the purchasers had exhausted their right to raise requisitions. But where the purchasers having raised a requisition then expressly reserve their right to raise further requisitions during those seven working days, I can see no reason why such a reservation of rights may not be made or should not be given effect. Given the terms of the letter of 22 April, the reservation of rights admits or no doubt. It would not be right, in the circumstances, to deprive the purchasers of what they had contractually bargained for."

31. Although in Yau Sau Chuen and Lee Chat the decisions were on how much time a purchaser may be allowed to consider title documents and raise requisitions when the vendor produces title documents only shortly before completion date, it seems that the same principle can be applied to "late" answers to requisitions. When a purchaser is deprived of adequate time to consider answers to requisitions, in addition to the right to take title as is or rejecting it, the purchaser ought to have the right to have completion time deferred for proper investigation of title. Thus Mr. Chan argued that the Defendant terminated the Contract pre-maturely.

32. With respects, I do not think Yau Sau Chuen and Lee Chat assist the Plaintiff at all. It was the Plaintiff who first purported to terminate and forfeit the deposit. Moreover, in Active Keen, because the vendor's answer reached the purchaser only two days before completion leaving not enough reasonable time for the purchaser to consider the answer and to get money ready for completion, the Court of Appeal held that there was failure to properly answer requisition in time and the purchaser was in the premises entitled to terminate.

33. However, one should further recall the general observation made in Chitty on Contracts (28th Edition) at 25-001:

"Discharge by breach. One party to a contract may, by reason of the other's breach, be entitled to treat himself as discharged from his liability further to perform his own unperformed obligations under the contract and from his obligation to accept performance by the other party if made or tendered. The expression "discharge by breach" is commonly employed to describe the situation where he is entitled to, and does, exercise that right. Nevertheless, the expression is not wholly accurate, at least without further explanation. In the first place, not every breach of contract has this effect. Discharge from liability is not necessarily coincident with a right to sue for damages. The rule is usually stated as follows: "Any breach of contract gives rise to a cause of action; not every breach gives a discharge from liability."

Thus, where time for answering requisitions is not of the essence, one wonders whether failure by a vendor to give reasonable time to consider proof should be treated as repudiatory breach giving the purchaser in all cases unreserved right to terminate. But until higher authorities have reconsidered the matter, I can only wonder.

34. Another related point raised by Mr. Chan is the reason or lack of reason given at the time of termination for alleged breach. Counsel contended that even if the vendor failed to properly answer a requisition or failed to do so in time, but the purchaser did not give that as the reason for termination, the purchaser cannot set up that reason in the subsequent action. The answer, in my view, can be found in the following passage in Chitty on Contracts (28th Edition) at 25-013:-

"No reason or bad reason given. The general rule is well established that, if a party refuses to perform a contract, giving therefor a wrong or inadequate reason or no reason at all, he may yet justify his refusal if there were at the time facts in existence which would have provided a good reason, even if he did not know of them at the time of his refusal. Thus when an employee brings an action against his employer, alleging that he has been wrongfully dismissed, the employer can rely on information acquired after the dismissal when seeking to justify the dismissal. The general rule is the subject of a number of exceptions. First, a party cannot rely on a ground which he did not specify at the time of his refusal to perform "if the point which was not taken could have been put right." Secondly, a party may be precluded by the operation of the doctrines of waiver or estoppel from relying on a ground which he did not specify at the time of his refusal to perform. Thirdly, a party may be held to have accepted the goods so that he is no longer able to justify his refusal to perform. However there does not appear to be any separate principle which would preclude a party from setting up a different ground simply because it would be unfair or unjust to allow him to do so."

35. The same should apply to both the vendor and the purchaser although the first reason given by Barnett J in Chau Fei quoted supra represents a different view.

Outstanding Requisitions

36. The position between the parties after close of business on 28th May 1998 (the completion date) is clearly stated in the fourth letter dated 28th May 1998 ("the Fourth Letter") from solicitors for the Defendant to solicitors for the Plaintiff:-

"We write to put on record that up to the time of writing this letter (7:45 p.m. on 28th May 1998), the requisitions on title and/or objections arising from the Agreement still remained outstanding and/or unattended include but not limited to:-

..........

4. Requisition No. 12 in relation to Approval Letter dated 14/12/1994 as contained in our letter dated 14/1/1998.

5. Requisition No. 13 in relation to Option to Purchase Memorial No. 6205008 as contained in our letter dated 14/1/1998.

6. Requisition No. 14(b) in relation to Release Memorial No. 7107144 as contained in our letter dated 14/1/1998.

7. Requisition No. 16 in relation to Nomination Memorial No. 6857251 as contained in our letter dated 14/1/1998.

8. Requisition No. 18 in relation to outstanding Government rent as contained in our letter dated 14/1/1998.

9. The unilateral demolition of the extended pantry by your client giving rise to:-

(a) a loss of usable space of about 25 sq. ft. in area; and/or

(b) a loss of water inlet and outlet facilities; and/or

(c) failure on the part of your client to sell the above property on an "as is" basis and in the state, condition and finishes existing as at the date of the Agreement.

10. Further or alternative to Item 9 above, the unilateral demolition of the extended pantry by your client giving rise to the losses and failure as mentioned in Item 9 above without offering for a reduction in price as compensation.

Further or alternatively, we write to put on record that your client had failed to give us reasonable time to consider your purported reply to some of our requisitions on title before you client rescinded the sale. As an example, you only sent us a plain copy of a letter from the Management Company dated 27th May 1998 at about 12:15 p.m. today.

In the circumstances, we are instructed that such purported rescission was extremely unreasonable and unlawful. Thus, the purported rescission evinces a clear intention of your client not to be bound by the Agreement and amounts to a repudiatory breach of the Agreement which is now accepted by our client and our client now exercises its right to rescind the Agreement.

Accordingly, we are instructed to demand the return of the deposit of HK$8,170,000.00 from your client forthwith. Please note that our client is entitled to a lien on the above property for the return of the deposit money for the time being. Our client also reserves its right to claim against your client for damages as may be suffered by our client."

37. The letter dated 14th January 1998 is the root of the requisitions. The relevant requisitions raised therein are:-

"12. Approval Letter from Manager dated 14th December 1994

(a) We note from the Building Management Agreement Memorial No. 4956580 that the newly appointed Manager was EIE-First Pacific Davies Property Management Limited. However, we note from the approval letter dated 14th December 1994 that it was issued by First Pacific Davies (Hong Kong) Limited which was obviously not the appointed Manager. Please let us have evidence of the formal approval of the partition of the 36th Floor and the sub-allocation of undivided shares by the Manager under the provisions of the Deed of Mutual Covenant.

(b) We note that the approval letter also refers to another Certificate from the Authorised Person dated 5th December 1994 in addition to his earlier one dated 3rd December 1994. Please let us have certified copy of the other Certificate dated 5/12/1994 for our perusal.

We return certified copy of the above approval letter and the certified copy of the Building Management Agreement Memorial No. 4956580 for your reference.

13. Option to Purchase Memorial No. 6205008

This instrument relates exclusively to the above property but you have only provided us with a certified copy of the above instrument before its registration at the Land Registry. Please let us have the original of the above instrument.

14. Release Memorial No. 7107144

(a) The above Release was executed by The China and South Sea Bank Limited by its attorney under a Power of Attorney dated 14/11/1989 executed by the bank under the laws of the People's Republic of China. Please let us have a legal opinion from a practising lawyer in PRC to prove its due execution under the laws of the PRC. We return certified copy of the Power of Attorney in question for your reference.

(b) Part of the property to be released by the Bank under the above Release being the "lobby and lavatory" was described in the Release as being coloured Pink and marked "3601" and "3602" on the plan annexed to Assignment Memorial No. 6199071 whereas it should be described as being coloured Yellow on the plan annexed to the Assignment Memorial No. 6199071. We return the above Release Memorial No. 7107144 for your rectification and return.

16. Nomination Memorial No. 6857251

The property in question under the above Nomination is wrongly described as on the "18th Floor" instead of 36th Floor. We return the Nomination Memorial No. 6857251 for your rectification and return.

18. Outstanding Government Rent

Please let us have evidence of due payment of Government Rent."

Requisition 12(b)

38. The Third Schedule to the applicable Deed of Mutual Covenant ("the House Rules") provides that:-

Clause 4(a)

"Any owner ...... wishing to carry out any permitted alterations ...... shall first send to the Manager ...... three complete sets of plans and specifications detailing the proposed changes and no work shall be commenced until the Manager has approved such plans and specifications. The Manager shall approve or reject such plans within 28 days of receipt thereof." (Emphasis added)

Clause 19(b)

"Such House Rules shall be binding on all the owners and may be enforceable as herein provided."

39. The original Requisition 12(b) after twists and turns through a series of correspondence evolved into complaints of (1) failure to deliver approval letter dated 27th May 1998 by the Manager ("the Approval Letter") in good time and (2) only ordinary copy sent. See third last paragraph of the Fourth Letter. The Approval Letter is short and simple:-

"We refer to your letter of 7th April, 1998 and reply ad seriatim:

1) The relocation and enlargement of the entrance to Room 3601 has been approved by us as the building manager of the Lippo Centre.

2) We confirm our approval of the present condition and state of Rooms 3601 and 3602 as existing at the date of this letter.

Should you have any queries, please do not hesitate to contact us."

40. Miss Wong contended that the Approval Letter faxed to solicitors for the Defendant at noon on 28th May 1998 was not good. It should be a certified true copy. Moreover, relying on Tang Wing Lam David v. Chung Chi Keung MP2766 of 1998, the vendor should have given the purchaser two days to consider the Approval Letter.

41. In fact, solicitors for the Defendant reacted to the Approval Letter by their Third Letter dated 28th May 1998 ("the Third Letter") in this way:-

We refer to you letter dated 28th May 1998 and would like to raise the following objection or requisition on title on the physical condition of the above property as it now stands as follows:-

..........

3. After the inspection by our client's representative earlier today, our client notes that the original entrance to Unit 3602 is being blocked by a conference room inside. As a result, Unit 3602 still has no clear access for fire exit contrary to Clause 17(b) of the Deed of Mutual Covenant Memorial No. 3824584. This breach of Deed of Mutual Covenant could not be cured by the Management Company's approval as the Management Company has no power to waive this breach under the provisions of the Deed of Mutual Covenant.

It is now 4:55 p.m. As there are still other requisitions on title outstanding at the present moment, we would draw your attention that your client is obliged to prove a good title to the above property at or before the time for completion.

Meanwhile, all our client's rights and remedies are reserved."

42. In the light of the simplicity and yet unequivocal manner in which the Manager covered by the Approved Letter whatever alterations that can be complained of, it can hardly be fair to say that the Defendant did not have reasonable time to deal with it. Indeed the Defendant dealt with it by raising a further query in the Third Letter that was in the end not pursued.

43. As to the Approval Letter being an ordinary copy, the point was not raised in the Third Letter. It was brought up for the first time in the Fourth Letter as one incident of repudiatory breach. On such a technical point, there is a technical answer. The Third Letter stated that "[the Plaintiff] is obliged to prove a good title to the above property at or before the time for completion." (Emphasis added). It was the Defendant's own position that the Plaintiff could prove (in contradistinction to show) title at the time for completion. Since the Defendant did not go to completion, it is not open to the Defendant to say that the Plaintiff was unable to handover the original or a certified copy of the Approval Letter at completion.

Requisition 13

44. One of the documents registered with the Land Registry affecting the Property was an Option to Purchase dated 20th December 1994. The Plaintiff sent a certified copy of that document but that copy happened to be a copy made before the original was registered and so it does not bear the memorial number. The actual wording of the requisition can be seen in the letter dated 14th January 1998 reproduced supra which did not complain that the copy certified was not an authentic true copy, only that it was not a copy made from the registered original. And the Defendant demanded the original. Miss Wong contended that in the context "original" meant "certified copy".

45. Mr. Chan for the Plaintiff argued that, quite apart from the ambiguity in the terms of the requisition, the Option to Purchase had been discharged by a Release of Option to Purchase registered under Memorial No. 6244905 a certified copy of which was sent to the Defendant. To this, Miss Wong countered that the initial Option to Purchase had to be read together with the Release and the Defendant was entitled to both the Option and the Release.

46. I would be prepared to see if the covering letter dated 7th January 1998 enclosing documents for proof of title might cure the certification problem. If it can be deduced from that letter that solicitors for the Plaintiff certified the "unregistered" copy as a true copy of the registered original, I would be happy to hold that the Plaintiff had discharged its obligation to prove the Option to Purchase. Alternatively, if I have sight of the Release, I would be prepared to study the Release to see if its terms are wide enough to erase any lingering doubt about a subsisting option. Unfortunately, neither documents were included in the trial bundle.

47. The Defendant was not entitled to the "original" but that does not mean that the Plaintiff had no duty in any event without demand to furnish an appropriate certified true copy. The only saving grace for the Plaintiff is, again, that proof of title, according to the Third Letter, could be at completion which the Defendant did not attend.

Requisition 14(b)

48. The Second Schedule to a Release (of Legal Charge and Mortgage) described the Property with exclusive use and the lobby and lavatory with shared use. The Property in the relevant plan was coloured pink whereas the lobby and lavatory were coloured yellow. The description in the Schedule of the lobby and the lavatory was, however, originally like this:-

"... (which lobby and lavatory are as shown on the Floor Plan annexed to the Assignment registered in the Land Registry by Memorial No. 6199071 and thereon coloured Pink and marked "3601" and "3602" thereon)."

Quite obviously, it was a misdescription. "3601" and "3602" comprise the Property, not the lobby and lavatory. Upon discovery of the mistake, the description was changed to:

"... (which lobby and lavatory are as shown on the Floor Plan annexed to the Assignment registered in the Land Registry by Memorial No. 6199071 and thereon coloured Yellow."

But the correction was initialled by a solicitor only.

49. Miss Wong contended that the rectification, initialled by a solicitor, was not good enough. The problem was not just a clerical error. It went to the root of title. Of course, I cannot take the latter point seriously. As to the procedure for correcting clerical error, none is needed. Mr. Chan was well supported by Halsbury's Laws of England (4th Edition) Volume 32, Para. 34:-

"Similarly, if there is a manifest absurdity or clerical error in a document7 or an obvious mistake as to date, or as to name, the court will treat it as rectified, and where property is settled subject to a mortgage the amount of which is incorrectly stated in the settlement, the error being clearly proved as between parties to the settlement, the court may treat the settlement as if the correct amount has been stated in it without putting the parties to the formality of a suit to rectify the error." (Emphasis added)

Requisition 16

50. There was an instrument of Nomination under Memorial No. 6857251. In that document, the Property was described as being on 18th Floor whereas in fact it should be 36th Floor. Nobody noticed that before, not even the Land Registry. The Defendant requested rectification. The Plaintiff replied that it will be done. It was done and the document was re-registered on completion date under Memorial No. 6857251. Miss Wong complained that certified copy of the rectified instrument of Nomination was not delivered to the Defendant within a reasonable time before completion and the Defendant needed not accept undertaking to provide certified copy after registration. Ironically, departing from the principle asserted for Requisition 13, counsel appeared willing to accept a certified copy of the instrument before registration as good.

51. The short answer to this problem is the same as that for the preceding requisition. There was a clerical error. Strictly speaking, no rectification was necessary.

Requisition 18

52. The Plaintiff refused to produce proof of up-to-date payment of government rent. It was canvassed on behalf of the Defendant that since non-payment of government rent would render the Property liable to forfeiture of the Government Lease, it was obligatory upon the Plaintiff to prove full payment. The Plaintiff relied on the decision of Sakhrani J in Jasmin Enterprises Ltd v. Chan Yuk Hon [1998] 4 HKC 224 where it was held that since the Law Society of Hong Kong had issued circulars reminding solicitors for a purchaser to check with the Government Treasury whether government rent has been paid up to date, and there is a simple procedure for seeking confirmation from the Treasury, it was not necessary for a vendor to prove full payment.

53. In my view, the Law Society circulars are entirely irrelevant for present purposes. All that the circulars does was and still is to remind solicitors of their duties to their client. The duty of a vendor to prove title is a statutory and contractual one. The Law Society of Hong Kong cannot by its circulars vary a statutory duty or contractual duty on vendors who are not members of that esteemed professional body. Nor do I think the Law Society of Hong Kong intended to do so by issuing the circulars.

54. The problem with the Defendant's case here is twofold. First, I have not been shown the Government Lease. It is not in the trial bundle either. So I am not satisfied that there is a forfeiture clause for non-payment of government rent. Secondly, the Property is two units on a high rise prestigious office building. I was told that the government rent had been apportioned on per unit basis. In case of non-payment of government rent for just those two units, assuming there is the usual forfeiture clause in the Government Lease, could there be forfeiture of the whole Lease? Litton PJ considered analogous problems in Active Keen and came to the conclusion, regarded as settling the issue once and for all, that the government cannot enforce against the whole or unrelated units for breach by individual units. Moreover, the distinguished judge queried whether a breach of covenant, whether in a deed of mutual covenants or Government Lease, which has not yet resulted in a registered encumbrance, can be regarded as a blot on title. Even if there is such registered encumbrance, Litton PJ appeared to hold that liability to pay or contribute for discharge of the encumbrance is not necessarily a blot on title. The Defendant failed to satisfy me that its requisition was a legitimate one. The requisition turned on legal arguments which the vendor needed not enter into.

Conclusion on Liability

55. For the reasons given, none of the complaints by the Defendant about failure to properly answer requisitions has been substantiated. The Defendant was obliged to complete by 5 p.m. on completion day fixed as 28th May 1998. The Defendant did not do so. By a letter issued by solicitors for the Plaintiff shortly after 5 p.m. that day, the Defendant was treated as being in breach and the deposit of $8,170,000 was forfeited. Miss Wong, quite properly, took no issue on whether the forfeiture was an unlawful penalty. In the premises, the Defendant is not entitled to refund of the deposit and is consequently liable in damages to the Plaintiff.

The Demolished Illegal Pantry

56. The Contract contains the usual "as is" clause. It is common ground that at the time of the Contract there was an unauthorised pantry annexed to the Property. The pantry occupied the short passage sandwiched between "3601" and "3602". The area of the pantry measured 25.30 sq. ft. The total area of the "3601" and "3602" comprising the Property is 2773.60 sq. ft. Thus the pantry constituted less than one per cent of the total area sold. The parties agree that the value as on completion day that may be put on the pantry is $200,000.

57. In order to avoid challenge of defective title, the Plaintiff demolished the pantry before completion time. Miss Wong contended that, after demolition of the pantry, the Plaintiff was not able to deliver possession of the Property to the Defendant in the physical state and condition agreed to be sold and to be conveyed on completion. Hence there was breach for which the Defendant was entitled to terminate the Contract.

58. If it were open to me to lay down the law, I would be very much inclined to hold that vendors must demolish all illegal and unauthorised structures and restore the property to be sold to its state as per approved building plans before delivery of possession on completion. I do not mean to say it by way of criticism, but I suspect courts are fuelling litigation and uncertainties by leaving the door open to arguments over whether illegal or unauthorised structures constitute a blot on title and to arguments as to the likelihood of enforcement action against such structures. Not all illegal or unauthorised structures are dangerous but there are enough of them to have taken lives and limbs and to pose continuing danger. There are laws prohibiting illegal and unauthorised structures. Courts may be undermining laws passed by our Legislature by giving recognition to illegal and unauthorised structures. It will be scandalous if one illegal structure the subject of a case deemed by the court worthy of a price and not a blot on title becomes the cause of a disaster. Perhaps, if the courts consistently hold that illegal and unauthorised structures (large or small and of whatever nature) are blots on title, owners would remove such structures before more funding can be found to re-double sorely needed enforcement efforts by the Building Authority. For this reason, I would hold that the Defendant is not entitled to insist on delivery of possession of the unauthorized pantry.

59. But there are already decisions recognising illegal and unauthorised structures. However, that is no comfort to the Defendant herein. The doctrine of substantial performance defeats the Defendant's case for termination of contract. See Homyip Investment Ltd v. Chu Karg Ming Trade Development Co Ltd [1995] 2 HKC and Goldful Way Development Ltd v. Wellstable Development Ltd [1998] 4 HKC 679. At best the Defendant is only entitled to a proportionate reduction in price or in damages in this case.

60. Mr. Chan for the Plaintiff took his client's case further. He said that the de minimis rule applies too. The area of the pantry is so small that the court should ignore its disappearance and leave the price or quantum of damages undisturbed. I think, at the end of the day, if I decide to allow a reduction of $200,000, it is so de minimis for the Plaintiff that it would not be bothered to challenge my decision. Nevertheless, the Defendant is entitled to judgment strictly according to principle. This is a case for the de minimis principle to apply.

Orders

61. Accordingly, I make the following declarations:-

(1) the Plaintiff has properly answered all requisitions;

(2) the Defendant was in breach of the Contract by failing to complete at the time contracted;

(3) the Plaintiff lawfully terminated the Contract and forfeited the deposit of $8,170,000;

(4) the Defendant is liable to the Plaintiff in damages being loss in market value of the Property less the deposit already forfeited i.e.
$40,850,000-31,450,000-8,170,000= $1.23 million.

The Plaintiff is also awarded costs to be taxed if not agreed. There is liberty to apply for proper terms of court order for enforcement if the parties cannot agree.

Caveat

62. I am driven by the circumstances of this case to say that, in reality, the Plaintiff succeeded due more to fluke than to correct understanding in May 1998 of the law and prudent practice. Had the Plaintiff failed in this case, solicitors acting for the Plaintiff might find themselves at the wrong end of a claim for over $9 million by their own client. Those solicitors neglected quite a number of routine measures that can be seized upon as crucial points in a multimillion dollar suit. The only mitigating circumstance for those solicitors

is that clearly the purchaser inundated them with massive number of queries and follow-up queries on unreal problems in title. The Court of Final Appeal and the Court of Appeal have cautioned parties to conveyancing transactions to act sensibly. I hope solicitors will always bear in mind that going a little out of the way to answer apparently over demanding requisitions may save their client and themselves a lot of subsequent trouble and anxieties. I think, in an appropriate case, there may be ground for the court to order conveyancing solicitors to bear the difference between solicitor and client costs and party and party costs of their vendor client even though their client succeeds in beating off requisition challenges in the subsequent proceedings .