LARGE LAND INVESTMENTS LTD. v. CHEUNG SIU KWAI PANSY

CACV 145/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 145 OF 2002

(ON APPEAL FROM HCA NO. 434 OF 1998)

-------------------------------------------

-----------------

JUDGMENT

-----------------

Hon Rogers VP:

1. I agree with the judgment of Yuen JA and the orders proposed.

Hon Le Pichon JA:-

2. I agree with the judgment and the orders proposed.

Hon Yuen JA:

3. This is an appeal from a judgment of Deputy Judge Muttrie in an action brought by the Plaintiff ("the Purchaser") to recover the deposits it had paid for the purchase of a property from the Defendant ("the Vendor"), the deposits having been forfeited by the Vendor when the sale and purchase was not completed. The Purchaser had refused to complete by reason of a defect in title.

The property

4. The property in question was a shop at street level in Kowloon. The address is Ground Floor, 244 Apliu Street. The building was developed in the 1960's.

The cockloft

5. After the Occupation Permit was issued in April 1963, the owner at the time submitted plans to the Building Authority (then the Buildings Ordinance Office) to erect a cockloft inside the property. The plans were approved in July 1963. They showed that the area of the cockloft was to run from the back wall to an edge 2.8 metres from the front of the shop. At this edge, there was to be a 3-foot high railing, leaving an open space ("the cockloft void"). The documents before the judge showed that a cockloft was in fact constructed in accordance with the approved plans.

The cockloft extension

6. At some stage between 1963 and 1996 however, someone had extended the floor of the cockloft to the front of the shop.

7. One of the matters in dispute at the trial was whether this extension was merely a decorative false ceiling which was not structural and therefore were exempted works (the Vendor's case), or whether it was a structural load-bearing extension, the construction of which required approval from the Building Authority (the Purchaser's case).

Judge's finding that extension was structural

8. The judge found as a fact that the extension was structural. There is no cross-appeal from the Vendor against that finding of fact.

Effect on title of property

9. Since the extension was structural, the approval of the Building Authority was required, but it was common ground at the trial that no approval had been obtained for the extension. Nor was it seriously challenged that the legal consequence of the failure to obtain approval was that the property was subject to enforcement proceedings by the Building Authority, rendering the title defective.

10. The Sale and Purchase Agreement between the parties contained a clause (Clause 13) providing that "the Vendor shall at his own expense show and give good title of [sic] the property pursuant to S.13 of the Conveyancing and Property Ordinance Cap. 219". Therefore, on the judge's finding that the extension was structural and rendered the title defective, the ordinary consequence would have been that the Purchaser would have been entitled to recover its deposits.

Waiver

11. The judge however held that the Purchaser was not entitled to do so as it had impliedly waived its right to make any objections to title arising from the existence of the cockloft.

Failure to plead

12. On appeal, the Purchaser's first complaint was that the issue of waiver (the burden of which was on the Vendor) had never been pleaded in the Vendor's defence. That complaint is well-founded. The Re-Amended Defence had raised four points (in addition to denying that the cockloft was an illegal structure):-

(a) that the requisition in respect of the cockloft was too late as it was raised on 26 November 1997;

(b) that the approved plans for the cockloft were among the title deeds and documents sent to the Purchaser's solicitors (this defence was not pursued at trial);

(c) that "prior to the parties' entering into the provisional agreement, the Plaintiff's representative had inspected the Property and was aware of the existence of a cockloft therein. The Plaintiff's representative had raised queries regarding the cockloft and was informed by the Defendant's representative in the presence of the agent that the cockloft was self-constructed", which was acknowledged in a written addendum attached to the provisional agreement;

(d) that insofar as there were illegal structures in the property, that did not prevent the Vendor from substantially performing the sale and purchase agreement (this defence was not pursued at trial).

13. No defence of waiver had been pleaded either expressly or by necessary implication (as will be examined later in this judgment, pre-contractual knowledge of a defect in title does not amount to waiver of the defect). The difficulties caused by the absence of a proper pleading of waiver were demonstrated when this court was given inconsistent answers on behalf of the Vendor to the question whether the waiver alleged was a waiver by election or a waiver by estoppel. In Motor Oil Hellas (Corinth) Refineries S.A. v Shipping Corporation of India (The "Kanchenjunga") [1990] 1 Lloyds Rep 391, 397-9, Lord Goff had set out the different characteristics of these two types (or meanings) of "waiver".

14. The Vendor's final case was that there was waiver by election, and it would appear from paragraph 58 of the judgment that that was the type of waiver that the judge found. It is to that case that I now turn.

Waiver by election

15. The principles to be applied in this area of law are as follows:-

(1) A waiver by election occurs "in the context of a binding contract, when a state of affairs comes into existence in which one party becomes entitled, either under the terms of the contract or by the general law, to exercise a right, and he has to decide whether or not to do so. His decision, being a matter of choice for him, is called in law an election" (The Kanchenjunga at 398).

(2) It is a prerequisite of election that the party making the election must first be aware of the facts which have given rise to the existence of his right (The Kanchenjunga at 398).

(3) It may be that the party must also be aware of his legal right of affirming or rescinding the contract when there has been a repudiation by the other party (Peyman v Lanjani [1985] 1 Ch 457 - although this aspect was not disputed and therefore not considered by the House of Lords in The Kanchenjunga).

(4) Further, since a party who elects not to exercise a right which has become available to him is abandoning that right, he will only be held to have done so if he has so communicated his election to the other party in clear and unequivocal terms (The Kanchenjunga at 398).

16. The judge found (i) that Mr Chan Wah-hing, the Plaintiff's representative, knew that the extension to the cockloft was illegal; (ii) that he knew that this tainted the title to the property; and (iii) that the Plaintiff had elected not to raise any requisitions in time on the issue of the cockloft.

Knowledge of the facts

17. In respect of the first matter, the judge said in paragraph 58 of the judgment that he "found on the evidence that Mr Chan knew that the extension to the cockloft was illegal" (my emphasis).

18. The judge had arrived at that conclusion from a number of factors which he set out in his judgment. The first point to note, however, with respect to the judge, is that in paragraph 44 of the judgment, he had found that Mr Chan was aware of the legal status of "the cockloft", without differentiating between the original cockloft (for which there was approval) and the extension (for which there was no approval).

- Plaintiff's experience

19. The judge had based his conclusion, first on the fact that Mr Chan had bought and sold properties in the area for many years, both as an estate agent and as an investor in his own right, "long enough to know that illegally constructed cocklofts were commonplace". The judge also found that Mr Chan had previously purchased shops with illegal cocklofts. That may be so, but the question in each case must be what evidence was there in this case to show that he was aware that the extension to the cockloft was an unauthorised structure?

20. There was no finding of fact that Mr Chan had any personal knowledge that the extension was structural. He had never gone up to the cockloft (which was used for storage by the tenant), and it was not suggested that by simply looking at the ceiling of the shop below, he would have been able to ascertain whether the extension was a decorative false ceiling or a structural load-bearing extension.

- Estate agent's evidence

21. The judge however relied on the evidence of Mis Karen Tam Soon-yi (formerly the 2nd Third Party), an employee of the estate agent (formerly the 1st Third Party), who were common agents for both the Vendor and the Purchaser. When analysed however, it is clear that Miss Tam's evidence was, to say the least, extremely unsatisfactory.

- Estate agent's evidence-in-chief

22. Miss Tam's witness statement, which had stood as evidence-in-chief, did not contain any evidence that Mr Chan knew that the extension to the cockloft was an unauthorised structure. First, she had denied that the Vendor had at any stage ever instructed her to inform prospective purchasers that the property would be "sold on condition that the prospective purchaser had to waive his right insofar as the existence of the cockloft was concerned". More important, of course, was not what her instructions from the Vendor were, but what she had said to Mr Chan.

23. According to her evidence-in-chief, all she had said to Mr Chan in respect of the cockloft was that "there existed a set of approved plans relating to the cockloft which however were not registered at the Land Registry and therefore the existence of the cockloft was not apparent from a land search. ... I added to Chan that if he was interested in the property, he might treat the cockloft as an

unapproved cockloft" (my emphasis).

24. On a plain reading of those words, what Miss Tam was saying by way of evidence-in-chief was that (a) there were approved plans for "the cockloft"; (b) because the approved plans for the cockloft were not registered at the Land Registry, Mr Chan "might treat" the cockloft as being unapproved.

25. The significance of that evidence lies in fact (a):- that she had told Mr Chan that there were approved plans for "the cockloft". Her statement (b) could only have been an expression of her opinion:- that because those plans had not been registered in the Land Registry, somehow that might affect the status of the cockloft. That opinion appears somewhat unfounded. But on no reasonable interpretation could that be construed to mean that she had told Mr Chan the true factual situation:- that there were approved plans for a part of the cockloft, but that there was a structural extension which was unauthorised.

- Estate agent's evidence in cross-examination

26. When she was cross-examined however, Miss Tam claimed that she had told Mr Chan that the cockloft was "illegal". The only unambiguous piece of evidence she gave concerning "illegality" arose in the following context (p 127 Transcript):-

"Q. Yes. Now, what did you tell Mr Chan then in relation to the cockloft?

A. I told him that it's an illegal cockloft.

Q. I see. Did you tell him that there were approved plans for the cockloft?

A. Yes.

Q. Did you explain to him why the cockloft was illegal when there were a set of approved plans for it?

A. I did explain to him.

Q. What did you explain to him?

A. Well, I told him that the plans were given to me by the previous property owner at the time of this completion of the transaction, but none of us knew what the plans were all about".

27. Reading Miss Tam's evidence in context, it is clear first that this was a departure from her evidence-in-chief that it was because the plans had not been registered in the Land Registry that the legality of the cockloft might be affected. Further, even if she had actually told Mr Chan that the cockloft was "illegal" even though there were approved plans, the sole reason she gave was simply that she did not know "what the plans were about". That explanation (which was based on her self-confessed ignorance) qualified the information she said she gave Mr Chan that the cockloft was "illegal" and relieved it of its effect.

28. Whilst an appellate court should of course defer to a trial judge's views on the credibility of a witness based on his or her demeanour, the present case was not one where the judge had placed any weight on demeanour. He relied on Miss Tam's evidence (presumably in cross-examination) that she had told Mr Chan that the cockloft was "illegal", but as the above analysis of her evidence shows, even if she had told Mr Chan that the cockloft was "illegal", she had explained that was because she did not know what the approved plans were about.

29. That cannot possibly be equated to her having told Mr Chan the actual facts:- that there were approved plans for a part of the cockloft, but that there was a structural extension which was unauthorised.

Appreciation of legal rights

30. The judge found that Mr Chan knew that the title was tainted by reason of what Miss Tam had told him. He found that it was Mr Chan's idea that the parties should sign an addendum on the same day as the provisional sale and purchase agreement. The addendum stated that the property was sold together with a "self-constructed" cockloft. The Vendor submitted that the use of the word "self-constructed" showed that Mr Chan knew that the cockloft was a blot on the title.

"Self-constructed cockloft"

31. Without more, the words "self-constructed cockloft" do not necessarily mean "unauthorised structure". They could simply have meant that it had not been built by the original developer of the building and/or had been built by the Vendor.

32. However the Vendor relied on Miss Tam's oral evidence to say that the term "self-constructed" meant "illegal". This had not been pleaded, nor was it in her witness statement. More importantly, Miss Tam's evidence did not bear up to analysis, as shown in her cross-examination (p139 Transcript):-

"Q. Well, Miss Tam, are you now suggesting that a self-constructed cockloft must be an illegal structure?

A. That's my understanding.

Q. What is a self-constructed cockloft, according to you?

A. A cockloft erected and constructed by oneself.

Q. Yes. And could one construct a cockloft legally?

A. Could have, yes.

Q. Yes, if you apply - if you go through the legal procedures, apply for approval from the Building Authority and construct it in accordance with the approval, what would make a self-constructed cockloft illegal, would you say?

A. I don't know.

Q. So, you can't confirm to his Lordship then, that a self-constructed cockloft can be legal? It can be illegal, of course, but it can also be legal.

A. Well, I won't object to you saying this.

Q. If you had given Mr Chan - sorry, if you had told Mr Chan that there were a set of approved plans for this cockloft, was there any reason why Mr Chan should think that it was illegal?

A. Can I have the question again? The interpreter. Well, I told him already that the plans were supplied to us by the previous property owner. All along, we did not say that the cockloft was legal. All along, we had been saying that it was illegal, and moreover, it seemed that he was not so interested in the plans that I gave him".

33. Although in the last answer cited above, Miss Tam reverted to her evidence that she had actually told Mr Chan that the cockloft was "illegal" (as to which see paragraph 27 above), it can be seen from the other parts of her evidence above that the word "self-constructed" did not by itself mean that the cockloft was "illegal".

Addendum superceded by express contract to give good title

34. But in any event, even if it could be said that the addendum showed that the Purchaser knew that there was a defect in the title, the addendum was superceded by the Sale and Purchase Agreement, in which the Vendor had expressly contracted to give a good title. It has been the common law for more than a century that where a vendor contracts expressly to give a good title, he must do so, and it makes no difference that the purchaser was aware of a defect in title at the time the contract was entered into (Cato v Thompson [1882] 9 QB 616 and Re Gloag and Miller's Contract [1883] 23 Ch 320). Counsel for the Vendor did not seek to persuade us that the law was otherwise, nor did he seek to advance the "subject-matter of sale" argument that had been disallowed in the Court of Final Appeal in Flywin Co Ltd v Strong & Associates Ltd [2002] 2 HKLRD 485 (i.e. that the property that the parties had contracted to buy and sell was an encumbered title).

35. In the present case, the parties had expressly agreed in Clause 13 of the Sale and Purchase Agreement that "the Vendor shall ... show and give good title" and in Clause 27 that "this Agreement supercedes and annuls all representations and previous agreements between the parties whether implied or expressed verbal or written". This wiped the slate clean.

36. Therefore, it matters not even if the words "self-constructed cockloft" in the addendum could be read to mean "unauthorised structure", and that the Purchaser knew that the title was encumbered. The Vendor had expressly contracted to give a good title, and he had to do so unless, between the execution of the Sale and Purchase Agreement and completion, the Purchaser waived the requirement to give good title.

No unequivocal communication of choice to affirm contract

37. What then, after the execution of the Sale and Purchase Agreement, could amount to such a waiver? In paragraph 58 of the judgment,

the judge said:

"[the Purchaser's] solicitors invoked the requisitions clause in time but without making any reference to the issue of the cockloft. ... I draw the irresistible inference that there was a positive election not to do so. The requisition made on 26 November was far too late in terms of a time limit strictly imposed. Although the response was not an outright rejection because it was made out of time, the manner in which the request was turned down does not in my view make any difference".

38. The first point made there is that there was a "positive election" on the part of the Purchaser's solicitors not to raise any requisitions regarding the cockloft when it sent requisitions to the Vendor's solicitors on 22 September 1997. This presupposed that the only requisitions that the Purchaser wished to raise were contained in that letter. However, that is to ignore the last paragraph of the letter in which the solicitors reserved their right to raise further requisitions.

39. Counsel for the Vendor submitted that that was just the conventional way of ending a letter containing requisitions. That may be so, and certainly, if the time for raising requisitions is limited, a statement saying that the right to raise further requisitions is reserved does not extend time. But the burden is on a party alleging waiver to show that the other party had unequivocally abandoned his rights, and a letter expressly reserving rights to raise further requisitions cannot possibly be said to be an unequivocal abandonment of those rights.

40. The Purchaser's solicitors did in fact raise further requisitions regarding the cockloft by a letter dated 26 November 1997, asking for written proof that the cockloft was exempted works or that approval from the Building Authority had been granted.

41. The judge held that this was too late, as Clause 12 provided that any requisitions or objections in respect of the title should be delivered in writing to the Vendor's solicitors "within seven (7) working days after the receipt of all the title deeds of the property by the Purchaser's Solicitors". The Purchaser's counsel submitted that, in that context, the term "title deeds" included title documents, and as late as 24 November 1997, the Vendor's solicitors had sent the Purchaser's solicitors a letter dated 16 October 1997 from the Buildings Department advising that the Occupation Permit which identified the property by a different subsection number did in fact cover the property in question.

42. The letter from the Buildings Department clearly affected the title to the property, and one would reasonably interpret the term "title deeds" in a clause limiting the time for raising requisitions to include "title documents", and not just documents which had been sealed.

43. However the term "title deeds and documents" appeared in Clauses 15 and 18 of the Sale and Purchase Agreement, so that it is arguable that when the parties chose in Clause 12 to refer to "title deeds" only, they meant the narrow sense of the term, however unfair to the Purchaser such a provision might be.

44. It is not necessary to decide this argument, because the Vendor did not rely on Clause 12. Instead it purported to answer the requisition by a response dated 28 November 1997, as follows:-

"We refer to your letter dated 26th November 1997 and in accordance with Clause 8(a) of the Agreement for Sale and Purchase, your client had been well awared [sic] of and accepted the structures inside the property and purchased the Property on an "as is" basis. Your client can not raise any requisition or objection on the said property. Therefore our client will not produce any relevant documents showing that the said cockloft is legal and authorised to your client".

45. It is clear from a plain reading of that letter that the Vendor was relying on Clause 8(a) (the "as is" clause) as an answer to the requisition. It was not a refusal to answer on the ground that the time for raising requisitions limited under Clause 12 had expired. By answering the requisition, the Vendor had waived its right (if it had any) to rely on Clause 12. Counsel for the Vendor did not seek to question the law on this point as set out in Worldful Investments Ltd v Young King Asia Ltd [1996] 4 HKC 238, 243 and applied in Regent Summit (Hong Kong) Ltd v Smart Business (Asia) Ltd [1998] 2 HKC 718.

46. In conclusion therefore, as the Purchaser had not made or communicated any election to affirm the contract when it became entitled to rescind it due to the defect in title, the Vendor was obliged to give good title. This it failed to do.

Order

47. Accordingly, the appeal should be allowed, the judge's order set aside, and an order made that the Vendor shall forthwith repay the Purchaser the amount of deposits in the total sum of HK$3,100,000.00 that had been paid by the Purchaser under the Agreement made between the parties dated 12 September 1997, with interest thereon at prime + 1% from the date of writ to the date of the judge's judgment, and thereafter at judgment rate until payment.

48. There having been no argument on the interest rate, the parties should have liberty to restore the hearing within 14 days of this judgment should either party wish to make further submissions on the rate of interest.

49. There should also be a declaration that the Purchaser is entitled to a lien on the property for the amount of the said deposits together with interest thereon, but not costs.

50. There will also be an order nisi that the costs of the appeal and of the action be paid by the Vendor to the Purchaser, to be taxed if not agreed.