TENG FUH CO. LTD. v. KEEN LLOYD (HOLDINGS) LTD.

CACV 193/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 193 OF 1999

(On Appeal from HCMP No.2438 of 1998)

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J U D G M E N T

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Cheung J : (Delivering the judgment of the Court)

The facts

1. Villa Rose is a residential development in the secluded Tai Tam area in Hong Kong. It consists of 16 detached houses each with a private garden. It is a new development, the Occupation Permit was issued in October 1996 and the Certificate of Compliance was issued in December 1996. The Defendant purchaser, in September 1997, entered into an agreement ("the Agreement") with the Plaintiff vendor to buy House No.16 for $82 million. The parties agreed on a long completion date - the completion was to take place on 27th May 1998. Documents of title were delivered by the Plaintiff to the Defendant on 23rd October 1997. Requisitions on title were raised and answered by the Defendant.

2. In May 1998, shortly before the completion, the Defendant raised seven new requisitions. These matters were raised on 14th, 19th and 25th May 1998. The last two requisitions were raised at 7:58 p.m. on 25th May 1998.

3. The sale was not completed on 27th May 1998. On 27th May 1998, the Defendant's solicitors, Tony Kan & Co. ("Kan") proposed that the Plaintiff's solicitors, P.C. Woo & Co. ("Woo") be given seven days to answer the requisition. On 28th May 1998 Woo stated no useful purpose would be served by further exchange of arguments on the requisition. It offered to complete the sale on 28th May 1998. This was declined by the Defendant. The Plaintiff terminated the agreement and forfeited part of the deposit equivalent to 10% of the purchase price.

The appeal

4. The Plaintiff sought a declaration that it was entitled to terminate the agreement and forfeit the deposit, and that it was entitled to damages and interest. Findlay J found for the Plaintiff. The Defendant now appeals.

The only requisition

5. Despite the numerous requisitions raised by the Defendant, the only one that was relied upon at the hearing before the learned Judge was on the encroachment of the garden of House No.15 into government land. House No.15 is next door to House No.16.

Time for requisition

6. Clause 13 of the Agreement requires the requisitions to be raised within seven days after receipt of the title deeds. In Hillier Development Limited v. Tread East Limited [1993] 1 HKC 285, it was held that if a vendor, having used due diligence, is unaware of some defect in the vendor's title, the time limit imposed in the agreement does not run against him. This principle applies to requisitions which go to the vendor's root of title. In Chan Chik Sum v. Great Pearl Industries Limited [1997] 1 HKC 27, Nazareth V-P further held that the requisition had to be made either within a reasonable time before the completion date or within the time prescribed by the agreement.

Discovery of extension

7. In this case, the Defendant became aware of the extension of the garden in House No.15 on 8th May 1998 when an inspection was carried out. According to the Defendant, the extension was not carried out at the time of an earlier inspection in January 1998.

What was encroached?

8. Kan stated in the letter of 14th May 1998 that the extension in House No.15 had encroached upon the garden of House No.16. In the letter of 19th May 1998, Kan further stated that the fencing of the unauthorised enlargement of the garden in House No.15 was erected with its bolt and screw mounted on the stone-pillar of the property. They raised the following requisition :

"Please let us have evidence that such encroachment is being stopped and rectified before completion."

9. On 22nd May 1998, Woo replied that :

"Alleged encroachment :

It is, as a matter of fact, not correct that the enlarged garden of House 15 has encroached on the garden of House 16. It is clear that the garden of House No.15 is extended outward onto what is apparently government land. Please do not make unfound allegations.

The fence is clearly not structural work. In any event, the fence is not erected on the land belonging to House No.16."

In this letter, Woo stated that the Defendant's requisitions were raised out of time and their response was made entirely without prejudice to the Plaintiff's position on time.

Effect of encroachment

10. In the letter of 25th May 1998, Kan raised for the first time that the encroachment of House No.15 was onto government land. They stated that :

"The slope gardens of No.10 and 15 are considered to be illegal structures/alterations/excavation/extension and their existence might have violated various provisions of the Conditions of Exchange No.12376 dated 28th February 1996 ("C/E") and/or the Deed of Mutual Covenant dated 20th January 1997 under Memorial No.6934055 ("DMC"). Copy of the Survey Report was enclosed with this letter."

11. The response from Woo came on 26th May 1998 in which they repeated that the requisition was being raised out of time. Kan on the same day replied that :

" Our client's concern with the stability of the slope is a real concern in view of the possible blot on title as a result of the breach of government list, conditions, and the terms and conditions of the Deed of Mutual Covenant, and/or building legislation. Further, it goes to the structural safety of the captioned property when the stability of the slope common to the captioned property and its neighbouring houses is being endangered."

12. Woo in its letter of 27th May 1998 again stated that the requisitions were raised out of time and they were "not formulated with the required reasonable precision to be effective". Paragraph 6 of the letter stated that :

"Without prejudice to our client's aforesaid position and within the very limited time available, we would like to comment on your purported requisitions as follows :

(a) As you know, a Certificate of Compliance has been given by the Government on 24th December 1996.

(b) You have in effect thrown 8 provisions of the Government Grant and 5 provisions of the Deed of the Mutual Covenant and Management Agreement at us without specifying in what manner there were alleged breaches of any of these provisions, and then ask to produce evidence to prove the negative, i.e. there having been no breach of such provisions. This is unsatisfactory. In any event, we do not see how the matters relied upon by you (which related to House No.10 and House No.15 and not House No.16) can give rise to any real risk of re-entry by the Government so as to affect the title to House No.16." (emphasis added)

Requisition raised late

13. In the present case, the extension of the garden was first discovered on 8th May 1998 and the requisition as to encroachment onto Government land was only raised for the first time in the evening of 25th May 1998, which was three days before the completion. In our view, the requisition was raised late.

14. As apparent from the content of the letters, it cannot be said that the relevant requisition was already raised on 14th or 19th May 1998. That requisition referred only to some suggested encroachment onto the garden of House No.16. The Defendant only instructed the surveyor to inspect the encroachment on 22nd May 1998. It is, of course, entitled to do so. However, if the completion was to take place on 27th May, then clearly the Defendant cannot excuse its delay in raising the requisition by saying that the surveyor was only instructed on 22nd May and its report was only available on 25th May.

15. Clearly the Defendant cannot escape its own responsibility and try to reverse the burden on the Plaintiff by saying that it was only on 22nd May that the Plaintiff disclosed the encroachment was on government land. If the Defendant wished to raise requisitions on title, it ought to ascertain the true position before firing off the requisitions. The true position could easily be ascertained. It cannot take advantage of what was later disclosed by the vendor and used it as an excuse for its delay in raising what in effect was the real requisition.

Requisitions answered

16. In any event, we are of the view that the requisition had been answered by Woo in its letter of 27th May 1998 when it pointed out that the matters concerning House No.15 could not give rise to any real risk of re-entry by the Government so as to affect the title of House No.16.

17. In Active Keen Industries Limited v. Fok Chi Keong [1994] 1 HKLR 396, Litton JA (as he then was) stated at page 411 that :

"What powers the Building Authority can lawfully exercise is a pure question of law. The purchaser is in as good a position to form a judgment on that matter as the vendor once he has in his possession the same facts as the vendor. The general practice of the Building Authority is not something peculiarly within the knowledge of the vendor"

Litton JA further held that :

"The situation of a property in the sole ownership of the vendor such as the Giant River case - is very different from that of a property in multiple ownership where, some considerable time in the past, spaces shown in the approved plans as common areas have been enclosed (usually by the original developer) and sold off as individual units. In the latter case the powers of enforcement of the Building Authority can be directed at the owners of those offending units, but not at owners of other units in the same building. Generally speaking, therefore, the title of the other flat-owners would not be affected by the presence of 'illegal structures' within the same building."

18. Active Keen is a case concerning possible enforcement actions under the Building Ordinance. The issue in this case is the risk of re-entry by the Government. We can see no difference in principle when one considers these two rights. What powers the Government may lawfully exercise is ultimately a pure question of law. Both parties to a sale are in a position to formulate a view on the issue.

19. In Spark Rich (China) Limited v. Valrose Limited (Civil Appeal No.249 of 1998), Godfrey JA formulated the test as follows :

"So the test may be usefully framed as follows : If the purchaser asks his solicitor : 'Can I be sure that I can safely disregard the risk?' then, unless his solicitor (being a prudent and experienced solicitor) can properly advise him that he can, the purchaser cannot be obliged to accept the vendor's title, ..."

No real risk of re-entry

20. In this case, the provision for re-entry by the Government under General Condition 12 of the Conditions of Exchange enables the Government to enter "the lot or any part thereof". This is a case where it was another house, i.e. House No.15, which encroached on government land. There was no breach by House No.16 of any condition. In our view, while the Government has the right to re-enter the whole lot, realistically and considering how the Government had conducted matters relating to land in Hong Kong in the past, any prudent and experienced solicitor would have advised the purchaser that he can safely disregard the risk of re-entry of the whole lot. The Conditions of Exchange itself entitled, in the event of breach, re-entry upon part only of the land and we are not in the least surprised that enforcement action was in fact taken, without any re-entry and without any impact on the title.

21. It is apparent from the correspondence that the requisition was concerned with the re-entry by the Government of the whole lot. The learned Judge was clearly right in finding that the requisition had been satisfactorily answered by the Plaintiff. Accordingly the Plaintiff was entitled to terminate the agreement.

Proof of good title on completion

22. Having shown a good title by answering the requisition, on the facts of this case, there was no further requirement on the Plaintiff to prove a good title on the same subject matter at the time of completion.

Damages

23. The Plaintiff recovered :

(1) Loss of bargain of $51 million. This is the difference between the contract price of $82 million and the price at which it was able to sell the property at $31 million.

(2) Bank interest - being mortgage interest that it was required to pay to the bank.

(3) Loss of interest it would have earned if the Defendant had kept to its bargain. The learned Judge awarded interest at bank prime rate plus 2%.

(4) Miscellaneous claims such as management fees, rates and government rent, conveyancing costs on resale, electricity charges, security guard and fees of estate agents involved in the resale of the property.

Clause 21 of the Agreement

24. These damages are recovered pursuant to Clause 21 of the Agreement. The relevant part of the clause is as follows :

"... Upon determination of this Agreement the Vendor may resell the Property either by public auction or by private contract or partly by one and partly by the other subject to such stipulations as the Vendor may think fit and any increase in price on resale shall belong to the Vendor. Without prejudice to the Vendor's right to recover the actual loss which may flow from the Purchaser's breach of this Agreement, on such resale any deficiency in price shall be made good and all expenses attending such resale shall be borne by the Purchaser and shall be recoverable by the Vendor as and for liquidated damages. ...."

Relying on this clause, the Plaintiff asked for damages representing its actual loss together with the deficiency in price in the resale and the expenses attending the resale.

Not a penalty clause

25. The Defendant submitted that the clause was in the nature of a penalty : Workers' Trust Bank Ltd. v. Dojap Ltd. [1993] AC 573 at 578D and Chitty on Contract, 27th Edition, para.26-061. Two reasons were advanced : First, there is no time limit for the Plaintiff to sell the property. Second, it is not a genuine pre-estimate of the loss because it is without prejudice to the Plaintiff's right to recover the actual loss. This means that if the actual loss is more than the deficiency in price, the Plaintiff can obtain the actual loss, and yet if it is less, then it can get the deficiency. The provision is used in terrorem of the purchaser.

"Liquidated damages" meaningless

26. Although the clause contains the words "liquidated damages", they do not seem to serve any useful purpose at all. This indeed was the view of the Court of Appeal in Broad Money Development Ltd. v. Industrial Engineers Ltd. (Civil Appeal No.101 of 1999) when construing a similar clause. Godfrey JA held that :

" There has been some argument before us as the meaning of the expression in Clause 8 'as and for liquidated damages'. I think the effect of this is that the vendor is entitled to say 'I have resold the property and the deficiency in price is X dollars. The expenses of the resale amount to Y dollars. I am therefore entitled without further inquiry or assessment to recover by way of damages a liquidated sum of X + Y dollars from the purchaser.' I do not think myself that the expression has any more significant meaning than that. ..."

27. A fixed sum would usually appear in a liquidated damages clause or a penalty clause. In this case, there is no fixed sum as such. In our view, this clause merely sets out the items of damages that the Plaintiff may recover at the determination of the Agreement. This indeed was the view of Godfrey JA in the same case where he stated that :

" Reference to Atkin's Court Forms, Second Edition, volume 34(1) (1998 Issue) title 'Sale of Land', shows that in the normal case where a seller claiming the sort of relief which is appropriate here he asks the court for a declaration that the deposit is forfeited and for 'damages', which include 'particulars of the loss on resale, the expenses and disbursements in respect of the resale and any abortive resale and any other special damage' : see the precedent No.9 (at pp.335 and 336). In effect, that is what has happened here. The order which the master made for the various items of damage which she held to constitute items in 'the actual loss' suffered by the vendor as a result of the purchaser's breach of contract (save for item (f), which requires separate consideration) all seem to me to be properly comprehended in a claim made by a contracting party, the victim of a breach of contract, against the contract breaker for items of damage which represent 'the actual loss'."

He was of the view that the reference to liquidated damages did not exclude the right to claim for other items if those items formed part of the actual loss of the vendor.

Re-sale within a reasonable time

28. As to the time in which the Plaintiff was to exercise the resale, Mr Warren Chan, SC, Counsel for the Plaintiff, accepted that the resale must be carried out within a reasonable time. An implied term to those effect forms part of the Agreement.

29. We agree. To give business efficacy to this Agreement, such a term must be implied, without which the Agreement would be ineffective. As to the difficulties in deciding what is a reasonable time, that, by itself, is not a reason for not implying the term. In any event, in our view any resale within six months after the determination of the Agreement should be considered as reasonable.

Sale upon the determination of the Agreement

30. The Defendant further contended that Clause 21 did not apply because it could only apply to cases where there was a sale : "upon the determination of this agreement". In the present case, the Agreement was terminated on 28th May 1998 but there was no sale until September 1998.

31. Clearly the Plaintiff would not be expected or be able to resell the property on the very day of the determination of the Agreement and the learned Judge had rightly rejected this construction urged upon him by the Defendant.

Deficiency in price

32. The principle is that generally damages are assessed at the date of the breach but the Court has the discretion to fix such other date as may be appropriate in the circumstances : Johnson v. Agnew [1980] AC 367. Lord Wilberforce at page 400 stated that :

" The general principle for the assessment of damages is compensatory, i.e., that the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed. Where the contract is one of sale, this principle normally leads to assessment of damages as at the date of the breach-a principle recognised and embodied in section 51 of the Sale of Goods Act 1893. But this is not an absolute rule : if to follow it would give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstances."

33. Sir John Swaine, SC, Counsel for the Defendant, submitted that there was no injustice if the market fell after the date fixed for completion. Therefore the conventional measure of damages should be adopted.

34. In this case, in October 1997, Hong Kong was faced with a financial crisis and the value of properties had a sudden drastic drop. The parties agreed that by 28th May 1998 the market value of the property had dropped from $82 million to $50.5 million. There is evidence in this case that the Plaintiff had, after the termination of the Agreement, immediately put the property in the market but was only able to effect a sale in September 1998 for $31 million. In the circumstances, it is clearly unjust to hold the Plaintiff to the date of the breach in measuring the damages.

Loss of interest

35. The learned Judge was right when he held that the Defendant must have realised that the purchase price would have to be used, in the first instance, to pay off the mortgage. As to the rate of interest, the Defendant relied upon Komala Deccof & Co., S.A. v. Perusahaan Pertambangan [1984] HKLR 219 in which the Court of Appeal suggested that the use of the rate of 1% above prime rate unless, in any particular case, there is evidence which show some other rate to be more appropriate.

36. In the present case, there is clearly evidence that the Plaintiff had borrowed money from its related company which, in turn, borrowed money from a bank at the rate of 2% above prime rate. This evidence was not challenged by way of cross-examination. The learned Judge was right to award interest at such a rate.

Management fees, rates, guard services and electricity charges

37. The learned Judge was clearly right when he held that the Plaintiff would not have incurred these items if the Defendant had not been in breach.

Agency fee

38. The Defendant argued that the Plaintiff had to pay its agency fee of the original sale as part of the expenses in securing the sale of the property at $82 million. There was no evidence of payment of agency fee by the Plaintiff in the original aborted sale. The true measure of damages would be "the fees actually incurred in the resale" minus "the fees that would have been incurred if the Defendant had kept to its bargain".

39. It is not necessary to make any determination on this issue because the Plaintiff, through Mr Chan, had undertaken not to enforce this item if it is discovered that the original agency fees had not been paid.

Conclusion

40. Accordingly, we will dismiss the appeal with costs nisi to the Plaintiff.