POLYSET LTD. v. PANHANDAT LTD.

HCMP 1840/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1840 OF 1998

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J U D G M E N T

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The stakes are quite high in this case although they pale into relative insignificance considering the principles involved. By a Sale and Purchase Agreement dated 23 May 1997 ("the Contract"), the Plaintiff agreed to purchase from the Defendant all the ground floor and yard of No. 2 Cannon Street, Causeway Bay ("the Property") subject to existing tenancies at $115 million. Completion date was agreed to be 2nd March 1998. Pursuant to the Contract, the Plaintiff paid, by a number of instalments, a total of $40.25 million to the Defendant towards the price of the Property. The Plaintiff had also paid over $1,449,877.03 to the Defendant for costs, losses and security to terminate all except one of the then existing tenancies affecting the Property.

2. Near the time for completion, the property market had fallen and apparently the Plaintiff encountered financial difficulties. By a Supplemental Agreement dated 2nd March 1998 ("the Supplemental Agreement"), the parties agreed to defer completion to 2nd April 1998 on condition that a further sum of $11.5 million be paid by the Plaintiff to the Defendant towards the purchase price. The Plaintiff did pay the said sum.

3. Then, by a letter dated 27th March 1998 ("the Advisory Letter"), the Building Department raised with the Defendant the matter of three items of illegal structure or building works on the Property. On account of the Advisory Letter and in purported exercise of its contractual right under Clause 12(a) of the Contract, the Plaintiff notified the Defendant by a letter dated 31st March 1998 that it rescinds the Contract. Needless to say, the Plaintiff did not pay the balance of the purchase price nor complete on 2nd April 1998.

4. By the Originating Summons herein, the Plaintiff seeks necessary declarations and order for

(1) refund of the total of $40.25 million paid under the Contract before 2nd March 1998;

(2) refund of the $11.5 million paid under the Supplemental Agreement; and

(3) refund of the $1,449,877.03 paid for termination of the tenancies affecting the Property.

The Defendant, on the other hand, counterclaims against the Plaintiff for (a) forfeiture of the said deposit of $40.25 million, (b) agreed interest calculated to 2nd April 1998 at $665,424.66 and (c) damages for loss of bargain to be assessed.

5. In final submission, Miss Eu, S.C. for the Plaintiff pointed out that the counterclaim does not allude to forfeiture of monies paid to the Defendant. However, throughout the trial, the issue of forfeiture never left the sight of the parties and the court. I do not think Miss Eu takes this pleading point seriously. Since this matter began by originating summons, technically there is no need for pleadings or formal amendments. In any event, if necessary, I would treat the Defendant's counterclaim as including prayer for forfeiture.

6. Mr. Chang, S.C. for the Defendant concedes that, of the $1,449,877.03 received by the Defendant in relation to the tenancies, $700,000 being security against claims by evicted tenants is refundable to the Plaintiff in any event. However, this amount and whatever other amounts already received by the Defendant under the Contract the court would hold not liable to forfeiture, the Plaintiff seeks set-off against damages payable to the Plaintiff. Strictly speaking, set-off has not been "pleaded". But, again, before and throughout the trial the Plaintiff had been left in doubt that the Defendant relied on set-off. So, set-off there will be if appropriate.

RESCISSION

7. The Plaintiff relied on Clause 12(a) of the Contract to exercise its option to rescind. The relevant provisions in the Contract in this regard are:

"12. (a) Save and except the existing two orders which have been registered at the Land Registry by Memorial Nos. 6436976 and 6436979 ("the said two orders") in respect of the Property and are referred to in Clause 25 hereinafter, the Vendor hereby warrants and declares that the Vendor has not received and is not aware of there being any notice or order from any Government or other competent authority or the manager or the management committee of the building of which the Property forms part requiring the Vendor to demolish or reinstate or improve any part of the Property. If it should be discovered that any notice or order for demolition or reinstatement or improvement unrelated to the subject matter of the said two orders has been issued/served before the date of completion, the costs for such demolition or reinstatement or improvement shall be solely borne by the Vendor and the Purchaser shall have the option to rescind this Agreement whereupon the said deposit and all monies paid hereunder shall be returned to the Purchaser forthwith by the Vendor in full but without any compensation interest or costs and neither party shall have any claim against the other hereon and the parties hereto shall be the costs of the Vendor enter into and cause to be registered at the Land Registry an Agreement for Cancellation.

25. The Purchaser is aware of and accepts the existence of the two orders registered at the Land Registry by Memorial Nos. 6436976 and 6436979 relating to and affecting the Property. The costs of and incidental to the compliance of the said two orders shall be borne by the Purchaser."

8. For ease of reference, one of the said two orders issued by the Building Department referred to in Clause 12(a) is reproduced below:-

" GOVERNMENT OF HONG KONG

BUILDINGS ORDINANCE (CAP. 123)

Order by the Building Authority under section 24(1)

Order No. C 0411/95/HK	Office of the Building Authority, Murray Building, 5th-12th Floors,
BD Ref. : BD 7/2488/54/NO1	Garden Road, Hong Kong.

To	The Co-owners of (as per attached list) No. 2 Cannon Street, Hong Kong.

Owner(s) of portion of the yard on Ground Floor adjoining the rear staircase of No. 2 Cannon Street, Hong Kong on (Lot Number) M.L. 52 s.E ss.5 & Ext.

It has been brought to my attention that building words have been carried out in and at the premises without having first obtained from me the approval of building plans and consent for the commencement of such building works required by section 14 of the Buildings Ordinance.

2. The said building works comprise a structure on and over the yard.

3. In exercise of the powers vested in me under section 24(1) of the Buildings Ordinance, I hereby order you to:-

demolish and remove the said building works and reinstate that part of the building so affected by the said building works in accordance with plans approved by the Building Authority.

4. You are required to commence the works ordered by me in paragraph 3 above within thirty days and complete such works within sixty days of the date of this order, all to the satisfaction of the Building Authority.

	( C. HO )
	Chief Building Surveyor/C/2 (Atg)
	For Building Authority

c.c. Land Registrar

Your attention is drawn to the provisions of sections 24(3), 24(4) and 33 of the Buildings Ordinance.

BD 109 (Rev. 8/93)"

The other order is in exactly the same format and wording. It is common ground that both orders had been complied with and discharged.

9. The notice on which the Plaintiff relied to rescind the Contract is the Advisory Letter. There is no real dispute that the Defendant received the Advisory Letter on 30th March 1998 and had remedial work finished on 31st March 1998 so that the subject matters complained of in the Advisory Letter had been purged on that very last day of March. The actual Advisory Letter was in Chinese. Since the case particulars therein are immaterial, one only needs to consider its format and standard wording which is reproduced below:-

"	YOUR REF來函檔號:
	OUR REF 本署檔號:
	FAX圖文傳真:
Buildings Department 屋宇署	TEL電話:

Owner/Occupant,

Dear Sir/Madam,

It has been brought to my attention that some building works have been carried out at the above premises and they comprise:

These building works contravene the provisions of the Buildings Ordinance and are therefore unauthorized. It may therefore be to your advantage as responsible owners/occupiers, to organize the removal work yourselves as soon as possible. It is also your responsibility to maintain your premises in a safe and sound condition and free from unauthorized building works (UBW).

I suggest that you now take steps to immediately remove the UBW and reinstate the premises to accord with the approved building plans.

Should you have any queries, please contact at telephone No.          or at          for details.

for Building Authority

C-SL 24b (8/97)"

10. Miss Eu, SC for the Plaintiff contended that the Advisory Letter is literally a notice within the meaning of Clause 12(a). For good measure, Miss Eu cited The New Shorter Oxford English Dictionary (1993) which says notice means "information, intelligence, warning, instruction to do something....". Hence the Plaintiff was strictly entitled to exercise its option to rescind.

11. Mr. Chang, SC for the Defendant derived support from the decision of Clough JA inCheung Kai Wei Sandra v. Fuk Ka Pak & Another [1990] 2 HKC 401. Interestingly, that case concern a contractual clause ("Clause 14") quite similar, but not identical, to the one under consideration although there the purchaser relied on a notice served by the management company of the property. Clause 14 reads:-

"(1) The vendor hereby warrants and declares that the vendor has not received and is not aware of there being any notice from any government or other competent authority requiring the vendor to demolish or reinstate any part of the property. If it should be discovered that such notice existed prior to the date hereof or if any such notice shall be served before the actual date of completion, the costs for such demolition or reinstatement shall be borne by the vendor and the purchaser shall have the option to rescind this agreement whereupon the deposit paid hereunder shall be returned to the purchaser by the vendor in full but without any compensation interest or costs and neither party shall have any claim against the other or his solicitors and the parties hereto shall at their own costs enter into and cause to be registered at the District Land Office an agreement for cancellation."

12. Clough JA sitting as an additional High Court judge to hear an appeal from the decision of the then Master Jerome Chan held at 407-409

" I come now to the short issue that arises between the parties on cl 14(1) of the agreement. The argument advanced by Mr KC Chan on behalf of the purchaser is in substance as follows. He submits that the words 'competent authority' in cl 14(1) are to be given their ordinary natural meaning. It is common ground between the parties that in the event the demolition or alteration of the premises that has in fact taken place is within the ambit of the expression 'demolish or reinstate' in cl 14(1). The issue remains between the parties regarding the meaning of 'competent authority' and 'notice' from any authority. Mr KC Chan points out that this agreement is a document which emanates from the vendors, not the purchaser and in support of his contention for the ordinary natural meaning to be given to 'competent authority', he relies on the contra proferentem principle to the extent that nowadays that principle can be invokes. He withdraws, in my view rightly, a concession to the contrary made by him before the Master and now acknowledges that his argument goes so far as to include the proposition that 'competent authority' must include any person or authority who has the contractual right or power to serve a notice requiring the demolition or reinstatement. This means, and he acknowledges it very fairly, that in a situation where there are adjoining properties with mutual restrictions regarding development and the like, in the event of breach, the owner with the benefit of the covenants who seeks to enforce them would be, for the purposes of cl 14(1), a competent authority.

Mr KC Chan further argues that there is no basis for the narrower meaning of these expressions contended for by Mr Kenneth Chan on behalf of the vendors and he refers to the dictionary meaning of authority by reference to persons exercising power or command. In my judgment, and this is very much a matter of first impression, this wide construction advanced on behalf of the purchaser cannot be accepted. In this connection, I gratefully adopt the approach of Master Chan in his helpful and careful reserved judgment, particularly his observations between pp 6 and 9 where he points out that the expression 'competent authority' is not uncommon in legislation and leads me to conclude that the expression is appropriate as a general comprehensive expression which can be adopted by a draftsman in order to avoid specifying all the authorities that he has in mind who might have statutory power to serve notices requiring demolition or reinstatement of buildings or premises.

Used in conjunction with the word 'government', I repeat the expression 'government or other competent authority', it seems to me to be clear that what is intended to be referred to by the expression 'other competent authority' - I emphasize the word 'other' - is some other body or person who has some statutory power, not a mere contractual right or power, to serve some form of prescribed notice upon the owner or occupier of infringing premises to ensure the demolition or reinstatement of structures which had been either erected or demolished in breach of some statutory obligation or duty. If it were intended that 'competent authority' should include any person or authority who had the contractual right or power to serve any sort of demand, whether it be described as a notice or a letter, then, it seems to me it would be quite inappropriate to use the words 'competent authority' because the words 'any other person' or 'any other competent person' would suffice and there would be no need to resort to the expression 'authority'.

In this connection, it is quite clear that Fairview's powers derive from a contractual document, from the covenants contained in the deed of mutual covenant, and Fairview is the agent of all the owners in whose interest it would be to take proceedings or serve notices in respect of infringement of the covenants contained in the deed. It seems to me, therefore, that Fairview is really standing in the shoes of the owners themselves, who have contractual rights, and that Fairview is not within the expression 'competent authority'."

Put simply, Mr. Chang, SC submitted that I should adopt an analogous approach and construe "notice" in Clause 12(a) as equivalent to "order", i.e. the notice must bear, in the words of counsel, "the force of the law".

13. For further assistance, leading counsel for the Defendant also referred to R v. Clarke [1969] 2 All E.R. 1008. In that case, the English Court of Appeal (Criminal Division) had to consider the word "require" in the context of a road traffic law enforcement provision. Geoffrey Lane, J (as he then was) observed at 1009-1010,

"The prosecution evidence on this matter was that P.C. Morris in uniform (though there was a dispute whether he was or was not in fact in uniform or was wearing his helmet) approached the applicant and said to him "I wish to give you a breath test owing to the manner in which you have been driving this vehicle, as I believe you are driving with more than the prescribed level of alcohol in your blood". Did that amount to evidence on which the jury was entitled to come to the conclusion that there had been a "requirement". We take the view that it did. A request in words which it is clear to the defendant is being made as of right is sufficient to amount to a requirement." (Emphases added).

Miss Eu, SC for the Plaintiff also thought that this criminal case and the words as of right would enlighten me.

14. Both sides called experts who are former senior government officials on the purpose and effect of the Advisory Letter from the point of view of Buildings Department. Although both gentlemen had worked for considerable time in Buildings Department, the two experts managed to profer essentially opposite views on the subject. I think I can dispose of this aspect of the case shortly. The meaning of the word "notice" is a matter of agreement between the parties. The purpose, intention and policy of the Buildings Department are immaterial in this regard. However, so far as the effect of the Advisory Letter is concerned, it is immediately apparent from the face of it, even more so after comparing it with the orders previously issued in relation to the Property, and taking into account all the evidence from both experts on the practice and procedure of the Buildings Department, that the Advisory Letter did not amount to an exercise by the Buildings Department of any of its legal powers.

15. Although Clause 14 is not identical with the clause in the Contract under consideration, it is in my view of the same context. It is quite clear to me that Clough JA treated the word "notice" as meaning a document issued in exercise of a legal right or power. A legal right or power may be based on common law, statute or contract. In his case, Clough JA held that the expression "government or other competent authority" circumscribed the legal right or power to statutory right or power. I have a strong feeling that Clause 12(a) in the instant case was drafted specifically to overcome the restrictive construction, in relation to the source or basis of the legal right or power, placed by Clough JA on the model of Clause 14. Hence, the true construction of Clause 12(a) must be that notice in this modified version means one that may be issued in exercise of statutory or contractual right or powers.

16. In fact, the context in Clause 14 giving the underlying meaning of notice in exercise of a legal right or power has been re-inforced in two ways in Clause 12(a). First, it is now "notice or order". One only has to revert back to the observation made by Clough JA on the expression "government or other competent authority" to see that the correct approach is to treat the or as the equal sign in an equation. Secondly, Clause 12(a) has added thereto specific reference to the said two orders issued by the Buildings Department which were registered with the Land Registry. One is left in no doubt that when the parties negotiated Clause 12(a), they were addressing contingencies like the issue of the said two orders.

17. Thus, on the construction I have placed on Clause 12(a) and the effect of the Advisory Letter I have held to be, the Advisory Letter does not fall within the meaning of "notice" in Clause 12(a). It follows that the Plaintiff wrongfully exercised its option to rescind. It also follows that the Plaintiff was in breach of the Contract by failing to complete the purchase of the Property.

BAD FAITH

18. There is a secondary issue raised by Mr. Chang, SC to attack the Plaintiff's exercise of option to rescind. This is how leading counsel canvassed it in his skeleton argument,

"V. Alternatively, there is an implied term that the exercise of the option must be in "good faith"

57. Alternatively, it is submitted that there is a term to be implied that the purchaser should act with good faith.

58. This is analogous with the duty of the vendor who:-

"must not use his right of rescission under a contract unreasonably .. that is to say, 'he must exercise the power bona fide for the purpose for which it was made part of the contract .. A vendor is seeking to rescind, must not act arbitrary, or capriciously, or unreasonably. Much less can he act in bad faith. He may not use the power of rescission to get out of a sale "brevi manu", since by so doing he makes a nullity of the whole elaborate and protracted transaction."

See Emmet on Title 19th Ed. Para. 7.009

59. In considering whether the exercise of the option was made in good faith, it is submitted that the following factors are relevant:-

(1) Whether the Plaintiff or its agent (including one Daniel Tong and the Plaintiff's contractors) had knowledge of the existence of the complaints in the BD's Letter for at least 3 months (ie since December 1997) and therefore is estopped from complaining;

(2) whether the situation was brought about at the instigation of the Plaintiff or its agent;

(3) whether the Plaintiff purported to rescind without giving any opportunity to the Defendant to respond;

(4) whether having asked for comments the Plaintiff then proceeded to invoke the option without waiting for such comments;

(5) whether the problem was subsisting at the date of the purported rescission;

(6) whether at the date of the purported rescission, it was already obvious that the problem was so trivial that it could be remedied and would be remedied forthwith before the time for completion.

60. As a matter of fact, the works suggested in the BD's Letter had been completed by 1st April 1998.

61. The speed in which the suggestions in the BD's Letter was complied with explains the small scale of the work involved. The expert suggests those were so minor that they did not fall into the category of unauthorized structures.

62. The amount of costs involved was only $27,000."

19. Since I have already held in his favour on the primary issue on construction of the Contract, it is not imperative to rule on Mr. Chang's secondary position. However, in deference to counsel's submission I hold that the option to rescind is strictly exercisable once the requisite conditions are present. One must also bear in mind the caveat by Nazareth JA in China Pride Investment Ltd. v. Silverpole Ltd. [1994] 2 HKC 341 at 361 where the learned judge dispelled the illusion of a general invitation to seek relief from the enforcement of legal rights upon the ground simply of unconcionability per se.

DEPOSIT

20. The Defendant relies on Clause 26(b) in the Contract to forfeit $40.25 million. That Clause reads,

"26.(b) For the avoidance of doubt, as it is an important commercial term and condition to this Agreement, the Purchaser hereby expressly acknowledges, agrees accepts confirms that in the light of the unusual long duration for completion, the Vendor shall be entitled to, without prejudice to the Vendor's other rights under this Agreement, forfeit the said deposit in full absolutely as agreed damages, i.e. HK$40,250,000.00 should the Purchaser fail to comply with Clause 26(a)."

Mr. Chang, SC for the Defendant did say that, should damages as assessed exceed $40.25 million, his client would be content to have the amount forfeited under Clause 26(b) taken into account.

21. The best I can do to put in focus Miss Eu's eloquent and elegant challenge to Clause 26(b) is to extract the relevant parts of her skeleton arguments as below:-

"Purported forfeiture

37. Clause 26(b) does not entitle the Defendant to forfeit $51.75 million. It only purports to allow the Vendor to

"forfeit the said deposit in full absolutely as agreed damages, i.e. HK$40,250,000.00 should the Purchaser fail to comply with Clause 26(a)." (B12-13)

38. But on the wording of Clause 26(b), it does not apply here because "the Purchaser [has not failed] to comply with Clause 26(a)", whatever that means. It should be noted that there has not been any resale of the Property by the Defendant.

39. In any event, there is no or no sufficient evidence to prove that the sum of $40,250,000, which is equivalent to 35% of the contract price, is a genuine pre-estimate of loss : Workers Trust & Merchant Bank Ltd. v. Dojap Investments Limited [1993] AC 573. The Defendant has put in absolutely no affidavit evidence to justify the forfeiture of the 35% or 45% "deposit". Note : The wording of the parties in the agreement is not conclusive. McGregor on Damages (16th ed.) para 492, 518, 544-557.

40. In China Pride Investment Limited v. Silver Pole Limited [1994] 2 HKC 341, Penlington JA did not regard "the fact that this was a sub-sale and the Vendor was no doubt anxious to see that it went through as planned so it could complete its purchase from the head vendor" as a "special circumstance" justifying the forfeiture of a 20% "deposit" (see p. 362D). He specifically disagreed with Godfrey JA's obiter dictum (at p.359D-H) on this issue. The third member of the Court, Nazareth JA, whilst agreeing that the appeal should be dismissed, did not express any opinion on the point.

41. It would take extremely "special" circumstances to justify the forfeiture of a 35% or 45% deposit. The material time to adopt in examining the purported forfeiture clause is May 1997 when the agreement was made, not April 1998 when it was allegedly breached or November 1999 (the time of trial), with the benefit of hindsight of what has since happened to the market after May 1997. There is simply no evidence at all that in May 1997 it was reasonably or even remotely foreseeable that the property market would or could have dropped by 35% or still worse 45% within 9.5 months time (23.5.97-2.3.98). The 35% or 45% deposit can hardly have been a genuine pre-estimate of the possible drop in market value of the Property.

42. The Defendant has not managed to find or cite any case, whether local or Commonwealth, where the forfeiture of a deposit as large as 35% or 45% was found to have been justified by "special circumstances" - whatever they may have been. Indeed it is difficult to find any land case justifying the forfeiture of anything more than 10%, and apart from China Pride in which there was no majority decision in relation to this issue, the Defendant has not managed to cite any land case in Hong Kong upholding the forfeiture of a deposit more than 10% (let alone 35 or 45%!)

43. If (which is denied), Clause 26(b) is a genuine liquidated damages clause justifying the Defendant's retention of the 35% or 45% deposit, the Defendant cannot claim any additional common law damages on top. It cannot have the best of both worlds. McGregor on Damages (16th ed.) 486."

I do not think Miss Eu seriously relied on the "fail to comply" point. In any event, there was clear failure to complete.

22. Since both parties relied on China Pride, one should study the judgment of Godfrey JA at 358-359 carefully,

" As a general rule, when a purchaser fails to perform his part of a contract for sale and purchase, the vendor's remedy is an action for damages, to be assessed in the ordinary way. But the contract may stipulate instead for a payment of a fixed sum of money by the purchaser to the vendor in the event of failure by the purchaser to perform his part of the contract. It may stipulate for such a payment before breach (as a guarantee that the purchaser means business and that the contract will be performed) or after breach. A payment of a fixed sum which is to be made before breach (as a guarantee that the purchaser means business and that the contract will be performed) may be described as a 'deposit'. A payment of a fixed sum which is to be made after breach may be described as 'liquidated damages'.

It is clear that in the case of a fixed sum payment which is to be made after breach (liquidated damages), the court will allow the provision for that fixed sum payment to displace the general rule to which I have referred if, but only if, the fixed sum represents a genuine pre-estimate of the vendor's loss. If it does not, the provision will be treated as penal, and the court will not allow the vendor to enforce it. He will be left to prove his loss in the ordinary way.

In the case of a fixed sum payment which is made before breach (the deposit) the position is perhaps not quite so clear. It is clear that if the fixed sum does not exceed a conventional size (eg 10% of the purchase price in sales of residential premises in England and Wales) the court will not treat a provision for its forfeiture as penal, even if it no way represents a genuine pre-estimate of the vendor's loss. This is anomalous, but there is no doubt that it is the law: see Workers Trust and Merchant Bank Ltd v. Dojap Investments Ltd [1993] AC 573.

What is not so clear is the attitude of the law towards a 'deposit' which exceeds the conventional size, or in a case in which there cannot be said to be any conventional size of 'deposit'.

In my judgment, the rule in such cases must be that the law will uphold the provision for the forfeiture of the 'deposit' if, but only if, the amount of the 'deposit' is of no more than a reasonable size in relation to the loss likely to be suffered by the vendor as the result of a failure on the part of the purchaser to perform his contract. If the amount of the 'deposit' exceeds this then, as it seems to me, it loses the benefit of the anomalous rule which precludes the purchaser, in the ordinary case of the conventional 'deposit', from asserting that the provision for forfeiture of the 'deposit' is penal in nature and ought not to be upheld. The court will, then, in my judgment, uphold provisions for the forfeiture of a 'deposit' in two cases: (1) where it is shown that the deposit did not exceed a conventional percentage of the purchase price; or (2) where it was of no more than a reasonable size in relation to the loss likely to be suffered by the vendor; in any other case, it will treat the provision for forfeiture of the 'deposit' as penal and will leave the vendor to his ordinary remedy for the purchaser's breach of contract, ie a claim for damages to be assessed. (Case (2) is not really a true case of 'forfeiture' at all, although it may be convenient so to refer to it. The true explanation of case (2) is, I think, not that the court treats the 'deposit' as forfeited but that it treats the purchaser as liable to pay to the vendor liquidated damages in the amount of the 'deposit', a liability which the vendor is entitled to treat as satisfied by applying the 'deposit' in discharge of it: for a similar analysis, see Williams, Contract for the Sale of Land, (1930) at pp 102, footnote (c), especially at p 103.)

In the case before us, the evidence established that a deposit of 10% would have been a deposit of conventional size; but that evidence was not, in my judgment, sufficient to establish that, on a sale of property such as this in Hong Kong, a deposit of as much as 20% ought to be regarded as of conventional size. ( I do not rule out the possibility, though it seems to me remote, that, in some future case here, and on other evidence, an argument that a deposit of over 10% ought properly to be regarded as conventional might succeed.) However, having regard to the circumstances of this particular case (and putting the question of what might have been a conventional deposit here entirely on one side) I have come to the conclusion that Miss Eu was right in her submission to the effect that it was reasonable for the vendor here to ask for, and take, a deposit of 20%. It has to be remembered that this was a subsale; and that the vendor, as the purchaser knew, would stand to lose considerably if the subsale went off at the last minute and the vendor, accordingly, found himself unable to come up with the money to complete his own contract with the head vendor. These were, I think, 'special circumstances' (see the Workers Trust case, cited above, at p 706 H) which justified a deposit of 20% in the instant case and, for this reason, I would not have been disposed to find in favour of the purchaser that it should be relieved from the forfeiture of its deposit on the ground that the provision for the forfeiture was penal in character."

23. As can be seen, Godfrey JA said in his judgment for Case (2) that the deposit must be of no more than a reasonable size in relation to the loss likely to be suffered by the vendor. But the learned judge went on to find special circumstances justifying a forfeitable deposit of 20% in the case before him. The problem caused by this ambivalent approach is put in sharp relief by counsel. It will be remembered that Miss Eu, SC contended that the Defendant seeking to forfeit an unconventional deposit must show by credible evidence:- (a) the parties at the time of entering into the Contract performed an exercise to estimate the likely loss and (b) the amount stipulated in the forfeiture provision represents a reasonable estimate of the likely loss. Mr. Chang, SC on the other hand suggested that (i) once special circumstances for an unconventional deposit is established, the deposit may be forfeited no matter how large it is and (ii) even if the deposit needs to be of reasonable size, the market ex post facto has shown that the amount to be forfeited under clause 26(b) is close to the actual loss.

24. Miss Eu, SC must be right on at least one point. The reasonableness of the size of a deposit cannot be justified by looking at the market ex post facto. That would make a forfeiture provision a gambling contract. As to "special circumstances", it is a phantom. Lord Wilkinson-Browne did say in Workers Trust cited supra at 580 that, "A vendor who seeks to obtain a larger amount by way of forfeitable deposit must show special circumstances which justify such a deposit." However, the Board in Workers Trust did not find special circumstances. In fact, the Board rejected the forfeiture clause in that case because the 25% deposit could not be justified as reasonable pre-estimate of liquidated damages. In China Pride, Godfrey JA treated as special circumstances the transaction being a sub-sale. In a sub-sale, the vendor stands to lose the bargain in the sub-sale and at least the conventional deposit paid to the head vendor. The combined losses justified the 20% unconventional deposit. Thus, although the learned judge spoke of special circumstances, his decision was indeed based on reasonable pre-estimate of loss. I think this is why both Nazareth and Penlington JJA refrained from alluding to the misleading "special circumstances". Even if Godfrey JA meant that special circumstances may justify a forfeitable unconventional deposit not of reasonable size in relation to the likely loss, such minority opinion cannot be taken as law laid down by the Court of Appeal.

25. In summary, China Pride is good authority only for:-

(1) a 10% deposit is conventional for Hong Kong and may be forfeited without proof of loss;

(2) a 20% deposit is usually acceptable where the transaction for which the deposit was taken is a sub-sale; and

(3) in any other case, a forfeitable deposit must represent a reasonable pre-estimate of the likely loss.

26. In the present case, Mr. Chang, SC contended that there are special circumstances justifying 35%. They are stated in the very Clause 26(b) itself, i.e. the parties took into account the unusually long time for completion and the inherent risks of fluctuations in the property market meanwhile. Although it is no longer relevant to look for special circumstances, the fact that there was to be a very long completion time may well be proof of need for a higher deposit. However, the parties had not at the time of entering into the Contract considered the possibility of loss through fall in the property market, much less the likely range of fall. In May 1997, the property market was booming like never before. It is incredible that either party could have anticipated any sharp downturn. On the contrary, the trial bundle contains a newspaper cutting of a report from knowledgeable source right after the parties had signed the Contract that the Plaintiff expected to divide the Property and re-sell shortly for a total of $150 million. The ultimate source of this report must be the Plaintiff.

27. I am inclined to think that the loss contemplated by the parties was the loss of a higher price to the Defendant tied down by the Contract for nearly one year before completion. The loss, according to the reported projection was at least $(150-115) million = $35 million. This is close enough to $40.25 million for estimate. Thus, taking into account the statement in Clause 26(b) and the newspaper report, there is evidence before me that the $40.25 million represents a reasonable pre-estimate of likely loss. Hence the clause is not a penalty clause. On this basis, Clause 26(b) viewed as a forfeiture of deposit provision may be upheld.

PART PAYMENT

28. On reflection, I wonder whether it is correct to approach Clause 26(b) as a forfeiture of deposit provision. If it is not, both China Pride and Worker's Trust should not be applied in this case. It is not insignificant that both leading counsel urged the court not to take the word "deposit" or other labelling devices literally. By the same token, "forfeiture", as noted by the distinguished judges in China Pride and Workers Trust, is in many cases a misleading expression used for convenience only. It therefore beholds me to look into what the parties truly intended and have done in deciding the effect of Clause 26(b).

29. It is important to note that the "deposit", whatever it means, in cases like China Pride and Workers Trust was paid over to and held by solicitors as stakeholder and not to be released to the vendor until completion. The "deposit" may be treated as earnest money, in the words of Godfrey JA,as a guarantee that the purchaser means business and that the contract will be performed. The "deposit" may otherwise be treated as payment on account of liquidated damages. In either case, the nature and purpose of the "deposit" is security for future performance.

30. In the present case, the first $11.5 million out of the $40.25 million in Clause 26(b) was paid to solicitors for the Defendant as stakeholder and not to be released except for completion. The balance $28.75 million paid to solicitors may be released to the Defendant after covering for outstanding mortgage on the Property. The last $11.5 million paid under the Supplemental Agreement is not forfeitable under Clause 26(b) of the Contract or otherwise. Thus, technically, there are three types of payments in this case. Miss Eu, SC did not draw any distinction between the first two but insisted that the last payment of $11.5 million under the Supplemental Agreement is refundable. She must have recognized that the technical distinction between the first two types of payments makes no substantive legal difference. In this she has the support of her counterpart and the court. Mr. Chang, SC conceded that the last payment of $11.5 million under the Supplemental Agreement cannot be forfeited under Clause 26(b). He must be right too. So the last payment of $11.5 million under the Supplemental Agreement on all views must be regarded as in law at large subject only to set-off if appropriate.

31. The nature of the $40.25 million under Clause 26(b), disregarding the peculiarity of the first $11.5 million paid upon signing of the Contract, must be determined by reference to the status of the bulk $28.75 million as provided by the Contract. Since the bulk may be released to the vendor after cover for outstanding mortgage, it is in essence an unreserved direct payment to the Defendant. The reservation to cover for outstanding mortgage is not a real stake; had there been no outstanding mortgage, the whole may be released to the Defendant. So, the payment of the $40.25 million is in the circumstances not to guarantee future performance but part performance.

32. The right to refund and conversely the right to retain payment in part performance was discussed in Workers Trust. Lord Wilkinson-Browne delivering the opinion of the Board cited supra at 581-582 observed,

" The question therefore arises whether the court has jurisdiction to relieve against the express provision of the contract that the deposit of 25 per cent. was to be forfeited. Although there is no doubt that the court will not order the payment of a sum contracted for (but not yet paid) if satisfied that such sum is in reality a penalty, it was submitted that the court could not order, by way of relief, the repayment of sums already paid to the defendant in accordance with the terms of the contract which, on breach, the contract provided should be forfeit. The basis of this submission was the view expressed in a considered obiter dictum of Romer L.J. in Stockloser v. Johnson [1954] 1 Q.B. 476.

In that case there was a contract for the sale of quarry machinery to the plaintiff, the purchase price to be paid by instalments. The contract provided that in the event of a default in payment of the instalments, the vendor could retake the machinery and all instalments of the price previously paid should be forfeit. Pursuant to the contract, the plaintiff took possession and used the machinery but defaulted in payment of an instalment. The defendant forfeited the instalments, alleging that their forfeiture was a penalty. The Court of Appeal unanimously held that the forfeiture did not constitute a penalty on the facts of that case but went on to express conflicting views, obiter, as to whether, if the forfeiture had been a penalty, the court had jurisdiction to order repayment. Somervell L.J. and Denning L.J. expressed the view that there was such jurisdiction. Romer L.J. held that there was no general right in equity to mend the parties' bargain and that, even where there was jurisdiction to relieve from forfeiture, that could only be exercised by allowing a late completion to a party who was in default in performance but willing and able to carry out the terms of the contract belatedly.

Their Lordships do not find it necessary to decide which of those two views is correct in a case where a party is seeking relief from forfeiture for breach of contract to pay a price by instalments, the party in default having been let into possession in the meantime. That is not such a case. In the view of their Lordships, since the 25 per cent. deposit was not a true deposit by way of earnest, the provision for its forfeiture was a plain penalty. There is clear authority that in a case of a sum paid by one party to another under the contract as security for the performance of that contract, a provision for its forfeiture in the event of non-performance is a penalty from which the court will give relief by ordering repayment of the sum so paid, less any damage actually proved to have been suffered as a result of non-completion: Commissioner of Public Works v. Hills [1906] A.C. 368. Accordingly, there is jurisdiction in the court to order repayment of the 25 per cent. deposit."

33. The passage quoted supports the view that Workers Trust was decided on the basis that the "deposit" was security for future performance. The same is true for China Pride. But, more importantly, the Board did not disapprove the decision of the English Court of Appeal in Stockloser v. Johnson which remains good authority.

34. Even if Stockloser v. Johnson should be taken as decided on its peculiar facts, I believe there are at least three reasons for allowing a vendor to keep part payments in performance of a contract where there is no provision for refund, even more so where there is provision for forfeiture. First, there is no clear legal basis for a purchaser to claim refund for its own breach. Even an innocent party to a frustrated contract has no automatic right to full restoration to its pre-contract position. Secondly, if a purchaser sues for money had and received, the equities are against the purchaser because it is the party in breach and the vendor's right as original lawful recepient cannot be assailed. Thirdly, although this does not apply in every case, the vendor may be protected by estoppel because it has altered its position. A seller of future goods may have used part payment to buy raw materials which may have became intermingled with other materials and turned into semi-finished products. In cases of multi-million dollar property dealings, ordinary business sense dictates that the vendor who receives part payments with many zeros is not going to leave it in the bank to earn interest. The part payments almost certainly will be used to finance some other investment or to discharge certain liability. The vendor, having wrestled from the purchaser large sums as unreserved part payment justifiably expects to be able to retain the sums in any event unless the vendor itself is in breach. It does not need more than token evidence for a vendor in the multi-million dollar business league to prove prejudice as a result of reliance on part payments.

35. In case it may be said the equity still prevents forfeiture of part payment in performance if the amount forfeited bears no relationship to actual or likely loss, I suggest the concept can be tested by an alternative case. If the courts do not uphold provisions like Clause 26(b), I think we may well see use of an option contract whereby a purchaser is required to pay large sums for an option to compel the vendor to sell a property. The price of the option is in effect the deposit and the price for the property to be sold will be reduced taking into account the price also paid for the option. I have yet to come across an authority which says that the price paid for an option has to be refunded because it is too large. So I do not really see what good does it do to the law or the commercial world to reject provisions for forfeiture of part payments in performance.

36. In the premises, treating Clause 26(b) as provision for non-return of part payments, one is not concerned with whether the part payments bear any relationship to likely loss. The Defendant, on this count too, is entitled to retain the entire $40.25 million.

DAMAGES

37. Miss Eu, SC quite fairly conceded that damages is payable should the Plaintiff be held to have wrongly exercised the option to rescind. It is common ground that the quantum of damages is the open market value of the Property as at 2nd April 1998 deducted from the total price $115 million under the Contract. To this end, both parties have called expert evidence on valuation of the Property.

38. Mr. Memphus Wong, a fellow member of the surveyor profession and head of a firm of surveyors, gave his expert opinion for the Plaintiff. He puts the value of the Property at $88.9 million. Mr. Esmond Yu, a member of the surveyor profession and director of Jones Lang La Salle, gave his expert opinion for the Defendant. He puts the value of the Property, at its highest, at $61.4 million and at its lowest $58 million. Since the distance between the two valuations is so large, I have to draw on my limited experience gained at the Lands Tribunal to arbitrate.

39. There are a large number of differences in opinion and approach between the two experts. In the end, I believe both sets of leading counsel and surveyors agreed, many of the differences do not really matter except as evidence tending to reflect poor professional judgment on the part of one or the other expert thereby discrediting other aspects of that expert's valuation. I will not go through those valuation points traversed during the trial which have no relevance to credibility or value.

40. The Property was in fact divided into 5 shops of different shapes and sizes: Shop A1, A, B, C and D. Shop A1 is slightly unusual but not uncommon. It is a very shallow shop with a relatively wide frontage. Shop C may be treated as unique. It is actually in the open yard. The yard looks more like a side lane next to Shop B. The entrance/exist of the yard leads directly on to Lockhart Road. This Shop C used to have an illegal superstructure so that to the uninitiated it could well have been regarded as a proper shop and for quite some time it had been let out for substantial monthly rent like that. The superstructure had been removed before 2nd March 1998 in compliance with the said two orders thus restoring the yard to practically bare and exposed state. But soon after 2nd April 1998, a small enclave was carved out along the party wall with the adjacent Shop B. The enclave is deep inside the yard/lane and measures 12 sq. ft. only. There is now also some kind of retractable canopy over a large portion of yard near the Lockhart Road entrance/exist. One more factor to note about Shop C is that in the very back there is a door opening into or out of the rear stair leading up the building; but it does not seem that the rear staircase and the yard have been used regularly as a passage for the occupants of the building.

41. Mr. Wong for the Plaintiff valued the Property as partitioned shops. Mr. Yu for the Defendant suggested that the value of the Property as partitioned shops come to a total of $61.4 million and as an undivided whole $58 million; but he prefers the undivided whole approach. There can be little doubt that the market in April 1998 had no appetite for the Property as a whole. No purchaser would in those gloomy days sink money into such large investment. Another property, comparable (4) used by Mr. Wong, situated at the other end of the block comprising 3 divided shops had to be re-sold separately.

42. The Comparable (4) already mentioned was perhaps the most controversial. Mr. Yu said that he knew of this comparable but he decided not to use it because the transaction price for reference was recorded in January 1999, some 9 months after the relevant valuation date. Mr. Wong for the Plaintiff relying on the applicable Jones Lang Wotton Property Index for Wanchai/Causeway Bay areas prime properties found it necessary to make a time adjustment of 55%. Mr. Yu argued that such large adjustment renders the comparable unreliable.

43. It is true that as a matter of valuation practice comparables needing large adjustment should be avoided. However, the better practice is in fact to avoid comparables requiring many adjustments. Comparable (4) requires practically only one adjustment for time and the adjustment is based on data from a published reference index. Such adjustment is normally as objective as any valuer may make. All the other comparables used by Mr. Wong or Mr. Yu need adjustments for two or three factors based essentially on intuition, impression or more euphemistically called professional judgment. Intuition and impression are not always susceptible to verification for accuracy. Professional judgment can differ wildly. When more than one subjective adjustment has to be made to one comparable, inaccuracy may be compounded. Thus, I consider Comparable (4) no worse than any other comparable put before the court so far as the risks of poor adjustment is concerned. On the other hand, Comparable (4) is much better than all the other comparables because it is the nearest to the Property one can find. In the premises, Comparable (4) should be taken into account.

44. Comparable (1) used by Mr. Wong, same as Comparable (1) used by Mr. Yu, was practically discarded by both parties because its recorded transaction price is suspect. There is evidence that the Rating and Valuation Department challenged the consideration stated in the relevant assignment for Comparable (1). The valuation of that transaction for stamp duty purpose is sub judice. So I need to look no more at this Comparable (1). Comparables (2) and (3) used by the Mr. Wong are common with two comparables used by Mr. Yu. I should not reject them. These two comparables tend to pull down the adjusted unit rate for valuation of the Property. Mr. Yu for the Defendants introduced two other comparables ("the yellow comparables"). They are the furtherest from the Property and in quite dissimilar neighbourhood or locality. They should not be used. In general, 3 comparables is enough for valuation. There is already Comparables (2), (3) and (4) from Mr. Wong's report which are the best available.

45. Interestingly, at the request of Mr. Chang, SC, Mr. Wong re-worked his valuation by leaving out Comparable (4), i.e. using only Comparables (2) and (3) which are the only common comparables, and the result is a value of $76.5 million. One would have thought that this can be taken as the better minimum value of the Property as at 2nd April 1998.

46. The difference in value of $88.9 million for the Plaintiff and $61.4 million for the Defendant may be accounted for, apart from the impact of Comparable (4) on the adjusted unit rate that has a global multiplier effect for all shops, by (a) the various factor adjustments made by Mr. Wong and Mr. Yu respectively and (b) the other material controversy which is the valuation of Shop C. For (a) the various factor adjustments, my own judgment is no better than either expert. When the adjustment applied by one expert is intuitively 10% and the other 30%, a judge either takes the middle (or mean) or leans towards the figure adopted by the expert believed to be the more reliable valuer.

47. For (b) the valuation of Shop C, Mr. Yu said the 12 sq. ft. enclave is the shop proper and hence it opens into the yard. Mr. Wong said the canopy covered area of the yard is the shop and it opens into Lockhart Road. It does not need a judge to say Mr. Wong is right. Photographs of the Property show Shop C as a flower shop with its front/opening right by the pavement of Lockhart Road. Mr. Yu's point of view, I have to say, is from jaundiced eyes. Now, it is conventional wisdom to convert ancillary areas such as uncovered roof-top or courtyard into notional covered area so as to apply the appropriate adjusted unit rate. Mr. Yu used a conversion rate of 1:10, i.e. for every 10 sq. ft. of the yard making up Shop C it is valued as 1 sq. ft. of covered shop area. Mr. Wong used a conversion rate of 1:5. In my experience, the Lands Tribunal has approved conversion rates of between 1:4 and 1:8. The 1:8 conversion rate is really reserved for a boxed-in patch tucked in the back of a building. The yard in this case is far better in quality than the cheapest backyard. It is quite unfair to apply the unheard of 1:10 conversion rate to this yard. On the other hand, the occupier of Shop C does not have exclusive access to the yard as in the case of a roof-top where the usual conversion rate is 1:4. I think a conversion rate of 1:6 should be adopted. This gives Shop C a total converted area of 48 sq. fit.

48. As to the adjusted unit rate, Mr. Wong's calculations show $130,000 per sq. ft. for Shop B but $137,000 per sq. ft. for Shop C. Shop B is right next to Shop C also fronting Lockhart Road. Shop B is a properly appointed shop. Shop C is basically a stall. It does, therefore, look very odd that Shop C should be worth more per square feet. Mr. Wong's explanation is that the notional converted area for Shop C is so small that it attracts a premium for size. This argument is not wrong. But, as I pointed out in court, Shop C as it is although attractive for the rental market should not be so for the capital market. It is difficult to imagine a purchaser willing to put up $7.7 million (on Mr. Wong's valuation) for an open yard with no exclusive access that may be used as a shop for certain trades only. I think on no account should the adjusted unit rate for Shop C exceed that of its neighbour. Applying the adjusted unit rate of $130,000 per sq. fit. (for Shop B by Mr. Wong) to Shop C of 48 sq. ft., the value of Shop C should be $6.54 million. The revised value of Shop C as assessed by me lowers Mr. Wong's total valuation to $87.5 million.

49. I have adopted Mr. Wong's adjusted unit rate for Shop B to estimate the value of Shop C. This implies that I also adopt generally the adjustments made by Mr. Wong for various factors in coming to the said adjusted unit rate. I do so because, as I have already somewhat indicated, Mr. Yu tends to be a rather heavy handed shaver. He undercuts aggressively to derive a much lower valuation. There are other instances which I ought to point out to support my skepticism of Mr. Yu's valuation exercise. For one, in setting up the model for calculating the Reduced Zone Area for each shop, Mr. Wong used the shop frontage as base reference. Mr. Yu, on the other hand, used the depth as base reference. It is accepted wisdom that the width of a shop is relatively more important than the depth for determination of the shop's value. For another instance, although Mr. Yu acknowledged at the time of writing his report that the yellow comparables, which have been rejected, were not really appropriate, yet in order to fix the adjusted unit rate for the shops, he arbitrarily cut down the calculated averages by varying amounts on account of the yellow comparables. All these instances do not inspire confidence and I therefore prefer to adopt Mr. Wong's adjustments and calculations.

50. The Plaintiff may have a legitimate grievance that $76.5 is too low because I have held that Comparable (4) ought to be taken into account and I have also held that Mr. Wong's calculations should be preferred. On the other hand, $87.5 million cannot be accepted unreservedly as the open market value of the property because there is danger in relying on indices blindly.

51. The Jones Lang Wotton index shows a drop of 13% in the property market from May 1997 to April 1998 and a further 55% (from Mr. Wong's calculation for Comparable (4)) from April 1998 to January 1999. The combined rate of fall of 68% appears to be far in excess of actual market behaviour noted in the analyses that have appeared in the newspapers. I am not suggesting that the Jones Lang Wotton index is unreliable. It is a very useful indicator of general trends when the market is a stable open one. But one must guard against false premises. In the case of drop of 13% from May 1997 to April 1998, one can determine the open market value in April 1998 by using that percentage only if the starting premise in May 1997 is true. Thus if the transaction price recorded in May 1997 is in fact an exceptionally high or low one, one cannot simply use the factor of 13% to calculate the open market value in April 1998.

52. The sharp fall of 55% from April 1998 to January 1999 as reflected by the index may be due to false market. The basic assumption for open market value is that the vendor is not compelled to sell. In times of sharp market fall, there may not be many property owners willing to sell because they can weather the sudden downturn. Those who sell are more likely to be ones gasping for liquidity. Thus the transaction prices recorded at the end of a falling price curve are dominated by those few that were compulsorily struck for ready funds. The overwhelming buyers' market tends to produce a distorted market index. The 55% drop is, I believe, an example of distortion caused by vendors compelled by their own financial straits to sell. But it is inherently impossible to scientifically correct the distortion.

53. In Singer & Friedlander ltd. v. John D. Wood & Co. (1977) 243 Estates Gazette 212, Watkins J. said, "The valuation of land by trained, competent and careful professional men is a task which rarely, if ever, admits of precise conclusion. Often beyond certain well-founded facts so many imponderables confront the valuer that he is obliged to proceed on the basis of assumptions. Therefore he cannot be faulted for achieving a result which does not admit of some degree of error." The learned judge went on to say that it was agreed generally in the profession that a permissible margin was 10 per cent either side of a figure which could be said to be the right figure (assessed as if arrived at when the valuation was made and not with the benefit of hindsight). In exceptional circumstances the margin could be 15 per cent or a little more either way. Any valuation falling outside the bracket brings into question the competence of the valuer.

54. Still preferring generally Mr. Wong's calculations, I think it would be safe and closer to the true open market value if one takes the half way point between $87.5 million (his valuation including Comparable (4)) and $76.5 million (his calculation excluding Comparable (4)). The figure at this point is $82 million. The high and the low from $82 million is a difference of $5.5 million, well within the 10% acceptable margin allowed by Watkins J.. Hence, I determine the open market value of the Property as at 2nd April 1998 at $82 million. Consequently, the damages suffered by the Defendant is $(115-82) million = $33 million. This amount of damages is less than that which may be forfeited under Clause 26(b) and does not threaten the last $11.5 million paid under the Supplemental Agreement.

55. Accordingly, I would declare that the Plaintiff wrongfully rescinded the Contract and was in breach of the Contract in failing to complete. I would also declare that the Defendant is entitled to forfeit $40.25 million which extinguishes damages assessed at $33 million. There should also be judgment for the Defendant for interest agreed for the period between 2nd March 1998 and 2nd April 1998 at $665,424.66 as prayed in the counterclaim. I should make an order nisi for costs of the action to the Defendant to be taxed if not agreed with certificate for two counsel. Since there are more monies held by the Defendant belonging to the Plaintiff than amounts due by this judgment from the Plaintiff to the Defendant, I leave it to the parties to agree the precise terms of the judgment and order to be made failing which there is liberty to apply.

56. I take this opportunity to thank both leading counsel and their support teams for helping me to negotiate this rather difficult case.