XCHRX TRADE YOUTH LTD. v. FIRST GOOD INTERNATIONAL LTD.

HCA 4151/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4151 OF 1998

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D E C I S I O N

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1. This is an application by the Defendant for summary judgment on its Counterclaim and to strike out the Plaintiff's claim, which is for the return of a sum of money paid as initial deposit for the purchase of a property and/or damages for breach of contract, and/or for misrepresentation.

Principles applied

2. The principles governing the Court's considerations in applications for summary judgment are well-known:- Order 14 is meant for clear cases, where there is no serious material factual dispute, and if a legal issue, no more than a crisp legal question (Man Earn Ltd v Wong Ting Fong [1996] 1 HKC 225, 228). This test should be strenuously applied particularly in this case where the orders sought are for judgment on a counterclaim and for the striking out of the Plaintiff's claim (which, it is not disputed, would necessarily follow). However, if after applying these principles, a court concludes that the respondent's liability is established, it is its duty to enter judgment.

3. The respondent to the application (the Plaintiff) has put forward two arguments against summary judgment:-

(i) that it rescinded the contract for the Defendant's misrepresentation;

(ii) that it was entitled to terminate the contract for the Defendant's repudiatory breach.

4. In the present case, having considered those facts which are common ground, and having assumed the Plaintiff's version in respect of those material facts which are disputed, it is clear to me that there should be judgment on the Defendant's Counterclaim and that the Plaintiff's claim ought to be struck out.

1st Provisional Sale and Purchase Agreement between registered owner and Confirmor

5. The factual background is plain. It is common ground that on 2 November 1997, the registered owner of property in Repulse Bay entered into a Provisional Sale and Purchase Agreement ("the 1st Provisional Sale and Purchase Agreement") to sell the property to the Defendant (which is referred to hereafter as "the Confirmor"). The purchase price was $22m.

6. This 1st Provisional Sale and Purchase Agreement was delivered on 8 January 1998 for registration at the Land Registry, but it had not been registered by the Land Registry even as late as 19 March 1998. This meant that as a "deed pending registration", a non-party could not obtain a copy of it from the Land Registry.

Purchaser's interest in acquiring the property

7. In early March 1998, the Plaintiff ("the Purchaser") became interested in the property. The Purchaser was aware that the party making the property available for sale was a confirmor. On or about 4 March 1998, it instructed its agent to conduct a land search which showed the date, the parties and the consideration in respect of the 1st Provisional Sale and Purchase Agreement.

The representation

8. The Purchaser says (and I accept for present purposes) that it was concerned that no formal Agreement for Sale and Purchase between the registered owner and the Confirmor had appeared in the land search by March 1998.

9. The Purchaser assumed that the 1st Provisional Sale and Purchase, like most provisional agreements, contained "escape clauses" whereby the parties are given "an option to back out", and the Purchaser points out that indeed the 1st Provisional Sale and Purchase Agreement did contain typical "escape clauses". These provided that the Confirmor would forfeit, and the registered owner would have to pay double, the initial deposit if either of them did not proceed with the sale and purchase.

10. The Purchaser says it thought that "the existence of a formal agreement could confirm beyond doubt that the [Confirmor] had the equitable interest to the property which was capable of being re-sold".

11. The Purchaser says that it was only when the agent (who was apparently a mutual agent) said that the Confirmor's director had said that a formal agreement had been concluded with the registered owner, that the Purchaser decided to sign on 7 March 1998 a Provisional Sale and Purchase Agreement ("the 2nd Provisional Sale and Purchase Agreement") offering to purchase the property for $20.58m. The escape clauses in this agreement were deleted. The Purchaser also drew a cheque for $700,000 as initial deposit. The Purchaser's evidence is that it acted quickly because the property market was then experiencing a "rebound", and it was anxious to secure the property for itself.

2nd Provisional Sale and Purchase Agreement between Confirmor and Purchaser

12. On 9 March 1998, the 2nd Provisional Sale and Purchase Agreement was executed by the Confirmor. It is not disputed that this constituted a valid and binding agreement between the Confirmor and the Purchaser. It provided, amongst other things, that a further deposit of $1,358,000 should be paid on 20 March 1998. Completion was not until 22 June 1998.

Discovery of misrepresentation - no formal Agreement with registered owner yet

13. On 12 March 1998, the Purchaser's solicitors told the Purchaser that the Confirmor's solicitors had said that no formal Agreement had yet been signed between the registered owner and the Confirmor, even though several drafts had been exchanged. The Confirmor's solicitors had undertaken to provide the 1st Provisional Sale and Purchase Agreement, but they had not yet done so.

Purchaser's proposal for terms in the formal Agreement rejected

14. The Purchaser then asked the Confirmor if the formal Agreement to be signed between them could provide that the further deposit payable be held by the Confirmor's solicitors as stakeholders, and that the Confirmor would appoint the Purchaser its attorney for the purpose of executing the assignment on completion.

15. According to the Purchaser, this proposal was, although first accepted, subsequently rejected by the Confirmor, which indicated that it would proceed on the strict terms of the 2nd Provisional Sale and Purchase Agreement which had not contained any such provisions.

16. Meanwhile, whilst the Confirmor's solicitors had promised to provide the 1st Provisional Sale and Purchase Agreement, it was not yet to hand.

17. On 14 March 1998 (Saturday), the Purchaser's solicitors wrote to the Confirmor's solicitors asking for the 1st Provisional Sale and Purchase Agreement "as soon as possible", and also asking the Confirmor's solicitors to take instructions on the Purchaser's request to add its proposed stakeholding provision in the formal Agreement, even though, according to the Purchaser, the Confirmor had already rejected it.

Purchaser's letter of 16 March 1998

18. On 16 March 1998 (Monday), the Purchaser's solicitors wrote a lengthy letter which led the next day to the Purchaser's issue of the writ. This letter was obviously meant to articulate the Purchaser's position. Due to its length I shall not set it out here.

19. It is clear from the letter that the Purchaser did not rescind, nor was intending or considering rescission of, the 2nd Provisional Sale and Purchase Agreement on the ground of misrepresentation.

20. On the contrary, it was asserting the existence of the contract. However it proceeded on the erroneous assumption that the Confirmor had an obligation at that stage to "prove a good title", and on the basis that the Confirmor had failed to do so, it alleged that that was tantamount to a repudiatory breach of the 2nd Provisional Sale and Purchase Agreement entitling the Purchaser to remedies for breach of contract.

Election not to rescind for misrepresentation

21. It is clear law that a misrepresentation does not by itself avoid a contract. It only makes the contract voidable at the instance of the misrepresentee - so it is up to the misrepresentee (the Purchaser) to elect whether to affirm the contract or to avoid it.

22. The misrepresentee must of course have reasonable time to elect, but once he has unequivocally (whether expressly or by conduct) chosen to affirm the contract, he cannot thereafter revive his right to rescind it. He cannot approbate and reprobate. Put another way, once there is an election to affirm the contract, the right to rescind is waived.

23. On the Purchaser's evidence, it had been aware of the misrepresentation since 12 March 1998. It did not rescind the contract. Instead it asked for the insertion of various terms in the formal agreement to be executed by the parties, a proposal which was rejected by the Confirmor on 13 March 1998.

24. On 14 March 1998, in an open letter to the Confirmor's solicitors, the Purchaser's solicitors requested that the further deposit "to be paid by our client on or before 20th March 1998 in accordance with the provisional agreement for sale and purchase dated 9th March 1998 shall be stakehold (sic) by your firm". Those words are consistent only with the continued existence of the contract and the Purchaser's intention to proceed with it. There was no reference at all to rescission for misrepresentation.

25. More importantly, the letter dated 16 March 1998 again did not assert, reserve, or even refer to, any right to rescind on the basis of misrepresentation even though it refers twice to the representation.

26. On the contrary, it contained assertions which were consistent, and consistent only, with the Purchaser affirming the contract. The 3rd paragraph of the letter stated:-

"In consequence whereof, the failure and refusal of the Confirmor to prove a good title is tantamount to an act of repudiation of the 2nd Agreement which enables the Purchaser to rescind the same together with the recovery of the HK$700,000 initial deposit paid plus damages liquidated at HK$700,000." [emphasis added]

The claim for "damages liquidated at HK$700,000" was misguided (as Mr Paul Lam, the Purchaser's counsel, accepts) because there was no liquidated damages clause in the 2nd Provisional Sale and Purchase Agreement (the "escape clauses" having been deleted). However, what is significant is that the Purchaser was upholding the existence of the contract and propounding rights under it.

27. In the 5th and 6th paragraphs of the letter, the Purchaser again clearly asserted what it considered to be its rights under a "live" contract:-

"We wish to reiterate ... the Confirmor has failed to prove that it has an unfettered right to assign the property to the Purchaser, thereby committing irretrievably a fundamental breach, releasing the Purchaser not only from the obligation to perform its part of the 2nd Agreement, including naturally the payment of further deposit, but also entitles the Purchaser to consider the 2nd Agreement as discharged and to recover the HK$700,000 initial deposit paid plus a further HK$700,000 as liquidated damages.

Failing your confirmation to us in writing that the Confirmor has categorically acceded to the Purchaser's demand herein for an immediate refund of the HK$700,000 initial deposit plus a further HK$700,000 as liquidated damages or alternatively, demonstrating the willingness and readiness of the Purchaser to proceed to completion of the transaction, for the entire deposit, including the HK$700,000 paid to be stakeheld pending completion together with a Power of Attorney to be executed in favour of the Purchaser, we are instructed that the Purchaser shall have no alternative but [to] institute appropriate proceedings against the Confirmor without further notice." [emphasis added]

28. The reference to the "willingness and readiness of the Purchaser to proceed to completion" may, Mr. Lam says, be a mistaken reference to the "Confirmor". But in my view, it does not matter:- if the Purchaser was demonstrating its own willingness and readiness to proceed to completion, it was obviously affirming the contract; even if the Purchaser was asking the Confirmor to demonstrate its willingness and readiness to proceed to completion, the Purchaser had still elected to proceed under the contract.

29. In my judgment, the letter of 16 March 1998 was an unequivocal election by the Purchaser to affirm the contract, albeit a contract that, in the Purchaser's view, was being breached by the Confirmor's failure to "prove title".

30. It is well-established law that such an election is final and irrevocable. It matters not whether the other party has acted to its detriment. Nor is it a case, as Mr Lam submitted, of a party having given a bad reason for terminating the contract (failure to prove title) and subsequently justifying it with a good reason (misrepresentation). Here, the Purchaser had the right to rescind for misrepresentation but had elected to affirm the contract. Once it made that election, it relinquished its right to avoid the contract for misrepresentation; in other words, it had already waived the good reason.

31. The Purchaser therefore has no arguable defence of misrepresentation. That being the case, it is not necessary for me to consider the other submissions made by Mr Earnest Cheung, counsel for the Confirmor, that the evidence of misrepresentation was incredible, or that the misrepresentation was immaterial in that the Purchaser could not have placed reliance on it. In my view, these are factual disputes which would have to be decided by a trial judge, and are not suitable for a summary judgment application.

No repudiatory breach of contract by Confirmor

32. Mr Lam's other argument was that the Purchaser was entitled to terminate the contract because the Confirmor had acted in such a way as to amount to repudiatory breach of the Agreement.

33. The act complained of was the failure to provide a copy of the 1st Provisional Sale and Purchase Agreement, which the Purchaser said in its letter of 16 March 1998 was failure/refusal by the Confirmor to "deduce a good title, fundamental to and essential for the transaction to proceed". The Purchaser asserted that "the failure and refusal of the Confirmor to prove a good title is tantamount to an act of repudiation of the 2nd Agreement ..." and that "the Confirmor has failed to prove that it has an unfettered right to assign the property to the Purchaser".

34. But the Confirmor did not, at that stage, have any obligation to deduce title. Completion was 3 months away. There was nothing in the 2nd Provisional Sale and Purchase Agreement requiring the Confirmor to prove title before the payment of the further deposit and the intended execution of the formal Agreement on 20 March 1998. In my view, therefore, it is clear that there is no arguable defence to the Counterclaim on the basis of repudiatory breach by the Confirmor.

35. Indeed, in any event, the Confirmor did not "refuse" to provide the 1st Provisional Sale and Purchase Agreement - even on the Purchaser's own evidence, the Confirmor's solicitors had undertaken and promised to supply it. The Purchaser's solicitors had only asked, in their letter dated 14 March 1998 for the 1st Provisional Sale and Purchase Agreement to be provided "as soon as possible". However, after the weekend, on 16 March 1998, a deadline of 24 hours was imposed.

36. As it turned out, the 1st Provisional Sale and Purchase Agreement was provided to the Purchaser either on 17 March 1998 (after the service of the writ) or on 18 March 1998. The Confirmor also informed the Purchaser that it had paid the further deposit. But by then the Purchaser had considered that it had validly terminated the agreement and had issued the present writ.

37. In fact it would not have been too late for the Purchaser to have withdrawn its purported termination of the agreement and to continue performing the contract by paying the further deposit on 20 March 1998. But the Purchaser did not do so, thereby evincing an intention no longer to be bound by the 2nd Provisional Sale and Purchase Agreement, and the following day, the Confirmor accepted the Purchaser's breach and terminated the agreement.

Order

38. As the only two defences to the Counterclaim are unarguable, I would make an order in terms of the Confirmor's summons of 18 March 1999.