Castle Global Ltd v. Ip Tai Hoi Paul

CACV 255/2020

[2021] HKCA 1540

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 255 OF 2020

(ON APPEAL FROM HCMP NO 645 OF 2019)

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Before:  Hon Kwan VP, Cheung and Au JJA in Court

Date of Hearing:  9 February 2021 (remote hearing)

Date of Judgment: 22 October 2021

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J U D G M E N T

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Hon Au JA (giving the Judgment of the Court):

A.   INTRODUCTION

1.This is the defendant’s appeal against the judgment of Recorder Yvonne Cheng SC (“the Recorder”) dated 15 June 2020 (“the Judgment”).

2.By way of the Judgment, the Recorder allowed the plaintiff’s claim against the defendant for his breach of a provisional sale and purchase agreement in relation to the plaintiff’s purchase of all the shares in the defendant’s company which in turn owned a landed property.  The Recorder ordered the defendant to refund the plaintiff’s deposit and further pay an equivalent sum as the agreed compensation provided in clause 16(b) of that agreement.

B.   BACKGROUD

3.The undisputed background leading to this appeal has been summarized by the Recorder at [4] - [16] of the Judgment.  We will only highlight the following that are relevant to this appeal.

4.By way of a provisional agreement dated 11 January 2019 (“the Agreement”), the plaintiff agreed to acquire the defendant’s entire issued share capital in Kingstate Inc Limited (“the Company”) with a view to purchase its only asset, a property at Unit C on the 21^st Floor of Tower 3, Grand Austin and car parking space number 2‑64 on Basement 2 Floor, Grand Austin[1].  It is not in dispute that all the terms of the Agreement remained valid and in full force as there was no subsequent formal agreement executed by the parties.

5.As stated at [8] of the Judgment, the relevant clauses of the Agreement are these:

“Clause 2

…

(c) Completion … shall take place … on 11-4-2019….

Clause 4

Completion is condition upon the following.

(a) the Purchaser having completed his due diligence investigation on the business, financial, legal and all other aspects of the Company and reasonably satisfied with the results thereof;

(b) all the representations, undertakings and warranties given by the Vendor under this Agreement and the Formal Agreement are and shall remain true, accurate, correct in all material respects up to the Completion.

If any of the foregoing conditions is not reasonably fulfilled (or waived by the Purchaser) on or before the Completion Date, the Purchaser shall be entitled by not less than 7 business days’ prior written notice to cancel the transaction under this Agreement whereupon the Vendor shall return all the deposit paid to the Purchaser forthwith and neither party shall be entitled to claim against other party for any reliefs.

Clause 5

To facilitate the carrying out of the due diligence investigation by the Purchaser, the Vendor hereby undertakes to deliver to the Purchaser or the Purchaser’s solicitors all documents relating to the Company for the past 7 years in his possession within 30 days from the date of this Agreement. The Purchaser shall carry out the due diligence investigation and confirm in writing to the Vendor or the Vendor’s solicitors whether he is reasonably satisfied with the results of such due diligence investigation within 14 days after the date of delivery of all documents by the Vendor or the date of delivery of such further documents reasonably requested by the Purchaser. If the Vendor does not receive the Purchaser’s confirmation in writing on or before the aforesaid deadline, the Purchaser shall be deemed to be reasonably satisfied with the results of the due diligence investigation. If the Purchaser discovers during the reasonably due diligence investigation period that there is any material problem, the Vendor shall use his reasonable endeavour to remedy the same as soon as possible before the Completion Date.

Clause 8

Upon completion and upon payment of the Balance of Purchase Price by the Purchaser, the Vendor shall:

…

(k) deliver to the Purchaser all the audited accounts of the Company for up to the past seven (7) financial years to the end of the latest financial year and the management account of the Company as at the Completion Date which must be certified as true and correct by the director of the Company. The aforesaid audited accounts shall be delivered to the Purchaser for verification within one month after the date of this Agreement and the draft of the said management account as at the Completion Date shall be delivered to the Purchaser for verification not less than 5 days prior to the Completion Date. The Vendor shall be responsible for the costs and expenses incurred for the preparation of the audited accounts and management account;

…

Clause 16

(a) Should the Purchaser fail to complete the purchase in accordance with the terms of this Agreement, the Vendor shall be entitled to forfeit the deposits paid absolutely as liquidated damages and terminate this Agreement and then sell the Sale Share and the Shareholder's Loan to anyone he thinks fit and the Vendor shall not take any action to claim against the Purchaser for any further liabilities and/or damages nor for specific performance of this Agreement.

(b) Should the Vendor after receiving the deposits paid hereunder fail to complete the sale in accordance with the terms of this Agreement, the Vendor shall immediately refund the deposits paid to the Purchaser and compensate the Purchaser with a sum equivalent to the amount of the deposits as liquidated damages and the Purchaser shall not take any further action to claim for damages or enforce specific performance.

Clause 21

Unless otherwise specified herein, time shall in every respect be of the essence of this Agreement.” (emphasis added)

6.Hence, under clause 8(k) of the Agreement (“clause 8(k)”), the defendant as the vendor shall deliver to the plaintiff (a) the Company’s audited accounts for the past seven years within one month of the Agreement (ie, by 11 February 2019), and (b) the draft management accounts of the Company as at completion date five days before that date.

7.After the Agreement:

(1)  The plaintiff paid the initial and further deposits at the total amount of HK$ 5.2 million under clauses 2(a) and 2(b);

(2)  On 28 January 2019, the defendant’s solicitors Messrs Wat & Co (“WC”) provided various corporate documents and account records of the Company to the plaintiff’s solicitors Messrs Terry Yeung & Lai (“TYL”) for due diligence investigation purpose;

(3)  On 29 January 2019, the parties agreed to advance the completion date from 11 April 2019 to 28 February 2019;

(4)  By a letter dated 8 February 2019, TYL raised a number of requisitions after reviewing the documents and asked for, among others, (i) under item B1, the Company’s accounting documents for the financial year ended 31 December 2018; and (ii) under item B10, the completion management account “not less than 5 days prior to the completion date”;

(5)  On around 25 February 2019, the plaintiff deposited the balance of the purchase money to TYL;

(6)  On 26 February 2019, in response to the requisitions, WC provided further documents to TYL and stated that (a) they “shall revert to you shortly” to requisitions raised under item B1, and (b) they “noted” the request made under item B10;

(7)  In light of the outstanding and unsatisfactory answers to the requisitions, by a letter dated 27 February 2019 (“the 27 February Letter”), TYL wrote to WC proposing to postpone the completion date to 14 March 2019 with all the terms and conditions of the Agreement to remain unchanged. WC accepted the proposal on the same date;

(8)  By a letter dated 26 February 2019, WC sought to provide TYL with further answers to the various outstanding requisitions and requests;

(9)  By a letter dated 11 March 2019 (“the 11 March Letter”) to WC, TYL referred to WC’s answers provided in their 26 February 2019 letter and further stated that the Company’s audited accounts for the year ending 31 December 2018 (the “2018 Audited Accounts”) and draft completion management accounts (the “Draft Management Accounts”) were still outstanding despite the fact that the completion date was approaching.  It further reminded the defendant that “time is of the essence” as stated in the 27 February Letter and stated that the plaintiff was considering the possibility of accepting the defendant’s wrongful repudiation of the Agreement;

(10)  On 12 March 2019, TYL wrote to WC to accept the defendant’s wrongful repudiation and terminate the Agreement.

8.The plaintiff thereafter brought the present claim against the defendant.  It is plaintiff’s case that the defendant was in breach of clause 8(k) in failing to deliver the 2018 Audited Accounts and the Draft Management Accounts, which breach was accepted by the plaintiff on 12 March 2019.  The plaintiff therefore claimed a refund of the deposit and liquidated damages of the same amount pursuant to clause 16(b) of the Agreement.

9.The defendant raised a number of defences against the plaintiff’s claim.  These defences were summarized by the Recorder at [18] of the Judgment as follows:

(1)  The conditions precedent to completion under clause 4 of the Agreement (namely, completion of due diligence by the plaintiff) had not been fulfilled, or alternatively, waived by the plaintiff;

(2)  The 11 March Letter raised fresh requisitions, and the defendant was given insufficient time to answer them, thus disqualifying the plaintiff from treating the Agreement as terminated;

(3)  There was no anticipatory breach of the Agreement;

(4)  The plaintiff is not entitled to claim relief under clause 16(b) of the Agreement, as it failed to do all that was required of it.

C.   THE JUDGMENT

10.The Recorder rejected all the above defences with detailed reasons given in the Judgment.  However, for the purpose of this appeal, we only need to be concerned with the Recorder’s dismissal of the following two defences, which dismissals are challenged by the defendant in this appeal.

11.Before the Recorder, the defendant argued that the plaintiff could not rely on the defendant’s failure to provide the 2018 Audited Accounts to terminate the Agreement because, in the 27 February Letter, TYL expressly noted that the requisitions raised in its letter of 8 February 2019 were not sufficiently addressed and proposed to postpone the completion date to 14 March 2019.  Such act, said the defendant, amounted to an affirmation of the Agreement and the plaintiff had thereby lost the right to terminate the Agreement for defendant’s failure to provide the 2018 Audited Accounts.  See [34] of the Judgment.

12.The Recorder did not accept this argument.  She found that the 27 February Letter was not a clear and unequivocal act of affirmation because it expressly stated that “time is hereby made of the essence of the [Agreement]” and more importantly, “all [the plaintiff’s] right under the [Agreement] are hereby expressly reserved”.  As a result, the letter only showed that plaintiff was considering its options and it remained open for the plaintiff later to rely on the defendant’s failure to provide the 2018 Audited Accounts to treat the Agreement as terminated: see [35] - [37] of the Judgment.

13.In the premises, the Recorder concluded that by 12 March 2019, as the defendant was already and continued to be in breach of clause 8(k) in failing to deliver the 2018 Audited Accounts and the Draft Management Accounts, the plaintiff was entitled to accept the breach and terminate the Agreement[2]: see [38] of the Judgment.

14.In relation to the defence based on the construction of clause 16(b) of the Agreement, the Recorder rejected the defendant’s contended interpretation that the plaintiff had to first satisfy various conditions before it could rely on that clause.  In the premises, she held that the plaintiff was entitled to invoke clause 16(b) to claim for the return of the deposit and the liquidated damages of the same amount: see [39] - [42] of the Judgment.

D.    THIS APPEAL

D1.    Grounds of appeal

15.The defendant raises the following three grounds of appeal in its Notice of Appeal:

(1)  The Recorder erred in holding that the plaintiff was entitled to terminate the Agreement, by its solicitors’ letter dated 12 March 2019, on the ground that the defendant had breached clause 8(k) thereof by failing to deliver the 2018 Audited Accounts (“Ground 1”);

(2)  The Recorder erred in holding that the plaintiff was entitled to terminate the Agreement, by its solicitors’ letter dated 12 March 2019, on the ground that the defendant had breached clause 8(k) thereof by failing to deliver the Draft Management Accounts (“Ground 2”);

(3)  The Recorder erred in holding that the plaintiff was entitled to liquidated damages in the equivalent amount of the deposits under clause 16(b) of the Agreement (“Ground 3”).

16.We will look at these grounds in turn.

D2.    Grounds 1 and 2

17.As submitted by Mr Paul Lam SC[3] (leading Mr Tam) for the defendant, these two grounds can and should be considered together, as they are both concerned with the defence of affirmation, in that the defendant says by way of the 27 February and the 11 March Letters, the plaintiff had affirmed the Agreement despite the defendant’s earlier failure to deliver the 2018 Audited Accounts and the Draft Management Accounts in accordance with clause 8(k).  In the premises, it was no longer open to the plaintiff to purportedly accept those breaches on 12 March 2019 to terminate the Agreement.

18.Mr Lam fairly says at the hearing that the success of this defence (and hence Grounds 1 and 2) boils down to an objective reading of the two Letters to see if they amount to unequivocal acts or conduct on the part of the plaintiff to affirm the Agreement despite the defendant’s earlier breach of clause 8(k) in failing to deliver those documents.  Mr Lam further agrees that the words or conduct ordinarily required to constitute an election to affirm must be unequivocal in the sense that it is consistent only with the outright exercise of one right which is inconsistent with the exercise of the other[4].

19.In this respect, both Mr Lam and Mr Dawes SC (leading Mr Jeffrey Li) for the plaintiff have no dispute that the following general principles are relevant to the finding of an affirmation of a contract[5]:

(1)  Whether there was an election is a fact-sensitive issue depending on the proper and objective construction of the relevant correspondence and conduct of the contracting parties.

(2)  The innocent party is not bound to accept a repudiation once a breach is committed by the other side.  He is entitled to consider his position and keep his options open.  Hence, the fact that the innocent party complains about the breach of the defaulting party and urges the rectification of such breach, without more, generally would not be regarded as conduct amounting to an election to affirm.

(3)  The significance of an express reservation of right or without prejudice statement varies depending on the facts of the case. If the objective conduct of the innocent party amounts to an outright exercise of a right which is inconsistent with another right, such conduct constitutes an election not to exercise the other, whatever reservation might have been made by that party when exercising that right.  On the other hand, where there is less clear conduct to show an outright exercise of that right, reservations by a party of its right may assist in depriving its conduct of the necessary unequivocal character.  All must be dependent on the particular facts and circumstances of the case.

20.Bearing these legal principles in mind, we now turn to look at the 27 February and 11 March Letters.

21.The 27 February 2019 Letter reads as follows:

“We refer to your letter dated 26^th February 2019 and write to put on record that most of our requisitions raised under our letter dated 8^th February 2019 remain outstanding and/or not duly answered to our client’s satisfaction.

In the circumstances, we are instructed to postpone the completion date from 28^th February 2019 to 14^th March 2019 with all other terms and conditions under the Provisional Agreement for Sale and Purchase of the Entire Issued Share Capital of the Company dated 11 January 2019 remain unchanged; in this regard, time is hereby made of the essence of the said Provisional Agreement.

Kindly confirm before 5:30pm of today if our client’s proposal aforesaid is accepted by your client.

Meanwhile, all our client’s right under the said Provisional Agreement are hereby expressly reserved.

Your prompt reply is highly appreciated.”

22.Mr Lam submits that this letter should be properly construed in the following context:

(1)  Under clause 8(k), the defendant shall provide the 2018 Audited Accounts to the plaintiff for verification within one month after the Agreement, ie, by 11 February 2019;

(2)  The defendant failed to provide them by the stipulated time;

(3)  Since then, the plaintiff had the right to terminate the Agreement;

(4)  However, the plaintiff did not elect to do so by 11 February 2019.  Instead, on 27 February 2019, the plaintiff proposed to postpone the competition date to 14 March 2019;

(5)  In proposing to postpone the completion date against the above context, the plaintiff clearly elected to affirm the Agreement and thus lost the right to terminate the Agreement based on the defendant’s repudiatory breach of clause 8(k).

23.At the hearing, Mr Lam again emphasizes that the act of the plaintiff to propose to extend the completion date, in particular only one day before the original completion date, amounted to a clear and unequivocal act to affirm the Agreement as this is clearly inconsistent with the right to terminate the Agreement.  Further, by proposing to so extend the completion date, the plaintiff was in effect giving the defendant further time to deliver the documents as re        quested within a reasonable time, and thus waiving the earlier breach.

24.Mr Lam further submits that the express reservation of right as stated in the letter does not assist the defendant in these circumstances, since when this is understood in the above context and objectively, the said reservation was made only for the interim purpose to see if the proposal would be accepted by the defendant.  Once the proposed postponement was accepted, the offer to postpone became an affirmation of the Agreement.

25.We are unable to accept Mr Lam’s above reading of the letter.

26.As pointed out by the learned Vice President at the hearing, the 27 February Letter must be read as a whole.  The proposal to postpone the completion date was accompanied by the express stipulations that all the other terms and conditions of the Agreement were to remain unchanged and time was still made of the essence.  Hence, read objectively and properly, the plaintiff had stated in clear terms that it would continue to hold the defendant to all the original terms of the Agreement, which must include the obligations to provide the requisite documents in accordance with clause 8(k).

27.Once the proposal to extend the completion date (and the completion date alone) is read together with this express adherence to all the original terms of the Agreement with time being continued to be made of the essence, objectively this proposal cannot be regarded as an unequivocal act on the part of the plaintiff to waive the defendant’s earlier breach in failing to deliver the 2018 Audited Accounts and the Draft Management Accounts in accordance with clause 8(k).  This is particularly so as the breaches are continuing in nature.  Quite to the contrary, we find this to be entirely consistent with the plaintiff’s adopting a wait and see position.  See the principles summarized at [19] above.

28.In response, Mr Lam has further drawn the Court’s attention to two authorities, which, he submits, support the defendant’s contentions that the reservation of right in this letter does not deprive the plaintiff’s conduct of extending the completion date the character of an unequivocal act to affirm the Agreement.

29.He first refers us to Summer Hill Businesses Estate Pty Ltd v Equititrust Ltd [2011] NSWCA 149 at [26] where Macfarlan JA states as follows:

“That concession was appropriately made because, as I indicate at [30] below, Equititrust’s rights were not inconsistent. If they had been inconsistent, a reservation of rights would likely have been ineffective because the outright exercise of one such right usually constitutes an election not to exercise the other, whatever reservation might have been made (see Haynes v Hirst (1927) 27 SR (NSW) 480 where a party unsuccessfully sought to ‘protect himself against the legal consequences of his acts by stating that he [did] them without prejudice’ (at 489)). If the time has not arrived at which a party is confronted with the need to choose between two inconsistent rights, it may keep its position open by refraining from engaging in conduct that unequivocally indicates that it has made a choice between them [authorities omitted]. If there has not been any outright exercise of one of the rights, reservations by a party of its rights may assist in depriving its conduct of the necessary unequivocal character.” (emphasis added)

30.While Mr Lam accepts that what was said at [26] is obiter as pointed out by Kwan VP, he seeks to rely on the last sentence of [26] which he submits is generally applicable.  In relation to that, Mr Lam appears to say that as the time for the plaintiff to exercise the right to accept the breach and terminate the Agreement had already “arrived” by the time when the plaintiff proposed to extend the completion date, the act to so extend the completion must be regarded as an outright exercise of an inconsistent right to continue with (and thus affirm) the Agreement.

31.Next, Mr Lam next refers us to Sargent v ASL Developments Ltd [1974] 131 CLR 634, where Mason J (as he then was) said this at 655‑656:

“… A person is said to have a right of election when events occur which enable him to exercise alternative and inconsistent rights, i.e. when he has the right to determine an estate or terminate a contract for breach of covenant or contract and the alternative right to insist on the continuation of the estate or the performance of the contract. It matters not whether the right to terminate the contract is conferred by the contract or arises at common law for fundamental breach — in each instance the alternative right to insist on performance creates a right of election.

Essential to the making of an election is communication to the party affected by words or conduct of the choice thereby made and it is accepted that once an election is made it cannot be retracted (R. v. Paulson); Tropical Traders Ltd. v. Goonan). No doubt this rule has been adopted in the interests of certainty and because it has been thought to be fair as between the parties that the person affected is entitled to know where he stands and that the person electing should not have the opportunity of changing his election and subjecting his adversary to different obligations.

A person confronted with a choice between the exercise of alternative and inconsistent rights is not bound to elect at once. He may keep the question open, so long as he does not affirm the contract or continuance of the estate and so long as the delay does not cause prejudice to the other side. An election takes place when the conduct of the party is such that it would be justifiable only if an election had been made one way or the other (Tropical Traders Ltd. v. Goonan). So, words or conduct which do not constitute the exercise of a right conferred by or under a contract and merely involve a recognition of the contract may not amount to an election to affirm the contract.”

32.With respect to Mr Lam, we do not think the quoted passages in these two authorities assist him.  All that were said in these cases is effectively restating the general principle that whether a reservation of rights may be regarded as having no effect on or aiding the assessment of whether there is an outright exercise of a right which is inconsistent with the another right depends on the particular circumstances and facts of the case[6].

33.As rightly submitted by Mr Dawes, the suggestion that a party who has by his conduct unequivocally elected for one course of action cannot avoid the consequences of his election by reserving his rights begs the question of whether this conduct was unequivocal in the first place.  It is not in dispute that all these are fact-sensitive and this a priori question is to be assessed by reference to all the circumstances.  There is therefore no good reason why an innocent party’s reservation of rights ought to be excluded from the factual matrix in the overall assessment.  When an innocent party’s otherwise unequivocal act is accompanied by such a disclaimer, his objective intention should at least be rendered equivocal[7].

34.In the premises, in our view, what was said in these two cases does not in any way affect our above objective interpretation of the 27 February Letter.

35.Mr Lam then further submits when the 27 February Letter is (as it should be) read together with the 11 March Letter, it must be clear that by 11 March 2019, the plaintiff had unequivocally affirmed the Agreement despite the defendant’s breaches[8].

36.As summarized in [7(7) - (9)] above, after the 27 February Letter and the agreement to extend the completion date to 14 March 2019, the defendant through WC had sought to provide through correspondence answers to various other requisitions raised by TYL earlier and in relation to the requests for the delivery of the 2018 Audited Accounts and the Draft Management Accounts.  By way of the 11 March Letter, TYL dealt with these matters.  In this respect, they dealt with the answers provided to the other requisitions raised in section “A. Corporate Matter” (“Section A”) of the letter.  In relation to the outstanding 2018 Audited Accounts and the Draft Management Account, TYL dealt with them under the letter’s section “B. Financial Matter” (“Section B”).

37.In dealing with Mr Lam’s submissions, it is important for us to set out the relevant parts of the 11 March Letter in full as follows:

“We refer to your letter dated 26/2/2019 and having perused those documents enclosed thereunder, we have the following requisitions for your attention:-

A. Corporate Matter

1. Noted.

2. Noted.

3. Regarding the Share Certificate No.2, Ip Tai Hoi Paul should be the registered holder of ‘1’ fully paid share(s) instead of ‘Kingstate Inc Limited’ fully paid share(s). please rectify and let us have the same duly rectified for our perusal.

4. Noted.

5. Noted.

6. Noted. We await your production of the said rectification resolution upon completion.

7. Noted. We await your production of the said rectification resolution upon completion.

8. Noted. We await your production of the said rectification resolution upon completion.

9. Noted. We await your production of the Minutes/Resolutions of Annual General Meeting held in 2018 and 2019 respectively.

10. Noted.

11. Noted. We await your production of the relevant board resolution for approving the appointment of auditor of the Company after the resignation of Richful.

B. Financial Matter

1-5, 8-10. We regret to note that your client has still failed to answer our requisitions up to now; in particular, your client has failed to deliver to us the (i) AFS together with the supporting accounting documents for the financial year ended 31.12.2018 [ie, the 2018 Audited Accounts] AND (ii) the draft completion management accounts [ie, the Draft Management Accounts] (which should have been delivered to us for our verification not less than 5 days before the completion date in compliance with the Provisional Agreement dated 11 January 2019) despite our repeated request and demand. As it has been agreed by parties that completion shall take place on 14/3/2019 and in this regard, time had been made of the essence as per our letter dated 27/2/2019, it is considered that your client has wrongfully evinced an intention not to be bound by the said Provisional Agreement. We are now taking instructions from our client in respect of your client’s said wrongful repudiation. Meanwhile, we hereby expressly reserve our client’s right including but not limited to its right to accept your client’s wrongful repudiation.

6. …

7. …” (emphasis added)

38.Mr Lam submits that when the 11 March Letter was read and understood together with the extension of the completion date offered by the plaintiff in the 27 February Letter, it is clear that the plaintiff had affirmed the Agreement.  His contentions run as follows:

(1)  Given the new extended completion date, the plaintiff had agreed to allow the defendant to deliver the 2018 Audited Accounts within a reasonable time upon the extension.  Similarly, the time to deliver the Draft Management Accounts was also extended to 9 March 2019 (five days before the new completion date).

(2)  It is also accepted that by 11 March 2019, the defendant would be regarded as having failed to deliver those documents with the new extended timeframe, and the plaintiff was entitled to exercise the right to terminate the Agreement for breach.  However, the plaintiff did not do so.  Instead, through TYL by way of the 11 March Letter, it still continued to pursue further replies in relation to the various requisitions stated under Section A.

(3)  The exercise of the right to continue to pursue those requisitions under the Agreement was clearly inconsistent with the exercise of the right to terminate the Agreement for breach.  In the premises, the plaintiff had by way of the 11 March Letter acted unequivocally to affirm the Agreement and thus lost the right to terminate it for the earlier breaches. In this respect, in seeking to support his contentions, Mr Lam has drawn our attention to Champtaloup v Thomas [1976] 2 NSWLR 264 at paragraph 280 per Mahoney JA, where it was said:

“In some cases, requisitions may be sent in the context in which it is clear that an election to affirm is to be imputed. Where requisitions are sent, and a demand made for the performance generally of the contract by the vendor, the sending of the requisitions will impose a present obligation to reply to them and an election may be held to have been made: cf. Turner v. Labafox International Pty. Ltd. But where a vendor knows that a purchaser does not intend to make an election, is purporting to reserve the right to elect when relevant information comes to hand, and sends requisitions on that basis, I do not think that what the purchaser has done is ‘adverse’, and such that an election should be imputed to him.” (emphasis added)

39.With respect, we are equally not persuaded by these submissions.

40.First, as rightly accepted by Mr Lam at the hearing, the 11 March Letter must again be read as a whole.  Mr Lam’s above contentions however focused only on Section A, and have wholly ignored Section B.  It is clear that under Section B, the plaintiff expressly stated that the defendant had by then still failed to deliver the 2018 Audited Accounts and the Draft Management Accounts despite repeated requests and demands, and thus the defendant had “evinced an intention not to be bound by the [Agreement]”, which amounted to the defendant’s “wrongful repudiation” of the Agreement.  It then further stated that the plaintiff’s right “including but not limited to its right to accept [the defendant’s] wrongful repudiation” was thereby “expressly reserved”.

41.Hence, under this section, there could not be any objective doubt that the plaintiff had in this letter continued to treat the defendant’s earlier failure to deliver the 2018 Audited Accounts and the Draft Management Accounts as a breach and thus a wrongful repudiation of the Agreement, which the plaintiff was reserving its right to accept and terminate the Agreement.  The express reservation of such a right to terminate the Agreement for the earlier breaches of the defendant clearly cannot be objectively regarded to be an unequivocal act to affirm the Agreement.

42.In the premises, once Section A is read and understood as a whole with its Section B, what was stated in the letter did not amount to an act on the part of the plaintiff to unequivocally affirm the Agreement.  This is particularly so as Section A is plainly drafted to deal with other requisitions which are entirely unrelated to the defendant’s obligations under clause 8(k) to deliver the 2018 Audited Accounts and the Draft Management Accounts.

43.Second, Champtaloup does not assist Mr Lam.  As accepted by Mr Lam, given the undisputed principles summarized in [19], [29] ‑ [33] above, whether certain acts and an express reservation of right can be regarded to support or negate an act said to be to affirm a contract must be fact sensitive and be considered in the particular circumstances of each case.  The use of authorities in this respect, other than for stating the general principles, in a particular case like the present one is likely to be very limited.

44.In any event, as Mahoney JA has also made it clear in the second part of paragraph 280 (the very paragraph Mr Lam relies on) that the act of pursuing outstanding requisitions does not necessary amount to an unequivocal act to affirm the contract by the purchaser:

“… But where a vendor knows that a purchaser does not intend to make an election, is purporting to reserve the right to elect when relevant information comes to hand, and sends requisitions on that basis, I do not think that what the purchaser has done is ‘adverse’, and such that an election should be imputed to him”.

45.In the present case, for the reasons we have explained above, given what was stated in Section B, it must be objectively obvious that the plaintiff was not affirming the Agreement despite the defendant’s breach in failing to deliver the documents although it continued to deal with the various other requisitions under Section A.

46.For all the above reasons, we do not accept that properly construed, the plaintiff had by way of the 27 February and 11 March Letters affirmed the Agreement despite the defendant’s earlier breach of clause 8(k) in failing to deliver the 2018 Audited Accounts and the Draft Management Accounts.  The Recorder is clearly correct in rejecting this defence.

47.Grounds 1 and 2 therefore fail and must be dismissed.

D3.    Ground 3

48.This ground turns on the proper construction of clause 16(b) of the Agreement.  It is perhaps helpful to recite clause 16 again as follows:

“Clause 16

(a) Should the Purchaser fail to complete the purchase in accordance with the terms of this Agreement, the Vendor shall be entitled to forfeit the deposits paid absolutely as liquidated damages and terminate this Agreement and then sell the Sale Share and the Shareholder's Loan to anyone he thinks fit and the Vendor shall not take any action to claim against the Purchaser for any further liabilities and/or damages nor for specific performance of this Agreement.

(b) Should the Vendor after receiving the deposits paid hereunder fail to complete the sale in accordance with the terms of this Agreement, the Vendor shall immediately refund the deposits paid to the Purchaser and compensate the Purchaser with a sum equivalent to the amount of the deposits as liquidated damages and the Purchaser shall not take any further action to claim for damages or enforce specific performance.”

49.In gist, it is Mr Lam’s contentions that, on a proper construction, clause 16(b) is a clause which can only be invoked (a) by the vendor (ie, the defendant) but not the purchaser (ie, the plaintiff),and (b) also only in the circumstances where the defendant has for his own reasons refused to complete the sale but not for his breach of the Agreement[9].

50.Mr Lam’s submissions can be summarised as these.

51.First, Mr Lam submits clause 16 of the Agreement is what has been typically called an “escape clause” or “alternative performance clause” which provides options to both parties to withdraw from the transaction by alternative modes of performance.  For the present purpose, clause 16(b) is for the benefit of a remorseful vendor who “repents” of his bargain in entering into the agreement for the sale of the property.  This construction is well supported by authorities[10].

52.Second, Mr Lam emphasises at the hearing that this construction is supported by the use of the words “immediately refund” in the sentence “the Vendor should immediately refund… and compensate…”.  These words in imposing a tight time limit (“immediately”) on the defendant vendor to refund the double deposit shows that the clause is intended to protect the defendant, as once he fails to do so “immediately”, he would lose the protection and is exposed to a claim by the purchase for specific performance or damages.  The message to the vendor is thus, Mr Lam submits, “if you want to back out, you must pay immediately or return immediately double deposit”.  If the clause was intended to be capable of being invoked by the plaintiff purchaser, the word “immediately” would serve no useful or practical purpose.  He submits that if the purchaser is entitled to invoke such a clause like clause 16(b) when the vendor is in breach, it would also imply that it will be precluded by the same clause to seek specific performance or damages.  This could not be the intention of the parties and goes beyond the purpose of an “escape” or “alternative performance” clause.

53.Third, if clause 16(b) can be invoked by the purchaser as contended by the plaintiff, it would result in an unusual consequence:

(1)  When the market has gone up, the plaintiff could still invoke this clause and receive his deposit and an equivalent sum as compensation even though he has suffered no loss.

(2)  On the other hand, when the market has gone down, the plaintiff could then argue that the vendor defendant had not refunded the double deposit “immediately”, and thus he could claim against the defendant for damages.

This, Mr Lam says, would give the purchaser the best of both worlds, which cannot be the objective intention of the parties.

54.In the premises, Mr Lam submits that on a proper construction, clause 16(b) is intended to give the vendor an option to render alternative performance, and therefore the word “fail” in the sentence “fail to complete the sale in accordance with the terms of this Agreement” shall also be construed to mean “refuse” to apply only to the situation where the defendant opts to refuse to complete the transaction but not where the defendant has breached the Agreement.

55.For the following reasons, we are unable to accept these contentions.

56.First, as Mr Lam has rightly and fairly accepted, as a matter of construction, we should start with the plain meaning of the words used in clause 16(b).  In this respect, he also accepts that the clause is drafted in very wide term as submitted by Mr Dawes.  The words used in the clause simply do not carry the plain and ordinary meaning that it could only be invoked by the defendant vendor and that it is restricted only to the situation where the vendor himself refuses to complete as Mr Lam contends.

57.Quite to the contrary, the meaning of the words used is plain: it applies as long as the defendant after receiving the deposits “fails to complete the sale in accordance with the terms of the [Agreement]” (emphasis added), which clearly also covers the situation where the defendant is in breach of the Agreement.  The ordinary and plain meaning of the word “fails” includes “includes all failure howsoever caused, ie, including refusal”[11].

58.Second, Mr Lam’s repeated references of this clause as an “escape clause” as a context to support his contended construction is misplaced as this is putting the cart before the horse.  Whether a particular clause is an “escape clause” is by itself a question of construction.  One does not and should not start by labelling the clause as an “escape clause” first to support the construction.

59.In any event, as rightly pointed out by Mr Dawes, the cases referred to by Mr Lam[12] to purportedly support his “escape clause” construction of clause 16(b) are only saying that such clause may be invoked by a remorseful vendor. These cases therefore are not intended to lay down general or exhaustive statements of the effect of such similarly drafted clauses, and are therefore not authority for the proposition that such clauses can only be invoked by the vendor.

60.Finally, the example of the so-called “unusual consequence” that Mr Lam has given does not take his case any further.  As the learned Vice-President has pointed out at the hearing, given the plain meaning of the words in the clause, the defendant could well protect his right and interests by vigilantly and strictly complying with the timeframe imposed by the clause to refund the double deposit (ie, immediately).  There is nothing so “unusual” about requiring the parties to abide by the terms of the contract they have agreed to, which represent the result of arm’s length negotiations.  This “consequence” therefore does not justify an interpretation which strains the plain meaning of the words used in clause 16(b) as submitted by Mr Lam.

61.Mr Lam in his skeleton submissions[13] appears to also contend that clause 16(b) as a liquidated damages clause may be unenforceable as a penalty as the plaintiff has not adduced evidence to show that the “double deposit compensation” provided in it represents a genuine estimate of the plaintiff’s loss, in particular in light of his above contentions on the “unusual consequence”.  Mr Lam has in our view rightly not elaborated on this in his oral submission at the hearing.  As submitted by Mr Dawes, this point is simply not open to Mr Lam as this fact-sensitive defence was not raised before the Recorder and also does not form part of the defendant’s grounds of appeal.  We will not entertain this contention in this appeal.

62.We therefore reject the defendant’s submissions on the meaning of clause 16(b).  The Recorder was therefore clearly right to find that the defendant’s failure to deliver the 2018 Audited Accounts and Draft Management Accounts amounted to the defendant’s failure to complete in accordance with the terms the Agreement as provided under clause 16(b), and the plaintiff is entitled to the refund of the deposit and be paid an equivalent sum as compensation.

63.Ground 3 therefore also fails.

E.   DISPOSITION

64.We therefore dismiss the defendant’s appeal.  For costs, we make an order nisi that the costs of this appeal be to the plaintiff, to be taxed if not agreed, with certificate for two counsel.

Mr Victor Dawes SC, and Mr Jeffrey Li, instructed by Terry Yeung & Lai, for the respondent (plaintiff)

Mr Paul Lam SC, and Mr Keith Tam, instructed by Wat & Co, for the appellant (defendant)