Polyset Ltd. v. Panhandat Ltd.
Read the full judgment text of FACV 28/2000 on BabelCite. This Court of Final Appeal judgment was delivered on 25 February 2002 before Bokhary PJ, Chan PJ, Ribeiro PJ, Litton NPJ, Lord Millett NPJ.
Contract law – sale of land – deposit and forfeiture – penalty – contract for sale of five shop premises for $115 million – completion 9 months later – purchaser paid 35% of purchase price ($40.25 million) by way of deposit and part payment – purchaser wrongfully repudiated – vendor sought to forfeit entire deposit – whether purchaser entitled to rescind under Clause 12 based on Buildings Department letter regarding unauthorized building works – whether vendor entitled to forfeit deposit exceeding conventional 10% – law relating to deposits distinct from law of penalties and liquidated damages – deposit is earnest of performance, not pre-estimate of loss – conventional deposit is 10% in Hong Kong – vendor seeking to forfeit larger deposit must show special circumstances objectively justifying the higher sum – Workers Trust test of reasonableness, not genuine pre-estimate of loss test – on rescission, unanimous Court of Final Appeal held Buildings Department letter was not a notice or order triggering rescission option under Clause 12 – on deposit, majority (4:1, Litton NPJ dissenting) held 35% deposit unreasonably excessive and could not be forfeited as true deposit – long completion period and market volatility did not justify 3.5 times the conventional amount – difference between deposit and actual loss ($7.25 million) to be refunded to purchaser with interest – Litton NPJ dissenting on deposit issue, applying penalty doctrine and finding parties at arm's length with freedom of contract – appeal allowed in part – no order as to costs given each party succeeded on important issues.
Legal issues: Whether the purchaser was entitled to rescind the contract under Clause 12 · Whether the vendor was entitled to forfeit a deposit of 35% of the purchase price
Outcome: Appeal allowed in part. The Court unanimously held the purchaser was not entitled to rescind the contract. By a majority of 4:1 (Litton NPJ dissenting), the Court held the vendor was not entitled to forfeit the entire 35% deposit and ordered the vendor to refund $7.25 million (the difference between the $40.25 million deposit and the $33 million assessed loss) to the purchaser, with interest.
Cited by 70 cases · Cites 1 case
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FACV No. 28 of 2000 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION FINAL APPEAL NO. 28 OF 2000 (CIVIL) (ON APPEAL FROM CACV NO. 70 OF 2000) _____________________
_____________________ Court: Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ, Mr Justice Litton NPJ and Lord Millett NPJ Date of Hearing: 15, 21 & 23 November 2001 Date of Judgment: 25 February 2002 _______________________ J U D G M E N T _______________________ Mr Justice Bokhary PJ: TWO ISSUES 1.This appeal concerns a contract for the sale of land. More particularly, it is a contract for the sale of five shop premises for $115 million. The sale was not completed. This was because the purchaser refused to complete. Two discrete issues arose as a result. Those two issues are now before the Court. The purchaser is here as the appellant, and the vendor is here as the respondent. THE FIRST ISSUE: RESCISSION 2.The first issue is whether the purchaser was entitled to rescind the contract. I respectfully agree with Mr Justice Litton NPJ that the purchaser was not entitled to rescind and had wrongfully repudiated the contract by purporting to do so. The Court is unanimous in affirming the decisions of the courts below on this issue. I have nothing to add to what Mr Justice Litton NPJ says thereon. THE SECOND ISSUE: DEPOSIT Deposit of 35 per cent retained 3.Turning to the second issue, it arises in the following way. Under the main agreement entered into between the parties on 23 May 1997, completion was fixed for 2 March 1998. Four sums were paid in advance of completion by the purchaser to the vendor. The main agreement describes the first sum as a deposit and part payment of the purchase price. It describes the other three sums as further deposits and part payments of the purchase price. Together these four sums total $40.25 million. This total sum is equivalent to 35 per cent of the purchase price. 4.On 2 March 1998 the parties entered into a supplemental agreement. Under the supplemental agreement, completion was put back by one month to 2 April 1998. Pursuant to the supplemental agreement and in advance of the new completion date, the purchaser paid the vendor a further sum of $11.5 million. This further sum is described in the supplemental agreement as a further deposit and part payment of the purchase price. 5.The vendor conceded at the trial that it was not entitled to retain the $11.5 million paid under the supplemental agreement. But it asserted the right to retain the $40.25 million paid under the main agreement. The loss suffered by the vendor as a result of the purchaser's wrongful refusal to complete has been assessed at $33 million. In other words, the vendor's loss is $7.25 million less than the $40.25 million which it asserts the right to retain. The purchaser asks that this difference of $7.25 million be refunded to it with interest. 6.Is the purchaser entitled to such refund? That is the second issue. It raises fundamental questions under the law relating to deposits, particularly in the context of contracts for the sale of land. I share Mr Justice Chan PJ, Mr Justice Ribeiro PJ and Lord Millett NPJ's view that this issue should be resolved in favour of the purchaser and that this appeal should be allowed in part accordingly. Since it is by a majority that the Court reverses the unanimous view of the learned judges in the courts below on fundamental questions of law, I propose to explain why I share the view taken by Mr Justice Chan PJ, Mr Justice Ribeiro PJ and Lord Millett NPJ thereon. I begin by acknowledging the particular benefit which I have derived from Mr Justice Ribeiro PJ's judgment. Deposits and liquidated damages serve different purposes 7.The law's development in regard to deposits has followed a very different course from its development in regard to liquidated damages and penalties. 8.As far as liquidated damages and penalties are concerned, the law is fairly well settled in its fundamental aspects. Contracts often specify the sum payable in the event of breach. Even if the sum so specified is described as liquidated damages, it may be seen upon examination to have been fixed as a threat to be held over a party's head with a view to compelling him to perform. If so, the specified sum will be regarded as a penalty and therefore not recoverable. And the innocent party will be awarded damages assessed according to his actual loss. In order for the specified sum to be recoverable as liquidated damages, one condition must be met. It is that such sum, judged by the position at the time when the contract was made, represents a genuine effort by the parties to pre-estimate the loss which the innocent party would suffer in the event of breach. Compensation according to a genuine pre-estimate of loss is the purpose which liquidated damages are meant to serve. 9.Deposits are meant to serve a wholly different purpose. Essentially a forfeitable deposit serves as an earnest of performance where there is an interval between the time when the contract is made and the time when payment in full becomes due. Such deposits are therefore standard in contracts for the sale of land. The property being off the market between contract and completion, it is only natural for the vendor to want an earnest of performance from the purchaser. 10.Provided that what the vendor takes as a deposit is within the bounds of an earnest of performance, it will constitute a true deposit. As such, it will be forfeited to the vendor if the purchaser wrongfully fails to perform his part of the bargain. This is so even if the vendor's loss is less than the deposit. It is so even if the vendor suffers no loss at all. Indeed, it is so even if the vendor makes a profit by selling the property to someone else at a higher price. If the vendor's loss exceeds the deposit, he is of course entitled to recover the full extent of his loss, giving credit for the deposit forfeited to him. Conventional deposits of 10 per cent 11.What is the test for determining whether a sum is within the bounds of an earnest of performance and is therefore a true deposit? The starting point is this. In Hong Kong as in many other parts of the world, a deposit representing 10 per cent of the purchase price of the land is conventional. If I were asked to account for the strict logic behind this percentage, I would have to answer that there is none that I know of and that there may be none that exists. I would augment or mitigate that answer by citing Mr Justice Holmes's famous aphorism (in "The Common Law" (1881) at p.1) that: "The life of the law has not been logic: it has been experience". Perhaps all that can really be said is that, for a long time and in many different places, 10 per cent has in practice enjoyed both legal and commercial acceptance as generally appropriate. 12.Contracts for the sale of land routinely provide that the purchaser shall pay a deposit of 10 per cent and that such deposit shall be forfeited to the vendor if the purchaser wrongfully fails to complete. Deposits of 10 per cent are routinely forfeited to vendors when purchasers wrongfully fail to complete. It is routinely accepted without question that a deposit of 10 per cent is a true deposit. Special circumstances justifying a larger deposit 13.That does not mean that a larger deposit can never be regarded as a true deposit. Sometimes even a deposit in a sum exceeding 10 per cent of the purchase price can be regarded as a true and therefore forfeitable deposit. It will be so regarded if the vendor can show that at the time when the contract was made there existed special circumstances which rendered it reasonable to extract an earnest of performance in that larger sum. This is the view that I take, first of all, on principle: based on the purpose which the law and commerce alike assign to deposits; and importing a test of reasonableness, as the law so often does. 14.Secondly, it is a view supported by most persuasive authority. In the case of Workers Trust and Merchant Bank Ltd v. Dojap Investments Ltd [1993] AC 573 the Privy Council was concerned, in an appeal from Jamaica, with a contract for the sale of land which provided for a forfeitable deposit of 25 per cent of the purchase price. Delivering the advice of their Lordships' Board, Lord Browne-Wilkinson said at p.580 C that a vendor who seeks to obtain a forfeitable deposit of more than the customary 10 per cent must show special circumstances which justify such a deposit. At p.581 D-E his Lordship said that the evidence fell short of showing that it was reasonable in the circumstances of that case to stipulate for a forfeitable deposit of 25 per cent. And at p.582 F his Lordship said that since that deposit of 25 per cent was unreasonable and therefore not a true deposit, it must be repaid as a whole. Jurisdiction to order repayment: one analysis 15.On the question of the jurisdiction of the courts to order such repayments, Lord Browne-Wilkinson said this at p.582 C-E:
16.This question of jurisdiction was described in Charles Harpum, "Deposits as Penalties" [1993] CLJ 389 at p.391 as the most controversial question in the Workers Trust case. Welcoming the way in which the Privy Council answered it, the learned author of that commentary said this at pp 391-392:
An alternative analysis 17.That is one analysis of the jurisdiction of the courts to order repayment in this kind of situation. And I have no quarrel with it. But an alternative analysis, with the same consequences, is as follows. Suppose in advance of completion of a contract for the sale of land, a sum is taken both as a deposit and as part payment, but turns out not to be a true deposit after all. If so, such sum must in the eyes of the law be treated merely as part payment in advance. In the normal way, such part payment in advance is, subject to one thing, repayable in whole to the purchaser in the event of the sale falling through and nothing being conveyed. That one thing is this. If the reason why the sale was not completed is because the purchaser wrongfully failed to complete, then the purchaser's right to repayment is necessarily subject to the vendor's right to damages. By "damages" I mean compensation for any loss which the vendor happens to have suffered as a result of the purchaser's wrongful failure to complete. 18.This alternative analysis avoids the use of the words "penalty" and "penal". It may be just as well to avoid those words. I am conscious of the statement in "Treitel on The Law of Contract", 10th ed. (1999) at p.938 that "the Privy Council held [in the Workers Trust case] that the deposit was not a reasonable pre-estimate of the loss which the vendor was likely to suffer in consequence of the default, that the deposit was therefore penal, and that it must be paid back to the purchaser". It is true, as we have seen, that Lord Browne-Wilkinson said that the provision for the forfeiture of the deposit of 25 per cent was a "plain penalty". But why? His Lordship did not say that the forfeiture clause was a plain penalty because the 25 per cent deposit was not a genuine or reasonable pre-estimate of loss. As we have seen, his Lordship said that the forfeiture clause was a plain penalty because the 25 per cent deposit was not a "true deposit by way of earnest". 19.Liquidated damages set and cap the amount recoverable, but the forfeiture of a deposit does not preclude the recovery of actual loss beyond the amount of the deposit. So the question whether a sum is an earnest of performance (and therefore a true deposit) is not the same as the question whether a sum is a genuine pre-estimate of loss (and therefore liquidated damages rather than a penalty). But, as Mr Justice Ribeiro PJ points out, these two different questions were treated as the same question in two of the three judgments delivered in the Court of Appeal in the case of China Pride Investment Ltd v. Silverpole Ltd [1994] 2 HKC 341. That was immaterial to the result in that case. Understandably given the China Pride precedent, the courts below in the present case, too, treated these two different questions as the same question. This time, however, it was done in the course of reaching the result. 20.That being so, the issue of whether the sum of $40.25 million retained by the vendor is a true deposit must now be considered afresh: by this Court applying the correct test. But before addressing the material facts on this issue, one further word should be said on the applicable law. 21.When the words "penalty" or "penal" are used in the course of discussing whether a sum is a true deposit, they are not meant to equate the payment of earnest money with the stipulation of a sum as a genuine pre-estimate of loss. So I do not regard the alternative analysis as opposed in substance to an analysis in which the words "penalty" or "penal" are used. In this connection, I would draw attention to the case of Linggi Plantations Ltd v. Jagatheesan [1972] 1 MLJ 89, an appeal to the Privy Council from Malaysia. The advice of their Lordships' Board was delivered by Lord Hailsham LC. As I understand what his Lordship says at p.94 E-G, the reason why a stipulation for an exorbitant deposit is penal is that it purports to render forfeit what is in truth mere part payment in advance. 22.The observation is made in Beale, "Unreasonable Deposits" (1993) 109 LQR 524 at p.529 that as a result of the Workers Trust case, "we now appear to have a rule that a sum which is paid in advance may be kept even though it does operate as a penalty, provided that the penalty is a reasonable one". This observation is no doubt based on Lord Browne-Wilkinson's statement at p.580 B that: "Since a true deposit may take effect as a penalty, albeit one permitted by law, it is hard to draw a line between a reasonable, permissible amount of penalty and an unreasonable, impermissible penalty". But the word "penalty" can be avoided. A sum may be a true and therefore forfeitable deposit by way of earnest because it does not exceed the conventional 10 per cent. Or it may be a true and therefore forfeitable deposit because, although it does exceed that percentage, there were special circumstances which made it reasonable nevertheless. In neither instance would I be disposed to employ or include the word "penalty" when describing the sum in question. Applying the correct test to the material facts 23.Coming back to the facts of the present case, we have a vendor who seeks to justify forfeiting a deposit of 35 per cent. In other words, the vendor seeks to set up a forfeitable deposit three and a half times the conventional size. This calls for a close examination of the material circumstances. 24.On the date when the contract in the present case was made, property prices had for some time been climbing at a gradient that was steep even by the standards of Hong Kong's property market in boom times. And the period between contract and completion was considerably longer than usual. These two factors combined to create an unusually high risk of a sharp market correction during the period when the property was off the market but the vendor had not yet been fully paid. Experience shows that many purchasers seek to escape from their contractual obligations when property prices fall sharply after contract but before completion. So there were special circumstances in which, as between parties like these, an earnest of performance in the form of a forfeitable deposit in excess of the conventional 10 per cent could be justified as reasonable. 25.But even in the special circumstances of the present case, I am not prepared to say that a forfeitable deposit as high as one of 35 per cent is justifiable. Such a deposit is very far in excess of the conventional forfeitable deposit of 10 per cent. It is after all three and a half times the conventional percentage. The circumstances were, I accept, unusual. But I am not persuaded that they were so highly unusual as to justify so great an excess as that. A view on such an issue does not readily lend itself to much elaboration. The correct test must of course be applied to the material facts. But once that has been done, the resolution, one way or the other, of an issue of this kind unavoidably becomes very largely a matter of impression on a question of fact and degree. Vendors who venture beyond the conventional 10 per cent ceiling when taking or purporting to take deposits necessarily enter an area of some uncertainty at their own risk. And of course the higher they go, the greater the risk. 26.A distinction can be drawn (as the Law Commission in England drew in paragraph 50 of their Working Paper No. 61 (1975) on "Penalty Clauses and Forfeiture of Monies Paid") between "the right to provide in a contract for the payment of a deposit" and "the question whether the money can be retained". The money that it took purportedly by way of deposit has, as it turns out, served the vendor as security for its damages. But the $7.25 million difference between the $40.25 million that it retained and its actual loss of $33 million must in the circumstances be refunded to the purchaser. CONCLUSION 27.I would allow this appeal in part. On the issue of rescission, I would affirm the decisions of the courts below. But on the issue of deposit, I would reverse the decisions of the courts below, and would order that the vendor refund to the purchaser $7.25 million together with interest thereon. I would deal with interest and costs as Mr Justice Ribeiro PJ proposes. 28.Before concluding this judgment, I wish to thank learned counsel on both sides for their most helpful arguments on both issues. Mr Justice Chan PJ: 29.I have the advantage of reading in draft the judgments of Mr Justice Ribeiro PJ and Mr Justice Litton NPJ. 30.On the first issue, namely, whether the appellant (the purchaser) was entitled to rescind the agreement for sale and purchase, I respectfully agree with the reasons and conclusion of Mr Justice Litton NPJ that the purchaser was so entitled. 31.On the second issue, namely, whether the respondent (the vendor) is entitled to forfeit the deposit paid by the purchaser under the agreement, I would agree with the reasons and conclusion of Mr Justice Ribeiro PJ that the vendor ought not to be allowed to retain the deposit. 32.In the result, I would allow the appeal and make the orders proposed by Mr Justice Ribeiro PJ. 33.Since we are disagreeing with the courts below, I would like to add a few words on the second issue, the forfeiture of deposit. 34.The Court of Appeal upheld the forfeiture by the vendor of a deposit of 35% of the purchase price, saying that it was not a penalty. In its discussion on the law of penalty, reliance was placed on a number of authorities concerning the question as to whether a provision for the payment or forfeiture of an agreed sum in the event of a breach of contract was enforceable as a liquidated damages clause or unenforceable as a penalty: Clydebank Engineering and Shipbuilding Co. v Don Jose Ramos Yzquierdo Y Castaneda [1905] AC 6; Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79; Philips Hong Kong Ltd v Attorney-General of Hong Kong (1993) 61 BLR 49; AMEV-UDC Finance Ltd v Austin & another (1986) 162 CLR 170. The principles relating to deposits and their forfeiture, in particular whether their forfeiture would amount to a penalty, have a different origin and are somewhat different. As Lord Hailsham LC said in Linggi Plantations Ltd v Jagatheesan [1972] 1 MLJ 89 at p.91B:
35.The confusion sometimes arises where there are provisions in a contract which stipulate for the forfeiture of a deposit as well as the vendor's right to deal with the property upon a repudiation by the purchaser and then to claim any consequential loss (in which event, the forfeited deposit may have to be taken into account when considering the loss suffered by the vendor); or where the provisions stipulate the vendor's right to retain all or any part of the money paid under the agreement which was described not only as deposit but also as agreed liquidated damages. In those cases where the court treated the clause as in truth a liquidated damages clause, it refused to sanction the forfeiture of a deposit and held that the clause was only valid if the amount was a genuine pre-estimate of loss. 36.The payment of a deposit is quite common in various types of contract, including a contract for the sale of land. A deposit "serves two purposes: if the purchase is carried out, it goes against the purchase money - but its primary purpose is this, it is a guarantee that the purchaser means business" (per Lord MacNaghten in Soper v Arnold & another (1889) 14 AC 429 at 435). See also Howe v Smith (1884) 27 Ch D 89, per Cotton LJ at p.95, Bowen LJ at p.98 and Fry LJ at p.101. In other words, it is a guarantee for the performance of a contract. That being the case, the starting point is, and this is generally accepted, that the defaulting purchaser has no right to recover his deposit. See Ex parte Barrell LR 10 Ch 512 which was accepted by the court in Howe v. Smith (1884) Ch D 89 at pp 94-95. Lord Browne-Wilkinson in Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573, considered that the law on the nature of a deposit is well settled. He said at p.578 H:
37.With regard to the basis for upholding a forfeiture of deposit, Cotton LJ in Howe v Smith stated (at p.95) that "the purchaser had neither in law nor in equity the right to the return of the deposit". Bowen LJ seemed to suggest (at p.98) that the reason was because to do so "would be to enable him to take advantage of his own wrong". Fry LJ (at p.101) considered that forfeiture was implied and that a deposit was "an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract." This explains why in Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd at 578, Lord Browne-Wilkinson considered that the forfeiture of deposit is an anomalous exception of the general rule that a contractual provision requiring the forfeiture of a payment of money upon default is unlawful as a penalty unless it is justified as being a payment of liquidated damages being a genuine pre-estimate of loss. 38.Both Cotton LJ and Bowen LJ, however, acknowledged that in some circumstances, the court might relieve against the forfeiture of a deposit. The approach adopted by the courts in deciding whether to grant relief or not has been quite consistent: this depends on a construction of the terms of the contract. See Palmer v. Temple, 9 Ad. & E 508, per Lord Denman CJ at p.520; Hinton v Sparkes (1868) LR 3 CP 161, per Bovill CJ at pp 164 and 165; Howe v Smith, per Bowen LJ at p.97; Mayson v Clouet & another [1924] AC 980, per Lord Dunedin at p.985. 39.That this is a question of construction of the contract between the parties and that in appropriate cases, the court will grant relief against forfeiture of a deposit was confirmed in Linggi Plantations Ltd v. Jagatheesan [1972] 1 MLJ 89 where Lord Hailsham, LC said at p.94 :
40.It would seem from what the Lord Chancellor said that the court would intervene where, upon investigation through a construction of the contract in question and the relevant circumstances, it is clear that the money paid was in fact not a true deposit and that the forfeiture of such deposit was to be considered as a penalty. Where a deposit is reasonable, it has always been regarded as a true deposit, namely, a guarantee of performance as well as part payment on account and that the law would not regard a forfeiture of such payment as a penalty. 41.This was accepted as accurately reflecting the law in Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd by Lord Browne-Wilkinson who elaborated on the subject as follows:
42.These are the principles applicable in the present case. An investigation as to whether the amount paid was a reasonable and true deposit does not involve an inquiry (as the courts below seemed to have conducted) as to whether the deposit paid was a genuine pre-estimate of loss. 43.Upon a construction of the relevant provisions in the agreement and in the circumstances of this case, a deposit more than the customary deposit of 10% in Hong Kong may be acceptable. However, I agree, for the reasons given by Mr Justice Ribeiro PJ, that when the deposit in question is judged objectively in the light of all the circumstances, there are no special circumstances which justify the forfeiture of a deposit as high as 35% of the purchase price. That there was an unusually long period before completion is not sufficient. The fact that the parties (by express provision) stated that because of this long period, they required a deposit larger than the customary deposit clearly indicates that what they had in mind was to protect the vendor against its potential loss in a volatile property market. However, it is extravagant and excessive as a deposit and was intended to serve a purpose other than those of a deposit. It is not a reasonable and true deposit and its forfeiture does amount to a penalty which justifies intervention by the court. Mr Justice Ribeiro PJ : 44.By an agreement dated 23 May 1997, the appellant ("the purchaser") contracted to purchase from the respondent ("the vendor") a commercial property in Causeway Bay consisting of five shops. The purchase price was $115 million and completion was agreed to take place on 2 March 1998, some 9 months after execution of the contract, with time of the essence. 45.The sum of $11.5 million, described as "deposit and part payment of the purchase price", was paid by the purchaser on signing. Over the following three months, three additional amounts, $5.75 million, $11.5 million and $11.5 million respectively, were paid to the vendor pursuant to the agreement, each similarly described as further deposit and part payment. The total amount so paid was $40.25 million, equivalent to 35% of the purchase price. 46.The parties subsequently agreed to put back completion by a month, that is, to 2 April 1998. In consideration of the vendor agreeing to the deferment, the purchaser paid over yet a further sum of $11.5 million, again described as "further deposit and further part payment of the purchase price". The first issue: whether the purchaser was entitled to rescind 47.The agreement was never completed. On 30 March 1998, the purchaser wrote to the vendor drawing attention to a letter dated 27 March 1998 from the Buildings Department to the vendor. That letter referred to certain building works on the property which were said to be unauthorized and so a contravention of the Buildings Ordinance. It suggested that the vendor take immediate steps to reinstate the premises to accord with the approved building plans. 48.On the following day, 31 March 1998, the purchaser wrote purporting to rescind the agreement, invoking Clause 12 of the agreement which is materially in the following terms :-
49.The purchaser's contention is that the Buildings Department's letter constituted a relevant "notice or order for demolition or reinstatement or improvement" triggering the option to rescind under Clause 12 and entitling the purchaser to a full refund of all monies paid pursuant to the agreement. 50.Whether this contention is correct is the first issue before this Court. Both courts below held that the letter was not sufficient to trigger the option. Accordingly, they held that the purchaser was not entitled to rescind and that, in purporting to do so, it had wrongfully repudiated the contract. 51.Having had the benefit of reading in draft the judgment of Mr Justice Litton NPJ, I respectfully agree with his reasons and conclusion upholding the decisions of the courts below on this issue. The second issue: Whether the vendor is entitled to forfeit deposit 52.The rest of this judgment concerns the other issue in this appeal, namely, as to whether the vendor is entitled to forfeit the sums paid over by way of deposit and part payment. In particular, the question arises as to whether the court will intervene to prevent forfeiture of a deposit representing 35% of the purchase price on the ground that such a sum is excessive qua deposit. 53.The amount at stake on this issue is however limited in two ways.
54.The vendor's claim to forfeit the entire deposit is based on Clauses 26(a) and 26(b) of the agreement which provide as follows :-
55.Whether the vendor's claim is good depends on the validity or otherwise of these clauses viewed in the light of the principles which have evolved in relation to deposits and their forfeiture. It is therefore necessary first to examine such principles. Deposits and part payments 56.Many types of contract call for one of the parties to pay money to the other in advance of the contract's performance. Contracts for the sale and purchase of land are a prime example. Completion usually takes place some time after execution of the contract and payment of sums made in anticipation of such completion. The issue which arises concerns cases where completion does not occur due to the default of the party who made the payments. The innocent party of course has his remedy in damages for breach of the contract. However, the question which the courts have had to answer is whether the innocent party is entitled in any event to forfeit the payments received, particularly where the breach has caused him no loss or only loss which is exceeded in value by the payments made. 57.It was in providing a solution, which involved distinguishing between deposits and mere advance payments, that the nature and legal incidents of a deposit came to be defined. The character of the payment depends on the parties' intentions to be ascertained by construing their agreement : Mayson v Clouet [1924] AC 980, 985. If they are found to have merely been intended as advance payments on account of what is due under the contract, they are in principle recoverable by the payer, subject to the innocent party's right to set off his claim for damages: Dies v British and International Mining and Finance Corp Ltd [1939] 1 KB 724 at 743, 745-6. 58.Such recoverability has been explained on the basis that such advance payments are impliedly conditional on the contract being completed. In McDonald v Dennys Lascelles Ltd (1933) 48 CLR. 457, Dixon J put it in these terms :-
59.His Honour added :-
60.The general recoverability of advance payments has also been explained on the basis that the payer acquires a restitutionary claim upon a total failure of consideration where the contract is terminated before the other party has performed any part of the contractual duties in respect of which payment was made: Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574, 588. 61.The explanations overlap. Where the contractual intention is that advance payments are conditional on completion of the contract, it will commonly be the case that failure to complete results in a total failure of consideration. 62.Not all part payments are recoverable. In some contracts, the payments may be intended to be unconditional, for instance, where they are intended to be spent by the payee to help finance his performance of the contract. Shipbuilding contracts like the contracts in Stocznia Gdanska SA v Latvian Shipping Co (above) and in Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129, are examples. A similar result was also reached in a case involving the sale of land, parts of which were conveyed in stages to the purchaser : Mussen v Van Dieman's Land Co [1938] Ch 253. In such situations, the right to the instalments accrues unconditionally to the payee. The part performance which he renders also means that the case is not one involving total failure of consideration. The nature of a deposit 63.Since the decision in Howe v Smith (1884) 27 Ch D 89, the legal nature of a deposit has been clear. Cotton LJ stated it as follows :-
64.Fry LJ put it in the following terms:-
65.His Lordship explained that the practice of taking such an earnest for performance was of great antiquity and concluded :-
66.It follows that if, on the true construction of the contract, the parties intend the advance payment as a deposit, they are taken to have agreed that it is to be forfeited in the event that the payer fails to complete. Five years after Howe v Smith, the House of Lords treated this proposition as beyond dispute: Soper v Arnold (1889) 14 App Cas 429, 435. 67.Given their nature as a guarantee of performance, deposits have been regarded as subject to forfeiture regardless of whether non-performance by the party in breach has caused, or was thought likely to cause, the innocent party any, or as much, loss. Thus, in Hinton v Sparkes (1868) LR 3 CP 161, the vendor was held entitled to enforce an IOU in respect of a ￡50 deposit on the ground that such deposit could be forfeited when the purchaser failed to complete purchase of a public house, even though the actual loss suffered by the vendor was only ￡10, this being the deficiency arising on re-sale of the property to another buyer. In Howe v Smith itself, the ￡500 deposit was validly forfeited notwithstanding that the vendor managed to re-sell the property at the original price and so suffered no loss. 68.The object of a deposit is therefore not to provide compensation for loss resulting from the breach of a contract. The mechanism for such compensation is the claim for damages. Having forfeited the deposit for failure to complete, the vendor remains entitled at common law to sue for damages, giving credit for the forfeited deposit where such damages exceed its amount. This is reflected in standard clauses in modern contracts for the sale and purchase of land which provide (as does Clause 26(a), discussed further below) for the vendor to forfeit the deposit and additionally to recover, inter alia, any deficiency arising on resale of the property, with such deficiency treated as liquidated damages, giving credit for the forfeited deposit: Shuttleworth v Clews [1910] 1 Ch 176. This is, for instance, how the standard covenant set out as clause 10 in Part A of the Second Schedule to the Conveyancing and Property Ordinance, Cap 219, is structured. 69.The focus of a deposit's operation is on the period elapsing between its payment and completion of the contract's performance. In entering into the contract, the vendor agrees to take his property off the market and to commit himself to the purchaser on the latter's promise that the acquisition will duly be completed and the vendor duly paid at the completion date. The forfeitable deposit is tendered to encourage the vendor to make the necessary commercial act of faith. It is, as the authorities show, an "earnest", that is, a thing of value given to signify serious intent on the purchaser's part. It is also the quid pro quo for the vendor depriving himself of the ability to deal commercially with the property, and so of making any potentially greater profits, while awaiting completion. Unlike the vendor, the purchaser is able to profit by re-selling the property during this period, in reliance on the contract. If, at the end of the period, completion does take place, the purpose of the deposit is spent and it becomes absorbed as part of the purchase monies. If, on the other hand, completion does not occur as promised, the deposit's forfeiture follows, whether or not the vendor has suffered any loss in consequence. Deposits and liquidated damages 70.In the light of the approach adopted by the Court of Appeal and of the submissions of Mr Denis Chang SC appearing for the respondent, it is necessary next to distinguish between deposits and liquidated damages. 71.The law generally permits the parties to fix their contractual liabilities by agreement. They can, for instance, agree that if certain breaches occur, the party in breach is to pay to the other party a definite sum by way of liquidated damages. The law recognizes that such an agreement may be in both parties' best interests where, for instance :-
72.This is however subject to certain limits. Damages are generally compensatory and the courts, both in equity and at common law, will refuse to enforce stipulations for liquidated damages if in substance they would operate as "a penalty to be held over the other party in terrorem" (per Lord Halsbury in the Clydebank case, at p 10), that is, as a "punishment irrespective of the damage sustained" (ibid, per Lord Davey at p.15). 73.In Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79, Lord Dunedin encapsulated the difference as follows :-
74.His Lordship stressed that :-
75.His Lordship listed (pp 87-88) various tests which would indicate, in some cases conclusively, whether a provision was a valid liquidated damages clause or a penalty. Thus, the clause will be struck down if the sum stipulated "is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach" or if the sanction prescribed for a failure to pay money is payment of a sum greater than that which ought to have been paid. A clause is to be presumed (but not necessarily held) to be a penalty if "a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage". 76.Clauses prescribing liquidated damages therefore spring from entirely different intentions and pursue different objectives compared with deposit clauses. Stipulations for liquidated damages focus on the loss considered likely to result from foreseeable breaches and aim to quantify in advance the damages payable. In the Clydebank case, for example, liquidated damages at a weekly rate were stipulated to cover the event of delay in the delivery of torpedo boats ordered by the Spanish government. In the Dunlop case, the clause required such damages to be paid at a stated rate for each tyre re-sold by a distributor in breach of certain agreed terms, including a price-maintenance clause. Such provisions are obviously not concerned with providing an earnest or guarantee of performance to cater for a period intervening between contract and completion. Nor are they concerned with a vendor extracting a commercial quid pro quo for withdrawing his asset from the market during that period. They establish an agreed measure of damages payable after breach. 77.Quite apart from the differences in the aims of the two devices, the legal consequences which attach to a liquidated damages clause differ in one important respect. As noted above, a clause permitting forfeiture of a deposit upon the purchaser's breach does not preclude the vendor from claiming damages in respect of any loss suffered over and above the value of the forfeited deposit. In contrast, where a breach is covered by a liquidated damages clause, the amount prescribed by that clause represents the agreed sum of damages payable, regardless of the quantum of actual loss. 78.This applies where the actual loss is in fact less than the liquidated damages amount (provided of course the clause represents a genuine pre-estimate of loss and has not been invalidated as a penalty). Thus, in Philips Hong Kong Ltd v Attorney General of Hong Kong [1993] 1 HKLR 269, Lord Woolf, giving the advice of the Privy Council, stated :-
79.The proposition that a liquidated damages clause is definitive of the damages recoverable also holds good where the actual loss exceeds the amount payable under the clause. For example, in Diestal v Stevenson [1906] 2 KB 345, a contract for the sale of coal prescribed payment of one shilling for every ton of coal not delivered. The buyer was held to this and not allowed to claim damages for the greater loss actually caused by the seller's non-delivery. Similarly, in Talley v Wolsey-Neech (1978) 38 P & C R 45, the vendor under a sale and purchase agreement sought to recover lost interest but failed as he was held entitled only to recover the liquidated damages as defined by the relevant clause. Even where the parties contract for liquidated damages in sums which they know are likely to be insufficient to cover actual loss if the foreseen breach occurs - so that the clause could be said not to be a genuine pre-estimate of likely loss ( the clause is likely to be upheld as a valid agreement to limit liability rather than a penalty: Cellulose Acetate Silk Co Ltd v Widnes Foundry (1925) Ltd [1933] AC 20. Such a clause does not inflict a penalty by exceeding the compensatory function of damages. Unreasonably excessive deposits 80.Bearing in mind the foregoing principles, the question of whether and under what circumstances a court will intervene to prevent forfeiture of a deposit on the grounds of excessiveness falls to be examined. 81.As indicated above, the central feature of a deposit is its susceptibility to forfeiture on the purchaser's failure to complete without the vendor having to offer any additional justification. With loss being irrelevant, a windfall could obviously result where, for instance, the vendor re-sells at the same price or even at a profit. A vendor might therefore misuse the concept of "deposit" to secure the ability to forfeit amounts exceeding anything which may reasonably be required by way of an earnest or guarantee of performance or as compensation for the vendor's removal of the property from the market pending completion. 82.The courts have made it clear that they are willing to intervene to prevent forfeiture in such a case. In Stockloser v Johnson [1954] 1 QB 476, for example, Denning LJ stated obiter as follows :-
83.But how is unreasonable excessiveness to be tested? One may begin with a negative proposition. Given the differences between liquidated damages and deposits in terms of their underlying purpose, nature and legal incidents, it is clear in principle that the test used to invalidate a liquidated damages clause would not be the right test to apply in deciding whether forfeiture of a deposit is permissible. Since a deposit is not intended as a mechanism for quantifying damages flowing from a foreseen breach, it is inapt to apply a test which asks whether the deposit amount represents a genuine pre-estimate of loss. 84.The importance of this difference was emphasised by the Privy Council in Linggi Plantations v Jagatheesan [1972] 1 MLJ 89, where Lord Hailsham, delivering the judgment of the Board, stated (at p.91):-
85.This distinction unfortunately escaped the Court of Appeal as each of the judgments in that court seeks to uphold the forfeiture on the basis that 35% of the purchase price was not a penalty but represented a genuine pre-estimate of loss, taking into account the long completion period and the possibility that the property market might fall sharply in a time of volatility. This proposition was also at the heart of Mr Chang's submissions to this Court. With respect, that was not the correct test. 86.In the passage from Linggi Plantations cited above, Lord Hailsham spoke of a deposit's forfeiture not being subject to relief "assuming the deposit or earnest to be reasonable". His Lordship added (at p.94) :-
87.Lord Hailsham was therefore indicating two possible routes that a court might take when faced with an excessive deposit. First, taking his cue from Denning LJ in Stockloser v Johnson, he suggests that some form of (as yet undefined) equitable relief may be available. Secondly, he indicates, no doubt as a matter of common law, that the court might regard the language of "deposit" used in a contract as "purely colourable" because of the unreasonably excessive quantum of the deposit. In such cases, the court might regard "the real nature of the transaction" as involving "the imposition of a penalty, by purporting to render forfeit something which is in truth part payment". The reference to "penalty" here is obviously not a reference to the doctrine of penalties applicable to liquidated damages clauses. Lord Hailsham is suggesting that what is colourably called a "deposit" but not a true deposit would not be subject to forfeiture but may instead be treated as a part payment which, as we have seen, is generally recoverable. 88.It is the latter of these two approaches that the Privy Council adopted as the basis of its decision in Workers Trust and Merchant Bank Ltd v. Dojap Investments Ltd [1993] AC 573.
89.The "reasonableness" of a deposit is therefore to be tested against the customary or conventional level of deposits generally taken as an earnest of performance. In Jamaica and in the United Kingdom, this was found to be 10% of the purchase price in contracts for the sale and purchase of land. As many cases show, 10% is also the conventional level for deposits in relation to such contracts in Hong Kong: see, for example, Gladflow Ltd v Grandland Development Ltd [1993] 2 HKLR 494; Dawson Enterprises Ltd v Talisteam Ltd [1995] 1 HKLR 93; and China Pride Investment Limited v. Silverpole Limited [1994] 2 HKC 341. 90.In the light of the foregoing authorities, the proper approach to unusually large deposits may be stated as follows.
91.The "reasonableness" test propounded in Workers Trust is plainly not the same as the "genuine pre-estimate of loss" test for penalties in the liquidated damages context. When Lord Browne-Wilkinson uses the language of "penalty" when contrasting a true deposit with excessive sums whose forfeiture is impermissible, he is, like Lord Hailsham in Linggi Plantations, indicating the consequence of judicial intervention in such cases and not eliding the two tests. 92.The Workers Trust reasonableness test was referred to in Demondrille Nominees Pty Ltd v Shirlaw (Federal Court of Australia, No. AG 24 of 1996, ACT Registry, 20 June 1996), where Beaumont J commented that a "deposit" amounting to two-thirds of the purchase price was "so substantially in excess of the usual 10 per cent permissible by way of a true deposit, [it] would not be enforceable as a deposit in terms of its liability to forfeiture". 93.In Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514, the Privy Council implicitly acknowledged the "reasonableness" test, citing Workers Trust. The land contract in question provided for the forfeiture of the deposit "as and for liquidated damages (and not a penalty)", prompting counsel for the purchaser to argue that the clause was to be construed, not as a deposit clause, but as one for liquidated damages and that the amount deposited was not a genuine pre-estimate of loss and so a penalty. Lord Hoffmann rejected this argument, holding the deposit to be forfeitable :-
94.Different views were expressed in the Hong Kong Court of Appeal in China Pride Investment Ltd v Silverpole Ltd [1994] 2 HKC 341, regarding the effect and application of Worker's Trust. It was recognized that the conventional deposit was 10% in relation to land contracts in Hong Kong. In the case before it, a 20% deposit had been paid by the purchaser. The question addressed by two of the Court's members was as to whether the vendor was entitled to forfeit that sum.
A genuine pre-estimate of loss? 95.I might add, although the matter does not fall to be decided, that even if the test for a forfeitable deposit should involve applying the doctrine of penalties relevant to liquidated damages, I would find it extremely difficult to accept that the sum of HK$40.25 million represents a genuine pre-estimate of loss flowing from the purchaser's failure to complete.
96.When, however, the present contract for the sale of the Causeway Bay shops was made, the property market had been steadily climbing. It was anyone's guess whether, nine months later, the value of the property in question would be even higher, would fall drastically, or be much the same. I find it extremely difficult to see how it can be said, on the basis of the terms and the inherent circumstances of this particular contract, judged as at the time of its making, that non-completion by the purchaser nine months later would be likely to cause loss, let alone cause loss which should genuinely be estimated at the sum of HK$40.25 million. Depending on the state of the market, non-completion might occasion no loss at all or loss ranging from the very serious to the trifling. 97.It is noteworthy that the standard covenants for sale and purchase agreements set out in the Conveyancing and Property Ordinance, the only provision for the payment of liquidated damages relates to a deficiency upon re-sale of the property after rescission. Loss is inherent in such a case and the clause aims to avoid debates as to the recoverable quantum of the deficiency. 98.It should also not be overlooked that the parties had in fact agreed to a further $11.5 million being handed over to the vendor on identical terms. The vendor has, no doubt wisely, decided not to assert a claim to that amount. Objectively, however, there is no basis for distinguishing between that sum and the $40.25 million which is claimed, making it even more difficult to see how such sums, totalling $51.75 million and equivalent to 45% of the purchase price, could be regarded as a genuine pre-estimate of loss. Applying the principles 99.The relevant clauses, 26(a) and 26(b) are set out in paragraph 54 above. Clause 26(a) deals with the consequences of the purchaser's breach. It entitles the vendor, inter alia :-
100.Clause 26(a) therefore incorporates the common law principles discussed above. The deposit is intended to be forfeitable on the purchaser's breach, but not to be treated as a sum of liquidated damages. As indicated in paragraphs 77 to 79 above, to treat it as such would be wholly inconsistent with the provisions in the same clause entitling the vendor to claim additional sums over and above the deposit amount by way of unliquidated damages for any actual loss or, upon re-sale of the property, by way of liquidated damages for any deficiency on such re-sale, plus expenses and interest. 101.Before going on to discuss the effect of clause 26(b) on the question of forfeiture, an incidental feature of that clause ought to be disposed of. Clause 26(b), which is not in standard terms, refers to the purchaser agreeing to forfeiture of the deposit "in full absolutely as agreed damages".
102.Turning to clause 26(b), its object is undoubtedly to discourage any interference with the vendor's possible forfeiture of the deposit. To this end, it draws attention to the purchaser's express acceptance of the vendor's right to forfeit and states as its justification for the unusually large amount involved, the fact that this has been agreed "in the light of the unusual long duration for completion." 103.It is of course accepted that, as Romer LJ put it in Stockloser v Johnson (at p 495) :-
104.One might add that this is also true of the courts administering the common law, certainly where there is no suggestion of any impropriety in securing the contract or any material inequality between the parties. However, as Romer LJ also accepted, there are exceptions where the courts will intervene to override contractual terms which are inconsistent with the established policy of the law. As the foregoing discussion shows, liquidated damages and deposits are both areas where, applying different tests, the courts have been prepared to intervene to prevent the distortion and misuse of lawful contractual devices ( damages which are genuinely compensatory in the case of liquidated damages and sums representing a true earnest of performance pending completion, in the case of deposits. Such intervention cannot be excluded by contract. The question is therefore whether the principles applicable to unusually large deposits, set out above, permit forfeiture of the 35% deposit in the present case. 105.It is not in dispute that in Hong Kong, 10% deposits are conventional. The deposit in question therefore exceeds the conventional by 31/2 times. One must accordingly ask whether the vendor can show any exceptional circumstances providing an objective justification for requiring so much higher a sum in the light of a true deposit's purposes. 106.As discussed above, the fundamental point urged by the vendor and accepted by the Court of Appeal is that the sum was reasonable in that it represented a genuine pre-estimate of loss given the long, nine-month completion period and the fact that the property market was then very volatile, having risen dramatically in the months preceding the agreement. Reliance on the concept of "genuine pre-estimate of loss" has already been criticised as an invocation of the wrong test. Nonetheless, the vendor is entitled to contend that the same factors, that is, the length of the pre-completion period and the market's volatility bear logically on the need for a larger than usual deposit. 107.In my view, there is force in such a submission. While I would not accept that a lengthier completion period justifies a larger percentage by way of an earnest of performance, I would be inclined to accept that a vendor may legitimately demand a larger quid pro quo for keeping his property off the market during the more prolonged period. A question of degree enters into this question and while I would have been prepared to accept that a deposit higher than the usual 10% deposit could be justified, I consider a deposit 31/2 times the norm to fall substantially beyond the ambit of reasonableness so that its forfeiture by the vendor is impermissible. 108.It was suggested in submissions that a court's refusal to permit forfeiture of an agreed deposit on the ground of excessiveness is objectionable in that it leads to commercial uncertainty. This criticism must be kept in perspective.
109.It was also suggested in submissions that a large deposit may be justified because the purchaser may be a single-purpose company with no assets to satisfy a damages judgment. It should however be noted that what the law forbids is the forfeiture of an excessive deposit. It does not prohibit the parties agreeing to a deposit followed by additional part payments towards the purchase price which, although recoverable by the purchaser in the event of non-completion, may function as security by being set-off against any claim that the vendor may have for damages in such event. Conclusion 110.For the reasons given above, the 35% deposit in the present case is in my judgment unreasonably excessive and may not, as a matter of law, be forfeited. It is accordingly to be treated merely as an advance payment towards the purchase price payable under the contract and is recoverable as such, subject to the vendor being entitled to deduct from it the sum of $33 million by way of damages. In my view, such damages represent full and adequate protection for the vendor. Retention of an additional $7.25 million is in the circumstances unjustifiable. 111.It is accordingly my view that this appeal must be allowed to the extent of ordering the respondent to return to the appellant the sum of HK$7.25 million together with interest. I would direct :-
Mr Justice Litton NPJ : Introduction 112.This appeal concerns an agreement for the sale and purchase of a commercial property located in Causeway Bay. It was entered into by two limited companies. The appellant was the purchaser and the respondent was the vendor. 113.The property, No.2 Cannon Street, Causeway Bay, consisted of 5 shop units located on the ground floor of a six-storeyed building. By an agreement dated 23 May 1997 the vendor agreed to sell and the purchaser agreed to buy the property for $115 million, completion to take place over 9 months later, on 2 March the following year. Time was of the essence of the contract. 114.The agreement (by its fourth schedule) made provisions for payment as follows :
115.The 4 instalments of the deposit, amounting in total to $40.25 million, represented 35% of the purchase price for the property. 116.As mentioned earlier, at the time of the agreement in May 1997, the property was sub-divided into 5 shop units, each tenanted, bringing in considerable income. One complication was this : Shop C occupied the space of an open yard which had, in the past, been roofed over contrary to the approved plans, and over part of this an illegal structure had been erected. The Building Authority had in 1995, issued orders under s.24(1) of the Buildings Ordinance, Cap.123, requiring the removal of the unauthorized building works and reinstatement of the premises in accordance with the approved plans. The orders were registered in the Land Registry against the property under Memorials number 6436976 and 6436979. This was of course known to the parties and they made provisions for this in clauses 12 and 25 of the agreement in these terms :
117.Clause 26(a) of the agreement made provisions in standard terms for rescission by the vendor should the purchaser fail to comply with any of the terms of the agreement, and forfeiture of the deposit in such an event. Clause 26(a) went on to say that upon determination of the agreement the vendor was entitled to sell the property and any increase in price on resale would belong to the vendor. Clause 26(a) went on to say :
118.Clause 26(b), which looms large on this appeal, stipulated as follows :
119.The agreement was made at the end of May 1997, about 5 weeks before China's resumption of the exercise of sovereignty over Hong Kong. At that time the property market was undergoing an extraordinary boom : Figures put before the trial judge relating to shop premises in the Wanchai and Causeway Bay area, for the period January to April 1997, showed increases in value of over 50%. Annualized to the end of April 1997 it was about 35%. 120.As mentioned earlier, the last instalment of the deposit was due on 4 August 1997. That was duly paid. 121.There was much correspondence between solicitors representing the parties, and the tenant of Shop C, concerning the demolition of the illegal structures over the yard and the reinstatement of the premises as required by the two orders of the Building Authority. Eventually, in December 1997, the Building Authority indicated that the requirements of these two orders had been met. 122.In February 1998, the purchaser entered into sub-sale agreements to sell the 5 shop units to sub-purchasers. The total sum involved came to the same figure as the original sale price for the property : $115 million : This was apparently simply a device to split the property among the investors behind the purchaser. 123.On 2 March 1998, the day fixed for completion, the parties entered into a supplemental agreement to extend the time for completion to 2 April 1998. This was "due to unexpected delay in arranging the mortgage loan" by the purchaser. A further deposit of $11.5 million was paid, thereby reducing further the balance of the purchase price to be paid by the purchaser on completion. As it forms no part of the vendor's case that this additional deposit was liable to be forfeited on the purchaser's failure to complete on due date, it drops out of the story. 124.On 27 March 1998, the Building Authority wrote to the "owner/occupant" of the ground floor shops, drawing attention to further unauthorized building works. As the effect of this letter forms one of the issues on this appeal, it would be convenient to set it out in full :
125.On 30 March the purchaser's solicitors drew the vendor's attention to this letter and sought its comments. Before any reply was received the purchaser's solicitors, by letter dated 31 March 1998, rescinded the agreement in reliance upon clause 12(a) of the agreement and required the return of the deposit. 126.The vendor's solicitors replied on 31 March stating that the unauthorized works referred to in the Building Authority's letter of 27 March only involved works in the common parts and that the vendor would organize with the co-owners to have those works removed. The vendor's solicitors went on to say that the purchaser was obliged to complete the transaction as stipulated, failing which the deposits paid would be forfeited. 127.It appears that the vendor was able to have the unauthorized works removed and the property reinstated very promptly, for by 11 am on 1 April 1998 representatives of the Buildings Department had inspected the premises and expressed their satisfaction with the work done. The purchaser's solicitors were informed of this by letter dated 1 April. 128.The purchaser failed to tender the balance of the purchase price on 2 April 1998. By letter dated 3 April 1998 the vendor's solicitors wrote saying that the deposits, which had already been released to the vendor pursuant to the agreement, were forfeited. The proceedings 129.On 29 April 1998 the purchaser commenced legal proceedings by originating summons seeking a declaration that it had effectively rescinded the agreement and sought an order for repayment of the deposits : There was no claim that, in the event that the court should find the purchaser in default, the court should exercise its equitable jurisdiction to relieve the purchaser from forfeiture of the deposit in the sum of $40.25 million. 130.The matter went before Deputy Judge Li who gave judgment in the vendor's favour. He found that, on account of the severe drop in property prices since the agreement was made in May 1997, the vendor had, at the time when completion should have taken place, suffered actual loss to the extent of $33 million. He did not, however, award to the vendor damages in that amount as it was extinguished by the $40.25 million which the vendor was entitled to retain. His judgment was upheld on appeal by the Court of Appeal (Mayo, Acting CJHC, Rogers V-P and Keith JA). Hence the appeal to this Court. The purchaser asks for judgment in the sum of $7.25 million : The amount by which the deposit exceeded the damages as assessed by the judge. The issues 131.There are in essence two issues before this Court :
The Notice point 132.The question, ultimately, turns on the effect of the letter of 27 March 1998 from the Building Authority, as read in the context of clause 12(a) of the agreement. 133.The second sentence of clause 12(a) gave the purchaser "the option to rescind" the agreement if it was :
This follows the first sentence which refers to the two orders and contains the vendor's warranty that it had not received and was not aware of any notice or order from any "Government or other competent authority or the manager or the management committee of the building" requiring the vendor to demolish or reinstate or improve any part of the property. Notice requiring demolition 134.It is common ground between the parties that, to enable the purchaser to rescind under clause 12(a), the letter from the Building Authority must operate as a notice requiring the vendor to demolish or reinstate or improve a part of the property unrelated to the subject-matter of the two earlier orders. The courts below proceeded on the basis that the notice, whatever its effect, was unrelated to the subject-matter of the two orders and that it did not relate to the common areas of the building; so the narrow issue in the courts below was whether the letter was a notice requiring demolition or reinstatement or improvement of some part of the property. Counsel for the vendor, at the hearing before us, said that at trial the vendor did in fact take the point that the notice referred to works required to be done in a common area - the rear stairwell - and therefore fell within clause 12(b) of the agreement, not clause 12(a) : But the point was not separately considered by the courts below : Presumably because it was superfluous to their decisions. 135.All four judges in the courts below concluded that the letter had the effect contended for by the vendor : That is to say, that it did not require the recipient to do anything : Therefore it did not come within clause 12(a). At no stage of the proceedings in the courts below did the vendor take the separate point that, in the context of clause 12(a) and of the agreement as a whole, the option to rescind was intended to be exercised only at the time of completion. When the point was put to counsel for the vendor at the hearing before us, counsel said (upon instructions) that he was not asking the Court to construe clause 12(a) in that way : So there the matter must rest for the purposes of the present case and without a decision on the point. 136.The issue is one of construction. The letter of 27 March was clearly some form of notification by the Building Authority that unauthorized works were found to exist within part of the property (whether that part was, as the vendor claimed, the common part, and therefore not within the provisions of clause 12(a) will be dealt with later). The trial judge referred to it as an "Advisory Letter" : This was because, internally within the Buildings Department, this form of letter, issued at a relatively junior level of the hierarchy, was referred to in this way : The letter advised the recipient "as a responsible owner" to take steps to remove the unauthorized works and reinstate the building in accordance with the approved plans. The letter did not, however, refer to the provisions of s.24(1) of the Buildings Ordinance, Cap.123, which empowered the Building Authority to order demolition and reinstatement nor to the penalty provisions contained in s.40(1B) of the Ordinance. The question is simply this : Did the letter read as a whole require the owner to demolish and reinstate part of the premises, or was it merely a preliminary notification : an attempt, as Keith JA puts it, to achieve by voluntary means that which could have been achieved by coercive means. 137.Clause 12(a) refers to "any notice or order". It is easy to conceive of an order requiring demolition and reinstatement : The orders issued under s.24 of the Buildings Ordinance relating to the covered yard, referred to in clause 12(a) itself, are clear examples. What then are the notices the parties had in mind in clause 12(a)? On one view of the matter, it can be said that orders such as those relating to the covered yard are also notices requiring demolition and reinstatement. They are notifications by the Building Authority of its requirement for action. But is that all the parties had in mind? Counsel for the vendor points for example to s.5(1) of the Fire Safety (Commercial Premises) Ordinance, Cap.502, which provides for notices to be served directing the owner of commercial premises to comply with requirements such as the installation of automatic sprinkler systems : Although the section speaks of "a fire safety direction", it plainly has the effect of a "notice" : see in particular section 5(4) which speaks of a "similar notice" withdrawing the "direction". 138.Clearly, the letter of 27 March 1998 is not a notice within the same spectrum as a notice served under s.5(1) of the Fire Safety (Commercial Premises) Ordinance. As Keith JA said in his judgment, the language used was not the language of compulsion : removal and reinstatement were merely "suggested" : the Building Authority was appealing to the good sense of the recipient of the notice "for the sake of your own interest and as a responsible owner/occupier". Nothing suggests that the infringements were serious : The vendor was able to have the works removed and the premises reinstated within less than 24 hours. 139.When the parties entered into the agreement in May 1997, their intention, objectively viewed, was to carry the contract through to completion. Clause 12(a) says that if any notice requiring demolition or reinstatement "has been issued/served before the date of completion" the cost of compliance is to be borne solely by the vendor. In other words, the clause served to allocate responsibility for the cost of compliance, which might be incurred after completion (so long as the notice was issued before completion) : Clause 12(a) did not serve simply to confer an option to rescind on the purchaser. The paramount intention of the parties was to ensure that, on the day of completion, the purchaser would take possession of premises substantially as described in the agreement and receive a clean title, unencumbered by liabilities for which they had not contracted. It would go against the whole tenor of the contract to suggest that the parties had, by clause 12(a), inserted into the agreement a trigger which, upon the merest touch, would bring the entire bargain to an end. The option was not inserted as a device for the purchasers to back out of a bad bargain. The length of time from contract to completion was in this case unusually long : Over nine months. Clause 12(a) made provisions for notices to come from different sources during that period : not only from "Government or other competent authority" but also from the manager or management committee : These could come at any time during the nine-odd months from contract to completion. It would be absurd to suggest that the parties intended that a notice, say, from the management committee suggesting ways of improving the appearance of the building could come within clause 12(a), giving the purchaser the option to rescind. The "requirement" in clause 12(a) was clearly intended to have a higher threshold. 140.In my judgment the courts below were right when they concluded that the purchaser was not entitled to rely on the letter of 27 March to rescind the agreement. It was not a notice requiring the vendor to do anything. Having reached this point, it is unnecessary to deal with the vendor's separate point that the letter related to the common parts of the building : Though I might add that whilst the gates on the staircase landings were undoubtedly located in a common area of the building, I am by no means convinced that the opening in the wall (which separated one of the shops from the rear staircase) could be so regarded. It was clearly within the capacity of the vendor to fill up the opening from within its own premises. But nothing turns on this point. 141.Moreover, it was never part of the purchaser's case that the premises, with the opening to the area of the rear staircase filled in, differed materially from those they had contracted to buy : There was, in fact, no evidence led at the trial as to whether the opening in the wall existed at the time of the contract. Subject therefore to the question of relief against forfeiture of the deposit, the purchaser must fail in this appeal. The Forfeiture point 142.Clause 26(a), making provisions in the event of the purchaser's default in complying with the terms of the agreement - including provisions for forfeiture of the deposit - is in standard form. But clause 26(b) is not. It refers specifically to the exceptionally long duration for completion. Clause 26(b) being "an important commercial term and condition to this agreement" confirms the vendor's entitlement to forfeit the deposit "in full absolutely as agreed damages" in the event of the purchaser's default. What, then, is the effect of this clause? Although it speaks of the $40.25 million as "agreed damages" it is plain from reading clause 26(a) and (b) as a whole that that sum was not intended to serve as liquidated damages in the sense of a covenanted pre-estimate of damage : Clause 26(a) imposed an obligation on the purchaser to compensate the vendor for "the actual loss" flowing from any deficiency in price upon a resale : "such deficiency and expenses shall be recoverable by the vendor as and for liquidated damages". Clause 26(b) went on to say that in addition to the "liquidated damages" the vendor was entitled to recover "damages representing interest paid or lost by him by reason of the Purchaser's default and failure". Commercial purpose 143.What, then, was the commercial purpose of clause 26(b)? Plainly, the deposit, amounting in total to 35% of the purchase price, served a number of purposes : First, it was by stages to be money in the vendor's pocket (the agreement made provisions for the progressive release to the vendor of the various instalments held by the vendor's solicitors as stakeholders). Secondly, it was an earnest for the performance of the contract : to be applied towards the payment of the purchase price if the transaction went on to completion. Thirdly, if the purchaser should default, it served to compensate the vendor in the event of a fall in the market value of the property. These three propositions are not controversial. The real issue in this case is whether there was, or might be, an over-riding purpose that dominated the rest, namely, the imposition of a penalty upon the contract breaker so unreasonable in its nature as to invite the intervention of equity. General approach 144.In the Court of Appeal all three judges approached the matter on the basis that the law relating to the forfeiture of deposits under contracts for the sale of land fell within the same broad principles as the law relating to penalties generally : namely, whether the amount to be forfeited in the event of breach was "unconscionable and extravagant" : see Clydebank Engineering & Shipbuilding Company v. Don Jose Ramos Yzquierdo Y Castaneda [1905] AC 6 at 10. The amount is to be judged "in comparison with the greatest loss that could conceivably be proved to have followed from the breach" : per Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd v. New Garage and Motor Co. Ltd [1915] AC 79 at 87; it is penal when "the sum agreed to be paid is in excess of any actual damage which can possibly, or even probably, arise from the breach", per Lord Parker of Waddington at 97 in the same case. 145.Mr Michael Thomas SC, counsel for the purchaser submits that this is the wrong approach : The forfeiture of a deposit paid under a contract for the sale of real estate falls, he says, under rather different principles. He cities in support a passage in Lord Hailsham LC's judgment in Linggi Plantations Ltd v. Jagatheesan [1972] 1 MLJ 89 at 91 where Lord Hailsham said :
146.Mr Thomas SC submits, on the authority of Workers Trust and Merchant Bank Ltd v. Dojap Investments Ltd [1993] AC 573, that unless the purchaser establishes special circumstances to justify it, any deposit above the "conventional" 10%, to be forfeited on breach by the purchaser, must be treated as penal : The court would grant relief against forfeiture. He accepts that, in the run-of-the-mill case, where a purchaser defaults after paying a 10% deposit, he cannot invoke equity's jurisdiction for relief against forfeiture, even though the period from contract to completion was a mere matter of weeks and the vendor was unlikely to suffer any real loss resulting from the purchaser's breach (apart from the inconvenience and expense of having to put the property on the market again) : This "conventional" approach is, he accepts, far too entrenched in the law to be disturbed : It matters not that, upon the facts, the vendor has suffered no loss at all, or even made a profit from the purchaser's breach : The law treats the deposit as an earnest of performance which the vendor is entitled to retain. As Fry LJ explained in the leading case of Howe v. Smith (1884) 27 Ch.D. 89 at 101 :
147.The justification for the law's special treatment of deposits, Mr Thomas SC says, lies in the fact that a deposit serves a different purpose from a liquidated damages clause as seen for example in Philips Hong Kong Ltd v. Attorney General of Hong Kong (1993) 61 BLR 49 which concerned a claim against a contractor for liquidated damages of $74,104 per day in the event of delay in completion of the contract : The Philips contract was part of a much larger programme of works undertaken by the government. There, the contract identified ten "key dates" which affected other contractors and the amount of liquidated damages set out in an appendix was a figure which varied between $60,655 to $77,818 per day. Plainly, the $40.25 million forfeited "as agreed damages" in the present case is far removed from the circumstances of a case such as Philips, where the contract on its face made a pre-estimate of damage. Mr Thomas SC argues, quite rightly, that the court is not concerned with labels; the designation in clause 26(b) of the sum of $40.25 million as "agreed damages" cannot hide the fact that the deposit operated in truth as an earnest for performance and in part payment of the purchase price; the vendor quite understandably required security in the event of loss flowing from the purchaser's default (the purchaser being a "shelf" company, having no known assets); but, Mr Thomas SC submits, once the actual loss has been ascertained, any excess over the amount of damages ascertained by the court must be returned to the purchaser. The two streams 148.As can be seen from what is said above, the key to Mr Thomas SC's submission lies in this proposition : That a clause providing for the forfeiture of a deposit (paid before breach) and one providing for payment of a liquidated sum (to be paid after breach) operates on quite separate principles : Hence, Mr Thomas SC submits, in considering whether the deposit (over the "conventional" figure of 10%) was reasonable, the court cannot look to what actually happened when the purchaser defaulted : The court is confined, he says, to the terms of the contract and the circumstances under which it was made : The court therefore must ignore the fact that when the time came for completion, there had in fact been a drastic fall in real estate values and the vendor had in truth suffered a severe loss as a result of the breach. 149.Mr Thomas SC further submits that Godfrey JA fell into error in confusing the two streams in China Pride Investment Ltd v. Silverpole Ltd [1994] 2 HKC 341. There the subject-matter of the sale was 121 carpark spaces within a multi-storey building in North Point. The contract provided for payment of a deposit amounting to 20% of the purchase price. The bargain fell through for reasons not relevant to this judgment. Godfrey JA, in a carefully reasoned judgment, articulated the law as follows : (1) Where the deposit was of a "conventional" size, the court would not treat the provision for forfeiture as penal, even if it in no way represented a genuine pre-estimate of the vendor's loss : see Workers Trust and Merchant Bank Ltd v. Dojap Investments Ltd (supra). (2) Where the deposit exceeded the "conventional" size, or where there could not be said to be a "conventional" size, the law would uphold the provision for forfeiture if the amount of the deposit was no more than reasonable in relation to the loss likely to be suffered by the vendor as a result of the purchaser's breach : In this case the court would in effect treat the purchaser as being liable to pay to the vendor liquidated damages in the amount of the deposit : a liability which the vendor would be entitled to regard as satisfied by applying the deposit in discharge of it. (3) In the special circumstances of that case Godfrey JA would have upheld the forfeiture of the 20% deposit. 150.As can be seen, in considering the reasonableness of the deposit, Godfrey JA asked what loss was likely to be suffered as a result of the purchaser's breach : In this context, it would be absurd not to look to the time when the purchaser actually defaulted, to see if the deposit was factually out of all proportion to the loss sustained : This was, in effect (though not articulated as such in Godfrey JA's judgment) a way of expressing Lord Parker's test in Dunlop Tyre Company v. New Garage : whether the sum agreed to be paid was in excess of any actual damage that could possibly arise from the breach. Mr Thomas submits that this approach is wrong, when there was no genuine pre-estimate of the loss, as there was in the Philips case. First principles 151.To examine the validity of Mr Thomas's carefully formulated arguments it is necessary to first consider what point Lord Hailsham was addressing in the passage quoted above. That case concerned the sale of an estate of 1,488 acres. The completion date was 90 days from the date of the contract which provided for a 10% deposit. There was no suggestion that, upon the purchaser's failure to complete, the vendor suffered any real damages beyond the inconvenience flowing from the purchaser's breach. Hence, the question Lord Hailsham was focused upon was whether, notwithstanding his inability to prove that he had suffered damage, the vendor was entitled to forfeit the whole of the deposit. This case therefore provides no clue to the issue in the present case where, unquestionably, the vendor had suffered very substantial loss. To consider Mr Thomas's submissions it is necessary to go back to first principles. A number of basic propositions arise : First, where parties have contracted at arm's length, upon independent advice, each looking to its own advantage, and there is no vitiating element such as fraud or sharp practice, it is the court's function to uphold the parties' bargain. Secondly, contracts for the sale of real property do not fall under different principles from contracts generally, though there are features of such contracts which may call for special consideration. Thirdly, where equity intervenes, and in effect re-adjusts a bargain in favour of one party to the detriment of the other, it does so by the application of principles which are generally applicable : even though, in relation to contracts for the sale of real property, there are, once again, features of such contracts which may call for special consideration. Fourth, in relation to contracts other than contracts for the sale of real property, doubt remains as to whether the court has jurisdiction to relieve against forfeiture of instalments of the purchase price where the contract provides for forfeiture in the event of the purchaser's default : Romer LJ in Stockloser v. Johnson [1954] 1 QB 476 at 495 held that, in the absence of pressure or duress, or other vitiating elements, there was no such jurisdiction : In this regard he was following Farwell J in Mussen v. Van Diemen's Land Company [1938] 1 Ch.253 (which did concern a contract for the sale of land). Denning and Somervell LJJ on the other hand doubted the correctness of Farwell J and held that where the sum forfeited was out of all proportion to the damage and it was unconscionable for the vendor to retain it, then equity would intervene : even though at common law there was no cause of action whereby the purchaser could have recovered the money paid over. When Stockloser v. Johnson came to be discussed in the Court of Appeal in Campbell Discount Co. Ltd v. Bridge [1961] 1 QB 445 (which concerned an "agreed compensation" to be paid for the termination of a hire purchase agreement by the hirer), the two opposing views were ventilated, without resolution, because the court came to the conclusion that there was nothing unconscionable on the part of the hire-purchase company to seek to enforce the "agreed compensation" clause. When that decision went up to the House of Lords it was reversed, upon a ground that did not involve considering Stockloser v. Johnson directly : But indirectly there appears this well-known passage in Lord Radcliffe's speech (see [1962] AC 600 at 626) :
152.In Workers Trust Bank v. Dojap Investments (supra) the Privy Council declined to express any view as to which of the two lines of reasoning in Stockloser v. Johnson was correct but held that, in the circumstances of that case, the 25% deposit was not a true deposit by way of earnest and the provision for its forfeiture was a plain penalty. For the purposes of the present appeal, it is unnecessary to resolve this conflict : But I would suggest that Denning LJ expressed the principle of law persuasively in Stockloser v. Johnson at 491 (a passage cited with apparent approval in Workers Trust Bank v. Dojap Investments Ltd at 579) when he said :
153.As can be seen, what Denning LJ was there addressing was the question whether, in the circumstances of the case, it would be unconscionable for the vendor to forfeit the deposit : Not whether the clause itself, as a contractual term, was unconscionable. 154.I would therefore reject Mr Thomas's submission that in considering whether the forfeiture clause is penal in nature, the court must disregard what actually happened upon the purchaser's default and confine its attention to the agreement itself. It must be remembered that the jurisdiction exercised by equity is a flexible one. It would go against the grain of equity to say that, in considering whether the court should give relief to a party, the court must ignore what in fact occurred consequent upon that party's breach and simply look to the internal linguistics of the contract, and the circumstances under which it was made, to decide the issue. This approach also deals effectively with another of Mr Thomas's argument when he said : Assume that the purchaser had paid 3 of the instalments of the deposit, but was late in paying the fourth, would the vendor be entitled to "forthwith determine" the agreement in terms of clause 26(a) and sue for the "agreed damages" of $40.25 million as an accrued right? The answer is probably no, because equity would in those circumstances intervene. This does not answer the question whether equity should intervene here. Applying the principles 155.In my judgment Lord Diplock expressed the equitable rule against penalties succinctly and accurately in Photo Production Ltd v. Securicor Transport Ltd [1980] AC 827 at 850 - F when he said :
156.By whatever yardstick one measures the proposition - unconscionability, unreasonableness, or that articulated by Lord Diplock as set out above - the threshold for the court's intervention is necessarily high. Where business people are dealing with each other at arm's length, their freedom to contract as they please is something the courts respect and protect. The court's "conscience" - a metaphorical term indicating a common standard of behaviour rather than a judge's conscience - is not easily engaged. 157.In considering this area of the law I put to one side those cases, perhaps numerically the most important in Hong Kong, where large companies are offering to persons of limited means flats for sale, where almost invariably the purchasers are buying on mortgage. The purchasers are sometimes young married couples, in urgent need of housing : There is hence pressure on them to buy. The vendors, on the other hand, are often under little pressure to sell; they sometimes have a large stock in hand; the time for offering the flats for sale in the market, and the rate at which they are to be released, are matters of the vendors' choosing. In these circumstances it would take a wholly exceptional case to justify a deposit of more than 10%. 158.But here the court is concerned with two limited companies, with sophisticated persons behind them, each independently advised. The vendor and purchaser, as reasonable contracting parties, would plainly have looked at the matter in the round. The contract was concluded at a time of booming prices for commercial premises in Causeway Bay. The purchaser would obviously not have agreed to pay such a large deposit (with the possibility of forfeiture) if it had thought that the market was on the verge of collapse. But the Hong Kong market is notoriously volatile in the sense that it is highly sensitive to external forces. Over the past half-century there have been many cycles of dramatic rise and fall. Upon entering into the contract, in May 1997, the purchaser had the possibility of almost immediate profit upon sub-division and re-sale. With the contract in hand, in an inflationary environment, the purchaser would have had little difficulty in raising money from the market. The vendor was, of course, locked into the contract for over 9 months, and exposed to uncertainties over a long period. It was therefore entirely reasonable for the vendor to seek reassurance that if the market should fall and the purchaser should default, it would be compensated : And that the compensation should be certain : that is to say, not dependent upon a court assessing the amount of compensation years after the event : Few vendors would welcome the prospect of expensive litigation to claim compensation, when the outcome would depend upon the resolution of conflicting evidence based upon valuation exercises by opposing experts, whose opinions could vary widely (as occurred in this case). The size of the deposit was a matter of bargain for the parties, as was every other term. They were contracting at arm's length, each independently advised, with each looking to its own advantage. 159.Over the years many cases of property disputes have come before the courts. Whilst it is true to say that, in the run-of-the-mill case, the deposit is normally 10% of the purchase price, this is not an inflexible rule. It is perhaps worth mentioning that when the purchaser instituted proceedings in this case by originating summons, there was no claim that in the event of the court finding the purchaser in default, the court should nevertheless exercise its equitable jurisdiction to relieve the purchaser from forfeiture of the deposit. 160.Upon the trial judge's finding of actual loss, the forfeited deposit did in fact over-compensate the vendor : But the parties were not very wide of the mark. On the vendor's valuation of the property in April 1998 it had fallen in value by over $57 million (a fall of nearly 50%) : At one time the purchaser's own evidence indicated that the diminution in value was in the order of $43 million (over 37%). The judge had considerable difficulty with the conflicting expert evidence as to value at trial. He said : "Professional judgment can differ wildly". The use of comparable transactions roughly within the same locality to arrive at a valuation yields widely differing results. One set of comparables produced at the trial showed that the diminution in value was $38.5 million (a figure very close to the deposit) : This was said by the judge to be "the better minimum value of the property as at 2 April 1998". A particular difficulty confronting the judge was the fact that shop C had become, by April 1998, effectively an open yard; but some form of canopy had been erected over a part of it and it was being used as a flower shop; to arrive at a figure for shop C, an artificial "conversion rate" was used to make it notionally into a covered shop for the purposes of valuation. Ultimately, the judge found the fall in value to be $33 million (over 29%). On no view of the case can it be said that the deposit, amounting to 35% of the purchase price, constituted an "extravagant" sum. The Court of Appeal considered this evidence as relevant in considering whether the forfeiture clause was penal in nature - following Godfrey JA's approach in China Pride Investment (supra). In my judgment it was right to do so. Conclusion 161.Reverting to Denning LJ's formulation in Stockloser v. Johnson quoted earlier in this judgment, the reality is that a purchaser is most unlikely to default on completion if, in the meanwhile, the property had increased considerably in value. Using Denning LJ's example : Assuming indeed that the contract stipulated for a deposit of 50% and, at the time of completion, the market had fallen 80% - not an impossible scenario in the Hong Kong context - by what reason in equity would the court say that the vendor should not treat the deposit as forfeited? Would the law in effect, force the vendor to come to court to prove his actual loss and then say : You can apply the deposit in extinguishment of the proven damages? Is the vendor not entitled to say : I am content to forfeit the deposit, and spare myself the expense and inconvenience of coming to court. 162.In my judgment, the Court of Appeal did not err in applying the principles governing relief against forfeiture in the circumstances of this case. Opinion can reasonably differ as to where the limit might be reached beyond which a court would say, without more, that a deposit is penal in nature. There is a public interest in having certainty in this branch of the law. When the parties have themselves set out the unusual feature justifying a substantial deposit, and called the provision for forfeiture "an important commercial term and condition" of their agreement, a court would be wise not to interfere. Here, experienced judges in the Court of Appeal have examined the matter closely and concluded that, in the circumstances of this case, the deposit was reasonable and its forfeiture was not unconscionable. Whilst, perhaps, accepting that this case strains the limits of tolerance, I do not consider it justifiable to reverse the Court of Appeal on this point. 163.I would accordingly dismiss this appeal with costs. Lord Millett NPJ: 164.I have had the advantage of reading the judgments of Mr Justice Bokhary PJ, Mr Justice Chan PJ and Mr Justice Ribeiro PJ with which I am in complete agreement. 165.Mr Justice Litton NPJ bases his dissent on the freedom of contract. The principle of party autonomy is, of course, a cornerstone of the law of contract. But the principle is not without limits, and it does not permit parties to contract in whatever terms they choose in all circumstances. It cannot be invoked to prevent a party from challenging a contractual term to which he has agreed which stipulates for the payment of a penalty (in the strict sense) in the event of breach. Nor does it prevent a party from challenging a contractual term to which he has agreed which stipulates for the payment in advance of a forfeitable deposit so large that it cannot be objectively justified by reference to the functions which such a deposit properly serves. Mr Justice Bokhary PJ: 166.The Court unanimously resolves the issue of rescission in favour of the respondent vendor. By a majority of 4:1 with Mr Justice Litton NPJ dissenting, the Court resolves the deposit issue in favour of the appellant purchaser. By such majority, the Court: (i) orders the vendor to refund to the purchaser $7.25 million with interest thereon; (ii) makes the direction as to interest which Mr Justice Ribeiro PJ proposes in paragraph 111 of his judgment; and (iii) makes the order nisi as to costs which he proposes in that paragraph. The appeal is allowed in part accordingly.
Representation: Mr Michael Thomas SC and Mr Godfrey Lam (instructed by M/s Kok & Ha) for the appellant Mr Denis Chang SC and Mr Andrew Mak (instructed by M/s Gallant Y.T. Ho & Co) for the respondent |
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