Teng Fuh Co. Ltd. v. Keen Lloyd Holdings Ltd.

HCMP002438/1998

1998, No. MP 2438

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

Coram: The Hon Mr Justice Findlay, in Court

Dates of hearing: 24 and 25 May 1999

Date of handing down of judgment: 27 May 1999

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JUDGMENT

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The Background

1. On 12 September 1997, the plaintiff and the defendant entered into a written agreement of sale relating undivided shares in a piece of land in Redhill Road on which 16 houses had been built. The defendant was also to be entitled to exclusive rights to House 16. I refer to the subject of the agreement as "the property". The purchase price was $82 million, and completion was to be on or before 27 May 1998, some 8 months after the date of the agreement. The agreement stipulated that the defendant's requisitions as to title were to be delivered within 7 business days after receipt of the title deeds. These were delivered on 23 October 1997. Time was to be of the essence. The defendant raised requisitions in October 1997, and these were answered. There is no complaint about them.

2. Following the agreement, the market value of Hong Kong land fell dramatically. The parties agree that, on 28 May 1998, the market value of the property sold was $50.5 million, and, on 15 September 1998, it was $34 million.

3. The defendant failed to complete on 27 May 1998. The plaintiff gave the defendant an opportunity to complete on 28 May 1998, but the defendant declined this. So the plaintiff terminated the agreement and forfeited part of the deposit equivalent to 10% of the price.

4. I now have before me an originating summons issued by the plaintiff by which it claims a declaration that it was entitled to so terminate and forfeit, damages and interest.

The Obligations

5. To be entitled to the declaration and the other relief claimed, the plaintiff must show that it performed its obligations under the agreement, and that the defendant's refusal to complete was unjustified. The only basis for the defendant's refusal to complete was an allegation that the plaintiff had not performed its obligations.

6. The plaintiff's relevant obligations under the agreement were -

a) to give satisfactory answers to valid requisitions by the defendant;

b) to show good title a reasonable time before the date for completion; and

c) to tender good title on the completion date.

7. These obligations are cumulative, although usually the obligation to show good title will have been discharged by giving satisfactory answers to requisitions. But the two obligations are not the same obligation. If the vendor refuses to answer a valid requisition, he has failed to discharge that obligation and the purchaser may rescind. It is no answer for the vendor to say that he could have shown good title later and well before completion. And the obligations to show and tender good title are not the same. If the vendor fails to show good title, he cannot avoid his breach of his obligation by showing that he was able to tender good title.

The Requisitions

8. In May 1998, the defendant raised new requisitions. Mr Ng Kam Sing, the investment manager of the defendant, says these were raised "upon new and changing circumstances". He does not say what these circumstances were, but one can safely assume that the rapid fall in the value of the property was one of them. The defendant maintained that these requisitions were not satisfactorily answered. Some of the requisitions are not sensible, but it unnecessary to deal with all of them. When the hearing commenced, Mr Edward Chan said that he would be relying on only one of them.

9. This remaining requisition concerned an extension to the garden of House 15, next door to House 16, onto adjacent government land. There was also a mention of a similar extension to the garden of House 10, but the situation regarding this was uncertain. The defendant knew about the extensions on 8 May 1998, but did not raise a requisition concerning this until it was communicated to the plaintiff's solicitors at 7.58pm on 25 May 1998 in a letter by the defendant's solicitors of that date. So it was raised only one full day before the date for completion.

10. The letter by the defendant's solicitors said that the extensions might have violated various provisions of the Conditions of Exchange of the land and the Deed of Mutual Covenant. Mr Edward Chan says that he does not rely on the allegation regarding the Deed of Mutual Covenant. The defendant also said that it wanted evidence that the extensions were not in breach of some general and special conditions of the Conditions of Exchange.

11. When the plaintiff's solicitors received this requisition, they replied saying that it was too late, although, without waiving this objection, they commented upon it. In effect, they said that the defendant had "thrown" some 13 provisions of the Conditions and Deed at them, without specifying in what manner they were breached. They also said that the matters relied upon related to House 10 and 15, and there was no risk of re-entry to affect the title to House 16.

Was the Requisition Too Late?

12. To be such that a vendor is obliged to give a satisfactory answer to it, a requisition must be delivered within the time stipulated in the agreement, or, if it goes to title, within a reasonable time of having discovered the potential defect with reasonable diligence.

13. As I have said, I find that the requisition was raised only one clear day before completion. There was no reason why it should have been so late. The defendant knew about the extensions much earlier than 25 May 1998; on 8 May 1998. By any reasonable standard, it was far too late. So, the plaintiff had no obligation to answer the requisition, and it did not waive the lateness objection.

14. Mr Edward Chan argues that this requisition was raised earlier than the letter of 25 May 1998, and he points to letters written by the defendant's solicitors dated 14 and 19 May 1998. I have read those letters several times, and believe that, by no stretch of the imagination, can they be construed as raising the requisition concerned. They are concerned with entirely different complaints. What they do show, however, is that the defendant could have raised the requisition with which I am concerned at that time at the latest.

Was the Requisition Sufficiently Specific?

15. Mr Warren Chan also complains that the requisition was not sufficiently specific.

16. I do not accept this. The requisition does, I think, sufficiently spell out the nature of the defendant's concern, assuming it to be genuine.

Was the Answer Self-Evident?

17. In any event, Mr Warren Chan says, the answer to the requisition was self-evident. I am not entirely sure about that, but I am sure that the plaintiff gave the only answer possible. It could not say anything else that would have added to the defendant's state of knowledge. The defendant knew the situation as well as the plaintiff. It was for the defendant to decide what to do in the light of the facts known well to both parties. The plaintiff did point out the obvious; that the extensions did not relate to House 16, and gave the opinion that there was no risk of re-entry.

The Effect of an Invalid Requisition

18. What is the effect of the requisition being out of time, other than relieving the plaintiff of the obligation to answer it? According to Mr Edward Chan, the effect is, other than that mentioned, nothing at all. The plaintiff still has, he says, the obligation to show and tender good title, and, if the extensions to the gardens on House 10 and 15, are a blot on that title, that obligation has not been met.

19. Mr Warren Chan urges the contrary. He says, in effect, that if a requisition is out of time, the vendor need not show or tender good title in respect of the matter raised in that requisition.

20. Counsel have not been able to draw my attention to any authority that deals with this question crisply so I must decide it on principle.

21. If I am right in saying that the plaintiff's obligations as mentioned earlier are distinct obligations, the fact that the plaintiff is not obliged to answer a requisition because it is too late does not relieve it of the obligations to show and tender good title. To take an extreme example, if it were so that, minutes before completion was to take place, a purchaser discovered that the government has re-entered the property sold, he would be entitled to refuse to complete because the vendor cannot show and tender good title. The fact that the purchaser had failed to raise any requisition regarding this defect at all, or had raised one too late, does not excuse the vendor from fulfilling his obligations.

The Defect

22. There can be no doubt that the extensions were a breach of the government lease, and entitled the government to take action as a consequence of that breach.

23. So the question is whether or not there was any real risk of the defendant's enjoyment of the property being disturbed by government action, not because of anything that had been done in relation to the property itself, but because some other independent owners of other properties had been naughty enough to extend their gardens onto government land.

24. In considering this question, I am, I think, entitled to make some assumptions. And these assumptions are the same as those that any sensible, prudent and experienced solicitor should make in deciding whether to advise a client to accept the title.

25. Firstly, one must assume that the public servant making this decision would act sensibly, with proper regard to all the circumstances, and not capriciously or vindictively.

26. Secondly, one must assume that he would appreciate that the defendant itself had done nothing wrong, and that it would be unfair to penalise it for the actions of someone over whom it had no control.

27. Thirdly, the public servant must be assumed to be aware that he must act consistently, and, if he were to do so, he would be obliged, in other cases of a like breach in similar circumstances, to re-enter the whole of land held in common ownership by, perhaps, many hundreds of people, who were innocent of any breach of a government lease, because of a breach of that lease by one common owner.

28. And lastly, he would be aware that, if he were to act in this way, he would, it is no exaggeration to say, largely destroy confidence in the Hong Kong property market. This is because any person purchasing shares in land held under common ownership, which I dare say categorises most land purchases in Hong Kong, could no longer do so with any degree of security because, in practical terms, it would not be possible for him to know, or find out, if one of the many other co-owners had breached the government lease, thus putting their title in jeopardy.

29. On this basis, my conclusion is that any such action by the government to re-enter the whole of the land in these circumstances would be classified by any reasonable person as an act demonstrating insanity, and therefore, to put the chances of such an action at its highest, extremely unlikely. I believe that no prudent and experienced solicitor in his right mind would say that there was any risk at all of this happening.

30. And if the government were minded to re-enter at all, it would, I am sure, contemplate only a re-entry of the offending part. I am aware that Godfrey, J, as he then was, in Kok Chong Ho v Double Value Development Ltd [1989-91] CPR 600, at 604, doubted whether it was possible to re-enter only part of a building held in multiple ownership, and one can easily see the difficulties in that concept, but the lease itself in the case before me contemplates a re-entry in respect of only part of the land leased. If the government decided to re-enter in respect of only those parts of the lot occupied by Houses 10 and 15, it could do so without the problems involved with a high-rise building in multiple ownership. The practical effect of this act would be that all the co-owners would lose their undivided shares in those pieces of land, without any real effect, and the offending owners would be left with undivided shares in the remaining land, but without any exclusive rights in relation to any of it; in effect, a valueless right. That way, the punishment, if it were thought justified, would be suffered by those who deserve it.

31. I am comforted in reaching this conclusion to learn that, as a matter of fact, the government took enforcement action in respect the extensions without affecting the title of the property. I am also comforted by the fact that Mr Stephen Yip, a chartered surveyor of much experience in this field, told me that he had never in his long career in Hong Kong come across an instance of the government taking action that affected the title of innocent owners in these circumstances. This does not surprise me in the least. In fact, I would been astonished if it were otherwise, and, I am sure, so would every conveyancing solicitor in Hong Kong.

Result on Liability

32. In the result, I find that the alleged defect in title was not one that would have caused any conveyancing solicitor the slightest twinge of concern; he should have advised his client that there was not the smallest or remotest risk of the government taking any action that would affect the title of the property. It follows that the defendant was not entitled to refuse to complete, and the plaintiff was entitled to terminate the agreement. I grant the declaration sought by the plaintiff.

Damages

The Loss of Bargain

33. The plaintiff sought damages on the basis of the difference between the contract price ($82 million) and the price at which it was able to sell the property ($31 million), being $51 million. This is the basis upon which the defendant agreed to pay damages, if it failed to complete, under clause 21 of the agreement.

34. Mr Edward Chan says that I should not accept this basis for assessment.

35. Firstly, he argues that the plaintiff is not entitled to claim on this basis because the plaintiff's deponent did not quote that part of clause 21 in his evidence. Mr Edward Chan said that this was not his "strongest point". I would say that it is not a point at all. The plaintiff made it quite clear that, in making its claim, it was relying on the whole agreement, which was produced in evidence.

36. Mr Edward Chan's second point is little better than his first. He says that, because clause 21said - "Upon determination of this Agreement the Vendor may resell . . .", the plaintiff was obliged to re-sell on the very day of the determination, not at any later time. I do not accept this. The obligation on the plaintiff was to re-sell with proper diligence; in other words to mitigate its damage reasonably. There is no suggestion in the evidence that the plaintiff did other that its best to sell for the best price in a very rocky market. Indeed, the plaintiff would have been very foolish to have done otherwise. I do not accept that the plaintiff can properly becriticised for selling when it did.

37. Mr Edward Chan's other point is that this provision in clause 21 is a penalty, and thus unenforceable. I do not accept this either. I can see no way at all, even with the most vivid of imaginations, that one can construe this perfectly reasonable provision in a contract of this kind as a penalty.

38. In any event, even without this specific contractual provision, I would have assessed damages on the basis contended for by the plaintiff. The defendant reneged on his deal knowing that the plaintiff wanted to sell, leaving the plaintiff with a property to sell in a very uncertain market. The defendant must have contemplated that the plaintiff would be able to sell only after considerable effort, making difficult decisions and in a market that was very volatile. The defendant cannot now reasonably complain that the plaintiff did not do the right thing. To do justice to the plaintiff, I would have felt obliged, in these circumstances, to assess its damages in the sum it actually suffered. The plaintiff has, however, restricted its claim to the agreed market value as at the date of sale; $34 million.

39. Accordingly, I assess the plaintiff's damages under this head at $48 million. From this must be deducted the sum already paid by the defendant; $12.3 million, leaving a balance of $35.7 million. The plaintiff is entitled to judgment in this sum of $35.7 million.

Bank Interest

40. The plaintiff also claims mortgage interest that it was obliged to pay to its bank.

41. There is no doubt that the defendant knew that the plaintiff had a mortgage; he was told so by the agreement, but Mr Edward Chan says that there is nothing to indicate that the purchase price was needed to pay the loan under the mortgage. Well, it seems to me that it does need much thought for a party to an agreement, who is told that there is a mortgage over the property, to realise that it is likely that the money coming from him would have to used, in the first instance, to pay off that mortgage. I believe this claim is fully justified.

42. I award judgement to the plaintiff in the sum of $2,733,316.18, which is the interest calculated to 22 April 1999, and the interest payable thereafter to the bank, until the date of delivery of this judgment.

Loss of Interest

43. The plaintiff also claims damages on the basis of the loss of interest it would have earned if the defendant had kept to its bargain. It seems to me that the proper basis to deal with this is to award interest on the amount that would have been in the plaintiff's pocket if the defendant had completed under the agreement. This sum is $25,240,483.77, and the interest rate should be the Hong Kong bank prime rate plus 2%. It should run from 27 May 1998 until the date of delivery of judgment. I make an award accordingly.

Miscellaneous Claims

44. The plaintiff claims the sum of $75,500 being management fees from the date of completion until the date of sale. This is a legitimate head of damage. The plaintiff would not have incurred these if the defendant had not been in breach. I grant judgment in this sum

45. The same applies to rates and government rent paid in the sum of $55,004.67, and I give judgment in this sum.

46. Another claim by the plaintiff is for $33,644.60 being conveyancing costs on the re-sale. I do not think this is recoverable in this form. The true measure of damages here would be the difference between the costs that would have been incurred if the defendant had kept to its bargain and the costs actually incurred. My attention has not been drawn to any evidence that would enable me to reach this figure. This claim is dismissed.

47. The next claim is for $806.43 being electricity charges for the period after the defendant should have completed. This is recoverable, and I grant judgment for it.

48. There is then a claim for payment of $6,800 for security guard services for the same period. This seems to be in order. It is a good claim. I grant judgment in this sum.

49. The last claim is for $360,000 being fees of estate agents involved in the re-sale of the property. Agent's commission was payable under the sale to the defendant so this is damage suffered by the plaintiff because of the defendant's refusal to complete. It is recoverable. I grant judgment in this sum also.

Judgment Interest

50. The sums I have awarded will bear interest at the judgment rate from the date of this judgment to the date of payment.

Costs

51. I have heard no argument on costs, but there is no obvious reason why they should not follow the event. I make an order nisi that the defendant pay the plaintiff's costs in this matter.

Representation:

Mr Warren Chan, SC, and Mr Liu Man Kin, instructed by Messrs Denton Hall, for the plaintiff.

Mr Edward Chan, SC, and Mr Herbert Au-Yeung, instructed by Messrs Tony Kan & Co, for the defendant.