Green Park Properties Ltd. v. Dorku Ltd.

Case No.HCA 8564/1998[2000] 2 HKLRD 400

Court

High Court CFI

Date13 Jun 2000

Judge—

Case Document

100%Judiciary

HCA008564/1998

HCA8564/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.8564 OF 1998

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BETWEEN
	GREEN PARK PROPERTIES LIMITED	Plaintiff

	AND

	DORKU LIMITED	Defendant

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Coram: Hon Cheung J in Court

Dates of Hearing: 15 - 19 May 2000

Date of Judgment: 13 June 2000

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J U D G M E N T

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FACTS

The property

1. The defendant is the registered owner of the property situated on the Ground Floor, Kiu Kin Mansion, No.566 Nathan Road, Hong Kong ("the Property"). It bought the Property with vacant possession in 1997. Previously, the Property was used as a pizza restaurant. Mr Wong Wing Wai ("Mr Wong") the person who controlled the defendant partitioned the Property into two portions, namely Portions A and B, and rented them to tenants. In the beginning of April 1998, Mr Wong asked estate agents to put up the Property for sale.

The plaintiff was approached

2. Mr Dennis Lee ("Mr Lee") was one of the estate agents approached by Mr Wong. Mr Lee was an employee of A.T. & Associates Ltd ("AT&A"). Mr Lee approached Mr Edwin Leong ("Mr Leong") of the plaintiff. Mr Lee provided the floor plan, the location plan and particulars of the Property to Mr Leong. At that time, AT&A had just set up its business. The owners of AT&A previously operated another estate agency firm. AT&A had information on the Property. AT&A had a copy of the floor plan in its office. There were some dispute as to which floor plan was actually provided by Mr Lee to Mr Leong. The plans produced by them were slightly different. The difference was on the shape of the partitions of the two portions in the Property. I am satisfied that the plan (Exhibit P1) produced by Mr Leong was the one given to him by Mr Lee. The difference in the shapes of the two portions does not in any way affect the outcome of the case. The plan showed that at the back of the Property there was a yard or light well.

3. According to Mr Leong, Mr Lee told him that the Property was worth $100 million in 1997 but the price had dropped to $65 million. It was a good buy. One of the tenant was engaged in the business of a Japanese sushi restaurant ("the restaurant") while the other tenant seemed to be engaged in a boutique business but Mr Lee was not sure about this at that time.

The first inspection

4. Mr Leong then attended the Property together with Mr Lee. At that time, the tenant in Portion A was carrying out decoration work. The parties inspected the Property and walked to the very end. Mr Leong saw that there was a yard ("the yard") which was an open space at the back of the Property. There was a gate separating the yard from the scavenger lane ("the lane") which lies beyond the yard. There were two toilets on the left and the right of the yard. Mr Leong saw a worker putting on wall tiles in the yard. Mr Leong was under the impression that the yard was part of the Property. The yard was not covered overhead. Mr Leong said that there was no reason for him to suspect that the yard was not part of the Property. It was common ground that no one at this inspection raised any question on whether the yard was part of the Property or not. The inspection lasted for a short time.

The second inspection

5. There was a second inspection of the Property afterwards, there was dispute whether the second inspection took place on the same day as the first inspection or on another day. In my view the timing of the second inspection is immaterial. There was also dispute as to who was present at the second inspection. Mr Leong said that he himself, Mr Philip Lee (Mr Leong's partner in the purchase of the Property) and Mr Stephen Hui (a director of Mr Philip Lee's company) attended the second inspection. Mr Lee and Mr Andrew Chan of AT&A were also present. Mr Andrew Chan is one of the owners of AT&A.

The tenancy plan

6. After the inspection, there was a discussion about the Property. Again, there was a dispute on whether the discussion took place on the same day or on another day. In my view, the timing of the discussion is again irrelevant. There is no dispute that at this discussion Mr Leong asked about the width of the distance of two columns that were inside Portion A. The distance between them seemed to be wider on the floor plan (P1) than its actual width. He asked Mr Andrew Chan whether the columns could be removed. Mr Andrew Chan said no and he asked Mr Lee to take out another plan. Mr Andrew Chan said that it was the tenancy plan. Mr Leong remembered this plan because there was some configuration in the plan and he had asked whether that was the air-duct. Mr Andrew Chan explained that it was the conveyer belt of the restaurant. There were also two signatures on the plan. The plan identified by Mr Leong was the tenancy plan of Portion A. The width of the two columns on the tenancy plan was much narrower than the width in P1. After the plan was shown, Mr Lee immediately took it away. Mr Andrew Chan and Mr Lee disputed that they had produced any tenancy plan.

The Agreement

7. The plaintiff decided to offer a price of $54 million. Mr Andrew Chan later indicated that this sum should be acceptable to the defendant. Mr Andrew Chan prepared a Provisional Agreement For Sale and Purchase of the Property ("the Agreement") and took it to Mr Leong. Mr Leong then asked the accountant of his office to sign the Agreement on behalf of the plaintiff. Later on, the Agreement was signed by the defendant as well. It was dated 14 April 1998.

8. The purchase price was agreed at $54 million. The completion was to take place on or before 15 May 1998. An initial deposit of $1.5 million was paid on the signing of the Agreement. A further deposit of $9.3 million was to be paid upon the signing of the formal agreement on or before 25 April 1998 and the balance of $43,200,000 to be paid on or before completion. The plaintiff duly paid the initial deposit and the further deposit, totalling $10,800,000. The money is kept by the defendant's former solicitors, Messrs Francis K.W. Ho & Co. ("Ho"), as a stakeholder.

Requisitions on title

9. Documents of title were supplied by Ho to JSM. The Assignment Plan of the Property showed that the yard was not included in the Property. Thereafter, requisitions on title were raised by Messrs Johnson, Stokes & Master ("JSM"), the plaintiff's solicitors, on, among other things, two matters which are now part of the issues in dispute in this case. First, the defendant had sold the Property which included the yard to the plaintiff. But according to the Assignment Plan, the yard was not part of the Property belonging to the defendant. The defendant had failed to show a good title to the yard. Second, the government lease prohibited the business of a "victualler" in the Property without the licence of the government. The use of Portion A as a Japanese sushi restaurant was within the definition of a victualler. This was a breach of the government lease condition which might result in possible government re-entry and potential litigation by the plaintiff. Accordingly, the defendant had failed to show a good title to the Property on this ground as well. JSM further alleged that the defendant had misrepresented that the yard was included in the Property to be sold to the plaintiff.

10. On 16 May 1998, JSM informed Messrs Wai & Co. ("Wai"), the defendant's solicitors who took over from Ho that the Agreement was rescinded and asked for the return of the deposit. On 18 May 1998, Wai wrote back stating that the rescission was wrongful and repudiatory. It asked for the return of the title deeds.

THE CLAIM AND COUNTERCLAIM

11. The writ was issued by the plaintiff on 26 May 1998 claiming, among other things, a declaration that the Agreement had been rescinded and asked for the return of the deposit. The writ was registered against the Property in the Land Registry. The defendant on the other hand counterclaimed that the plaintiff had repudiated the Agreement and that it was entitled to forfeit the deposit.

THE BASIS OF THE PLAINTIFF'S CLAIM

12. The plaintiff's rescission of the Agreement is based on first, misrepresentation by the defendant that the yard was part of the Property to be sold to the plaintiff and second, defect in title in that the defendant was unable to convey the yard to the plaintiff. There was also defect in title because of the restriction imposed in the Government lease on the usage of the Property.

MISREPRESENTATION

13. The misrepresentation relied upon by the plaintiff was made in two ways : first, by conduct in the process of showing the Property to the plaintiff; second, by showing the tenancy plan to the plaintiff. The plaintiff is not relying on the floor plan as a ground of misrepresentation.

Misrepresentation by conduct

14. The plaintiff argued that the defendant was aware that the yard was not included in the Property to be sold. By not disclosing this fact, the defendant was guilty of misrepresentation. A person may be guilty of misrepresentation by conduct. In the simplest case, conduct may be intended to convey information in precisely the same way as the written or spoken word : Chitty on Contracts, 28th Ed., Vol.1, para.6-014.

Non-disclosure and misrepresentation

15. Farrand on Contract and Conveyance (4th Ed.) at page 62 discussed the difference between non-disclosure, misdescription and misrepresentation. First, a misdescription appears in the contract itself, whereas both misrepresentation and a non-disclosure precede and induce (positively or negatively) the contract. Secondly, a misrepresentation does not cause a breach of contract but merely an intervention of equity assisted now by statute, whereas both a misdescription and a non-disclosure (where there was a duty to disclose) do cause a breach of contract.

16. The author further discussed the duty of disclosure in sale of land :

First, the general rule of contract is caveat emptor - 'the failure to disclose a material fact which might influence the mind of a prudent contractor does not give the right to avoid the contract' (per Lord Atkin in Bell v Lever Bros Ltd [1932] AC 161, at p 227). To this rule there are three well-known exceptions where non-disclosure of material facts is a ground for relief :

(1) where the contract requires uberrima fides (eg, insurance, family arrangement);

(2) where a fiduciary relationship exists between the parties (eg, solicitor and client, trustee and beneficiary); and

(3) where a positive representation thereby becomes distorted.

Second, contracts for the sale of land go beyond all three of these exceptions and occupy a somewhat ambivalent position. The general caveat emptor rule does apply (see Terrene Ltd v Nelson [1937] 3 All ER 739, at p 744). Yet some, if not the utmost, good faith is expected in that the vendor must disclose some, if not all, of the material facts. This half-exception to the general rule imposes on a vendor of land a duty to disclose to a prospective purchaser any latent defects in title. These are incumbrances and other adverse matters of title which the purchaser could not discover for himself by inspecting the property with reasonable care; discovery is reasonably possible, and defects patent, only where there is some visible indication on the property of the existence of third party rights.

In Yandle & Sons v. Sutton [1922] 2 Ch 199, Sargant J at page 210 held that :

" In all these cases between vendor and purchaser, the vendor knows what the property is, and what the rights with regard to it are. The purchaser is generally in the dark. I think, therefore, that, in considering what is a latent defect and what a patent defect, one ought to take the general view that a patent defect, which can be thrust upon the purchaser, must be a defect which arises either to the eye, or by necessary implication from something which is visible to the eye. It would not be fair to hold that a purchaser is to be subjected to all the rights which he might have found out if he had pursued an inquiry based upon that which was presented to his eye. I think he is only liable to take the property subject to those defects which are patent to the eye, including those defects which are a necessary consequence of something which is patent to the eye."

17. The author pointed out at page 63 that the mere presence of a visible way, i.e. a road or path, is not sufficient unless it necessarily implies third party rights, rather than, say, simply an exercise of ownership by the vendor. At page 64 the author stated that if the vendor has misled the purchaser by a representation as to a patent defect, then there is in effect a duty to disclose the true position : the purchaser would be justified in relying on the vendor and the court would grant relief (Bascomb v Beckwith (1869) 20 LT 862; Denny v Hancock (1870) 23 LT 686). For example, where a plan attached to auction particulars of sale did not show a footway over the property, the purchasers were granted relief for misrepresentation even though the footway constituted a patent defect (Dykes v Blake (1838) 4 Bing (NC) 463).

Site inspection

18. Ms Eu SC, counsel for the defendant, argued that the Property was in its natural state. By showing the Property to the plaintiff, there could not be any representation that the yard was part of the Property. The fact that the worker was working at the yard was not an indication that the yard was included in the Property.

19. I agree that even if a worker was working at the yard, it was not an indication that the yard was part of the Property. There is a more fundamental question involved : what is the purpose of a vendor showing the property to a purchaser? The answer is obviously to tell the purchaser that this is the property to be sold. In this case, the yard is within the perimeter of the Property. The actual physical boundary of the Property showed that there was a gate separating the Property from the lane. It really does not matter if the gate was locked or not because the presence of the gate is the clearest indication that the area within the gate, namely the yard, lies within the boundary of the Property. The entry to the yard is through the front of the shop. This was how Mr Leong was brought into the shop. Mr Leong was under the impression that the yard was included because the door leading out to the lane was locked and entry to the yard could only be gained from the shop. There was no reason why he would expect that it was not part of the Property. He would not even suspect that it was not included . In my view, these are reasonable conclusions. By showing the Property there must be a representation that the yard was part of the Property to be sold.

20. Both Mr Leong and Mr Wong are experienced property investors. They had bought and sold many properties including shop premises. Mr Leong said that it was common for the backyard to be included as part of a property. Mr Wong, on the other hand, took a different view and said that he had previously bought another property where the backyard was not included.

21. Mr Wong knew that the yard was not included as part of the Property. Mr Lee was not aware that the yard was not part of the Property. It is only when one looks at the assignment plan which expressly excluded the yard from the Property, that one realises what is the exact area included in the Property. In my view, there was misrepresentation by Mr Wong when he allowed the plaintiff to inspect the Property. He, afterall, allowed the estate agents to take Mr Leong and his associates to the Property for inspection.

Duty to disclose

22. Furthermore, Mr Wong clearly had the duty to disclose to the intended purchasers that the yard was not included in the Property to be sold. He had personal knowledge of the matter.

23. The yard is, of course, something that is visible to the eye. However, at the same time, unless the purchaser is told at the inspection that the yard is not included as part of the Property, what is visible to the eye does not convey the whole picture. In considering the physical layout of the Property, it was not patent to the eye of Mr Leong that the yard was in fact not part of the Property to be sold by the defendant. What was said by Sargant J in Yandle & Sons is appropriate to this case :

"It would not be fair to hold that a purchaser is to be subjected to all the rights which he might have found out if he had pursued an inquiry based upon that which was presented to his eye."

24. In the circumstances, the defendant was clearly under a duty to disclose that the yard was not part of the Property to be sold.

The plaintiff to find out the true position?

25. It was argued that Mr Leong could simply ask whether the yard was part of the Property. As I had said, every indication is that the yard was part of the Property and there was no contrary circumstances which may arouse anyone's suspicion. I fail to see why Mr Leong would be expected to ask specifically whether the yard was part of the Property. Furthermore, if the representee did not know that the representation was false, it is no defence to an action for rescission that the representee might have discovered its falsity by the exercise of reasonable care : Chitty, para.6-036. Further, where a person seeks to rescind a contract on the ground of misrepresentation, it is not necessary for him to prove that if the misrepresentation had not been made, he would not have made the contract; it is sufficient if there is evidence to show that it was materially influenced by the misrepresentation : Chitty, para.6-039.

Finding on the second inspection

26. Mr Andrew Chan denied that he had gone into the site at the second inspection. He said that he was waiting in his car while the party went to the Property. I do not accept this evidence. His discussion on the width of the columns would only make sense if in fact he was present at the second visit as well. He might have visited the Property previously, but in my view, unless he was present on the second visit, he would not be able to respond so quickly to Mr Leong's enquiries on the columns. Furthermore, he must have the tenancy plan with him at the time of the discussion. The plan showed the existing layout with the two columns being intact. In my view, that was the only reason why he would be able to tell Mr Leong that the two columns could not be demolished.

Finding on the tenancy agreement

27. Mr Andrew Chan and Mr Lee both said that the tenancy plan was only shown to the plaintiff after the Agreement was signed by the parties later on. Mr Leong asked for the plan after the Agreement was signed. Mr Lee said that previously he had asked Mr Wong for the tenancy agreement but Mr Wong only agreed to give him four pages of the tenancy agreement of Portion A. They were given to him in a meeting with Mr Wong. The tenancy agreement consisted of six pages. The two pages that were not provided by Mr Wong were the plan and a page with details of the deposit and rates. After the Agreement was signed, Mr Wong faxed the plan to Mr Lee.

28. Mr Wong said that after he had placed the Property for sale, he had faxed four pages of the tenancy agreement to Mr Lee. Four pages of the tenancy agreement of Portion A were attached to the Agreement. These four pages contained fax notations. They were dated 9 April 1998. While the particular of the sender was not shown, the telephone number of the recipient was that of AT&A. The notation indicated seven pages were sent to AT&A. Mr Edward Chan SC, counsel for the plaintiff, submitted that the seven pages were the six-page tenancy agreement of Portion A and the covering sheet.

29. I find that at the direction of Mr Andrew Chan, Mr Lee did show the tenancy plan to Mr Leong. This evidence was confirmed by Mr Hui as well. I find that Mr Andrew Chan and Mr Lee had the tenancy plan which was obtained from Mr Wong. I find that Mr Wong provided them with the whole set of the tenancy agreement. Mr Wong said that he did not send the page of the tenancy agreement that dealt with the payment of deposits and rates. He also did not send the plan. He said he had to give accurate tenancy details. When other agents asked him for the tenancy agreement, he would also send them the four pages only. He also confirmed that the tenancy plan was only provided after the Agreement was signed.

30. Despite what Mr Wong said, I find it odd that he would deliberately not provide the estate agents with the tenancy plan. I am firmly of the view that Mr Wong, Mr Andrew Chan and Mr Lee had given untrue evidence on the tenancy plan. Mr Lee and Mr Wong's evidence on how the four pages of the tenancy agreement was first provided is contrived. JSM in its letter of 13 May 1998 expressly stated that Mr Andrew Chan had, prior to the signing of the Agreement, shown Mr Leong and Mr Hui the tenancy plan. If indeed the tenancy plan was only asked for by the plaintiff and provided by the defendant after the Agreement was signed, one would expect the defendant's lawyer to respond categorically that this was the situation. After all, the requisition was raised shortly after the signing of the Agreement. There was no question of any lapse of memory on this issue. There was never any such response from the defendant's lawyer. Instead they merely denied that Mr Wong had provided the plan to Mr Andrew Chan.

31. It is true that Ho had in its letter of 8 May 1998 stated that at the signing of the Agreement, only the tenancy agreement but not the tenancy plan, was supplied to the plaintiff. However, by 13 May 1998, JSM had specifically alleged that the tenancy plan was shown at the time of the inspection. The response from Wai on 14 May 1998 was as follows :

"The Tenancy Plan which is ... expressly marked not to scale and for identification purpose only is intended to identify the 2 Portions of the Property ... and by no means meant to be of any contractual or legal effect.

.....

For that reason also, when the Tenancy Agreement was attached to the Provisional Agreement, the Tenancy Plan was deliberately left out so as to avoid any possible doubt or confusion."

On the tenancy plan produced to Mr Leong, Wai stated that :

"More specifically, we are instructed that our client has not furnished the Tenancy Plan to Mr Andrew Chan as alleged. Our client has relayed your allegations to Mr Andrew Chan who confirms that during the initial stage of the negotiation, a plan (taken from the sale brochure of the property printed many years ago) was sent to you client for general reference (a copy of the said plan is enclosed herewith). However (according to Mr Chan's advice), your client said that the said plan is not correct as the middle part of the Property (where the sushi conveying belt now situates) as shown on the said plan is larger than what it actually seems to be. Hence, Mr Chan from his own resources produced the Tenancy Plan just to demonstrate how that middle part of the shop would look like with the sushi conveying belt installed. However, it was understood that the Tenancy Plan is just a rough sketch prepared by the Tenant before the Tenant commenced decoration." (emphasis added)

32. Mr Andrew Chan, when giving evidence, stated that he had not discussed the matter with Wai and he did not know how Wai wrote the letter. He said Mr Wong had probably mixed up the sequence of events. When giving evidence, Mr Wong did not say anything concerning the letter of Wai. It was not put to Mr Leong or Mr Hui that the plaintiff only asked for the tenancy agreement after the Agreement had been signed.

33. Irrespective of whether the questions were put to the witnesses or not, I find Mr Wong, Mr Andrew Chan and Mr Lee's evidence not convincing. After the Agreement was signed, the defendant, in order to show title, had to produce the tenancy agreement to the plaintiff in any event. If the plaintiff was interested in the plan, it would have asked for it before the Agreement was signed and not afterwards.

34. In the Defence served on 21 July 1998, the defendant merely pleaded a non-admission to the plaintiff's allegation of the showing of the tenancy plan prior to the signing of the Agreement. It was only in February 1999 when the witness statements were served that Mr Wong, Mr Andrew Chan and Mr Lee stated that the tenancy plan was provided after the Agreement. It was said that the estate agents were still providing service to the plaintiff and there is no reason why they should give false evidence against it. Mr Andrew Chan said that he was embarrassed to give evidence when both the plaintiff and the defendant were his "bosses". In my view, a person may give untrue evidence for all kinds of reasons. The mere fact that the estate agents were still providing service to the plaintiff is not an indication that their evidence is credible.

Representation by the tenancy plan

35. The tenancy plan showed the outline of the Property and the area occupied by Portion A. This area covered the bulk of the Property. Portion B occupied a part of the Property at the front. On the tenancy plan, Portion A was shaded and the shaded part extended to the very end of the Property. The tenancy plan clearly gave the impression that the yard, which was located at the back of the Property, was included in the Property as well.

36. Ms Eu argued that even if the tenancy plan was provided prior to the Agreement, it did not amount to misrepresentation. It was argued that Mr Leong did not mention the tenancy plan as a ground for thinking that the yard was included. When he was specifically asked about the yard with reference to the plan, he merely answered that at the time when they were looking at the plan, they did not pay attention to the yard. He further said that when he was shown this plan, he did not read it carefully and he did not pay attention to it.

37. It is true that the purpose of showing the tenancy plan to Mr Leong was to deal with the question of the width of the two columns. It is also true that when the tenancy plan was shown, Mr Leong agreed that he was not paying attention to the yard at that time. However, Mr Leong also mentioned when the tenancy plan was shown to him, it signified the shape of the shop premises. What Mr Leong said about not paying attention to the yard, in my view, is understandable because he said "The tenancy plan did not show any part which was specifically marked out. It ran in a straight line to the boundary at the very end of the shop premises." Furthermore, when the inspections were carried out, there were no contrary indication that the yard was not included as part of the Property.

38. It was argued that the tenancy plan was more in the nature of a sketch. It was marked not to scale and for identification purposes. There are obvious inaccuracies in that even the location of the toilets are wrong. In my view, one really has to take a broad approach in this matter. The overall impression of the tenancy plan is that the area let to the tenant covered the whole of Portion A. This included the yard as well and this was the Property that the defendant intended to sell. In my view, there was misrepresentation by the tenancy plan.

IS THE REPRESENTATION MATERIAL?

39. Ms Eu argued that the plaintiff had failed to show that there was a misrepresentation sufficiently material to justify termination of the agreement and that the small open yard affected its decision to purchase the Property. In other words, the plaintiff had failed to show that it would not have purchased the Property but for the yard.

40. Ms Eu briefly referred to the case of William Sindall plc v. Cambridgeshire County Council [1994] 1 WLR 106. In that case, the court found that there was no misrepresentation or mistake but went on to consider whether if there was misrepresentation or mistake, damages or rescission should be ordered. The three matters which Hoffmann LJ (as he then was) considered to be relevant were :

(1) the nature of the misrepresentation;

(2) the loss that would be caused by the misrepresentation if the contract were upheld; and

(3) the loss which would be caused to the vendor by rescission.

In Flight v. Booth (1834) 1 Bing. (N.C.) 370, Tindal CJ held that :

"... where the misdescription, although not proceeding from fraud, is in a material and substantial point, so far affecting the subject-matter of the contract that it may reasonably be supposed, that, but for such misdescription, the purchaser might never have entered into the contract at all, in such case the contract is avoided altogether, and the purchaser is not bound to resort to the clause of compensation."

In Goldful Way Development Ltd v. Well Stable Development Ltd [1999] 1 HKLRD 563, the issue concerned an unauthorized structure occupying part of the backyard of a detached house. The structure covered a very minor area of the property. The issue is whether the vendor would still be in a position to complete by substantially performing the agreement if it demolished the structure before the completion. The case was concerned with the question of good title. Yuen J was of the view that there was substantial performance. The test was whether the vendor would be conveying substantially what the purchaser had contracted together.

41. In my view, the representation was material. The yard forms part of the Property to be sold and it affects the overall size and value of the Property. Mr Lee said that in terms of valuation of a shop, the front portion is more valuable than the back. Mr Lee, of course, is not a valuer. More importantly, in my view, every part of a property has a value to the owner and the occupier. An area is certainly more valuable to the owner if it could be used exclusively by him and not to be shared by others in the same building.

42. It had been argued that the yard is about 72 sq.ft. and the shop itself was about 2,000 sq.ft., hence the yard constitutes only an insignificant portion of the Property. As I have already indicated, every part of the Property has a value to the owner. The doctrine of substantial performance cannot apply in the present case because after the problem of the yard was raised, Mr Lee had attempted to ask Mr Wong to reduce the price but he definitely refused to discuss this matter.

43. Furthermore, it is through the yard that access was to be gained to the two toilets at the back of the restaurant. It had been argued that the toilets could be entered through the restaurant itself instead of through the yard. In my view, the material time must be at the time of the inspection. The layout of the restaurant was that the yard was to be used as the access to the two toilets. The plaintiff was to buy the Property subject to the tenancy of Portion A and this is how the tenant intended to use the Property.

RELIANCE ON THE REPRESENTATION

Mr Leong's concern

44. In order to deal with this issue, it has to be borne in mind that this is not a case where the plaintiff had asked and was expressly told by Mr Andrew Chan or Mr Lee that the yard was part of the Property. While Mr Leong had indeed said that the price the plaintiff offered to buy the Property was based on the rental returns and matters relating to the tenancy, obviously, his answers have to be considered in the context of this case. Furthermore, Mr Leong when asked whether he would buy the Property on the same terms if he were told that the yard was excepted from the Property, his answer was definitely not. He said he would ask many questions which included :

(1) if the yard was not included why was the tenant able to close the gate at the lane;

(2) if the yard was accessible and able to be used by others, and if some owners wanted to place something like an air-conditioner in the yard, the owner and the tenant have no right to remove the obstruction;

(3) if the Incorporated Owners of the building wanted to place something in the yard, this would affect the operation of the tenant.

He stated that for an investor in 1998, there were many choices. The plaintiff did not have to buy the Property with so many problems. Furthermore, even if the existing tenant had left, the new tenant would face the same problems. As an investor, he also had to account to his shareholders. He would not make such a quick decision to buy or offer such a price. The plaintiff was to buy a rental property and he did not want troubles to happen in the future. He would make a careful enquiry first, he would not have the confidence to buy if he had been shown the tenancy agreement and it did not stipulate clearly about the yard.

Response to the concern

45. Ms Eu argued that the plaintiff's solicitors did not raise any requisition about the closing of the gate. The activities envisaged by Mr Leong in relation to other owners and the Incorporated Owners were not something that they were even entitled to do under the Deed of Mutual Covenants ("DMC") of the building. Clause 2 of the DMC provided :

"2. Each of the parties hereto and his licensees shall in common with his co-owners of the whole of the said premises and their licensees have access to and be entitled to use the entrance-halls staircases and landings and the common corridors or passages of and in the said building for the purpose only of ingress to and egress from that part of the said building to which he is entitled to his exclusive use and enjoyment but for no other purposes whatsoever."

It is not disputed in this case that the other owners of the Property do not need to use the yard in order to reach their own properties. Further, by virtue of clause 2, the only use that can be made of the yard is a means of ingress and egress and not any other purpose.

46. Clause 10(d) provided that the owners agreed :

"(d) Not to place or cause permit or suffer to be placed anything or cause any obstruction in any part of the said building intended for common use and not to use or cause permit or suffer to be used such parts of the said building otherwise than for access to and egress from his part of the said building."

Again, this demonstrated the restrictive nature of the use of the yard. Hence, the concern of Mr Leong that other owners may place things in the yard in fact is not a real one.

There was reliance

47. These are valid arguments. As to the plaintiff's argument that the Incorporated Owners may use the yard for a purpose connected with the building itself, for example, the installation of a communal satellite TV disc, this is something that may or may not happen. However, the point is this. If Mr Leong was told about the exclusion of the yard, he would have made enquiries first instead of committing himself so quickly to the purchase. While many of the concerns expressed by Mr Leong, on deeper analysis, proved to be unsubstantiated, the fact remains if he had been told that the yard was not included as part of the Property, he would not have made such a quick decision to buy the Property. In April 1998, it was a buyer's market and there were other properties to choose from. In my view, there was clear reliance by the plaintiff on the misrepresentation.

Enquiry with the tenant

48. It is also argued that the tenant of Portion A had expressly recognised that the yard was a common area and Mr Leong's concern about the problem with the tenancy is unsubstantiated. On 9 May 1998, JSM wrote to the tenant of Portion A stating :

"... We were told by your present landlord that this Yard is NOT included in the Tenancy. Please confirm to us if your landlord is right i.e. whether the Yard is let to you by your landlord under the Tenancy.

If the Yard is not included in the Tenancy, your present use of the Yard is therefore ILLEGAL, and as soon as we acquire the property, our client will exercise its right to claim against you for illegal use of the Yard and breach of Tenancy."

The response of the tenant's lawyer came on 12 May 1998 :

" We are instructed to confirm that our client acknowledges that the subject Yard is a common part of the subject building and that our client has not used the said Yard in a manner as if our client had the exclusive right to it."

49. The point on the tenancy is this. The agreement was dated 14 April 1998. The completion was to take place on 15 May 1998. It was a short completion. The title deeds and documents were provided to JSM by Ho on 29 April 1998. The plaintiff had very little time to consider problems concerning the yard. While the tenant stated that it recognized the yard as a common area, it had not responded unequivocally that the yard was not let to it. While no complaints had been made by the tenants in the past two years concerning the yard, I think the state of the play must be judged at the time of the completion.

THE CAPACITY OF THE ESTATE AGENTS

50. It was argued that even if there was a representation, this was never done by or on behalf of the defendant. The estate agent AT&A in this case was a broker and acted for both parties. AT&A was to receive commissions from both the vendor and purchaser under Clause 9 of the Agreement. Clause 13 further stated that :

"It is hereby declared that the agent is the agent for both the vendor and the purchaser / for the vendor only / for the purchaser only."

There was no deletion in this clause on the capacity of AT&A.

51. Whether an estate agent is an agent for either the vendor or the purchaser would really depend on the facts of each case : Cheng Kwok Fai v. Mok Yin Wah [1999] 2 HKLR 440; Happy Face Ltd v. Lau Sui King, HCA4110 of 1996 and Welltech Investment Ltd v. Easy Fair Industries Ltd [1996] 4 HKC 711. Although in this case, AT&A received commissions from both parties, in considering the capacity of AT&A, one has to consider its role at different stages of the negotiation leading to the signing of the Agreement. It was Mr Wong who asked Mr Lee to sell the Property. Mr Lee also informed Mr Wong of the intended inspection and he must have agreed to it. While Mr Leong was interested in seeing the Property, Mr Lee and Mr Andrew Chan were clearly acting as the agents of Mr Wong when they showed the Property to Mr Leong and in discussions with him after the inspection. Mr Lee and Mr Andrew Chan might well be acting for the plaintiff when Mr Leong asked them to present the offer to the defendant to buy the Property but this would not preclude them to be the defendant's agent before that event. While Mr Lee and Mr Andrew Chan were not aware that the yard was not part of the Property, Mr Wong clearly had the knowledge. I agree with Mr Chan that the defendant must at least be negligent in not drawing this fact to their attention so that they would not mislead the purchasers.

EXCLUSION OF LIABILITY

Clause 12 of Agreement

52. The defendant relied on Clause 12 of the Agreement to exclude its liability based on misrepresentation. The clause provides that :

"This Agreement supercedes all prior negotiations, representation, understanding and agreements of the parties hereto."

Misrepresentation Ordinance

53. Section 4 of the Misrepresentation Ordinance provides that :

"4. Avoidance of provision excluding liability for misrepresentation

If a contract contains a term which would exclude or restrict -

(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or

(b) any remedy available to another party to the contract by reason of such a misrepresentation,

that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 3(1) of the Control of Exemption Clauses Ordinance (Cap.71); and it is for the person claiming that the term satisfies that requirement to show that it does."

54. Section 3 of the Control of Exemption Clauses Ordinance provides that :

"3. The 'reasonableness' test

(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Ordinance and section 4 of the Misrepresentation Ordinance (Cap.284) is satisfied only if the court or arbitrator determines that the term was a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made."

55. In Cheng Kwok Fai, Godfrey J (as he then was) found that the exclusion clause was of no effect by reason of section 4 of the Misrepresentation Ordinance. In that case, he found that the vendors did nothing to mislead the purchaser who relied entirely on a sketch supplied to him by the agent whom both parties had instructed in the transaction. The agent gave the plaintiff a sketch of the flat produced from the agent's own records and not from the vendors. It recorded the area as being of a size larger than the one advertised. The judge found that the agent did not have actual or ostensible authority to supply the plaintiff with the sketch from the agent's own records.

56. In this case, Mr Wong knew that the yard was not included as part of the Property. He allowed the agents to show the Property to the plaintiff without advising the agent in advance of this fact. He should also be aware that the tenancy plan gave a misleading impression in that the area of Portion A shown on the plan extended right to the end of the Property. From the letter of Wai, it is clear that Mr Wong was aware that the tenancy plan might be misleading. There was no indication that the yard was not part of the Property. There was nothing which would put the plaintiff on enquiry as to the yard. In my view, in the circumstances clause 12 of the Agreement would have no effect because it failed to satisfy the reasonableness test under the Control of Exemption Clauses Ordinance. Mr Wong had done nothing to dispel any misunderstanding by the plaintiff in this matter.

MISREPRESENTATION PROVED

57. In my view, the plaintiff is entitled to rescind on the basis of misrepresentation under section 3 of the Misrepresentation Ordinance. It is not the defendant's case that the representation was made in circumstances that it had the grounds to believe and did believe that the facts represented were true.

DEFECT IN TITLE : THE YARD

Was the yard part of the Property sold?

58. Mr Edward Chan argued that the Property agreed to be sold was a matter of interpretation of the contract against the background matrix of facts. He submitted that the Property to be sold should be construed with reference to what was shown in the floor plans, the site visit and the tenancy plan. Within the four corners of the Agreement, he submitted that it is plain that the yard was intended to be included. The argument is like this. Clause 1 of the Agreement described the Property as the Ground Floor Shop, 566, Nathan Road, Kowloon. Clause 15A provided that :

"The Property shall be sold subject to the existing tenancy agreement, the particulars of which are : Tenant 'A' (see attachment 1), Tenant 'B' ...."

The attachment 1 is the tenancy agreement of Portion A. The tenancy agreement described Portion A as "Part A, Ground Floor Shop, No.566, Nathan Road, Kowloon (as shown on the plan and referred to as the premises)" (emphasis added). The plan was, of course, not included in the four pages of the tenancy agreement which was attached to the agreement. However, since the Agreement expressly provided that the Property was sold subject to the tenancy of Portion A, then the whole of the tenancy agreement including the plan could be looked at in order to ascertain what was the Property to be sold. Irrespective of whether the words "as shown in the plan" in the tenancy agreement should be read as part of the description of the Property let or merely for identification purposes, what was shown and identified in the tenancy plan was a shop with a straight boundary line along the scavenger lane and not the shop with the yard excluded.

This approach is fundamentally flawed

59. In my view, this approach is fundamentally flawed. Despite the reference to the plan in the tenancy agreement, the actual four page tenancy agreement attached to the Agreement did not include a plan. I agree with Ms Eu that Clause 15A only referred to the tenancy details which were relevant, it was not for the purpose of delineating the Property to be sold.

60. The tenancy agreement was not signed in the presence of lawyers. There is no evidence that it was prepared by lawyers. After the address of Portion A was described, the words that followed were "(as shown on the plan ...)". It is difficult to equate these words with the well-known words such as "more particularly delineated on the plan". Afterall the tenancy agreement itself is not a conveyancing document. In Sihombing and Wilkinson, Hong Kong Conveyancing, Law and Practice, Volume 1(A), para.213, the authors stated that :

"... Where property is assigned both by way of a verbal property description and reference to a plan, it is important that the draftsman makes it clear whether, in the case of inconsistency, the plan or the verbal description should prevail. If the plan is to prevail over any property description, the appropriate words used should be that the property is 'more particularly delineated ... on the plan annexed to assignment memorial number ...' : Eastwood v Ashton [1915] AC 900 (HL). If, however, the property description is to prevail, the appropriate wording should be that the plan is to be used 'for the purposes of identification only': Wigginton & Milner Ltd v Winster Engineering Ltd [1978] 1 WLR 1462."

Since the plan was not even attached to the Agreement, this is not a case of inconsistency between the written and plan description. Furthermore, if one look at the tenancy plan, the words "... for identification purposes only" were inserted. For the meaning of this phrase, Emmet on Title, 19th Ed., para.17.005 stated that :

" Plans often contain notes that they are for identification purposes only and not part of a contract, but it is doubtful whether such notes are effective. In Re Lindsay and Forder's Contract (1895) 72 L.T.832, a plan annexed to particulars of sale had indorsed thereon a note that 'this plan is simply prepared as a guide to intending purchasers, and its accuracy in regard to area, measurement, abuttals, or otherwise is in no way guaranteed', and it was held that, notwithstanding the note, it formed part of the contract, and that the purchaser was entitled to a conveyance of the whole of the land coloured on the plan. However, it has been suggested that a note to the effect that a plan attached to the contract was for reference only and that no guarantee of its accuracy was given would enable the vendor to correct the plan on proper evidence before completion (Re Sparrow and James' Contract (1902), reported at [1910] 2 Ch.60). But cp. Jackson v. Bishop (1979) 48 P. & C.R.57, CA."

At para.17.012, the author further stated that :

" However, further judicial consideration has now been given to the phrase. The effect is that the plan may be looked to for elucidation but not contradiction of the verbal description; Wigginton & Milner Ltd v. Winster Engineering Ltd [1978] 1 W.L.R.1462. In that case, the Court of Appeal reviewed the earlier authorities and it is now clear that the idea must be abandoned that any plan incorporated by such a phrase could at most be looked to for rough guidance as to the geographical situation of the land. On the contrary, such a plan can be taken as indicating precise boundaries whenever the parcels clause itself merely uses words of general description, i.e. insufficiently precise to be open to detailed contradiction (see per Bridge L.J., ibid., 1475). Nevertheless, this remains a weakening phrase in the sense that where the verbal description is sufficient, the plan must be treated as subordinate and is to be disregarded in the event of any inconsistency (cp. per Buckley L.J., ibid., at 1470 and at 1465-6)."

61. In this case, the defendant did not need to rely on the tenancy plan in order to sell the Property. Since it was selling the whole of the Property, which included both Portions A and B, there was no need to supply or attach the tenancy plan in order to delineated the Property to be sold. Clause 15A only referred to the tenancy's detail which were relevant. It was not for the purpose of delineating the Property to be sold. Indeed, it referred to two tenancy agreements. In relation to Portion B, only the name of the tenant, the rental and the deposits were specified. I accept Mr Andrew Chan's evidence that the inclusion of the tenancy agreement for Portion A was just to save some typing.

No defect in title

62. I found that the yard was not included as the Property to be sold to the defendant and the requisition on this issue was answered when the defendant's solicitors pointed out that the tenancy plan was not part of the Agreement and was expressly stated to be for identification purpose only.

INCONSISTENT APPROACH?

63. In my view, there is nothing inconsistent by holding that the tenancy plan could be relied upon as the basis of misrepresentation but not for the purpose of showing that the yard was intended to be included in the Property. In misrepresentation, the impression conveyed by the tenancy plan was that the Property included the yard which was situated at the rear portion of the Property. The plaintiff, however, is now relying on the tenancy plan by saying that it showed the actual property to be sold. In my view, one cannot elevate the tenancy plan to such a purpose. Afterall, by the time the actual tenancy agreement was supplied, the assignment plan was also supplied as well. The assignment plan clearly excluded the yard from the Property to be sold.

DEFECT IN TITLE : THE LEASE CONDITION

The victualler clause

64. The Crown Lease of the Property provided that :

"... the Leasee or any other person or persons shall not nor will during the continuance of this demise use exercise or follow in or upon the said premises or any part thereof the trade or business of a Brazier Slaughierman Soap-maker Sugar-baker Fellmonger Melter of tallow Oilman Butcher Distiller Victualler or Tavern-keeper Blacksmith Nightman Seavenger or any other noisy noisome or offensive trade or business whatever without the previous licence of His Majesty signified in writing by the Governor or other person duly authorized in that behalf ..." (emphasis added)

Existing case law

65. In Sunny Star Limited v. Au Mui, HCMP No.897 of 1995, Deputy Judge Yuen (as she then was) held that the business of sale of roast and preserved meat was within the prohibition of "Victualler" in the covenant. She stated that :

"In the context of a statute prohibiting the sale of 'victuals', it was held in R v Hodgkinson (1829) 10 B&C 74:-

'I think that the word victuals ..... comprises every thing which constitutes an ingredient in the food of man, and all articles which mixed with other constitute food.'

A 'victualler' is therefore a person who provides food.

It is not disputed that the Property in question was being used for roasting meat for provision as food.

Accordingly, the Property was being used in the trade of a victualler, contrary to the covenant in the Crown Lease."

She held that the food licence issued by the Urban Services Department was not a licence for carrying on the trade prohibited by this covenant.

66. In Hodgkinson, the issue was whether barm or yeast sold by the defendant was considered to be "victuals" within the provisions of an English statute which provided that :

"Nothing in that act shall extend to prohibit any persons from selling any printed papers licensed by authority, or any fish, fruit or victuals."

Lord Tenderden CJ held that barm or yeast might not perhaps be necessarily used in the making of bread, but it generally was used and he was of the opinion that it was within the exempting clause.

67. See also the discussion on this topic in Sihombing & Wilkinson, Vol. 1, para.II [109.5].

Dictionary meanings

68. The New Oxford Dictionary of English defines "victualler" as follows :

"1 (also licensed victualler) Brit. a person who is licensed to sell alcoholic liquor.

2 (dated) a person providing or selling food or other provisions.

■a ship providing supplies for troops or other ships.

- ORIGIN late Middle English: from Old French vitaill(i)er, from vitaille (see VICTUAL)."

The New Shorter Oxford English Dictionary defines "victualler" as follows :

"1 A supplier of victuals; spec. (a) a person whose business is the provision of food and drink; (b) = licensed victualler

2 spec. a A person who supplies, or undertakes to supply, an army with provisions; a sutler. b Orig., a person who undertook to victual a trading vessel in return for a share in the profits. Later, a person who supplies a ship or navy with stores.

3 A ship employed to carry stores for a fleet or for troops overseas."

The response to requisition

69. Wai in response to JSM's requisition on the clause stated that the Property had been used as a pizza restaurant for years prior to the present tenancy. There had never been any notice of objection on usage from the Government. There were also other restaurants and food and meals retails in the close vicinity of the Property. Wai told JSM that "your allegation of breach of the Government Lease is unreal and untrue". It further stated that whatever yardstick, ancient or modern, a Japanese sushi restaurant cannot possibly be regarded as noisome or offensive business. Earlier Ho had stated in its response to the requisition on 8 May 1998 that :

"... Indeed, this type of restrictive provision in a Government Lease is not uncommon in Hong Kong e.g. it appears in the Government Lease under which the famous Taikoo Shing Development (where you do find hundreds of restaurants including Japanese restaurants) is being held."

Wai in its letter of 14 May 1998 stated that JSM acted for the developer in the Taikoo Shing project and that they must be more familiar with its title documents than them.

70. Mr Pang of the defendant's present solicitors had produced the Crown Lease of properties in the vicinity of the Property and also that of Taikoo Shing. He visited the area of the Property and confirmed the existence of restaurants in the nearby properties. Mr Pang conducted a land search using the computer linkup system with the Land Registry and received the documents by fax from the Land Registry.

Defendant's argument

71. Ms Eu drew my attention that there was no comma separating each of the trade described in that clause. She submitted that in the context of this lease condition, "victualler" is used as an alternative to tavern keeper because of the word "or" in between these two words. For tavern, the main purpose is alcohol drinking and the consumption of food is incidental. Such trade may well be noisy. It is different from a restaurant where patrons go for the food rather than for alcoholic drinking. She submitted that a Japanese sushi restaurant is not within the meaning of the term "victualler".

Common sense approach

72. I think the absence of a comma after each of the trade is not a matter of significance. That was probably the style of legal writing at that time because when one looks at the Crown Lease, no comma was ever used in the whole of the document. It is not necessary for me to come to a conclusion whether the clause only intends to cover offensive and noisome trade. It is also not necessary for me to conclude whether a restaurant is a victualler or not. In my view, a commonsense approach must be adopted in construing this clause. Even if the word "victualler" extends to restaurants, it would be unthinkable that the Hong Kong Government would enforce this particular clause. In my view, this approach is consistent with the recent pronouncements from the Court of Final Appeal in cases like Jumbo King Ltd v. Faithful Properties Ltd [1999] 2 HKCFAR 279; Jumbo Gold Investment Ltd v. Leung Yuen Cheung [2000] 1 HKLRD 763; Mexon Holdings Ltd v. Silver Bay International Ltd [2000] 1 HKLRD 935.

73. Litton PJ in Jumbo Gold stated that :

"Counsel was unable to point to any precedent where the government has acted in such a harsh and capricious manner."

Bokhary PJ stated that :

"It is simply not in the nature of good government to harm innocent people unnecessarily like that. Accordingly it is safe to proceed on the basis that the Government would never do so."

Litton PJ in Mexon Holdings Ltd stated that :

"Whether it had raised sufficient doubts concerning the vendor's title such that it could reasonably have said that the title which the vendor was proposing to convey was not a good one."

"A good title does not mean a perfect title, free from every possible blemish. Whenever a question like this arises, it must be approached from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsenses, both intending to see the transaction through to completion in terms of their own bargain."

Hoffmann PJ in Jumbo King (at 726E) stated that :

"The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean ... But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean."

No defect in title

74. The facts of this case highlight the force of these statements. It would create havoc in our community if restaurant operators situated in properties with similar clauses are told that their businesses offend the restriction on victualler, a word which is not used in modern parlance. The dictionary described it as being "dated". I suspect, to most people, including lawyers, it is a word that one has to look up the dictionary to ascertain the meaning. The Property is situated in the heart of Mongkok with numerous restaurants and bars, the risk of the Government taking enforcement actions on such a clause is a fanciful one.

75. The restaurant had in fact obtained a restaurant licence from the former Provisional Urban Council ("the Council") and a full licence from the Food and Environmental Hygiene Department which took over the former functions of the Council. It is said that the Council was not part of the Government. The short answer is that at the time when the offensive trade clause was introduced, it could hardly be envisaged that the functions of Government would be discharged by so many different organisations in response to the needs of a contemporary society. On this issue, there is no defect in title and the requisition had been answered.

76. Mr Edward Chan objected to the production of documents by Mr Pang on the ground that they are not admissible. Section 26A of the Land Registration Ordinance makes specific provision for the admissibility of copy document registered in the Land Registry. He submitted that the defendant had not produced the certificate by the Land Registrar under section 26A(1)(b).

77. I accept the evidence of Mr Pang on how he obtained the documents. It is not necessary for the defendant to file any certified copies of the documents which Ms Eu, on behalf of the defendant, undertook to do, if so required by the court. These are documents which can be accessed by the public. With respect to Mr Edward Chan, his objection is a technical one and is unlikely to find favour in the context of this case.

PLAINTIFF ENTITLED TO RESCIND

78. In my view, the plaintiff was entitled to rescind the Agreement because of misrepresentation and it had properly rescinded the Agreement.

DEPOSIT

Plaintiff entitled to its return

79. The plaintiff is successful in its claim, it is entitled to the return of the deposit. As the deposit is now held in the hands of a stakeholder, it is the duty of the stakeholder to hand over the deposit to the vendor : Sihombing & Wilkinson, Vol. 1, para.VIII [1204], Rockeagle Ltd v. Alsop Wilkinson [1991] 3 WLR 573 per Farqusarson LJ at p.577.

Position if the defendant is successful

80. However, as the parties had addressed me on whether the whole of the deposit should be forfeited in the event that the defendant is successful, I will state briefly my views on this matter.

81. There is no provision for forfeiture of the deposit in the Agreement, however, it still can be forfeited according to the common law as indicated in cases such as Howe & Smith (1884) 27 Ch. D.89, where Fry LJ at p.101 held that :

" On the other hand, in Collins v. Stimson (2), Baron Pollock said : 'According to the law of vendor and purchaser the inference is that such a deposit is paid as a guarantee for the performance of the contract, and where the contract goes off by default of the purchaser, the vendor is entitled to retain the deposit.'

...

... The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also 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."

See Farrand on Contract and Conveyancing, 4th Ed., p.203.

Special circumstances

82. The deposit is 20% of the purchase price. In the absence of special circumstances, the vendor is not entitled to forfeit the deposit as it exceeds the conventional amount of 10% of the purchase price : Workers Trust & Merchants Bank Ltd v. Dojap Investment Ltd [1993] 2 WLR 702, at 706 and Silverpole Ltd v. China Pride Investment Ltd [1994] 2 HKC 52, at 57.

83. Ms Eu argued that there were special circumstances for requiring 20% deposit. In 1998, there had been a sharp fall in the property prices and there were very few buyers. This was a large commercial transaction and the evidence showed that there were only five potential buyers. The market was thus extremely small. The persons operating behind the plaintiff were experienced property dealers. Since they were willing to pay 20% deposit as earnest money, there was good indication that this was a reasonable deposit. Furthermore, the plaintiff was a shelf company and would not be good for damages or even legal cost in case of default. Mr Leong had admitted, in the defendant's application for security for costs against the plaintiff, that the shareholders of the plaintiff refused to put up security and the plaintiff had no assets, only liabilities. Even if the defendant succeeds in this action, it would not be able to get any costs from the plaintiff. On the other hand, the plaintiff can play the market with subsales. Since it is a shelf company, if the market turns against it, it can default and only runs the risk of losing the deposit. The defendant's property is, on the other hand, locked up at the time of completion. Further, its property provides the security for the deposit and the conveyancing cost for as long as the litigation lasts.

84. While these are valid arguments, I agree with Mr Edward Chan that if the defendant wishes to justify a 20% deposit by reason of special circumstances, the matter should be pleaded so that the plaintiff could respond to it by way of evidence. This had not been done in the present case and the matter was only raised in submission.

Relief against forfeiture

85. In Union Eagle Ltd v. Golden Achievement Ltd [1997] 1 HKC 173, Hoffmann PJ at p.180 stated that :

"So far as these retentions [i.e. retention of deposit or part payment of the purchase price] exceed a genuine pre-estimate of damage or a reasonable deposit, they will constitute a penalty which can be said to be essentially to provide security for payment of the full price. No objectionable uncertainty is created by the existence of a restitutionary form of relief against forfeiture, which gives the court a discretion to order repayment of all or part of the retained money."
(emphasis added)

86. In the circumstances of the case, if the defendant was successful, I would order only 10% of the deposit to be forfeited and the balance to be returned to the plaintiff.

DAMAGES

87. I will also briefly deal with the defendant's claim for damages. It consists of two parts, namely :

1. the difference between the contract price and the market price of the Property; and

2. the wasted conveyancing cost of $70,500.

Barnsley's Conveyancing Law & Practice, 4th Ed., p.654 stated that :

"A vendor is not entitled to recover in addition to damages his expenses incurred in connection with the abortive sale (e.g. legal fees). However as an alternative to suing for damages for loss of profit, he may elect to claim for wasted expenditure and recovery is not limited to post-contract expenses, but he cannot forfeit the deposit and also recover his expenses."

This approach is followed by Master Poon in Yeung Leung Wai Kwan v. Tsang Nui Tai [1999] 3 HKC 618. I agree and would have so ordered if the defendant was successful. The defendant had also abandoned its claim for slander on title.

LIEN

88. The plaintiff had registered the writ against the Property in respect of the deposit and wasted expenses, namely conveyancing costs of $49,765. Mr Edward Chan, at the beginning of the hearing, conceded that because the deposit was held by a stakeholder, the plaintiff was not entitled to a lien on the Property in respect of the deposit. However, despite this concession, the lis pendens has continued to be registered. The plaintiff is required to take steps to correct the situation.

RELIEF

89. In the circumstances, the plaintiff is entitled to the following relief :

1. A declaration that the plaintiff was entitled to rescind the Agreement on the basis of the defendant's misrepresentation.

2. A declaration that it had validly and effectively rescinded the Agreement.

3. A declaration that it is relieved from further obligations and performance of the Agreement.

4. A declaration that the defendant is not entitled to forfeit the HK$10,800,000.

5. A declaration that the plaintiff is entitled to the return of HK$10,800,000 with interest held by Messrs Francis K.W. Ho & Co. as stakeholder.

6. Damages in the sum of HK$49,765 being wasted conveyancing expenses.

7. A declaration that the plaintiff is entitled to an equitable lien on the Property for the payment of the sum of HK$49,765 together with costs and interest.

8. Interest at judgment rate on HK$49,765 from date of the issue of the writ to payment.

9. The plaintiff be at liberty to apply in the event that the plaintiff is required to pay to AT&A the commissions under the Agreement.

COSTS

90. The plaintiff is successful in its claim. It is entitled to costs nisi of this action and of the counterclaim. The defendant's counterclaim is dismissed.