Cheung Kung Leung and Another v. Chinachem Investmen T Co Ltd

HCA002738/1975

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION NO. 2738 OF 1975

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ACTION NO. 2739 OF 1975

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Coram: Li, J.

Date of Judgment: 3 December 1977

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JUDGMENT

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1. In these consolidated actions all the 26th plaintiffs are purchasers of one or more units of flats in a building designated to be the University Heights at 12 Babington Path of I.L. 8171 of which site the defendant is the developer and vendor. They all signed a sales and purchase agreement (hereinafter referred to as the 'agreements') the material terms of which are practically identical with the defendant on various dates sometime in 1970/71. They have all paid a deposit or down payment to the defendant. The plaintiffs' respective shares and units to be acquired and the amounts paid to the defendant are set out in the Statement of Claim in Action No. 2738 of 1975 and the Schedule attached to the Statement of Claim in Action No. 2739 of 1975. At the time when the agreements were signed the said building was in the preliminary stage of construction. For the purpose of these proceedings the material terms may be set out as follows:

2. On the 17th November 1971 the defendant first obtained the Building Authorities' consent to commence work on the spread footing of the lower block of the building. Consents to commence other stages of building work then followed. It is not necessary to cite them in detail. They are evident in Exhibit C. Suffice it to say that in the normal course of events the defendant would be required to complete the said building by 17th May 1973 under the provisions in Clause 3(1) subject to the maximum extensions which might be granted by the architect under Clause 3(4). By early June 1972 the foundation work for the lower block of the said building had been completed up to the first floor of the car park above it and some work had been done to form a retaining wall behind the upper block. In addition part of the foundation work of the upper block had been made. On the 18th June 1972 a landslip occurred in the area of Po Shan Road and Kotewall Road. As a result, tons of debris, rock and earth fell on the said site on which the said building was to be erected. Part of the site was 25 feet below the surface of the debris. Following this the defendant was barred from access to the said site to do anything until the 3rd November 1972 when the Building Authority wrote to the defendant's Architect in the following terms:

Clearance and demoliti on work so necessitated began in January 1973 after a series of correspondence and consultation between the defendant's architect and the Building Authority. In the meanwhile some boring work for soil test was done. It was not until June 1973 before the said site was cleared and reinstated to its original contour before the landslip. Between September 1973 and May 1975 a long series of soil tests and observation of ground water levels were undertaken on the said site by a firm of consultants employed by the defendant in order to satisfy the Building Authority as to safety requirements. In the process additional caisson walls were required to safeguard the access road and underpinnings required to secure the old foundation. As a result the renewed consent to resume building work was not given by the Building Authority until November 1976.

3. On the 19th August 1975 solicitors for the plaintiffs in Action No. 2379 wrote to the defendant in the following terms:

To this the defendant replied on the 20th August 1975 through its solicitors as follows:

"Your letter of the 19th instant to our clients, Chinachem Investment Co. Ltd. has been handed to us with instructions to reply thereto."

On the 18th September 1975 solicitors for the plaintiffs in Action No. 2738 of 1975 wrote to the defendant two letters the terms of which were identical save the names and figures:

"We are instructed by our said client to give you notice which we hereby do that our client will after the expiry of 14 days rescind the Sale and Purchase Agreements dated 29th May 1971 and 20th September 1971 pursuant to Clause 3(2) thereof. Our client will upon the rescission of the said Agreements demand from you repayment of all amount paid under the said Agreements together with interest at the rate of 1% as stated below:"

The defendant replied as follows:

"We have advised our clients that the agreement between our respective clients is discharged as a result of its frustration thereof and pursuant to Clause 22 of the agreement. We enclose herewith our clients' cheque for the sum of $20,850.00 being a refund of the deposit herein. Would you kindly acknowledge receipt."

On the 20th September 1975 the defendant through its solicitor also returned the deposits and down payments individually to each and every plaintiff in Action No. 2739 of 1975. The plaintiffs in Action No. 2738 of 1975 accepted payment without prejudice to their claim of interest under Clause 3(2) of the agreement. The plaintiffs in Action No. 2739 of 1975 held the cheques without prejudice to their claim for specific performance and interests under Clause 3(3) of the agreements.

4. The aforesaid facts are not in dispute and are supported by documentary evidence. By their Statement of Claim dated 7th November 1975 the plaintiffs in both actions found their claim on the terms of the agreements. They all claim for a declaration that the agreements have not been frustrated. The plaintiffs in Action No. 2738 of 1975 further claim interests due to them to be calculated in accordance with the provisions of Clause 3(2) of the agreements. The plaintiffs in Action No. 2379 of 1975 further claim specific performance of the agreements and for payment of interests to be calculated according to Clause 3(3) of the respective agreements. By their defence and counterclaim dated the 20th December 1975 the defendant pleads that as a result of the landslip in June 1972, the Building Authority had not, up to the date of the writ, renewed the consent to resume building work and by reason of this the agreements are frustrated and the defendant is discharged from performance. The defendant counterclaims for a declaration that the agreements have been frustrated and that the plaintiffs are not entitled to interests as claimed. In their Reply the plaintiffs allege that the defendant did not cause the necessary plans to be submitted to the Building Authority until August 1975 and/or July 1976 and as such there was no frustration and alternatively any frustration was self-induced. Perhaps I should add that in its original defence the defendant pleads the provisions in Clause 22 of the agreements and claims that in view of the unforeseen circumstances the defendant has the right to rescind the agreements to return the payments to the plaintiffs without interests and that the defendant did return such payments to the plaintiffs in September 1975. In the course of the opening of the defence case learned counsel for the defendant very properly abandoned this defence. As a result the only issue before me is whether the agreements have been frustrated in the circumstances. There is a subsidiary issue, in case I find that the agreements have not been frustrated, whether this is a proper case to order specific performance.

5. The doctrine of frustration in its application to the law of contracts has been subject matter for consideration by the highest judicial authorities in England. There is certainly no lack of guidance in principle. It is a question of applying the principle to the fact of a particular case. In the case of Hirji Mulji and Others v. Cheong Yue Steamship Company Limited (1926) A.C.497 it was held that a charterparty for a period of ten months as from the 1st March 1917 was frustrated on the ship being requisitioned before that date. After reviewing the previous authorities Lord Summer said at page 507:

"An event occurs, not contemplated by the parties and therefore not expressly dealt with in their contract, which, when it happens, frustrates their object. Evidently it is their common object that has to be frustrated, not merely the individual advantage which one party or the other might have gained from the contract. If so, what the law provides must be a common relief from this common disappointment and an immediate termination of the obligations as regards future performance. This is necessary, because otherwise the parties would be bound to a contract which is one that they did not really make. If it were not so, a doctrine designed to avert unintended burdens would operate to enable one party to profit by the event and to hold the other, if he so chose, to a new obligation."

A more obvious example is to be found in the case of Metropolitan Water Board v. Dick, Kerr and Company, Limited (1918) A.C.119. In that case it was held that a building contract to construct a reservoir within six years was frustrated by a notice given by Ministry of Munitions to require the contractors to cease work on their contract.

6. In his judgment at page 128 Lord Dunedin said:

"It is admitted that an interruption may be so long as to destroy the identity of the work or service, when resumed, with the work or service when interrupted. But quite apart from mere delay it seems to me that the action as to the plant prevents this contract ever being the same as it was. Express the effect by a clause. It the Water board had, when the contract was being settled, proposed a clause which allowed them at any time during the contract to take and sell off the whole plant, to interrupt the work for a period no longer than that for which the work has actually been interrupted, and then bound the contractor to furnish himself with new plant and recommence the work, does any one suppose that Dick, Kerr & Co. or any other contractor would have accepted such a clause? And the reason why they would not have accepted it would have been that the contract when resumed would be a contract under different conditions from those which existed when the contract was begun. It may be said that it is possible that plant may be cheaper after the war. But no one knows, and the contractor is not bound to submit to an aleatory bargain to which he was not agreed. It will also be kept in mind that the contract was a measure and value contract. The difference between the new contract and the old is quite as great as the difference between the two voyages in the case of Jackson v. Union Marine Insurance Co."

At page 137:

"The question is one of contract law, and the decision in each case depends on the ascertainment of the true meaning of the bargain between the parties. If the parties have provided by apt words in the contract for their mutual rights or liabilities, in the event of the contract works being stopped, or indefinitely hindered by the operation of a subsequent law and such provision is not contrary to public policy, then it would be the duty of any Court to give effect to such provision. If, on the other hand, the contract contains no provision for such a contingency as the interference of the Legislature, then the Court must be determine whether this contingency is of such a character that it can reasonably be implied to have been in the contemplation of the parties at the date when the contract was made. Care must always be taken not to imply a condition which would be inconsistent with the expressed intention of the parties."

7. On the other side of the scale is Davis Contractors Ltd. v. Fareham Urban District Council (1956) A.C.697. In that case it was held that an unexpected turn of events which rendered the contract more onerus than had been contemplated was not sufficient to frustrate a building contract. Lord Morton of Henryton at page 717 cited, with approval the following dictum of Morris L.J.:

"Though the basis or footing 'of the contract was removed in the limited sense that the anticipations of the parties were not realized, the facts found do not require an implication in the contract that it was to come to an end if those anticipations were not realized'. It is, I think, impossible to hold that a contract has been frustrated unless it can be said: 'As and from such and such a date, at latest, the contract ceased to bind the parties.'"

Lord Reid, having rejected the theory of implied terms and theory of "parties' contemplation" as basis for applying the doctrine of frustration said at page 720:

"It appears to me that frustration depends, at least in most cases, not on adding any implied term, but on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances when the contract was made. There is much authority for this view. In British Movietonews Ltd. v. London and District Cinemas Ltd. Viscount Simon said: 'If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point - not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation.' In Sir Lindsay Parkinson & Co. Ltd. v. Commissioners of Works Asquith L.J. said: 'In each case a delay or interruption was fundamental enough to transmute the job the contractor had undertaken into a job of a different kind, which the contract did not contemplate and to which it could not apply, although there was nothing in the express language of either contract to limit its operation in this way.' I need not multiply citations, but I might note a reference by Lord Cairns so long ago as 1876 to 'additional or varied work so peculiar, so unexpected, and so different from what any person reckoned or calculated upon' (Thorn v. London Corporation). On this view there is no need to consider what the parties thought or how they or reasonable men in their shoes would have dealt with the new situation if they had foreseen it. The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end."

The following passage in his judgment gives the true ratio of his decision when he said at page 724:

"In a contract of this kind the contractor undertakes to do the work for a definite sum and he takes the risk of the cost being greater or less than he expected. If delays occur through no one's fault that may be in the contemplation of the contract, and there may be provision for extra time being given: to that extent the other party takes the risk of delay. But he does not take the risk of the cost being increased by such delay. It may be that delay could be of a character so different from anything contemplated that the contract was at an end, but in this case, in my opinion, the most that could be said is that the delay was greater in degree than was to be expected. It was not caused by any new and unforeseeable factor or event: the job proved to be more onerous but it never became a job of a different kind from that contemplated in the contract."

Observing that the factor of delay is one of the instances of the circumstances which cause the principle of frustration being invoked Lord Radliffe said at page 727:

"the principle of frustration, the origin of which seems to lie in the development of commercial law, is seen to be a branch of a wider principle which forms part of the English law of contract as a whole. But, in my opinion, full weight ought to be given to the requirement that the parties 'must have made' their bargain on the particular footing. Frustration is not to be lightly invoked as the dissolvent of a contract."

On the question of delay he said at page 731:

"Two things seem to me to prevent the application of the principle of frustration to this case. One is that the cause of the delay was not any new state of things which the parties could not reasonably be thought to have foreseen. On the contrary, the possibility of enough labour and materials not being available was before their eyes and could have been the subject of special contractual stipulation. It was not made so. The other thing is that, though timely completion was no doubt important to both sides, it is not right to treat the possibility of delay as having the same significance for each. The owner draws up his conditions in detail, specifies the time within which he requires completion, protects himself both by a penalty clause for time exceeded and by calling for the deposit of a guarantee bond and offers a certain measure of security to a contractor by his escalator clause with regard to wages and prices. In the light of these conditions the contractor makes his tender, and the tender must necessarily take into account the margin of profit that he hopes to obtain upon his adventure and in that any appropriate allowance for the obvious risks of delay. To my mind, it is useless to pretend that the contractor is not at risk if delay does occur, even serious delay. And I think it a misuse of legal terms to call in frustration to get him out of his unfortunate predicament."

8. The case of Amalgamated Investment & Property Co. Ltd. v. John Walker & Sons Ltd. (1977) 1 W.L.R.164 has not added any new principle. However, learned counsel for the plaintiffs relies strongly on the dictum of Buckley L.J. at page 173 to substantiate his contention that whichever party takes the risk in the contract cannot invoke the principle of frustration to relieve that party of the risk taken in the contract. At page 173 Buckley L.J. said:

"The purchasers in the present case bought knowing that they would have to obtain planning permission in order to develop the property. The effect of listing under the sections of the Act to which I have referred makes the obtaining of planning permission, it may be, more difficult, and it may also make it a longer and more complicated process. But still, in essence, the position is that the would-be developer has to obtain the appropriate planning permissions qone form of permission being the 'listed building permission.' The purchasers, when they entered into the contract, must obviously be taken to have known that they would need to get planning permission. They must also, in my judgment, be taken to have known that there was the risk, although they may not have regarded it as a substantial risk, that the building might at some time be listed, and that their chances of obtaining planning permission might possibly be adversely affected to some extent by that, or at any rate their chances of obtaining speedy planning permission. But, in my judgment, this is a risk of a kind which every purchaser should be regarded as knowing that he is subject to when he enters into his contract of purchase. It is a risk which I think the purchaser must carry, and any loss that may result from the maturing of that risk is a loss which must lie where it falls.

9. If I understand the aforesaid authorities properly the whole issue depends on the construction of the contract between the parties. Whatever theory one applies is only a difference in words. One must look at the occurrence of the event which is alleged to have frustrated the contract and find whether provisions had been made in the said contract for such eventuality. If it had then the rights and liabilities of the parties will be determined by the provisions in the contract. If not, then one would have to find whether the said event was foreseeable by the parties at the time of the contract. If the said event is fore-seeable then the consequences of it should fall on the party who took the risk without making provisions for it in the contract. If it is not foreseeable one would have to find whether the occurrence of the event has caused the performance of the original contract such a change in character so that it becomes the performance of a different contract. When this happens the Court will hold that the contract has been frustrated.

10. In the course of the hearing in this case learned counsel for all parties concerned have placed before me certain formal admissions. They are entitled "Formal Admissions" and are in the following terms:

11. In addition the plaintiffs call two officers of the Building Authority. The defendant's director Wong Tak Fai also gives evidence. It is not necessary to refer to the evidence in detail. Suffice it to say that I find as a fact on their evidence that as a result of the landslip the Building Authority was in no position to approve whatever plan which might render the site safe to build on until mid 1975. So much depended on the soil test and the observation of the ground water levels. With ideas of rendering the site safe for building purposes the defendant had to undertake a great deal more of work than what was originally required such as underpinning the foundation of the lower block and sinking caisson columns to secure the retaining wall and the access road. The defendant's business is that of a property developer who operates on the basis of developing building sites and complete the whole transaction on sales within a matter of four to five years for each project. In this day and age of inflation any prolonged delay invariably result in high costs and expenses for each project. It is a fact however, that the defendant retained all the deposit and down payment of the plaintiffs who paid for the units in the said buildings up to August/September 1975. I also find as a fact that soon after the landslip the defendant had the opportunity to rescind the on tract and refund the deposits and down payments to the plaintiffs without interests by virtue of Clause 22 of the agreements.

12. I now come to the nature and terms of the agreements. They are all in the same material terms. It is not necessary for me to decide whether they are agreements simply for the sale of land. If it were necessary I am of opinion that they are not. They require something more from the defendant. Having regard to the work to be done within a short period of time before the land become sellable it is idle to suggest that the plaintiffs would be satisfied with each of them being assigned undivided shares in a fraction of the building site without a building part of which each of the plaintiffs could be entitled to have exclusive use. The agreements should be construed on the basis that the principle of frustration is applicable without going into the deep water of the Cricklewood case. As to the terms of the agreements I find that Clause 3 provides for all events set out therein subject to a time limit of their effects. Time is of the essence of the contract under Clause 12 of the agreements. Had these two clauses been all which govern the termination or continuance of the agreements I would have found that the agreements had been frustrated by the landslip - the event. It has been admitted that the landslip was an unforeseeable natural disaster. It is also admitted that as a result of the landslip it was not possible for the defendant to complete the said building before the 1st October 1976. As a result of the landslip the combined effect of Clause 3 and Clause 12 of the agreements is that the defendant is bound to pay interests to the plaintiffs on their deposits and down payments at the rate of 1% per month from the 17th May 1974 to the 1st October 1976. This is quite different from the original terms of the original agreements. Up to this point I would say that none of the parties apply their respective minds to this and on which they were never ad idem. However I have also to consider the terms in Clause 22 which is set out at the earlier part of this judgment. In my opinion this clause provides for circumstances which render performance of the agreements impossible. When these happened the defendant had an opportunity to rescind the agreements forthwith by returning the purchase price already paid. Thus the parties had applied their minds to unforeseen events which might cause an impossibility of performance subject to certain conditions. That being so, even the unforeseen and impossibility have been provided for in the agreements. The parties must abide by the terms of contract for its determination. The words in Clause 22 are clear. When the landslip occurred and the performance of the original agreements rendered impossible the defendant had its chance to rescind them forthwith. In order to rescind the agreements the defendant must at once refund to the plaintiffs all instalments of purchase price already paid to-date. This is so particularly where time is of essence of the contract. In the absence of any provision in Clause 22 for any extension of time during which the defendant could rescind the agreements and refund the purchase price I come to the conclusion that the defendant could validly rescind the agreements only soon after the unforeseen event occurred viz: the landslip or within a reasonable time of its realisation of the impossibility of performance within the stipulated time. No one can suggest that three and a half years' time is reasonable. If there is any doubt as to how the word 'forthwith' should be construed I observe that all the agreements are in standard form drafted by solicitors for the defendant.

13. Applying the principle obtained, and as I understand them, from the cited authorities I am of opinion that since there are clear provisions for the rescission of the agreements in the event of unforeseen circumstances the principle of frustration does not apply. I repeat the word of Lord Reid in Davis Contractors Ltd. v. Fareham Urban District Council when he said:

14. In the words of Lord Dunedin at page 137 of the Metropolitan Water Board case:

"The question is one of contract law, and the decision in each case depends on the ascertainment of the true meaning of the bargain between the parties. If the parties have provided by apt words in the contract for their mutual rights or liabilities, in the event of the contract works being stopped, or indefinitely hindered by the operation of a subsequent law and such provision is not contrary to public policy, then it would be the duty of any Court to give effect to such provision."

15. In my construction of the agreements the unforeseen and the impossibility have been provided for. The parties must abide by the terms. There is no room for the application of the principle of frustration. If the defendant can rely on that principle then the Court must ignore the provisions in Clause 22 and grant the defendant extra relief without complying with the conditions stipulated in the said clause 22. That indeed is asking this Court to exercise an absolving power of which the Court has none. For this reason I come to the conclusion that none of the agreements has been frustrated. The parties must be left to their remedies in accordance with the terms of the agreements. Having failed to act on the terms of the agreement it is too late for the defendant to avoid liability of the full terms of the agreements.

16. There remains the only question whether I may properly order specific performance. In the course of the hearing the defendant further admits that:

17. It is true that the Court will not order specific performance of a contract which requires the supervision of the Court - particularly in respect of personal performance. It is also true according to the evidence of the plaintiffs' witness Wilkinson that the grades of finishing vary considerably from building to building. In view of the admissions, however, I am satisfied that the finish of the various flats would not be of a lower standard than that as advertised in the first instance when the agreements were signed. They are all to be built by the same contractor which is a wholly owned subsidiary of the defendant. As such the performance would not require supervision of the Court. In Document 243, the defendant has advertised no less than over 100 flats other than those committed to the plaintiffs. I cannot imagine that the defendant would build flats of a different finish in the same block or to lower the standard of other flats in order to spite the plaintiffs. I also bear in mind that the agreements, though partly building contracts in nature, are also agreements of sales of land. For these reasons I am of opinion that specific performance is a proper order. The question of interests payable on the purchase price paid in advance may be assessed by the Registrar. I direct that they be so assessed.

18. In passing I like to observe that, from the moral point of view, it is as unjust that the defendant should have to deliver the units of flats to the plaintiffs plus interests for the down payments for all these years - bearing in mind the extra expenses the defendant has to incur through no fault of its own - as it is for the defendant to be completely absolved from the agreements after hanging on to the moneys all these years and had the use of them. However, the parties insisted on litigation. Hardship does not come into the picture in such cases as these. I have to adjudicate according to the facts and law.

19. In conclusion I find for the plaintiffs in Action 2738 of 1975 in respect of paragraphs (a), (b) and (c) of their prayer in the Statement of Claim. I find also for the plaintiffs in Action No. 2739 of 1975 in respect of paragraphs (a), (b), (d) and (e) of their prayer in the Statement of Claim. The counterclaim of the defendant in both actions be dismissed.

Representation: