Wan Moon Ling Wandy v. Sino Gain Investment Ltd.

HCMP003248/1996

1996, No.MP 3248

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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Coram: Hon Mrs Justice Le Pichon in Court

Date of hearing: 10 March 1997 (last written submissions tendered on 14 March 1997)

Date of handing down judgment: 21 March 1997

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J U D G M E N T

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1. This vendor and purchaser summons was taken out by the Purchaser as Plaintiff against the Vendor as Defendant arising out of an Agreement dated 24 May 1996 (the Agreement") for the sale and purchase of the premises situated on Lot No.794 in DD226, Sai Kung, New Territories ("the Property") for $5.5 million.

2. The Plaintiff sought declarations (1) that requisitions and objections on title raised by the Plaintiff had not been sufficiently answered by the Vendor, (2) that the Plaintiff was not precluded by Clause 21(a) of the Agreement from making or raising its objection and requisition in respect of illegal structures, (3)that a good title to the Property had not been shown, (4) that Condition 10 contained in Part A of the Second Schedule to the Conveyancing and Property Ordinance ("Condition 10") incorporated by reference into the Agreement was not in essence a provision for forfeiture of deposit, and (5) that the sum of $450,000 paid to the Vendor on 24 May 1996 was in essence an instalment payment of the balance of the purchase money and as such was not subject to forfeiture. The Plaintiff also sought the repayment of all moneys paid to the Defendant with interest and in the alternative the repayment of the sum of $450,000 with interest and incidental expenses.

3. Two issues arise : one relates to the requisition raised concerning illegal structures and the other relates to the forfeiture of the deposit.

The requisition

4. Three days prior to completion, the Purchaser's solicitors wrote asserting that there was an illegal structure outside the kitchen area of the Property to be sold. This objection arose from "adverse comments" contained in a valuation report prepared by valuers appointed by the prospective mortgagee to the effect that there was a re-inforced concrete construction at the rear of the house which appeared to the valuer to be "enauthorised in nature" and was disregarded for the purposes of the valuation. The requisition was not made by reference to any discrepancy between any plans filed with the District Land Office and the actual condition of the Property. Rather, it was a bald assertion made by the Purchaser, founded on nothing more than the observations of a valuer whose mandate was merely to value the Property rather to conduct a survey and where the basis upon which those unsolicited observations were made were not stated. In these circumstances, there does not appear to be any proper foundation for raising the requisition. Moreover, the requisition was not raised timeously : it has to be raised within a reasonable time before the completion date or within the time prescribed in the Formal Agreement : see Chan Chik Sum v. Great Pearl Industries Civ.App.No.181 of 1996 [1997] HLRLD at B46 applying Tread East Ltd. v. Hillier Development Ltd. [1993] HKC 285.

5. Faced with these two seemingly insuperable hurdles, counsel for the Purchaser abandoned the requisition issue very early on and conceded that the summons should be heard on the basis that the Purchaser had been in default in not completing the sale and purchase on the date stipulated for completion.

6. The only issue then left for argument was the amount which the Vendor was entitled to forfeit upon the Purchaser's failure to complete. Before dealing with the forfeiture issue, it is to be noted that the forfeiture point only became a live issue when the Plaintiff realised that the requisition issue was doomed to fail. In fact, the issue of forfeiture of the deposit hardly featured in the Plaintiff's skeleton submission : there was but the briefest reference to it and nothing that could be described as an outline of the argument. Not unnaturally, the Defendant's skeleton submission also only focused on the requisition issue. As a result, several relevant authorities were not referred to at the hearing.

Forfeiture of the deposit

7. The sequence of events and the material provisions are set out below. As is almost invariably the practice in Hong Kong, the parties entered into a provisional agreement which provided for a formal agreement to be entered into subsequently.

8. The Provisional Agreement

9. On 4 May 1996, the Plaintiff entered into a Provisional Agreement with the Defendant to purchase the Property. Clause 5 of the Provisional Agreement provided for payment as follows :

5A On the signing of this agreement, a provisional deposit shall be paid immediately in the sum of Hong Kong dollars one hundred thousand only (HK$100,000.00).

5B On or before 24 May 1995, a last/further deposit shall be paid to the Vendor's solicitors' firm (HK$450,000.00).

5C On or before 8 July 1995, the balance of the purchase price shall be paid to the Vendor's solicitors' firm (HK$4,950,000.00).

10. The Agreement

11. The Agreement was entered into on 24 May 1996. Clause 2 of the Agreement provided that the purchase price was payable in the manner set out in Part III of the First Schedule which provided as follows :

Clause 4 provided that time should be of the essence of the Agreement. Clause 16 incorporated into the Agreement the conditions on the part of the Vendor and the Purchaser set out in Part A of the Second Schedule to the Conveyancing and Property Ordinance. Condition 10 reads :

"10. FAILURE OF THE PURCHASER

If the purchaser shall fail to comply with any of the terms and conditions of the agreement the deposit money shall be absolutely forfeited as and for liquidated damages (and not as a penalty) to the vendor who may (without being obliged to tender an assignment to the purchaser) rescind the agreement and either retain the property the subject of the agreement or any part or parts thereof or resell the same, either as a whole or in lots, and either by public auction or by private contract, or partly by the one and partly by the other, and subject to such conditions and stipulations as to title or otherwise as the vendor may think fit. Any deficiency arising from such resale and all expenses attending the same or any attempted resale shall be made good and paid by the purchaser as and for liquidated damages, and any increase in price realised by any such resale shall belong to the vendor. This clause shall not preclude or be deemed to preclude the vendor from taking other steps or remedies to enforce the vendor's rights under the agreement or otherwise..."

12. Clause 17 then provided as follows :

This Agreement supersedes all previous agreements, whether oral or in writing, entered into by the parties hereto or their agents.

13. Counsel for the Plaintiff submitted that only a genuine deposit is forfeitable where a purchaser defaults. It was submitted that the $100,000 paid upon the signing of the Provisional Agreement was in truth an earnest. It represented 1.8% of the purchase price and as the Provisional Agreement was binding, that sum was paid to guarantee the Purchaser's performance. Thus it was argued that the payment made on the signing of the Agreement could not also be a deposit. In the alternative, it was submitted that if the court were to take the view that the further payment made on the signing of the Agreement was a deposit, forfeiture was only exercisable under Condition 10 which was incorporated by reference under Clause 16 of the Agreement. Because Condition 10 provided for the deposit to be absolutely forfeited "as and for liquidated damages (and not as a penalty)", that further sum could not be a true deposit. The court was invited to hold that Condition 10 being internally inconsistent could not constitute a proper basis for forfeiting the $450,000. Counsel for the Plaintiff relied principally on Dawson Enterprises Ltd. v. Talisteam Ltd. [1994] 2 HKC 327, where it was held (at p.340D) that :

"A deposit must represent reasonable earnest money in all the circumstances. Liquidated damages must represent a genuine pre-estimate of loss. If either fails to pass the test, it will constitute a penalty which the courts may enforce."

Reference was also made to the Law Society's Circular 295/94 (PA) issued on 26 September 1994 urging caution in incorporating Condition 10 as a term of the contract following the Dawson decision in which Condition 10 was described as "a trap for the unwary".

14. The points raised by counsel for the Plaintiff are not novel : as will become apparent, similar arguments have in fact been deployed, unsuccessfully, in earlier cases including two recent decisions.

15. During the course of the hearing, when the matter was put to him, counsel for the Plaintiff assured the court (apparently in error) that the only relevant case since Dawson is China Pride Investments Ltd. v. Silver Pole Ltd. [1994] 2 HKC 341. After the conclusion of the hearing, counsel for the Defendant submitted two authorities for the Court's consideration namely, Cheer King Investments Ltd. v. Rich Glory Investment Ltd. [1995] 1 HKC 663 and Union Eagle Ltd. v. Golden Achievement Ltd. [1995] 2 HKC 225. Both were decided by Cheung J. and directly addressed the issue now raised. As a result, both counsel tendered further written submissions to the Court on 14 March 1997.

16. Surprisingly, it would not appear that either counsel was aware that Union Eagle went on appeal although the decision of the Court of Appeal is reported in [1996] 1 HKC 349. Nor were they aware that on 3 February 1997, some five weeks prior to the present hearing, the Privy Council rendered its judgment in Union Eagle : Privy Council Appeal No.15 of 1996.

17. Suffice to say that had these matters been unearthed prior to the hearing, the hearing might well not have been necessary and court time could have been saved. But that was not to be. Further, it should be mentioned that the Provisional Agreement upon which counsel for the Plaintiff placed considerable reliance is a document in Chinese. Yet no English translation of this was made available either at the hearing (which was conducted in English) or at the time subsequent written submissions were tendered to the Court. Where, as here, the proceedings are conducted in English, it is incumbent on the party who seeks to rely on a document written in Chinese to provide the appropriate translation. So much for the unsatisfactory manner in which this case has proceeded. I now turn to the legal submissions.

18. As I understand it, the first submission is that where, as in the present case, two sums are payable, the second cannot be a genuine deposit and must be an instalment of the purchase price. But this precise point arose in Union Eagle (at p.243D) and was rejected. In that case, two sums were paid by way of deposit - HK$100,000 being the initial deposit and the sum of HK$320,000 being the further deposit. Upon the purchaser's default, the vendor was entitled to forfeit both sums which together constituted the deposit.

19. There is no principle of law to the effect that a genuine deposit may not be effected by more than one payment. Tang Wai-chee v. Aik San Realty Ltd. 1978 No.3425, Ng Chek Kok v. Kin Wai Ming [1992] 1 HKLR 5 and Cheer King Investments Ltd. v. Rich Glory International Ltd. [1995] 1 HKC 663 are other instances where a deposit was constituted by two payments - an initial deposit and a further deposit.

20. InMayson v. Clouet [1924] AC 980 the Privy Council approved the decision in Howe v. Smith (1884) 27 Ch.D.89 where it was held that a payment may be a true deposit although it served a dual function : in that case it was paid as deposit as well as part-payment of the purchase money. Where money is paid both in part-payment and as a deposit which is frequent, it is a question of fact whether the payment is to secure performance of the contractual obligations and on default in such performance the vendor is entitled to forfeit it : see the judgment of Mr Commissioner Penlington in Tang Wai-chee v. Aik San Realty Ltd. 1978 No.3425 at pp.8-9 where the sum of $3,000 which was paid on signing the "instructions for sale" was incorporated into the sum of $119,190 paid on the signing of the formal agreement. It was held that that sum (of $119,190) which included the $3,000 was a deposit to secure performance of the contract.

21. It is thus a question of fact whether the second payment was in truth a deposit. When one looks at the language of the Provisional Agreement, the common denominator of the description of the two payments is the word "deposit". Each is qualified by a prefix : in the translation made available by the parties on 20 March 1997, the first is qualified by the word "preliminary". As to the second payment, the parties cannot agree on a translation of the expression???????. According to the Plaintiff, it should be translated as "the last deposit" and according to the Defendant, as "further deposit". Whichever is the more appropriate translation, the clear connotation of the term in Chinese ????? is that it represents the bulk of the deposit. In the Agreement itself, the first payment was described as an initial deposit and the second payment was described as "further deposit and part-payment of purchase money". The Agreement, like the formal agreement in China Pride, was expressed to and did supersede the Provisional Agreement : see Clause 17 of the Agreement.

22. That the parties intended both payments to constitute the deposit derives support from Clause 22(a) of the Agreement which reads as follows :

"The parties hereto agree that the deposit (save the initial deposit which has been paid by the Purchaser to the Vendor direct) payable on the signing hereof shall be paid to the Vendor." (emphasis added)

It is worth noting that even the Purchaser's solicitors, when forwarding the second payment, described it as being "the further deposit for your further action". See Richard Tai's letter dated 24 May 1996.

23. In my judgment, both payments were intended by the parties to constitute a deposit to secure or guarantee performance of the contract by the Plaintiff. Counsel for the Plaintiff submitted that the Provisional Agreement was not expressed to be "subject to contract" and as such was binding without any need for the parties to enter into a formal agreement. Be that as it may, by entering into the Agreement, both parties undertook mutual obligations which were more extensive than that contained in the Provisional Agreement which the Agreement superseded. The contract, the performance of which the deposit was meant to guarantee, is the Agreement rather than the Provisional Agreement which has been superseded.

24. The two payments taken together constitute 10% of the purchase price which is the conventional percentage and wholly unexceptional. In China Pride, Godfrey JA held that the court will uphold provisions for the forfeiture of a deposit, inter alia, where it is shown that the deposit did not exceed a conventional percentage of the purchase price even if it in no way represents a genuine pre-estimate of the vendor's loss, stating that while this is anomalous, it is the law : see China Pride [1994] 2 HKC at 358F.

25. I now turn to consider the argument based on Condition 10. As noted above, this point also arose in Union Eagle where Cheung J. maintained his earlier view (expressed in Cheer King) that in respect of the 10% deposit in the forfeiture clause, that remains forfeitable even if there is no evidence to show that it is a genuine pre-estimate of loss, distinguishing Dawson. The forfeiture clause in both Cheer King and Union Eagle was modelled on Condition 10 and contained the phrase "as and for liquidated damages (and not as a penalty)". Cheung J. based his decision on the Privy Council decision of Workers Trust & Merchant Bank Ltd. v. Dojap Investment Ltd. [1993] AC 573 at 578F, China Pride [1994] 2 HKC at 358F and Ng Chek Kok v. Kin Wai Ming [1992] 1 HKLR 5, 16-17.

26. Cheung J. 's decision has been upheld both by the Court of Appeal (by a majority) and by the Privy Council. In the Court of Appeal, Litton V.-P. held (at 357E) that :

"The judge rightly referred to this as a conventional sum, the forfeiture of which has long been held by the court to be justified in the event of breach on the part of the purchaser."

27. In the Privy Council, Lord Hoffman who delivered the judgment of the court dismissed the "liquidated damages" point in the following terms :

"Mr Lyndon-Stanford Q.C. 's third point was that the purchaser was in any event entitled to the return of his deposit because it was not a genuine pre-estimate of damage. He accepted that, in the normal case of a reasonable deposit, no inquiry is made as to whether it is a pre-estimate of damage or not: Howe v. Smith (1884) 27 Ch.D.89; Workers Trust & Merchant Bank Ltd v. Dojap Investments Ltd [1993] A.C.573. But he said that this deposit was not franked under that rule because clause 12 described it 'as and for liquidated damages (and not a penalty)'. Their Lordships do not think that these words deprived the deposit of its character as a deposit, an earnest of performance, which was liable to forfeiture on rescission." (emphasis added)

28. It follows that the Plaintiff's submission that the words "as and for liquidated damages (and not a penalty)" is fatal to a forfeiture of that sum as a deposit is wholly misconceived.

Conclusion

29. The Plaintiff is not entitled to any of the relief sought. The Originating Summons is dismissed and I make an order nisi for costs in favour of the Defendant.

Representation:

Mr Jeremy Cheung, inst'd by M/s Richard Tai & Co., for the Plaintiff

Mr Kenny Lin, inst'd by M/s Joseph Chu, C.P. Cheung & Co., for the Defendant