Ni Tiee Bor Robert and Another v. Golden Crane Industries Ltd.

HCMP004407/1998

HCMP 4407/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4407 OF 1998

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Coram: Recorder Edward Chan, SC in Court

Dates of Hearing: 7 - 10 and 13 March 2000

Date of Judgment: 21 March 2000

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J U D G M E N T

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1. This matter arose out of the sale and purchase of the property known as House 37, Windsor Park Phase II together with the car ports and also the garden space appurtenant thereto (herein after called "the property"). The Plaintiffs were the purchasers and the Defendant was the vendor. The Defendant was in fact a company wholly owned by Mr Luk Siu Kai and his wife. The Plaintiffs' claim was for the recovery of the deposits and also for damages after the abortive sale and purchase of this property.

2. In April 1997 the Defendant bought the property. After the purchase of the property, the Defendant made various alterations to the property without any consent or approval of the Building Authority. These alternations were :

(1) The kitchen on the ground floor was extended to outside the external wall of the house with additional enclosure walls and roof. In effect, this would mean that a new structure was built to be used as the kitchen.

(2) The internal side wall of the original kitchen was removed and the original kitchen area was converted into part of the dining area.

(3) The full height glazing of the living room was extended into the garden area with additional structural ceiling cover.

(4) The passageway to the master bedroom on the first floor was extended towards the garden with a structural floor slab in line with the glazing on the ground floor.

(5) The semi-circular balcony of the second bedroom on the first floor was enclosed and was roofed over so that the balcony would form part of the second bed room.

(6) The glazing and the external walls of the master bedroom and the 3rd bedroom were extended out to the flat roof of the first floor.

(7) The bathroom of the master bedroom was relocated.

(8) The flat roof of the car ports on the ground floor was demolished and in place thereof a sloping glazing cover was constructed above the car ports spanning from the fence wall to the external wall of the house.

3. The Defendant let the property for a short period of time in early 1998. In May 1998 the property became vacant and the Defendant decided to sell the property. Mr Luk of the Defendant placed the property for sale with various agents, and the Midland Realty (Shatin) Limited ("Midland") was one of them. Mr Luk was aware that because of the unauthorised alterations to the property, unless he would ensure that the purchaser was aware of the alternations and their possible illegality and would still agree to purchase the property subject to such alterations, the purchaser may make use of such alterations as an excuse to back out from the transaction. Accordingly when he approached Midland to put the property up for sale in the market, he told them in general terms that there were alterations to his property but he did not tell them specifically of the 8 alterations he made to the property. He told them to find him a purchaser who would accept the property with the alterations. The agent he spoke to in Midland told him that it would be usual for the parties to sign a side agreement on the acceptance of the illegal structures and alterations by the purchaser instead of recording the same in the agreement they signed lest the purchaser would have difficulties in raising mortgage loan if provisions relating to the acceptance of illegal structures should appear in the agreement. Mr Luk informed the agent that he was prepared to sign the side agreement and indeed he would expect that such side agreement would be signed if a deal were made.

4. Initially the Defendant set the sale price of the property at $20 million. That price appeared to be too high. There was no response. After some time, the Defendant lowered the asking price to $16 million but still there was no offer to purchase the property. Eventually Mr Luk of the Defendant told the agent that he was prepared to accept a price of $14 million.

5. In May 1998, the Plaintiffs were looking for a residential property. Mr Ni got in touch with Midland and on one Sunday in May 1998, he was shown a number of properties. He was not impressed by any of them. Then Mr Lau of Midland asked him if he was interested in looking at one property, the asking price of which was beyond his budget. He indicated interest in seeing the property. This was in fact the subject property. He was not given any plan of the property as this was an unscheduled visit. He was shown the property and was led to the first floor. He was told of the extension to the master bedroom and also the 3rd bedroom. He thought that these extensions were merely extension of the floor into the flat roof outside. He was also told of the enclosure and the roof over of the balcony of the 2nd bedroom. He was also aware of the extension to the passage way thinking that it, too, was an extension into a flat roof at the front part of the house. He did not consider that alterations would cause serious problems because he thought that they could be reinstated easily if the Government should raise any objection. He was also aware that the glass panel cover to the car port area was not the original design but was subsequently put in. However he was not aware of any alteration at the ground floor of the house. His overall impression was that the house was nice with the alterations. As the house was out of his budget, there was no follow up action. He did not ask for the plan to the house because he was quite satisfied with the explanation by the agents of Midland who led him to view the property.

6. On 20 July 1998, Mr Ni received a call from Mr Lau of Midland telling him that the owner of the property was prepared to accept the highest offer. He was told to view the property again and was told to bring along a cheque of $500,000.00 for the deposit. He was interested in buying the property for $14 million. He went to see the property again but on this occasion, he was not told anything about any unauthorized structures. He was asked by Mr Pun, another agent of Midland, to sign the provisional sale and purchase agreement and also a side agreement prepared by Midland. He did not think that the side agreement would post any problems because he was aware of the extensions at the time of his last visit. To him it probably would not matter whether the provisions in the side agreement were to be set out in separate document or were to be included in the provisional agreement as he did not require any mortgage to finance his purchase and did not intend to do so.

7. On 20 July 1998, Mr Luk received a phone call from Mr Pun or Mr Tso of Midland. He was told that a purchaser was prepared to offer the price of $14 million and had signed also a side agreement. He indicated that he was prepared to sell the property at that price. Mr Pun and Mr Tso of Midland then came to meet him and asked him to sign the provisional sale and purchase agreement and also the side agreement. The terms of the provisional agreement were agreeable and Mr Luk signed the agreement and received a preliminary deposit of $500,000.00. He was also given the side agreement to sign. The terms of the side agreement had not been previously shown to or agreed by him, but he was happy to sign it. After he signed both agreements, he was told by Mr Tso that he could keep the side agreement for himself and that it was only necessary to give the provisional sale and purchase agreement to his solicitors for further action. In accordance with the advice of Mr Tso, when he instructed his solicitors to act for him he simply passed to the solicitors the provisional sale and purchase agreement. He waited to sign the formal sale and purchase agreement to receive the balance of the deposit. This happened on 3 August 1998. He agreed that his solicitors had explained to him the contents of the formal agreement although he himself had not paid much attention to its terms.

8. On the part of the purchasers, it would appear that the solicitors acting for the purchasers received a copy of the provisional sale and purchase agreement by fax from Midland. However the side agreement had not been made available to the solicitors. The negotiation of the terms of the formal sale and purchase agreement was done between the solicitors with the purchasers' solicitors writing to the vendor's solicitors on 22 July 1998 enclosing a copy of the provisional sale and purchase agreement and asking for a draft of the formal sale and purchase agreement. After the terms of the formal sale and purchase agreement had been agreed between the vendor's and the purchasers' solicitors, in accordance with the usual conveyancing practice, it was the purchasers who would sign the agreement first. On or about 3 August 1998, Mr Ni went to his solicitors' firm to sign the agreement. On this occasion, he also brought along his copy of the provisional sale and purchase agreement and the side agreement and gave them to Mr Jackson Kwok, a clerk of his solicitors. By then the terms of the formal agreement had already been agreed and the agreement was ready for Mr Ni's execution. Mr Kwok was surprised by the existence of the side agreement and there was a discussion between Mr Kwok and Mr Ni. Mr Kwok pointed out to Mr Ni that since there was a clause in the formal sale and purchase agreement superseding all previous agreements, the side agreement could be ignored. The conclusion reached in the meeting was that Mr Ni would sign the formal sale and purchase agreement and paid the $900,000.00 further deposit. Mr Kwok on the other hand would take advice from some professionals and if there was no problem, then the signed agreement and the further deposit would be passed on to the vendor's solicitors. I find that Mr Kwok was plainly aware of the inconsistency between the side agreement and the provisions in the formal sale and purchase agreement, and by so telling Mr Ni, Mr Kwok effectively told Mr Ni that he would bring the matter to the attention of the solicitors about the side agreement and if the solicitors thought it advisable then the signed formal agreement together with the deposit would be forwarded to the vendor's solicitors in its current form for the vendor's signature.

9. As I have found above, the formal agreement duly signed by the purchasers and the balance of the deposit was passed to the vendor's solicitors for execution by the vendor on 3 August 1998. Nothing was mentioned about the conflict between the provisions of the side agreement and the terms of the formal sale and purchase agreement or the existence of the side agreement at all.

10. The formal sale and purchase agreement contained inter alia the following terms :

"12.0 The Vendor hereby warrants and declares that :-

(a) the Vendor has not received and is not aware of there being any notice from the Government or any other competent authority or the manager or the management committee of the Building of which the Property forms part (collectively "Relevant Authorities") requiring the Vendor to demolish or reinstate any part of the Property. If it should be discovered that such notice shall be served before the date of completion, the costs for such demolition or re-instatement shall be borne by the Vendor and the Purchaser shall have the option to rescind this agreement whereupon all the initial deposit paid by the Purchaser to the Vendor direct and the deposit paid hereunder shall be forthwith returned to the Purchaser by the Vendor in full but without any compensation interest or cost and neither party shall thereafter have any further claim against the other and the parties hereto shall at their own costs enter into and cause to be registered at the Land Registry an agreement for cancellation.

19.01 Save and except for the intents and purposes of the Stamp Duty Ordinance Cap. 117, this agreement shall supersede all previous agreements whether verbally or in writing or implied between the parties.

19.02 This agreement constitutes the entire agreement between the parties hereto. Each of the parties hereto hereby acknowledges that in entering into this agreement he has not relied on any representation or warranty save as expressly set out herein and if there is any warranty or representation not set out herein, the same is deemed to have been withdrawn by the giving party or his agent immediately prior to the execution of this agreement."

The formal agreement also incorporated the terms set out in Part A of the Second Schedule of the Conveyancing and Property Ordinance. Paragraph 3 of that Part provides :

"3. Condition of Property

The Purchaser purchases with full knowledge of the physical condition of the property and takes it as it stands"

11. The side agreement was in the following terms :

"Re: 37 (including the 2 carports appurtenant thereto) Windsor Park Phrase II No. 1 Ma Lok Path Shatin N.T.

Notwithstanding anything contained herein to the contrary if it is found that there is in existence of any unauthorized alterations or illegal structures in the said Premises on of (sic) before completion, the Purchaser shall subject to the provisions herein below complete the sale and purchase of the said Premises. The Vendor hereby warrants and declares that he has not received whether directly or indirectly any notice form the relevant Government or competent authorities in respect of any unauthorized alterations or illegal structures requiring the demolition or rectification thereto. Provided that if it should be discovered that any such notice have been or shall be served by the Government or other competent authorities upon the Vendor before completion and if any building order(s) has been registered against the said Premises in the Land Registry before the completion all costs and expenses for regularising such unauthorized alterations or illegal structures, if any, including reinstatement and restoration to the state conforming with the approved building plans shall be borne by the Vendor absolutely Provided Always the Purchaser shall be required to complete the sale and purchase of the said Premises. For the avoidance of doubt, if any such notice shall be served by the Government upon the Vendor after completion, all costs and expenses for such reinstatement and restoration to the state conforming with the building plans shall be borne by the Purchaser absolutely Provided Always the Purchaser shall still be required to complete the sale and purchase absolutely Provided Always the Purchaser shall still be required to complete the sale and purchaser (sic) of the said Premises."

12. The title deeds were sent to the purchasers' solicitors on 5 August 1998. On 10 August 1998 the purchasers' solicitors wrote to raise several requisitions. They were subsequently adequately answered. Meanwhile, on 9 August 1998 Mr Ni inspected the property again and by this time, Mr Ni had already had a copy of the plan of the property provided to him by his solicitors. He realised that the property was substantially different from the plan. He raised the matter with his solicitors and he was advised to inspect the property again with an authorized person, Mr Hui. The inspection with Mr Hui took place on 10 August 1998. As a result Mr Hui found that all 8 items of alterations made by the vendor. He set out his findings in a report. He concluded in his report by saying that items 1, 3, 4, 5 & 6 would involve alterations to the envelope of the property and could not be considered as exempted work under the Building Ordinance and these items of work would require submission of plans to the Building Authority for approval. He further concluded that the alterations might also contravene the Lease Conditions and the Deed of Mutual Covenants, although it would appear that by then, he had never had sight of any of these documents.

13. On 11 August 1998, the purchasers' solicitors wrote again to the vendor's solicitors in the following terms :

"We are instructed that certain building works and alteration have been carried out in the above property,

We enclose herewith a copy of Architect's Report dated 11 August 1998 in respect of the said property for you attention and comments"

Enclosed with the letter was the report by Mr Hui.

14. On 18 August 1998 the vendor's solicitors wrote back referring to the side agreement and saying that the alleged building works were drawn to the attention of the purchasers when they first inspected the property, and that the building works and the alterations should have been put into the preliminary agreement and the formal agreement but this was not done at the purchasers' request. As I have found earlier, not all the alterations were drawn to the purchasers' attention and certainly in this case, the purchasers had not requested that the side agreement should not be incorporated into the preliminary agreement or the formal agreement. Although it is generally the case that purchasers would not like to have this kind of side agreement incorporated into the formal sale and purchase agreement because it may create problems when they want to apply for mortgage, in this particular case, Mr Ni did not require any mortgage at all. Hence he was not really concerned as to whether the terms of the side agreement would find its way into the provisional agreement or the formal agreement or not.

15. On 20 August 1998 the purchasers' solicitors wrote to say that they were not prohibited from raising requisitions on the unauthorized structures because :

(1) The purchasers were only aware of some of the unauthorized structures;

(2) The purchasers were not aware of the legal consequences of the unauthorized structures;

(3) The side agreement had been superseded by the formal agreement.

16. On 23 August 1998 there was a meeting between Mr Ni, and Mr Luk during which Mr Ni asked if Mr Luk could supply him a certificate to certify the structural safety of the property. Mr Luk declined to do so.

17. No completion took place on the date of completion. Each party held the other party to be in breach of the agreement.

18. It is not in dispute that apart from the effect of the side agreement, the title to the property was rendered defective because of the risks of enforcement by the Building Authority of the items 1, 3, 4, 5, 6 & 8 the alterations to the property made by the vendor.

19. The vendor took the point that the requisitions in relation to the unauthorized structures were not properly raised. It was argued that the letter of the purchasers' solicitors merely asked for the comments of the vendor's solicitors and this were not proper requisitions. While I do agree that the requisitions should and could have been more precise, I am not disposed to rule that the requisitions had been so improperly raised that the vendor need not deal with them. Indeed, the vendor did deal with them by referring to the side agreement. What I do hold is that insofar as the letter of 11 August 1998 was to be relied upon as a requisition relating to the compliance of the terms of the Government Lease or the Deed of Mutual Covenant, the same was not a proper requisition. By 11 August 1998, the purchasers were already in possession of the terms of the Government lease and also the Deed of Mutual Covenants. Thus the purchasers' solicitors certainly would be in a position to raise specifically what concern they had over which particular provisions in the Government lease or in the Deed of Mutual Covenant so as to enable the vendor's solicitors to properly deal with them. As it was, the requisitions would simply amount to saying : please let me have your comments as to whether the terms in any instrument capable of affecting the property had been complied with, and this is far too vague.

20. There are two main issues in this case. First, there is the issue as to whether the side agreement was superseded by the formal agreement or whether it should be given effect either as a collateral side agreement or by way of rectification. If the first issue is decided in favour of the vendor, there is the further issue of whether the effect of the side agreement is such that the purchasers could not take objection to the presence of the alterations or illegal structures so as to refuse to complete the sale and purchase.

The first issue

21. In the present case the vendor claimed that the agreement ought to be rectified so that in lieu of clause 12.01(a) there should be written into the agreement the provisions of the side agreement. However there was no prayer in the counterclaim for any rectification. In Hamed El Chiaty & Co. v The Thomas Cook Group Ltd, the Court was faced with a situation that the parties had in fact agreed that the Egyptian Court should have exclusive jurisdiction but this was omitted from the terms of the contracts. It was held that the Court had power to treat an agreement as rectified without making an actual order for rectification and accordingly although there was no prayer before the Court for rectification, the Court could stay the proceedings to enforce the contract brought in England on the basis that there was such exclusive jurisdiction clause in the contract. Thus I am of the view that although in the prayer to the counterclaim by the vendor there was no express prayer for the remedy of rectification, if I am satisfied that the formal agreement between the parties ought to be rectified, I should give effect to the contract as rectified in considering the rights and obligations of the parties.

22. The purchasers contended that rectification was not open to the vendor because clearly this is not a case of common mistake. I agree that this is not a case of common mistake. By the time when Mr Ni signed the formal sale and purchase agreement, he was well aware that although the parties had agreed on the terms of the side agreement, the terms of the side agreement were not incorporated into the formal agreement. Furthermore Mr Kwok also had advised him that the formal agreement, on its face contained words to the effect of superseding the side agreement. The vendor however contended that although the present case was merely a case of unilateral mistake, the purchasers were aware of the vendor's mistake and the circumstances were such that it would be inequitable to allow the purchasers to insist on the binding force of the formal agreement without its being rectified.

23. The law on rectification in the case of unilateral mistake was recently discussed in Citilite Properties Ltd v Innovative Development Co. Ltd [1997] 2 HKC 74 where Le Pichon J adopted the following the statement of the law in Snell's Equity (29th edition at page 630-631) :

"By what appears to be a species of equitable estoppel, if one party to a transaction knows that the instrument contains a mistake in his favour but does nothing to correct it, he will be precluded from resisting rectification on the ground that the mistake is unilateral and not common. Under this head the evidence of the knowledge and intention of the defendant must be such as to involve him in a degree of sharp practice, or at least the conduct must be such as to affect the conscience of the party who has suppressed the fact that he has recognised the presence of a mistake"

On the meaning and the requirement of sharp practice, Le Pichon J also adopted and approved the observation of Buckley LJ in Thomas Bates Ltd v Wyndham's Ltd [1981] 1 WLR 505 at page 515 :

"Undoubtedly, I think in any such case the conduct of the defendant must be such as to make it inequitable that he should be allowed to object to the rectification of the document. If this necessarily implies some measure of 'sharp practice', so be it; but for my part I think that the doctrine is one which depends more upon the equity of the position. The graver the character of the conduct involved, no doubt the heavier the burden of proof may be; but in my view, the conduct must be such as to affect the conscience of the party who has suppressed the fact that the has recognised the presence of a mistake.

For this doctrine - that is to say the doctrine of A Roberts Y Co. Ltd v Leicestershire County Council - to apply I think it must be shown : first, that one party A erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did contain; secondly, that the other party B was aware of the omission or the inclusion and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice of A. And I think there must be a fourth element involved, namely, that the mistake must be one calculated to benefit B. If these requirements are satisfied, the court may regard it as inequitable to allow B to resist rectification to give effect to A's intention on the ground that the mistake was not, at the time of execution of the document, a mutual mistake."

Le Pichon J's decision was upheld on appeal : [1998] 4 HKC 62. The Court of Appeal in upholding the decision stressed that the burden on the party seeking rectification in establishing the knowledge of the mistake on the part of the one resisting rectification was a heavy one, akin to convincing proof, although probably not as high as beyond reasonable doubt and that the Court must be cautious in granting rectification since the effect of rectification was to rewrite an agreement which the parties had on the face of the document never intended or agreed to.

24. In the present case, it is plain that the parties had agreed to the terms of the side agreement and it must be plain that the parties intended that the terms of the side agreement as well as those of the provisional sale and purchase agreement would form the basic terms of the formal agreement which they would eventually sign. It is plain that clause 12.01(a) and the side agreement cannot be reconciled at all. The effect of the side agreement is clear that the purchasers were still bound to accept the assignment of the property even though there were illegal structures or unauthorized alterations to the property and even though there were enforcement orders directed at those alterations.

25. It is plain that in the course of the negotiation on the terms of the formal sale and purchase agreement, both firms of solicitors were unaware of the existence of the side agreement. It is also plain from the correspondence between the solicitors in particular the letter dated 31 July 1998 that at least the purchasers' solicitors were keen to stick to the principle that the terms in the formal sale and purchase should not go beyond or be inconsistent with the terms of the agreement already been reached between the parties. There was nothing to indicate that the vendor's solicitors would take a different attitude. From the evidence before me, it is plain that in reaching an agreement on the terms of the formal sale and purchase agreement, the parties themselves as opposed to their respective solicitors had very little input. In fact the terms were reached between the solicitors based on what had been agreed between the parties as evidenced in the provisional sale and purchase agreement, being the only document available to the solicitors, and also what were generally recognised as the usual terms of a sale and purchase agreement. It is quite inconceivable that the parties would have agreed to include clause 12.01(a) in its existing form if the attention of their solicitors had been brought to the side agreement. Equally I am of the view that as the terms in the side agreement were in fact agreed, it is certain that if the vendor's solicitors' attention had been brought to the existence of the side agreement they would have insisted in incorporating the side agreement into the formal sale and purchase agreement instead of allowing clause 12.01(a) to be a term of the formal sale and purchase agreement. Likewise if the vendor's attention was brought to the fact that clause 12.01(a) was inconsistent with the terms of the side agreement and that by the omission of the provisions of the side agreement from the formal agreement, the vendor would be deprived of the protection given by the side agreement, I am quite sure that the vendor would have insisted that the terms of the side agreement must be incorporated into the formal agreement and the purchasers or its solicitors would have no reason to refuse such request. Thus I am satisfied that the parties did intend to have the provisions of the side agreement as part of the their agreement for the sale and purchase of the property and that the omission of these provisions and the inclusion of clause 12.01(a) was due to a mistake initially of both solicitors.

26. I am equally satisfied that the purchasers or their solicitors were aware of the mistake on the part of the vendor. The property was full of unauthorised structures and alterations. The very purpose of the side agreement was to make sure that the purchasers may not be able to take objection to those structures and refuse to complete. The purchasers or their solicitors must be aware that apart from mistakes there was no reason for the vendor to be prepared to agree to sign a formal sale and purchase agreement without the protection of the terms of the side agreement. The terms of the side agreement were exclusively to the benefit of the vendor and the omission of those terms and the inclusion of clause 12.01(a) could only serve to benefit the purchasers. The purchasers' solicitors had decided to keep quiet about the mistake on the part of the vendor or its solicitors.

27. It was contended by the purchasers that since the terms of the formal sale and purchase agreement had been interpreted to Mr Luk of the vendor, Mr Luk of the vendor must be aware of the fact that the side agreement had not been incorporated into the formal agreement and that by the term of the formal agreement the side agreement was superseded. I accept the evidence of Mr Luk that when the formal agreement was interpreted to him, he did not pay much attention of it thinking that it was a standardized document. Mr Luk might well have been guilty of being too careless. However carelessness on the part of the person seeking rectification is not a defence to rectification (see Snell's Equity 29th edition page 635).

28. In the circumstances, I am also of the view that the vendor had satisfied the stringent requirements of rectification for unilateral mistake and I am prepared to order that the formal agreement be rectified by deletion of clause 12.01(a) and replacing them with the provisions of the side agreement. Of course there should be other consequential amendments as indicated in paragraph 8(c)(iv)(b) of the Amended Defence.

The second issue

29. Having decided that the agreement ought to be rectified, the purchasers could no longer say that the side agreement was not effective because it was superseded by clause 19.01 of the formal agreement.

30. The purchasers however contended that as the vendor had not been full and frank in informing them of all the unauthorized alterations which were known to the vendor, the vendor could not rely on the protection of the side agreement at all.

31. The effect of a clause in an agreement for sale and purchase of land providing for the consequences when it was found that the property agreed to be sold contained unauthorized structures was considered by the Court of Final Appeal in Jumbo King Ltd v Faithful Properties Ltd [1993] 3 HKLRD 757. The relevant clauses in the agreement bore some resemblance to the side agreement and were in the following terms :

"18(b) The Vendor hereby warrants and declares that the Vendor has not received any notice from any Government or other competent authority requiring the Vendor to demolish or reinstate any part of the Property. If it should be discovered that such notice existed prior to the date hereof or if any such notice shall be issued before the date for completion and if ... the cost for such demolition or reinstatement shall be borne by the Vendor provided that the Purchaser shall not be entitled to rescind this agreement or claim any compensation or damages or reduction in the price other than the said costs for such demolition or reinstatement.

18(e) The Vendor does not warrant or represent that each and every ... structure (if any) on the Property ... is erected in all respect in compliance with the Building Ordinance (Cap. 123) and/or its subsidiary legislation ... The Vendor shall be under no liability whatsoever if it is discovered at any time (whether before or after completion) that at the date hereof or before completion, there is any ... structure ... which is in contravention of the Building Ordinance ... The Purchaser shall not be entitled to raise any requisition or objection or to rescind this agreement or to annul the sale or to claim any compensation or damages from the Vendor by reason of or in connection with any such contravention.

19 .... the Purchaser shall be deemed to have duly inspected the Property prior to the signing of this agreement and the Purchaser expressly declares that he is fully aware that he is purchasing the Property in its present state and user thereof and shall not make any objection as to title or otherwise or raise any requisition thereto or in connection thereof. The Property is and will be sold on an "as is" basis ... "

Litton PJ re-affirmed that the parties are free to modify the obligation to make a good title (771C), and he said (at 770H) :

"An agreement to sell and convey an interest in land is, like any other contract, a matter for the parties themselves. Generally speaking, the court would give effect to the parties' intentions as evidenced by their agreement"

The learned PJ held that the effect of clause 18(e) was to pass the risk of the Government action on any unauthorized structures to the purchaser and any requisition on the unauthorized structures could be satisfactorily answered by saying that by virtue of clause 18(e) the purchaser is not entitled to raise that objection to title.

32. In the same case, Lord Hoffmann preferred the view that it is a matter of construction of the contract between the parties as to whether the terms of the contract were such that the purchaser was still obliged to accept the title to the property even though the vendor was aware of certain defects in title which had not been disclosed to the purchaser. He said (at 776D) :

" On the question of the cocklofts I agree with Litton PJ that cls 18(e) and 19 preclude the purchaser from basing any objection to title on this ground. Ms Eu submitted that there was a rule of equity which prevented a vendor, as a matter of law, from relying on such clauses in a case in which he knows or ought to know of a defect in title. I think that is putting the matter far too broadly. Contracts for the sale of land are not exceptions to the principle that parties have freedom of contract and may agree to whatever terms they like. What the cases show is that the courts will be very reluctant to construe such a term as enabling the vendor to mislead the purchaser. As is stated in Farrand Contract and Conveyance (4th ed.) at p. 93, such conditions are "subject to the overpowering principle that the vendor must not mislead the purchaser in any way: this means that a sufficient indication of the risk must be given before the contract is made." This may be said to leave it unclear whether the "overpowering principle" is an aid to construction of the contract or something which operates outside the contract. It probably does not matter, although for my part I think it is better regarded as a matter of construction. Thus it is inconceivable that a term will be construed as enabling a vendor to impose upon a purchaser a serious defect in title of which he actually knew. No purchaser would sign a contract which was bare-faced enough to stipulate expressly that the vendor need not disclose serious defects in title of which he had actual knowledge and, even if there was no objection on grounds of public policy, nothing less than the most express language would do. On the other hand, the position is different if the vendor did not actually know of the defect but had the means of knowledge, or if the matter was technically a defect in title but something which a purchaser might reasonably be prepared to accept. Prima facie, it is the duty of the vendor to deduce and then convey a good title and if he relies upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so. As Farrand says, the question is whether the purchaser would have been aware of the risk he was being asked to take. So, for example, general words which did not identify any specific defect in tittle have been held inadequate to protect the vendor against liability for a serious defect, which he could easily have discovered : Becker v Partridge [1966] 2 QB 155. In the present case, however, the language of cl. 18(e) was entirely apt to cover the cocklofts. No one who had read that clause and saw the cocklofts could have failed to appreciate that he was being asked to bear the risk that they were unauthorised structures. The language seems to me perfectly clear. And therefore, in the absence of any evidence that the vendor actually knew that they were unauthorised, the purchaser was in my opinion bound by the clause."

In my view, it is important to note that although at the end of the day, the Court of Final Appeal made specific reference that since there was no evidence to show that the vendor was actually aware that the cocklofts were unauthorized, the purchaser was precluded from raising objection to the title based on the suggestion that the cocklofts were unauthorised, the real question was not whether the vendor had the knowledge or not. The real question was whether the clause relied upon by the vendor on its true construction could protect the vendor from this challenge to the title. If the wordings were wide and clear enough, there is no rule of law to say that the vendor may not rely on the clause simply because he was aware of the defects which the clause is designed to cover.

33. In the present case, it is plain that the vendor was aware of the existence of all the alterations. It is also clear that not all the alterations would require the consent and approval of the Building Authority. This is clear from the fact that although all 8 alterations were identified by Mr Hui, he only named items 1, 3, 4, 5, 6 & 8 as being alterations which would not be exempted and which would require the consent and approval of the Building Authority. If objection to title on account of unauthorized structures was taken, it could only be taken in relation to these 6 items. On the part of vendor, it is clear that the vendor must know that at least some of the alterations would require the Building Authority's approval, but it is not clear as to whether the vendor was fully aware that these 6 items were the ones which would require the approval. It is also plain that the vendor through the estate agent had merely pointed out items 5 and 6 to the purchasers. However I cannot find that because Mr Ni was merely told of these extensions, he was led into believing that there was no other alterations. On the evidence, he was aware, probably through his own observation, that there were other alterations, viz. the extension of the passageway and also the car port cover, which had not been pointed out to him. Mr. Ni was fully aware of the risk of enforcement against unauthorised structures. Furthermore although unauthorised structures are liable to be subject to enforcement action, they do not totally deprive the purchaser of the benefit of the enjoyment of the property sold, and a lot of purchasers are prepared to accept property with unauthorised alterations. While I fully accept that the purchasers here were not aware of any of the extensions or alterations to the ground floor, the question is whether in the light of what Mr Ni was told and shown, which formed part of the matrix of facts for the construction of the side agreement, the terms of the side agreement were such that would prevent the purchasers from raising any objection to the existence of all these alterations and would bind them to complete the sale and purchase despite the presence of these alterations.

34. In my view the terms of the side agreement clearly have the following effects :

(1) The first sentence made it clear that there might be unauthorized alterations or illegal structures at the premises to be sold, and these might not have all been identified to the purchasers. This is clear from the words "if it is found that there is in existence any unauthorized or illegal structures". Even if there was any such unauthorized or illegal structures, the purchasers must still complete the sale and purchaser and the only remedy was limited to the rights given to them under this side agreement.

(2) The effect of the second sentence was the assurance that the vendor warranted that he had no notice of any notice from the Government or other competent authority requiring the rectification of any unauthorized structures.

(3) The proviso to the second sentence was to the effect that even if the Government had in fact served a notice requiring the rectification of any unauthorized structure on the vendor, or that between the time of the agreement and completion, the Government should serve the notice requiring the rectification of any unauthorized structure, then the remedy open to the purchasers is to require the vendor to pay for the cost of the rectification. However even in such circumstances the purchasers would still have to complete.

(4) If the Government notice to rectify any of the unauthorized structures should come after the date of completion, then the purchasers shall bear the cost of the rectification required by such notice and the purchasers must still complete.

It is quite plain that the effect of the side agreement is that the purchasers must still complete the sale and purchase even though there were unauthorized alterations or illegal structures at the property. Even though the Government had served notice on the vendor requiring the vendor to rectify any alterations or structures (which the vendor had warranted that he had no notice) the purchasers must still complete the sale and purchase. It is thus quite clear that the side agreement had the effect of making the purchasers to bear the full risks of the existence of any unauthorized or illegal structures even though they were not made aware of those structures and even though the vendor was in fact aware of the existence of the illegal structures and the requirement to rectify them because a Government notice requiring rectification had been served on the vendor.

35. In the light of the width of the side agreement, I am of the view that the purchasers are not entitled to raise any requisition or objection to title on account of the presence of any unauthorized alterations or illegal structures which had been found and identified by Mr Hui. Even though these structures existed and were unauthorized, the purchasers must still complete the sale and purchase. Accordingly the side agreement was a complete answer to the purported requisition raised by the purchasers in relation to these unauthorized alterations and illegal structures.

36. The purchasers further argued that the side agreement was not effective to protect the vendor because the purchasers were not aware of the legal consequences of the unauthorized alterations or illegal structures. I reject this argument. First, on the evidence the purchasers were plainly aware that the consequence of any unauthorized alterations or illegal structures was that the Government had the power to order that the alterations be removed and the property to be put back to its original conditions in compliance with the approval plan. In fact this is the very basis for saying that the unauthorized alterations or illegal structures would render the title defective. I do not consider that the purchasers need to be appraised of the fact that this could amount to an objection to title to the property. In any event, the present case is one which, because of the express wordings of the contract, the purchasers were bound to complete notwithstanding the presence of the these unauthorized alterations or illegal structures and it is not a question of waiver of his rights.

37. It follows that I am of the view that the purchasers are not entitled to refuse to complete the sale and purchase and that the purchasers were in breach of the agreement in refusing to complete the sale and purchase.

Damages

38. Since the sale had fallen through the vendor managed to sell the property again on 21 September 1998 at a price of $11.8 million. I accept the evidence that in so doing, the vendor had to incur agency fees in the sum of $118,000.00. The vendor is entitled to recover the difference in the price as an item of damages. Taking into account the fact that even if the purchasers had performed the contract, the vendor would have to pay 1% agency fees to Midland, which, because of this decision would now become payable by the purchasers, the parties had agreed that the quantum of damages after giving credit to the forfeited deposit was $778,000.00. On top of this item of loss, the vendor had to spend extra conveyancing cost because of the abortive sale to the purchasers in the sum of $32,640.00. I would also allow this sum. The total damage is therefore $810,640.00 after taking into account the forfeited deposit.

39. In exercise of my power under Section 48 of the High Court Ordinance, I will also award interest at the prime rate from 28 August 1998 to today.

40. I will also grant the Defendant the declarations prayed for in paragraphs 1 and 2 of the prayer in the counterclaim.

Cost

41. On the question as to cost, the Defendant succeeded on the point of rectification which was only introduced to the Defence by way of amendment on the first day of the trial. I gave leave to amend and the trial was adjourned for one day in order to enable the Plaintiffs to consider their position and to make consequential amendment. I have awarded cost of the amendment and also the cost of any consequential amendment to the Plaintiffs including the cost of the one day adjournment. I have left open the question as to whether I should make any other more stringent order such as the cost up to date against the Defendant. It was argued that as the Defendant was only successful because I allowed the amendment to allow the Defendant to raise rectification, I ought to have awarded cost up to the first date of the trial to the Plaintiffs too. I note however the issue on the true effect of the side letter had always been pleaded and whether rectification was raised or not, it would be an issue that both parties would have be prepared to deal with. In all the circumstances in exercise of my discretion, I would order that subject to orders as to cost which had already been made, there shall be no order as to cost for the period since the filing of the original Defence to the first day of the trial. Subject to that and subject to orders as to cost already made, the Defendant is to have the cost of the action.

Representation:

Mr Andy Cheng, instructed by Messrs Ricky Li & Co., for the Plaintiffs

Mr Nelson Miu, instructed by Messrs Chui & Lau, for the Defendant

Remarks:
Appeal by the Plaintiffs to the Court of Appeal. Appeal dismissed. Please refer to the Appeal Judgment CACV000120/2000.