Team Master Ltd. v. Tung Fong Hung Medicine Co. Ltd.
Read the full judgment text of HCA 13944/1998 on BabelCite. This High Court CFI judgment was delivered on 16 June 2000.
1. The plaintiff and defendant are parties to a document headed Provisional Tenancy Agreement. Each claims the other has wrongfully repudiated it. The plaintiff sues for consequential loss. The defendant counterclaims for refund of a deposit paid.
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HCA013944/1998 HCA 13944/1998 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 13944 OF 1998 ____________
____________ Coram: Deputy High Court Judge Gill in Court Dates of Hearing: 8-9 June 2000 Date of Judgment: 16 June 2000 _______________ J U D G M E N T _______________ 1. The plaintiff and defendant are parties to a document headed Provisional Tenancy Agreement. Each claims the other has wrongfully repudiated it. The plaintiff sues for consequential loss. The defendant counterclaims for refund of a deposit paid. Background 2. The plaintiff is Team Master Limited (Team Master). On 26 January 1998 it entered into an agreement to purchase shop premises in Yuen Long (the Shop). Completion was scheduled for 28 February 1998. The Shop was tenanted to the defendant Tung Fong Hung Medicine Company Limited (Tung Fong Hung) for two years expiring on 31 July 1998. The purchase by Team Master was subject to that tenancy. Also on 26 January, in anticipation of Team Master becoming the owner and landlord of the Shop, Team Master as landlord and Tung Fong Hung as tenant contracted to continue the tenancy for a further two years from the expiry date of the existing tenancy, by entering into the Provisional Tenancy Agreement to which I have referred. Pertinent terms of that document are the following:-
Alongside the word "Remarks" was recorded:-
3. The document was signed for and on behalf of each party. 4. Team Master's purchase was completed on due date - 28 February 1998. 5. The next sequence of events was the exchange of letters between Messrs Tony Lam and Harrace Lau (Tony Lam) and Vincent T K Cheung Yap & Co. (Vincent Cheung) for the purpose of settling the terms of the Formal Tenancy Agreement referred to in clause 2. On 27 May Tony Lam sent a first draft inviting execution and return if in acceptable terms and $160,000 to satisfy clause 8(a) ($200,000 was already held by Team Master and counted as part payment). Vincent Cheung's response of 13 June was to return the draft with a large number of changes. The letter concluded with this paragraph:-
6. Tony Lam's next letter was to respond to the various changes proposed. Its final paragraph read as follows:-
7. A number of letters followed as the solicitors grappled to find common ground on the form the Formal Tenancy Agreement was to take. By 9 July the sticking points had been whittled down to the content of one clause. On that date Vincent Cheung proposed a revised wording. Tony Lam responded on 11 July, accepting that proposal. The letter is important in the context of these proceedings and I shall repeat the contents verbatim:-
8. But by the deadline of 5 p.m. 15 July the Formal Tenancy Agreement had not been signed. Instead by letter of that date which was sent and received at about 5 p.m. Vincent Cheung wrote to Tony Lam the text of which I shall also repeat in full:-
9. Tony Lam's response of 16 July sent and received mid-morning was to note non-compliance with the deadline imposed and gave an extension to it to 5 p.m. that day, time being of the essence. Vincent Cheung replied the same day to the effect that the time limit was not acceptable and that their client was still reviewing the proposed terms of the Formal Tenancy Agreement. Still on the same day, after the deadline, Tony Lam wrote again the final four paragraphs of which I repeat verbatim:-
10. Meanwhile Vincent Cheung had returned the draft Formal Tenancy Agreement with three clauses revised. Tony Lam responded to that on 17 July that they were unacceptable and that their client maintained its position as recorded above. 11. Vincent Cheung wrote by letter of 17 July refuting Team Master's claim that their client had repudiated the Provisional Tenancy Agreement, imposing their own deadline in paragraphs I repeat verbatim:-
12. Tony Lam by letter of 17 July declined to oblige. Vincent Cheung by letter of 18 July gave notice that their client regarded Team Master to be in repudiatory breach. 13. Nothing further was done or said. At or shortly after the expiry date of the existing tenancy Tung Fong Hung vacated the Shop. Team Master retained the $200,000 deposit. The Pleadings 14. Team Master pleaded wrongful repudiation and claimed in damages for consequential loss, assessed by it to amount to $1,084,250 together with interest. Tung Fong Hung counterclaimed repudiatory breach and for the refund of the $200,000, and interest. The Issue 15. Which party has repudiated the Provisional Tenancy Agreement, and is liable for the other's loss? Conveyancing in Hong Kong 16. That question is best answered by my summarising first what in practice takes place when parties in Hong Kong want to buy and sell or let and take a tenancy of premises. Commonly they will be introduced by a broker who will then endeavour to get them to agree on the essential terms; price, completion date and so on if it is a sale and purchase, amount of rent, term and so on if it is a tenancy. He will have to hand a ready supply of agreement forms which will probably be described as provisional. If the parties can agree the essential terms he will incorporate these into the provisional form and get them to sign. There will likely be a clause requiring the parties by a given date prior to the completion date to sign a "formal" agreement to supersede the provisional. This is designed to be a much fuller document, comprising not only the essential terms as recorded in the provisional agreement but, ideally, the sort of safeguards that a prudent vendor and purchaser, or landlord and tenant as the case may be, properly advised, would require to be included to protect their interests. Usually there is also a further cash obligation to be met by the purchaser or tenant on the date the formal agreement is signed. 17. Of course the so-called provisional agreement's status depends on its wording as dictated by the intentions of the parties. But typically it is intended to be binding on the parties once signed. The benefit of that is apparent. The parties having agreed the essential terms can speedily commit themselves and thereafter proceed on the certainty of a binding contract, whilst then allowing their respective solicitors enough time to negotiate for them the terms of the formal agreement by which ultimately the parties will be bound. So the best of both worlds; speed and then, prior to completion, security. 18. All well and good if they are able to agree the terms of the formal agreement. But what if they cannot agree? This is not a fanciful scenario. The parties on advice may have diverse views on whether or not a clause should or should not be included, or the form it takes. In practice the solicitors, like the brokers, have standard forms and the parties after negotiation usually agree on the final terms. But this cannot be assumed. One or the other may, acting reasonably or unreasonably, refuse to sign. 19. What happens next is a matter of construction of the provisional agreement and the conduct of the parties in arriving at the impasse. Assuming the provisional agreement contains the essential details and provides no escape route, the parties will remain committed and bound to complete according to its terms. If a party refuses to do so he puts himself at risk of enforcement proceedings. 20. This proposition has been tested many times in the courts of Hong Kong. One example is the case of Lam Tam Yi & Another v. Chak Wai Man [1992-93] CPR 377. A purchaser and vendor were parties to a provisional agreement which contained the usual term that the parties would by a given date enter into a formal agreement at which time the purchaser would pay a further deposit. During the course of negotiating the terms of the formal agreement, the vendor unilaterally repudiated the provisional agreement. He claimed the provisional agreement was not a concluded and binding contract but even if it was it had been rescinded by subsequent correspondence, which made reference to the parties not being bound and that negotiations were subject to contract. The purchaser sued for specific performance. 21. Godfrey J (as he then was) allowed the claim. 22. The headnote to the case adequately sets out his reasons and the principle to which I have referred as follows:-
23. But where the parties negotiate towards a formal agreement being executed and in the course of that one of the parties makes demands as to what is to be incorporated in it that are so unreasonable that he must be taken to be demonstrating an intention no longer to be bound by the contract into which he has already entered, he might well be held to have repudiated it. 24. In the case of Keung Shiu Tang v. D H Shuttlecocks Limited [1994-5] CPR 335, the parties were vendor and purchaser in a provisional agreement which called for the signing of a formal agreement. The purchaser proposed terms which the vendor not only did not agree with but found amounted to a repudiation. He refused to proceed and held as forfeited the deposit already paid. The purchaser won a suit of specific performance and the appeal against that decision was dismissed. Godfrey JA (as he then was) said at p. 360:-
Liability 25. It is now for me to determine at whose feet, Team Master's or Tung Fong Hung's, the act of repudiation lies, by applying the principles to which I have referred. 26. The completion of Team Master's purchase of the Shop satisfied the condition to which the Provisional Tenancy Agreement was subject and it became binding on the parties. That is not in dispute. If the parties were not to have succeeded in reaching a consensus on the form of the Formal Tenancy Agreement (apart from the inclusion of the essential terms already agreed) then the parties would have been committed to proceed under the Provisional Tenancy Agreement with payment of the balance of deposit and first month's rental due under clause 8 deferred to completion date, the first day of the tenancy. This much is clear from Lam Tam Yi and similar authorities. 27. But clause 2 was there for a purpose and not to be ignored. Whilst the parties could not have been forced to agree terms not already settled an obligation arose that they negotiate towards that end and, in the doing, adopt a reasonable approach. That is what they did. Mr Chan representing Team Master said he counted 32 proposed amendments to the original draft that Tony Lam sent on 27 May. During the course of the exchange of correspondence those were whittled down to final acceptance as to form on 11 July. So, he submitted, the date by which the Formal Tenancy Agreement was scheduled to be completed, 30 June, having passed, Team Master was justified in imposing the deadline with time of the essence for the signing of the Formal Tenancy Agreement and payment of the moneys then due. Tung Fong Hung's refusal to do so within the time limit imposed in these circumstances and subsequent introduction of fresh demands for alteration of the Formal Tenancy Agreement constituted conduct so unreasonable as to give Team Master the right to treat that as repudiation. 28. The validity of that argument depends, or at any rate is influenced, by the parties' respective positions as at 11 July. At first blush it would seem that agreement had been reached committing them to sign the Formal Tenancy Agreement on those terms. But at the outset by their letter of 13 June Vincent Cheung took the precaution of making the negotiations subject to contract, a safeguard Tony Lam also preserved for their client by letter of 22 June. These words are not meaningless legal mumbo jumbo. They ensure that whatever is said or transpires during the course of the negotiations the party in question will not be bound until the Formal Tenancy Agreement is actually signed. 29. So there could have been no agreement until pen was put to paper, and that had not happened at the time of Tony Lam's letter of 11 July. It follows that it was not open to Team Master unilaterally to impose a time limit, make time of the essence and then pronounce non-compliance as repudiation by Tung Fong Hung. This would be tantamount to saying:- "We insist we come to agreement by a given time. If we do not we shall treat that as your repudiating our bargain." 30. But was Tung Fong Hung in any event behaving unreasonably by bringing fresh negotiations to the table after apparent consensus had been reached? Had it by that made demands on the form of the Formal Tenancy Agreement which were so unreasonable that it must be taken to be demonstrating an intention no longer to be bound in contract? As Godfrey JA said, that cannot be lightly inferred. By the letter of 15 July Vincent Cheung demonstrated their client's good faith by inviting Tony Lam to be stakeholder for the moneys due and payable under clause 8 pending signing of the Formal Tenancy Agreement. None of the additional amendments sought were in any way untoward. Tung Fong Hung was doing no more than having second thoughts on what it wanted incorporated into the Formal Tenancy Agreement, a right to which it was wholly entitled, that having been reserved by both parties at the outset. To put beyond doubt Tung Fong Hung's intentions concerning completion, I record verbatim the last paragraphs of Vincent Cheung's letter of 16 July:-
31. That final sentence speaks for itself. There was nothing at all to infer from Tung Fong Hung's conduct an intention to repudiate. 32. I find that Tung Fong Hung did not repudiate the contract. It follows that Team Master did. The answer to the question posed, being the issue to be resolved, is Team Master, and it must be held to account accordingly. Quantum 33. There is no dispute between the parties on quantum that Tung Fong Hung should be entitled to a refund of the deposit should, as has transpired, it succeed on liability. Judgment follows. Judgment 34. The plaintiff's claim is dismissed. 35. There shall be judgment in favour of the defendant on the counterclaim for $200,000 together with interest thereon at 8% per annum from 18 July 1998 to the date of this judgment of $30,641. 36. Costs shall be to the defendant taxed if not agreed. 37. The order for costs shall be nisi at first instance.
Representation: Mr Louis K Y Chan, instructed by Messrs Richard Tai & Co., for the Plaintiff Mr Richard Zimmern, instructed by Messrs Vincent T K Cheung, Yap & Co., for the Defendant
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