Gigabillion Asia Pacific Ltd v. Sino Dynamic International Ltd

HCA 1053/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1053 OF 2011

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J U D G M E N T

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1.In this action the plaintiff, Gigabillion Asia Pacific Limited (兆億亞太有限公司), claims against the defendant, Sino Dynamic International Limited (中田國際有限公司), for return of all the deposits paid to the defendant under an Agreement dated 11 March 2011 (“Agreement”) whereby the plaintiff agreed to purchase and the defendant agreed to sell a property known as Unit C on 25^th Floor of Gold King Industrial Building (“Property”).

2.It is the plaintiff’s case that the defendant had failed to answer the requisitions relating to the liability of the Incorporated Owners of Gold King Industrial Building (“IO”) for costs in certain legal proceedings sufficiently or satisfactorily and failed to prove good title to the Property and, as such, the plaintiff was entitled to terminate the Agreement and obtain return of all the deposits paid under the Agreement together with damages. 

3.The defendant denies that it failed to answer the requisitions raised by the plaintiff’s solicitors sufficiently or satisfactorily or that it failed to prove good title to the Property.  As the plaintiff had wrongfully repudiated the Agreement, the defendant was entitled to forfeit the deposits paid by the plaintiff. 

Background fact

4.There is little dispute between the parties on the fact relevant to the dispute. 

5.By a provisional sale and purchase agreement dated 16 February 2011 (“PSPA”) made between the defendant as vendor and Mr Wan Ngok Fai (“Mr Wan”) or his nominee as purchaser, the plaintiff agreed to buy and the defendant agreed to sell the Property at $6,721,596. Mr Wan later nominated the plaintiff to be the purchaser. 

6.By letter dated 18 February 2011, Synergis Management Services Limited (“Synergis”), the manager of Gold King Industrial Building, informed the defendant’s solicitors, Messrs. Chow Griffiths & Chan (“CGC”), that the IO was involved in the following litigations:

(1) HCA 1603/2007 and the subsequent appeal in CACV 252/2010 between Chatham Industries Limited, the IO and the management company;

(2) HCA 104/2006 and the subsequent appeal in CACV 297/2006 between the owner of the common area and external wall and the IO; and

(3) DCCJ No 347/2009 between the owner of common area and external wall, the IO and the management company (collectively “Litigations”). 

7.By another letter dated 22 February 2011, Synergis informed Messrs Tang, Lee & Co (“TLC”), the plaintiff’s former solicitors, of the existence of the Litigations. 

8.On 11 March 2011, the plaintiff and the defendant entered into the Agreement which provides, inter alia, as follows:

(1) The plaintiff shall pay $336,000 and $336,159.60 as initial deposit and further deposit prior to execution of the Agreement and a further sum of $336,079.80, being further part payment of the purchase price, on or before 1 April 2011 and the balance of the purchase price on or before completion (clause 2; Part I of Schedule 3).

(2) The purchase shall be completed on or before 15 June 2011 (“Completion Date”) (clause 3; Part II of Schedule 3).

(3) On completion, the defendant will execute a proper assignment or other assurance of the Property to the plaintiff free from all encumbrances (clause 8).

(4) The defendant shall give his title to the Property pursuant to s13A of the Conveyancing and Property Ordinance (“CPO”), and shall at his own expenses prove its title to the Property in accordance with s13 of the CPO (clause 16(a)).

(5) If the plaintiff fails to complete the purchase in accordance with the Agreement, the defendant may forthwith determine the Agreement by giving notice of termination in writing to the plaintiff or its solicitors to such effect, and “all the said deposit or further deposits or instalments of the purchase price paid by the [plaintiff] shall be absolutely forfeited to the [defendant]” (clause 18).

(6) Upon determination of the Agreement pursuant to clause 18, the defendant may resell the Property as it may think fit and any increase in price on resale shall belong to the defendant.  On such resale, any deficiency in price shall be made good and all reasonable expenses attending such resale shall be borne by the plaintiff and be recoverable by the defendant as and for liquidated damages (clause 19). 

(7) In the event that the defendant fails to complete in accordance with the terms of the Agreement, all moneys and deposits paid by the plaintiff to the defendant pursuant to the Agreement shall be returned to the plaintiff who shall also be entitled to recover from the defendant such damages which the plaintiff may sustain (clause 20).

9.Despite the letters dated 18 and 22 February 2011 from Synergis to CGC and TLC, there was no reference to the Litigations in the Agreement. 

10.By 1 April 2011, the plaintiff paid an aggregate amount of $1,008,239.40 to the defendant, being $336,000, $336,159.60 and $336,079.80 (collectively “Deposits”).

11.By letter dated 11 April 2011, TLC raised requisitions on, inter alia, the Litigations and requested CGC to furnish documents “to show that all the contributions and/or the apportioned shares payable by the owner of the [Property] in respect of the said litigations (“the contributions”) have been fully paid and satisfied or alternatively a certain amount of monies will be deducted from the balance of the purchase price being the contributions pending for (sic) the full settlement of the litigations”. 

12.In response, CGC in their letter dated 13 April 2011 stated that they understood from the management office that no contribution had yet been called for in respect of the Litigations.  TLC was not satisfied with the answer and stated in their letter dated 20 April 2011 that the Litigations constituted an encumbrance against the Property and required CGC to provide a constructive reply to their requisitions.  By another letter dated 9 May 2011, TLC referred to the judgment in CACV 252/2010 dated 4 May 2011, which awarded costs of the appeal and below against the IO, and urged CGC to answer the outstanding requisitions regarding the Litigations in good time.  In the letter dated 9 May 2011, Messrs Raymond Chan, Kenneth Yuen & Co (“RCKY”), solicitors for the plaintiff in place of TLC, referred to the Litigations and asserted that the defendant had failed to disclose the “latent defects and liabilities” faced by the IO and whether the IO had sufficient funds to meet such liabilities. 

13.By letter dated 13 May 2011, CGC informed RCKY that there was no claim for damages in the Litigations and, as regards liability in legal costs, they had been advised by the management office that the surplus in the “management funds” was sufficient and no contribution needed to be called from the co-owners.  RCKY did not accept the answer, and in their letter dated 21 May 2011, requested CGC to provide written confirmations from the IO and the solicitors for the other parties on the exact amounts of legal costs and disbursements payable by the IO and/or the manager of the Building.    

14.In their letter dated 3 June 2011, CGC provided a copy of the minutes of the annual general meeting (“AGM”) of the IO held on 26 May 2011 and stated that there were “ millions of surplus accumulated” and the IO had resolved at the meeting that up to $1 million was allowed for the costs of the Litigations without further sanctioning.  In addition, the defendant offered “to set aside a sum of HK$10,000 from the balance of purchase price for each Unit on completion as security money to be held by CGC as stakeholder in case contribution is called for at the end of the day from co-owners.”

15.I note however that the statements of CGC are not entirely consistent with the minutes of the AGM, which recorded that:

(1) as at December 2010, the IO had reserve and accumulated profits in the amount of $2.66 million and $2.55 million respectively;

(2) as at 31 December 2010, the total amount of cash deposited in various bank accounts was $7,264,446.72; and

(3) the Litigations were still on-going and required further follow up action and, for this purpose, it was resolved that the IO could use up to $1 million for the Litigations. 

16.In response to CGC’s offer, RCKY in their letter dated 3 June 2011, stated as follows:

“We cannot advise our clients whether HK$1,000,000 is sufficient to settle the legal costs and disbursements (including counsels (sic) fees) in the 2 High Court Actions (plus 2 Civil Appeals) and 1 District Court action. Unless the plaintiffs’ solicitors could provide at least their draft bills of legal costs and disbursements or estimate in writing the total amounts thereof, we cannot advise our clients or even our clients’ intended mortgagee whether any amount needs to be contributed by the owners of the Properties or whether HK$10,000 for each Unit (ie totally HK$20,000[1]) is sufficient for contribution.”

17.Nevertheless, CGC in their letter dated 7 June 2011 maintained that as there were “ millions of management surplus (over HK$7 million)”, it was not likely that contribution would be called for from the co-owners.  Moreover, with the defendant’s offer to set aside $10,000 for the Property, there would be another $1 million[2] to meet the IO’s liability for costs in the Litigations.  In their letter dated 8 June 2011, RCKY reiterated that without any written confirmations form the solicitors concerned, they could not accept CGC’s assertions that no contribution would be required from the co-owners and maintained that the IO’s potential liability in the Litigations amounted to an encumbrance affecting the defendant’s title to the Property. 

18.Further correspondence were exchanged between 8 and 10 June 2011 in which:

(1) CGC stated that it was not feasible or reasonable for the defendant to request for written confirmation or even an estimate of the IO’s liability for costs in the Litigations.  In particular, in their letter dated 9 June 2011, CGC alleged, for the first time, that before signing the PSPA, the “lady agent” had expressly drawn to the attention of the plaintiff’s representative of the Litigations and, after enquiry and answer for about 20-30 minutes, the plaintiff’s representative said no problem before they proceeded to discuss other details such as consideration and completion date. 

(2) RCKY denied that the plaintiff’s representative had been told about the Litigations which, if disclosed, would affect the plaintiff’s consideration on the price it would pay for the Property. They reiterated that the mortgagee/bank was aware of the Litigations involving the IO and needed their “clear advice” before it could advance the mortgage loan by crediting the same into their account to enable the plaintiff to complete the purchase. 

19.By letter dated 13 June 2011, CGC offered to set aside $25,000 as “security money for the litigation costs to be demanded (if any) at the end of the day”.  The offer was not accepted.  In their letter dated 13 June 2011, RCKY stated that they would not be able to give the usual 2 or 3 working days’ prior notice in writing to the mortgagee bank to draw down the mortgage loan as they could not satisfy the mortgagee bank or the plaintiff that the Property may be conveyed to the plaintiff or the bank free from encumbrances and liabilities arising from the Litigations. 

20.In their letter dated 14 June 2011, CGC asserted that they had fully answered the defendant’s requisitions but offered, “out of abundant good will”, that in addition to setting aside $25,000 from the purchase price on completion, the defendant “would create an Indemnity in favour of [the plaintiff] undertaking to settle the apportioned sum called for at the end of the day and keep [the plaintiff] indemnified against such contribution” (“the Offer”).

21.Finally, in their letter dated 15 June 2011, RCKY stated that the Offer was “still not sufficient to remove the encumbrances or potential liabilities involved or secure clearance thereof” and, although the plaintiff had signed the mortgage in escrow and instructed them to request the bank to draw down the mortgage loan for payment of the balance of purchase price for completion, they could not satisfy the mortgagee bank that the title of the Property could be conveyed to the plaintiff and mortgaged to the bank free from encumbrances, such that the mortgage loan could not be drawn down for completion purpose.  

22.Completion did not take place on 15 June 2011.  By letter dated 16 June 2011, CGC stated that the plaintiff had repudiated the Agreement and the defendant was entitled to and did forfeit the Deposits. 

Issues

23.In the Statement of Claim dated 23 November 2011 (“SoC”), the plaintiff claims return of the Deposits together with damages.  The only particulars of damages pleaded in the Further and Better Particulars of the SoC dated 1 August 2012 (“FBP”) are “[t]he excessive amount which the plaintiff needs to pay to purchase similar property in the vicinity or area where the Property situates and the further cost the plaintiff needs to incur for acquiring the alternative property for his own business use or alternatively loss of rental income which the plaintiff should be able to enjoy or receive after 15^th June 2011 by letting out the Property.”

24.At trial, Mr Eric Lau, counsel for the plaintiff, submits that the plaintiff is entitled to damages for loss of the benefit of the Agreement which, he submits, is the difference between the price of the Property under the Agreement and its market price as at the date of completion or the price at which the Property was sold in July 2012.  The submission must be rejected as:

(1) this is not the basis for which the plaintiff claims damage in its pleadings;

(2) no evidence has been adduced by the plaintiff in support of any claim for damage; and

(3) the submission is inconsistent with the plaintiff’s claim for return of the Deposits, which is premised on its entitlement not to perform the Agreement, rather than to uphold the Agreement. Indeed, in his opening submissions, Mr Lau states that “The plaintiff is entitled to the return of the Deposit (and interests (sic) thereon) upon rescission of the [Agreement].”     

25.Upon enquiry from the court, Mr Lau confirms that the plaintiff will only pursue its claim for return of the Deposits together with interest thereon from the date of the writ.

26.In the Defence and Counterclaim dated 20 December 2011 (“D&CC”), the defendant pleads that the plaintiff had wrongfully repudiated the Agreement and, as such, the defendant was entitled to forfeit the Deposits.  The defendant counterclaims against the plaintiff for a declaration that “the plaintiff is liable for any deficiency in price upon resale of the Property and to pay the defendant all reasonable expenses attending such resale, pursuant to paragraph 19 of the Agreement” together with damages.  The only damage pleaded is “interest paid or lost by the defendant by reason of the plaintiff’s breach”. 

27.In response to the defendant’s case on forfeiture, Mr Lau submits that even if the plaintiff is found to have acted in repudiatory breach of the Agreement, the defendant was not entitled to forfeit the Deposits as clause 18 of the Agreement is a penalty clause.  Mr Lau submits that the burden is on the defendant to justify why it was entitled to forfeit the Deposits which were on their face excessive.  Ms Pauline Leung, counsel for the defendant, does not dispute that the burden is on the defendant to justify its entitlement to forfeit the Deposits. 

28.Ms Leung informs the court that the defendant will not pursue its counterclaim as the Property was sold pursuant to a sale and purchase agreement dated 20 July 2012 for $7,766,550, which was $1,044,954 more than the price stated in the Agreement, there was thus no deficiency in price which may be claimed against the plaintiff.   

29.I should add that in the witness statement of Mr Ho Ying Cheung (“Mr Ho”) filed on behalf of the defendant, it is alleged that prior to the parties entering into the PSPA, Mr Wan had been informed by his agent of the existence of the Litigations and the liability of IO in the Litigations.  Such allegation has never been pleaded in the D&CC.  Indeed, in her opening submissions, Ms Leung contends that as the plaintiff has not pleaded “non-disclosure” of the Litigations in support of its claim, it should not be an issue in this action.  I agree, but the same must apply to the defendant’s attempt to raise allegation not pleaded in the D&CC.  As neither party has pleaded any fact or matter in relation to the disclosure or non-disclosure of the Litigations, let alone the effect thereof, I do not think it is an issue open to either party.  

30.Accordingly, the issues requiring determination of the court are as follows:

(1) whether the defendant has failed to answer the plaintiff’s requisitions on the liability of the IO in the Litigations;

(2) whether the defendant has failed to prove good title to the Property;

(3) if the answer to either (1) or (2) is in the affirmative, the plaintiff is entitled to obtain return of the Deposits together with interest; and

(4) if the answers to (1) and (2) are in the negative, such that the plaintiff had repudiated the Agreement, whether Defendant was entitled to forfeit the Deposits by reason of its excessiveness.

Whether the defendant has failed to answer the plaintiff’s requisitions and whether the defendant has failed to prove title

31.The first 2 issues can be dealt with together.

32.The issues turn on the nature of the liability of the IO in the Litigations and whether such liability constitutes a defect in title.  Mr Lau relies on Chi Kit Co Ltd & anor v Lucky Health International Enterprise Ltd (2000) 3 HKCFAR 268 and submits that the IO’s liability for costs in the Litigations constituted a defect in title because such liability:

(1) was extraordinary in nature and fell outside the contemplation of the parties; and

(2) might be enforced against individual owners including the plaintiff once it becomes the owner of the Property.  The burden is on the defendant to show good title, which is a very high burden, and the defendant has failed to proved that it has good title to the Property. 

33.Ms Leung accepts that the burden is on the defendant to show good title.  She does not dispute the principles propounded in Chi Kit but submits that the present case is distinguishable as the liability of the IO for costs in the Litigations is not extraordinary.  As I understand her submissions, the basis for suggesting that the IO’s liability is not extraordinary is because the magnitude of the liability, says Ms Leung, is nowhere near the extent of liability in Chi Kit.  While Ms Leung accepts that the IO’s liability for costs was uncertain at the time the requisitions were raised (and remains uncertain at trial), she submits that such liability is not substantial or extraordinary and the chances of calling contribution from the owners are “slim” in light of the following matters:

(1) the IO’s liability in the Litigations is only limited to costs and does not involve any damage;

(2) the IO had resources to satisfy the costs of the Litigations in that it had cash fund in excess of $7 million and reserve of $2.55 million as at December 2010;

(3) $1 million was already set aside by the IO to discharge the liability for costs in the Litigations;

(4) there was no indication that the IO had any concern about the extent of liability in the Litigations or that it would call for contribution from the owners to meet such liability; and

(5) the plaintiff was only purchasing 49 out of 4989 shares (0.98%) in the Building and, therefore, any contribution which might be called for would not be in the comparable magnitude as that in Chi Kit.

34.The question of the nature of the liability of an owners corporation associated with legal proceedings and whether such liability constitutes a defect in title were sufficiently explained by the Court of Final Appeal in Chi Kit, and may be summarised as follows:

(1) A liability of the incorporated owners would be met from the funds of the corporation established under s20 of the Building Management Ordinance (Cap 344) (“BMO”).  The management committee decides whether to establish and maintain a contingency fund under s20(2) to meet a liability of the corporation, and contribution may be required from the owners from time to time.  Any amount payable by an owner is a debt due to the corporation.  Once a demand for payment is made of an owner, the liability attaches to his interest in land and passed to his successor-in-title (at 277C-D, 280B-E). 

(2) The liability of an owner to meet contribution is a liability which goes to the ownership of the unit.  Although the liability of the unit owner to meet a contribution is not charged on the unit, it binds the unit and therefore can constitute a blot on the title or an encumbrance.  The liability binds successive owners of the unit so long as the contribution remains unpaid.  Such a liability, if it is so extraordinary having regard to matters such as its nature or magnitude as to be wholly outside the contemplation of a reasonable purchaser, would constitute a defect in title. This is because the liability to contribute means that the purchaser will end up with a title which carries with it a substantial liability even if limited to its proportionate share or, if not so limited, an even greater liability (at 281C-282B, 284J-285B).

(3) The burden is on the vendor to prove a good title to the very high standard of proof beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of an encumbrance (at 282I-J).

35.In light of the above principles, the contention of CGC that the liability of the plaintiff would only be limited to 1% of liability of the IO is plainly wrong, as it failed to take into account the possibility that the orders for costs made against the IO can with leave of the Lands Tribunal be enforced against individual owners including the plaintiff once it becomes the owner of the Property. 

36.In my view, the liability of the IO in the Litigations and the potential liability of the owners to contribute to the funds of the IO towards such liability are by their nature extraordinary, as it is not an ordinary affair of an owners corporation to be involved in any litigation, let alone 5 sets of legal proceedings against different parties.  A reasonable purchaser of the Property would not have expected or even contemplated that the IO had been subject to such a liability.  I do not accept Ms Leung’s submission that the question whether the liability of the IO is extraordinary should be determined by reference only to its magnitude. This is based on a misreading of the ratio in Chi Kit, at 282A-B.

37.Although CGC asserted in their letter dated 9 June 2011 that Mr Wan had been aware of the Litigations before the PSPA was signed, such assertion has not been pleaded in the D&CC.  The decision not to plead such matter must be deliberate, having regard to its apparent importance.  In any event, the assertion does not assist the defendant.  In Chi Kit, the court below found that the purchaser had been aware of the pending action, the amount potentially involved, the call for contributions towards costs and that judgment might be enforced against individual owners and further, there was a specific clause in the agreement which, on its face, had the effect of precluding the purchaser from raising any objection or requisition in respect of the title to the property.  Even then, the Court of Final Appeal held that the purchaser was not aware of the risk it was being asked to take and was not aware of the defect (at 285H-286B, 286J-287I).  In the present case, there is no provision in the Agreement which precludes the plaintiff from raising requisition in respect of title.  Nor is there any evidence to show that Mr Wan was aware of the existence, let alone the extent of the IO’s liability in the Litigations at the time he signed the PSPA.

38.Even if the question whether the liability of the IO is extraordinary is to be determined by reference only to its magnitude, in my view, the defendant has not proven beyond reasonable doubt that the plaintiff will not be at risk of a successful assertion against it of an encumbrance in light of the following matters:

(1) The liability of the IO in the Litigations has never been ascertained and remains unknown at trial.  I am unable to see how CGC could in their answers assert that the liability of the IO was not substantial or that it would be limited to $1 million, $2 million or even $3.5 million.

(2) It is clear from the minutes of the AGM that prior to 15 June 2011 (the date for completion), the Litigations were still on-going and $1 million was set aside for the purpose of dealing such on-going Litigations.  CGC were wrong when they asserted in correspondence that the $1 million had been set aside to pay the costs awarded against the IO in the Litigations. 

(3) As the Litigations were at the material times still on-going, it was not certain whether the $1 million would be sufficient to discharge the IO’s own costs, let alone the costs ordered against the IO. 

(4) The fact that the IO had cash fund in excess of $7 million as at 31 December 2010 was wholly irrelevant, as it was one of the assets of the IO and could not be taken as fund available to discharge the liability of the IO.  Unless all the liabilities of the IO were taken into account, it was impossible to say that the cash fund of $7 million could be used to discharge the liability in the Litigations, as CGC asserted. 

(5) As for the reserve of $2.55 million as at 31 December 2010, after setting aside $1 million to meet the costs of the on-going Litigations, only about $1.55 million was left.  It can be seen from the minutes of the AGM that the IO had at the same meeting set aside another $1 million to meet the cost of the renovation of the lift lobby. Thus, the reserve was reduced to about $0.55 million, assuming the IO did not need to use the reserve for any other purposes.

(6) The above matters, taken together, show that it was likely that the management committee would call on the owners to contribute towards the liability of the IO for costs in the Litigations. 

39.Ms Leung submits that even if the potential liability to contribute to the costs of the Litigations was a blot on title, by making the Offer, the defendant has proven good title to the Property and answered the requisitions sufficiently.  In support of her submissions, Ms Leung relies the following cases:

(1) E-Global Limited v Trenda Limited, HCA 1887/2011, where Deputy High Court Judge Burrell held that the vendor’s offer to stakehold $50,000 to meet any potential contribution arising from the work to be done by the owners corporation in compliance with the directions issued by the Fire Services Department coupled with an unconditional undertaking to pay the excess should the contribution exceeds $50,000, was a reasonable offer which the purchase had unreasonably rejected (at §§20-32). 

(2) Luk Ho Chang v Fook Man Finance Co Ltd [2006] 2 HKLRD 489, where the owners corporation had resolved to replace the lift and carry out major repairs to the building and each owner’s contribution was set after the agreement for sale and purchase had been entered into.  Deputy High Court Judge Muttrie found that stakeholding was a reasonable way to complete title and allow the vendor to give a good title (at 496H).

(3) In Hui Mei Yu v King Best Enterprise Ltd, HCA 9317/1998, 10 July 2000, the owners corporation had resolved to carry out renovation work in compliance with a building order but the cost of the work had not been established.  Deputy High Court Judge To (as he then was) held that although the purchaser might be at risk of having to pay the cost proportionate to the unit, that liability could readily be discharged by the vendor’s undertaking to bear the share of cost apportioned to the unit.  The vendor’s offer of undertaking was reasonable and sufficient to discharge the encumbrance (at pp 6-7).   

40.I do not think Ms Leung can derive any assistance from the above cases as the potential contributions from the individual owner all related to the cost of renewal or repair of particular parts of the building and, as such, were matters within the contemplation of a reasonable purchaser (Chi Kit, at 284H-J).  In any event, I note that Hui Mei Yu was decided before Chi Kit.  As for E-Global Limited and Luk Ho Chang, the judgment of Chi Kit was not drawn to the attention of the court. 

41.The question whether an offer of indemnity to meet the liability in the event that leave is given by the Lands Tribunal to enforce the judgment against the purchaser after completion was considered in Chi Kit, where the Court of Final Appeal took into account the finding of the Judge below and the following evidence (at 286E-I):

“‘….after completion the new owner of the Property would still have to be burdened with proceedings regarding the enforcement of the Judgment, any appeal or cross-appeal and the potential claims for contribution from and against the numerous small co-owners. This was never within the contemplation of the plaintiff at the time when it submitted the Tender. This would also affect the saleability of the Property and the ability of any purchaser to obtain a mortgage thereon. This is because if a property is subject to substantial litigation, its marketability is substantially reduced for people would not like to be involved in and/or burdened with court proceedings. The purpose of the plaintiff in purchasing the Property was for investment. The marketability of the Property which affects the price, was the dominant factor in its consideration whether to tender for the Property. If the litigation had been disclosed, the plaintiff definitely would not have tendered for the Property.’

There was, in addition, evidence (which was uncontradicted) that the two banks which had been prepared to finance 60% of the purchase price withdrew on learning of the judgment.  Sub-purchasers lost interest for the same reason.”

42.Although the offer for indemnity made by the vendor in Chi Kit was reinforced by an offer to set aside a sum of $33,025,758[3] out of the purchase price or make available a bank guarantee for the full amount of the liability of the owners corporation or any other reasonable amount that the purchaser might nominate, the Court of Final Appeal held that the offer did not resolve all problems which flowed from the existence of the potential liability. 

43.In the present case, the Offer for indemnity did not cover the full amount of the liability of the IO in the Litigations. Even if the Offer can be construed as covering the full amount of the liability of the IO, it was not backed up by any security other than a sum of $25,000 to be set aside and stakeheld by the defendant’s solicitors.  The $25,000 offered to be set aside was plainly insufficient as it was based on the erroneous assumption that the potential liability of the plaintiff after completion of the Agreement was limited to 1% of the IO’s liability in the Litigations. 

44.Ms Leung seeks to distinguish Chi Kit by submitting that in the present case, there is no evidence to show that the bank has withdrawn the mortgage loan or that the marketability of the Property has been adversely affected.  I do not agree.  In their letters dated 3, 10, 13 and 15 June 2011, it was repeatedly stated by RCKY that in light of the uncertainty on the liability of the IO in the Litigations, they were unable to advise the mortgagee bank to advance the loan required by the plaintiff to complete the Agreement.  As for the marketability of the Property, the mere fact that the IO was liable to pay the costs in the Litigations would inevitably affect its saleability including the price at which a willing purchaser would pay for the Property. It is not a matter which needs to be proved by the plaintiff. 

45.For the above reasons, I hold that the defendant has failed to answer the requisitions raised by the plaintiff concerning the liability of the IO in the Litigations.  As the liability of the IO in the Litigations constituted an encumbrance, the defendant has failed to prove a good title to the Property. 

Whether the Deposits amount to a penalty

46.In light of my conclusion on the first two issues, the issue whether the provision for forfeiture of the Deposits amounted to a penalty does not arise.  In case I am wrong in my conclusion and the plaintiff was in repudiatory breach of the Agreement, it is necessary to consider whether the provision for forfeiture of the Deposits amounts to a penalty. 

47.There is no dispute that a deposit representing 10% of the purchase price of the land is conventional and deposits of 10% are routinely forfeited to vendors when purchasers wrongfully fail to complete.  As the Deposits amounted to 15% of the purchase price, it was an unusually large deposit.  Both counsel agree that the question whether an unusually large deposit may be vitiated is to be determined in accordance with the principles propounded in Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234 as follows:

“ (a) Where (in the absence of fraud or vitiating factors other than excessiveness) the amount of an agreed deposit matches or is less than the conventional amount, its forfeiture will not attract judicial scrutiny, whether or not the innocent party has suffered any loss as a result of the other party’s breach.

(b) Where the deposit exceeds the conventional amount, that is, 10% in Hong Kong, forfeiture is only permitted if the party seeking to forfeit can show that exceptional circumstances justify the higher amount.

(c) Such exceptional circumstances must relate to a true deposit’s purpose as an earnest of performance and as compensation for the vendor’s withdrawal of his asset from the property market pending completion, providing an objective justification for the higher sum.

(d) If such justification is not forthcoming, the courts will not recognize the amount as a true deposit but will treat it as an advance payment towards what was payable under the contract and recoverable as such, subject to the innocent party’s entitlement to deduct damages for any actual loss suffered as a result of the other party’s breach.”

48.In his witness statement, Mr Ho said that prior to signing the PSPA, a Mr Suen, the plaintiff’s estate agent, informed him that Mr Wan wanted to sub-sell the Property to earn the price difference during the completion period, and asked if the defendant would agree to a 4-month completion period and gave the keys of the Property to Mr Suen during the completion period.  After considering the request, Mr Ho informed Mr Suen that the defendant was agreeable to sell the Property at a lower price of $1,428 psf to Mr Wan, but that if Mr Wan wished to have a 4-month completion period and to have the keys be kept by his agent, Mr Wan would have to pay 15% of the purchase price as deposit, that is, 5% more than the usual deposit.  This was agreed by Mr Wan whereupon the PSPA was signed which provided that Mr Wan was required to pay initial deposit, further deposit and additional deposit on 16 February 2011, 1 March 2011 and 1 April 2011 respectively. 

49.The above evidence of Mr Ho is not challenged by the plaintiff during his cross-examination. 

50.However, when the above case of the plaintiff is put to Mr Wan, he denies that he intended to sub-sell the Property as confirmor.  Mr Wan maintains that it was his plan to partition the Property and turn it into 22 small offices for sub-letting to tenants.  For this purpose, during the completion period, Mr Wan engaged a designer to draw a layout plan, went to the Property a few times to take measurement and prepared an application for changing the fire hoses.  Mr Wan admits that there were advertisements for sale of the Property in Sing Tao Daily during the completion period, but explains that this was done by the plaintiff’s estate agent, Ms Shek, who was very keen to sell the Property to earn more commission.  Mr Wan did not object to Ms Shek advertising the Property for sale but made clear to her that he would only agree to sub-sell the Property before the commencement of the decoration work.  As the defendant did not allow the plaintiff to start any decoration work before completion, it would mean that Ms Shek was only authorised to sub-sell the Property during the completion period.  As to the reason for agreeing to pay 15% of the purchase price as deposits, Mr Wan says that as he always intended to complete the purchase, he did not mind paying 15% of the purchase price as desposits in advance of completion.

51.Mr Ho’s evidence has not been challenged and I accept it.  Mr Wan’s denial that he intended to sub-sell the Property during the completion period is irrelevant.  The fact remains that the 5% additional deposit was specifically requested by Mr Ho in return for his agreement to give Mr Wan (and hence the plaintiff) a 4-month period for completion and to leave the keys to the Property with the plaintiff’s agent. As the reasons for the parties to agree on a higher deposit were to compensate the defendant for withdrawing the Property from the market for four months and allowing the plaintiff to have access to the Property pending completion, I consider that it was justified in the circumstances.  It follows that if, contrary to my conclusion on the first two issues, such that the plaintiff had wrongfully repudiated the Agreement, the defendant was entitled to forfeit the Deposits even though they represent 15% of the purchase price. 

Conclusion

52.In conclusion, I hold that the defendant has failed to answer the requisitions raised by the plaintiff relating to the liability of the IO in the Litigations.  In light of this liability, there was an encumbrance on the defendant’s title and the defendant has failed to prove good title to the Property.  I make an order that the defendant do within 7 days from the date of this judgment return the Deposits in the aggregate amount $1,008,239.40 to the plaintiff. 

53.As for interest, Mr Lau submits that the defendant should pay interest on the Deposits from the date of writ to the date of judgment at judgment rate.  Ms Leung makes no submission on interest. I therefore order the defendant to pay interest on $1,008,239.40 from the date of the writ until payment at judgment rate.  I make an order nisi that the plaintiff shall have the costs of the action including the costs of the defendant’s counterclaim on a party and party basis, to be taxed if not agreed.

(Linda Chan, SC) Deputy High Court Judge

Mr Eric YN Lau, instructed by Raymond Chan, Kenneth Yuen & Co for the plaintiff

Ms Pauline Leung, instructed by Chow, Griffiths & Chan for the defendant