Cheung Kit Lai and Another v. Rich Prosper Ltd and Another

HCA 972/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 972 OF 2011

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BETWEEN

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J U D G M E N T

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INTRODUCTION

1.This is the Plaintiffs’ action for specific performance of an agreement (the “Agreement”) for sale and purchase of property in Shatin (the “Property”), built under the small house scheme in the New Territories usually known as “Ting house”. 

2.The 2^nd Defendant is the legal owner of the Property and the grantee of the land on which the Property was built. He raised a loan from the 1^st Defendant, a finance company, using the Property as security.  He defaulted in repayment of the loan.  The 1^st Defendant obtained an order from the District Court for the sale of the Property which it sold to the Plaintiffs under the Agreement.  The completion of the Agreement was delayed because the District Lands Officer (“DLO”) took four years and eight months to assess the premium payable before agreeing to consent to the re-assignment of the land to the Plaintiffs.  The question is which of the two innocent parties is to suffer at the contumelios conduct of the DLO.

Background

3.In May 1997, the Plaintiffs entered into a development agreement with the 2^nd Defendant, who is an indigenous villager of the New Territories, to build the Property on the 2^nd Defendant’s land.  Upon completion of the Property in 1999, the 1^st and 2^nd Plaintiffs respectively occupied the ground and first floors of the Property while the 2^nd Defendant occupied the second floor and roof.

4.Without the knowledge of the Plaintiffs and using the Property as security, the 2^nd Defendant entered into three loan agreements with:

(1) United Asia Finance Ltd (“United Asia”) on 7 April 2001 in the amount of $250,000;

(2) Freeway Finance Co Ltd (“Freeway”) on 19 July 2001 in the amount of $400,000; and

(3) the 1^st Defendant on 11 January 2002 in the amount of $190,720.

In connection with the third loan, the 2^nd Defendant executed an irrevocable power of attorney as grantee of the land in favour of the 1^st Defendant.  He defaulted in repayment.  Then Freeway and the 1^st Defendant obtained charging orders absolute against the Property as the first and second chargees respectively.  Subsequent to that, the Plaintiffs also obtained a charging order absolute against the Property as the third chargee in the amount of $1,737,000 being building costs of the Property allegedly lent to the 2^nd Defendant under their development agreement.

5.On 8 October 2003, the 1^st Defendant obtained an order for sale of the Property from Master KW Wong of the District Court in DCMP 1476/2003 (the “Order”).  In 2004, the 1^st Defendant took possession of the second floor and the roof of the Property, while the Plaintiffs were allowed to continue in possession of the ground and first floors.  Through their then solicitors, Hagon Wai & Partners (“W&P”), the Plaintiffs informed the 1^st Defendant’s then solicitors their interest as the third chargee and their intention to purchase the Property. 

6.On 13 February 2004, the DLO informed the 2^nd Defendant and 1^st Defendant’s solicitors that upon payment of premium in the amount of $1,819,800 on or before 11 March 2004, Government would consent to re-assigning the Property to a new purchaser. 

7.Despite having been informed of the Plaintiffs’ interest in the Property, on 25 February 2004 the 1^st Defendant entered into provisional agreements to sell the Property to two intending purchasers, Mak and Yung, at $3.9 million.  On 28 February 2004, the Plaintiffs offered to purchase the Property at $3.95 million inclusive of the premium of $1,819,800.  On 15 March 2004, the 1^st Defendant, Mak and Yung signed three formal sale and purchase agreements, one for each floor of the Property (“Mak and Yung agreements”).  By then the due day for payment of the premium had lapsed without payment.  Had it been paid, the case would not have turned out to be as disastrous five years later or as it is today. 

8.After some negotiation, with the help of Yip Chi Man (“Yip”), a debt collector engaged by the 1^st Defendant to collect the debt from the 2^nd Defendant, the 1^st Defendant agreed to sell the Property to the Plaintiffs instead at the same price but on the Plaintiffs paying a sum of $290,000 as damages to Mak and Yung for the cancellation of the Mak and Yung agreements.  On 26 July 2004, the Plaintiffs paid the said sum to be stakeheld by the 1^st Defendant’s then solicitors, Messrs Raymond Chan, Kenneth Yuen & Co Solicitors (“C&Y”).  On 14 October 2004, the Plaintiffs and the 1^st Defendant entered into the Agreement for the sale and purchase of the Property for $3.9 million.  On the same day, the 1^st Defendant entered into a cancellation agreement with Mak and Yung and released the said sum of $290,000 stakeheld by C&Y to them.  On 19 October 2004, the Plaintiffs paid the deposit of $390,000 to C&Y.

9.Immediately following the execution of the Agreement, C&Y applied to the DLO for fresh demand note for premium. Despite repeated requests and reminders, for four years and eight months the DLO failed to advise the premium payable.  It was only until 8 June 2009 that the DLO issued fresh demand notes for premium, forbearance fee, administrative fee for issue of toleration letter and administrative fee for issue of consent letter in the amount of $2,658,500, $265,850, $33,100, and $3,960, totalling $2,961,410, to be paid on or before July 2009.  In the meantime, since 2007, the 1^st Defendant rented the second floor and roof to tenants at the monthly rental of $7,000 to $9,000.

10.The 1^st Defendant refused to complete the Agreement.  On 11 September 2009, it offered to sell the ground and first floors only to the Plaintiffs for $2.8 million. On 18 September 2009, it attempted to rescind the Agreement and return the deposit. The Plaintiffs insisted on completion.   On 31 October 2009, the 1^st Defendant threatened to instruct its solicitors to write to the DLO to give up payment of premium and let government repossess the Property.  The parties were in deadlock. 

11.On 3 March 2010, the DLO threatened to take lease enforcement action, including re-entering the Property unless the 1^st Defendant first settled the two demand notes for administration fee in the amount of $3,960 and $33,100 on or before 16 March 2010 and later pay the premium and forbearance fee.  The 1^st Defendant repeatedly requested for extension of time to pay, but failed to pay.

12.On 21 April 2010, the parties had a negotiation meeting at the office of the 1^st Defendant’s then solicitors, Messrs Deannie Yew and Associates (“DY&A”), but failed to reach any agreement for payment of the premium and forbearance fee or for a new agreement for the sale and purchase of the Property, except that the Plaintiffs agreed to settle the two sums of administration fees on behalf of the 1^st Defendant, which they did on the following day.  The 1^st Defendant alleged that an oral supplemental agreement was reached for the sale and purchase of the ground and first floors of the Property at $4,000,000, inclusive of a decoration fee $800,000.

13.On 7 October 2010, the DLO increased the premium and forbearance fee to $4,619,200 and $461,920 respectively.

14.On 5 November 2010, the 1^st Defendant suggested to enter into a new agreement with the Plaintiffs to sell the ground and first floors at $4,257,847. 

15.On 11 February 2011, the DLO increased the premium and forbearance fee to $4,853,300 and $485,330 respectively.

16.On 10 June 2011, the Plaintiffs commenced the present action seeking against both the 1^st and 2^nd Defendants specific performance of the Agreement, damages in lieu and other remedies.   The 1^st Defendant filed its defence on 8 August 2011, pleading frustration, repudiation, the supplemental agreement, and promissory estoppel.  Then shortly before trial on 4 July 2013, the 1^st Defendant introduced another defence of implied condition precedent.  No defence was filed by the 2^nd Defendant.

17.By way of further background, this case is about sale and purchase of a Ting house built under the small house scheme in the New Territories.  Under that scheme, a house may be built on land granted to the grantee, who is an indigenous villager, at a concessionary price subject to a non-assignment clause which prohibits disposition of the land within a specified period, usually five years, after completion of the building on the land.  After that period has lapsed, the grantee may freely dispose of the property to any other person.  Alternatively, the grantee may, with the prior written consent of the DLO, dispose of the property to another within the five year period, upon payment of premium representing two-thirds of the difference between the full market value of the land and the concessionary price for which it was granted to the grantee.  For that purpose, the DLO would issue a demand note for payment of premium and administrative fee for issue of a letter of consent.  If the DLO refuses to give consent or fails to give consent, the sale and purchase of the property cannot proceed.  

18.The present case is somewhat peculiar.  Under clause 5(a) of the Special Condition of the New Grant, the 2^nd Defendant, as the grantee of the land on which the Property was built, may not dispose of the land at all for a period of three years from completion of the Property (the “non-assignment clause”).  After the lapse of that period, he may with the prior written consent of the DLO dispose of the land to another indigenous villager without premium or to a non-indigenous villager upon payment of premium as assessed by the DLO. 

19.Here, the DLO took the view that the execution by the 2^nd Defendant of the power of attorney in favour of the 1^st Defendant, the three legal charges in favour of United Asia, Freeway and the 1^st Defendant as well as the execution by the 1^st Defendant on behalf of the 2^nd Defendant of the Mak and Yung agreements and the Agreement are unlawful dispositions of the land in breach of clause 5(a) because these transactions took place within the period of three years after completion of the Property.  Hence, in addition to charging a premium and administrative fee for issue of a consent letter, the DLO charged a forbearance fee and administrative fee for issue of a toleration letter.  The forbearance fee was only 10% of the premium.  What caused the drastic increase in the premium assessed was the time factor and the inflation in the property market.   

The issues

20.The dispute in this case is whether the 1^st Defendant was in breach of the Agreement.  There is no dispute that the parties had entered into the Agreement and that it was not performed.  The 1^st Defendant raised three defences: condition precedent, frustration and renunciation by the supplemental agreement.  Except for the existence of the supplemental agreement and the renting out of the second floor and roof, the above factual background is incontrovertible and supported by documentary evidence.  In the light of the pleadings and the incontrovertible background, the issues raised in this case are:

(1) what were the parties’ undertakings under the Agreement;

(2) whether the Agreement was subject to any condition precedent;

(3) whether the performance of the Agreement was frustrated by the DLO’s delay in assessing the premium;

(4) whether the Plaintiffs had renunciated the Agreement by entering into the supplemental agreement; and

(5) the appropriate remedies if the 1^st Defendant was in breach of the Agreement. 

Mr Luk, counsel for the Plaintiffs, raised many other issues, including whether the 1^st Defendant breached the Order; whether the 1^st Defendant breached his duty as chargee in self occupation of the Property and in failing to account for the rental income; and related factual issues.  Many of those issues are quite unnecessarily raised. Even if the 1^st Defendant was in breach of the Order, that would give no remedy to the Plaintiffs.  

THE PARTIES’ UNDERTAKINGS UNDER THE AGREEMENT

21.The Agreement is an agreement in which the 1^st Defendant agreed to sell and the Plaintiffs agreed to buy the Property.  The Plaintiffs’ undertaking was to pay.  They paid the deposit and were ready and willing to pay the balance on completion.  Nothing arises from their undertaking. 

22.The 1^st Defendant’s undertaking was to sell the Property in accordance with the terms of the Agreement.  Under clause 1 of the Agreement, its duty was to sell the Property free from the mortgage/charges mentioned in the Seventh Schedule. 

23.Under clause 9 and the Third Schedule, its solicitors shall stakehold the purchase price paid by the Plaintiffs and apply it to discharge the incumbrances set out in the Seventh Schedule and paragraph 7 of the Order.  Those incumbrances are the premium to be charged by the DLO and the legal charges and charging orders of Freeway, the 1^st Defendant and the Plaintiffs.

24.As the Property to be sold is a house built under the government’s small house scheme in the New Territories, the DLO’s consent to remove the non-assignment clause is necessary before the Property could be re-assigned.  The DLO would require payment of a premium as a condition for giving consent.  However, the Agreement contained no provisions as to the parties’ rights and liabilities if such consent was not given, or not given within a certain period; or if the amount of premium charged was beyond any specified limit.

25.Under clause 11, the Property was sold for the residue of the term of years for which it was held from the Government.

26.Clause 15 provides that “time shall in every respect be of the essence of this Agreement”. 

27.Viewed in the round, the primary or basic undertaking of the 1^st Defendant was to obtain the consent of the DLO to remove the non-assignment clause, discharge the incumbrances and convey the Property to the Plaintiffs free from incumbrances on completion date.  If it failed to do so, it was in breach of the Agreement.  It has contracted to assume the risks that consent would not be given, that the premium would be too high, that the purchase price after discharging the incumbrances and paying the premium would not be sufficient to pay its debt secured by the charging orders or that it may even land itself in liability under the Agreement.  These are business risks.  They are all real risks and have actualised. 

28.The 1^st Defendant only has itself to blame for not doing adequate due diligence before lending money to the 2^nd Defendant.  It failed to appreciate the impact of the non-assignment clause in the New Grant when accepting the Property as security for the loan to the 2^nd Defendant.  It failed to ascertain the value of the various prior incumbrances and properly.  It failed to assess a purchase price which will enable it to perform its obligation to sell, discharge the prior incumbrances and at the same time recover its debt due from the 2^nd Defendant.  Presumably, for those reasons the other chargees before it chose not to enforce their legal charges and charging orders.  Lastly, it also failed to make adequate provisions in the Agreement to cover itself from some of those risks.

CONDITION PRECEDENT

29.The 1^st Defendant argued that there was an express or implied condition precedent in the Agreement that the purchase price must be sufficient to discharge all the incumbrances as stated in paragraph 7 of the Order, including the premium payable to the DLO.  This is a question of construction of the Agreement.  Condition precedent means conditions of a contract until the fulfilment of which the contract is not to be binding[1]. 

30.The 1^st Defendant’s argument is based on paragraph 2 of the Recital, the Third Schedule, the Fourth Schedule, the Seventh Schedule and clause 9(b) of the Agreement. 

31.Paragraph 2 of the Recital recited the Order whereby the Property was ordered to be sold subject to the terms and conditions set out in the Order.  Paragraph 7 of the Order is relevant. That paragraph provides:

“The proceeds of such sale shall be used and applied in the following manner and priority:

(i) to pay all Government rent, taxes, rates, and other outgoings due and affecting the Property, if any;

(ii) to repay the Premium payable to the District Land Office for selling of the Property, if any;

(iii) if the Property is not sold subject to prior incumbrance, to discharge all the prior incumbrance;

(iv) in payment and discharge of all costs of and incidental to the sale, including:- …

(v) to pay the amount due and owing by the [2^nd Defendant] in respect of the Charging Order registered by the [1^st Defendant];

(vi) in payment and discharge of the costs of this action;

(vii) any surplus or balance of the proceeds of sale to be paid to the incumbrance registered subsequent to the said Charging Order, and if there is none, to the 2^nd Defendant or otherwise dealt with as the Court may direct; and …”

32.Clause 9 of the Agreement provides:

“(a) On payment of the balance of the said purchase money in manner aforesaid (or …) and concurrent upon the Assignment is first signed by the Purchaser and delivered to the Vendor’s solicitors, the Vendor shall within 45 days from the date of payment of the balance of the purchase money procure and cause the Assignment of the Property to be sold executed by the Registrar of the District Court conveying the title of the Property on behalf of the owner Yeung Ting Cheung to the Purchaser or the Purchaser’s nominee or sub-purchaser. The balance of the purchase money payable to the Vendor shall be stakeheld by the Vendor’s solicitor and shall not be released to the Vendor unless and until the said Assignment shall have been duly executed by the Registrar of the District Court. Immediately after the Assignment is duly executed by the Registrar of the District Court, the Vendor shall within 28 days thereafter obtain a release or order (as the case may require) to discharge the encumbrances in the order as set out in the Seventh Schedule hereto.

(b) After discharge of the incumbrances under items (i) to (vi) of the Seventh Schedule hereto, any residue of the purchase price shall be paid to the Purchaser for discharge of the charges under items (vii) and (viii) of the Seventh Schedule hereto provided that nothing herein contained shall be binding on Vendor to fully discharge the amount due under the said charges in favour of the Purchaser.”

33.The Seventh Schedule referred in clause 9(b) is a list of incumbrances, the first six items of which were created by the legal charges and loan agreements of Freeway and the 1^st Defendant.  Items (vii) and (viii) are the incumbrances created by the Plaintiffs.  The effect of clause 9 is that any surplus after discharging government rent and taxes, premium, costs and prior incumbrances shall be paid to the Plaintiffs to discharge the incumbrances they created over the Property, but the 1^st Defendant shall not be liable to discharge those incumbrances, if there is no or no sufficient surplus.

34.The Third Schedule provides:

“The purchase price is HONG KONG DOLLARS THREE MILLION AND NINE HUNDRFED THOUSAND ONLY (HK$3,900,000.00) which shall be paid by the Purchaser in the following manner:-

1. HK$390,000.00 being deposit and part payment of the purchase money has been paid by the Purchaser to the Vendor’s solicitors as stakeholder; and

2. HK$3,510,000.00 being balance of purchase money to be paid by the Purchaser to the Vendor’s solicitors as stakeholder within 2 months from the date of this Agreement.

Subject to clause 9 hereof the deposit and the balance of the purchase price shall be paid to the Vendor’s solicitors as stakeholder who shall apply the same to discharge the charge/incumbrances in the priority as set out in the Seventh Schedule and pursuant to paragraph 7 of the Order dated 8 October 2003 including but not limited to the premium payable to the District Land Office for selling of the Property.” 

(emphasis added by the 1^st Defendant)

35.The completion date of the Agreement is specified under the Fourth Schedule as:

“Within next two months and 45 days from the date of this Agreement provided that the Assignment is executed by the Registrar but the Vendor is entitled to extend the period of completion for two further months in accordance with clause 28 hereof.”

Clause 28 provides that the 1^st Defendant, shall take steps to enforce the Order for sale and obtain possession of the Property from the occupiers.  The Plaintiffs continued in possession of the ground and first floors.  But nothing material is relied on by the parties in respect of this clause.

36.On the strength of these provisions, Mr Tam, counsel for the 1^st Defendant, submitted that it was an express or implied condition precedent that the purchase price shall be more than sufficient to settle the premium and administrative fees charged by the DLO as well as the payments necessary to discharge the incumbrances created by Freeway and the 1^st Defendant.  With respect, by no reading of these provisions or any other provisions in the Agreement can I find any such express condition precedent.  Mr Tam will have to argue the 1^st Defendant’s case on the basis of implied condition precedent.

37.In Kensland Realty Ltd v Whale View Investment Ltd & Anor[2], the Court of Final Appeal held that such a condition would only be implied into a contract if the following conditions are satisfied:

(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that “it goes without saying”;

(4) it must be capable of clear expression; and

(5) it must not contradict any express terms of the contract.

38.Reading paragraph 2 of the Recital and the Third Schedule together, Mr Tam submitted that as the purchase price was set with the incumbrances, in particular the amount of the premium in mind, the inference is that the purchase price must be sufficient to settle the premium payable to the DLO and discharge the incumbrances.  He drew the inference on two basis. First, he argued that the premium must be paid to the DLO, failing which the intended transfer of the Property to the Plaintiffs would not be valid and lawful.  Second, the Agreement does not impose any positive obligation on the 1^st Defendant to pay the premium itself but rather it is only obliged to apply the down payment and the balance of the purchase price to settle the premium.  Hence, Mr Tam submitted that it is an implied condition precedent by reason of business efficacy and/or the obvious intention of the parties that the premium payable to the DLO and the amount required to discharge the incumbrances should not exceed the purchase price of the Property.  He also drew support for his construction from clause 9(b) which expressly differentiate between items which have to be discharged before completion such as items (i) to (vi) of the Seventh Schedule and items which need not be discharged before completion, such as items (vii) and (viii).

39.Mr Tam further argued that unlike an ordinary vendor who is the owner of the property for sale, the 1^st Defendant was a mere chargee of the Property selling under a court order.  The 1^st Defendant cannot pocket the sale proceeds of the Property but has to return all surplus to the 2^nd Defendant.  He argued that the chargee-vendor should not find himself in a position where he will suffer loss from the sale of the charged property.  Hence, he submitted that a condition precedent that the purchase price should be sufficient to cover the premium and the money required to discharge the incumbrances ought to be implied into the Agreement and that such an implied condition precedent is reasonable and equitable.    

40.An agreement has to be construed as a whole.  The 1^st Defendant cannot just pick and choose a few terms and construe them in isolation.  In construing a contract, the court should give effect to, rather than frustrate, the presumed common intention of the parties.   With this starting principle in mind, the Agreement should be viewed this way.  It is a contract for sale and purchase of property between a consumer and a chargee as vendor of the Property.  It is a commercial contract to be viewed with commercial realism in the context of sale and purchase of property.  What is important is the intention held in common between the parties as purchaser and vendor of the property and not the chargee’s own subjective intention or desire for profit.  People enter into commercial contracts, primarily for gain and not with a view for loss.  Loss may be the undesired or unintended result of miscalculation, mismanagement, lack of prudence, speculation ending on the wrong side, and many more.  It may even be deliberate, just to make the best of a bad bargain, to get out of a bad position, to cut loss so as to prevent further loss, to get rid of unmarketable stock and many more.  It must be the motive or subjective desire of the 1^st Defendant to recover its debt owed by the 2^nd Defendant.  It must at least be its intention to break even and not to incur loss.  But that could not be the intention it held in common with the Plaintiffs.  The Plaintiffs would not care whether the 1^st Defendant recovered its debt owed by the 2^nd Defendant. For the Plaintiffs, their position must be the lower the price the better, and the more loss the 1^st Defendant was prepared to tolerate, the happier.  Viewed with commercial realism in the context of a sale of property by a chargee-vendor and purchase by a consumer, the common intention to be drawn from clause 9 and the Third Schedule is to ensure that the purchase price will be applied towards payment of the premium and incumbrances to ensure the Plaintiffs secure a good title in the Property for the price they paid rather than to ensure the 1^st Defendant recovers its debt.  The Agreement is totally silent as to whether the purchase price should be sufficient to pay the premium or the premium and the first six incumbrances set out in the Seventh Schedule.  If it is insufficient, the one or ones lowest on the list of priority will not be paid, as simple as that. The construction suggested by Mr Tam would result in uncertainty.  It is unreasonable and does not give business efficacy.

41.While the chargee should not find itself incurring a loss by enforcing his security, there can be no guarantee that a chargee always wins.  There is nothing to prevent him from incurring a loss as result of his own miscalculation, mismanagement, lack of prudence and speculation ending on the wrong side.  The purchase price was all a matter of agreement for the parties.  The chargee has to exercise reasonable diligence to sell the property at a reasonable price.  If the property commands a higher price, the chargee shall sell at that price and not capriciously at a lower price and to leave no or insufficient surplus to discharge the incumbrances which had lower priority after him or to leave no surplus to the chargor.  To recover his debt and to protect his interest, he should negotiate for a price which is sufficient to discharge the incumbrances, or negotiate for a sale subject to incumbrances.  The Order did not require the 1^st Defendant to sell the Property free of incumbrances.  Paragraph 7 of the Order permits sale subject to incumbrances. It was only by the agreement of the parties that clause 9 and the Seventh Schedule set out the list of incumbrances to be discharged by the 1^st Defendant.  He should, at least, not enter into a sale and purchase agreement which would land him into another liability under that agreement.  But, if the Property cannot command a price sufficient to discharge the incumbrances which had priority over him, he should realise that his security is not good and he may not recover the debt owed to him.  

42.In the present case, the 1^st Defendant should have ascertained the value of the incumbrances which had priority before it and determined a price which would be sufficient to discharge those incumbrances, to pay the loan secured, the estimated premium and a prudent margin to cover contingencies.  There is no evidence that the 1^st Defendant had done so.  It should have assessed whether the Property could be sold at that price before applying for the order for sale.  The other two chargees before it saw fit not to apply.  The 1^st Defendant applied and obtained the Order.  If the Plaintiffs would not agree to buy at a price which was sufficient to pay the premium (or the anticipated premium) and other prior incumbrances, the 1^st Defendant should look for another buyer willing to pay a higher price.  If the Property cannot command such a price, the 1^st Defendant should realise that its security was not good for the debt.  It has to bargain for a lower price or not to sell or enforce the security.  He cannot always be in a no loss position.  Having agreed to a price and made a bargain through its own lack of prudence or failure in exercising due diligence, the 1^st Defendant cannot turn around and argue that the Agreement is not operative because there is an implied condition precedent that the price should exceed the premium and the money required to discharge the incumbrances.  The price and the terms were matters of agreement by the parties.  It is a business decision for the parties.  If the 1^st Defendant decides to sell at the agreed price, it runs a business risk.  It failed to exercise due diligence in assessing the value of its security and in selling the Property at a proper price.  It made a bad bargain and has to live with it.  It is not for the court to rush to the vendor’s assistance by implying a condition precedent to protect it from suffering a business loss, which it was too lazy to guard itself against.  It is not for the court to settle the terms of the contract for the parties.  The court’s function is to give effect to the common intention of the parties rather than to frustrate it.

43.Mr Tam referred to the Fourth Schedule which defines completion date and argued that as the Agreement should be completed within the next two months and forty-five days from the date of the Agreement, it is an implied condition precedent by reason of business efficacy and/or the obvious intention of the parties that the Agreement should lapse and be of no effect unless the revised premium payable was assessed prior to the completion date.

44.I am unable to read the Fourth Schedule that way.  The parties agreed to sell and purchase the Property subject to the terms and conditions set out in the Order.  The 1^st Defendant’s primary undertaking was to obtain the consent of the DLO to remove the non-assignment clause, discharge the incumbrances and convey the Property to the Plaintiffs free from incumbrances on completion date.  Completion date has been fixed by clause 3 of the Agreement as specified in the Fourth Schedule, being two months and forty-five days from the date of the Agreement.  The period of two months, I assume, is the usual reasonable time for the purchaser to arrange finance and for the vendor to arrange delivery of vacant possession.  The period of forty-five days is to allow additional time for processing the assignment to be signed by the Registrar of the District Court as this is a sale pursuant to a court order.  Clause 15 provides that “time shall in every respect be of the essence of this Agreement”.  When the date for completion has arrived, the parties have to complete.  The party which is unable to complete is in breach.  To complete, the 1^st Defendant had to obtain the DLO’s consent to remove the non-assignment clause.  It had not obtained such consent.  The 1^st Defendant failed to convey the Property and was in breach of the Agreement.  It is not open to the 1^st Defendant to argue that because the DLO has not assessed the premium, a condition precedent that the Agreement shall be of no effect unless the revised premium payable was assessed prior to completion date or that the purchase price shall be higher than the premium is to be implied.  Mr Tam was putting the cart before the horse and arguing that by implication the cart is a self propelled vehicle.  

45.There are ways by which the 1^st Defendant could have avoided the dilemma.  The parties could have made an express condition that the agreement is subject to conditions precedent, such as the DLO’s consent having been obtained within a specified period, or the premium assessed shall not be more than a specified amount.  Alternatively, the agreement could have provided for how the premium is to be shared between the parties, or even as simple as that the price is exclusive of the premium which shall be paid solely by the purchaser.  The 1^st Defendant could have bargained for those provisions to be inserted in the Agreement, but it did not.  The fault was with the 1^st Defendant in failing to exercise due diligence in ascertaining the value of its security and making adequate provisions in the Agreement to protect its interest.  

46.Lastly, Mr Tam argued that the parties’ intention can be further construed from their behaviour from mid 2009 to early 2010 during which they re-negotiated for a new sale and purchase agreement in respect of the Property in the light of the soaring premium. 

47.I dismiss that argument.  The Plaintiffs were obviously forced to negotiate as the 1^st Defendant refused to perform the Agreement.  It was just part of their attempt to mitigate their loss.  I give no weight to and draw no inference from such conduct.  In any event, no agreement was reached.   That negatives rather than supports the inference urged by Mr Tam.

48.What is most fatal to the 1^st Defendant’s argument of implied condition precedent is clause 7 of the Agreement.  This clause provides:

“This Agreement sets out the full agreement between the parties hereto and may only be varied (whether by way of collateral contract or otherwise) in writing under the hands of the parties hereto.”

The condition precedent sought to be implied is contrary to Clause 7 which is an all agreement clause.  The terms of the Agreement are comprehensive, unambiguous and not unreasonable.  The purchase price was a matter of fair bargain.  If on the face, the terms of a contract make sense, are legal and can be performed, the court should construe the Agreement in such a way as to give effect to it rather than to imply such additional terms to make what the court thinks a better or even fairer contract. The condition precedent sought to be implied, though not unreasonable, is unnecessary and would create uncertainty as to the existence of the Agreement.  To imply such a condition precedent which has the effect of suspending the entire performance of the Agreement is inconsistent with this all agreement clause and will frustrate the common intention of the parties.  There is no room in the Agreement for the condition precedent to be implied. 

49.For the above reasons, I dismiss the 1^st Defendant’s argument of express or implied condition precedent.

FRUSTRATION

50.The 1^st Defendant pleads frustration by reason of the long delay of four years and eight months caused by a third party, the DLO, in assessing the premium.  The following is a summary of what took place during that period.   

Further facts

51.On 14 October 2004, C&Y requested the DLO for issue of fresh demand note for premium.  On 17 November 2004, about a month later, the DLO replied, alleging that the power of attorney executed by the 2^nd Defendant in favour of the 1^st Defendant as well as the Mak and Yung agreements dated 15 March 2004 were breaches of the non-assignment clause.  The DLO reserved the Government’s rights and promised to revert after consideration.

52.C&Y wrote back on 22 November 2004 explaining that the power of attorney was executed by the 2^nd Defendant as security for repayment of a loan and that the Mak and Yung agreements were sales pursuant to a court order.  The DLO did not respond.  C&Y issued another reminder.  On 11 April 2005, the DLO replied along the same line as before.

53.There was no response for two months.  C&Y issued another reminder.  The DLO replied on 23 June 2005 repeating that the matter was receiving attention and would revert once a substantial reply can be made. 

54.There was no response.  On 6 September 2005, C&Y issued a reminder.  On 22 November 2005, the DLO replied along the same line as before and asked C&Y to contact the DLO should there be any queries. 

55.The process of reminder, promise to revert and silence repeated four times in 2006 on 16 January, 4 April, 25 August and 28 December, 2006.

56.On 16 March 2007, the DLO wrote to C&Y demanding demolition of an illegal structure erected for shading purpose at the Property.  That illegal structure was promptly removed and C&Y requested for assessment via their letter dated 22 March 2007.  The DLO did not respond for one year and four months.

57.On 2 July 2008 C&Y wrote to the DLO again reminding him that their request had been outstanding for almost forty-five months.  Again, the DLO did not respond.

58.Eventually, after another year, the DLO responded on 8 June 2009.  The DLO assessed the premium, forbearance fee, administrative fee for toleration letter and administrative fee for consent letter in the total amount of $2,961,410 to be paid on or before 5 July 2009. The increase was $1,141,610, ie about 62.73% over the 2004 assessment and representing an increase of 29.27% over the purchase price.  While the assessed premium was in line with the increase in the property price index over that five year period, the quantum was clearly a shock to both parties.

59.The DLO took four years and eight months to come up with an assessment.  This was extraordinary.  The previous assessment was made within two months.  A senior land executive of the DLO, Yeung Yiu Wah, was subpoenaed to produce correspondences between the 1^st Defendant and the DLO.  The occasion was taken to enquire from him about the reason for the long delay.  He was only a middle executive and was not in the position to explain the reason for the delay.  He pointed out that this was an unusual case in that the grantee disposed of the land by way of an irrevocable power of attorney during the three year restricted period, within which the DLO would not give consent.  The consent procedure would only be available after the three year period.  He said that there was no precedent of this kind of breach and it was in 2008 that the DLO adopted a forbearance policy against such breach.  This might explain the delay but not the reason.  I do not shy away from my criticism of the DLO’s contumelios delay which was in total disregard of the Plaintiffs’ interest and expectation.

The applicable legal principles

60.The doctrine of frustration operates to excuse from further performance of a contract where (1) it appears from the nature of the contract and the surrounding circumstances that the parties have contracted on the basis that some fundamental thing or state of things will continue to exist, or that some particular person will continue to be available, or that some future event which forms the basis of the contract will take place, and (2) before breach, an event in relation to the matter stipulated in head (1) above renders performance impossible or only possible in a very different way from that contemplated, but without default of either party: see Halsbury’s Laws of Hong Kong[3].

61.The existence of the doctrine of frustration is now well established. It has a very narrow scope of operation.  In Lauritzen AS v Wijsmuller BV (The Super Servant Two)[4], after extensively reviewing the highest authorities in the United Kingdom, Bingham LJ set out the following five propositions which describe the essence of the doctrine.  First, the doctrine has evolved to mitigate the rigour of the common law’s insistence of literal performance of absolute promises[5].  Its object was to give effect to the demands of justice, to achieve a just and reasonable result, to do what is reasonable and fair, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances. 

62.Second, frustration operates to kill the contract and discharge the parties from further liability under it and that therefore it cannot be lightly invoked but must be kept within very narrow limits and ought not to be extended[6].

63.Third, Frustration brings a contract to an end forthwith, without more and automatically[7].

64.Fourth, the essence of frustration is that it should not be due to the act or election of the party seeking to rely on it[8].  It must be some outside event or extraneous change of situation[9].

65.Fifth, a frustrating event must take place without blame or fault on the part of the party seeking to rely on it[10].

66.In Edwinton Commercial Corporation v Tsavliris Russ, The Sea Angel[11], Rix LJ held that in applying the doctrine the court has to adopt a multi-factorial approach.  The starting point of consideration is the terms of the contract, its factual matrix, and its context.  Second, the court shall ascertain from the above circumstances, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract so far as these can be ascribed mutually and objectively.  Third, the court shall consider the nature of the supervening event.  Lastly, the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.  The ultimate question the court has to decide is whether in the eventual analysis the supervening or frustrating event has rendered the contract impossible of performance or that its performance will be radically different from what the parties undertook.  The test is both subjective and objective.

67.Whatever the alleged source of frustration, a contract is not discharged under this doctrine merely because it turns out to be difficult to perform or onerous.  Thus the parties will not generally be released from their bargain on account of rises or falls in price, depreciation of currency or unexpected obstacles to the execution of the contract, for these are ordinary business risks: see Halsbury’s Laws of Hong Kong[12].  The converse is also true.  If the performance will be radically different from what the parties have contracted, a party is not to be held to his part of the bargain merely because the other party will suffer more severe damage as a result.  This is because the test for frustration is whether performance will be radically different.  The test is not based on balance of detriment suffered by the parties.

68.If delay is relied on as the supervening or frustrating event, the delay must be abnormal in its cause, its effects, or its expected duration, so that it falls outside what the parties could reasonably contemplate at the time of contracting.  The fact that the delay was caused by a new and unforeseeable factor or event is a relevant factor.  The probable length of the delay must be assessed in relation to the nature of the contract, and to the expected duration of the contract after the delay is expected to end.

Discussion

69.With the above principles in mind, I turn to examine the facts.  The obligations undertaken by the 1^st Defendant was to obtain the consent of the DLO to remove the non-assignment clause; pay the premium; discharge the incumbrances, at least items (i) to (vi) of the Seventh Schedule, with the purchase price; and convey the Property to the Plaintiffs free of the above incumbrances on completion date.  The surrounding factual matrix was that it was a sale by the chargee-vendor to recover the 2^nd Defendant’s debt owed by sale of the Property; that the consent of the DLO was required; and that previously it took the DLO between two to four months to assess the premium and issue demand note for payment. The premium payable in May 2003 and March 2004 were $1,763,800 and $1,819,800 respectively.  Such were the knowledge, expectation, assumptions and contemplations in the minds of the parties as to the time required for the issue of demand note for payment of premium and the amount of the premium payable.  The purchase price after payment of anticipated premium would leave a very comfortable cushion of about $2 million to discharge the various incumbrances.  The parties made no allocation of risk of delay by the DLO in assessing the premium.   

70.Here, the delay was almost five years.  The DLO last gave an assessment of the premium on 13 February 2004 within two months of request.  Probably, on that occasion the DLO had overlooked the breach.  Upon signing the Agreement, C&Y wrote to the DLO on 14 October 2004 to apply for the issue of fresh demand note for premium.  Then, despite repeated requests, it was not until 8 June 2009 that the DLO gave his assessment.  The premium and other fees payable was increased by 62.73% from $1,819,800 to $2,961,410. 

71.Probably in view of the past experience, the parties reasonably assumed that the premium would be assessed in two to four months’ time.  They did not anticipate a delay of almost five years and were not aware of the importance the DLO attached to the fact that the power of attorney was executed during the three year restriction period.  They did not anticipate as a result of the delay an increase in premium of that magnitude.  

The Agreement is not incapable of performance in the sense that the Property was destroyed or that such disposition has been rendered unlawful.  Such would have been the classical case of frustration. The Agreement is still capable of performance, but with very different financial consequence.  The amounts required to discharge the incumbrances and pay the premium have all increased during the almost five year period.  The question is what effect the delay has on the performance of the Agreement.   Has the delay made the performance of the Agreement radically different from that which the 1^st Defendant undertook?

72.In March or April 2004, the amount required to pay the premium and discharge the incumbrances under items (i) to (vi) of the Seventh Schedule was $2,916,057.  The purchase price of $3.9 million would have been sufficient to discharge those liabilities, leaving a balance of $983,943 to the Plaintiffs for discharging their own incumbrances under items (vii) and (viii).  That amount would not be sufficient to discharge those incumbrances, but under clause 9 of the Agreement there was no obligation to.  In addition, the Plaintiffs were always ready and willing to forgo their incumbrances.   The calculation is shown hereunder:

Purchase Price		$3,900,000
Less:
Premium	$1,819,800
Freeway’s incumbrances	$795,365
1st Defendant’s incumbrances	$300,892	-$2,916,057
	Balance:	$983,943
		========

Taking into account the surplus available to the Plaintiffs, the net purchase price to the Plaintiffs would have been less than $2 million. The Agreement made business sense, particularly in the context of a vendor-chargee’s sale.

73.Now, as result of the delay, the premium with added forbearance fee and administrative fees swelled to $2,961,410.  The amount required to discharge Freeway’s charging orders (ie items (i), (iii) and (iv) of the Seventh Schedule) increased to $2,740,562.  The amount required to discharge the 1^st Defendant’s legal charge and charging orders (ie items (ii), (v) and (vi)) was increased to $360,335.  The purchase price was short of more than $2 million to discharge all those liabilities.  The calculation is shown below:

Purchase Price		$3,900,000
Less:
Premium etc	$2,961,410
Freeway’s incumbrances	$2,740,562
1st Defendant’s incumbrances	$360,335	-$6,062,307
	Balance:	-$2,162,307
		========

Not only would the 1^st Defendant not recover the debt secured, it would also incur a liability of about $1.8 million or about $1.6 million, if the rental income for the two years since 2007 is taken into account.  In any event, there would be no surplus left to the Plaintiffs.

74.The difficulty caused by the DLO’s delay was compounded by Freeway.  In 2004, Freeway’s claim was $795,365.  Now, its claim was increased three and half folds to $2,740,562.  It claimed that apart from the amount charged under the charging orders, there was another amount owed under the “all moneys” legal charge.  Freeway was uncooperative and refused to give particulars of the amount claimed unless C&Y or W&P meet with the conditions it imposed.  Mr Luk argued that the amount claimed by Freeway under the legal charge is questionable.  He suggested that the 1^st Defendant could pay into court the amount which on the Plaintiffs’ calculation would be sufficient to discharge Freeway’s two charging orders, ie $715,950.49, and then apply to court to clear Freeway’s charging orders.  But that would not clear Freeway’s legal charge under item (i) of the Seventh Schedule.  I do not think that would discharge the 1^st Defendant’s obligation to convey the Property to the Plaintiffs free of incumbrances, not at least without another satellite litigation.  It would be futile to speculate.  But I am satisfied that by reason of the DLO’s delay the performance of the Agreement has been rendered much more difficult than the parties had anticipated.  The difficulty was not within their expectation,   assumption and contemplation at the time they entered into the Agreement.

75.The Agreement could still be performed but with very different financial consequences to the 1^st Defendant.  The 1^st Defendant would now find itself in liability of $1.6 to $1.8 million if it completes the Agreement.  Usually, the fact that performance is rendered more difficult and onerous to a party as such is not a sufficient reason to discharge that party from further performance of the contract.  To determine the question of frustration, the court has to adopt a multi-factoral approach.  It must consider the undertakings of the parties under the agreement, the terms and conditions of the agreement, the factual matrix and all the circumstances.  One important circumstance is that the Agreement is a chargee-vendor sale.  Though previously, I have held that that fact is irrelevant for the purpose of implying the condition precedent into the Agreement, that fact is highly relevant when considering the question of frustration.  If the Agreement were an ordinary agreement for sale by owner, it could be argued that as the 1^st Defendant had failed to exercise due diligence, it contracted an absolute obligation to convey the Property free from incumbrances.  Hence, the financial consequence arising from the DLO’s delay would be a business risk which the vendor must take.  This is different in a chargee-vendor sale.  A chargee obtains a charging order and sells the property charged to recover the debt owed.  At worst, the proceeds of sale may not enable him to recover his debt.  But he would not land himself in personal liability. 

76.The effect of the DLO’s delay is that the 1^st Defendant would have to bear the inflation in the property market for a period of almost five years which is equivalent to about 30% in the purchase price, if the Agreement is to be performed.  The 1^st Defendant had failed to exercise due diligence before entering into the Agreement and had in some ways failed to adequately protect itself.  But those failures would not have landed it in liability in performing the Agreement, but for the DLO’s delay.  It must be beyond the 1^st Defendant’s expectation and contemplation that by enforcing its security for a loan of $160,000, it would end up with a liability of $1.6 to $1.8 million.  That additional burden makes the performance of the Agreement radically different from what the parties have contracted for. 

77.And so thought the parties as evidenced by their immediate conduct after the issue of the demand notes for premium etc.  They pulled their heads together, first, to object to the assessment as excessive and then to re-negotiate among themselves for the sale and purchase of only two floors or for an increased price for all three floors.  Eventually, they were unable to reach agreement.  Their conduct reflected what reasonable men and women would have viewed the effect of the delay and would have conducted their affairs. 

78.Bearing in mind that this was a vendor-chargee sale, I think the performance of the Agreement after a delay of four years and eight months resulting in such financial consequence would be radically different from that which the 1^st Defendant undertook.  The delay was caused by the act of default of neither party.  It was abnormal in its cause, its effects, or its expected duration and falls far outside what the parties could reasonably expected or contemplated.  It would be just and fair that the 1^st Defendant should be excused from further performance of the Agreement.  I therefore hold that the Agreement has been frustrated by the delay of the DLO in assessing the premium.

79.I appreciate that the Plaintiffs would suffer more severe detriment than would the 1^st Defendants, if the decision had been the other way round.  But, as the test for frustration is whether the performance will be radically different, it would be wrong for me to decide by balancing the detriment to be suffered by the parties.

RENUNCIATION AND THE SUPPLEMENTAL AGREEMENT

80.The 1^st Defendant pleads a further defence that it was discharged from the further performance of the Agreement which was renunciated or repudiated by the parties upon their entering into an alleged oral supplemental agreement.  It argued that the Plaintiffs evinced an intention no longer to be bound by the Agreement.  This argument is unnecessary and doomed to fail.  If an agreement has been frustrated, there could be no room for its repudiation or renunciation.  I shall, however, deal with this defence assuming that there was no frustration.   

Further facts

81.The 1^st Defendant’s case of renunciation is as follows.  Upon receipt of the demand notes for premium, forbearance fee and administrative fees, their then new solicitors, DY&A, wrote to the DLO on 22 July 2009 objecting to the high premium and requested a re-assessment.  The DLO replied saying that before the objection will be considered, the two demand notes for administrative fee had to be settled first and that the fees paid would not be refunded in the event that the revised premium was not accepted by the 1^st Defendant.

82.The 1^st Defendant did not pay and entered into a series of negotiations with the Plaintiffs through their respective solicitors.  DY&A offered to sell the ground and first floors. That was not accepted by the Plaintiffs, initially.  However, the parties agreed that the deposit be continued to be stakeheld by DY&A.

83.On 14 August 2009, the DLO informed the 1^st Defendant that the assessment had lapsed by reason of non-payment.  On 11 September 2009, DY&A offered to sell the ground and first floors to the Plaintiffs at $2.6 million.  The Plaintiffs counter-offered $1.8 million on 17 September 2009.  On 18 September 2009, DY&A returned the deposit of $390,000 to the Plaintiffs.  The Plaintiffs rejected the payment on 22 September 2009.  They reverted back to the Agreement and enquired about completion.   On 24 September 2009, DY&A returned the deposit again to rescind the Agreement.  DY&A repeated that the 1^st Defendant would only sell the ground and first floors at $2.6 million.  On 26 September 2009, the Plaintiffs raised their offer to purchase the ground and first floors at $2 million.  On 6 October 2009, they increased their offer to $2.1 million.  That was rejected by DY&A.

84.On 15 October 2009, the Plaintiffs offered to purchase the entire Property at $4.3 million.  That offer was rejected by DY&A who insisted to sell the ground and first floors only at $2.6 million.  DY&A also threaten not to pay the administrative fees and allow the DLO to take enforcement action.  On 31 October 2009, DY&A renewed the threat.  On 28 November 2009, the Plaintiffs offered to purchase the entire Property at $4.6 million.  That was also rejected by DY&A.

85.Then, following some direct negotiations between the Plaintiffs and the 1^st Defendant, on 11 January 2010 the Plaintiffs’ solicitors informed DY&A that the parties had reached agreement to purchase and sell the entire Property at $4.7 million.  On 15 January 2010, DY&A replied that the 1^st Defendant only agreed to sell the Property at $4,230,000 plus $470,000 decoration fees, making a total of $4.7 million but subject to three conditions.  First, the agreement would be treated as fallen through if the 1^st Defendant could not obtain an assessment of the premium from the DLO on or before 31 July 2010.  Second, the Plaintiffs shall bear the excess premium over and above that assessed by the DLO in their letter dated 8 June 2009.  Third, the 1^st Defendant will not discharge the encumbrance created by Freeway’s legal charge, ie item (i) of the Seventh Schedule in the Agreement.  Again no agreement was reached.

86.On 3 March 2010, the DLO threatened to take enforcement action for breaches of the non-assignment clause unless the 1^st Defendant would settle the two demand notes for payment of administrative fees.  DY&A requested the Plaintiffs to reconsider the 1^st Defendant’s offer.  W&P made enquiries with Freeway about the amount due under Freeway’s legal charge.  Freeway replied that the amount due up to 31 March 2010 was $2,740,562.

87.On 15 April 2010, the DLO again threatened to take lease enforcement action against the Property.  DY&A called for an urgent meeting with the Plaintiffs.  A meeting was held on 21 April 2010.  Both parties attended with their solicitors.  It is the 1^st Defendant’s case that at the meeting both parties agreed to terminate the Agreement and to enter into a supplemental agreement for the sale and purchase of the ground and first floors of the Property at $4.7 million.  The premium shall be paid by the 1^st Defendant, provided that if the premium payable is more than that stated in the DLO’s letter dated 8 June 2009, two-thirds of the excess amount shall be borne by the Plaintiffs.  The Plaintiffs denied having reached the above agreement.  They only agreed to pay the administrative fees so as to avoid enforcement action by the DLO.  The alleged agreement was not reduced into writing, nor was there any minute, memorandum or note made of the meeting signed by the Plaintiffs or their solicitors.  Even if there was such an oral supplemental agreement, it is unenforceable.  However, despite that, if its existence is proven, it may advance the 1^st Defendant’s defence of renunciation. 

Discussion

88.There is no dispute that a meeting took place on 21 April 2010 attended by the Plaintiffs and their solicitor on the one part and by Joanne Wong, Samson Kong on behalf of the 1^st Defendant and its solicitor, Deannie Yew, on the other.  The dispute is whether the supplemental agreement in the terms as alleged by the 1^st Defendant had been reached. Joanne Wong, Samson Kong and Deannie Yew gave evidence on behalf of the 1^st Defendant.  The Plaintiffs also gave evidence but did not call their then solicitor from W&P.  

89.I do not think it necessary to give a detailed analysis of the evidence of these witnesses.  Suffice it to say, I find the 1^st Defendant’s case grossly exaggerated.  The 1^st Defendant accused the Plaintiffs of having damaged the lock to the second floor to gain access and unlawfully occupied the second floor.  It denied having rented it out between 2007 and 2009.  Joanne Wong said that she was told by a staff, surnamed Mak, that someone had wrongfully occupied the second floor; that she instructed another staff, surnamed Chow, to move into the second floor as a watchman to protect that floor against trespass by the Plaintiffs; and that the 1^st Defendant made several reports of trespass to the police.  Neither Mak nor Chow was called to give evidence.  No document in support of the reports made to the police, not even a report card or letter from the police, was produced.  What appeared to be first hand information in Joanne Wong’s and Samson Kong’s witness statements were found to be hearsay based on witnesses who were not called and documents which were not produced.  On the other hand, the Plaintiffs were able to produce copies of envelopes of letters addressed to the occupiers of the second floor and gave evidence of the conversation they had with the occupiers who informed them of their surnames and rent paid for their occupation.  One of the envelopes was from the Water Supplies Department purportedly containing a disconnection notice.  Its authenticity was not disputed.  It is beyond dispute that the second floor was tenanted but not by someone surnamed Chow.   The Plaintiffs’ evidence cannot be doubted.

90.The 1^st Defendant alleged that the 2^nd Plaintiff changed the lock of the entrance to the staircase and put up intimidating posters to deter would be tenants or purchasers.  The 2^nd Plaintiff admitted changing the lock for security reason but said that she had given the key to the new lock to the 1^st Defendant whose staff had no difficulties gaining access.  This aspect of the 1^st Defendant’s case is contradicted by its own witness, Yip, who confirmed that he saw no one occupying the second floor and saw no threatening posters in the staircase on the various occasions of his visit.  The 2^nd Plaintiff only put up a poster on her own door giving notice that there was dispute in respect of the Property.

91.Joanne Wong and Samson Kong asserted that decoration expenses of $800,000 had been incurred on the Property, but do not know what they were for.  This was not a small amount of money for one floor and the roof of a Ting house.  They agreed that there should be invoices and receipts but could not explain why the 1^st Defendant was unable to produce any.  The Plaintiffs’ evidence is that no decoration work had been carried out by the 1^st Defendant who even refused to carry out minor maintenance work.  The photographs produced showed no sign of any recent decoration of that magnitude.   The claim for decoration expenses was clearly fictitious.

92.The 1^st Defendant’s case that the second floor was first unlawfully occupied by the Plaintiffs and then occupied by its own staff as watchman, that it was prevented access by the Plaintiffs; that the Plaintiffs put up intimidating posters in the staircase and that it incurred $800,000 decoration expenses on the second floor of the Property are all exaggerated.  It dishonestly concealed having received rental income in respect of the second floor.  The only inference I can draw from the 1^st Defendant’s intention to include the fictitious decoration expenses of $800,000 in the purchase price of the Property in a new sale and purchase agreement to be signed by the Plaintiffs was to take secret profit from the intended sale.  The 1^st Defendant’s dishonesty was blatant.  If an employer adopts a dishonest attitude in the conduct of its affairs and litigation, the evidence of its employees has to be carefully scrutinised.  I find the 1^st Defendant’s dishonesty overflowed onto its witnesses.  Not only do I not believe Joanne Wong’s and Samson Kong’s evidence in respect of these aspects of the 1^st  Defendant’s case, I do not accept their evidence that the parties reached a concluded agreement at the meeting on 21 April 2010.  I accept the Plaintiffs’ evidence that no agreement was reached at that meeting, except their agreement to settle the two demand notes for administrative fee to enable them to continue residing in the Property.

93.Deannie Yew is a solicitor and is now not acting for the 1^st Defendant.  She should be considered an independent and reliable witness.  However, she could produce no documentary proof of what was agreed at the meeting.  She realised the necessity for an oral agreement for disposition of interest in land to be evidenced in writing but admitted that no memorandum or note of the meeting was signed by the parties.  She admitted under cross-examination that the Plaintiffs refused to sign and suggested defer drafting of the supplemental agreement until the final amount of premium and the latest amount of redemption monies required to discharge Freeway’s legal charge were ascertained.  That by itself is strong evidence of lack of agreement of a fundamental term.  Though the Plaintiffs did not call their own solicitor who attended that meeting, Deannie Yew’s own evidence is sufficient for me to conclude that no oral supplemental agreement was reached.  Her evidence of oral agreement is her misunderstanding or misinterpretation of the discussion which took place at the meeting.

94.On the fact, I find no oral agreement on the terms of the alleged supplemental agreement was reached at the meeting on 21 April 2010.  The basis of this defence completely collapsed.  In fact, the Plaintiffs never repudiated or renunciated the Agreement.  On 22 September 2009, they were still insisting the 1^st Defendant to perform the Agreement in accordance with its terms.  They were forced to mitigate their damage by negotiating a settlement.  There was no repudiation or renunciation on their part.

95.Mr Tam further argued that in reliance on the supplemental agreement, the 1^st Defendant prejudiced its position by withdrawing its objection to the premium assessed by the DLO dated 8 June 2009.  He argued that the 1^st Defendant suffered detriment as the premium has surged from a total of $2,924,350 as of 8 June 2009 to $5,081,120 by 7 October 2010 and hence the Plaintiffs are estopped from denying the existence of the supplemental agreement and from enforcing the Agreement.  With respect, this is a very presumptive and circular argument, which is incapable of being understood.  If on the fact I am unable to find that the parties had entered into the alleged supplemental agreement, there can be no basis for the 1^st Defendant to argue that the Plaintiffs had made any representation of the existence of the supplemental agreement on which the 1^st Defendant acted and suffered detriment.  Besides, the 1^st Defendant has not suffered any detriment as it is not required to pay the increased premium and never paid.  

96.I therefore conclude, on the assumption that the Agreement had not been frustrated, the Plaintiffs had not renunciated or repudiated the Agreement and the 1^st Defendant are not discharged from further performance of the Agreement.  But that is of no consolation to the Plaintiffs in view of my conclusion on frustration.

CONCLUSION

The judgment

97.My decision either way will cause injustice to one of the parties.  To hold the Agreement frustrated would be in conformity with well established legal principles; whereas to hold the Agreement is still on foot would not.  I do not shy away from my criticism that the conduct of the DLO was the cause of the injustice.

98.For reasons as explained, I find the Agreement discharged by reason of frustration.  The 1^st Defendant is obliged to return the deposit paid by the Plaintiffs for total lack of consideration.  I therefore dismiss the Plaintiffs’ action except to the extent of ordering the return by the 1^st Defendant of the deposit of $390,000 forthwith. 

99.While the 1^st Defendant succeeded on its plea of frustration, it made false allegations against the Plaintiffs which the Plaintiffs have to rebut.  And in the course of so doing, it was revealed that the 1^st Defendant had been and still is receiving secret rental income from the Property, which presumably it had no intention to account for by reason of its non-admission.  It also obviously intended to make secret profit by attempting to discount from the purchase price of the Property a fictitious claim of decoration expenses of $800,000.  It was in serious breach of its duty as chargee.  It also unnecessarily took up much time in arguing on grounds which were bound to fail and factual issues which it failed to prove.  It succeeded on evidence which is not in dispute.  Besides that, the rest of its case was largely concocted.  I therefore make a costs order nisi that there be no order as to costs.

A plea to the DLO

100.This has not been an easy decision to make.  The loss and damage to be suffered by the parties would be in the magnitude of millions of dollars.  The ultimate question is: which of the two innocent parties to the Agreement is to suffer for the contumelios delay of the DLO.

101.I am least concerned with the loss suffered by Freeway and the 1^st Defendant.  They were parties to the breach of the non-assignment clause.  They had constructive, if not actual, notice of the non-assignment clause.  They carried on the business of financing and ought to have exercised due diligence and discovered that restriction before advancing money to the 2^nd Defendant on the strength of the Property as security.  They assumed business risk by reason of the nature of their business.  In any event, the 1^st Defendant has by now more than fully recovered its loan and interest through the rental income it received; and Freeway had a chance of a substantial recovery, but forwent it by its uncooperative, uncompromising and arrogant attitude. 

102.My sympathy is with the Plaintiffs.  They are simple old folks wanting to invest in a home but were first made victims by the default of the 2^nd Defendant.  To mitigate their loss, they purchased the Property from the 1^st Defendant acting as chargee of the Property.  Then they became victims of the DLO.  They were double scourged.  As a result, they suffered the loss of their entire investment and the benefit of the appreciation of the Property over a very critical five year period in the property market which their prudence and foresight would have earned.

103.Unlike Freeway and the 1^st and 2^nd Defendants, the Plaintiffs were not parties to the breach of the non-assignment clause.  There is nothing to suggest that they were in breach by jointly developing the Property with the 2^nd Defendant.  They entered into the Agreement with the 1^st Defendant as the chargee who had obtained an order for sale from the court.  Their charging orders were made as an exercise of a creditor’s right to a legal remedy by charging whatever interest the 2^nd Defendant had over the Property.  They were utterly without fault.  However, they were made to suffer collateral damage as the result of Freeway’s and the Defendants’ breach and the DLO’s delay in assessing the premium.  I think the DLO cannot free himself from blame for the delay, the hardship and injustice he caused to the Plaintiffs.

104.It was suggested by DLO’s senior land executive that this is a case for which there was no precedent.  But that cannot explain why the DLO took almost five years to come up with a decision.  If there was no precedent, this case should have been the better and prior occasion to set one. The DLO should have made a decision then within reasonable time.  He should not have deferred making a decision until 2008 and to let a later case set the precedent.  Then his officers took yet another year to come up with an assessment.  Some officers of the DLO are badly to blame.  The DLO should have either tolerated the breach and made the assessment or taken prompt enforcement action and re-entered the land within reasonable time.  The parties are entitled to know their position and arrange their affairs.  Even if the DLO had re-entered in 2004, the Plaintiffs would have ended up in a better position. They could have taken steps to mitigate their loss, bought another property and protected themselves from the inflation of the property market during those five years.  In deciding to tolerate, the DLO may not be criticised even if he charged premium equivalent to the full price of the land without giving any credit to the concessionary price paid by the 2^nd Defendant for the Plaintiffs are not indigenous villagers.  But in deferring his decision for four years and eight months, he deserves severe criticism for his delay which is in contumelios disregard of the Plaintiffs’ interest and expectation.  The price of property has now become unaffordable to the Plaintiffs.  The Plaintiffs are suffering grave injustice at the hands of the DLO.  It is this injustice that I wish to address.  

105.This injustice has to be rectified by the DLO who caused it.  Therefore, I invite the DLO to take very prompt enforcement action against the Property which would have the effect of clearing the incumbrances which are void and to have the un-incumbered Property sold to the Plaintiffs at a price which would give the DLO some saving grace for curing the injustice created by the irresponsible and ugly conduct of his officers.  A price at the full land value in 2004 plus all costs of enforcement or the purchase price under the Agreement, whichever the higher, would be a convenient starting point for negotiation of the purchase price.  The Plaintiffs would then be restored to the position as if the Agreement has been performed.  They will be able to retain their equities in the Property they invested and the benefit of their foresight in the investment.  For reasons as explained in paragraph 101, taking enforcement action would not cause any injustice to Freeway or the 1^st Defendant.

Mr Victor Luk, instructed by K B Chau & Co, for the Plaintiffs

Mr Jeffrey Tam, instructed by Philip T F Wong & Co, for the 1^stDefendant

The 2^nd Defendant was not represented and did not appear