Howarth Cheung Natalie Jane Y. S. v. Tsang Hong Kwang Ok and Another

CACV 272/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 272 OF 2013

(ON APPEAL FROM HCA NO. 2298 OF 2012)

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BETWEEN

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Before : Hon Cheung CJHC, Lam VP and Cheung JA in Court

Date of Hearing : 17 September 2014

Date of Judgment : 15 October 2014

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J U D G M E N T

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Hon Cheung CJHC :

1.I agree with the judgment of Cheung JA and the additional observations made by Lam VP.

Hon Lam VP :

2.1I respectfully agree with the judgment of Cheung JA, which I have read in draft.  I only wish to add a few words on the question of equitable relief.  As far as Hong Kong law is concerned, as discussed in my Lord’s judgment, the judgment of Lord Hoffmann in Union Eagle is conclusively against the case of the plaintiff.  Mr Lee valiantly tried to escape from this inevitable result by contending that the erroneous and unforeseeable event causing default in the present case was not remotely in the contemplation of either party.  With respect, I cannot accept this submission.  As my Lord explained, it was perfectly open to the plaintiff to arrange for payment of the initial deposit by way of a cashier order.  Alternatively, the plaintiff can also arrange for such payment by way of a cheque marked good by the bank.  The plaintiff chose instead to make such payment by an ordinary cheque.  In so doing, unless there are contractual provisions to the contrary, the plaintiff assumed the risk attendant upon such a mode of payment.

2.2As a matter of substance, I cannot see any material distinction between the present case and the situation of the purchaser in Tanwar Enterprises Pty Ltd v Cauchi (2003) 210 ALR 359.  Thus, even if there were scope for the more liberal approach in the Australian authorities to be applied, it cannot be of any avail to the plaintiff.  In addition to the passages cited by my Lord, I would also draw attention to paragraphs 120 to 122 of the judgment of Kirby J in that case, where His Honour underscored the requirement of a burden upon the conscience of the innocent party.  At paragraph 122, Kirby J made the following observations,

‘ In the present instance, … there is no such burden on the vendor’s conscience. Given the nature of the transaction and of the parties, … the language of the strict stipulation as to time and its obvious purpose, the arrangement of the purchaser … was one that carried inherent risks of delay resulting in breach of the essential stipulation. When those risks eventuated, they did not constitute an accident.’

In my view, the same observations can be made here. 

2.3Mr Lee accepted in the course of argument that the estate of a purchaser who died at an inopportune moment before making a payment on time (despite he had the necessary fund for doing so) could not claim equitable relief in a conveyancing transaction.  This illustrates the mere insistence on a strict time limit for payment in a conveyancing transaction cannot be regarded as unconscionable notwithstanding the default of a purchaser is due to unfortunate circumstances beyond his control.  There is thus no room for the grant of any equitable relief in the present case.

Hon Cheung JA:

I. Background

3.1The plaintiff is the purchaser (‘the purchaser’) of a property in the residential development known as Vienna Court, Realty Gardens, situated at 41 Conduit Road, Hong Kong together with a car park (‘the property’).  The defendants, a married couple, are the vendors (‘the vendors’) of the property.

3.2The parties entered into a Preliminary Agreement dated 27 November 2012 (‘the Agreement’) for the sale of the property in the sum of $25 million.  Clause 2(a) provided that, among other things, a deposit of $1,240,000 shall be paid upon signing of the Agreement.  This is slightly less than 5% of the purchase price.

3.3Upon signing the Agreement, the purchaser provided a cheque dated 26 November 2012 of $1,240,000 drawn on her bank, HSBC, in favour of the vendors’ solicitors Messrs Edmund W H Chow & Co. (‘Edmund Chow’) as deposit under the Agreement.

3.4On 4 December 2012 Edmund Chow informed the vendors that the cheque was dishonoured upon presentation.  Edmund Chow was informed by HSBC of the dishonour on 3 December 2012.  The reason for the dishonour was said by HSBC to be ‘Drawer’s chop/signature differs from specimen in our possession.’ 

3.5Upon the advice of Edmund Chow, the vendors decided to terminate the Agreement.  However, on the evening of 4 December the husband of the purchaser (‘Mr Nihalani’) approached the vendors, as they happened to be neighbours living in adjacent flats and there were discussions between Mr Nihalani and one of the vendors (‘Mr Tsang’) about the dishonour of the cheque and the transaction.  Mr Tsang informed Mr Nihalani that they had decided to terminate the transaction and nothing came out from the discussion.

3.6On 5 December 2012 Edmund Chow issued a letter of the same date to the purchaser’s solicitors Messrs Vincent T. K. Cheung, Yap & Co. (‘Vincent Cheung’) stating, among other things, that the purchaser was in breach of Clause 2 of the Agreement by paying a cheque for the deposit which was dishonoured.  The vendors confirmed that they had accepted the purchaser’s repudiation and the Agreement was terminated.

3.7The purchaser then commenced the present action seeking, among other things, specific performance of the Agreement.  The vendors raised a counterclaim for, among other things, the sum of $1,240,000. 

3.8Pursuant to the vendors’ application for summary judgment for the sum of $1,240,000, Deputy High Court Judge Simon Leung gave judgment for the vendors.  The purchaser now appeals.

II. Time of the essence

4.1Although there was no express provision in the Agreement making time to be of the essence, it is now beyond argument that in the context of Hong Kong conveyancing, time was of the essence of the Agreement.  Further, although the document signed by the parties was described as a Preliminary Agreement, it was to all intents and purposes a binding and enforceable agreement.  The time of essence principle has been clearly stated by this Court in Wong Wai Chi Ann & Anor v Cheung Kwok Fung Wilson & Ors [1996] 3 HKC 287 by Godfrey JA at 290 :

‘ …… But in the absence of special circumstances, it will usually be the case that a provisional agreement for sale and purchase in the common form in use in Hong Kong will be treated as one of which time is of the essence, although no express provision in that behalf is contained in the agreement (for helpful dicta to that effect in this court see: Man Sun Finance International Ltd v Lee Ming Ching Stephen [1993] 1 HKC 113 at 120B-D, [1992-93] CPR 340 at 347 A-D per Litton JA; Lee Kenny v Wong Kwok Yan [1994] 2 HKC 309 at 316, [1994-95] CPR 356 at 363 per Macdougall VP; and Health Link Investment Ltd v Pacific House Investment Ltd [1995] 1 HKC 249 at 258, [1994-95] CPR 399 at 408 per Liu JA).’

4.2This was approved by Court of Final Appeal in Kwan Siu Man v Yaacov Ozer (1997-98) 1 HKCFAR 343 per Litton PJ at p.355C–E :

̒  Further, as is common knowledge in Hong Kong, the property market is highly volatile.  Whatever might have been the position in England in the last century — when the concept of an “open contract” was first developed in a climate of a stable pound sterling and no inflation — in the Hong Kong of today, the date of completion is an essential term of any contract for the sale and purchase of land: to the extent that in the case of a provisional agreement in the common form in use here, time for completion would normally be treated as of the essence of the agreement, even though no express provision to that effect is in the agreement: see Wong Wai Chi v Cheung Kwok Fung [1996] 3 HKC 287.’

4.3Mr Thomas Lee, counsel for the purchaser, does not challenge this principle on appeal, although he states that, in the event that the purchaser is granted leave to defend, he would argue the issue of time of the essence at the trial having regard to the particular situation at the time of Agreement which was shortly after the Government had introduced measure by way of stamp duty to cool the overheated property market.

4.4In Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514, the Privy Council on appeal from Hong Kong, rejected the purchaser’s contention that tender of the balance price ten minutes after the 5 pm deadline for completion was good tender where time was of the essence of the contract.  Lord Hoffmann at 518 stated that :

̒  ……But he is not entitled unilaterally to tender performance according to some other terms. Once 5 p.m. had passed, performance of the contract by the purchaser was no longer possible.  The vendor could be required to accept late performance only on the grounds of some form of waiver or estoppel.’

4.5If time was of the essence of the Agreement, then the failure of the purchaser to pay the cheque on time by reason of its subsequent dishonour clearly constituted a repudiation of the Agreement which entitled the vendors to accept and terminate the Agreement.

III. Implied term suspending payment

The Purchaser’s case

5.1Mr Lee, however, submits that the time of essence provision is further subjected to an implied term that the payment of the deposit is suspended because of the extraordinary event that had happened which was beyond the control of the purchaser.  It was an error on the part of the bank.  He categorised the event as a ‘catastrophic accident’ which was not foreseeable by the parties.  The purchaser’s case on the dishonour of the cheque is that HSBC was in error in verifying her signature.  There was no discrepancy of her signature on the cheque with her specimen signature that was kept by HSBC. HSBC also did not inform her immediately of the dishonour. 

5.2The implied term that Mr Lee seeks to engraft onto the Agreement is as follows :

̒ Where, through no fault of the [purchaser’s] own, the cheque is dishonoured on first presentation because of an unforeseen error on the part of the [purchaser’s] bank, the [purchaser’s] obligation to pay the initial deposit upon signing of the Preliminary Agreement is suspended until the error is rectified.’

5.3Mr Lee relies heavily on the Australian case of Imperial Brothers Pty Ltd v Ronim Pty Ltd [1998] QCA 444 where the purchaser’s solicitor was unable to conduct a title search before completion of a land sale because the computer system of the Land Titles Office was inoperative.  The purchaser’s request for completion after the 5 pm deadline was refused by the vendor.  The Court of Appeal of Queensland first of all recognized that :

̒ 15. …... Where parties have contracted in clear terms, their apparent intent must be respected.  It is not part of the court’s role, in such a case, to engraft what it may see as a generally desirable criterion of fairness onto what the parties have agreed. If, as here, the parties have created an apparently rigid framework, then the court must respect, not disregard, the underlying intent.’

5.4As a result it held that there should be no extension beyond the 5 pm deadline.  However, it went on to hold that there was an implied term that :

̒ 18. …… Where, through no fault of their own, on the day for completion, the parties cannot carry out the necessary computer checks through the Land Titles Office to verify title, because the relevant departmental computer is inoperative, the obligation to complete is suspended until that can be done.  Such a term is reasonable and equitable, so obvious that it goes without saying (especially in light of the evidence about uniform conveyancing practice), is capable of clear expression, and is not contradictory of any express provision of the contract.  As to the other requirement, that the term be necessary to give business efficacy to the contract, while it is true that the contract could operate without such provision, it could not in these circumstances operate effectively, because the purchaser would be quite unable to determine whether it would, in exchange for the balance purchase moneys, receive the title it had been promised.  It is to our mind inconceivable that had the parties given consideration to this possibility, they would have assumed that the purchaser would be obliged nevertheless to stumble on in the dark.’

5.5Ronim was referred to in two subsequent first instance judgments of Australia namely Aussie Invest v Pulcesia Pty Ltd [2005] VSC 362 (Supreme Court of Victoria Dodds-Streeton J) and Grubb v Toomey [2003] TASSC 131 (Supreme Court of Tasmania Slicer J) but with no discussion on the decision itself.

5.6In the Court below, the purchaser also relied on an implied term that a reasonable time should be allowed for the cheque to be honoured.  This was rejected by the Judge and was no longer pursued here.

My view on implied term

5.7As is readily apparent, the implied term Mr Lee now relies upon in the present case is formulated along the same lines as Ronim. 

5.8In my view Ronim is clearly a decision based on its own facts.  Under the Australian Torren title system, the proof of title is based on the certificate of title issued by the Land Titles Office.  On this basis, one can readily see the need and significance of the parties (not only that of purchaser but also the vendor) having access to the departmental computer.  This is because without title confirmation from this office, the vendor would not be able to show a good title and the purchaser would not be obliged to accept title from the vendor.  On this basis, the implied term imposed by the Court of Appeal of Queensland is clearly necessary to give business efficacy to the transaction.

5.9However, in the present case, my firm view is that there is no room for the implied term sought by Mr Lee to be imposed in the Agreement.  Unlike the position where the breakdown of the departmental computer is beyond the control of the parties, the obligation to pay the deposit on its due day lies fully and squarely within the control of the purchaser.  The starting point of the discussion is the fundamental principle in commercial law that a cheque is treated as cash.  Lord Denning M.R. in Fielding & Platt Ltd v. Selim Najjar [1969] 1 W.L.R. 357 at 361 stated that :

̒ We have repeatedly said in this court that a bill of exchange or a promissory note is to be treated as cash.  It is to be honoured unless there is some good reason to the contrary.’

5.10Mr Lee argued that it is necessary for the purchaser to collaborate with a third party, namely, HSBC in order to perform the obligation of the payment of the deposit.  However, the relationship between a customer and its bank in respect of the drawing and payment of the customer’s cheques as against money of the customer’s in the banker’s hands is that of principal and agent, as per Lord Atkinson in Westminster Bank Ltd v Hilton [1927] 43 TLR 124.  Therefore any dispute between the purchaser and her bank HSBC on the verification of her signature is not a matter that the vendor should be concerned of. 

5.11The suggested implied term clearly does not fulfill the requird conditions reaffirmed in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 at paragraph 26, namely,

̒ (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; (5) it must not contradict any express term of the contract.’

in that, most importantly, it does not meet the necessity of giving business efficacy to the transaction for the reasons that I have just given.

5.12Furthermore, this implied term, apart from being contradictory to the express term of the contract on the payment date, is not capable of clear expression.  Error on the part of the bank may take many forms.  Hence it has to be restricted to the error of verification of the signature as I have suggested at the hearing.  But even with this restriction, such a term is problematic.  In a matter concerning the verification of a signature, short of a clear admission from the bank that it had erred on the verification, how is one to judge that an error had in fact been made?  Is the purchaser’s obligation to be held in suspense because of what she perceived to be an error by the bank?  How long should the suspension be?  Is a fresh payment to be made immediately upon the dishonour or is a reasonable time to be given? If a reasonable time formula is to be used, how long should it be?

5.13These questions highlight the difficulties of implying such a term to the payment of deposit which, in the context of Hong Kong conveyancing, took place at the same time of the signing of a ‘Preliminary Agreement’ or ‘Provisional Agreement’.  This type of agreement is a binding agreement which affects the rights and obligations, not only of the parties themselves, but also of third parties such as estate agents.  Based on the agreement, a purchaser also has the right to enter into sub-sales with its own purchasers.  In my view the suspension of the obligation of the purchaser to pay the deposit is simply not workable in this context. 

5.14Mr Lee submits that the implied term is necessary at this stage because, unlike the completion stage when the purchaser has ample time to have the payment in order and can pay by cashier order issued by the bank (instead of a cheque) which will preclude any room for error, the opportunity for a prolonged negotiation to enter into a ‘preliminary agreement’ is often not feasible in the local property market and a decision to buy has to be made very quickly and payment of the deposit by cheque is often the common form of payment. 

5.15I disagree.  Even in a heated property market where there is a rush to enter a deal, I think the difficulty of paying by a cashier order instead of cheque is exaggerated in a city like Hong Kong which has a sufficient banking system.  At most it may involve more work on the part of the purchaser in getting a cashier order.

IV.  Equitable Relief

6.1The purchaser asks for relief from the termination of the Agreement by reason of the cheque being dishonoured.  She further asks for specific performance of the Agreement.

The traditional view

6.2Lord Hoffmann discussed equitable relief in Union Eagle Ltd.  At 520 he referred to Steedman v Drinkle [1916] 1 AC 275 and explained that for the past 80 years, the courts in England, although ready to grant restitutionary relief against penalties, have been unwilling to grant relief by way of specific performance against breach of an essential condition as to time.

6.3He, however, recognized at page 521, that this principle, although has never been questioned in any case in England or the Privy Council, has been criticised in academic writings and certain Australian cases as both historically inaccurate and unduly rigid.  Amongst the Australian cases he referred to are the well-known case of Legione v. Hateley (1983) 152 C.L.R. 406 and Stern v. McArthur (1988) 165 C.L.R. 489.  At page 523, he held that it will remain for consideration on some future occasion as to whether the way to deal with the problems which have arisen in such cases is by relaxing the principle, as the Australian courts have done, or by development of the law of restitution and estoppel.

6.4Lord Hoffmann held at page 523 :

̒ There is no question of any penalty, or of the vendor being unjustly enriched by improvements made at the purchaser’s expense, or of the vendor’s conduct having contributed to the breach, or of the transaction being in substance a mortgage.’

6.5He concluded that there was no relief in that case because :

̒ The present case seems to their Lordships to be one to which the full force of the general rule applies.  The fact is that the purchaser was late.  Any suggestion that relief can be obtained on the ground that he was only slightly late is bound to lead to arguments over how late is too late, which can be resolved only by litigation.  For five years the vendor has not known whether he is entitled to resell the flat or not.  It has been sterilised by a caution pending a final decision in this case.  In his dissenting judgment, Godfrey J.A. said that the case ‘cries out for the intervention of equity.’  Their Lordships think that, on the contrary, it shows the need for a firm restatement of the principle that in cases of rescission of an ordinary contract of sale of land for failure to comply with an essential condition as to time, equity will not intervene.’

Application of the traditional view

6.6In the present case I do not accept equity should step in to decree specific performance and in the context of an order 14 application this is not an issue that calls for leave to defend to be granted.  Applying the traditional view as stated in Union Eagle Ltd, the purchaser was in breach of an essential condition as to time of the payment of the deposit.  There is also no question of any penalty, or of the vendor being unjustly enriched by improvements made at the purchaser’s expense, or of the vendor’s conduct having contributed to the breach, or of the transaction being in substance a mortgage.

The Australian approach

6.7The Australian approach is that, in a proper case, it is sufficient to sustain equitable jurisdiction to relieve a purchaser under a contract for sale of land against forfeiture of his interest for time default, even in respect of a time provision agreed to be essential.

6.8In Legione, it was held that fraud, mistake, accident, and surprise are elements which may make it inequitable to insist on termination of a contract for failure to observe its strict terms.

6.9In Stern, Mason CJ also stated that equity intervenes only where the vendor has, by the vendor’s conduct, caused or contributed to a circumstance rendering it unconscionable for the vendor to insist upon its legal rights.

6.10These two cases had been analysed by Lord Hoffmann in Union Eagle Ltd at pages 521 to 522, I will not repeat them.  In the more recent case of Tanwar Enterprises Pty Ltd v Cauchi (2003) 201 ALR 359, the High Court of Australia examined the ambit of these two cases. Kirby J at paragraph 99 described the majority in Legione :

̒ embraced “an expansive view of the equitable jurisdiction to relieve against forfeiture”.’

6.11At paragraph 106, sub-paragraph 3, Kirby J referred to Stern and held that :

̒ The equitable interest has developed to relieve from forfeiture a party with a substantial stake in the property in consequence of an exercise of legal rights that is shown to be the result of fraud, mistake, accident or surprise or otherwise unconscionable in all the circumstances.’  (emphasis added)

6.12In Tanwar, the vendors entered into three contracts to sell land to the purchaser.  Deposits were paid by the purchaser. The original date for completion of the contracts was extended from 28 February 2000 to August 2000. 

6.13On 20 August 2000, the vendors issued notices of termination of each contract.  The parties negotiated deeds dated 5 June 2001, containing a new completion date of 25 June 2001.  Time was stated to be of the essence.  The funds for a second mortgage over the combined land were to come from a source in Singapore.  Those funds did not arrive on the due date, but on 26 June 2001.

6.14The vendors served notice of termination of each contract.  The purchaser commenced proceedings in the Supreme Court of New South Wales, for relief against forfeiture and for specific performance of each contract or alternatively for return of each deposit.

6.15The primary judge rejected the claim to relief against forfeiture.  The Court of Appeal dismissed the purchaser’s appeal.  The purchaser further appealed to the High Court of Australia.  It dismissed the purchaser’s appeal.

6.16Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ at paragraphs 63 to 66 discussed the issue of relief by reason of ‘accident’ :

̒ [63]    In its extremity, Tanwar [i.e. the purchaser] then founds upon the jurisdiction to relieve against the consequences of “accident”.

[64] In Legione, Mason and Deane JJ referred to authorities disputing the treatment of cases of relief against penalties and forfeitures as instances of relief against accident. The jurisdiction with respect to accident was recognised at a time before the development of any settled body of equitable principles. The point is well made by Professors Keeton and Sheridan:

“Accident” was a vague term which covered many situations, in their nature unforeseen, and it could, in particular situations, shade off into fraud. The law of mistake, particularly in relation to contracts and conveyances, is included under this head, and it led in turn to the development of the equitable rules governing the rectification of contracts and other instruments, and the rescission of documents of all kinds.”

[65] What then remains as the subject matter of accident in modern equity? In Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 at 385-6, Young J referred to various writings on the subject which distinguish mistake as supposing an operation of the will of the agent in producing the event, albeit by reason of erroneous impressions on the mind. Spence, writing in 1846, said that the kinds of accidents or cases of extremity which might be relieved against were only to be ascertained from an examination of the cases (The Equitable Jurisdiction of the Court of Chancery, 1846, vol 1, p 628). He instanced forfeiture and penalties. Other instances include the accidental diminution of assets in the hands of an executor, lost evidence and the defective execution of powers of appointment, (Snell’s Equity, 30^th ed, 2000, pp 603-6) all far from the present case.

[66] However, the learned writers on the subject emphasise and put to one side those situations where the event which has come to pass is one for which an express exculpatory provision might have been made, but was not sought or was not agreed to, and where to relieve against its consequences after it has occurred would deprive the other party to the contract of an essential right. In particular, equity will not relieve where “the possibility of the accident may fairly be considered to have been within the contemplation of the contracting parties”. Story wrote:

And this leads us naturally to the consideration of those cases of accident in which no relief will be granted by Courts of Equity. In the first place, in matters of positive contract and obligation created by the party (for it is different in obligations or duties created by law), it is no ground for the interference of equity that the party has been prevented from fulfilling them by accident, or that he has been in no default, or that he has been prevented by accident from deriving the full benefit of the contract on his own side ... The reason is, that he might have provided for such contingencies by his contract if he had so chosen; and the law will presume an intentional general liability where he has made no exception.’

6.17The Judges held that accident was not established in that case :

̒ [67]    It is here that the circumstances leading up to, and the terms of, the 2001 deeds are of critical importance.  The vendors withdrew the earlier notices of termination in return for the assumption by Tanwar of obligations to complete couched in unqualified terms.  The obligation in the 2001 deeds to settle by the stipulated time was not made subject to the availability of Tanwar’s finance on that day.  That there might be a failure by a third party to provide the finance was reasonably within the contemplation of Tanwar.  The failure by Tanwar to avail itself of the advantages it obtained by negotiating the 2001 deeds and by keeping the contracts on foot had the effect of exposing Tanwar again to the exercise by the vendors of their rights to terminate the contracts.  Equity does not intervene to prevent the effective exercise of those rights.  The claim by Tanwar for relief against the consequences of the failure in the timely provision of the second mortgage does not succeed.’

6.18Kirby J agreed that there was no accident in that case.  He held that :

̒ [118]    It is to be noted that “accident” in this context, as one of the stated grounds for equity’s intervention, is not expressed as a free-standing foundation for a new and so far unelaborated development of equitable principle.  Instead, as hypothesised, it remains for the party relying on the relevant “accident” to render it applicable, as a source of equitable relief, by showing that, although the accident was not occasioned by the “innocent party”, it is sufficient of itself to render it unconscionable or inequitable for that party to insist upon its legal rights.

[119] This formulation makes it clear that, in the end, the provision of equitable relief comes back to a consideration of whether, in the light of an accident caused by a stranger, it is unconscionable or inequitable for the innocent party to the contract to proceed as otherwise in law it is entitled to do. Self-evidently, where the vendor in a contract of sale with a strict time stipulation is entitled under the contract to enforce its legal rights, it takes an exceptional “accident” to burden the innocent vendor with obligations of conscience derived from an event over which it had no control and for which it was not responsible.’

My view on the Australian approach

6.19In my view, even if the traditional view is to be departed and relief is to be granted on the breach of an essential condition as to time of the Agreement relating to payment of the deposit, the non payment in the present case does not fulfil the requirement of an accident as detailed in the Australian approach.

6.20The parties themselves have stipulated the time for payment which is of the essence of the contract.  The purchaser had chosen to pay by cheque which in law is in the nature of payment by cash.  This by itself precludes any argument on suspension of this obligation.  Further, the possibility of the bank not honouring the cheque is not beyond the reasonable contemplation of the parties as mishaps do happen.  Hence payment of the deposit can be subject to an exculpatory provision which has not been sought for by the purchaser in the first place.  As presently drafted, the payment term is not subject to the purchaser tendering another payment upon discovering that the cheque has not been made.  In any event, HSBC is not a third party in the strict sense of the term but an agent of the purchaser.  To decree relief will deprive the vendor of an essential right of the agreement.  The whole circumstances just do not come within the ambit of the requirement for relief that, although the accident was not occasioned by the vendors who were innocent, it was sufficient of itself to render it unconscionable or inequitable for the vendors to insist upon its legal rights.

6.21In the circumstances, there is no room for equitable relief.

V.  Judgment sum

7.1In the Court below there was argument whether the vendors could recover the sum of $1,240,000.  This sum was sought in the counterclaim as ‘the forfeited deposit’ or alternatively as ‘liquidated damages’.  Reference was made by the vendor to Clause 8 of the Agreement which provided that :

‘Should the Purchaser fail to complete the purchase in the manner herein contained the deposit shall be forfeited to the Vendor and the Vendor shall then be entitled at his absolute discretion to sell the said premises to anyone he thinks fit and the Vendor shall not sue the Purchaser for any liabilities and/or damages caused by the Purchaser’s default of this Agreement.’

7.2In my view the first description in the vendors’ claim is not strictly correct because this sum had not been paid yet and therefore there was nothing for the vendors to forfeit.  The alternative description is also incorrect because the amount is not in the nature of liquidated damages but is either a liquidated sum or a debt.

7.3Mr Lee does not strenuously argue this issue on appeal and simply relies on his written submission on the recovery of this sum.

7.4In my view this sum is recoverable.

7.5In Dewar v. Mintoft [1912] 2 K.B. 373, the purchaser of a farm contrary to the conditions of sale, had in fact never paid any deposit at all and refused to carry out the contract of purchase.  The farm was subsequently resold by the vendor, and the actual damage suffered by the vendor by reason of the breach of contract was less than the sum the purchaser would have deposited if he had carried out the contract.  The vendor brought an action against the purchaser for damages for breach of the contract.  It was held by Horridge J that although no deposit had in fact been made, the vendor was entitled to recover the amount which would have been deposited by the purchaser if he had performed his contract, and not merely the actual damage suffered by the vendor.  The point was dealt with very briefly at page 387 :

̒ At the trial it was contended before me that the paragraph beginning ‘Lastly’ at the end of the conditions of sale did not apply inasmuch as the deposit had not been paid, and that the only damages which could be recovered were the actual loss and expenses on resale.  I ruled that the defendant could not put himself in a better position by refusing to pay the deposit than if the deposit had in fact been paid, in which case it could be retained by the seller (Wallis v. Smith (1882) 21 Ch.D. 243), and I directed the jury that the damages [should be calculated accordingly].’

7.6Dewar was applied in Hong Kong in cases including Sun Lee Kyoung Sil v Jia Weili [2010] 2 HKLRD 30 (Recorder Patrick Fung SC).

7.7Pennycuick J in Lowe v Hope [1970] 1 Ch. 94 declined to follow Dewar.  At page 100, he stated that :

̒  ….. In the present case the vendor has elected for rescission and he is not entitled, as a preliminary to rescission, to obtain an order for payment which he could only obtain if he were insisting upon performance of the contract. 

No authority directly in point has been cited apart from Dewar v. Mintoft [1912] 2 K.B. 373.  I was referred to a discussion in the notes in Williams on Vendor and Purchaser, 4th ed. (1936), Vol. 2, at pp. 1007 and 1011.  I will not read those notes.  It will be sufficient to say that the author is evidently not very happy over the decision in Dewar v. Mintoft [1912] 2 K.B. 373 and he suggests, without approval, a possible explanation of that judgment, something on the lines of the argument advanced by Mr. Leckie here.  I share the author’s doubts.  It seems to me that, with great respect, I ought not to follow that decision.’

7.8Lowe was adopted in the Australian case of Kathopoulos v Bjelica Investments Pty Ltd 25 ALR 309.  The purchaser there likewise failed to pay a deposit of $14,000 for the sale of land.  The vendor rescinded the contract and sought “by way of liquidated damages pursuant to the agreement being the amount of the deposit forfeited” plus certain sums for lost rent and legal costs and, in the alternative, damages for breach of contract.  Muirhead J of the Supreme Court of the Northern Territorydeclined to give judgment for the sum of $14,000.  At page 324, he held that :

̒  ……  It seems to me that the recoverability of moneys equating the unpaid deposit will to some extent depend upon the wording of the contract.  In the present case it seems to me that the issue is an open one; but as I said previously I do not consider a court should treat a deposit as liquidated damages upon rescission, unless the parties have so agreed.  Nor, once the contract has been rescinded, should unpaid deposit moneys retain an identity so as to be recoverable as damages: an entirely different concept to forfeiture of such moneys paid by way of earnest to the bargain.  In short, whilst my understanding is that I am not bound by authority I consider I should follow the more modern authorities and if Dewar v Mintoft is to be established as the law, it is preferable that a higher court should so decide.’

7.9The English Court of Appeal in Damon Compania Naviera S.A. v. Hapag Lloyd International S.A. [1985] 1 WLR 435, however, held that Dewar was correctly decided and declined to follow Lowe.  In that case, the agreement of the parties was that a 10% deposit ($236,000) was to be paid upon the parties signing a memorandum by a stipulated date.  The agreement provided that if the purchase money was not paid, the sellers had the right to cancel the contract and forfeit the deposit.  The memorandum was not signed and the deposit not paid.  The seller withdrew the agreement.  The arbitrator held that the vendor was entitled to $60,000 by way of damages.  On a special case stated by the arbitrator Leggatt J held that the seller was entitled to recover the deposit from the purchaser.  On appeal, Fox LJ at 449 held that,

̒  …… I accept that in a seller’s action against the buyer for non-acceptance of goods and failure to pay the price the measure of damages would normally be the difference between the price under the contract and the market or current price for the goods. The postulated action in the present case, however, is of a different kind.  It is not an action for failure to take delivery but an action on a particular term of the contract.  That term, I suppose, had a practical use in that it required the terms of the contract to be recorded.  But its principal, if not its only, legal consequence was that (on the construction which I have adopted) it was the event which obliged the purchaser to pay the deposit. Damages for breach of contract are a compensation for the loss which the plaintiff has suffered through the breach.  Accordingly, the plaintiff is entitled to be placed in the same position as if the contractual obligation had been performed.  In the present case, if the obligation had been performed, Hapag-Lloyd [seller] could have sued Damon [purchaser] in debt for the amount of the deposit and it seems to me that that should be reflected in the damages recoverable for breach of the obligation.  The fact that Hapag-Lloyd would thus recover an amount of damages greater than the general loss of the bargain for sale does not seem to me to be a conclusive answer.  The purpose of the deposit was to protect Hapag-Lloyd against the event which actually happened, namely the failure by Damon to complete.  In that event Hapag-Lloyd was intended to have secured to it, by forfeiture of the deposit, an amount of money which could well exceed the amount of the general damages recoverable against the purchaser for failure to take delivery and pay the purchase price. Consequently to allow a claim for damages for failure to sign the memorandum, in an amount equal to the amount of the deposit does not seem to me to distort the intention of the parties but merely to place Hapag-Lloyd in the position which it would be in if Damon had complied with the obligation to sign the memorandum.  Thus far, therefore, I accept Mr. Moore-Bick’s contention.’ (emphasis added)

7.10Fox LJ at 450 referred to the consequence of acceptance of repudiation of a contract :

̒  ……The general position I take to be as stated by Dixon J. in McDonald v. Dennys Lascelles Ltd. (1933) 48 C.L.R. 457, 476-477 :

“When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach.”

This was approved by the House of Lords in Johnson v. Agnew [1980] A.C. 367, 396.’  (emphasis added)

7.11Commenting on Dewar and Lowe, Fox LJ at 451 held that :

̒ Mr. Moore-Bick contends that Dewar v. Mintoft is to be preferred to Lowe v. Hope because rescission by the injured party only releases the party in breach from future obligations.  I think that is right.  In deciding Lowe v. Hope [1970] Ch. 94 Pennycuick J. did not have the advantage of the decision in Johnson v. Agnew [1980] A.C. 367 and the clarification of the law which it contained.  Pennycuick  J. remarked that it was admittedly the case that if the vendor has accepted the purchaser’s repudiation, there can thereafter be no recovery in respect of money bearing simply the character of purchase price.  That is correct but it is dealing with a different problem.  A purchase price is payable in return for a conveyance and if the obligation to convey has gone because of the acceptance of the repudiation there is no longer a purchase and sale to which a purchase price can be related.  The right of the vendor to forfeit the deposit is not, however, dependent upon completion of the purchase.  The right to forfeit arises out of the breach and is, therefore, something quite different from the right to receive the purchase money in return for a conveyance.’  (emphasis added)

7.12Kathopoulos was amongst the cases cited in argument. Plainly in view of the analysis, its rationale was likewise rejected. 

7.13Robert Goff LJ who dissented on the facts of the case as to whether the purchaser was obliged to pay the deposit before the Memorandum was signed (page 455) did not disagree with the proposition that ‘If the repudiation occurred after the obligation to pay the deposit had accrued due, but before [the purchaser] had paid it, [the seller] could sue [the purchaser] for the deposit as a debt.’ (page 456 F)

7.14I agree with Fox LJ’s analysis that Dewar correctly stated the law on the recovery of a deposit which should have been but has not been paid by the time of rescission of the contract.  Damages for breach of contract are a compensation for the loss which the plaintiff has suffered through the breach and the vendors in the present case are entitled to be placed in the same position as if the contractual obligation had been performed.

7.15In the present case the vendors are entitled to recover $1,240,000 from the purchaser.

VI.  Conclusion

8.Accordingly, I would dismiss the appeal with costs nisi to the vendors.

Hon Cheung CJHC :

9.The appeal is dismissed with costs nisi to the defendants.

Mr Thomas Lee, instructed by Vincent T. K. Cheung, Yap & Co., for the plaintiff

Mr John Hui, instructed by Anthony Siu & Co., for the 1^st and 2^nd defendants