Channel Green Ltd v. Huge Grand Ltd

CACV 174/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 174 OF 2013

(ON APPEAL FROM HCMP NO. 2052 OF 2011)

_______________________

_______________________

_______________________

J U D G M E N T

_______________________

Hon Lam VP (giving the Judgment of the Court):

1.By a provisional sale and purchase agreement of 2 June 2011, Ho Ching Wai [“Ms Ho”] agreed to purchase from Huge Grand Limited, the defendant, the property which is made up of 10 shops and an open forecourt at a building at the junction of Prince Edward Road West and Fa Yuen Street in Mongkok, Kowloon [“the Property”]. The agreed purchase price was $240 million. Subsequently, at the nomination of Ms Ho, Channel Green Limited, the plaintiff herein became the purchaser in the formal sale and purchase agreement of 17 June 2011 [“the Agreement”].

2.The Agreement contained the following provisions (written in Chinese language), which were copied from the provisional agreement, and they are the focus of the present appeal:

“ 30. 該物業是以現狀售予買方，買方已視察及明白該物業之現時狀況，買方不得因該物業存有任何未經批准之加建、改建或潛建之建築物，而向賣方提出質詢或藉此理由拒絕成交或拖延成交。

31. 成交日或之前，該物業如收到任何政府有部門發出之清拆令，修葺令或其他命令，解除該等命令之費用及工程費用由買方負責。”

3.The English translation of these provisions, as certified, are as follows:

“ 30. The Property is sold on an ‘as is’ basis to the purchaser. The purchaser has inspected and understands the existing state of the Property, and the purchaser shall not raise any questions/inquiries or refuse to complete or delay completion of transaction on the ground that there are any unauthorized additions, alterations or illegal structures on the Property.

31. On or before the date of completion, if the Property receives any demolition order, repair order or other order issued by any governmental department, the expenses for the discharge of such orders and the cost of carrying out such works shall be borne by the purchaser.”

4.Completion was scheduled to take place on 14 October 2011 under the Agreement.  An initial deposit of $7.2 million was paid at the time of the signing of the provisional agreement.  A further deposit of $28.8 million was paid around the time of the signing of the Agreement.  Thus, altogether a total sum of $36 million (representing 15% of the purchase price) had been paid by way of deposit.  Clause 12 of the Agreement provided for the right of the defendant (as vendor) to forfeit the deposit if the plaintiff (as purchaser) failed to complete:

“ 12. If the Purchaser (other than due to the default of the Vendor and save as provided herein) shall fail to complete the purchase in accordance with any of the terms and conditions herein contained, the Deposit shall be absolutely forfeited to the Vendor as liquidated damages who may (without tendering an Assignment to the Purchaser or his solicitors) rescind the sale and resell the Property either wholly or in parcels and either by public auction or private contract with power upon such sale to make any stipulations as to title or evidence or commencement of title or otherwise which the Vendor may think fit and any deficiency in price and all reasonable expenses attending such resale(s) shall be borne by the Purchaser and shall be recoverable by the Vendor as and for damages. Any increase in price on resale(s) shall belong to the Vendor. On the exercise of the Vendor’s right of forfeiture and rescission under this clause, the Vendor shall have the right, if this Agreement shall have been registered in the Land Registry, to register at the Land Registry a Memorial signed by the Vendor alone to rescind the sale of the Property and to vacate the registration of this Agreement”

5.Clause 14 of the Agreement preserved the right of a non-defaulting party to seek relief (specific performance, damages in lieu or additional damages) against the defaulting party other than those provided for in the Agreement.  Clause 18(b) provided for the obligation of the defaulting party to bear the stamp duty for the transaction and to indemnify the non-defaulting party in respect of the same. 

6.Disputes arose between the parties on whether the plaintiff could rely on certain features in the physical conditions of the Property to challenge the title to it.  As a result the transaction was not completed and the defendant forfeited the deposit.  In these proceedings, the plaintiff seeks declaratory relief on the bases that the defendant failed to answer requisitions and failed to show and/or give a good title.  It asks for declaration of equitable lien over the Property pending return of deposit and payment of conveyancing costs and damages.  It also seeks the return of deposit and such conveyancing costs and damages for breach of the Agreement and interests.  It further asks for indemnity on agency commission payable to the estate agent.     

7.The relevant features in the physical conditions of the Property and the related requisitions were succinctly summarised by Recorder Coleman SC at paragraphs 11 to 13 of the judgment of 19 July 2013.  We gratefully adopt the same:

“ 11. Requisition 5 concerned breaches of two of the Special Conditions of the Conditions of Sale (“Government Lease”), namely:

(1) Special Condition (7) (“SC7”) which states:

‘Space shall be provided within the lot for the parking of not less than 12 private cars and the space so provided shall not be used for any other purpose.’

(2) Special Condition (8) (“SC8”) which states:

‘No structure shall be erected on any part of the area coloured red and hatched black on plan, but projections over such area at upper floor levels may be permitted as approved by the Director of Public Works.’

12. These conditions are said to have been breached because of:

(1) the absence of the car parking spaces mandated under SC7 which were originally provided for in the Forecourt but which became occupied by the Stalls; and

(2) the extension of some of the Shops into the area of the Property that is required by SC8 not to be built over (“Non-Built Over Area”).

13. Requisition 7 was in essence a request for documentary proof that the listed breaches of the Deed of Mutual Covenant (“DMC”) in respect of the Building, alleged in a letter dated 17 June 2011 from the solicitors forthe Incorporated Owners of the Building (“IO”), had been remedied.  Those breaches listed were:

(1) the entire façade overhanging on the external wall fronting Prince Edward Road;

(2) the split air-conditioning units overhanging on the external wall along the rear lane;

(3) the overhead cover of the light well (located between Flats C and D, Ground Floor, close to Prince Edward Road West); and

(4) the steel-framed racks abutting the structural wall.”

8.The defendant relies upon Clause 30 as a bar to these requisitions.

9.The plaintiff also disputes the defendant’s right to forfeit the deposit since it is more than 10% of the purchase price.  It is contended that the forfeiture provision is a penalty.

10.After trial, the learned Recorder found in favour of the defendant and he held that the defendant was entitled to forfeit the deposit.  The claims of the plaintiff were dismissed.

11.On appeal, the grounds relied upon by Mr Edward Chan SC (appearing for the plaintiff together with Mr Paul Lam SC) can broadly be summarised as follows:

(1) The judge erred in finding that Ms Ho and the plaintiff knew that there were numerous and substantial additions, alterations and illegal structures at the Property and there were potential problems with more than one government department (viz. not simply the Building Authority) in respect of the same [“the Knowledge issue”];

(2) The judge erred in construing Clause 30 to encompass breaches of SC7 and SC8 and the DMC [“the Construction issue”]; and

(3) The judge erred in holding that the forfeiture of the deposit was not a penalty [“the Forfeiture issue”].

12.Though Mr Chan in his oral submissions addressed the Construction issue first, we shall discuss the Knowledge issue before the Construction issue because the judge referred to the knowledge of the plaintiff as part of the factual matrix against which he construed Clause 30.

The Knowledge issue

13.Mr Chan accepted the onus faced by an appellant seeking to appeal against the finding of fact made by a primary judge after having the opportunity to hear the evidence at the trial.  However, Mr Chan took up the challenge by arguing that the finding of the judge was not supported by any evidence and the judge drew inference which he should not have drawn. 

14.The judge carefully considered the history of the transaction and the relevant evidence before him at paragraphs 29 to 76 in the judgment.  In respect of the Knowledge issue, the crucial paragraphs are paragraphs 61 and 64:

“ 61. But in any event, whether or not Ms Ho and Channel Green are wholly independent of the Town Health Group may not need to be decided. Where all negotiation from the purchaser’s side was conducted through Mr Leung, I have no difficulty in holding as a fact that whatever knowledge and documents were provided to him by Ms To were at some point of time before the PSPA provided by him to Ms Ho.

62. As stated, Ms Ho was present in various meetings throughout the process, and I think it more likely than not that she was kept abreast of matters as they progressed. But even assuming she was a latecomer to the deal, and replaced Town Health on its ‘referral’, she would likely have been handed the ‘file’ or told of the progress to date and she was plainly content to allow Mr Leung to continue to act as the purchaser’s agent, both before and after the PSPA.

63. I also bear in mind that had Mr Leung been called as a witness, he could have spoken to what was or was not said or passed by him to Ms Ho. Again, that he did not give evidence weakens Ms Ho’s evidence on the point. Further, though Mr Chan suggested that information obtained by Mr Leung as agent for one principal does not transfer to another principal in a concurrent agency, there was no concurrency on Ms Ho’s own case, but she would (as I find) have known or then been told of the information when she stepped into the deal.

64. It is hardly surprising Ms To continued to think Mr Leung was acting for the same principal. There is no proper evidential basis for suggesting she was ever told otherwise. Indeed, even after Mr Leung was provided on 4 June with a draft agreement which in its body and at the signature block described Ms Ho as being “of Town Health International Investments Limited”, neither he nor Ms Ho ever suggested Ms To had thereby made a mistake.”

15.Mr Chan’s submissions focused on the lack of direct evidence of Ms Ho’s knowledge of whatever information given by the agent, Ms To, to Mr Leung, the person who contacted Ms To on behalf of Town Health.  Counsel also placed emphasis on the fact that Ms Ho was not cross-examined on her evidence and the lack of basis for drawing adverse inference from the plaintiff’s omission to call Mr Leung as a witness.

16.With respect, we are not impressed by Mr Chan’s argument.  In our judgment, it is perfectly legitimate for the judge to draw the inference he did in light of the following:

(1) All along Mr Leung was the only person who as representative of the purchaser liaised with the agent.  According to the evidence of Ms To[1], the agent, it was Mr Leung who put forward the offer of $240 million on 25 May 2011 on behalf of the purchaser.  After the offer was orally accepted by the vendor, it was Mr Leung who worked on the drafts of the provisional agreement with the agent between 31 May and 2 June.  The name of Ms Ho as the purchaser was given by Mr Leung to the agent on 2 June.  The appointment for the signing of the provisional agreement was made with Mr Leung and he was present on the occasion.  Even after the signing of the provisional agreement, the agent continued to liaise with Mr Leung about the transaction;

(2) The transaction in question was a sale and purchase of substantial value and Ms Ho was a person with substantial commercial experience.  She did not come into the picture at the last minute shortly before the signing of the provisional agreement.  She had been involved from an early stage when she participated at two presentations by the agent on 5 January and 2 March 2011.  The Property was one of the properties presented on 2 March and at that presentation there were specific discussions about the use of the forecourt by the stalls-on-wheels as opposed to the provision of parking spaces.  As Ms Lisa Wong SC (appearing for the defendant together with Ms Queenie Lau) submitted, in light of the above, it defies logic and common sense that Ms Ho would not seek information from Mr Leung and that Mr Leung would withhold the relevant information from Ms Ho; and

(3) In her second affirmation filed in response to the affirmation of the agent, Ms Ho did not put forward a case that Mr Leung had not relayed the relevant information to her.  Nor did she give any evidence as to what sort of due diligence she had conducted before she decided to purchase the Property if she had not been given such information.  She did not even assert that Mr Leung had not acted as the liaison between her and the agent.

17.Against such background, we do not think much mileage can be gained by the defendant’s decision in not subjecting Ms Ho to cross-examination.  There is ample basis for the judge to draw the inference he did.

The Construction issue

18.The crucial clause in the present context is Clause 30.  Read together with Clause 8(a) of the Agreement (which provides for the giving of title subject to Clauses 30 and 31), it is plain that it cuts down the duty of the defendant as vendor in giving title.  The question is the extent to which the clause has done so.  On its plain and natural meaning, the clause can be divided into three parts:

(a) The Property is to be sold on an “as is” basis;

(b) The purchaser (viz. the plaintiff) has inspected and understands the existing state of the Property; and

(c) The purchaser shall not raise any requisitions[2] or refuse to complete or delay completion of transaction on the ground that there are any unauthorized additions, alterations or illegal structures on the Property.

19.For present purposes, we can concentrate on the third part of the clause which operated as a qualification on the title to be proved and given and a limitation on requisitions that could be raised by the purchaser[3]. However, one must have regard to the other parts of Clause 30 when one resolves the dispute on the proper construction of the third part as the contract must be construed as a whole.  For the same reason, insofar as other clauses in the Agreement (including Clause 31) can shed light on the meaning of Clause 30, we must pay attention to the same.

20.The competing constructions advanced by the parties are as follows.  Mr Chan submitted that Clause 30 did not apply to problems caused to the title apart from those arising from a breach of the Buildings Ordinance.  Thus, breach of SC7 and SC8 and breaches of DMC did not come within the scope of Clause 30.

21.As a fall-back position, Mr Chan submitted that Clause 30 did not exonerate the defendant from its primary obligation to show and give a good title in respect of breaches of SCs7 and 8 and DMC other than those objections on the ground that there are any unauthorized additions, alterations or illegal structures on the Property.  He submitted that the requisitions raised by the solicitors for the plaintiff in respect of breaches of SCs 7 and 8 and the DMC went beyond that exempted scope.

22.On the other hand, Ms Wong submitted that Clause 30 was not confined to a breach of the Buildings Ordinance.  Counsel argued that the clause could be relied upon by the defendant to preclude requisitions (and qualified the title to be proved and given) relating to breaches arising from SC7 and SC8 as well as the DMC so long as they stemmed from unauthorized additions, alterations or illegal structures on the Property.  In answer to the fall-back position of Mr Chan, Ms Wong submitted that in substance all the requisitions relating to SC7 and the breaches of the DMC were in respect of unauthorized additions, alterations or illegal structures, and as such caught by Clause 30.

23.In holding in favour of the defendant on the Construction issue, the judge took account of his findings that the plaintiff had general knowledge about the potential problems relating to SC7 and SC8 and it also knew that defendant had purchased the Property notwithstanding the matters as to breaches of the Government Lease and complaints from the IO.  He regarded these as part of the factual matrix which he could take into account in construing Clause 30.  See paragraphs 88 to 95 of the judgment.

24.At the same time, it should be noted that the judge had apparently come to same conclusion on the construction of Clause 30 at paragraphs 77 to 87 even without reference to such knowledge on the part of the plaintiff.  We only need to quote what the judge said at paragraphs 83 to 87:

“ 83. I do not think the wording of Clause 30 is limited to the situation where a requisition is premised upon a contravention of the BO, but which could not apply where a requisition is made by reference to the same contravention(s) based on a breach of the Government Lease or the DMC.

84. Mr Chan’s submission that there is no express provision in Clause 30 that Channel Green was precluded from raising requisitions or objections to title in respect of any breach of the Government Lease or the DMC merely begs the question as to the proper meaning of the clause. For it can just as easily be pointed out that the clause does not expressly limit the precluding of requisitions to situations of a breach of the BO.

85. In Modern Sino Ltd v Art Fair Co Ltd [1999] 3 HKLRD 847, at 850F-G, Yuen J (as she then was) pointed out:

“ The presence of substantial buildings works not included in approved building plans immediately gives rise to at least three questions:

(a) is there a risk of enforcement action by the Building Authority?

(b) is there a risk of re-entry by Government as lessor?

(c) is there a risk of action against the owner by co-owners under the deed of mutual covenant (DMC)?”

(original emphasis)

86. Of course, Mr Chan is right when he points out that there may be a breach of a government lease without there necessarily being a breach of the BO, and vice versa, but in line with the point made in the Modern Sino case, the parties in this case were certainly alive to both possibilities.

87. The fact that Clause 30 is a clause relating to questions of title, but has no limitation identified as to how title might be affected by any unauthorised additions, alterations or illegal structures on the Property, seems to me to show that what is intended to be precluded is any requisition irrespective of the basis upon which any such unauthorised additions, alterations or illegal structure might affect title.”

25.Thus, it seems to us that the judge only referred to the factual matrix as a cross-check to confirm his conclusion reached upon the wordings used in the Agreement.

26.Mr Chan submitted that the knowledge of the plaintiff could not be relevant in the construction of the clause.  Mere knowledge of a defect in title on the part of a purchaser does not lessen the obligation of a purchaser to show and give good title.  Further, such knowledge does not operate to modify the terms of the contract.  Counsel cited Giant River Ltd v Asie Marketing Ltd [1990] 1 HKLRD 297 at 312B and Hua Tyan Development Ltd v Zurich Insurance Co Ltd FACV 18 of 2013, 10 September 2014, paragraph 44 in support of the latter proposition.

27.In our judgment, putting aside the knowledge of the plaintiff for the time being, confining ourselves to the natural and ordinary meaning of Clause 30, we do not see any basis to support Mr Chan’s contention that it should be confined to breaches of the Buildings Ordinance.  The linchpin of Mr Chan’s argument is the expression “潛建之建築物”[4] (translated as “illegal structures”) in the clause.  Counsel submitted that this phase could only be interpreted as referring to illegal structures under the Buildings Ordinance.  A breach of SC7 or SC8, he said, could be waived (perhaps upon payment of a premium) and therefore a structure so erected would not be described as an illegal structure.  We do not accept this line of argument.  In our view, illegal structure simply means any structure erected against the law.  The relevant illegality can stem from a breach of the Buildings Ordinance, it can equally stem from a breach of the terms of the Government Lease or the terms of the DMC.  The fact that a breach of the Government Lease may be addressed by a waiver from the Government does not alter the character of such a structure as an illegal structure before such waiver has been obtained.   

28.Further, the clause is not restricted to illegal structures.  The relevant part describing the subject matters covered by it is “任何未經批准之加建、改建或潛建之建築物” (translated as “any unauthorized additions, alterations or illegal structures”).  Thus, three categories of matters are within the scope of Clause 30 in respect of which the obligation of the defendant to show and give a good title is qualified:

(a) Unauthorized additions;

(b) Unauthorized alterations; or

(c) Illegal structures.

29.In our judgment, unauthorized additions or alterations could certainly include additions or alterations done to the Property in breach of the Government Lease or the DMC, irrespective of their status under the Buildings Ordinance.

30.Turning to Mr Chan’s fall-back position, we do not read the clause as being restricted to breaches arisen from “建築物” or “structures”. The expression “未經批准之加建、改建” (“unauthorized additions or alterations”) is wide enough to encompass physical states of the Property occasioned by additions or alterations which do not involve the erection of a structure.  Thus, whether the stalls-on-wheels can be regarded as structures is not important.

31.We also reject Mr Chan’s submission that the words “未經批准” (meaning unauthorized) connoted that clause 30 only applies to additions, alterations or illegal structures that the relevant authorities could have authorized, and as such does not apply to breaches of SCs 7 & 8.  The plain meaning of the clause is that it applies to any unauthorized physical state of the Property irrespective of whether authorization could have been obtained as matter of law.  In respect of breaches under the Buildings Ordinance (which Mr Chan accepted to be within the scope of Clause 30), the Building Authority does not have the power to authorize an illegal structure. 

32.Further, “未經批准之改建” (“unauthorized alterations”) is apt to include alterations by way of converting car-parking spaces into stalls or converting common areas into part of a private unit.  We also agree with Ms Wong that reading them in proper context the substances of the requisitions are the same whether they were put on the basis of presence of unauthorized additions, alterations or illegal structures or on the basis of lack of provision of car-parking spaces and conversion of common areas.  There is no sound reason to dissect the requisitions arising from the same underlying sources of problems into two different facets and to confine the effect of clause 30 to one facet but not the other.  Such an approach will defeat the plain intention of the parties in having clause 30 in the Agreement.   

33.Mindful of the correct approach in construction of documents as explained in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at p.912-3 and Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at p.296, we must also have regard to the factual matrix in order to discover what a reasonable person would have understood the parties to mean:

“ And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.” (per Lord Hoffmann in Jumbo King at p.296D to E)

“ (4) The meaning which a document … would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even … to conclude that the parties must, for whatever reason, have used the wrong words or syntax…

(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had …” (per Lord Hoffmann in West Bromwich Building Society)

34.As observed by Lord Hoffmann in West Bromwich Building Society, the factual matrix includes anything which would have affected the way in which the language of the document would have been understood by a reasonable man though previous negotiations of the parties and declarations of subjective intent are excluded.  In respect of the exclusion of previous negotiations, the rule was explained in Prenn v Simmonds [1971] 1 WLR 1381 at 1384-5 by Lord Wilberforce:

“ The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact. Cardozo J. thought so in the Utica Bank case. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get ‘agreement’ and in the hope that disputes will not arise. The only course then can be to try to ascertain the ‘natural’ meaning. Far more, and indeed totally, dangerous is it to admit evidence of one party’s objective - even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised.”

35.In Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, after reviewing comments and submissions on this exclusionary rule, Lord Hoffmann concluded that it should not be departed from.  His Lordship reiterated, however, that the rule is not an absolute prohibition against the admission of previous negotiations.  It depends on the purpose for which the evidence is admitted.  At paragraph 42, the learned judge said:

“ The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.”

36.In that case, Lord Hoffmann recognized that there could be cases where the previous negotiations could be relevant yet their admission should be rejected on pragmatic grounds.  One of those grounds was the strife for certainty in the interpretation of contracts.  Thus, at paragraphs 37 and 38, His Lordship said:

“ 37. … It reflects what may be a sound practical intuition that the law of contract is an institution designed to enforce promises with a high degree of predictability and that the more one allows conventional meanings or syntax to be displaced by inferences drawn from background, the less predictable the outcome is likely to be. …

38. …. But pre-contractual negotiations seem to me capable of raising practical questions different from those created by other forms of background. Whereas the surrounding circumstances are, by definition, objective facts, which will usually be uncontroversial, statements in the course of pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute.  It is often not easy to distinguish between those statements which (if they were made at all) merely reflect the aspirations of one or other of the parties and those which embody at least a provisional consensus which may throw light on the meaning of the contract which was eventually concluded.  But the imprecision of the line between negotiation and provisional agreement is the very reason why in every case of dispute over interpretation, one or other of the parties is likely to require a court or arbitrator to take the course of negotiations into account. …”

37.The exception to the exclusionary rule was expressed by Lord Wilberforce in Prenn v Simmonds, supra, at p.1385H as follows:

“ … evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transactions.”

38.In the context of the present appeal, Mr Chan did not refer us to any fact or matter in the factual background which indicates something had gone wrong in the language of Clause 30.  In particular, there was nothing he could pinpoint to dictate a different meaning to be given to the clause as opposed to the plain and natural meaning as analysed by us above.  In other words, this is a case where a reasonable person, taking into account the factual background, would have understood the parties to ascribe a meaning which is the same as the ordinary and natural meaning of Clause 30.  As Lord Hoffmann said in Jumbo King, supra, at p.296G:

“ If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.”

39.Once we reach this conclusion, it is quite beside the point whether the judge was entitled to have regard to the knowledge of the plaintiff as to the potential problems with SC7 and SC8 to reinforce his conclusion.  There is simply no reason why full effect should not be given to the plain and natural meaning of Clause 30 which, as we have held, covers breaches of the Government Lease, the DMC as well as the Buildings Ordinance.

40.In any event, we are of the view that the judge was entitled to take account of the knowledge of the plaintiff as evidence of the ‘genesis’ and the ‘aim’ of the transactions.  The extent to which the defendant, as vendor, was obliged to show and give a good title was an essential element in the subject matter of the sale and purchase.  As we have seen, this obligation is defined by Clause 30 and the court could have regard to the objective fact that the plaintiff was aware that there were problems about the physical state of the property stemming not only from the Buildings Ordinance.  Confining the use of the evidence on pre-contractual discussions to such purpose, we do not think there is any inconsistency with the observations of the Chief Justice in Hua Tyan Development Ltd v Zurich Insurance Co Ltd, supra, at paragraph 44.  Nor do we think the admission of such evidence suffers from the practical difficulties which provided the pragmatic bases for the rule in Prenn v Simmonds as explained by Lord Wilberforce and Lord Hoffmann. 

41.In the very extensive disclosure made by the agent before the signing of the provisional agreement, there were references to the terms of SC7 and SC8 and the use of the forecourt not in accordance with those conditions.  There were also references to other unauthorized structures.  Copies of the Government Lease and the DMC were supplied to Mr Leung. 

42.Hence, this is not a case where the plaintiff can complain about non-disclosure of serious title defect.  In Jumbo King, supra, at p.299, Lord Hoffmann discussed the overpowering principle that a vendor must not mislead a purchaser in any way and a term of contract will not be construed as enabling a vendor to impose upon a purchaser a serious defect in title of which he actually knew.  Mr Chan relied on this part of that judgment to submit that Clause 30 should not be construed as extending to a defect in title stemming from breaches of SC7 and SC8.  In particular, he relied on what was said by His Lordship at p.299G to H:

“ Prima facie, it is the duty of the vendor to deduce and then convey a good title and if he relies upon the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do so. As Farrand says, the question is whether the purchaser would have been aware of the risk he was being asked to take. So, for example, general words which did not identify any specific defect in title have been held inadequate to protect the vendor against liability for a serious defect which he could easily have discovered …” (our emphasis)

43.But that part of the judgment had to be read together with what was said earlier in the same paragraph at p.299C:

“Contracts for the sale of land are not exceptions to the principle that parties have freedom of contract and may agree to whatever terms they like. What the cases show is that the courts will be very reluctant to construe such a term as enabling the vendor to mislead the purchaser.”

44.In the appeal before us as well as the trial before the judge, the plaintiff did not run a case of the defendant having in any way misled it as to the risk flowing from the breaches of SCs7 and 8 and the DMC.  Nor did it run a case of it not being aware of such risks.  Against such background, we do not think what had been said by Lord Hoffmann at p.299 could take the plaintiff’s case further.   

45.Nor do we think there is any support for Mr Chan’s arguments on construction in the judgment of the Court of Appeal in All Ports Holdings Ltd v Grandfix Ltd [2001] 2 HKLRD 630.  Unlike Clause 30, the relevant clause in that case did not specifically refer to the exclusion of requisitions on any unauthorized additions, alterations or illegal structures at the property.  That was a wholly different scenario from the present case.  

46.In conclusion, we agree with the judge that the requisitions in question are within the scope of Clause 30 and the defendant was entitled to rely on that clause in the present case.

The Forfeiture issue

47.The deposit was 15% of the purchase price.  As it was higher than the 10% conventional amount, the court has to consider whether it was justified by exceptional circumstances.  The exceptional circumstances must relate to a true deposit’s purpose as an earnest of performance and as compensation for the vendor’s withdrawal of the property from the market pending completion, see Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234.  That is a different concept from liquidated damages where the test is genuine pre-estimate of loss.

48.The relevant test is reasonableness at the time of contract.  In Polyset, supra, Ribeiro PJ said at paragraphs 106 and 107:

“ 106. … Reliance on the concept of ‘genuine pre-estimate of loss’ has already been criticised as an invocation of the wrong test. Nonetheless, the vendor is entitled to contend that the same factors, that is, the length of the pre-completion period and the market’s volatility bear logically on the need for a larger than usual deposit.

107. In my view, there is force in such a submission.  While I would not accept that a lengthier completion period justifies a larger percentage by way of an earnest of performance, I would be inclined to accept that a vendor may legitimately demand a larger quid pro quo for keeping his property off the market during the more prolonged period.  A question of degree enters into this question and while I would have been prepared to accept that a deposit higher than the usual 10% deposit could be justified, I consider a deposit 3½ times the norm to fall substantially beyond the ambit of reasonableness so that its forfeiture by the vendor is impermissible.”

49.To similar effect is the judgment of Bokhary PJ at paragraphs 13, 24 and 25.  At paragraph 25, His Lordship said,

“…A view on such an issue does not readily lend itself to much elaboration. The correct test must of course be applied to the material facts. But once that has been done, the resolution, one way or the other, of an issue of this kind unavoidably becomes very largely a matter of impression on a question of fact and degree…”

50.The judge identified the correct test and applied it at paragraphs 101 to 110 of the judgment below.  His conclusion was that the 15% deposit in the present case was justified.  The completion period in the present case was 4 ½ months as compared with the usual completion period (as found by the judge) of 3 months for a commercial property of this nature.  The plaintiff did not challenge the 15% deposit as inherently unreasonable.  However, as Mr Chan submitted the burden is on the defendant to justify a deposit of larger than 10%.

51.Mr Chan submitted that the judge had wrongly adopted an arithmetical approach in holding a proportionate increase in deposit is commensurate with the lengthening of completion period.  Though the judge did refer to the correlation between the amount of deposit and the period of completion in the drafts of the provisional agreements at paragraph 105, we do not think he had made the error as suggested by Mr Chan.  It is clear from a fair reading of his judgment that the judge did consider other matters and applied the correct test as discussed in Polyset in coming to his conclusion at paragraph 109.

52.Mr Chan also submitted that the judge should not rely on the evidence of Ms To to conclude that the usual period for completion for this type of property was 3 months.  Her evidence in this respect was elicited by Ms Wong in examination-in-chief.  Mr Chan did not object to the admissibility of the same.  Instead he focused on the weight to be attached to such evidence.  His submission before the judge was that Ms To was not experienced to give an assessment of the normal period for completion.  That was rejected by the judge at paragraph 104 of the judgment.  Having considered the relevant parts of the transcript, we do not think there is any basis for us to disturb the judge’s assessment in that regard.

53.In this appeal, Mr Chan argued that the normal completion period should be a matter of expert evidence subject to expert directions.  But this was not the stance taken below and counsel was content to allow the evidence to be adduced.  In our judgment, this is the kind of evidence that the court can take from an estate agent practising in the field and it was the basis on which the judge accepted the evidence of Ms To.

54.Mr Chan then submitted that the judge should have regard to another draft provisional agreement prepared by Ms To where the deposit was 10% with a completion period of 4 months.  With respect, that point has been satisfactorily considered by the judge at paragraph 104 of the judgment.

55.We also see no merit in Mr Chan’s contention that the judge had reversed the burden of proof when he commented upon the lack of challenge from the plaintiff that the 15% deposit was inherently unreasonable.  The judge had already referred to the need for the vendor to justify a sum higher than 10% by reference to exceptional circumstances at paragraph 101(2) of the judgment and how the defendant in the present case tried to justify it at paragraph 102.          

56.As observed by Ribeiro PJ and Bokhary PJ, whether a higher deposit is reasonable in the circumstances of a particular case is a matter of fact and degree.  In the present case, the judge was clearly entitled to take account of the fact that the longer the completion period, the longer the vendor is at risk of the vicissitudes of the market and there is objective justification for a 15% deposit.

57.For these reasons, we reject Mr Chan’s appeal on the Forfeiture issue.

Outcome

58.We dismiss the appeal by the plaintiff and order the plaintiff to pay the costs of the appeal to the defendant, with certificate for two counsel.  Such costs are to be taxed if not agreed.

Mr Edward Chan, SC & Mr Paul Lam, SC instructed by Woo, Kwan, Lee & Lo, for the plaintiff

Ms Lisa K Y Wong, SC & Ms Queenie Lau instructed by Kok & Ha, for the defendant