Gigabillion Asia Pacific Ltd v. Sino Dynamic International Ltd
Read the full judgment text of CACV 98/2014 on BabelCite. This Court of Appeal judgment was delivered on 17 February 2015.
1. This conveyancing dispute concerns the sale and purchase of an industrial unit, known as Unit C, 25 th Floor, Gold King Industrial Building, Kwai Chung, which fell through over a requisition on title. The plaintiff purchaser successfully sued for the return of the forfeited deposits and part payments of over $1 million from the defendant vendor, after trial of the action before Deputy High Court Judge Linda Chan SC (now a recorder), who held in her judgment dated 3 April 2014 that the requisi
Cited by 5 cases · Cites 8 cases
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CACV 98/2014 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 98 OF 2014 (ON APPEAL FROM HCA 1053/2011) ____________
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_______________ J U D G M E N T _______________ Hon Cheung CJHC: 1.This conveyancing dispute concerns the sale and purchase of an industrial unit, known as Unit C, 25th Floor, Gold King Industrial Building, Kwai Chung, which fell through over a requisition on title. The plaintiff purchaser successfully sued for the return of the forfeited deposits and part payments of over $1 million from the defendant vendor, after trial of the action before Deputy High Court Judge Linda Chan SC (now a recorder), who held in her judgment dated 3 April 2014 that the requisition had not been satisfactorily answered and therefore a good title to the property not proven. This is the defendant’s appeal. The facts 2.Gold King Industrial Building is a multi‑storey industrial building comprising many units co‑owned by different owners. At all material times, the vendor was a 1% co‑owner of the land and building with the exclusive right to possession of Unit C on the 25th Floor. The co‑owners have incorporated themselves in the name of Incorporated Owners of Gold King Industrial Building pursuant to the provisions in the Building Management Ordinance (Cap 344) (“the Ordinance”). The building is managed by Synergis Management Services Limited. 3.The provisional sale and purchase agreement was dated 16 February 2011. Pursuant to the provisional agreement, a formal sale and purchase agreement was signed on 11 March 2011. It provided for completion on or before 15 June 2011. It provided for the payment of an initial deposit, a further deposit and a further part‑payment, totalling $1,008,239.40 on or before 1 April 2011 with the balance of the purchase price to be paid on or before completion. Clause 16(a) of the agreement required the vendor to give his title pursuant to section 13A of the Conveyancing and Property Ordinance (Cap 219) and to prove its title to the property in accordance with section 13 of that Ordinance. Clause 20 of the agreement provided that should the vendor fail to complete the sale of the property in accordance with the terms of the agreement, all moneys and deposits paid by the purchaser pursuant to the agreement should be returned to the purchaser. 4.The requisition on title which gave rise to the dispute between the parties centred on one matter. Put simply, the incorporated owners were involved in three pieces of litigation at the material time:
At the material time, these were ongoing litigations. Moreover, in CACV 252/2010, this court (differently constituted) handed down judgment on 4 May 2011 in which it awarded the costs of the appeal and the proceedings below against the incorporated owners. No damages were claimed against the incorporated owners in any of these proceedings, and it is not disputed that the incorporated owners’ actual and potential liabilities under them were restricted to costs. 5.Understandably, the plaintiff was concerned about its potential liability as a co-owner after completion regarding the actual or potential liabilities of the incorporated owners under the litigations. Relying on the well known Court of Final Appeal case of Chi Kit Co Ltd v Lucky Health International Enterprise Ltd (2000) 3 HKCFAR 268, which held that the liability of a unit owner in a multi‑storey building to meet a contribution to the funds of the incorporated owners may constitute a defect in title if the liability is “so extraordinary having regard to matters such as its nature or magnitude as to be wholly outside the contemplation of a reasonable purchaser” (p 282A/B), the plaintiff raised a requisition in relation to the magnitude of the actual and potential exposure of the incorporated owners to costs in the three sets of proceedings. 6.The solicitors’ correspondence has been summarised in paragraphs 11 to 21 of the judgment below, and it is not necessary to repeat the exercise here. Suffice it to say, the plaintiff’s position, as at 13 June 2011, two days before completion, was quite clearly set out in the letter of its solicitors as follows[1]:
7.As for the defendant’s ultimate position before completion, it may be found in the defendant’s solicitors (Chow, Griffiths & Chan)’s second letter dated 14 June 2011:
8.The AGM minutes referred to in the vendor’s solicitors’ reply contained the following information (court translation):
9.The vendor’s solicitors’ lengthy reply failed to satisfy the plaintiff’s solicitors. In their letter dated 15 June 2011 written on the very day scheduled for completion, they maintained :
10.In another letter written on the same day, the plaintiff’s solicitors added, in respect of the indemnity offered:
11.As mentioned, the transaction fell through and completion did not take place on 15 June 2011. The defendant therefore forfeited the moneys paid under the agreement, and this resulted in the commencement of the action below for the recovery of the moneys paid on the ground that the defendant had failed to answer satisfactorily the plaintiff’s requisition on title and therefore failed to prove a good title to the property. The judgment below 12.In holding for the plaintiff, the deputy judge rejected the defendant’s argument that the potential liability of the plaintiff (after completion) would only be limited to 1% of the liability of the incorporated owners, as it failed to take into account the possibility that the order for costs made against the incorporated owners could, with leave of the Lands Tribunal, be enforced against individual owners including the plaintiff after completion. The deputy judge considered that the actual and potential liabilities of the incorporated owners in the litigations and the potential liability of the co‑owners to contribute to the funds of the incorporated owners towards such liabilities were by their nature extraordinary, as it was not an ordinary affair of an owners’ corporation to be involved in any litigation, let alone three sets of legal proceedings against different parties. Moreover, even if one were to focus on the magnitude of such liability or potential liability alone, the deputy judge considered, the defendant had still not proven beyond reasonable doubt that the plaintiff would not be at risk of a successful assertion against it of an encumbrance in light of the following matters (para 38):
13.The deputy judge further rejected the defendant’s argument that the offer of $25,000 plus an indemnity was a sufficient answer to the plaintiff’s requisition. She pointed out that the offer for indemnity did not cover the full amount of the liabilities of the incorporated owners in the litigations. Moreover, it was not backed up by any security other than a sum of $25,000 to be set aside and stakeheld by the defendant’s solicitors. Furthermore, the evidence showed that the plaintiff’s side was in difficulty in getting a mortgage loan, and the marketability of the property had been affected. 14.For those reasons, the deputy judge took the view that the defendant had failed to answer the requisition satisfactorily and therefore failed to prove a good title to the property. The deputy judge also decided on other points which are no longer pursued on appeal. The arguments on appeal 15.In this appeal, Mr Robert Pang SC, leading Ms Pauline Leung, took three main points on behalf of the defendant. He submitted that by reason of the duties and rights of an owners’ corporation under sections 16 and 18 of the Building Management Ordinance, liability of an owners’ corporation to a third party to meet litigation to protect the rights of the owners of a building by nature must be within the contemplation of a reasonable purchaser. Such liability by nature is not extraordinary. Counsel argued that even though at the time of the agreement there were three sets of proceedings, the incorporated owners were only liable in costs in CACV 252/2010 and HCA 1603/2007; and no order as to costs both in relation to the appeal and to the hearings below was made by this court (differently constituted) in CACV 297/2006 (arising from HCA 104/2006) in their judgment dated 17 September 2007; and the claim in DCCJ 3471/2009 was only in respect of costs (legal and administrative) said to be incurred in dealing with the demolition of a watchman’s hut. None of the litigations involved any substantial damages. Counsel therefore submitted that the magnitude of the incorporated owners’ exposure to costs was by no means extraordinary and was a far cry from the situation in Chi Kit (where the judgment sum involved was $25 million together with interests and costs). 16.Secondly, Mr Pang argued that the incorporated owners had over $7 million in their bank accounts, and the judge was in error as regards how much money was available to the incorporated owners for use to meet the potential liability. Counsel submitted that in fact the incorporated owners had the means to meet the contingent liability on costs, and there was nothing in the evidence to indicate otherwise. Counsel submitted that even though the exact quantum could not be ascertained from the management company before completion, the judgments in the litigations were public documents and the plaintiff properly advised could come to a conclusion on the likely quantum of the costs of the proceedings. Those costs were something which the incorporated owners, given their strong financial position, could meet without calling on the owners to contribute to the funds of the incorporated owners. 17.Thirdly, counsel relied on the offer of $25,000 plus the offer for an indemnity as a good answer to the requisition on title. Counsel argued that the chances of those plaintiffs involved in the litigations applying successfully to the Lands Tribunal for leave to enforce their judgments against the individual owners were remote. It would be even more remote and unlikely, according to counsel, that the Tribunal would exercise its discretion to order the plaintiff as a 1% co-owner to bear an amount more than its proportionate share of such costs. In those circumstances, even though the indemnity would not cover the full amount of the costs payable by the incorporated owners in the litigations, it would operate to cover, counsel contended, a very remote and fanciful risk of enforcement against the plaintiff alone. The law 18.It is basic conveyancing law that a vendor has the twin obligations to show/prove a good title before completion and to make/give a good title upon completion. For the purposes of proving a good title, that is, proving it to the very high standard of proof beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of an encumbrance (MEPC Ltd v Christian‑Edwards [1981] AC 205), the vendor has to answer satisfactorily requisitions on title that have been properly raised: Active Keen Industries Limited v Fok Chi Keong [1994] 1 HKLR 396. As illustrated by the actual decision in Active Keen, a failure to give a satisfactory answer to a properly raised requisition on title can be fatal to a vendor even though he may, in fact and in law, have a good title to the property. 19.As was decided by the Court of Final Appeal in Chi Kit, a liability to contribute to the funds of the incorporated owners of a multi‑storey building in which the subject property for sale and purchase is situated may constitute a blot on title if “the liability to contribute is extraordinary in view of its magnitude so that it exceeds what any reasonable purchaser might be expected to have in contemplation” (Chi Kit at p 284J). As mentioned, earlier on, the Court of Final Appeal had also said that whether the liability to contribute is extraordinary may be gauged from matters “such as its nature or magnitude” (p 282A/B). What the purchaser will end up buying, in that sort of situation, is not a title free from liability, but one “which carries with it a substantial liability even if limited to its proportionate share or, if not so limited, an even greater liability” (Chi Kit at p 285A/B). 20.Pausing here, it would be natural to think that such a substantial liability to contribute could lead to a title problem in the following ways. First, depending on the provisions of the deed of mutual covenant, it may lead to the incorporated owners’ registering a charge against the purchaser’s unit if the call for contributions is not met, thus affecting title: section 19(1) of the Ordinance. Alternatively, even if it is met, yet if because of other reasons (such as the call not being met by other co‑owners) the incorporated owners are unable to or otherwise do not discharge the liability towards the third party, the third party may take out execution proceedings against the purchaser as owner of the unit, subject to obtaining leave from the Lands Tribunal (section 17(1)(b)) – such leave may be limited to the proportionate share of the purchaser for the liability corresponding to his share in the land or, depending on the circumstances, not so limited. If leave is granted, the execution process may involve the registration of a charging order against the purchaser’s unit, thereby affecting title. Furthermore, if the incorporated owners should be wound up, the co‑owners are liable, both jointly and severally, to contribute, according to their respective shares, to the assets of the corporation of an amount sufficient to discharge its debts and liabilities (section 34). This could, eventually, lead to the levying of execution against the purchaser’s unit by way of a charging order, thus affecting title. 21.But as the Court of Final Appeal explained in Chi Kit (pp 281C/D‑282C/D), an “encumbrance” that affects title is not limited to some claim to the property or a charge which may be imposed upon the property. A liability which attaches to the owner for the time being is one which binds successive owners and thus goes with and binds the property. It is not a liability which is merely personal to the owner at a given time. In other words, a mere liability, or a mere (but real) risk of a liability to make a substantial contribution may, by itself, constitute an encumbrance, regardless of whether there is a real risk that eventually matters should so develop that a charge or charging order is imposed on the unit of the purchaser. 22.In this regard, one is only concerned with what may happen to the purchaser after completion, that is, the evaluation of a risk of a call for substantial contribution which, as explained, binds the owner for the time being, and thus the property. Unless the risk can be said to be fanciful or unreal, the presence of the risk is sufficient to constitute a blot on the title of the vendor, thus entitling an unwilling purchaser not to complete. 23.Understood in this light, the facts that in Chi Kit, an actual judgment of over $25 million had been entered against the incorporated owners by the third party, that the incorporated owners had no money to meet the liability without making a call for contributions, that it was therefore a certainty that a contribution call would be made, and that some co‑owners had expressly stated to the media that they had no money to meet the expected call for contributions, were all circumstances relevant in that case to the assessment of whether there was a real, as opposed to a fanciful, risk of the owner for the time being, and thus the unit, being saddled with a substantial liability outside of the purchaser’s contemplation, and therefore a defect in title. It is not necessary to have all those facts present in a particular case before the court may conclude that the title is defective because the risk is a real rather than a fanciful one. Facts are bound to vary from case to case. What really matters is a real risk of the coming into being of an encumbrance in this type of situation. The present case 24.In my view, the litigations involved in the present case cannot, when viewed as a whole, be regarded as an ordinary incident of building management that a reasonable purchaser may be expected to have in contemplation. Here one is concerned with three different sets of litigations, which cannot be termed as a common occurrence in building management. The subject matters of the litigations were no doubt building management matters, but they could not be described as ordinary matters encountered in day to day building management. Certainly, one is not concerned with potential contributions to meet ordinary running expenses of the incorporated owners or the manager, nor is one concerned with the expenses of upkeep and repair of the building, nor the costs to meet a building order issued by the Building Authority. Moreover, the magnitude of the costs exposure in the litigations is potentially great. At the time, the litigations were ongoing. In HCA 1603/2007, there had been a five‑day trial before the Court of First Instance which was followed by a one‑day appeal before the Court of Appeal, and they resulted in orders against the incorporated owners regarding the costs of the trial and the costs of the appeal. In HCA 104/2006 and CACV 297/2006, there were hearings before a master, a judge and the Court of Appeal in relation to an application for summary judgment, in which both sides were only partially successful, and eventually the Court of Appeal made no order as to costs regarding the hearings, and the incorporated owners had to shoulder their own costs. In other words, both the actual and potential liabilities of the incorporated owners for costs – their own costs as well as those payable to the other side – were substantial. 25.In short, I take the view that the actual and potential liabilities for costs in the present case were not something that the plaintiff as purchaser should be taken to be within its reasonable contemplation when it entered into the agreement for the purchase of the property, so much so that it could not be heard to complain by way of a requisition on title. 26.This being the case, the requisition on title in relation to the actual and potential exposure to costs was properly raised and demanded a satisfactory answer from the defendant by way of proof of title. And in this regard, the focal point was on the magnitude of the actual and potential exposure to costs of the incorporated owners. 27.Further, I take the view that this properly raised requisition has not been satisfactorily answered. Despite the heavy reliance on the contents of the AGM minutes, there can be no doubt that the defendant singularly failed to give any indication, not even a rough one, as to the magnitude of the actual and potential exposure to costs that was involved. What one cannot find from the correspondence was any such indication. Instead, the defendant’s solicitors repeatedly maintained that they had tried their best to obtain an answer; that the manager was not more forthcoming than it could or should; that the incorporated owners had millions of surplus available to meet the actual and potential liabilities; that the manager had told the solicitors that a call for contribution was “unlikely”; that a sum of $1 million had been set aside for the purposes of the litigations; that no claim of damages was made in any of the litigations and only costs were involved; that a sum of $25,000 would be stakeheld to meet any call for contribution (which would translate into a fund of $2.5 million assuming that everybody would pay up); and that on top, there was an offer of indemnity (albeit unsecured) to “settle the apportioned sum called for at the end of the day and keep [the plaintiff indemnified] against any such contribution”. 28.In my view, none of these, whether alone or collectively, provide a satisfactory answer to the properly raised requisition of the plaintiff. They all failed to address a central issue, that is, what was the likely magnitude of the total costs exposure of the incorporated owners in the litigations. There was no such estimate, not even a rough one. Without such a figure, it was simply impossible to evaluate whether the various matters relied on by the defendant’s solicitors were sufficient to render the risk of an encumbrance a fanciful, rather than a real one. 29.And the fact that the defendant’s solicitors had (apparently) done their best to obtain an answer, or the fact that the manager was not more forthcoming than it could, is neither here nor there. For they were not the questions that had to be answered. The issue was not whether the vendor’s solicitors had done their best to provide an answer. The issue was whether the vendor had, through its solicitors, provided a satisfactory answer to the requisition, thereby proving a good title to the property beyond reasonable doubt. 30.Without even a rough estimate of the likely exposure, it was simply impossible to assess whether the mere assurance by the manager that a call for contributions was not “likely” was to be accepted at its face value, not to mention that “likely”, in the context of proof of title, might well not be sufficient given the high standard of proof involved. 31.Likewise, the fact that the incorporated owners had some cash in the bank accounts did not really advance the vendor’s case when the total potential liability for costs was quite unknown. In any event, as the deputy judge pointed out, the amount of cash in hand was rather unhelpful because one must take into account the actual and potential liabilities of the incorporated owners. Quite plainly, even from the minutes, the incorporated owners had other liabilities to meet, including the huge cost of the lift replacement exercise – stage 2 would only be completed in mid 2011. The fact that $1 million was set aside for litigation purpose could mean many things. At that time, the litigations were still ongoing, and the $1 million could well be for future costs. Moreover, the fact that $1 million was set aside might mean that if the costs, actual or potential, were to go beyond $1 million, the incorporated owners would consider making a call for contributions. 32.I do not agree, in any event, that nothing more could be, or could have been, done. As co‑owner, the vendor was entitled to attend the AGM held on 7 May 2011 and asked for details about the litigations (which were discussed at the AGM), including, in particular, the basis for setting aside $1 million for legal costs. And in fact, even after the AGM, as co‑owner, the defendant could ask the incorporated owners for more details about the litigations, for instance, whether, as regards the judgment of the Court of Appeal handed down on 4 May 2011 in CACV 252/2010, which reversed Au J’s judgment in favour of the incorporated owners and made adverse costs orders against the incorporated owners, there would be an application for leave to appeal to the Court of Final Appeal, thereby increasing the exposure to costs. As a matter of fact, there was indeed an application to this court for leave to appeal to the Court of Final Appeal, which was successfully resisted by the plaintiff on 15 September 2011, in which the plaintiff, originally represented by Mr KM Chong and Mr Lester Lee, brought in Mr Benjamin Yu SC as leader. The matter did not end there – the incorporated owners sought leave to appeal from the Court of Final Appeal itself (FAMV 35/2011), this time bringing in Mr Edward Chan SC as leader, leading Mr Andrew Mak. That application also failed, with costs again awarded against the incorporated owners and manager. All this, of course, happened after the falling through of the transaction. But, they illustrated my point that at the material time, the magnitude of the actual and potential exposure to costs of the incorporated owners arising from the ongoing litigations was an unknown, and the fear that it could be so great that it could lead to a substantial liability or a call for substantial contributions was a real rather than a fanciful one, which could not be satisfactorily answered by the various matters relied on by the vendor’s solicitors. 33.I do not think the offer of $25,000 plus an indemnity really took the matter any further in the present case. Without any reliable idea on the likely quantum of the costs exposure, there was no way the purchaser could judge whether the offer of $25,000 was sufficient or not. And in this regard, the burden was squarely on the vendor to come up with a satisfactory figure, and it was not for the purchaser to name a figure. The offer of an indemnity was insufficient either. First, it was only limited to the difference between the amount of the call and the sum of $25,000. It did not cover the further liability of the purchaser as unit owner after completion in case any other co‑owners should fail to meet the call for contributions. Moreover, it was an unsecured offer, not buttressed up by anything. As the plaintiff’s solicitors replied in one of their last letters, the financial situation of the defendant was unknown. In any event, there was evidence that the litigations had affected or were likely to affect the marketability of the property and the obtaining of mortgage. In Chi Kit, the Court of Final Appeal considered that an offer to set aside over $33 million as indemnity for the liability involved was insufficient to resolve all the problems which flowed from the existence of the potential liability (Chi Kit at p 286C‑I). For similar reasons, I fail to see how the offer of $25,000 plus an indemnity could solve all the potential problems arising from the litigations in the present case. Disposition 34.For all these reasons, I have come to the conclusion that the defendant has failed to answer satisfactorily the requisition on title properly raised by the plaintiff relating to the litigations, and has therefore failed to prove a good title to the property. In other words, the deputy judge was right in entering judgment against the defendant for the return of the deposits and part‑payments. I would, therefore, dismiss the appeal and make an order nisi that the plaintiff shall have the costs of this appeal, to be taxed if not agreed. Hon Cheung JA: 35.I agree with the judgment of the Chief Judge. Hon Chu JA: 36.I agree with the judgment of the Chief Judge. Hon Cheung CJHC: 37.Accordingly, we dispose of this appeal as indicated in paragraph 34 above.
Mr Eric Lau, instructed by Raymond Chan, Kenneth Yuen & Co, for the plaintiff Mr Robert Pang SC and Ms Pauline Leung, instructed by Chow, Griffiths & Chan, for the defendant [1] There was also another unit in the building contracted to be sold, and the correspondence dealt with the sale and purchase of both units – owned by different vendors – together. The present case only concerns Unit 25C. |
Cases cited in this judgment