Long Life Chinese Health Food Ltd v. Luen Fat Air Condition (H.K.) Trading & Engineering Co Ltd
Read the full judgment text of HCA 1376/2013 on BabelCite. This High Court CFI judgment was delivered on 19 June 2015.
1. The plaintiff is the purchaser and the defendant the vendor of the property being Ground Floor including the Cockloft of Lin Cheong Building, 131 Cheung Sha Wan Road. I shall refer to it simply as “the property” and to the two parts of it as “the Ground Floor” and “the Cockloft” respectively.
Cited by 2 cases · Cites 9 cases
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HCA 1376/2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1376 OF 2013 ____________
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_____________ D E C I S I O N _____________ Introduction 1.The plaintiff is the purchaser and the defendant the vendor of the property being Ground Floor including the Cockloft of Lin Cheong Building, 131 Cheung Sha Wan Road. I shall refer to it simply as “the property” and to the two parts of it as “the Ground Floor” and “the Cockloft” respectively. 2.The sale and purchase of the property was eventually aborted because the plaintiff raised and maintained requisitions about a notice and an order issued by the Building Authority in relation to an unauthorised structure in the property while the defendant contended that the plaintiff was precluded by a provision in the agreement from raising such requisitions. 3.The plaintiff began this action by writ and the matter has come to me by way of a summons issued under Order 14A for determination of certain questions of construction. I shall set out the questions below after describing the factual background. The sale and purchase agreement 4.The property consists of shop premises in the Ground Floor and the Cockloft. On 10 November 2012, the parties entered into a provisional agreement for the sale and purchase of the property for $22.5 million with a completion date of 20 May 2013. The Ground Floor was to be sold with a tenancy for a two-year term expiring on 30 September 2014, while the Cockloft was to be sold with vacant possession. The vendor agreed to permit the purchaser, within seven days after payment of deposits amounting to 10% of the price, to start renovating the Cockloft. 5.The annex (printed in Chinese) to the provisional agreement (which was in an estate agent’s standard form) contained six additional conditions. Condition 2 is of central importance in this case (“Condition 2”). I shall set it out below together with its certified English translation and, for ease of reference, add the designations “A” to “E” to its five component sentences:
Condition 5 of the annex provided:
6.Upon the signing of the provisional agreement, a deposit of $500,000 was paid by the plaintiff to the defendant’s solicitors as stakeholders. 7.The parties subsequently executed a formal sale and purchase agreement dated 29 November 2012, when the plaintiff paid a further deposit of $1,750,000 to the defendant’s solicitors as stakeholders. The annex to the provisional agreement was expressly incorporated as an annex to the formal agreement as well. I shall refer below to the formal sale and purchase agreement simply as “the agreement”. 8.Clause 7 of agreement provided:
9.Clause 8 of agreement provided:
10.Clause 9(b) of the agreement provided:
11.Clause 32 of the agreement stated that the sale and purchase was also subject to the additional terms in the annex and that in the event of any contradiction between those additional terms and the preceding conditions in the agreement, the terms in the annex were to prevail. 12.On 20 February 2013, the plaintiff entered into a provisional agreement to sub-sell the property to a third party called Able Luck Finance Limited for the price of $25.5 million. The same annex formed part of that provisional agreement. The requisitions 13.On 22 April 2013, the defendants’ solicitors sent the title deeds of the property to the plaintiff’s solicitors for their perusal. A week later, the plaintiff’s solicitors wrote to raise a number of requisitions. By the requisitions that are material for present purposes (ie those numbered 4 and 5 in the correspondence), the plaintiff’s solicitors referred to, and enclosed with their letter, copies of two documents issued by the Building Authority to one Mr Chan Tak Shing and registered in the Land Registry against the property in 2007. Chan Tak Shing was the defendant’s predecessor-in-title, who had sold the property to the defendant in May 2012. 14.The first document was a notice issued by the Building Authority under s 24C(1) of the Buildings Ordinance (Cap 123) on 7 December 2006. It stated that a structure had been erected in the backyard of the property contrary to s 14 of the Buildings Ordinance, and that if it was not demolished or altered so as not to contravene the Ordinance by 4 February 2007, the notice would be registered in the Land Registry against the property. In their requisition, the plaintiffs’ solicitors asked “whether this Order [sic] has been complied with” (requisition no 5). 15.The other document was an order issued by the Building Authority on 8 January 2007 which superseded the notice referred to above. By the order the Building Authority stated that a cooling tower supporting frame attached to the external wall at the rear of the property had been erected without his approval and, pursuant to his power under s 24(1) of the Buildings Ordinance, ordered Chan Tak Shing to demolish it within 30 days. The plaintiffs’ solicitors asked the vendor’s solicitors to advise “whether letter of compliance of this Order has been obtained” (requisition no 4). 16.On 2 May 2013, the defendant’s solicitors replied as follows:
17.On 7 May 2013, the plaintiff’s solicitors responded, raising two points. First, Condition 2 referred to steps leading from the shop to the Cockloft and an extension area in the Cockloft, and did not cover the cooling tower supporting frame at the rear of the property. Secondly, the words in Condition 2(E) were not wide enough to cover illegal structures subject to a demolition order. As an exclusion clause, it was the vendor’s duty to specify the exclusion exactly. 18.Thereafter the parties joined issue in their correspondence on whether Condition 2 covered the requisition. 19.By the third of their letters dated 15 May 2013, the defendant’s solicitors stated that the cooling tower supporting frame had been demolished or dismantled. Since there is evidence that the structure was still there during an inspection on 9 May 2013, if it had in fact been dismantled then the work would have been done between 9 and 15 May 2013. No supporting document or other information was however provided by the defendant’s solicitors about the removal of the structure. 20.On 18 May 2013, the plaintiff’s solicitors sent the defendant’s solicitors a copy of the sub-purchaser’s solicitors’ letter dated 16 May 2013 maintaining the requisition in question. They also attached a copy of a letter from Goal d’Arch Associates (“Goal d’Arch”), a firm of architectural and design consultants, to the plaintiff’s solicitors dated 16 May 2013 asserting that there had been seven alterations to the property which seriously affected the structural safety of the entire building. By the letter, the plaintiff demanded for the return of the deposits. 21.On the morning of 20 May 2013, the defendant’s solicitors responded by pointing out that by virtue of clause 8 of the agreement, the matters referred to in Goad d’Arch’s letter were raised out of time, and stating that completion would take place as scheduled. Not surprisingly, completion did not take place in the end on 20 May 2013, and on the following day the parties’ solicitors wrote to each other asserting that the other side was in breach. The action 22.The plaintiff issued the writ in this action in July 2013 claiming, inter alia, return of the deposit in the sum of $2,250,000 and damages. The defendant denies liability and counterclaims for damages for breach of the agreement. 23.On 11 February 2014, the plaintiff issued a summons under Order 14A for determination of the following questions.
24.Order 14A enables the court to determine a question of law or construction without a full trial at any stage of the proceedings. Order 14A rule 1(1) provides:
25.I had misgivings about the way in which the questions were framed. Further, as the only affidavit evidence placed before me was an affirmation filed by the plaintiff which primarily exhibited the relevant documents, I was unsure whether the court was apprised of all material facts for the determination of the questions (see Rockwin Enterprises Ltd v Shui Yee Ltd [2003] 3 HKC 174 at §§20, 27). I raised the matter with counsel at the beginning of the hearing and gave them time to consider it and take instructions. After considering the matter at some length both counsel assured me that all the facts available and relevant for present purposes have been placed before the court and that the parties had no further relevant evidence to adduce. On that basis I proceeded with the hearing with a view to determining the primary question between the parties, ie whether, on the true and proper construction of the agreement as a whole and in particular Condition 2, the plaintiff was entitled to raise and maintain the requisition on the demolition order concerned, ie requisition nos 4 and 5. Discussion of requisition nos 4 & 5 26.Clause 7 of the agreement provides that, subject to other provisions, the vendor shall give a good title to the property and shall prove and show a good title to the property. At common law, part of that obligation consists in the vendor’s obligation to answer requisitions on and objections to title: Active Keen Industries Ltd v Fok Chi-keong [1994] 1 HKLR 396, 405. 27.As with any other commercial contract, the parties to a conveyancing transaction are free to make their own agreement and, in particular, to modify any obligation regarding the title to be shown and given by the vendor and the requisitions that may be raised by the purchaser: Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, 293, 299. Thus clause 8 of the agreement imposes temporal limits on the purchaser’s right to raise requisitions. Condition 2 imposes “subject matter limits” on the vendor’s obligation to show and give good title and the purchaser’s entitlement to raise requisitions and objections. 28.It is not in dispute that the Building Authority’s order was an encumbrance on the property and the requisition raised by the plaintiff in this case would be a proper one to raise but for Condition 2. Equally it is not in dispute that it was open to the parties to reach an agreement in advance that would have the effect of precluding such requisition and imposing the property on the plaintiff notwithstanding the defect in title. Nor is it in dispute that to have such effect the agreement must so provide clearly. As Lord Hoffmann said in Jumbo King Ltd v Faithful Properties Ltd at p 299G:
29.The issue is whether Condition 2, viewed in the context of the entire agreement, has that effect. The main argument advanced by the plaintiff is that Condition 2 does not apply to preclude requisitions arising from the Building Authority’s order because a vendor who has failed to disclose a known encumbrance or defect of title is not entitled to rely on a contractual provision such as Condition 2 to prevent the purchaser from objecting to title on the basis of the encumbrance or defect. 30.In Rignall Developments Ltd v Halil [1988] 1 Ch 190; [1987] 3 All ER 170, 174h, Millett J described the principle as a well-established rule of equity that
31.In Wah Ying Properties Ltd v Sound Cash Ltd [1994] 1 HKC 786, the sale and purchase agreement entered into in May 1992 contained the following clause:
32.In fact, the Building Authority had in 1983 ordered the predecessors-in-title of the vendor to carry out remedial work in respect of the earth-retaining structure of the property. The order was registered in June 1987. Another order was made in August 1987 to like effect which was registered in February 1988. The work required had not been done by the owners but by the Building Authority, who demanded to be paid the cost of the work in December 1992 and registered the demand against the property. The purchaser, who had already completed the purchase, brought an action against the vendor for breach of covenant of title. Deputy Judge Cheung (as Cheung JA then was), after referring to Rignall Developments Ltd v Halil, stated (at p 795):
33.In Modern Sino Ltd v Art Fair Co Ltd [1999] 3 HKLRD 847, the agreement for the sale and purchase of the property was entered into on 4 August 1997. It transpired that the Building Authority had in 1985 issued an order to the then owner of the property to demolish certain unauthorised building works. The demolition order was registered against the property. When requisition was raised on behalf of the purchaser, the vendor relied on a letter dated 1 August 1997 issued by the Building Authority which withdrew the demolition order “for the time being”, while stressing that the works were still considered illegal and might be subject to enforcement action if circumstances so required. Yuen J (as she then was) found that despite the letter, there was a sufficient risk of enforcement action by the Building Authority to render the title objectionable. The vendor, however, relied on a clause in the agreement which stated that the purchaser had inspected and was fully satisfied with and accepted in all respects the existing physical state, condition and finishes of the property and the fixtures and fittings therein and “shall not make any objection or requisition thereto or in connection therewith”. Further, no warranty or representation was given or made by the vendor on, amongst other things, the physical state and condition of the property, the area of the property and the composition of the building or manner of construction. 34.On the question whether the vendor could rely on such a clause, Yuen J held (at p 852):
35.In Jumbo King Ltd v Faithful Properties Ltd, one of the issues was whether the vendor could rely on clauses in the contract to prevent the purchaser from raising an objection to title in relation to the extensive cocklofts which were unauthorised structures. In particular, clauses 18(e) and 19 provided:
36.In the Court of Appeal (whose decision is reported at [1999] 3 HKLRD 231), Godfrey JA said (at p 244H):
37.In the Court of Final Appeal (whose decision is reported at (1999) 2 HKCFAR 279), Litton PJ (at p 295) left open the question whether the court gives relief to the purchaser in such circumstances as a matter of the proper construction of the contract or by the application of some principle of equity which empowers the court to moderate the harsh terms of the contract. He held on the facts that the vendors were entitled to rely on clause 18(e) and that the purchaser was precluded from raising the objection concerned. 38.Lord Hoffmann NPJ said (at p 299):
39.In Chi Kit Co Ltd v Lucky Health International Enterprise Ltd (2000) 3 HKCFAR 268, there was a pending claim for damages for personal injuries against the incorporated owners of the building when the agreement for sale and purchase of the property (which formed part of the building) was entered into. The question was raised whether a clause in the agreement prevented the purchaser from objecting to the title on the basis of the liability or potential liability of the owners arising out of that personal injuries action. Clause 26 of the agreement provided:
Bokhary PJ and Sir Anthony Mason NPJ stated (at 287D):
40.In Ip Kam Wah v Fair City Group Ltd [2005] 4 HKLRD 168, the question again arose whether the vendor could rely on a contractual provision to preclude a requisition on illegal structures. The clause concerned provided:
Deputy Judge A To (as To J then was) held that the matter was one of construction, that there was no overpowering principle and that “ultimately, as regards any term of the contract providing for a waiver of the right to raise requisition, the question is what have the parties agreed in the light of all the surrounding circumstances and the factual matrix” (p 183D, §24). In the result, he held that the purchaser was prevented by the clause from objecting to title on the basis of the illegal structures concerned. 41.In Channel Green Ltd v Huge Grand Ltd (CACV 174/2013; 29 December 2014), the purchaser refused to complete the purchase of certain shops in a building because of the existence of breaches of the Government lease and of the Deed of Mutual Covenant in respect of the building arising from certain unauthorised additions or alterations. The vendor relied on two clauses in the contract as a bar to the objections, which provided:
The Court of Appeal held that the purchaser was barred from raising the requisitions in question. I shall return to the cases of Jumbo King, IP Kam Wah and Channel Green since they were relied upon by the defendant. 42.I too would approach the question in this case as a matter of construction. The authorities show that in construing a sale and purchase agreement, the court should lean heavily against an interpretation that would enable the vendor to mislead the purchaser, or would impose a defect of title on the purchaser of which the vendor was aware but which he had failed to disclose. 43.It is notable that sub-clause (A) of Condition 2 refers to three specific aspects of the condition of the property, namely, the existence of the Cockloft within the shop premises, the staircase connecting the Cockloft and the Ground Floor, and the extended area of the Cockloft. So it is clear that the parties paid particular attention to these three matters in terms of unauthorised works. However, although (as Mr Leung accepted) the defendant knew of the existence of the demolition order which was indeed among the title deeds of the property subsequently delivered to the plaintiff, there was inexplicably no mention of it or of the relevant structure in Condition 2 at all. A reasonable potential purchaser might be led into thinking that there was nothing other than the three matters specifically mentioned that the vendor knew as a fact to be unauthorised. The express mention of certain unauthorised works in the clause makes it all the more surprising that an actual demolition order relating to a different unauthorised structure was not disclosed. 44.Sub-clause (B) stated the plaintiff knew that part of the relevant condition of the property had not been authorised, but there is no evidence, and no basis to suggest, that it knew of the demolition order. There was some suggestion in the correspondence that the purchaser should have carried out a search at the Land Registry and since the order was registered, should be deemed to have notice of it. The point, however, was not taken by Mr Leung, who submitted instead that knowledge of the purchaser of the existence or otherwise of the demolition order is “beside the point”. 45.Sub-clause (C) stated that the defendant gave no warranty as to whether or not the relevant condition amounted to unauthorized or illegal works. It is not entirely clear what “relevant condition” means. In any event, this clause is negative in effect. It simply provides that no warranty was given by the vendor. But the plaintiff does not have to rely on a warranty in order to object to a title defect. Clause 4 of the provisional agreement provided that the property was to be sold free from encumbrances. Clause 7 of the formal agreement provided that the vendor had to give good title to the property. Condition 5 of the annex stated that the basis of the contract was the title being in good order. The defendant has to identify a contractual provision that binds the plaintiff to accept the title notwithstanding the defect in question. 46.Moreover, Condition 2(C) must be read together with clause 9(b) of the Agreement whereby the defendant warranted that the property was not adversely affected by any liability of which he was aware, other than those disclosed in the agreement and those of which the plaintiff was aware or which the plaintiff could have ascertained on reasonable inspection of the property. As I have stated there is no evidence to show that the plaintiff was aware of the demolition order when it contracted to purchase the property (ie 10 November 2012), or even by the time when the formal agreement was entered into (ie 29 November 2012). The defendant has not adduced any proper evidence to that effect. Nor is the order or the illegal nature of the works in question something that the plaintiff could have discovered by inspecting the property. On its own terms, therefore, there was a material warranty in clause 9(b) which was breached by the existence of the demolition order. 47.I do not think that there is a contradiction between Condition 2(C) and clause 9(b) such that, by virtue of clause 32, the former must be treated as overriding the latter. Clause 9(b) set out a specific warranty that there was no liability affecting the property of which the defendant was aware. Condition 2(C) was a general clause negativing warranties as to whether or not the relevant condition was unauthorized or illegal works. There is no inconsistency, in my view, for the vendor to say to the purchaser: “I do not warrant whether or not any part of the property is an illegal structure, but I warrant there is no liability affecting the property, such as arising from a demolition order, of which I am aware.” Nothing in Condition 2(C) stated that the defendant gave no warranty as to whether or not any enforcement order had been received. 48.Condition 2(D) stated that the plaintiff accepted the existing condition of the property. That is a risk it was entitled and willing to take, but the scope of the risk it had undertaken depends on the terms of the clause. The “most express language”[2] is required if a vendor wishes to shift to the purchaser risks arising from serious defects in title of which the vendor had actual knowledge but which he had not disclosed to the purchaser. In my view sub-clause (D) does not mean that the plaintiff was prepared to assume liability under any existing enforcement order against the plaintiff of which the defendant was aware. To have that meaning the sub-clause would have to be much clearer and more explicit than it is. 49.Condition 2(E) stated that no requisition could be raised in respect of the “existing state” or “the aforementioned condition”. The “aforementioned condition” appears to be a reference to the three specific matters mentioned in Condition 2(A). The reference to “existing state”, on the other hand, is a general term. As Lord Hoffmann said in Jumbo King, as quoted in paragraph 38 above, it is “inconceivable” that a term will be construed as enabling a vendor to impose upon a purchaser a serious defect in title of which he was aware. In the absence of some very special circumstances I would be most reluctant to hold that a general agreement not to raise requisition on title arising from the existing condition of the property precluded the purchaser from objecting to a defect which the vendor knew of but failed to disclose before the contract. 50.Mr Leung who appeared for the defendant relied on Jumbo King, Ip Kam Wah and Channel Green, where the terms in question were held to be effective to preclude an objection on title arising from illegal structures. But each case has to be decided on its own facts. In Jumbo King, as Litton PJ stated, neither party knew the cocklofts were actually illegal structures, though both parties were aware of the possibility that some or all of the cocklofts were unauthorised (see p 292D-F). So there was no failure by the vendor to disclose a defect he actually knew, and having regard to the words they used the court concluded both parties contracted on the basis that the purchaser was to take the risk. As can be seen from the last part of the passage quoted in paragraph 38 above, the absence of evidence that the vendor actually knew the cocklofts were unauthorised was of some importance to the conclusion of Lord Hoffmann in that case. 51.In Ip Kam Wah, the central question of fact was the purchaser’s knowledge of the title defect. Despite that the proceedings were begun by originating summons, Deputy Judge To found that the purchaser knew the unauthorised structure in question existed before he signed the agreement and that his assertions on affirmation to the contrary were “practically moonshine and incapable of belief” (§13). On this basis, it was not surprising, if I may respectfully say so, that the deputy Judge did not find it significant whether the vendor had knowledge of the defect and concluded that the purchaser could not have been misled in any way. 52.In Channel Green, there was no suggestion that the purchaser had been misled or that he was not aware of the risks he was being asked to assume (§44). There were findings that the vendor had disclosed the unauthorised structures prior to the provisional agreement (§41) and that the purchaser had knowledge of the potential problems (§§23, 40). See also §§34, 38-39, 89 and 94-95 of the first instance decision (HCMP 2052/2011). The issue that arises in this case was therefore quite irrelevant on the facts of that case. Conclusion on requisition nos 4 & 5 53.It follows from the above that the plaintiff, in my view, was entitled to raise, and not debarred by Condition 2 from raising, requisition nos. 4 and 5 concerning the apparently outstanding demolition order. Removal of the structure 54.This however is not quite the end of the matter for there is a suggestion by Mr Leung that even if the plaintiff was entitled to raise and maintain the requisition, it had been sufficiently dealt with by the defendant’s solicitors’ letter dated 15 May 2013, which asserted that the structure had been demolished or dismantled and invited the defendant to inspect by prior appointment. The defence did plead that the steel frame had been dismantled by 15 May 2013 and aver that there was in the circumstances no risk of enforcement action being taken by the Building Authority. But regrettably the point was not mentioned at all in Mr Leung’s skeleton argument so neither Mr Cheung nor the court had prior notice of it. 55.For his part Mr Cheung referred to All Ports Holdings Ltd v Grandfix Ltd [2001] 2 HKLRD 630, §21 and argued that the defence nevertheless failed because the order had to be complied “to the satisfaction of the Building Authority” and there was no evidence to that effect. 56.In my view it would be unsatisfactory for the point to be decided in the context of this application. I am far from satisfied that all relevant evidence, facts and matters are before me so far as this issue is concerned. Nor has the point been formulated in the Order 14A summons as one of the questions for determination. Requisition based on letter from Goal d’Arch 57.Further, Mr Cheung argued that the plaintiff was in any event entitled to rescind the agreement as the requisition raised on 18 May 2013 based on the letter from Goal d’Arch (see paragraph 20 above) was not satisfactorily answered. However that letter mentioned a number of alleged alterations or dangerous conditions which are hardly self-explanatory. It was raised only two days before the completion date as a result of which there was little explanation of them in the correspondence. Nor is there any further elaboration in the evidence filed as to what the problems were. 58.Further, after asking for a lengthy period during the hearing to take instructions, Mr Leung said the defendant intended to amend its defence by adding a plea that by virtue of clause 8 of the agreement, the requisition raised in the plaintiff’s solicitors’ letter of 18 May 2013 by reference to Goal d’Arch’s letter was out of time. No draft pleading was provided. The point was not in Mr Leung’s skeleton argument. Again, the matter is not the specific subject of any of the questions in the Order 14A summons at all. 59.In these circumstances it would be wholly undesirable for me even to begin to deal with these points on the present summons. Conclusion 60.In these circumstances, the only determination I ought to make is to answer Question 1(a) as follows: No, so far as requisition nos. 4 and 5 are concerned. 61.I decline to determine the other questions set out in the Order 14A summons. 62.There will be an order nisi that the defendant is to pay the plaintiff forthwith the costs of and relating to the summons.
Mr Jeremy Cheung and Mr Moses Kong Dick Chi, instructed by N.K. Tsang & Co., for the plaintiff Mr Paul H M Leung, instructed by Kong & Tang, for the defendant |
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