Archive for the ‘Construction’ Category

Implication of a term is an aspect of contractual interpretation

June 15, 2014

In A-G of Belize v Belize Telecom Ltd ([2009] UKPC 10, PC) the question was whether a term should be implied into the articles of association of a company (‘the company’) that had been formed to carry on the business of the Belize Telecommunications Authority. Belize Telecom (‘BT’) was the majority shareholder in the company. The company’s shares were divided into classes. BT, as holder of  C shares that exceeded 37.5% of the issued share capital, had the right (under the terms of the company’s articles) to appoint two of the members of the board of directors. When BT defaulted on loans made to it by the Government, it had to transfer a substantial number of shares to the Government. The result was that its C shares no longer amounted to 37.5% of the issued share capital.

The question was whether its appointees to the board remained members of the board. There was no express term dealing with this contingency. Was there an implied term to the effect that a director appointed by virtue of a specified shareholding should vacate his office if there is no longer any holder of such a shareholding.

Lord Hoffmann gave the only full judgment. He emphasised that the law on the implication of contract terms was an aspect of the general law concerning contractual interpretation:

‘It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.’ ([21])

The term contended for was implied, ‘to avoid defeating what appears to have been the overriding purpose of the machinery of appointment and removal of directors, namely to ensure that the board reflects the appropriate shareholder interests in accordance with the scheme laid out in the articles’ ([32]).

Michael Lower


Ownership of roof voids depends on proper construction of the relevant deeds

May 5, 2014

Hong Kong Mansion, Causeway Bay (IO) v Bothlink Ltd ([2014] 2 HKLRD 78, CA) concerned the ownership of roof voids. The incorporated owners argued that they were common parts and sought to recover them from the defendant (B) who argued that they had been assigned to his predecessor in title. The voids were in the roof space and were the lower portion of a space, the upper portion of which housed the maintenance platform for the lifts.

The Court of Appeal looked at the question as being one that turned on the construction of the first assignment in the building. This had included the right to ‘the remaining self-contained portions’, flat roofs and other roofs. It had not included property intended to be used for the common enjoyment of co-owners and co-occupiers. The question was as to whether the roof voids had been included in the first assignment or were property intended for common enjoyment. The Court of Appeal (like the Court of First Instance) held that the roof voids were intended for common enjoyment.

The question was as to the parties’ contractual intention at the time of the first assignment. The elements of the factual matrix all supported the incorporated owners’ contention that the voids were common parts: they were not included in the calculation of the gross floor area or building volume calculations in the approved building plans; the plans did not distinguish between the upper and the lower levels of the spaces in question (and it was agreed that the upper levels were common parts); the plans suggested that the relevant structures (in their entirety) were intended to house lift machinery; and at the time of the first assignment there was no means of access to the lower levels of the voids ([29] – [30]).

Michael Lower

The limited role of admissible background in the case of registered documents

February 10, 2014

In Cherry Tree Investments Ltd v Landmain Limited ([2012] EWCA Civ 736, CA (Eng)) C had granted a charge of property to D pursuant to the terms of a facility agreement. The facility agreement extended the statutory power of sale in section 101(3) of the Law of Property Act 1925 by providing that the power of sale could be exercised at any time after the execution of the charge. This extension of the statutory power of sale did not appear in the charge. The charge was registered at the Land Registry but the facility agreement was not registered. D sold the property to L in exercise of the power of sale. It could only do so if the statutory power of sale had been extended as set out in the facility agreement. No claim was made for rectification of the charge. The primary question was whether the power of sale implied into the charge could be ‘interpreted’ in such a way as to include the extension found in the facility agreement. The English Court of Appeal decided (Arden LJ dissenting) that the charge could not be so interpreted.

Lewison LJ thought that he was bound to hold that the facility letter was admissible evidence for the purposes of interpreting the charge. But it was still necessary to consider the effect of this: what use could be made of the facility letter ([104] and [128])? The fact that the charge was a document that would be registered at the Land Registry was highly significant. The factual background carries a different weight in such cases than it would in other sorts of contract:

‘The reasonable reader’s background knowledge would, of course, include the knowledge that the charge would be registered in a publicly accessible register upon which third parties might be expected to rely. In other words a publicly registered document is addressed to anyone who wishes to inspect it. His knowledge would include the knowledge that in so far as documents or copy documents were retained by the registrar they were to be taken as containing all material terms, and that a person inspecting the register could not call for originals. The reasonable reader would also understand that the parties had a choice about what they put into the public domain and what they kept private. He would conclude that matters which the parties chose to keep private should not influence the parts of the bargain that they chose to make public.’ ([130])

A little later, Lewison LJ observed:

‘Even the staunchest advocates of the court’s ability to consider extrinsic evidence stop short at saying that by the process of interpretation the court can insert whole clauses that the parties have mistakenly failed to include.’ ([132]).

The charge could not be interpreted in such a way as to confer the more expansive power of sale contained in the facility agreement.

Longmore LJ agreed with the conclusion and reasoning of Lewison LJ ([150]).

Michael Lower

Periodic tenancy: effect of exercise of landlord’s right to increase the rent

June 7, 2013

In West Coast International (Parking) Ltd v Secretary for Justice ([2001] HKEC 442, CA) L granted T a lease for a two year fixed term. At the end of the two years, the agreement provided for the tenancy to continue from quarter to quarter until terminated by either party as provided for in the agreement. The lease gave the landlord the right to revise the rent at the end of the third year of the agreement. The landlord exercised this right. The tenant completed a reply slip indicating its willingness to pay the increased rent and to pay an additional deposit (the agreement provided for an increase in the rent but not in the amount of the deposit). Not long after, the landlord served a notice to quit. The question was whether the agreement as to the revised rent and increased deposit simply amounted to a variation of the terms of an ongoing periodic tenancy or amounted to the surrender of the lease and the grant of a new two year term that would later become a periodic tenancy.

As a matter of construction of the correspondence concerning the increase (in the context of the relevant terms of the tenancy) the Court of Appeal held that this was a variation of the terms of the existing periodic tenancy. Hence L was entitled to serve notice to quit.

Michael Lower

Holding over: parties at cross-purposes

June 5, 2013

In Shum Tsing Fai v Chiap Heng Cheng (HK) Ltd ([2001] HKEC 296, CFI) a fixed term tenancy came to an end. The tenant had an option to renew for a further two years but did not exercise it. As the tenancy approached its end, the parties discussed a new tenancy and agreed a rent below that specified in the option. The parties were at cross-purposes: the landlord thought that the tenant was, in effect if not formally, exercising the option. The tenant intended the arrangement to be temporary until it had bought replacement premises. The tenant gave notice to quit after a few months and the question was whether it was entitled to do so or whether it was bound for the full term envisaged by the option. It was decided that the tenant was a periodic tenant and had been entitled to give notice to quit.

The court thought that the objective intention was for a temporary arrangement and rejected a tenancy at will or at sufferance. This left the periodic tenancy. It inferred, from the monthly rental payments, an intention to create a monthly periodic tenancy.

As to this, Cheung J. said:

‘Although reference is made [in Woodfall] to the word “presumption”, ultimately it is a matter of inference from all the circumstances of the case as to the nature of the tenancy.’

Michael Lower

Fully Profit (Asia) Ltd v Secretary for Justice (Court of Final Appeal)

May 21, 2013

In Fully Profit (Asia) Ltd v Secretary for Justice ([2013] HKEC 717, CFA) F owned several neighbouring plots of land. Each lot was the subject of a Government lease containing a restriction against building more than one house on the land. The question was whether building a single 26-storey residential building straddling the lots would be a breach of the covenant not to build more than one house on the land.

The plots had been carved out of a larger lot the subject of Conditions of Exchange which provided that if more than one ‘building’ were erected on the land then there would be a separate lease for each building (special condition 6). They also required the construction of ‘one or more good and permanent buildings’ on the land. There was a prohibition on industrial use and a restriction on building more than twenty houses. The lot covered by the Conditions of Exchange had twenty houses on it, each being the subject of a separate Government lease containing the restriction on building more than one house. There was nothing to indicate that the leases were intended to introduce any additional restrictions beyond those contained in the Conditions of Exchange.

The Court of Final Appeal (reversing the decision of the Court of Appeal) held that the proposed development would amount to a breach of the covenant.

Ma CJ emphasised the key role that context has to play in the process of contractual interpretation ([15]).

Applying that principle to this case, he continued:

‘In context, it is clear that the meaning of the word “house” under the Government Leases must have reference to those characteristics of the houses which were actually standing at the time the Government Leases were entered into … [H]ouses were actually standing on each of the individual, sub-divided Lots at the time the Government Leases were created. In the context of those Leases, the meaning of the word “house” should be taken to mean the type of house existing on the individual lots. ([17])

Michael Lower

Clerical errors in notice exercising right to give notice to determine a lease

April 23, 2013

In Carradine Properties Ltd v Aslam ([1976] 1 W.L.R. 442) a lease included a break clause giving the landlord the right to determine the lease on September 27 1975. By mistake, the notice (served in 1974) purported to terminate the lease on September 27 1973. The question was whether or not this slip invalidated the notice. It was held that the notice was valid. As a matter of construction (having regard to the relevant factors as they applied in this case) it was clear that the notice sought to exercise the right to terminate the lease on September 27 1975. Goulding J. thought that the same approach to construction would be equally applicable to a notice to quit in relation to a periodic tenancy.

Goulding J. explained the test as follows:

‘I would put the test generally applicable as being this: “Is the notice quite clear to a reasonable tenant reading it? Is it plain that he cannot be misled by it?” Applying that test, if applicable, to the present case, I think the notice would be saved because the tenant receiving that notice and knowing the terms of the lease must have seen there was a mistake, as it would not say “1973” in 1974. Once that is accepted, it is obvious that the notice is for 1975 and not 1973. In no ordinary circumstances would a reasonable tenant knowing the terms of the lease take the notice as being other than for 1975. It therefore seems to me that if one applies the test I have mentioned, then the notice would be saved.’ (444)

A little later:

‘In an option clause the requirement is that a party must strictly comply with the condition for its exercise. If the condition includes the giving of a particular notice, it seems to me that the logical first approach is to interpret the notice, looking at the words and applying legal principles to their construction, and then ask whether it complies with the strict requirements as to exercise of the option. If that is right, I think a benevolent approach could be applied in this case, as in the Duke of Bedford’s case (1796) 7 Term Rep. 63, because reasonably read by a reasonable tenant the mistake is obvious on the face of it, and there is no doubt what the mistake was. Therefore one interprets the notice as asserting an intention to  determine in 1975. It is true that if whoever made the mistake had typed 1976 instead of 1973, the error would probably have been incurable because although the tenant might suspect there was a slip, it might be that the landlord did intend 1976, not knowing or understanding his rights under the lease. In such a case the tenant would be entitled to disregard the notice but because a past date was given in the notice it is insensible and therefore an authority such as the Duke of Bedford’s case is in point.’ (446)

Construction of ‘curtilage’ covenant in Government lease

April 9, 2013

In New Mercury Holdings Corp v Secretary for Justice ([2013] HKEC 435, CFI) P wanted to re-develop the residential properties on sites it owned. It sought a declaration that the government should permit these developments. There were two applications. One concerned the redevelopment of property on two neighbouring lots. The other concerned the redevelopment of a ‘stand-alone’ lot. The relevant leases contained the following covenant:

“[The plaintiff] … shall at all times during the term hereby created maintain and preserve in respect of and exclusively for the purposes of the residential premises now erected or being upon the demised premises a curtilage or compound of an area (including the area covered by buildings) of not less than Eight thousand square feet; AND shall at all such times provide maintain and preserve in respect of and exclusively for the purposes of any other residential premises which may at any time be erected upon the demised premises in each case a curtilage or compound as aforesaid of like minimum area”

Essentially, the question was whether, as the government contended, the purpose and effect of the covenant was to control the density of permissible development: did the clause require each house to have its own ‘curtilage or compound’ of eight thousand square feet? The developer contended that this was not the correct interpretation and that houses could share their curtilage with each other (so that two semi-detached houses could share some of the eight thousand feet with each other).

The government succeeded.

The court reminded itself of the relevant legal principles:

‘7. These are not in dispute: (a) when construing the terms of a land grant, the court can take into account the matrix of fact (that is, the objective surrounding circumstances known (or reasonably known) to both parties) at the time of the grant: see, for example, Gold Shine Investment v Secretary for Justice [2010] 1 HKC 212 , 218; Investors Compensation Scheme Ltd v West Bromwich [1998] 1 WLR 896 , 912; Jumbo King Ltd v Faithful Properties [1999] 4 HKC 707 , 726;

(b) the court shall have regard to the object and purpose of the term, which can be informed by the genesis, the background and the context: River Trade Terminal Co Ltd v Secretary for Justice (2005) 8 HKCFAR 95 , 107 (para 34 to 36);

(c) the above are applicable to the construction of a lease: Woodfall’s Law of Landlord and Tenant (2012) Vol 1, para 11.007 and 11.008).’  (Andrew Chung J.)

The factual matrix and the relevant term construed in the context of the rest of the document all supported the government’s contention.

Construction of contract to assign a lease: was the right to terminate the agreement validly exercised?

February 20, 2013

Lancashire Insurance Co Ltd v MS Frontier Reinsurance Ltd ([2012] UKPC 42, PC) was an appeal to the Privy Council from the Court of Appeal of Bermuda.  LI had entered into a contract to assign a lease to MS. The agreement provided that LI would serve notice on MS that it was ready to move out. Completion was to take place within 15 working days after MS’s receipt of the notice. The agreement provided that either party could serve a notice to terminate the agreement if completion had not taken place by 31 December 2009. On 18 December 2009, LI served notice that it was ready to move out. This meant that completion would take place by 13 January 2010 at the latest. MS served notice to terminate the agreement on 13 January 2010.

On the face of it, MS was simply exercising the right to terminate conferred on it by the agreement. LI contended that there was an implied term to the effect that no notice to terminate could be served after midnight on 12 January. The Privy Council accepted LI’s contention that a term had to be implied that would reconcile the timing of the right to terminate with other aspects of the timetable for completion contained in the agreement. On the other hand, this did not lead to the implied term contended for by LI. The notice to terminate could be served at any time on 13 January.

There had been discussions between the parties concerning completion arrangements after LI had served notice of its readiness to move. These did not give rise to a waiver by MS of its right to terminate. Nothing in what MS said or did amounted to a clear and unequivocal communication to LI that it would not exercise its right to terminate.

Corridor: common part?

February 18, 2013

In Chow Sai Ping v Chan Yam King ([2013] HKEC 199, CA) P and D owned neighbouring flats. The flats both opened onto a small side corridor. The question was whether the corridor was a common part or was part of the area owned by P. The DMC identified the corridor as being a common area but it was shown as being part of the land included in the later assignment to P’s predecessor. The Court of Appeal had no difficulty in concluding that the DMC had priority over the later assignment. The corridor was a common part.