Archive for the ‘Contracts’ Category

England: oral agreements and the common intention constructive trust

February 19, 2017

In Matchmove Ltd v Dowding ([2016] EWCA Civ 1233, CA (Eng)) Matchmove (a company controlled by F, a property developer) was negotiating for the purchase of a plot of land (‘the land’) and the adjoining meadow. F intended to split the land into two plots and to build a house on each plot. He orally agreed with his friend D that D would buy one of the plots and the meadow (D wanted to keep horses on the meadow).

In due course, Matchmove entered into a written contract for the sale of the plot to D and this sale was completed. There was, however, no written contract for the sale of the meadow to D. F and D fell out and F sought to resile from the oral agreement to sell the meadow to D.

D sought a declaration that Matchmove held the meadow on trust for him. Matchmove denied the existence of a binding agreement for the sale of the meadow. It relied on the lack of a signed written agreement to satisfy section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989.

F had intended the oral agreement concerning the meadow to be immediately binding. He was well known by D to have a business approach that attached real importance to his word as a businessman. By the time of the dispute, D had paid the entire purchase price for the meadow to Matchmove.

In these circumstances, the question was whether the agreement gave rise to a common intention constructive trust that could fall within section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989.

The Court of Appeal referred to Arden LJ’s discussion of this question in Herbert v Doyle. There, Arden LJ said that section 2(5) could  not be relied on:  (1) if the parties intend to make a formal agreement setting out the terms on which one or more of the parties is to acquire an interest in property; (2) if further terms for that acquisition remain to be agreed between them so that the interest in property is not clearly identified; and (3) if the parties do not expect their agreement to be immediately binding.

The Court of Appeal did not see this statement as setting out three conditions to be satisfied but as being three ways of making the same point about the effect of the judgment in Cobbe v Yeoman’s Row ([32]).

There was a clear express agreement between the parties. Although both parties were well aware that a written contract would be needed, they regarded this as a technicality and took the view that they already had a binding agreement. The payments made by D provided the detrimental reliance.

There was a common intention constructive trust that fell within section 2(5). D could enforce the oral agreement for the purchase of the meadow.

Michael Lower

 

 

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Failure to pay deposit by stipulated date: the seller did not waive the breach by cashing a cheque for the deposit after communicating an intention to treat the agreements as terminated

February 11, 2017

In Fast Happy Ltd v Lee Chun Pong Bruce ([2017] HKEC 121) the plaintiffs entered into provisional sale and purchase agreements (‘the agreements’) for the sale of land by the plaintiffs to the defendants. The initial deposit was to be paid in two instalments on dates specified in the agreements.

The cheque for the first instalment was not honoured when presented. The cheque for the second instalment was proffered after the date specified in the agreements. Time was of the essence for making the payments.

The sellers’ solicitors sent an email and a letter to the estate agents handling the transactions terminating the agreements on the grounds of the buyers’ breach. The plaintiffs’ bank then re-presented the cheque for the first instalment of the deposit and it was honoured.

The defendants registered the agreements at the Land Registry and the plaintiffs sought the vacation of these registrations. The defendants argued that the plaintiffs had waived the breach by presenting the cheque for the first instalment of the deposits after the defendant’s breach.

The defendant’s argument failed. The sellers were entitled to cash the deposit cheque and to forfeit the deposit without waiving the breach. This was especially the case since the sellers had by then given clear notice of their intention to treat the agreement as having come to an end.

This was a case where the estate agents were acting for both parties and not only for the sellers. Thus notice of termination given to the agents was an effective way of giving notice to the defendants.

Michael Lower

Misrepresentation as to the identity of the purchaser

November 26, 2016

In Greatland Property Consultants Ltd v Charis Patria Ltd ([2016] HKEC 2518) C signed sale and purchase agreements to sell two floors of a building to P (a company that owned two other floors of the building) for a total consideration of HK$ 6 million. This meant that P owned 80% of the shares in the building and could apply for a compulsory sale of the property under the Land (Compulsory Sale for Redevelopment) Ordinance. The sale was arranged by L, an estate agent. C had made it clear to L that it was prepared to sell for HK$6 million but that the price for a sale to P would be much higher. L represented to C that the buyer was a businessman from the mainland. On this basis, C agreed to sell for HK$ 6 million. The provisional sale and purchase agreements provided for C to pay L HK$60,000 by way of commission (or agreed damages if the sale did not go ahead). When C discovered that P was the purchaser it rescinded the sale and purchase agreements and paid P HK$300,000 by way of liquidated damages.

L brought proceedings against C claiming the HK60,000 she alleged was due under the sale and purchase agreements. C’s defence was that L had misrepresented the identity of the purchasers. To facilitate this, L had written the purchasers’ name in Chinese so that C would not realise that the purchaser was P. Although P’s company chop was placed next to the signature of the authorised signatory, this was only done after C’s representative had signed so that C had no way of seeing it before the contract was entered into. Overturning the finding at first instance that this misrepresentation had not induced the contract, the Court of Appeal (Chu JA giving the main judgment) held that C’s defence was successful. Its counterclaim to recover from L the HK$300,000 it had paid in damages to P was also successful.

Michael Lower

 

Vague arrangements as to the completion date

October 15, 2016

In Tsang Wing Man v  Chung On Ling ([2016] HKEC 2164, CA) D agreed to sell his property to P. Completion was to be within 3 days of P’s sale of her own property. It was held that this arrangement was so vague and uncertain as to be of no legal effect. As a result, there was no agreement as to the completion date. As indicated in Kwan Siu Man v Yaacov Ozer, this was strong evidence that there was no contractual intent. P had later given an oral promise to complete by the end of August 2011. This did not help matters since the need to resort to an oral term meant that there was a failure to comply with section 3(1) of the Conveyancing and Property Ordinance.

Michael Lower

Contracts and illegality: Patel v Mirza

August 25, 2016

In Patel v Mirza ([2016] UKSC 42) the UK Supreme Court considered the law concerning the recovery of money paid under a contract to carry out an illegal activity where the illegal act is not performed. If the activity were not illegal, the party who has paid the money would be entitled to recover the sum paid as a claim in unjust enrichment. The question is whether the illegality should prevent the claimant from recovering the money or other property transferred to the other party to the failed contract. In the context of Hong Kong’s property law, these principles are relevant, for example, where ding rights are sold to developers and false declarations are made to the Government as part of the overall performance of the contract. Can property transferred to developers in pursuance of the illegality-tainted contract be recovered?

Until now, English law in this area has been based on the House of Lords decision in Tinsley v Milligan and Hong Kong’s courts have applied this framework. Under the Tinsley approach, the question is dealt with as a procedural matter. The plaintiff is treated as having substantive legal rights and the question of illegality is dealt with as a procedural issue. The plaintiff can succeed if he has no need to plead his own illegality. If the plaintiff has to plead his own illegality (to rebut a presumption of advancement for example) then the claim will fail. This is subject to the possibility of a locus poenitentiae; the plaintiff who has to plead his own illegality might still be able to succeed if he can show that he withdrew from the transaction before implementation. This approach to the treatment of sums paid under illegal contracts that are not performed has come in for severe criticism. The  judgments of the nine members of the UK Supreme Court in this case are a collective attempt to create a new framework for dealing with cases of this sort. While there was unanimity as to the outcome on the facts of the case, there was disagreement within the Supreme Court on some of the fundamentals of the approach to be taken in this area.

In Patel, P paid GBP620,000 to M. M was to use the money to bet on shares in RBS relying on M’s insider information concerning an anticipated UK Government announcement. The announcement was never made. P sought to recover the GBP 620,000 on the basis that M would be unjustly enriched if he were permitted to keep it once the contract had failed. The question was whether the courts would help P given the illegality of the contract which amounted to a conspiracy to commit the offence of insider dealing. The UK Supreme Court were unanimous in deciding that P was entitled to recover the money despite the illegality of the contract and despite the fact that he would need to explain the nature of the agreement in order to establish his claim.

 

Lord Toulson and the majority: enforce the contract where to do so would be appropriate as a matter of policy (the ‘range of factors’ test)

The majority of the Supreme Court expressed agreement with the ‘range of factors’ approach articulated by Lord Toulson. Under this approach, the court would carry out a balancing act when deciding on whether or not to enforce a contract where there was unlawful conduct in its formation, purpose or performance. In broad terms, the court would:

a) consider the underlying purpose of the prohibition which has been transgressed, b) consider conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and c) keep in mind the possibility of overkill unless the law is applied with a due sense of proportionality.’ ([101] Lord Toulson).

Lord Toulson did not think any greater detail than that would help but suggested that relevant factors to be borne in mind when reaching a judgment would include: ‘the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties’ respective culpability.’ (107) The reliance approach in Tinsley should no longer be followed ([110] Lord Toulson).

 

Lord Neuberger’s Rule

Lord Neuberger takes a much simpler approach. He begins by saying that the appeal concerns, ‘a claim for the return of money paid by the claimant to the defendant pursuant to a contract to carry out an illegal activity, and the illegal activity is not in the event proceeded with owing to matters beyond the control of either party.’ ([145]). He contends for a very simple rule to the effect that the plaintiff is entitled to the money paid under such a contract (‘the Rule’) ([146]). This would apply ‘in appropriate cases’ even if the contract has been wholly or partly performed ([167]) though credit might have to be given for any benefit that the plaintiff has received ([168]). Lord Toulson’s balancing approach could be useful in deciding whether or not the case was an appropriate case for the application of the Rule ([174).

 

Do not enforce illegal contracts but order restitution of benefits conferred under contracts that fail on the grounds of illegality

The approach of the remaining judges is that the illegal contract is not enforced but is unravelled. Lord Mance disagreed with the majority’s suggestion that there needed to be a significant revision of the law in this area. His approach is that the unlawful contract could be rescinded and the parties put into the position that they would have been in had the contract never been entered into ([197]). Rescission would be available even if the contract had been partially performed, but the court would make adjustments to reflect any benefits that the plaintiff had received ([198]).

Lord Sumption spoke in favour of the illegality defence and the reliance principle as the appropriate guide as to when the defence was available (while accepting that its formulation in Tinsley was open to criticism). Where a contract fails then benefits conferred by one party on the other are recoverable ([247]). Equally, where the contract fails on the grounds of its illegality then the parties should be put into the position that they would have been had it never been entered into ([250]). The contract in this case was affected by the illegality principle ([267]) but restitution of the money that P paid to M in accordance with it should be ordered ([268]).

Michael Lower

 

Oral variation of contract despite clause requiring variations to be in writing

July 27, 2016

In MWB Business Exchange Centres Ltd v Rock Advertising Ltd ([2016] EWCA Civ 553, CA(Eng)) Rock was the licensee of business premises managed by MWB. Rock fell into arrears with the payments due under the licence. MWB brought these proceedings to recover the arrears. Rock’s managing director had had a telephone conversation about the arrears with MWB’s credit controller. They reached an oral agreement to the effect that Rock could pay a reduced amount for a period and then pay a larger amount later so that by the end of the period the arrears would have been cleared. It was found as a fact that the agreement had been reached and that the credit controller had authority to conclude the agreement on behalf of MWB. MWB received the first payment under the revised schedule but then wanted to revert to the payment arrangements in the original contract. The main question was whether the oral agreement was binding on MWB.

At first instance, Rock failed because the licence agreement contained the following clause:

‘This licence sets out all of the terms as agreed between MWB and the licensee. No other representations or terms shall apply or form part of this licence. All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

It was held at first instance that this precluded the possibility of an effective oral variation. Rock’s appeal against this conclusion succeeded. Notwithstanding the clause, the oral agreement to vary the payment terms was contractually binding. The English law on these clauses was considered in depth by the English Court of Appeal in April 2016  in Globe Motors  Inc v TRW Lucas Varity Electric Steering Ltd ([2016] EWCA Civ. 396, CA (Eng)). This respects the freedom of the parties to a contract to agree new terms (Kitchin LJ at [34]).

MWB also argued that Rock had not given any consideration for the agreement to vary the payment terms. This argument, too, was the subject of extensive comment in the judgment of Kitchin LJ and was the principal focus of Arden LJ’s judgment. MWB argued that the rule in Pinnel’s Case and the judgment in Foakes v Beer established that an agreement to accept a partial payment of a sum due under a contract was not binding unless some new consideration had been given. The judge at first instance had this in mind but thought that the arrangement did secure enough of an advantage for MWB for there to be consideration. The Court of Appeal agreed with this conclusion. The agreement would avoid a commercially harmful void period for the property and at least ensured that MWB got some of what was due to it.

The Court of Appeal also considered when the contract to revise the licence terms took effect. Kitchin LJ was of the view that the agreement was formed when the first payment was made and the promise to make further payments in accordance with the revised payment schedule was given ([49]). Arden LJ thought that this might be a collateral unilateral contract:

‘meaning that, collaterally to the licence, for so long as Rock was entitled to and did occupy the unit and paid the licence fee as renegotiated, MWB would be bound on payment of the initial £3,500 to accept the deferral of the arrears in accordance with the variation agreement. ‘ (Arden LJ at [89]).

Rock succeeded on its arguments as to the effectiveness of the oral contract. The Court of Appeal also considered, obiter, whether equity might have a part to play. Could promissory estoppel, for example, prevent MWB from going back on the agreement? As a result, there is a useful survey of the law. Kitchin LJ’s judgment contains this summary:

‘Drawing the threads together, it seems to me that all of these cases are best understood as illustrations of the broad principle that if one party to a contract makes a promise to the other that his legal rights under the contract will not be enforced or will be suspended and the other party in some way relies on that promise, whether by altering his position or in any other way, then the party who might otherwise have enforced those rights will not be permitted to do so where it would be inequitable having regard to all of the circumstances. It may be the case that it would be inequitable to allow the promisor to go back upon his promise without giving reasonable notice, as in the Tool Metal case; or it may be that it would be inequitable to allow the promisor to go back on his promise at all with the result that the right is extinguished. All will depend upon the circumstances. It follows that I do not for my part think that it can be said, consistently with the authorities, including, in particular, the decisions of the House of Lords in Foakes v Beer and this court in In re Selectmove , that in every case where a creditor agrees to accept payment of a debt by instalments, and the debtor acts upon that agreement by paying one of the instalments, and the creditor accepts that instalment, then it will necessarily be inequitable for the creditor later to go back upon the agreement and insist on payment of the balance. Again, all will depend upon the circumstances.’ ([61])

Here Rock did not suffer any detriment as a result of the speedy change of mind by MWB. The promissory estoppel defence would have failed ([63]).

Michael Lower

 

Specific performance: ready willing and able; hardship; calculating damages

June 8, 2016

In Siu Wei v Ng Ying Ying ([2016] HKEC 1162, CFI) S and P entered into a provisional sale and purchase agreement for the sale and purchase of property. S later decided that she wanted to keep the property and refused to complete. S admitted that she was in breach of contract. P now sought specific performance.

  1. Was P ready, willing and able to perform his obligations under the contract?
  2. S argued that specific performance would inflict great hardship on her and so should be refused.
  3. P sought damages in addition to specific performance. How should these be calculated?

1 Ready, willing and able?

This must be the case both at the date of the writ and at the date of the decree. Anthony To J. commented that P needed to show:

‘on a balance of probability that he was and is ready, willing and able to perform his obligations at the material times as those obligations fall due in the sense that he is not presently incapacitated from future performance and is not indisposed to do what the contract requires when the time comes. It is all a matter of evidence, a matter of credibility for the court.’ ([33])

P satisfied this test.

2 Relevance of hardship

Specific performance will not be granted if to do so would inflict great hardship on the defendant (S here). Hardship involves a balancing of the position of both parties:

‘A defendant has to show hardship in the sense of relative prejudice. He has to show that he would suffer greater prejudice if an order of specific performance is made against him than that likely to be suffered by the injured party if the order is refused.’ ([38])

This test favoured P; he really wanted to live in the flat while it was merely a commodity for S. He would be put to additional transaction costs (including a higher level of stamp duty) if he had to buy another property([44] – [46]).

Conduct was also relevant and S had not conducted her defence in good faith ([44]).

3 Calculation of damages

‘In the case of delay in conveyance of property, the normal compensation is the value of the user of the property, which will generally be taken as its rental value, for the period from the contractual time for completion to the date of actual completion’ ([48])

P was entitled to the rental value of the property for this period but reduced by the amount of mortgage interest that he would have had to pay, had completion gone ahead, but had been ‘saved’ from by the refusal of S to complete on time ([52]).

Michael Lower

Non-registration of trust. Dispositions to defraud creditors

June 1, 2016

In Goldfame Consultants Ltd v Tse Sai Ming ([2016] HKEC 1113, CFI) TCS agreed to sell land to Goldfame. The contract provided for the payment of deposits and then for the payment of the balance of the purchase price to be made on 14 August 2006. The contract provided that the assignment of the land would take place within 7 days of receipt of a letter from the Buildings Department approving the proposed site formation plan or at such other time as the purchaser might specify. The balance of the purchase price was duly paid on 14 August 2006 but the approval had not been received and the assignment did not take place. Instead, TCS executed Declarations of Trust under which he held the land on trust for Goldfame. TCS also nominated Goldfame as attorney to act for him in relation to the land. Neither the contract nor any of the other documents were registered with the Land Registry.

TCS died intestate in 2010 and TSM was granted letters of administration of his estate. TSM sold the land to H. Goldfame brought an action against TSM for breach of contract seeking damages or the return of the price paid to TCS. It also sought a declaration that TSM held the land on trust for Goldfame. It sought to have the sale to H set aside under section 60 of the Conveyancing and Property Ordinance.

There was no answer to the breach of contract claim and TSM was ordered to repay the purchase price with interest. It was accepted on all sides that the sale contract and the declarations of trust were void as against H since they had not been registered and there was no reason to doubt his good faith. Section 3(2) of the Land Registration Ordinance took effect.

Goldfame was forced to rely on section 60 of the Conveyancing and Property Ordinance. In Tradepower (Holdings) Ltd (in liquidation) v Tradepower (Hong Kong) Ltd, Ribeiro PJ  said that ‘where the disposition was made for valuable consideration, or where the disponor is not insolvent or where the disposition does not deplete the fund potentially available to creditors, an actual intent to defraud creditors must be shown as an inference properly to be drawn on the available evidence before s. 60 is engaged.’ (at [88]). The sale to H was not at an undervalue, nor was there any intention to defraud creditors ([94]). The claim against H failed.

In commenting on the expert evidence as to the market value of the property at the time of the sale to H, Recorder Coleman SC expressed his preference for valuation methods based on direct comparables where available. The subject matter of the transaction (undeveloped rural land where there was no guarantee that the approvals needed for development would be obtained) was somewhat out of the ordinary and so indices looking at the property market as a whole were unhelpful. Valuations based on the residual method involved too many assumptions to be as useful as direct comparables.

Michael Lower

Open contracts in Hong Kong

April 6, 2016

Fong Yin Hing v Fong Kwan Pui ([2016] HKEC 740, CFI) concerned an oral agreement by a brother to sell a flat to his sister. The sister drafted a memorandum of the terms of the agreement and the brother signed it. The brother later refused to complete and the sister sought specific performance. One aspect of the brother’s defence was that, following the Court of Final Appeal decision in Kwan Siu Man v Yaacov Ozer, there could be no contract where there was no express agreement as to the completion date. To J. rejected this interpretation of Kwan Siu Man. It is legally possible to enter into an open contract but the courts should not be too ready to find that this has occurred in the context of Hong Kong’s volatile property market. ‘In my opinion, the test is one of intention, i.e. have the parties reached a binding contract for the sale and purchase of that property at that price. If they have, then the other terms can be implied.’ ([79]). Here there was ample evidence that the parties had the necessary intention to be contractually bound.

Although no completion date was specified, the parties had agreed that completion would not take place until after their mother had died (the brother was joint tenant of the flat with the mother). It was to be implied that completion would take place at a reasonable time after the mother’s death. If completion does not take place within that time, the innocent party could issue a notice fixing a new completion date and making time of the essence ([80] referring to Behzadi v Shaftesbury Hotels Ltd and Lau Suk Ching Peggy v Ma Hing Lam). This was not void for uncertainty since it was certain that the mother would die even though the date of death could not be known ([83]).

The memorandum not only recorded the terms of the oral agreement but also the fact that the sister had paid the agreed deposit under the agreement. This did not mean that it was invalid as a memorandum. This was not a case where additional terms had been included in the memorandum casting doubt on whether it was truly intended to record the existence of an alleged oral agreement ([95]).

The oral agreement had been formed and the memorandum recorded it. The memorandum could even be considered as a written agreement. Specific performance was ordered.

Michael Lower

There is an implied term that a sale of land is with vacant possession

March 30, 2016

In Wong Yuk Ying v Chan Pui Shan May ([2016] HKEC 537, CA) S1 agreed to sell a workshop to S2. S2 entered into a sub-sale agreement with P. The workshop was divided into three units and each unit was subject to a separate tenancy. Details of the tenancies were contained in the sale and purchase agreements (both the head contract and the sub-sale). Two of the tenancies would determine by effluxion of time by the time of the completion date, the third would not. The tenants of the units whose leases expired did not vacate the property at the end of the term and were still in possession at the completion date specified in the sale and purchase agreements. P argued that the failure to give vacant possession on completion amounted to a failure to give good title and sought a declaration that S2 was in breach of contract and the return of the deposit paid to S2.

S2 argued that there was no express or implied term to the effect that sale was with vacant possession. Yuen JA disagreed: there is an implied term that sale is with vacant possession in the absence of agreement to the contrary ([22.1]). The fact that the sale was subject to and with the benefit of the tenancies did not amount to an expression of a contrary intention given that the tenancies would have expired by the completion date. In the absence of a contrary intention, the seller bore the risk that the tenants would remain in possession at the end of their leases ([30]); P’s knowledge of the existence of the tenancies and that the tenants might not vacate did not mean that there was any such contrary intention.

Michael Lower