Archive for the ‘Contracts’ Category

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

Sale and option to re-purchase: does the option terminate the original buyer’s rights?

May 20, 2015

In Siu Kai Ming v Lau Sai Hing ([2015] HKEC 211, CFA) D owned a village house. D entered into two contracts with P (a developer). Under the terms of the first contract, P agreed to build a three-storey village house on land owned by D in consideration of the assignment of the second floor and roof of the house (the Property) to P. The second contract granted D an option to purchase the Property from P. P built the house but D did not assign the title to the Property to P. D validly exercised the option but then gave notice that he did not intend to honour the contract thereby created. P accepted this repudiation and now sought transfer of the Property to him. D argued that the exercise of the option brought P’s rights to the Property to an end and that P was only entitled to damages for breach of the contract arising from the exercise of the option.

P succeeded. The first contract gave P an equitable interest in the property. Neither the option nor its exercise brought this to an end; they simply gave rise to another contract. In respect of the first contract, P could elect for specific performance or damages and he had chosen specific performance. He was also entitled to damages for breach of the contract arising from the option but he had suffered no loss in this respect since the market price exceeded the option price.

Michael Lower

Interpretation of a letter modifying conditions of sale

April 1, 2015

In United Bright Limited v Secretary for Justice ([2015] HKEC 438, CA) the Court of Appeal (Lam V-P delivering the judgment of the Court) had to deal with a dispute concerning the construction of a letter modifying restrictions contained in the Conditions of Sale. The Conditions of Sale (entered into in 1939) allowed only ‘European type houses’ to be built and contained a ‘DDH’ clause:

‘The design of the exterior elevations and the disposition and height of any building to be erected on the lot shall be subject to the special approval of the Director of Public Works and in no case may any building to be erected on the lot exceed 2 storeys.’

In 1957 the Government issued a Letter of Modification that allowed flats to be built instead of houses. This modification was said to be subject to conditions:

‘(a) Payment of an additional premium amounting to $33,550.00 for each Section within 14 days on demand.

(b) Buildings to comply with the following coverage limitations:

3 storeys over car port – 55% of lot area

4 ” ” ” ” – 45% ” ” ”

5 ” ” ” ” – 40% ” ” ”

(c) Car parking to be at the rate of not less than 1 car per flat.

(d) Buildings to be in accordance with the provisions of the Buildings Ordinance and plans to be submitted to the Building Authority for approval in the usual way.’

United Bright wanted to build a 37 storey block of flats with car parking beneath and associated facilities. It contended that the Letter of Modification permitted this development. The Government contended that the Letter of Modification only permitted a 5 storey development and that the DDH clause remained in full operation. Thus, the question concerned the proper construction of the Letter of Modification.

The Government succeeded:

1. Defining the relevant ‘context’ against which the relevant terms should be considered is central to contractual interpretation (Fully Profit (Asia) Limited v Secretary for Justice) ([8]). The relevant context included the Conditions of Sale that were modified ([9] – [12]). In terms of the letter itself, it was to be noted that it did not expressly release the lessee from the need to obtain approval under the DDH clause ([14]).

2. In Ying Ho Co Ltd v Secretary for Justice, the Court of Final Appeal had decided that the DDH clause in that case was an independent restriction from other more detailed restrictions in the Conditions of Sale. There was no reason to take a different view of the status of the DDH clause in the present case ([15] – [19]).

3. The fact that the Building Ordinance had been amended in 1955 (shortly before the Letter of Modification) allowing buildings of more than 5 storeys to be built and conferring powers to disapprove plans) was not part of the relevant context. The Government’s powers under the Building Ordinance and under the Conditions of Sale were separate from each other and had different objects even if administered by the same Department (Hang Wah Chong Investment Ltd v AG) ([20] – [24]).

The Court of Appeal reached its decision (in favour of the Government) based on the above considerations([27]).

The court went on, however, to look at the admissibility of correspondence around the time of the application.The lessee applied for the modification in 1956. There was, however, earlier correspondence between the lessee’s solicitors and the Government  referring to an earlier (1955) application for permission to build ‘not more than four flats on each of the six sites.’ The 1956 application was a renewal of the 1955 application. Should the correspondence be taken into account when interpreting the letter? The developer objected that the correspondence was a subjective statement of intent or merely reflected the state of the negotiations at a given moment in time ([31]). This objection failed. It was legitimate to look at the correspondence in order to clarify the subject matter of the application ([33]). The letter of modification referred to the application and so invited a reading together of the two documents. The correspondence cast light on what had been applied for (permission to erect flats and not houses) ([33] – [34]).

Evidence of the Government’s internal calculations of the premium was also admissible since the basis of the calculation was common knowledge among the relevant professional community at the time. The fact that the specific calculations were not shown to the lessee did not, therefore, mean that the calculation was inadmissible ([35] – [40]).

Finally, the correspondence was admissible even though it was being used to interpret a document registered at the Land Registry. The letter of modification regulated the rights and duties as between lessor and lessee and was not of its nature a public document ([41]). The English Court of Appeal has recently said that ‘context’ is of limited relevance when interpreting publicly registered documents (Cherry Tree Investments Ltd v Landmain Limited) but that was said in the context of a registration system with a state guarantee of title and Hong Kong’s system is materially different ([41(d)]). It is reasonable to expect Hong Kong purchasers to make enquiries of the Lands Department if they are in any doubt as to the effect of a letter of modification ([41(e)]).

Michael Lower

Deposit: where sums are described as a deposit but the ‘escape’ clauses in the provisional agreement have been deleted

February 10, 2015

In Best Linkage Ltd v Marbella Garden Ltd ([2015] HKEC 167, CFI) the parties had entered into a provisional agreement for the sale and purchase of the plaintiff’s property. The agreement required the defendant to pay $200,000 as an initial deposit and then provided for a further deposit (to take the total of the deposits to 10% of the purchase price) on the signing of the formal agreement. Two clauses had been deleted from the standard form of provisional agreement signed by the parties. One was the clause entitling the seller to forfeit the deposit (and still pursue its other remedies) in the event of the buyer’s default. The other was the ‘escape’ clause entitling the seller to terminate the contract by refunding the initial deposit and making a further payment to the buyer of an equivalent amount. The buyer later wrongfully refused to proceed with the purchase. The seller later sold to another party at a very much higher price. The seller sought, and was granted, declarations that the buyer had wrongfully repudiated the agreement and that the seller was entitled to forfeit the initial deposit.

Although the clause expressly entitling the seller to forfeit the deposit had been deleted, the parties still intended the payment to be a deposit and the nature of a deposit is now well settled (see Polyset Ltd v Panhandat Ltd) ([66]). Where there was an ambiguity, deletions have a limited role to play in interpreting a contract but there was no ambiguity here. Even if there were an ambiguity, it is not legitimate to infer from a deletion (of the clause entitling the seller to forfeit the deposit) that the parties intended the reverse proposition to govern their agreement (that the deposit could not be forfeited (see The Golden Leader)).

Michael Lower

Completion: the duties to deliver executed assignment and to pay the completion monies trigger each other (in the absence of a contrary stipulation)

November 3, 2014

In Chong Kai Tai Ringo v Lee Gee Kee ([1997] HKLRD 461, PC) D entered into a provisional sale and purchase agreement to sell a flat in Hong Kong to P. P was at the end of a chain of sub-sales and, as a result, the purchaser under a contract higher up the chain was to execute the assignment to P. Time was of the essence for completion. The contract included a liquidated damages clause in the event of default by either party. P failed to provide the completion monies by the time stipulated for completion. D argued that this was a repudiatory breach and it purported to accept it. P sought specific performance.

The Privy Council (Lord Hutton giving the only full judgment) held that the obligations to pay the purchase price and to deliver the executed assignment are to be carried out simultaneously (in the absence of an express or implied agreement to the contrary). D was not in a position to deliver the executed assignment by the completion date because it had not arranged for the purchaser higher up the chain to execute the assignment (D anticipated dealing with this after completion). Since it was not ready to complete, P’s duty to provide the completion monies was not triggered.

The result was not to bring the contract to an end but that time ceased to be of the essence  and completion was to take place within a reasonable time. D was not entitled to rescind.

D argued that the liquidated damages clause meant that specific performance was no longer available. The Privy Council declined to consider whether this was true as a general proposition. D’s argument failed because it had not offered to pay the liquidated damages. In that case, the liquidated damages clause did not prevent the award of specific performance.

Michael Lower

‘Hong Kong style’ completion and sub-sales

October 27, 2014

In Wellfit Investments Ltd v Commence Ltd ([1997] HKLRD 857, PC) the Privy Council had to consider the impact of an agreement to effect a Hong Kong style completion and the fact that both parties were aware that the transaction was a sub-sale on the construction of the provisions as to completion in the sub-sale agreement.

The agreement was for the sub-sale of an apartment. Time was of the essence in the agreement. The funds from completion of the sub-sale were to be used to finance completion of the head contract. The sub-sale was to be completed by 3pm on the stipulated date and the deadline for completion under the head contract was two and a half hours later. The sub-contract was ‘subject to and with the benefit of’ the head contract. The sub-contract provided that on completion, the seller would execute a ‘proper assurance’ and give vacant possession. The parties agreed to a ‘Hong Kong style’ completion (on completion, the seller gave an undertaking to forward the executed assignment within 17 days of completion). The sub-purchaser had not provided the completion monies by 3pm and the sub-seller rescinded 24 minutes later. The sub-purchaser sought specific performance.

The buyer’s argument that the deadline had been waived or varied  by virtue of a telephone conversation between the solicitors acting for the parties failed. The words used did not amount to a clear representation that the sub-seller would not insist on its contractual rights.

The buyer argued that the seller was in breach since on completion it would not be in a position to execute a proper assurance or give vacant possession (it could only do this when the head contract was completed). This failed since these obligations were to be interpreted in the light of the agreement to complete by undertakings and because both parties were aware of the sub-sale context and had factored this into their contract.

The sub-purchaser sought relief in equity. This judgment was handed down a few months before Union Eagle. The Privy Council expressed no view as to whether such jurisdiction existed. We had to wait for Union Eagle to learn the answer to this. The Privy Council held that it would not grant such relief even if it had the power to do so. Given the linkage between the sub-contract and the head contract, there was nothing unconscionable in the sub-seller’s insistence on its strict contractual rights.

Michael Lower

Seller entitled to rescind and recover deposit where deposit cheque is accidentally dishonoured and time is of the essence?

October 20, 2014

In Howarth Cheung Natalie Jane YS v Tsang Hong Kwang Ok ([2014] HKEC 1683, CA) S entered into a preliminary agreement for the sale of property to P. The agreement provided for P to pay a deposit of just under 5% of the purchase price. The cheque was not honoured as the bank thought that there was a discrepancy between the signature on the cheque and the specimen signature that they had. S accepted the repudiatory breach and P sought specific performance. S counter-claimed for payment of the deposit.

It was accepted by both parties that time for payment of the deposit is of the essence in Hong Kong even in the absence of an express stipulation to this effect. So the delay in paying the deposit was a repudiatory breach ([4.1] – [4.5] per Cheung JA). P argued, however, that the contract included an implied term to the effect that the stipulation as to time was suspended because the extraordinary event that had happened was beyond P’s control. This failed. The obligation was specified in clear terms ([5.9]); S should not be affected by disputes between P and her agent ([5.10]); the term was not needed to give business efficacy to the contract ([5.11]); nor was it capable of clear expression ([5.12]).

P argued that she should be granted equitable relief from termination of the agreement. This was rejected. First, the point had already been dealt with by the Privy Council in Union Eagle ([6.1]). The Australian courts took a different approach and granted equitable relief where the delay was occasioned by fraud, mistake, accident or surprise (and the High Court of Australia considered the ambit of these exceptions in Tanwar Enterprises Pty Ltd v Cauchi (2003) 201 ALR 359). Even if the Australian approach were followed, it would not allow for relief in the present case:

‘The parties themselves have stipulated the time for payment which is of the essence of the contract. The purchaser had chosen to pay by cheque which in law is in the nature of payment by cash. This by itself precludes any argument on suspension of this obligation. Further, the possibility of the bank not honouring the cheque is not beyond the reasonable contemplation of the parties as mishaps do happen. Hence payment of the deposit can be subject to an exculpatory provision which has not been sought for by the purchaser in the first place. As presently drafted, the payment term is not subject to the purchaser tendering another payment upon discovering that the cheque has not been made. In any event, HSBC is not a third party in the strict sense of the term but an agent of the purchaser. To decree relief will deprive the vendor of an essential right of the agreement. The whole circumstances just do not come within the ambit of the requirement for relief that, although the accident was not occasioned by the vendors who were innocent, it was sufficient of itself to render it unconscionable or inequitable for the vendors to insist upon its legal rights.’ ([6.20] per Cheung JA).

Finally, S could recover the unpaid deposit from P. Contractual damages aim to put S in the position that he would have been in had the contract been performed (and in that event the deposit would have been paid). Alternatively, the effect of the acceptance of a repudiatory breach is to discharge the parties from all executory obligations but does not affect rights and obligations that have already accrued (Damon Compania Naviera S.A. v. Hapag Lloyd International S.A. [1985] 1 WLR 435). This approach has been taken by the Hong Kong courts (for example, Sun Lee Kyoung Sil v Jia Weili [2010] 2 HKLRD 30).

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

Wise Think Global Ltd: had a further deposit been paid?

November 14, 2013

In Wise Think Global Ltd v Finance Worldwide Ltd ([2013] HKEC 1790, CFA) S agreed to sell property to P. A deposit of HK$500,000 was paid on the signing of the provisional agreement. A further HK$3.1m was to be paid on the signing of the formal agreement. The provisional agreement provided that if the vendor failed to complete the agreement, it would refund the deposit paid together with a further amount equal to the deposit. The provisional agreement also provided that the deposits would be held by the vendor’s solicitors as stakeholders.

The terms of the formal agreement were agreed and P sent the agreement signed on behalf of P and a cheque for HK$3.1m. P’s solicitors’ accompanying letter declared that the agreement and cheque were sent against S’ solicitors undertaking to send in return the part of the formal agreement signed on behalf of S within three days. S’ solicitors did not give this undertaking. They cashed the cheque but did not send a part of the formal agreement signed on behalf of S. Instead, more than three days later, S purported to terminate the provisional agreement by paying liquidated damages in accordance with the terms of the provisional agreement. S refunded both of the deposits and paid a further $500,000 (equal to the initial deposit). The question was whether it had also to pay further liquidated damages equal to the HK$3.1 m further deposit.

Litton NPJ said that the central question was whether the deposit had been paid to and accepted by the vendor’s solicitors ([23]). They were to hold the deposits as stakeholders but they were also the vendor’s agents. When they cashed the cheque, the money was received and paid ([25]). The terms of the undertaking that the purchaser’s solicitors sought to impose did not render the payment conditional. The only realistic interpretation of the proposed undertaking was that the vendor’s solicitors were being asked not to cash the cheque unless they were in a position to send the vendor’s signed part of the contract to the purchaser’s solicitors ([28]). Litton NPJ emphasised that this case turned on its special facts; it would be rare for a purchaser to pay a deposit before the contract had been signed ([31]).

Bokhary NPJ approached the matter on the basis that the purchaser had accepted the risk that the further deposit would be forfeited and that there was an expectation that the right to resile, and the consequences of doing so, would be matching (the same for each party) ([37]).

Lord Millett NPJ said that the vendor’s solicitors could refuse the deposit by returning the cheque, by holding it without cashing it or by cashing it on the express basis that the money was held to the purchaser’s solicitors order ([41]). Simply cashing the cheque, by contrast, amounted to acceptance of the deposit monies ([42]).

Since the right to resile had not been validly exercised, the Court of Final Appeal ordered specific performance of the contract.

Michael Lower