Archive for the ‘deposit’ Category

Interpretation of a clause barring requisitions about unauthorised structures. Justification of a large deposit.

March 3, 2015

In Channel Green Ltd v Huge Grand Ltd ([2015] 1 HKLRD 655, CA) C agreed to buy commercial property from H. The agreement contained a clause (clause 30) to the effect that the purchaser ‘shall not raise any questions / inquiries or refuse to complete or delay completion of transaction on the ground that there are any unauthorised additions, alterations or illegal structures on the Property’. There were defects arising out of the physical condition of the property. Stalls occupied areas designated for car parking under the terms of the Government Lease. Parts of shop premises were built on areas that the Government Lease stipulated should not be built upon. Despite the terms of the agreement, C raised requisitions about these matters and later failed to complete. The question was whether clause 30 prevented  C from raising these requisitions and from asserting that H could not give good title.

C argued that the effect of the clause was only to prevent it from objecting to unauthorised or illegal structures to the extent that they amounted to a breach of the Buildings Ordinance but not to the same problems considered as breaches of the terms of the Government Lease or the Deed of Mutual Covenant. The argument failed:

‘In our view, illegal structure simply means any structure erected against the law. The relevant illegality can stem from a breach of the Buildings Ordinance, it can equally stem from a breach of the terms of  the Government lease or the terms of the DMC.’ ([27], Lam V-P)

Applying Jumbo King the plain words of the clause prevented C from raising requisitions or objecting to the title on the grounds of the defects relied on ([39]). The fact that C knew of the problems at the time of the contract was part of the factual matrix and this made it even clearer that the clause prevented C from objecting to the defects ([40]). While Lord Hoffmann had spoken of an ovepowering principle that a vendor could not knowingly impose on a purchaser a seriously defective title, this was to be balanced against freedom of contract ([42] – [43]).

C had paid a 15% deposit and this was forfeited. C argued that the fact that the deposit was larger than the customary 10% meant that the onus was on H to justify it being treated as a deposit. This proposition was accepted ([50]) but H had provided the necessary justification. H had agreed to a four and a half month gap between contract and completion:

‘whether a higher deposit is reasonable in the circumstances of a particular case is a matter of fact and degree. In the present case, the Judge was clearly entitled to take account of the fact that the longer the completion period, the longer the vendor is at risk from the vicissitudes of the market and there is objective justification for a 15% deposit.’ ([56]).

Michael Lower

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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

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

 

 

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

Interpretation of clause modifying duty to respond to requisitions concerning unauthorised structures

August 20, 2013

In Channel Green Ltd v Huge Grand Ltd ([2013] HKEC 1124, CFI) CG had entered into a contract to buy property from HG. It had paid a 15% deposit. The contract contained a clause to the effect that the property was sold on an ‘as is’ basis. The clause provided that CG could neither raise requisitions concerning unauthorised additions, alterations or illegal structures nor refuse to complete or delay completion on account of any such matters. There were several unauthorised structures at the property. CG raised requisitions concerning these structures and refused to complete. HG elected to terminate the contract and forfeit the deposit as a result.

The question was whether, as a matter of contractual interpretation, the relevant clause meant that CG had no right to raise requisitions nor to refuse to complete on account of the unauthorised structures. The Court of First Instance decided that this was the case ([91] – [98] per Recorder Coleman SC).

The court noted that although the content of pre-contractual negotiations is irrelevant to the process of interpretation, statements of fact made in the course of negotiations are good evidence as to the context or factual matrix and so  are relevant to the construction of the contract ([23]). Thus, the fact that HG had informed CG of the existence of a number of the unauthorised structures before contracts had been exchanged was relevant to the construction of the clause.

The court also considered whether the 15% deposit was a true deposit or whether it could potentially be a penalty and decided that it was a true deposit. While the amount exceeded the conventional 10%, this was justifiable in the context of a lengthy period between contract and completion ([109]).

Michael Lower

Deposit or penalty? The court can order repayment of a penalty that has already been paid.

June 26, 2013

Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd ([1993] AC 573, PC) was an appeal to the Privy Council from the Court of Appeal of Jamaica. A purchaser had paid a 25% deposit and this had been forfeited by the vendor when the purchaser failed to complete on time (time being of the essence for completion). The purchaser successfully sought relief from forfeiture of the deposit.

Lord Browne-Wilkinson explained that in general a provision that a party in default is to pay or forfeit a sum of money is an unlawful penalty unless the sum in question can be shown to be a genuine pre-estimate of damages. There is an exception to this general rule in the case of deposits; these can be forfeited even where they bear no relation to the anticipated loss of the innocent party (p. 578).

For a sum to be treated as a deposit it must be a sum that can reasonably be described as a deposit. Since it is difficult to say what sum would be a reasonable deposit, the approach is to accept (without searching for any further explanation) that it is long established custom and usage in the United Kingdom and Jamaica to accept a 10% deposit as being reasonable in those jurisdictions. It is for a seller wishing to rely on any larger sum to show what special circumstances would justify the larger deposit (p. 580). A reference to market practice at the time of the contract does not amount to such a justification (pp. 579 – 580).

Here the vendor had not been able to show why a larger (25%) deposit was justified. As a result, the entire sum (not merely the excess over 10%) was treated as a penalty. The court had jurisdiction to order the vendor to repay the entire sum less the amount of any damage actually suffered by the vendor as a result of the purchaser’s breach (p. 582).

Michael Lower

Can the standard requirement to pay a sum equivalent to the deposit as liquidated damages be enforced?

June 25, 2013

In Chan Yuen Ka Crystal v Chu Cheong Kit Raymond ([2009] HKEC 1705, CFI) the provisional sale and purchase agreement provided that should the seller fail to complete the sale then he was to refund the deposits paid and pay an additional sum equivalent to the deposit as liquidated damages. The clause went on to provide that if the seller were to do this then the purchaser had no right to claim damages or seek specific performance.

The seller was unable to complete. The question was whether the buyer could require the seller to make the payment of liquidated damages just referred to.

There was no doubt that the deposit(s) had to be returned. Rogers V-P was of the view, however, that the buyer could not enforce the requirement to pay the equivalent sum as liquidated damages; this was a penalty unless the buyer could show that it was a genuine pre-estimate of damages.

Unless the buyer could do this, the seller had an option either (i) to comply with the clause (repay the deposits plus the additional sum) as an alternative method of performance of the contract or (ii) to return the deposit(s) and accept that the buyer might bring an action against him for damages for breach of contract ([31] – [32]).

Michael Lower

Deposit paid under void contract: whether recoverable depends on the parties’ intention and the law of restitution

February 26, 2013

In Sharma v Simposh Ltd ([2012] 1 EGLR 113, CA (Eng)) Simposh granted Sharma an option to acquire property to be developed by Simposh. Sharma paid a deposit of GBP55,000. The agreement required Simposh to carry out the development works within an agreed timescale and not to market the property elsewhere. The agreement was oral and so invalid because of its failure to comply with section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989.  Simposh nevertheless honoured the agreement, carrying out the work and not marketing the development. Sharma then decided not to proceed and sought the return of its deposit.

The English Court of Appeal saw the outcome as depending on the correct interpretation of Chillingworth v Esche.  The deposit had passed to Simposh and it was a question of the intention of the parties concerning the terms on which property had passed. This understanding, while clearly related to the void contract, was separate from it. Here the parties’ intention was that Simposh was to keep the deposit if Sharma did not proceed with the purchase:

‘In the present case the agreement was not illegal in the same sense as in Singh, but it was void for failure to comply with the formal requirements of section 2. As in the case of a contract void for illegality, so in the case of a contract void for lack of formal validity, it did not follow that property in the deposit could not pass to the defendant. That depended on the intention with which the payment was made. Was the payment intended to be conditional on the claimants completing the transaction or was it intended to be unconditional? If the former, the defendant would have obtained only a conditional title to the money and would have been bound to return it on the transaction falling through. If the property passed unconditionally, the defendant was prima facie entitled to retain it.’ (Toulson LJ, [44])

Sharma also sought to rely on restitution. This failed too:

‘The fact that property was intended to pass and did pass does not, of course, exclude the possibility of a claim for restitution, but such a claim depends on the claimant being able to establish a recognised ground of restitution. In this case the only suggested ground is failure of consideration. Since the claimants obtained the benefit for which the payment was made, there is no merit in their claim and no injustice in the defendant retaining the money. The justice of the matter is entirely on the defendant’s side.’ (Toulson LJ, [55])

When has a deposit been paid?

October 29, 2012

In Wise Think Global Ltd v Finance Worldwide Ltd ([2012] HKEC 1432, CA – subsequently reversed by the Court of Final Appeal) 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 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 expressly 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.

The Court of Appeal held that, on its true construction, the provisional agreement required S to refund all deposits that had been paid. So the question was whether the HK$3.1m further deposit had been ‘paid’. The Court of Appeal (Yuen JA dissenting) held that the further deposit had not been paid. It would only have been paid had the formal agreement been entered into (since the obligation to pay the further deposit was linked to the obligation to enter into the formal agreement ([57])).

Yuen JA urged the property industry to promulgate a standard provisional agreement that ensured consistency between the English and Chinese versions ([62.5]).

Michael Lower

Deposits, liquidated damages and penalties

October 12, 2012

In Polyset Ltd v Panhandat Ltd [2002] 3 HKLRD 319, CFA) S agreed in May 1997 to sell property to P for HK$115 million. Completion was due to take place nine months after the date of the contract. P paid a deposit of HK$40.25 million (35%  of the purchase price). The contract expressly justified the larger than usual deposit on the basis of the longer than usual period between contract and completion. P later alleged a breach of contract and refused to complete. The Court of Final Appeal agreed with the Court of Appeal that S was not in breach of contract. The question was whether S could keep the deposit which exceeded S’s actual loss (HK$ 33million) by just over HK$ 7 milion. It held (Litton NPJ dissenting) that the deposit in this case was excessive and so the seller was not entitled to forfeit it.

The Court of Final Appeal distinguished between a liquidated damages clause and a deposit. A liquidated damages clause is intended to replace a claim for breach of contract. If it represents a genuine attempt to quantify the damages that might be payable in the event of breach then effect will be given to it. It then prevents any claim to the effect that the amount is too large or too small. If the liquidated damages payable are excessive so that they cannot be said to be a pre-estimate of the damages payable but are, instead, an attempt to terrorise the other party into performance then the liquidated damages clause is a penalty and the court will strike down the liquidated damages clause.

A deposit is quite different from a liquidated damages clause. A payment in advance is properly classified as a deposit if  it is intended both as part payment of the purchase price and as a proof that the buyer is serious about the transaction. It is not intended to substitute for a claim for breach of contract; in principle, a seller can keep the deposit and bring an action for breach (giving credit for the deposit if the claim is successful). If the deposit is not excessive then effect will be given to the contractual intention in its regard (usually that the seller can keep the deposit if the purchaser fails, without legal justification, to complete).

Where, however, the deposit is excessive the seller will not be allowed to keep it. When deciding whether or not a deposit is excessive, it is not appropriate to ask whether or not it represents a genuine pre-estimate of loss. That question is relevant to the evaluation of a liquidated damages clause but not to the contractual provisions concerning a deposit.  A deposit that is in line with usual practice (10% of the purchase price in Hong Kong) is not excessive. A deposit that is larger than the customary deposit is excessive unless there were special circumstances to justify it.

Ribeiro PJ summarised the position thus:

‘In the light of the foregoing authorities, the proper approach to unusually large deposits may be stated as follows.

(a) Where (in the absence of fraud or vitiating factors other than excessiveness) the amount of an agreed deposit matches or is less than the conventional amount, its forfeiture will not attract judicial scrutiny, whether or not the innocent party has suffered any loss as a result of the other party’s breach.
(b) Where the deposit exceeds the conventional amount, that is, 10% in Hong Kong, forfeiture is only permitted if the party seeking to forfeit can show that exceptional circumstances justify the higher amount.
(c) Such exceptional circumstances must relate to a true deposit’s purpose as an earnest of performance and as compensation for the vendor’s withdrawal of his asset from the property market pending completion, providing an objective justification for the higher sum.
(d) If such justification is not forthcoming, the courts will not recognize the amount as a true deposit but will treat it as an advance payment towards what was payable under the contract and recoverable as such, subject to the innocent party’s entitlement to deduct damages for any actual loss suffered as a result of the other party’s breach.’ (para. 90)

A 35% deposit was excessive.  The lengthy gap between contract and completion might justify a larger than usual deposit but not a deposit as large as that paid in the present case.  Hence, P could not be allowed to forfeit the deposit but was only entitled to its actual loss. The safest course for a seller is to accept the customary deposit and to have a clause that allows him to re-sell and to claim the loss on sale and the costs of sale as liquidated damages. A seller should accept that a deposit that is several times larger than the customary deposit is likely to be impermissible (para. 108).