Archive for the ‘deposit’ Category

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).

Failure to reinstate at the end of a lease and associated licence

July 20, 2012

In China Resources Property Management Ltd v Max Merit Ltd ([2012] HKEC 1010 (District Court)) C had granted M a lease of some shop premises for use as a sandwich shop and a licence of an Outside Seating Area. M had taken over the business of a previous owner of the shop and H was a director both of M and of the previous tenant. She had undertaken day to day management of the business both before and after the takeover.

At the end of the lease / licence term, C alleged that M had failed to reinstate ceiling panels to their ‘bare shell’ state as required by the agreement between them. One  question was whether this required the panels to be in the state they were in at the time of the takeover or at the time of the original lease to the previous tenant. The close involvement of H in both businesses persuaded the court that the ‘bare shell’ clause created an obligation to reinstate as at the date of the original lease to the previous tenant ([41] – [42]). The tenant was in breach and the agreement required it to indemnify C in respect of any costs associated with the breach.

The agreement prohibited the installation of fixtures of a permanent nature. The ceiling fans and spotlights were not fixtures since they were temporary and easy to remove. There was no breach of this prohibition.

The court had not allowed the landlord to rely on photographs and project documents as part of its evidence. They had been in existence for quite a long time but disclosed very late. The person who took the photos had not been called as a witness and so the photos would have been hearsay evidence.

The landlord’s claim to be able to forfeit the deposit because of non-payment of sums due under the agreement failed. The terms of the agreements did not allow forfeiture of the deposit in the circumstances of this case.

Time generally of the essence in Hong Kong Conveyancing

May 1, 2012

The time for payment of the initial deposit payable under the terms of a Provisional Sale Agreement is usually of the essence in Hong Kong.

In Sun Lee Kyoung Sil v Jia Weili ([2010] 2 HKLRD 30) the purchaser’s cheque for the initial deposit under a Provisional Sale Agreement bounced. The purchaser had the money but, by mistake, had not transferred it to the right account to be ready to honour the cheque. The next day the purchaser proffered a cashier order for the deposit but the seller refused to accept it, preferring to treat the failure to pay the deposit on the due day as a repudiatory breach. The court decided that he was entitled to do so and, in accordance with the terms of the agreement, to forfeit the deposit. The nature of the subject matter (real estate in Hong Kong) and the surrounding circumstances indicated that time was to be treated as being of the essence and equity could not relieve from the defendant from a duty of strict compliance. In any event, the purchaser had no defence to an action on the cheque (though the seller could not recover twice),

Extinguishing a purchaser’s lien

June 16, 2011

A purchaser’s lien can be extinguished by operation of law, by the common intention of the parties or by a holder of the lien. The test of intention is objective. Unless the intention is express, the burden is on the party denying the existence of the lien to prove by clear and manifest inference that such was the parties’ intention.

In Re Bank of China (Hong Kong) Ltd ([2011] HKEC 660, CFI) V and P entered into an agreement for the sale of a flat and P paid very substantial deposits to V. By operation of law, a purchaser has an equitable lien over property as security for the deposit paid. V and P later entered into a cancellation agreement that terminated the sale agreement and contained a clause purporting to give security for repayment of the deposits. V and P later sought a consent order under which V would repay the deposits and the agreement would be terminated. Between the cancellation agreement and the application for the consent order, various other interests were created in respect of the property. This case concerned the priority between P’s equitable lien and the other later interests.

To J explained that a purchaser’s lien can be extinguished by operation of law, by the common intention of the parties or by a holder of the lien. The test of intention is objective. Unless the intention is express, the burden is on the party denying the existence of the lien to prove by clear and manifest inference that such was the parties’ intention. The more extensive security arrangements contained in the cancellation agreement showed a common intention to extinguish the lien. In the circumstances, the application for the consent order had the same effect. The equitable lien was extinguished and the later claims were not subject to it.