Ipsofactoj.com: International Cases [2002] Part 6 Case 5 [CFA]


COURT OF FINAL APPEAL, HKSAR

Coram

Dorku Ltd

- vs -

Green Park Properties Ltd

CHIEF JUSTICE LI

JUSTICE BOKHARY PJ

JUSTICE RIBEIRO PJ

JUSTICE LITTON NPJ

LORD MILLETT NPJ

10 DECEMBER 2001


Judgment

Justice Litton NPJ

INTRODUCTION

  1. This appeal illustrates the problems that can arise when parties enter into provisional agreements for the sale of real property without clearly defining the precise boundary of the property. The facts as found by the courts below show that there was plainly no attempt by the vendors to mislead or to over-reach; the parties thought they had a concluded agreement; and yet the vendors lost their bargain because a minute area of the property to be sold, which was of no use to any one except the occupier of the property itself, was found not to belong to the vendors exclusively.

  2. The property in question comprised shop premises in Mongkok, Kowloon. The appellants are the vendors. The respondents are the purchasers.

  3. By a provisional agreement dated 14 April 1998 the respondents agreed to buy and the appellants agreed to sell property described as "Ground Floor Shops, No. 566 Nathan Road, Kowloon" for the price of $54 million. A deposit of $10.8 million (representing 20% of the purchase price) was paid to the vendors' solicitors as stakeholders. Completion was to be on or before 15 May 1998. The premises were, at the time of the agreement, divided into two portions, A and B, both rented out to tenants. This appeal concerns matters relevant to portion A only.

  4. The story starts at the beginning of April 1998 when Mr. Wong Wing-wai ("Mr. Wong") the director in charge of the appellants asked estate agents to put the property up for sale. For this purpose Mr. Wong gave to the estate agents the tenancy agreement relating to portion A which had attached to it a plan showing the area let to the tenants.

  5. A few days before the agreement was signed, there was an inspection of the premises. This was attended by a representative of the purchasers and one of the estate agents. Portion A, used by the tenants as a restaurant, was then under decoration. A pair of swing doors at the back of the restaurant led to a small yard (measuring 72 sq.ft.) which then gave access to toilets on either side of the yard. A gate in the back wall of the yard gave access to a scavenging lane: Once this gate was locked, the only access to the yard was through the restaurant. To all appearances, this small yard, which led in effect to nowhere except the toilets and the scavenging lane, formed part of Portion A.

  6. Following this first inspection, there was a second inspection a short time later. During this inspection the tenancy plan was shown by the real estate agents to the purchasers' representatives. This plan indicated that the premises let to the tenant included the yard, and, together with the physical appearance of the premises, induced the purchasers into believing that Portion A being offered for sale by the vendors included the yard.

  7. The trial judge found that this amounted to a representation regarding the subject-matter of the sale made by the vendors acting through their agents. In fact, under the Deed of Mutual Covenants ("DMC") relating to the building, the yard formed part of the common areas and was not in the exclusive possession of the vendors. This became clear when the documents of title were delivered to the purchasers' solicitors. Hence, the representation as made by the vendors' agents turned out to be misleading.

  8. Under the DMC the co-owners of the multi-storied building agreed that the common areas were for "access to and egress from his part of the building": an illusory right as far as the other co-owners of the building were concerned since the yard led nowhere except to areas owned by the vendors - and of course to the scavenging lane. But, nevertheless, the yard was not the exclusive property of the vendors and to this extent there was a misrepresentation as to the true facts.

  9. Based upon these matters, and upon the vendors' alleged failure to answer requisitions properly relating to the title to the yard, the purchasers rescinded the agreement and demanded the return of the deposit. (There were other matters covered by the requisitions not relevant to this appeal.)

  10. In May 1998, the purchasers instituted legal proceedings. The matter went before Cheung J who held :

    (1)

    The vendors' title to Portion A was not defective, as the purchasers alleged, because the property which the vendors agreed to convey did not include the yard.

    (2)

    But nonetheless the purchasers had been induced to enter into the agreement to purchase the property in reliance upon the representation made during the inspections concerning the ownership of the yard.

    (3)

    Despite clause 12 of the agreement which provided that the written agreement superceded "all prior negotiations, representation, understanding and agreements of the parties hereto" the purchasers were entitled to rely on the representation made during the inspections to rescind the agreement: The judge held that clause 12 had no effect by reason of section 4 of the Misrepresentation Ordinance, Cap.284 since it failed to satisfy the requirement of reasonableness as stated in section 3(1) of the Control of Exemption Clauses Ordinance, Cap.71.

  11. There were other findings not relevant to this appeal. Judgment was entered in favour of the purchasers based upon points (2) and (3) above. The judge ordered that the deposit, held by the vendors' solicitors, be returned and damages in the sum of $49,765, being wasted conveyancing expenses, be paid. Costs were awarded to the purchasers.

    COURT OF APPEAL

  12. The vendors appealed to the Court of Appeal against Cheung J's judgment, seeking a reversal of the order for the return of the deposit and consequential orders. The purchasers cross-appealed against the judge's finding that the property which the vendors had agreed to convey did not include the yard: They sought a declaration that the agreement was lawfully rescinded on the ground that the title which the vendors had agreed to convey was defective.

  13. The Court of Appeal (Rogers VP, Stock and Le Pichon JJA):

    (1)

    dismissed the vendors' appeal on the finding of misrepresentation ("the Misrepresentation" point) and

    (2)

    allowed the purchasers' cross-appeal on the issue regarding the title ("the Defective Title" point), and awarded all the costs of the appeal to the purchasers.

  14. The vendors, being dissatisfied, now appeal to this Court.

    DEFECTIVE TITLE

  15. The point turns upon the effect of the provisional agreement dated 14 April 1998. Quite simply, upon a fair reading of the agreement, what did the vendors agree to sell and convey and what did the purchasers agree to buy? Or, put another way, did the yard form part of the subject-matter of the sale?

  16. The "parcels clause" in the agreement merely identified the property to be sold as "Ground Floor Shops, 566 Nathan Road, Kowloon". There was no plan attached to the agreement to identify with greater particularity the area over which exclusive possession was to be conveyed to the purchasers on completion.

  17. However, as the Court of Appeal said, the purchase was subject to existing tenancies. Clause 15A made reference to the tenancy agreement in respect of Portion A and this was annexed to the agreement : But the tenancy plan (showing the yard as part of the area let by the vendors to the tenant) was omitted.

  18. When one turns to the tenancy agreement itself one sees the property described as "Part A, Ground Floor Shop, No. 566 Nathan Road, Kowloon (as shown on the plan)". The plan referred to in the tenancy agreement was the same plan which was shown to the purchasers at the second inspection.

  19. As Le Pichon JA said, the parcels clause in the sale and purchase agreement threw no light on the boundary of the property and did not say whether the yard was within the boundary of the property: Nor, for that matter, did it say whether the toilets on either side of the yard formed part of the property. Plainly, in the circumstance of this case, the only way whereby the precise boundary of the property could be ascertained was by reference to the tenancy agreement.

  20. If the tenancy agreement (which was annexed to the agreement) had included the tenancy plan, the matter would have been conclusive: It matters not that the plan was said to be "for identification purposes only". It would have shown that the entire area including the yard was the subject-matter of the sale. But it did not. How then does this leave the parties?

  21. It was obviously not open to the judge to throw up his hands and say: "The agreement failed ab initio because it never identified the property to be sold with sufficient precision: The parties thought they had a binding agreement: In law they did not". This was not a position adopted by either party, so the judge had to do the best he could with the agreement as it stood, and to ascertain the scope of the bargain from the words actually used and the circumstances under which the agreement was made. Since the tenancy agreement, annexed to the sale and purchase agreement, referred to the tenancy plan for the purpose of identifying the area purportedly in the vendors' ownership, it was plainly permissible for the purchasers to rely upon that. As Le Pichon JA remarked in her judgment: "The whole point of reference to the plan was because of the inadequacy of the verbal description in both the agreement as well as the tenancy agreement".

  22. Once one looks at the plan, the position becomes clear: The vendors were purporting to sell and convey to the purchasers Portion A including the yard: This was not something they were able to do on completion: There was accordingly a defect in the title which the vendors, by the agreement, were purporting to convey. The Court of Appeal was accordingly right to reverse the trial judge on this point.

    SUBSTANTIAL PERFORMANCE

  23. Before the judge, the vendors also sought to uphold the stance they took on the basis that what they offered to the purchasers was substantial performance of the contract: The yard formed only 3% of Portion A and led nowhere except to areas exclusively owned by the vendors themselves: The value of the property was diminished only to a minimal extent by the fact that the yard was technically in common ownership. At first instance, Cheung J considered this point in the context of the materiality of the representation. He was handicapped in entertaining the point because there was no evidence regarding the value of the yard. He held that every part of the property had a value: The representation concerning the yard was therefore material. The Court of Appeal agreed with the judge on this issue.

  24. In the vendors' printed case lodged before us, the vendors sought to rely upon the "doctrine of substantial performance" and submitted, in effect, that this Court should consider ordering specific performance with an abatement of the purchase price. This led counsel for the purchasers Mr. Edward Chan SC to riposte that the vendors have come far too late: Not only has the property since been sold by the mortgagees, rendering the remedy of specific performance (with an abatement) impossible, but the vendors had never offered, prior to completion, to convey the property with an abatement: Counsel asks: "How would the purchasers know how much to tender at completion?" He submits that, as a matter of law, where a vendor has not, prior to completion, offered to complete with an abatement of the price, stating clearly what the reduced purchase price would be, a court cannot, in the exercise of its equitable jurisdiction, thereafter adjust the bargain between the parties: He invites us to state that in so far as Summit Link Ltd v Sunlink Group (HK) Co Ltd [2000] 2 HKLRD 724 at 743 decided to the contrary, it should be overruled.

  25. In my judgment, this Court simply does not have the necessary material before it for a determination on the point. It was never taken in the courts below in the way Mr. Chan SC has articulated it in this Court. Moreover, the vendors were not legally represented at the hearing before us. This point must therefore be reserved for determination another day.

    MISREPRESENTATION

  26. What has been said above effectively disposes of this appeal. Since the vendors were in no position on completion to convey to the purchasers the title they had contracted to convey, the purchasers were entitled to rescind.

  27. As regards the representation concerning ownership of the yard, this was a question of fact. Both courts below made findings adverse to the vendors. There is no basis upon which this Court can interfere with those findings.

  28. One matter which has caused me anxiety is Cheung J's approach to the effect of section 4 of the Misrepresentation Ordinance. This states:

    4.

    Avoidance of provision excluding liability for misrepresentation

    If a contract contains a term which would exclude or restrict -

    (a)

    any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or

    (b)

    any remedy available to another party to the contract by reason of such a misrepresentation,

    that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 3(1) of the Control of Exemption Clauses Ordinance (Cap.71); and it is for the person claiming that the term satisfies that requirement to show that it does.

    Section 3 of the Control of Exemption Clauses Ordinance provides:

    3.

    The 'reasonableness' test

    (1)

    In relation to a contract term, the requirement of reasonableness for the purposes of this Ordinance and section 4 of the Misrepresentation Ordinance (Cap.284) is satisfied only if the court or arbitrator determines that the term was a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.

  29. As can be seen, what s.4 of the Misrepresentation Ordinance, combined with s.3 of the Control of Exemption Clauses Ordinance, looks to is the contract term: in this case clause 12 which says that the agreement of 14 April 1998 supercedes all prior negotiations, representations etc. The reasonableness test is satisfied if the judge concludes that the term was fair and reasonable having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the agreement was made. What might those circumstances be? In this case they would include the circumstances surrounding real estate dealings in Hong Kong known to both parties bearing on whether it was fair and reasonable for a term like clause 12 to be included in a standard form of provisional agreement put forward by real estate agents for the parties' signature. But this was not how the judge approached the matter. He concluded that clause 12 was of no effect because

    1. Mr. Wong knew that the yard was "not included as part of the property";

    2. Mr. Wong allowed the agents to show the property to the purchasers without advising the agents of this in advance;

    3. he should have been aware that the plan was misleading;

    4. there was nothing on the ground to put the purchasers on enquiry as to the yard.

    These factors bear on the seriousness of Mr. Wong's conduct leading to the representation being made by the agents at the time of the inspection: They were not circumstances known to or in the contemplation of the parties in terms of s.3(1) of the Control of Exemption Clauses Ordinance.

  30. This point however plays no part in the Court of Appeal's judgment and is in any case not relevant to the outcome of the appeal. I therefore say no more about it.

    CONCLUSION

  31. I have some sympathy for the vendors in this case. Their "fault" (if that be the appropriate term) was in failing to realize the importance of the incidence of ownership of the yard: maybe because, in everyday terms, it made little difference: It was apparently of no concern to their tenant. This problem emerged soon after the title documents were delivered to the purchasers' solicitors. This was some time before the date for completion. The purchasers' solicitors then raised a number of requisitions of title, of which this was one. As things turned out those other requisitions were either satisfactorily dealt with or had no merit. It is easy to be prescient in hindsight, but if the vendors (or their solicitors) had been able to focus simply on the problem over the yard, and had accepted the fact that objectively viewed they had by the agreement contracted to convey ownership of the yard to the purchasers, and offered to convey the property with a reasonable reduction in price, the outcome might well have been quite different. On any view of the case the provisional agreement did not delineate with certainty the part of the property which was in the exclusive possession of the vendors: The possibility that a purchaser might have been misled was therefore a real one.

  32. This case illustrates yet once again the importance of the parties facing up to requisitions as to title squarely when they arise. Conveyancing is not a game. The courts would, generally speaking, assume that in entering into an agreement, the parties intended to carry the transaction through to completion. When problems emerge between the parties before completion it is sometimes the case that these can be dealt with flexibly, with a certain amount of give and take : but only if they had been acknowledged squarely in the first place. But once the parties have adopted an absolute position, as the vendors did in this case, then they must, generally speaking, stand or fall on that position.

  33. I would dismiss this appeal, with costs.

    Mr. Justice Bokhary PJ

  34. I agree with Mr. Justice Litton NPJ's judgment.

    Mr. Justice Ribeiro PJ

  35. I have read in draft the judgment of Mr. Justice Litton NPJ. I agree with it and for the reasons it states I would also dismiss the appeal.

    Lord Millett NPJ

  36. I agree.

    Chief Justice Li

  37. I agree with the judgment of Mr. Justice Litton NPJ.

  38. The Court unanimously dismisses this appeal with costs.


Cases

Summit Link Ltd v Sunlink Group (HK) Co Ltd [2000] 2 HKLRD 724

Legislations

Misrepresentation Ordinance: s.4

Control of Exemption Clauses Ordinance: s.3

Representations

The appellant represented by its director, Mr. Wong Wing Wai

Mr. Edward Chan SC and Mr. C.Y. Li for respondent (instructed by M/s Johnson Stokes & Master)


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