FACV No 8 of 2014

IpsofactoJ.com: International Cases [2015] Part 2 Case 9 [CFA]


COURT OF FINAL APPEAL, HKSAR

Coram

K.M Siu

(蕭啟明)

- vs -

S.H. Lau

(劉世興)

CHIEF JUSTICE GEOFFREY MA

JUSTICE R.A.V. RIBEIRO PJ

JUSTICE ROBERT TANG PJ

JUSTICE JOSEPH FOK PH

LORD PHILLIPS OF WORTH MATRAVERS NPJ

5 FEBRUARY 2015


Judgment

Chief Justice Ma

  1. This appeal[1] by the defendant in the action was brought as of right,[2] the relevant matter directly in dispute (being real property, the second floor and roof of a house) having a value exceeding $1m. After hearing counsel for the appellant defendant[3] in the substantive appeal, and both counsel[4] on costs, the appeal was dismissed with costs. We indicated that the reasons for judgment would be handed down in due course.

  2. I agree with the judgment of Mr Justice Tang PJ and that of Lord Phillips of Worth Matravers NPJ (which contains a summary of the legal analysis in this appeal). This was ultimately a simple appeal to resolve. The effect of the various agreements between the parties can be distilled into the following: the plaintiff contracted with the defendant to build at his own expense a three-storey house on the defendant’s land in consideration of the assignment to him (the plaintiff) of the second floor and roof of that house (“the Property”). The assignment was, however, subject to an option[5] exercisable by the defendant to purchase from the plaintiff his interest in the Property. Even if the option had been properly exercised by the defendant in the present case,[6] thereby giving rise to an obligation on his part to purchase the Property, this fell through when the defendant repudiated this obligation and the repudiation was accepted by the plaintiff. The plaintiff was then left with his contractual entitlement to have the Property assigned to him. The defendant’s suggestion that once the option to purchase was exercised by the defendant, the obligation to assign the Property to the plaintiff had somehow been extinguished, was simply wrong. The plaintiff was fully entitled to have this obligation enforced.

    Justice Ribeiro PJ

  3. I agree with the Reasons of The Chief Justice, Mr Justice Tang PJ and Lord Phillips of Worth Matravers NPJ.

    Justice Tang PJ

  4. The plaintiff agreed to build a village house on land[7] owned by the defendant. In return the defendant agreed to assign the 2nd floor and the roof of the house(“the Property”) to the plaintiff. [8] For that purpose, they entered into a series of agreements in Chinese. The first in time were a Joint Development House Splitting Agreement and a Supplemental Joint Development House Splitting Agreement both dated 6 June 2006.[9] However, by these agreements, the plaintiff in turn granted to the defendant a pre-emptive right to purchase the Property. The relevant clause in the 6 June agreement read:

    Both parties agree that if Party A (the plaintiff) shall sell the 2nd Floor and the Roof assigned to him, Party B(the defendant) has a pre-emptive right to purchase the same by giving written notice of his intention to purchase to Party A, within a month from the date of lodging application for the Occupation Permit. The purchase price shall be the price valued by (3 named banks), whichever is highest.

  5. The pre-emptive right was modified by the 6 June supplemental agreement which provided that if the defendant was not satisfied with the valuations provided by any of the named banks:

    .... Party B is entitled to jointly appoint a valuer with Party A to revalue the house, ....

  6. Sometime later, and it does not matter exactly when, the parties entered into a signed and witnessed by one Lau Pak On “Joint Development House Splitting Agreement” which was dated 2006[10] and a Supplemental Joint Development House Splitting Agreement dated5 August 2006.[11]

  7. The 2006 agreement contained provisions from the 6 June agreements[12] but only Clause III.5 of the 2006 agreement is important to this appeal. It provided:

    If Party B needs to re-purchase the property title owned by Party A, the purchase price shall be the highest of the valuations made by 3 property valuers. But Party B shall communicate his decision to Party A within 30 days after the issuance of the Certificate of Compliance.... (The names of three valuers were then given.)

  8. In this action, the plaintiff claimed assignment of the Property pursuant to, inter alia, the 2006 agreement, and the defendant counter-claimed for an order that “the plaintiff do sell [the Property] to the Defendant at HK$2,440,000 ....”. The Plaintiff succeeded both at first instance and in the Court of Appeal. Because the value of the Property exceeded $1,000,000, the defendant appealed to us as of right. We dismissed the appeal with costs at the conclusion of the hearing and my reasons for doing so are set out below.

  9. At trial, one of the issues was whether Clause III.5 of the 2006 agreement conferred on the defendant an option to purchase and not merely a pre-emptive right to purchase the Property[13]. As I shall endeavour to explain it does not matter whether the defendant had a right of pre-emption or an option.

  10. The differences between an option and a right of pre-emption are well known but they do not matter in this case. It is sufficient to note that a right of pre-emption is commonly triggered by the grantor desiring to dispose of the subject property and informing the grantee of such desire.[14] In the case of an option, ordinarily, the exercise of the option does not depend on the volition of the grantor. However, as Templeman LJ (as he then was) said they share one common feature:

    each prescribes circumstances in which the relationship between the owner of the property which is the subject of the right and the holder of the right will become the relationship of vendor and purchaser. [15]

  11. The 6 June agreement, required “written notice of (the defendant’s) intention to purchase” to be given “within one month from the date of lodging application for the Occupation Permit” but said nothing about any notice of desire to sell by the plaintiff. Be that as it may, it is clear that provided the plaintiff “shall sell”, the defendant was entitled to purchase at valuation. It may be it was expectedthat the plaintiff would sell and realize his profit as soon as he could[16] . Indeed, the plaintiff, using the name of the defendant, on 30 May 2007, entered into a Memorandum of Understanding to sell the Property to Fancy Spread Ltd, which was before the Certificate of Compliance was issued, and received a deposit of $320,000, being 10% of the purchase price.[17]

  12. Under the 2006 agreement, the defendant had 30 days from the Certificate of Compliance to communicate his decision. The Certificate of Compliance was issued on 23 October 2007.[18] If the defendant had an option under the 2006 agreement, he could exercise it within the 30days. Even if the defendant only had a pre-emptive right, having regard to the plaintiff’s earlier decision(in May 2007) to sell the Property, it would have been triggered. 

  13. Thus, in my view, the defendant was entitled to purchase the Property provided he communicated his decision to do so in accordance with Clause III.5 of the 2006 agreement, whether he had an option to purchase or a right of pre-emption.[19] I turn to consider whether the defendant had exercised his right to do so.

  14. The plaintiff gave a written notice dated 16 November 2007 to the defendant, notifying him that he could “reply within one month whether to re-purchase ....”. The Court of Appeal noted that:

    48.

    Although the Judge did not make any express finding, it is the plaintiff’s own evidence that the defendant’s mother told him on 16 December 2008 that the defendant would buy the Property.

    On the basis of such evidence, the Court of Appeal held that there was a valid exercise of the option. With respect, this conclusion is not without problem.

  15. We do not have a transcript of the plaintiff’s evidence. But from the chronology to the defendant’s skeleton arguments in the Court of Appeal, the plaintiff’s evidence was summarized as follows:[20]

    16th Dec 2007

    Defendant’s mother told P that D would buy back Property at HK$2.44 million.
    Plaintiff claimed he had agreed provided completion took place within 7 days.
    Defendant’s mother asked for one month and Plaintiff agreed but asked for written notice.
    No written notice was received by the Plaintiff.

    P’s Supp W/S para 6 [B/6]

  16. This and other evidence showed that the plaintiff’s evidence that there was an exercise of the option on 16 December 2007 was nuanced.[21] Anyway, nothing seemed to have come of the exercise of the option.[22]

  17. Then came a letter dated 8 April 2008, from the plaintiff’s solicitors to the defendant’s solicitors. After stating that under Clause III.5 of the 2006 agreement that the defendant had the “right to buy back the Property” at the highest valuation provided by 3 valuers, it went on to say that their respective clients had agreed to appoint AG Wilkinson & Associates (one of the named valuers), whose valuation would be the price payable for the Property. There was no written reply.[23]

  18. Then, there was a letter dated 8 August 2008 from the plaintiff’s solicitors to the defendant, which asserted inter alia, that unless the defendant was willing to repurchase the Property at $3,200,000, which was the price which Fancy Spread Ltd, a willing purchaser ,was willing to pay on 30 May 2007, the defendant must assign the Property to the plaintiff. In this letter, the plaintiff relied on the 6 June agreements. There was no reference to the 2006 agreement[24] .

  19. The defendant’s solicitors on 9 September 2008 asserted that the 6 June agreements had been superseded by the 2006 agreement and that proper valuations had been obtained from the named surveyors and the highest,by Centaline Surveyors Ltd, was $2,440,000. The letter went on to say “In the premises, we have instructions to give you notice, which we hereby do, that our client now endeavours to exercise his lawful contractual right of pre-exemption(sic) of purchase of [the Property] by way of the valuation price of HK$2,440,000.00.”

  20. The fact that the defendant’s solicitors regarded the right under the 2006 agreement as a pre-emptive right does not matter. It is a matter of construction what right was conferred. However, the fact that the letter did not mention that there had been an earlier exercise of the option or pre-emptive right may bear on the Court of Appeal’s view that there had been a valid exercise of the option on 16December 2007. Further, it was not the defendant’s pleaded case that he had through his mother or at all exercised the option on 16 December 2007. The defendant’s case was not clearly pleaded. I will not go into the pleadings in detail because they are not illuminating. It was pleaded in para 34 of the Re-Re-Amended Defence “.... the defendant had accepted the first offer[25] of the plaintiff, and/or exercised his pre-emptive right by accepting the plaintiff’s offer[26] , to sell [the Property] in or about 28 November 2007 or 2 December 2007 ....” 

  21. Since, it will not affect the outcome of this appeal, I will not go further into the Court of Appeal’s finding that the option had been exercised on 16 December, I will proceed on the basis that the option had been exercised on 16 December and that the price payable was $2,440,000 and that as Mr Andy Hung for the defendant contended a contract of sale thereby resulted. I will treat the letter of 9 September 2008 as a confirmation by the defendant of the exercise of the option.

  22. However, by the defendant’s solicitor’s letter of 11 October 2008  addressed to the plaintiff’s solicitors, the plaintiff was informed that “our client hereby irrevocably withdraws his endeavour to exercise his right under the contract to purchase [the Property] at the valuation price of $ 2,440,000.00”.

  23. By letter of 22 October 2008, the plaintiff asked for assignment of the Property whilst reserving his right to damages. 

  24. The Court of Appeal regarded the letter of 11 October as a repudiation[27] by the defendant of his obligation which arose from his exercise of the option to purchase and the letter of 22 October as the plaintiff acceptance of it. For that reason, the Court of Appeal dismissed the defendant’s appeal and upheld the order for specific performance in favour of the plaintiff. With respect, I agree.

  25. Mr Hung, submitted rightly, in my view that upon exercise of the option to purchase, a binding contract to sell and purchase the Property thereby arose. As Hoffmann J (as he then was) put it in Spiro v Glencrown Properties Ltd [1991] Ch537 at 543:

    .... When the option is exercised, vendor and purchaser come under obligations to perform as if they had concluded an ordinary contract of sale.

  26. However, I cannot agree with Mr Hung that notwithstanding the purchaser’s repudiation of the contract arising from his exercise of the option (“the option contract”), the vendor only had a remedy in damages for breach of that contract and was thus limited to a monetary claim for that breach. The vendor could elect one of two alternative remedies. He could have but was not obliged to seek specific performance of the option contract. Alternatively, he could instead “proceed to claim damages for breach of the contract, both parties being discharged from further performance of the contract”.[28] Upon such discharge, the vendor would be left with his interest in the property the subject of the contract. That this is so, in a typical case where an owner granted an option to purchase, which was duly exercised by the grantee who then repudiated the contract, is beyond argument.

  27. Nor should it make any difference, where as in this case, the vendor had only an equitable interest. The defendant’s option or right of pre-emption was predicated on the plaintiff having an interest to sell.

  28. Here, under the 6 June agreements, which were replaced by the 2006 agreement, in consideration of his constructing the village house, the plaintiff was entitled to the Property. That is to say, the plaintiff was the purchaser of the Property from the defendant as vendor, and in due course, he would be entitled to an assignment of the Property. His right to the Property could be enforced by specific performance of the 6 June agreements as replaced by the 2006 agreement. Thus, if the option granted by the 2006 agreement had not been exercised so as to bring into existence the option contract, the plaintiff would have been entitled to the assignment of the Property by the defendant to him in due course. The Court of Appeal held that the option had been duly exercised. Upon the due exercise of the option, the option contract, being a contract of sale of the plaintiff’s beneficial interest in the Property arose “as if they had concluded an ordinary contract of sale.”  However, just like an ordinary contract of sale, this contract of sale could miscarry. In this case, by the letter of 11 October 2008, the defendant repudiated the option contract. The repudiation was accepted by the plaintiff by letter of 22 October. The plaintiff was not obliged to seek specific performance of the option contract. As Lord Wilberforce made clear, he could instead opt to sue for damages for breach of the option contract (if any) and, more importantly, be discharged from further performance of that contract. The plaintiff here chose the latter course of action. Critically, though, being consequently discharged from further performance of the option contract, the plaintiff was left with his rights under the 2006 agreement, including in particular his right to specific performance thereof.

  29. Mr Hung also submitted that the parties should be taken to have intended or agreed that upon the defendant exercising his option to purchase, the 2006 agreement under which the defendant agreed to assign the Property to the plaintiff was rescinded. With respect, there was no question of any rescission. As explained, upon the due exercise of the option, the option contract arose, being a contract of sale with the plaintiff as vendor and the defendant as purchaser. The formation of the option contract did not extinguish the plaintiff’s rights under the 2006 agreement. On the contrary, the option contract was predicated on the plaintiff having a beneficial interest in the Property to sell. Thus, when the option contract was discharged by reason of the defendant’s breach which was accepted by the plaintiff and brought the option contract to an end, the parties reverted to their rights under the 2006 agreement.

  30. For these reasons, I dismissed the defendant’s appeal with costs.

    Justice Fok PJ

  31. I agree with the Reasons of The Chief Justice, Mr Justice Tang PJ and Lord Phillips of Worth Matravers NPJ.

    Lord Phillips of Worth Matravers NPJ

  32. I agree with the judgment of Mr Justice Tang PJ. The facts of this case are, however, unusual, in that they involve two linked contracts. In these circumstances the use of terms such as “rescission”, “repudiation” and “acceptance of repudiation” are capable of giving rise to confusion. Accordingly I propose to set out briefly my own analysis of the position.

  33. The two agreements dated 6 June 2006, and the “2006” agreement that replaced them conferred the following rights and obligations:

    1. The plaintiff had to build a house on the defendant’s land;

    2. On completion of the house the defendant had to transfer to the plaintiff title to the second floor and the roof of the house (“the upper part”) to the plaintiff;

    3. The title deeds of the property were to be held by solicitors pending completion.

    4. Upon completion the defendant would have an option to buy back from the plaintiff the title to the upper part at a valuation to be provided by an independent valuer.

    I agree with Mr Justice Tang that it is immaterial whether the option started life as a right of preemption. Nor does the precise provision for valuation of the upper part matter.

  34. On completion the defendant failed to transfer title to the upper part to the plaintiff.

  35. The defendant gave notice of the exercise of the option to purchase the plaintiff’s interest in the upper part for the valuation figure of $2,440,000. This gave rise to binding obligations on the defendant to buy and the plaintiff to sell the plaintiff’s interest in the upper part. Because the defendant had failed to transfer title in the upper part to the plaintiff, this was merely an equitable interest.

  36. By his solicitors’ letter of 11 October 2008 the defendant repudiated his liability to buy the plaintiff’s interest in the upper part for $2,440,000.

  37. By his letter of 22 October the plaintiff implicitly accepted this repudiation. This left the plaintiff with an equitable interest in the upper part, which he was entitled to enforce by requiring the defendant to transfer title to him.

  38. The plaintiff also had a right to claim damages for the defendant’s failure to purchase the plaintiff’s interest in the upper part. The fact of this litigation suggests, however, that the value of the upper part exceeded the sum of $2,440,000, so that the plaintiff has suffered no damage.

  39. The defendant’s case appears to have been that the parties agreed that the defendant’s obligations under the original agreement should be replaced by a simple debt of $2,440,000. That is in conflict with the clear provisions of the contract and the conduct of the parties and I can see no warrant for it.


[1] From the judgment of the Court of Appeal (Stock VP, Barma JA and Poon J) dated 20 March 2014.

[2] Under s 22(1)(a) of the Hong Kong Court of Final Appeal Ordinance Cap 484. This route of appeal has been abolished by s 8(1) of the Administration of Justice (Miscellaneous Provisions) Ordinance 2014 enacted on 24 December 2014.

[3] Mr Andy Hung.

[4] The respondent plaintiff was represented by Mr Andrew Mak and Ms Carol Wong.

[5] The lower courts dealt extensively with the question whether as a matter of law there was an option granted to the defendant or a right of pre-emption. It matters not for present purposes which it is.

[6] And for reasons set out in the judgment of Mr Justice Tang PJ, there are considerable doubts as to this.

[7] The remaining portion of Lot No 78 in DD 236, New Territories.

[8] It seems likely, though not explored in the judgments below, that the defendant was a male indigenous villager and as such could obtain a permit to build one 3 storey village house on village land. This is known as a “Ding right”. Normally, the permit would prohibit sale of any interest in the house before a certificate of compliance is issued. Indigenous villagers who have no land sometimes enter into complicated schemes with developers so that their Ding right could be exploited. Indigenous villagers who have land but are unable or unwilling to fund their building, might enlist the help of developers who would build the houses for them in return for a share in the houses built. In this appeal, we are not concerned with the legality of any such scheme.

[9] I shall refer to these agreements jointly as the 6 June agreements and separately as the 6 June agreement and 6 June supplemental agreement respectively. In these agreements the plaintiff was known as “Party A” and the defendant as “Party B”. 

[10] I will refer to this as the 2006 agreement. The plaintiff regarded this as a second supplemental agreement to the 6 June agreement. At trial, Deputy Judge Seagroatt regarded it as a novation agreement, and in the Court of Appeal, a replacement agreement which superseded the 6 June agreements. With respect I agree.

[11] There is another copy of this agreement dated 24 July 2006 signed by the plaintiff and witnessed by Lau Pak On but not signed by the defendant. The Supplemental Agreement is not relevant.

[12] There are some differences between the 6 June agreements and the 2006 agreement but they do not matter to this appeal.

[13] At trial, Deputy High Court Judge Seagroatt held that the defendant had a right of pre-emption. In the Court of Appeal, Stock VP, Barma JA and Poon J, held that the defendant had an option.

[14] Barnsley’s Land Options 5th ed at 6-003.

[15] Pritchard v Briggs [1980] 1 Ch 338 at 418B.

[16] Normally, village houses or interests in them should only be sold after Certificate of Compliance. Sale before the certificate might have consequences.

[17] The memorandum expressly provided that it “does not constitute a binding agreement.” But it also provided that the deposit should be forfeited if “the Purchaser fail to complete the purchase ....”. As part of the transaction, the plaintiff, personally gave a deed of indemnity in favour of the purchaser to indemnify it against loss in the event of failure by the vendor to complete the sale contemplated by the memorandum of understanding, namely within 30 days of the signing of an Agreement for Sale and Purchase, which should be signed within 14 working days of written notice that “the Certificate of Compliance has been issued ....” Clause (2)(b) and (c). I will not go into further detail but this kind of transactions would not be unfamiliar to persons involved in the buying and selling of village houses before a Certificate of Compliance is issued. 

[18] CFI Judgment, para 48.

[19] In either event, at the valuation arrived at in accordance with the 2006 agreement.

[20] Plaintiff’s pleading on this point is at para 8B(c) of the Re-Amended Reply and Defence to Re-Re-Amended Counterclaim.

[21] I will not go into the plaintiff’s case that the valuations obtained by the defendant were invalid because the valuers had not been jointly appointed and/or the defendant failed to disclose to the valuers the fact that there was a willing purchaser at $ 3,200,000.

[22] There was no discussion on why there had been no completion within a reasonable time of 16 December 2007 or at all.

[23] The defendant pleaded that he had rejected the proposal for a further valuation and re-affirmed his decision to purchase.

[24] Nor to the 5 August 2006 supplemental agreement.

[25] It is no clear what this referred to.

[26] Nor is it clear what offer was referred to.

[27] As the Court pointed out, that was also the submissions of counsel for the defendant.

[28] Per Lord Wilberforce, Johnson v Agnew [1980] AC 367, 392.


Representations

Andrew Mak and Carol Wong, instructed by Adrian Yeung & Cheng, for the plaintiff/respondent.

Andy Hung, instructed by Damien Shea & Co, for the defendant/appellant.


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