The conveyancing transaction which gave rise to
this appeal was, save in one respect, entirely commonplace. The appellant ("the purchaser")
entered into a written agreement dated 1st August 1991 to buy a flat on Hong
Kong Island from the respondent ("the vendor") for HK$4.2
million. In accordance with the
contract, the purchaser paid a deposit of HK$420,000 to the vendor's solicitors,
Messrs. Robert C.K. Tsui & Co., as stakeholders. Completion was to take place on or before 30th September 1991 and
before 5.00 p.m. on that day. Time was
to be in every respect of the essence of the agreement. Clause 12 provided that:-
"If the Purchaser shall fail to comply
with any of the terms and conditions of this Agreement the deposit money and
any part payment of purchase price so paid shall be absolutely forfeited as and
for liqui dated damages (and not a penalty) to the Vendor who may (without
being obliged to tender an Assignment to the Purchaser) rescind this agreement
and either retain the Property the subject of this Agreement or any part or
parts thereof or resell the same ..."
1. The purchaser failed to complete by 5.00 p.m.
on 30th September 1991 and the vendor declared that the contract was rescinded
and the deposit forfeited.
2. The only unusual feature was that the pur chaser
tendered payment of the purchase price ten minutes after the time for
completion had passed. The purchaser
refused to accept that so venial a lapse should result in the loss of the contract and commenced proceedings for
specific performance. Cheung J.
dismissed the action and his decision was affirmed by the Court of Appeal
(Litton V.-P. and Ching J.A., Godfrey J.A. dissenting).
3. The chief question in the case is whether the
court has, and should have exercised, an equitable power to absolve the
purchaser from the contractual consequences of having been late and to decree
specific performance. But Mr.
Lyndon-Stanford Q.C., who appeared for the purchaser, also argued three other
points, of which one was taken unsuccessfully before the Court of Appeal and
the other two were new. Their Lordships
can dispose of these quite shortly, but in order to explain the first two, it
is necessary to give some further details about what happened on the last day
fixed for completion.
4. The purchaser missed a morning appointment to
inspect the flat. As a result, shortly
before noon, Miss Chow, a conveyancing clerk with Robert C.K. Tsui & Co.,
telephoned Miss Tin, a clerk with the purchaser's solicitors, Messrs. F.
Zimmern & Co., and warned that the balance of the purchase price should be
paid by 5.00 p.m. or else her client would exercise his right to rescind and
forfeit the deposit. Under the usual
Hong Kong practice, the vendor was to complete by giving a solicitor's letter
of undertaking to forward the necessary documents of title. Miss Tin rang back to confirm that her
client would complete in accordance with the contract. However, by 5.00 p.m. this had not taken
place and at 5.01 p.m. Miss Chow telephoned Miss Tin again. She said that the money had not arrived and
that the vendor reserved the right to rescind and forfeit the deposit. Miss Tin replied that a messenger was on his
way. The judge found that he arrived at
5.10 p.m. with an envelope containing the cheques for the purchase money and a
letter of undertaking in a form previously agreed. Mr. Tsui telephoned his client for instructions and was told to
rescind the agreement. At 5.11 p.m.
Miss Chow telephoned F. Zimmern & Co., told them that the contract would be
rescinded and returned the envelope and con tents to the messenger.
5. Mr. Lyndon-Stanford Q.C. submitted that when
performance was tendered at 5.10 p.m. the contract was still on foot. Although failure to perform in
time was a
repudiatory breach, the vendor had not yet accepted the repudiation and
rescinded. Meanwhile, the contract remained alive for the benefit of both
parties. At 5.10 p.m. the purchaser was
still entitled to complete the contract by performance and had tendered to do
so. Failure to accept his tender was a
repudiatory breach by the vendor.
6. This argument attracted Godfrey J.A. but their
Lordships think it is quite untenable.
It is true that until there has been acceptance of a repudiatory breach,
the contract remains in existence and the party in breach may tender
performance. Thus a party whose conduct
has amounted to an anticipa tory breach may, before it has been accepted as
such, repent and perform the contract according to its terms. But he is not entitled unilaterally to
tender performance according to some other terms. Once 5.00 p.m. had passed, performance of the contract by the
purchaser was no longer possible. The
vendor could be required to accept late performance only on the grounds of some
form of waiver or estoppel.
7. The second point has even less merit. Mr. Lyndon-Stanford Q.C. invited their
Lordships to infer from the evidence that the messenger had handed the envelope
to Miss Chow and that she had opened it and examined its contents before
handing it back. This, he said, was an
affirmation of the contract. Cheung J.
made no finding of fact about what Miss Chow had done with the envelope and
even if she had opened it, their Lordships do not think that this could
possibly be construed as acceptance of late performance. Everything Miss Chow said and did made it
clear that the tender was being rejected.
8. Mr. Lyndon-Stanford Q.C.'s third point was that
the purchaser was in any event entitled to the return of his deposit because it
was not a genuine pre-estimate of damage. He accepted that, in the normal case
of a reasonable deposit, no inquiry is made as to whether it is a pre-estimate
of damage or not: Howe v. Smith (1884) 27 Ch.D. 89; Workers Trust
& Merchant Bank Ltd v. Dojap Investments Ltd [1993] A.C. 573. But he said that this deposit was not
franked under that rule because clause 12 described it "as and for
liquidated damages (and not a penalty)".
Their Lordships do not think that these words deprived the deposit of
its character as a deposit, an earnest of performance, which was liable to
forfeiture on rescission.
This
clears the way for the main point in the appeal. The boundaries of the equitable jurisdiction to relieve against
contractual penalties and forfeit ures are in some places imprecise. But their Lord ships do not think that it is
necessary in this case to draw them more exactly because they agree with Litton
V.-P. that the facts
lie well beyond the reach of the doctrine. The notion that the court's jurisdiction to
grant relief is "unlimited and unfettered" (per Lord Simon of
Glaisdale in Shiloh Spinners Ltd v. Harding [1973] A.C. 691, 726) was
rejected as a "beguiling heresy" by the House of Lords in The
Scaptrade (Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana
[1983] 2 A.C. 694, 700). It is worth
pausing to notice why it continues to beguile and why it is a heresy. It has the obvious merit of allowing the court
to impose what it considers to be a fair solution in the individual case. The principle that equity will restrain the
enforcement of legal rights when it would be unconscionable to insist upon them
has an attractive breadth. But the
reasons why the courts have rejected such generalisations are founded not
merely upon authority (see Lord Radcliffe in Campbell Discount Co. Ltd v.
Bridge [1962] A.C. 600, 626) but also upon practical considerations of
business. These are, in summary, that
in many forms of transaction it is of great importance that if something
happens for which the contract has made express provision, the parties should
know with certainty that the terms of the contract will be enforced. The existence of an undefined discretion to
refuse to enforce the contract on the ground that this would be
"unconscion able" is sufficient to create uncertainty. Even if it is most unlikely that a
discretion to grant relief will be exercised, its mere existence enables
litigation to be employed as a negotiating tactic. The realities of commercial life are that this may cause
injustice which cannot be fully compensated by the ultimate decision in the
case.
The considerations of this nature, which led
the House of Lords in The Scaptrade to reject the existence of an
equitable jurisdiction to relieve against the withdrawal of a ship for late
payment of hire under a charterparty, are described in a passage from the
judgment of Robert Goff L.J. in the Court of Appeal [1983] Q.B. 529, 540-541
which was cited with approval by the House: see [1983] 2 A.C. 694, 703-4. Of course the same need for certainty is not
present in all transactions and the difficult cases have involved attempts to
define the jurisdiction in a way which will enable justice to be done in
appropriate cases without destabilising normal commercial relationships.
9. Their Lordships do not think that it is
possible, as Mr. Lyndon-Stanford Q.C. suggested, to draw a broad distinction
between "commercial" cases such as The Scaptrade and
transactions concerning land, which are the traditional subject-matter of
equitable rules. Land can also be an
article of commerce and a flat in Hong Kong is probably as good an example as
one could find. It is necessary to look
more closely at the nature of the transaction rather than its
subject-matter. The jurisdiction to
grant relief is well established in cases of late payment of money due under a
mortgage or rent due under a lease. The
principle upon which the court acts was stated by Lord Wilberforce in Shiloh
Spinners Ltd v. Harding [1973] A.C. 691, 722 as follows:- "Where it is
possible to state that the object of the transaction and of the insertion of
the right to forfeit is essentially to secure the payment of money, equity has
been willing to relieve on terms that the payment is made with interest, if
appropriate, and also costs."
10. In such cases the court will, despite the
express words of forfeiture in the mortgage or lease, "mould them into
mere securities": see Viscount Haldane L.C. in G. and C. Kreglinger v.
New Patagonia Meat and Cold Storage Company Ltd [1914] AC 25, 35.
11. In the case of contracts for the sale of land,
however, the position is rather more complicated. It appears that in the
eighteenth century, there may have been a view that the vend or's right to
rescind was also regarded as "essential ly to secure the payment of
money" and that relief should be given as in the case of a mortgage. Vernon v. Stephens (1722) P.Wms. 66
may have been such a case, although a different explanation is given by
Chancellor Kent in Benedict v. Lynch (1815) 7 Am.Dec. 484, 488. But such an attitude did not survive Eldon
L.C.'s famous outburst in Hill v. Barclay (1811) 18 Ves. Jun. 56, 60:-
"... the Court has certainly affected to
justify that right, which it has assumed, to set aside the legal contracts of
men, dispensing with the actual specific performance, upon the notion, that it
places them, as nearly as can be, in the same situation as if the contract had
been with the utmost precision specifi cally performed: yet the result of
experience is, that, where a man, having contracted to sell his estate, is
placed in this situation, that he cannot know, whether he is to receive the
price, when it ought to be paid, the very circumstance, that the condition is
not performed at the time stipulated, may prove his ruin, notwithstanding all
the Court can offer as compensation."
12. When a vendor exercises his right to rescind,
he terminates the contract. The
purchaser's loss of the right to specific performance may be said to amount to
a forfeiture of the equitable interest which the contract gave him in the
land. But this forfeiture is different
in its nature from, for example, the vendo r's right to retain a deposit or
part payments of the purchase price. So
far as these retentions exceed a genuine pre-estimate of damage or a reasonable
deposit they will constitute a penalty which can be said to be essentially to
provide security for pay ment of the full price. No objectionable uncertainty is created by the existence of a
restitutionary form of relief against forfeiture, which gives the court a
discretion to order repayment of all or part of the retained money. But the right to rescind the contract, though
it involves termination
of the purchaser's equitable
interest, stands upon a rather different footing. Its purpose is, upon breach of an essential term, to restore to
the vendor his freedom to deal with his land as he pleases. In a rising market,
such a right may be valuable but volatile.
Their Lordships think that in such circumstances a vendor should be able
to know with reasonable certainty whether he may re-sell the land or not.
13. It is for this reason that, for the past eighty
years, the courts in England, although ready to grant restitutionary relief
against penalties, have been unwilling to grant relief by way of specific
perform ance against breach of an essential condition as to time. In Steedman v. Drinkle [1916] 1 AC 275 Viscount Haldane said at page 279:-
"Courts of Equity, which look at the
substance as distinguished from the letter of agreements, no doubt exercise an
extensive jurisdiction which enables them to decree specific performance in
cases where justice requires it, even though literal terms of stipulations as
to time have not been observed. But they never exercise this jurisdiction where
the parties have expressly intimated in their agreement that it is not to apply
by providing that time is to be of the essence of their bargain."
14. This principle has never since been ques tioned
in any case in England or the Privy Council, although it has been criticised in
academic writings and certain Australian cases as both historically inaccurate
and unduly rigid. It is certainly true
that in In re Dagenham (Thames) Dock Co. Ex parte Hulse (1873) L.R. 8
Ch.App. 1022 the court declared a term providing for forfeiture of half the
purchase price to be a penalty and granted relief by a decree of specific
performance, despite an express provision that time was to be of the
essence. The same may have happened in Kilmer
v. British Columbia Orchard Lands Ltd. [1913] AC 319, although the latter
case was distinguished in Steedman v. Drinkle on the ground that the
parties had agreed to a new completion date of which time was not to be of the
essence. It is difficult to find any
trace of this ground in the judgment in Kilmer and the explanation has
been said to be a rewriting of history, although, if this was so, Lord
Atkinson, who had been a member of the Board in Kilmer, adhered to the
revised version when delivering the judgment of the Judicial Committee in Brickles
v. Snell [1916] 2 AC 599. But
their Lordships do not think it necessary to pursue these historical inquiries
because it can freely be acknowledged that there have been cases, such as In
re Dagenham (Thames) Dock Co. Ex parte Hulse, in which the courts appear to
have considered that, first, a restitutionary form of relief would for some
reason be inadequate, and secondly, that the need for commercial certainty was
not so strong as to
make it necessary to exclude relief by way of specific performance. A feature of the Dagenham case was
that the purchaser had been in possession of the land pending completion for
five years, during which time it had constructed a dock at its own
expense. In the then state of the
English law of unjust enrichment, it would not have been easy to find a
restitutionary remedy which provided adequate relief against forfeiture:
compare Stocklo ser v. Johnson [1954] 1 Q.B. 476.
15. Similar considerations informed the judgment of
the High Court of Australia in Legione v. Hateley (1983) 152 C.L.R. 406,
in which the purchasers entered into possession pending completion of a
contract of which time was of the essence and built a house upon the land. They failed to complete on the due date after
asking for an extension and receiving a non-committal answer from a clerk with
the vendors' solicitors. Gibbs C.J. and
Murphy J., at pages 413-430, considered that the conversation estopped the
vendors from relying upon the contractual date until a definite refusal had
been returned and a reasonable time had then elapsed. Alternatively, the fact that the purchasers had built a house of
consider able value upon the land, so that they would suffer a "harsh and
excessive penalty for a comparatively trivial breach" (page 429) made the
case an exceptional one in which the principle in Steedman v. Drinkle
should not be applied and relief granted by way of a decree of specific
performance. Mason and Deane JJ., at
pages 430-451, did not accept that the conversation amounted to an estoppel,
but agreed to the grant of relief by way of specific performance on the ground
that the conversation had contributed to the purchaser's breach and that this,
together with the other features of the case, made it unconscionable for the
vendor to rescind the contract and recover the property.
16. The line between conduct which amounts to an
estoppel and conduct which contributes to the breach so as to make it
unconscionable to enforce a forfeiture is in their Lordships' view a narrow
one, particularly in view of the broad modern concept of estoppel which has
been developed in cases such as Taylors Fashions Ltd. v. Liverpool Victoria
Trustees Co. Ltd. (Note) [1982] QB 133.
Leaving aside the question of estoppel, both In re Dagenham (Thames)
Dock Co. Ex parte Hulse and Legione v. Hateley could be regarded as
cases in which it might have been expected that the purchaser should be
entitled to relief by way of restitution rather than by way of being allowed to
keep the benefit of the bargain in spite of his breach of an essential
term. In neither case, however, was
restitutionary relief considered; partly, no doubt, because of the state of the
author ities on this branch of the law and partly because there was no
suggestion that the value of the land so exceeded the purchase price as to make
a practical difference between restitution and specific performance. In the later Australian case of Stern v.
McArthur (1988) 165 C.L.R. 489, however, the distinction emerged
very clearly and sharply divided the court.
The purchasers in that case bought a plot of land in 1969 for A$5,250
payable by way of a deposit of $250 and thereafter by monthly instal ments of
not less than $50. Under the contract,
on default in paying instalments for more than 4 weeks the balance of the
purchase price became due, and the vendor could then serve a notice to complete
within 21 days making time of the essence.
The purchasers built a house upon the land but in 1979 they defaulted
and failed to comply with a notice to complete. By that time the value of the land had greatly increased. The purchasers tendered the balance of the
price and claimed relief by way of specific performance. The vendor offered restitution by way of
compensa tion for their improvements to the land. Deane and Dawson JJ. said, at page 528, that the instalment
payments were "essentially an arrangement whereby the appellants undertook
to finance the respondents' purchase upon the security of the land". There was accord ingly a compelling analogy
with a mortgage, in which relief against forfeiture of the estate would
ordinarily be granted as of course despite an express term that time was to be
of the essence. Gaudron J. put her judgment,
at pages 530-542, entire ly upon the mortgage analogy. Mason C.J., at pages 493-505, and Brennan
J., at pages 505-521, dissented, treating the contract as one of sale. They refused to accept that a purchaser, in
breach of a term which expressly entitled the vendor to rescind, could claim to
retain the benefit of the bargain and held that the offer of restitution
disposed of any claim to relief.
17. Equity has always regarded the question of
whether a transaction is a mortgage as depending upon substance rather than
form, so that the difference of opinion in Stern v. McArthur can be
regarded as concerning the proper analysis of the nature of the transaction
rather than the scope of the jurisdiction to relieve against forfeiture. But their Lordships do not think it
necessary to consider these Australian developments further because they
provide no help for the purchaser in this case. There is no question of any penalty, or of the vendor being
unjustly enriched by improve ments made at the purchaser's expense, or of the
vendor's conduct having contributed to the breach, or of the transaction being
in substance a mortgage. It remains for
consideration on some future occa sion as to whether the way to deal with the
prob lems which have arisen in such cases is by relaxing the principle in Steedman
v. Drinkle supra, as the Austra lian courts have done, or by development of
the law of restitution and estoppel.
The present case seems to their Lordships to be one to which the full
force of the general rule applies. The
fact is that the purchaser was late.
Any suggestion that relief can be obtained on the ground that he was
only slightly late is bound to lead to arguments over how late
is too late, which can be
resolved only
by litigation.
For five years the vendor has not known whether he is entitled to resell
the flat or not. It has been sterilised
by a caution pending a final decision in this case. In his dissenting judgment, Godfrey J.A. said that the case
"cries out for the intervention of equity". Their Lordships think that, on the contrary, it shows the need
for a firm restatement of the principle that in cases of rescission of an
ordinary contract of sale of land for failure to comply with an essential
condition as to time, equity will not intervene.
18. Their Lordships will accordingly humbly advise
Her Majesty that the appeal should be dismissed. The appellant must pay the respondent's costs before their
Lordships' Board.
CROWN
COPYRIGHT as at the date of judgment.