The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 15 of 1996

 

Union Eagle Limited Appellant

v.

Golden Achievement Limited Respondent

 

FROM

 

THE COURT OF APPEAL OF HONG KONG

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 3rd February 1997

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Present at the hearing:-

Lord Goff of Chieveley

Lord Griffiths

Lord Mustill

Lord Hoffmann

Lord Hope of Craighead

  ·[Delivered by Lord Hoffmann]

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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 liqui­dated 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 The purchaser failed to complete by 5.00 p.m. on 30th September 1991 and the vendor declared that the contract was rescinded and the deposit forfeited.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 pur­chaser 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 con­tents 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 anticipa­tory 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 ChD 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 forfeit­ures are in some places imprecise.  But their Lord­ships 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 "unconscion­able" 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 vend­or's right to rescind was also regarded as "essential­ly 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 specifi­cally 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 vendo­r'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 pay­ment 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 perform­ance 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 ques­tioned 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 Stocklo­ser 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 consider­able 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 author­ities 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 instal­ments 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 compensa­tion 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 accord­ingly 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, entire­ly 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 improve­ments 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 occa­sion as to whether the way to deal with the prob­lems which have arisen in such cases is by relaxing the principle in Steedman v. Drinkle supra, as the Austra­lian 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.