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DARTON LTD v HONG KONG ISLAND DEVELOPMENT LTD

6 December 2001

Court of Final Appeal

CFA

Miscellaneous Proceedings No 22 of 2001 (Civil)

FAMV 22/2001

Citations:

[2002] 1 HKLRD 145 English Judgment

Presiding Judges:

Li CJ, Chan and Ribeiro PJJ

Phrases:

Contract law - agreement made subject to contract - deposit required under clause in agreement expressly not made subject to contract - failure to enter into formal contract - deposit recoverable on ground of lack of consideration

Contract law - consideration - whether consideration for deposit

Facts:

D and P entered into an agreement for a tenancy marked "subject to contract". It contained a clause (the clause) under which P was required to pay a deposit which was non-refundable if it did not proceed to execute the formal tenancy agreement. The clause was "expressly not subject to contract". P signed the agreement and paid the deposit but failed to enter into the formal agreement. At issue was whether the deposit was recoverable. The Court of Appeal held that it was, since there was no binding agreement and the clause was not supported by consideration (see [2001] 3 HKLRD 479). D sought leave to appeal to the Court of Final Appeal.

Held, dismissing the application, that:

(1) A "deposit" was in law an earnest of and security for performance of a contract. Payment of a deposit operated in the context of a binding contract between the parties as an incentive encouraging the payer to complete it in due course. The binding contractual arrangements provided the consideration for the deposit and its potential forfeiture (Howe v Smith (1884) 27 Ch D 89 applied). (See p.148E-F.)

(2) Here, however, it was difficult to see how the clause could operate when there was no binding contract at all. By agreeing to terms on a subject to contract basis, the parties agreed that they should each have the right to withdraw from the agreement unless and until an unconditional contract was executed. That *146 was wholly inconsistent with forfeiting money paid by the potential tenant where it did in fact exercise its right to withdraw. It followed that P's payment of the money as a purported non-refundable deposit was unsupported by consideration, giving P a good claim for restitution (Chillingworth v Esche [1924] 1 Ch 97 applied). (See p.148F-I.)

(3) (Obiter) Nevertheless, circumstances might exist where a pre-contractual payment might in law be irrecoverable upon failure of the parties' negotiations. (See p.148I-J.)

Application for leave to appeal to Court of Final Appeal

This was the defendant's application for leave to appeal to the Court of Final Appeal on the ground that its case involved points of great general and public importance. The Court of Appeal had allowed the plaintiff's appeal (see [2001] 3 HKLRD 479) against an order by Judge Li, dated 28 December 2000, dismissing its summons seeking determination of the question of whether the defendant had provided any consideration in return for a deposit the plaintiff had paid, pursuant to an agreement between them. The facts are set out in the judgment.

Counsel In The Case:

Mr Johnny Mok, instructed by Chu & Lau, for the applicant.Mr Louis Chan, instructed by Yeung Law & Co, for the respondent.

Cases Cited in the Judgement:

Darton Ltd v Hong Kong Island Development Ltd (unrep., DCCJ No 15672 of 2000)

Howe v Smith (1884) 27 Ch D 89

Chillingworth v Esche [1924] 1 Ch 97

Darton Ltd v Hong Kong Island Development Ltd [2001] 3 HKLRD 479

Details of Judgment:

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Ribeiro PJ

1. This case involves a somewhat curious agreement for a tenancy entered into by the parties which was marked "subject to contract". It provided for payment of "a cash deposit" of $302,118 which was equivalent to three months rent and other charges by the plaintiff who was the proposed tenant "upon acceptance of this offer" and that such deposit would be non-refundable if the plaintiff did not proceed to execute the tenancy agreement. It stated "that this item only is expressly not subject to contract".

2. The plaintiff signed the agreement and paid the money, then decided not to proceed with the tenancy, seeking return of the money paid. It contended that the agreement was subject to contract and that payment was unsupported by consideration passing from the defendant.

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3. His Honour Judge ZE Li, sitting in the District Court (DCCJ No 15672 of 2000) to which this case had been transferred from the Court of First Instance, ruled on issues raised under O.14A of the Rules of the High Court (Cap.4A, Sub.Leg.). He found that there was an implied request by the tenant to the landlord to forbear from letting the premises to someone else and held in favour of the defendant.

4. This ruling was reversed in the Court of Appeal (CACV No 146 of 2001, Rogers V-P, Le Pichon JA and Stone J). It was common ground that the letter was subject to contract and created no binding agreement. The court held that the unusual clause seeking to make non-refundability of the deposit the only item which was not subject to contract did not make a difference since it did not have the effect of creating any enforceable contractual obligation, the absence of consideration being fatal. The judge's finding of an implied request to forbear from letting the premises to someone else was held to be unjustified. The court therefore entered judgment for the plaintiff for the return of the money with interest.

5. It would appear that the Court of Appeal in effect found that the plaintiff had a good restitutionary claim on the basis of a total failure of consideration.

6. The defendant now seeks leave to appeal on the ground that the decision raises points of great general and public importance which have been formulated as follows:

(1) Whether, in a case where parties have entered into negotiations for a tenancy agreement:

(a) the parties have agreed to the terms of the tenancy on a "subject to contract" basis;

(b) a "deposit" has been paid by the intended tenant to the intended landlord under an express stipulation that the same will become non-refundable if for any reason whatsoever the intended tenant does not proceed to execute the tenancy agreement; and

(c) such provision is expressly stipulated to be "not subject to contract".

the said express stipulations are ineffective in precluding the intended tenant from recovering such "deposit" even though it was the intended tenant, not landlord, who decided not to proceed to execute the tenancy agreement.

(2) Whether the said "deposit" is recoverable by the intended tenant on the ground that there is no or no sufficient consideration, or whether such issue should be determined by reference to the intention of the parties, or otherwise.

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(3) Whether the leading authority of Chillingworth v Esche [1924] 1 Ch 97 is distinguishable in the circumstances set out in para.(1) above.

7. In our view, none of these constitutes a question of great general and public importance.

8. The recitation of the circumstances forming the premise of Question 1 shows the unusual nature of the arrangement entered into by the parties. Any issues raised by that arrangement are not of general or public importance. The courts below were merely faced with construing an unusual document and applying well-established legal principles to the facts.

9. Questions 2 and 3 both depend upon the arrangement referred to in Question 1 and similarly fail to raise any point of general or public importance.

10. That is sufficient to dispose of the application but we would add that it is in any event our view that the Court of Appeal was right.

11. The parties agreed to an arrangement that was subject to contract, but stated that one item referred to in the letter was an exception. The item in question refers to a "deposit" which is made non-refundable in the event that the proposed tenant does not proceed to execute tenancy agreement.

12. A "deposit" is in law an earnest of and security for performance of a contract: see Howe v Smith (1884) 27 Ch D 89. Payment of a deposit operates in the context of a binding contract between the parties as an incentive encouraging the payer to complete it in due course. The binding contractual arrangements provide the consideration for the deposit and its potential forfeiture.

13. It is, however, difficult to see how the clause in question can operate in the present circumstances, where there is no binding contract at all. By agreeing to terms on a subject-to-contract basis, the parties agreed that they should each have the right to withdraw from the agreement unless and until an unconditional contract was executed. That is wholly inconsistent with forfeiting money paid by the potential tenant where it does in fact exercise its right to withdraw. This inconsistency is the basis of the reasoning in Chillingworth v Esche [1924] 1 Ch 97 at pp.106-7 and at p.111.

14. It follows, as the Court of Appeal held, that the plaintiff's payment of the money as a purported non-refundable deposit was unsupported by consideration, giving the plaintiff a good claim for restitution.

15. Mr Johnny SL Mok, appearing for the applicant, submitted that circumstances might exist where a pre-contractual payment may in law be irrecoverable upon failure of the parties' negotiations. That is no doubt true. However, nothing has been shown to us capable of providing the basis of any such argument in the present case. On the contrary, the agreement itself plainly shows that the payment *149 was made solely in the hope and expectation of the agreement being consummated and not as a free-standing irrevocable payment.

16. The application must accordingly be dismissed.

Li CJ

17. Costs will follow the event. The application is dismissed with costs.

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