BALCHITA LTD v. KAM YUCK INVESTMENT CO LTD AND ANOTHER

bjbj HCA005312/1981 Headnote Innocent misrepresentation. Objective and subjective tests. Considerations relevant to rescission as opposed to award of compensation in equity or of damages pursuant to section 3(2) of the Misrepresentation Ordinance (Cap. 284) examined. Purchasers of shops in a new development claimed to rescind their agreements with the vendors by reason of an innocent misrepresentation contained in a plan enclosed with the sales brochure as to the relative levels of the floors of the shops and of the adjacent pavement. The vendors denied any misrepresentation and counterclaimed damages on the footing that the purchasers had repudiated their obligations. Held: The plan in question was calculated to mislead and had misled the purchasers in relation to a substantial and material matter. In consequence the purchasers were entitled to rescind and the vendors counterclaim failed. Action No. 5312 of 1981 IN THE SUPREME COURT OF HONG KONG HIGH COURT _______ BETWEEN BALCHITA LIMITED Plaintiffs and KAM YUCK INVESTMENT COMPANY LIMITED 1st Defendants THE GREAT EAGLE COMPANY LIMITED 2nd Defendants _______ Coram : Hon. Kempster, J. Date : 7th March 1983 _______________ JUDGMENT _______________ In the summer of 1980 there was money to be made from the purchase and sale of property in Hong Kong. A number of businessmen experienced in manufacture and trade who daily lunched together at the China Restaurant" in Kowloon were minded to engage in such activity. They formed a limited company, Balchita Limited the plaintiffs in this action, as their vehicle for this perfectly legitimate enterprise. On or about the 11th August 1980 one of the businessmen in question and a director of Balchita Limited, namely Mr. Lo, saw in the newspaper an advertisement for shops and flats under construction in Shamshuipo. It is common ground that the building plans for this development, called Kam Yuck Building, had by then been approved in a form which clearly indicated that the floors of the ground floor shops were below adjacent street level. Mr. Lo went to the site office, obtained a colour brochure, which contained plans and a price list, and at that day s luncheon showed it to his colleagues and fellow directors. The brochure was beyond a peradventure intended to constitute an inducement to buy units in the development. The businessmen studied the brochure and in particular the ground floor plan. I am satisfied both that this plan was in fact an inducement to the signature on behalf of Balchita Limited first of provisional and then of formal agreements to purchase from the first defendants shops 223, 224, 227 and 228 in the development and that the directors desired and intended to acquire shops the floors of which would be level with the adjacent pavement. The provisional agreements were signed on the same day, the 11th August, 1980 and formal agreements on the 7th January, 1981. Prior to the latter date none of the directors inspected the site. Subsequently the plaintiffs discovered that the floors of their shops were below the level of the adjacent street and, in consequence, seek to rescind the agreements, with the terms of which the defendants admittedly complied, on the basis that they were induced to enter into them by the innocent misrepresentation of the defendants by the ground floor plan to which I have referred. Paragraph 3 of the Re-Re-Amended Statement of Claim reads:- "In order to induce readers of the colour brochure to purchase the shops the 1st and 2nd defendants represented by the colour brochure particularly the Ground Floor Plan and the price list therein contained that the shops situated at the floor level described as the Ground Floor of Kam Yuck Building were on a level with the street or pavement outside those shops or thereabout." In paragraph 4 of their Re-Amended Reply the plaintiffs admitted that the four shops shown on the ground floor plan were marked with dotted lines indicating the presence of steps above or below their respective floor levels or something suspended from their respective ceilings or something concealed and in any event outside the space covered by the plan . This admission, based on the expert evidence of their Chartered Surveyor, Mr. C. Y. Leung, does not greatly assist the defendants since it has no relevance to the levels in question. By the Amended Defence and Counterclaim the first defendants seek forfeiture of sums paid on account and damages. By the 11th August 1980 Kam Yuck Building had reached first floor level and therefore any representation made in relation to the ground floor was a representation as to existing fact. It is trite law that such a representation may as well be made by a plan as by recitals and it is on the nature of the ground floor plan that the plaintiffs rely. It is for the Court to determine whether this plan was calculated to convey to an ordinary buyer of ordinary vigilance and prudence the representation that the floors of the shops and the adjacent pavement were on the same level. If the Court so finds it must go on to determine in the light of the evidence whether the plaintiffs, by their directors, were in fact so misled. To quote from Kay, LJ. in Low v. Bouverie (1) at p 113 : "Where no fraud is alleged it is essential to show that the statement was of such a nature that it would have misled any reasonable man and that the plaintiff was in fact misled by it." In Dykes v. Blake (2) at p 474, one of the authorities cited by Mr. Edward Chan on behalf of the plaintiffs, Tindal, CJ. put the question from a different angle :- "Whether the description of the premises in the printed particulars and plans exhibited at the time of the sale upon the faith of which the plaintiff made his purchase was such that a prudent and vigilant man would enter into the contract without discovering the existence of" in that case "the right of way." He held that there was no sufficient disclosure of the existence of the right of way to enable a bidder at auction, by the exercise of ordinary vigilance and sagacity, to discover that such way existed. He went on to say at p 476 : "Particulars and plans of this nature should be so framed as to convey clear information to the ordinary class of persons who frequent sales by auction and they would only become a snare to the purchaser if, after the bidder has been misled by them, the seller should be able to avail himself of the expressions which none but lawyers could understand or attend to. He might to day have said lawyers, architects or surveyors . Other considerations may well obtain if particulars or plans contain material which will put the ordinarily vigilant purchaser on inquiry. Reliance was also placed on authorities relevant to the common law position affecting company prospectuses but in my view such cases come into a special and distinct category. Nonetheless I do accept that it is at the very least wise for vendors of property to provide clear and unambiguous information to intending purchasers. I now turn to the material evidence; the ground floor plan itself being the most critical. That plan, which does not condescend to the clear indications of the approved plans, shows the shops to be sold in light and dark brown. The common areas of access to lifts, stairs and lavatories are shown in grey and service areas, courtyards and lifts in white. There is no conventional symbol suggesting any difference in level as between the adjacent streets and the respective shops. On closer examination it appears, looking at what I have arbitrarily called the west end of the plan, that visitors to the building have to go down a series of stairs into a lobby and that from that lobby, through partitions or doors shown by dotted lines, access can be gained to shops 214, 215 and 216 on the same level. Such careful perusal indicates, therefore, that those shops are in fact on a lower level than the adjacent pavement. Turning to what I have arbitrarily termed the north of the plan it is again reasonably apparent that visitors entering the lobby have to descend a series of stairs in order to gain access to the lifts. It is not, however, apparent that any access is to be had from that lobby to shops 223 and 224 let alone to shops 227 and 228. The fact that four water-closets are shown in line does not in my view, however desirable or undesirable it may be from the point of view of plumbing, that those water-closets, the lobby and shops 223 and 224 are on the same level. The key to the matter, in my view, is any understanding which a prospective buyer of ordinary vigilance and prudence might have been afforded by dotted lines appearing in the respective shop areas. As to these even the professional witnesses were not satisfied that they could be understood to represent stairs in the absence either of an inspection of the site or of informed and scrupulous examination of the plan. Mr. C. Y. Leung, called on behalf of the plaintiffs, said that these dotted lines raised a question in his mind but, looking at the plan, he could not determine whether the floor levels of the shops were the same as the adjacent pavement or not. Stairs are normally indicated by parallel and continuous lines. The probability of the dotted lines indicating staircases was less than the probability that they indicated concealed or overhanging objects or other objects outside the ground floor area. At the end of cross-examination Mr. Leung said, on the basis of the inspection which he had made of the premises, that the broken lines indicated a stairway and therefore shops 223 and 224 were shown to be at a lower level than the adjacent street. Mr. Vincent Chu, the Surveyor called on behalf of the defendants, said that looking at the dotted lines in isolation it was difficult to determine what they meant. In relation to the west end of the plan and for the reasons that I have already indicated he was satisfied that shops 214, 215 and 216 were shown to be on a lower level than the adjacent pavements but he could not say the same thing about shops 223 and 224 let alone shops 227 and 228 since it was not clear that the four water closets were on the same level. Where there is an appreciable change of level, "he said "you will expect to see a stair indicated. If no conventional indication of stairs is given, it will be assumed there is no change of levels. Mr. Y. L. Cheng, a registered Architect who had familiarised himself with the approved plans said in relation to such plans: If we use dotted lines we must explain them. Therefore it appears to me to be strange that no explanation appeared on the ground floor plan enclosed in the brochure which was to be read by laymen. To their credit by the 30th July 1981 the defendants had substituted a clear and unambiguous plan for inclusion in their sales brochure. In the circumstances it is not difficult to accept that laymen were misled. Mr. Lo told me that if he had appreciated that the dotted lines in question indicated staircases he would not have signed the original Provisional Agreements on behalf of the plaintiffs and that nothing he had seen when he went to the site office or when he studied the ground floor plan led him to infer that the shop floor levels differed from those of the pavement outside. He thought that the dotted lines represented air-conditioner racks and said that the disparity in levels was discovered on or about the 16th April 1981 at a time when the plaintiffs were seeking to obtain a loan from the Bank of East Asia to complete the purchases. The directors were taking a lively interest in the matter at this juncture as personal guarantees were required from them by the prospective lender. It was suggested that the Court should not place too much reliance on Mr. Lo s evidence because, when applying for the loan on a form furnished by the Bank and dated the 16th April 1981, there were typed opposite the heading rental the words "to be self-occupied and he said that the plaintiffs had determined or decided to occupy the shops for their own purpose because it was a condition precedent to a loan from the Bank; an assertion which was not supported by his fellow director, Mr. F. K. Lam. However, Mr. Lam did say that the directors did not intend to lease the premises but only to sell them and to leave them unoccupied until sales were effected. There was no deception as regards the Bank of East Asia. The Manager of the Aberdeen Branch involved with the negotiations for a loan said that if the plaintiffs had left the shops empty the Bank would have regarded them as being occupied by the plaintiffs for their own use. Mr. Lam had looked at the plans and studied the brochure at the luncheon meeting when the directors determined to make this investment. The plaintiffs, with scant regard perhaps to clause 19(1)(a), alternatively relying on an implication from clause 24 of the formal agreements, had apparently intended to remove the walls between the pairs of shops and to make two large stores out of such conversion. Mr. Lam thought that all the shops were on the street level and that the dotted lines meant something concealed which would not affect the user of the shops. It did not occur to me they might represent stairs. I considered the relative levels as between lobby and the shops and the caretaker s room and the W. C. I thought that the interior lift lobby, which is on the north part of the plan adjacent to shops 223 and 224, was on a lower level than the shops. I intended to make an entrance to the combined shops 223 and 224 at the north part of the lobby which is at ground level. He went on to say that he considered the dotted lines to be irrelevant to the plaintiffs proposed user in any event. He thought the lines might have referred to removable show-windows, something readily removable and disposable, and said he had not thought of looking at the approved plans because he trusted the second defendants to give a fair indication of what was being sold on the plans in the colour brochure. In answer to a question from the Court he said that he understood that the shops and the street levels were the same because the plan did not show steps inside the shops leading down from the pavement. His commonsense indicated to him as a businessman that the levels were the same. Why, he asked, did the maker of the plan not draw the same symbol for stairs, if they were stairs, inside the shops as for stairs in the lobbies? I would have noted such a symbol. The second defendants have a good reputation, I trusted them. It is true to say that in the letter before action dated the 14th July 1981 the plaintiffs solicitors said that the directors visited the premises and discovered that the floor levels were below the level of the door sill after the 2nd of July 1981. It is apparent from the two directors evidence that such visit and discovery had been made during the previous April. To that extent there is an apparent discrepancy between the instructions given to the solicitors and what I have been told. I take it into account. Nonetheless in my view, having heard and seen them in the witness box, Mr. Lo and Mr. Lam acted throughout as ordinarily prudent and vigilant businessmen and potential buyers. They and their fellow -directors were in fact misled by a ground floor plan calculated to convey to such persons the representation alleged in paragraph 3 of the Re-Re-Amended Statement of Claim. The form of the plan was not such as reasonably to have put the plaintiffs directors on inquiry though I might well have found otherwise had they been qualified surveyors. Paragraph 13 of the Amended Defence sets out the terms of clause 8 of the formal Sales and Purchase Agreements concluded between the parties but that clause is no longer relied upon as it is conceded that the differences in level materially affected the description and value of the shops in question. I so find in any event. The shops as built were materially different from the shops as represented. It now falls to determine whether or not the plaintiffs are entitled to rescind the agreements for the purchase and sale of the shops or whether relief should be limited pursuant to section 3(2) of the Misrepresentation Ordinance (Cap. 284) to damages or to compensation in equity on the basis that they might themselves install floors at street level and forego the 3 to 4 feet of height of the shops which would thereby be lost. It is argued that the effect of this course would be to compel the plaintiffs to accept something different from their contractual entitlement. By clause 3(1)(c) the defendants were obliged to complete the said building in accordance with the building plans ; defined in recital (g). Such plans did indicate the heights of the respective shops. But they also indicated their relative levels. More significantly it has never been held that a man is obliged to take a thing with compensation when the thing is substantially and materially different from that which he was induced by the representations made to him to believe that he bought per James, LJ. in Re Arnold (3) at p 279. Albeit the case just cited was grounded in contract certain further observations of Lord Justice James are also helpful in relation to the wider issues. Referring to the defendants argument in that case he said at p 281: Then it is said 'if you had looked at the plan and looked at the property itself and then read the particulars you must have seen that there was some mistake and you ought to have inquired and ascertained what that mistake was and you would have found at once that you were not getting the whole of 490A but only a share of it. That is not, to my mind, a very acceptable suggestion on the part of a vendor. If a man makes a description calculated to mislead I do not think it is well for him to say If you had been very careful you would have found out the blunder. No more in this case do I think it well for defendants who have stigmatized the plaintiffs refusal to complete a repudiation of the agreements and purported to accept such repudiation so as to ground a counterclaim for damages in effect to seek specific performance. I turn again to Tindal, CJ. for guidance by analogy. In Flight v. Booth (4) at P 377, another case grounded in contract, he posed the material consideration as being whether the relevant misdescription although not proceeding from fraud is in a material and substantial point, so far affecting the subject matter of the contract that it may reasonably be supposed that, but for such misdescription, the purchaser might never have entered into the contract at all. Taking all these factors into account, as I am entitled to do, I do not find it equitable to declare the contract subsisting and to award damages or compensation in lieu of rescission. The plaintiffs claim to rescind the agreements for the purchase and sale of the four shops and to recover, the sum of $737,440 paid on account of the purchase price is upheld. The counterclaim is dismissed. (M. Kempster) Judge of the High Court Representation: Mr. Edward Chan (Iu, Lai & Li) for Plaintiff Mr. Michael Miller, QC, Miss Audrey Eu (P. C. Woo & Co.) for Defendants (1) 1891 3 Ch. 82 (2) 1838 4 Bing NS 463 (3) 1880 14 Ch. 270 (4) (1834) 1 Bing NC 370 PAGE PAGE - - &`#$ ACAT005312/1981 Normal.dot Microsoft Word 9.0 Judiciary Hong Kong SAR kodak ACAT005312/1981 Title Microsoft Word Document MSWordDoc Word.Document.8 ACAT005312/1981 Normal.dot Microsoft Word 9.0 Judiciary Hong Kong SAR ACAT005312/1981 Title Judiciary Hong Kong SAR