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Take Care When Issuing Cheques
1 May 2015

When buying a property in Hong Kong, it is very common for the purchaser to pay an initial deposit by cheque on signing the provisional / preliminary sale and purchase agreement with a vendor. However, even if the purchaser’s account has sufficient funds, payment by way of cheque does not necessarily mean that the purchaser has made timely payment and the transaction will be completed. This can be illustrated in the case of Howarth Cheung Natalie Jane YS v Tsang Hong Kwang Ok and Tsang Shing Hong (CACV 272 / 2013).

The Case

The plaintiff as purchaser entered into a Preliminary Sale and Purchase Agreement (“Agreement”) with the defendants as vendors on 27 November 2012 for the purchase of a residential property in the sum of HK$25 million. Clause 2(a) of the Agreement provided, inter alia, that a deposit of HK$1,240,000 shall be paid upon signing of the Agreement. Accordingly, the purchaser issued a cheque for HK$1,240,000 drawn on her bank, HSBC, in favour of the vendors’ solicitors.

On 3 December 2012, HSBC gave notice of dishonour of the purchaser’s cheque because the signature on it was different from the specimen in HSBC’s possession. Subsequently, the vendors decided to terminate the Agreement and accepted the purchaser’s repudiation in the view that the purchaser was in breach of Clause 2 of the Agreement. The purchaser then commenced legal proceedings against the vendors seeking specific performance of the Agreement; and the vendors counterclaimed for the sum of HK$1,240,000.

The Deputy High Court Judge gave judgment for the vendors for the sum of HK$1,240,000 and dismissed the purchaser’s claim. The purchaser then appealed to the Court of Appeal (“Court”).

The Judgment

1. Time of the essence

Although there was no express provision in the Agreement making time of the essence, it is beyond argument that in the context of Hong Kong conveyancing, time was of the essence of the Agreement. As such, the Court held that the failure of the purchaser to pay the cheque on time by reason of its subsequent dishonour clearly constituted a repudiation of the Agreement which entitled the vendors to accept and terminate the Agreement.

2. Implied term suspending payment

Counsel for the purchaser submitted that the time is of the essence provision is subjected to an implied term that the payment of the deposit is suspended because of an extraordinary event that had happened which was beyond the purchaser’s control or a “catastrophic accident” which was not foreseeable by the parties. HSBC was in error in verifying the purchaser’s signature, which in fact was not discrepant with her specimen signature that was kept by HSBC.

The Court distinguished the cases or authorities relied on by the purchaser’s counsel and held that the obligation to pay the deposit on its due day lies fully and squarely within the control of the purchaser. HSBC was the purchaser’s agent in respect of the drawing and payment of the purchaser’s account and any dispute between the purchaser and her bank HSBC on the verification of her signature was not a matter that the vendor should be concerned of.

3. Equitable Relief

The purchaser asked for equitable relief from the termination of the Agreement by reason of the cheque being dishonoured and specific performance of the Agreement. The Court applied the traditional view being, 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. As such, given the purchaser in this case was in breach of an essential condition as to the time of payment of the deposit, equitable relief was not considered.

4. Vendors’ Counterclaim

The Court affirmed that the vendors were entitled to recover HK$1,240,000 from the purchaser as damages for breach of contract and compensation for the loss which the vendors had suffered through the breach. Thus, the vendors in this case were entitled to be placed in the same position as if the contractual obligation had been performed. The right of the vendors to forfeit the deposit is not dependent upon the completion of the purchase but arose out of the breach of the Agreement.

Conclusion

In view of the above case and to avoid cheques being carelessly drawn due to discrepancies in names or amount, purchasers in general should consider arranging payment by way of cashier orders or cheques to be marked good by the banks. Our lawyers will be happy to assist you if you have any queries regarding the above eNews or any matters relating to property.

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