Introduction
Advantages of drawing a cheque for payment are plenty: for example, one does not need to carry a large number of bank notes in order to effect a payment of a substantial value, and the flow of funds in and out of accounts can be traced more easily which facilitates bookkeeping. Nevertheless, in the context of sale and purchase of real property, even provided that the current account has sufficient funds, does a cheque always guarantee timely payment and the eventual completion of a transaction? The answer is in the negative, as illustrated in the recent case of Howarth Cheung Natalie Jane Y.S. v Tsang Hong Kwang Ok & Anor, CACV 272/2013.

Facts
The Plaintiff as purchaser and the Defendants as vendors entered into a preliminary agreement (the “Agreement”) dated 27 November 2012 for the sale and purchase of a residential property for a consideration of HK$25 million. Clause 2(a) of the Agreement provides that a deposit of HK$1,240,000 shall be paid upon signing of the Agreement. Upon signing the Agreement, the purchaser provided a cheque of HK$1,240,000 drawn on her bank, HSBC, in favour of the vendors’ solicitors, as deposit under the Agreement.

But on 3 December 2012, HSBC informed the vendors’ solicitors that the cheque was dishonoured upon presentation allegedly because the drawer’s chop/signature differed from specimen in HSBC’s possession. On 4 December 2012, the vendors’ solicitors informed the vendors of the dishonour of the purchaser’s cheque, and upon the former’s advice, the vendors decided to terminate the Agreement. On 5 December 2012, the vendors’ solicitors issued a letter to the purchaser’s solicitors, stating that the purchaser was in breach of Clause 2 of the Agreement by paying a cheque for the deposit which was dishonoured. Upon their solicitors’ advice, the vendors confirmed that they had accepted the purchaser’s repudiation and the Agreement was terminated.

The purchaser then commenced legal proceedings against the vendors, seeking specific performance of the Agreement. The vendors raised a counterclaim for, amongst other things, the sum of HK$1,240,000. Deputy High Court Judge Leung gave judgment for the vendors for the sum of HK$1,240,000 in their application for summary judgment. The purchaser appealed to the Court of Appeal.

Judgment of the Court of Appeal

Implied Term Suspending Payment
In the context of Hong Kong conveyancing, it is trite law that time is of the essence of the Agreement even if there is no express provision in the agreement making time to be of the essence. As such the Court viewed that 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.

However, counsel for the purchaser submitted that the time of essence provision is further subjected to an implied term (the “Implied Term”) that the payment of the deposit is suspended, because of a “catastrophic accident” which was unforeseeable by the parties, beyond the purchaser’s control and through no fault of the purchaser, namely an error on the part of HSBC in failing to verify the purchaser’s signature, which was not discrepant with her specimen signature.

Ronim Distinguished
Counsel for the purchaser relied on Imperial Brothers Pty Ltd v Ronim Pty Ltd [1998] QCA 444 (“Ronim”) in arguing for the Implied Term.  In that case, the purchaser’s solicitor was unable to conduct a title search before completion because the computer system of the Land Titles Office was inoperative. The purchaser’s request for completion after the 5 p.m. deadline was refused by the vendor. The Court of Appeal of Queensland held that where, through no fault of their own, on the day for completion, the parties cannot carry out the necessary computer checks through the Land Titles Office to verify title, the obligation to complete is suspended until such computer checks can be done.

The Court of Appeal of Hong Kong in the present case distinguished Ronim based on the particular facts of that case.  Under the Australian Torrens title system, without title confirmation from the Land Titles Office, the vendor would not be able to show a good title and the purchaser would not be obliged to accept title from the vendor. On the contrary, the Court viewed that obligation to pay deposit on its due day in the present case lied squarely within the purchaser’s control. Further, HSBC was held to act as the purchaser’s agent in debiting from the purchaser’s account in honouring the cheque; as such any dispute between them in the said agency was irrelevant to the vendor.

The Court did not consider that the Implied Term could meet the necessity of giving business efficacy (i.e. one of the requirements for a term to be implied in an agreement as laid down in Attorney General of Belize v Belize Telecom Ltd [2009] WLR 1988) and therefore should fail.

Implied Term Unworkable
Further, the Court held that the Implied Term is contradictory to the express term in the Agreement and is incapable of clear expression. First, error on the part of the bank may take many forms. Second, even if the Implied Term is restricted to the error of verification of the signature on the cheque, short of a clear admission from the bank that it had erred on the verification, it is very difficult to ascertain whether an error had in fact been made. The Court put forward four instances of difficulties if such Implied Term is incorporated:

1.         Is the purchaser’s obligation to be held in suspense because of what he perceived to be an error by the bank?

2.         How long should the suspension be?

3.         Is a fresh payment to be made immediately upon dishonour or is a reasonable time to be given?

4.         If a reasonable time formula is to be used, how long should it be?

Provided that the Agreement also affects the rights and obligations of third parties such as estate agents and purchasers of sub-sales, the Court viewed that the suspension of obligation of the purchaser to pay the deposit as formulated in the Implied Term is not workable.

Equitable Relief under Traditional View
The purchaser asked for equitable relief from the termination of the Agreement by reason of the cheque being dishonoured.  In Union Eagle Ltd v Golden Achievement Ltd [1997] A.C. 514, Lord Hoffmann explained that for the past 80 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 the present case, none of the exceptional circumstances which the Court may consider to grant relief under the traditional view were present.

Equitable Relief under the Australian Approach
Even if the more liberal Australian approach is to be adopted, in other words, equitable relief can be granted even in respect of a time provision agreed to be essential, the purchasers in the present case failed to meet the hurdle for such relief. The Court took into account the following features of the present case in refusing relief:

1.         The parties themselves have stipulated the time for payment to be of the essence of the contract.

2.         The purchaser had chosen to pay by cheque which in law is in the nature of payment by cash, and which the Court held, by itself precluded any argument on suspension of this obligation.

3.         The possibility of the bank not honouring the cheque was not beyond the reasonable contemplation of the parties as mishaps do happen.

4.         The purchaser had not sought for any exculpatory term as to payment in the Agreement in the first place, nor did he include any term to allow for another payment upon discovering that the cheque has not been made.

5.         It was not unconscionable or inequitable for the Vendor to insist upon its legal right to accept the purchaser’s repudiation.

Vendors’ Counterclaim
As damages for breach of contract are a compensation for the loss which the plaintiff has suffered through the breach, the vendors in the present case were entitled to be placed in the same position as if the contractual obligation had been performed, and not merely the actual damage suffered by the vendors. Although upon the vendors’ acceptance of the repudiatory breach the purchaser was discharged from all executory obligations, the purchaser’s obligation to pay the deposit, which had already accrued, remained unaffected. The vendors’ right to forfeit the deposit arose out of the breach of the Agreement and was therefore not dependent upon the completion of the purchase. Hence the Court affirmed the Court of First Instance’s decision that the vendors were entitled to recover the sum of HK$1,240,000 from the purchaser.

Conclusion
It is not uncommon that a purchaser draws a personal cheque to pay the initial deposit upon signing the provisional agreement for sale and purchase of real property. Sometimes such cheques may have been drawn carelessly involving, for example, drawer’s signature (as in the above decision) different from the specimen, or name(s) of the payee(s) or amount different from what they were intended to be. Applying the rationale of the above decision, if there are any such discrepancies (including but not limited to discrepant signatures) and the bank dishonours the cheque upon presentation, the purchaser will be in repudiation of the provisional agreement, and the vendor will be entitled to accept his repudiation and terminate the provisional agreement.

In the circumstances, it would be advisable for the purchaser to pay with a cashier’s order instead, which the bank is obliged to honour, to minimise the risk of non-timely payment of the initial deposit and the vendor’s consequential acceptance of the purchaser’s repudiation.

As for the vendor, when he is informed of the purchaser’s personal cheque being dishonoured, should it be in his commercial interest to find another purchaser, he may elect to treat the dishonoured cheque as the purchaser’s repudiation of the provisional agreement and accept such repudiation. He could then claim against the purchaser by way of a debt action for an amount equivalent to the initial deposit.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.