Introduction

It is not unusual for an agreement to include a clause which provides that one party thereunder (e.g. the vendor) acknowledges receipt of a payment made by another party (e.g. the purchaser) pursuant to that agreement.  Such clause is commonly known as a receipt clause and below is an example of a simplified receipt clause:-

“RECEIVED on or before the day and year first above written of and from the Purchaser the sum of HK$1,000,000 only.”

However, parties may sometimes, for whatever reasons, manage to sign an agreement containing a receipt clause while in fact full payment has not yet been made.  In a recent decision of Asgain Company Limited v Cheng Ka Yan DCCJ 81/2014, the District Court had to decide the effect of receipt clauses, if any, when parties are disputing as to whether full payment has been made pursuant to the agreement.

Background

This case is concerned with the sale and purchase of an industrial unit located in Kwun Tong owned by the Plaintiff.  According to the Plaintiff, the Defendant, who was the purchaser of the industrial unit in question, had not made the full payment of HK$750,000 for the transaction.  The Plaintiff therefore took out a claim as vendor against the Defendant for outstanding payment arising from the transaction.

On the other hand, the Defendant contended that first, as a matter of fact, payment for purchase price had been fully paid to the Plaintiff.  Further or alternatively, the Defendant argued that the Plaintiff was estopped (literally meaning barred) from making any claim because of the receipt clauses (the “Receipt Clauses”) set out in the Memorandum of Agreement for Sale and Purchase (the “Memorandum”) and the assignment (the “Assignment”) for the transaction.

Issues

At trial, there were two main issues before the Court, namely:-

• Whether the purchase price had been paid in full by the Defendant to the Plaintiff; and
• Whether the Plaintiff was now estopped from making any claim for the outstanding payment against the Defendant by reason of the Receipt Clauses.

Regarding the first issue, after hearing the witnesses, the Court found that the Defendant had not made full payment of the purchase price to the Plaintiff.  This newsletter will discuss the second issue below.

Legal Principle

(a)Contractual Estoppel

Under the common law, there is the doctrine of contractual estoppel.  In simple words, if a written agreement contains an acknowledgement of a fact which both parties at the time of the agreement know to be untrue, the law may still enable one of them to rely on that acknowledgement so as to estop (or bar) the other from denying the agreed statement in an action brought on the agreement.  Such doctrine of contractual estoppel was founded on freedom of contract and agreed contractual rights and obligations.

There have been instances in which the doctrine of contractual estoppel applied in the context of receipt clauses.  In Wong Lai Ling v Lam Kin Chung HCA 828/2011, the plaintiff sued the defendant on a loan agreement by which the plaintiff said she lent the defendant a sum of HK$5 million.  The defendant, among other things, argued that there was an issue on whether the HK$5 million had been passed to the defendant pursuant to the loan agreement.  The Court found that the defendant in this case had acknowledged receipt of the loan advance under an “express acknowledgement” clause in the loan agreement, and the same would give rise to a contractual estoppel preventing the defendant from asserting facts contrary to what he had acknowledged.  The Court therefore rejected the defendant’s argument that there was an issue on whether the loan advance had been made.

(b)Statutory Discharge

Relevant to the effect of a receipt clause is also the statutory discharge provision contained in section 18(1) of the Conveyancing and Property Ordinance (Cap.219) (“CPO”):-

“A receipt for consideration in the body of an instrument shall be a sufficient discharge to the person paying the consideration…”

In essence, this section dispenses with the duplication of receipts, by providing that a receipt in the body of the instrument is a sufficient discharge to a purchaser or other person responsible for payment of the consideration and is sufficient evidence of payment.

In Best Join Investments Limited v Kagani Ltd and Another HCA 2608/2006, the 2nd defendant assigned a property to the plaintiff by an assignment at a consideration of HK$9.2 million.  The plaintiff later sought vacant possession of the property, but the 2nd defendant opposed by claiming that she never received any consideration from the assignment of the property.  Based on the doctrine of contractual estoppel and section 18(1) of the CPO, the Court held that the receipt clause contained in the assignment had discharged the plaintiff’s obligation as purchaser to pay the consideration to the 2nd defendant.  Thus, the Court rejected the 2nd defendant’s assertion that she had never received the consideration from the plaintiff.

Discussion

In the present case, the Court had managed to separately deal with the doctrine of contractual estoppel and the statutory discharge provision under section 18(1) of the CPO.

As to the doctrine of contractual estoppel, the Court noted that an estoppel could be established even if it was common ground that payment had not been made.  However, the Court noticed and pointed out that, as opposed to the authorities where an estoppel was established, the relevant question in the present case was whether the parties had agreed to admit or treat that the purchase price had been fully paid, putting aside whether that was factually true or not.  This went to whether parties had actually agreed to the inclusion of the Receipt Clauses.

The Court accepted the evidence given by the sole shareholder of the Plaintiff, who testified that he had not paid attention to any of the Receipt Clauses when the Memorandum and the Assignment were executed.  He also said that the lawyer went through the terms to him in a broad brush manner and he did not had any impression that he was told that there was a term saying money had been received.  Since the sole shareholder of the Plaintiff was not aware of the Receipt Clauses, the Court found that the Plaintiff had not intended the inclusion of the Receipt Clauses in the Memorandum and the Assignment and had not agreed to their effects.  More importantly, the Court found that the Defendant had not relied on the Receipt Clauses by continuing to make part payments after execution of the Memorandum and the Assignment.  As such, the Court held that contractual estoppel had not been established.

On the issue of whether section 18(1) of the CPO did assist the Defendant, the Court noted that a receipt under section 18(1) of the CPO was a sufficient but not conclusive discharge or conclusive evidence of payment.  Given the Defendant had failed to prove that the parties had agreed to proceed with the transaction premised on the Receipt Clauses on the one hand, and the Defendant had been making payments for the purchase price after execution of the Memorandum and the Assignment on the other, the Court held that the Defendant could not rely on section 18(1) of the CPO either.

Since the Defendant could not rely on both contractual estoppel and section 18(1) of the CPO, the Court ruled in favour of the Plaintiff and entered judgment against the Defendant for the outstanding payment of purchase price.

Conclusion

As can be seen from the above case, depending on the factual circumstances, the inclusion of a receipt clause in an agreement may or may not give rise to contractual estoppel and invoke section 18(1) of the CPO, both of which could potentially bar one party from claiming the outstanding balance of payment from another party.  Parties to any property transactions should ensure that they fully understand the terms and conditions in the documents before they sign the same.

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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.