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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 Citations: Presiding J dges: P!rases: FAM! 22"2001 #2002$ 1 %&'(D 1)* +nglis, -udgment 'i C-. C,an and (ibeiro P-Contract la/ 0 agreement made sub1ect to contract 0 deposit re2uired under clause in agreement e3pressl4 not made sub1ect to contract 0 failure to enter into formal contract 0 deposit recoverable on ground of lac5 of consideration Contract la/ 0 consideration 0 /,et,er consideration for deposit
D and P entered into an agreement for a tenanc4 mar5ed 6sub1ect to contract67 8t contained a clause (t,e clause under /,ic, P /as re2uired to pa4 a deposit /,ic, /as non0refundable if it did not proceed to e3ecute t,e formal tenanc4 agreement7 9,e clause /as 6e3pressl4 not sub1ect to contract67 P signed t,e agreement and paid t,e deposit but failed to enter into t,e formal agreement7 At issue /as /,et,er t,e deposit /as recoverable7 9,e Court of Appeal ,eld t,at it /as. since t,ere /as no binding agreement and t,e clause /as not supported b4 consideration (see #2001$ : %&'(D );< 7 D soug,t leave to appeal to t,e Court of Final Appeal7 %eld. dismissing t,e application. t,at= (1 A 6deposit6 /as in la/ an earnest of and securit4 for performance of a contract7 Pa4ment of a deposit operated in t,e conte3t of a binding contract bet/een t,e parties as an incentive encouraging t,e pa4er to complete it in due course7 9,e binding contractual arrangements provided t,e consideration for t,e deposit and its potential forfeiture (%o/e v >mit, (1??) 2; C, D ?< applied 7 (>ee p71)?+0F7 (2 %ere. ,o/ever. it /as difficult to see ,o/ t,e clause could operate /,en t,ere /as no binding contract at all7 @4 agreeing to terms on a sub1ect to contract basis. t,e parties agreed t,at t,e4 s,ould eac, ,ave t,e rig,t to /it,dra/ from t,e agreement unless and until an unconditional contract /as e3ecuted7 9,at *146 /as /,oll4 inconsistent /it, forfeiting mone4 paid b4 t,e potential tenant /,ere it did in fact e3ercise its rig,t to /it,dra/7 8t follo/ed t,at PAs pa4ment of t,e mone4 as a purported non0 refundable deposit /as unsupported b4 consideration. giving P a good claim for restitution (C,illing/ort, v +sc,e #1<2)$ 1 C, <; applied 7 (>ee p71)?F087 (: (Bbiter Nevert,eless. circumstances mig,t e3ist /,ere a pre0 contractual pa4ment mig,t in la/ be irrecoverable upon failure of t,e partiesA negotiations7 (>ee p71)?80-7 Application for leave to appeal to Court of Final Appeal 9,is /as t,e defendantAs application for leave to appeal to t,e Court of Final Appeal on t,e ground t,at its case involved points of great general and public importance7 9,e Court of Appeal ,ad allo/ed t,e plaintiffAs appeal (see #2001$ : %&'(D );< against an order b4 -udge 'i. dated 2? December 2000. dismissing its summons see5ing determination of t,e 2uestion of /,et,er t,e defendant ,ad provided an4 consideration in return for a deposit t,e plaintiff ,ad paid. pursuant to an agreement bet/een t,em7 9,e facts are set out in t,e 1udgment7

"a#ts:

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Co nse$ In T!e Case: Cases Cited in t!e J dge%ent:

Mr -o,nn4 Mo5. instructed b4 C,u C 'au. for t,e applicant7Mr 'ouis C,an. instructed b4 Deung 'a/ C Co. for t,e respondent7
Darton 'td v %ong &ong 8sland Development 'td (unrep7. DCC- No 1*6;2 of 2000 %o/e v >mit, (1??) 2; C, D ?< C,illing/ort, v +sc,e #1<2)$ 1 C, <; Darton 'td v %ong &ong 8sland Development 'td #2001$ : %&'(D );<

Detai$s o& J dg%ent:

*146 (ibeiro P17 9,is case involves a some/,at curious agreement for a tenanc4 entered into b4 t,e parties /,ic, /as mar5ed 6sub1ect to contract67 8t provided for pa4ment of 6a cas, deposit6 of E:02.11? /,ic, /as e2uivalent to t,ree mont,s rent and ot,er c,arges b4 t,e plaintiff /,o /as t,e proposed tenant 6upon acceptance of t,is offer6 and t,at suc, deposit /ould be non0refundable if t,e plaintiff did not proceed to e3ecute t,e tenanc4 agreement7 8t stated 6t,at t,is item onl4 is e3pressl4 not sub1ect to contract67 27 9,e plaintiff signed t,e agreement and paid t,e mone4. t,en decided not to proceed /it, t,e tenanc4. see5ing return of t,e mone4 paid7 8t contended t,at t,e agreement /as sub1ect to contract and t,at pa4ment /as unsupported b4 consideration passing from t,e defendant7 *147 :7 %is %onour -udge F+ 'i. sitting in t,e District Court (DCC- No 1*6;2 of 2000 to /,ic, t,is case ,ad been transferred from t,e Court of First 8nstance. ruled on issues raised under B71)A of t,e (ules of t,e %ig, Court (Cap7)A. >ub7'eg7 7 %e found t,at t,ere /as an implied re2uest b4 t,e tenant to t,e landlord to forbear from letting t,e premises to someone else and ,eld in favour of t,e defendant7 )7 9,is ruling /as reversed in t,e Court of Appeal (CAC! No 1)6 of 2001. (ogers !0P. 'e Pic,on -A and >tone - 7 8t /as common ground t,at t,e letter /as sub1ect to contract and created no binding agreement7 9,e court ,eld t,at t,e unusual clause see5ing to ma5e non0refundabilit4 of t,e deposit t,e onl4 item /,ic, /as not sub1ect to contract did not ma5e a difference since it did not ,ave t,e effect of creating an4 enforceable contractual obligation. t,e absence of consideration being fatal7 9,e 1udgeAs finding of an implied re2uest to forbear from letting t,e premises to someone else /as ,eld to be un1ustified7 9,e court t,erefore entered 1udgment for t,e plaintiff for t,e return of t,e mone4 /it, interest7 *7 8t /ould appear t,at t,e Court of Appeal in effect found t,at t,e plaintiff ,ad a good restitutionar4 claim on t,e basis of a total failure of consideration7 67 9,e defendant no/ see5s leave to appeal on t,e ground t,at t,e decision raises points of great general and public importance /,ic, ,ave been formulated as follo/s= (1 G,et,er. in a case /,ere parties ,ave entered into negotiations for a tenanc4 agreement= (a t,e parties ,ave agreed to t,e terms of t,e tenanc4 on a 6sub1ect to contract6 basisH (b a 6deposit6 ,as been paid b4 t,e intended tenant to t,e intended landlord under an e3press stipulation t,at t,e same /ill become non0refundable if for an4 reason /,atsoever t,e intended tenant does not proceed to e3ecute t,e tenanc4 agreementH and (c suc, provision is e3pressl4 stipulated to be 6not sub1ect to contract67 t,e said e3press stipulations are ineffective in precluding t,e intended tenant from recovering suc, 6deposit6 even t,oug, it /as t,e intended tenant. not landlord. /,o decided not to proceed to e3ecute t,e tenanc4 agreement7 (2 G,et,er t,e said 6deposit6 is recoverable b4 t,e intended tenant on t,e ground t,at t,ere is no or no sufficient consideration. or /,et,er suc, issue s,ould be determined b4 reference to t,e intention of t,e parties. or ot,er/ise7 *148 (: G,et,er t,e leading aut,orit4 of C,illing/ort, v +sc,e #1<2)$ 1 C, <; is distinguis,able in t,e circumstances set out in para7(1 above7 ;7 8n our vie/. none of t,ese constitutes a 2uestion of great general and public importance7

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?7 9,e recitation of t,e circumstances forming t,e premise of Iuestion 1 s,o/s t,e unusual nature of t,e arrangement entered into b4 t,e parties7 An4 issues raised b4 t,at arrangement are not of general or public importance7 9,e courts belo/ /ere merel4 faced /it, construing an unusual document and appl4ing /ell0 establis,ed legal principles to t,e facts7 <7 Iuestions 2 and : bot, depend upon t,e arrangement referred to in Iuestion 1 and similarl4 fail to raise an4 point of general or public importance7 107 9,at is sufficient to dispose of t,e application but /e /ould add t,at it is in an4 event our vie/ t,at t,e Court of Appeal /as rig,t7 117 9,e parties agreed to an arrangement t,at /as sub1ect to contract. but stated t,at one item referred to in t,e letter /as an e3ception7 9,e item in 2uestion refers to a 6deposit6 /,ic, is made non0refundable in t,e event t,at t,e proposed tenant does not proceed to e3ecute tenanc4 agreement7 127 A 6deposit6 is in la/ an earnest of and securit4 for performance of a contract= see %o/e v >mit, (1??) 2; C, D ?<7 Pa4ment of a deposit operates in t,e conte3t of a binding contract bet/een t,e parties as an incentive encouraging t,e pa4er to complete it in due course7 9,e binding contractual arrangements provide t,e consideration for t,e deposit and its potential forfeiture7 1:7 8t is. ,o/ever. difficult to see ,o/ t,e clause in 2uestion can operate in t,e present circumstances. /,ere t,ere is no binding contract at all7 @4 agreeing to terms on a sub1ect0to0contract basis. t,e parties agreed t,at t,e4 s,ould eac, ,ave t,e rig,t to /it,dra/ from t,e agreement unless and until an unconditional contract /as e3ecuted7 9,at is /,oll4 inconsistent /it, forfeiting mone4 paid b4 t,e potential tenant /,ere it does in fact e3ercise its rig,t to /it,dra/7 9,is inconsistenc4 is t,e basis of t,e reasoning in C,illing/ort, v +sc,e #1<2)$ 1 C, <; at pp71060; and at p71117 1)7 8t follo/s. as t,e Court of Appeal ,eld. t,at t,e plaintiffAs pa4ment of t,e mone4 as a purported non0 refundable deposit /as unsupported b4 consideration. giving t,e plaintiff a good claim for restitution7 1*7 Mr -o,nn4 >' Mo5. appearing for t,e applicant. submitted t,at circumstances mig,t e3ist /,ere a pre0 contractual pa4ment ma4 in la/ be irrecoverable upon failure of t,e partiesA negotiations7 9,at is no doubt true7 %o/ever. not,ing ,as been s,o/n to us capable of providing t,e basis of an4 suc, argument in t,e present case7 Bn t,e contrar4. t,e agreement itself plainl4 s,o/s t,at t,e pa4ment *149 /as made solel4 in t,e ,ope and e3pectation of t,e agreement being consummated and not as a free0standing irrevocable pa4ment7 167 9,e application must accordingl4 be dismissed7 'i C1;7 Costs /ill follo/ t,e event7 9,e application is dismissed /it, costs7 J 2012 9,omson (euters %ong &ong 'td7