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Chapter 3 - Brief review of the
existing law governing the protection of purchasers of completed units in the
second-hand market
_________________________________________________________
Introduction
| 3.1 | In
this chapter, we shall take a brief look at the existing law governing the
protection of purchasers in the second-hand market. We shall try to see if the
existing law is adequate to protect
purchasers. |
Misrepresentation
| 3.2 | At
common law, an agreement for sale and purchase of a flat may be rescinded if it
has been induced by a misrepresentation, that is to say an untrue statement of
fact made by one party to the other. The statement may be deliberately untrue
or made recklessly as to whether or not it is true or it may be made negligently
or innocently. Most misrepresentations are of the latter type. Once a
misrepresentation of the latter type has occurred the contract becomes voidable:
the victim of the misrepresentation has the option of withdrawing from the
contract but may choose to continue with it. Alternatively, by virtue of
statute (the Misrepresentation Ordinance Cap 284) the court may award
damages to the victim, in which event the sale stands but the party who is
responsible for the misrepresentation must pay compensation to the other party.
If the misrepresentation is fraudulent, the contract is automatically void and
damages (on a more generous scale) are
recoverable. |
| 3.3 | It
may
be difficult for the purchaser to whom misleading
information has been given to rely upon the law of misrepresentation. First, if
the false statement is not in writing, as is particularly likely to be the case
in a sale between private individuals, there will be difficulties in
establishing that it was made and precisely what was said or communicated. A
representation may be oral, in which case there could well be a clash of
evidence as to what was said, or it may be by act or implication. There are
particular difficulties where the representation is by silence, ie the failure
to correct a false impression gained by the purchaser. Second, even if the
court is satisfied as to what was said, the purchaser may not be able to show
that the statement induced him to enter into the purchase agreement: typically a
variety of factors will have led to his decision to buy, including price,
surroundings and convenience of location, and separating the influences of these
from that of the false statement is problematic. Third, in order to be
actionable, the inaccurate statement must be a statement of fact and not of
opinion or of law. It can be particularly difficult to discern whether an
assertion is an expression of the speaker or writer's opinion or is a statement
of fact (indeed an assertion may contain a mixture of fact and opinion). An
example is a general description of the internal decorations of a flat where
phrases such as "high quality", "well designed" and so forth may be used.
Fourth, the statement must be one of existing fact, not a promise as to future
fact. |
| 3.4 | A
further complication is that, whatever may have occurred during negotiations
prior to the signing of the provisional agreement, the formal sale and purchase
agreement frequently contains a standard clause to the effect that the agreement
contains the whole agreement between the parties and that no representations or
warranties other than those in the contract have been made or can be relied
upon. A variant of this limits the remedies available for misrepresentation to
damages and lays down how any compensation is to be calculated. These are
examples of exclusion clauses which, under the provisions of the Control of
Exemption Clauses Ordinance (Cap 71), generally would be effective only to
the extent that they are reasonable but that ordinance specifically does not
apply to contracts for the transfer of an interest in land so such clauses in a
sale and purchase agreement are
effective. |
Breach of
contract
| 3.5 | If
information concerning a property is incorporated into the contract of sale and
is supported by an undertaking in the contract that the information is true or
accurate, the purchaser will have an action for breach of contract should the
information transpire to be inaccurate. Such stipulations are more frequent
where the terms of the contract are influenced by an outside agency. For
instance, in sales under the consent scheme, the vendor is obliged to warrant to
the purchaser that the flat will be as shown on the plan and will be of the
stipulated saleable area and that the sales brochure is accurate and complies
with the requirements concerning such brochures laid down by the Lands
Department. This approach is, however, unusual in a private sale of second-hand
property: it would require the purchaser to insist upon a special clause in the
contract and, where as is usual there is a provisional agreement, he can so
insist only if the clause has been written into the provisional
agreement. |
| 3.6 | The
law also implies terms into contracts but the circumstances in which this will
be done are limited to where the implication is necessary or is prescribed by
law. |
Fraudulent
behaviour
| 3.7 | In
Hong Kong, cases involving aspects of fraudulent behaviour are dealt with either
as specific offences under the Theft Ordinance (Cap 210) or, where a
criminal agreement between two or more persons can be proven, by means of a
charge of "conspiracy to
defraud."[3] |
Obtaining property or
pecuniary advantage by deception
"Any person who by
any deception (whether or not such deception was the sole or main inducement)
dishonestly obtains property belonging to another, with the intention of
permanently depriving the other of it, shall be guilty of an offence and shall
be liable on conviction upon indictment to imprisonment for
10 years."
"Any person who by
any deception (whether or not such deception was the sole or main inducement)
dishonestly obtains for himself or another any pecuniary advantage shall be
guilty of an offence and shall be liable on conviction upon indictment to
imprisonment for 10 years."
| 3.10 | "Deception"
is defined as "any deception (whether deliberate or reckless) by words or
conduct as to fact or law
...."[4] Hence, mere silence
in itself cannot be a deception within the meaning of the
section.[5] It is therefore
difficult to base liability on the mere omission (albeit deliberate) on the part
of the vendor to provide property information. At present, there is no positive
legal duty on the vendor to provide property information except a vendor's
statement as to known structural additions or alterations and repairs or
improvements to his unit under the Estate Agents Ordinance (Cap
511).[6] Even that vendor's
statement on structural alterations and repairs is not supplied to the purchaser
direct by the vendor himself. The vendor makes the statement and passes it to
the estate agent who will in turn pass it on to the purchaser. As the statement
relates to known structural alterations or repairs, a vendor need not make any
disclosure so long as he is not aware of any such
matters. |
Conspiracy to
defraud
| 3.10 | In
brief, the common law offence of conspiracy to defraud consists of an agreement
by two or more persons to commit fraud. It does not apply to one person acting
alone. In most cases, the vendor alone supplies the property information and it
is difficult to prove the existence of any agreement to defraud the purchaser.
It is therefore difficult to find any liability in conspiracy to defraud in
respect of the provision of property
information. |
Substantive offence of
fraud
| 3.11 | Acting
upon the recommendations of the Law Reform Commission in its report entitled
Report on Creation of a Substantive Offence of
Fraud,[7] a new section 16A was
added to the Theft Ordinance on 16 July
1999.[8] The new section 16A(1)
provides: |
"If any person by
any deceit (whether or not such deceit is the sole or main inducement) and with
the intent to defraud induces another person to commit an act or make an
omission, which results either –
| a) | in
benefit to any person other than the second-mentioned person;
or |
| b) | in
prejudice or substantial risk of prejudice to any person other than the
first-mentioned
person, |
the
first-mentioned person commits the offence of fraud and is liable on conviction
upon indictment to imprisonment for 14 years."
| 3.12 | This
new statutory offence of fraud applies to one person acting alone. However, it
is hard to prove beyond reasonable doubt deceit and the intention to defraud in
the case of vendors providing wrong property information. For instance, the
owners of units in old buildings may not know whether there are illegal
structures or alterations as the building plans may be missing or may not be
readily accessible at reasonable cost. The owners may make an honest mistake in
providing wrong or misleading information as to illegal structures or
alterations. It would be difficult to find deceit and intention to defraud on
the basis of such honest mistake. |
Trade Descriptions
Ordinance (Cap 362)
| 3.13 | Section
7(1)(a)(i) of the Trade Descriptions Ordinance (Cap 362) provides that it
is an offence to apply a false trade description to any goods in the course of
any trade or business. Section 2(1) defines "goods" as including "vessel and
aircraft, things attached to land and growing crops" which arguably includes the
fittings and finishes of flats and even the building itself. However, a private
individual selling his unit is usually not doing it "in the course of any trade
or business". It is therefore difficult to establish liability for false trade
descriptions in respect of misleading or false property information supplied by
a private vendor in the second-hand market. |
| 3.14 | Moreover,
a "trade description" requires a direct or indirect indication under section
2(1). Mere silence on the part of the vendor is therefore not a trade
description. The Trade Descriptions Ordinance cannot catch vendors who
deliberately withhold material facts. |
Existing disclosure
requirements under the Estate Agents Ordinance (Cap 511)
| 3.16 | Under
the Estate Agents Ordinance, estate agents are required by law to provide seven
basic property particulars to purchasers. These are:
|
| l | current
ownership and
encumbrances, |
| l | total
or entire
area, |
| l | year
of construction
completion, |
| l | use
restrictions, |
| l | unexpired
term of Government
lease, |
| l | term
of new
lease, |
| l | vendor
statement on known structural additions or alterations and repairs or
improvements.[9] |
The
estate agent is responsible for collecting these property particulars, except
for the vendor statement on structural alterations and repairs. Hence, the
vendor's existing duty under the Estate Agents Ordinance is confined to the
provision of the statement on structural alterations and repairs. But even that
vendor statement covers only any information "within the vendor's knowledge".
If the vendor is not aware of the structural alterations or repairs, he is not
obliged to make any vendor statement.
| 3.17 | If
the property particulars supplied by an estate agent are wrong, the estate agent
may be able to rely upon the defence of due
diligence.[10] The Estate Agents
Ordinance increases the transparency of transactions and provides more sales
information to purchasers but falls short of giving them ultimate satisfactory
protection. |
Lack of vendor's duties
of disclosure
| 3.18 | The
above review of the existing law indicates that there are few positive duties,
if at all, on a vendor of second-hand property to disclose particulars of the
property for sale. In second-hand sales, there is no such thing as a sales
brochure compiled by the vendor. A vendor is, of course, obliged to provide
basic information on the property in the preliminary agreement. It is of little
assistance to the purchaser only to obtain the property information after the
preliminary agreement is signed. Moreover, the contents of the preliminary
agreement are not uniform. Most preliminary agreements contain only the address
of the property, the purchase price, payment terms, and date of completion of
sale and purchase. |
[3]
The Law Reform Commission of Hong Kong, Report on Creation of a Substantive
Offence of Fraud, (Topic 24, July 1996), paragraph
2.4.[4]
Theft Ordinance (Cap 210), sections 17(4) and
18(3).[5]
Archbold 1998, at paragraph
21-181.[6]
Estate Agents Ordinance (Cap 511), section
36(2)(g).[7]
See paragraph 1 of the Explanatory Memorandum to the Theft (Amendment) Bill
1998.[8]
Ordinance No 45 of
1999.[9]
See section 36(2)(a) to (g) of Estate Agents Ordinance (Cap
511).[10]
Under section 36(5)(b)(ii) of the Estate Agents Ordinance (Cap 511), there is a
defence of due diligence available to an estate agent if he shows that (A) he
relied on information obtained from a source prescribed for the purposes of this
subparagraph in respect of such information; (B) it was reasonable for him to
have relied on such information; and (C) he had taken all steps reasonably open
to him to avoid the failure.