|
Hong Kong Law Reform Commission |
1.1 In Part I of this report, we consider how to improve the existing
protection given to purchasers of completed units in the second-hand market.
Here we refer to those residential units with an occupation permit sold by
private vendors to purchasers. We define private vendors for our purposes as
those who are not in business as developers or subsidiaries or associates of
developers.
1.2 In the second-hand market, there will rarely, if ever, be a sales
brochure, as the vendors are mainly private individuals. Thus, we shall explore
other means of imposing positive duties on private vendors to provide essential
property information to prospective purchasers. In this respect, we shall look
at the feasibility of introducing a vendor’s information form. We shall
also study the possibility of inserting certain standard clauses into the
preliminary agreement.
1.3 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.
1.4 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be rescinded if it has been induced by a misrepresentation, that is to say, an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 made
innocently. Where an innocent misrepresentation 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) would be
recoverable.
1.5 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 the convenience of the 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.
1.6 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.
1.7 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 it transpire that the information is 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.
1.8 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.
1.9 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 proved, by
means of a charge of "conspiracy to
defraud."[6]
1.10 Section 17(1) of the Theft Ordinance (Cap 210) provides:
"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."
1.11 Section
18(1) of the Theft Ordinance (Cap 210) provides:
"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."
1.12 "Deception"
is defined as "any deception (whether deliberate or reckless) by words or
conduct as to fact or as to law
...."[7] Hence, mere silence
in itself cannot be a deception within the meaning of the
section.[8] 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).[9] 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.
1.13 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.
1.14 Acting upon the recommendations of the Law Reform Commission in
its report entitled Report on Creation of a Substantive Offence of
Fraud,[10] a new section 16A was
added to the Theft Ordinance (Cap 210) on 16 July
1999.[11] The new section 16A(1)
provides:
"If any person by any deceit (whether or not the deceit is the sole or main inducement) and with 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."
1.15 This
new statutory offence of fraud applies to one person acting alone. However, it
would be 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 establish the necessary deceit and
intention to defraud on the basis of such a mistake.
1.16 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.
1.17 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.
1.18 Under section 36(1) of the Estate Agents Ordinance, estate
agents are required to provide purchasers with certain information about the
property. The nature of that information is prescribed by regulation. Section
36(2) provides that the information to be prescribed may include:
1.21 It is clear from the foregoing review of the existing law that
there are few positive duties, if any, on a vendor of second-hand property to
disclose particulars of the property for sale. In second-hand sales, there is
no sales brochure compiled by the vendor. A vendor is, of course, obliged to
provide basic information about the property in the preliminary agreement, but
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 the date of completion of sale and purchase. It is of little
assistance to the purchaser if he obtains adequate property information only
after the preliminary agreement has been signed.
[6] The Law Reform Commission
of Hong Kong, Report on Creation of a Substantive Offence of Fraud,
(Topic 24, July 1996), paragraph
2.4.
[7] Theft Ordinance (Cap
210), sections 17(4) and 18(3).
[8]
Archbold 1998, at paragraph
21-181.
[9] Estate Agents
Ordinance (Cap 511), section
36(2)(g).
[10] See paragraph 1
of the Explanatory Memorandum to the Theft (Amendment) Bill
1998.
[11] Ordinance No 45 of
1999.
[12] See Part 2 of Form 1 in the Schedule to the Estate Agents Practice (General Duties and Hong Kong Residential Properties) Regulation (Cap 511 sub leg).
[13] 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.