1986 Nov. 24, 25; Dec. 11
Lord Keith of Kinkel, Lord Templeman, Lord Oliver of Aylmerton, Lord Goff of Chieveley and Sir Ivor Richardson
11 December. The judgment of their Lordships was delivered by LORD TEMPLEMAN.
Between April 1979 and April 1984, the defendants representing the Hong Kong government negotiated with the Hong Kong Land Co. Group ("HKL"), which includes the plaintiff company, for an exchange whereby the government would acquire 83 flats, forming part of the Tregunter property belonging to HKL, and in exchange HKL would take from the government a Crown lease of property known as Queen's Gardens and be granted the right to develop Queen's Gardens and certain adjoining property already held by HKL. It is common ground that the negotiations did not result in a contract. The exchange of the 120 Tregunter and Queen's Gardens properties was agreed in principle but subject to contract in January 1981. The government contend that in the events which happened between June 1981 and August 1982 both parties became estopped froth refusing to give effect to the agreement in principle. HKL purported to withdraw from the negotiations in April 1984. By that time both parties had sufficiently indicated their intentions with regard to the details of the exchange to enable the court to make an order which would ensure that the agreement in principle was carried into effect on terms acceptable to both parties if the agreement in principle had become binding by estoppel. The question is whether HKL were entitled to withdraw from the negotiations in April 1984. The trial judge, Jackson-Lipkin J., found in favour of HKL and his decision was upheld by the Court of Appeal of Hong Kong (Li V.-P., Yang and Fuad JJ.A.). The government now appeal to Her Majesty in Council.
The agreement in principle was set forth in detail in an offer letter from the government dated 12 January 1981 and an acceptance letter from HKL dated 13 January 1981. A major part of this agreement, as subsequently modified and expanded, was carried out. In particular the government took possession of the Tregunter flats and fitted them out, and moved in senior civil servants to that accommodation by August 1981. The government disposed of the residences formerly occupied by those servants. HKL took possession of Queen's Gardens by November 1981 and demolished the existing buildings an the Queen's Gardens and adjoining sites by May 1982 with a view to redevelopment. HKL paid to the government by August 1982 the full sum of $103,865,608, the agreed difference between the value of the Tregunter premises and the value of Queen's Gardens. There remained to be solved various minor problems, some of which were envisaged in the agreement in principle and some of which arose thereafter. There also remained to be agreed and executed documents which would transfer the Tregunter premises to the government and which would vest in HKL a Crown lease of Queen's Gardens. These documents would define the rights and obligations of the government as part owners of Tregunter and the rights and obligations of HKL as lessees of Queen's Gardens and as developers. By February 1984 all these problems had been solved with trivial exceptions of no importance. By February 1984 also, the necessary documents had been drafted and agreed, again with trivial exceptions of no importance. By February 1984 there was no difficulty in the Court devising an order for specific performance of the agreement in principle provided that the agreement had become binding by estoppel.
The agreement in principle was not binding in its inception. The Letter dated 12 January 1981 containing the government's offer was marked "without prejudice." The writer of the letter, was "pleased to inform" HKL that "subject to contract, government have agreed in principle" to grant Queen's Gardens to HKL in exchange for the Tregunter flats. After setting out the "basic terms" in some detail, the letter continued:
"I must, however, point out that the above basic terms may be varied or withdrawn prior to formal' execution of the transaction. Furthermore, any agreement reached shall be subject to formal 121 approval by the government and until the document or documents necessary to give legal effect to this transaction are executed and registered, this letter should not be considered as binding the government in any way."
Thus the author prudently gave emphasis to the principle that an agreement which is "subject to contract" has no binding force. The government were fully aware and intended that either party could at any time and without any reason withdraw from the agreement in principle.
Mr. Morritt, who appeared for the government, submitted that every action of the government and every action of HKL after the date of the agreement in principle served to create or encourage a belief in the government that the agreement in principle would be carried into effect. The actions taken by the government in that belief were admittedly and seriously detrimental in a way which could not be remedied. The civil servants cannot be returned to their former residences and the buildings on Queen's Gardens and elsewhere which were demolished cannot be restored. In these circumstances Mr. Morritt submitted that by August 1982 it was unconscionable for HKL to withdraw from the agreement in principle and they were estopped from so doing.
Their Lordships accept that the government acted to their detriment and to the knowledge of HKL in the hope that HKL would not withdraw from the agreement in principle. But in order to found an estoppel the government muss go further. First the government muss show that HKL created or encouraged a belief or expectation on the part of the government that HKL would not withdraw from the agreement in principle. Secondly the government must show that the government relied on that belief or expectation. Their Lordships agree with the courts of Hong Kong that the government fail on both counts.
Mr. Morritt submitted that every action of the government and every action of HKL after the date of the agreement in principle served to create or encourage a belief and expectation in the government that the agreement in principle would be carried into effect and that HKL would not withdraw. HKL allowed the government to take possession of Tregunter, to fit out the flats, to re-house senior civil servants and to dispose of their former residences. HKL prevailed on the government to allow HKL to enter upon and to destroy the buildings comprised in Queen's Gardens and adjacent sites and HKL paid in full the price for taking over Queen's Gardens. It was impossible for the government to go back and unthinkable that HKL would not go forward. It was unconscionable for HKL to seek to exercise their legal right to withdraw from the agreement in principle.
Their Lordships accept that there is no doubt that the government acted in the confident and not unreasonable hope that the agreement in principle would come into effect. As time passed and more and more actions were undertaken in conformity with the proposals contained in the agreement in principle, the government's hopes were strengthened. It became more and more unlikely that either the government or HKL would have a change of heart and would withdraw from the agreement in principle. But at no time did HKL indicate expressly or by implication that they had surrendered their right to change their mind and to withdraw. That right, expressly reserved and conferred by the government, was to withdraw at any time before "document or documents necessary to give legal effect to this transaction are executed 125 and registered." HKL did not encourage or allow a belief or expectation an the part of the government that HKL would not withdraw. HKL proceeded in accordance with the proposals contained in the agreement in principle but at the same time they continued to negotiate the exact provisions of the documents which were necessary to be executed before the parties could become bound.
There were significant events which indicated plainly that HKL, to the knowledge of the government, retained the right to withdraw from the agreement in principle.
In the present case the government acted in the hope that a voluntary agreement in principle expressly made "subject to contract" and therefore not binding would eventually be followed by the achievement of legal relationships in the form of grants and transfers of property. It is possible but unlikely that in circumstances at present unforeseeable a party to negotiations set out in a document expressed to be "subject to contract" would be able to satisfy the court that the parties had 128 subsequently agreed to convert the document into a contract or that some form of estoppel had arisen to prevent both parties from refusing to proceed with the transactions envisaged by the document. But in the present case the government chose to begin and elected to continue on terms that either party might suffer a change of mind and withdraw.