If a director of a company signed a contract to purchase a landed property，where the director has unauthorized mandate from the board to sign the contract. Meanwhile, it was later discovered that the landed property has problem of water seepage and illegal unauthorized structures, which were not disclosed by the owner of the landed property prior to entering the contract. The owner of the landed property is minded to legally enforce the contract against the company. The company is minded not to purchase the landed property and does not wish to perform the duty to pay the balance of the purchase monies, on ground that the owner concealed the fact that the landed property had illegal structures and water seepage problems.
What are the legal remedies to which the company and the owner are entitled respectively?
A. Legal Remedies for the Company:
- Rescission of the Contract:
The company may seek to rescind the contract on the grounds that the owner concealed material facts about the property, including the illegal unauthorized structures and water seepage problems. In Max Smart Ltd. v. First Super Investment Ltd. [1998] HKCFI 312 / [1999] 1 HKLRD 519, the court held that the vendor's failure to disclose unauthorized structures and the inability to pass good title entitled the purchaser to rescind the agreement and recover the deposit. Similarly, the company can argue that the concealment of these defects constitutes a failure to pass good title, justifying rescission of the contract. - Return of Deposit and Costs:
If the contract is rescinded, the company may claim a refund of any deposit paid, reimbursement of costs incurred in investigating the title, and interest on the deposit. This remedy was upheld in Max Smart Ltd. v. First Super Investment Ltd., where the purchaser was entitled to recover the deposit and associated costs.
- Defense Against Enforcement:
The company can argue that the unauthorized mandate of the director to sign the contract invalidates the agreement. The lack of proper authorization from the board may render the contract unenforceable against the company. This argument aligns with general principles of corporate governance and contract law. - Material Defects in Title:
The company can rely on the precedent set in Sun Great International Ltd. v. Hui Lai Ying Polly [1996] HKCFI 291, where the court ruled that illegal structures rendered the title defective, allowing the purchaser to reject the property. The company can argue that the illegal structures and water seepage problems materially affect the property's title and usability, justifying non-performance of the contract.
B. Legal Remedies for the Owner:
- Enforcement of the Contract:
The owner may seek to enforce the contract against the company, arguing that the company is bound by the director's actions under the principle of apparent authority. However, this argument may be weakened if the company can prove the director lacked proper authorization. - Rectification of the Contract:
If the owner can demonstrate that the parties intended to proceed with the sale despite the defects, the owner may seek rectification of the contract to reflect the true intention of the parties. In Ni Tiee Bor Robert and Another v. Golden Crane Industries Ltd. [2000] HKCA 291, the court upheld rectification where the parties intended to include terms acknowledging unauthorized alterations.
- Retention of Deposit:
If the company fails to complete the purchase without valid grounds, the owner may argue for forfeiture of the deposit as compensation for the breach. However, this remedy may not apply if the company successfully rescinds the contract due to the owner's concealment of defects. - Defense Against Rescission:
The owner may argue that the company waived its right to rescind by proceeding with the contract despite knowledge of the defects. This defense was considered in Ni Tiee Bor Robert and Another v. Golden Crane Industries Ltd., where the court found that the purchasers accepted the property with the alterations.
C. Conclusion:
The company has strong grounds to rescind the contract and recover its deposit and costs due to the owner's concealment of material defects, including illegal structures and water seepage problems. The owner may attempt to enforce the contract or retain the deposit, but these remedies are likely to fail if the company proves the defects materially affect the property's title and usability, and the director lacked proper authorization to bind the company.
