廈門新景地集團有限公司 Formerly Known As 廈門市鑫新景地房地產有限公司 v. Eton Properties Ltd and Others

HCCL 13/2011

[2022] HKCFI 2566

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 13 OF 2011

(TRANSFERRED FROM HCA NO 961 OF 2008)

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Before:  Hon Mimmie Chan J in Chambers (Open to Public)

Date of Hearing:  27 July 2022

Date of Decision: 18 August 2022

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D E C I S I O N

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Background

1.The dispute between the parties to these proceedings and the history of the litigation between them have been referred to in the numerous decisions of the Court, and will not be repeated here. In brief, the Plaintiff has obtained judgment on liability in its common law action against the 1^st and 2^nd Defendants, for their breach of the implied promise to honour and perform an arbitral award made on 27 October 2006 (“Award”) in an arbitration commenced by the Plaintiff (“Arbitration”) against the 1^st and 2^nd Defendants under an agreement dated 4 July 2003 (“Agreement”), under which the Plaintiff had agreed to purchase and the 1^st and 2^nd Defendants had agreed to sell their shares in the 4^th Defendant, for the Plaintiff to obtain the right to develop Lot 22 in Xiamen (“Land”) which right was held in the name of the 5^th Defendant.

2.The applications currently before this Court concern, firstly, the summons issued by the 1^st and 2^nd Defendants (“Defendants”) for leave to amend their Statement in Response filed on 15 January 2021 for the forthcoming trial on the assessment of damages to be paid by the Defendants. Secondly, there are separate summonses issued by the Plaintiff and the Defendants for directions on expert evidence to be adduced at the trial for assessment of damages, by which they sought to introduce different issues for the experts’ consideration.

Summons to amend

3.The Plaintiff opposes the amendments proposed to be made to paragraph 32A(5) and 32B of the Statement in Response. At paragraph 32A, the Defendants plead that insofar as the Plaintiff claims damages with reference to the development value of the Land based on the actual development carried out thereon and the profits earned as a result, the Plaintiff is not entitled to claim on such basis.

4.At paragraph 32A(5), the Defendants seek to plead as follows:

“If and to the extent that the Plaintiff can identify and prove its loss (as to which no admission is made):

(a) such loss (if any) should be limited to the reasonably anticipated profits the Plaintiff would have made if it had developed the Land according to its own design and schedule as contemplated under the Agreement; and

(b) in assessing such loss (if any) account must be taken of all relevant costs, expenses and tax liabilities which the plaintiff would have incurred or borne.”

5.At paragraph 32B, the Defendants further seek to plead:

“Further, without prejudice to the foregoing, insofar as the Plaintiff alleges that the date of assessment of its alleged loss should be 27 October 2006, being the date of the 1^st Award, the 1^st and 2^nd Defendants refer to the matters pleaded in paragraphs 24, 28 to 32 of their Re-Amended Defence filed on 11 January 2012 in this action and aver that the date of assessment should be no later than April 2005…”

The draft amendment goes on to refer to various matters, to support the contention that the date of assessment should be no later than April 2005, by reference to a Notice to Discontinue Performance of the Agreement (“Notice”) sent by the Defendants to the Plaintiff on 14 November 2003, and the fact that the Plaintiff only commenced the Arbitration on 8 August 2005, 20 months after it received the Notice, and with claims made as to the Plaintiff’s substantial delay. The Defendants seek to plead, at paragraph 32B(4) to (6), as follows:

“(4) Had the Plaintiff commenced arbitration within a reasonable time after November 2003 by, say, February 2004, the Plaintiff would have obtained an arbitral award from the tribunal by no later than April 2005 (assuming the tribunal would take the same time as it did for conducting the arbitration and issuing the 1^st Award).

(5) In the premises, the 1^st Award would have been granted substantially earlier but for the Plaintiff’s own failure to commence arbitration within a reasonable time. The Plaintiff should not be allowed to adopt the date of the 1^st Award (i.e. 27 October 2006) as the date of assessment and thereby take advantage of any upward movement of the property market in Xiamen, PRC, prior to that date.

(6) Further or alternatively, had the development of the Land been carried out according to the Plaintiff’s own design and schedule as contemplated under the Agreement, the Plaintiff would have been able to sell by way of pre-sale most of the units in the development and derived profits therefrom by no later than April 2005.”

6.In summary, the contention sought to be made by the disputed amendments is that the Plaintiff’s loss should be limited to the reasonably anticipated profits it would have made if it had developed the Land according to the Plaintiff’s own design (as opposed to the design of the 5^th Defendant) and the Plaintiff’s schedule as contemplated under the Agreement, and further, that in assessing the value of the development of the Land in accordance with the Plaintiff’s design, the date of assessment should be no later than April 2005. The Plaintiff referred to these disputed amendments as the “Plaintiff’s Design Argument” (“P-Design Argument”).

7.The Plaintiff opposes the amendments on the basis that the Defendants are late in raising this new substantive defence, that the amendments disclose no reasonable defence and/or amount to an abuse of process, requiring additional expert evidence and causing delay.

The nature of the Plaintiff’s claim and the remedies to be granted

8.In determining the applications now before the Court, it is necessary to bear in mind the nature of the Plaintiff’s claim and the remedies which the Court is asked to grant at the remaining trial on quantum.

9.The Plaintiff’s claim is for breach of the Defendants’ implied promise to honour and perform the Award (“Implied Promise”). The Court of Appeal and the Court of Final Appeal have clearly set out in their judgments of 9 October 2020 (“CFA Judgment”) and 15 April 2016 (“CA Judgment”) the relevant basic principles applicable to the Plaintiff’s common law action for enforcement of the Implied Promise made in or relating to the Award. The action is concerned with the law of remedies and is governed by the law of procedure of the lex fori, ie Hong Kong law, and not the governing law of the original Agreement.  Yuen JA made it clear in her judgment that the court of enforcement is not limited to granting relief which mirrors the terms of the Award, but can order damages or equitable compensation, even though the tribunal had only made an award for continued performance of the Agreement.

10.Particularly significant and material to the consideration of the applications presently made by the parties is the nature of the relief and the remedies to be granted by the Court in the common law action on the Award. The Court of Final Appeal held that it was wrong for the Defendants to argue that the damages claimed by the Plaintiff in the action on the Award should be viewed simply as damages for loss of profits of the development flowing from the breach of the Agreement.  The Court of Final Appeal highlighted the fundamental difference between proceedings at the arbitration as opposed to proceedings at the enforcement phase, and the wide range of remedies open to the enforcing court.  At paragraph 122 of the CFA Judgment, Ribeiro PJ pointed out:

“At the enforcement stage, in an action on the implied promise, the enforcing court may grant relief appropriate to the award. If it is a monetary award for payment within the jurisdiction, it may simply be a judgment enforcing the award as a debt. If it is a non-monetary award which has not been complied with, the court may fashion an apt remedy chosen from the full range of remedies available in an ordinary common law action.”

11.With the guidance given in the CFA Judgment and the CA Judgment as to the nature of the action for breach of the Implied Promise, such Implied Promise being a separate contractual obligation which is distinct from the obligations created by the underlying Agreement, it is clear that the damages to be awarded for breach of the Implied Promise is for attaining the object of putting the Plaintiff, so far as money can do it, in the same situation “as if the contract (ie the Implied Promise) had been performed”. As Counsel for the Plaintiff correctly pointed out, this involves consideration of a counterfactual scenario, as opposed to the consideration of the actual reality of what has happened. The assessment of damages has to be approached with this in mind.

The disputed amendment application

12.What is indisputable is that as a general principle, all amendments to pleadings are to be allowed for the purpose of determining the real question in controversy between the parties to the proceedings, or correcting any defect or error in proceedings. As summarized by the court in Hsu Ming Chi v Lam Shu Chit HCCL 8/2013, 22 October 2014, leave to amend should be readily granted before trial unless it can be shown that the proposed amendment is “bound to fail”.  While the court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, so as not to require prolonged investigation. The court will take the applicant’s proposed pleaded case to the highest, when considering whether the proposed amendments are bound to fail such that leave should not be granted.

13.First, on the question of delay, the trial on quantum is scheduled to take place in September 2023, more than 12 months away.  Even if there were complexities arising from the proposed amendments which may call for further expert evidence, given the history of these proceedings and the time which the parties have already spent in considering the issues arising in this case, I do not regard the application to amend which is made at this stage to be unduly late, such that there is any prejudice to the Plaintiff which cannot be compensated in costs.

14.The disputed amendments set out the Defendants’ claim as to how damages for breach of the Implied Promise to honour the Award should be assessed. The basis of assessment of the damages to be paid by the Defendants for such breach, including the date to be taken into account for the purpose of the assessment of the Plaintiff’s loss, are questions for determination at trial – and not for final determination as preliminary issues at this stage. As the Court of Appeal pointed out in Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455 (at para 25) (cited in Hsu Ming Chi v Lam Shu Chit), it is only when the merits are so readily apparent that the court can conclude at the amendment stage that the proposed amendments are bound to fail, that such amendment is not allowed. The court should not undertake a prolonged investigation of the merits, and shut out a litigant from arguing its case at trial. In giving effect to the objectives of the Rules of the High Court, the primary aim in exercising the powers of the court, including the power to allow amendments to be made, is to secure the just resolution of disputes in accordance with the parties’ substantive rights (O1A r 2(2)).

15.I am not satisfied at this stage that the amendments sought to be made are bound to fail at trial.

16.The Plaintiff’s position is that its damages should be assessed in order to put it into a position it would have been in had the Award been performed in October 2006 (when it was issued), but that the disputed amendments sought to be made by the Defendants are premised on compensating the Plaintiff’s loss arising from the Defendants’ breach of the Agreement, as opposed to their breach of the Implied Promise to perform the Award. The P-Design Argument contends that the Plaintiff’s loss should be limited to the reasonably anticipated profits the Plaintiff would have made if the Plaintiff had itself developed the Land according to the Plaintiff’s own design and schedule as contemplated under the terms of the Agreement, which profits which the Plaintiff would have been able to reap by April 2005, if it had commenced the Arbitration within a reasonable time after receipt of the Notice served by the Defendants in November 2003.

17.The Plaintiff highlights the fact that the Award is for performance of the Agreement, and the purpose and object of the parties entering into the Agreement is for the Plaintiff to obtain benefits of the development of the Land through the share acquisition under the Agreement. The Plaintiff pointed out that the different courts have recognized this throughout the proceedings, accepting and emphasizing that the ultimate objective of the sale and purchase of the shares in the 4^th Defendant under the Agreement is to enable the Plaintiff to obtain control of the 5^th Defendant and thereby to enjoy the income and profits from the development of the Land. According to the Plaintiff, the P‑Design Argument advanced in the proposed amendments concerns the counterfactual scenario of the Plaintiff being able to develop the Land in accordance with its own design and schedule as provided for in the Agreement, had the Defendants performed the Agreement and delivered the Land to the Plaintiff. This is on the premise of awarding damages to the Plaintiff for its loss arising from breach of the Agreement, as opposed to its loss from breach of the Implied Promise.

18.The Plaintiff pointed out that when the Award was made by the tribunal, it had been made aware of the fact that by October 2006, the Defendants had already taken substantial steps to develop the Land, pre‑sale of all the residential units built on the Land had been almost completed, the interests of third party purchasers were involved, and the development could not be unbuilt by that stage. Counsel for the Plaintiff emphasized that this was part of the factual matrix of the Award.

19.Since the Award was for the parties to continue to perform the Agreement, the Plaintiff argued that had the Award been performed when it was issued in October 2006, and upon obtaining the 4^th Defendant’s shares from the 1^st and 2^nd Defendants, the Plaintiff could only have, and would have, adopted the existing design which had been submitted by the 5^th Defendant before as well as after the purported termination of the Agreement in November 2003, which designs had been approved by the Mainland authorities, and the Plaintiff would have continued the development of the Land through the 5^th Defendant, based on the already approved and built design. The Plaintiff emphasized that the Agreement itself provided that the Plaintiff was free to decide the development details of the Land, which would have entitled the Plaintiff to continue to adopt the design proposal submitted on behalf of the 5^th Defendant.

20.In short, Counsel for the Plaintiff pointed out that the tribunal did not, by the Award, order the Defendants to transfer the Land to the Plaintiff in January 2004 for the Plaintiff to develop it in accordance with the Plaintiff’s original design and to sell it in April 2005. The relevant counterfactual scenario, if the Award had been performed, is that the Plaintiff would have obtained the shares in the 4^th Defendant and continued the development in accordance with the already approved design, and would have reaped the profits in the development which were vested with the 5^th Defendant. Any impossibility of performance of the Defendants’ obligation to transfer the shares in the 4^th Defendant is irrelevant.

21.These submissions will no doubt be made in full and be tested at trial, and may even be accepted by the Court. They support the expert issues proposed by the Plaintiff on the expert summons, but I am not satisfied that the disputed amendments sought to be made by the Defendants should not be allowed on the basis that they are doomed to fail and would have no prospects of being accepted by the Court when the Court decides on the appropriate relief to be granted to the Plaintiff.

22.It must be borne in mind, and the Court of Appeal has emphasized the fact, that in the common law action on the Award, the Court is considering the grant of equitable compensation in respect of the Defendants’ breach of the Award for the performance of the Agreement.  The CA Judgment made it clear that the common law action gives to the Plaintiff a wide range of remedies (paragraph 115 of the CA Judgment), and that the courts are flexible in the remedies to be granted in a common law action, based on and upon consideration of all the facts and circumstances of the case. The court enforcing an award “is not hamstrung by the precise terms of the award) (paragraph 165 of the CA Judgment), and the jurisdiction of the enforcing court is to be exercised with a view to fashioning an appropriate remedy in order to give effect to the award (paragraph 126 of the CFA Judgment).

23.Counsel for the Defendants also referred to the CFA Judgment, where it was pointed out that there is very likely to be “a significant overlap” between the damages to be awarded by the enforcing court and whatever damages which might have been awarded by the tribunal for breach of the Agreement.

24.At the end of the day, in enforcing and giving effect to the Award, the Court must consider what is the fair, equitable and appropriate remedy to grant, in all the circumstances of the case.  Consideration of the situation the Plaintiff would have been in had the Award been performed necessitates consideration being given to the counterfactual situation of the Agreement being performed (as ordered in the Award), as well as to the realities existing at the time when the Award was made. I am not persuaded at this stage that this would preclude the Court’s consideration of the matters set out in paragraph 32A(5)(a) and 32B, particularly in the context of whether it would be unjust or inequitable to the Defendants for damages to be assessed at a particular date contended by the Plaintiff. Whether there was delay in the Plaintiff’s procurement of the Award, whether this is relevant or should have any effect on the relief sought by the Plaintiff, and if there was delay, whether it was caused or contributed to by the Defendants, are matters which are more appropriately to be determined at trial. Even if the P-Design Argument may not ultimately be accepted by the Court in full as the basis of assessment of damages, it cannot be said at this stage that the amendments are bound to fail at trial.

25.I accordingly allow the amendments sought by the Defendants on their summons.

The expert issues

26.Having allowed the Defendants’ amendments, I am prepared to grant leave for expert evidence to be adduced on the issues raised in the amended pleading.

27.In the Statement of Case, the Plaintiff has pleaded its loss in paragraph 11, to include the value of the entire shareholding in the 5^th Defendant, including the interests in the Land and its sale proceeds received by the 5^th Defendant; compensation for diminution in value of the shareholding in the 4^th Defendant; and loss of opportunity to improve the development of the Land and maximize the profits.

28.The dispute between the parties on the questions to be answered by the experts on damages turns again on the basis of the assessment of damages.  As pointed out in the earlier parts of this Decision, the basis and method of assessment are matters to be determined upon full arguments being made by the parties at trial, on the entirety of the evidence filed. The Plaintiff’s contention is that damages should be reflected by the gross development value of the Land on the date of the Award, on the basis of the actual development built by the 5^th Defendant, and either what the 5^th Defendant actually achieved by sales, or what the 5^th Defendant ought to have achieved by way of sales having regard to the prevailing market conditions. On the Plaintiff’s case, if the Award had been performed, the Defendants would have procured the transfer to the Plaintiff of all the issued shares in the 4^th Defendant (which included the entire interest in the Land and in the sale proceeds held by the 5^th Defendant), the Plaintiff would have adopted the existing design submitted to the Mainland authorities and would have continued the development, such that it would have reaped the benefits of the development of the Land in accordance with the Award. It follows from this, as contended by the Plaintiff, that one of the heads of loss to be assessed by the Court is the value of the shareholding of the 4^th Defendant (which is represented by the value of the Land as developed by the 5^th Defendant) as at the date of the Award when the Defendants ought to have honored the Implied Promise. As it is also the Plaintiff’s contention that the Defendants had failed to maximize the profits, it seeks expert evidence on what the 5^th Defendant ought to have achieved in sales on the basis of the prevailing market conditions.

29.On their part, the Defendants contend that the damages should be reflected by the net profit of the development on the Land upon completion obtainable as at 30 April 2005, on the assumption that the Plaintiff’s design of the development as approved by the authorities on 7 November 2003 was to be used. The Defendants argued that the Implied Promise was to honour the Award which required the parties to perform the Agreement on its terms. As pointed out above, the Court should be flexible in deciding on the most apt and appropriate remedy to be granted, and I am not persuaded that the it should be precluded from taking into account the actual realities of the situation and of the parties’ position as of October 2006 when the Award was made. The Plaintiff’s case on the basis of assessment is certainly not unarguable.

30.Which of the parties’ contentions is correct and should be adopted by the Court will be decided at trial, and it is neither appropriate nor necessary for this to be determined at the interlocutory stage.

31.The pleadings raise the relevance and necessity of expert evidence on the issues and questions identified by the Plaintiff and the Defendants in their respective summonses. On the complexities of this case and bearing in mind the history of the long drawn out litigation between the parties, I will allow separate experts to be called on the subjects and to answer the questions set out in both the parties’ summonses. As directed, the parties should confer and agree on directions for the preparation and filing of the expert reports in the manner specified by the Court. A draft order to reflect the terms of the leave granted and the time-table for the reports should be submitted for the Court’s approval.

Disposition

32.Apart from the submission of the draft order and directions for the expert evidence allowed, parties are to confer and submit for the Court’s approval a draft order to be made on the Defendants’ summons to amend, with agreed directions on the timetable for the filing of the Amended Statement of Response and Statement of Reply, if any.

33.The appropriate order for costs is that the costs of the amendment summons are to be paid to the Plaintiff by the Defendants (which seek the indulgence of the Court), with certificate for Counsel, and the costs of the expert summonses are to be in the cause. Orders nisi are made to such effect and shall be made absolute unless application to vary same is made within 14 days after the handing down of this Decision.

Mr Bernard Man SC leading Mr James Man and Mr Jonathan Ng, instructed by Anthony Siu & Co, for the plaintiff

Mr Benjamin Yu SC, Mr Richard Khaw SC and Ms Bonnie Cheng, instructed by Mayer Brown, for the 1^st and 2^nd defendants