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

[2024] HKCFI 1291

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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BETWEEN

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J U D G M E N T

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Background

1.This is the judgment on the trial of assessment of damages in this action which was first commenced in 2008. The dispute concerns an Agreement made between the Plaintiff and the 1^st and 2^nd Defendants dated 4 July 2003 (“Agreement”), under which the Plaintiff had agreed to purchase and the 1^st and 2^nd Defendants agreed to sell their shareholding in the 4^th Defendant (“Shares”), in order for the Plaintiff to obtain the right to develop Lot 22 in Xiamen (“Land”) which was held in the name of the 5^th Defendant. The dispute has been made the subject matter of an arbitration which was commenced in 2005, and proceedings in the Court of First Instance, the Court of Appeal and the Court of Final Appeal in Hong Kong, with several judgments of the different levels of the Court having been handed down.

2.In brief, the 1^st and 2^nd Defendants were the shareholders of the 4^th Defendant, which in turn held 100% of the shares in the 5^th Defendant, and the 5^th Defendant held the Land which was to be developed. Under the Agreement, the 1^st and 2^nd Defendants warranted that they had absolute control over the 4^th and 5^th Defendants, and in consideration and upon payment (by installments) of the price of RMB 120 million, the 1^st and 2^nd Defendants were to transfer their Shares in the 4^th Defendant to a company designated by the Plaintiff, to enable the Plaintiff to obtain the right to develop the Land in the name of the 5^th Defendant, and to obtain the right to profits from the development.

3.The Agreement provides for the laws of the PRC to be the governing law.

4.After the Plaintiff had paid a sum of RMB 5 million as deposit, the 1^st and 2^nd Defendants failed to deliver possession of the Land to the Plaintiff and instead, purported to terminate the Agreement by a notice dated 14 November 2003. On 8 August 2005, the Plaintiff commenced arbitration proceedings against the 1^st and 2^nd Defendants before the CIETAC tribunal (“Arbitration”), seeking the continued performance of the Agreement.

5.By the time of the commencement of the Arbitration, development of the Land had already commenced in around May 2005, on the basis of a design which had been submitted by the 5^th Defendant, and approved by the relevant Mainland authorities. Shortly after the commencement of the Arbitration, and without the knowledge of the Plaintiff and the tribunal, the Defendants carried out a restructuring of its group (“Eton Group”), as a result of which the 1^st and 2^nd Defendants’ shareholding in the 4^th Defendant was transferred to another entity, the 3^rd Defendant, within the Eton Group (“Restructuring”).

6.On 27 October 2006, the arbitral tribunal issued an award in the Arbitration (“Award”). The tribunal rejected the claims made by the Defendants that the Agreement was illegal under PRC law, and also rejected the Defendants’ claim that it was impossible to perform the Agreement. It found that an agreement was binding upon the parties once it was executed, and that although any change in circumstances may make it difficult for the parties to perform the agreement, the allegations of invalidity and impossibility of performance in this case could not constitute justifiable reasons for the Defendants to discontinue performance of the Agreement without the consent of the Plaintiff.

7.Accordingly, by the Award, the tribunal ordered the Defendants to pay damages to the Plaintiff for breach of the Agreement, and further, to “continue to perform the Agreement”.

8.Focusing on the key developments which are relevant to the assessment of damages, and leaving aside the various detours and distractions in the course taken by the parties in this action, the Plaintiff first applied for and obtained from the Hong Kong Court leave to enforce the Award in Hong Kong. On 31 October 2007, judgment was entered by the Hong Kong Court in terms of the Award (“Statutory Judgment”). The Defendants applied to set aside the Statutory Judgment, on the ground that performance of the Award was impossible by reason of the fact that, as a result of the Restructuring, the 1^st and 2^nd Defendants could no longer transfer the Shares in the 4^th Defendant to the Plaintiff, and further, the Land could not be delivered to the Plaintiff for redevelopment, since 99% of the residential units developed had by then already been sold.

9.The Plaintiff then commenced HCA 961/2008 (later relisted as HCCL 13/2011) in May 2008, as a common law action to enforce the Award.

10.The Defendants’ application to set aside the Statutory Judgment was dismissed by Reyes J on 24 June 2008, as the judge was not satisfied that the Agreement was substantially incapable of performance. On appeal, His Lordship’s judgment was affirmed by the Court of Appeal, Le Pichon JA taking the view that there was no insuperable impediment to the transfer of the 4^th Defendant’s Shares to the Plaintiff from the 3^rd Defendant, particularly when the alleged impossibility of performance was self-inflicted by the Eton Group.

11.In August 2008, the 1^st and 2^nd Defendants returned to the CIETAC tribunal to seek a determination that the Agreement could no longer be performed, and that the parties should be discharged from the Agreement. That application was dismissed by the tribunal. The tribunal rejected the claims made by the 1^st and 2^nd Defendants that the transfer of the shareholding from the 3^rd Defendant to the Plaintiff was impossible as a matter of fact, as the Restructuring was a breach of the Agreement and not a ground for lawful termination. Further, the tribunal was not satisfied that the objectives of the Agreement could not be met.

12.Although the Defendants made a further attempt to seek a ruling from the tribunal as to the “alternative approaches” which could be taken to meet the purpose of the Agreement, the tribunal rejected the application on the basis that the Award was final, and there was no remaining matter which could be determined according to the PRC Arbitration Law.

13.In the common law action, the Plaintiff’s claims were initially dismissed by the Court at first instance. However, on appeal, the Court of Appeal allowed its claim in respect of the 1^st and 2^nd Defendants’ breach of their implied promise, that they would honour the Award obtained by arbitration in accordance with a valid submission under the Agreement (“Implied Promise”). At paragraph 114 of the judgment of the Court of Appeal of 15 April 2016 (“CA Judgment”), Yuen JA explained that the essential ingredients of the new and fresh cause of action on an Award, which is separate and independent from an action based on breach of the underlying contract, are simply a valid submission of the dispute to arbitration, an award in favor of the plaintiff, and the defendant’s failure to honour it.

14.On the Defendants’ application, the Plaintiff was compelled by the Court of Appeal to elect between maintaining the Statutory Judgment and obtaining a judgment for damages for breach of the Implied Promise. It elected in favor of the judgment for damages on the common law action on the Award, and the Statutory Judgment was accordingly set aside. In October 2017, judgment was entered against the 1^st and 2^nd Defendants, for their payment to the Plaintiff of damages for breach of the Implied Promise.

15.The 1^st and 2^nd Defendants’ appeal to the Court of Final Appeal in the common law action was dismissed, with a judgment handed down on 9 October 2020 (“CFA Judgment”).

16.The trial on quantum for assessment of the damages allowed by the Court of Appeal had initially been stayed in April 2018, pending determination of the Defendants’ application for leave to appeal to the CFA. Such trial finally proceeded in September 2023, 17 years after the issue of the Award.

Issues in dispute

17.From the submissions made by Counsel, the issues in dispute which require determination by this Court for assessment of damages are:

(1) How should the Plaintiff’s damages be assessed?

(2) What is the relevant date for assessment of damages?

(3) What is the quantum of damages to be awarded?

(4) Is the Plaintiff required to give credit for the sum of RMB 1,275,000 awarded by the tribunal as damages?

(5) Is the Plaintiff entitled to pre-judgment interest?

The basis or approach in assessing damages

18.As this Court explained, at paragraph 24 of the Decision handed down on 3 August 2021 (on the Defendants’ application for striking out), the Plaintiff’s action is one for breach of the Implied Promise, and the object of awarding damages for breach of the cause of action based on the Implied Promise is to put the Plaintiff, so far as money can do it, in the same situation as if the contract had been performed (Robinson v Harman (1848) 1 Ex 850, 855). In this case when the Implied Promise is to perform the Award, the Plaintiff’s damages are to be assessed on the basis as if the Award had been complied with. As held in the CA Judgment and the CFA Judgment, the Implied Promise, as a contractual obligation, is separate and distinct from the obligations created by the underlying Agreement between the parties and under which the Award was issued.

19.The difference between Counsel in their submissions as to the proper counterfactual to be adopted for assessing the Plaintiff’s damages lies in this distinction between the performance of the Agreement, and the performance of the Award. It is true that in this particular case, the distinction is fine and can at times be easily blurred. The Award in this case is for the Defendants to continue to perform the Agreement, and hence it may be argued that the counterfactual to be considered is the performance of the Agreement, in accordance with its terms. However, it must not be forgotten that the Implied Promise is to perform the Award, which in this case is for the relevant Agreement to be performed, and so to find the counterfactual for assessing damages for breach of the relevant obligation, what has to be considered are the circumstances if the Award had been duly performed, after it was issued by the tribunal in October 2006.

20.It should also be borne in mind that this Court is exercising its powers as the enforcing court, and as the CFA has highlighted and explained in the CFA Judgment, the enforcing court has flexibility in the remedial measures to be granted, such that it is able to “fashion an appropriate remedy to give effect to the Award”, as distinct from any remedy that might have been claimed in the arbitration itself and which might have been within the jurisdiction and powers of the tribunal to have granted.

21.Again highlighting the fact that this Court is enforcing the Award, and the Implied Promise or the relevant contract being considered is the Award, what has to be construed and considered is the Award. It is only upon construing the Award that the Court can reach a conclusion as to the meaning of the Award being performed, and what would have happened had the Award been performed. I would also point out at this stage that an arbitral award should as a matter of construction be read generously, in a reasonable and commercial way (Zemalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR, CNG v G & G [2024] HKCFI 575), and in accordance with the expectations of commercial persons who are parties to the arbitration agreement.

The Award and what it contemplated

22.In the Award, the tribunal considered and set out the nature of the Agreement. It stated that:

“… in a strict sense, the Agreement in this case is neither an agreement of share transfer nor an agreement of transfer of land use right. It is a complicated arrangement of rights and obligations closely related to transfer of shares.”

23.The tribunal continued to describe the Agreement as follows:

“The Arbitral Tribunal considers that the Agreement in this case is a share transfer arrangement made between the parties for the contractual purpose of assigning and obtaining the right to develop and obtain earnings from the development of the No 22 Land. To this end, the Applicant agrees to pay the Respondents RMB 120 million by installments, and progressively obtain the right to develop and make earnings from the No 22 Land. After the amount is paid in full, the Applicant is further entitled and obligated to purchase all the shares in Hong Kong Legend for HK $2. On analysis of the provisions of the Agreement in this case, the subject matter of the Agreement is neither the shares in Hong Kong Legend nor the right to use the No 22 Land held by Xiamen Legend. The subject matter of the Agreement is the contractual right to buy and sell the shares in Hong Kong Legend that has an indirect effective control over the No 22 Land. The amount of RMB 120 million is the consideration for the Applicant to obtain the contractual right to acquire all the shares in Hong Kong Legend for HK $2, and also the consideration for the Respondents to obtain the contractual right to sell the shares in Hong Kong Legend for HK $2.” (Emphases added)

24.Counsel for the 1^st and 2^nd Defendants sought to emphasize the fact that the tribunal had pointed out that the Agreement is not one for the sale and purchase or transfer of the shares in the company. It was pointed out that the tribunal had referred to the Agreement as a complicated arrangement of rights and obligations.

25.The observations made by the tribunal should be read in context, and the Award must be read as a whole.

26.In the context of the transaction as reflected by the terms of the Agreement, and how the transfer of shares and of the right to the Land was structured, it is of course correct for the tribunal to point out in the Award that the Agreement cannot simply be described as either an agreement just to transfer the shares, or as an agreement just to transfer the land use right. However, reading the Award, it is clear that the tribunal perfectly understood and explained its construction of the Agreement as to the purpose of the parties in entering into the Agreement.

27.It is also pertinent that the Defendants in the Arbitration had alleged and made a counterclaim in the Arbitration that the Agreement was illegal under PRC law, as being an illegal transfer of land, or was made for illegal purposes, and/or to achieve an illegal transfer of the land use right, and being in contravention of Mainland regulations, with references made to the Land Administration Law, the Implementation Rules for the Land Administration Law, and other Mainland regulations. In that context, the tribunal had to consider and in the Award deal with the issues of whether the Agreement was illegal or invalid by reason of its being an agreement to transfer land use right, or for the alleged illegal purpose of enabling the Plaintiff to make earnings from the Land (which arguments were all rejected).

28.The tribunal therefore explained in the Award that the Agreement was not simply an agreement of share transfer, nor an agreement of transfer of land use right. It pointed out that the main provisions of the Agreement are all about the rights and obligations of the parties before the conditions for transfer of shares in the 4^th Defendant occur, further explaining:

“The Arbitral Tribunal considers that such arrangement fully indicates that the true intent of the parties is to progressively transfer the right to develop, operate and make earnings from the No 22 Land and, after all the terms and conditions provided in the Agreement are met, to sign the legal instrument on transfer of shares in the target company and to handle the specific procedures. In other words, the main rights and obligations of the parties in the Agreement in this case do not involve how to transfer the shares in Hong Kong Legend in detail but involve how to perform certain specific obligations to cause the said transfer of shares to be effected ultimately.” (Emphases added)

29.The tribunal recognized and highlighted the fact that the share transfer procedures were positioned at the end of the entire transaction or arrangement under the Agreement, and that because this was not a common practice in the domestic real estate development market, the Agreement could “not be simply defined as an agreement of share transfer”.

30.In considering whether the Agreement was one for transfer of land use right, the tribunal pointed out that “making earnings from land development by means of acquiring the shares in the company holding the land use right to become the shareholder or capital contributor of the said company” fully complies with the PRC Company Law, the Land Administration Law and other laws and regulations of the Mainland. It concluded that the practice was not an illegal transfer of land in “other forms”, notwithstanding that the Plaintiff’s admitted purpose of the Agreement was for “obtaining the earnings from development and operation of the No 22 Land” and that that was to be achieved by share acquisition.

31.Suffices it to say that in the Award, the tribunal dismissed the Defendants’ defence that the Agreement was to conceal any illegal purpose, or was unlawful or invalid in any way.

32.Finally, the tribunal found in the Award that there was no reason not to perform or to discontinue performance of the Agreement on the ground, as the Defendants alleged, that it was impossible to do so. The reason was stated as follows:

“The Arbitral Tribunal considers that an agreement shall be binding upon the parties thereto once the agreement is executed. Even though any change in circumstances makes it difficult to perform the agreement during its performance, the parties shall exert reasonable efforts in good faith to perform the Agreement completely and fully other than purely emphasize external causes. In this case, as stated by the Respondents, the Agreement is a framework agreement, whose performance may be difficult due to various uncertainties. This needs close cooperation between the parties and reasonable efforts to seek alternative approaches to meet the purpose of the Agreement. The Respondents’ allegations cannot constitute justifiable reasons for impossibility to perform the Agreement and discontinuing the performance of the Agreement without consent of the Applicant.” (Emphases added)

33.It was for all the above reasons that the tribunal ordered that the 1^st and 2^nd Defendants “shall continue to perform the Agreement”, and dismissed the counterclaim of the Defendants.

34.It is in my judgment demonstrably clear that the tribunal had considered that the contractual purpose of the arrangements under the Agreement was for “assigning and obtaining the right to develop and obtain earnings from the development of” the Land. As the Plaintiff emphasized, the purpose as stated in the Award was for the Plaintiff to “progressively obtain the right to develop and make earnings from” the Land, and that after payment, the Plaintiff was “entitled and obligated” to purchase the shares, and the 1^st and 2^nd Defendants likewise were “entitled and obligated” upon collection of the price to sell all the shares in the 4^th Defendant. As clearly pointed out in the Award, the RMB 120 million was for the Plaintiff “to obtain the contractual right” to acquire and, for the 1^st and 2^nd Defendants, to sell all the shares in the 4^th Defendant.

35.Despite the emphases made by the 1^st and 2^nd Defendants as to all the intricate and complicated arrangements, duties and rights of the parties provided for under the Agreement and leading up to the transfer of the Land and the Shares in the 4^th Defendant, the intention of the parties and, ultimately, the purpose of the Agreement was to transfer the Shares in the 4^th Defendant to the Plaintiff, for the purpose of enabling the Plaintiff to attain the right to develop the Land and to obtain the earnings from the development of the Land. The order that the 1^st and 2^nd Defendants were to continue to perform the Agreement must and can only be for attaining this purpose. If the Award is to be performed, it is also for the objective of enabling the Plaintiff to attain the stated purpose of the Agreement, as found and accepted by the tribunal. Sensibly, objectively and commercially read, as an award should be, I can see nothing in the Award that can suggest otherwise.

The relevant counterfactual

36.In the Re-amended Statement of Claim (“SOC”), the Plaintiff seeks loss and damage by an award of equitable compensation or by means of an award of damages. It claims (at paragraph 35(5) of the SOC) that if the Court refuses to grant relief enabling it to become the sole shareholder of the 4^th Defendant, its loss and damage is:

“the difference between (i) the existing value of the entire shareholding·in the 4^th Defendant (which includes the entire interests in the Land or its sale proceeds held by its wholly-owned subsidiary, the 5^th Defendant) and (ii) the sum of RMB 120,000,000 which the Plaintiff agreed to pay under the Agreement for the acquisition of the same.”

37.According to the Plaintiff, the 1^st and 2^nd Defendants were in breach of the Implied Promise. The Plaintiff claims that had these Defendants performed the Implied Promise, the Plaintiff would simply have reaped the benefit of the 5^th Defendant’s development of the Land. According to the Plaintiff’s Statement of Case in Respect of Loss, filed on 11 December 2020 for the trial on quantum of damages, the Plaintiff seeks “the value of the entire shareholding in the 4^th Defendant, which includes the entire interests in the Land and/or its sale proceeds received by the 5^th Defendant”. It has not pursued its remaining claim, for compensation for the diminution in value of the shareholding in the 4^th Defendant, and loss of opportunity to improve the development of the Land and to maximize the profits.

38.The Plaintiff’s case is that damages should be assessed as at 27 October 2006, which is the date of the Award, and when the 1^st and 2^nd Defendants should have honored the Award in accordance with their Implied Promise. The Plaintiff claims that it is entitled to pre-judgment interest, from the date of the Award (and alternatively from the date of the Writ or the date of pleading paragraph 35(5) of the SOC) to the date of judgment to be handed down.

39.Counsel for the Defendants criticize the Plaintiff’s case as having adopted the wrong counterfactual for assessing the Plaintiff’s damages. They highlighted the fact that the Agreement which was ordered to be performed was NOT for the transfer of the Shares of the 4^th Defendant, but involved a much more complicated arrangement of rights and obligations between the parties.

40.Counsel pointed out that the Plaintiff’s case is on the basis that the Award contemplated the continued performance of the Agreement by way of transfer of the 4^th Defendant’s shareholding or benefits from the development to the Plaintiff, the argument being that had the 1^st and 2^nd Defendants performed the Award by transferring the shareholding of the 4^th and 5^th Defendants to the Plaintiff, the Plaintiff would have adopted the design of the Defendants and continued the development of the Land based on such design, and further, performed the agreements entered into with the purchaser under the pre-sale. Leading Counsel for the Defendants highlighted that allowing the Plaintiff’s claim for damages on such basis amounted to rewriting the Award, because the tribunal had not regarded the Agreement as one for the transfer of shares, but that it was for a different arrangement.

41.Counsel for the Defendants emphasized the fact that the tribunal only directed the 1^st and 2^nd Defendants to continue to perform the Agreement, and not some modified version of the Agreement.

42.According to the 1^st and 2^nd Defendants, the Plaintiff is not entitled to claim damages by reference to the actual development which had been carried out by the 5^th Defendant, and it amounts to a claim for disgorgement of the Defendants’ profits. Instead, damages should be assessed on the reasonably anticipated profits that the Plaintiff would have made, if it had developed the Land according to its own (and not the 5^th Defendant’s) design and the Plaintiff’s own schedule, as contemplated under the Agreement. In this regard, Counsel for the Defendants argued that the Plaintiff has not properly pleaded nor proved the losses suffered by the Plaintiff, as there is no evidence of how it could have built its own development on the Land with its design, what steps it could have taken in furtherance of the Agreement, whether it was able to carry out the development, and what its costs and/or profits would have been. In particular, the Defendants relied on the fact that even on the Plaintiff’s own estimate made in 2004, the profits it had expected from the project contemplated under the Agreement was only RMB 27 million, without taking into account finance costs. The Defendants claim that, by way of contrast, the Plaintiff is now seeking damages in excess of RMB 190 million on the gross development value of the Land, and a sum of RMB 300 million in respect of the net profit of the development.

43.The 1^st and 2^nd Defendants further contend that damages should be assessed as at April 2005, when the Plaintiff would have obtained an arbitral award if the Plaintiff had not delayed in taking action, as it ought reasonably to have known by November 2003 that the 1^st and 2^nd Defendants would not continue to perform the Agreement. Counsel highlighted the injustice of having to compensate the Plaintiff for any period before its claim for damages had been properly introduced and pursued, bearing in mind that the damages claim was only added in paragraph 35(5) of the SOC after it had obtained leave to re-amend on 21 December 2011. When the action was first commenced, there was no claim at all for damages, and the Plaintiff did not elect for damages in lieu of maintaining the Statutory Judgment until 20 October 2017.

44.The 1^st and 2^nd Defendants further contend that the Plaintiff must give credit for the damages already assessed and allowed by the tribunal in the Arbitration, and that the Plaintiff is not entitled to interest for the entire period of time between the date when the cause of action arose and the date of judgment, because the Plaintiff had delayed in making its claim and delayed in electing for damages.

45.As pointed out in the earlier part of this Judgment, the differences in the counterfactual scenarios submitted by Counsel in this case turn on what is envisaged to have been performed, had the relevant contract been performed.

46.The Defendants argued that the tribunal did not regard the Agreement as one for share transfer, such that it would be wrong for the Plaintiff to argue its case on the basis that had the Defendants performed the Award by transferring the shareholding of the 4^th and 5^th Defendants to the Plaintiff, the Plaintiff would have adopted the design of the Defendants and continued the development of the Land based on such design, and performed the agreements with the end-purchasers. They emphasized that the design of the actual development was the 5^th Defendant’s, and not the design of the 1^st and 2^nd Defendants. They also emphasized that the 1^st and 2^nd Defendants no longer controlled the Shares in the 4^th Defendant after the Restructuring, and that there is no evidence as to how the Plaintiff and the 1^st and 2^nd Defendants could have continued to perform the Agreement by close cooperation and making reasonable efforts, when there were other crucial steps under the scheme of the Agreement which came before the transfer of the Shares. It was claimed that the Plaintiff could not focus on the transfer of the Shares in the 4^th Defendant as the only step in the performance of the Agreement, to be carried out, before the Plaintiff could reap any profits.

47.Counsel for the Defendants further argued that it was wrong for the Plaintiff to place reliance on the earlier judgments of the Courts, in contending that the Hong Kong Courts had throughout affirmed the Plaintiff’s claim that there was to be a prospective transfer of the Shares in the 4^th Defendant under the Agreement. It was argued that the statements in the judgments were not made in the context of ruling on any entitlement of the Plaintiff to damages, and at a time when the Plaintiff’s case was viewed as a claim made in constructive trust (which claim was ultimately abandoned/rejected).

48.According to the 1^st and 2^nd Defendants, what was ordered under the Award was the continued performance of the Agreement, in accordance with the terms of the Agreement, and this in turn contemplated that the Plaintiff had to carry out the development of the Land itself, in accordance with its own design (as envisaged under the Agreement), and that whatever profits or benefits the Plaintiff might have reaped could only be referable to its own development, and not to the actual development as completed by the 5^th Defendant on the basis of the 5^th Defendant’s more superior design.

49.The Plaintiff’s claim is that by the time of the Award in October 2006, the Defendants had already taken substantial steps in developing the Land. The 5^th Defendant had submitted a new design for the development on the Land, and its design had been approved by the authorities in October 2004 and January 2005. By the time of the termination of the Agreement in November 2003, the Defendants’ development work on the Land had already commenced (in May 2005), and sales of the residential units had started in June 2006, with 95% of the residential units sold by the end of 2006. As highlighted by the Defendants, the tribunal was aware that construction activities based on the Defendants’ design had already taken place on the Land.

50.In this regard, Counsel for the Defendants argued that for the assessment of damages, any impossibility of performance under the relevant contract is irrelevant, such that the Court should not take into account the fact that the development of the Land and the sales of the units which had already commenced could not (by October 2006) be undone. It was contended that this is all in accordance with the established principles set out in Robinson v Harman 154 ER 363 and British Gas Trading Ltd v Shell UK Limited [2020] EWCA Civ 2349. The normal measure of damages entitles a buyer to the value of the performance promised, even if it is impossible (McGregor on Damages (21^st ed, 2022) para 8-142A. The court should simply assume that the relevant breach did not occur.

51.Counsel further argued that any compensatory damages for the Defendants’ breach cannot extend to the profits of the 5^th Defendant, since it is not the obligation of the 1^st and 2^nd Defendants under the Award to perform by giving the Plaintiff the benefit of the development based on the 5^th Defendant’s design and from the 5^th Defendant’s sales. It was emphasized that the Award did not hold that the Plaintiff was entitled to adopt the 5^th Defendant’s design and to continue the development based on such design, and that the transfer of shares was only to occur after the Plaintiff has fulfilled its obligations under the Agreement, and that there was no evidence as to the Plaintiff’s fulfillment of or that it could fulfil such conditions.

52.Having carefully considered the submissions made by the parties, and the findings and conclusions made in the Award, I cannot accept the submissions made for the Defendants as to the performance of the Agreement as envisaged by the Award, nor as to the date for assessment of the damages for non-performance of the Award.

53.It is significant that by the time when the Award was issued in 2006, the Defendants had already informed the tribunal as to the state of the works which had already been carried out and the activities which had taken place on the Land. Essentially, the design of the development had already been completed and approved, construction had already commenced on the approved design of the Defendants, such construction had already been partially completed, and 80% of the residential units developed or to be developed on the Land had been sold by July 2006. Against such background, the tribunal nevertheless ordered the Defendants in October 2006 “to continue to perform the Agreements”, with the “exhortation” (as highlighted by the Defendants) that the parties should cooperate and use reasonable efforts to seek alternative approaches to meet the purpose of the Agreement. The tribunal had referred in the Award to such “purpose” as being to obtain the right to develop and obtain earnings from the development of the Land, progressively. As Counsel for the Plaintiff pointed out, the “continued performance of the Agreement” which was ordered by the tribunal involved and must include the transfer of the Shares of the 4^th Defendant to the Plaintiff.

54.The fact that there was no express order for the Defendants to procure the transfer of the Shares to the Plaintiff, does not detract from the fact that the tribunal had ordered the Defendants to perform the Agreement in the progressive manner it had referred to, all in order to achieve the purpose of enabling the Plaintiff to obtain the right to develop the Land and to obtain earnings therefrom.

55.I agree with Mr Man SC that it would be against common sense, and indeed nonsensical, to read the continued performance of the Agreement as ordered under the Award as meaning that the Plaintiff was obliged to take the Land, to restart development, which inevitably meant (on the actual facts of the case) demolishing all that had been built, and sold, by the time of the Award, and to construct a new development by seeking fresh approval of the Plaintiff’s own design, merely to enable the Plaintiff to perform what it had originally agreed to carry out under the Agreement, if it had not been breached by the 1^st and 2^nd Defendants.

56.In Mr Man’s words, the submissions made for the Defendants as to what they say should be the proper counterfactual for the “continued performance of the Agreement” amount to saying that the tribunal had ordered the parties to build a different development with a different design, on the Land, 18 months before the Award.

57.On his part, Mr Man submits that when a serious document such as a contract, or an order made by an arbitral tribunal, is being interpreted, there is a presumption against construing it to mean nonsense. On the facts and in the particular context of this rather unusual case, I have to agree that the Award can only be read, sensibly and commercially, to mean that the Agreement was to be performed by the parties with the facts prevailing and the realities existing at the time when the Award was issued in October 2006. This, in my view, is borne out by the fact that the Award was expressed to direct the parties to continue to perform the Agreement - by implication meaning that the situation on the ground and the status of the development was to continue, instead of being overturned or changed fundamentally, as the Defendants’ counterfactual suggests.

58.Mr Yu SC argued that the Court should not be rewriting the Agreement by contemplating performance in any way other than as provided for under the Agreement. However, in this context, it is pertinent to recall the observations made by Ribeiro PJ in the CFA Judgment (at para 126), that the orders made by the enforcing court are more flexible and that the court is able to fashion an “appropriate remedy” in order to give effect to the Award. It is the Award which is being enforced by this Court. In my view, as distinct from an order to enforce the Agreement, and what the parties should be ordered to do to perform the Agreement, an order to enforce the Award need not be hamstrung in the same way, and the Court can give a fit, appropriate and just remedy which takes into account all the circumstances in which the Award was made, at the time it was made.

59.Even the tribunal recognized the need for flexibility, as it made it clear, after having been appraised of the progress already made in the development of the Land, that with regard to the performance of the Agreement and the change in circumstances and the uncertainties which made performance difficult, it required “close cooperation between the parties and reasonable efforts to seek alternative approaches to meet the purpose of the Agreement”. This indicates that the tribunal could not have been envisaging the strict adherence to the precise terms of the Agreement, when “continued performance” was ordered.

60.In my judgment, the tribunal’s reference to the parties’ continued performance and to their exerting “reasonable efforts in good faith to perform the Agreement completely and fully” must be a reference to their doing so on the basis of the conditions and the situation as at the date of the Award.

61.The Defendants have made submissions, that the Plaintiff has presented no evidence to suggest that the 1^st and 2^nd Defendants would have been able to procure the transfer of the 4^th Defendant’s Shares to the Plaintiff, or that the Eton Group must be able to reverse the effect of the Restructuring, such that the Plaintiff cannot claim that it would have been able, had the Award been performed, to reap the profits and benefit of the development. Its repeated complaint is that the Plaintiff has ignored the fact that the Plaintiff had to carry out many other acts under the Agreement before it could have compelled the 1^st and 2^nd Defendants to transfer the Shares to it.

62.However, the 1^st and 2^nd Defendants’ inability to transfer the Shares of the 4^th Defendant, and the Plaintiff’s inability to perform its part of the Agreement, were largely if not entirely due to the Defendants’ own fault and breach of the Agreement. It lies ill in their mouth now to complain of these inabilities or impossibilities, when it was they which had prevented the Plaintiff from performing its part under the Agreement. By accepting their case, the Court would effectively be permitting the Defendants to benefit from their own breach, and this cannot be condoned.

63.I do not consider that the decision in British Gas Trading Ltd v Shell UK Limited [2020] EWCA Civ 2349 is of assistance to the Defendants in this case, in their criticism of the counterfactual proposed by the Plaintiff. In British Gas, the Court applied the cardinal principle of assessing damages for breach of contract, as established in Robinson v Harman, that the innocent party is entitled to be put in the same position as he would have been in if the defendant had not broken the contract. The court reaffirmed that this requires a careful analysis of the contract. At paragraph 77 of the judgment of Lord Justice Males, it was explained:

“Damages must therefore be assessed on the basis that the party in breach had performed its obligation. That is not, or at least is not necessarily, the same as saying that damages should be assessed as if the party in breach had taken steps to avoid being in breach of contract in the first place.

As Toulson LJ emphasised in Durham Tees Valley Airport, it is therefore of critical importance to construe the contract in order to identify the obligation of which the defendant is in breach. ...” (Emphasis added)

64.British Gas was clearly and succinctly explained in McGregor on Damages, at para 8-142A:

“In that case, the Court of Appeal held that sellers of gas under long term agreements had breached terms of those agreements that obliged the sellers to maintain a capacity to deliver natural gas at a specified rate. Although the sellers had met their delivery obligations to the buyers, the buyers argued that in order to avoid being in breach of their capacity obligation the sellers would have served variation notices reducing the capacity which they were required to maintain, which would in turn have reduced the price to the buyers by £61 million. Males LJ, in the leading judgment, held that the relevant counterfactual was what the sellers were required to do, which was to maintain the relevant capacity, even though this was impossible for them to do. The counterfactual was not concerned with what the sellers might have done if they had known that they were in breach, but did not do, namely to issue variation notices. Hence, only nominal damages could be awarded. Both Andrews LJ and Peter Jackson LJ recognised the curiosity of this conclusion, which arises because performance was impossible and if the sellers had known that they were in breach then their likely action may have been to issue the variation notice. But the normal measure of damages entitles a buyer to the value of performance promised even if it is impossible. And the counterfactual for the recovery of consequential losses depends upon a finding of what would have happened if the seller had not been in breach. It does not ask what would have happened if the seller had known that it would be in breach.”

65.The decision thus focused on the importance of identifying the obligation of which the defendant is said to be in breach. The counterfactual to be considered then is that the defendant had performed that obligation. The fact that the relevant obligation could not in actuality have been carried out is not material. The particular facts of British Gas illustrated the point that the counterfactual was not concerned with what the sellers might have done if they had known they were in breach. The variation notices which the sellers should have served were found not to be a contractual obligation of the sellers, and were hence irrelevant. The further act which could have been done by the party in breach, but had not been carried out, does not arise on the facts of the present case to be relevant to the counterfactual being considered.

66.Applying British Gas to this case simply means that the obligation of which the 1^st and 2^nd Defendants were in breach under the Implied Promise is their obligation to continue to perform the Agreement in 2006 in order to meet the purpose of the Agreement. The relevant counterfactual is simply that the 1^st and 2^nd Defendants would have procured the transfer of the Shares of the 4^th Defendant to the Plaintiff, to enable the Plaintiff to obtain the benefits of the development of the Land held by the 5^th Defendant. The fact that it was no longer possible to procure the transfer of the Shares is irrelevant for the Court’s assessment of damages. If it was claimed that development of the Land was for some reason also impossible, this would likewise be an irrelevant consideration. Whether the Land could be developed on the basis of the Plaintiff’s design similarly makes no difference.

67.The Plaintiff has pointed out that under the express terms of the Agreement, it was free to decide the development details of the Land. There was nothing in the Agreement which required the Plaintiff to build in accordance with its design only. The development of the Plaintiff’s design might have been what the Agreement and the parties had contemplated in July 2023 when the Agreement was executed, but as Mr Man sought to emphasize, it was not and could not be what the Award ordered in October 2006. I agree.

68.The Plaintiff’s witness, Mr Xu, stated in his evidence that if the Award had been performed by the Defendants, the Plaintiff would simply and realistically have adopted the Defendants’ design and continued the development on the Land based on that design. As Mr Man stressed, it follows from such evidence that the Plaintiff would have obtained the profits of the actual development based on the Defendants’ design, and it would be absurd for the Defendants to suggest to the Court that if the Defendants had complied with the Award in October 2006, the Plaintiff would have demolished what had already been built by the Defendants on the basis of their approved design, terminated all the sale and purchase agreements made with purchasers in October 2006, and have a new development built from scratch, on a design of its own.

69.The Plaintiff’s cause of action is for breach of the Implied Promise, and the Implied Promise could only have been made by the time the Award was issued in October 2006. The Plaintiff’s claim for damages is not for breach of the Agreement made in 2003. The counterfactual must be as if the Defendants had performed in accordance with the Award in 2006, and the position in which the Plaintiff would have been, in 2006. The Court considers the position then, and fashion a remedy for the Plaintiff which would give effect to the Award and be appropriate, and realistic, in those circumstances in 2006. In enforcing the Implied Promise to abide by an arbitral award, the Court cannot order what would be seen and regarded by commercial businessmen to be unrealistic, or impractical, to the extent of being non-sensical.

70.In conclusion, I accept the counterfactual propounded for the Plaintiff, that damages should be assessed on the basis that the Plaintiff would, in 2006, have been in a position to have obtained the Shares in the 4^th Defendant and be entitled to obtain the earnings from the development of the Land, this being the entire purpose of the Agreement at the time when it was made and as accepted by the tribunal in the Award. The counterfactual proposed for the Defendants, that damages should be assessed on the basis of the profits the Plaintiff would have made from its development of the Land, according to the Plaintiff’s design and not the 5^th Defendant’s, and to be assessed not as at the date of the Award but as at 30 April 2005, is more theoretical than realistic. It is not consistent with the aim of the enforcing Court when it is endeavouring to grant a remedy to compensate a claimant in circumstances when it has clearly suffered loss as a result of the defendant’s breach.

71.The further argument made for the Defendants is that to allow damages on the Plaintiff’s counterfactual, without any evidence from the Plaintiff as to its own case of the development costs and earnings, would amount to seeking the Defendants’ disgorgement of profits. This, the Defendants argued, was impermissible when damages for breach of contract should be compensatory of the claimant’s true loss, and it has not been shown that there are exceptional circumstances in this case to warrant damages being assessed on any different basis.

72.It was emphasized for the Defendants that there had never been any guarantee that had the Award been performed, the Plaintiff would have obtained the same profits on the development as the 5^th Defendant had, because much would depend on the specific steps taken by the Plaintiff in furtherance of the Agreement, the design the Plaintiff was to adopt, the extent to which it was able to carry out the development, and the costs involved in the construction on the Land in accordance with the Plaintiff’s own design. Counsel for the Defendants further placed reliance on the principles set out in One Step (Support) Ltd v Morris-Garner [2019] AC 649, that compensatory damages for breach of contract are generally are not the same as the economic value of the right to performance, as an asset. The Court should not award damages designed to deprive the contract breaker of any profit he may have made as a consequence of his failure in performance.

73.One Step concerned damages for the breach of covenants not to compete, and the essential question for the Court was whether the claimant was entitled to damages assessed by reference to the amount which would notionally have been agreed in hypothetical negotiations between reasonable parties as the price for releasing the defendants from their covenant obligations. It was held that “negotiating damages” were only available where, because the breach of contract for which damages were sought had resulted in the loss of a valuable asset created or protected by the right infringed, and the damages so assessed would effectively be compensating the claimant for his true loss. The Court considered in One Step that the relevant defendants’ breach of contract had not resulted in the loss of a valuable asset. The claimant should only be entitled to damages for the loss of profits and goodwill resulting from the defendants’ competition in breach of covenant, and however difficult the quantification may be, the loss should be assessed in the conventional manner, by measuring as accurately as could be done on the available evidence, the financial loss which the claimant had actually sustained.

74.As Lord Reed himself observed in One Step, “a case is only an authority for what it actually decides”. Paragraph 1 of his judgment sets out the issue considered in One Step: “in what circumstances can damages for breach of contract be assessed by reference to the sum that the claimant could hypothetically have received in return for releasing the defendant from the obligation in which he failed to perform?” The particular type of breach, and the type of “negotiating damages” considered in One Step, do not arise in the present case. However, the judgment of Lord Reed set out a detailed and useful analysis of the different categories of damages awarded for breach of contract, for tortious invasion of rights to tangible property, and for infringement of intellectual property rights, as well as the general principles governing common law damages, and damages in equity. Some of the passages have been relied upon by Counsel for the Defendants, and other passages have been relied upon by Counsel for the Plaintiff. It is of assistance to consider the relevant observations on damages, as a whole.

75.At paragraphs 34 to 38 of Lord Reed’s judgment, important general principles are set out:

“34. The compensatory nature of damages for breach of contract, and the nature of the loss for which they are designed to compensate, were explained by Lord Diplock in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 848-849. As Lord Diplock stated, a contract is the source of primary legal obligations upon each party to it to procure that whatever he has promised will be done is done. Leaving aside the comparatively rare cases in which the court is able to enforce a primary obligation by decreeing specific performance of it, breaches of primary obligations give rise to “substituted or secondary obligations” on the part of the party in default. Those secondary obligations of the contract breaker arise by implication of law:

‘The contract, however, is just as much the source of secondary obligations as it is of primary obligations ... Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of the contract breaker to which it gives rise by implication of the common law is to pay monetary compensation to the other party for the loss sustained by him in consequence of the breach ...’ (p 849)

35. Damages for breach of contract are in that sense a substitute for performance. That is why they are generally regarded as an adequate remedy. The courts will not prevent self-interested breaches of contract where the interests of the innocent party can be adequately protected by an award of damages. Nor will the courts award damages designed to deprive the contract breaker of any profit he may have made as a consequence of his failure in performance. Their function is confined to enforcing either the primary obligation to perform, or the contract breaker’s secondary obligation to pay damages as a substitute for performance (subject, according to the decision in Attorney General v Blake, to a discretion to order an account of profits in exceptional circumstances where the other remedies are inadequate). The damages awarded cannot therefore be affected by whether the breach was deliberate or self-interested.

36. It follows from the principle in Robinson v Harman that the language of election is not appropriate in a discussion of the quantification of damages for breach of contract. The objective of compensating the claimant for the loss sustained as a result of non-performance (an expression used here in a broad sense, so as to encompass delayed performance and defective performance) makes it necessary to quantify the loss which he sustained as accurately as the circumstances permit. What is crucial is first to identify the loss: the difference between the claimant’s actual situation and the situation in which he would have been if the primary contractual obligation had been performed. Once the loss has been identified, the court then has to quantify it in monetary terms.

37. The quantification of economic loss is often relatively straightforward. There are, however, cases in which its precise measurement is inherently impossible. As Toulson LJ observed in Parabola Investments Ltd v Browallia Cal Ltd (formerly Union Cal Ltd) [2010] EWCA Civ 486; [2011] QB 477, para 22:

‘Some claims for consequential loss are capable of being established with precision (for example, expenses incurred prior to the date of trial). Other forms of consequential loss are not capable of similarly precise calculation because they involve the attempted measurement of things which would or might have happened (or might not have happened) but for the defendant’s wrongful conduct, as distinct from things which have happened. In such a situation the law does not require a claimant to perform the impossible, nor does it apply the balance of probability test to the measurement of the loss.’

An example relevant to the present case is the situation where a breach of contract affects the operation of a business. The court will have to select the method of measuring the loss which is the most apt in the circumstances to secure that the claimant is compensated for the loss which it has sustained. It may, for example, estimate the effect of the breach on the value of the business, or the effect on its profits, or the resultant management costs, or the loss of goodwill: see Chitty on Contracts, 32^nd ed (2015), paras 26-172 - 26-174. The assessment of damages in such circumstances often involves what Lord Shaw described in Watson, Laidlaw at pp 29-30 as ‘the exercise of a sound imagination and the practice of the broad axe’.

38. Evidential difficulties in establishing the measure of loss are reflected in the degree of certainty with which the law requires damages to be proved. As is stated in Chitty, para 26-015:

‘Where it is clear that the claimant has suffered substantial loss, but the evidence does not enable it to be precisely quantified, the court will assess damages as best it can on the available evidence.’

In so far as the defendant may have destroyed or wrongfully prevented or impeded the claimant from adducing relevant evidence, the court can make presumptions in favour of the claimant. The point is illustrated by the case of Armory v Delamirie (1721) 1 Str 505, where a chimney sweep’s boy found a jewel and took it to the defendant’s shop to find out what it was. The defendant returned only the empty socket, and was held liable to pay damages to the boy. Experts gave evidence about the value of the jewel which the socket could have accommodated, and Pratt CJ directed the jury

‘that, unless the defendant did produce the jewel, and shew it not to be of the finest water, they should presume the strongest against him, and make the value of the best jewels the measure of their damages: which they accordingly did.’”

(Emphases added)

76.The judgment then continued with a discussion on damages awarded in lieu of injunctions, which involve an award of damages based on the value of the right infringed, such right being treated as an asset with a commercial value. In this context, there was an analysis of whether the method of assessment of damages in the Wrotham Park case [1974] 1 WLR 798 could be justified on compensatory principles. At paragraph 59, His Lordship referred to the judgment of Bingham MR in Jaggard v Sawyer [1995] 1 WLR 269, 281-282 and observed:

“59. That analysis [of restitution being the basis of the award of damages] was rejected in Jaggard v Sawyer. Bingham MR, with whose judgment Kennedy LJ agreed, stated at [1995] 1 WLR 269, 281-282:

‘I cannot, however, accept that Brightman J’s assessment of damages in the Wrotham Park case was based on other than compensatory principles. The defendants had committed a breach of covenant, the effects of which continued. The judge was not willing to order the defendants to undo the continuing effects of that breach. He had therefore to assess the damages necessary to compensate the plaintiffs for this continuing invasion of their right. He paid attention to the profits earned by the defendants, as it seems to me, not in order to strip the defendants of their unjust gains, but because of the obvious relationship between the profits earned by the defendants and the sum which the defendants would reasonably have been willing to pay to secure release from the covenant.’

He continued, in a passage of wider significance to the issues in the present case, by citing with approval a passage in the judgment of Megarry V-C in Tito v Waddell (No 2) [1977] Ch 106, 335, when he said, in relation to Wrotham Park Estatee case:

‘If the plaintiff has the right to prevent some act being done without his consent, and the defendant does the act without seeking that consent, the plaintiff has suffered a loss in that the defendant has taken without paying for it something for which the plaintiff could have required payment, namely, the right to do the act. The court therefore makes the defendant pay what he ought to have paid the plaintiff, for that is what the plaintiff has lost.’

60. Millett LJ commented at p 291:

‘It is plain from his judgment in the Wrotham Park case that Brightman J’s approach was compensatory, not restitutionary. He sought to measure the damages by reference to what the plaintiff had lost, not by reference to what the defendant had gained. He did not award the plaintiff the profit which the defendant had made by the breach, but the amount which he judged the plaintiff might have obtained as the price of giving its consent. The amount of the profit which the defendant expected to make was a relevant factor in that assessment, but that was all.’”

(Emphases added)

77.In One Step, after analyzing the different bases for awards of damages for different categories of breaches, Lord Reed in his judgment pointed out in his conclusions, first at paragraph 91, that damages for breach of contract depend on considering the outcome if the contract had been performed. Paragraph 95 of the judgment then sets out a summary of the conclusions reached by His Lordship. Of relevance is the conclusion made that there may be different methods of and approaches to quantifying damages, and in the case (by way of example) of awarding damages in lieu of an injunction or in substitution for specific performance, it is for the court to judge what method of quantification, in the circumstances of the case before it, will give a fair equivalent for what is lost by the refusal of an injunction or order. At paragraph 96(6), Lord Reed explained that common law damages for breach of contract are intended to compensate the claimant for loss or damage resulting from the non-performance of the obligation in question, and that they are normally based “on the difference between the effect of performance and non-performance upon the claimant’s situation”.

78.Applying the general principles on the award of damages for breach of contract as observed in One Step, the obligation under the contract has first to be identified, and in the present case, such obligation under the Implied Promise has already been identified to be the duty to continue to perform the Agreement. Following the principle of compensating the Plaintiff for the loss sustained as a result of the non-performance of such obligation, the Court should then consider the difference between the Plaintiff’s actual situation and the situation in which it would have been if the primary contractual obligation under the Award had been performed. In monetary terms, the Plaintiff’s loss would be the profits from the development of the Land if the Defendants had continued to perform the Agreement, and transferred or procured the transfer of the Shares to the Plaintiff - irrespective of whether such transfer was possible, and whether or not the 1^st and 2^nd Defendants had further interests in the 4^th and 5^th Defendants as a result of the Restructuring. As Mr Man submitted, the fact that such loss of the Plaintiff coincides with or mirrors the amount of the 5^th Defendant’s profits does not mean that damages have been designed to deprive the Defendants of their profits, or to order them to disgorge their profits made as a consequence of their failure in performance. Nor does it, per se, mean that the Plaintiff is entitled to an order for restitution. As illustrated by the examples used in Lord Reed’s judgment in One Step, the consideration and use of the 5^th Defendant’s profits in the assessment of damages is only a tool utilised, or technique of estimation employed in the exercise, for arriving at the value of the Plaintiff’s true loss. The Court is simply doing its best (with “the exercise of a sound imagination and the practice of the broad axe”) to quantify such loss, when it is clear that the Defendant’s non-performance of the Agreement has resulted in substantial loss and damage to the Plaintiff.

79.On Mr Man’s submission, the Court should assess damages as best it can on the evidence available, and this is so even if the evidence does not enable the Plaintiff to precisely quantify its loss. Citing Chitty on Contracts (34^th edn) paragraph 29-019, it was submitted that the loss of profits suffered by the claimant as a result of a defendant’s breach of contract frequently depends on many speculative factors, but the courts will always attempt to assess the amount of the loss, as best it can. The law does not require a claimant to perform the impossible, nor does the Court apply the balance of probability test to the measurement of the loss.

80.I also accept Mr Man’s further submission, that the Court will not allow difficulty of estimation to deprive a plaintiff of a remedy to which it is found to be clearly entitled, particularly where that difficulty is itself the result of the defendant’s wrongdoing. In the process, the Court is aided by the principle of reasonable assumptions, and it is fair to resolve uncertainties about what would have happened but for a defendant’s wrongdoing, by making reasonable assumptions which err on the side of generosity to the plaintiff where it is the defendant’s wrongdoing which has created those certainties (Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] 1 All ER 1321, para 188).

81.In the present case, it has been pointed out by the different levels of the Hong Kong Court that the alleged impossibility of transferring the Shares of the 4^th Defendant to the Plaintiff was solely as a result of the Restructuring of the Eaton Group, and this was entirely the Defendants’ own and deliberate doing and procuring. If the Defendants seek to claim and rely on the fact that the Plaintiff had not carried out any part of what had been envisaged to have been performed by the Plaintiff under the Agreement, such as using its design to build the development and thereafter taking steps to continue the development on the Land, these were completely due to the Defendants’ own refusal to deliver the Land to the Plaintiff, and the Defendants’ wrongful termination of the Agreement at the early stage of the development.

82.In conclusion, I am prepared to accept Mr Man’s approach of assessing damages, by looking at what the Defendants had made by way of profits from the development of the Land, and treat these as reflective of the profits which the Plaintiff would have been able to obtain and receive, if only the Defendants had been in the position to transfer the Shares to the Plaintiff as envisaged by the Agreement. Ordering these profits to be paid over to the Plaintiff would compensate the Plaintiff for the Defendants’ breach and non-performance of the Implied Promise, by their failure to comply with the Award that they were to continue to perform the Agreement in 2006.

Quantum of damages

83.Mr Man’s proposition to the Court was that the Plaintiff’s damages should be equivalent to the profits generated from the 5^th Defendant’s existing development, and quantified by the value of the 4^th Defendant’s Shares which (the Plaintiff submits) is the gross development value of the 5^th Defendant’s development of the Land as at 26 October 2006, minus the costs associated with the development, which include (for the Plaintiff) the price of RMB 120 million. From the outset of these assessment proceedings, Mr Man had always taken the stance that the exercise of ascertaining the profits should be a simple one, of looking at the actual expenses incurred and deducting them from the sales proceeds actually obtained by the Defendants.

84.There are expert reports filed on issues of quantum. By order of the Court of 25 October 2022, leave was granted for expert evidence to be adduced. This was after a contested hearing, when submissions were made as to firstly, the questions to be addressed by the experts, and secondly, whether leave for expert evidence should be confined to property valuation (as submitted by the Plaintiff), or should be extended to the subjects of construction costs valuation, and accounting and tax issues (as submitted by the Defendants). After hearing the parties, the Court allowed leave for expert evidence on all the 3 subjects, and for the engagement of experts to answer the 3 questions formulated by the Plaintiff and the Defendants respectively:

(1) what would be the net profit of a development on the Land upon completion reasonably expected to be 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 (“Question (a)”);

(2) what was the gross development value (“GDV”) of the Land on 27 October 2006, on the basis of the actual development built by the 5th Defendant, and what the 5th Defendant actually achieved by way of sales (“Question (b)”); and

(3) what was the GDV of the Land on 27 October 2006, on the basis of the actual development built by the 5^th Defendant but what the 5^th Defendant ought to have achieved by way of sales having regard to the prevailing marketing conditions (“Question (c)”).

85.Pertinently, I did not include in the directions of 25 October 2022 (“October Directions”) any confinement of the expert evidence to which question or questions are to be addressed by the experts from the 3 fields. The intention was to leave it to the parties to decide for themselves whether to adduce expert evidence on any or all of the 3 questions, and which expert should (within their competence) address the questions formulated.

86.Accordingly, although leave was granted to adduce expert evidence on the 3 questions, it was always open to either party to decide whether its expert(s) were to address the questions for which leave was granted generally, to both parties. Moreover, so long as the expert has the qualification to address the 3 questions, the October Directions did not contain any restriction as to the subject matter to be addressed by which particular expert/experts. There is therefore nothing in the October Directions to confine Kong, Mao or any other expert to deal with any particular one of the 3 questions only, as Counsel for the Defendants appear to suggest. So long as a party has reasonable notice of the matters to be addressed by the expert, who is an expert to assist the Court, I see no basis or justification from the language of the October Directions to exclude accounting expert evidence on Questions (b) and (c), even if those questions were not proposed by the Plaintiff.

87.According to Annex 1 of the submissions of Counsel for the Defendants, the expert assessments of the quantity surveyors on construction costs and the assessments of the accounting experts are only relevant to Question (a). I have already rejected the use of Question (a) as the relevant counterfactual.

88.On the Plaintiff’s part, it confirmed that it will not pursue assessment of damages on the basis formulated in Question (c).

89.It should be highlighted at the outstart that in the assessment of damages in this case, the Court is not seeking to ascertain, from the 5^th Defendant’s accounts or otherwise, the actual net profits made by the 5^th Defendant from the development, and to order the Defendants to pay over these actual net profits to the Plaintiff. Instead, the Court is seeking to assess (to the best it can, on the available evidence) the profits which the Plaintiff would have been able to receive from the development of the Land, if the Defendants had continued to perform the Agreement in compliance with the Award, and proceeded to transfer the Shares of the 4^th Defendant to the Plaintiff, at the time envisaged, in October 2006. In its attempt to put the Plaintiff in a situation it would conceivably be in at the time of the Award in October 2006, on the basis that it would be nonsensical and uncommercial to expect and require the parties to demolish the buildings completed by that time and to rewind the sales already concluded, the Court has to grapple and deal with the difficulties of calculating the costs of the development and the effect of performance of various obligations under the Agreement retrospectively, when the time scheduled for payment and other performance under the Agreement had already passed, in October 2006. Faced with these difficulties and abnormalities, the Court is prepared instead to look at and include in its calculations and assessment the actual costs incurred and the actual sales proceeds received by the 5^th Defendant, on the basis of the 5^th Defendant’s design being used, as this should reasonably be the most proximate to the actual loss and damage sustained by the Plaintiff. If necessary, the Court will then make adjustments to these actual figures, on the basis that it must have been reasonably necessary for the Plaintiff to incur any further expenses and make additional expenditure before it could receive any profit. I agree with Counsel for the Plaintiff that these adjustments should be made only if it can be established to the reasonable satisfaction of the Court, on clear and credible evidence, that the expenses should reasonably be deducted or be included in the final figures.

Carparks valuation

90.The Court was informed that the parties have agreed to split the differences in the expert valuation of the carpark spaces. The remaining difference relates to the valuation of the residential units and the retail units of the development.

Residential units valuation

91.In relation to the residential units, Counsel for the Plaintiff pointed out that the Plaintiff’s expert Mr Lau and the Defendant’s expert Mr Leung have produced unit rates for 27 October 2006 which are very similar: RMB 9,200/square meter for Mr Lau’s Approach 2 and RMB 9,144/square meter for Mr Leung. The total value assessed by Mr Lau under his Approach 1 (RMB 585,461,855) and the total value assessed by Mr Leung (RMB 585,925,984) are also very close.

92.Under Approach 1, Mr Lau calculated the GDV of the residential units by multiplying the actual average sales unit rate achieved by the 5^th Defendant in September 2006, by the gross floor area of the actual development. Under his Approach 2, the GDV was calculated by multiplying the unit rate derived from adjusted sales comparables by the gross floor area of the actual development.

93.As a starting point, I am reluctant in this case to consider valuation and to make assessment on the basis of or by reference to comparables – if there is another option. This is because the actual development and the comparables used by the experts are located in Xiamen. This Court is not familiar with the location of the Land and how the development thereon actually and commercially equates with the comparables used by the experts. In Hong Kong, and no doubt elsewhere, the location of the property is of prime importance when it is valued. A residential development in Repulse Bay on Hong Kong Island can hardly be compared with a residential development in Wanchai, or in Jordan, Kowloon. Necessary and meaningful adjustments will likewise have to be made if one compares a retail development in Causeway Bay with one in Tuen Mun, or in Tsim Sha Tsui. Even with assistance from the experts, who differ in their opinions on whether the comparables are appropriate, this Court cannot make a useful correlation between the comparables and the development on the Land in question.

94.Of Mr Lau’s 2 approaches, I therefore prefer his Approach 1. This valuation of his (RMB 585,461,855) is in fact very close to Mr Leung’s (RMB 585,925,984). I will accept Mr Man’s proposal, to adopt a figure of RMB 585,693,919.50 which is the average of these 2 valuations, as a rough estimate of the value of the residential project in the hands of the 5^th Defendant as at 27 October 2006.

Retail Units valuation

95.With regard to the retail units, I have already stated my reluctance to rely on comparables and Mr Lau’s valuation included retail comparables which do not even contain specific information of the exact addresses and characteristics. On his part, Mr Leung used 2 bundled transactions of a total of 14 retail units in the actual development on the Land (“Bundled Transactions”). This basis is preferred, subject to the adjustments proposed by Mr Lau, which I will deal with below.

96.I have taken into account Mr Leung’s unsatisfactory performance in court, as he was (to the Court’s surprise) unable to explain the formula he used for calculating the adjusted unit rate of the property, which to some extent cast doubt on whether his valuation report was prepared by him and whether he had knowledge of the detailed contents thereof with regard to the valuation. His reference to and use of materials prepared by his colleague, and given to Mr Leung in the course of his giving evidence without prior leave of the Court, was totally unprofessional, and cast doubts as to whether he understood his duties as an expert of the Court. Nevertheless, as invited by Counsel for the Defendants, the Court should consider the quality of his report as a whole and decide on whether his methodology and calculations are reasoned and justified, which I have done, instead of dismissing them summarily.

97.On behalf of the Plaintiff, it was contended that it is inappropriate to rely solely on the data derived from the Bundled Transactions, which were all concluded with the same group of purchasers, within a very short time, in essentially one deal. The Plaintiff argued that it is common for purchasers to get a bulk discount from the seller, even in a good market. On his part, Mr Leung considered that a bulk discount is not necessary, when the real estate market demonstrated high activity levels and the retail market was rising rapidly in 2005. Applying common sense, I would agree that a bulk discount can be reasonably expected from a seller, even in an active market, and accept the Plaintiff’s case that a 7.5% upward adjustment is appropriate for the Bundled Transactions.

98.I have also considered Mr Lau’s evidence on the locational adjustments to the retail units on L1 and L2 respectively of the development. He has analyzed the floor plan of L1 and L2 of the development respectively, explaining how the retail units along the eastern side were most popular, those along the northern side were considered second best, and those along the southern side were considered to have the least locational advantage. Mr Lau further explained the location of and the access to the staircases and the passenger lifts, and expressed the opinion that those units with more available access to the staircases and the lifts would command better value. In particular, Mr Lau analyzed the transacted unit rates on L1 and L2, which demonstrated that there was a marked difference of 19% and 9% for the highest and lowest transacted unit rates on the two floors, and that the differences in values between the two levels showed that the locational considerations for L1 and L2 retail units were different. Mr Lau’s conclusion was that adjustments for locational differences of retail units on L1 cannot be applied to the retail units in the same location on L2.

99.In my judgment, Mr Leung was not able to give any satisfactory answer or explanation to the above criticisms made by Mr Lau.

100.On the basis of his analyses, Mr Lau made adjustments for frontage, size, and layout of the retail units of the development, and produced an adjusted valuation. I accept these adjustments, but also agree to include the post-valuation-dates transactions which Mr Leung had included. As the Defendants pointed out, there is no evidence of unforeseeable major changes in market sentiment after the date of valuation.

101.It will be for the parties to submit for the Court’s confirmation the appropriate final figure, after taking into account the adjustments I have allowed. The parties should be able to agree on small figures if there is any uncertainty in calculations.

Costs of the actual development

102.I have found against the counterfactual of assessing damages on the basis of the net profit obtainable as at 30 April 2005 on the assumption that the Plaintiff’s design was to be used. I reject 30 April 2005 being used as the relevant date, because the counterfactual should be on the basis of the Implied Promise being performed in October 2006.

103.The counterfactual contended by the Defendants involve expert evidence on the estimation of the total construction costs of a notional development to be built 20 years ago, on the basis of the limited evidence of the preliminary design plans of the Plaintiff, and is inevitably filled with inherent uncertainties. I agree with Mr Man, that it would be extremely difficult if at all possible for the Court to reconstruct the counterfactual contended by the Defendants and the costs involved with any degree of accuracy, when there is no available evidence of the concrete design and details of the features to be built, including by way of example, the windows, window frames, tiles and lifts to be incorporated in the Plaintiff’s design. Mr Man was quick to point out that this was due to the 1^st and 2^nd Defendants’ breach of the Agreement when they terminated it at an early stage of the development. This all goes towards supporting the conclusion that the Plaintiff’s counterfactual should be preferred by the Court to arrive at a fair assessment, doing the best it can in the circumstances.

104.Hence, the exercise is to ascertain the costs of the actual development which incorporates the 5^th Defendant’s design, in order to assess the net profit or the neccessary deductions to be made, as an indicator of the damages to be awarded to the Plaintiff. In this regard, the Plaintiff pointed out that the Defendants have refused and failed to produce documents of the 5^th Defendant which can show the time and price at which units of the Property were sold and the costs and expenses incurred in respect of the actual development. The Plaintiff argued that by reason of the Defendants’ failure to produce these relevant documents, adverse inferences should be drawn that the documents of the 5^th Defendant, if produced, would have exposed facts unfavourable to the Defendants.

105.On the Defendants’ part, they claim that it is the Plaintiff which has failed to produce documents to prove its own loss in the sense of its expected return and costs from/of the development, and it cannot rely on the Defendants to establish the Plaintiff’s case, nor is it entitled to draw any adverse inference against the Defendants when its own failure to prove its case should result in dismissal of its claims.

106.Whilst the Court would be prepared to adopt a pragmatic approach, and can accept that the Plaintiff must have sustained loss as a result of the Defendants’ breach, and further, to be flexible in the grant of an appropriate remedy to the Plaintiff to compensate it for its loss, I bear in mind that the general burden of proof of damage is on the Plaintiff, and am not persuaded that the Court needs to or should draw any adverse inference against the Defendants by reason only of their failure to produce the 5^th Defendant’s underlying records of sales and costs. On the Plaintiff’s case, the costs of the actual development can already be deduced from the 5^th Defendant’s audited statements and as pointed out in the preceding paragraphs, I am prepared to proceed on those figures (as a “proxy”, the term used by Counsel) to ascertain the costs of and profits from the development as built on the Defendants’ design, and not on some hypothetical figures based on a design originally envisaged but which was not finalized by the Plaintiff in 2003. I am also prepared to accept that where the Defendants dispute the costs and profits alleged or relied upon by the Plaintiff, on the basis that some other or further item of costs should be deducted from the sales income recorded in the accounts, then the Defendants have to establish their assertion, but always bearing in mind that it is the Plaintiff which has the burden to prove its case.

107.The Defendants have highlighted the fact that according to a document produced at trial and referred to as “Appendix 7”, which was appended to an Integrated Report dated 19 April 2003 on 4 pieces of land including Lot 22, the calculations, projections and estimates made of the Plaintiff’s investment in and development of the Land show estimated construction costs of RMB 152 million, and estimated sale proceeds of RMB 390 million. Based on the figures representing estimated construction costs and sale proceeds as contained in Appendix 7, the Defendants’ calculation of the estimated net profit was (according to the witness statement of Mr Mok of 17 February 2012) RMB 27 million (without taking into account any cost of finance), with construction and development costs estimated at RMB 183.6 million (equivalent to a unit rate of RMB 2,136 per square meter). The Defendants argued that these estimates were substantially lower than the damages now sought by the Plaintiff on the basis of the net profit or gross development value of the Land.

108.The Plaintiff’s evidence on Appendix 7 is that it was a document prepared by the Plaintiff in April 2003 for the reference of the 6^th Defendant. Appendix 7 was prepared at a time which coincided with the peak of the SARS pandemic affecting the region, and according to the Plaintiff, the profit projection made in Appendix 7 was on the conservative side. The Plaintiff’s own design was only produced later, in October 2003, and on the Plaintiff’s case, any estimates prepared in April 2003 were not and could not have been accurate and should not be used as the basis of assessing the Plaintiff’s actual loss or damage caused by the Defendants’ breach in 2006, by which time the development had substantially evolved. The Plaintiff’s costs expert, Wang, considered that estimates of construction costs contained in Appendix 7 cannot be accurate as it was not even prepared by quantity surveyors. The Plaintiff’s accounting expert, Kong, also considered that it was not helpful to rely on Appendix 7 as it was merely an estimate which was not supported by any actual data.

109.In my judgment, Appendix 7 is not appropriate for the exercise of assessment in this case, simply because Appendix 7 was prepared on the basis that the Plaintiff’s design was to be used. I have found that the relevant counterfactual should be on the basis that the development was to be continued, in 2006, in its actual state of the 5^th Defendant’s design having been adopted. The costs should naturally be assessed on that same basis, ie how much costs would have to be incurred to build the project on the 5^th Defendant’s design which, incidentally, the Defendants claim to be far more superior than the Plaintiff’s design and more attractive to purchasers. I would accept therefore that it would have been more expensive to build as per the 5^th Defendant’s design, than as envisaged under Appendix 7.

110.According to the 5^th Defendant’s audited statements, the costs of the actual development using the 5^th Defendant’s design were RMB 585,586,246.33. This, as summarized by the Plaintiff’s accounting expert (Kong), is derived at by deducting the net profit recorded in the accounts from the recorded sales income received by the 5^th Defendant. These costs were recorded to include project development costs (which include the land acquisition price and construction costs), taxes and other surcharges, and expenses such as for sales, management and financing.

111.On the Plaintiff’s case, various amounts have to be deducted from the total operating costs of the development as reflected in the 5^th Defendant’s accounts, when costs are considered for the purpose of assessing the Plaintiff’s damages.

112.First, the Plaintiff explained that the land acquisition price of RMB 84,962.158 (“Land Acquisition Cost”) which was shown to have been paid by the 5^th Defendant was not contractually to be borne by the Plaintiff. In support of this, the Plaintiff referred to and relies on:

(1) Article 10(2) of the Agreement, under which all costs relating to the Land (which must include the Land Acquisition Cost) which were incurred before delivery of the Land to the Plaintiff were to be borne by the 1^st and 2^nd Defendants.

(2) Article 3 of the Agreement, which provides that all shareholder loans of the 4^th and 5^th Defendant were to be waived.

(3) Article 9(1) of the Agreement, which provides that all liabilities incurred by the 5^th Defendant before 31 December 2003 were to be borne by the 1^st and 2^nd Defendants, and shall be discharged before 31 December 2003.

(4) The recitals to and provisions of the draft agreement for sale and purchase of the Shares, and of the draft assignment of debt, which provide for a mechanism to assign to the Plaintiff the 4^th Defendant’s shareholder loan owed to the 1^st and 2^nd Defendants, upon the Plaintiff’s payment of the price of RMB 120 million.

113.The Land Acquisition Cost was paid by the 5^th Defendant before 2003 through the 4^th Defendant’s equity investment (of RMB 42,969,000), and a shareholders loan from the 4^th Defendant (of RMB 41,993,158) which was funded by the 1^st and 2^nd Defendants. The Plaintiff pointed out therefore that since it was not required under the Agreement to pay any sum corresponding to the 4^th Defendant’s equity investment, and the loans to the 4^th Defendant would be discharged or assigned to the Plaintiff before the share transfer, the effect of Articles 3 and 9(1) of the Agreement is that apart from paying the price of RMB 120 million, the Land Acquisition Cost was not to be borne by the Plaintiff. This appears to be accepted by the Defendants’ accounting expert.

114.According to the Plaintiff, since the Land Acquisition Price had been recorded in the audited statements of the 5^th Defendant as being part of the total operating costs, it was necessary to deduct the sum of RMB 84,962,158 from the total costs of the development when the Plaintiff’s damages are calculated. The Plaintiff would however have to give credit to the price of RMB 120 million payable by it under the Agreement.

115.Bearing in mind the provisions contained in the Agreement which are referred to at paragraph 112 above, I accept the Plaintiff’s submissions.

116.A further issue relating to the calculation of the costs of the development is the funding costs: (1) of the price of RMB 120 million to be paid under the Agreement; and (2) of other development costs. This includes what the funding costs comprised, the duration of such funding costs, and the interest rate. The question for my consideration and determination is whether “funding cost” should be included in the calculation of the costs of the development, to be deducted when ascertaining the profit to which the Plaintiff was entitled if the Award had been performed.

117.Counsel for the Defendants have referred to the report of the Plaintiff’s accounting expert, Kong, where she opined that if the financing cost of RMB 120 million is to be taken into account, the relevant costs would be RMB 4,659,054.90. If the financing cost of development and construction costs only (and not the RMB 120 million) are to be taken into account, then Kong considered that the relevant financing costs would be RMB 2,553,630.49.

118.The Defendants argued, in the context of the ascertainment of the “net profit” of the development as may be gathered from the 5^th Defendant’s accounts, that funding costs should only be calculated with respect to development costs but not the price of RMB 120 million to be paid under the Agreement. On the Defendants’ argument, the RMB 120 million should not be counted as the cost of the land when it was the 5^th Defendant, and none of the parties to the Agreement, which was to remain the holder of the right to use the Land. On the Defendants’ case, the RMB 120 million was only the consideration which the Plaintiff had to pay under the Agreement to acquire the right to develop the Land in the name of the 5^th Defendant, and not the consideration for acquiring the Land itself. The RMB 120 million which the Plaintiff had to pay has to be taken into account when deciding the Plaintiff’s alleged loss, but from the perspective of the 5^th Defendant, the only land price is RMB 87,567,817.29.

119.Counsel for the Plaintiff in fact argued that the relevant funding costs should be negligible, since the Plaintiff would have been able, if the Award had been performed, to utilize the sale proceeds received by the 5^th Defendant to immediately repay any loan borrowed by the Plaintiff for the purpose of settling the RMB 120 million due under the Agreement.

120.In the light of the evidence and submissions, I will not give consideration to funding costs for RMB 120 million when assessing the costs which have to be incurred in the development.

121.Again, it is to be borne in mind that the expert evidence of Kong and Mao (the Defendants’ expert) were essentially on Question (a), on the premise of the completion of the development as at 30 April 2005. The counterfactual I am considering is the position in which the Plaintiff would have been, in October 2006, had the Defendants performed in accordance with the Award, at a time when the development had been completed upon the Defendants’ refusal to deliver the Land to the Plaintiff in accordance with the time schedule stipulated or contemplated under the Agreement (eg for payment of the price of RMB 120 million by the instalments provided for). I am not persuaded that the basis of Kong’s calculation of the funding cost (by reference to the time due for payment of the instalments of RMB 120 million) is applicable when the consideration is what the parties should have done by way of continued performance of the Agreement in October 2006.

122.There is the further issue of whether account should be given of the fact that there would have been funding costs of the development costs of the completion of the project (other than the land price). In this regard, I accept that in the ordinary course, it would have been necessary to arrange for funding of the works for the project, and that costs would have to be incurred some time before the actual commencement of building works, from the planning stage which would require the engagement of architects, consultants and other professionals and for the preparation of the necessary designs and submissions for approval. Mao (the Defendant’s expert) considered that funding costs would have been required around 7 months before the commencement of construction works, and construction on the 5^th Defendant’s design commenced in May 2005. Mao further opined that on the evidence, the permit for pre-sales was only obtained on 15 June 2006, sales were only completed on 27 October 2006, and interest for funding should be calculated up to 31 October 2006.

123.This is reasonably acceptable.

124.The exact calculations of funding costs were made by Kong and Mao on the basis of the figures on costs and sales revenue as estimated by the costs and property valuation experts. Counsel for the Defendants pointed out that in relation to Kong’s assessment of the funding costs, her own admission was that the floating rate of interest for loans could substantially vary amongst different enterprises, and that it was difficult to derive any uniform interest rate for a particular period of time even in relation to identical types of loans within the same industry. Kong had referred in her report to an entrusted loan advanced by an associated company of the 5^th Defendant, to support her proposition that the upward floating rate of interest should be less than 20%. On behalf of the Defendants, Counsel pointed out that this rate, for the loan from an associated company, was not representative of the interest rates offered by commercial banks and in Mao’s opinion, 20% did not represent the industry standard. In Mao’s view, an upward adjustment rate of 30% should be used instead.

125.In my considered view, Mao’s evidence makes commercial sense and I accept her opinion as to the duration of the period and the rates of interest, in respect of the funding costs for development costs apart from the land price.

126.However, there is no sufficiently clear evidence to persuade me that the legal expenses of RMB 17,298,853.29 recorded in the 5^th Defendant’s accounts for the period from 2007 to 2012 are related to the development and should be deducted as a cost of the development. The same applies to the donation expenses of RMB 8,250,000, and the recorded bad debts loss of RMB 333,000,643.31. These are not allowed.

127.There was much debate amongst the accounting experts and Counsel as to whether land appreciation tax was payable in respect of the development. However, I have been reminded by Mr Yu in Closing that this dispute concerns only Question (a) put to the experts, on the basis of the relevant counterfactual being completion of the project in April 2005 in accordance with the Plaintiff’s design. I was informed that both experts agree that land appreciation tax is payable in the counterfactual contemplated in Questions (b) and (c), with a relevant date of 27 October 2006. The experts do not dispute that land appreciation tax was payable for projects completed and sold after 1 January 2006.

128.According to the summary of the accounting experts’ assessments, there appears to be a dispute over Kong’s calculation of the land appreciation tax payable (of RMB 101,194,431.25) for Question (b). According to Mao, a sum of RMB 25,755,597.24 should be deducted from the costs actually incurred by the 5^th Defendant and as reflected in its audit reports. From my understanding of paragraph 3.7 of Mao’s supplemental report, her evidence is that upon her review of the 5^th Defendant’s audit reports, she inferred that it was “highly probable” that the 5^th Defendant had completed the settlement of the land appreciation tax in 2009, and had paid the settlement amount in 2010. The 5^th Defendant’s audit report for 2009 shows an “account payable” of RMB 25,755,597.24, but as payment of the sum was not made in 2009, it was not possible for the 5^th Defendant to obtain an invoice for the account payable in 2009, and without the invoices, the account payable would not be recognized as a deductible item for settlement of the land appreciation tax. This, Mao explained, was her “inference” drawn from the 5^th Defendant’s tax documents but she had not made further inquiries. In Mao’s opinion, when calculating the land appreciation tax payable (on the basis of the income and costs) the account payable of RMB 25,755,597.24 should be deducted from the total project development costs actually incurred by the 5^th Defendant.

129.I do not accept Mao’s opinion on the deduction to be made. What it comes to is that there were no invoices at the relevant time to support the alleged payable or costs of the development to justify deductions for the purposes of land appreciation tax. Nor has Mao or the Defendants produced for the purpose of these proceedings any documents or invoices (not available in 2009 but since obtained by the 5^th Defendant) to evidence the costs payable. It has not been established to my satisfaction that what the Defendants allege are deductible as costs should, on any evidence, be deducted.

130.Kong and Mao further disagree as to the assessment of sales and administrative expenses as an item of expense to be deducted as costs. Kong assessed sales expenses on the basis of 1.57% of the sales revenue of the actual development and administrative expenses on the basis of 1.47% of such revenue. Her approach was to take the actual expenses incurred and as shown in the 5^th Defendant’s audited accounts, and to calculate the ratio these expenses bore to the actual revenue.

131.The Defendants’ expert, Mao, assessed the sales and administrative expenses at 3.5% and 2% respectively, by adopting the percentages used by the Plaintiff in Appendix 7. The Defendants’ case is that the percentages of 1.57 and 1.47 as adopted by Kong are inappropriate, since the sales and advertising expenses of the 5^th Defendant had been kept lower because of the fact that services had been rendered to the 5^th Defendant by associated companies within the Eaton Group, and that a developer like the Plaintiff would have to incur higher costs in the absence of the support and free services of the Eaton Group companies.

132.On the Plaintiff’s part, Counsel argued that it would not be appropriate to adopt the percentages used in Appendix 7 (as Mao had done), since Appendix 7 was prepared on the basis of the Plaintiff’s design being used (instead of the 5^th Defendant’s).

133.I accept that the estimates made in Appendix 7 were based on the Plaintiff’s design which was entirely different to that of the 5^th Defendant ultimately used. Whereas I would not accept the costs estimates used in Appendix 7 at a time when the design was at a very preliminary stage of planning and as yet unfinalized, I consider that the Plaintiff’s estimates of the requisite sales and administration expenses of the development should not be vastly different, whatever the design of the buildings may ultimately be. As was pointed out for the Defendants, the Plaintiff itself was an experienced developer of properties and it should have a good idea of the projected expenses usually budgeted for the sale, administration and development of a project of the type concerned. I will accept the 3.5% and 2% budgeted by the Plaintiff itself for the sale and administrative expenses.

134.Overall, I accept the Plaintiff’s assessment of damages, but with adjustments to be made as indicated in the preceding paragraphs. The net profit from the development, assessed after deducting the necessary costs and the consideration of RMB 120 million from the sale proceeds, represents the value of the shareholding in the 4^th Defendant which the Plaintiff would have obtained under the Agreement, if the 1^st and 2^nd Defendants had performed in accordance with the Award.

Is the Plaintiff required to give credit for RMB 1,275,000?

135.In the Award, the tribunal ordered the 1^st and 2^nd Defendants to pay the sum of RMB 1,275,000 for breach of the Agreement. The Defendants now claim that the Plaintiff should give credit for this amount, which overlaps with and should be subsumed under the Plaintiff’s claim for breach.

136.I do not accept such submission. The RMB 1,275,000 was awarded by the tribunal as damages for breach of the Agreement, for delay in the Defendants’ performance, or its non-performance, of the Agreement, in circumstances when the tribunal did not accept that the Defendants’ performance could be excused by reason of illegality, or impossibility, or otherwise.

137.In this action, the Plaintiff is seeking damages for the Defendants’ breach of the Implied Promise to comply with the Award, which ordered the Defendants to continue to perform the Agreement. As the Hong Kong Courts have made it abundantly clear, this is a separate cause of action from that under the Agreement. The amount awarded by the tribunal for breach of the Agreement is not subsumed under the Plaintiff’s present claim, for breach of the Implied Promise in respect of the Award.

Interest and delay

138.Finally, there is the question of whether the Plaintiff is entitled to seek interest on the damages awarded, for the entire period from the date of the Award to the date of the judgment on assessment. The Defendants claim that there has been a total delay of 17 years from the Award to the trial on quantum, and in particular a delay of 11 years from the date of the Award to October 2017 when the Plaintiff finally elected to have judgment for damages (in lieu of the Statutory Judgment in terms of the Award).

139.Having considered the overall conduct of the parties and the manner of progress of the relevant proceedings, I am of the view that the delay in obtaining judgment on the damages claim cannot be attributed to the Plaintiff only. The Plaintiff’s claim and the proceedings commenced have been resisted by the Defendants every step of the way: consistently, relentlessly and on the whole effectively so far as causing delay, costs and difficulties is concerned.

140.As Counsel rightly pointed out, the cause of action on the Implied Promise arose in 2006 when the Award was issued. The Plaintiff had taken immediate steps to enforce the Award on the Mainland in 2007, which enforcement steps were of course strenuously resisted by the Defendants. After its unsuccessful attempts in enforcement on the Mainland, the Plaintiff commenced proceedings in Hong Kong on 31 October 2007 to apply for the Statutory Judgment. It was only in the course of the Defendants’ opposition to these enforcement proceedings that the Defendants disclosed the Restructuring for the first time, which Restructuring (according to the Defendants) made transfer of the Shares pursuant to the Agreement impossible. The Plaintiff then commenced these proceedings on 27 May 2008 as a common law action to enforce the Award (and subsequently relisted the action on the Commercial List). The amendment in December 2011 of the plea in the SOC for damages, once made, date back to the original pleading in May 2008.

141.The Defendants complain of the delay in the Plaintiff’s plea for damages which was only made in December 2011, and that the Plaintiff’s election to pursue the damages claim under the Implied Promise instead of the Statutory Judgment was only made in October 2017. According to Counsel for the Defendants, it would be unjust to compensate the Plaintiff for the period before its damages claim was properly introduced and pursued, between 2006 to 2017. According to the Defendants, until the election was made in 2017, the Plaintiff did not have proper basis to contend that it had been kept out of any money.

142.As Mr Man submitted, there is no suggestion (and it is highly dubious) that the Defendants would have immediately made payment or accepted liability for damages, if the Plaintiff had made its election earlier, and before 2017. Any delay in the election was not, on the facts of this case, the predominant cause of the Plaintiff being put out of its money, or of its being deprived of the fruits of the judgment. As Mr Man also highlighted, the Defendants had been keeping and had free use of funds which, if the Defendants had duly performed its obligations under the Award, they would not have had. The Defendants’ duty under the Award was to act in accordance with the Award, to continue to perform the Agreement or to pay damages, as the alternative of performance. The Plaintiff has been deprived of the money or the value of the Implied Promise which it ought to have received in October 2006, and it cannot be denied that the predominant cause of this is that the Defendants have been opposing the common law action on the Award persistently and steadfastly until today.

143.Given the unique facts and circumstances of the claim, and the fact that the matter has been pursued on appeal all the way to the Court of Final Appeal for resolution of the complex issues raised, I am not satisfied that the delay in this case is due to any neglect on the Plaintiff’s part to pursue its claims, or that the Plaintiff has been kept out of the fruits of the judgment in its favour by its own fault. I have only been troubled by the period of about 18 months from the time the Court of Appeal held, in April 2016, that the Defendants were liable for breach of the Implied Promise and that the Plaintiff was entitled to elect between maintaining the Statutory Judgment and obtaining a judgment for damages, until October 2017 when the Plaintiff made the election for damages. I have taken into consideration the fact that the parties made steps after the handing down of the CA Judgment to apply for leave to further appeal to the Court of Final Appeal. However, this cannot explain the delay of 18 months for the election which was finally ordered by the Court of Appeal in October 2017. Exercising my discretion, I will disallow a period of 14 months during this interim, in the Plaintiff’s claim for interest.

Conclusion

144.The sums to be awarded await the Plaintiff’s computation after making the deductions or additions as indicated in this Judgment.

145.The Court allows interest (with the deduction in time as provided for above) at the rate of prime +1% from 27 October 2006 to the date of judgment, with costs of the action for assessment of damages, including any costs reserved, with Certificate for 3 Counsel.

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, Ms Bonnie Cheng and Ms Astina Au, instructed by Mayer Brown, for the 1^st and 2^nd defendants