Honasia Ltd. v. Charter Land Ltd.

HCA019122/1998

HCA 19122/98

In The High Court Of The

Hong Kong Special Administrative Region

Court Of First Instance

Action No. A19122 Of 1998

Coram: Master de Souza in Court

Dates of Hearing: 14, 15, 16, 29 and 30 March 2000

Date of Handing Down: 19 July 2000

________________________

Assessment of Damages

________________________

Facts

1. On 15 July 1998, the plaintiff entered into an Agreement of Exchange ("the exchange agreement") with the defendant whereby it was agreed that they would exchange their respective interests in certain properties. More particularly, the plaintiff agreed to transfer its interest in the Beacon Height Properties ("the plaintiff's properties") to the defendant in exchange for the defendant's Island Centre Properties ("the defendant's properties"). The defendant was additionally required to pay to the plaintiff equality money in the sum of HK$250,000 for the exchange.

2. The plaintiff's properties comprised of a domestic flat (Flat B, 6th floor, Block 19) and 48 carparks at Beacon Heights Phase II, Nos. 1-19 & 2-14, Lung Ping Road, Shek Kip Mei, Kowloon. The defendant's interests to be exchanged were in a number of office units on several floors at the Island Centre, 470 Reclamation Street, Kowloon. Completion was contemplated to occur on 25 October 1998, but it being a Sunday, the date was moved to 26 October 1998. Pursuant to the exchange agreement, the parties took possession of each other's properties. In the event, the defendant failed to complete on 26 October 1998 and the plaintiff accepted the wrongful repudiation by the defendant on 27 October 1998. On the same day, the plaintiff vacated the defendant's properties and brought suit to recover its loss and damage occasioned by the defendant's breach on 9 November 1998. On 11 November 1998, the defendant vacated the plaintiff's properties.

3. On 1 December 1998, the plaintiff entered into a provisional sale and purchase agreement to sell the same properties to a Mr. Chan Wah Cheung for HK$10 million. The formal agreement for sale and completion followed later.

4. Interlocutory judgment by consent was entered against the defendant for damages to be assessed by order dated 11 March 1999.

The Plaintiff's heads of claim

5. The plaintiff has sought to recover the following items of loss:

The loss of bargain

6. It is as well that one starts with general principles.

7. It is settled law that where a purchaser of land fails to complete, the normal measure of damages is the contract price less the market price at the time fixed for completion, plus any consequential expenses or loss: Laird v Pim (1841) 7 M. & W. 474, York Glass Co v Jubb (1926) 134 L.T. 36. A resale price may be evidence of the market price: Noble v Edwards (1877) 5 Ch.D. 378. It is equally patent that market value is to be determined by the price obtained, or obtainable on a resale within a reasonable time of the breach: Keck v Faber, Jellet and Keeble (1915) Sol Jo 253.

8. Considerable controversy surrounded the assessment of the open market value of the plaintiff's properties. As is clear from the heads of claim and the evidence adduced in support, it was the plaintiff's contention that it had suffered a significant loss upon the resale of its properties at the price of $10,000,000 in early December 1998. Owing to a fall in demand for properties across the board that coincided with the worse market performance for decades, it was the best price that could be obtained on an open sale that had attracted very little interest. The defendant, however, submitted that the resale was essentially a forced sale or a dishonest transaction between friends and the price achieved therefore did not accurately reflect the true open market price that could reasonably have been achieved with proper marketing over a reasonable period of between 3 to 6 months. It was further contended that the plaintiff's properties were worth in excess of $16,000,000 by reference to the valuations of the defence survey and the figures from the Ratings & Valuation Department. Upon that basis, no loss should have been sustained if the plaintiff had properly mitigated its loss. In very broad terms, these then are the conflicting positions under this head of claim.

The evidence

9. PW2, Mr. Wong Chi Wai, a chartered surveyor from Lawson David & Sung Surveyors Ltd ("Mr. Wong") conducted a valuation on the properties of both parties. His valuation of the plaintiff's properties as at 26 October 1998 was the subject of much criticism and scrutiny by the defence and by its expert, Mr. Paul Dwyer, the surveyor from Chesterton Petty ("Mr. Dwyer").

10. The evidence of Mr. Wong was to the following effect.

11. In both his original and supplemental reports dated respectively 27 October 1999 and 13 January 2000, the basis of his valuation that did not escape criticism was set out. It was put to him, and he very fairly admitted, that he had omitted from his stated criteria that a purchaser should be expected to act reasonably, knowledgeably and without compulsion. In my view, this omission was in essence of no moment as his assessment of value was plainly premised upon an open market sale at arm's length. That was a consideration, the significance of which did not escape him. In discharging his brief, he was doing his professional best to provide a proper and accurate valuation and not, as was suggested, simply tailoring the figures to approximate the price at which the plaintiff's properties were subsequently sold. In my considered view, there was simply no basis for this suggestion.

12. He valued the plaintiff's flat at $3.2m. In coming to this conclusion, he had adopted a direct comparison method by reference to actual transactions and then discounting for time and noise factors. These comparables were listed in his enclosure III that Mr. Dwyer remarked he had never come across in his considerable experience in the field. Mr. Dwyer's main bone of contention was that Mr. Wong's approach had been seriously flawed, he having worked on median figures based on only on two transactions and simply attributing their differing values to time. In his view, other crucial considerations such as floor height, aspect and location had been entirely overlooked. In his view, a mathematical approach could create artificial growth over time when the general property market could well have fallen. He opined for reasons given in evidence and in his report that the flat ought to have had an open market value of $4 m.

13. It was common ground that a 10% difference in valuation between experts was regarded as permissible. As was submitted by Mr. Chain, counsel for the plaintiff, if allowance for time should not have been made by Mr. Wong (and this was not conceded), the flat's valuation would have to be increased to about $3.6m as Mr. Wong had apparently given equal weight to the two factors of time and noise. Taking the difference between the two conflicting valuations and then halving that difference as Mr. Chain submitted would indicate a revised valuation of $3.6 m. That would, he said, satisfy the 10% variation allowable between experts. I agree if it was indeed necessary to embark on such an exercise, which I deem to be unwarranted. In reality, despite the opposing views expressed by these two witnesses, their respective valuations were not so far apart and his methodology so obviously inappropriate as to suggest that Mr. Wong must have committed a serious flaw in his approach, thereby rendering his assessment wholly unreliable as suggested. Valuation is not and cannot be an exact science. I do not accept that Mr. Wong's assessment of the plaintiff's flat was erroneous. I accept his figure of $3.2 m. In this connection, I refer to the valuation of the plaintiff's first choice surveyors, CB Richard Ellis. It is interesting to note that they had considered that the flat's value as at 1 December 1998 was $3,212,000 after discounting by 20%.

14. Regarding the plaintiff's 48 carparks, Mr. Wong opined they had a value of $250,000 each as against Mr. Dwyer's figure of $300,000 per parking space. Again, direct comparables were used by Mr. Wong. In light of the very flat market obtaining at the time, the fact of bulk purchase, the properties' uniqueness and restriction on alienation to non-residents of Beacon Heights, the ratio of flats to carparks and the unattractive return on such investment at this estate, he suggested that a discount of 45% should be given. Initially, Mr. Dwyer considered that no discount should be factored in as there was and continued to be a steady demand for carparks as an investment vehicle. It was his evidence that the properties had not been properly and adequately marketed by the plaintiff. He set out his reasons for this view and then proceeded to furnish detail of expressions of interest in such investment received. After further deliberation, he considered that a discount of just 5% might have been in order. He was prepared to give 15% discount on the defendant's properties to reflect quantum purchase.

15. On the evidence, discounting by 45% is unduly pessimistic even allowing for the market condition at the time. I consider that a discount of 30% should be about right. Adopting Mr. Wong's valuation for the carparks, their valuations should be $8.4 m ($250,000 per carpark less 30% x 48 units). To that will be added the valuation of the flat, namely $3.2 m. In my considered view, a total valuation for the plaintiff's properties of $11.6 m would perhaps have been more appropriate and apt.

16. Evidence of valuation notwithstanding, it is incumbent upon me to assess the open market value of the plaintiff's properties in order to properly and fairly assess the plaintiff's recoverable loss and damage, if any.

17. As revealed, the plaintiff's properties were ultimately resold for $10 m. Mr. Yip Kin Tim of the plaintiff ("Mr. Yip") testified to his attempts to resell the property with expedition. On the evidence, I am satisfied to find that he had done what was reasonably expected of him to mitigate the plaintiff's loss and to find a another buyer at the highest price achievable given the prevailing market. Contrary to suggestion, the resale was entirely above board to a genuine buyer. It was a bona fide transaction at arm's length. As he said, and there was no reason to reject his evidence in this regard, there was a but a modicum of interest in the plaintiff's properties. He would gladly have sold at a much higher price than actually received. The plaintiff was not cash-strapped at the time as was contended. Whilst both Mr. Wong and Mr. Dwyer considered that a marketing period of between 3 and 6 months would be ideal, the fact remained that there was hardly any interest in, let alone many genuine offers to take up the plaintiff's properties. Mr. C Y Mak of the defendant ("Mr. Mak") was offered the properties at $11.3 m which he plainly viewed as a bargain. He stated that he would have snapped them up but for the defendant's inability to raise the necessary funds. It cannot go unnoticed that the defendant even at the time of the trial was still attempting without success to sell its properties and that after taking up possession and prior to re-delivering possession of the plaintiff's properties had failed abysmally to sell any of the carparks, not for want of effort and despite Mr. Mak's very considerable experience as a property investor. It is just too glib to suggest that the plaintiff could and should have waited to do better.

18. There was no obligation on and indeed the plaintiff ought not to have been required to nurse the properties until a good deal chanced along. The plaintiff had not acted unreasonably by taking up the firm offer of $10 m. In the circumstances of the case, that was the best and most reliable evidence of the true open market value of the plaintiff's properties. I so hold.

19. It was common ground that the defendant's properties had an assessed valuation of $13,950,000. I propose to adjust this figure downwards by not 15% for bulk purchase as contended for. A 5% reduction would be adequate in the circumstances to reflect their worth. But for the defendant's repudiation of the exchange arrangement, the plaintiff would have acquired properties of that value. Additionally, it would also have been paid an equalisation sum of $250,000. Mr. Pirie, counsel for the defendant contended that the equalisation money was irrecoverable. Shortly stated, the plaintiff was put to election to pursue this amount or go for damages at large. I profess to have some difficulty following this argument as this sum was pursued upon the basis that it was a benefit the plaintiff would and should have received but for the calculated repudiation of the exchange agreement. It is plainly a loss within the contemplation of the parties at the time of contract as the probable result of the breach of it or damage naturally arising from such a breach within the meaning of Hadley v Baxendale (1854) 9 Exch 341. Accordingly, I hold that the equalisation money is recoverable.

20. In sum, under this head the plaintiff is awarded damages as follow:

Valuation of the defendant's properties	$13,252,500
Plus
Equalisation money	$250,000
Less
Resale price	$10,000,000
Total	$3,502,500

Occupational rent

21. Whilst it is true as Mr. Pirie has pointed out, that the exchange agreement prohibited letting prior to completion, the plaintiff's claim was essentially based on the defendant's use of the plaintiff's properties prior to re-delivery of possession. As the defendant had free use of the plaintiff's properties in the interim, so too did the plaintiff of the defendant's properties. It would neither be fair nor just to allow a claim under this head without giving due allowance to the other side in reduction of damages. Striking a proper balance is well nigh impossible as the defendant has adduced no evidence of the extent of this set-off. This might well have been an oversight. As the following head relating to unpaid management fees, if found competent, would in effect give the plaintiff a double benefit, I propose to dismiss the claim for occupational rent.

Management fees

22. That this item and the subsequent heads of claim were expenses, loss and damage arising directly from the defendant's breach of agreement cannot be gainsaid.

23. Under the exchange contract, the party in possession was responsible for discharging management fees for the properties it occupied. Mr. Mak confessed that the defendant had not fulfilled this obligation whereas the plaintiff clearly had.

24. The defendant was in possession of the plaintiff's properties from 17 July to 11 November 1998, or 6 days short of 4 months. The carparks carried a monthly maintenance fee of $435 each whereas the flat's management fee was $2,300 per month. Four full months of unpaid fees therefore amounted to $92,720. A 6 day deduction must be accorded the defendant. Adopting a 30 day month, 6 days of unpaid fees for the carparks and the flat come to $4,636 (6 days for the flat and carparks amount to $460 and $4176 respectively). The amount allowed under this head will be ($92,720 less $4,636) $88,084.

Legal costs paid for the aborted mortgage

25. The sum of $25,038 is supported by documentary evidence and represents a necessary and wasted expenditure incurred by the plaintiff in readiness of the completion of the exchange agreement. This sum is plainly recoverable in my judgment.

Handling charge for loan cancellation

26. The evidence disclosed that the plaintiff had originally paid $40,000. The expenditure was legitimately and properly incurred for the purpose of the exchange as well. The plaintiff had made arrangement for mortgage facility with Canadian Eastern Finance Ltd and the sum was not unreasonably incurred. The claim is however for the reduced amount of $20,000 as the plaintiff through negotiations have been able to obtain a reduction by way of set-off as disclosed in Mr. Yip's testimony. I allow the claim of $20,000.

Legal costs paid for resale of plaintiff's properties

27. Under this item of claim, the amount for which reimbursement is sought is $19,210. The claim supported by evidence is competent and allowed.

Commission on resale paid to Newfortune Property Agency Co

28. The amount of $100,000 paid was challenged on the basis that the plaintiff had been spared the amount of $250,000 payable on the exchange agreement by reason of the defendant having paid the agent. An agreement between the defendant and the agent was put in by consent and it was the defendant's case that he had paid the agent $75,000 pursuant to that agreement. Mr. Chain argued that there was no supporting evidence aside from a bald assertion that $75,000 had been made over. He invited the court to reject this aspect of the evidence from the defence as the contract in question was one to which the plaintiff was not privy. There was no evidence that it was entered into with the knowledge, consent of and for the benefit of the plaintiff. With this I concur. I propose to award the full amount of the claim under this head.

Additional mortgage interest

29. Had the exchange proceeded as envisaged, the plaintiff would not have incurred this additional expenditure. The calculations have been exhibited for the period of claim, namely 27 October to 27 January 1999, the latter date being the completion of the resale. I wholly accept Mr. Yip's evidence in this regard and award the plaintiff the sum of $287,584 as claimed.

Summary of awards

30. There shall be interest at the rate of prime plus 1% on the sum of $4,042,416 from the date of the writ until the date hereof and at judgment rate thereafter until full payment.

31. As to costs, I have heard arguments from counsel. The hearing before Master Wilson was plainly aborted because of insufficient time having been allocated. The one day fixture was clearly inadequate for full ventilation of the case. The adjournment had not been occasioned through any fault of the plaintiff as was suggested. The plaintiff shall have the costs of this assessment including the cost of the hearing before Master Wilson, taxed if not agreed. I certify the hearing before me as fit for counsel's involvement.

Representation:

CL Chow & Lam

Ruby Yeung & Co.