Professional Builders Investment Ltd. v. Wabo Ltd.

HCA003869/1998

HCA3869/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3869 OF 1998

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Coram: Deputy High Court Judge Muttrie in Court

Dates of Hearing: 21-24 January 2002

Date of Judgment: 4 February 2002

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J U D G M E N T

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1.By a sale and purchase agreement ('the Agreement") dated 25 March 1997 the defendant agreed to sell and the plaintiff agreed to purchase shop premises at Shop 80, New Mandarin Plaza, 14 Science Museum Road, Tsim Sha Tsui East ("the Property"). The price was $60,000,000. Pursuant to the Agreement the defendant assigned the Property to the plaintiff by a written assignment dated 3 July 1997.

2.The Property was sold subject to an existing tenancy and it was declared that a certified copy of the tenancy agreement had been considered by the purchaser prior to the signing of the Agreement. The tenant was Watch Gallery Ltd with which the defendant had entered into a tenancy agreement for three years from 1 December 1994 to 30 November 1997 with an option to renew for one year. The rental was $420,000 per month. Clause 24 of the tenancy agreement provided as follows :

"If the Tenant shall not less than six months before the expiration of the term of the tenancy hereby granted give to the Landlord notice in writing of its desire to take a further tenancy of the Premises...., then the Landlord will let the Premises to the tenant for a further term of one year from the date of expiry of the said term hereby created on the same terms and conditions as herein contained except this clause for renewal and except that :

(i) The amount of the deposit shall be in the amount equivalent to the aggregate of two times the new monthly rent and the necessary deposit of the new air-conditioning and management charges;

(ii) The amount of air conditioning and management charges shall be at the then prevailing rate;

(iii) The new monthly rent payable shall be the then prevailing market rent exclusive of rates, air-conditioning and management charges and other outgoings; and

(iv) The new rent, air conditioning and management charges shall commence to be payable immediately upon commencement of the further term."

3.The Agreement contained the following Clause 31 :

"(a) If the existing tenant elects to exercise its option right of renewal under the Tenancy, it is the responsibility of the Vendor at its own costs and expenses to conduct negotiation with the existing tenant as to the applicable rent for the option period. The Vendor realises the standing instructions of the Purchaser and will use its best endeavour to strike for an increase of rental from the existing tenant at a minimum rate of 15% of the current rental.

(b) If the existing tenant elects not to exercise its option right or that on exercising its option right, there is no compromise between the existing tenant and the Vendor on applicable market rent whereas it is adjudged that the market rent for the renewal period falls below $420,000.00 per month, the shortfall in rental and/or damages suffered by the purchasers therefrom shall be compensated by the Vendor to the Purchaser on full indemnity basis.

(c) The Vendor is aware of the intention of the purchaser in sub-dividing the Property into such number of units as may be determined by the Purchaser and such partition would be physically carried out after the existing tenant has vacated the property. In any event, the Vendor will do all necessary acts and execute all necessary documents to facilitate and cope with the intentions of the Purchaser which include but are not limited to :-

(i) procure the existing tenant to enter into such corresponding numbers of new tenancy agreements as may be determined by the Purchaser for the option period respectively for the partitioned premises (if so required) with the Purchaser and/or its nominees, and

(ii) procure consent to be given by all relevant authorities/institutions with regard to such proposed sub-division

(d) The above are essential terms of the sale and purchase of the Property and the terms shall survive completion of the sale and purchase."

4.On 25 June 1997 the plaintiff's solicitors wrote to the defendant's solicitors asking for confirmation whether the tenant had given notice of renewal and, if it had, the new rental. The defendant's solicitors replied on 26 June 1997 that their client was engaged in numerous negotiations, that the defendant's obligations under Clause 31 of the Agreement survived completion and that they would advise the outcome when they had instructions. In the meantime, the parties went ahead with completion on 3 July 1997. Then on 29 July the defendant's solicitors wrote to the plaintiff's solicitors that the tenant had not given any notice of renewal, and that they considered that the tenant would not exercise its option to renew. The letter continued in the following terms :

".....We are instructed to inform you that there is an intended tenant for renting the above property at a monthly rental of $420,000 for the term of one year commencing from 1st December 1997. Kindly take your client's instructions as to whether the terms of the proposed tenancy mentioned above are acceptable to them and confirm the same to us within 7 days from the date hereof. In case the same are acceptable to your client, please also prepare a draft tenancy agreement within 7 days from the date hereof so that your client and the proposed tenant can sign the tenancy agreement as soon as possible. In case your client does not accept the proposed tenancy within the said 7 days' notice, we must stress that our client would in that event consider its obligation under Clause 31 of the said Agreement for Sale and Purchase discharged."

5.There was no further communication between the parties until 27 October 1997 when the plaintiff's solicitors wrote to the defendant's solicitors to the effect that the tenant had asked for early determination of the existing tenancy on 1 October 1997, which the plaintiff had refused, notifying them that it was unlikely that the tenant would renew, and reserving the plaintiff's rights to indemnity under Clause 31 of the Agreement. This was followed by a letter of 5 November, enclosing a letter dated 25 October by which the tenant delivered up vacant possession of the Property and returned the keys to the plaintiff.

6.Nothing was heard from the defendant's solicitors. The plaintiff changed solicitors and its new solicitors wrote to them on 5 December 1997 and 8 December 1997 to the effect that the plaintiff had done its best to find a new tenant but in vain and claiming indemnity under Clause 31. The defendant's solicitors on 11 December 1997 replied to the effect that the defendant had been able to identify a substitute tenant, that this had been communicated to the plaintiff through its solicitors, and that by reason of the plaintiff's inaction the defendant's obligation under Clause 31 had been fully discharged.

7.The plaintiff now claims damages for breach of Clause 31(b) of the Agreement. The defendant denies any such breach and says that a number of implied terms are to be implied into the Agreement, as to the plaintiff's duties if the existing tenant did not exercise its option to renew the tenancy, namely that :

(1) the defendant could discharge its obligations to compensate the plaintiff by introducing a tenant which was willing to pay at least $420,000 per month for one year;

(2) the plaintiff should take all steps to let out or accept offers for letting the property for rental either in its original form or in partitioned sub-units;

(3) the plaintiff could not without reason refrain from accepting or considering any offer of letting from any potential tenant willing to pay the guaranteed rental for at least one year;

(4) the plaintiff would take all reasonable steps to avert any avoidable loss or damage; and

(5) if the plaintiff was in breach of any of these implied terms, the defendant would be released from any further liability under Clause 31(b) or would be released to the extent of any loss which the plaintiff could have avoided if it had performed them.

8.In addition the defendant says that on a proper construction of the Agreement, the defendant could discharge its obligations by introducing a tenant willing to pay at least $420,000 per month for one year. The defendant also says that it was only liable to compensate the plaintiff for loss caused by the tenant not exercising the option and any loss was not caused thereby, but by the plaintiff's unreasonable conduct in refusing to let the property to the intended tenant which the defendant had introduced.

9.The plaintiff denies the implied terms and the construction contended for but avers that even if it was obliged to mitigate its loss, in fact it did take all reasonable steps do so.

10.The plaintiff's evidence, in brief, is that because of an administrative failure either on the part of its solicitor or its own staff, the responsible director concerned, Madam Lin, did not see the letter of 29 July 1997 until November 1997, although a fax copy had been sent by the solicitors to the plaintiff's Singapore office and received by a Mr Michael Lim there. When the plaintiff knew that the tenant would not renew the tenancy, in October 1997, it caused the Property to be advertised for letting or sale but, because of the Asian financial crisis, simply could not do so until September 1999 when it was able to lease the property for three years at a monthly rent of $103,000. The defendant's evidence comes from a Madam Hon, who has control of it and a number of other property companies; she says that the intended tenant was a joint venture between one of her companies, which is an estate agent, and another estate agent. The offer was a genuine one and the joint venture would have been good for the rent and term offered.

11.The main disputes on the evidence are as to the truth of the plaintiff's contention that it did in fact seek to mitigate its losses, whether or not it was required to, and secondly as to whether the new tenant was a genuine tenant which would have been good for the rent and term offered. Before looking at the evidence in any detail it is necessary to deal with the various points of law, because only if the plaintiff was under a duty to mitigate its loss will it be necessary to decide whether or not it did so, and only if the defendant could discharge its obligations by putting forward a substitute tenant will it be necessary to consider whether that tenant would have been good for the rent and term offered.

Construction of the Agreement

12.Before deciding whether terms are to be implied into the Agreement it is necessary to consider the effect of Clause 31 as it stands. For the principles of interpretation it is helpful to refer to the passage by Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] WLR 896 at 912 which sets them out in detail :

"I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 3 All ER 237 at 240-242, [1971] 1 WLR 1381 at 1384-1386 and Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co [1976] 3 All ER 570, [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of 'legal' interpretation has been discarded. The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945.

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:

'... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.'"

13.When they entered into the Agreement the parties knew that there was a tenant which was nearing the end of its term. There was an option to renew, and the tenant must have been expected to exercise it, and to be good for the term and the rent, or there would have been no need for Clause 31; the parties could have simply agreed to buy and sell at an appropriate price taking into account that no rent would be coming in after 30 November 1997. As it was, the plaintiff was to pay $60,000,000 for the Property but it could reasonably expect to recover rent from the tenant. The plaintiff was to take over as landlord and so would expect in any event to recover rent from the date of completion, 3 July 1997, to the date of termination of the tenancy, 30 November 1997, i.e. five months' rent or $2,100,000.

14.As to what would then happen, either the tenant would renew, or it would not. If it did, the tenant wanted at least the $420,000 per month which the tenant was currently paying, or $5,040,000 for the 12 months. The defendant agreed by Clause 31(a) to negotiate for 15% more. In the nature of things it could not guarantee the outcome but it would obviously be under a duty to get the best rent it could. If it could only get a "market rent" less than agreed, the defendant by Clause 31(b) agreed to indemnify the plaintiff for the shortfall. That is simple enough. But the question is, what was to happen if the tenant did not renew at all? Was the defendant liable to indemnify the plaintiff for a shortfall of $420,000 per month?

15.The defendant argues that this was not an unconditional clause providing for payment in any event. It would only oblige the defendant to pay if the plaintiff suffered damages. The sub-clause mentions "market rent" as well as "shortfall in rental and/or damages". The "market rent" comes in by reference to the tenancy agreement, for that is what the existing tenant is to pay under Clause 24 thereof, though there is no provision as to how the market rent is to be decided or adjudged as between landlord and tenant. "Damages" could not refer to the shortfall. To that extent to use the words of Lord Hoffmann, "something must have gone wrong with the language" of the Agreement.

16.The defendant had no means of ensuring that the tenant would renew, and no means of ensuring that if the tenant did renew, it would never default. If the existing tenant did renew, say for $300,000 per month, but then defaulted, there is no provision for indemnity for the default. The defendant did not undertake to ensure that the plaintiff actually received $420,000 per month, come what may. However, the interpretation for which the plaintiff contends in effect means that the defendant said to the plaintiff "If the market rent which the existing tenant will pay you on renewal is less that $420,000, (say $300,000) we will indemnify you for the difference; if the tenant defaults we will not indemnify you for that, and $120,000 is all you will get; but if the tenant will not renew at all, we will indemnify you for the full $420,000, irrespective of what the rent obtainable in the open market may be."

17.This, to my mind, flouts business common sense. The plaintiff argues that Clause 31(b) was, or was analogous to, a contract of insurance in that it depended entirely on the tenant's exercise of its option, an event over which neither party had control. That is an attractive argument but I cannot see why, in the light of the market as it then stood and the parties' knowledge of that market the defendant would have agreed to insure the plaintiff in this way, or why the plaintiff would have seen the need for such insurance. There were, at least when the Agreement was signed, plenty of potential tenants in the market. As I see it the only arrangement which would not flout business common sense would be one whereby the defendant would indemnify the plaintiff for the difference between $420,000 and a lower market rent, obtainable either from the existing tenant or if that tenant would not renew, from another tenant. Only if no tenant could be found, so that in effect the market rent was zero, would the defendant be liable for the full amount. It is difficult to interpret the words of Clause 31(b) in this way, but as I have indicated, something must have gone wrong with the language of the Agreement and therefore it is necessary to consider whether terms may be implied which would put that right.

Implied Terms

18.In Liverpool City Council v. Irwin [1977] AC 239, 253-254 Lord Wilberforce set out four bases on which terms may be held to exist notwithstanding that they are not expressed. In Twinkle Step Investment Ltd v. Smart International Industrial Ltd Bokhary PJ summarised them thus :

"(1) Established usage. This was not argued in the present case.

(2) On the principles of The Moorcock (1889) 14 PD 64. In the words of Chitty on Contract (27th Ed) at para 13-005, 'A term will be implied if it is necessary, in the business sense, to give efficacy to the contract.'

(3) Reasonableness. This was, rightly, rejected by Lord Wilberforce.

(4) By establishing what the contract is, some terms not having been stated."

19.Since Clause 31(b) flouts business common sense it is possible to imply a term or terms to correct that under the second or fourth of the above bases.

20.A further statement of the law on implied terms was given by Lord Simon in the Privy Council in the case of B.P. Refinery (Westernport) Pty. Ltd v. President, Councillors and Ratepayers of Shire of Hastings [1978] 52 ALJR 20. This decision was followed by the Court of Appeal in Hong Kong in a decision called the Attorney General v. Melhado Investment Limited [1983] HKLR 327 and by Hunter J in Shun Shing Hing Investment Co. Ltd v. Attorney General [1983] HKLR 432. Lord Simon, delivering the majority opinion in that case at page 26, said :

"Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied : (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

21.The first implied term contended for is that the defendant could discharge its obligations to compensate the plaintiff by introducing a tenant which was willing to pay at least $420,000 per month for one year. I think this goes too far. The potential tenant would not just have to be willing to pay, it would have to be able to pay. Anything less would not be reasonable or equitable. However subject to the addition of that requirement, it seems to me that if one applies Lord Simon's conditions to the term contended for, it would be reasonable and equitable, because it would put the plaintiff in the position it would have been in if the existing tenant had renewed. On my interpretation of the contract, it is necessary to ensure that Clause 31 does not flout business common sense. It is obvious; the "officious bystander" would surely ask "But why would anyone agree to take on the burden of the whole rent, when another able and willing tenant can be found?" It is capable of clear expression and on my interpretation of Clause 31(b) does not contradict it.

22.The next implied term contended for is that the plaintiff should take all steps to let out or accept offers for letting the property for rental either in its original form or in partitioned sub-units. I do not think partitioning comes into the picture; that was something the plaintiff could do or not at its option and Clause 31(c) was only there to ensure the defendant's co-operation if it did. However it seems to me that this implied term otherwise meets Lord Simon's conditions.

23.As to the third implied term contended for, to say that the plaintiff could not without reason refrain from accepting any offer of letting from any potential tenant willing to pay the guaranteed rental for at least one year is to put far too high an onus on the plaintiff. It would surely be entitled to satisfy itself of the bona fides and the commercial soundness of the potential tenant. It would not be reasonable or equitable to expect it to accept any tenant which made an offer. However, once an offer was made it would equally surely be the plaintiff's duty to consider it and find out whether the tenant would be acceptable in the same way as it would deal with a tenant making an offer in response to its own advertisement.

24.It would also be necessary in my view to include the fourth term contended for namely that the plaintiff would take all reasonable steps to avert any avoidable loss or damage as well as the fifth term as to the release of the defendant from liability.

The Factual Issues

25.It is therefore necessary to consider the following factual issues :

(1) Was Madam Hon's joint venture able as well as willing to pay rent of $420,000 for one year;

(2) Did the plaintiff's failure to follow up on the letter of 29 July 1997 cause the loss, by failing to accept the able and willing tenant; and

(3) Did the plaintiff take all necessary steps to find another tenant?

26.Now there is no doubt that the plaintiff did fail to follow up on the letter of 29 July within a reasonable time. Madam Lin says that the solicitors copied that letter by fax to the plaintiff's Singapore office where it was received by Mr Michael Lim; he told her that there was something wrong with the fax copy, so he had waited for the solicitors to send it again but then forgot it. Whether it was the fault of the plaintiff's Mr Lim, or that of their solicitors that the letter never reached Madam Lin does not concern us here. The solicitors received notice that there was a potential client and something should have been done about that even if the letter purported to be a "take it or leave it" offer. Madam Lin of the plaintiff accepted that if she had received the letter when it was sent, she would have asked for more information. Madam Hon of the defendant, herself an estate agent, says that she would have done so; and the defendant's expert Mr Lai says that he would have treated such an offer seriously because it was put forward by solicitors. If the offer had been followed up and the plaintiff had been satisfied that it was genuine it would probably have been accepted, perhaps subject to some kind of guarantee by the person or persons, company or companies behind the joint venture.

27.There is nothing on the face of the letter itself to suggest that it was a sham but we come back to the question whether the offer was in fact genuine in that the joint venture would have been able as well as willing to pay the rent for the 12-month term. The only evidence on this comes from Madam Hon. She says that the joint venture was to have been between her own agency, Chinam Ltd, which traded under the name of Wing Shing, a prestigious name in the trade, and one Heng Fung Property Consultant Ltd. It was expected to make more than $9,000,000 per annum. That is what appeared in her statement; but later she said that this was the figure that could be made before the joint venture came into being; and it later had to be revised upwards. Now unfortunately, under cross-examination, Madam Hon was unable to explain how, on the basis of financial figures given for both Chinam Ltd and Heng Fung Property Consultant and put into chart form by Counsel for the plaintiff, this proposed joint venture could ever have made as much profit as the individual companies would have made. Chinam Ltd had very small profits and it largely managed those because it was being charged little and ultimately no rent by related companies also controlled by Madam Hon. Between the two companies, the aggregate of profits between 1995 and 1997 rose from about $1.2 million to about $2.5 million; the latter on a gross total income of about $8.7 million. In the year to March 1997 the average profit margin before tax for the two companies was 42.55%. If the joint venture had been formed, it would have had to find, for the year, rent of $5,040,000 and as counsel has demonstrated, the profit margin before tax, even if a gross total income of $13 million could have been achieved, would not have been more than 19.56%. Madam Hon said that the business expected to be done was the renting out of premises within the same building owned by companies controlled by her but it is not clear how such extra profit could have been made or why it was necessary to put it through the joint venture rather than Chinam Ltd in any event. The joint venture never in fact came into being; it was represented by no more than a verbal agreement and it never got any further when no response came back to the letter of 29 July 1997.

28.I am driven to conclude that at best the joint venture was something which Madam Hon wanted to set up in order to try to get the defendant "off the hook". It is not possible to say that the plaintiff's failure to reply in time to the letter of 29 July 1997 caused the loss because it is not certain that, if it had made inquiries, it could ever have been satisfied that the joint venture, itself no more than a verbal agreement at that time, would have been acceptable as a tenant. Nor is it clear that the joint venture would in fact have been good for the rent offered, for the 12-month term. On the other hand if inquiries had been made it is not impossible that the joint venture would have been acceptable subject to some kind of personal guarantee.

29.I turn to the question whether the plaintiff took the necessary steps to find another tenant. On this there is the evidence of Mr Wang Pei Yung, a peripatetic Taiwanese whose duties were to manage the plaintiff's properties in Hong Kong, Shanghai and Taiwan. He worked under Madam Lin, a director of the plaintiff and with Mr Michael Lim of the plaintiff's Singapore office, and at the relevant time he visited Hong Kong regularly; he was able to give the dates of his visits by reference to his travel documents. Mr Wang says that when it became apparent that Watch Gallery Ltd would not renew he caused some ten estate agencies to be instructed, all to no avail. One of these was Landsources (International) Property Consultants Ltd and one was Midland Realty Properties. He was able to produce an unsigned contract form between Landsources and the plaintiff, and two documents which he said represented newspaper advertisements placed by Midland, though they later turned out to have been posters, but no other documents. They showed an asking rent of $400,000 per month in October 1997 and one of $230,000 in February 1998. A Miss Shin of Landsources also gave evidence that her company had been instructed by a representative of the plaintiff to rent out the property for about $280,000 which was in her view too high. They had advertised the property at that figure for a year, but without success.

30.The defendant called an expert estate agent, Mr Patrick Lai Wah Chi. He had assessed the open market rent for the Property on two different bases. The first was on the forecast basis of what it would be, looking ahead from 26 June, 29 July and 22 October 1997; namely the dates of correspondence between solicitors. The figures actually went up from $403,010.00 at the first date, to $415,670 at the last date. The second basis was the actual open market rent value on the earlier dates of forecast and on later dates going through from 27 October 1997 to 1 May 1997; this basis showed a figure of $390,000 on the first date and $257,000 on the last.

31.Mr Lai said that many of the comparable properties on which his valuations had been based were themselves in the New Mandarin Plaza. In 1997 to 1998 he said that the letting potential for properties in that building was generally good. He also said that it might take two or three months to get a potential client to talk seriously about letting.

32.Counsel for the defendant attacked the plaintiff's evidence as to what was done to let the property. The suggestion was in effect that, if Mr Wang and his colleagues had really sought to let it out, they would have been in a position to produce all kinds of reports from the estate agents they had instructed, showing what those agents had done. There was some support for this in Mr Lai's evidence but one has to remember that Mr Wang was operating mainly in Taiwan and only flying periodically to Hong Kong while Miss Lin was in Singapore. Documents would not necessarily be kept in the way demanded by a cross-examiner; in fact one suspects that in real life they rarely are. Objection was also taken to the Midland documents as being hearsay although I rejected that; they could not possibly be produced to prove the truth of what was said; all the witness was saying was that he had instructed an agent to offer the Property for letting and these documents were what he had seen publicised as a result of his instructions.

33.I think the greater problem for the plaintiff arises from the evidence of Mr Lai and in particular from his schedule of letting comparables. Nine of the eleven he used were properties within the New Mandarin Plaza. The leases of four of these commenced between February and April 1998, i.e. after the market had begun to fall in about October 1997. One of these, a property of 2,285 square feet saleable area on the ground floor went for $338,000 per month. The Property has a saleable area of about 2,110 square feet; it is on an outside corner of the ground floor. It is very difficult to see why no one should have wanted it. If advertising had begun in October 1997 and it took until February 1998 to find a taker, Mr Lai's figure for the rent then was $290,000 per month. It is very difficult to understand how, if a large agency like Midland was offering the Property for $230,000 in that month which figure Mr Lai put on the low side, someone would not have at least shown interest in it.

34.I think it is more probable than not that some advertising was done from October 1997 onwards. Mr Wang's photographs of the shopfront, with posters on it, supports that as does the evidence of Miss Shin. But it is difficult to believe that there were no offers at all or even on the evidence of Miss Shin, only one potential customer showing an interest. The financial crisis may by then have struck Hong Kong; Mr Lai puts its effective date at 23 October 1997 though it is rather difficult to put an exact date on such a thing. But a financial crisis does not mean that no one will buy; it means prices go down and there are bargains to be collected by those who can do so. It seems to me more probable than not that if advertisement had been made at a sufficiently low price then a new tenant could have been found.

35.However the plaintiff's position does not simply depend on what it did from October onwards. As at the date of completion the plaintiff had no certainty that the tenant would renew. On receipt by its solicitor of the letter of 29 July 1997 the plaintiff had notice that the tenant had not in fact renewed. On my finding as to the implied terms the duty then fell on the plaintiff to consider the offer; but if it did not accept the offer, it also had the duty to mitigate the possible loss by seeking a new tenant. If it had done so, on Mr Lai's evidence - and there is nothing to contradict it - a new tenant could probably have been found then or up to 22 October 1997 at a rent very close to the figure of $420,000 per month. In any event therefore it seems to me that the plaintiff was in breach of the implied terms that it should take all reasonable steps to let the property and would take all reasonable steps to avert any avoidable loss or damage.

36.It follows that the plaintiff's claims must fail and the defendant's counterclaim must succeed. The plaintiff's claims are dismissed with costs to the defendant, to be taxed if not agreed. There will be judgment for the defendant for a declaration in terms of the second alternative of its counterclaim that the defendant was discharged from any further obligation under Clause 31(b) by the breach of the implied terms, as well as the costs of the counterclaim, to be taxed if not agreed. The costs orders are nisi.

Representation:

Mr Simon Chiu, instructed by Messrs Vincent T.K Cheung, Yap & Co., for the Plaintiff

Mr Louis Chan, instructed by Messrs Cheung, Chan & Chung, for the Defendant

Remarks:
Appeal by Plaintiff to Court of Appeal. Appeal dismissed. Please refer to Appeal Judgment of CACV000183/2002.