Choy Nga Wai Nancy v. Gentle Smart Ltd and Another
Read the full judgment text of DCCJ 4895/2007 on BabelCite. This District Court judgment before Deputy District Judge Bernard Mak.
Civil law – contract for sale of land – breach of contract – damages in lieu of specific performance – assessment of damages – date of assessment – loss of bargain – Wrotham Park damages – disgorgement of profits – conveyancing costs – interest on deposits – District Court. Whether damages should be assessed at date of breach or judgment – No, date of breach unless Johnson v Agnew applies – Whether loss of profit recoverable – No, not within contemplation – Whether Wrotham Park damages applicable – Yes, 50% of net gain – Conveyancing costs included in assessment – Interest disallowed for delay period. Damages assessed at HK$260,000.00; Deposits returned HK$278,000.00; Costs order made.
Legal issues: Date of assessment of damages · Loss of profit from resale · Wrotham Park damages · Conveyancing costs · Interest on deposits
Outcome: Damages assessed at HK$260,000.00; Deposits returned HK$278,000.00; Costs order made.
Cites 6 cases
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DCCJ 4895/2007 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO. 4895 OF 2007 ------------------------ BETWEEN
---------------------- Coram: Deputy District Judge Bernard Mak in Court Date of Trial: 27th February & 2nd March 2009 Date of Handing Down Judgment: 27th April 2009 ---------------------- JUDGMENT -------------------- 1.In June 2007, Madam Choy was desirous of investing in real property in Quarry Bay, Hong Kong. After introductions by estate agents, Madam Choy settled on the subject property known as Unit 1006 on 10th Floor of Block G, Nos.5-7 Hong Shing Street, Kornhill, Hong Kong (“the Property”). The Property was registered in the name of the 1st Defendant company, of which the 2nd Defendant and his ex-wife, Madam Shing, were the shareholders and directors. After negotiation through the estate agent, Madam Choy on 26 July 2007 entered into a provisional sale and purchase agreement with the 1st Defendant to purchase the Property at the consideration of HK$2,780,000.00. Pursuant to the provisional agreement, which was signed by the 2nd Defendant for and on behalf of the 1st Defendant, Madam Choy paid initial deposits of HK$10,000 to the 1st Defendant and HK$73,400.00 to the 1st Defendant’s solicitors as stakeholder. Completion of the sale and purchase was scheduled to take place on 12 September 2007. 2.Madam Choy then instructed her solicitors to handle the conveyancing transaction. The formal Sale and Purchase agreement was entered into by Madam Choy and the 1st Defendant on 9 August 2007. A further deposit of HK$194,600.00 was duly paid by Madam Choy to the 1st Defendant’s solicitors as stakeholder. The Formal Sale and Purchase agreement was duly stamped, and as expected, the stamp duty at the sum of HK$41,700.00 was borne by Madam Choy. In order to finance the purchase, she applied for mortgage from the DBS Bank (Hong Kong) Limited which approved her application on 27 August 2007 for HK$1.7 million. 3.Madam Choy’s purchase of the Property became complicated when on 27 August 2007 her solicitors received notice from Madam Shing’s solicitors in FCMC 6494/2003 (by which Madam Shing sought to divorce the 2nd Defendant and claimed ancillary relief) that Madam Shing disputed the 2nd Defendant’s authority to offer to sell the Property and to execute the Sale and Purchase agreements on behalf of the 1st Defendant. By consent the completion of the transaction was firstly postponed to 12 September 2007 and then to 5 October 2007, when there was a hearing before HHJ Lok in FCMC 6494/2007; but no agreement or order was made. Whilst the completion was further postponed to 11 October 2007, the 1st Defendant still failed to complete. 4.Madam Choy took out the present action on 3 November 2007, claiming against the 1st Defendant for specific performance, and alternatively against the 2nd Defendant for damages for breach of implied warranty of authority. The real twist in the matter was that the 1st Defendant defaulted instalment payments to its mortgagee bank (“Morgagee Bank”) since November 2007. Whilst the 1st Defendant did not file any Notice of Intention of Defend to Madam Choy’s claim (notwithstanding that solicitors for Madam Shing had notice of these proceedings since its inception), the solicitors for Madam Choy did not seek default judgment against the 1st Defendant until after the Mortgagee Bank started action against the 1st Defendant and obtained possession of the Property. Madam Choy entered default judgment against the 1st Defendant on 6 October 2008 with damages to be assessed and the Property was sold by the Mortgagee Bank on 13 October 2008 at a price higher than the contract price at HK$3.3 mil. 5.The matter then came before HHJ Lok on 15 October 2008 and the 2nd Defendant was given leave to take part in the hearing of assessment of damages and the taxation proceedings against the 1st Defendant. 6.At the beginning of the hearing before me, the parties indicated that other than the interest on the deposits paid and reasonableness of Madam Choy’s conveyancing costs, the question involved was solely whether damages should be assessed at the date of the postponed completion or rather at the date of the auction. 7.That is not the impression I glean from the papers. Madam Choy in her witness statement asserted that she should be entitled to the difference between the auction price and the contract price because “otherwise the 1st Defendant would be unjust enriched [sic]”. Whilst filing of a valuation report by Madam Choy and the Defendants was ordered, the valuation report produced was in respect of the market value of the Property “as at 13 October 2008”, i.e. the date of the auction. It showed that the auction price was better than the then market price. I got no indication as to what use Madam Choy sought to make of the auction price and the valuation report: Was Madam Choy asking the Court to depart from the normal rule regarding the time of assessment? Was she also suggesting that the market price of the Property at the time of the auction instead of the auction price should be adopted for assessment? 8.In the written opening filed on behalf of Madam Choy, the difference between the auction price and the contract price was particularized as damages for “loss of bargain (i.e. increase in price between the sale by mortgagee bank SCB and the Agreement)”. The questions of how and why the possibility of resale was within the contemplation of the 1st Defendant, and how the Court could be satisfied that Madam Choy would have certainly tapped the “profit” but for the breach of the 1st Defendant, were not addressed. While “unjust enrichment” was alluded to, the extent to which the law of restitution affected and governed the assessment of equitable damages were not set out. 9.Madam Choy asked for the aggregate of the deposits, stamp duty, conveyancing costs and “loss of bargain”. Common sense dictates that if one gets the profit lost, one cannot at the same time recoup the expenses which he/she would have to incur in order to earn the profit. In the absence of a concise statement of damages claimed, I had no idea as to the precise basis or bases upon which Madam Choy claimed and quantified her damages. 10.I trust even post-CJR, the Court would not be involved in coaching the parties to formulate their claim or defence. In an adversarial setting, it is always open to this Court to award nominal damages to Madam Choy should Madam Choy fail to prove her loss. But bearing the interests of the parties in mind, I allowed Madam Choy’s application to tender further surveying evidence, and directed the parties to file written submissions on the relevant issues after evidence (which direction was regrettably honoured in the breach than in the compliance). I indicated that I shall reserve judgment to be handed down which I hereby do. Other background 11.Madam Choy gave evidence that she told her estate agent that she wanted to buy a property for investment purposes. She had never met the 2nd Defendant and all the negotiations were left to the estate agent. She considered that the contract price was more or less the market price. Under cross-examination she accepted that she did not instruct her estate agent to inform the vendor specifically of her purpose or reason of buying the Property and she had no idea as to what was said by the estate agent during the negotiation with the 2nd Defendant. As to why she did not ask for default judgment or return of deposits without prejudice to her present action at some earlier time, she said she left it to her lawyers. 12.Ms Kwong of Centaline Surveyors Limited, which provided the valuation report, opined that the market price of the Property at the time of the postponed completion date was HK$2,860,000.00 and that at the time of the judgment was HK$3,260,000.00. Such valuation opinions were arrived at after analysis of comparable transactions in Kornhill and with adjustments on time, orientation, floor and view made. By reference to the “private domestic – price indices for selected popular developments” as set out in the February 2009 monthly supplement of the “Hong Kong Property Review” issued by the Rates and Property Department, she opined that the market price for the sector of the private property market, of which the properties in Kornhill were a component, continuously rose from September 2007 and only came down from August 2008. Using the index in October 2007 [111] and her valuation of the Property’s market price on 11 October 2007 as the base figure, she roughly estimated that the market price of the Property in February 2008 [index: 136.2] would be approximately HK$3,509,000.00 and in April 2008 [index: 134.2] would be approximately HK$3,457,000.00. 13.The 2nd Defendant gave evidence and said that he was actually informed by the estate agent that Madam Choy wanted the Property for self-use. He said the initial deposit of HK$10,000 was paid back to the stakeholder account of the solicitors who acted for the 1st Defendant after the completion fell through and he stressed that Madam Choy could have entered judgment and/or recovered the deposits much earlier. The law relating to assessment of damages in lieu of specific performance 14.When the vendor breached a contract for sale of land, the purchaser is faced with two options:
15.In the present case this Court is only concerned with damages in lieu of specific performance which became impossible when the Property was sold by the Mortgagee bank. Because different considerations apply in different assessment methods, the wasted conveyancing costs are not necessarily recoverable in every method. 16.It is trite that the normal measure of damages for breach of a contract for sale of land by the vendor is the market value of the property at the contractual time for completion less the contract price (McGregor on Damages §22-005). The damages are assessed on the assumption that with such an award, the purchaser can make a substitute purchase in the market. If wasted conveyancing costs are not awarded as well, the purchaser would be prejudiced insofar as he/she has to pay conveyancing costs twice over. In asking the Court to assess damages by the normal rule, the purchaser can rely on a subsequent re-sale by the vendor as evidence of the valuation of the property at the contractual time. By so doing the Court does not depart from the normal rule (McGregor on Damages §22-006). 17.Alternatively the purchaser can ask for damages to be assessed by reference to the valuation of the property at different times. Damages so assessed, by the same reasoning as applied in assessment by the normal rule, should include wasted conveyancing costs. 18.In the further alternative the purchaser can ask for assessment by reference not to the appreciation in value of the property but the profits he/she would have made but for the breach by the vendor (Cottrill v Steyning & Littlehampton Building Society [1966] 1 WLR 753; McGregor on Damages §22-008). In such event while deposits paid should be recoverable as the consideration for them totally failed, it would be unfair for the Court to award the purchaser the conveyancing costs he/she incurred in the aborted transaction, because such costs would have to be incurred by the purchaser in order that he/she could earn the profit. 19.Recent authorities, which I shall come to in a moment, make clear that it is now possible for assessment to be made by reference not only to the quantifiable financial losses suffered by the purchaser but also to gains made by the contract breaker. Once the Court is satisfied that a just response to circumstances in which the compensation which is the purchaser’s due cannot be measured (or cannot be measured solely) by reference to identifiable financial loss, the Court would no doubt take into account the purchaser’s conveyancing costs wasted in assessing the damages, and in such circumstances it seems to me to be wrong in principle to award the purchaser a further head of damages to compensate his/her for wasted conveyancing costs. 20.Whilst different principles govern different assessment methods, the principles are the same whether the damages are granted at common law (e.g. where the seller had no title to convey) or in lieu of specific performance (see Johnson v Agnew [1980] AC 367). Madam Choy’s case 21.In substance Madam Choy sought to ask the Court to consider all the alternative assessment methods; regrettably Mr. Cheung, Counsel for Madam Choy, did not seek to distinguish the law and evidence that he has to rely on in seeking each and every of such alternatives, and it falls onto this Court to consider what method of assessment the justice of this case demands. Assessment by reference to market value of the Property at the time of Judgment 22.Mr. Cheung, referring to Johnson v Agnew, asked me firstly to assess the damages by reference to the market value of the Property at the time of judgment. In so doing, the starting point is not the auction price because it was indeed open to him to ask for assessment by reference to the market value had the auction price been below the market value of the Property at the time of judgment. On the evidence, the market value of the Property at the time of judgment was HK$3,260,000.00. 23.When the Court finds that assessment of damages under the normal rule does not give a realistic substitute for specific performance, assessment can be made by reference to the market value of the subject property at a date later than that of the breach. Exceptions to the normal rule could be illustrated by:
24.But in the present case, Madam Choy could have obtained specific performance before the Mortgagee Bank obtained possession and thereby avoided the forced sale. An order for specific performance with directions for clearance of the Mortgagee Bank’s encumbrance and execution by the Registrar for and on behalf of the 1st Defendant would give Madam Choy what she contracted for under the Sale and Purchase Agreement. Worth v Tyler should therefore be distinguished here on the basis that departure from the normal rule is not warranted as there were options available to Madam Choy between the time of the breach and the date of auction for her to avoid the alleged loss, being the appreciation in the value of the Property between the date of breach and the date of judgment. 25.I find that in the present case, Madam Choy can only recover damages by reference to the market value of the Property at the time of judgment if Johnson v Agnew is applicable. It has to be noted that in Johnson v Agnew, at page 401, Lord Wilberforce states:-
26.From the history of these proceedings and for reasons set out in paragraph 24 above, I find that Johnson v Agnew should not be followed in the present case to assess the Madam Choy’s damages at the date of judgment as I do not accept that Madam Choy had acted reasonably in pursuing the remedy of specific performance. Assessment of damages by reference to consequential losses 27.Cottrill v Steyning & Littlehampton Building Society is the authority for damages for breach of contract for sale of land to be assessed by reference to the profits which both parties contemplated the claimant would make. The learned editors of McGregor on Damages set out such claim not as an additional claim for consequential losses but rather as an alternative method of assessment when assessment by the normal rule would be grossly unfair (§22-009). 28.Mr Cheung submitted that “But for D1’s breach of the Agreement, [Madam Choy] would have been able to purchase the Property as well as to pocket the profit in the subsequent resale thereof”. He further submitted that a re-sale of the Property was within the contemplation of the 1st Defendant because the Sale and Purchase Agreement provided in clause 21 that “… If, however, the Purchaser wishes to sub-sell the Property the increase in costs of the Vendor’s for approving the Assignment(s) as a result of an increase in the purchase price on sub-sale (at half scale charge) shall be borne by the Purchaser”. 29.I disagree with both submissions. Dealing with the issue of contemplation first, clause 21 caters specifically for the possible situation where Madam Choy, before the completion, sells the Property as a confirmor. It was not suggested that this clause was otherwise than a standard clause in a template. It has to be noted that in Seven Seas Properties v Al-Essa & Anor [1993] 1 WLR 1083, where the Plaintiff had indeed entered into a subcontract before completion, the Court made clear that the knowledge of a possible subcontract is not sufficient for the Defendant to be exposed to the risk of losses under such sub-contract:
30.Clause 21 only suggested a somewhat remote possibility of re-sale by Madam Choy. Without more it is not evidence probative of any settled intention on the part of Madam Choy to re-sell or of any requisite knowledge or contemplation on the part of the 1st Defendant. I am not satisfied on the totality of the evidence that it was within the 1st Defendant’s contemplation that Madam Choy purchased the Property for re-sale, even if that was the case. On the question of certainty of profit, even if the 1st Defendant could be imputed or attributed with the requisite knowledge or contemplation, it would still be a quantum leap to find that Madam Choy would have necessarily tapped the entirety of the difference between the auction price and the contract price. It was simply a proposition made with the benefits of hindsight – had the completion taken place, Madam Choy might have sold the Property earlier than October 2008; or she might have held the Property until today’s date. Her claim for assessment by reference to her alleged loss of profit simply cannot get off the ground. Assessment of damages by reference to gains by the 1st Defendant 31.It is not suggested that Madam Choy had an interest in the performance of the contract which is not readily measurable in terms of money, which would necessarily be the case if she bought it for investment. In such premise, an award of damages, assessed by reference to her financial loss, is prima facie adequate. 32.But then I cannot overlook the fact that Madam Choy could have obtained specific performance even in October 2008 but for the 1st Defendant’s failure to meet its mortgage payments. Viewed in this light, the 1st Defendant ought not to benefit from committing yet another breach of contract, i.e. its contract with the Mortgagee Bank. 33.Adhering to the normal rule, Madam Choy would without the need for further argument be entitled to the difference between the market value of the Property at the time of breach and the contract price, i.e. HK$2.86 mil minus HK$2.78 mil = HK$80,000.00. The reality of the situation is that there is now a realized appreciation in value created by the forced sale (HK$3.3 mil minus HK$2.86 mil = HK$440,000.00). The questions are therefore: Should the 1st Defendant disgorge the entirety of this realized appreciation as if he is ordered to account for profits? Or should Madam Choy only be entitled to a portion of this realized appreciation? If yes, how should it be assessed? 34.Johnson v Agnew makes clear that assessment of damages is governed by the same principles whether the damages are awarded in lieu of specific performance or at common law. At common law, the Court can, instead of ordering the Defendant to make only a strict compensation for loss which the Plaintiff can prove to have been caused by the breach, require the Defendant to make a reasonable payment of the benefits he/she gained as a result of his/her breach. 35.The starting point is the principles contained in the judgments of Wrotham Park [1974] 1 WLR 798, Blake [2001] 1 AC 268 and the Experience Hendrix case [2003] 1 All ER (Comm) 830 which establish that where a covenantor breaches a restrictive convenant, the convenantee is entitled to claim as damages a reasonable payment in respect of the hypothetical release of the covenant (See Chitty on Contract §26-024 - §26-27). 36.Wortham Park damages primarily equal a sum that as might reasonably have been demanded by the convenantee as a quid pro quo for relaxing the convenant. As identified by Peter Smith J at the first instance in WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment [2006] FSR 663, para 174 (see also the judgment of the Court of Appeal [2008] 1 WLR 445 at para 15), the fact that the innocent party would never have agreed to such sale or relaxation is irrelevant. The decision whether or not to award damages on this basis can take into account factors such as delay in intimating the claim and prosecuting the action, if appropriate. Those facts also could be taken into account a later stage in quantifying the claim. 37.Wortham Park damages are not restricted to cases which concern breaches of a restrictive covenant or infringements of property rights, and are generally available as a remedy for breach of a contractual obligation (see the Experience Hendrix case, at para 56, per Peter Gibson LJ). It is assessed on a discretionary basis and to be arbitrary in amount, which is not confined to the assessment of the result of a hypothetical negotiation between the innocent party and the contract breaker. This is made clear by the WWF-World Wide Fund for Nature case where Chadwick LJ states that:
38.In the present case, after the conclusion of the Sale and Purchase Agreement, Equity imposed duties on the 1st Defendant to protect, pending completion of the sale, the interest which Madam Choy acquired under the contract (see Englewood Properties Ltd v Patel [2005] 1 WLR 1961, and Megarry & Wade, The Law of Real Property, 7th Ed. (2008) 15-053). The 1st Defendant blatantly failed to discharge this duty. The duties of the 1st Defendant as a vendor trustee for the purchaser continued for as long as it remained in possession. This is the case even if it remained in possession after the contractual completion date only because the purchaser has failed to complete on time (see Oakley, Constructive Trusts, 3rd Ed. (1997), p.295 citing Philips v Silvester (1872) LR 8 Ch 173), a fortiori where it was the vendor who failed to complete. What the 1st Defendant did was to suffer or permit the equitable interest of Madam Choy in the Property to be diminished, a state of affairs which the 1st Defendant has to prevent under his trusteeship arouse from the Sale and Purchase Agreement. It is tantamount to interference with or invasion of a proprietary interest vested in Madam Choy. 39.In the premises, to restrict Madam Choy’s damages to the difference between the contract price and the market value of the Property at the date of breach would seem a questionable fairness on the facts of this case (c.f. Wortham Park at p812 per Brightman J). I find that it is just that Madam Choy should be entitled to a remedy which has the effect of depriving the 1st Defendant of some of its profits made from its breach of contract and breach of duties. 40.In Hong Kong, Wrotham Park damages were awarded in Lee On Management Ltd v Po Hing Laundry Limited, unrep., HCA 2342/1987, MacDougall J, 9 February 1988, in the context of damages in lieu of mandatory injunction to restrain a breach of the DMC. A reasonable licence fee for relaxing the subject covenants was assessed as damages in lieu of an injunction. Blake was referred to in Marble Holding Ltd v Yatin Development Ltd, unrep., HCA1127/2004, Burrell J, 2 February, 2007. In Marble Holding Ltd, the defendant vendor repudiated the sale and purchase agreement and the plaintiff claimed for the return of the deposit plus an account of profits made by the vendor in the sub-sequent resale. Blake was referred to by the Court to illustrate that an account of profits will be appropriate only in exceptional circumstances. Blake has been referred to in other cases in Hong Kong but mainly in relation to whether account of profits should be awarded. The Experience Hendrix case and the WWF-World Wide Fund for Nature case have seemingly yet to find their way into the local jurisprudence. 41.Though there is apparently no precedent in Hong Kong for Wortham Park damages to be awarded and assessed by way of a percentage disgorgement of the contract breaker’s benefits, I find such an approach a natural and logical development of a principle already embraced by the Hong Kong Courts, and that justice demands that damages sought by Madam Choy should be so assessed. 42.Wortham Park damages are not used to penalize the contract breaker and hence any such payment should not in principle exceed the actual gain made by the contract breaker. In this case, I also find that such payment should not make Madam Choy better off than in the case where assessment is made by reference to the market value of the Property on the date of the judgment, otherwise Madam Choy stands to gain from procrastinating on her application for specific performance. 43.In considering what is a reasonable payment I have taken into account the following facts:
44.Taking into account all the circumstances, I consider that it is just for the 1st Defendant to be disgorged at least 50% of the net gain as identified in the preceding paragraph. I find that an overall payment of HK$260,000.00 by the 1st Defendant to the Plaintiff is reasonable as damages to Madam Choy. Conveyancing costs 45.I have taken into account Madam Choy’s wasted conveyancing costs in assessing the quantum of a reasonable payment by the 1st Defendant. For reasons set out in paragraph 19 above, I make no separate award of damages for Madam Choy’s wasted conveyancing costs. Interest on deposits 46.Given the history of these proceedings, in particular the matters set out under paragraph 43 above, I disallow interest on deposits between May 2008 and the date of judgment. As to the rate of interest, the parties accepted that commercial rate instead of judgment rate should be applied. Conclusions 47.I therefore make the following orders:
Costs 48.Taking into account all circumstances, in particular the conduct of this assessment by the Plaintiff, I consider that the Plaintiff should be disallowed half of the costs of this assessment. I therefore make an Order nisi that the 1st Defendant do pay half of Plaintiff’s costs of this assessment, to be taxed if not agreed. Unless any of the parties applies by Summons to vary it, the costs order nisi shall be made absolute 14 days from today.
Representation: Mr. Victor C. F. Cheung instructed by Messrs Simon C. W. Yeung & Co. for the Plaintiff. The 1st Defendant, unrepresented, absent. Ms Rita So instructed by Messrs Y. H. Yeung and Associates for the 2nd Defendant. |
Cases cited in this judgment
Further hearings and rulings under DCCJ 4895/2007