Zhuang Pp Holdings Ltd Formerly Known As China United Holdings Ltd and Others v. Lam How Mun Peter and Others
Read the full judgment text of HCA 1589/2003 on BabelCite. This High Court CFI judgment was delivered on 19 August 2009.
1. This is the trial of an action by the Plaintiffs against the 7 th Defendant, Vigers Hong Kong Limited (“Vigers”), for breach of contract and/or duty of care as a professional property valuer.
Cited by 10 cases · Cites 5 cases
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HCA 1589/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 1589 OF 2003 ____________ BETWEEN
____________ Before: Deputy High Court Judge To in Court Dates of Hearing: 18 - 22, 25 - 27, 29 May and 3 - 4 June 2009 Date of Judgment: 19 August 2009 ______________ J U D G M E N T ______________ Introduction 1.This is the trial of an action by the Plaintiffs against the 7th Defendant, Vigers Hong Kong Limited (“Vigers”), for breach of contract and/or duty of care as a professional property valuer. 2.The 1st Plaintiff is a company listed in the Stock Exchange of Hong Kong. The 2nd to 4th Plaintiffs are subsidiaries of the 1st Plaintiff. At all material times, the 1st to 3rd Defendants were respectively the managing director, chairman and executive director of the Plaintiffs. The 4th and 5th Defendants were property developers of a property at 28 Marble Road, North Point (“Building”). The 6th Defendant was the financier for the Plaintiffs in respect of the purchase of the basement of the Building (“Basement”). Vigers was a professional property valuer instructed by the Plaintiffs to give an opinion on the open market value of Shops 5 and 6 on the ground floor and the 7th floor of the Building on 27 February 1997 and of the Basement on 9 May 1997. The background 3.The parties have no dispute about the following factual background leading to this litigation. 4.The Building is known as 28 Marble Road. It is situated at the junction of Shu Kuk Street and Marble Road, which runs parallel to and is a few minutes walk from the busy King’s Road. The locality is an old urbanized area in North Point with multi-storey residential and commercial buildings. On the northern side of Marble Road opposite the Building are fixed pitch stalls. The Building rests on a floor plate of about 15,000 square feet gross area. It was designed and built as a modern high class commercial building with glass curtain wall. The Basement, ground and first floors are shop premises. The 2nd to 5th floors are car parks, the 6th floor is a service floor for mechanical plant and the 7th to 32nd floors are office floors. There are no 4th, 14th and 24th floors in the Building. It is, nevertheless, a small commercial building with office and shops. 5.The main entrance of the Building is at Marble Road which serves as the office entrance lobby. There are seven shop spaces in the ground floor. There is a side entrance at Shu Kuk Street with a pair of escalators leading to and from the lobby to the 1st floor shopping arcade of 7,534 square feet saleable area and another pair of escalators leading to and from the lobby to the Basement. The Basement has direct access to the MTR North Point Station via Exit A4. That exit used to serve residents of the then existing North Point Estate until the estate was demolished in 2003. The Basement occupied a gross area of 1,463.04 square metres or 15,748 square feet. The office floors are much smaller, of about 10,000 square feet gross area. There are altogether twenty-seven car parking spaces on the 3rd and 5th floors and five lorry parking spaces and some loading areas on the 2nd floor. At the material time, the Building was still under construction. The occupation permit was not issued until 28 August 1997. 6.On or about 20 January 1997, the 2nd Plaintiff which was then the sole subsidiary of Fei Wang Incorporated (“Fei Wang”) entered into three agreements to purchase Shops 5, 6 on the ground floor and the 7th floor of the Building from the 5th Defendant for a total consideration of $108 million. The property formed the sole asset of the 2nd Plaintiff and hence of Fei Wang. 7.On 26 February 1997, on the instructions of the 1st Plaintiff Joseph Leung of Vigers prepared a valuation report of Shops 5 and 6 on the ground floor and the 7th floor of the Building. On the following day, Joseph Leung issued a valuation report for the property at a total value of $142.5 million. On the basis of that valuation, the 1st Plaintiff acquired the entire issued share capital of Fei Wang on 11 March 1997 at $140.175 million. Since then, the 2nd Plaintiff became a subsidiary of the 1st Plaintiff. 8.On a day before 9 May 1997, the 1st Defendant orally instructed Joseph Leung to prepare a valuation report of the Basement. On the same day, Joseph Leung went to the Building to have an outside inspection. On 9 May 1997, he sent a valuation letter (“Vigers Valuation Letter”) giving a value of $470 million for the Basement. On 12 May 1997, Joseph Leung issued a valuation report consisting of eight pages and a covering letter valuing the Basement at $470 million (“Vigers Report”). The valuation given in the Vigers Valuation Letter and the Vigers Report were stated to be “for finance purpose”. 9.On 13 May 1997, the 1st and 3rd Defendants held a board of directors meeting of the 1st Plaintiff and passed a resolution to approve the acquisition of the Basement. On the same day, the 3rd Defendant signed the sale and purchase agreement on behalf of the 2nd Defendant to purchase the Basement from the 4th Defendant at a consideration of $470 million (“Principal Agreement”). Under the Principal Agreement, half of the consideration (i.e. $235 million) was to be paid by cash and the other half by issue and allotment of shares of and in the 1st Plaintiff in favour of the 4th Defendant (“Consideration Shares Arrangement”). 10.On 14 May 1997, the 1st Plaintiff published an announcement of the purchase of the Basement in newspapers calling for a special general meeting of shareholders on 11 June 1997 to approve the purchase. 11.On 26 May 1997, the 1st Plaintiff issued a circular to shareholders (“Circular”) annexing the Vigers Report as Appendix III. Shortly prior to that, at the request of the 1st Plaintiff, Joseph Leung had given his consent for the Vigers Report to be included in the Circular. 12.On the same day, the 1st and 3rd Defendants held a board of directors meeting of the 3rd Plaintiff and approved its sub-purchase of the Basement from the 2nd Plaintiff. They also signed the sub-sale and purchase agreement in respect of the Basement at $470 million respectively on behalf of the 3rd Plaintiff as sub-purchaser and the 2nd Plaintiff as vendor/confirmor. 13.On 11 June 1997, the shareholders of the 1st Plaintiff approved the Principal Agreement and the Consideration Shares Arrangement. 14.On 22 July 1997, the 6th Defendant issued the 3rd Plaintiff a facility letter offering credit facilities of $235 million to provide the cash required for the purchase under the Principal Agreement. The loan agreement was signed on 11 August 1997. Previously, the 6th Defendant had obtained a valuation report from Midland Surveyors Limited valuing the Basement at $420 million (“Midland Report”) and a valuation report from Richard Ellis Ltd valuing the Basement at $315 million (“Richard Ellis Report”). 15.Then between 7 August and 31 December 1997, the 5th Defendant entered into three further sale and purchase transactions with subsidiaries of the 1st Plaintiff in respect of other floors in the Building. The particulars of those three transactions together with the acquisition of Fei Wang and the Basement are summarized as follows:
16.Following a change in management and control of the Plaintiffs, the Plaintiffs instituted action in 2003 against the seven Defendants for conspiracy to defraud whereby the 4th and 5th Defendants managed to dispose of chunks of the uncompleted Building to the Plaintiffs to reap cash receipts in excess of $1 billion with the help of the then directors of the Plaintiffs, namely the 1st to 3rd Defendants and Vigers who provided the valuation of the Basement. 17.During the course of the past six years, the Plaintiffs abandoned the action against the 1st to 3rd Defendants and reached settlement with the 4th to 6th Defendants. The only outstanding action is against Vigers. The parties' case 18.The parties have no dispute about the above factual background leading to this litigation. 19.The Plaintiffs are not pursuing the allegation of conspiracy against Vigers. The Plaintiffs’ claim is just for damages for breach of contract and/or breach of duty of care as a professional property valuer, arising out of its valuation of the Basement on 9 May 1997 at $470 million. The first thrust of the Plaintiffs’ case is that instead of properly valuing the Basement as a professional valuer should, Vigers gave a valuation which was exactly the same as the previously agreed consideration of $470 million which Vigers had been informed beforehand and that valuation was grossly inflated. They called the 3rd Defendant as a factual witness as if she were an immunity witness in a criminal action. She gave evidence that of a conversation between her and the 1st Defendant which suggests that Vigers was to fix up the valuation. The second thrust of the Plaintiffs’ case is that the valuation was indeed substandard and grossly out of line with the true valuation. The Plaintiffs called Mr Cullen who is a professional surveyor as expert witness to give expert opinion of the valuation of the Basement and professional practice in making valuation. Mr Cullen is of the opinion that the open market value of the Basement on a vacant possession basis as at 9 May 1997 was $108 million. 20.Vigers denied the allegation of fixing the valuation or that they had been negligent. They called one factual witness, namely Joseph Leung who was the director in charge of commercial valuation department of Vigers and who prepared the valuation of the Basement complained of by the Plaintiffs. They also called a professional valuer Mr Rock Tsang as expert witness to support the reasonableness of the valuation. Mr Tsang is of the opinion that the open market value of the Basement on a vacant possession basis as at 9 May 1997 was $439 million. 21.Mr Lai, counsel for Vigers, seized on the Plaintiffs’ allegation of conspiracy in their statement of claim as excusing Vigers from liability being an innocent instrument of the fraud of the 1st to 3rd Defendants. He also seized on the 3rd Defendant’s defence to the conspiracy allegation that the 1st to 3rd Defendants saw the Basement as a good investment as a break in the chain of causation and raised the defence of contributory negligence on the part of the Plaintiffs. 22.Given the nature of the dispute, the single and most crucial issue is whether Joseph Leung was negligent in making the valuation. If he was, regardless whether there was any agreement between him and the 1st Defendant to fix the valuation, Vigers will be liable. If he was not negligent and his valuation was within the bracket of what was considered reasonable, even if there was an agreement to fix the valuation, Vigers will not be liable. I shall therefore begin with investigating the issue whether Vigers were negligent in the valuation. I shall then investigate the allegation of fixing the valuation for the purpose of dealing with the issues of causation and contributory negligence in case the valuation was negligently made. The law 23.Counsel have no dispute that the nature of Vigers’ contractual duty under the oral retainer was no different from its common law duty of care in tort. Hence, it is immaterial that the Plaintiffs did not adduce any evidence of the content of the oral retainer given to Vigers. The legal principles in relation to surveyors’ negligence is well-established and are accurately summarised in paragraph 10-062 in Jackson & Powell on Professional Liability, 6th edition as follows:
The above passage as it then existed in the 4th edition of Jackson & Powell on Professional Liability was approved by Stuart-Smith LJ in Watts v Savills, CA, 16 June 1998 at paragraph 38. 24.The locus classicus of the test whether a person professing to exercise some skill or competence is that set out in the direction to the jury given by McNair J in Bolam v Friern Hospital Management Committee, [1957] 1 WLR 582 at 586-587. There McNair J said:
The Bolam test has been sanctioned by long usage. It is of general application to any person exercising or professing a particular skill and is not confined to the medical profession which was at issue in that case. The application of the standard requires there to be a body of professional practice or opinion to which to refer in assessing the conduct of the defendant criticised. The test as adapted to the surveying profession has been stated by Stephen Brown LJ in Nye Saunders & Partners v Alan E Bristow, (1987) 37 BLR 97 at 103 to be whether there was evidence that at the time a responsible body of surveyors would have taken the view that the way in which the subject of the inquiry had carried out his duties was an appropriate way of carrying out the duty and would not hold him guilty of negligence merely because there was a body of competent professional opinion which held that he was at fault. If there are conflicting opinion from different bodies of the profession and if the surveyor’s way of carrying out the duty accords with the opinion of one of those bodies, he is absolved of liability. 25.In course of time, the courts have made inroads into what used to be the exclusive realm of the professionals. In JD Williams & Co Ltd v Michael Hyde & Associates Ltd [2000] Lloyd’s LR 823, after reviewing the authorities, Ward LJ held at 830 that the Bolam test has been held not to apply under three circumstances. 26.Firstly, in Bolitho And City and Hackney Health Authority, [1997] 3 WLR 1151, Lord Browne-Wilkinson stressed that the court has to be satisfied that the exponents of the body of opinion relied upon can demonstrate that such opinion has a logical basis. If it can be demonstrated that the professional opinion is not capable of withstanding logical analysis, the judge is entitled to hold that the body of opinion is not reasonable or responsible. 27.Secondly, in Nye Saunders & Partners, Stephen Brown LJ held that where the evidence of the expert amounted to no more than an expression of his personal opinion as to what he would or would not have done in the circumstances, the judge was entitled to take the view that such evidence falls short of constituting evidence of a responsible body of architects: see also Midland Bank Trust Co Ltd and another v Hett, Stubbs & Kemp (a firm) [1978] 3 WLR 167. In effect, in such a case, the initial criteria for the application of the Bolam test are not met. 28.Thirdly, in Gold v Haringey Health Authority [1988] QB 481 at 490, Lloyd LJ held that if the giving of advice required no special skill, then the Bolam test should not apply. In order words, where it is not necessary to apply any particular expertise to decide whether the defendant has failed to exercise the skill and care expected of an ordinary member of the surveying profession, there is no room for application of the test. 29.Nowadays, the courts are more cautious in accepting expert opinion in deciding issues of professional negligence. Before applying the Bolam test, the courts have to be satisfied that the circumstances are such that expert opinion is called for, that the expert opinion presented to the court has a local basis and that it represents the opinion of the appropriate body of professionals and not just the personal opinion of the expert testifying in court. 30.As the plaintiff bears the legal burden of proving negligence, the practice is for the plaintiff to adduce such expert evidence as to show what the practice of the profession was and that the defendant’s conduct fell short of that standard. Then the defendant would adduce evidence of a different practice by another competent body of the profession. If such contrary practice is proven to the satisfaction of the court and if the defendant’s conduct conformed to that contrary practice, he is absolved of liability. However, the ultimate question, as King CJ of the Supreme Court of South Australia put it in F v R (1983) 33 SASR 189 at 194 is:
31.Before admitting evidence of expert witnesses, the court must first decide whether expert opinion is necessary in respect of the conduct complained of. Then, in admitting evidence of expert witnesses, care must be exercised in distinguishing between evidence of the practice of the profession and expression of the expert’s personal opinion of what he would or would not have done in the circumstances of the subject under criticism. Evidence of the latter is irrelevant. In respect of the former, the court must be satisfied that there is a logical basis for the expert’s opinion. 32.As for the standard of care and skill required of a surveyor, it is that standard possessed by a person of ordinary competence exercising the same calling. The standard of reasonable care and skill is usually established by reference to the general practice of the surveying profession. While evidence of such practice may assist the court, it is not decisive of what is required to discharge the standard of reasonable care. It is for the court to decide having regard to the particular circumstances of the case what that standard is. A surveyor whose conduct is called in question need not possess the highest expert skill. It is well established law that it is sufficient if he exercises the ordinary skill of an ordinary competent man exercising that particular profession. Where a profession embraces a range of views as to what is an acceptable standard of conduct, the competence of the surveyor is to be judged by the lowest standard that would be regarded as acceptable. But a court should be slow to find a professionally qualified man guilty of a breach of his duty of skill and care towards a client without evidence from those within the same profession as to the standard expected on the facts of the case and the failure of the professionally qualified man to measure up to that standard: Sansom & Another v Metcalfe Hambleton & Co [1998] PNLR 542 at 549, per Butler-Sloss LJ. Credibility of witnesses 33.The crucial issue in this case is whether in assessing the value of the Basement, Joseph Leung lived up to the standard of the ordinary skilled surveyor exercising and professing to have that special skill. In reaching that conclusion, the Court is to be largely guided by the experts’ evidence of professional practice. As such, credibility of the factual witnesses is of relatively minor significance compared with reliability of the experts, especially as the factual background in this case is not in dispute. 34.The Plaintiffs’ expert witness was Mr Ian Cullen. He had given expert evidence in the courts and his evidence had been accepted by the courts. He was well qualified to give expert evidence and understood that as an expert witness he owed primary duty to assist the Court rather than to advance his client’s case. Mr Lai suggests that Mr Cullen is the typical English gentleman of Saville Row with cultured speech and refined attire but is unfamiliar with Hong Kong situation. Mr Cullen has lived and worked in Hong Kong for almost the entirety of his professional life. He is thoroughly familiar with Hong Kong at least insofar as is required of his expertise as a surveyor. He gave evidence in a most professional, unbiased and forthwith manner. His evidence was very solid and capable of withstanding logical analysis. I accept his evidence. 35.Mr Rock Tsang was called by Vigers as their expert witness. He was also well qualified to give expert evidence and had given evidence in the courts before. In answer to my question, he told me that his evidence had been accepted by the courts. According to his evidence, he had given evidence once in the High Court and twice in the Lands Tribunal. As revealed in the course of cross-examination, the courts commented on him adversely. He was commented by the judge in High Court Miscellaneous Proceedings No 531 of 1989 as the least reliable of the three expert witnesses called and as appearing somewhat partisan. The judge commented on his stubborn insistence on the irrelevant and obviously totally inadequate model which would create more problems than it solved. His methodology was rejected by the Lands Tribunal. Mr Sarony SC, counsel for the Plaintiffs, referred to numerous instances which he submits show that Mr Tsang was not acting impartially as an expert. I agree with Mr Sarony SC’s comments. I do not find it necessary to refer to those instances save for some major ones, such as his choice of comparables and his rejection of Mr Cullen’s comparables from which lack of impartiality could be readily inferred. Mr Tsang did not impress me as an impartial expert witness. His evidence was not capable of withstanding logical analysis. He stubbornly insisted on irrelevant comparables. He was more of an advocate advancing the case of his client who instructed him than an independent expert witness with a view to assist the Court. As I shall demonstrate, some of his opinions were just nonsense. I do not accept his evidence. 36.Each side called one factual witness. The Plaintiffs called the 3rd Defendant, Ms Kwok, as their witness of fact. She is a solicitor and a director of a listed company. Her evidence was capable of belief but was contradicted by her defence and some company documents of the 1st Plaintiff. Having regard to the totality of the evidence and the inference to be drawn from the other facts which have been proven to my satisfaction, I do not consider her credible and her evidence reliable. 37.Vigers called Joseph Leung as their factual witness. His evidence was inconsistent with his witness statements. He admitted that he made various mistakes in his witness statements. He explained that was due to his emotional upset. He was cross-examined on why he had not made an internal inspection of the Basement even though he normally would have gained access to the building to be valued according to his witness statement. He gave a convoluted explanation that he did not wish to ask for consent from the 1st, 4th or 5th Defendants because it would cause problem or trouble. When pressed further, he said he would not go into most sites under construction in Hong Kong for fear that he might get into trouble though he had no such problem in China. Then he changed and became adamant that he never entered any building under construction at all. This may have little bearing in the issues in dispute. However, his demeanour demonstrated that he was not serious or sincere in his evidence. 38.His evidence was even more convoluted when questioned why he did not state the saleable area in the Vigers Report. He replied that it was because the saleable area had not been confirmed and that if he was not certain he would not put it in. When it was suggested that he could have added a rider that the saleable area was subject to confirmation, he responded that he would not write it that way. But, elsewhere, he relied on the fact that the saleable area was mentioned in the Vigers Valuation Letter. Then when questioned about the manuscript calculations of the saleable area on one of the documents, he said that they were records of the measurements taken of the area. He said that he did not do the calculations but was only taking measurements to get the area. He changed and said it was one of his colleagues who did the calculation which was contrary to his evidence that the handwriting was his own. Then he changed again by saying he meant he counterchecked the calculation. His evidence was incomprehensible. Vigers had not done any land search by that stage. The only plan Joseph Leung had at that stage was the floor plan which was not to scale and had only one linear measurement marked on it. No one had entered the Building and no physical measurements could have been taken. It was just impossible by relying on the floor plan he or anyone from Vigers could have come up with the precise figure of 11,388 square feet saleable area. While these instances have little bearing in this case, Joseph Leung’s demeanour demonstrated that he was not a responsible witness. He was simply not telling the whole truth. 39.In his witness statement dated 23 July 2004, he mentioned that he had made a mental note that the Basement had a direct link to the MTR North Point Station which gave it a very unique feature like the Prudential Centre in Jordan Road. Then in his witness statement dated 17 October 2005, more than a year later, he picked this up and produced rental data of a shop in Prudential Centre in October 1994 from Vigers’ research department and his calculation from those data of the capitalised value of the Basement for cross referencing his valuation based on the seven comparables he used (Exhibit D-3). He said that Exhibit D-3 was a contemporaneous document. Indeed, the calculations were done on the back of a printed document the content of which included reference to the exchange rate of Reminbei in 1997 and there were rust stains on the document. Exhibit D-3 must have been filed together with the worksheet on which he made the valuation and which was produced in Court. If at the material time Joseph Leung had done the cross checking with the rental data from Prudential Centre and had filed that document in the valuation file of the Basement, one wonders why he did not mention in his witness statement of 2004 that he had carried out such an important cross checking process. I think his evidence about having cross-checked his valuation with the rental data from Prudential Centre is an afterthought and Exhibit D-3 is a concocted document. 40.I do not consider Joseph Leung a credible witness. 41.I shall next take an overall view of the reports of the experts of both parties and then deal with the issues in dispute between the experts. I shall form my view of what is a reasonable valuation of the Basement and then consider if Joseph Leung and, hence, Vigers were negligent in preparing the valuation of the Basement. The Cullen Valuation Reports 42.The Plaintiffs’ valuation expert is Mr Ian Cullen of Ian Cullen & Associates. Mr Cullen was awarded a Diploma in General Surveying in 1975. He has been continuously engaged in general practice in surveying within the private sector in Hong Kong since 1977. He was elected a Professional Associate of the Royal Institution of Chartered Surveyors in 1980. During 1988, he was elected a Fellow of the Hong Kong Institute of Surveyors. In 1993, he was elected a Professional Fellow of the Royal Institution of Chartered Surveyors. During 1997, he became a Registered Professional Surveyor (General Practice Division). He became an Associate of the Chartered Institute of Arbitrators in 1999 and have subsequently become a full member of that institute. He produced four reports on behalf of the Plaintiffs dated 2 May 2003, 18 January 2006, 30 November 2007 and 12 May 2009 (“Cullen Report I, II, III and IV” respectively). Cullen Report I is a report on the valuation of the Basement. Cullen Reports II and III are replies to the reports prepared by Vigers’ expert. Cullen Report IV is a report on the present valuation of the Basement, which is not relevant for the present purpose. 43.In paragraph 1.1 of Cullen Report I, Mr Cullen stated the terms of his instruction under the retainer as follows:
44.In paragraph 6.3.1 of Cullen Report I, he noted that the saleable area of the Basement by reference to the Principal Agreement was 1,057.963 square metres or 11,388 square feet. By reference to architectural floor plans, he assessed the saleable area to be 11,250 square feet. As that is within 1% of the above quoted area, he adopted the saleable area as 11,388 square feet for the purpose of preparing the valuation. 45.Mr Cullen assessed the value of the Basement by direct comparison method. As large basements were not common in North Point and hence not frequently transacted, he chose large podium level floor space of similar size as comparables for the purpose of assessing the open market value of the Basement. The four comparable transactions chosen by Mr Cullen are as follows:
46.Mr Cullen calculated the transaction price per square foot or unit rate in those four comparable transactions. He then made adjustments on the unit rates for (1) time lag between the transaction dates of those four comparables and 9 May 1997 (“Valuation Date”) by reference to the Jones Lang Wootton statistics on retail capital value index movement (“JLW Index”); (2) location or trading potential; (3) size; (4) signage or visibility; (5) accessibility; and (6) age, condition and building type. Having regard to the similarities and hence compatibility of the comparables to the Basement, he applied a weighting factor to the unit rates and arrived at a valuation for the Basement. The weighting factor and adjustments other than that for time lag are subjective, being based on Mr Cullen’s personal experience or intuition. Using the above method, he arrived at a unit rate of $9,500 per square foot saleable area at Valuation Date and a valuation of $108 million for the entire Basement. 47.Mr Cullen then cross-checked his valuation by reference to the rental receipt of the Basement. The Basement was first let out as a whole on 16 August 1999 at a monthly rental of $238,000 exclusive of rates and management fee for a three year fixed term. By reference to JLWIndex, the rental levels were approximately 55% higher at the Valuation Date in comparison to the actual date of commencement of the lease. He arrived at the rental adjusted to the Valuation Date to be $370,000 exclusive per month. After allowing for 3% government rent and 2% sinking fund for repairs, the net monthly rental at Valuation Date was $351,500. According to the Rating and Valuation Department Private Property Market Yields, the yield of retail premises at Valuation Date was circa 4.6% per annum, while the yield suggested by Jones Lang Wootton’s commentary was 4% per annum yield for prime premises. Applying a capitalisation factor of 301 for yield at 4% per annum, he calculated the capital value of the Basement to be $105,801,500 or say $106 million. The valuation obtained by rental capitalisation supports the valuation obtained by use of comparables. The Lanbase Reports 48.Vigers’ expert is Mr Rock Tsang of Lanbase Surveyors Limited. Mr Tsang was elected as a Professional Member of the Royal Institution of Chartered Surveyors in 1985. In 1990, he was elected a Professional Associate of Hong Kong Institute of Surveyors. He became a Registered Professional Surveyor (General Practice). He produced a letter dated 5 July 2005 commenting on the Vigers Valuation Letter, Vigers Report, Midland Report, Richard Ellis Report and Cullen Report I (“Lanbase Letter”). He also produced three reports dated 5 July 2005, 24 October 2005 and 4 September 2007 (“Lanbase Report I, II and III” respectively). Lanbase Report I is a valuation of the Basement prepared by Mr Tsang. Lanbase Report II is a supplemental report to support Joseph Leung’s use of a transaction in the Prudential Centre as a comparable for his valuation. Lanbase Report III is a reply to Cullen Reports II and III. 49.In the Lanbase Letter, Mr Tsang commented that Vigers Valuation Letter served as an indication of value only and would be subject to a final valuation report. He considered the format of the Vigers Report reasonable and acceptable and that Joseph Leung as a valuer has acted reasonably in preparing the valuation. I shall deal with those comments in greater detail when I analyse the Vigers Report. He considered the Midland Report and Richard Ellis Report up to the standard as normally required by the profession, despite the lack of comparable/analysis and information about the saleable area. As for Cullen Report I, he considered the format up to the standard required by the profession, but criticised the comparables as inappropriate. 50.In Lanbase Report I, Mr Tsang quoted his instructions in paragraph 3 of the report as follows:
51.Mr Tsang prepared a valuation of the Basement by direct comparison method. He chose the following comparables:
52.After making adjustment to the unit rates for time lag, size, street frontage and MTR effect, Mr Tsang calculated the adjusted unit rates of the three comparable transactions to be $43,242, $35,959 and $36,492 making an average adjusted unit rate of $38,564 per square foot. Based on that adjusted unit rate, he valued the Basement at $439 million as at 9 May 1997. He did not use any weighting factor. It was unnecessary as all the comparables were within the Building. The Midland Report 53.The Midland Report was obtained by the 6th Defendant, presumably in connection with the 1st Plaintiff’s loan application. It is not clear who was the maker of the report. I assume it was made by the person who signed the report on behalf of Midland who claimed to be a chartered surveyor and registered professional surveyor. The instruction given to Midland as stated in the report was to conduct an open market valuation of the Basement as at the date of the report, i.e. 15 July 1997. The report quoted the gross floor area of the Basement was 15,748 square feet, without mentioning the saleable area. Midland valued the Basement at $420 million as at 15 July 1997. No comparable was quoted by Midland. It is not clear on what basis the valuation was made. The maker of the report was not called. In the circumstances, the report is worthless for the purpose of this litigation. 54.Mr Tsang argued in Lanbase Report I that in commenting the valuation in the Vigers Report it was preferable (under cross-examination, he changed ‘preferable’ to ‘helpful’) to make reference to other valuation reports prepared at the same period of time because those reports reflected the same market atmosphere and made in the same physical environment. Mr Cullen was of a different opinion. His opinion was that value is reflected by actual sales and lettings in the property market and valuation reports were clearly just the valuer’s interpretations of such data. He also argued that market atmosphere was more usually referred to as ‘time’ or ‘time lag’ which can be adjusted using data from the Rating and Valuation Department or well established surveyors such as JLW Index. He agreed that environments change over time but argued that unless a major land use change had occurred, referring to evidence six or nine months from a Valuation Date should adequately reflect the environment. I prefer Mr Cullen’s opinion as being more logical. Actual transactions must have reflected the market atmosphere. Besides, what is fatal to Mr Tsang’s argument is the absence of information about what comparables were used by the valuer in arriving at the valuation in the Midland Report. I reject Mr Tsang’s argument. 55.I note that the valuation given in the Midland Report was as at 15 July 1997 which was two months after the Vigers Report. The valuer must have conducted a land search or otherwise been informed of the transaction price of the Basement. Despite that knowledge and despite the fact that the market was still on the rise in July 1997, the valuer gave a valuation which was more than 10% lower than that in the Vigers Report. That reflects the valuer’s feeling of unreality of Joseph Leung’s valuation. The Richard Ellis Report 56.The Richard Ellis Report was also requisitioned by the 6th Defendant. According to the report, Richard Ellis’ instruction was to advise on the open market value of the Basement. The valuation date was not mentioned. I assume its instruction was to advise on the open market value as at the date of the report which was 24 July 1997. The valuer or writer of the report was not identified. I assume he was a professional surveyor. Unlike the Midland Report, it quoted the net area of the Basement as 10,942 square feet. It valued the Basement at $315 million, but no comparable was quoted in the report. 57.I repeat my observation that the absence of information about the comparables used for the purpose of preparing the valuation rendered the valuation worthless. For the same reason, I also reject Mr Tsang’s argument that in considering the valuation in the Vigers Report it is preferable or helpful to make reference to this report. But of course, I also note that despite the valuer probably had knowledge of the transaction price of the Basement and despite the rising market in July 1997 as compared with that in May 1997, the valuer gave a valuation which was only two-thirds of Joseph Leung’s. That valuation reflects even greater the feeling of unreality in Joseph Leung’s valuation by members of his profession at the material time. The Vigers Report 58.The Vigers Report was prepared by Joseph Leung. Joseph Leung received his training in Vigers and qualified as a chartered surveyor in 1993. He became the head of the valuation department of Vigers since 1996. He left Vigers in the end of November 2002 to practice on his own in China. 59.According to Joseph Leung, a day or so before 9 May 1997, he received urgent oral instructions over the telephone from the 1st Defendant to give a valuation on the Basement for the purpose of obtaining financing from a bank. Though the 1st Plaintiff was a retained client of Vigers, Joseph Leung had never seen the 1st Defendant in person. He had only communicated with him over the telephone. He noted the essential information about his conversation in his notebook and printed some comparables from Vigers’ data bank. He visited the Building the same day with his notebook and printed comparables. From the comparables, he prepared a handwritten list which was a worksheet on which he did the valuation (“Worksheet”). He worked late into the early hours of the following day and valued the Basement at $470 million. He issued the Vigers Valuation Letter and then the full Vigers Report a few days later. He had thrown away his notebook and the printed comparables in course of time, but a handwritten list of the comparables with his calculations was kept in Vigers’ files. 60.In paragraph 4 of the Vigers Report, Joseph Leung described the location of the Basement as follows:
The above is a correct description of the location of the Building, except that Joseph Leung did not mention the downside aspect of the location, namely, that on the opposite side of Marble Road waslined with fixed pitch stalls which in Mr Cullen’s opinion is a negative factor affecting value of the Basement. I agree with Mr Cullen’s opinion. 61.Joseph Leung gave a description of the Building in paragraph 5 of the Vigers Report, which was basically what was described by the developer. He mentioned, in particular, that the Building would be served by four passenger lifts, one service lift and two staircases. In respect of the Basement, he mentioned that the Basement would be linked to the MTR North Point Station, served by a pair of escalators, two flights of staircases with one leading to Marble Road and two toilets. In paragraph 7, he mentioned that according to the developer, the gross floor area of the Basement was 1,463.04 square metres or 15,748 square feet. Neither did he verify the correctness of the gross area stated by the developer nor did he calculate the saleable area. 62.Joseph Leung stated in paragraph 13 of the Vigers Report his valuation considerations as follows:
Then in the concluding paragraph of the Vigers Report, Joseph Leung gave a valuation of $470 million. 63.Unlike the Cullen Report and the Lanbase Report, Joseph Leung did not quote any of the comparables he used nor did he show how the valuation was arrived at by using the comparables. In his evidence in Court, Joseph Leung referred to his Worksheet which contained a list of seven comparables. Three of the comparables were Shops 2, 5 and 6 on the ground floor of the Building and the other four were small ground floor shops in Marble Road. The gross floor areas of Shops 2, 5 and 6 are respectively 188, 490 and 889 square feet. Though they are located in the Building, on the basis of the expert evidence which I accept, they cannot be regarded as similar commercial premises in view of the great disparity in size. In the light of the seven comparables shown in the Worksheet, Joseph Leung’s statement that he hadanalysed sales transactions of similar commercial premises in the subject building is wholly misleading. 64.The seven comparables chosen by Joseph Leung are as follows:
Joseph Leung made adjustments for time, location and size and calculated an adjusted unit rate of $40,228 per square foot. He rounded that up to $41,000 per square foot because he said he did not like the figure ‘40’ and normally would not issue valuation report using ‘4’ or ‘40’. This was extremely arbitrary, unscientific and bizarre to come from the mouth of a professional surveyor whose duty was to give a fair open market value of the property he was instructed to survey on a professional basis. Then based on a saleable area of 11,388 square feet, he reached a valuation of $466,908,000 which he further rounded up to the nearest ten million instead of to the nearest million and reached a valuation of $470 million. This ultimate valuation also has a figure ‘4’. The choice of comparables and the MTR effect 65.Before dealing with the comparables, I shall first address Mr Lai’s opinion about the difference in value between ground floor and basement or podium floor by suggesting that there is no industry prescribed impediment and that such property all fall into one category. He says it is one man’s word against another on their respective subject views on the matter. He says the difference is small on just one narrow point, but the mathematical consequence is tremendous. The crux of this case is the correctness of the choice of comparables by Joseph Leung, Mr Tsang and Mr Cullen. Certainly, the wrong choice of comparables will lead to great disparity in valuation. That is a matter for the experts. Mr Lai’s view that the ground floor, basement or podium floor all fall into one category is contrary to those of Mr Cullen’s and are not even supported by Vigers’ expert. He is trespassing the territory which belongs exclusively to the experts. I reject his submission. 66.From the Cullen Reports, Lanbase Reports and Vigers Report, it can be seen that Mr Cullen, Mr Tsang and Joseph Leung all used the direct comparison method in assessing the value of the Basement. Mr Cullen also used the capitalised rental income method to countercheck his valuation. So did Joseph Leung, according to his evidence. Mr Tsang had no dispute that such countercheck was appropriate. As experts, Mr Cullen and Mr Tsang were in agreement that the direct comparison method is an appropriate method for assessing the value of the Basement. Mr Cullen also used the reduced zoning method to question the correctness of Mr Tsang’s valuation. The applicability of the reduced zoning method to Hong Kong is criticised by Mr Lai. The experts’ dispute is in respect of their choice of comparables and the extent of the beneficial effect of the direct link to MTR North Point Station (“MTR Effect”). They also differ as regards the adjustments to be made to the comparables. Mr Lai also challenged the applicability of the reduced zoning method. 67.It is the common opinion of Mr Cullen, Mr Tsang and Joseph Leung that the larger the floor area of the property, the lower is its unit rate. Mr Cullen and Mr Tsang are in agreement that large commercial premises such as supermarkets, schools and churches command lower unit rate than small Ginza style shops in a shopping arcade. Hence, it is Mr Cullen’s opinion that to value the Basement which has a saleable area of 11,388 square feet, it was necessary to look for transactions in commercial properties of comparable size located in similar locations in North Point. I accept this as the proper professional practice in looking for comparables. As large basements were not common in North Point and not frequently transacted, Mr Cullen turned to transactions of large podium level floors in North Point. He is of the opinion that podium floor properties being one level up from ground level offered the next most appropriate properties for comparison with the Basement which is one level down from ground level. He concedes that adjustments should be made for signage and visibility in addition to time lag, building age/condition, trading potential etc. Mr Tsang has no dispute with these broad principles in selection of comparables, but he rejects the comparables chosen by Mr Cullen. 68.Based on those principles, Mr Cullen chose (1) the entire 1st floor of the Building; (2) the entire 1st floor of Roca Centre; (3) the 2nd floor of Fortress Tower; and (4) the entire 1st floor of Tanner Garden as comparables. These were 1st or 2nd floor commercial properties with a comparable floor plate of 7,534 to 15,672 square feet. I have been shown those four properties on a site visit. I agree that the character of the environment of Fortress Tower and Tanner Garden was more residential and different from that of the Building such that adjustments to be made to those comparables may not be meaningful. I ignore those two comparables. That said, it has little effect on Mr Cullen’s valuation because Mr Cullen gave a very low weighting to those two comparables and in any event the unit rate of those two comparables were within the range of the other two comparables chosen by Mr Cullen. 69.Mr Tsang criticises the use of the 1st floor of the Building as a comparable for two reasons. Firstly, the sale and purchase agreement of that property was executed on 16 September 1997 which was after the date of the Vigers Report and such information was not available to Joseph Leung. Mr Cullen thought otherwise. He considers it the benefit of post valuation date analysis in that data after the valuation can be referred to. Though such data were not available to Joseph Leung at the time, they serve as a check whether a valuation made just prior to such sale was out of line with the market reality. Of course, the non-availability of the data might have a bearing on my assessment as to whether the standard of care was properly discharged in the circumstances. 70.Secondly, Mr Tsang argues that the transaction was not a genuine transaction as it was subsequently cancelled and hence should not be used as a comparable. Mr Cullen’s opinion is that the transaction was a genuine, though not a full or completed transaction. Indeed, the courts have seen many arm’s length transactions agreed just prior to the property market crash in October to November 1997 were subsequently cancelled because buyers were desperate to exit unprofitable acquisitions. Excuses based on defective title were often successfully argued to avoid an otherwise valid and binding sale and purchase agreement. As the documents show, the buyer sought extension of time to complete and eventually forfeited $9 million in having the sale and purchase agreement cancelled. That was a genuine transaction. The price was reached at arm’s length based on the then market condition. I agree with Mr Cullen that had the property market not collapsed towards the end of 1997, that transaction would have in all likelihood been completed and that transaction was a reliable indicator of pre-crash price and had factored in “frothy prices” in a speculative market in the third quarter of 1997. The 1st floor of the same Building which was comparable in size to the Basement and was of same user makes it an excellent reality check piece of evidence. It was the most appropriate comparable to be used in valuing the Basement. 71.The second comparable chosen by Mr Cullen was the 1st floor of Roca Centre which was at the junction of King’s Road with Shu Kuk Street. It was located at a comparable location one block south of the Building. Unlike the Building, Roca Centre was a composite building with residential towers over a commercial podium. The current user of the 1st floor is a restaurant. It has a saleable area of 12,402 square feet which is nearly the same as the Basement. It has escalator access from the main entrance of the shopping arcade at ground level just beside a main MTR exit. It was ten years older than the Building. 72.Mr Tsang considers Roca Centre as not a suitable comparable for two reasons. Firstly, he considers the character of the area in which Roca Centre is located different from that of the Building. He argues that the Building is located close to a wet market in Java Road and fixed pitch stalls on Marble Road where people would carry out their daily shopping activities whereas the locality where Roca Centre is located is occupied by restaurants and banks. I have visited Roca Centre and the Building. By the age and look of the buildings thereat, the two locations do not appear to me to be any different now from 1997, except that the nearby North Point Estate had been demolished. I agree with Mr Cullen that in every respect, the 1st floor of Roca Centre is in a superior position than the Basement. It has access via a pair of escalator located at the main entrance of the building just opposite the pedestrian crossing. It has open visibility and good accessibility. The 1st floor, whether used as a restaurant as it now is, or as a small shopping arcade as the Basement was intended to be, is simply inviting to pedestrians. The fact that Roca Centre is located among other restaurants and banks means the pedestrian traffic there is heavier than that at the Building. The 1st floor of Roca Centre has a notably superior trading potential. Mr Tsang’s argument is very strained and his opinion lacks logic. 73.In line with Mr Tsang’s opinion, Mr Lai suggests that the Building is a very high class commercial building and a promise of the future while Roca Centre is something of the past. He argues that purchasers of units in the Building are buying a dream. As Mr Cullen rightly points out, that suggestion is just marketing gimmicks and glamour of the sales brochure. The brochure depicted the shopping area of the Building as a high class shopping arcade with a bank, motor car show room and boutique shops. The prudent purchasers should take a cold hard look at the Building, its vicinity and the market. This is more all the so for the professional property valuer. The Building is a small building with seven small shop spaces on the ground level, another seven shop spaces on the 1st floor and the Basement. The total saleable area is not more than 30,000 square feet. The Building is located in an old area with a wet market nearby and fixed pitch stalls opposite. As was revealed during the site visit, the shopping arcade can only serve as a community shopping area and not a high class shopping arcade selling brand name goods. Not only is the character of the Building and its neighbourhood not substantially superior to that of Roca Centre as to render the latter unsuitable as a comparable, the character of Roca Centre and its neighbourhood is actually more superior and has a higher trading potential. A property valuer should take a cool, hard look at the Building and its neighbourhood. The size of the shopping area in the Building is not capable of supporting the picture depicted in the brochure. If his client wants to buy a dream, he should remind his client of the bed he is sleeping on. 74.Mr Lai argues that the upper floors in the Building are office floors like Pacific Place whereas those in Roca Centre are residential and as such is unsuitable as a comparable. He suggests that high profile office employees would buy brand name goods in the Building and that would enhance the value of the Basement. With respect to counsel, it is a gross exaggeration to compare the Building in North Point in its particular neighbourhood as I have described in the above paragraph with Pacific Place in prime central. The Building, the smallness of its shopping area and its neighbourhood is not capable of attracting retailers of brand name goods. As Mr Cullen points out, office occupants do not flood downstairs everyday in Pacific Place to buy brand name goods. The big spenders in the shopping arcade in Pacific Place are the constant flow of tourists from the nearby five star hotels. I do not think those tourists would go to shop in the Building with no more than 30,000 square feet of shopping area and no other attractions nearby. The real thing a valuer should look for in a comparable is similarity in shopping potential. The shopping potential of Roca Centre with residential units above and that of the Building with office above are within comparable range. 75.Mr Lai points to the lack of public parking in Roca Centre and argues that within the neighbourhood hourly public parking is only available in the Building which enhances its value. Such argument is absolutely misleading. The three floors of parking space were sold to the Plaintiffs. The parking spaces were owner-occupied and not available for public parking. In any event, there were only twenty-seven car parking spaces and five lorry parking spaces. The parking facility argument is just a non-point. I do not think Roca Centre fails to be a suitable comparable for any of the reasons given by Mr Lai. 76.Furthermore, Mr Tsang argues that as ground floor comparables within the Building are available, Roca Centre is not a suitable comparable. The ground floor comparables suggested by Mr Tsang are Shops 2, 5 and 6 of the Building, which are the very comparables which he and Joseph Leung used in their valuations. These are small shops of 186, 491 and 885 square feet in area. I shall now turn to examine Mr Tsang’s comparables. 77.A general point to note is that Mr Tsang does not dispute that smaller shops command higher unit rates. The Basement is of a saleable area of 11,388 square feet. Using the 1st floor of Roca Centre with a similarly large floor plate as a comparable is far more reliable than using any small shop spaces of 1.63% to 7.77% of the saleable area of the Basement. In Hsin Kuang Restaurant (Holdings) Limited and Commissioner of Rating and Valuation LDRA 52 of 1997, it was held that it was inappropriate to use a property of 181.4 square metres as a comparable in valuing a property of 4,000 square metres, i.e. less than 4.5% in area. To use the unit rate in transactions of properties which are not comparable in size to the Basement as comparables and then inflate it by size adjustment is just like asking blind men to feel parts of an elephant and then to imagine what an elephant is. Depending on where the blind men feel, they may come up with different ideas of what an elephant is. Another way to describe the anomaly is to ask someone to compare a cat with a tiger and then by adjustment to blow a cat up into a super tiger. 78.Shop 2 has a saleable area of 186 square feet. It is the smallest shop in the ground floor of the Building. Shop 5 has a saleable area of 491 square feet. Both shops fall outside the size range as comparable for the Basement of 11,388 square feet which is 61 times larger than Shop 2 and 23 times larger than Shop 5. Size alone makes them unsuitable as comparables. 79.All the three shops are located at street level with open visibility and accessibility. Shop 2 has an extremely good frontage. It is located at the corner and entrance of the Building at Shu Kuk Street. It is open to Marble Road, Shu Kuk Street and to the inside of the arcade. It is an indisputable fact that corner shops command higher unit rate. Shop 5 has external frontage to Marble Road and an internal frontage to the arcade. It has good visibility and accessibility. Shop 6 has external frontage to Marble Road but no internal frontage. It has good visibility and accessibility though inferior to those of Shop 2 and Shop 5. However, the Basement is located one level below street level. Practically, it has no visibility, except to MTR passengers who use Exit A4. 80.Mr Tsang tries to off set the drawback of the Basement by arguing on the MTR Effect. Joseph Leung also emphasised heavily on the benefit of the direct link to MTR entrance in the Vigers Report. He said in his evidence that the direct link to MTR was a very unique feature and advantage of the Basement. He equated the Basement with Prudential Centre in Jordan district and said that the link to MTR had a very positive impact on pedestrian flow and rental income. He argued that the neighbourhood in which the Basement and Prudential Centre are located are very similar, namely old mixed commercial and residential area. He said that because of the MTR linkage, the accessibility of the Basement was not limited to the neighbourhood of Marble Road but was open to a wide MTR network, though he conceded that the Basement was a little less desirable than Prudential Centre. Mr Tsang is supportive of that opinion. He even goes further to argue that any shop inside an MTR station is linked to the pedestrians in all MTR stations in Hong Kong. He advanced three further reasons for the benefit of the MTR linkage. The pedestrians in an MTR station are weather protected. They can shop comfortably in air conditioned environment. They enjoy a feeling of safety and security. He argues that for these reasons, Roca Centre is inferior to the Basement as the pedestrians are exposed to rain, sunshine or storm. He quotes the views of an estate agent about the benefit oflow pedestrian flow in the Basement. That estate agent’s view was that the Basement can serve as a specialty centre for selling women underwear as the shops were unexposed but easy to find. Women would not miss the Basement if told to exit from Exit A4 in MTR North Point Station. 81.I agree with Mr Cullen’s opinion that it is inappropriate to compare the Basement with Prudential Centre. The localities are distinctly different. Prudential Centre is situated on Nathan Road in Jordan area which is a very busy commercial and shopping area in Kowloon frequented by locals and tourists. There are a few small hotels nearby and many more larger five star hotels to the south of Nathan Road which supply a continuous flow of tourists. There are large shopping centres, restaurants, theatres nearby which attract shoppers from all over Hong Kong and Kowloon. Apart from the older residential and commercial buildings on the western side of Nathan Road which Mr Tsang and Mr Lai rely on as being similar in character to neighbourhood of the Building, there are many and more luxurious housing developments on the eastern side, even back in 1997. Undoubtedly, the spending power of the residents in that part of Jordan is far higher than those in Marble Road. Marble Road is in a much quieter neighbourhood near a wet market and fixed pitch stalls. It is not frequented by tourists. There are no hotels nearby, not to mention five star hotels. The neighbourhood is more residential than commercial. 82.Mr Lai paints a very busy picture of the then neighbourhood with the then existing North Point Estate, the North Point/Kowloon City Ferry and bus terminus. He suggests that Mr Cullen might have been misguided when making a valuation of the Basement in 2003 in a much quieter environment after the demolition of the North Point Estate and closure of the ferry and bus terminus. Even then, I do not think the locality is as vibrant as or a near comparable to Jordan district where Prudential Centre is situated. Furthermore, as Mr Cullen rightly points out, his valuation was based on actual transactions at a time very close to 9 May 1997. The North Point Estate and everything else which Mr Lai considers relevant were in situ at the time of the comparable transactions. I do not think Mr Cullen could have erred. 83.The MTR Jordan Station is one of the busiest and largest stations to which the North Point Station is hardly comparable. The pedestrian flow is certainly much heavier than in MTR North Point Station. The exit to Prudential Centre is far wider that Exit A4 to the Basement. More strikingly and importantly, the exit opens right into the heart of Prudential Centre with a system of escalators leading to four floors of shopping area which makes it necessary for pedestrians to walk round the arcade before exiting the building. 84.On the contrary, the entrance to the Basement even within the Building is inconspicuous. Accessibility is poor. The escalator is located in such a position that pedestrians travelling from ground level to the MTR station have to walk one-third inside the Building and turn back to take the escalator down to the Basement which delivers the pedestrians almost right to the MTR entrance, by-passing the entrance to the Basement. Similarly, pedestrians exiting the MTR station going to ground level are drawn to the escalator going up to ground level on their right without noticing the Basement on their left. The Basement is unlikely to be frequented by the casual pedestrians on Shu Kuk Street or Marble Road but only by the destination shoppers who know of the Basement and have a purpose to go to there. As admitted by Mr Tsang, many of the pedestrians on Marble Road are people buying in the wet market nearby or the fixed pitch stalls opposite the Building. They are a different kind of shoppers from those visiting Prudential Centre. 85.Mr Lai tries to paint a picture about shoppers visiting from the Peak or mid-level in North Point driving to shop in this state of the art Building in North Point in their motor cars. There is a sauna house of 7,534 square feet saleable area on the 1st floor, seven shops of, say similar area on the ground floor of the Building and 11,388 square feet shopping area in the Basement. Even assuming there were seven retail shops on the 1st floor instead of one sauna as originally designed, the shopping area in the Building including the Basement is very small. On a visual impression of the plan of Prudential Centre and the Building as well as the visual impression gained during the site visit, the shopping area in Prudential Centre is many times that of the Building. Such a small shopping area in the Building cannot attract shoppers of great spending power. There are only twenty-seven car parking spaces in the Building and they were all owner occupied. There are no convenient public parking nearby. The shopping facilities which the Building can offer are much inferior than that suggested by Mr Lai. The Building is nothing like Pacific Place or Elements where there are many floors of luxurious shoppingspaces, fine dinning, a theatre and entertainment facilities. The shopping areas are tens or even a hundred times bigger than that in the Building and there are free parking facilities for a modest purchase. The very vibrant picture of the Building painted by Mr Lai is illusory. 86.Mr Tsang’s contrary view that the low pedestrian flow of the Basement is an asset is no better. He commended to the Court that the Basement can be used a specialist centre for selling women underwear. The Basement had been operated as a stamp centre but failed, presumably because of its quietness, poor visibility and inaccessibility. Joseph Leung argued that it failed because of poor management, but there is no evidence in support of that assertion. As for Mr Tsang’s opinion, I do not think women, these days, act discretely when they go to purchase underwear or lingerie. Advertisements for such items can be seen openly almost anywhere in bill boards, MTR stations, trains, trams, shopping centres, etc. Women purchase these items openly in large department stores and shops in luxurious shopping arcades. If women’s purchasing behaviour for those items are so discrete, the lingerie business could not have thrived so well in those expensive and luxurious shopping arcades. I think the estate agent’s opinion is wholly nonsense. That view would have been dismissed by any reasonable man who has walked any large department store or any luxurious shopping arcade with open eyes. It is a surprise that an expert whose duty is to assist the Court would have so thoughtlessly commended to the Court such an nonsensical view of an estate agent, whose business is to market properties. I note incidentally that Lanbase Surveyors Limited also operates an estate agent business. 87.Mr Tsang’s argument on MTR Effect is a whole load of non-sense. He has clearly demonstrated himself to be an advocate doing his best to advance his client’s case rather than as an expert assisting the Court with unbiased professional opinion. The MTR Effect proffered by Mr Tsang and Mr Lai is non-existing in the Basement. The Basement is nothing like the Prudential Centre. The immediate neighbourhood of Prudential Centre is significantly different by a wide margin from that of the Building as to render it unsuitable to be a comparable. 88.It is just common knowledge that ground floor shops command a much higher value than basement shops or podium shops. In Cullen Report II, Mr Cullen produced sales data of ground floor units and basement units in President Shopping Centre in Causeway Bay and Sino Centre in Nathan Road in Mongkok, which showed that basement value is only 25% and 28% respectively of ground floor value. In other words, if a ground floor shop is used as comparable, an adjustment of minus 75% is called for. In Ngai Kai Suen v Director of Lands [1994] HKDCLR 123, Judge Cruden held that a plus 100% adjustment to the unit rate in a basement transaction to assess the unit rate of a street level shop is unsuitable. The reverse is equally true. A minus 50% adjustment to the unit rate in a street level shop to assess the unit rate of a basement is also unsuitable. An adjustment of that magnitude is a very telling sign that comparable is not a suitable comparable, not to say an adjustment of minus 75%. Mr Tsang’s insistence that the 1st floor of the Building is not a suitable comparable and his insistence to use small street facing shops in the Building as comparables for the Basement with no frontage is just absurd. 89.Mr Tsang’s rejection of the 1st floor of Roca Centre as a comparable also lacks logical basis. Such opinion is unreasonable and cannot withstand logical analysis. His choice of comparables and his stubborn insistence on their suitability as comparables simply demonstrates his lack of impartiality as an expert. He is trying to justify the use of the transactions of Shops 2, 5 and 6 which are small shop spaces and commanding a higher unit rate so as to inflate the valuation of the Basement. I consider his choice of using Shops 2, 5 and 6 as comparables is his own personal opinion and not the opinion of any body of the surveying profession. Clearly, Mr Tsang is trying to advance his client’s case than assisting the Court. For the fundamental differences I have referred to above, it is unrealistic to use street level shops as comparables for a large inaccessible Basement. Though Mr Tsang made adjustments to the unit rate of his comparables, adjustments to the unit rate of a street level shop for the purpose of assessing the unit rate of the Basement is both difficult and unrealistic. I accept Mr Cullen’s choice of comparables and reject Mr Tsang’s. 90.I now turn to the other comparables which Joseph Leung used in arriving at the valuation. They were all very small ground floor shops on Marble Road with sizes ranging from 70 square feet to 625 square feet. The unadjusted unit rates range from $23,360 to $69,047 per square foot. For reasons which should by now be manifestly clear, these comparables were not suitable. 91.The basic principle of valuation in the direct comparison method is to compare like with like. I accept Mr Cullen’s evidence that the practice of the profession in looking for comparables is to look for transactions in properties of a similar nature, within the same size range, with a similar neighbourhood and in a similar location. I accept Mr Cullen’s opinion that the 1st floor of the Building and 1st floor of Roca Centre are suitable comparables. I reject Mr Tsang’s opinion that Shops 2, 5 and 6 on the ground floor of the Building are suitable comparables. Ground floor shops cannot be compared with basement shops. The adjustment allowed by Mr Tsang is utterly inadequate. An adjustment of up to minus 75% as demonstrated by proven data produced by Mr Cullen may be appropriate. But even then, an adjustment up to that magnitude simply tells that the adjustment is meaningless and the property is just not a suitable comparable for the other. I reject Mr Tsang’s opinion as his own personal and biased opinion which is demonstrably wrong. It does not represent the opinion of a responsible body of the profession. 92.As a concluding remark to the opening paragraph in this section, Mr Lai is right in one sense. If the comparables are wrongly chosen as a matter of principle, the divergence in valuation is bound to be great, as in this case. If one boards the train from the wrong platform in MTR North Point Station, one finds oneself in the Hong Kong International Airport, instead of Chai Wan where one is destined to. Hence, we have the divergence in valuation by Mr Cullen on the one hand and Mr Tsang and Joseph Leung on the other. The adjustment 93.Before dealing with adjustments, I shall first address Mr Lai’s opinion that time lag indices, whether government or private sector always fall behind real market movements with time delay running up to three months and beyond. He says that given this perpetual chase of analysis data after empirical field transactions, the index believers are likely to see these price trend setters at the moment of their transactions as crazy and going beyond the charted range of rational behaviour. He therefore considers time adjustment futile. He argues that understanding the limitation of indices leads to appreciation of the benefit of looking at contemporary or “real time” comparisons which are far more reliable than retrospective time indexing. He criticised Mr Cullen as not being able to feel the market heat as did the Midland and Richard Ellis teams. With respect to Mr Lai, there is no evidence about inordinate delay in registering sale and purchase transactions. Usually, because of the risk of loss of priority caused by delay in registration, the absolute majority of transactions are registered within one month. Such time lag within a month does not support the scenario painted by Mr Lai. Any delay beyond one month must be rare and exceptional. I reject the valuations contained in Midland Report and Richard Ellis Report not because of Mr Cullen’s or the Court’s failure to have regard to market heat or market atmosphere but because of the total absence of information about the basis of the valuation and the comparables used in those reports. Besides, as Mr Cullen points out, his valuation was based on actual transactions at a time very close to 9 May 1997 and adequately adjusted according to JLW Index. Actual transaction price is a function of all relevant factors including market heat or the uncharted range of irrational behaviour. Again, Mr Lai is trespassing the expert’s arena. I reject his argument. 94.There is no dispute that adjustments are necessary to comparable transactions to allow for time lag, location/trading potential, size, signage/visibility, accessibility, and age/condition of the Building. These factors may be combined and called differently by different experts, but adjustments are necessary. In respect of adjustment for time lag, the JLW Index is generally accepted by the profession. Mr Lai argues that there is a time lag between a sale and purchase transaction and its registration in the Land Registry from which the statistics are made. I think the difference caused by the time lag is insignificant unless at around 9 May 1997 there was a sudden change in market condition. That was not the case. According to the JLW Index, the market was very buoyant up to the third quarter of 1997. Mr Lai next argues that the JLW Index is not sufficiently categorised into districts and there is no separate index for North Point. Be that as it may, the JLW Index is probably the best the profession has and the parties have to live with it. In respect of other adjustments, they are subjective and intuitive, based on the views and experience of the valuer. 95.As the 1st floor of the Building is within the Building itself, Mr Cullen made no adjustment for location/trading potential and age/condition of the building. He gave an allowance of minus 15% for time lag in accordance with the JLW Index as the transaction was made while the market was still on the rise. He gave an allowance of minus 5% due to the smaller size and minus 5% for the better signage/visibility of the comparable. He gave another allowance of plus 10% for accessibility including the MTR. The total adjustment is therefore minus 15%. Based on the unit rate of $12,347 per square foot saleable area, he calculated the adjusted unit rate to be $10,495 per square foot as at 9 May 1997. 96.As the 1st floor of Roca Centre is at a distance away from the Basement and on a better location, adjustments are necessary for all the factors. Because the transaction was a year earlier, he added 16.8% to the unit rate. Because the accessibility of the 1st floor of Roca Centre is not as convenient as that of the Basement and the building is ten years older than the Basement, he allowed another plus 10% and plus 15% respectively. He gave an allowance of minus 8.5% for the better location/trading potential and minus 5% for signage/visibility of the comparable. The total adjustment is therefore plus 28.3%. Based on the unit rate of $6,529 per square foot saleable area, he calculated the adjusted unit rate to be $8,377 per square foot as at 9 May 1997. 97.Mr Cullen gave a weighting factor of 5 to the 1st floor of the Building and 3 to the 1st floor of Roca Centre. He also gave a weighting factor of 1 to the other two comparables which I excluded. I do not intend to adjust the weighting factor as a result of my exclusion of the other two comparables. So adopting a total weighting factor of 8 instead of 10, I calculate the weighted unit rate to be $9,700 per square foot, which is $200 higher than Mr Cullen’s valuation. Accordingly, the open market value of the Basement as at 9 May 1997 was $110,463,600 or say $110.5 million. I prefer to round up to the nearest $100,000. This valuation is $2.5 million higher than Mr Cullen’s. It is within 5% of Mr Cullen’s valuation by rental capitalisation method. I find the true open market value of the Basement as at 9 May 1997 to be $110.5 million. 98.Having rejected Shops 2, 5 and 6 as suitable comparables, it would be unnecessary to consider the adjustments Mr Tsang made to those comparables. I shall, however, briefly demonstrate that his adjustments are also inadequate. Mr Tsang argues that the difference between the lower ground floor and the 2nd basement of Prudential Centre is that the former has both street frontage and MTR access whereas the latter has only MTR access. Based on the difference in rateable value of the two floors of 35%, he argues that street frontage adjustment for a shop with MTR access is minus 35%. He also allowed size adjustments of minus 15% for Shop 2 and minus 10% for Shops 5 and 6. Thus the total adjustment in respect of these two items for Shop 2 is minus 50% and that for Shops 5 and 6 is minus 45%. 99.Mr Cullen argues that the lower ground floor of Prudential Centre is in fact half a level below street level such that the value of its street frontage is substantially reduced. I agree. Pedestrians along Nathan Road would only have a partial view of the shop from above instead of a direct front view. Thus 35% adjustment is not adequate. By reference to his data from President Shopping Centre, Mr Cullen argues that the adjustment should have been minus 72% to minus 75%. He then cross referenced this adjustment by using the reduced zoning method. He argues that the Basement with an area of 11,388 square feet is mainly comparable to the least valuable Zone C area of shops. Based on the reduced zoning method of analysis, Zone C shop value is only 25% that of Zone A. Since these Shops 2, 5 and 6 are 1.63% to 7.77% the size of the Basement, they must all be within the most valuable Zone A area and that the Basement be within Zone C. Hence, the adjustment should also be 75%. 100.Mr Lai submits that the reduce zoning method which originated in the United Kingdom where the shops are rectangular in shape with a relatively small frontage and greater depth is inapplicable in Hong Kong and has been rejected by the Lands Tribunal. Whether the reduced zoning method is applicable to Hong Kong is not necessary for my decision because Mr Cullen’s data from President Shopping Centre and Sino Centre are sufficient to prove Mr Tsang’s adjustment inadequate. The reduced zoning method was referred to by Mr Cullen not for the purpose of giving a valuation to the Basement but for the purpose of showing Mr Tsang’s adjustment is inadequate. Thus, this is not a suitable occasion for arguing whether the method is applicable to Hong Kong. I shall deal with counsel’s submission very briefly, but whatever view I express is bound to be obiter. 101.Mr Lai cited six authorities in support of his proposition that the reduced zoning method is not applicable in Hong Kong. I shall examine those authorities in chronological order. 102.Mr Cullen was the expert witness in Secretary for the New Territories v Lee Pui Leung LDLR 1 of 1981, [1982] HKDCL5. In accepting the reduced zoning method submitted by Mr Cullen, the Lands Tribunal said that it did so because the method was not seriously challenged. The Tribunal also referred to Man On Land Investment Co Ltd v Director of Public Works [1977] HKLTR 4 at 7 in which the Tribunal commented that it did not consider the reduced zoning method easily applicable to Hong Kong conditions especially in the case of the smaller shops. Thus, the method was actually accepted though the Tribunal doubted its applicability to smaller shops. The method was not accepted in the other decisions which followed. 103.In Ngai Kai-suen v Director of Lands, Judge Cruden rejected the reduced zoning method and said:
The Tribunal refused to adopt the reduced zoning method and commented that an adjustment of plus 100% for a basement shop for frontage emphasised the unsuitability of the method. This is the case in which the method was severely criticised. Despite that the Tribunal recognised in the last paragraph quoted above the importance of frontage, the fact that as depths increases the value decreases and the possible use of Depth Tables. Mr Sarony SC submits that in the last paragraph above the Tribunal effectively endorsed the reduced zoning approach. I do not agree. The Tribunal only recognised that Depth Tables might be used if it is satisfied that they are appropriate for the local circumstances. Their appropriateness remains to be proved. Nevertheless, I am unable to read from the above dicta that the reduced zoning method was expressly rejected as not being applicable to Hong Kong. It was not adopted because better direct comparables were available. That in fact is the sentiment of the Tribunal as expressed in later decisions. 104.In Rand Company Limited and The Director of Lands LDLR 7 of 2001, after reviewing Man On Land Investment Co Ltd, Lee Pui Leung and Ngai Kai-suen v Director of Lands [1994] HKDCLR 123, Deputy Judge Wong held at paragraph 25:
The reduced zoning method was not expressly rejected. It was not preferred because direct comparables were available. 105.In Mingo Properties Limited And The Director of Lands LRLD 6 of 2005, in refusing to adopt the reduced zoning method, the Tribunal held at paragraph 17:
Similarly, the reduced zoning method was not accepted because the layout and size of the comparables and the subject property were similar. 106.In Tung Mei Chi Vera and Fung Lee Stephanie Man Chi And The Director of Lands LDLR 1 of 2006, the Tribunal refused to adopt the reduced zoning method as being unreliable. It held at paragraph 23:
Again, the reduced zoning method was not adopted in this case where comparables of fairly regular shape were available. 107.Despite the rather flimsy circumstances under which the reduced zoning method was adopted by the Tribunal in Lee Pui Leung, from the authorities cited above it appears that the method has long been recognised by the profession. It was not accepted in many of the authorities cited by Mr Lai not because it was found to be inapplicable to Hong Kong conditions but because it was not suitable in the factual circumstances of the case as better comparables were available. So long as suitable comparables are available, they must be the best evidence of value and direct comparison method using unit rate should be preferred. This is just common sense. The reduced zoning method is arbitrary. But in the absence of truly suitable comparables, the reduced zoning method does not cease to be a useful means of analysis. It is useful for shops of irregular shape and greater depths. As demonstrated by Mr Cullen, so long as the same depth for Zone A is adopted for all the comparables, the result would be reasonably consistent. 108.Turning back to the present case. I do share the sentiments of Judge Cruden in Ngai Kai Suen that a basement shop was not a suitable comparable for a street level shop and vice versa. The value of the street level shops and basement shops in President Shopping Centre and in Sino Centre demonstrate the adjustment should be in the range of minus 72% to minus 75%. Those real data support Mr Cullen’s opinion that if the very small street level shops of Shops 2, 5 and 6 are used as comparables, the very large Basement falls within Zone C under the reduced zoning method. Besides, an adjustment of that magnitude is a very telling sign that the comparable is not a suitable comparable. Accordingly, Mr Tsang’s adjustments must be rejected. That said, this is nevertheless not an appropriate occasion to determine whether the reduced zoning method is applicable to Hong Kong conditions. Whether the Vigers Report was negligently prepared 109.On the basis of expert evidence, I reach the conclusion that the open market value of the Basement as at 9 May 1997 was $110.5 million. Vigers’ valuation of $470 million was 4.25 times the true open market value. On any objective criteria, there is no need to consider whether it was outside the permissible bracket. It clearly was. The valuation was so bizarre, so glaringly sub-standard and so disproportionate that negligence can be readily inferred. I shall nevertheless turn to examine the Vigers Report in greater detail. 110.On the format, Mr Tsang opined that the format of the Vigers Report was reasonable and acceptable. He said that there is no particular requirement from the Hong Kong Institute of Surveyors or the Royal Institution of Chartered Surveyors (Hong Kong Branch) that comparables and comparable analysis must be included in the report. The common practice is not to include comparables unless specifically requested by the instructing client. He also referred to the absence of such in the Midland Report, the Richard Ellis Report and the model report adopted by the Hong Kong Institute of Surveyors and the Royal Institution of Chartered Surveyors (Hong Kong Branch). Mr Cullen agrees that there is no requirement for residential property but points out that for valuation of this size, it is unusual not to quote the comparables and that he had not seen a valuation of a large basement which did not quote the evidence on which the valuation was based. A property even of a valuation of $110.5 million is a significant investment, not to mention a property with a valuation of $470 million as suggested by Vigers. Though no comparables or analysis were indicated in the model report, the model report is probably for general application and not intended for a valuation of property of substantial value. It is not just a matter of common sense but sense of responsibility of a person practising a profession. Indeed in Menno Leendert Vos and Global Fair Industrial Limited and others HCA 4200/1995, Vigers prepared a valuation report under its reference NL/jc/V63512-93 dated 11 September 1993, which quoted the saleable area and comparables used in valuing a small commercial property of $3.4 million. In many other company winding-up cases, I have also seen valuation reports prepared by reputable surveyors quoting comparables even for commercial properties valued much lower. I think the comparables were produced not at the specific instruction of lay clients as Mr Tsang suggests, but as the profession’s standard of good practice in valuing at least commercial properties of substantial value. In any event, for a valuation of $470 million in 1997, a responsible valuer must inform his client the basis on which the valuation was reached, so that the lay client knows the basis of the professional opinion and the extent of his risk in acting on that opinion. I concur with Mr Cullen’s opinion as representing the standard and practice of the profession. Vigers fell short of that standard. 111.The saleable area was not stated in the Vigers Report. Mr Tsang opines that that was not strictly necessary. Mr Tsang’s Lanbase Report I also quoted the saleable area. The Richard Ellis Report also took care to quote the net area. In the model report, both gross floor area and saleable floor area are shown. This is clear evidence of professional practice. Joseph Leung or his colleagues had calculated the saleable area which was exactly the same as that given in the sale and purchase agreement. Joseph Leung said he would not quote the figure because he could not be sure if it is correct. He rejected counsel’s suggestion of quoting the figure with a rider that it is subject to confirmation. On the other hand, contrary to what he said, Joseph Leung quoted the saleable area in the Vigers Valuation Letter. Even Mr Tsang admits that saleable area is the most important factor to determine value. Without such datum, the client may not have a clear appreciation of what he was bargaining for. 112.Mr Sarony SC criticises Joseph Leung for just lifting information from the developer’s brochure and assumed that the information was correct. Both Mr Sarony SC and Mr Cullen criticise Mr Joseph Leung for making a valuation without even inspecting the Basement. For a building in progress, some assumptions, such as the standard of the finishes and the materials to be used would have to be made. However, Joseph Leung’s evidence is that he made generous assumptions. He assumed that the escalators would be installed in such a way as to direct the pedestrian flow to the Basement and if not an extra pair would be installed by the developer. He said he could not read from the plans how the pedestrians would be delivered by the escalators. I do not agree. The drawings show that the up and down escalators would be aligned together to operate in different directions. This together with the vertical cross section drawing made it clear that pedestrians would be diverted away from the Basement. My layman’s view may have been assisted by hindsight and the benefit of a site visit, but as a professional Joseph Leung ought to have known. Joseph Leung said he did not go inside the Basement to make an on-site inspection because it would create difficulties. He made the decision not to inspect even without asking the 1st Defendant for permission to inspect. As Mr Cullen said, he should have put on the helmet and went inside. I agree. In view of the size of the valuation he reached, he should have made an on-site inspection to verify his valuation. 113.While he placed strong emphasis on the benefit of the MTR link, not only did he not do any pedestrian flow analysis, he did not even visit the MTR North Point Station when he inspected the Building. Had he gone inside, he would have realized MTR North Point Station is very much different from MTR Jordan Station and that the Basement could not be compared to Prudential Centre. The very wild assumptions he made showed the total lack of care in making the valuation. 114.Joseph Leung wrongly chose small street level shops with good visibility and accessibility as comparables to value this large underground Basement. His choice of comparables, if not deliberately made in bad faith, is basically and manifestly wrong for three reasons. Firstly, it is wrong to use small shops as comparables for a large basement. He should use shops with a floor plate which is within the range as comparable. Secondly, he should not use street level shops as comparables. As shown in Cullen Report II, basement shops usually have a value of between 25% to 28% of street level shops. This is a well-recognised fact known even to the layman, not to mention the professional. Thirdly, instead of making a minus 75% adjustment which would have been appropriate, he only made an adjustment of minus 15% by relying on the MTR Effect. I have found that the MTR Effect is practically non-existent in the Basement. His opinion was based on his comparing the Basement with Prudential Centre. Again, if that was not a comparable chosen in bad faith, it was a negligent choice. For reasons as I have explained earlier, the Basement is nothing near to Prudential Centre. Joseph Leung claimed in the report that he has “analysed sales transactions of similar commercial premises in the subject building and North Point”. As I have already pointed out, this is a misleading statement and reflects his grossly negligent approach in making the valuation. 115.The comparables chosen by Joseph Leung were inappropriate. In defending his choice of small street level shops as comparables, he said he assumed that the purchaser would do what is best in his interest and to develop the Basement into Ginza style shopping arcade. Again that was a wild assumption. He did not even ask the 1st Defendant or the Plaintiffs if that was the intention of the Plaintiffs; nor did he disclose in the Vigers Report that the valuation was on the basis that the Basement would be converted into a Ginza style shopping arcade. His choice of comparables was clearly negligent. If that choice was based on the assumptions, he was reckless. 116.At the time Joseph Leung made the valuation, he did not have the benefit of the transaction data of the 1st floor of the Building. The transaction information about the 1st floor of Roca Centre was available to him. But he chose to use those seven small street level shops with good visibility and accessibility as comparables for the underground Basement. It is his wrong choice of comparables and insufficient adjustments which led to the grossly wrong valuation. This is what this case is all about. On the basis of the valuation, a conclusion could safely be drawn that Joseph Leung was negligent in his valuation of the Basement. Fixing the valuation 117.The Plaintiffs’ case in the big picture is that there was a conspiracy among some or all the Defendants, except Vigers, to dispose of chunks of the uncompleted Building to the Plaintiffs by a series of transactions so as to cash strip the Plaintiffs in excess of $1 billion in favour of the Defendants. In the narrow picture, part of that design involved the 1st Defendant causing Joseph Leung of Vigers to value the Basement at $470 million, i.e. to fix the valuation of the Basement. The thrust of the Plaintiffs’ case against Vigers is that the valuation was fixed before the transaction was made. Joseph Leung could not have reached a valuation which coincidentally was identical to the transaction price unless there was an agreement between him and the 1st Defendant to fix the valuation. Mr Sarony SC relied on the evidence of the 3rd Defendant as supported by the inferences to be drawn from Joseph Leung’s valuation and how he arrived at the valuation. 118.Joseph Leung denied that there was such an agreement between him and the 1st Defendant. He said he was not told and he did not ask what the bargain price for the Basement was. There is little Joseph Leung could say in the witness box about a negative averment, except a denial. Mr Lai submits that the events did not happen that way. He suggests that the 1st Defendant was negotiating the purchase with the 5th Defendant and the price was yet to be agreed. That explained the great urgency of the 1st Defendant’s telephone call asking Joseph Leung for an urgent valuation to name a price for him to bargain on. Joseph Leung gave a valuation via the Vigers Valuation Letter. Armed with that letter, the 1st Defendant returned to the negotiation table with a price offer and successfully negotiated the price down from whatever it was to the valuation of $470 million. When the formal report came out three days later, the deal was closed. 119.I shall first briefly recap those inferences before turning to the evidence of the 3rd Defendant. Joseph Leung’s valuation of $470 million was so glaringly excessive and the way he made the valuation so negligent and reckless that the valuation could not have been reached by a qualified and experienced valuer like him however negligent. Joseph Leung’s choice of small street level shops as comparables was a blatant departure from professional practice. His putting the Basement as the same category of properties as Prudential Centre and over amplifying the MTR Effect on the Basement was such defiance of common sense as to suggest a conscious intention to over value. His failure to make an on-site inspection, his irresponsible assumption about the position of the escalators and pedestrian traffic was so out of line with professional practice. Though he made adjustment for size to the unit rates for his comparables, his assumption that the Plaintiff will sub-divide the Basement to maximise its development potential and to value the Basement as if it were an aggregate of small units indicate that he had no intention to follow the professional practice but to reverse engineer some valuation. Then, there were the various negligent conduct in the valuation, such as his inexplicable reasons for rounding up the unit rate in his comparables and then rounding up the valuation to the nearest ten million and that none of his calculation hit a valuation of $470 million, to name a few. Mr Sarony SC submits that from the above facts the inference that Joseph Leung reverse calculated the valuation of $470 million pursuant to an agreement to fix the valuation could readily be drawn. 120.I now turn to the evidence of the 3rd Defendant. She is the younger sister of the 2nd Defendant. She had worked in the 2nd Defendant’s garment factory for about two years before she went to study law in the United Kingdom. She qualified as a solicitor in Hong Kong in 1993. In 1994, she and the 2nd Defendant acquired Unisouth Industrial Company Limited which then changed its name and became the 1st Plaintiff. She became a director of the 1st Plaintiff with responsibility for its secretarial and legal department. The 2nd Defendant became the chairman while the 1st Defendant was invited to join as the managing director of the 1st Plaintiff. The 1st to 3rd Defendants were also appointed as directors of the 2nd and 3rd Plaintiffs. 121.In essence, the 3rd Defendant made three crucial allegations. Firstly, in around March 1997, the 1st Defendant informed her that he intended to procure the Plaintiffs to enter into a series of transactions with the 4th and 5th Defendants in respect of the Building. She sought confirmation from the 2nd Defendant who told her to take care of the legal aspects of the transaction. 122.Secondly, as a result, the 1st Plaintiff acquired the entire issued share capital of Fei Wang and the 2nd Plaintiff on 11 March 1997 at $140.175 million. Thus, the 1st Plaintiff effectively acquired Shops 5 and 6 on the ground floor and the 7th floor of the Building for $140.175 million. The 3rd Defendant was not particularly concerned about this transaction as the 1st and 2nd Defendants had already decided, that it was the 1st Plaintiff’s business to acquire and sell property and that the price was within the means of the 1st Plaintiff. 123.Thirdly, on a day before 9 May 1997, the 1st Defendant informed the 3rd Plaintiff that he had provisionally concluded a deal with the 4th Defendant for the purchase of the Basement at $470 million. She was surprised by the purchase price and asked the 1st Defendant if the price was a fair market one. The 1st Defendant relied that he would procure Vigers to issue a valuation report that the Basement was worth the purchase price. The 1st Defendant said words to the effect that he “would get it done”, which she understood to mean that the 1st Defendant had verbally informed Vigers the purchase price of the Basement was $470 million and it would be vital to obtain such valuation report to support the decision to purchase. 124.The 3rd Defendant said that she objected to the Basement transaction as she thought the price of $470 million exorbitant compared with that of $140.175 million for the earlier transaction just two months ago. She thought the Plaintiffs would be paying the price of a Rolls Royce for a bicycle. She doubted if the Basement worth that much. She was worried that the Plaintiffs did not have funds to make the purchase. She disagreed with financing the purchase with the Consideration Shares Arrangement under which shares of the 1st Plaintiff would have to be issued at substantial discount. She also objected to the absence of a locked-up period for the shares issued under the Consideration Shares Arrangement. She raised her objections but the 1st and 2nd Defendant overruled her. She made it clear that she did not consent to the Basement transaction. 125.The 3rd Defendant was so uncomfortable with the Basement transaction that she contemplated resigning from the Plaintiffs. She tendered her resignation notice in July to take effect in September 1997. Despite her firm stand and her non-consent to the Basement transaction, she nevertheless signed the board minutes with the 1st Defendant on 13 May 1997 approving the transaction at the behest of the 2nd Defendant. She also signed the Principal Agreement on behalf of the 2nd Plaintiff to purchase the Basement from the 4th Defendant when the 1st Defendant excused himself from attending the solicitors’ office at the last minute. 126.After the issue of the present proceedings, the 1st Defendant approached the 3rd Defendant. The 3rd Defendant told the 1st Defendant to handle the litigation on her behalf and appointed him as her attorney. She told the 1st Defendant to have his solicitor, Messrs Jones Day, to represent her as well. She discussed the litigation with the 1st Defendant a number of times. The 1st Defendant gave instruction to Messrs Jones Day on her behalf. Messrs Jones Day acted as the common solicitors for all the three Defendants and filed a defence dated 4 September 2003 on behalf of the 3rd Defendant. In essence, she denied the allegation of conspiracy and fixing the valuation. She and the 1st and 3rd Defendants justified the price for the Basement because of the boom in the property market, hot money from China, Singapore, Indonesia and confidence in the future of Hong Kong. They boasted about the MTR access for the Basement. The defence filed on behalf of the 3rd Defendant is wholly inconsistent with her evidence in Court. 127.On the basis of her evidence, I can well imagine the frustration the 3rd Defendant was suffering upon receipt of the statement of claim from the Plaintiffs. It was normal to seek support and assistance from one’s co-director who was also being sued and pull their heads together to consider their defence. It would not have been unusual for one director to hand the litigation over to another director who was in the same boat and had the necessary experience and competence to handle the litigation. However, the 3rd Defendant is not a company director of ordinary competence and skill. She is a solicitor of ten years’ standing by the time litigation started. She is familiar with company practice. She must be aware of her liability as a director of the Plaintiffs. She was being sued for over $300 million. More importantly, according to her evidence, she was not in the same boat as the 1st and 2nd Defendants. She objected to the Basement transaction for good reasons. According to her, the purchase price was grossly inflated. The Plaintiffs were paying the price of a Rolls Royce for a bicycle. She recalled it was the 1st Defendant who said he would have Vigers to fix the valuation. The 1st Defendant should be the last person on earth whom she should trust. Yet, she did not seek separate legal representation. Instead, she entrusted the 1st Defendant, appointed him as her attorney, asked him to instruct his solicitors to act for her and left it to him to give instructions to Messrs Jones Day. She chose to stand on the same front with the 1st Defendant. She did not discuss with the 2nd Defendant, who is her brother, saying that he was always flying around and not available. In the end, she was shown the defence prepared on the basis of the 1st Defendant’s instruction. She read and approved the defence which, on the basis of her evidence, she knew does not represent her case at all. Her conduct was inconsistent with the allegation she is now making against the 1st Defendant and Joseph Leung. Her signing the board minutes approving the Basement transaction, the Principal Agreement and the sub-purchase agreement and her conduct in preparing for the defence in this action can only be explained on the basis that she was acting in line with the 1st and 2nd Defendants as is consistent with her defence. The 3rd Defendant had read and approved the defence filed on her behalf. Her defence filed in this action, even if it had been withdrawn, stands as a previous inconsistent statement which discredits her evidence in Court. Her defence casts doubts on the veracity of her evidence in Court. Now, instead of entrusting her defence to the 1st Defendant, she is stabbing him in the back by putting all the blame on him for fixing the valuation. Her evidence creates insurmountable difficulties to the Plaintiffs. 128.The inference of fixing the valuation to be drawn from the glaringly excessive valuation and the way the valuation was arrived at by Joseph Leung is a very strong one. However, the inference of negligence is equally strong. Two months later, two reputable valuers, namely Midland and Richard Ellis also made very excessive valuations of the Basement. They might probably have been influenced to some extent by the actual transaction, without which they might come up with a lower valuation. Nevertheless, their valuations suggest mistake was easy to make by the less competent, particularly in view of the then market atmosphere. Negligence could not be ruled out. The evidence of the 3rd Defendant is decisive of negligence or fixing valuation. 129.Though the Plaintiffs are not pursuing on the allegation of conspiracy against Vigers, fixing a valuation is a very serious allegation to make of a professional valuer. The burden of proof is on the Plaintiffs who make the assertion and they must proof their assertion with cogent evidence. What weight can I give to the evidence of the 3rd Defendant in the light of her inconsistent pleading in her defence? Was her allegation that the 1st Defendant had told her on a day before 9 May 1997 that he had provisionally concluded the transaction at $470 million a concoction? Could she have mistaken about what was said and when it was said? Could she have misunderstood or misinterpreted what was said? The 1st Defendant might well have been very optimistic about the market as pleaded in the 3rd Defendant’s defence and hence said he would have Vigers to make a valuation which would support the purchase price which he believed was appropriate. As between a grossly negligent valuer and one who bends to the wishes of his client, I prefer to identify Joseph Leung as the former. In the light of the quality of the 3rd Defendant’s evidence, I cannot be satisfied that the 3rd Defendant’s evidence was wholly reliable. The 1st Defendant was not called. Hence, the scenario as suggested by Mr Lai is not at all unlikely. The 1st to 3rd Defendants were very optimistic about the market. So was Joseph Leung. He too indulged in the Defendants’ dreams and negligently gave an excessive valuation which became the transaction price agreed to by the misinformed Plaintiffs. The case of fixing the valuation is not made out. But that has no bearing on the issue of negligence. Causation 130.The allegation of conspiracy against Vigers has now been abandoned, but the statement of claim has not been amended to that effect. The Plaintiffs’ solicitors have by letter shortly before commencement of the trial informed the Plaintiffs’ solicitors that they did “not intend to proceed with the allegation of conspiracy”. However, Mr Lai submits that the Plaintiffs cannot simply walk away from their pleaded case with impunity. He argues that the conspiracy issue has been standing in the pleading for years and a very strong prima facie case of conspiracy is pictured in the witness statement of the 3rd Defendant. The Plaintiffs opened the arena with a very high profile letter of 17 February 2003 alleging the Vigers Report as a “design to deceive”, … and “assisting the perpetration of the deceit/fraud”. He submits that Vigers is running a defence of lack of causation and contributory negligence. Contributory negligence, if successfully contended at 100% is a complete defence and is just another way of saying that even if the valuation report was wrong and negligent, there was no causation because the conspirators were in any event bent on pushing ahead. All they wanted from Vigers was just some industry compliant papers by whatever naïve or gullible valuers they could get hold of to see the deal through. 131.I am not the least convinced by Mr Lai’s submission. Assuming that there was a conspiracy among the Defendants, save Vigers, and all that those Defendants wanted from Vigers was a valuation report of $470 million to see the deal through, there was nothing to prevent Vigers from doing the valuation properly and arrive at a valuation which was within the range of what a valuer exercising ordinary skill and care would have arrived at. Vigers offered no evidence that any of the Defendants had done anything to mislead or prevent Joseph Leung from doing his valuation properly. There was no evidence that the Defendants prevented him from making an on-site inspection. Joseph Leung did not even ask for permission to visit the Basement. There was no evidence of any misrepresentation made by the Defendants about the Basement. Joseph Leung made various assumptions which no valuer would have made. Under cross-examination, he admitted that he would assume the Plaintiffs would maximise the value of the Basement by partitioning it into small units and he effectively valued the Basement as an aggregate of small units. 132.Mr Lai submits that as far as Vigers were concerned, the 1st to 3rd Defendants were the corporate minds of the Plaintiffs. He submits that the 1st and 3rd Defendants went on a shopping spree under circumstances as described in the 3rd Defendant’s defence and that the Plaintiffs were buying a dream of the future. Mr Lai argues that Vigers were under no duty to inquire. Vigers did not have to inquire what was in the corporate mind of the Plaintiffs. They were under a duty to make a proper valuation but they failed miserably in that duty. If Vigers made a proper valuation and if despite that the Plaintiffs’ corporate mind determined to proceed with the dream, it would have been a matter for the Plaintiffs. That the Plaintiffs’ corporate mind decided to go ahead with the transaction could not relieve Vigers’ duty to make a proper valuation. 133.Mr Lai argues that there was no reliance on Vigers’ valuation as the 1st to 3rd Defendants were bent to go ahead with the transaction. He argues that the irony is that if the 3rd Defendant’s evidence is to be believed, it would kill the Plaintiffs’ case instantly because there was no reliance. Even if the 1st to 3rd Defendants were bent to go ahead, they could not do so unless supported by the valuation in the Vigers Report. The decision to proceed with the transaction had to be approved by shareholders in a general meeting. The transaction could not have been approved unless the Plaintiffs’ Circular issued to the shareholders contained a valuation which would support the transaction. Joseph Leung consented on behalf of Vigers to have the Vigers Report annexed to the Circular. At the shareholders meeting, the shareholders’ mind was the corporate mind. Regardless of the intention and desires of the 1st to 3rd Defendants, the shareholders would not have approved the transaction without the Vigers Report. Clearly, the shareholders acted on the Vigers Report. Furthermore, the real irony is that it is Vigers’ case and Mr Lai’s submission that Joseph Leung prepared a valuation based on which the Plaintiffs reached the transaction price with the 4th Defendant. It cannot be said that there was no reliance on the Vigers Report. 134.Lastly, Mr Lai submits that despite the initial reliance on the Vigers Report, the chain of causation was broken when according to the Plaintiffs’ own pleading and the documentary evidence the Plaintiffs could have pulled out of the transaction upon the conditions precedents not being fulfilled by the 4th Defendant. I do not think Vigers can rely on the fortuitous event that the conditions precedents were not fulfilled to be relieved of liability. It was the Vigers Report which set the chain of events in motion. If as a result of the failure of conditions precedent, the motion stops, Vigers is entitled to be lucky as no injuries would be suffered. But if the motion does not stop, Vigers are liable just the same. There was all along reliance by the shareholders in general meeting. Whether subsequent to that the 1st to 3rd Defendants as agents of the Plaintiffs took or by their imprudent conduct failed to take advantage of the failure of conditions precedent is neither nor there. Contributory negligence 135.Specifically on contributory negligence, that defence presupposes the Plaintiffs, or at least the 1st to 3rd Defendants, knew that the valuation was bogus but nevertheless were bent to proceeding with the transaction. There is no evidence that the Plaintiffs knew the valuation was bogus before the transaction. It is Vigers’ case that the valuation was not bogus and that there was no agreement to fix the valuation. It is even Vigers’ case that the Plaintiffs closed the deed based on the valuation in Vigers Report. Joseph Leung never informed the 1st Defendant or the Plaintiffs that the valuation was bogus. Only if there is evidence of such knowledge would it be open to Vigers to argue that in carrying on with the transaction the Plaintiffs were contributory negligent. Measure of damages 136.Mr Lai submits that the Plaintiffs have not proved their case properly and their claim can be dismissed under the principle of damnum absque injuria because they still have their Basement. He produced some newspaper cutting suggesting that a bubble mentality has resurfaced in the Hong Kong property market. He says who knows whether in the not too distant future the Hong Kong people who sees a “river of gold” in property today will bring the market mania back to days of 1997 or beyond. I reject that submission. Firstly, it has been proved to my satisfaction that the true open market value of the Basement as at 9 May 1997 was $110.5 million. Secondly, the injuries were incurred on the date of the transaction. The bubble mentality today is totally irrelevant to the injuries suffered yesterday. 137.The Plaintiffs are entitled to be compensated the difference between what they paid for in reliance on the Vigers Report and what they get as at the transaction date, subject to any damages they have successfully mitigated. They obtained compensation in the amount of $101,708,828.74 from the 4th to 6th Defendants. Accordingly, I award the Plaintiffs $257,791,171.26 being the difference between the valuation which is the same as the transaction price and the true open market value of $110.5 million as at 9 May 1997 less the compensation received from the 4th to 6th Defendants. 138.This is a case of serious breach of duty. The manner in which Joseph Leung carried out the valuation was extremely irresponsible, reckless and even appalling. Vigers’ expert witness, Mr Tsang, totally ignored his duty to assist the Court and gave opinion as advocate in support of his client’s case. His evidence is revolting and a waste of the Court’s time. For these reasons, it is appropriate that Vigers should pay the Plaintiffs’ costs on an indemnity basis. Conclusion 139.Accordingly, I enter judgment in favour of the Plaintiffs in the amount of $257,791,171.26 with interest from the date of the writ. I also make a costs order nisi that the 7th Defendant shall pay the Plaintiffs’ costs on an indemnity basis with certificate for two counsel, to be taxed if not agreed.
Mr. Sarony Neville, SC and Ms. Angel W. Lau, instructed by M/s Lam & Co., for the Plaintiffs Mr. Thomas Lai, instructed by M/s Kennedys, for the 7th Defendant |
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